##### 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 endedJune 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
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    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 July 28, 2006Common Stock, No Par Value
    
    
    
    42,902,996 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
    
    
    19Item 3 - Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4 - Controls and Procedures
    
    
    39Part II  Other InformationItem 2 -Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6 -Exhibits
    
    
    41Signatures
    
    
    42Exhibit Index
    
    
    43Form of Restricted Stock AgreementForm of Restricted Stock Agreement2006 Management Incentive PlanSection 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification by Chief Executive Officer
  2




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##### Table of Contents



Consolidated Balance Sheets  Citizens Banking Corporation and Subsidiaries
 June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005(unaudited)
    
    (Note 1)
    
    (unaudited)AssetsCash and due from banks
    
    $
    205,117
    
    
    $
    194,748
    
    
    $
    163,461Interest-bearing deposits with banks
    
    
    1,478
    
    
    
    380
    
    
    
    1,128Investment Securities:Available-for-sale (amortized cost $1,434,595, $1,501,819 and $1,703,232, respectively)U.S. Treasury and federal agency securities
    
    
    1,043,773
    
    
    
    1,122,306
    
    
    
    1,341,398State and municipal securities
    
    
    363,095
    
    
    
    378,235
    
    
    
    379,625Other securities
    
    
    1,747
    
    
    
    1,456
    
    
    
    975Held-to-maturity:State and municipal securities (fair value of $94,559, $82,364 and $69,263, respectively)
    
    
    96,789
    
    
    
    82,431
    
    
    
    67,813FHLB and Federal Reserve stock
    
    
    55,235
    
    
    
    55,911
    
    
    
    55,143Total investment securities
    
    
    1,560,639
    
    
    
    1,640,339
    
    
    
    1,844,954Mortgage loans held for sale
    
    
    18,013
    
    
    
    16,252
    
    
    
    29,751Portfolio loans:Commercial
    
    
    1,789,583
    
    
    
    1,688,079
    
    
    
    1,634,924Commercial real estate
    
    
    1,443,851
    
    
    
    1,402,128
    
    
    
    1,334,169Residential mortgage loans
    
    
    551,048
    
    
    
    539,824
    
    
    
    524,735Direct consumer
    
    
    1,099,146
    
    
    
    1,142,002
    
    
    
    1,186,659Indirect consumer
    
    
    844,411
    
    
    
    844,086
    
    
    
    842,741Total portfolio loans
    
    
    5,728,039
    
    
    
    5,616,119
    
    
    
    5,523,228Less: Allowance for loan losses
    
    
    (114,560
    )
    
    
    (116,400
    )
    
    
    (119,967
    )Net portfolio loans
    
    
    5,613,479
    
    
    
    5,499,719
    
    
    
    5,403,261Premises and equipment
    
    
    120,154
    
    
    
    121,730
    
    
    
    120,353Goodwill
    
    
    54,527
    
    
    
    54,527
    
    
    
    54,527Other intangible assets
    
    
    9,684
    
    
    
    11,133
    
    
    
    12,582Bank owned life insurance
    
    
    85,921
    
    
    
    84,435
    
    
    
    83,183Other assets
    
    
    145,158
    
    
    
    128,620
    
    
    
    112,737Total assets
    
    $
    7,814,170
    
    
    $
    7,751,883
    
    
    $
    7,825,937LiabilitiesNoninterest-bearing deposits
    
    $
    954,907
    
    
    $
    969,074
    
    
    $
    927,270Interest-bearing demand deposits
    
    
    744,744
    
    
    
    891,313
    
    
    
    1,008,599Savings deposits
    
    
    1,537,098
    
    
    
    1,437,024
    
    
    
    1,475,220Time deposits
    
    
    2,447,820
    
    
    
    2,176,428
    
    
    
    1,789,649Total deposits
    
    
    5,684,569
    
    
    
    5,473,839
    
    
    
    5,200,738Federal funds purchased and securities sold
under agreements to repurchase
    
    
    443,651
    
    
    
    505,879
    
    
    
    930,499Other short-term borrowings
    
    
    24,073
    
    
    
    23,242
    
    
    
    17,952Other liabilities
    
    
    78,881
    
    
    
    86,351
    
    
    
    78,072Long-term debt
    
    
    933,124
    
    
    
    1,006,109
    
    
    
    936,527Total liabilities
    
    
    7,164,298
    
    
    
    7,095,420
    
    
    
    7,163,788Shareholders EquityPreferred stock  no par valueAuthorized - 5,000,000 shares; Issued  none
    
    
    
    
    
    
    
    
    
    
    Common stock  no par valueAuthorized -
100,000,000 shares; Issued and outstanding - 42,887,320 at 6/30/06,
42,967,649 at 12/31/05, and 43,280,829 at 6/30/05
    
    
    78,920
    
    
    
    85,526
    
    
    
    94,100Retained earnings
    
    
    587,494
    
    
    
    570,483
    
    
    
    555,017Accumulated other comprehensive income
    
    
    (16,542
    )
    
    
    454
    
    
    
    13,032Total shareholders equity
    
    
    649,872
    
    
    
    656,463
    
    
    
    662,149Total liabilities and shareholders equity
    
    $
    7,814,170
    
    
    $
    7,751,883
    
    
    $
    7,825,937
  3




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##### Table of Contents



Consolidated Statements of Income (Unaudited)  Citizens Banking Corporation and Subsidiaries
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest IncomeInterest and fees on loans
    
    $
    98,093
    
    
    $
    83,475
    
    
    $
    191,544
    
    
    $
    162,747Interest and dividends on investment securities:Taxable
    
    
    13,063
    
    
    
    14,979
    
    
    
    26,674
    
    
    
    29,667Tax-exempt
    
    
    5,259
    
    
    
    5,147
    
    
    
    10,576
    
    
    
    10,344Money market investments
    
    
    1
    
    
    
    18
    
    
    
    13
    
    
    
    27Total interest income
    
    
    116,416
    
    
    
    103,619
    
    
    
    228,807
    
    
    
    202,785Interest ExpenseDeposits
    
    
    35,305
    
    
    
    19,122
    
    
    
    66,297
    
    
    
    37,193Short-term borrowings
    
    
    5,395
    
    
    
    6,700
    
    
    
    9,131
    
    
    
    11,141Long-term debt
    
    
    9,726
    
    
    
    9,018
    
    
    
    19,914
    
    
    
    17,439Total interest expense
    
    
    50,426
    
    
    
    34,840
    
    
    
    95,342
    
    
    
    65,773Net Interest Income
    
    
    65,990
    
    
    
    68,779
    
    
    
    133,465
    
    
    
    137,012Provision for loan losses
    
    
    1,139
    
    
    
    1,396
    
    
    
    4,139
    
    
    
    4,396Net interest income after provision for loan losses
    
    
    64,851
    
    
    
    67,383
    
    
    
    129,326
    
    
    
    132,616Noninterest IncomeService charges on deposit accounts
    
    
    9,521
    
    
    
    8,822
    
    
    
    18,396
    
    
    
    17,109Trust fees
    
    
    4,972
    
    
    
    4,503
    
    
    
    10,014
    
    
    
    8,915Mortgage and other loan income
    
    
    2,106
    
    
    
    2,074
    
    
    
    4,116
    
    
    
    4,434Brokerage and investment fees
    
    
    1,703
    
    
    
    2,284
    
    
    
    3,218
    
    
    
    3,883ATM network user fees
    
    
    1,018
    
    
    
    1,223
    
    
    
    2,005
    
    
    
    2,096Bankcard fees
    
    
    1,129
    
    
    
    961
    
    
    
    2,186
    
    
    
    1,801Fair value change in CD swap derivatives
    
    
    
    
    
    
    
    
    
    
    (207
    )
    
    
    Other
    
    
    3,242
    
    
    
    3,242
    
    
    
    9,526
    
    
    
    7,326Total fees and other income
    
    
    23,691
    
    
    
    23,109
    
    
    
    49,254
    
    
    
    45,564Investment securities gains
    
    
    54
    
    
    
    37
    
    
    
    61
    
    
    
    43Total noninterest income
    
    
    23,745
    
    
    
    23,146
    
    
    
    49,315
    
    
    
    45,607Noninterest ExpenseSalaries and employee benefits
    
    
    32,690
    
    
    
    32,351
    
    
    
    64,946
    
    
    
    65,702Occupancy
    
    
    5,291
    
    
    
    5,685
    
    
    
    11,233
    
    
    
    11,245Professional services
    
    
    3,703
    
    
    
    3,726
    
    
    
    7,781
    
    
    
    7,925Equipment
    
    
    3,301
    
    
    
    4,937
    
    
    
    6,467
    
    
    
    8,238Data processing services
    
    
    3,714
    
    
    
    3,499
    
    
    
    7,453
    
    
    
    6,868Advertising and public relations
    
    
    934
    
    
    
    1,820
    
    
    
    2,968
    
    
    
    3,566Postage and delivery
    
    
    1,629
    
    
    
    1,520
    
    
    
    3,091
    
    
    
    3,110Telephone
    
    
    1,392
    
    
    
    1,465
    
    
    
    2,856
    
    
    
    2,906Other loan expenses
    
    
    1,217
    
    
    
    874
    
    
    
    1,633
    
    
    
    1,249Stationery and supplies
    
    
    631
    
    
    
    602
    
    
    
    1,358
    
    
    
    1,521Intangible asset amortization
    
    
    724
    
    
    
    724
    
    
    
    1,449
    
    
    
    1,449Other
    
    
    4,839
    
    
    
    3,787
    
    
    
