Citizens Republic Bancorp (CTZ+A) 10-Q 2011 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

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.

(Exact name of registrant as specified in its charter)

MICHIGAN	38-2378932
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
328 S. Saginaw St., Flint, Michigan	48502
(Address of principal executive offices)	(Zip Code)

(810) 766-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 29, 2011
Common Stock, No Par Value	397,777,045 Shares

Citizens Republic Bancorp, Inc.
Index to Form 10-Q

	Page
Part I — Financial Information (unaudited)
Item 1 — Financial Statements (unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Changes in Shareholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3 — Quantitative and Qualitative Disclosures about Market Risk		58
Item 4 — Controls and Procedures		58
Part II — Other Information
Item 1A — Risk Factors		59
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3 — Defaults Upon Senior Securities		59
Item 6 — Exhibits		60
Signatures		61
Exhibit Index		62
EX-10.63
EX-10.64
EX-31.1
EX-31.2
EX-32.1

2

Consolidated Balance Sheets (Unaudited)
Citizens Republic Bancorp, Inc.

	March 31,			December 31,			March 31,
(in thousands, except share amounts)	2011			2010			2010
Assets
Cash and due from banks	$	136,638		$	127,585		$	148,161
Money market investments		495,562			409,079			760,746
Investment Securities:
Securities available for sale, at fair value		2,119,416			2,049,528			2,057,599
Securities held to maturity, at amortized cost (fair value of $541,646, $469,421 and $115,484, respectively)		547,449			474,832			113,259
Total investment securities		2,666,865			2,524,360			2,170,858
FHLB and Federal Reserve stock		143,873			143,873			155,084
Portfolio loans:
Commercial and industrial		1,353,167			1,474,227			1,824,801
Commercial real estate		1,794,284			2,120,735			2,768,299
Total commercial		3,147,451			3,594,962			4,593,100
Residential mortgage		727,304			756,245			877,201
Direct consumer		1,006,424			1,045,530			1,174,726
Indirect consumer		823,019			819,865			794,183
Total portfolio loans		5,704,198			6,216,602			7,439,210
Less: Allowance for loan losses		(224,117	)		(296,031	)		(322,377	)
Net portfolio loans		5,480,081			5,920,571			7,116,833
Loans held for sale		38,121			40,347			107,772
Premises and equipment		102,162			104,714			108,680
Goodwill		318,150			318,150			318,150
Other intangible assets		9,626			10,454			13,247
Bank owned life insurance		218,016			217,757			216,179
Other assets		115,019			148,755			212,115
Assets of discontinued operations		—			—			324,097
Total assets	$	9,724,113		$	9,965,645		$	11,651,922
Liabilities
Noninterest-bearing deposits	$	1,413,920		$	1,325,383		$	1,239,352
Interest-bearing demand deposits		956,676			947,953			1,057,094
Savings deposits		2,646,851			2,600,750			2,533,002
Time deposits		2,674,058			2,852,748			3,651,750
Total deposits		7,691,505			7,726,834			8,481,198
Federal funds purchased and securities sold under agreements to repurchase		40,069			41,699			30,209
Other short-term borrowings		690			620			2,920
Other liabilities		139,819			152,072			133,893
Long-term debt		906,629			1,032,689			1,337,746
Liabilities of discontinued operations		—			—			421,562
Total liabilities		8,778,712			8,953,914			10,407,528
Shareholders’ Equity
Preferred stock — no par value Authorized — 5,000,000 shares; Issued and outstanding — 300,000 at 3/31/11, 12/31/10, and 3/31/10, redemption value of $300 million		279,955			278,300			273,522
Common stock — no par value Authorized — 1,050,000,000 shares at 3/31/11,12/31/10, and 3/31/10; Issued and outstanding — 397,782,546 at 3/31/11, 397,167,137 at 12/31/10 and 394,391,857 at 3/31/10		1,432,271			1,431,829			1,430,273
Retained deficit		(752,547	)		(678,242	)		(453,910	)
Accumulated other comprehensive loss		(14,278	)		(20,156	)		(5,491	)
Total shareholders’ equity		945,401			1,011,731			1,244,394
Total liabilities and shareholders’ equity	$	9,724,113		$	9,965,645		$	11,651,922

See notes to consolidated financial statements.

3

Consolidated Statements of Operations (Unaudited)
Citizens Republic Bancorp, Inc.

	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2011			2010
Interest Income
Interest and fees on loans	$	80,711		$	101,742
Interest and dividends on investment securities:
Taxable		19,610			18,261
Tax-exempt		3,086			5,285
Dividends on FHLB and Federal Reserve stock		1,125			1,002
Money market investments		253			424
Total interest income		104,785			126,714
Interest Expense
Deposits		16,375			29,511
Short-term borrowings		18			24
Long-term debt		9,778			15,990
Total interest expense		26,171			45,525
Net Interest Income		78,614			81,189
Provision for loan losses		88,724			101,355
Net interest loss after provision for loan losses		(10,110	)		(20,166	)
Noninterest Income
Service charges on deposit accounts		9,429			9,684
Trust fees		3,923			3,795
Mortgage and other loan income		2,942			2,589
Brokerage and investment fees		1,108			933
ATM network user fees		1,755			1,597
Bankcard fees		2,238			2,007
Net loss on loans held for sale		(1,106	)		(7,702	)
Investment securities (losses) gains		(383	)		6,016
Other income		3,237			3,474
Total noninterest income		23,143			22,393
Noninterest Expense
Salaries and employee benefits		31,018			29,947
Occupancy		7,562			7,461
Professional services		2,219			2,253
Equipment		3,052			3,072
Data processing services		4,352			4,629
Advertising and public relations		569			1,297
Postage and delivery		1,116			1,014
Other loan expenses		5,255			5,974
Losses on other real estate (ORE)		9,122			6,763
ORE expenses		1,768			1,190
Intangible asset amortization		828			1,130
Other expense		14,795			13,373
Total noninterest expense		81,656			78,103
Loss from Continuing Operations Before Income Taxes		(68,623	)		(75,876	)
Income tax provision from continuing operations		55			147
Loss from Continuing Operations		(68,678	)		(76,023	)
Discontinued operations:
Loss from income from discontinued operations (net of income tax)		—			(8,973	)
Net Loss		(68,678	)		(84,996	)
Dividend on redeemable preferred stock		(5,627	)		(5,282	)
Net Loss Attributable to Common Shareholders	$	(74,305	)	$	(90,278	)
Loss Per Share from Continuing Operations
Basic	$	(0.19	)	$	(0.21	)
Diluted		(0.19	)		(0.21	)
Loss Per Share from Discontinued Operations
Basic	$	—		$	(0.02	)
Diluted		—			(0.02	)
Net Loss Per Common Share
Basic	$	(0.19	)	$	(0.23	)
Diluted		(0.19	)		(0.23	)
Average Common Shares Outstanding
Basic		394,060			393,779
Diluted		394,060			393,779

