##### 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 September 30, 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
  þ o o
  o þ
   Class
    
    Outstanding at October 27, 2006Common Stock, No Par Value
    
    42,906,011 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
    
    
    20Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4  Controls and Procedures
    
    
    40Part II  Other InformationItem 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 6  Exhibits
    
    
    41Signatures
    
    
    42Exhibit Index
    
    
    43Retention Agreement, dated August 16, 2006Certification 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
 September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005(unaudited)
    
    
    (Note 1)
    
    
    (unaudited)AssetsCash and due from banks
    
    $
    151,591
    
    
    $
    194,748
    
    
    $
    184,135Interest-bearing deposits with banks
    
    
    165
    
    
    
    380
    
    
    
    1,366Investment Securities:Available-for-sale
(amortized cost $1,381,225, $1,501,819 and $1,662,299,
respectively)U.S. Treasury and federal agency securities
    
    
    1,002,893
    
    
    
    1,122,306
    
    
    
    1,283,574State and municipal securities
    
    
    367,721
    
    
    
    378,235
    
    
    
    381,914Other securities
    
    
    8,626
    
    
    
    1,456
    
    
    
    537Held-to-maturity:State and municipal securities (fair value of $104,397, $82,364 and $75,333, respectively)
    
    
    102,667
    
    
    
    82,431
    
    
    
    74,943FHLB and Federal Reserve stock
    
    
    58,193
    
    
    
    55,911
    
    
    
    55,143Total investment securities
    
    
    1,540,100
    
    
    
    1,640,339
    
    
    
    1,796,111Mortgage loans held for sale
    
    
    11,689
    
    
    
    16,252
    
    
    
    29,847Portfolio loans:Commercial
    
    
    1,788,922
    
    
    
    1,688,079
    
    
    
    1,623,857Commercial real estate
    
    
    1,468,952
    
    
    
    1,402,128
    
    
    
    1,377,082Residential mortgage loans
    
    
    545,171
    
    
    
    539,824
    
    
    
    531,953Direct consumer
    
    
    1,090,757
    
    
    
    1,142,002
    
    
    
    1,171,388Indirect consumer
    
    
    859,573
    
    
    
    844,086
    
    
    
    864,994Total portfolio loans
    
    
    5,753,375
    
    
    
    5,616,119
    
    
    
    5,569,274Less: Allowance for loan losses
    
    
    (113,076
    )
    
    
    (116,400
    )
    
    
    (118,626
    )Net portfolio loans
    
    
    5,640,299
    
    
    
    5,499,719
    
    
    
    5,450,648Premises and equipment
    
    
    117,821
    
    
    
    121,730
    
    
    
    120,755Goodwill
    
    
    54,527
    
    
    
    54,527
    
    
    
    54,527Other intangible assets
    
    
    8,959
    
    
    
    11,133
    
    
    
    11,858Bank owned life insurance
    
    
    86,580
    
    
    
    84,435
    
    
    
    83,773Other assets
    
    
    136,839
    
    
    
    128,620
    
    
    
    118,330Total assets
    
    $
    7,748,570
    
    
    $
    7,751,883
    
    
    $
    7,851,350LiabilitiesNoninterest-bearing deposits
    
    $
    893,320
    
    
    $
    969,074
    
    
    $
    939,560Interest-bearing demand deposits
    
    
    739,895
    
    
    
    891,313
    
    
    
    962,893Savings deposits
    
    
    1,467,622
    
    
    
    1,437,024
    
    
    
    1,445,838Time deposits
    
    
    2,524,509
    
    
    
    2,176,428
    
    
    
    1,878,180Total deposits
    
    
    5,625,346
    
    
    
    5,473,839
    
    
    
    5,226,471Federal funds purchased and securities sold
under agreements to repurchase
    
    
    342,736
    
    
    
    505,879
    
    
    
    916,816Other short-term borrowings
    
    
    13,298
    
    
    
    23,242
    
    
    
    11,825Other liabilities
    
    
    73,752
    
    
    
    86,351
    
    
    
    83,553Long-term debt
    
    
    1,019,131
    
    
    
    1,006,109
    
    
    
    957,836Total liabilities
    
    
    7,074,263
    
    
    
    7,095,420
    
    
    
    7,196,501Shareholders EquityPreferred stock  no par valueAuthorized  5,000,000 shares; Issued  none
    
    
    
    
    
    
    
    
    
    
    Common stock  no par valueAuthorized  100,000,000 shares; Issued and outstanding  42,904,289 at 9/30/06,
42,967,649 at 12/31/05, and 43,043,845 at 9/30/05
    
    
    79,730
    
    
    
    85,526
    
    
    
    87,405Retained earnings
    
    
    596,040
    
    
    
    570,483
    
    
    
    563,597Accumulated other comprehensive income
    
    
    (1,463
    )
    
    
    454
    
    
    
    3,847Total shareholders equity
    
    
    674,307
    
    
    
    656,463
    
    
    
    654,849Total liabilities and shareholders equity
    
    $
    7,748,570
    
    
    $
    7,751,883
    
    
    $
    7,851,350
  3




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##### Table of Contents



Consolidated Statements of Income (Unaudited)
 Citizens Banking Corporation and Subsidiaries
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest IncomeInterest and fees on loans
    
    $
    102,871
    
    
    $
    88,536
    
    
    $
    294,415
    
    
    $
    251,283Interest and dividends on investment securities:Taxable
    
    
    12,574
    
    
    
    14,845
    
    
    
    39,248
    
    
    
    44,512Tax-exempt
    
    
    5,278
    
    
    
    5,109
    
    
    
    15,854
    
    
    
    15,453Money market investments
    
    
    21
    
    
    
    16
    
    
    
    34
    
    
    
    43Total interest income
    
    
    120,744
    
    
    
    108,506
    
    
    
    349,551
    
    
    
    311,291Interest ExpenseDeposits
    
    
    40,004
    
    
    
    21,859
    
    
    
    106,301
    
    
    
    59,052Short-term borrowings
    
    
    3,596
    
    
    
    7,707
    
    
    
    12,727
    
    
    
    18,848Long-term debt
    
    
    11,499
    
    
    
    9,298
    
    
    
    31,413
    
    
    
    26,737Total interest expense
    
    
    55,099
    
    
    
    38,864
    
    
    
    150,441
    
    
    
    104,637Net Interest Income
    
    
    65,645
    
    
    
    69,642
    
    
    
    199,110
    
    
    
    206,654Provision for loan losses
    
    
    1,190
    
    
    
    4,000
    
    
    
    5,329
    
    
    
    8,396Net interest income after provision for loan losses
    
    
    64,455
    
    
    
    65,642
    
    
    
    193,781
    
    
    
    198,258Noninterest IncomeService charges on deposit accounts
    
    
    9,674
    
    
    
    9,343
    
    
    
    28,070
    
    
    
    26,452Trust fees
    
    
    4,633
    
    
    
    4,541
    
    
    
    14,647
    
    
    
    13,456Mortgage and other loan income
    
    
    2,267
    
    
    
    2,450
    
    
    
    6,383
    
    
    
    6,884Brokerage and investment fees
    
    
    1,885
    
    
    
    1,974
    
    
    
    5,103
    
    
    
    5,857ATM network user fees
    
    
    988
    
    
    
    1,194
    
    
    
    2,993
    
    
    
    3,291Bankcard fees
    
    
    1,213
    
    
    
    976
    
    
    
    3,399
    
    
    
    2,777Fair value change in CD swap derivatives
    
    
    
    
    
    
    
    
    
    
    (207
    )
    
    
    Other
    
    
    2,884
    
    
    
    3,463
    
    
    
    12,410
    
    
    
    10,788Total fees and other income
    
    
    23,544
    
    
    
    23,941
    
    
    
    72,798
    
    
    
    69,505Investment securities gains
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    43Total noninterest income
    
    
    23,544
    
    
    
    23,941
    
    
    
    72,859
    
    
    
    69,548Noninterest ExpenseSalaries and employee benefits
    
    
    32,569
    
    
    
    34,060
    
    
    
    97,515
    
    
    
    99,762Occupancy
    
    
    5,604
    
    
    
    5,255
    
    
    
    16,837
    
    
    
    16,500Professional services
    
    
    3,486
    
    
    
    4,517
    
    
    
    11,267
    
    
    
    12,442Equipment
    
    
    3,191
    
    
    
    3,133
    
    
    
    9,658
    
    
    
    11,371Data processing services
    
    
    3,779
    
    
    
    3,188
    
    
    
    11,232
    
    
    
    10,056Advertising and public relations
    
    
    1,211
    
    
    
    1,717
    
    
    
    4,179
    
    
    
    5,283Postage and delivery
    
    
    1,559
    
    
    
    1,512
    
    
    
    4,650
    
    
    
    4,622Telephone
    
    
    1,394
    
    
    
    1,242
    
    
    
    4,250
    
    
    
    4,148Other loan expenses
    
    
    1,407
    
    
    
    720
    
    
    
    3,040
    
    
    
    1,969Stationery and supplies
    
    
    653
    
    
    
    726
    
    
    