    10,402
    
    
    
    7,812Total noninterest expense
    
    
    60,065
    
    
    
    60,990
    
    
    
    121,637
    
    
    
    121,591Income Before Income Taxes
    
    
    28,531
    
    
    
    29,539
    
    
    
    57,004
    
    
    
    56,632Income tax provision
    
    
    7,624
    
    
    
    8,974
    
    
    
    15,341
    
    
    
    15,987Net Income
    
    $
    20,907
    
    
    $
    20,565
    
    
    $
    41,663
    
    
    $
    40,645Net Income Per Common Share:Basic
    
    $
    0.49
    
    
    $
    0.48
    
    
    $
    0.98
    
    
    $
    0.94Diluted
    
    
    0.49
    
    
    
    0.47
    
    
    
    0.97
    
    
    
    0.93Cash Dividends Declared Per Common Share
    
    
    0.290
    
    
    
    0.285
    
    
    
    0.575
    
    
    
    0.570Average Common Shares Outstanding:Basic
    
    
    42,606
    
    
    
    43,160
    
    
    
    42,694
    
    
    
    43,192Diluted
    
    
    42,738
    
    
    
    43,424
    
    
    
    42,839
    
    
    
    43,534
  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
    
    
    
    
    
    
    
    
    
    
    40,645
    
    
    
    
    
    
    
    40,645Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,455
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,962
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,683Proceeds from stock options exercised and restricted stock activity
    
    
    122
    
    
    
    2,376
    
    
    
    
    
    
    
    
    
    
    
    2,376Net change in deferred compensation, net of tax
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    124Recognition of stock-based compensation
    
    
    105
    
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    (126
    )Cash dividends declared on common shares  $0.570 per share
    
    
    
    
    
    
    
    
    
    
    (24,630
    )
    
    
    
    
    
    
    (24,630
    )Shares acquired for retirement
    
    
    (186
    )
    
    
    (5,580
    )
    
    
    
    
    
    
    
    
    
    
    (5,580
    )Balance  June 30, 2005
    
    
    43,281
    
    
    $
    94,100
    
    
    $
    555,017
    
    
    $
    13,032
    
    
    $
    662,149Balance at January 1, 2006
    
    
    42,968
    
    
    $
    85,526
    
    
    $
    570,483
    
    
    $
    454
    
    
    $
    656,463Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    41,663
    
    
    
    
    
    
    
    41,663Other comprehensive income:Net unrealized gain/(loss) on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,002
    )Net change in unrealized gain/(loss) on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,996
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,667Proceeds from stock options exercised and restricted stock activity
    
    
    69
    
    
    
    1,529
    
    
    
    
    
    
    
    
    
    
    
    1,529Recognition of stock-based compensation
    
    
    185
    
    
    
    813
    
    
    
    
    
    
    
    
    
    
    
    813Cash dividends declared on common shares  $0.575 per share
    
    
    
    
    
    
    
    
    
    
    (24,652
    )
    
    
    
    
    
    
    (24,652
    )Shares acquired for retirement
    
    
    (335
    )
    
    
    (8,948
    )
    
    
    
    
    
    
    
    
    
    
    (8,948
    )Balance  June 30, 2006
    
    
    42,887
    
    
    $
    78,920
    
    
    $
    587,494
    
    
    $
    (16,542
    )
    
    $
    649,872
  5




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##### Table of Contents



Consolidated Statements of Cash Flows  Citizens Banking Corporation and Subsidiaries
 Six Months EndedJune 30,(in thousands)
    
    2006
    
    
    2005Operating Activities:Net income
    
    $
    41,663
    
    
    $
    40,645Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    4,139
    
    
    
    4,396Depreciation and amortization
    
    
    5,979
    
    
    
    7,967Amortization of goodwill and other intangibles
    
    
    1,449
    
    
    
    1,449Net amortization on investment securities
    
    
    604
    
    
    
    2,686Investment securities gains
    
    
    (61
    )
    
    
    (43
    )Loans originated for sale
    
    
    (97,844
    )
    
    
    (163,021
    )Proceeds from sales of mortgage loans held for sale
    
    
    97,596
    
    
    
    163,787Net gains from mortgage loan sales
    
    
    (1,513
    )
    
    
    (2,479
    )Net loss on sale of other real estate
    
    
    354
    
    
    
    150Stock-based compensation
    
    
    813
    
    
    
    (2
    )Other
    
    
    (16,088
    )
    
    
    2,770Net cash provided by operating activities
    
    
    37,091
    
    
    
    58,305Investing Activities:Net (increase) decrease in money market investments
    
    
    (1,098
    )
    
    
    641Securities available-for-sale:Proceeds from sales
    
    
    113
    
    
    
    Proceeds from maturities and payments
    
    
    125,688
    
    
    
    222,357Purchases
    
    
    (58,396
    )
    
    
    (196,008
    )Securities held-to-maturity:Purchases
    
    
    (14,406
    )
    
    
    (13,780
    )Net increase in loans and leases
    
    
    (117,899
    )
    
    
    (136,476
    )Proceeds from sales of other real estate
    
    
    2,261
    
    
    
    3,570Net increase in properties and equipment
    
    
    (4,403
    )
    
    
    (10,376
    )Net cash used by investing activities
    
    
    (68,140
    )
    
    
    (130,072
    )Financing Activities:Net decrease in demand and savings deposits
    
    
    (60,662
    )
    
    
    (276,358
    )Net increase in time deposits
    
    
    271,392
    
    
    
    177,336Net (decrease) increase in short-term borrowings
    
    
    (61,397
    )
    
    
    223,677Proceeds from issuance of long-term debt
    
    
    75,453
    
    
    
    200,000Principal reductions in long-term debt
    
    
    (151,297
    )
    
    
    (215,067
    )Cash dividends paid
    
    
    (24,652
    )
    
    
    (24,630
    )Proceeds from stock options exercised and restricted stock activity
    
    
    1,529
    
    
    
    2,376Shares acquired for retirement
    
    
    (8,948
    )
    
    
    (5,580
    )Net cash provided by financing activities
    
    
    41,418
    
    
    
    81,754Net decrease in cash and due from banks
    
    
    10,369
    
    
    
    9,987Cash and due from banks at beginning of period
    
    
    194,748
    
    
    
    153,474Cash and due from banks at end of period
    
    $
    205,117
    
    
    $
    163,461
  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
 SFAS No. 123R, Stock-Based Compensation (Revised 2004).
 Note 2. New Accounting Pronouncements
 FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109, Accounting for Income Taxes.
 FASB Staff Position (FSP) FIN 46(R)-6 Determining the Variability to be Considered in Applying
FASB Interpretation No. 46(R).
 7




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##### Table of Contents



Note 3. Investment Securities
  June 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
    
    
    765,619
    
    
    
    737,818
    
    
    
    210
    
    
    
    28,011
    
    
    
    825,933
    
    
    
    811,898
    
    
    
    985
    
    
    
    15,020Other
    
    
    310,763
    
    
    
    305,955
    
    
    
    882
    
    
    
    5,690
    
    
    
    309,681
    
    
    
    310,408
    
    
    
    2,046
    
    
    
    1,319State and municipal
    
    
    356,507
    
    
    
    363,095
    
    
    
    9,151
    
    
    
    2,563
    
    
    
    364,853
    
    
    
    378,235
    
    
    
    14,391
    
    
    
    1,009Mortgage and
asset-backed
    
    
    247
    
    
    
    247
    
    
    
    1
    
    
    
    1
    
    
    
    280
    
    
    
    280
    
    
    
    1
    
    
    
    1Other
    
    
    1,459
    
    
    
    1,500
    
    
    
    41
    
    
    
    
    
    
    
    1,072
    
    
    
    1,176
    
    
    
    107
    
    
    
    3Total available
for sale
    
    $
    1,434,595
    
    
    $
    1,408,615
    
    
    $
    10,285
    
    
    $
    36,265
    
    
    $
    1,501,819
    
    
    $
    1,501,997
    
    
    $
    17,530
    
    
    $
    17,352Held to Maturity:State and municipalTotal held to
maturity
    
    $
    96,789
    
    
    $
    94,559
    
    
    $
    90
    
    
    $
    2,320
    
    
    $
    82,431
    
    
    $
    82,364
    
    
    $
    590
    
    
    $
    657Other Investment Securities:FHLB and Fed
Reserve stockTotal Other
Securities
    
    $
    55,235
    
    
    $
    55,235
    
    
    $
    
    
    
    $
    
    
    
    $
    55,911
    
    
    $
    55,911
    
    
    $
    
    
    
    $
    
  8




---



##### Table of Contents



As of June 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
    
    
    130,218
    
    
    
    2,342
    
    
    
    582,249
    
    
    
    25,669
    
    
    
    712,467
    
    
    
    28,011Other
    
    
    212,222
    
    
    
    3,391
    
    
    
    58,316
    
    
    
    2,299
    
    
    
    270,538
    
    
    
    5,690State and municipal
    
    
    41,945
    
    
    
    1,542
    
    
    
    22,562
    
    
    
    1,021
    
    
    
    64,507
    
    
    
    2,563Mortgage and asset-backed
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    1
    
    
    
    98
    
    
    
    1Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    
    384,385
    
    
    
    7,275
    
    
    
    663,225
    
    
    
    28,990
    
    
    
    1,047,610
    
    
    
    36,265Held to Maturity:State and municipal
    
    
    63,825
    
    
    
    1,730
    
    
    
    14,871
    
    
    
    590
    
    
    
    78,696
    
    
    
    2,320Total held to maturity
    
    
    63,825
    
    
    
