##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 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  to
 Commission
file Number 000-10535
 CITIZENS BANKING CORPORATION
 
  MICHIGAN
    
    38-2378932(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)328 S. Saginaw St., Flint, Michigan
    
    48502(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year,
   þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ
   Class
    
    Outstanding at April 30, 2006Common Stock, No Par Value
    
    42,728,083 Shares




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##### 



Citizens Banking Corporation
 PagePart I  Financial Information (unaudited)Item 1 - Financial Statements (unaudited)Consolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Changes in Shareholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3 - Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4 - Controls and Procedures
    
    
    35Part II  Other InformationItem 2 -Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 6 -Exhibits
    
    
    36Signatures
    
    
    37Exhibit Index
    
    
    38Certification of Chief Executive Officer to Rule 13a-14(a)Certification of Chief Financial Officer to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350
  2




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##### Table of Contents



Consolidated Balance Sheets
 Citizens Banking Corporation and Subsidiaries
 March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2005(unaudited)
    
    
    (Note 1)
    
    
    (unaudited)AssetsCash and due from banks
    
    $
    152,077
    
    
    $
    194,748
    
    
    $
    145,707Interest-bearing deposits with banks
    
    
    1,503
    
    
    
    380
    
    
    
    1,596Investment Securities:Available-for-sale (amortized cost $1,479,417, $1,501,819 and $1,761,586, respectively)
U.S. Treasury and federal agency securities
    
    
    1,087,099
    
    
    
    1,122,306
    
    
    
    1,377,766State and municipal securities
    
    
    378,454
    
    
    
    378,235
    
    
    
    386,515Other securities
    
    
    1,243
    
    
    
    1,456
    
    
    
    963Held-to-maturity:State and municipal securities (fair value of $89,699, $82,364 and $58,622, respectively)
    
    
    90,346
    
    
    
    82,431
    
    
    
    58,942FHLB and Federal Reserve stock
    
    
    55,975
    
    
    
    55,911
    
    
    
    68,020Total investment securities
    
    
    1,613,117
    
    
    
    1,640,339
    
    
    
    1,892,206Mortgage loans held for sale
    
    
    13,399
    
    
    
    16,252
    
    
    
    34,627Portfolio loans:Commercial
    
    
    1,688,970
    
    
    
    1,688,079
    
    
    
    1,626,541Commercial real estate
    
    
    1,418,596
    
    
    
    1,402,128
    
    
    
    1,313,825Residential mortgage loans
    
    
    549,116
    
    
    
    539,824
    
    
    
    495,953Direct consumer
    
    
    1,109,249
    
    
    
    1,142,002
    
    
    
    1,173,234Indirect consumer
    
    
    826,060
    
    
    
    844,086
    
    
    
    820,289Total portfolio loans
    
    
    5,591,991
    
    
    
    5,616,119
    
    
    
    5,429,842Less: Allowance for loan losses
    
    
    (115,423
    )
    
    
    (116,400
    )
    
    
    (120,945
    )Net portfolio loans
    
    
    5,476,568
    
    
    
    5,499,719
    
    
    
    5,308,897Premises and equipment
    
    
    120,719
    
    
    
    121,730
    
    
    
    121,107Goodwill
    
    
    54,527
    
    
    
    54,527
    
    
    
    54,527Other intangible assets
    
    
    10,408
    
    
    
    11,133
    
    
    
    13,307Bank owned life insurance
    
    
    85,142
    
    
    
    84,435
    
    
    
    83,072Other assets
    
    
    135,857
    
    
    
    128,620
    
    
    
    121,690Total assets
    
    $
    7,663,317
    
    
    $
    7,751,883
    
    
    $
    7,776,736LiabilitiesNoninterest-bearing deposits
    
    $
    899,850
    
    
    $
    969,074
    
    
    $
    891,849Interest-bearing demand deposits
    
    
    816,293
    
    
    
    891,313
    
    
    
    1,106,744Savings deposits
    
    
    1,452,638
    
    
    
    1,437,024
    
    
    
    1,578,058Time deposits
    
    
    2,355,206
    
    
    
    2,176,428
    
    
    
    1,712,883Total deposits
    
    
    5,523,987
    
    
    
    5,473,839
    
    
    
    5,289,534Federal funds purchased and securities sold
under agreements to repurchase
    
    
    401,702
    
    
    
    505,879
    
    
    
    853,926Other short-term borrowings
    
    
    852
    
    
    
    23,242
    
    
    
    6,157Other liabilities
    
    
    82,203
    
    
    
    86,351
    
    
    
    79,656Long-term debt
    
    
    1,003,029
    
    
    
    1,006,109
    
    
    
    901,875Total liabilities
    
    
    7,011,773
    
    
    
    7,095,420
    
    
    
    7,131,148Shareholders EquityPreferred stock  no par valueAuthorized
 5,000,000 shares; Issued  none
    
    
    
    
    
    
    
    
    
    
    Common stock  no par valueAuthorized
 100,000,000 shares; Issued and outstanding - 42,769,821 at 3/31/06,
42,967,649 at 12/31/05, and 43,172,892 at 3/31/05
    
    
    80,341
    
    
    
    85,526
    
    
    
    94,966Retained earnings
    
    
    578,980
    
    
    
    570,483
    
    
    
    546,882Accumulated other comprehensive income
    
    
    (7,777
    )
    
    
    454
    
    
    
    3,740Total shareholders equity
    
    
    651,544
    
    
    
    656,463
    
    
    
    645,588Total liabilities and shareholders equity
    
    $
    7,663,317
    
    
    $
    7,751,883
    
    
    $
    7,776,736
  3




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##### Table of Contents



Consolidated Statements of Income (Unaudited)
 Citizens Banking Corporation and Subsidiaries
 Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2006
    
    
    2005Interest IncomeInterest and fees on loans
    
    $
    93,451
    
    
    $
    79,272Interest and dividends on investment securities:Taxable
    
    
    13,611
    
    
    
    14,688Tax-exempt
    
    
    5,317
    
    
    
    5,197Money market investments
    
    
    12
    
    
    
    9Total interest income
    
    
    112,391
    
    
    
    99,166Interest ExpenseDeposits
    
    
    30,992
    
    
    
    18,071Short-term borrowings
    
    
    3,736
    
    
    
    4,441Long-term debt
    
    
    10,188
    
    
    
    8,421Total interest expense
    
    
    44,916
    
    
    
    30,933Net Interest Income
    
    
    67,475
    
    
    
    68,233Provision for loan losses
    
    
    3,000
    
    
    
    3,000Net interest income after provision for loan losses
    
    
    64,475
    
    
    
    65,233Noninterest IncomeService charges on deposit accounts
    
    
    8,875
    
    
    
    8,287Trust fees
    
    
    5,042
    
    
    
    4,412Mortgage and other loan income
    
    
    2,010
    
    
    
    2,360Brokerage and investment fees
    
    
    1,515
    
    
    
    1,599ATM network user fees
    
    
    987
    
    
    
    873Bankcard fees
    
    
    1,057
    
    
    
    840Fair value change in CD swap derivatives
    
    
    (207
    )
    
    
    Other
    
    
    6,284
    
    
    
    4,084Total fees and other income
    
    
    25,563
    
    
    
    22,455Investment securities gains
    
    
    7
    
    
    
    6Total noninterest income
    
    
    25,570
    
    
    
    22,461Noninterest ExpenseSalaries and employee benefits
    
    
    32,256
    
    
    
    33,351Occupancy
    
    
    5,942
    
    
    
    5,560Professional services
    
    
    4,078
    
    
    
    4,199Equipment
    
    
    3,166
    
    
    
    3,301Data processing services
    
    
    3,739
    
    
    
    3,369Advertising and public relations
    
    
    2,034
    
    
    
    1,746Postage and delivery
    
    
    1,462
    
    
    
    1,590Telephone
    
    
    1,464
    
    
    
    1,441Other loan expenses
    
    
    416
    
    
    
    375Stationery and supplies
    
    
    727
    
    
    
    919Intangible asset amortization
    
    
    725
    
    
    
    725Other
    
    
    5,563
    
    
    