    2,011
    
    
    
    2,247Intangible asset amortization
    
    
    725
    
    
    
    725
    
    
    
    2,174
    
    
    
    2,174Other
    
    
    3,824
    
    
    
    3,755
    
    
    
    14,226
    
    
    
    11,567Total noninterest expense
    
    
    59,402
    
    
    
    60,550
    
    
    
    181,039
    
    
    
    182,141Income Before Income Taxes
    
    
    28,597
    
    
    
    29,033
    
    
    
    85,601
    
    
    
    85,665Income tax provision
    
    
    7,616
    
    
    
    8,041
    
    
    
    22,957
    
    
    
    24,028Net Income
    
    $
    20,981
    
    
    $
    20,992
    
    
    $
    62,644
    
    
    $
    61,637Net Income Per Common Share:Basic
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    1.47
    
    
    $
    1.43Diluted
    
    
    0.49
    
    
    
    0.48
    
    
    
    1.46
    
    
    
    1.41Cash Dividends Declared Per Common Share
    
    
    0.290
    
    
    
    0.285
    
    
    
    0.865
    
    
    
    0.855Average Common Shares Outstanding:Basic
    
    
    42,587
    
    
    
    43,099
    
    
    
    42,658
    
    
    
    43,161Diluted
    
    
    42,709
    
    
    
    43,453
    
    
    
    42,795
    
    
    
    43,507
  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
    
    
    
    
    
    
    
    
    
    
    61,637
    
    
    
    
    
    
    
    61,637Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,231
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,084Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,147
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,490Proceeds from stock options exercised and restricted stock activity
    
    
    167
    
    
    
    3,711
    
    
    
    
    
    
    
    
    
    
    
    3,711Tax benefit on non-qualified stock options
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    327Net change in deferred compensation, net of tax
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    401Recognition of stock-based compensation
    
    
    111
    
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    (126
    )Cash dividends declared on common shares  $0.855 per share
    
    
    
    
    
    
    
    
    
    
    (37,042
    )
    
    
    
    
    
    
    (37,042
    )Shares acquired for retirement
    
    
    (474
    )
    
    
    (14,214
    )
    
    
    
    
    
    
    
    
    
    
    (14,214
    )Balance  September 30, 2005
    
    
    43,044
    
    
    $
    87,405
    
    
    $
    563,597
    
    
    $
    3,847
    
    
    $
    654,849Balance at January 1, 2006
    
    
    42,968
    
    
    $
    85,526
    
    
    $
    570,483
    
    
    $
    454
    
    
    $
    656,463Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    62,644
    
    
    
    
    
    
    
    62,644Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,406
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (511
    )Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,917
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,727Proceeds from stock options exercised and restricted stock activity
    
    
    71
    
    
    
    1,568
    
    
    
    
    
    
    
    
    
    
    
    1,568Recognition of stock-based compensation
    
    
    200
    
    
    
    1,584
    
    
    
    
    
    
    
    
    
    
    
    1,584Cash dividends declared on common shares  $0.865 per share
    
    
    
    
    
    
    
    
    
    
    (37,087
    )
    
    
    
    
    
    
    (37,087
    )Shares acquired for retirement
    
    
    (335
    )
    
    
    (8,948
    )
    
    
    
    
    
    
    
    
    
    
    (8,948
    )Balance  September 30, 2006
    
    
    42,904
    
    
    $
    79,730
    
    
    $
    596,040
    
    
    $
    (1,463
    )
    
    $
    674,307
  5




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##### Table of Contents



Consolidated Statements of Cash Flows
 Citizens Banking Corporation and Subsidiaries
 Nine Months EndedSeptember 30,(in thousands)
    
    2006
    
    
    2005Operating Activities:Net income
    
    $
    62,644
    
    
    $
    61,637Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    5,329
    
    
    
    8,396Depreciation and amortization
    
    
    8,897
    
    
    
    10,863Amortization of goodwill and other intangibles
    
    
    2,174
    
    
    
    2,174Net amortization on investment securities
    
    
    152
    
    
    
    2,716Investment securities gains
    
    
    (61
    )
    
    
    (43
    )Loans originated for sale
    
    
    (170,352
    )
    
    
    (253,129
    )Proceeds from sales of mortgage loans held for sale
    
    
    177,662
    
    
    
    255,136Net gains from mortgage loan sales
    
    
    (2,747
    )
    
    
    (3,816
    )Net loss on sale of other real estate
    
    
    492
    
    
    
    99Stock-based compensation
    
    
    1,584
    
    
    
    275Other
    
    
    (22,088
    )
    
    
    3,350Net cash provided by operating activities
    
    
    63,686
    
    
    
    87,658Investing Activities:Net decrease in money market investments
    
    
    215
    
    
    
    403Securities available-for-sale:Proceeds from sales
    
    
    114
    
    
    
    Proceeds from maturities and payments
    
    
    200,647
    
    
    
    294,877Purchases
    
    
    (82,468
    )
    
    
    (227,588
    )Securities held-to-maturity:Purchases
    
    
    (20,308
    )
    
    
    (20,946
    )Net increase in loans and leases
    
    
    (145,909
    )
    
    
    (187,863
    )Proceeds from sales of other real estate
    
    
    2,756
    
    
    
    4,848Net increase in properties and equipment
    
    
    (4,988
    )
    
    
    (13,674
    )Net cash used by investing activities
    
    
    (49,941
    )
    
    
    (149,943
    )Financing Activities:Net decrease in demand and savings deposits
    
    
    (196,574
    )
    
    
    (339,156
    )Net increase in time deposits
    
    
    348,081
    
    
    
    265,867Net (decrease) increase in short-term borrowings
    
    
    (173,087
    )
    
    
    203,867Proceeds from issuance of long-term debt
    
    
    225,453
    
    
    
    225,000Principal reductions in long-term debt
    
    
    (216,308
    )
    
    
    (215,087
    )Cash dividends paid
    
    
    (37,087
    )
    
    
    (37,042
    )Proceeds from stock options exercised and restricted stock activity
    
    
    1,568
    
    
    
    3,711Shares acquired for retirement
    
    
    (8,948
    )
    
    
    (14,214
    )Net cash (used) provided by financing activities
    
    
    (56,902
    )
    
    
    92,946Net (decrease) increase in cash and due from banks
    
    
    (43,157
    )
    
    
    30,661Cash and due from banks at beginning of period
    
    
    194,748
    
    
    
    153,474Cash and due from banks at end of period
    
    $
    151,591
    
    
    $
    184,135
  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 and Accounting Policies
 www.citizensonline.com
 Statements of Financial Accounting Standards
 Statement of Financial Accounting Standards (SFAS) No. 123R, Stock-Based Compensation (Revised
2004). Share-Based Payment, (Revised 2004),
 Note 2. New Accounting Pronouncements
 Final FASB Statements
 FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109, Accounting for Income Taxes.
 SFAS No. 157, Fair Value Measurements.
 7




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##### Table of Contents



SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
 Emerging Issues Task Force (EITF) Consensuses
 EITF Issue 06-5 Accounting for Purchases of Life Insurance  Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. Accounting for
Contingencies"
 SEC Staff Accounting Bulletins
 Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements.
 Note 3. Investment Securities
  8




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##### Table of Contents



September 30, 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
    
    
    706,380
    
    
    
    692,486
    
    
    
    723
    
    
    
    14,617
    
    
    
    825,933
    
    
    
    811,898
    
    
    
    985
    
    
    
    15,020Other
    
    
    310,942
    
    
    
    310,407
    
    
    
    1,209
    
    
    
    1,744
    
    
    
    309,681
    
    
    
    310,408
    
    
    
    2,046
    
    
    
    1,319State and municipal
    
    
    355,315
    
    
    
    367,721
    
    
    
    12,667
    
    
    
    261
    
    
    
    364,853
    
    
    
    378,235
    
    
    
    14,391
    
    
    
    1,009Mortgage and asset-backed
    
    
    186
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    280
    
    
    
    280
    
    
    
    1
    
    
    
    1Other
    
    
    8,402
    
    
    
    8,440
    
    
    
    38
    
    
    
    
    
    
    
    1,072
    
    
    
    1,176
    
    
    
    107
    
    
    
    3Total available for sale
    
    $
    1,381,225
    
    
    $
    1,379,240
    
    
    $
    14,637
    
    
    $
    16,622
    
    
    $
    1,501,819
    
    
    $
    1,501,997
    
    
    $
    17,530
    
    
    $
    17,352Held to Maturity:State and municipal
Total held to maturity
    
    $
    102,667
    
    
    $
    104,397
    
    
    $
    1,832
    
    
    $
    102
    
    
    $
    82,431
    
    
    $
    82,364
    
    
    $
    590
    
    
    $
    657Other Investment Securities:FHLB and Fed Reserve stockTotal Other Securities
    
    $
    58,193
    
    
    $
    58,193
    
    
    $
    
    
    
    $
    
    
    
    $
    55,911
    
    
    $
    55,911
    
    
    $
    
    
    
    $
    
  As of September 30, 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
    
    
    486,687
    
    
    
    11,267
    
    
    
