##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2008
 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 001-33063
 CITIZENS
REPUBLIC BANCORP, INC.
  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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   Class
    
    Outstanding at October 31, 2008Common Stock, No Par Value
    
    126,015,039 Shares




---



##### 



Citizens Republic Bancorp, Inc.
 PagePart I  Financial Information (unaudited)Item 1 - Financial Statements (unaudited)Consolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    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
    
    
    23Item 3 - Quantitative and Qualitative Disclosures about Market Risk
    
    
    47Item 4 - Controls and Procedures
    
    
    47Part II  Other InformationItem 1A - Risk Factors
    
    
    47Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    48Item 6 - Exhibits
    
    
    48Signatures
    
    
    49Exhibit Index
    
    
    50EX-3.1EX-10.44EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



Consolidated Balance Sheets
 Citizens Republic Bancorp and Subsidiaries
 September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2007(unaudited)

    
    
    (Note 1)

    
    
    (unaudited)AssetsCash and due from banks
    
    $
    268,944
    
    
    $
    241,104
    
    
    $
    224,683Money market investments
    
    
    2,568
    
    
    
    172
    
    
    
    5,193Investment Securities:Securities available for sale, at fair value
    
    
    2,018,958
    
    
    
    2,132,164
    
    
    
    2,177,516Securities held to maturity, at amortized cost
(fair value of $134,367, $129,366 and $122,186, respectively)
    
    
    139,574
    
    
    
    129,126
    
    
    
    122,610Total investment securities
    
    
    2,158,532
    
    
    
    2,261,290
    
    
    
    2,300,126FHLB and Federal Reserve stock
    
    
    148,768
    
    
    
    148,838
    
    
    
    142,107Portfolio loans:Commercial and industrial
    
    
    2,703,714
    
    
    
    2,557,152
    
    
    
    2,236,131Commercial real estate
    
    
    3,070,282
    
    
    
    3,097,196
    
    
    
    3,068,540Total commercial
    
    
    5,773,996
    
    
    
    5,654,348
    
    
    
    5,304,671Residential mortgage
    
    
    1,279,696
    
    
    
    1,445,214
    
    
    
    1,460,993Direct consumer
    
    
    1,481,380
    
    
    
    1,572,329
    
    
    
    1,602,126Indirect consumer
    
    
    843,126
    
    
    
    829,353
    
    
    
    851,436Total portfolio loans
    
    
    9,378,198
    
    
    
    9,501,244
    
    
    
    9,219,226Less: Allowance for loan losses
    
    
    (217,727
    )
    
    
    (163,353
    )
    
    
    (176,958
    )Net portfolio loans
    
    
    9,160,471
    
    
    
    9,337,891
    
    
    
    9,042,268Loans held for sale
    
    
    106,531
    
    
    
    75,832
    
    
    
    76,384Premises and equipment
    
    
    123,805
    
    
    
    132,500
    
    
    
    130,148Goodwill
    
    
    597,218
    
    
    
    775,308
    
    
    
    778,516Other intangible assets
    
    
    23,540
    
    
    
    30,546
    
    
    
    33,206Bank owned life insurance
    
    
    219,125
    
    
    
    214,321
    
    
    
    212,243Other assets
    
    
    306,449
    
    
    
    288,181
    
    
    
    278,275Total assets
    
    $
    13,115,951
    
    
    $
    13,505,983
    
    
    $
    13,223,149LiabilitiesNoninterest-bearing deposits
    
    $
    1,156,419
    
    
    $
    1,125,966
    
    
    $
    1,104,992Interest-bearing demand deposits
    
    
    768,466
    
    
    
    782,889
    
    
    
    795,950Savings deposits
    
    
    2,607,974
    
    
    
    2,221,813
    
    
    
    2,136,082Time deposits
    
    
    4,473,216
    
    
    
    4,171,257
    
    
    
    3,904,715Total deposits
    
    
    9,006,075
    
    
    
    8,301,925
    
    
    
    7,941,739Federal funds purchased and securities sold
under agreements to repurchase
    
    
    59,781
    
    
    
    488,039
    
    
    
    764,527Other short-term borrowings
    
    
    63,281
    
    
    
    54,128
    
    
    
    33,274Other liabilities
    
    
    102,391
    
    
    
    144,501
    
    
    
    120,968Long-term debt
    
    
    2,347,644
    
    
    
    2,939,510
    
    
    
    2,800,768Total liabilities
    
    
    11,579,172
    
    
    
    11,928,103
    
    
    
    11,661,276Shareholders EquityPreferred stock  $50 par value

Authorized - 5,000,000 shares; None outstanding
    
    
    
    
    
    
    
    
    
    
    Common stock  no par value

Authorized - 150,000,000 shares; Issued and outstanding -
126,016,618 at 9/30/08,
75,722,115 at 12/31/07, and 75,633,669 at 9/30/07
    
    
    1,179,661
    
    
    
    975,446
    
    
    
    973,619Retained earnings
    
    
    365,954
    
    
    
    597,333
    
    
    
    591,306Accumulated other comprehensive income
    
    
    (8,836
    )
    
    
    5,101
    
    
    
    (3,052
    )Total shareholders equity
    
    
    1,536,779
    
    
    
    1,577,880
    
    
    
    1,561,873Total liabilities and shareholders equity
    
    $
    13,115,951
    
    
    $
    13,505,983
    
    
    $
    13,223,149
  3




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##### Table of Contents



Consolidated Statements of Operations (Unaudited)
 Citizens Republic Bancorp and Subsidiaries
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest IncomeInterest and fees on loans
    
    $
    144,099
    
    
    $
    171,650
    
    
    $
    447,279
    
    
    $
    514,814Interest and dividends on investment securities:Taxable
    
    
    18,275
    
    
    
    21,238
    
    
    
    58,319
    
    
    
    67,337Tax-exempt
    
    
    7,272
    
    
    
    7,310
    
    
    
    21,922
    
    
    
    21,947Dividends on FHLB and Federal Reserve stock
    
    
    1,917
    
    
    
    1,603
    
    
    
    5,508
    
    
    
    4,736Money market investments
    
    
    160
    
    
    
    53
    
    
    
    206
    
    
    
    89Total interest income
    
    
    171,723
    
    
    
    201,854
    
    
    
    533,234
    
    
    
    608,923Interest ExpenseDeposits
    
    
    53,001
    
    
    
    64,380
    
    
    
    167,713
    
    
    
    195,015Short-term borrowings
    
    
    1,060
    
    
    
    5,439
    
    
    
    7,867
    
    
    
    25,504Long-term debt
    
    
    30,344
    
    
    
    37,162
    
    
    
    94,409
    
    
    
    98,413Total interest expense
    
    
    84,405
    
    
    
    106,981
    
    
    
    269,989
    
    
    
    318,932Net Interest Income
    
    
    87,318
    
    
    
    94,873
    
    
    
    263,245
    
    
    
    289,991Provision for loan losses
    
    
    58,390
    
    
    
    3,765
    
    
    
    163,489
    
    
    
    39,122Net interest income after provision for loan losses
    
    
    28,928
    
    
    
    91,108
    
    
    
    99,756
    
    
    
    250,869Noninterest IncomeService charges on deposit accounts
    
    
    12,254
    
    
    
    12,515
    
    
    
    35,756
    
    
    
    35,701Trust fees
    
    
    4,513
    
    
    
    4,973
    
    
    
    13,905
    
    
    
    14,931Mortgage and other loan income
    
    
    3,269
    
    
    
    2,939
    
    
    
    9,636
    
    
    
    13,334Brokerage and investment fees
    
    
    1,376
    
    
    
    2,141
    
    
    
    5,503
    
    
    
    5,872ATM network user fees
    
    
    1,715
    
    
    
    1,601
    
    
    
    4,805
    
    
    
    4,820Bankcard fees
    
    
    1,874
    
    
    
    1,695
    
    
    
    5,542
    
    
    
    4,318Gains (losses) on loans held for sale
    
    
    (1,261
    )
    
    
    
    
    
    
    (3,508
    )
    
    
    Other income
    
    
    4,265
    
    
    
    4,732
    
    
    
    14,349
    
    
    
    14,321Total fees and other income
    
    
    28,005
    
    
    
    30,596
    
    
    
    85,988
    
    
    
    93,297Investment securities gains (losses)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    (25
    )Total noninterest income
    
    
    28,005
    
    
    
    30,604
    
    
    
    85,988
    
    
    
    93,272Noninterest ExpenseSalaries and employee benefits
    
    
    39,728
    
    
    
    42,115
    
    
    
    120,999
    
    
    
    132,251Occupancy
    
    
    6,749
    
    
    
    7,377
    
    
    
    21,378
    
    
    
    23,363Professional services
    
    
    3,246
    
    
    
    5,096
    
    
    
    11,540
    
    
    
    13,599Equipment
    
    
    3,160
    
    
    
    3,227
    
    
    
    9,810
    
    
    
    10,793Data processing services
    
    
    4,185
    
    
    
    3,724
    
    
    
    12,722
    
    
    
    12,360Advertising and public relations
    
    
    1,297
    
    
    
    1,003
    
    
    
    4,593
    
    
    
    6,070Postage and delivery
    
    
    1,626
    
    
    
    1,777
    
    
    
    5,411
    
    
    
    5,937Other loan expenses
    
    
    2,755
    
    
    
    1,245
    
    
    
    8,014
    
    
    
    3,237ORE expenses, profits, and losses, net
    
    
    1,825
    
    
    
    360
    
    
    
    9,461
    
    
    
    394Intangible asset amortization
    
    
    2,226
    
    
    
    2,803
    
    
    
    7,006
    
    
    
    8,875Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    178,089
    
    
    
    Restructuring and merger-related expenses
    
    
    
    
    
    
    1,009
    
    
    
    
    
    
    
    8,603Other expense
    
    
    7,504
    
    
    
    7,607
    
    
    
    23,068
    
    
    
    23,061Total noninterest expense
    
    
    74,301
    
    
    
    77,343
    
    
    
    412,091
    
    
    
    248,543Income (Loss) Before Income Taxes
    
    
    (17,368
    )
    
    
    44,369
    
    
    
    (226,347
    )
    
    
    95,598Income tax provision (benefit)
    
    
    (10,192
    )
    
    
    12,605
    
    
    
    (28,664
    )
    
    
    22,723Net Income (Loss)
    
    
    (7,176
    )
    
    
    31,764
    
    
    
    (197,683
    )
    
    
    72,875Deemed dividend on preferred stock
    
    
    (11,737
    )
    
    
    
    
    
    
    (11,737
    )
    
    
    Net Income (Loss) Attributable to Common Shareholders
    
    $
    (18,913
    )
    
    $
    31,764
    
    
    $
    (209,420
    )
    
    $
    72,875Net Income (Loss) Per Common Share:Basic
    
    $
    (0.20
    )
    
    $
    0.42
    
    
    $
    (2.50
    )
    
    $
    0.97Diluted
    
    
    (0.20
    )
    
    
    0.42
    
    
    
    (2.50
    )
    
    
    0.96Cash Dividends Declared Per Common Share
    
    
    
    
    
    
    0.290
    
    
    
    0.290
    
    
    
    0.870Average Common Shares Outstanding:Basic
    
    
    95,937
    
    
    
    75,353
    
    
    
    83,670
    
    
    
    75,391Diluted
    
    
    95,937
    
    
    
    75,501
    
    
    
    83,670
    
    
    
    75,688
  4




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##### Table of Contents



Consolidated Statements of Changes in Shareholders Equity
 Citizens Republic Bancorp and Subsidiaries
 AccumulatedOtherPreferred
    
    
    Common Stock
    
    
    Retained
    
    
    Comprehensive(in thousands, except per share amounts)
    
    Stock
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance at December 31, 2007
    
    $
    
    
    
    
    75,722
    
    
    $
    975,446
    
    
    $
    597,333
    
    
    $
    5,101
    
    
    $
    1,577,880Comprehensive income, net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (197,683
    )
    
    
    
    
    
    
    (197,683
    )Other comprehensive income (loss):Net unrealized loss on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,225
    )Net change in unrealized loss on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,937
    )Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211,620
    )Proceeds
from issuance of preferred stock (2,408 shares), net of costs of $6,221
    
    
    114,161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,161Deemed dividend on preferred stock (See Note 13)
    
    
    11,737
    
    
    
    
    
    
    
    
    
    
    
    (11,737
    )
    
    
    
    
    
    
    Conversion of preferred stock to common stock
    
    
    (125,898
    )
    
    
    30,096
    
    
    
    125,898
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of common stock, net of costs of $4,239
    
    
    
    
    
    
    19,904
    
    
    
    75,379
    
    
    
    
    
    
    
    
    
    
    
    75,379Proceeds from stock options exercised and restricted stock activity
    
    
    
    
    
    
    326
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Recognition of stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,315
    
    
    
    
    
    
    
    
    
    
    
    3,315Cash dividends declared on common shares  $0.290 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,959
    )
    
    
    
    
    
    
    (21,959
    )Shares purchased for taxes
    
    
    
    
    
    
    (31
    )
    
    
    (444
    )
    
    
    
    
    
    
    
    
    
    
    (444
    )Balance  September 30, 2008
    
    $
    
    
    