    4,025Total noninterest expense
    
    
    61,572
    
    
    
    60,601Income Before Income Taxes
    
    
    28,473
    
    
    
    27,093Income tax provision
    
    
    7,717
    
    
    
    7,013Net Income
    
    $
    20,756
    
    
    $
    20,080Net Income Per Common Share:Basic
    
    $
    0.49
    
    
    $
    0.46Diluted
    
    
    0.48
    
    
    
    0.46Cash Dividends Declared Per Common Share
    
    
    0.285
    
    
    
    0.285Average Common Shares Outstanding:Basic
    
    
    42,784
    
    
    
    43,224Diluted
    
    
    42,941
    
    
    
    43,646
  4




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##### Table of Contents



Consolidated Statements of Changes in Shareholders Equity
 Citizens Banking Corporation and Subsidiaries
 AccumulatedOtherCommon Stock
    
    
    Retained
    
    
    Comprehensive(in thousands, except per share amounts)
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance at January 1, 2005
    
    
    43,240
    
    
    $
    97,180
    
    
    $
    539,128
    
    
    $
    17,994
    
    
    $
    654,302Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    20,080
    
    
    
    
    
    
    
    20,080Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,275
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,021Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,254
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,826Exercise of stock options
    
    
    19
    
    
    
    374
    
    
    
    
    
    
    
    
    
    
    
    374Net change in deferred compensation, net of tax
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Cash dividends declared on common shares  $0.285 per share
    
    
    
    
    
    
    
    
    
    
    (12,326
    )
    
    
    
    
    
    
    (12,326
    )Shares acquired for retirement
    
    
    (86
    )
    
    
    (2,618
    )
    
    
    
    
    
    
    
    
    
    
    (2,618
    )Balance  March 31, 2005
    
    
    43,173
    
    
    $
    94,966
    
    
    $
    546,882
    
    
    $
    3,740
    
    
    $
    645,588Balance at January 1, 2006
    
    
    42,968
    
    
    $
    85,526
    
    
    $
    570,483
    
    
    $
    454
    
    
    $
    656,463Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    20,756
    
    
    
    
    
    
    
    20,756Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,319
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,231
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,525Exercise of stock options
    
    
    56
    
    
    
    1,256
    
    
    
    
    
    
    
    
    
    
    
    1,256Recognition of stock-based compensation
    
    
    1
    
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    409Cash dividends declared on common shares  $0.285 per share
    
    
    
    
    
    
    
    
    
    
    (12,259
    )
    
    
    
    
    
    
    (12,259
    )Shares acquired for retirement
    
    
    (255
    )
    
    
    (6,850
    )
    
    
    
    
    
    
    
    
    
    
    (6,850
    )Balance  March 31, 2006
    
    
    42,770
    
    
    $
    80,341
    
    
    $
    578,980
    
    
    $
    (7,777
    )
    
    $
    651,544
  5




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##### Table of Contents



Consolidated Statements of Cash Flows
 Citizens Banking Corporation and Subsidiaries
 Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Operating Activities:Net income
    
    $
    20,756
    
    
    $
    20,080Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    3,000
    
    
    
    3,000Depreciation and amortization
    
    
    2,993
    
    
    
    2,953Amortization of goodwill and other intangibles
    
    
    725
    
    
    
    725Net amortization on investment securities
    
    
    207
    
    
    
    1,455Investment securities gains
    
    
    (7
    )
    
    
    (6
    )Loans originated for sale
    
    
    (41,452
    )
    
    
    (92,262
    )Proceeds from sales of mortgage loans held for sale
    
    
    45,097
    
    
    
    87,120Net gains from loan sales
    
    
    (792
    )
    
    
    (1,447
    )Net loss on sale of other real estate
    
    
    292
    
    
    
    148Stock-based compensation
    
    
    409
    
    
    
    30Other
    
    
    (5,883
    )
    
    
    (1,591
    )Net cash provided by operating activities
    
    
    25,345
    
    
    
    20,205Investing Activities:Net (increase) decrease in money market investments
    
    
    (1,123
    )
    
    
    173Securities available-for-sale:Proceeds from maturities and payments
    
    
    52,747
    
    
    
    116,207Purchases
    
    
    (30,578
    )
    
    
    (159,892
    )Securities held-to-maturity:Purchases
    
    
    (7,947
    )
    
    
    (4,911
    )Net decrease (increase) in loans and leases
    
    
    20,151
    
    
    
    (40,716
    )Proceeds from sales and pay-offs of other real estate
    
    
    1,274
    
    
    
    1,813Net increase in properties and equipment
    
    
    (1,982
    )
    
    
    (6,116
    )Net cash provided (used) by investing activities
    
    
    32,542
    
    
    
    (93,442
    )Financing Activities:Net decrease in demand and savings deposits
    
    
    (128,630
    )
    
    
    (110,795
    )Net increase in time deposits
    
    
    178,778
    
    
    
    100,570Net (decrease) increase in short-term borrowings
    
    
    (126,567
    )
    
    
    135,309Proceeds from issuance of long-term debt
    
    
    
    
    
    
    25,000Principal reductions in long-term debt
    
    
    (6,286
    )
    
    
    (70,044
    )Cash dividends paid
    
    
    (12,259
    )
    
    
    (12,326
    )Proceeds from stock options exercised
    
    
    1,256
    
    
    
    374Shares acquired for retirement
    
    
    (6,850
    )
    
    
    (2,618
    )Net cash (used) provided by financing activities
    
    
    (100,558
    )
    
    
    65,470Net decrease in cash and due from banks
    
    
    (42,671
    )
    
    
    (7,767
    )Cash and due from banks at beginning of period
    
    
    194,748
    
    
    
    153,474Cash and due from banks at end of period
    
    $
    152,077
    
    
    $
    145,707
  6




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Consolidated Financial Statements
 
 Notes to Consolidated Financial Statements (Unaudited)
 Citizens Banking Corporation and Subsidiaries
 Note 1. Basis of Presentation
  Note 2. Recent Accounting Pronouncements
Statements of Financial Accounting Standards
 SFAS No. 123R, Stock-Based Compensation (Revised 2004).
 FASB
Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments
 Note 3. Investment Securities
  7




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005Estimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Gross Unrealized
    
    
    Amortized
    
    
    Fair
    
    
    Gross Unrealized(in thousands)
    
    Cost
    
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Cost
    
    
    Value
    
    
    Gains
    
    
    LossesAvailable For Sale:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal agencies:Mortgage-backed
    
    
    800,287
    
    
    
    779,164
    
    
    
    364
    
    
    
    21,487
    
    
    
    825,933
    
    
    
    811,898
    
    
    
    985
    
    
    
    15,020Other
    
    
    309,852
    
    
    
    307,935
    
    
    
    1,346
    
    
    
    3,263
    
    
    
    309,681
    
    
    
    310,408
    
    
    
    2,046
    
    
    
    1,319State and municipal
    
    
    368,134
    
    
    
    378,454
    
    
    
    11,804
    
    
    
    1,484
    
    
    
    364,853
    
    
    
    378,235
    
    
    
    14,391
    
    
    
    1,009Mortgage and asset-backed
    
    
    265
    
    
    
    265
    
    
    
    1
    
    
    
    1
    
    
    
    280
    
    
    
    280
    
    
    
    1
    
    
    
    1Other
    
    
    879
    
    
    
    978
    
    
    
    102
    
    
    
    3
    
    
    
    1,072
    
    
    
    1,176
    
    
    
    107
    
    
    
    3Total available for sale
    
    $
    1,479,417
    
    
    $
    1,466,796
    
    
    $
    13,617
    
    
    $
    26,238
    
    
    $
    1,501,819
    
    
    $
    1,501,997
    
    
    $
    17,530
    
    
    $
    17,352Held to Maturity:State and municipal
Total held to maturity
    
    $
    90,346
    
    
    $
    89,699
    
    
    $
    452
    
    
    $
    1,099
    
    
    $
    82,431
    
    
    $
    82,364
    
    
    $
    590
    
    
    $
    657Other Investment Securities:FHLB and Fed
Reserve stockTotal Other Securities
    