    132,992
    
    
    
    3,350
    
    
    
    619,679
    
    
    
    14,617Other
    
    
    243,695
    
    
    
    1,299
    
    
    
    25,175
    
    
    
    445
    
    
    
    268,870
    
    
    
    1,744State and municipal
    
    
    3,333
    
    
    
    24
    
    
    
    15,270
    
    
    
    237
    
    
    
    18,603
    
    
    
    261Mortgage and asset-backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    
    733,715
    
    
    
    12,590
    
    
    
    173,437
    
    
    
    4,032
    
    
    
    907,152
    
    
    
    16,622Held to Maturity:State and municipal
    
    
    5,255
    
    
    
    25
    
    
    
    8,929
    
    
    
    77
    
    
    
    14,184
    
    
    
    102Total held to maturity
    
    
    5,255
    
    
    
    25
    
    
    
    8,929
    
    
    
    77
    
    
    
    14,184
    
    
    
    102Total
    
    $
    738,970
    
    
    $
    12,615
    
    
    $
    182,366
    
    
    $
    4,109
    
    
    $
    921,336
    
    
    $
    16,724
 9




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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
  10




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##### Table of Contents



Note 4. Allowance for Loan Losses and Impaired Loans
  Analysis of Allowance for Loan Losses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    114,560
    
    
    $
    119,967
    
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    1,190
    
    
    
    4,000
    
    
    
    5,329
    
    
    
    8,396Charge-offs:Commercial
    
    
    597
    
    
    
    1,912
    
    
    
    2,372
    
    
    
    7,097Commercial real estate
    
    
    585
    
    
    
    1,965
    
    
    
    1,807
    
    
    
    2,843Total commercial
    
    
    1,182
    
    
    
    3,877
    
    
    
    4,179
    
    
    
    9,940Residential mortgage
    
    
    252
    
    
    
    182
    
    
    
    755
    
    
    
    633Direct consumer
    
    
    983
    
    
    
    1,257
    
    
    
    3,868
    
    
    
    3,908Indirect consumer
    
    
    1,840
    
    
    
    2,640
    
    
    
    6,244
    
    
    
    6,410Charge-offs
    
    
    4,257
    
    
    
    7,956
    
    
    
    15,046
    
    
    
    20,891Recoveries:Commercial
    
    
    543
    
    
    
    1,334
    
    
    
    2,719
    
    
    
    4,613Commercial real estate
    
    
    50
    
    
    
    232
    
    
    
    614
    
    
    
    1,166Total commercial
    
    
    593
    
    
    
    1,566
    
    
    
    3,333
    
    
    
    5,779Residential mortgage
    
    
    22
    
    
    
    32
    
    
    
    125
    
    
    
    32Direct consumer
    
    
    485
    
    
    
    370
    
    
    
    1,102
    
    
    
    1,090Indirect consumer
    
    
    483
    
    
    
    647
    
    
    
    1,833
    
    
    
    2,036Recoveries
    
    
    1,583
    
    
    
    2,615
    
    
    
    6,393
    
    
    
    8,937Net charge-offs
    
    
    2,674
    
    
    
    5,341
    
    
    
    8,653
    
    
    
    11,954Allowance for loan losses  end of period
    
    $
    113,076
    
    
    $
    118,626
    
    
    $
    113,076
    
    
    $
    118,626
 Accounting by
Creditors for Impairment of a Loan,
 Impaired Loan Information
 Balances
    
    
    Valuation ReserveSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005Balances Impaired loans with valuation reserve
    
    $
    18,540
    
    
    $
    7,989
    
    
    $
    16,698
    
    
    $
    6,373
    
    
    $
    5,059
    
    
    $
    8,462Impaired loans with no valuation reserve
    
    
    465
    
    
    
    908
    
    
    
    1,893
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    19,005
    
    
    $
    8,897
    
    
    $
    18,591
    
    
    $
    6,373
    
    
    $
    5,059
    
    
    $
    8,462Impaired loans on nonaccrual basis
    
    $
    4,099
    
    
    $
    4,728
    
    
    $
    6,188
    
    
    $
    1,746
    
    
    $
    2,747
    
    
    $
    3,179Impaired loans on accrual basis
    
    
    14,906
    
    
    
    4,169
    
    
    
    12,403
    
    
    
    4,627
    
    
    
    2,312
    
    
    
    5,283Total impaired loans
    
    $
    19,005
    
    
    $
    8,897
    
    
    $
    18,591
    
    
    $
    6,373
    
    
    $
    5,059
    
    
    $
    8,462
  11




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##### Table of Contents



Note 5. Long-term Debt
  September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Citizens (Parent only):Subordinated debt:Notes maturing February 2013
    
    $
    118,474
    
    
    $
    120,852
    
    
    $
    121,951Deferrable interest debenture maturing June 2033
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Subsidiaries:Federal Home Loan Bank advances
    
    
    874,430
    
    
    
    859,483
    
    
    
    810,111Other borrowed funds
    
    
    453
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    1,019,131
    
    
    $
    1,006,109
    
    
    $
    957,836
 Note 6. Accumulated Other Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    (16,542
    )
    
    $
    13,032
    
    
    $
    454
    
    
    $
    17,994Net unrealized gain (loss) on securities for the
quarter, net of tax effect of $8,398 in 2006 and
$(5,264) in 2005, and net unrealized loss on
securities for the nine month period, net of tax
effect of $(735) in 2006 and $(8,186) in 2005
    
    
    15,596
    
    
    
    (9,776
    )
    
    
    (1,367
    )
    
    
    (15,203
    )Less: Reclassification adjustment for net losses
included in net income or the nine month period,
net of tax effect of $(22) in 2006 and $(15) in 2005
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (28
    )Net change in unrealized (loss) gain on cash flow
hedges for the quarter, net of tax effect of
$(278) in 2006 and $318 in 2005, and net change
in unrealized (loss) gain for the nine month
period, net of tax effect of $(275) in 2006 and
$584 in 2005.
    
    
    (517
    )
    
    
    591
    
    
    
    (511
    )
    
    
    1,084Accumulated other comprehensive income, net of tax
    
    $
    (1,463
    )
    
    $
    3,847
    
    
    $
    (1,463
    )
    
    $
    3,847
 12




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##### Table of Contents



Note 7. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Basic and dilutive earnings per share  net income
available to common shareholders
    
    $
    20,981
    
    
    $
    20,992
    
    
    $
    62,644
    
    
    $
    61,637Denominator:Basic earnings per share  weighted average shares
    
    
    42,587
    
    
    
    43,099
    
    
    
    42,658
    
    
    
    43,161Effect of dilutive securities  potential conversion
of employee stock options
    
    
    122
    
    
    
    354
    
    
    
    137
    
    
    
    346Diluted earnings per share  adjusted weighted-average
shares and assumed conversions
    
    
    42,709
    
    
    
    43,453
    
    
    
    42,795
    
    
    
    43,507Basic earnings per share
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    1.47
    
    
    $
    1.43Diluted earnings per share
    
    $
    0.49
    
    
    $
    0.48
    
    
    $
    1.46
    
    
    $
    1.41
 Note 8. Stock-Based Compensation
     13




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##### Table of Contents



Analysis of Stock-Based Compensation Expense
 Three Months
    
    
    Nine Months
    
    
    Three Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005Stock Option Compensation
    
    $
    8
    
    
    $
    43
    
    
    $
    
    
    
    $
    (126
    )Restricted Stock Compensation
    
    
    763
    
    
    
    1,541
    
    
    
    278
    
    
    
    401Stock-based compensation expense before income taxes
    
    
    771
    
    
    
    1,584
    
    
    
    278
    
    
    
    275Income tax benefit
    
    
    (270
    )
    
    
    (554
    )
    
    
    (97
    )
    
    
    (96
    )Total stock-based compensation expense after income taxes
    
    $
    501
    
    
    $
    1,030
    
    
    $
    181
    
    
    $
    179
   Accounting for
Stock-Based CompensationTransition and Disclosure, Accounting for Stock Issued to Employees,
  Three Months
    
    
    Nine MonthsEnded
    
    
    Ended(in thousands, except per share amounts)
    
    September 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    20,992
    
    
    $
    61,637Less pro forma expense related to options granted
    
    
    (304
    )
    
    
    (3,019
    )Pro forma Net Income
    
    $
    20,688
    
    
    $
    58,618Net income per shareBasic  as reported
    
    $
    0.49
    
    
    $
    1.43Basic  pro forma
    
    
    0.48
    
    
    
    1.36Diluted  as reported
    
    
    0.48
    
    
    
    1.41Diluted  pro forma
    
    
    0.47
    
    
    
    1.34
  14




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Weighted Average Assumptions
    
    2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    4.0
    %
    
    
    3.5
    %Expected volatility
    
    
    15.1
    %
    
    
    26.1
    %
    
    
    15.1
    %
    
    
    26.9
    %Risk-free interest rate
    
    
    4.72
    %
    
    
    3.68
    %
    
    
    4.72
    %
    
    
    3.77
    %Expected lives
    
    3 yrs
    
    2 yrs
    
    3 yrs
    
    2 yrs
   OptionsWeightedAverage
    
    
    Weighted Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Contractual Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    3,917,891
    