    
    126,017
    
    
    $
    1,179,661
    
    
    $
    365,954
    
    
    $
    (8,836
    )
    
    $
    1,536,779Balance at December 31, 2006
    
    $
    
    
    
    
    75,676
    
    
    $
    980,772
    
    
    $
    584,289
    
    
    $
    (7,375
    )
    
    $
    1,557,686Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,875
    
    
    
    
    
    
    
    72,875Other comprehensive income:Net unrealized loss on securities available-for-sale, net of
reclassification adjustment for net gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,120Net change in unrealized loss on qualifying
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (797
    )Other comprehensive income total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,323Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,198Proceeds from stock options exercised and restricted stock activity
    
    
    
    
    
    
    647
    
    
    
    5,143
    
    
    
    
    
    
    
    
    
    
    
    5,143Recognition of stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,427
    
    
    
    
    
    
    
    
    
    
    
    2,427Cash dividends declared on common shares  $0.870 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,858
    )
    
    
    
    
    
    
    (65,858
    )Shares acquired for retirement and purchased for taxes
    
    
    
    
    
    
    (689
    )
    
    
    (14,723
    )
    
    
    
    
    
    
    
    
    
    
    (14,723
    )Balance  September 30, 2007
    
    $
    
    
    
    
    75,634
    
    
    $
    973,619
    
    
    $
    591,306
    
    
    $
    (3,052
    )
    
    $
    1,561,873
  5




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##### Table of Contents



Consolidated Statements of Cash Flows
 Citizens Republic Bancorp and Subsidiaries
 Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007Operating Activities:Net income (loss)
    
    $
    (197,683
    )
    
    $
    72,875Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    163,489
    
    
    
    39,122Goodwill impairment
    
    
    178,089
    
    
    
    Depreciation and software amortization
    
    
    8,780
    
    
    
    10,094Amortization of intangibles
    
    
    7,006
    
    
    
    8,875Amortization and fair value adjustments of purchase accounting mark-to-market, net
    
    
    (12,511
    )
    
    
    (19,205
    )Fair value adjustment on loans held for sale and other real estate
    
    
    13,688
    
    
    
    Discount accretion and amortization of issuance costs on long term debt
    
    
    890
    
    
    
    691Net accretion on investment securities
    
    
    (4,040
    )
    
    
    (3,306
    )Investment securities losses
    
    
    
    
    
    
    25Loans originated for sale
    
    
    (240,359
    )
    
    
    (405,033
    )Proceeds from loans held for sale
    
    
    284,816
    
    
    
    489,028Net gains from loan sales
    
    
    (5,755
    )
    
    
    (7,756
    )Net (gain) loss on other real estate
    
    
    2,712
    
    
    
    (440
    )Recognition of stock-based compensation
    
    
    3,315
    
    
    
    2,427Restructure and merger related reserve
    
    
    (3,096
    )
    
    
    (41,020
    )Net change in federal tax liability
    
    
    (18,003
    )
    
    
    1,024Other
    
    
    (22,750
    )
    
    
    (4,617
    )Net cash provided by operating activities
    
    
    158,588
    
    
    
    142,784Investing Activities:Net increase in money market investments
    
    
    (2,396
    )
    
    
    (4,990
    )Securities available-for-sale:Proceeds from sales
    
    
    
    
    
    
    364,421Proceeds from maturities and payments
    
    
    360,033
    
    
    
    443,750Purchases
    
    
    (263,777
    )
    
    
    (144,280
    )Securities held-to-maturity:Proceeds from maturities and payments
    
    
    1,505
    
    
    
    Purchases
    
    
    (12,777
    )
    
    
    (12,869
    )Sale of branches, net of cash received
    
    
    
    
    
    
    (163,592
    )Net increase in loans and leases
    
    
    (95,242
    )
    
    
    (33,500
    )Proceeds from sales of other real estate
    
    
    23,338
    
    
    
    11,667Net increase in properties and equipment
    
    
    (2,838
    )
    
    
    (3,942
    )Net cash provided by investing activities
    
    
    7,846
    
    
    
    456,665Financing Activities:Net increase (decrease) in demand and savings deposits
    
    
    402,190
    
    
    
    (189,529
    )Net increase (decrease) in time deposits
    
    
    302,247
    
    
    
    (364,405
    )Net decrease in short-term borrowings
    
    
    (468,970
    )
    
    
    (140,777
    )Proceeds from issuance of long-term debt
    
    
    525,000
    
    
    
    1,341,750Principal reductions in long-term debt
    
    
    (1,066,265
    )
    
    
    (1,170,114
    )Net proceeds from issuance of common stock
    
    
    75,379
    
    
    
    Net proceeds from issuance of preferred stock
    
    
    114,161
    
    
    
    Cash dividends paid on common stock
    
    
    (21,959
    )
    
    
    (65,858
    )Proceeds from stock options exercised and restricted stock activity
    
    
    67
    
    
    
    5,143Shares acquired for retirement and purchased for taxes
    
    
    (444
    )
    
    
    (14,723
    )Net cash used by financing activities
    
    
    (138,594
    )
    
    
    (598,513
    )Net increase in cash and due from banks
    
    
    27,840
    
    
    
    936Cash and due from banks at beginning of period
    
    
    241,104
    
    
    
    223,747Cash and due from banks at end of period
    
    $
    268,944
    
    
    $
    224,683Supplemental Cash Flow Information:Loans transferred to other real estate owned
    
    $
    38,535
    
    
    $
    23,540Loans transferred to held for sale
    
    
    82,943
    
    
    
    Held for sale loans transferred to other real estate
    
    
    7,757
    
    
    
    Deemed dividend on preferred stock
    
    
    11,737
    
    
    
    Conversion of preferred stock to common stock
    
    
    125,898
    
    
    
    
  6




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##### Table of Contents



Part I  Financial Information
 Item 1  Consolidated Financial Statements
 
 Notes to Consolidated Financial Statements (Unaudited)
 Citizens Republic Bancorp, Inc. and Subsidiaries
 Note 1. Basis of Presentation and Accounting Policies
 www.citizensbanking.com
 Statements of Financial Accounting Standards
 SFAS No. 157, Fair Value Measurements.
  FASB Staff Position (FSP) on SFAS No. 157-2.
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
 7




---



##### Table of Contents



Note 2. New Accounting Pronouncements
 EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities Earnings per Share.
 Note 3. Merger and Acquisition Activity
  Restructuring Reserve
 Balance
    
    
    Changes in 2008
    
    
    BalanceDecember 31,
    
    
    Cash
    
    
    Other
    
    
    September 30,(in thousands)
    
    2007
    
    
    Payments
    
    
    Adjustments
    
    
    2008Personnel
    
    $
    1,562
    
    
    $
    (944
    )
    
    $
    (116
    )
    
    $
    502Facilities/Branches
    
    
    1,557
    
    
    
    (85
    )
    
    
    (14
    )
    
    
    1,458$
    3,119
    
    
    $
    (1,029
    )
    
    $
    (130
    )
    
    $
    1,960
   Merger-related Reserve
 Balance
    
    
    Changes in 2008
    
    
    BalanceDecember 31,
    
    
    Cash
    
    
    Other
    
    
    September 30,(in thousands)
    
    2007
    
    
    Payments
    
    
    Adjustments
    
    
    2008Personnel
    
    $
    1,276
    
    
    $
    (1,276
    )
    
    $
    
    
    
    $
    Facilities/Branches
    
    
    1,360
    
    
    
    (779
    )
    
    
    (4
    )
    
    
    5772,636
    
    
    
    (2,055
    )
    
    
    (4
    )
    
    
    577Other Transaction and
System Reserves
    
    
    12
    
    
    
    (12
    )
    
    
    
    
    
    
    $
    2,648
    
    
    $
    (2,067
    )
    
    $
    (4
    )
    
    $
    577
  8




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##### Table of Contents



Note 4. Investment Securities
  September 30, 2008
    
    
    December 31, 2007Estimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Gross Unrealized
    
    
    Amortized
    
    
    Fair
    
    
    Gross Unrealized(in thousands)
    
    Cost
    
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Cost
    
    
    Value
    
    
    Gains
    
    
    LossesAvailable For Sale:Federal Agencies
    
    $
    248,947
    
    
    $
    253,868
    
    
    $
    4,921
    
    
    $
    
    
    
    $
    298,177
    
    
    $
    304,074
    
    
    $
    5,897
    
    
    $
    Collateralized Mortgage Obligations
    
    
    484,414
    
    
    
    466,895
    
    
    
    2,295
    
    
    
    19,814
    
    
    
    587,355
    
    
    
    586,954
    
    
    
    2,278
    
    
    
    2,679Mortgage-backed
    
    
    745,716
    
    
    
    753,166
    
    
    
    8,361
    
    
    
    911
    
    
    
    667,504
    
    
    
    670,565
    
    
    
    5,707
    
    
    
    2,646State and municipal
    
    
    538,512
    
    
    
    539,766
    
    
    
    7,680
    
    
    
    6,426
    
    
    
    560,073
    
    
    
    569,466
    
    
    
    10,336
    
    
    
    943Other
    
    
    5,265
    
    
    
    5,263
    
    
    
    
    
    
    
    2
    
    
    
    1,067
    
    
    
    1,105
    
    
    
    38
    
    
    
    Total available for sale
    
    $
    2,022,854
    
    
    $
    2,018,958
    
    
    $
    23,257
    
    
    $
    27,153
    
    
    $
    2,114,176
    
    
    $
    2,132,164
    
    
    $
    24,256
    
    
    $
    6,268Held to Maturity:State and municipalTotal held to maturity
    
    $
    139,574
    
    
    $
    134,367
    
    
    $
    214
    
    
    $
    5,421
    
    
    $
    129,126
    
    
    $
    129,366
    
    
    $
    978
    
    
    $
    738FHLB and Fed Reserve stock
    
    $
    148,768
    
    
    $
    148,768
    
    
    $
    
    
    
    $
    
    
    
    $
    148,838
    
    
    $
    148,838
    
    
    $
    
    
    
    $
    
  9




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##### Table of Contents



As of September 30, 2008
 Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized(in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable For Sale:Collateralized Mortgage Obligations
    
    $
    288,597
    
    
    $
    19,789
    
    
    $
    4,201
    
    
    $
    25
    
    
    $
    292,798
    
    
    $
    19,814Mortgage-backed
    
    
    153,236
    
    
    
    858
    
    
    
    2,984
    
    
    
    53
    
    
    
    156,220
    
    
    
    911State and municipal
    
    
    180,118
    
    
    
    6,302
    
    
    
    1,840
    
    
    
    124
    
    
    
    181,958
    
    
    
    6,426Other
    
    
    11
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    2Total available for sale
    
    
    621,962
    
    
    
    26,951
    
    
    
    9,025
    
    
    
    202
    
    
    
    630,987
    
    
    
    27,153Held to Maturity:State and municipal
    
    
    113,582
    
    
    
    4,948
    
    
    
    4,238
    
    
    
    473
    
    
    
    117,820
    
    
    
    5,421Total held to maturity
    
    
    113,582
    
    
    
    4,948
    
    
    
    4,238
    
    
    
    473
    
    
    
    117,820
    
    
    
    5,421Total
    
    $
    735,544
    
    
    $
    31,899
    
    
    $
    13,263
    
    
    $
    675
    
    
    $
    748,807
    
    
    $
    32,574
 As of December 31, 2007
 Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized(in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable For Sale:Collateralized Mortgage Obligations
    
    $
    212,274
    
    
    $
    2,165
    
    
    $
    67,253
    
    
    $
    514
    
    
    $
    279,527
    
    
    $
    2,679Mortgage-backed
    
    
    33,102
    
    
    
    219
    
    
    
    115,712
    
    
    
    2,427
    
    
    
    148,814
    
    
    
    2,646State and municipal
    
    
    69,429
    
    
    
    625
    
    
    
    17,596
    
    
    
    318
    
    
    
    87,025
    
    
    
    943Total available for sale
    
    
    314,805
    
    
    
    3,009
    
    
    
    200,561
    
    
    
    3,259
    
    
    
    515,366
    
    
    
    6,268Held to Maturity:State and municipal
    
    
    43,700
    
    
    
    536
    
    
    
    14,230
    
    
    
    202
    
    
    
    57,930
    
    
    
    738Total held to maturity
    
    
    43,700
    
    
    
    536
    
    
    
    14,230
    
    
    
    202
    
    
    
    57,930
    
    
    
    738Total
    
    $
    358,505
    
    
    $
    3,545
    
    
    $
    214,791
    
    
    $
    3,461
    
    
    $
    573,296
    
    
    $
    7,006
  10




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##### Table of Contents



Note 5. Allowance for Loan Losses and Impaired Loans
  Analysis of Allowance for Loan Losses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Allowance for loan losses  beginning of period
    
    $
    181,718
    
    
    $
    181,118
    
    
    $
    163,353
    
    
    $
    169,104Provision for loan losses
    
    
    58,390
    
    
    
    3,765
    
    
    
    163,489
    
    
    
    39,122Charge-offs:Commercial and industrial
    
    
    2,222
    
    
    
    1,618
    
    
    
    4,188
    
    
    
    4,400Commercial real estate
    
    
    15,063
    
    
    
    1,270
    
    
    