    $
    55,975
    
    
    $
    55,975
    
    
    $
    
    
    
    $
    
    
    
    $
    55,911
    
    
    $
    55,911
    
    
    $
    
    
    
    $
    
  As of March 31, 2006
 Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable For Sale:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal agencies:Mortgage-backed
    
    
    266,868
    
    
    
    3,775
    
    
    
    491,186
    
    
    
    17,712
    
    
    
    758,054
    
    
    
    21,487Other
    
    
    267,101
    
    
    
    3,263
    
    
    
    
    
    
    
    
    
    
    
    267,101
    
    
    
    3,263State and municipal
    
    
    42,607
    
    
    
    1,016
    
    
    
    12,643
    
    
    
    468
    
    
    
    55,250
    
    
    
    1,484Mortgage and asset-backed
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    1
    
    
    
    105
    
    
    
    1Other
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3
    
    
    
    6
    
    
    
    3Total available for sale
    
    
    576,576
    
    
    
    8,054
    
    
    
    503,940
    
    
    
    18,184
    
    
    
    1,080,516
    
    
    
    26,238Held to Maturity:State and municipal
    
    
    50,222
    
    
    
    910
    
    
    
    5,780
    
    
    
    189
    
    
    
    56,002
    
    
    
    1,099Total held to maturity
    
    
    50,222
    
    
    
    910
    
    
    
    5,780
    
    
    
    189
    
    
    
    56,002
    
    
    
    1,099Total
    
    $
    626,798
    
    
    $
    8,964
    
    
    $
    509,720
    
    
    $
    18,373
    
    
    $
    1,136,518
    
    
    $
    27,337
 8




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##### Table of Contents



As of December 31, 2005
 Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable For Sale:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal agencies:Mortgage-backed
    
    
    320,048
    
    
    
    3,669
    
    
    
    440,599
    
    
    
    11,351
    
    
    
    760,647
    
    
    
    15,020Other
    
    
    173,266
    
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    173,266
    
    
    
    1,319State and municipal
    
    
    36,539
    
    
    
    658
    
    
    
    10,046
    
    
    
    351
    
    
    
    46,585
    
    
    
    1,009Mortgage and asset-backed
    
    
    197
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    1Other
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3
    
    
    
    6
    
    
    
    3Total available for sale
    
    
    530,050
    
    
    
    5,647
    
    
    
    450,651
    
    
    
    11,705
    
    
    
    980,701
    
    
    
    17,352Held to Maturity:State and municipal
    
    
    41,471
    
    
    
    544
    
    
    
    3,660
    
    
    
    113
    
    
    
    45,131
    
    
    
    657Total held to maturity
    
    
    41,471
    
    
    
    544
    
    
    
    3,660
    
    
    
    113
    
    
    
    45,131
    
    
    
    657Total
    
    $
    571,521
    
    
    $
    6,191
    
    
    $
    454,311
    
    
    $
    11,818
    
    
    $
    1,025,832
    
    
    $
    18,009
  Note 4. Allowance for Loan Losses and Impaired Loans
  9




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##### Table of Contents



Analysis of Allowance for Loan Losses
 Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    3,000
    
    
    
    3,000Charge-offs:Commercial
    
    
    921
    
    
    
    2,463Commercial real estate
    
    
    616
    
    
    
    678Total commercial
    
    
    1,537
    
    
    
    3,141Residential mortgage
    
    
    198
    
    
    
    324Direct consumer
    
    
    1,669
    
    
    
    1,424Indirect consumer
    
    
    2,829
    
    
    
    2,236Total charge-offs
    
    
    6,233
    
    
    
    7,125Recoveries:Commercial
    
    
    1,175
    
    
    
    1,162Commercial real estate
    
    
    79
    
    
    
    707Total commercial
    
    
    1,254
    
    
    
    1,869Residential mortgage
    
    
    55
    
    
    
    Direct consumer
    
    
    285
    
    
    
    343Indirect consumer
    
    
    662
    
    
    
    674Total recoveries
    
    
    2,256
    
    
    
    2,886Net charge-offs
    
    
    3,977
    
    
    
    4,239Allowance for loan losses  end of period
    
    $
    115,423
    
    
    $
    120,945
  Impaired Loan Information
 Balances
    
    
    Valuation ReserveMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005Balances -Impaired loans with valuation reserve
    
    $
    12,936
    
    
    $
    7,989
    
    
    $
    35,416
    
    
    $
    5,454
    
    
    $
    5,059
    
    
    $
    14,266Impaired loans with no valuation reserve
    
    
    2,592
    
    
    
    908
    
    
    
    2,739
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    15,528
    
    
    $
    8,897
    
    
    $
    38,155
    
    
    $
    5,454
    
    
    $
    5,059
    
    
    $
    14,266Impaired loans on nonaccrual basis
    
    $
    5,646
    
    
    $
    4,728
    
    
    $
    5,955
    
    
    $
    2,061
    
    
    $
    2,747
    
    
    $
    2,179Impaired loans on accrual basis
    
    
    9,882
    
    
    
    4,169
    
    
    
    32,200
    
    
    
    3,393
    
    
    
    2,312
    
    
    
    12,087Total impaired loans
    
    $
    15,528
    
    
    $
    8,897
    
    
    $
    38,155
    
    
    $
    5,454
    
    
    $
    5,059
    
    
    $
    14,266
  Note 5. Long-term Debt
  10




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##### Table of Contents



March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Citizens (Parent only):Subordinated debt:Notes maturing February 2013
    
    $
    117,803
    
    
    $
    120,852
    
    
    $
    120,948Deferrable interest debenture maturing June 2033
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Subsidiaries:Federal Home Loan Bank advances
    
    
    859,452
    
    
    
    859,483
    
    
    
    755,131Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    22Total long-term debt
    
    $
    1,003,029
    
    
    $
    1,006,109
    
    
    $
    901,875
 Note 6. Accumulated Other Comprehensive Income
  Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    454
    
    
    $
    17,994Net unrealized loss on securities for the quarter, net of tax effect of
$(4,477) in 2006 and $(8,223) in 2005
    
    
    (8,315
    )
    
    
    (15,271
    )Less: Reclassification adjustment for net gains on securities
included in net income for the quarter, net of tax effect of
$(3) in 2006 and $(2) in 2005
    
    
    (4
    )
    
    
    (4
    )Net change in unrealized gain on cash flow hedges for the quarter,
net of tax effect of $48 in 2006 and $549 in 2005
    
    
    88
    
    
    
    1,021Accumulated other comprehensive income, net of tax
    
    $
    (7,777
    )
    
    $
    3,740
 Note 7. Earnings Per Share
  Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2006
    
    
    2005Numerator:Basic and dilutive earnings per share  net income
available to common shareholders
    
    $
    20,756
    
    
    $
    20,080Denominator:Basic earnings per share  weighted average shares
    
    
    42,784
    
    
    
    43,224Effect of dilutive securities  potential conversion
of employee stock options
    
    
    157
    
    
    
    422Diluted earnings per share  adjusted weighted-average
shares and assumed conversions
    
    
    42,941
    
    
    
    43,646Basic earnings per share
    
    $
    0.49
    
    
    $
    0.46Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.46
 11




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##### Table of Contents



Note 8. Stock-Based Compensation
      Analysis of Stock-Based Compensation Expense
 Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Stock Option Compensation
    
    $
    19
    
    
    $
    Restricted Stock Compensation
    
    
    390
    
    
    
    30Stock-based compensation expense before income taxes
    
    
    409
    
    
    
    30Income tax benefit
    
    
    (143
    )
    
    
    (10
    )Total stock-based compensation expense after income taxes
    
    $
    266
    
    
    $
    20
   12




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##### Table of Contents



Three Months Ended(in thousands, except per share amounts)
    
    March 31, 2005Net income, as reported
    
    $
    20,080Less pro forma expense related to options granted
    
    
    (505
    )Pro forma Net Income
    
    $
    19,575Net income per shareBasic  as reported
    
    $
    0.46Basic  pro forma
    
    
    0.45Diluted  as reported
    
    
    0.46Diluted  pro forma
    
    
    0.45
  Three Months EndedMarch 31,Weighted Average Assumptions
    
    2006
    
    2005Dividend yield
    
    
    