    1,730
    
    
    
    14,871
    
    
    
    590
    
    
    
    78,696
    
    
    
    2,320Total
    
    $
    448,210
    
    
    $
    9,005
    
    
    $
    678,096
    
    
    $
    29,580
    
    
    $
    1,126,306
    
    
    $
    38,585
 As of December 31, 2005
 Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable For Sale:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal agencies:Mortgage-backed
    
    
    320,048
    
    
    
    3,669
    
    
    
    440,599
    
    
    
    11,351
    
    
    
    760,647
    
    
    
    15,020Other
    
    
    173,266
    
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    173,266
    
    
    
    1,319State and municipal
    
    
    36,539
    
    
    
    658
    
    
    
    10,046
    
    
    
    351
    
    
    
    46,585
    
    
    
    1,009Mortgage and asset-backed
    
    
    197
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    1Other
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3
    
    
    
    6
    
    
    
    3Total available for sale
    
    
    530,050
    
    
    
    5,647
    
    
    
    450,651
    
    
    
    11,705
    
    
    
    980,701
    
    
    
    17,352Held to Maturity:State and municipal
    
    
    41,471
    
    
    
    544
    
    
    
    3,660
    
    
    
    113
    
    
    
    45,131
    
    
    
    657Total held to maturity
    
    
    41,471
    
    
    
    544
    
    
    
    3,660
    
    
    
    113
    
    
    
    45,131
    
    
    
    657Total
    
    $
    571,521
    
    
    $
    6,191
    
    
    $
    454,311
    
    
    $
    11,818
    
    
    $
    1,025,832
    
    
    $
    18,009
  Note 4. Allowance for Loan Losses and Impaired Loans
  9




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##### Table of Contents



Analysis of Allowance for Loan Losses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    115,423
    
    
    $
    120,945
    
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    1,139
    
    
    
    1,396
    
    
    
    4,139
    
    
    
    4,396Charge-offs:Commercial
    
    
    854
    
    
    
    2,722
    
    
    
    1,775
    
    
    
    5,185Commercial real estate
    
    
    606
    
    
    
    200
    
    
    
    1,223
    
    
    
    878Total commercial
    
    
    1,460
    
    
    
    2,922
    
    
    
    2,998
    
    
    
    6,063Residential mortgage
    
    
    305
    
    
    
    127
    
    
    
    502
    
    
    
    451Direct consumer
    
    
    1,216
    
    
    
    1,227
    
    
    
    2,885
    
    
    
    2,651Indirect consumer
    
    
    1,575
    
    
    
    1,534
    
    
    
    4,404
    
    
    
    3,770Charge-offs
    
    
    4,556
    
    
    
    5,810
    
    
    
    10,789
    
    
    
    12,935Recoveries:Commercial
    
    
    1,001
    
    
    
    2,117
    
    
    
    2,176
    
    
    
    3,279Commercial real estate
    
    
    485
    
    
    
    227
    
    
    
    564
    
    
    
    934Total commercial
    
    
    1,486
    
    
    
    2,344
    
    
    
    2,740
    
    
    
    4,213Residential mortgage
    
    
    48
    
    
    
    
    
    
    
    102
    
    
    
    Direct consumer
    
    
    332
    
    
    
    377
    
    
    
    618
    
    
    
    720Indirect consumer
    
    
    688
    
    
    
    715
    
    
    
    1,350
    
    
    
    1,389Recoveries
    
    
    2,554
    
    
    
    3,436
    
    
    
    4,810
    
    
    
    6,322Net charge-offs
    
    
    2,002
    
    
    
    2,374
    
    
    
    5,979
    
    
    
    6,613Allowance for loan losses  end of period
    
    $
    114,560
    
    
    $
    119,967
    
    
    $
    114,560
    
    
    $
    119,967
  Impaired Loan Information
 Balances
    
    
    Valuation ReserveJune 30,
    
    
    December 31,
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005Balances -Impaired loans with valuation reserve
    
    $
    13,649
    
    
    $
    7,989
    
    
    $
    16,876
    
    
    $
    6,093
    
    
    $
    5,059
    
    
    $
    9,269Impaired loans with no valuation reserve
    
    
    526
    
    
    
    908
    
    
    
    2,001
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    14,175
    
    
    $
    8,897
    
    
    $
    18,877
    
    
    $
    6,093
    
    
    $
    5,059
    
    
    $
    9,269Impaired loans on nonaccrual basis
    
    $
    3,884
    
    
    $
    4,728
    
    
    $
    7,403
    
    
    $
    2,220
    
    
    $
    2,747
    
    
    $
    4,043Impaired loans on accrual basis
    
    
    10,291
    
    
    
    4,169
    
    
    
    11,474
    
    
    
    3,873
    
    
    
    2,312
    
    
    
    5,226Total impaired loans
    
    $
    14,175
    
    
    $
    8,897
    
    
    $
    18,877
    
    
    $
    6,093
    
    
    $
    5,059
    
    
    $
    9,269
  Note 5. Long-term Debt
  10




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Citizens (Parent only):Subordinated debt:Notes maturing February 2013
    
    $
    117,456
    
    
    $
    120,852
    
    
    $
    125,621Deferrable interest debenture maturing June 2033
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Subsidiaries:Federal Home Loan Bank advances
    
    
    789,441
    
    
    
    859,483
    
    
    
    785,125Other borrowed funds
    
    
    453
    
    
    
    
    
    
    
    7Total long-term debt
    
    $
    933,124
    
    
    $
    1,006,109
    
    
    $
    936,527
 Note 6. Accumulated Other Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    (7,777
    )
    
    $
    3,740
    
    
    $
    454
    
    
    $
    17,994Net unrealized (loss) gain on securities for the quarter, net of tax effect of
$(4,657) in 2006 and $5,300 in 2005
    
    
    (8,648
    )
    
    
    9,844Less: Reclassification adjustment for net gains (losses) on securities
included in net income for the quarter, net of tax effect of
$(19) in 2006 and $(13) in 2005
    
    
    (35
    )
    
    
    (24
    )Net unrealized loss on securities for the period, net of tax effect of
$(9,134) in 2006 and $(2,923) in 2005
    
    
    
    
    
    
    
    
    
    
    (16,963
    )
    
    
    (5,427
    )Less: Reclassification adjustment for net (gains) losses included in net
income for the period, net of tax effect of $(21) in 2006 and $(15) in 2005
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (28
    )Net change in unrealized loss on cash flow hedges for the quarter, net of tax
effect of $44 in 2006 and $284 in 2005
    
    
    (82
    )
    
    
    (528
    )Net change in unrealized gain on cash flow hedges for the period,
net of tax effect of $4 in 2006 and $(265) in 2005
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    493Accumulated other comprehensive income, net of tax
    
    $
    (16,542
    )
    
    $
    13,032
    
    
    $
    (16,542
    )
    
    $
    13,032
 Note 7. Earnings Per Share
  11




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Basic and dilutive earnings per share  net income
available to common shareholders
    
    $
    20,907
    
    
    $
    20,565
    
    
    $
    41,663
    
    
    $
    40,645Denominator:Basic earnings per share  weighted average shares
    
    
    42,606
    
    
    
    43,160
    
    
    
    42,694
    
    
    
    43,192Effect of dilutive securities  potential conversion
of employee stock options
    
    
    132
    
    
    
    264
    
    
    
    144
    
    
    
    343Diluted earnings per share  adjusted weighted-average
shares and assumed conversions
    
    
    42,738
    
    
    
    43,424
    
    
    
    42,839
    
    
    
    43,535Basic earnings per share
    
    $
    0.49
    
    
    $
    0.48
    
    
    $
    0.98
    
    
    $
    0.94Diluted earnings per share
    
    $
    0.49
    
    
    $
    0.47
    
    
    $
    0.97
    
    
    $
    0.93
 Note 8. Stock-Based Compensation
      12




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##### Table of Contents



Analysis of Stock-Based Compensation Expense
 Three Months
    
    
    Six Months
    
    
    Three Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005Stock Option Compensation
    
    $
    15
    
    
    $
    35
    
    
    $
    (126
    )
    
    $
    (126
    )Restricted Stock Compensation
    
    
    389
    
    
    
    778
    
    
    
    94
    
    
    
    124Stock-based compensation expense before income taxes
    
    
    404
    
    
    
    813
    
    
    
    (32
    )
    
    
    (2
    )Income tax benefit
    
    
    (141
    )
    
    
    (285
    )
    
    
    11
    
    
    
    1Total stock-based compensation expense after income taxes
    
    $
    263
    
    
    $
    528
    
    
    $
    (21
    )
    
    $
    (1
    )
     Three Months
    
    
    Six MonthsEnded
    
    
    Ended(in thousands, except per share amounts)
    
    June 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    20,565
    
    
    $
    40,645Less pro forma expense related to options granted
    
    
    (2,210
    )
    
    
    (2,715
    )Pro forma Net Income
    
    $
    18,355
    
    
    $
    37,930Net income per shareBasic  as reported
    
    $
    0.48
    
    
    $
    0.94Basic  pro forma
    
    
    0.43
    
    
    
    0.88Diluted  as reported
    
    
    0.47
    
    
    
    0.93Diluted  pro forma
    
    
    0.42
    
    
    
    0.87
  13




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Weighted Average Assumptions
    
    2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    
    
    
    
    3.5
    %
    
    
    
    
    
    
    3.5
    %Expected volatility
    
    
    
    
    
    
    26.7
    %
    
    
    
    
    
    
    26.9
    %Risk-free interest rate
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    3.77
    %Expected lives
    