    66,420
    
    
    
    15,975Total commercial
    
    
    17,285
    
    
    
    2,888
    
    
    
    70,608
    
    
    
    20,375Residential mortgage
    
    
    497
    
    
    
    1,602
    
    
    
    23,004
    
    
    
    3,128Direct consumer
    
    
    3,603
    
    
    
    3,188
    
    
    
    10,756
    
    
    
    8,301Indirect consumer
    
    
    3,924
    
    
    
    2,312
    
    
    
    10,590
    
    
    
    6,397Charge-offs
    
    
    25,309
    
    
    
    9,990
    
    
    
    114,958
    
    
    
    38,201Recoveries:Commercial and industrial
    
    
    1,805
    
    
    
    1,026
    
    
    
    2,249
    
    
    
    2,796Commercial real estate
    
    
    274
    
    
    
    100
    
    
    
    565
    
    
    
    814Total commercial
    
    
    2,079
    
    
    
    1,126
    
    
    
    2,814
    
    
    
    3,610Residential mortgage
    
    
    12
    
    
    
    1
    
    
    
    27
    
    
    
    108Direct consumer
    
    
    304
    
    
    
    500
    
    
    
    1,341
    
    
    
    1,353Indirect consumer
    
    
    533
    
    
    
    438
    
    
    
    1,661
    
    
    
    1,862Recoveries
    
    
    2,928
    
    
    
    2,065
    
    
    
    5,843
    
    
    
    6,933Net charge-offs
    
    
    22,381
    
    
    
    7,925
    
    
    
    109,115
    
    
    
    31,268Allowance for loan losses  end of period
    
    $
    217,727
    
    
    $
    176,958
    
    
    $
    217,727
    
    
    $
    176,958
  11




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##### Table of Contents



Impaired Loan Information
 Balances
    
    
    Valuation ReserveSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007BalancesImpaired loans with valuation reserve
    
    $
    108,655
    
    
    $
    33,651
    
    
    $
    35,610
    
    
    $
    17,769Impaired loans with no valuation reserve
    
    
    27,369
    
    
    
    18,684
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    136,024
    
    
    $
    52,335
    
    
    $
    35,610
    
    
    $
    17,769Impaired loans on nonaccrual basis
    
    $
    136,024
    
    
    $
    52,335
    
    
    $
    35,610
    
    
    $
    17,769Impaired loans on accrual basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    136,024
    
    
    $
    52,335
    
    
    $
    35,610
    
    
    $
    17,769
  Note 6. Goodwill
  September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Specialty Commercial
    
    $
    
    
    
    $
    178,089Regional Banking
    
    
    595,417
    
    
    
    595,418Wealth Management
    
    
    1,801
    
    
    
    1,801Total Goodwill
    
    $
    597,218
    
    
    $
    775,308
  12




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##### Table of Contents



Note 7. Long-Term Debt
  September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Citizens (Parent only):Variable rate promissary notes payable due May 1, 2010
    
    $
    
    
    
    $
    50,000Subordinated debt:5.75% subordinated notes due February 2013
    
    
    119,878
    
    
    
    119,125Variable rate junior subordinated debenture due June 2033
    
    
    25,774
    
    
    
    25,7267.50% junior subordinated debentures due September 2066
    
    
    146,684
    
    
    
    145,971Subsidiaries:Federal Home Loan Bank advances
    
    
    1,816,979
    
    
    
    2,344,636Other borrowed funds
    
    
    238,329
    
    
    
    254,052Total long-term debt
    
    $
    2,347,644
    
    
    $
    2,939,510
  Note 8. Income Taxes
    Note 9. Accumulated Other Comprehensive Income
  13




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    (6,080
    )
    
    $
    (20,674
    )
    
    $
    5,101
    
    
    $
    (7,375
    )Net unrealized (loss) gain on securities for
the quarter, net of tax effect of $(2,034) in
2008 and $9,608 in 2007, and net unrealized
(loss) gain on securities for the nine month
period, net of tax effect of $(7,659) in 2008
and $2,749 in 2007
    
    
    (3,777
    )
    
    
    17,842
    
    
    
    (14,225
    )
    
    
    5,104Less: Reclassification adjustment for net
(gains) losses on securities included in net
income for the quarter, net of tax effect of
$(3) in 2007, and included in net income for
the nine month period, net of tax effect of
$9 in 2007.
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    16Net change in unrealized gain (loss) on cash
flow hedges for the quarter, net of tax effect
of $550 in 2008 and $(115) in 2007, and net
change in unrealized gain (loss) for the nine
month period, net of tax effect of $155 in 2008
and $(429) in 2007.
    
    
    1,021
    
    
    
    (215
    )
    
    
    288
    
    
    
    (797
    )Accumulated other comprehensive loss, net of tax
    
    $
    (8,836
    )
    
    $
    (3,052
    )
    
    $
    (8,836
    )
    
    $
    (3,052
    )
 Note 10. Fair Values of Assets and Liabilities
       14




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##### Table of Contents



ASSETS AND LIABILITIES RECORDED AT FAIR VALUE ON A RECURRING BASIS  Investment Securities Available for Sale.
 Derivative Financial Instruments.
 Deferred Compensation Assets.
  September 30, 2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Investment Securities Available for Sale
    
    $
    2,018,958
    
    
    $
    
    
    
    $
    2,018,958
    
    
    $
    Other assets (1)
    
    
    30,069
    
    
    
    8,253
    
    
    
    21,816
    
    
    
    Total Assets
    
    $
    2,049,027
    
    
    $
    8,253
    
    
    $
    2,040,774
    
    
    $
    Other liabilities (2)
    
    $
    13,599
    
    
    $
    
    
    
    $
    13,599
    
    
    $
    
 
 (1)
    
    Includes Derivative Financial Instruments and Deferred Compensation Assets.(2)
    
    Includes Derivative Financial Instruments. ASSETS AND LIABILITIES RECORDED AT FAIR VALUE ON A NONRECURRING BASIS  Mortgage Servicing Rights
 Loans Held for Sale.
 15




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##### Table of Contents



Impaired Loans.
  September 30, 2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Loans (1)
    
    $
    90,997
    
    
    $
    
    
    
    $
    
    
    
    $
    90,997Commercial Loans Held For Sale (2)
    
    
    44,339
    
    
    
    
    
    
    
    
    
    
    
    44,339Mortgage Loans Held For Sale (3)
    
    
    17,995
    
    
    
    
    
    
    
    
    
    
    
    17,995Total Assets
    
    $
    153,331
    
    
    $
    
    
    
    $
    
    
    
    $
    153,331
 
 (1)
    
    Impaired Loans with an initial carrying value of
$152.3 million were written down to their fair value of $91.0 million.(2)
    
    Impaired Loans with an initial carrying value of $70.7 million were written down to their fair value of $44.3 million.(3)
    
    Nonperforming Mortgage Loans with an initial carrying value of $33.7 million were written down to their fair value of $18.0 million. Note 11. Pension Benefit Cost
  16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Defined Benefit Pension PlansInterest cost
    
    $
    1,165
    
    
    $
    1,265
    
    
    $
    3,495
    
    
    $
    3,640Expected return on plan assets
    
    
    (1,900
    )
    
    
    (1,956
    )
    
    
    (5,700
    )
    
    
    (5,869
    )Amortization of unrecognized:Prior service cost
    
    
    10
    
    
    
    3
    
    
    
    30
    
    
    
    8Net actuarial loss
    
    
    75
    
    
    
    133
    
    
    
    225
    
    
    
    383Net pension cost
    
    $
    (650
    )
    
    $
    (555
    )
    
    $
    (1,950
    )
    
    $
    (1,838
    )Supplemental Pension PlansInterest cost
    
    $
    190
    
    
    $
    192
    
    
    $
    573
    
    
    $
    577Amortization of unrecognized:Prior service cost
    
    
    118
    
    
    
    42
    
    
    
    353
    
    
    
    126Net actuarial loss
    
    
    5
    
    
    
    32
    
    
    
    15
    
    
    
    98Net pension cost
    
    $
    313
    
    
    $
    266
    
    
    $
    941
    
    
    $
    801Postretirement Benefit PlansService cost
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    3Interest cost
    
    
    128
    
    
    
    124
    
    
    
    386
    
    
    
    372Amortization of unrecognized:Prior service cost
    
    
    (64
    )
    
    
    (67
    )
    
    
    (192
    )
    
    
    (202
    )Net actuarial gain
    
    
    (8
    )
    
    
    
    
    
    
    (25
    )
    
    
    Net pension cost
    
    $
    56
    
    
    $
    58
    
    
    $
    169
    
    
    $
    173Defined contribution retirement and 401K PlansEmployer contributions
    
    $
    1,628
    
    
    $
    1,746
    
    
    $
    5,026
    
    
    $
    4,380Total periodic benefit cost
    
    $
    1,347
    
    
    $
    1,515
    
    
    $
    4,186
    
    
    $
    3,516
  Note 12. Stock-Based Compensation
  17




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##### Table of Contents



Analysis of Stock-Based Compensation Expense
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock Option Compensation
    
    $
    9
    
    
    $
    9
    
    
    $
    26
    
    
    $
    26Restricted Stock Compensation
    
    
    1,164
    
    
    
    967
    
    
    
    3,289
    
    
    
    2,401Stock-based compensation expense before income taxes
    
    
    1,173
    
    
    
    976
    
    
    
    3,315
    
    
    
    2,427Income tax benefit
    
    
    (410
    )
    
    
    (342
    )
    
    
    (1,160
    )
    
    
    (849
    )Total stock-based compensation expense after income taxes
    
    $
    763
    
    
    $
    634
    
    
    $
    2,155
    
    
    $
    1,578
    Number of
    
    Weighted-AverageShares
    
    Grant Date Fair ValueOutstanding restricted stock at
December 31, 2007
    
    
    486,842
    
    
    $
    21.32Granted
    
    
    338,995
    
    
    
    8.56Vested
    
    
    (163,251
    )
    
    
    21.97Forfeited
    
    
    (25,941
    )
    
    
    18.99Restricted stock at September 30, 2008
    
    
    636,645
    
    
    
    14.46
  Note 13. Shareholders Equity and Earnings Per Share
  18




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Basic and dilutive earnings per share  net income
(loss)
    
    $
    (7,176
    )
    
    $
    31,764
    
    
    $
    (197,683
    )
    
    $
    72,875Deemed dividend on preferred stock
    
    
    (11,737
    )
    
    
    
    
    
    
    (11,737
    )
    
    
    Net income (loss) attributable to common shareholders
    
    $
    (18,913
    )
    
    $
    31,764
    
    
    $
    (209,420
    )
    
    $
    72,875Denominator:Basic earnings per share  weighted average shares
    
    
    95,937
    
    
    
    75,353
    
    
    
    83,670
    
    
    
    75,391Effect of dilutive securities  potential conversion
of employee stock options and restricted stock awards
    
    
    
    
    
    
    148
    
    
    
    
    
    
    
    297Diluted earnings per share  adjusted weighted-average
shares and assumed conversions
    
    
    95,937
    
    
    
    75,501
    
    
    
    83,670
    
    
    
    75,688Basic earnings per common share
    
    $
    (0.20
    )
    
    $
    0.42
    
    
    $
    (2.50
    )
    
    $
    0.97Diluted earnings per common share
    
    $
    (0.20
    )
    
    $
    0.42
    
    
    $
    (2.50
    )
    
    $
    0.96
 Note 14. Lines of Business
  19




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##### Table of Contents



Line of Business Information
 Specialty
    
    
    Regional
    
    
    Wealth(in thousands)
    
    Commercial
    
    
    Banking
    
    
    Mgmt
    
    
    Other
    
    
    TotalEarnings Summary  Three Months Ended September 30, 2008Net interest income (taxable equivalent)
    
    $
    20,167
    
    
    $
    66,544
    
    
    $
    16
    
    
    $
    5,184
    
    
    $
    91,911Provision for loan losses
    
    
    47,190
    
    
    
    7,230
    
    
    
    
    
    
    
    3,970
    
    
    
    58,390Net interest income after provision
    
    
    (27,023
    )
    
    
    59,314
    
    
    
    16
    
    
    
    1,214
    
    
    
    33,521Noninterest income
    
    
    (647
    )
    
    
    20,130
    
    
    
    5,873
    
    
    
    2,649
    
    
    
    28,005Noninterest expense
    
    
    5,590
    
    
    
    54,681
    
    
    
    5,395
    
    
    
    8,635
    
    
    
    74,301Income before income taxes
    
    
    (33,260
    )
    
    
    24,763
    
    
    
    494
    
    
    
    (4,772
    )
    
    
    (12,775
    )Income tax provision (benefit)  taxable equivalent
    
    
    (11,641
    )
    
    
    8,667
    
    
    
    173
    
    
    
    (2,798
    )
    
    
    (5,599
    )Net income (loss)
    
    $
    (21,619
    )
    
    $
    16,096
    
    
    $
    321
    
    
    $
    (1,974
    )
    
    $
    (7,176
    )Average assets(in millions)
    
    $
    2,079
    
    
    $
    5,966
    
    
    $
    12
    
    
    $
    5,100
    
    
    $
    13,157Earnings Summary  Three Months Ended September
30, 2007(1)Net interest income (taxable equivalent)
    