    
    
    
    3.5
    %Expected volatility
    
    
    
    
    
    
    28.8
    %Risk-free interest rate
    
    
    
    
    
    
    3.84
    %Expected lives
    
    
    
    
    
    5 yrs
   OptionsWeighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Contractual Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    3,917,891
    
    
    $
    27.91Granted
    
    
    
    
    
    
    Exercised
    
    
    (55,982
    )
    
    
    19.88Forfeitures or Expirations
    
    
    (35,514
    )
    
    
    32.39Outstanding at March 31, 2006
    
    
    3,826,395
    
    
    $
    27.99
    
    
    6.1 yrs
    
    $
    4,629,632Exercisable
    
    
    3,787,834
    
    
    $
    28.00
    
    
    6.1 yrs
    
    $
    4,591,960
 13




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##### Table of Contents



Weighted-AverageNumber of
    
    
    Grant Date FairShares
    
    
    ValueOutstanding restricted stock at December 31, 2005
    
    
    129,180
    
    
    $
    27.19Granted
    
    
    500
    
    
    
    27.74Vested
    
    
    (4,155
    )
    
    
    33.35Forfeited
    
    
    (104
    )
    
    
    29.02Restricted stock at March 31, 2006
    
    
    125,421
    
    
    $
    26.99
  Note 9. Pension Benefit Cost
  Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Defined Benefit Pension PlansService cost
    
    $
    1,189
    
    
    $
    1,198Interest cost
    
    
    1,371
    
    
    
    1,311Expected return on plan assets
    
    
    (1,890
    )
    
    
    (1,757
    )Amortization of unrecognized:Net transition asset
    
    
    
    
    
    
    (1
    )Prior service cost
    
    
    48
    
    
    
    49Net actuarial loss
    
    
    291
    
    
    
    301Net pension cost
    
    $
    1,009
    
    
    $
    1,101
  Note 10. Lines of Business Information
  14




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##### Table of Contents



Line of Business Information
 Commercial
    
    
    Consumer
    
    
    Wealth(in thousands)
    
    Banking
    
    
    Banking
    
    
    Mgmt
    
    
    Other
    
    
    TotalEarnings Summary  Three Months Ended March 31, 2006Net interest income (taxable equivalent)
    
    $
    30,939
    
    
    $
    35,570
    
    
    $
    332
    
    
    $
    4,050
    
    
    $
    70,891Provision for loan losses
    
    
    1,188
    
    
    
    1,812
    
    
    
    
    
    
    
    
    
    
    
    3,000Net interest income after provision
    
    
    29,751
    
    
    
    33,758
    
    
    
    332
    
    
    
    4,050
    
    
    
    67,891Noninterest income
    
    
    3,466
    
    
    
    14,453
    
    
    
    6,503
    
    
    
    1,148
    
    
    
    25,570Noninterest expense
    
    
    18,309
    
    
    
    31,807
    
    
    
    5,398
    
    
    
    6,058
    
    
    
    61,572Income before income taxes
    
    
    14,908
    
    
    
    16,404
    
    
    
    1,437
    
    
    
    (860
    )
    
    
    31,889Income tax expense (taxable equivalent)
    
    
    5,254
    
    
    
    5,747
    
    
    
    509
    
    
    
    (377
    )
    
    
    11,133Net income
    
    $
    9,654
    
    
    $
    10,657
    
    
    $
    928
    
    
    $
    (483
    )
    
    $
    20,756Average assets(in millions)
    
    $
    3,006
    
    
    $
    2,591
    
    
    $
    28
    
    
    $
    2,029
    
    
    $
    7,654Earnings Summary  Three Months Ended March 31, 2005(1)Net interest income (taxable equivalent)
    
    $
    28,644
    
    
    $
    37,308
    
    
    $
    216
    
    
    $
    5,417
    
    
    $
    71,585Provision for loan losses
    
    
    1,753
    
    
    
    1,248
    
    
    
    (1
    )
    
    
    
    
    
    
    3,000Net interest income after provision
    
    
    26,891
    
    
    
    36,060
    
    
    
    217
    
    
    
    5,417
    
    
    
    68,585Noninterest income
    
    
    3,058
    
    
    
    11,778
    
    
    
    6,007
    
    
    
    1,618
    
    
    
    22,461Noninterest expense
    
    
    18,186
    
    
    
    33,134
    
    
    
    5,530
    
    
    
    3,751
    
    
    
    60,601Income before income taxes
    
    
    11,763
    
    
    
    14,704
    
    
    
    694
    
    
    
    3,284
    
    
    
    30,445Income tax expense (taxable equivalent)
    
    
    4,154
    
    
    
    5,146
    
    
    
    246
    
    
    
    819
    
    
    
    10,365Net income
    
    $
    7,609
    
    
    $
    9,558
    
    
    $
    448
    
    
    $
    2,465
    
    
    $
    20,080Average assets(in millions)
    
    $
    2,858
    
    
    $
    2,569
    
    
    $
    22
    
    
    $
    2,279
    
    
    $
    7,728
 
 (1)
    
    Certain amounts have been reclassified to conform to current year presentation. Note 11. Derivatives and Hedging Activities
    15




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##### Table of Contents



Derivative Financial Instruments:
 March 31, 2006
    
    December 31, 2005Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueReceived fixed swaps
    
    $
    285,000
    
    
    $
    (903
    )
    
    $
    530,000
    
    
    $
    (7,429
    )Pay fixed swaps
    
    
    124,000
    
    
    
    2,622
    
    
    
    124,000
    
    
    
    2,486Customer initiated swaps and corresponding offsets
    
    
    300,914
    
    
    
    
    
    
    
    233,104
    
    
    
    Interest rate lock commitments
    
    
    27,586
    
    
    
    27
    
    
    
    17,897
    
    
    
    37Forward mortgage loan contracts
    
    
    27,500
    
    
    
    161
    
    
    
    22,000
    
    
    
    (66
    )Total
    
    $
    765,000
    
    
    $
    1,907
    
    
    $
    927,001
    
    
    $
    (4,972
    )
 Derivative Classifications and Hedging Relationships:
 March 31, 2006
    
    December 31, 2005Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueDerivatives Designated as Cash Flow Hedges:Hedging repurchase agreements
    
    $
    124,000
    
    
    $
    2,622
    
    
    $
    124,000
    
    
    $
    2,486Derivatives Designated as Fair Value Hedges:Hedging time deposits
    
    
    185,000
    
    
    
    (277
    )
    
    
    25,000
    
    
    
    (10
    )Hedging long-term debt
    
    
    100,000
    
    
    
    (626
    )
    
    
    225,000
    
    
    
    (3,815
    )Derivatives Not Designated as Hedges:Receive fixed swaps
    
    
    
    
    
    
    
    
    
    
    280,000
    
    
    
    (3,604
    )Customer initiated swaps
    
    
    300,914
    
    
    
    
    
    
    
    233,104
    
    
    
    Total
    
    $
    709,914
    
    
    $
    1,719
    
    
    $
    887,104
    
    
    $
    (4,943
    )
 Note 12. Commitments, Contingent Liabilities and Guarantees
   March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Loan commitments and letters of credit:Commitments to extend credit
    
    $
    1,626,348
    
    
    $
    1,762,259Financial standby letters of credit
    
    
    45,077
    
    
    
    44,739Performance standby letters of credit
    
    
    8,206
    
    
    
    11,557Commercial letters of credit
    
    
    219,562
    
    
    
    223,269Total loan commitments and letters of credit
    
    $
    1,899,193
    
    
    $
    2,041,824
 16




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17




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Selected Quarterly Information
Citizens Banking Corporation and Subsidiaries
 Three Months EndedMarch 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,2006
    
    2005
    
    2005
    
    2005
    
    2005Summary of Operations (thousands)Interest income
    
    $
    112,391
    
    
    $
    111,958
    
    
    $
    108,506
    
    
    $
    103,619
    
    
    $
    99,166Net interest income
    
    
    67,475
    
    
    
    69,095
    
    
    
    69,642
    
    
    