See notes to consolidated financial statements

4

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Citizens Republic Bancorp, Inc.

												Accumulated
												Other
	Preferred		Common Stock						Retained			Comprehensive
(in thousands)	Stock		Shares			Amount			Deficit			Income (Loss)			Total
Balance at December 31, 2010	$	278,300		397,167		$	1,431,829		$	(678,242	)	$	(20,156	)	$	1,011,731
Comprehensive loss, net of tax:
Net loss										(68,678	)					(68,678	)
Other comprehensive income (loss):
Net unrealized gain on securities available-for-sale													7,418
Net change in unrealized loss on qualifying cash flow hedges													(1,540	)
Other comprehensive income total																5,878
Total comprehensive loss																(62,800	)
Accrued dividend on redeemable preferred stock										(3,972	)					(3,972	)
Accretion of preferred stock discount		1,655								(1,655	)					—
Proceeds from restricted stock activity				617			—									—
Recognition of stock-based compensation							443									443
Shares purchased for taxes				(1	)		(1	)								(1	)
Balance — March 31, 2011	$	279,955		397,783		$	1,432,271		$	(752,547	)	$	(14,278	)	$	945,401
Balance at December 31, 2009	$	271,990		394,397		$	1,429,771		$	(363,632	)	$	(7,093	)	$	1,331,036
Comprehensive loss, net of tax:
Net loss										(84,996	)					(84,996	)
Other comprehensive income (loss):
Net unrealized gain on securities available-for-sale													2,299
Net change in unrealized loss on qualifying cash flow hedges													(697	)
Other comprehensive income total																1,602
Total comprehensive loss																(83,395	)
Accrued dividend on preferred stock										(3,750	)					(3,750	)
Accretion of preferred stock discount		1,532								(1,532	)					—
Proceeds from restricted stock activity				(5	)		—									—
Recognition of stock-based compensation							502									502
Balance — March 31, 2010	$	273,522		394,392		$	1,430,273		$	(453,910	)	$	(5,491	)	$	1,244,394

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows (Unaudited)
Citizens Republic Bancorp, Inc.

	Three Months Ended
	March 31,
(in thousands)	2011			2010
Operating Activities:
Net Loss	$	(68,678	)	$	(84,996	)
Less: Loss from discontinued operations, net of income tax		—			(8,973	)
Loss from continuing operations		(68,678	)		(76,023	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		88,724			101,355
Deferred tax expense		55			147
Depreciation and software amortization		2,844			3,041
Amortization of intangibles		828			1,130
Amortization and fair value adjustments of purchase accounting mark-to-market, net		(1,504	)		(2,054	)
Fair value adjustment on loans held for sale and other real estate		6,177			6,897
Net amortization on investment securities		4,109			539
Investment securities losses (gains)		383			(6,016	)
Loans originated for sale		(50,032	)		(37,909	)
Proceeds from loans held for sale		61,706			40,537
Net gains from loan sales		(1,446	)		(968	)
Net loss on other real estate		2,946			1,150
Recognition of stock-based compensation expense		443			502
Other		(2,133	)		7,376
Discontinued operations, net		—			(7,508	)
Net cash provided by operating activities		44,422			32,196
Investing Activities:
Net increase in money market investments		(86,483	)		(74,460	)
Securities available-for-sale:
Proceeds from sales		2,369			153,463
Proceeds from maturities and payments		167,857			306,062
Purchases		(236,673	)		(432,675	)
Securities held-to-maturity:
Proceeds from maturities and payments		8,552			995
Purchases		(81,621	)		—
Net decrease in loans and leases		337,039			188,860
Proceeds from sales of other real estate		15,809			10,281
Net increase in properties and equipment		(292	)		(1,018	)
Discontinued operations, net		—			10,131
Net cash provided by investing activities		126,557			161,639
Financing Activities:
Net increase in demand and savings deposits		143,360			25,740
Net decrease in time deposits		(178,689	)		(45,427	)
Net decrease in short-term borrowings		(1,560	)		(6,670	)
Principal reductions in long-term debt		(125,036	)		(174,912	)
Shares purchased for taxes		(1	)		(498	)
Net cash used by financing activities		(161,926	)		(201,767	)
Net increase (decrease) in cash and due from banks		9,053			(7,932	)
Cash and due from banks at beginning of period, continuing operations		127,585			149,049
Cash and due from banks at beginning of period, discontinued operations		—			7,044
Cash and due from banks at beginning of period		127,585			156,093
Cash and due from banks at end of period, continuing operations		136,638			143,259
Cash and due from banks at end of period, discontinued operations		—			4,902
Cash and due from banks at end of period	$	136,638		$	148,161
Supplemental Cash Flow Information:
Interest paid	$	25,531		$	55,832
Income tax paid, net of refunds		3,000			—
Supplemental Disclosures of noncash items:
Loans transferred to other real estate owned		4,469			11,961
Loans transferred to held-for-sale		75,696			41,054
Held for sale loans transferred to other real estate owned		184			538
Accrued dividend on redeemable preferred stock		3,972			3,750
Accretion of preferred stock discount		1,655			1,532

See notes to consolidated financial statements.