    $
    19,810
    
    
    $
    70,508
    
    
    $
    2
    
    
    $
    9,173
    
    
    $
    99,493Provision for loan losses
    
    
    (3,822
    )
    
    
    3,655
    
    
    
    
    
    
    
    3,932
    
    
    
    3,765Net interest income after provision
    
    
    23,632
    
    
    
    66,853
    
    
    
    2
    
    
    
    5,241
    
    
    
    95,728Noninterest income
    
    
    992
    
    
    
    18,290
    
    
    
    7,004
    
    
    
    4,318
    
    
    
    30,604Noninterest expense
    
    
    5,281
    
    
    
    53,422
    
    
    
    5,292
    
    
    
    13,348
    
    
    
    77,343Income before income taxes
    
    
    19,343
    
    
    
    31,721
    
    
    
    1,714
    
    
    
    (3,789
    )
    
    
    48,989Income tax provision (benefit)  taxable equivalent
    
    
    6,769
    
    
    
    11,103
    
    
    
    600
    
    
    
    (1,247
    )
    
    
    17,225Net income (loss)
    
    $
    12,574
    
    
    $
    20,618
    
    
    $
    1,114
    
    
    $
    (2,542
    )
    
    $
    31,764Average assets(in millions)
    
    $
    2,036
    
    
    $
    5,736
    
    
    $
    14
    
    
    $
    5,379
    
    
    $
    13,165
 Line of Business Information
 Specialty
    
    
    Regional
    
    
    Wealth(in thousands)
    
    Commercial
    
    
    Banking
    
    
    Mgmt
    
    
    Other
    
    
    TotalEarnings Summary  Nine Months Ended September 30, 2008Net interest income (taxable equivalent)
    
    $
    57,095
    
    
    $
    195,625
    
    
    $
    17
    
    
    $
    24,391
    
    
    $
    277,128Provision for loan losses
    
    
    95,319
    
    
    
    31,913
    
    
    
    
    
    
    
    36,257
    
    
    
    163,489Net interest income after provision
    
    
    (38,224
    )
    
    
    163,712
    
    
    
    17
    
    
    
    (11,866
    )
    
    
    113,639Noninterest income
    
    
    (1,834
    )
    
    
    58,522
    
    
    
    19,379
    
    
    
    9,921
    
    
    
    85,988Noninterest expense
    
    
    195,646
    
    
    
    164,524
    
    
    
    16,633
    
    
    
    35,288
    
    
    
    412,091Income before income taxes
    
    
    (235,704
    )
    
    
    57,710
    
    
    
    2,763
    
    
    
    (37,233
    )
    
    
    (212,464
    )Income tax provision (benefit)  taxable equivalent
    
    
    (20,166
    )
    
    
    20,199
    
    
    
    967
    
    
    
    (15,781
    )
    
    
    (14,781
    )Net income (loss)
    
    $
    (215,538
    )
    
    $
    37,511
    
    
    $
    1,796
    
    
    $
    (21,452
    )
    
    $
    (197,683
    )Average assets(in millions)
    
    $
    2,169
    
    
    $
    6,027
    
    
    $
    13
    
    
    $
    5,089
    
    
    $
    13,298Earnings Summary  Nine Months Ended September 30,
2007(1)Net interest income (taxable equivalent)
    
    $
    60,678
    
    
    $
    209,468
    
    
    $
    (25
    )
    
    $
    33,743
    
    
    $
    303,864Provision for loan losses
    
    
    22,679
    
    
    
    9,860
    
    
    
    
    
    
    
    6,583
    
    
    
    39,122Net interest income after provision
    
    
    37,999
    
    
    
    199,608
    
    
    
    (25
    )
    
    
    27,160
    
    
    
    264,742Noninterest income
    
    
    3,180
    
    
    
    58,449
    
    
    
    20,370
    
    
    
    11,273
    
    
    
    93,272Noninterest expense
    
    
    15,755
    
    
    
    164,869
    
    
    
    16,521
    
    
    
    51,398
    
    
    
    248,543Income before income taxes
    
    
    25,424
    
    
    
    93,188
    
    
    
    3,824
    
    
    
    (12,965
    )
    
    
    109,471Income tax provision (benefit)  taxable equivalent
    
    
    8,898
    
    
    
    32,616
    
    
    
    1,338
    
    
    
    (6,256
    )
    
    
    36,596Net income (loss)
    
    $
    16,526
    
    
    $
    60,572
    
    
    $
    2,486
    
    
    $
    (6,709
    )
    
    $
    72,875Average assets(in millions)
    
    $
    2,095
    
    
    $
    6,195
    
    
    $
    13
    
    
    $
    5,022
    
    
    $
    13,325
 
 (1)
    
    Certain amounts have been reclassified to conform to current
year presentation. 20




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##### Table of Contents



Note 15. Commitments, Contingent Liabilities and Guarantees
   September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Loan commitments and letters of credit:Commitments to extend credit
    
    $
    2,197,029
    
    
    $
    2,510,255Financial standby letters of credit
    
    
    109,016
    
    
    
    101,229Performance standby letters of credit
    
    
    23,465
    
    
    
    27,244Commercial letters of credit
    
    
    222,432
    
    
    
    255,538Total loan commitments and letters of credit
    
    $
    2,551,942
    
    
    $
    2,894,266
  Note 16. Derivatives and Hedging Activities
   21




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##### Table of Contents



Derivative Financial Instruments:
 September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueReceive fixed swaps (1) (7)
    
    $
    1,005,000
    
    
    $
    601
    
    
    $
    300,000
    
    
    $
    1,574Customer initiated swaps and corresponding offsets (2) (7)
    
    
    1,100,359
    
    
    
    3,700
    
    
    
    713,290
    
    
    
    Interest rate lock commitments
    
    
    
    
    
    
    
    
    
    
    24,808
    
    
    
    199Forward mortgage loan contracts
    
    
    
    
    
    
    
    
    
    
    68,030
    
    
    
    (501
    )Total
    
    $
    2,105,359
    
    
    $
    4,301
    
    
    $
    1,106,128
    
    
    $
    1,272
 Derivative Classifications and Hedging
Relationships:
 September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueDerivatives Designated as Cash Flow Hedges:Prime Based Loan Hedges (3)
    
    $
    625,000
    
    
    $
    794
    
    
    $
    100,000
    
    
    $
    (47
    )LIBOR Based Loan Hedges (4)
    
    $
    75,000
    
    
    $
    (150
    )
    
    
    
    
    
    
    Derivatives Designated as Fair Value Hedges:Hedging time deposits (5)
    
    
    80,000
    
    
    
    314
    
    
    
    50,000
    
    
    
    1,434Hedging long-term debt (6)
    
    
    225,000
    
    
    
    (357
    )
    
    
    150,000
    
    
    
    187Derivatives Not Designated as Hedges:Customer initiated swaps and
corresponding offsets (2)
(7)
    
    
    1,100,359
    
    
    
    3,700
    
    
    
    713,290
    
    
    
    Total
    
    $
    2,105,359
    
    
    $
    4,301
    
    
    $
    1,013,290
    
    
    $
    1,574
 
 (1)
    
    Fair value includes accrued interest of $738 and $1,191 for September 30, 2008 and December 31, 2007, respectively(2)
    
    Fair value includes accrued interest of $0 for both September 30, 2008 and December 31, 2007.(3)
    
    Fair value includes accrued interest of $233 and $0 for September 30, 2008 and December 31, 2007, respectively(4)
    
    Fair value includes accrued interest of $14 as of September 30, 2008.(5)
    
    Fair value includes accrued interest of $493 and $1,196 for September 30, 2008 and December 31, 2007, respectively.(6)
    
    Fair value includes accrued interest of $(1) and ($4,829) for September 30, 2008 and December 31, 2007, respectively.(7)
    
    Right to reclaim cash collateral under master netting arrangement was $2,300 as of September 30, 2008. 22




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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 Republic Bancorp and Subsidiaries
 September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,2008
    
    2008
    
    2008
    
    2007
    
    2007Summary of Operations (thousands)Net interest income
    
    $
    87,318
    
    
    $
    87,615
    
    
    $
    88,312
    
    
    $
    92,188
    
    
    $
    94,873Provision for loan losses
    
    
    58,390
    
    
    
    74,480
    
    
    
    30,619
    
    
    
    6,055
    
    
    
    3,765Total fees and other income
    
    
    28,005
    
    
    
    27,058
    
    
    
    30,925
    
    
    
    29,296
    
    
    
    30,596Investment securities gains (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Noninterest expense (1)
    
    
    74,301
    
    
    
    261,228
    
    
    
    76,562
    
    
    
    78,880
    
    
    
    77,343Income tax provision
    
    
    (10,192
    )
    
    
    (19,401
    )
    
    
    929
    
    
    
    8,582
    
    
    
    12,605Net income (loss)
    
    
    (7,176
    )
    
    
    (201,634
    )
    
    
    11,127
    
    
    
    27,967
    
    
    
    31,764Net income (loss) attributable to common shareholders (2)
    
    
    (18,913
    )
    
    
    (201,634
    )
    
    
    11,127
    
    
    
    27,967
    
    
    
    31,764Taxable equivalent adjustment
    
    
    4,593
    
    
    
    4,611
    
    
    
    4,679
    
    
    
    4,673
    
    
    
    4,620Cash dividends
    
    
    
    
    
    
    
    
    
    
    21,959
    
    
    
    21,941
    
    
    
    21,934Per Common Share DataBasic net income (loss)
    
    $
    (0.20
    )
    
    $
    (2.53
    )
    
    $
    0.15
    
    
    $
    0.37
    
    
    $
    0.42Diluted net income (loss)
    
    
    (0.20
    )
    
    
    (2.53
    )
    
    
    0.15
    
    
    
    0.37
    
    
    
    0.42Cash dividends
    
    
    
    
    
    
    
    
    
    
    0.290
    
    
    
    0.290
    
    
    
    0.290Market value (end of period)
    
    
    3.08
    
    
    
    2.82
    
    
    
    12.43
    
    
    
    14.51
    
    
    
    16.11Book value (end of period)
    
    
    12.20
    
    
    
    16.12
    
    
    
    20.82
    
    
    
    20.84
    
    
    
    20.65At Period End (millions)Assets
    
    $
    13,116
    
    
    $
    13,170
    
    
    $
    13,539
    
    
    $
    13,506
    
    
    $
    13,223Portfolio loans
    
    
    9,378
    
    
    
    9,449
    
    
    
    9,573
    
    
    
    9,501
    
    
    
    9,219Deposits
    
    
    9,006
    
    
    
    8,661
    
    
    
    8,487
    
    
    
    8,302
    
    
    
    7,942Shareholders equity
    
    
    1,537
    
    
    
    1,546
    
    
    
    1,577
    
    
    
    1,578
    
    
    
    1,562Average for the Quarter (millions)Assets
    
    $
    13,157
    
    
    $
    13,296
    
    
    $
    13,442
    
    
    $
    13,305
    
    
    $
    13,165Portfolio loans
    
    
    9,456
    
    
    
    9,514
    
    
    
    9,499
    
    
    
    9,335
    
    
    
    9,163Deposits
    
    
    8,837
    
    
    
    8,604
    
    
    
    8,417
    
    
    
    7,951
    
    
    
    8,049Shareholders equity
    
    
    1,551
    
    
    
    1,546
    
    
    
    1,579
    
    
    
    1,561
    
    
    
    1,536Ratios (annualized)Return on average assets
    
    
    (0.22
    )%
    
    
    (6.10
   )%
    
    
    0.33
    %
    
    
    0.83
    %
    
    
    0.96
    %Return on average shareholders equity
    
    
    (1.84
    )
    
    
    (52.47
    )
    
    
    2.83
    
    
    
    7.11
    
    
    
    8.20Average equity to average assets
    
    
    11.79
    
    
    
    11.62
    
    
    
    11.74
    
    
    
    11.73
    
    
    
    11.67Net interest margin (FTE) (3)
    
    
    3.09
    
    
    
    3.11
    
    
    
    3.12
    
    
    
    3.26
    
    
    
    3.39Efficiency ratio (4)
    
    
    61.96
    
    
    
    219.00
    
    
    
    61.79
    
    
    
    62.52
    
    
    
    59.45Net loans charged off to average portfolio loans
    
    
    0.94
    
    
    
    2.93
    
    
    
    0.74
    
    
    
    0.84
    
    
    
    0.34Allowance for loan losses to portfolio loans
    
    
    2.32
    
    
    
    1.92
    
    
    
    1.84
    
    
    
    1.72
    
    
    
    1.92Nonperforming assets to portfolio loans plus ORAA (end of period)
    
    
    3.87
    
    
    
    3.01
    
    
    
    3.39
    
    
    
    2.64
    
    
    
    2.06Nonperforming assets to total assets (end of period)


    2.78
    
    
    
    2.17
    
    
    
    2.41
    
    
    
    1.86
    
    
    
    1.44Tier 1 Leverage ratio
    
    
    8.76
    
    
    
    8.71
    
    
    
    7.40
    
    
    
    7.53
    
    
    
    7.49Tier 1 capital ratio
    
    
    10.88
    
    
    
    10.80
    
    
    
    9.04
    
    
    
    9.18
    
    
    
    9.28Total capital ratio
    
    
    13.13
    
    
    
    13.03
    
    
    
    11.26
    
    
    
    11.66
    
    
    
    11.79
 
 (1)
    
    Noninterest expense includes a goodwill impairment charge of $178.1 million in the second quarter of 2008 and restructuring and merger related expenses of
($0.4) million in the fourth quarter of 2007 and $1.0 million in the third quarter of 2007.(2)
    
    Net income (loss) attributable to common shareholders includes a non-cash $11.7 million deemed dividend to preferred shareholders in the third quarter of 2008.(3)
    
    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%.(4)
    
    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). 23




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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 for loan losses would cause Citizens net income to decline and could have a
negative impact on Citizens 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 Citizens 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 and retain core deposits, to obtain third
party financing on favorable terms, or to have access to interbank or other liquidity
sources (as a result of rating agency downgrades or other market factors), 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
 24




---



##### Table of Contents



financing, pay dividends from the subsidiaries to the Holding Company, attract deposits or
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.
    