    68,779
    
    
    
    68,233Provision for loan losses (1)
    
    
    3,000
    
    
    
    (7,287
    )
    
    
    4,000
    
    
    
    1,396
    
    
    
    3,000Total fees and other income (2)
    
    
    25,563
    
    
    
    19,930
    
    
    
    23,941
    
    
    
    23,109
    
    
    
    22,455Investment securities gains (losses) (3)
    
    
    7
    
    
    
    (8,970
    )
    
    
    
    
    
    
    37
    
    
    
    6Noninterest expense (4)
    
    
    61,572
    
    
    
    60,901
    
    
    
    60,550
    
    
    
    60,990
    
    
    
    60,601Income tax provision
    
    
    7,717
    
    
    
    7,553
    
    
    
    8,041
    
    
    
    8,974
    
    
    
    7,013Net income
    
    
    20,756
    
    
    
    18,888
    
    
    
    20,992
    
    
    
    20,565
    
    
    
    20,080Taxable equivalent adjustment
    
    
    3,416
    
    
    
    3,432
    
    
    
    3,284
    
    
    
    3,324
    
    
    
    3,353Cash dividends
    
    
    12,259
    
    
    
    12,269
    
    
    
    12,412
    
    
    
    12,304
    
    
    
    12,326Per Common Share DataBasic net income
    
    $
    0.49
    
    
    $
    0.44
    
    
    $
    0.49
    
    
    $
    0.48
    
    
    $
    0.46Diluted net income
    
    
    0.48
    
    
    
    0.44
    
    
    
    0.48
    
    
    
    0.47
    
    
    
    0.46Cash dividends
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285Market value (end of period)
    
    
    26.85
    
    
    
    27.75
    
    
    
    28.40
    
    
    
    30.22
    
    
    
    29.36Book value (end of period)
    
    
    15.23
    
    
    
    15.28
    
    
    
    15.21
    
    
    
    15.31
    
    
    
    14.95At Period End (millions)Assets
    
    $
    7,663
    
    
    $
    7,752
    
    
    $
    7,851
    
    
    $
    7,826
    
    
    $
    7,777Portfolio loans
    
    
    5,592
    
    
    
    5,616
    
    
    
    5,569
    
    
    
    5,523
    
    
    
    5,430Deposits
    
    
    5,524
    
    
    
    5,474
    
    
    
    5,226
    
    
    
    5,201
    
    
    
    5,290Shareholders equity
    
    
    652
    
    
    
    656
    
    
    
    655
    
    
    
    662
    
    
    
    646Average for the Quarter (millions)Assets
    
    $
    7,654
    
    
    $
    7,754
    
    
    $
    7,821
    
    
    $
    7,807
    
    
    $
    7,728Portfolio loans
    
    
    5,561
    
    
    
    5,575
    
    
    
    5,531
    
    
    
    5,472
    
    
    
    5,393Deposits
    
    
    5,513
    
    
    
    5,305
    
    
    
    5,239
    
    
    
    5,254
    
    
    
    5,349Shareholders equity
    
    
    655
    
    
    
    654
    
    
    
    655
    
    
    
    654
    
    
    
    649Ratios (annualized)Return on average assets
    
    
    1.10
    %
    
    
    0.97
    %
    
    
    1.06
    %
    
    
    1.06
    %
    
    
    1.05
    %Return on average shareholders equity
    
    
    12.86
    
    
    
    11.46
    
    
    
    12.71
    
    
    
    12.62
    
    
    
    12.54Net interest margin (FTE) (5)
    
    
    3.97
    
    
    
    3.95
    
    
    
    3.93
    
    
    
    3.92
    
    
    
    3.96Efficiency ratio (6)
    
    
    63.84
    
    
    
    65.87
    
    
    
    62.51
    
    
    
    64.06
    
    
    
    64.44Net loans charged off to average portfolio loans (1)
    
    
    0.29
    
    
    
    (0.36
    )
    
    
    0.38
    
    
    
    0.17
    
    
    
    0.32Allowance for loan losses to portfolio loans
    
    
    2.06
    
    
    
    2.07
    
    
    
    2.13
    
    
    
    2.17
    
    
    
    2.23Nonperforming assets to portfolio loans plus ORAA (end of period)
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.76
    
    
    
    0.89
    
    
    
    0.80Nonperforming assets to total assets (end of period)
    
    
    0.48
    
    
    
    0.51
    
    
    
    0.54
    
    
    
    0.63
    
    
    
    0.56Average equity to average assets
    
    
    8.55
    
    
    
    8.43
    
    
    
    8.38
    
    
    
    8.37
    
    
    
    8.40Leverage ratio
    
    
    8.14
    
    
    
    7.98
    
    
    
    7.86
    
    
    
    7.85
    
    
    
    7.83Tier 1 capital ratio
    
    
    10.09
    
    
    
    9.94
    
    
    
    9.91
    
    
    
    10.00
    
    
    
    9.97Total capital ratio
    
    
    13.39
    
    
    
    13.22
    
    
    
    13.20
    
    
    
    13.31
    
    
    
    13.32
 (1)
    
    The provision for loan losses and net loans charged off during the fourth
quarter of 2005 reflect an insurance settlement of $9.1 million accounted for as a loan loss
recovery.(2)
    
    Total fees and other income includes a cumulative charge of $3.6 million on swaps
related to brokered certificates during the fourth quarter of 2005 and a $2.9 million gain on the
sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006.(3)
    
    Investment securities gains (losses) includes a net loss of $9.0 million on the sale
of securities as a result of restructuring the investment portfolio during the fourth quarter of
2005.(4)
    
    Noninterest expense includes a contribution to Citizens charitable foundation of
$1.5 million during the first quarter of 2006.(5)
    
    Net interest margin is presented on an annual basis, includes taxable equivalent
adjustments to interest income and is based on a tax rate of 35%.(6)
    
    The Efficiency Ratio measures how efficiently a bank spends its revenues. The
formula is: Noninterest expense/(Net interest income + Taxable equivalent adjustment +
Total fees and other income). 18




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##### Table of Contents



Introduction
  Forward  Looking Statements
  
    
    Citizens faces the risk that loan losses, including unanticipated loan losses due to
changes in loan portfolios, fraud and economic factors, will exceed the allowance for loan
losses and that additional increases in the allowance will be required. Additions to the
allowance would cause net income to decline and could have a negative impact on capital and
financial position.
    
    While Citizens attempts to manage the risk from changes in market interest rates,
interest rate risk management techniques are not exact. In addition, Citizens may not be
able to economically hedge its interest rate risk. A rapid or substantial increase or
decrease in interest rates could adversely affect net interest income and results of
operations.
    
    An economic downturn, and the negative economic effects caused by terrorist attacks,
potential attacks and other destabilizing events, would likely contribute to the
deterioration of the quality of the loan portfolio and could reduce Citizens customer
base, its level of deposits, and demand for financial products such as loans.
    
    If Citizens is unable to continue to attract core deposits or continue to obtain third
party financing on favorable terms, its cost of funds will increase, adversely affecting
the ability to generate the funds necessary for lending operations, reducing net interest
margin and negatively affecting results of operations.
    
    Increased competition with other financial institutions or an adverse change in
Citizens relationship with a number of major customers could reduce Citizens net interest
margin and net income by decreasing the number and size of loans originated, the interest
rates charged on these loans and the fees charged for services to customers. If Citizens
were to lend to customers who are less likely to pay in order to maintain historical
origination levels, it may not be able to maintain current loan quality levels.
    
    Citizens is a party to various lawsuits incidental to its business. Litigation is
subject to many uncertainties such that the expenses and ultimate exposure with respect to
many of these matters cannot be ascertained.
    
    The financial services industry is undergoing rapid technological changes. If Citizens
is unable to adequately invest in and implement new technology-driven products and
services, it may not be able to compete effectively, or the cost to provide products and
services may increase significantly.
    
    Citizens business may be adversely affected by the highly regulated environment in
which it operates. Changes in banking or tax laws, regulations and regulatory practices at
either the federal or state level may adversely affect the Corporation, including its
ability to offer new products and services, obtain financing, pay dividends from the
subsidiaries to the Holding Company, attract deposits, make loans and leases at
satisfactory spreads, and may also result in the imposition of additional costs.
    