6

Part I — Financial Information

Item 1 — Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)
Citizens Republic Bancorp, Inc.

Note 1. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc. (“Citizens” or the “Corporation”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Certain amounts have been reclassified to conform with the current year presentation. Citizens’ significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Citizens’ 2010 Annual Report on Form 10-K. For interim reporting purposes, Citizens follows the same basic accounting policies, as updated by the information contained in this report. For further information, refer to the consolidated financial statements and footnotes included in Citizens’ 2010 Annual Report on Form 10-K. Citizens maintains an internet website at www.citizensbanking.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the U.S. Securities and Exchange Commission (“SEC”). The information on Citizens’ website does not constitute a part of this report.

The Corporation has two active wholly owned trusts formed for the purpose of issuing securities which qualify as regulatory capital and are considered Variable Interest Entities (“VIEs”). The Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in the consolidated financial statements. Each of the two active trusts issued trust preferred securities to investors in 2006 and 2003, with respect to which there remain $48.7 million and $25.8 million in aggregate liquidation amounts outstanding, respectively. The gross proceeds from the issuances were used to purchase junior subordinated deferrable interest debentures issued by Citizens, which is the sole asset of each trust. The trust preferred securities held by these entities qualify as Tier 1 capital and are classified as “long-term debt” on the Consolidated Balance Sheets, with the associated interest expense recorded in “long-term debt” on the Consolidated Statements of Operations. The expected losses and residual returns of these entities are absorbed by the trust preferred security holders, and consequently the Corporation is not exposed to loss related to these VIEs.

Discontinued Operations

On January 29, 2010 Citizens entered into a stock purchase agreement with Great Western Bank whereby Great Western Bank agreed to acquire all of the stock of Citizens’ wholly owned subsidiary, F&M Bank — Iowa (“F&M”). On April 23, 2010, Citizens completed the stock sale in exchange for $50.0 million in cash. Citizens has no continuing cash flow from F&M. As of the transaction sale date, the assets and liabilities of F&M were removed from Citizens consolidated balance sheet. The financial condition and operating results for this subsidiary have been segregated from the financial condition and operating results of Citizens’ continuing operations throughout this report and, as such, are presented as a discontinued operation.

7

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”)

Accounting Standard Update (“ASU”)

FASB ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”

The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 was effective for Citizens in the first quarter of 2011. The adoption of ASU 2010-28 did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

FASB ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”

The portion of this ASU effective for the current reporting period includes new disclosures about activity that occurs during a reporting period. The activity-based disclosures required by ASU 2010-20 were effective for Citizens in the first quarter of 2011. The adoption of these disclosures did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”

The portion of this ASU effective for the current reporting period includes new disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements. The roll-forward disclosures required by ASU 2010-06 were effective for Citizens in the first quarter of 2011. The adoption of these disclosures did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

Note 2. Pending Accounting Pronouncements

FASB ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”

The amendments in this ASU clarify which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. ASU 2011-02 is effective for Citizens in the third quarter of 2011. Citizens does not expect the adoption of the amendments to have a material impact on Citizens’ financial condition, results of operations or liquidity; however, the adoption will have an impact on Citizens’ disclosures about troubled debt restructurings.

8

Note 3. Investment Securities

The amortized cost, estimated fair value and gross unrealized gains and losses on investment securities as of March 31, 2011 and December 31, 2010 follow:

	March 31, 2011								December 31, 2010
			Estimated								Estimated
	Amortized		Fair		Gross Unrealized				Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		Losses		Cost		Value		Gains		Losses
Securities available for sale:
Federal agencies	$	—	$	—	$	—	$	—	$	5,510	$	5,557	$	47	$	—
Collateralized mortgage obligations		619,985		624,256		7,843		3,572		596,308		599,264		8,181		5,225
Mortgage-backed		1,295,977		1,327,735		33,807		2,049		1,232,571		1,259,131		30,661		4,101
State and municipal		163,626		166,510		3,523		639		181,719		183,584		3,188		1,323
Other		913		915		42		40		1,985		1,992		45		38
Total available for sale	$	2,080,501	$	2,119,416	$	45,215	$	6,300	$	2,018,093	$	2,049,528	$	42,122	$	10,687
Securities held to maturity:
Mortgage-backed(1)	$	438,316	$	429,835	$	—	$	8,481	$	363,427	$	356,652	$	—	$	6,775
State and municipal		109,133		111,811		3,199		521		111,405		112,769		2,269		905
Total held to maturity	$	547,449	$	541,646	$	3,199	$	9,002	$	474,832	$	469,421	$	2,269	$	7,680
FHLB and Federal Reserve stock	$	143,873	$	143,873	$	—	$	—	$	143,873	$	143,873	$	—	$	—

⁽¹⁾ Amortized cost includes adjustments for the unamortized portion of unrealized gains on securities transferred from available for sale.

Securities with amortized cost of $0.8 billion at March 31, 2011 and December 31, 2010 were pledged to secure public deposits, repurchase agreements and other liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of securities of any single issuer exceeded 10% of consolidated shareholders equity at March 31, 2011 and December 31, 2010.

In December 2010, Citizens transferred certain mortgage-backed securities from the available-for-sale to the held-to-maturity category. Management determined that it had both the ability to hold these investments and the intent to do so. The securities transferred had a total amortized cost of $179.2 million and a fair value of $181.8 million. The unrealized gain of $2.6 million will be amortized over the remaining life of the security as an adjustment of the yield, offset against the amortization of the unrealized gain maintained in accumulated other comprehensive income.