    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 its results of operations.
    
    Citizens vendors could fail to fulfill their contractual obligations, resulting in a
material interruption in, or disruption to, its business and a negative impact on its
results of operations.
    
    Citizens potential inability to integrate acquired operations could have a negative
effect on Citizens expenses and results of operations.
    
    Events such as significant adverse changes in the business climate, adverse action by a
regulator, unanticipated changes in the competitive environment, and a decision to change
Citizens operations or dispose of an operating unit could have a negative effect on the
goodwill or other intangible assets Citizens recorded at the time of the Republic merger
such that it may need to record an impairment charge, which could result in a negative
impact on 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 and bylaws as well as certain banking laws may have
an anti-takeover effect.
  Critical Accounting Policies
  25




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##### Table of Contents



Fair Value Measurements
 Results of Operations
 Summary
    26




---



##### Table of Contents




    
    Centralized and upgraded the commercial real estate portfolio management team, which now
reports directly to the Chief Credit Officer and is comprised of 22 full-time equivalent
employees (FTE). The group continues to monitor closely the servicing performance of real
estate loans in the commercial portfolio, including age of appraisals, adherence to lot
release schedules, rent roll updates, construction costs within forecasts, and that guarantor
liquidity is affirmed by current financial statements; in short, that all aspects of the
transactions are current and performing according to terms;
 
    
    Expanded the size of the special loans workout team by 4 FTE, bringing the total to 28, to
support higher watchlist and nonperforming loan levels and improve oversight and monitoring of
action plans to remediate the credits;
 
    
    Transitioned mortgage servicing and collection activities to PHH Mortgage, a nationally
recognized servicing agent; and
 
    
    Tightened underwriting criteria for consumer loans to include:
 o

    Home equity loans: reduced maximum loan-to-value, or LTV, to 80% for primary residences
and 70% for secondary residences and discontinued lending on rental properties;o

     Indirect loans: increased credit score cutoffs to improve collateral positioning and
reduce risk, increased pricing spreads, and reduced advance rates.
   
    
    Added longer-term brokered certificates of deposit;
 
    
    Increased focus on cross-sales through its retail delivery channel;
 
    
    Conducted targeted marketing campaigns for deposits;
 
    
    Increased available collateral for Federal Home Loan Bank (FHLB) funding; and
 
    
    Increased discipline around loan funding and pricing to better align changes in loans
outstanding with funding, liquidity, and profitability objectives.
  
    
    Implemented new incentive plans that promote a focus on profitability with targeted returns
above Citizens cost of capital;
 
    
    Suspended the dividend, preserving $88 million annually (based on December 31, 2007 shares
outstanding and dividend rates);
 27




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##### Table of Contents




    
    Raised $200 million of additional capital (before issuance costs and underwriting discount
totaling $10.5 million); and
 
    
    Increased discipline around loan pricing to enhance returns on risk-adjusted capital,
emphasizing full-relationship banking and reducing capital intensive credit-only business.
  Regulatory Minimum
    
    
    
    
    
    
    
    
    
    
    
    
    
    Excess Capitalfor
    
    
    
    
    
    
    
    
    
    
    
    
    
    over MinimumWell-Capitalized
    
    9/30/08
    
    6/30/08
    
    3/31/08
    
    (in millions)Tier 1 capital ratio
    
    
    6.00
    %
    
    
    10.88
    %
    
    
    10.80
    %
    
    
    9.04
    %
    
    $
    493.2Total capital ratio
    
    
    10.00
    %
    
    
    13.13
    %
    
    
    13.03
    %
    
    
    11.26
    %
    
    $
    316.5Tier 1 leverage ratio
    
    
    5.00
    %
    
    
    8.76
    %
    
    
    8.71
    %
    
    
    7.40
    %
    
    $
    472.2Tangible common equity to tangible assets
    
    
    
    
    
    
    7.33
    %
    
    
    6.44
    %
    
    
    6.07
    %Tangible equity to tangible assets
    
    
    
    
    
    
    7.33
    %
    
    
    7.35
    %
    
    
    6.07
    %
 Net Interest Income and Net Interest Margin
  28




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##### Table of Contents



Average Balances/Net Interest Income/Average Rates
 2008
    
    
    2007Three Months Ended September 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    

Interest(1)
    
    

Rate(2)
    
    
    Balance
    
    
    Interest (1)
    
    
    Rate (2)Earning AssetsMoney market investments
    
    $
    31,955
    
    
    $
    160
    
    
    
    1.99
    %
    
    $
    2,822
    
    
    $
    53
    
    
    
    7.44
    %Investment securities (3):Taxable
    
    
    1,435,883
    
    
    
    18,275
    
    
    
    5.09
    
    
    
    1,650,012
    
    
    
    21,238
    
    
    
    5.15Tax-exempt
    
    
    674,102
    
    
    
    7,272
    
    
    
    6.64
    
    
    
    672,679
    
    
    
    7,310
    
    
    
    6.69FHLB and Federal Reserve stock
    
    
    148,782
    
    
    
    1,917
    
    
    
    5.13
    
    
    
    139,504
    
    
    
    1,603
    
    
    
    4.56Portfolio Loans (4):Commercial and industrial
    
    
    2,738,993
    
    
    
    36,633
    
    
    
    5.42
    
    
    
    2,135,927
    
    
    
    38,704
    
    
    
    7.31Commercial real estate
    
    
    3,087,556
    
    
    
    48,698
    
    
    
    6.28
    
    
    
    3,084,792
    
    
    
    60,203
    
    
    
    7.75Residential mortgage
    
    
    1,294,952
    
    
    
    19,100
    
    
    
    5.90
    
    
    
    1,472,544
    
    
    
    24,276
    
    
    
    6.59Direct consumer
    
    
    1,491,328
    
    
    
    24,858
    
    
    
    6.63
    
    
    
    1,617,340
    
    
    
    32,110
    
    
    
    7.88Indirect consumer
    
    
    843,549
    
    
    
    14,260
    
    
    
    6.73
    
    
    
    852,885
    
    
    
    14,511
    
    
    
    6.75Total portfolio loans
    
    
    9,456,378
    
    
    
    143,549
    
    
    
    6.07
    
    
    
    9,163,488
    
    
    
    169,804
    
    
    
    7.39Loans held for sale
    
    
    110,377
    
    
    
    550
    
    
    
    1.99
    
    
    
    79,333
    
    
    
    1,846
    
    
    
    9.18Total earning assets (3)
    
    
    11,857,477
    
    
    
    171,723
    
    
    
    5.92
    
    
    
    11,707,838
    
    
    
    201,854
    
    
    
    7.01Nonearning AssetsCash and due from banks
    
    
    221,332
    
    
    
    
    
    
    
    
    
    
    
    209,278Bank premises and equipment
    
    
    124,343
    
    
    
    
    
    
    
    
    
    
    
    132,459Investment security fair value adjustment
    
    
    850
    
    
    
    
    
    
    
    
    
    
    
    (5,393
    )Other nonearning assets
    
    
    1,140,661
    
    
    
    
    
    
    
    
    
    
    
    1,301,482Allowance for loan losses
    
    
    (187,981
    )
    
    
    
    
    
    
    
    
    
    
    (180,394
    )Total assets
    
    $
    13,156,682
    
    
    
    
    
    
    
    
    
    
    $
    13,165,270Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    788,495
    
    
    $
    1,333
    
    
    
    0.67
    %
    
    $
    811,955
    
    
    $
    1,325
    
    
    
    0.65
    %Savings deposits
    
    
    2,601,866
    
    
    
    10,414
    
    
    
    1.59
    
    
    
    2,165,386
    
    
    
    16,384
    
    
    
    3.00Time deposits
    
    
    4,300,715
    
    
    
    41,254
    
    
    
    3.82
    
    
    
    3,928,215
    
    
    
    46,671
    
    
    
    4.71Short-term borrowings
    
    
    226,893
    
    
    
    1,060
    
    
    
    1.86
    
    
    
    465,980
    
    
    
    5,439
    
    
    
    4.63Long-term debt
    
    
    2,420,601
    
    
    
    30,344
    
    
    
    4.99
    
    
    
    2,982,035
    
    
    
    37,162
    
    
    
    4.95Total interest-bearing liabilities
    
    
    10,338,570
    
    
    
    84,405
    
    
    
    3.25
    
    
    
    10,353,571
    
    
    
    106,981
    
    
    
    4.10Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    1,146,010
    
    
    
    
    
    
    
    
    
    
    
    1,143,917Other liabilities
    
    
    121,521
    
    
    
    
    
    
    
    
    
    
    
    131,837Shareholders equity
    
    
    1,550,581
    
    
    
    
    
    
    
    
    
    
    
    1,535,945Total liabilities and shareholders equity
    
    $
    13,156,682
    
    
    
    
    
    
    
    
    
    
    $
    13,165,270Net Interest Income
    
    
    
    
    
    $
    87,318
    
    
    
    
    
    
    
    
    
    
    $
    94,873Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    2.91
    %Contribution of noninterest bearing sources
of funds
    
    
    
    
    
    
    
    
    
    
    0.42
    
    
    
    
    
    
    
    
    
    
    
    0.48Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.09
    %
    
    
    
    
    
    
    
    
    
    
    3.39
    %
 
 (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 $4.6 million and $4.6 million for the three months ended
September 30, 2008 and 2007, 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. 29




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##### Table of Contents



Average Balances/Net Interest Income/Average Rates
 2008
    
    
    2007Nine Months Ended September 30,
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(dollars in thousands)
    
    Balance
    
    

Interest(1)
    
    

Rate(2)
    
    
    Balance
    
    
    Interest
(1)
    
    
    Rate
(2)Earning AssetsMoney market investments
    
    $
    13,011
    
    
    $
    206
    
    
    
    2.11
    %
    
    $
    2,150
    
    
    $
    89
    
    
    
    5.53
    %Investment securities (3):Taxable
    
    
    1,482,512
    
    
    
    58,319
    
    
    
    5.25
    
    
    
    1,770,676
    
    
    
    67,337
    
    
    
    5.07Tax-exempt
    
    
    674,529
    
    
    
    21,922
    
    
    
    6.67
    
    
    
    670,504
    
    
    
    21,947
    
    
    
    6.71FHLB and Federal Reserve stock


    148,819
    
    
    
    5,508
    
    
    
    4.94
    
    
    
    135,122
    
    
    
    4,736
    
    
    
    4.68Portfolio Loans (4):Commercial and industrial
    
    
    2,654,263
    
    
    
    109,764
    
    
    
    5.62
    
    
    
    2,055,575
    
    
    
    113,988
    
    
    
    7.54Commercial real estate
    
    
    3,129,542
    
    
    
    152,409
    
    
    
    6.51
    
    
    
    3,112,813
    
    
    
    179,722
    
    
    
    7.72Residential mortgage loans
    
    
    1,355,791
    
    
    
    62,867
    
    
    
    6.18
    
    
    
    1,504,709
    
    
    
    74,947
    
    
    
    6.64Direct consumer
    
    
    1,520,591
    
    
    
    77,967
    
    
    
    6.85
    
    
    
    1,656,050
    
    
    
    97,239
    
    
    
    7.85Indirect consumer
    
    
    829,704
    
    
    
    41,825
    
    
    
    6.73
    
    
    
    841,640
    
    
    
    42,400
    
    
    
    6.74Total portfolio loans
    
    
    9,489,891
    
    
    
    444,832
    
    
    
    6.29
    
    
    
    9,170,787
    
    
    
    508,296
    
    
    
    7.44Loans held for sale
    
    
    83,387
    
    
    
    2,447
    
    
    
    3.91
    
    
    
    105,815
    
    
    
    6,518
    
    
    
    8.17Total earning assets (3)
    
    
    11,892,149
    
    
    
    533,234
    
    
    
    6.14
    
    
    
    11,855,054
    
    
    
    608,923
    
    
    
    7.02Nonearning AssetsCash and due from banks
    
    
    206,709
    
    
    
    
    
    
    
    
    
    
    
    195,503Bank premises and equipment
    
    
    126,947
    
    
    
    
    
    
    
    
    
    
    
    137,428Investment security fair value adjustment
    
    
    17,354
    
    
    
    
    
    
    
    
    
    
    