    The products and services offered by the banking industry and customer expectations
regarding them are subject to change. Citizens attempts to respond to perceived customer
needs and expectations by offering new products and services, which are often costly to
develop and market initially. A lack of market acceptance of these products and services
would have a negative effect on Citizens financial condition and results of operations.
    
    New accounting or tax pronouncements or interpretations may be issued by the accounting
profession, regulators or other government bodies which could change existing accounting
methods. Changes in accounting methods could negatively impact Citizens results of
operations and financial position.
 19




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##### Table of Contents




    
    Citizens business continuity plans or data security systems could prove to be
inadequate, resulting in a material interruption in, or disruption to, Citizens business
and a negative impact on the results of operations.
    
    Citizens vendors could fail to fulfill their contractual obligations, resulting in a
material interruption in, or disruption to, its business and a negative impact on its
results of operations.
    
    Citizens potential inability to integrate acquired operations could have a negative
effect on Citizens expenses and results of operations.
    
    Citizens could face unanticipated environmental liabilities or costs related to real
property owned or acquired through foreclosure. Compliance with federal, state and local
environmental laws and regulations, including those related to investigation and clean-up
of contaminated sites, could have a negative effect on Citizens expenses and results of
operations.
    
    As a bank holding company that conducts substantially all of its operations through its
subsidiaries, the ability of the Holding Company to pay dividends, repurchase its shares or
to repay its indebtedness depends upon the results of operations of its subsidiaries and
their ability to pay dividends to the Holding Company. Dividends paid by these
subsidiaries are subject to limits imposed by federal and state law.
    
    Citizens controls and procedures may fail or be circumvented, which could have a
material adverse effect on its business, results of operations, and financial condition.
    
    Citizens articles of incorporation, by-laws and shareholder rights agreement, as well
as certain banking laws, may have an anti-takeover effect.
  Critical Accounting Policies
  Results of Operations
 Summary
   20




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##### Table of Contents



Net Interest Income and Net Interest Margin
  21




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##### Table of Contents



Average Balances/Net Interest Income/Average Rates
 2006
    
    2005Three Months Ended March 31,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands )
    
    Balance
    
    
    Interest(1)
    
    
    Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    1,684
    
    
    $
    12
    
    
    
    2.82
    
    
    $
    1,799
    
    
    $
    9
    
    
    
    2.01Investment securities (3):Taxable
    
    
    1,181,397
    
    
    
    13,611
    
    
    
    4.61
    
    
    
    1,435,683
    
    
    
    14,688
    
    
    
    4.09Tax-exempt
    
    
    446,657
    
    
    
    5,317
    
    
    
    7.33
    
    
    
    420,931
    
    
    
    5,197
    
    
    
    7.60Mortgage loans held for sale
    
    
    16,471
    
    
    
    232
    
    
    
    5.64
    
    
    
    31,341
    
    
    
    430
    
    
    
    5.49Portfolio Loans (4):Commercial
    
    
    1,646,899
    
    
    
    27,982
    
    
    
    7.02
    
    
    
    1,615,304
    
    
    
    21,842
    
    
    
    5.62Commercial real estate
    
    
    1,415,201
    
    
    
    23,985
    
    
    
    6.88
    
    
    
    1,291,629
    
    
    
    19,358
    
    
    
    6.08Residential mortgage loans
    
    
    541,390
    
    
    
    7,664
    
    
    
    5.66
    
    
    
    497,925
    
    
    
    6,813
    
    
    
    5.47Direct consumer
    
    
    1,124,379
    
    
    
    20,011
    
    
    
    7.22
    
    
    
    1,167,894
    
    
    
    17,363
    
    
    
    6.03Indirect consumer
    
    
    833,436
    
    
    
    13,577
    
    
    
    6.61
    
    
    
    820,291
    
    
    
    13,466
    
    
    
    6.66Total portfolio loans
    
    
    5,561,305
    
    
    
    93,219
    
    
    
    6.83
    
    
    
    5,393,043
    
    
    
    78,842
    
    
    
    5.96Total earning assets (3)
    
    
    7,207,514
    
    
    
    112,391
    
    
    
    6.49
    
    
    
    7,282,797
    
    
    
    99,166
    
    
    
    5.68Nonearning AssetsCash and due from banks
    
    
    165,909
    
    
    
    
    
    
    
    
    
    
    
    158,195Bank premises and equipment
    
    
    121,348
    
    
    
    
    
    
    
    
    
    
    
    120,902Investment security fair value adjustment
    
    
    (3,305
    )
    
    
    
    
    
    
    
    
    
    
    18,974Other nonearning assets
    
    
    278,550
    
    
    
    
    
    
    
    
    
    
    
    268,861Allowance for loan losses
    
    
    (116,151
    )
    
    
    
    
    
    
    
    
    
    
    (121,267
    )Total assets
    
    $
    7,653,865
    
    
    
    
    
    
    
    
    
    
    $
    7,728,462Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    857,273
    
    
    $
    1,362
    
    
    
    0.64
    
    
    $
    1,153,239
    
    
    $
    2,002
    
    
    
    0.70Savings deposits
    
    
    1,448,866
    
    
    
    7,973
    
    
    
    2.23
    
    
    
    1,626,232
    
    
    
    5,092
    
    
    
    1.27Time deposits
    
    
    2,281,926
    
    
    
    21,657
    
    
    
    3.85
    
    
    
    1,662,673
    
    
    
    10,977
    
    
    
    2.68Short-term borrowings
    
    
    390,307
    
    
    
    3,736
    
    
    
    3.88
    
    
    
    717,971
    
    
    
    4,441
    
    
    
    2.51Long-term debt
    
    
    1,004,948
    
    
    
    10,188
    
    
    
    4.10
    
    
    
    927,497
    
    
    
    8,421
    
    
    
    3.67Total interest-bearing liabilities
    
    
    5,983,320
    
    
    
    44,916
    
    
    
    3.04
    
    
    
    6,087,612
    
    
    
    30,933
    
    
    
    2.06Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    924,788
    
    
    
    
    
    
    
    
    
    
    
    906,615Other liabilities
    
    
    91,150
    
    
    
    
    
    
    
    
    
    
    
    84,766Shareholders equity
    
    
    654,607
    
    
    
    
    
    
    
    
    
    
    
    649,469Total liabilities and shareholders equity
    
    $
    7,653,865
    
    
    
    
    
    
    
    
    
    
    $
    7,728,462Net Interest Income
    
    
    
    
    
    $
    67,475
    
    
    
    
    
    
    
    
    
    
    $
    68,233Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    3.45
    %
    
    
    
    
    
    
    
    
    
    
    3.62
    %Contribution of noninterest bearing sources of funds
    
    
    
    
    
    
    
    
    
    
    0.52
    
    
    
    
    
    
    
    
    
    
    
    0.34Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    
    
    
    
    3.96
    %
 (1)
    
    Interest income is shown on actual basis and does not include taxable equivalent
adjustments.(2)
    
    Average rates are presented on an annual basis and include taxable equivalent
adjustments to interest income of $3.4 million and $3.4 million
for the three months ended March
31, 2006 and 2005, respectively, based on a tax rate of 35%.(3)
    
    For presentation in this table, average balances and the corresponding average
rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.(4)
    
    Nonaccrual loans are included in average balances for each applicable loan
category.(5)
    
    The interest spread and net interest margin are presented on a tax-equivalent
basis.(6)
    
    Because noninterest-bearing funding sources, demand deposits, other liabilities and
shareholders equity also support earning assets, the net interest
margin exceeds the interest spread.  22




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##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense
 Three Months Ended March 31,Increase (Decrease)2006 compared with 2005
    
    Net
    
    
    Due to Change in(in thousands)
    
    Change(1)
    
    
    Rate(2)
    
    
    Volume(2)Interest Income:Money market investments
    
    
    3
    
    
    
    4
    
    
    
    (1
    )Investment securities:Taxable
    
    
    (1,077
    )
    
    
    1,716
    
    
    