    
    
    
    
    1 yr
    
    
    
    
    
    2 yrs
   OptionsWeightedAverage
    
    
    Weighted AverageExercise
    
    
    Remaining
    
    
    AggregateShares
    
    
    Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    3,917,891
    
    
    $
    27.91Granted
    
    
    
    
    
    
    Exercised
    
    
    (69,232
    )
    
    
    19.82Forfeitures or Expirations
    
    
    (39,595
    )
    
    
    32.18Outstanding at June 30, 2006
    
    
    3,809,064
    
    
    $
    28.02
    
    
    5.8 yrs
    
    $
    2,471,499Exercisable
    
    
    3,798,924
    
    
    $
    28.01
    
    
    5.8 yrs
    
    $
    2,471,499
    Weighted-AverageNumber of
    
    
    Grant Date FairShares
    
    
    ValueOutstanding restricted stock at December 31, 2005
    
    
    129,180
    
    
    $
    27.19Granted
    
    
    185,669
    
    
    
    24.16Vested
    
    
    (4,755
    )
    
    
    32.79Forfeited
    
    
    (724
    )
    
    
    29.02Restricted stock at June 30, 2006
    
    
    309,370
    
    
    $
    26.01
 14




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##### Table of Contents



Note 9. Pension Benefit Cost
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Defined Benefit Pension PlansService cost
    
    $
    1,282
    
    
    $
    1,213
    
    
    $
    2,472
    
    
    $
    2,411Interest cost
    
    
    1,427
    
    
    
    1,300
    
    
    
    2,798
    
    
    
    2,612Expected return on plan assets
    
    
    (1,890
    )
    
    
    (1,757
    )
    
    
    (3,780
    )
    
    
    (3,514
    )Amortization of unrecognized:Net transition asset
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Prior service cost
    
    
    48
    
    
    
    49
    
    
    
    95
    
    
    
    99Net actuarial loss
    
    
    305
    
    
    
    301
    
    
    
    596
    
    
    
    601Net pension cost
    
    $
    1,172
    
    
    $
    1,105
    
    
    $
    2,181
    
    
    $
    2,206
  Note 10. Lines of Business Information
  15




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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 June 30, 2006Net interest income (taxable equivalent)
    
    $
    30,413
    
    
    $
    35,597
    
    
    $
    310
    
    
    $
    3,053
    
    
    $
    69,373Provision for loan losses
    
    
    (842
    )
    
    
    1,981
    
    
    
    
    
    
    
    
    
    
    
    1,139Net interest income after provision
    
    
    31,255
    
    
    
    33,616
    
    
    
    310
    
    
    
    3,053
    
    
    
    68,234Noninterest income
    
    
    3,528
    
    
    
    11,849
    
    
    
    6,812
    
    
    
    1,556
    
    
    
    23,745Noninterest expense
    
    
    17,630
    
    
    
    31,684
    
    
    
    5,960
    
    
    
    4,791
    
    
    
    60,065Income before income taxes
    
    
    17,153
    
    
    
    13,781
    
    
    
    1,162
    
    
    
    (182
    )
    
    
    31,914Income tax expense (taxable equivalent)
    
    
    6,041
    
    
    
    4,773
    
    
    
    411
    
    
    
    (218
    )
    
    
    11,007Net income
    
    $
    11,112
    
    
    $
    9,008
    
    
    $
    751
    
    
    $
    36
    
    
    $
    20,907Average assets(in millions)
    
    $
    3,046
    
    
    $
    2,589
    
    
    $
    31
    
    
    $
    2,005
    
    
    $
    7,671Earnings Summary  Three Months Ended June 30,
2005 (1)Net interest income (taxable equivalent)
    
    $
    29,972
    
    
    $
    37,822
    
    
    $
    222
    
    
    $
    4,086
    
    
    $
    72,102Provision for loan losses
    
    
    2,195
    
    
    
    (796
    )
    
    
    (3
    )
    
    
    
    
    
    
    1,396Net interest income after provision
    
    
    27,777
    
    
    
    38,618
    
    
    
    225
    
    
    
    4,086
    
    
    
    70,706Noninterest income
    
    
    3,053
    
    
    
    12,283
    
    
    
    6,458
    
    
    
    1,352
    
    
    
    23,146Noninterest expense
    
    
    17,288
    
    
    
    33,391
    
    
    
    5,822
    
    
    
    4,489
    
    
    
    60,990Income before income taxes
    
    
    13,542
    
    
    
    17,510
    
    
    
    861
    
    
    
    949
    
    
    
    32,862Income tax expense (taxable equivalent)
    
    
    4,743
    
    
    
    6,129
    
    
    
    307
    
    
    
    1,118
    
    
    
    12,297Net income
    
    $
    8,799
    
    
    $
    11,381
    
    
    $
    554
    
    
    $
    (169
    )
    
    $
    20,565Average assets(in millions)
    
    $
    2,913
    
    
    $
    2,589
    
    
    $
    23
    
    
    $
    2,282
    
    
    $
    7,807
 
 (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  Six Months Ended June 30, 2006Net interest income (taxable equivalent)
    
    $
    61,353
    
    
    $
    71,169
    
    
    $
    639
    
    
    $
    7,103
    
    
    $
    140,264Provision for loan losses
    
    
    346
    
    
    
    3,793
    
    
    
    
    
    
    
    
    
    
    
    4,139Net interest income after provision
    
    
    61,007
    
    
    
    67,376
    
    
    
    639
    
    
    
    7,103
    
    
    
    136,125Noninterest income
    
    
    6,994
    
    
    
    26,015
    
    
    
    13,602
    
    
    
    2,704
    
    
    
    49,315Noninterest expense
    
    
    35,685
    
    
    
    63,517
    
    
    
    11,585
    
    
    
    10,850
    
    
    
    121,637Income before income taxes
    
    
    32,316
    
    
    
    29,874
    
    
    
    2,656
    
    
    
    (1,043
    )
    
    
    63,803Income tax expense (taxable equivalent)
    
    
    11,384
    
    
    
    10,411
    
    
    
    939
    
    
    
    (594
    )
    
    
    22,140Net income
    
    $
    20,932
    
    
    $
    19,463
    
    
    $
    1,717
    
    
    $
    (449
    )
    
    $
    41,663Average assets(in millions)
    
    $
    3,026
    
    
    $
    2,590
    
    
    $
    29
    
    
    $
    2,017
    
    
    $
    7,662Earnings Summary  Six Months Ended June 30,
2005(1)Net interest income (taxable equivalent)
    
    $
    58,618
    
    
    $
    75,135
    
    
    $
    432
    
    
    $
    9,504
    
    
    $
    143,689Provision for loan losses
    
    
    3,948
    
    
    
    453
    
    
    
    (5
    )
    
    
    
    
    
    
    4,396Net interest income after provision
    
    
    54,670
    
    
    
    74,682
    
    
    
    437
    
    
    
    9,504
    
    
    
    139,293Noninterest income
    
    
    6,110
    
    
    
    23,764
    
    
    
    12,762
    
    
    
    2,971
    
    
    
    45,607Noninterest expense
    
    
    35,197
    
    
    
    66,564
    
    
    
    11,590
    
    
    
    8,240
    
    
    
    121,591Income before income taxes
    
    
    25,583
    
    
    
    31,882
    
    
    
    1,609
    
    
    
    4,235
    
    
    
    63,309Income tax expense (taxable equivalent)
    
    
    8,993
    
    
    
    11,160
    
    
    
    572
    
    
    
    1,939
    
    
    
    22,664Net income
    
    $
    16,590
    
    
    $
    20,722
    
    
    $
    1,037
    
    
    $
    2,296
    
    
    $
    40,645Average assets(in millions)
    
    $
    2,885
    
    
    $
    2,579
    
    
    $
    23
    
    
    $
    2,281
    
    
    $
    7,768
 
 (1)
    
    Certain amounts have been reclassified to conform to current year presentation. 16




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##### Table of Contents



Note 11. Derivatives and Hedging Activities
    Derivative Financial Instruments:
 June 30, 2006
    
    
    December 31, 2005Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueReceived fixed swaps
    
    $
    270,000
    
    
    $
    (1,490
    )
    
    $
    530,000
    
    
    $
    (7,429
    )Pay fixed swaps
    
    
    104,000
    
    
    
    2,496
    
    
    
    124,000
    
    
    
    2,486Customer initiated swaps and corresponding offsets
    
    
    329,008
    
    
    
    
    
    
    
    233,104
    
    
    
    Interest rate lock commitments
    
    
    21,406
    
    
    
    26
    
    
    
    17,897
    
    
    
    37Forward mortgage loan contracts
    
    
    19,650
    
    
    
    104
    
    
    
    22,000
    
    
    
    (66
    )Total
    
    $
    744,064
    
    
    $
    1,136
    
    
    $
    927,001
    
    
    $
    (4,972
    )
 Derivative Classifications and Hedging Relationships:
 June 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
    
    
    $
    2,496
    
    
    $
    124,000
    
    
    $
    2,486Derivatives Designated as Fair Value Hedges:Hedging time deposits
    
    
    170,000
    
    
    
    (325
    )
    
    
    25,000
    
    
    
    (10
    )Hedging long-term debt
    
    
    100,000
    
    
    
    (1,165
    )
    
    
    225,000
    
    
    
    (3,815
    )Derivatives Not Designated as Hedges:Receive fixed swaps
    
    
    
    
    
    
    
    
    
    
    280,000
    
    
    
    (3,604
    )Customer initiated swaps
    
    
    329,008
    
    
    
    
    
    
    