    
    $
    27.91Granted
    
    
    500
    
    
    
    25.98Exercised
    
    
    (71,332
    )
    
    
    19.72Forfeitures or Expirations
    
    
    (62,669
    )
    
    
    30.11Outstanding at September 30, 2006
    
    
    3,784,390
    
    
    $
    28.03
    
    
    5.6 yrs
    
    $
    4,269,209Exercisable
    
    
    3,773,750
    
    
    $
    28.02
    
    
    5.6 yrs
    
    $
    4,266,180
    Weighted-AverageNumber of
    
    
    Grant Date FairShares
    
    
    ValueOutstanding restricted stock at December 31, 2005
    
    
    129,180
    
    
    $
    27.19Granted
    
    
    200,703
    
    
    
    24.21Vested
    
    
    (5,987
    )
    
    
    31.49Forfeited
    
    
    (827
    )
    
    
    29.02Restricted stock at September 30, 2006
    
    
    323,069
    
    
    $
    25.95
 15




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##### Table of Contents



Note 9. Pension Benefit Cost
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Defined Benefit Pension PlansService cost
    
    $
    979
    
    
    $
    1,322
    
    
    $
    3,450
    
    
    $
    3,733Interest cost
    
    
    1,090
    
    
    
    1,317
    
    
    
    3,888
    
    
    
    3,928Expected return on plan assets
    
    
    (1,890
    )
    
    
    (1,757
    )
    
    
    (5,669
    )
    
    
    (5,271
    )Amortization of unrecognized:Net transition asset
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )Prior service cost
    
    
    47
    
    
    
    49
    
    
    
    142
    
    
    
    148Net actuarial loss
    
    
    229
    
    
    
    263
    
    
    
    825
    
    
    
    864Net pension cost
    
    $
    455
    
    
    $
    1,192
    
    
    $
    2,636
    
    
    $
    3,398
  Note 10. Lines of Business Information
  16




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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
September 30, 2006Net interest income (taxable equivalent)
    
    $
    30,978
    
    
    $
    35,617
    
    
    $
    248
    
    
    $
    2,215
    
    
    $
    69,058Provision for loan losses
    
    
    (2,574
    )
    
    
    3,764
    
    
    
    
    
    
    
    
    
    
    
    1,190Net interest income after provision
    
    
    33,552
    
    
    
    31,853
    
    
    
    248
    
    
    
    2,215
    
    
    
    67,868Noninterest income
    
    
    3,523
    
    
    
    12,056
    
    
    
    6,653
    
    
    
    1,312
    
    
    
    23,544Noninterest expense
    
    
    18,347
    
    
    
    30,238
    
    
    
    5,752
    
    
    
    5,065
    
    
    
    59,402Income before income taxes
    
    
    18,728
    
    
    
    13,671
    
    
    
    1,149
    
    
    
    (1,538
    )
    
    
    32,010Income tax expense (taxable equivalent)
    
    
    6,593
    
    
    
    4,849
    
    
    
    408
    
    
    
    (821
    )
    
    
    11,029Net income
    
    $
    12,135
    
    
    $
    8,822
    
    
    $
    741
    
    
    $
    (717
    )
    
    $
    20,981Average assets(in millions)
    
    $
    3,113
    
    
    $
    2,612
    
    
    $
    28
    
    
    $
    1,971
    
    
    $
    7,724Earnings Summary  Three Months Ended
September 30, 2005(1)Net interest income (taxable equivalent)
    
    $
    31,622
    
    
    $
    38,041
    
    
    $
    240
    
    
    $
    3,022
    
    
    $
    72,925Provision for loan losses
    
    
    (177
    )
    
    
    4,180
    
    
    
    (3
    )
    
    
    
    
    
    
    4,000Net interest income after provision
    
    
    31,799
    
    
    
    33,861
    
    
    
    243
    
    
    
    3,022
    
    
    
    68,925Noninterest income
    
    
    3,360
    
    
    
    12,885
    
    
    
    6,176
    
    
    
    1,520
    
    
    
    23,941Noninterest expense
    
    
    18,752
    
    
    
    33,490
    
    
    
    5,606
    
    
    
    2,702
    
    
    
    60,550Income before income taxes
    
    
    16,407
    
    
    
    13,256
    
    
    
    813
    
    
    
    1,840
    
    
    
    32,316Income tax expense (taxable equivalent)
    
    
    5,825
    
    
    
    4,639
    
    
    
    287
    
    
    
    573
    
    
    
    11,324Net income
    
    $
    10,582
    
    
    $
    8,617
    
    
    $
    526
    
    
    $
    1,267
    
    
    $
    20,992Average assets(in millions)
    
    $
    2,933
    
    
    $
    2,645
    
    
    $
    25
    
    
    $
    2,218
    
    
    $
    7,821
 
 (1) Certain amounts have been reclassified to conform to current year presentation. Line of Business Information
 Commercial
    
    
    Consumer
    
    
    Wealth(in thousands)
    
    Banking
    
    
    Banking
    
    
    Mgmt
    
    
    Other
    
    
    TotalEarnings Summary  Nine Months Ended
September 30, 2006Net interest income (taxable equivalent)
    
    $
    92,330
    
    
    $
    106,786
    
    
    $
    887
    
    
    $
    9,320
    
    
    $
    209,323Provision for loan losses
    
    
    (2,228
    )
    
    
    7,557
    
    
    
    
    
    
    
    
    
    
    
    5,329Net interest income after provision
    
    
    94,558
    
    
    
    99,229
    
    
    
    887
    
    
    
    9,320
    
    
    
    203,994Noninterest income
    
    
    10,518
    
    
    
    38,071
    
    
    
    20,255
    
    
    
    4,015
    
    
    
    72,859Noninterest expense
    
    
    54,033
    
    
    
    93,756
    
    
    
    17,337
    
    
    
    15,913
    
    
    
    181,039Income before income taxes
    
    
    51,043
    
    
    
    43,544
    
    
    
    3,805
    
    
    
    (2,578
    )
    
    
    95,814Income tax expense (taxable equivalent)
    
    
    17,976
    
    
    
    15,260
    
    
    
    1,348
    
    
    
    (1,414
    )
    
    
    33,170Net income
    
    $
    33,067
    
    
    $
    28,284
    
    
    $
    2,457
    
    
    $
    (1,164
    )
    
    $
    62,644Average assets(in millions)
    
    $
    3,055
    
    
    $
    2,596
    
    
    $
    29
    
    
    $
    2,003
    
    
    $
    7,683Earnings Summary  Nine Months Ended
September 30, 2005(1)Net interest income (taxable equivalent)
    
    $
    90,240
    
    
    $
    113,177
    
    
    $
    672
    
    
    $
    12,525
    
    
    $
    216,614Provision for loan losses
    
    
    3,771
    
    
    
    4,633
    
    
    
    (8
    )
    
    
    
    
    
    
    8,396Net interest income after provision
    
    
    86,469
    
    
    
    108,544
    
    
    
    680
    
    
    
    12,525
    
    
    
    208,218Noninterest income
    
    
    9,470
    
    
    
    36,649
    
    
    
    18,939
    
    
    
    4,490
    
    
    
    69,548Noninterest expense
    
    
    53,948
    
    
    
    100,054
    
    
    
    17,197
    
    
    
    10,942
    
    
    
    182,141Income before income taxes
    
    
    41,991
    
    
    
    45,139
    
    
    
    2,422
    
    
    
    6,073
    
    
    
    95,625Income tax expense (taxable equivalent)
    
    
    14,818
    
    
    
    15,799
    
    
    
    859
    
    
    
    2,512
    
    
    
    33,988Net income
    
    $
    27,173
    
    
    $
    29,340
    
    
    $
    1,563
    
    
    $
    3,561
    
    
    $
    61,637Average assets(in millions)
    
    $
    2,901
    
    
    $
    2,601
    
    
    $
    24
    
    
    $
    2,260
    
    
    $
    7,786
 
 (1) Certain amounts have been reclassified to conform to current year presentation. 17




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##### Table of Contents



Note 11. Derivatives and Hedging Activities
 Accounting for Derivative Instruments and Hedging Activities, Accounting for Certain Derivative Instruments and Certain Hedging Activities
   Derivative Financial Instruments:
 September 30, 2006
    
    
    December 31, 2005Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueReceived fixed swaps
    
    $
    260,000
    
    
    $
    (294
    )
    
    $
    530,000
    
    
    $
    (7,429
    )Pay fixed swaps
    
    
    104,000
    
    
    
    1,699
    
    
    
    124,000
    
    
    
    2,486Customer initiated swaps and corresponding offsets
    
    
    353,708
    
    
    
    
    
    
    
    233,104
    
    
    
    Interest rate lock commitments
    
    
    
    
    
    
    
    
    
    
    17,897
    
    
    
    37Forward mortgage loan contracts
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    (66
    )Total
    
    $
    717,708
    
    
    $
    1,405
    
    
    $
    927,001
    
    
    $
    (4,972
    )
 Derivative Classifications and Hedging Relationships:
 September 30, 2006
    