    (2,793
    )Tax-exempt
    
    
    120
    
    
    
    (190
    )
    
    
    310Mortgage loans held for sale
    
    
    (198
    )
    
    
    11
    
    
    
    (209
    )Loans:Commercial
    
    
    6,140
    
    
    
    5,705
    
    
    
    435Commercial real estate
    
    
    4,627
    
    
    
    2,673
    
    
    
    1,954Residential mortgage loans
    
    
    851
    
    
    
    242
    
    
    
    609Direct consumer
    
    
    2,648
    
    
    
    3,315
    
    
    
    (667
    )Indirect consumer
    
    
    111
    
    
    
    (104
    )
    
    
    215Total portfolio loans
    
    
    14,377
    
    
    
    11,831
    
    
    
    2,546Total
    
    
    13,225
    
    
    
    13,372
    
    
    
    (147
    )Interest Expense:Deposits:Interest-bearing demand
    
    
    (640
    )
    
    
    (159
    )
    
    
    (481
    )Savings
    
    
    2,881
    
    
    
    3,489
    
    
    
    (608
    )Time
    
    
    10,680
    
    
    
    5,769
    
    
    
    4,911Short-term borrowings
    
    
    (705
    )
    
    
    1,826
    
    
    
    (2,531
    )Long-term debt
    
    
    1,767
    
    
    
    1,030
    
    
    
    737Total
    
    
    13,983
    
    
    
    11,955
    
    
    
    2,028Net Interest Income
    
    $
    (758
    )
    
    $
    1,417
    
    
    $
    (2,175
    )
 (1)
    
    Changes are based on actual interest income and do
not reflect taxable equivalent adjustments.(2)
    
    The change in interest not solely due to changes in
volume or rates has been allocated in proportion to
the absolute dollar amounts of the change in each.    23




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##### Table of Contents



Noninterest Income
  Noninterest Income
 Three Months EndedMarch 31,
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentService charges on deposit accounts
    
    $
    8,875
    
    
    $
    8,287
    
    
    $
    588
    
    
    
    7.1
    %Trust fees
    
    
    5,042
    
    
    
    4,412
    
    
    
    630
    
    
    
    14.3Mortgage and other loan income
    
    
    2,010
    
    
    
    2,360
    
    
    
    (350
    )
    
    
    (14.8
    )Brokerage and investment fees
    
    
    1,515
    
    
    
    1,599
    
    
    
    (84
    )
    
    
    (5.2
    )ATM network user fees
    
    
    987
    
    
    
    873
    
    
    
    114
    
    
    
    13.0Bankcard fees
    
    
    1,057
    
    
    
    840
    
    
    
    217
    
    
    
    25.8Financial services
    
    
    774
    
    
    
    730
    
    
    
    44
    
    
    
    6.1Investment securities gains
    
    
    7
    
    
    
    6
    
    
    
    1
    
    
    
    15.0Fair value change in CD swap derivatives
    
    
    (207
    )
    
    
    
    
    
    
    (207
    )
    
    
    N/MOther
    
    
    5,510
    
    
    
    3,354
    
    
    
    2,156
    
    
    
    64.3Total noninterest income
    
    $
    25,570
    
    
    $
    22,461
    
    
    $
    3,109
    
    
    
    13.8
      24




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##### Table of Contents



Noninterest Expense
  Noninterest Expense
 Three Months EndedMarch 31,
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentSalaries and employee benefits
    
    $
    32,256
    
    
    $
    33,351
    
    
    $
    (1,095
    )
    
    
    (3.3
    )%Occupancy
    
    
    5,942
    
    
    
    5,560
    
    
    
    382
    
    
    
    6.9Professional services
    
    
    4,078
    
    
    
    4,199
    
    
    
    (121
    )
    
    
    (2.9
    )Equipment
    
    
    3,166
    
    
    
    3,301
    
    
    
    (135
    )
    
    
    (4.1
    )Data processing services
    
    
    3,739
    
    
    
    3,369
    
    
    
    370
    
    
    
    11.0Advertising and public relations
    
    
    2,034
    
    
    
    1,746
    
    
    
    288
    
    
    
    16.5Postage and delivery
    
    
    1,462
    
    
    
    1,590
    
    
    
    (128
    )
    
    
    (8.0
    )Telephone
    
    
    1,464
    
    
    
    1,441
    
    
    
    23
    
    
    
    1.6Other loan expenses
    
    
    416
    
    
    
    375
    
    
    
    41
    
    
    
    10.8Stationery and supplies
    
    
    727
    
    
    
    919
    
    
    
    (192
    )
    
    
    (20.8
    )Intangible asset amortization
    
    
    725
    
    
    
    725
    
    
    
    
    
    
    
    Other
    
    
    5,563
    
    
    
    4,025
    
    
    
    1,538
    
    
    
    38.2Total noninterest expense
    
    $
    61,572
    
    
    $
    60,601
    
    
    $
    971
    
    
    
    1.6
    25




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##### Table of Contents



Income Taxes
    Lines of Business Results
  Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Commercial Banking
    
    $
    9,654
    
    
    $
    7,609Consumer Banking
    
    
    10,657
    
    
    
    9,558Wealth Management
    
    
    928
    
    
    
    448Other
    
    
    (483
    )
    
    
    2,465Net Income
    
    $
    20,756
    
    
    $
    20,080
 26




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##### Table of Contents



Commercial Banking
  Consumer Banking
  Wealth Management
  Other
  Financial Condition
  27




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##### Table of Contents



Investment Securities and Money Market Investments
  Portfolio Loans
      Mortgage Loans Held for Sale
  Provision and Allowance for Loan Losses
  28




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##### Table of Contents



Analysis of Allowance for Loan Losses
 Three Months EndedMarch 31,(in thousands)
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    3,000
    
    
    
    3,000Charge-offs
    
    
    6,233
    
    
    
    7,125Recoveries
    
    
    2,256
    
    
    
    2,886Net charge-offs
    
    
    3,977
    
    
    
    4,239Allowance for loan losses  end of period
    
    $
    115,423
    
    
    $
    120,945Portfolio loans outstanding at period end (1)
    
    $
    5,591,991
    
    
    $
    5,429,842Average portfolio loans outstanding during period (1)
    
    
    5,561,305
    
    
    
    5,393,043Allowance for loan losses as a percentage of portfolio loans
    
    
    2.06
    %
    
    
    2.23
    %Ratio of net charge-offs during period to average portfolio loans
(annualized)
    
    
    0.29
    
    
    
    0.32
 (1)
    
    Balances exclude mortgage loans held for sale.      29




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##### Table of Contents



Nonperforming Assets
  Nonperforming Assets
 March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Nonperforming LoansNonaccrual Commercial:Commercial
    
    $
    10,594
    
    
    $
    11,880
    
    
    $
    12,991Commercial real estate
    
    
    5,219
    
    
    
    5,068
    
    
    
    11,004Total commercial
    
    
    15,813
    
    
    
    16,948
    
    
    
    23,995Nonaccrual Consumer:Direct
    
    
    3,911
    
    
    
    4,326
    
    
    
    3,474Indirect
    
    
    569
    
    
    
    2,454
    
    
    
    1,025Total consumer
    
    
    4,480
    
    
    
    6,780
    
    
    
    4,499Nonaccrual Mortgage:
    
    
    7,396
    
    
    
    8,412
    
    
    
    8,099Total nonaccrual loans
    
    
    27,689
    
    
    
    32,140
    
    
    
    36,593Loans 90 days past due and still accruing
    
    
    547
    
    
    
    385
    
    
    
    11Restructured loans
    
    
    1,844
    
    
    
    
    
    
    
    42Total nonperforming loans
    
    
    30,080
    
    
    
    32,525
    
    
    
    36,646Other Repossessed Assets Acquired (ORAA)
    
    
    6,397
    
    
    
    7,351
    
    
    
    7,118Total nonperforming assets
    
    $
    36,477
    
    
    $
    39,876
    
    
    $
    43,764Nonperforming assets as a percent of portfolio loans plus
ORAA(1)
    