    233,104
    
    
    
    Total
    
    $
    703,008
    
    
    $
    1,006
    
    
    $
    887,104
    
    
    $
    (4,943
    )
 Note 12. Commitments, Contingent Liabilities and Guarantees
  17




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##### Table of Contents



June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Loan commitments and letters of credit:Commitments to extend credit
    
    $
    1,635,533
    
    
    $
    1,762,259Financial standby letters of credit
    
    
    42,670
    
    
    
    44,739Performance standby letters of credit
    
    
    16,023
    
    
    
    11,557Commercial letters of credit
    
    
    217,518
    
    
    
    223,269Total loan commitments and letters of credit
    
    $
    1,911,744
    
    
    $
    2,041,824
  Note 13. Pending Transaction
  18




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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 EndedJune 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,2006
    
    2006
    
    2005
    
    2005
    
    2005Summary of Operations (thousands)Interest income
    
    $
    116,416
    
    
    $
    112,391
    
    
    $
    111,958
    
    
    $
    108,506
    
    
    $
    103,619Net interest income
    
    
    65,990
    
    
    
    67,475
    
    
    
    69,095
    
    
    
    69,642
    
    
    
    68,779Provision for loan losses (1)
    
    
    1,139
    
    
    
    3,000
    
    
    
    (7,287
    )
    
    
    4,000
    
    
    
    1,396Total fees and other income (2)
    
    
    23,691
    
    
    
    25,563
    
    
    
    19,930
    
    
    
    23,941
    
    
    
    23,109Investment securities gains (losses) (3)
    
    
    54
    
    
    
    7
    
    
    
    (8,970
    )
    
    
    
    
    
    
    37Noninterest expense (4)
    
    
    60,065
    
    
    
    61,572
    
    
    
    60,901
    
    
    
    60,550
    
    
    
    60,990Income tax provision
    
    
    7,624
    
    
    
    7,717
    
    
    
    7,553
    
    
    
    8,041
    
    
    
    8,974Net income
    
    
    20,907
    
    
    
    20,756
    
    
    
    18,888
    
    
    
    20,992
    
    
    
    20,565Taxable equivalent adjustment
    
    
    3,383
    
    
    
    3,416
    
    
    
    3,432
    
    
    
    3,284
    
    
    
    3,324Cash dividends
    
    
    12,393
    
    
    
    12,259
    
    
    
    12,269
    
    
    
    12,412
    
    
    
    12,304Per Common Share DataBasic net income
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.44
    
    
    $
    0.49
    
    
    $
    0.48Diluted net income
    
    
    0.49
    
    
    
    0.48
    
    
    
    0.44
    
    
    
    0.48
    
    
    
    0.47Cash dividends
    
    
    0.290
    
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285
    
    
    
    0.285Market value (end of period)
    
    
    24.41
    
    
    
    26.85
    
    
    
    27.75
    
    
    
    28.40
    
    
    
    30.22Book value (end of period)
    
    
    15.15
    
    
    
    15.23
    
    
    
    15.28
    
    
    
    15.21
    
    
    
    15.31At Period End (millions)Assets
    
    $
    7,814
    
    
    $
    7,663
    
    
    $
    7,752
    
    
    $
    7,851
    
    
    $
    7,826Portfolio loans
    
    
    5,728
    
    
    
    5,592
    
    
    
    5,616
    
    
    
    5,569
    
    
    
    5,523Deposits
    
    
    5,685
    
    
    
    5,524
    
    
    
    5,474
    
    
    
    5,226
    
    
    
    5,201Shareholders equity
    
    
    650
    
    
    
    652
    
    
    
    656
    
    
    
    655
    
    
    
    662Average for the Quarter (millions)Assets
    
    $
    7,671
    
    
    $
    7,654
    
    
    $
    7,754
    
    
    $
    7,821
    
    
    $
    7,807Portfolio loans
    
    
    5,610
    
    
    
    5,561
    
    
    
    5,575
    
    
    
    5,531
    
    
    
    5,472Deposits
    
    
    5,560
    
    
    
    5,513
    
    
    
    5,305
    
    
    
    5,239
    
    
    
    5,254Shareholders equity
    
    
    647
    
    
    
    655
    
    
    
    654
    
    
    
    655
    
    
    
    654Ratios (annualized)Return on average assets
    
    
    1.09
    %
    
    
    1.10
    %
    
    
    0.97
    %
    
    
    1.06
    %
    
    
    1.06
    %Return on average shareholders equity
    
    
    12.96
    
    
    
    12.86
    
    
    
    11.46
    
    
    
    12.71
    
    
    
    12.62Net interest margin (FTE) (5)
    
    
    3.84
    
    
    
    3.97
    
    
    
    3.95
    
    
    
    3.93
    
    
    
    3.92Efficiency ratio (6)
    
    
    64.54
    
    
    
    63.84
    
    
    
    65.87
    
    
    
    62.51
    
    
    
    64.06Net loans charged off to average portfolio loans (1)
    
    
    0.14
    
    
    
    0.29
    
    
    
    (0.36
    )
    
    
    0.38
    
    
    
    0.17Allowance for loan losses to portfolio loans
    
    
    2.00
    
    
    
    2.06
    
    
    
    2.07
    
    
    
    2.13
    
    
    
    2.17Nonperforming assets to portfolio loans plus ORAA (end of period)
    
    
    0.61
    
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.76
    
    
    
    0.89Nonperforming assets to total assets (end of period)
    
    
    0.44
    
    
    
    0.48
    
    
    
    0.51
    
    
    
    0.54
    
    
    
    0.63Average equity to average assets
    
    
    8.44
    
    
    
    8.55
    
    
    
    8.43
    
    
    
    8.38
    
    
    
    8.37Leverage ratio
    
    
    8.21
    
    
    
    8.14
    
    
    
    7.98
    
    
    
    7.86
    
    
    
    7.85Tier 1 capital ratio
    
    
    9.96
    
    
    
    10.09
    
    
    
    9.94
    
    
    
    9.91
    
    
    
    10.00Total capital ratio
    
    
    13.20
    
    
    
    13.39
    
    
    
    13.22
    
    
    
    13.20
    
    
    
    13.31
 
 (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). 19




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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.
 20




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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
   21




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##### Table of Contents



Results of Operations
 Summary
      22




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##### Table of Contents



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 June 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    
    Interest(1)
    
    
    Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    1,373
    
    
    $
    1
    
    
    
    0.45
    
    
    $
    3,209
    
    
    $
    18
    
    
    
    2.28Investment securities (3):Taxable
    
    
    1,158,939
    
    
    
    13,063
    
    
    
    4.51
    
    
    
    1,436,384
    
    
    
    14,979
    
    
    
    4.17Tax-exempt
    
    
    447,476
    
    
    
    5,259
    
    
    
    7.23
    
    
    
    421,144
    
    
    
    5,147
    
    
    
    7.52Mortgage loans held for sale
    
    
    21,680
    
    
    
    301
    
    
    
    5.54
    
    
    
    38,478
    
    
    
    538
    
    
    
    5.59Portfolio Loans (4):Commercial
    
    
    1,704,447
    
    
    
    30,328
    
    
    
    7.26
    
    
    
    1,640,287
    
    
    
    23,609
    
    
    
    5.90Commercial real estate
    
    
    1,426,911
    
    
    
    25,337
    
    
    
    7.13
    
    
    
    1,320,077
    
    
    
    20,654
    
    
    
    6.28Residential mortgage loans
    
    
    544,526
    
    
    
    7,836
    
    
    
    5.76
    
    
    
    499,425
    
    
    
    7,037
    
    
    
    5.64Direct consumer
    
    
    1,103,024
    
    
    
    20,602
    
    
    
    7.49
    
    
    
    1,181,656
    
    
    
    18,129
    
    
    
    6.15Indirect consumer
    
    
    831,012
    
    
    
    13,689
    
    
    
    6.61
    
    
    
    830,330
    
    
    
    13,508
    
    
    
    6.53Total portfolio loans
    
    
    5,609,920
    
    
    
    97,792
    
    
    
    7.03
    
    
    
    5,471,775
    
    
    
    82,937
    
    
    
    6.12Total earning assets (3)
    
    
    7,239,388
    
    
    
    116,416
    
    
    
    6.63
    
    
    
    7,370,990
    
    
    
    103,619
    
    
    
    5.81Nonearning AssetsCash and due from banks
    
    
    157,670
    
    
    
    
    
    
    
    
    
    
    
    152,838Bank premises and equipment
    
    
    120,650
    
    
    
    
    
    
    
    
    
    
    
    121,863Investment security fair value adjustment
    
    
    (18,523
    )
    
    
    
    
    
    
    
    
    
    
    15,326Other nonearning assets
    
    
    287,048
    
    
    
    
    
    
    
    
    
    
    
    266,932Allowance for loan losses
    
    
    (115,274
    )
    
    
    
    
    
    
    
    
    
    
    (120,560
    )Total assets
    
    $
    7,670,959
    
    
    
    
    
    
    
    
    
    
    $
    7,807,389Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    789,168
    
    
    $
    1,273
    
    
    
    0.65
    
    
    $
    1,071,211
    
    
    $
    1,800
    
    
    
    0.67Savings deposits
    
    
    1,471,803
    
    
    
    9,457
    
    
    
    2.58
    
    
    
    1,512,212
    
    
    
    4,809
    
    
    
    1.28Time deposits
    
    
    2,386,346
    
    
    
    24,575
    
    
    
    4.13
    
    
    
    1,742,621
    
    
    
    12,513
    
    
    