The amortized cost and estimated fair value of debt securities by maturity at March 31, 2011 are shown below. Maturities of mortgage-backed securities are based upon current industry prepayment schedules. Expected maturities may differ significantly from contractual maturities, as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

9

	March 31, 2011
	Amortized		Estimated Fair
(in thousands)	Cost		Value
Securities available for sale:
State and municipal and other
Contractual maturity within one year	$	25,221	$	25,372
After one year through five years		25,732		26,559
After five years through ten years		67,327		68,801
After ten years		45,346		45,778
Subtotal		163,626		166,510
Collateralized mortgage obligations and mortgage-backed		1,915,962		1,951,991
Other		913		915
Total available for sale	$	2,080,501	$	2,119,416
Securities held to maturity:
State and municipal and other
Contractual maturity within one year	$	2,958	$	2,996
After one year through five years		1,153		1,196
After five years through ten years		58,291		60,397
After ten years		46,731		47,222
Subtotal		109,133		111,811
Mortgage-backed		438,316		429,835
Total held to maturity	$	547,449	$	541,646

As of March 31, 2011, 152 securities had unrealized losses compared with 229 securities as of December 31, 2010. Securities with unrealized losses, categorized by length of time the security has been in an unrealized loss position, as of March 31, 2011 and December 31, 2010 are displayed in the following tables.

	Less than 12 Months				More than 12 Months				Total
March 31, 2011	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Securities available for sale:
Collateralized mortgage obligations	$	164,383	$	1,918	$	16,250	$	1,654	$	180,633	$	3,572
Mortgage-backed		320,116		2,046		131		3		320,247		2,049
State and municipal		19,933		436		3,297		203		23,230		639
Other		—		—		102		40		102		40
Total available for sale	$	504,432	$	4,400	$	19,780	$	1,900	$	524,212	$	6,300
Securities held to maturity:
Mortgage-backed	$	429,835	$	8,481	$	—	$	—	$	429,835	$	8,481
State and municipal		14,565		521		—		—		14,565		521
Total held to maturity	$	444,400	$	9,002	$	—	$	—	$	444,400	$	9,002

10

	Less than 12 Months				More than 12 Months				Total
December 31, 2010	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Securities available for sale:
Collateralized mortgage obligations	$	151,618	$	2,417	$	25,726	$	2,808	$	177,344	$	5,225
Mortgage-backed		293,745		4,098		135		3		293,880		4,101
State and municipal		41,580		1,138		3,289		185		44,869		1,323
Other		—		—		102		38		102		38
Total available for sale	$	486,943	$	7,653	$	29,252	$	3,034	$	516,195	$	10,687
Securities held to maturity:
Mortgage-backed	$	356,652	$	6,775	$	—	$	—	$	356,652	$	6,775
State and municipal		32,082		905		—		—		32,082		905
Total held to maturity	$	388,734	$	7,680	$	—	$	—	$	388,734	$	7,680

Citizens performs a review of securities with unrealized losses at each reporting period. Citizens assesses each holding to determine whether and when a security will recover in value, whether it intends to sell the security and whether it is more likely than not that Citizens will be required to sell the security before the value is recovered. In assessing the recovery of value, the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, payment history of the security, changes to the credit rating of the security, recoveries or declines in value subsequent to the balance sheet date or any other relevant factors. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases. As of March 31, 2011, Citizens has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above tables are believed to be temporary and thus no impairment loss has been realized in the Consolidated Statement of Operations. Citizens has not decided to sell securities with any significant unrealized losses nor does Citizens believe it will be required to sell securities before the value is recovered, but may change its intent in response to significant, unanticipated changes in policies, regulations, statutory legislation or other aforementioned criteria.

The collateralized mortgage obligations (“CMO”) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At March 31, 2011, the whole loan CMOs had a market value of $180.6 million with gross unrealized losses of $3.6 million. Citizens performs a thorough credit review on a quarterly basis for the underlying mortgage collateral as well as the supporting credit enhancement and structure. The results of the March 31, 2011 credit review demonstrated continued strength and no material degradation in the holdings.

Citizens has determined there is no other-than-temporary impairment at March 31, 2011.

For the three months ended March 31, 2011, Citizens completed security sales with an amortized cost of $2.8 million of available for sale securities and recorded a net loss of $0.4 million, in accordance with Citizens policy regarding security downgrades. During the first three months of 2010, Citizens completed security sales with an amortized cost of $147.6 million and recorded a gain of $6.0 million.

Note 4. Loans, Nonperforming Assets, Allowance for Loan Losses, and Loans Held for Sale

Citizens primarily extends credit within the Midwestern states of Michigan, Wisconsin, and Ohio. Citizens seeks to limit its credit risk by using established guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries and geographic areas. Collateral is secured based on the nature of the credit and management’s credit assessment of the customer. Total portfolio loans outstanding are recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments.

The majority of Citizens’ commercial real estate loans consist of mortgages on non-owner occupied properties. Those borrowers are involved in real estate business activities and the sources of repayment are dependent on the performance of the real estate market. In such cases, Citizens generally requires the borrower to have a proven

11

record of success and to meet Citizens’ underwriting criteria for this type of credit risk. Citizens does not have a concentration in any single industry that exceeds 10% of total loans.

Past Due Loans, Nonaccrual Loans and Nonperforming Assets.Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when the collection of principal or interest is considered doubtful or payment of principal or interest is past due 90 days or more. When loans are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Loans are normally restored to accrual status if and when interest and principal payments are current and it is believed that the financial condition of the borrower has improved to the extent that future principal and interest payments will be met on a timely basis. Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days and still accruing interest, restructured loans, nonperforming loans held for sale, and other repossessed assets acquired.

Citizens recognized $0.3 million of interest income on nonperforming loans during the first quarter of 2011. Had nonaccrual loans performed in accordance with their original contract terms, the Corporation would have recognized additional interest income of approximately $2.1 million in the first quarter of 2011. There were no significant commitments outstanding to lend additional funds to clients whose loans were classified as nonaccrual or restructured at March 31, 2011.