    
    0.65
    %
    
    
    0.71
    %
    
    
    0.80
    %Nonperforming assets as a percent of total assets
    
    
    0.48
    
    
    
    0.51
    
    
    
    0.56Allowance for loan loss as a percent of nonperforming loans
    
    
    383.72
    
    
    
    357.88
    
    
    
    330.04Allowance for loan loss as a percent of nonperforming assets
    
    
    316.43
    
    
    
    291.90
    
    
    
    276.36
 (1)
    
    Portfolio loans exclude mortgage loans held for sale. 30




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##### Table of Contents



Deposits
   Borrowed Funds
   31




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##### Table of Contents



Capital Resources
  Capital Ratios
 Regulatory MinimumWell-
    
    March 31,
    
    December 31,
    
    March 31,Required
    
    Capitalized
    
    2006
    
    2005
    
    2005Risk based:Tier 1 capital
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    10.09
    %
    
    
    9.94
    %
    
    
    9.97
    %Total capital
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.39
    
    
    
    13.22
    
    
    
    13.32Tier 1 leverage
    
    
    4.00
    
    
    
    5.00
    
    
    
    8.14
    
    
    
    7.98
    
    
    
    7.83
   Contractual Obligations and Off-Balance Sheet Arrangements
  Liquidity and Debt Capacity
     32




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##### Table of Contents



Interest Rate Risk
    33




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##### Table of Contents



Static Repricing Gap
 Total0 - 3
    
    
    4 - 6
    
    
    7 - 12
    
    
    Within
    
    
    1 - 5
    
    
    Over(dollars in millions)
    
    Months
    
    
    Months
    
    
    Months
    
    
    1 Year
    
    
    Years
    
    
    5 Years
    
    
    TotalMarch 31, 2006Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,615.4
    
    
    $
    231.1
    
    
    $
    408.6
    
    
    $
    3,255.1
    
    
    $
    1,917.1
    
    
    $
    419.8
    
    
    $
    5,592.0Mortgage loans held for sale
    
    
    13.4
    
    
    
    
    
    
    
    
    
    
    
    13.4
    
    
    
    
    
    
    
    
    
    
    
    13.4Investment securities
    
    
    65.7
    
    
    
    57.1
    
    
    
    240.7
    
    
    
    363.5
    
    
    
    866.3
    
    
    
    383.3
    
    
    
    1,613.1Short-term investments
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Total
    
    $
    2,696.0
    
    
    $
    288.2
    
    
    $
    649.3
    
    
    $
    3,633.5
    
    
    $
    2,783.4
    
    
    $
    803.1
    
    
    $
    7,220.0Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,712.0
    
    
    $
    457.8
    
    
    $
    708.0
    
    
    $
    2,877.8
    
    
    $
    990.9
    
    
    $
    755.4
    
    
    $
    4,624.1Other interest bearing liabilities
    
    
    540.7
    
    
    
    55.0
    
    
    
    176.9
    
    
    
    772.6
    
    
    
    479.2
    
    
    
    153.8
    
    
    
    1,405.6Total
    
    $
    2,252.7
    
    
    $
    512.8
    
    
    $
    884.9
    
    
    $
    3,650.4
    
    
    $
    1,470.1
    
    
    $
    909.2
    
    
    $
    6,029.7Derivatives
    
    $
    (166.0
    )
    
    $
    70.0
    
    
    $
    80.0
    
    
    $
    (16.0
    )
    
    $
    16.0
    
    
    $
    
    
    
    $
    Period GAP(4)
    
    $
    277.3
    
    
    $
    (154.6
    )
    
    $
    (155.6
    )
    
    $
    (32.9
    )
    
    $
    1,329.3
    
    
    $
    (106.1
    )
    
    $
    1,190.3Cumulative GAP
    
    
    277.3
    
    
    
    122.7
    
    
    
    (32.9
    )
    
    
    
    
    
    
    1,296.4
    
    
    
    1,190.3March 31, 2005Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,626.3
    
    
    $
    217.7
    
    
    $
    364.2
    
    
    $
    3,208.2
    
    
    $
    1,868.9
    
    
    $
    352.7
    
    
    $
    5,429.8Mortgage loans held for sale
    
    
    34.6
    
    
    
    
    
    
    
    
    
    
    
    34.6
    
    
    
    
    
    
    
    
    
    
    
    34.6Investment securities
    
    
    65.6
    
    
    
    38.2
    
    
    
    86.1
    
    
    
    189.9
    
    
    
    1,147.4
    
    
    
    554.9
    
    
    
    1,892.2Short-term investments
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6Total
    
    $
    2,728.1
    
    
    $
    255.9
    
    
    $
    450.3
    
    
    $
    3,434.3
    
    
    $
    3,016.3
    
    
    $
    907.6
    
    
    $
    7,358.2Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,891.9
    
    
    $
    244.9
    
    
    $
    397.3
    
    
    $
    2,534.1
    
    
    $
    1,077.7
    
    
    $
    785.9
    
    
    $
    4,397.7Other interest bearing liabilities
    
    
    1,002.2
    
    
    
    
    
    
    
    0.7
    
    
    
    1,002.9
    
    
    
    579.3
    
    
    
    179.8
    
    
    
    1,762.0Total
    
    $
    2,894.1
    
    
    $
    244.9
    
    
    $
    398.0
    
    
    $
    3,537.0
    
    
    $
    1,657.0
    
    
    $
    965.7
    
    
    $
    6,159.7Derivatives
    
    $
    44.0
    
    
    $
    (135.0
    )
    
    $
    
    
    
    $
    (91.0
    )
    
    $
    (104.0
    )
    
    $
    195.0
    
    
    $
    Period GAP(4)
    
    $
    (122.0
    )
    
    $
    (124.0
    )
    
    $
    52.3
    
    
    $
    (193.7
    )
    
    $
    1,255.3
    
    
    $
    136.9
    
    
    $
    1,198.5Cumulative GAP
    
    
    (122.0
    )
    
    
    (246.0
    )
    
    
    (193.7
    )
    
    
    
    
    
    
    1,061.6
    
    
    
    1,198.5
 (1)
    
    Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff.(2)
    
    Balances exclude mortgage loans held for sale.(3)
    
    Includes interest bearing savings and demand deposits without contractual maturities of $1.1 billion in the less than one year category and $1.2
billion in the over one year category as of March 31, 2006. The same amounts as of March 31, 2005 were $1.5 billion and $1.2 billion,
respectively. These amounts reflect managements assumptions regarding deposit repricing behavior and tenor.(4)
    
    GAP is rate sensitive assets less rate sensitive liabilities plus the effect of derivatives.   34




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   35




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares That May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    The Plans or ProgramsPeriod
    
    Shares Purchased
    
    Per Share
    
    Programs
    
    (a)January 2006
    
    
    30,000
    
    
    
    28.06
    
    
    
    30,000
    
    
    
    2,211,200February 2006
    
    
    105,000
    
    
    
    27.31
    
    
    
    105,000
    
    
    
    2,106,200March 2006
    
    
    120,000
    
    
    
    26.17
    
    
    
    120,000
    
    
    
    1,986,200Total
    
    
    255,000
    
    
    
    26.86
    
    
    
    255,000
    
    
    
    1,986,200
 (a)
    
    In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of
common stock from time to time in the market. There is no expiration date for the
repurchase program. As of March 31, 2006, 1,986,200 shares remain to be purchased under
this program. The purchase of shares is subject to limitations that may be imposed by
applicable securities laws and regulations and the rules of the Nasdaq Stock Market. The
timing of the purchases and the number of shares to be bought at any one time depend on
market conditions and Citizens capital requirements. There can be no assurance that
Citizens will repurchase the remaining shares authorized to be repurchased, or that any
additional repurchases will be authorized by the Board of Directors. 
 Item 6. Exhibits
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193432.1
    
    Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934
 36




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##### Table of Contents



SIGNATURES
  CITIZENS BANKING CORPORATIONDate: May 5, 2006
    
    By
    
    /s/ Charles D. ChristyCharles D. ChristyChief Financial Officer(principal financial officer and duly authorized officer)
 37




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##### Table of Contents



10-Q EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193432.1
    
    Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934
 38