    (677
    )Other nonearning assets
    
    
    1,231,893
    
    
    
    
    
    
    
    
    
    
    
    1,310,611Allowance for loan losses
    
    
    (177,119
    )
    
    
    
    
    
    
    
    
    
    
    (172,711
    )Total assets
    
    $
    13,297,933
    
    
    
    
    
    
    
    
    
    
    $
    13,325,208Interest-Bearing LiabilitiesDeposits:Interest-bearing demand
    
    $
    778,202
    
    
    $
    3,863
    
    
    
    0.66
    %
    
    $
    851,704
    
    
    $
    4,389
    
    
    
    0.69
    %Savings deposits
    
    
    2,553,627
    
    
    
    35,423
    
    
    
    1.85
    
    
    
    2,202,134
    
    
    
    48,827
    
    
    
    2.96Time deposits
    
    
    4,171,204
    
    
    
    128,427
    
    
    
    4.11
    
    
    
    4,046,052
    
    
    
    141,799
    
    
    
    4.69Short-term borrowings
    
    
    398,345
    
    
    
    7,867
    
    
    
    2.64
    
    
    
    702,992
    
    
    
    25,504
    
    
    
    4.85Long-term debt
    
    
    2,585,968
    
    
    
    94,409
    
    
    
    4.87
    
    
    
    2,676,820
    
    
    
    98,413
    
    
    
    4.91Total interest-bearing liabilities
    
    
    10,487,346
    
    
    
    269,989
    
    
    
    3.44
    
    
    
    10,479,702
    
    
    
    318,932
    
    
    
    4.07Noninterest-Bearing Liabilities and
Shareholders EquityNoninterest-bearing demand
    
    
    1,117,144
    
    
    
    
    
    
    
    
    
    
    
    1,142,272Other liabilities
    
    
    135,214
    
    
    
    
    
    
    
    
    
    
    
    156,845Shareholders equity
    
    
    1,558,229
    
    
    
    
    
    
    
    
    
    
    
    1,546,389Total liabilities and shareholders equity
    
    $
    13,297,933
    
    
    
    
    
    
    
    
    
    
    $
    13,325,208Net Interest Income
    
    
    
    
    
    $
    263,245
    
    
    
    
    
    
    
    
    
    
    $
    289,991Interest Spread(5)
    
    
    
    
    
    
    
    
    
    
    2.70
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %Contribution of noninterest bearing sources
of funds
    
    
    
    
    
    
    
    
    
    
    0.41
    
    
    
    
    
    
    
    
    
    
    
    0.47Net Interest Margin(5)(6)
    
    
    
    
    
    
    
    
    
    
    3.11
    %
    
    
    
    
    
    
    
    
    
    
    3.42
    %
 
 (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 $13.9 million and $13.9 million for the nine months ended
September 30, 2008 and 2007, 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. 30




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##### Table of Contents



31




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##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense
 Three Months Ended September 30,
    
    Nine Months Ended September 30,Increase (Decrease)
    
    
    
    
    
    Increase (Decrease)2008 compared with 2007
    
    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 on Earning Assets:Money market investments
    
    $
    107
    
    
    $
    (65
    )
    
    $
    172
    
    
    $
    117
    
    
    $
    (86
    )
    
    $
    203Investment securities:Taxable
    
    
    (2,963
    )
    
    
    (235
    )
    
    
    (2,728
    )
    
    
    (9,018
    )
    
    
    2,252
    
    
    
    (11,270
    )Tax-exempt
    
    
    (38
    )
    
    
    (53
    )
    
    
    15
    
    
    
    (25
    )
    
    
    (156
    )
    
    
    131FHLB and Federal Reserve stock


    314
    
    
    
    203
    
    
    
    111
    
    
    
    772
    
    
    
    275
    
    
    
    497Loans:Commercial and industrial
    
    
    (2,071
    )
    
    
    (11,514
    )
    
    
    9,443
    
    
    
    (4,224
    )
    
    
    (33,105
    )
    
    
    28,881Commercial real estate
    
    
    (11,505
    )
    
    
    (11,559
    )
    
    
    54
    
    
    
    (27,313
    )
    
    
    (28,290
    )
    
    
    977Residential mortgage loans
    
    
    (5,176
    )
    
    
    (2,413
    )
    
    
    (2,763
    )
    
    
    (12,080
    )
    
    
    (4,964
    )
    
    
    (7,116
    )Direct consumer
    
    
    (7,252
    )
    
    
    (4,881
    )
    
    
    (2,371
    )
    
    
    (19,272
    )
    
    
    (11,812
    )
    
    
    (7,460
    )Indirect consumer
    
    
    (251
    )
    
    
    (93
    )
    
    
    (158
    )
    
    
    (575
    )
    
    
    (74
    )
    
    
    (501
    )Total portfolio loans
    
    
    (26,255
    )
    
    
    (30,460
    )
    
    
    4,205
    
    
    
    (63,464
    )
    
    
    (78,245
    )
    
    
    14,781Loans held for sale
    
    
    (1,296
    )
    
    
    (1,830
    )
    
    
    534
    
    
    
    (4,071
    )
    
    
    (2,898
    )
    
    
    (1,173
    )Total
    
    
    (30,131
    )
    
    
    (32,440
    )
    
    
    2,309
    
    
    
    (75,689
    )
    
    
    (78,858
    )
    
    
    3,169Interest Expense on Interest-Bearing Liabilities:Deposits:Interest-bearing demand
    
    
    8
    
    
    
    47
    
    
    
    (39
    )
    
    
    (526
    )
    
    
    (165
    )
    
    
    (361
    )Savings
    
    
    (5,970
    )
    
    
    (8,806
    )
    
    
    2,836
    
    
    
    (13,404
    )
    
    
    (20,370
    )
    
    
    6,966Time
    
    
    (5,417
    )
    
    
    (9,561
    )
    
    
    4,144
    
    
    
    (13,372
    )
    
    
    (17,729
    )
    
    
    4,357Short-term borrowings
    
    
    (4,379
    )
    
    
    (2,360
    )
    
    
    (2,019
    )
    
    
    (17,637
    )
    
    
    (9,066
    )
    
    
    (8,571
    )Long-term debt
    
    
    (6,818
    )
    
    
    219
    
    
    
    (7,037
    )
    
    
    (4,004
    )
    
    
    (892
    )
    
    
    (3,112
    )Total
    
    
    (22,576
    )
    
    
    (20,461
    )
    
    
    (2,115
    )
    
    
    (48,943
    )
    
    
    (48,222
    )
    
    
    (721
    )Net Interest Income
    
    $
    (7,555
    )
    
    $
    (11,979
    )
    
    $
    4,424
    
    
    $
    (26,746
    )
    
    $
    (30,636
    )
    
    $
    3,890
 
 (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.    32




---



##### Table of Contents



Noninterest Income
  Noninterest Income
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change in 2008
    
    September 30,
    
    Change in 2008(dollars in thousands)
    
    2008
    
    2007
    
    Amount
    
    Percent
    
    2008
    
    2007
    
    Amount
    
    PercentService charges on deposit accounts
    
    $
    12,254
    
    
    $
    12,515
    
    
    $
    (261
    )
    
    
    (2.1
    )%
    
    $
    35,756
    
    
    $
    35,701
    
    
    $
    55
    
    
    
    0.2
    %Trust fees
    
    
    4,513
    
    
    
    4,973
    
    
    
    (460
    )
    
    
    (9.2
    )
    
    
    13,905
    
    
    
    14,931
    
    
    
    (1,026
    )
    
    
    (6.9
    )Mortgage and other loan income
    
    
    3,269
    
    
    
    2,939
    
    
    
    330
    
    
    
    11.2
    
    
    
    9,636
    
    
    
    13,334
    
    
    
    (3,698
    )
    
    
    (27.7
    )Brokerage and investment fees
    
    
    1,376
    
    
    
    2,141
    
    
    
    (765
    )
    
    
    (35.7
    )
    
    
    5,503
    
    
    
    5,872
    
    
    
    (369
    )
    
    
    (6.3
    )ATM network user fees
    
    
    1,715
    
    
    
    1,601
    
    
    
    114
    
    
    
    7.0
    
    
    
    4,805
    
    
    
    4,820
    
    
    
    (15
    )
    
    
    (0.3
    )Bankcard fees
    
    
    1,874
    
    
    
    1,695
    
    
    
    179
    
    
    
    10.6
    
    
    
    5,542
    
    
    
    4,318
    
    
    
    1,224
    
    
    
    28.3Gains (losses) on held or sale loans
    
    
    (1,261
    )
    
    
    
    
    
    
    (1,261
    )
    
    
    N/M
    
    
    
    (3,508
    )
    
    
    
    
    
    
    (3,508
    )
    
    
    N/MOther income
    
    
    4,265
    
    
    
    4,732
    
    
    
    (467
    )
    
    
    (9.9
    )
    
    
    14,349
    
    
    
    14,321
    
    
    
    28
    
    
    
    0.2Total fees and other income
    
    
    28,005
    
    
    
    30,596
    
    
    
    (2,591
    )
    
    
    (8.5
    )
    
    
    85,988
    
    
    
    93,297
    
    
    
    (7,309
    )
    
    
    (7.8
    )Investment securities gains
    
    
    
    
    
    
    8
    
    
    
    (8
    )
    
    
    (100.0
    )
    
    
    
    
    
    
    (25
    )
    
    
    25
    
    
    
    100.0Total noninterest income
    
    $
    28,005
    
    
    $
    30,604
    
    
    $
    (2,599
    )
    
    
    (8.5
    )
    
    $
    85,988
    
    
    $
    93,272
    
    
    $
    (7,284
    )
    
    
    (7.8
    )
 
 N/M  Not Meaningful   33




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##### Table of Contents



Noninterest Expense
 Noninterest Expense
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change in 2008
    
    September 30,
    
    Change in 2008(dollars in thousands)
    
    2008
    
    2007
    
    Amount
    
    Percent
    
    2008
    
    2007
    
    Amount
    
    PercentSalaries and employee benefits
    
    $
    39,728
    
    
    $
    42,115
    
    
    $
    (2,387
    )
    
    
    (5.7
    )%
    
    $
    120,999
    
    
    $
    132,251
    
    
    $
    (11,252
    )
    
    
    (8.5)
    %Occupancy
    
    
    6,749
    
    
    
    7,377
    
    
    
    (628
    )
    
    
    (8.5
    )
    
    
    21,378
    
    
    
    23,363
    
    
    
    (1,985
    )
    
    
    (8.5
    )Professional services
    
    
    3,246
    
    
    
    5,096
    
    
    
    (1,850
    )
    
    
    (36.3
    )
    
    
    11,540
    
    
    
    13,599
    
    
    
    (2,059
    )
    
    
    (15.1
    )Equipment
    
    
    3,160
    
    
    
    3,227
    
    
    
    (67
    )
    
    
    (2.1
    )
    
    
    9,810
    
    
    
    10,793
    
    
    
    (983
    )
    
    
    (9.1
    )Data processing services
    
    
    4,185
    
    
    
    3,724
    
    
    
    461
    
    
    
    12.4
    
    
    
    12,722
    
    
    
    12,360
    
    
    
    362
    
    
    
    2.9Advertising and public relations
    
    
    1,297
    
    
    
    1,003
    
    
    
    294
    
    
    
    29.4
    
    
    
    4,593
    
    
    
    6,070
    
    
    
    (1,477
    )
    
    
    (24.3
    )Postage and delivery
    
    
    1,626
    
    
    
    1,777
    
    
    
    (151
    )
    
    
    (8.5
    )
    
    
    5,411
    
    
    
    5,937
    
    
    
    (526
    )
    
    
    (8.9
    )Other loan expenses
    
    
    2,755
    
    
    
    1,245
    
    
    
    1,510
    
    
    
    121.2
    
    
    
    8,014
    
    
    
    3,237
    
    
    
    4,777
    
    
    
    147.6ORE expenses, profits, and losses, net
    
    
    1,825
    
    
    
    360
    
    
    
    1,465
    
    
    
    406.8
    
    
    
    9,461
    
    
    
    394
    
    
    
    9,067
    
    
    
    2,302.2Intangible asset amortization
    
    
    2,226
    
    
    
    2,803
    
    
    
    (577
    )
    
    
    (20.6
    )
    
    
    7,006
    
    
    
    8,875
    
    
    
    (1,869
    )
    
    
    (21.1
    )Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/M
    
    
    
    178,089
    
    
    
    
    
    
    
    178,089
    
    
    
    N/MRestructuring and merger-related expenses
    
    
    
    
    
    
    1,009
    
    
    
    (1,009
    )
    
    
    N/M
    
    
    
    
    
    
    
    8,603
    
    
    
    (8,603
    )
    
    
    N/MOther expenses
    
    
    7,504
    
    
    
    7,607
    
    
    
    (103
    )
    
    
    (1.4
    )
    
    
    23,068
    
    
    
    23,061
    
    
    
    7
    
    
    
    0.0Total noninterest expense
    
    $
    74,301
    
    
    $
    77,343
    
    
    $
    (3,042
    )
    
    
    (3.9
    )
    
    $
    412,091
    
    
    $
    248,543
    
    
    $
    163,548
    
    
    