    2.88Short-term borrowings
    
    
    487,549
    
    
    
    5,395
    
    
    
    4.44
    
    
    
    890,444
    
    
    
    6,700
    
    
    
    3.02Long-term debt
    
    
    895,056
    
    
    
    9,726
    
    
    
    4.36
    
    
    
    925,817
    
    
    
    9,018
    
    
    
    3.91Total interest-bearing liabilities
    
    
    6,029,922
    
    
    
    50,426
    
    
    
    3.35
    
    
    
    6,142,305
    
    
    
    34,840
    
    
    
    2.27Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    913,181
    
    
    
    
    
    
    
    
    
    
    
    927,566Other liabilities
    
    
    80,727
    
    
    
    
    
    
    
    
    
    
    
    83,828Shareholders equity
    
    
    647,129
    
    
    
    
    
    
    
    
    
    
    
    653,690Total liabilities and shareholders equity
    
    $
    7,670,959
    
    
    
    
    
    
    
    
    
    
    $
    7,807,389Net Interest Income
    
    
    
    
    
    $
    65,990
    
    
    
    
    
    
    
    
    
    
    $
    68,779Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    3.28
    %
    
    
    
    
    
    
    
    
    
    
    3.54
    %Contribution of noninterest bearing sources of funds
    
    
    
    
    
    
    
    
    
    
    0.56
    
    
    
    
    
    
    
    
    
    
    
    0.38Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.84
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
 
 (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 June 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
    
    
    2005Six Months Ended June 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    
    Interest(1)
    
    
    Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    1,528
    
    
    $
    13
    
    
    
    1.75
    
    
    $
    2,508
    
    
    $
    27
    
    
    
    2.18Investment securities (3):Taxable
    
    
    1,170,105
    
    
    
    26,674
    
    
    
    4.56
    
    
    
    1,436,036
    
    
    
    29,667
    
    
    
    4.13Tax-exempt
    
    
    447,069
    
    
    
    10,576
    
    
    
    7.28
    
    
    
    421,038
    
    
    
    10,344
    
    
    
    7.56Mortgage loans held for sale
    
    
    19,090
    
    
    
    532
    
    
    
    5.58
    
    
    
    34,929
    
    
    
    968
    
    
    
    5.54Portfolio Loans (4):Commercial
    
    
    1,675,832
    
    
    
    58,311
    
    
    
    7.14
    
    
    
    1,627,864
    
    
    
    45,450
    
    
    
    5.76Commercial real estate
    
    
    1,421,089
    
    
    
    49,322
    
    
    
    7.00
    
    
    
    1,305,932
    
    
    
    40,013
    
    
    
    6.18Residential mortgage loans
    
    
    542,966
    
    
    
    15,501
    
    
    
    5.71
    
    
    
    498,679
    
    
    
    13,850
    
    
    
    5.55Direct consumer
    
    
    1,113,643
    
    
    
    40,613
    
    
    
    7.35
    
    
    
    1,174,813
    
    
    
    35,492
    
    
    
    6.09Indirect consumer
    
    
    832,217
    
    
    
    27,265
    
    
    
    6.61
    
    
    
    825,338
    
    
    
    26,974
    
    
    
    6.59Total portfolio loans
    
    
    5,585,747
    
    
    
    191,012
    
    
    
    6.93
    
    
    
    5,432,626
    
    
    
    161,779
    
    
    
    6.04Total earning assets (3)
    
    
    7,223,539
    
    
    
    228,807
    
    
    
    6.56
    
    
    
    7,327,137
    
    
    
    202,785
    
    
    
    5.75Nonearning AssetsCash and due from banks
    
    
    161,767
    
    
    
    
    
    
    
    
    
    
    
    155,502Bank premises and equipment
    
    
    120,997
    
    
    
    
    
    
    
    
    
    
    
    121,385Investment security fair value adjustment
    
    
    (10,956
    )
    
    
    
    
    
    
    
    
    
    
    17,140Other nonearning assets
    
    
    282,822
    
    
    
    
    
    
    
    
    
    
    
    267,891Allowance for loan losses
    
    
    (115,710
    )
    
    
    
    
    
    
    
    
    
    
    (120,912
    )Total assets
    
    $
    7,662,459
    
    
    
    
    
    
    
    
    
    
    $
    7,768,143Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    823,032
    
    
    $
    2,635
    
    
    
    0.65
    
    
    $
    1,111,998
    
    
    $
    3,802
    
    
    
    0.69Savings deposits
    
    
    1,460,399
    
    
    
    17,430
    
    
    
    2.41
    
    
    
    1,568,907
    
    
    
    9,901
    
    
    
    1.27Time deposits
    
    
    2,334,424
    
    
    
    46,232
    
    
    
    3.99
    
    
    
    1,702,868
    
    
    
    23,490
    
    
    
    2.78Short-term borrowings
    
    
    439,197
    
    
    
    9,131
    
    
    
    4.19
    
    
    
    804,684
    
    
    
    11,141
    
    
    
    2.79Long-term debt
    
    
    949,698
    
    
    
    19,914
    
    
    
    4.22
    
    
    
    926,653
    
    
    
    17,439
    
    
    
    3.79Total interest-bearing liabilities
    
    
    6,006,750
    
    
    
    95,342
    
    
    
    3.20
    
    
    
    6,115,110
    
    
    
    65,773
    
    
    
    2.17Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    918,952
    
    
    
    
    
    
    
    
    
    
    
    917,148Other liabilities
    
    
    85,909
    
    
    
    
    
    
    
    
    
    
    
    84,294Shareholders equity
    
    
    650,848
    
    
    
    
    
    
    
    
    
    
    
    651,591Total liabilities and shareholders equity
    
    $
    7,662,459
    
    
    
    
    
    
    
    
    
    
    $
    7,768,143Net Interest Income
    
    
    
    
    
    $
    133,465
    
    
    
    
    
    
    
    
    
    
    $
    37,012Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    3.36
    %
    
    
    
    
    
    
    
    
    
    
    3.58
    %Contribution of noninterest bearing sources of funds
    
    
    
    
    
    
    
    
    
    
    0.54
    
    
    
    
    
    
    
    
    
    
    
    0.36Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.90
    %
    
    
    
    
    
    
    
    
    
    
    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 $6.8 million and $6.7 million
for the six months ended June 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



Analysis of Changes in Interest Income and Interest Expense
 Three Months Ended June 30,
    
    
    Six Months Ended June 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
    
    
    (17
    )
    
    
    (10
    )
    
    
    (7
    )
    
    
    (14
    )
    
    
    (5
    )
    
    
    (9
    )Investment securities:Taxable
    
    
    (1,916
    )
    
    
    1,142
    
    
    
    (3,058
    )
    
    
    (2,993
    )
    
    
    2,866
    
    
    
    (5,859
    )Tax-exempt
    
    
    112
    
    
    
    (202
    )
    
    
    314
    
    
    
    232
    
    
    
    (393
    )
    
    
    625Mortgage loans held for sale
    
    
    (237
    )
    
    
    (4
    )
    
    
    (233
    )
    
    
    (436
    )
    
    
    5
    
    
    
    (441
    )Loans:Commercial
    
    
    6,719
    
    
    
    5,765
    
    
    
    954
    
    
    
    12,861
    
    
    
    11,486
    
    
    
    1,375Commercial real estate
    
    
    4,683
    
    
    
    2,927
    
    
    
    1,756
    
    
    
    9,309
    
    
    
    5,594
    
    
    
    3,715Residential mortgage loans
    
    
    799
    
    
    
    153
    
    
    
    646
    
    
    
    1,651
    
    
    
    395
    
    
    
    1,256Direct consumer
    
    
    2,473
    
    
    
    3,741
    
    
    
    (1,268
    )
    
    
    5,121
    
    
    
    7,046
    
    
    
    (1,925
    )Indirect consumer
    
    
    181
    
    
    
    170
    
    
    
    11
    
    
    
    291
    
    
    
    66
    
    
    
    225Total portfolio loans
    
    
    14,855
    
    
    
    12,756
    
    
    
    2,099
    
    
    
    29,233
    
    
    
    24,587
    
    
    
    4,646Total
    
    
    12,797
    
    
    
    13,682
    
    
    
    (885
    )
    
    
    26,022
    
    
    
    27,060
    
    
    
    (1,038
    )Interest Expense:Deposits:Interest-bearing demand
    
    
    (527
    )
    
    
    (70
    )
    
    
    (457
    )
    
    
    (1,167
    )
    
    
    (229
    )
    
    
    (938
    )Savings
    
    
    4,648
    
    
    
    4,780
    
    
    
    (132
    )
    
    
    7,529
    
    
    
    8,258
    
    
    
    (729
    )Time
    
    
    12,062
    
    
    
    6,517
    
    
    
    5,545
    
    
    
    22,742
    
    
    
    12,285
    
    
    
    10,457Short-term borrowings
    
    
    (1,305
    )
    
    
    2,426
    
    
    
    (3,731
    )
    
    
    (2,010
    )
    
    
    4,256
    
    
    
    (6,266
    )Long-term debt
    
    
    708
    
    
    
    1,015
    
    
    
    (307
    )
    
    
    2,475
    
    
    
    2,032
    
    
    
    443Total
    
    
    15,586
    
    
    
    14,668
    
    
    
    918
    
    
    
    29,569
    
    
    
    26,602
    
    
    
    2,967Net Interest Income
    
    $
    (2,789
    )
    
    $
    (986
    )
    
    $
    (1,803
    )
    
    $
    (3,547
    )
    
    $
    458
    
    
    $
    (4,005
    )
 