An age analysis of financing receivables, segregated by class, as of March 31, 2011 and December 31, 2010 follows:

12

	March 31, 2011
				Loans 90+ Days Past
		Loans Accruing		Due & Still						Current Portfolio		Total Portfolio
(in thousands)		30-89 Days Past Due		Accruing		Non-Accruing Loans		Total Past Due Loans		Loans		Loans
Land hold		$	509	$	—	$	1,154	$	1,663	$	15,610	$	17,273
Land development			—		—		78		78		22,666		22,744
Construction			—		—		395		395		22,902		23,297
Income producing			4,817		—		28,250		33,067		1,005,607		1,038,674
Owner-occupied			1,981		—		21,738		23,719		668,577		692,296
Total commercial real estate			7,307		—		51,615		58,922		1,735,362		1,794,284
Commercial and industrial			1,454		660		19,494		21,608		1,012,529		1,034,137
Small business			4,723		—		6,291		11,014		308,016		319,030
Total commercial			13,484		660		77,400		91,544		3,055,907		3,147,451
Residential mortgage			10,279		—		30,385		40,664		686,640		727,304
Direct consumer			17,210		—		13,043		30,253		976,171		1,006,424
Indirect consumer			10,187		—		1,169		11,356		811,663		823,019
Total consumer			37,676		—		44,597		82,273		2,474,474		2,556,747
Total financing receivables		$	51,160	$	660	$	121,997	$	173,817	$	5,530,381	$	5,704,198

	December 31, 2010
				Loans 90+ Days Past
		Loans Accruing		Due & Still						Current Portfolio		Total Portfolio
(in thousands)		30-89 Days Past Due		Accruing		Non-Accruing Loans		Total Past Due Loans		Loans		Loans
Land hold		$	2,233	$	—	$	3,250	$	5,483	$	22,776	$	28,259
Land development			216		—		3,070		3,286		31,514		34,800
Construction			464		—		7,472		7,936		95,751		103,687
Income producing			20,643		—		62,021		82,664		1,088,318		1,170,982
Owner-occupied			14,705		—		42,826		57,531		725,476		783,007
Total commercial real estate			38,261		—		118,639		156,900		1,963,835		2,120,735
Commercial and industrial			5,801		1,573		47,508		54,882		1,085,645		1,140,527
Small business			3,257		—		10,244		13,501		320,199		333,700
Total commercial			47,319		1,573		176,391		225,283		3,369,679		3,594,962
Residential mortgage			15,389		—		22,076		37,465		718,780		756,245
Direct consumer			22,379		—		12,562		34,941		1,010,589		1,045,530
Indirect consumer			13,287		—		1,279		14,566		805,299		819,865
Total consumer			51,055		—		35,917		86,972		2,534,668		2,621,640
Total financing receivables		$	98,374	$	1,573	$	212,308	$	312,255	$	5,904,347	$	6,216,602

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Impaired loans. A loan is considered impaired when Citizens determines that it is probable that all the contractual principal and interest due under the loan may not be collected. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

A summary of information regarding loans individually reviewed for impairment, segregated by class, as of March 31, 2011 and December 31, 2010, are set forth in the following table.

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	March 31, 2011
		Unpaid Contractual		Recorded Investment		Recorded Investment		Total Recorded		Specific		Average Recorded
(in thousands)		Principal Balance		with No Specific Allowance		with Specific Allowance		Investment		Related Allowance		Investment
Nonaccrual loans (impaired)
Land hold		$	553	$	—	$	183	$	183	$	22	$	1,095
Land development			—		—		—		—		—		1,341
Construction			471		238		—		238		—		3,503
Income producing			27,931		6,534		16,570		23,104		6,085		38,783
Owner-occupied			18,713		10,296		3,566		13,862		630		23,176
Total commercial real estate			47,668		17,068		20,319		37,387		6,737		67,898
Commercial and industrial			26,213		12,381		3,963		16,344		617		29,297
Small business			710		—		688		688		78		971
Total commercial			74,591		29,449		24,970		54,419		7,432		98,166
Residential mortgage			10,058		—		10,058		10,058		1,988		7,627
Direct consumer			1,119		—		1,048		1,048		114		1,061
Total consumer			11,177		—		11,106		11,106		2,102		8,688
Total nonaccrual loans (impaired)			85,768		29,449		36,076		65,525		9,534		106,854
Accrual loans (impaired)
Residential mortgage			162		—		162		162		31		162
Direct consumer			620		—		620		620		70		361
Total accrual loans (impaired)			782		—		782		782		101		523
Total impaired loans		$	86,550	$	29,449	$	36,858	$	66,307	$	9,635	$	107,377

	December 31, 2010
		Unpaid Contractual		Recorded Investment		Recorded Investment		Total Recorded		Specific		Average Recorded
(in thousands)		Principal Balance		with No Specific Allowance		with Specific Allowance		Investment		Related Allowance		Investment
Nonaccrual loans (impaired)
Land hold		$	2,007	$	—	$	2,007	$	2,007	$	1,719	$	2,882
Land development			5,954		1,224		1,458		2,682		842		16,526
Construction			9,151		—		6,769		6,769		1,413		22,752
Income producing			76,310		21,315		33,145		54,460		11,759		112,214
Owner-occupied			39,018		13,153		19,337		32,490		7,786		50,976
Total commercial real estate			132,440		35,692		62,716		98,408		23,519		205,350
Commercial and industrial			51,300		9,357		32,894		42,251		9,298		45,521
Small business			1,272		445		809		1,254		173		714
Total commercial			185,012		45,494		96,419		141,913		32,990		251,585
Residential mortgage			5,196		—		5,196		5,196		1,079		5,129
Direct consumer			1,127		—		1,074		1,074		115		1,107
Total consumer			6,323		—		6,270		6,270		1,194		6,236
Total nonaccrual loans (impaired)			191,335		45,494		102,689		148,183		34,184		257,821
Accrual loans (impaired)
Residential mortgage			162		—		162		162		31		163
Direct consumer			101		—		101		101		15		26
Total accrual loans (impaired)			263		—		263		263		46		189
Total impaired loans		$	191,598	$	45,494	$	102,952	$	148,446	$	34,230	$	258,010

Credit Quality Indicators.Citizens categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Citizens analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million and non-homogeneous loans, such as commercial and industrial and commercial real estate loans. Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with Citizens’ credit policy. The Company uses the following definitions for risk ratings:

15

Special Mention.Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation for full value, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Commercial loans considered doubtful are evaluated for impairment as part of the specific allocated allowance.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2011 and December 31, 2010, the risk category of commercial loans by class follows.