    65.8
 
 N/M  Not Meaningful     Income Taxes
  34




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##### Table of Contents



Lines of Business Results
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Specialty Commercial
    
    $
    (21,619
    )
    
    $
    12,574
    
    
    $
    (215,538
    )
    
    $
    16,526Regional Banking
    
    
    16,096
    
    
    
    20,618
    
    
    
    37,511
    
    
    
    60,572Wealth Management
    
    
    321
    
    
    
    1,114
    
    
    
    1,796
    
    
    
    2,486Other
    
    
    (1,974
    )
    
    
    (2,542
    )
    
    
    (21,452
    )
    
    
    (6,709
    )Net Income (Loss)
    
    $
    (7,176
    )
    
    $
    31,764
    
    
    $
    (197,683
    )
    
    $
    72,875
 Specialty Commercial
  Regional Banking
  35




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##### Table of Contents



Wealth Management
  Other
  Financial Condition
  Investment Securities
   Portfolio Loans
   36




---



##### Table of Contents



Commercial Loan Portfolio
 Sep 30
    
    
    Jun 30
    
    
    Mar 31
    
    
    Dec 31
    
    
    Sep 30in millions
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007Land Hold
    
    $
    48.3
    
    
    $
    49.8
    
    
    $
    61.6
    
    
    $
    63.8
    
    
    $
    78.9Land Development
    
    
    125.0
    
    
    
    128.2
    
    
    
    159.2
    
    
    
    167.8
    
    
    
    161.0Construction
    
    
    364.2
    
    
    
    344.1
    
    
    
    370.7
    
    
    
    342.6
    
    
    
    376.3Income Producing
    
    
    1,533.2
    
    
    
    1,569.9
    
    
    
    1,567.3
    
    
    
    1,526.0
    
    
    
    1,338.8Owner-Occupied
    
    
    999.6
    
    
    
    1,009.3
    
    
    
    1,015.6
    
    
    
    997.0
    
    
    
    1,113.5Total Commercial Real
Estate
    
    
    3,070.3
    
    
    
    3,101.3
    
    
    
    3,174.4
    
    
    
    3,097.2
    
    
    
    3,068.5Commercial and Industrial
    
    
    2,703.7
    
    
    
    2,703.8
    
    
    
    2,653.8
    
    
    
    2,557.1
    
    
    
    2,236.2Total Commercial Loans
    
    $
    5,774.0
    
    
    $
    5,805.1
    
    
    $
    5,828.2
    
    
    $
    5,654.3
    
    
    $
    5,304.7
       
    
    Delinquency Rates by Loan Portfolio  This table illustrates the loans where the
contractual payment is 30 to 89 days past due and interest is still accruing. While these
loans are actively worked to bring them current, past due loan trends may be a leading
indicator of potential future nonperforming loans and charge-offs.
 
    
    Commercial Watchlist  This table illustrates the commercial loans that, while still
accruing interest, may be at risk due to general economic conditions or changes in a
borrowers financial status.
 37




---



##### Table of Contents




    
    Nonperforming Assets (3-quarter and 5-quarter versions)  These tables illustrate the loans
that are in nonaccrual status, loans past due 90 days or more on which interest is still
accruing, nonperforming loans that are held for sale, and other repossessed assets acquired.
The commercial loans included in these tables are reviewed as part of the watchlist process in
addition to the loans displayed in the commercial watchlist table.
 
    
    Analysis of Allowance for Loan Losses  This table illustrates the changes that result in
the period-end allowance for loan losses position.
 
    
    Net Charge-Offs  This table illustrates the portion of loans that have been charged-off
during each quarter.
 Delinquency Rates by Loan Portfolio
  Table 1  Delinquency Rates By Loan Portfolio
 30 to 89 days Past Due
    
    Sep 30, 2008
    
    
    Jun 30, 2008
    
    
    Mar 31, 2008
    
    
    Dec 31, 2007
    
    
    Sep 30, 2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofin millions
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    PortfolioLand Hold
    
    $
    7.3
    
    
    
    15.11
    %
    
    $
    9.3
    
    
    
    18.67
    %
    
    $
    6.6
    
    
    
    10.71
    %
    
    $
    4.6
    
    
    
    7.21
    %
    
    $
    4.2
    
    
    
    5.32
    %Land Development
    
    
    10.3
    
    
    
    8.24
    
    
    
    1.1
    
    
    
    0.86
    
    
    
    16.3
    
    
    
    10.24
    
    
    
    28.7
    
    
    
    17.10
    
    
    
    18.4
    
    
    
    11.43Construction
    
    
    26.1
    
    
    
    7.17
    
    
    
    11.9
    
    
    
    3.46
    
    
    
    10.5
    
    
    
    2.83
    
    
    
    31.7
    
    
    
    9.25
    
    
    
    17.6
    
    
    
    4.68Income Producing
    
    
    50.1
    
    
    
    3.27
    
    
    
    48.5
    
    
    
    3.09
    
    
    
    29.3
    
    
    
    1.87
    
    
    
    54.0
    
    
    
    3.54
    
    
    
    31.2
    
    
    
    2.33Owner-Occupied
    
    
    21.3
    
    
    
    2.13
    
    
    
    18.6
    
    
    
    1.84
    
    
    
    19.0
    
    
    
    1.87
    
    
    
    20.3
    
    
    
    2.04
    
    
    
    10.8
    
    
    
    0.97Total Commercial Real Estate
    
    
    115.1
    
    
    
    3.75
    
    
    
    89.4
    
    
    
    2.88
    
    
    
    81.7
    
    
    
    2.57
    
    
    
    139.3
    
    
    
    4.50
    
    
    
    82.2
    
    
    
    2.68Commercial and Industrial
    
    
    29.1
    
    
    
    1.08
    
    
    
    29.5
    
    
    
    1.09
    
    
    
    39.9
    
    
    
    1.50
    
    
    
    39.0
    
    
    
    1.53
    
    
    
    22.0
    
    
    
    0.98Total Commercial Loans
    
    
    144.2
    
    
    
    2.50
    
    
    
    118.9
    
    
    
    2.05
    
    
    
    121.6
    
    
    
    2.09
    
    
    
    178.3
    
    
    
    3.15
    
    
    
    104.2
    
    
    
    1.96Residential Mortgage
    
    
    37.7
    
    
    
    2.95
    
    
    
    38.5
    
    
    
    2.94
    
    
    
    33.5
    
    
    
    2.40
    
    
    
    46.4
    
    
    
    3.21
    
    
    
    37.7
    
    
    
    2.58Direct Consumer
    
    
    19.5
    
    
    
    1.32
    
    
    
    18.4
    
    
    
    1.22
    
    
    
    21.7
    
    
    
    1.42
    
    
    
    24.3
    
    
    
    1.55
    
    
    
    21.5
    
    
    
    1.34Indirect Consumer
    
    
    13.6
    
    
    
    1.61
    
    
    
    14.4
    
    
    
    1.73
    
    
    
    13.3
    
    
    
    1.62
    
    
    
    15.9
    
    
    
    1.92
    
    
    
    14.7
    
    
    
    1.73Total Delinquent Loans
    
    $
    215.0
    
    
    
    2.29
    %
    
    $
    190.2
    
    
    
    2.01
    %
    
    $
    190.1
    
    
    
    1.99
    %
    
    $
    264.9
    
    
    
    2.79
    %
    
    $
    178.1
    
    
    
    1.93
    %
  Commercial Watchlist
  38




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##### Table of Contents



Table 2  Commercial Watchlist
 Accruing loans only
    
    Sep 30, 2008
    
    
    Jun 30, 2008
    
    
    Mar 31, 2008
    
    
    Dec 31, 2007
    
    
    Sep 30, 2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofin millions
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    PortfolioLand Hold
    
    $
    20.7
    
    
    
    42.86
    %
    
    $
    24.2
    
    
    
    48.59
    %
    
    $
    27.7
    
    
    
    44.97
    %
    
    $
    27.1
    
    
    
    42.48
    %
    
    $
    27.0
    
    
    
    34.22
    %Land Development
    
    
    51.8
    
    
    
    41.44
    
    
    
    47.5
    
    
    
    37.05
    
    
    
    55.9
    
    
    
    35.11
    
    
    
    72.7
    
    
    
    43.33
    
    
    
    52.3
    
    
    
    32.48Construction
    
    
    104.8
    
    
    
    28.78
    
    
    
    86.3
    
    
    
    25.08
    
    
    
    66.7
    
    
    
    17.99
    
    
    
    90.1
    
    
    
    26.30
    
    
    
    91.7
    
    
    
    24.37Income Producing
    
    
    290.3
    
    
    
    18.93
    
    
    
    239.3
    
    
    
    15.24
    
    
    
    221.3
    
    
    
    14.12
    
    
    
    225.5
    
    
    
    14.78
    
    
    
    173.8
    
    
    
    12.98Owner-Occupied
    
    
    167.0
    
    
    
    16.71
    
    
    
    161.8
    
    
    
    16.03
    
    
    
    155.8
    
    
    
    15.34
    
    
    
    153.0
    
    
    
    15.35
    
    
    
    213.0
    
    
    
    19.13Total Commercial Real Estate
    
    
    634.6
    
    
    
    20.67
    
    
    
    559.1
    
    
    
    18.03
    
    
    
    527.4
    
    
    
    16.61
    
    
    
    568.4
    
    
    
    18.35
    
    
    
    557.8
    
    
    
    18.18Commercial and Industrial
    
    
    431.2
    
    
    
    15.95
    
    
    
    432.5
    
    
    
    16.00
    
    
    
    407.1
    
    
    
    15.34
    
    
    
    387.4
    
    
    
    15.15
    
    
    
    362.4
    
    
    
    16.21Total Watchlist Loans
    
    $
    1,065.8
    
    
    
    18.46
    %
    
    $
    991.6
    
    
    
    17.08
    %
    
    $
    934.5
    
    
    
    16.03
    %
    
    $
    955.8
    
    
    
    16.90
    %
    
    $
    920.2
    
    
    
    17.35
    %
  Nonperforming Assets
  Nonperforming Assets
 September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2007Nonperforming LoansCommercial and industrial
    
    $
    38,168
    
    
    $
    12,659
    
    
    $
    9,386Commercial real estate
    
    
    132,629
    
    
    
    110,159
    
    
    
    97,557Total commercial
    
    
    170,797
    
    
    
    122,818
    
    
    
    106,943Residential mortgage
    
    
    40,234
    
    
    
    46,865
    
    
    
    32,824Direct consumer
    
    
    16,270
    
    
    
    13,657
    
    
    
    10,926Indirect consumer
    
    
    2,090
    
    
    
    2,057
    
    
    
    1,806Total consumer
    
    
    18,360
    
    
    
    15,714
    
    
    
    12,732Total nonaccrual loans
    
    
    229,391
    
    
    
    185,397
    
    
    
    152,499Loans 90 days past due and still accruing
    
    
    1,635
    
    
    
    3,650
    
    
    
    1,923Restructured loans
    
    
    271
    
    
    
    315
    
    
    
    332Total nonperforming portfolio loans
    
    
    231,297
    
    
    
    189,362
    
    
    
    154,754Nonperforming loans held for sale
    
    
    86,645
    
    
    
    21,676
    
    
    
    5,846Other Repossessed Assets Acquired (ORAA)
    
    
    46,459
    
    
    
    40,502
    
    
    
    30,395Total nonperforming assets
    
    $
    364,401
    
    
    $
    251,540
    
    
    $
    190,995Nonperforming assets as a percent of portfolio loans plus ORAA (1)
    
    
    3.87
    %
    
    
    2.64
    %
    
    
    2.06
    %Nonperforming assets as a percent of total assets
    
    
    2.78
    
    
    
    1.86
    
    
    
    1.44Allowance for loan loss as a percent of nonperforming loans
    
    
    94.13
    
    
    
    86.26
    
    
    
    114.35Allowance for loan loss as a percent of nonperforming assets
    
    
    59.75
    
    
    
    64.94
    
    
    
    92.65
 
 (1)
    
    Portfolio loans exclude mortgage loans held for sale.  39




---



##### Table of Contents



Table 3  Nonperforming Assets
 Sep 30, 2008
    
    
    Jun 30, 2008
    
    
    Mar 31, 2008
    
    
    Dec 31, 2007
    
    
    Sep 30, 2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofin millions
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    Portfolio
    
    
    $
    
    
    PortfolioLand Hold
    
    $
    11.0
    
    
    
    22.77
    %
    
    $
    3.4
    
    
    
    6.83
    %
    
    $
    5.5
    
    
    
    8.93
    %
    
    $
    4.5
    
    
    
    7.05
    %
    
    $
    3.0
    
    
    
    3.80
    %Land Development
    
    
    20.6
    
    
    
    16.48
    
    
    
    22.8
    
    
    
    17.78
    
    
    
    46.4
    
    
    
    29.15
    
    
    
    35.6
    
    
    
    21.22
    
    
    
    40.4
    
    
    
    25.09Construction
    
    
    25.7
    
    
    
    7.06
    
    
    
    12.6
    
    
    
    3.66
    
    
    
    51.9
    
    
    
    14.00
    
    
    
    28.8
    
    
    
    8.41
    
    
    
    18.6
    
    
    
    4.94Income Producing
    
    
    57.6
    
    
    