 (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. 26




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##### Table of Contents



Noninterest Income
  27




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##### Table of Contents



Noninterest Income
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Change in 2006
    
    
    June 30,
    
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    Percent
    
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentService charges on deposit accounts
    
    $
    9,521
    
    
    $
    8,822
    
    
    $
    699
    
    
    
    7.9
    %
    
    $
    18,396
    
    
    $
    17,109
    
    
    $
    1,287
    
    
    
    7.5
    %Trust fees
    
    
    4,972
    
    
    
    4,503
    
    
    
    469
    
    
    
    10.4
    
    
    
    10,014
    
    
    
    8,915
    
    
    
    1,099
    
    
    
    12.3Mortgage and other loan income
    
    
    2,106
    
    
    
    2,074
    
    
    
    32
    
    
    
    1.5
    
    
    
    4,116
    
    
    
    4,434
    
    
    
    (318
    )
    
    
    (7.2
    )Brokerage and investment fees
    
    
    1,703
    
    
    
    2,284
    
    
    
    (581
    )
    
    
    (25.4
    )
    
    
    3,218
    
    
    
    3,883
    
    
    
    (665
    )
    
    
    (17.1
    )ATM network user fees
    
    
    1,018
    
    
    
    1,223
    
    
    
    (205
    )
    
    
    (16.7
    )
    
    
    2,005
    
    
    
    2,096
    
    
    
    (91
    )
    
    
    (4.3
    )Bankcard fees
    
    
    1,129
    
    
    
    961
    
    
    
    168
    
    
    
    17.4
    
    
    
    2,186
    
    
    
    1,801
    
    
    
    385
    
    
    
    21.3Investment securities gains
    
    
    54
    
    
    
    37
    
    
    
    17
    
    
    
    47.9
    
    
    
    61
    
    
    
    43
    
    
    
    18
    
    
    
    43.0Fair value change in CD swap
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/M
    
    
    
    (207
    )
    
    
    
    
    
    
    (207
    )
    
    
    N/MOther
    
    
    3,242
    
    
    
    3,242
    
    
    
    
    
    
    
    N/M
    
    
    
    9,526
    
    
    
    7,326
    
    
    
    2,200
    
    
    
    30.0Total noninterest income
    
    $
    23,745
    
    
    $
    23,146
    
    
    $
    599
    
    
    
    2.6
    
    
    $
    49,315
    
    
    $
    45,607
    
    
    $
    3,708
    
    
    
    8.1
 
        Noninterest Expense
  28




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##### Table of Contents



Noninterest Expense
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Change in 2006
    
    
    June 30,
    
    
    Change in 2006(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Amount
    
    
    Percent
    
    
    2006
    
    
    2005
    
    
    Amount
    
    
    PercentSalaries and employee benefits
    
    $
    32,690
    
    
    $
    32,351
    
    
    $
    339
    
    
    
    1.1
    %
    
    $
    64,946
    
    
    $
    65,702
    
    
    $
    (756
    )
    
    
    (1.1)
    %Occupancy
    
    
    5,291
    
    
    
    5,685
    
    
    
    (394
    )
    
    
    (6.9
    )
    
    
    11,233
    
    
    
    11,245
    
    
    
    (12
    )
    
    
    (0.1
    )Professional services
    
    
    3,703
    
    
    
    3,726
    
    
    
    (23
    )
    
    
    (0.6
    )
    
    
    7,781
    
    
    
    7,925
    
    
    
    (144
    )
    
    
    (1.8
    )Equipment
    
    
    3,301
    
    
    
    4,937
    
    
    
    (1,636
    )
    
    
    (33.2
    )
    
    
    6,467
    
    
    
    8,238
    
    
    
    (1,771
    )
    
    
    (21.5
    )Data processing services
    
    
    3,714
    
    
    
    3,499
    
    
    
    215
    
    
    
    6.1
    
    
    
    7,453
    
    
    
    6,868
    
    
    
    585
    
    
    
    8.5Advertising and public relations
    
    
    934
    
    
    
    1,820
    
    
    
    (886
    )
    
    
    (48.7
    )
    
    
    2,968
    
    
    
    3,566
    
    
    
    (598
    )
    
    
    (16.8
    )Postage and delivery
    
    
    1,629
    
    
    
    1,520
    
    
    
    109
    
    
    
    7.2
    
    
    
    3,091
    
    
    
    3,110
    
    
    
    (19
    )
    
    
    (0.6
    )Telephone
    
    
    1,392
    
    
    
    1,465
    
    
    
    (73
    )
    
    
    (4.9
    )
    
    
    2,856
    
    
    
    2,906
    
    
    
    (50
    )
    
    
    (1.7
    )Other loan expenses
    
    
    1,217
    
    
    
    874
    
    
    
    343
    
    
    
    39.3
    
    
    
    1,633
    
    
    
    1,249
    
    
    
    384
    
    
    
    30.8Stationery and supplies
    
    
    631
    
    
    
    602
    
    
    
    29
    
    
    
    4.6
    
    
    
    1,358
    
    
    
    1,521
    
    
    
    (163
    )
    
    
    (10.7
    )Intangible asset amortization
    
    
    724
    
    
    
    724
    
    
    
    
    
    
    
    
    
    
    
    1,449
    
    
    
    1,449
    
    
    
    
    
    
    
    Other
    
    
    4,839
    
    
    
    3,787
    
    
    
    1,052
    
    
    
    27.8
    
    
    
    10,402
    
    
    
    7,812
    
    
    
    2,590
    
    
    
    33.2Total noninterest expense
    
    $
    60,065
    
    
    $
    60,990
    
    
    $
    (925
    )
    
    
    (1.5
    )
    
    $
    121,637
    
    
    $
    121,591
    
    
    $
    46
    
    
    
    0.0
        Income Taxes
   29




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##### Table of Contents



Lines of Business Results
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Commercial Banking
    
    $
    11,112
    
    
    $
    8,799
    
    
    $
    20,932
    
    
    $
    16,590Consumer Banking
    
    
    9,008
    
    
    
    11,381
    
    
    
    19,463
    
    
    
    20,722Wealth Management
    
    
    751
    
    
    
    554
    
    
    
    1,717
    
    
    
    1,037Other
    
    
    36
    
    
    
    (169
    )
    
    
    (449
    )
    
    
    2,296Net Income
    
    $
    20,907
    
    
    $
    20,565
    
    
    $
    41,663
    
    
    $
    40,645
 Commercial Banking
  Consumer Banking
  Wealth Management
  30




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##### Table of Contents



Other
  Financial Condition
  Investment Securities and Money Market Investments
  Portfolio Loans
     31




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for loan losses  beginning of period
    
    $
    115,423
    
    
    $
    120,945
    
    
    $
    116,400
    
    
    $
    122,184Provision for loan losses
    
    
    1,139
    
    
    
    1,396
    
    
    
    4,139
    
    
    
    4,396Charge-offs
    
    
    4,556
    
    
    
    5,810
    
    
    
    10,789
    
    
    
    12,935Recoveries
    
    
    2,554
    
    
    
    3,436
    
    
    
    4,810
    
    
    
    6,322Net charge-offs
    
    
    2,002
    
    
    
    2,374
    
    
    
    5,979
    
    
    
    6,613Allowance for loan losses  end of period
    
    $
    114,560
    
    
    $
    119,967
    
    
    $
    114,560
    
    
    $
    119,967Portfolio loans outstanding at period end (1)
    
    $
    5,728,039
    
    
    $
    5,523,228
    
    
    $
    5,728,039
    
    
    $
    5,523,228Average portfolio loans outstanding during period (1)
    
    
    5,609,920
    
    
    
    5,471,775
    
    
    
    5,585,747
    
    
    
    5,432,626Allowance for loan losses as a percentage of portfolio loans
    
    
    2.00
    %
    
    
    2.17
    %
    
    
    2.00
    %
    
    
    2.17
    %Ratio of net charge-offs during period to average portfolio
loans (annualized)
    
    
    0.14
    
    
    
    0.17
    
    
    
    0.22
    
    
    
    0.25
 
 (1)
    
    Balances exclude mortgage loans held for sale.     32




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Nonperforming Assets
  33




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##### Table of Contents



Nonperforming Assets
 June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2005Nonperforming LoansNonaccrual Commercial:Commercial
    
    $
    8,795
    
    
    $
    11,880
    
    
    $
    17,903Commercial real estate
    
    
    4,956
    
    
    
    5,068
    
    
    
    9,692Total commercial
    
    
    13,751
    
    
    
    16,948
    
    
    
    27,595Nonaccrual Consumer:Direct
    
    
    3,167
    
    
    
    4,326
    
    
    
    3,726Indirect
    
    
    904
    
    
    
    2,454
    
    
    
    1,042Total consumer
    
    
    4,071
    
    
    
    6,780
    
    
    
    4,768Nonaccrual Mortgage:
    
    
    8,179
    
    
    
    8,412
    
    
    
    9,828Total nonaccrual loans
    
    
    26,001
    
    
    
    32,140
    
    
    
    42,191Loans 90 days past due and still accruing
    
    
    887
    
    
    
    238
    
    
    
    2Restructured loans
    
    
    406
    
    
    
    
    
    
    
    32Total nonperforming loans
    
    
    27,294
    
    
    
    32,378
    
    
    
    42,225Other Repossessed Assets Acquired (ORAA)
    
    
    7,472
    
    
    
    7,351
    
    
    
    6,817Total nonperforming assets
    
    $
    34,766
    
    
    $
    39,729
    
    
    $
    49,042Nonperforming assets as a percent of portfolio loans plus ORAA (1)
    