					March 31, 2011
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Land hold	$	3,533	$	8,382	$	5,336	$	22	$	17,273
Land development		12,823		682		9,239		—		22,744
Construction		18,385		4,635		238		39		23,297
Income producing		685,242		202,405		144,882		6,145		1,038,674
Owner-occupied		540,822		64,876		85,894		704		692,296
Total commercial real estate		1,260,805		280,980		245,589		6,910		1,794,284
Commercial and industrial		801,754		106,382		125,158		843		1,034,137
Small business		268,790		24,814		25,061		365		319,030
Total commercial	$	2,331,349	$	412,176	$	395,808	$	8,118	$	3,147,451

					December 31, 2010
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Land hold	$	3,611	$	10,126	$	12,803	$	1,719	$	28,259
Land development		13,057		693		20,209		841		34,800
Construction		62,981		18,809		20,253		1,644		103,687
Income producing		664,151		198,323		296,771		11,737		1,170,982
Owner-occupied		550,074		81,133		143,928		7,872		783,007
Total commercial real estate		1,293,874		309,084		493,964		23,813		2,120,735
Commercial and industrial		799,823		140,099		191,144		9,461		1,140,527
Small business		280,697		23,483		28,994		526		333,700
Total commercial	$	2,374,394	$	472,666	$	714,102	$	33,800	$	3,594,962

For the residential and consumer loan class, Citizens evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2011 and December 31, 2010.

16

			March 31, 2011
(in thousands)	Residential Mortgage		Direct Consumer		Indirect Consumer		Total Consumer Loans
Performing	$	695,501	$	991,098	$	821,850	$	2,508,449
Nonperforming		31,803		15,326		1,169		48,298
Total	$	727,304	$	1,006,424	$	823,019	$	2,556,747

			December 31, 2010
(in thousands)	Residential Mortgage		Direct Consumer		Indirect Consumer		Total Consumer Loans
Performing	$	732,309	$	1,031,430	$	818,586	$	2,582,325
Nonperforming		23,936		14,100		1,279		39,315
Total	$	756,245	$	1,045,530	$	819,865	$	2,621,640

Allowance for Loan Losses.The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a formula-based risk-allocated allowance for the remainder of the portfolio and a general valuation allowance calculation. A summary of changes in the allowance for loan losses follows:

	Allowance for												Allowance for
	Loan Losses at		Provision for										Loan Losses at
(in thousands)	December 31, 2010		Loan Losses		Charge-offs			Recoveries		Net charge-offs			March 31, 2011
Commercial and industrial	$	26,619	$	17,635	$	(29,712	)	$	1,603	$	(28,109	)	$	16,145
Small business		16,334		1,495		(4,078	)		174		(3,904	)		13,925
Commercial real estate		156,623		56,425		(118,721	)		913		(117,808	)		95,240
Total commercial		199,576		75,555		(152,511	)		2,690		(149,821	)		125,310
Residential mortgage		47,623		7,679		(3,403	)		3		(3,400	)		51,902
Direct consumer		32,255		5,237		(6,468	)		972		(5,496	)		31,996
Indirect consumer		16,577		253		(2,472	)		551		(1,921	)		14,909
Total	$	296,031	$	88,724	$	(164,854	)	$	4,216	$	(160,638	)	$	224,117

A summary of allowance for loan losses, segregated by portfolio segment, as of March 31, 2011 and December 31, 2010 was as follows:

17

	March 31, 2011
	Loans Individually		Loans Collectively				Total
	Evaluated for		Evaluated for				Allowance for
(in thousands)	Impairment		Impairment		Unallocated		Loan Losses
Commercial and industrial	$	617	$	15,528	$	—	$	16,145
Small business		78		13,847		—		13,925
Commercial real estate		6,736		84,754		3,750		95,240
Total commercial		7,431		114,129		3,750		125,310
Residential mortgage		2,019		49,883		—		51,902
Direct consumer		185		31,811		—		31,996
Indirect consumer		—		14,909		—		14,909
Total allowance for loan losses	$	9,635	$	210,732	$	3,750	$	224,117

	December 31, 2010
	Loans Individually		Loans Collectively				Total
	Evaluated for		Evaluated for				Allowance for
(in thousands)	Impairment		Impairment		Unallocated		Loan Losses
Commercial and industrial	$	9,298	$	17,321	$	—	$	26,619
Small business		173		16,161		—		16,334
Commercial real estate		23,519		128,604		4,500		156,623
Total commercial		32,990		162,086		4,500		199,576
Residential mortgage		1,110		46,513		—		47,623
Direct consumer		130		32,125		—		32,255
Indirect consumer		—		16,577		—		16,577
Total allowance for loan losses	$	34,230	$	257,301	$	4,500	$	296,031

A summary of the recorded investment in loans, segregated by portfolio segment, as of March 31, 2011 and December 31, 2010 was as follows:

18

	March 31, 2011
	Loans Individually		Loans Collectively					Total
	Evaluated for		Evaluated for		Unearned			Recorded
(in thousands)	Impairment		Impairment		(Fees)/Costs			Investment
Commercial and industrial	$	16,344	$	998,266	$	19,527		$	1,034,137
Small business		688		318,158		184			319,030
Commercial real estate		37,387		1,760,171		(3,274	)		1,794,284
Total commercial		54,419		3,076,595		16,437			3,147,451
Residential mortgage		10,220		718,804		(1,720	)		727,304
Direct consumer		1,668		1,005,628		(872	)		1,006,424
Indirect consumer		—		805,788		17,231			823,019
Total portfolio loans	$	66,307	$	5,606,815	$	31,076		$	5,704,198

	December 31, 2010
	Loans Individually		Loans Collectively					Total
	Evaluated for		Evaluated for		Unearned			Recorded
(in thousands)	Impairment		Impairment		(Fees)/Costs			Investment
Commercial and industrial	$	42,251	$	1,085,404	$	12,872		$	1,140,527
Small business		1,254		332,267		179			333,700
Commercial real estate		98,408		2,024,321		(1,994	)		2,120,735
Total commercial		141,913		3,441,992		11,057			3,594,962
Residential mortgage		5,358		749,368		1,519			756,245
Direct consumer		1,175		1,047,286		(2,931	)		1,045,530
Indirect consumer		—		802,894		16,971			819,865
Total portfolio loans	$	148,446	$	6,041,540	$	26,616		$	6,216,602

Loans Held for Sale.    During the first quarter of 2011, $53.7 million in commercial loans were transferred to held for sale and then subsequently sold.