    
    December 31, 2005Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueDerivatives Designated as Cash Flow Hedges:Hedging repurchase agreements
    
    $
    104,000
    
    
    $
    1,699
    
    
    $
    124,000
    
    
    $
    2,486Derivatives Designated as Fair Value Hedges:Hedging time deposits
    
    
    160,000
    
    
    
    48
    
    
    
    25,000
    
    
    
    (10
    )Hedging long-term debt
    
    
    100,000
    
    
    
    (342
    )
    
    
    225,000
    
    
    
    (3,815
    )Derivatives Not Designated as Hedges:Receive fixed swaps
    
    
    
    
    
    
    
    
    
    
    280,000
    
    
    
    (3,604
    )Customer initiated swaps
    
    
    353,708
    
    
    
    
    
    
    
    233,104
    
    
    
    Total
    
    $
    717,708
    
    
    $
    1,405
    
    
    $
    887,104
    
    
    $
    (4,943
    )
 18




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##### Table of Contents



Note 12. Commitments, Contingent Liabilities and Guarantees
   September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Loan commitments and letters of credit:Commitments to extend credit
    
    $
    1,675,777
    
    
    $
    1,762,259Financial standby letters of credit
    
    
    42,629
    
    
    
    44,739Performance standby letters of credit
    
    
    14,798
    
    
    
    11,557Commercial letters of credit
    
    
    209,799
    
    
    
    223,269Total loan commitments and letters of credit
    
    $
    1,943,003
    
    
    $
    2,041,824
  Note 13. Pending Transaction
  Note 14. Subsequent Events
   19




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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 EndedSeptember 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,2006
    
    2006
    
    2006
    
    2005
    
    2005Summary of Operations (thousands)Interest income
    
    $
    120,744
    
    
    $
    116,416
    
    
    $
    112,391
    
    
    $
    111,958
    
    
    $
    108,506Net interest income
    
    
    65,645
    
    
    
    65,990
    
    
    
    67,475
    
    
    
    69,095
    
    
    
    69,642Provision for loan losses (1)
    
    
    1,190
    
    
    
    1,139
    
    
    
    3,000
    
    
    
    (7,287
    )
    
    
    4,000Total fees and other income (2)
    
    
    23,544
    
    
    
    23,691
    
    
    
    25,563
    
    
    
    19,930
    
    
    
    23,941Investment securities gains (losses) (3)
    
    
    
    
    
    
    54
    
    
    
    7
    
    
    
    (8,970
    )
    
    
    Noninterest expense (4)
    
    
    59,402
    
    
    
    60,065
    
    
    
    61,572
    
    
    
    60,901
    
    
    
    60,550Income tax provision
    
    
    7,616
    
    
    
    7,624
    
    
    
    7,717
    
    
    
    7,553
    
    
    
    8,041Net income
    
    
    20,981
    
    
    
    20,907
    
    
    
    20,756
    
    
    
    18,888
    
    
    
    20,992Taxable equivalent adjustment
    
    
    3,413
    
    
    
    3,383
    
    
    
    3,416
    
    
    
    3,432
    
    
    
    3,284Cash dividends
    
    
    12,435
    
    
    
    12,393
    
    
    
    12,259
    
    
    
    12,269
    
    
    
    12,412Per Common Share DataBasic net income
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.44
    
    
    $
    0.49Diluted net income
    
    
    0.49
    
    
    
    0.49
    
    
    
    0.48
    
    
    
    0.44
    
    
    
    0.48Cash dividends
    
    
    0.290
    
    
    
    0.290
    
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285Market value (end of period)
    
    
    26.26
    
    
    
    24.41
    
    
    
    26.85
    
    
    
    27.75
    
    
    
    28.40Book value (end of period)
    
    
    15.72
    
    
    
    15.15
    
    
    
    15.23
    
    
    
    15.28
    
    
    
    15.21At Period End (millions)Assets
    
    $
    7,749
    
    
    $
    7,814
    
    
    $
    7,663
    
    
    $
    7,752
    
    
    $
    7,851Portfolio loans
    
    
    5,753
    
    
    
    5,728
    
    
    
    5,592
    
    
    
    5,616
    
    
    
    5,569Deposits
    
    
    5,625
    
    
    
    5,685
    
    
    
    5,524
    
    
    
    5,474
    
    
    
    5,226Shareholders equity
    
    
    674
    
    
    
    650
    
    
    
    652
    
    
    
    656
    
    
    
    655Average for the Quarter (millions)Assets
    
    $
    7,724
    
    
    $
    7,671
    
    
    $
    7,654
    
    
    $
    7,754
    
    
    $
    7,821Portfolio loans
    
    
    5,694
    
    
    
    5,610
    
    
    
    5,561
    
    
    
    5,575
    
    
    
    5,531Deposits
    
    
    5,680
    
    
    
    5,560
    
    
    
    5,513
    
    
    
    5,305
    
    
    
    5,239Shareholders equity
    
    
    659
    
    
    
    647
    
    
    
    655
    
    
    
    654
    
    
    
    655Ratios (annualized)Return on average assets
    
    
    1.08
    %
    
    
    1.09
    %
    
    
    1.10
    %
    
    
    0.97
    %
    
    
    1.06
    %Return on average shareholders equity
    
    
    12.63
    
    
    
    12.96
    
    
    
    12.86
    
    
    
    11.46
    
    
    
    12.71Net interest margin (FTE) (5)
    
    
    3.78
    
    
    
    3.84
    
    
    
    3.97
    
    
    
    3.95
    
    
    
    3.93Efficiency ratio (6)
    
    
    64.15
    
    
    
    64.54
    
    
    
    63.84
    
    
    
    65.87
    
    
    
    62.51Net loans charged off to average portfolio loans (1)
    
    
    0.19
    
    
    
    0.14
    
    
    
    0.29
    
    
    
    (0.36
    )
    
    
    0.38Allowance for loan losses to portfolio loans
    
    
    1.97
    
    
    
    2.00
    
    
    
    2.06
    
    
    
    2.07
    
    
    
    2.13Nonperforming assets to portfolio loans plus ORAA (end of period)
    
    
    0.69
    
    
    
    0.61
    
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.76Nonperforming assets to total assets (end of period)
    
    
    0.52
    
    
    
    0.44
    
    
    
    0.48
    
    
    
    0.51
    
    
    
    0.54Average equity to average assets
    
    
    8.53
    
    
    
    8.44
    
    
    
    8.55
    
    
    
    8.43
    
    
    
    8.38Leverage ratio
    
    
    8.29
    
    
    
    8.21
    
    
    
    8.14
    
    
    
    7.98
    
    
    
    7.86Tier 1 capital ratio
    
    
    10.13
    
    
    
    9.96
    
    
    
    10.09
    
    
    
    9.94
    
    
    
    9.91Total capital ratio
    
    
    13.37
    
    
    
    13.20
    
    
    
    13.39
    
    
    
    13.22
    
    
    
    13.20
 
 (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). 20




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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.
 21




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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, including those
associated with the pending merger with Republic Bancorp, 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
  Citizens Republic Bancorp
  22




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##### Table of Contents



Subsequent Events
   Results of Operations
 Summary
     Net Interest Income and Net Interest Margin
  23




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##### Table of Contents



Average Balances/Net Interest Income/Average Rates
 2006
    
    
    2005Three Months Ended September 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    
    Interest(1)
    
    
    Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    2,048
    
    
    $
    21
    
    
    
    4.08
    
    
    $
    2,691
    
    
    $
    16
    
    
    
    2.30Investment securities (3):Taxable
    
    
    1,115,959
    
    
    
    12,574
    
    
    
    4.51
    
    
    
    1,381,469
    
    
    
    14,845
    
    
    
    4.30Tax-exempt
    
    
    449,364
    
    
    
    5,278
    
    
    
    7.23
    
    
    
    428,534
    
    
    
    5,109
    
    
    
    7.34Mortgage loans held for sale
    
    
    16,743
    
    
    
    253
    
    
    
    6.04
    
    
    
    40,836
    
    
    
    529
    
    
    
    5.18Portfolio Loans (4):Commercial
    
    
    1,740,592
    
    
    
    32,523
    
    
    
    7.54
    
    
    
    1,622,724
    
    
    
    25,491
    
    
    
    6.36Commercial real estate
    
    
    1,458,104
    
    
    
    26,674
    
    
    
    7.26
    
    
    
    1,352,733
    
    
    
    21,910
    
    
    
    6.43Residential mortgage loans
    
    
    545,907
    
    
    
    7,852
    
    
    
    5.75
    
    
    
    520,861
    
    
    
    7,218
    
    
    
    5.54Direct consumer
    
    
    1,093,724
    
    
    
    21,213
    
    
    
    7.69
    
    
    
    1,178,476
    
    
    
    19,194
    
    
    
    6.46Indirect consumer
    
    
    855,229
    
    
    
    14,356
    
    
    
    6.66
    
    
    
    856,207
    
    
    
    14,194
    
    
    
    6.58Total portfolio loans
    
    
    5,693,556
    
    
    