    3.76
    
    
    
    23.1
    
    
    
    1.47
    
    
    
    40.5
    
    
    
    2.58
    
    
    
    21.5
    
    
    
    1.41
    
    
    
    26.5
    
    
    
    1.98Owner-Occupied
    
    
    17.7
    
    
    
    1.77
    
    
    
    13.1
    
    
    
    1.30
    
    
    
    23.5
    
    
    
    2.31
    
    
    
    19.7
    
    
    
    1.98
    
    
    
    9.0
    
    
    
    0.81Total Commercial Real Estate
    
    
    132.6
    
    
    
    4.32
    
    
    
    75.0
    
    
    
    2.42
    
    
    
    167.8
    
    
    
    5.29
    
    
    
    110.1
    
    
    
    3.55
    
    
    
    97.5
    
    
    
    3.18Commercial and Industrial
    
    
    38.2
    
    
    
    1.41
    
    
    
    31.6
    
    
    
    1.17
    
    
    
    20.3
    
    
    
    0.76
    
    
    
    12.7
    
    
    
    0.50
    
    
    
    9.4
    
    
    
    0.42Total Nonperforming Commercial
Loans
    
    
    170.8
    
    
    
    2.96
    
    
    
    106.6
    
    
    
    1.84
    
    
    
    188.1
    
    
    
    3.23
    
    
    
    122.8
    
    
    
    2.17
    
    
    
    106.9
    
    
    
    2.02Residential Mortgage
    
    
    40.2
    
    
    
    3.14
    
    
    
    12.4
    
    
    
    0.95
    
    
    
    45.8
    
    
    
    3.29
    
    
    
    46.9
    
    
    
    3.25
    
    
    
    32.8
    
    
    
    2.25Direct Consumer
    
    
    16.3
    
    
    
    1.10
    
    
    
    16.3
    
    
    
    1.09
    
    
    
    13.5
    
    
    
    0.88
    
    
    
    13.7
    
    
    
    0.87
    
    
    
    10.9
    
    
    
    0.68Indirect Consumer
    
    
    2.1
    
    
    
    0.25
    
    
    
    1.4
    
    
    
    0.17
    
    
    
    1.7
    
    
    
    0.21
    
    
    
    2.1
    
    
    
    0.25
    
    
    
    1.8
    
    
    
    0.21Loans 90+ days still
accruing and restructured
    
    
    1.9
    
    
    
    0.02
    
    
    
    2.5
    
    
    
    0.03
    
    
    
    4.4
    
    
    
    0.05
    
    
    
    3.9
    
    
    
    0.04
    
    
    
    2.4
    
    
    
    0.03Total Nonperforming Portfolio Loans
    
    
    231.3
    
    
    
    2.47
    %
    
    
    139.2
    
    
    
    1.47
    %
    
    
    253.5
    
    
    
    2.65
    %
    
    
    189.4
    
    
    
    1.99
    %
    
    
    154.8
    
    
    
    1.68
    %Nonperforming Held for Sale
    
    
    86.6
    
    
    
    
    
    
    
    92.6
    
    
    
    
    
    
    
    22.8
    
    
    
    
    
    
    
    21.6
    
    
    
    
    
    
    
    5.8Other Repossessed Assets Acquired
    
    
    46.5
    
    
    
    
    
    
    
    54.1
    
    
    
    
    
    
    
    50.3
    
    
    
    
    
    
    
    40.5
    
    
    
    
    
    
    
    30.4Total Nonperforming Assets
    
    $
    364.4
    
    
    
    
    
    
    $
    285.9
    
    
    
    
    
    
    $
    326.6
    
    
    
    
    
    
    $
    251.5
    
    
    
    
    
    
    $
    191.0
  Allowance for Loan Losses, Provision for Loan Losses, and Net Charge-Offs
  40




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##### Table of Contents



Analysis of Allowance for Loan Losses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Allowance for loan losses  beginning of period
    
    $
    181,718
    
    
    $
    181,118
    
    
    $
    163,353
    
    
    $
    169,104Provision for loan losses
    
    
    58,390
    
    
    
    3,765
    
    
    
    163,489
    
    
    
    39,122Charge-offs
    
    
    25,309
    
    
    
    9,990
    
    
    
    114,958
    
    
    
    38,201Recoveries
    
    
    2,928
    
    
    
    2,065
    
    
    
    5,843
    
    
    
    6,933Net charge-offs
    
    
    22,381
    
    
    
    7,925
    
    
    
    109,115
    
    
    
    31,268Allowance for loan losses  end of period
    
    $
    217,727
    
    
    $
    176,958
    
    
    $
    217,727
    
    
    $
    176,958Portfolio loans outstanding at period end (1)
    
  $
    9,378,198
    
    
    $
    9,219,226
    
    
    $
    9,378,198
    
    
    $
    9,219,226Average portfolio loans outstanding during period (1)
    
    
    9,456,378
    
    
    
    9,163,,488
    
    
    
    9,489,891
    
    
    
    9,170,787Allowance for loan losses as a percentage of portfolio loans
    
    
    2.32
    %
    
    
    1.92
    %
    
    
    2.32
    %
    
    
    1.92
    %Ratio of net charge-offs during period to average portfolio
loans (annualized)
    
    
    0.94
    
    
    
    0.34
    
    
    
    1.54
    
    
    
    0.46
 
 (1)
    
    Balances exclude mortgage loans held for sale.  Table 4  Net Charge-Offs
 Three Months EndedSep 30, 2008
    
    
    Jun 30, 2008
    
    
    Mar 31, 2008
    
    
    Dec 31, 2007
    
    
    Sep 30, 2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofin millions
    
    $
    
    
    Portfolio**
    
    
    $
    
    
    Portfolio**
    
    
    $
    
    
    Portfolio**
    
    
    $
    
    
    Portfolio**
    
    
    $
    
    
    Portfolio**Land Hold
    
    $
    1.7
    
    
    
    14.08
    %
    
    $
    0.7
    
    
    
    5.62
    %
    
    $
    0.5
    
    
    
    3.25
    %
    
    $
    0.4
    
    
    
    2.51
    %
    
    $
    
    
    
    
    
    %Land Development
    
    
    6.9
    
    
    
    22.08
    
    
    
    16.4
    
    
    
    51.17
    
    
    
    6.6
    
    
    
    16.58
    
    
    
    6.3
    
    
    
    15.02
    
    
    
    0.4
    
    
    
    0.99Construction
    
    
    0.5
    
    
    
    0.55
    
    
    
    13.8
    
    
    
    16.04
    
    
    
    1.2
    
    
    
    1.29
    
    
    
    1.8
    
    
    
    2.10
    
    
    
    0.1
    
    
    
    0.11Income Producing
    
    
    4.4
    
    
    
    1.15
    
    
    
    7.7
    
    
    
    1.96
    
    
    
    0.9
    
    
    
    0.23
    
    
    
    2.4
    
    
    
    0.63
    
    
    
    0.1
    
    
    
    0.03Owner-Occupied
    
    
    1.3
    
    
    
    0.52
    
    
    
    3.4
    
    
    
    1.35
    
    
    
    (0.1
    )
    
    
    (0.04
    )
    
    
    (0.2
    )
    
    
    (0.08
    )
    
    
    0.6
    
    
    
    0.22Total Commercial Real Estate
    
    
    14.8
    
    
    
    1.93
    
    
    
    42.0
    
    
    
    5.42
    
    
    
    9.1
    
    
    
    1.15
    
    
    
    10.7
    
    
    
    1.38
    
    
    
    1.2
    
    
    
    0.16Commercial and Industrial
    
    
    0.4
    
    
    
    0.06
    
    
    
    0.6
    
    
    
    0.09
    
    
    
    0.9
    
    
    
    0.14
    
    
    
    1.4
    
    
    
    0.22
    
    
    
    0.6
    
    
    
    0.11Total Commercial Loans
    
    
    15.2
    
    
    
    1.05
    
    
    
    42.6
    
    
    
    2.94
    
    
    
    10.0
    
    
    
    0.69
    
    
    
    12.1
    
    
    
    0.86
    
    
    
    1.8
    
    
    
    0.14Residential Mortgage
    
    
    0.5
    
    
    
    0.16
    
    
    
    20.7
    
    
    
    6.33
    
    
    
    1.8
    
    
    
    0.52
    
    
    
    2.0
    
    
    
    0.55
    
    
    
    1.6
    
    
    
    0.44Direct Consumer
    
    
    3.3
    
    
    
    0.89
    
    
    
    3.1
    
    
    
    0.83
    
    
    
    3.0
    
    
    
    0.79
    
    
    
    2.3
    
    
    
    0.59
    
    
    
    2.6
    
    
    
    0.65Indirect Consumer
    
    
    3.4
    
    
    
    1.61
    
    
    
    2.9
    
    
    
    1.39
    
    
    
    2.6
    
    
    
    1.27
    
    
    
    3.3
    
    
    
    1.59
    
    
    
    1.9
    
    
    
    0.88Total Net Charge-offs
    
    $
    22.4
    
    
    
    0.94
    %
    
    $
    69.3
    
    
    
    2.93
    %
    
    $
    17.4
    
    
    
    0.74
    %
    
    $
    19.7
    
    
    
    0.84
    %
    
    $
    7.9
    
    
    
    0.34
    %
 
 **
    
    Represents an annualized rate.    41




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##### Table of Contents



Loans Held for Sale
 Goodwill
 Deposits
 42




---



##### Table of Contents



Borrowed Funds
   Capital Resources
 Capital Ratios
 Regulatory MinimumWell-
    
    September 30,
    
    December 31,
    
    September 30,Required
    
    Capitalized
    
    2008
    
    2007
    
    2007Risk based:Tier 1 capital
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    10.88
    %
    
    
    9.18
    %
    
    
    9.28
    %Total capital
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.13
    
    
    
    11.66
    
    
    
    11.79Tier 1 Leverage
    
    
    4.00
    
    
    
    5.00
    
    
    
    8.76
    
    
    
    7.53
    
    
    
    7.49
  43




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##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
 Liquidity and Debt Capacity
    44




---



##### Table of Contents



Credit Ratings
 Moodys
    
    
    
    
    
    DominionStandard &
    
    Investor
    
    Fitch
    
    Bond RatingPoors
    
    Service
    
    Ratings
    
    SeerviceCitizen Republic Bancorp(Holding Company)Long-Term Debt
    
    BBB-
    
    
    A3
    
    
    BBB-
    
    BBBShort-Term Debt
    
    
    A-3
    
    
    P
    -2
    
    
    
    F3
    
    
    R-2 (middle)Trust Preferred
    
    BB
    
    Baa 1
    
    BB+
    
    BBB (low)Citizens BankCertificate of Deposit
    
    
    
    
    
    
    A2
    
    
    BBB
    
    BBB (high)F & M Bank-lowaCertificate of Deposit
    
    
    
    
    
    
    
    
    
    BBB
    
    BBB (high)
 Interest Rate Risk
  45




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##### Table of Contents



46




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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
   Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
 Form 10-K.
 47




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Total Number ofShares Purchased as
    
    
    Maximum Number ofPart of Publicly
    
    
    Shares That May YetTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Be Purchased UnderPeriod
    
    Shares Purchased
    
    
    Per Share
    
    
    Programs
    
    
    The Plans or ProgramsJuly 2008
    
    
    38
    (a)
    
    
    2.54
    
    
    
    
    
    
    
    1,241,154August 2008
    
    
    166
    (a)
    
    
    3.88
    
    
    
    
    
    
    
    1,241,154September 2008
    
    
    729
    (a)
    
    
    4.87
    
    
    
    
    
    
    
    1,241,154Total
    
    
    933
    
    
    
    4.60
    
    
    
    
    
    
    
    1,241,154
 
 (a)
    
    Shares repurchased in connection with taxes due from employees as a result of the vesting of
certain restricted share awards in accordance with the related grant agreements. These
repurchases were not part of the repurchase program approved in October 2003. ®
 
 Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    
    Against
    
    
    Abstain
    
    
    Broker 
Non-VotesApprove amendment
to Article III of
the Corporations
Amended and
Restated Articles
of Incorporation
    
    
    75,422,010
    
    
    
    4,718,747
    
    
    
    621,173
    
    
    
    205,108
 
 Item 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of Citizens Republic Bancorp, Inc., as
amended through September 23, 200810.43
    
    2008 Management Incentive Plan* (incorporated by reference from Citizens Current
Report on Form 8-K filed September 17, 2008)10.44
    
    Agreement between Citizens Republic Bancorp, Inc., and Clinton A. Sampson, dated November 4, 2008.31.1
    
    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. 48




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##### Table of Contents



SIGNATURES
   Date: November 10, 2008
By
    /s/ Charles D. ChristyCharles D. ChristyChief Financial Officer

     (principal financial officer and duly authorized officer) 49




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##### Table of Contents



10-Q EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of Citizens Republic Bancorp, Inc., as
amended through September 23, 200810.43
    
    2008 Management Incentive Plan* (incorporated by reference from Citizens Current
Report on Form 8-K filed September 17, 2008)10.44
    
    Agreement between Citizens Republic Bancorp, Inc., and Clinton A. Sampson, dated November 4, 2008.31.1
    
    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. 50