Note 5. Long-Term Debt

The components of long-term debt as of March 31, 2011 and December 31, 2010 are presented below.

	March 31,		December 31,
(in thousands)	2011		2010
Citizens (Parent only):
Subordinated debt:
5.75% subordinated notes due February 2013	$	16,973	$	16,932
Variable rate junior subordinated debenture due June 2033		25,774		25,774
7.50% junior subordinated debentures due September 2066		48,479		48,382
Subsidiaries:
Federal Home Loan Bank advances		711,222		837,410
Other borrowed funds		104,181		104,191
Total long-term debt	$	906,629	$	1,032,689

19

During the first quarter of 2010, Citizens decided to defer regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities. While Citizens accrues for this obligation, it is currently in arrears with the interest payments on the junior subordinated debentures as permitted by the related documentation. As of March 31, 2011 and December 31, 2010, the amount of the arrearage on the payments on the subordinated debt associated with the trust preferred securities is $6.0 million and $4.9 million, respectively.

Note 6. Income Taxes

The income tax provision for the first quarter of 2011 was $0.1 million, essentially unchanged from the first quarter of 2010. The effective tax rate for the first quarter of 2011 was (0.08) %, which includes adjustments for tax-exempt income and the deferred tax asset valuation allowance. The expense for the first quarter of 2011 is directly related to the deferred tax expense from the amortization of tax deductible goodwill.

Note 7. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2011 and 2010 are presented below.

				Net Unrealized
	Net Unrealized			Gain(Loss) On
	Gain(Loss) On			Derivative			Pension and Post-
(in thousands)	Investments			Instruments			Retirement			Total
Balance at December 31, 2010	$	3,963		$	7,368		$	(31,487	)	$	(20,156	)
Comprehensive income (loss), net of tax:
Net loss
Other comprehensive (loss) income, net of tax:
Net unrealized gain on securities available-for-sale		7,801			—			—			7,801
Reclassification adjustment for net loss on securities included in net income		(383	)		—			—			(383	)
Net unrealized loss on qualifying cash flow hedges		—			(1,540	)		—			(1,540	)
Other comprehensive income (loss) total		7,418			(1,540	)		—			5,878
Balance at March 31, 2011	$	11,381		$	5,828		$	(31,487	)	$	(14,278	)
Balance at December 31, 2009	$	10,593		$	13,089		$	(30,775	)	$	(7,093	)
Comprehensive income (loss), net of tax:
Net loss
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities available-for-sale		(3,717	)		—			—			(3,717	)
Reclassification adjustment for net gain on securities included in net income		6,016			—			—			6,016
Net unrealized loss on qualifying cash flow hedges		—			(697	)		—			(697	)
Other comprehensive income (loss) total		2,299			(697	)		—			1,602
Balance at March 31, 2010	$	12,892		$	12,392		$	(30,775	)	$	(5,491	)

The accumulated net unrealized gain on cash flow hedges was $5.8 million at March 31, 2011 and $7.4 million at December 31, 2010.

Note 8. Fair Values of Assets and Liabilities

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Given that there is no active market for many of Citizens’ financial instruments, Citizens has made estimates using discounted cash flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore can not be determined with precision. Accordingly, the derived fair value estimates presented herein are not necessarily indicative of the amounts Citizens could realize in a current market exchange.

The fair value estimates are based on existing on- and off-balance sheet financial instruments and do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. For example, Citizens has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value

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estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include Citizens’ brokerage network, net deferred tax assets (and the related valuation reserves), and premises and equipment. In addition, tax ramifications related to the recognition of unrealized gains and losses such as those within the investment securities portfolio can have a significant effect on estimated fair values and have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of the value of the Corporation.

Citizens groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

The estimated fair values of Citizens’ financial instruments follow.

	March 31, 2011						December 31, 2010
	Carrying			Estimated			Carrying			Estimated
(in thousands)	Amount			Fair Value			Amount			Fair Value
Financial assets:
Cash and due from banks	$	136,638		$	136,638		$	127,585		$	127,585
Money market investments		495,562			495,562			409,079			409,079
Securities available for sale		2,119,416			2,119,416			2,049,528			2,049,528
Securities held to maturity		547,449			541,646			474,832			469,421
FHLB and Federal Reserve stock		143,873			143,873			143,873			143,873
Net portfolio loans		5,480,081			4,763,621			5,920,571			5,157,339
Deferred compensation assets		10,341			10,341			10,951			10,951
Loans held for sale		38,121			38,121			40,347			40,347
Accrued interest receivable		32,545			32,545			33,310			33,310
Financial liabilities:
Deposits		7,691,505			7,731,530			7,726,834			7,778,461
Short-term borrowings		40,759			40,759			42,319			42,319
Long-term debt		906,629			941,416			1,032,689			1,071,250
Accrued interest payable		11,541			11,541			10,901			10,901
Financial instruments with off-balance sheet risk(1):
Letters of credit(2)		(944	)		(3,480	)		(1,357	)		(4,980	)
Derivative instruments		247			247			1,862			1,862

(1)	Positive amounts represent assets, whereas negative amounts represent liabilities.
(2)	The carrying amount for letters of credit is part of the total carrying amount of net loans. It is shown here separately to disclose the estimated fair value which is based on a discounted cash flow method utilizing current market pricing. This amount is not included in the net loans estimate of fair value.