    102,618
    
    
    
    7.20
    
    
    
    5,531,001
    
    
    
    88,007
    
    
    
    6.36Total earning assets (3)
    
    
    7,277,670
    
    
    
    120,744
    
    
    
    6.78
    
    
    
    7,384,531
    
    
    
    108,506
    
    
    
    6.02Nonearning AssetsCash and due from banks
    
    
    165,403
    
    
    
    
    
    
    
    
    
    
    
    158,631Bank premises and equipment
    
    
    119,246
    
    
    
    
    
    
    
    
    
    
    
    121,142Investment security fair value adjustment
    
    
    (12,203
    )
    
    
    
    
    
    
    
    
    
    
    8,321Other nonearning assets
    
    
    288,493
    
    
    
    
    
    
    
    
    
    
    
    267,861Allowance for loan losses
    
    
    (114,302
    )
    
    
    
    
    
    
    
    
    
    
    (119,695
    )Total assets
    
    $
    7,724,307
    
    
    
    
    
    
    
    
    
    
    $
    7,820,791Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    753,412
    
    
    $
    1,219
    
    
    
    0.64
    
    
    $
    1,016,366
    
    
    $
    1,705
    
    
    
    0.67Savings deposits
    
    
    1,511,956
    
    
    
    10,724
    
    
    
    2.81
    
    
    
    1,471,878
    
    
    
    5,742
    
    
    
    1.55Time deposits
    
    
    2,489,653
    
    
    
    28,061
    
    
    
    4.47
    
    
    
    1,810,928
    
    
    
    14,412
    
    
    
    3.16Short-term borrowings
    
    
    321,140
    
    
    
    3,596
    
    
    
    4.44
    
    
    
    900,520
    
    
    
    7,707
    
    
    
    3.40Long-term debt
    
    
    980,584
    
    
    
    11,499
    
    
    
    4.66
    
    
    
    942,624
    
    
    
    9,298
    
    
    
    3.92Total interest-bearing liabilities
    
    
    6,056,745
    
    
    
    55,099
    
    
    
    3.61
    
    
    
    6,142,316
    
    
    
    38,864
    
    
    
    2.51Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    925,004
    
    
    
    
    
    
    
    
    
    
    
    939,668Other liabilities
    
    
    83,749
    
    
    
    
    
    
    
    
    
    
    
    83,671Shareholders equity
    
    
    658,809
    
    
    
    
    
    
    
    
    
    
    
    655,136Total liabilities and shareholders equity
    
    $
    7,724,307
    
    
    
    
    
    
    
    
    
    
    $
    7,820,791Net Interest Income
    
    
    
    
    
    $
    65,645
    
    
    
    
    
    
    
    
    
    
    $
    69,642Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    3.17
    %
    
    
    
    
    
    
    
    
    
    
    3.51
    %Contribution of noninterest bearing sources of funds
    
    
    
    
    
    
    
    
    
    
    0.61
    
    
    
    
    
    
    
    
    
    
    
    0.42Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    3.93
    %
 
 (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 $3.3 million for the
three months ended September 30, 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. 24




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##### Table of Contents



Average Balances/Net Interest Income/Average Rates
 2006
    
    
    2005Nine Months Ended September 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    
    Interest(1)
    
    
    Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    1,703
    
    
    $
    34
    
    
    
    2.69
    
    
    $
    2,570
    
    
    $
    43
    
    
    
    2.22Investment securities (3):Taxable
    
    
    1,151,859
    
    
    
    39,248
    
    
    
    4.54
    
    
    
    1,417,647
    
    
    
    44,512
    
    
    
    4.19Tax-exempt
    
    
    447,842
    
    
    
    15,854
    
    
    
    7.26
    
    
    
    423,564
    
    
    
    15,453
    
    
    
    7.48Mortgage loans held for sale
    
    
    18,191
    
    
    
    785
    
    
    
    5.75
    
    
    
    36,920
    
    
    
    1,497
    
    
    
    5.41Portfolio Loans (4):Commercial
    
    
    1,697,656
    
    
    
    90,834
    
    
    
    7.28
    
    
    
    1,626,133
    
    
    
    70,942
    
    
    
    5.96Commercial real estate
    
    
    1,433,563
    
    
    
    75,996
    
    
    
    7.09
    
    
    
    1,321,703
    
    
    
    61,923
    
    
    
    6.27Residential mortgage loans
    
    
    544,065
    
    
    
    23,354
    
    
    
    5.72
    
    
    
    506,154
    
    
    
    21,068
    
    
    
    5.55Direct consumer
    
    
    1,106,930
    
    
    
    61,825
    
    
    
    7.47
    
    
    
    1,176,047
    
    
    
    54,686
    
    
    
    6.22Indirect consumer
    
    
    839,972
    
    
    
    41,621
    
    
    
    6.62
    
    
    
    835,741
    
    
    
    41,167
    
    
    
    6.59Total portfolio loans
    
    
    5,622,186
    
    
    
    293,630
    
    
    
    7.02
    
    
    
    5,465,778
    
    
    
    249,786
    
    
    
    6.15Total earning assets (3)
    
    
    7,241,781
    
    
    
    349,551
    
    
    
    6.64
    
    
    
    7,346,479
    
    
    
    311,291
    
    
    
    5.84Nonearning AssetsCash and due from banks
    
    
    162,992
    
    
    
    
    
    
    
    
    
    
    
    156,556Bank premises and equipment
    
    
    120,407
    
    
    
    
    
    
    
    
    
    
    
    121,303Investment security fair value adjustment
    
    
    (11,377
    )
    
    
    
    
    
    
    
    
    
    
    14,168Other nonearning assets
    
    
    284,734
    
    
    
    
    
    
    
    
    
    
    
    267,881Allowance for loan losses
    
    
    (115,235
    )
    
    
    
    
    
    
    
    
    
    
    (120,502
    )Total assets
    
    $
    7,683,302
    
    
    
    
    
    
    
    
    
    
    $
    7,785,885Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    799,570
    
    
    $
    3,854
    
    
    
    0.64
    
    
    $
    1,079,770
    
    
    $
    5,506
    
    
    
    0.68Savings deposits
    
    
    1,477,773
    
    
    
    28,154
    
    
    
    2.55
    
    
    
    1,536,209
    
    
    
    15,643
    
    
    
    1.36Time deposits
    
    
    2,386,736
    
    
    
    74,293
    
    
    
    4.16
    
    
    
    1,739,284
    
    
    
    37,903
    
    
    
    2.91Short-term borrowings
    
    
    399,412
    
    
    
    12,727
    
    
    
    4.26
    
    
    
    836,980
    
    
    
    18,848
    
    
    
    3.01Long-term debt
    
    
    960,107
    
    
    
    31,413
    
    
    
    4.37
    
    
    
    932,035
    
    
    
    26,737
    
    
    
    3.83Total interest-bearing liabilities
    
    
    6,023,598
    
    
    
    150,441
    
    
    
    3.34
    
    
    
    6,124,278
    
    
    
    104,637
    
    
    
    2.28Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    920,992
    
    
    
    
    
    
    
    
    
    
    
    924,737Other liabilities
    
    
    85,182
    
    
    
    
    
    
    
    
    
    
    
    84,084Shareholders equity
    
    
    653,530
    
    
    
    
    
    
    
    
    
    
    
    652,786Total liabilities and shareholders equity
    
    $
    7,683,302
    
    
    
    
    
    
    
    
    
    
    $
    7,785,885Net Interest Income
    
    
    
    
    
    $
    199,110
    
    
    
    
    
    
    
    
    
    
    $
    206,654Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    
    
    
    
    3.56
    %Contribution of noninterest bearing sources of funds
    
    
    
    
    
    
    
    
    
    
    0.56
    
    
    
    
    
    
    
    
    
    
    
    0.38Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.86
    %
    
    
    
    
    
    
    
    
    
    
    3.94
    %
 
 (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 $10.2 million and $10.0 million for the
nine months ended September 30, 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. 25




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##### Table of Contents



26




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##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)2006 compared with 2005
    
    Net
    
    
    Due to Change in
    
    
    Net
    
    
    Due to Change in(in thousands)
    
    Change(1)
    
    
    Rate(2)
    
    
    Volume(2)
    
    
    Change(1)
    
    
    Rate(2)
    
    
    Volume(2)Interest Income:Money market investments
    
    
    5
    
    
    
    10
    
    
    
    (5
    )
    
    
    (9
    )
    
    
    7
    
    
    
    (16
    )Investment securities:Taxable
    
    
    (2,271
    )
    
    
    693
    
    
    
    (2,964
    )
    
    
    (5,264
    )
    
    
    3,570
    
    
    
    (8,834
    )Tax-exempt
    
    
    169
    
    
    
    (77
    )
    
    
    246
    
    
    
    401
    
    
    
    (467
    )
    
    
    868Mortgage loans held for sale
    
    
    (276
    )
    
    
    77
    
    
    
    (353
    )
    
    
    (712
    )
    
    
    91
    
    
    
    (803
    )Loans:Commercial
    
    
    7,032
    
    
    