    
    0.61
    %
    
    
    0.71
    %
    
    
    0.89
    %Nonperforming assets as a percent of total assets
    
    
    0.44
    
    
    
    0.51
    
    
    
    0.63Allowance for loan loss as a percent of nonperforming loans
    
    
    419.73
    
    
    
    359.50
    
    
    
    284.11Allowance for loan loss as a percent of nonperforming assets
    
    
    329.52
    
    
    
    292.98
    
    
    
    244.62
 
 (1)
    
    Portfolio loans exclude mortgage loans held for sale.    34




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##### Table of Contents



Deposits
   Borrowed Funds
   Capital Resources
  Capital Ratios
 Regulatory MinimumWell-
    
    June 30,
    
    December 31,
    
    June 30,Required
    
    Capitalized
    
    2006
    
    2005
    
    2005Risk based:Tier 1 capital
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    9.96
    %
    
    
    9.94
    %
    
    
    10.00
    %Total capital
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.20
    
    
    
    13.22
    
    
    
    13.31Tier 1 leverage
    
    
    4.00
    
    
    
    5.00
    
    
    
    8.21
    
    
    
    7.98
    
    
    
    7.85
  Contractual Obligations and Off-Balance Sheet Arrangements
  35




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##### Table of Contents



Liquidity and Debt Capacity
        Interest Rate Risk
  36




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##### Table of Contents



37




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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
    
    
    TotalJune 30, 2006Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,638.6
    
    
    $
    242.7
    
    
    $
    388.5
    
    
    $
    3,269.8
    
    
    $
    1,999.1
    
    
    $
    459.1
    
    
    $
    5,728.0Mortgage loans held for sale
    
    
    18.0
    
    
    
    
    
    
    
    
    
    
    
    18.0
    
    
    
    
    
    
    
    
    
    
    
    18.0Investment securities
    
    
    35.2
    
    
    
    68.6
    
    
    
    210.5
    
    
    
    314.3
    
    
    
    766.3
    
    
    
    480.1
    
    
    
    1,560.7Short-term investments
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Total
    
    $
    2,693.3
    
    
    $
    311.3
    
    
    $
    599.0
    
    
    $
    3,603.6
    
    
    $
    2,765.4
    
    
    $
    939.2
    
    
    $
    7,308.2Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,900.4
    
    
    $
    524.9
    
    
    $
    642.7
    
    
    $
    3,068.0
    
    
    $
    993.0
    
    
    $
    668.7
    
    
    $
    4,729.7Other interest bearing liabilities
    
    
    526.0
    
    
    
    80.9
    
    
    
    125.0
    
    
    
    731.9
    
    
    
    515.2
    
    
    
    153.7
    
    
    
    1,400.8Total
    
    $
    2,426.4
    
    
    $
    605.8
    
    
    $
    767.7
    
    
    $
    3,799.9
    
    
    $
    1,508.2
    
    
    $
    822.4
    
    
    $
    6,130.5Derivatives
    
    $
    (96.0
    )
    
    $
    100.0
    
    
    $
    (20.0
    )
    
    $
    (16.0
    )
    
    $
    16.0
    
    
    $
    
    
    
    $
    Period GAP(4)
    
    $
    170.9
    
    
    $
    (194.5
    )
    
    $
    (188.7
    )
    
    $
    (212.3
    )
    
    $
    1,273.2
    
    
    $
    116.8
    
    
    $
    1,177.7Cumulative GAP
    
    
    170.9
    
    
    
    (23.6
    )
    
    
    (212.3
    )
    
    
    
    
    
    
    1,060.9
    
    
    
    1,177.7June 30, 2005Rate Sensitive Assets(1)Portfolio loans(2)
    
    $
    2,677.1
    
    
    $
    225.6
    
    
    $
    401.7
    
    
    $
    3,304.4
    
    
    $
    1,906.8
    
    
    $
    312.0
    
    
    $
    5,523.2Mortgage loans held for sale
    
    
    29.8
    
    
    
    
    
    
    
    
    
    
    
    29.8
    
    
    
    
    
    
    
    
    
    
    
    29.8Investment securities
    
    
    96.3
    
    
    
    79.9
    
    
    
    180.5
    
    
    
    356.7
    
    
    
    1,061.6
    
    
    
    426.7
    
    
    
    1,845.0Short-term investments
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Total
    
    $
    2,804.3
    
    
    $
    305.5
    
    
    $
    582.2
    
    
    $
    3,692.0
    
    
    $
    2,968.4
    
    
    $
    738.7
    
    
    $
    7,399.1Rate Sensitive LiabilitiesDeposits(3)
    
    $
    1,711.7
    
    
    $
    240.0
    
    
    $
    486.0
    
    
    $
    2,437.7
    
    
    $
    1,073.4
    
    
    $
    762.4
    
    
    $
    4,273.5Other interest bearing liabilities
    
    
    949.4
    
    
    
    0.7
    
    
    
    120.0
    
    
    
    1,070.1
    
    
    
    609.5
    
    
    
    205.4
    
    
    
    1,885.0Total
    
    $
    2,661.1
    
    
    $
    240.7
    
    
    $
    606.0
    
    
    $
    3,507.8
    
    
    $
    1,682.9
    
    
    $
    967.8
    
    
    $
    6,158.5Derivatives
    
    $
    (101.0
    )
    
    $
    (10.0
    )
    
    $
    (20.0
    )
    
    $
    (131.0
    )
    
    $
    (84.0
    )
    
    $
    215.0
    
    
    $
    Period GAP(4)
    
    $
    42.2
    
    
    $
    54.8
    
    
    $
    (43.8
    )
    
    $
    53.2
    
    
    $
    1,201.5
    
    
    $
    (14.1
    )
    
    $
    1,240.6Cumulative GAP
    
    
    42.2
    
    
    
    97.0
    
    
    
    53.2
    
    
    
    
    
    
    
    1,254.7
    
    
    
    1,240.6
 
 (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 June 30, 2006. The same amounts as of June 30, 2005 were $1.3 billion and $1.2 billion,
respectively. These amounts reflect managements assumptions regarding deposit repricing behavior
and tenor.(4)
    
    GAP is rate sensitive assets less rate sensitive liabilities plus the effect of
derivatives.   38




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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
   39




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Maximum Number ofTotal Number of
    
    
    Shares That May YetShares Purchased as
    
    
    Be Purchased UnderPart of Publicly
    
    
    The Plans orTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    ProgramsPeriod
    
    Shares Purchased
    
    
    Per Share
    
    
    Programs
    
    
    (a)April 2006
    
    
    50,000
    
    
    
    26.24
    
    
    
    50,000
    
    
    
    1,936,200May 2006
    
    
    30,000
    
    
    
    26.20
    
    
    
    30,000
    
    
    
    1,906,200June 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,906,200Total
    
    
    80,000
    
    
    
    26.23
    
    
    
    80,000
    
    
    
    1,906,200
 
 (a)
    
    In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of
common stock from time to time in the market. There is no expiration date for the
repurchase program. As of June 30, 2006, 1,906,200 shares remain to be purchased under
this program. The purchase of shares is subject to limitations that may be imposed by
applicable securities laws and regulations and the rules of the NASDAQ Stock Market. The
timing of the purchases and the number of shares to be bought at any one time depend on
market conditions and Citizens capital requirements. There can be no assurance that
Citizens will repurchase the remaining shares authorized to be repurchased, or that any
additional repurchases will be authorized by the Board of Directors. Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    For
    
    WithheldJoseph P. Day
    
    
    30,860,139
    
    
    
    371,575Benjamin W. Laird
    
    
    30,700,736
    
    
    
    530,977Stephen J. Lazaroff
    
    
    30,940,893
    
    
    
    290,820William C. Shedd
    
    
    30,725,967
    
    
    
    505,746James L. Wolohan
    
    
    30,753,706
    
    
    
    478,008
 Item 5. Other Information
 th
  40




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##### Table of Contents



Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger, dated as of June 26, 2006, by and between Citizens
Banking Corporation and Republic Bancorp Inc. (Incorporated by reference from Citizens
Form 8-K filed June 29, 2006)10.19
    
    Employment Agreement, dated as of June 26, 2006, by and between Citizens and William
R. Hartman (Incorporated by reference from Citizens Form 8-K filed June 29, 2006)10.28
    
    Form of Restricted Stock Agreement (Employee Version)10.29
    
    Form of Restricted Stock Agreement (Director Version)10.30
    
    2006 Management Incentive Plan*31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193432.1
    
    Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934
 
 *
    
    Portions of this exhibit have been omitted pursuant to Citizens request to the
Secretary of the Securities and Exchange Commission for confidential treatment pursuant to
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. 41




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##### Table of Contents



SIGNATURES
   Date: August 4, 2006
    By:
    /s/ Charles D. ChristyCharles 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.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of June 26, 2006, by and between Citizens
Banking Corporation and Republic Bancorp Inc. (Incorporated by reference from Citizens
Form 8-K filed June 29, 2006)10.19
    
    Employment Agreement, dated as of June 26, 2006, by and between Citizens and William
R. Hartman (Incorporated by reference from Citizens Form 8-K filed June 29, 2006)10.28
    
    Form of Restricted Stock Agreement (Employee Version)10.29
    
    Form of Restricted Stock Agreement (Director Version)10.30
    
    2006 Management Incentive Plan*31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 193432.1
    
    Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934
 
 *
    
    Portions of this exhibit have been omitted pursuant to Citizens request to the
Secretary of the Securities and Exchange Commission for confidential treatment pursuant to
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. 43