    5,083
    
    
    
    1,949
    
    
    
    19,892
    
    
    
    16,657
    
    
    
    3,235Commercial real estate
    
    
    4,764
    
    
    
    2,974
    
    
    
    1,790
    
    
    
    14,073
    
    
    
    8,562
    
    
    
    5,511Residential mortgage loans
    
    
    634
    
    
    
    280
    
    
    
    354
    
    
    
    2,286
    
    
    
    673
    
    
    
    1,613Direct consumer
    
    
    2,019
    
    
    
    3,471
    
    
    
    (1,452
    )
    
    
    7,139
    
    
    
    10,499
    
    
    
    (3,360
    )Indirect consumer
    
    
    162
    
    
    
    178
    
    
    
    (16
    )
    
    
    454
    
    
    
    245
    
    
    
    209Total portfolio loans
    
    
    14,611
    
    
    
    11,986
    
    
    
    2,625
    
    
    
    43,844
    
    
    
    36,636
    
    
    
    7,208Total
    
    
    12,238
    
    
    
    12,689
    
    
    
    (451
    )
    
    
    38,260
    
    
    
    39,837
    
    
    
    (1,577
    )Interest Expense:Deposits:Interest-bearing demand
    
    
    (486
    )
    
    
    (59
    )
    
    
    (427
    )
    
    
    (1,652
    )
    
    
    (288
    )
    
    
    (1,364
    )Savings
    
    
    4,982
    
    
    
    4,822
    
    
    
    160
    
    
    
    12,511
    
    
    
    13,128
    
    
    
    (617
    )Time
    
    
    13,649
    
    
    
    7,182
    
    
    
    6,467
    
    
    
    36,390
    
    
    
    19,470
    
    
    
    16,920Short-term borrowings
    
    
    (4,111
    )
    
    
    1,881
    
    
    
    (5,992
    )
    
    
    (6,121
    )
    
    
    6,012
    
    
    
    (12,133
    )Long-term debt
    
    
    2,201
    
    
    
    1,814
    
    
    
    387
    
    
    
    4,676
    
    
    
    3,851
    
    
    
    825Total
    
    
    16,235
    
    
    
    15,640
    
    
    
    595
    
    
    
    45,804
    
    
    
    42,173
    
    
    
    3,631Net Interest Income
    
    $
    (3,997
    )
    
    $
    (2,951
    )
    
    $
    (1,046
    )
    
    $
    (7,544
    )
    
    $
    (2,336
    )
    
    $
    (5,208
    )
 
 (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.     27




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##### Table of Contents



Noninterest Income
  Noninterest Income
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Change in 2006
    
    
    September 30,
    
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    Percent
    
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentService charges on deposit accounts
    
    $
    9,674
    
    
    $
    9,343
    
    
    $
    331
    
    
    
    3.5
    %
    
    $
    28,070
    
    
    $
    26,452
    
    
    $
    1,618
    
    
    
    6.1
    %Trust fees
    
    
    4,633
    
    
    
    4,541
    
    
    
    92
    
    
    
    2.0
    
    
    
    14,647
    
    
    
    13,456
    
    
    
    1,191
    
    
    
    8.9Mortgage and other loan income
    
    
    2,267
    
    
    
    2,450
    
    
    
    (183
    )
    
    
    (7.5
    )
    
    
    6,383
    
    
    
    6,884
    
    
    
    (501
    )
    
    
    (7.3
    )Brokerage and investment fees
    
    
    1,885
    
    
    
    1,974
    
    
    
    (89
    )
    
    
    (4.6
    )
    
    
    5,103
    
    
    
    5,857
    
    
    
    (754
    )
    
    
    (12.9
    )ATM network user fees
    
    
    988
    
    
    
    1,194
    
    
    
    (206
    )
    
    
    (17.3
    )
    
    
    2,993
    
    
    
    3,291
    
    
    
    (298
    )
    
    
    (9.0
    )Bankcard fees
    
    
    1,213
    
    
    
    976
    
    
    
    237
    
    
    
    24.5
    
    
    
    3,399
    
    
    
    2,777
    
    
    
    622
    
    
    
    22.4Investment securities gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    43
    
    
    
    18
    
    
    
    42.8Fair value change in CD swap derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207
    )
    
    
    
    
    
    
    (207
    )
    
    
    N/MOther
    
    
    2,884
    
    
    
    3,463
    
    
    
    (579
    )
    
    
    (16.7
    )
    
    
    12,410
    
    
    
    10,788
    
    
    
    1,622
    
    
    
    15.0Total noninterest income
    
    $
    23,544
    
    
    $
    23,941
    
    
    $
    (397
    )
    
    
    (1.7
    )
    
    $
    72,859
    
    
    $
    69,548
    
    
    $
    3,311
    
    
    
    4.8
 
     28




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##### Table of Contents



Noninterest Expense
  Noninterest Expense
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Change in 2006
    
    
    September 30,
    
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    Percent
    
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentSalaries and employee benefits
    
    $
    32,569
    
    
    $
    34,060
    
    
    $
    (1,491
    )
    
    
    (4.4
    )%
    
    $
    97,515
    
    
    $
    99,762
    
    
    $
    (2,247
    )
    
    
    (2.3
    )%Occupancy
    
    
    5,604
    
    
    
    5,255
    
    
    
    349
    
    
    
    6.7
    
    
    
    16,837
    
    
    
    16,500
    
    
    
    337
    
    
    
    2.0Professional services
    
    
    3,486
    
    
    
    4,517
    
    
    
    (1,031
    )
    
    
    (22.8
    )
    
    
    11,267
    
    
    
    12,442
    
    
    
    (1,175
    )
    
    
    (9.4
    )Equipment
    
    
    3,191
    
    
    
    3,133
    
    
    
    58
    
    
    
    1.9
    
    
    
    9,658
    
    
    
    11,371
    
    
    
    (1,713
    )
    
    
    (15.1
    )Data processing services
    
    
    3,779
    
    
    
    3,188
    
    
    
    591
    
    
    
    18.5
    
    
    
    11,232
    
    
    
    10,056
    
    
    
    1,176
    
    
    
    11.7Advertising and public relations
    
    
    1,211
    
    
    
    1,717
    
    
    
    (506
    )
    
    
    (29.5
    )
    
    
    4,179
    
    
    
    5,283
    
    
    
    (1,104
    )
    
    
    (20.9
    )Postage and delivery
    
    
    1,559
    
    
    
    1,512
    
    
    
    47
    
    
    
    3.1
    
    
    
    4,650
    
    
    
    4,622
    
    
    
    28
    
    
    
    0.6Telephone
    
    
    1,394
    
    
    
    1,242
    
    
    
    152
    
    
    
    12.2
    
    
    
    4,250
    
    
    
    4,148
    
    
    
    102
    
    
    
    2.5Other loan expenses
    
    
    1,407
    
    
    
    720
    
    
    
    687
    
    
    
    95.3
    
    
    
    3,040
    
    
    
    1,969
    
    
    
    1,071
    
    
    
    54.4Stationery and supplies
    
    
    653
    
    
    
    726
    
    
    
    (73
    )
    
    
    (10.0
    )
    
    
    2,011
    
    
    
    2,247
    
    
    
    (236
    )
    
    
    (10.5
    )Intangible asset amortization
    
    
    725
    
    
    
    725
    
    
    
    
    
    
    
    
    
    
    
    2,174
    
    
    
    2,174
    
    
    
    
    
    
    
    Other
    
    
    3,824
    
    
    
    3,755
    
    
    
    69
    
    
    
    1.8
    
    
    
    14,226
    
    
    
    11,567
    
    
    
    2,659
    
    
    
    23.0Total noninterest expense
    
    $
    59,402
    
    
    $
    60,550
    
    
    $
    (1,148
    )
    
    
    (1.9
    )
    
    $
    181,039
    
    
    $
    182,141
    
    
    $
    (1,102
    )
    
    
    (0.6
    )
   29




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Income Taxes
    Lines of Business Results
  30




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Commercial Banking
    
    $
    12,135
    
    
    $
    10,582
    
    
    $
    33,067
    
    
    $
    27,173Consumer Banking
    
    
    8,822
    
    
    
    8,617
    
    
    
    28,284
    
    
    
    29,340Wealth Management
    
    
    741
    
    
    
    526
    
    
    
    2,457
    
    
    
    1,563Other
    
    
    (717
    )
    
    
    1,267
    
    
    
    (1,164
    )
    
    
    3,561Net Income
    
    $
    20,981
    
    
    $
    20,992
    
    
    $
    62,644
    
    
    $
    61,637
 Commercial Banking
  Consumer Banking
  Wealth Management
  31




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Other
  Financial Condition
  Investment Securities and Money Market Investments
  Portfolio Loans
      32




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##### Table of Contents



Mortgage Loans Held for Sale
  Provision and Allowance for Loan Losses
  Analysis of Allowance for Loan Losses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    114,560
    
    
    $
    119,967
    
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    1,190
    
    
    
    4,000
    
    
    
    5,329
    
    
    
    8,396Charge-offs
    
    
    4,257
    
    
    
    7,956
    
    
    
    15,046
    
    
    
    20,891Recoveries
    
    
    1,583
    
    
    
    2,615
    
    
    
    6,393
    
    
    
    8,937Net charge-offs
    
    
    2,674
    
    
    
    5,341
    
    
    
    8,653
    
    
    
    11,954Allowance for loan losses  end of period
    
    $
    113,076
    
    
    $
    118,626
    
    
    $
    113,076
    
    
    $
    118,626Portfolio loans outstanding at period end (1)
    
    $
    5,753,375
    
    
    $
    5,569,274
    
    
    $
    5,753,375
    
    
    $
    5,569,274Average portfolio loans outstanding during period (1)
    
    
    5,693,556
    
    
    
    5,531,001
    
    
    
    5,622,186
    
    
    
    5,465,778Allowance for loan losses as a percentage of portfolio loans
    
    
    1.97
    %
    
    
    2.13
    %
    
    
    1.97
    %
    
    
    2.13
    %Ratio of net charge-offs during period to average portfolio loans
(annualized)
    
    
    0.19
    
    
    
    0.38
    
    
    
    0.21
    
    
    
    0.29
 (1)
    
    Balances exclude mortgage loans held for sale.     33




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Nonperforming Assets
  34




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##### Table of Contents



Nonperforming Assets
 September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Nonperforming LoansNonaccrual Commercial:Commercial
    
    $
    8,440
    
    
    $
    11,880
    
    
    $
    14,457Commercial real estate
    
    
    7,835
    
    
    
    5,068
    
    
    
    5,720Total commercial
    
    
    16,275
    
    
    
    16,948
    
    
    
    20,177Nonaccrual Consumer:Direct
    
    
    3,972
    
    
    
    4,326
    
    
    
    4,459Indirect
    
    
    781
    
    
    
    2,454
    
    
    
    962Total consumer
    
    
    4,753
    
    
    
    6,780
    
    
    
    5,421Nonaccrual Mortgage:
    
    
    10,536
    
    
    
    8,412
    
    
    
    9,929Total nonaccrual loans
    
    
    31,564
    
    
    
    32,140
    
    
    
    35,527Loans 90 days past due and still accruing
    
    
    303
    
    
    
    238
    
    
    
    92Restructured loans
    
    
    391
    
    
    
    
    
    
    
    13Total nonperforming loans
    
    
    32,258
    
    
    
    32,378
    
    
    
    35,632Other Repossessed Assets Acquired (ORAA)
    
    
    7,767
    
    
    
    7,351
    
    
    
    6,984Total nonperforming assets
    
    $
    40,025
    
    
    $
    39,729
    
    
    $
    42,616Nonperforming assets as a percent of portfolio loans plus ORAA (1)
    
    
    0.69
    %
    
    
    0.71
    %
    
    
    0.76
    %Nonperforming assets as a percent of total assets
    
    
    0.52
    
    
    
    0.51
    
    
    
    0.54Allowance for loan loss as a percent of nonperforming loans
    
    
    350.54
    
    
    
    359.50
    
    
    
    332.92Allowance for loan loss as a percent of nonperforming assets
    
    
    282.51
    
    
    
    292.98
    
    
    
    278.36
 (1)
    
    Portfolio loans exclude mortgage loans held for sale.    35




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##### Table of Contents



Deposits
   Borrowed Funds
   Capital Resources
  Capital Ratios
    
    Regulatory MinimumWell-
    
    September 30,
    
    December 31,
    
    September 30,Required
    
    Capitalized
    
    2006
    
    2005
    
    2005Risk based:Tier 1 capital
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    10.13
    %
    
    
    9.94
    %
    
    
    9.91
    %Total capital
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.37
    
    
    
    13.22
    
    
    
    13.20Tier 1 leverage
    
    
    4.00
    
    
    
    5.00
    
    
    
    8.29
    
    
    
    7.98
    
    
    
    7.86
  Contractual Obligations and Off-Balance Sheet Arrangements
  36




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Liquidity and Debt Capacity
        Interest Rate Risk
  37




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##### Table of Contents



38




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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
    
    
    TotalSeptember 30, 2006Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,613.3
    
    
    $
    229.5
    
    
    $
    413.5
    
    
    $
    3,256.3
    
    
    $
    2,060.2
    
    
    $
    436.8
    
    
    $
    5,753.3Mortgage loans held for sale
    
    
    11.7
    
    
    
    
    
    
    
    
    
    
    
    11.7
    
    
    
    
    
    
    
    
    
    
    
    11.7Investment securities
    
    
    88.4
    
    
    
    160.4
    
    
    
    99.1
    
    
    
    347.9
    
    
    
    798.5
    
    
    
    393.7
    
    
    
    1,540.1Short-term investments
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Total
    
    $
    2,713.6
    
    
    $
    389.9
    
    
    $
    512.6
    
    
    $
    3,616.1
    
    
    $
    2,858.7
    
    
    $
    830.5
    
    
    $
    7,305.3Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,938.7
    
    
    $
    411.1
    
    
    $
    811.5
    
    
    $
    3,161.3
    
    
    $
    924.6
    
    
    $
    646.1
    
    
    $
    4,732.0Other interest bearing liabilities
    
    
    281.2
    
    
    
    95.0
    
    
    
    55.0
    
    
    
    431.2
    
    
    
    765.2
    
    
    
    178.8
    
    
    
    1,375.2Total
    
    $
    2,219.9
    
    
    $
    506.1
    
    
    $
    866.5
    
    
    $
    3,592.5
    
    
    $
    1,689.8
    
    
    $
    824.9
    
    
    $
    6,107.2Derivatives
    
    $
    (56.0
    )
    
    $
    (20.0
    )
    
    $
    
    
    
    $
    (76.0
    )
    
    $
    76.0
    
    
    $
    
    
    
    $
    Period GAP(4)
    
    $
    437.7
    
    
    $
    (136.2
    )
    
    $
    (353.9
    )
    
    $
    (52.4
    )
    
    $
    1,244.9
    
    
    $
    5.6
    
    
    $
    1,198.1Cumulative GAP
    
    
    437.7
    
    
    
    301.5
    
    
    
    (52.4
    )
    
    
    
    
    
    
    1,192.5
    
    
    
    1,198.1September 30, 2005Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,649.8
    
    
    $
    204.2
    
    
    $
    406.9
    
    
    $
    3,260.9
    
    
    $
    1,940.4
    
    
    $
    368.0
    
    
    $
    5,569.3Mortgage loans held for sale
    
    
    29.8
    
    
    
    
    
    
    
    
    
    
    
    29.8
    
    
    
    
    
    
    
    
    
    
    
    29.8Investment securities
    
    
    84.2
    
    
    
    57.7
    
    
    
    144.7
    
    
    
    286.6
    
    
    
    1,032.0
    
    
    
    477.5
    
    
    
    1,796.1Short-term investments
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Total
    
    $
    2,765.2
    
    
    $
    261.9
    
    
    $
    551.6
    
    
    $
    3,578.7
    
    
    $
    2,972.4
    
    
    $
    845.5
    
    
    $
    7,396.6Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,549.8
    
    
    $
    249.9
    
    
    $
    636.5
    
    
    $
    2,436.2
    
    
    $
    1,030.5
    
    
    $
    820.2
    
    
    $
    4,286.9Other interest bearing liabilities
    
    
    926.6
    
    
    
    
    
    
    
    175.0
    
    
    
    1,101.6
    
    
    
    579.5
    
    
    
    205.4
    
    
    
    1,886.5Total
    
    $
    2,476.4
    
    
    $
    249.9
    
    
    $
    811.5
    
    
    $
    3,537.8
    
    
    $
    1,610.0
    
    
    $
    1,025.6
    
    
    $
    6,173.4Derivatives
    
    $
    (31.0
    )
    
    $
    (125.0
    )
    
    $
    25.0
    
    
    $
    (131.0
    )
    
    $
    (74.0
    )
    
    $
    205.0
    
    
    $
    Period GAP(4)
    
    $
    257.8
    
    
    $
    (113.0
    )
    
    $
    (234.9
    )
    
    $
    (90.1
    )
    
    $
    1,288.4
    
    
    $
    24.9
    
    
    $
    1,223.2Cumulative GAP
    
    
    257.8
    
    
    
    144.8
    
    
    
    (90.1
    )
    
    
    
    
    
    
    1,198.3
    
    
    
    1,223.2
 (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 $1.2 billion in the less than one year category and $1.1 billion in the over one year category
as of September 30, 2006. The same amounts as of September 30, 2005 were $1.1 billion and $1.3
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.   39




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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
  40




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
 10.31
    
    Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J.
Peterson, dated August 16, 200631.1
    
    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
 41




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##### Table of Contents



SIGNATURES
   Date: November 3, 2006
    
    By
    
    /s/ Charles D. Christy

Charles D. ChristyChief Financial Officer(principal financial officer and duly authorized officer)
 42




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##### Table of Contents



10-Q EXHIBIT INDEX
 Exhibit No.
    
    Description10.31
    
    Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J.
Peterson, dated August 16, 200631.1
    
    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
 43