The carrying amount approximates fair value for cash, money market investments, and accrued interest. The methods and assumptions used to estimate the fair value for other financial instruments are set forth below. There

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were no changes in the valuation methods used to estimate fair value during the three month period ended March 31, 2011.

Securities Available for Sale.Fair value measurement is based upon quoted prices for similar assets, if available, or matrix pricing models. Matrix pricing is a mathematical technique widely used in the banking industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. The securities in the available for sale portfolio are priced by independent providers. In obtaining such valuation information from third parties, Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in Citizens’ principal markets. Further, Citizens has developed an internal, independent price verification function that performs testing on valuations received from third parties. Citizens’ principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets.

Recurring Level 3 securities include auction rate securities issued by student-loan authorities and a taxable municipal Qualified Zone Academy Bond (“QZAB”). Due to the nature of the auction rate securities and the lack of a secondary market with active fair value indicators, Citizens used an income approach based on a discounted cash flow model utilizing significant unobservable inputs (Level 3) in the valuation process to estimate the transaction price between market participants for each group of securities as of the valuation date. The significant assumptions made in this modeling process included the discount rate, the term over which this discount rate would stabilize, and fail rate formulas utilizing assumed interest payments. Due to the current illiquid market for QZAB bonds, Citizens relies on models containing significant unobservable market-based inputs to determine the fair-value of these bonds. The primary unobservable pricing input was the assumption made regarding the ability for market participants to utilize the tax credits associated with this type of instrument.

Securities Held to Maturity.The fair value of securities classified as held to maturity are based upon quoted prices for similar assets, if available, or matrix pricing models.

FHLB and Federal Reserve Stock.The carrying amount of FHLB and Federal Reserve stock is used to approximate the fair value of these investments. These securities are not readily marketable, are recorded at cost (par value), and are evaluated for impairment based on the ultimate recoverability of the par value. Citizens considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. Citizens believes its investments in FHLB and Federal Reserve stock are ultimately recoverable at par.

Net Portfolio Loans.The fair value of loans and loan commitments is estimated based on discounted cash flows. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market.

Deposits.The estimated fair value of demand deposits (e.g., noninterest and interest bearing demand, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of Citizens’ long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments.

Short-Term Borrowings.The carrying amounts of federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings approximate their fair values because they frequently reprice to a market rate.

Long-Term Debt.The fair value is estimated using observable market prices and by discounting future cash flows using current interest rates for similar financial instruments.

Derivative Instruments.Substantially all derivative instruments held or issued by Citizens are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments are priced by independent providers using observable market assumptions with adjustments based on widely accepted valuation techniques. For those derivatives, Citizens measures fair value with models that use primarily market observable

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inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk (credit valuation adjustments). Citizens assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.

Deferred Compensation Assets.Citizens has a portfolio of mutual fund investments which hedge the deferred compensation liabilities for various employees, former employees and directors. These investments are traded on active exchanges with valuations obtained from readily available pricing sources for market transactions involving identical assets. Additionally, Citizens invests in a Guaranteed Income Fund which is valued based on similar assets in an active market.

Impaired Loans.A loan is considered to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may not be collected. Impairment is typically measured based on the fair value of the underlying collateral. The fair value of the underlying collateral is determined, where possible, using market prices derived from appraisals or broker price opinions, which are considered to be Level 2. Fair value may also be measured using the present value of expected future cash flows discounted at the loan's effective interest rate. Since certain assumptions and unobservable inputs are currently being used in both techniques, impaired loans are recorded as Level 3 in the fair-value hierarchy. Citizens measures impairment on all nonaccrual commercial and industrial and commercial real estate loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses.

Loans Held for Sale.Residential mortgage loans held for sale are comprised of loans originated for sale in the ordinary course of business and selected nonperforming residential mortgage loans. The fair value of residential mortgage loans originated for sale in the secondary market is based on purchase commitments or quoted prices for the same or similar loans and are classified as nonrecurring Level 2. The fair value of nonperforming residential mortgage loans is based on the fair value of the underlying collateral, net of estimated costs to sell, using market prices derived from indicative pricing models which utilize projected assumptions Citizens believes potential investors would make, broker price opinions or appraisals, and are classified as nonrecurring Level 3.

Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the lower of carrying amount or market value based on appraisals of the underlying collateral, adjusted based on management’s judgment due to current market conditions. Fair value may also be measured using the present value of expected future cash flows discounted at the loan's effective inters rate. Citizens records commercial loans held for sale as nonrecurring Level 3.

Other Real Estate.Other real estate (“ORE”) is comprised of commercial and residential real estate acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure, and former branch locations. Commercial properties and former branch locations are carried at the lower of cost or market value at the time of acquisition based on the fair value of the underlying property, net of estimated costs to sell. This is determined using market prices derived from appraisals or broker price opinions, which are considered to be Level 2. However, certain assumptions and unobservable inputs are currently being used by appraisers and brokers, therefore, qualifying the assets as Level 3 in the fair value hierarchy. Residential real estate is recorded at the fair value of the underlying property, net of estimated costs to sell, using market prices derived from indicative pricing models which utilize projected assumptions Citizens believes potential investors would make, broker price opinions or appraisals, and are classified as nonrecurring Level 3. Losses arising from the initial acquisition of such properties are charged against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to reflect the lower of cost or market value, as well as gains and losses on disposal of these properties, are charged to other expenses as incurred. Citizens records ORE properties as nonrecurring Level 3.

Repossessed Assets.Repossessed assets consist of consumer assets acquired to satisfy the consumer’s outstanding delinquent debt. These assets consist of automobiles, boats, recreational vehicles and other personal items. These assets are carried at the lower of cost or market value, net of estimated costs to sell, based on internally developed procedures.

Some of the assets and liabilities discussed above are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, investment securities available for sale, derivative instruments and deferred compensation assets are recorded at fair value on a recurring basis. Other assets, such as loans held for sale, impaired loans, other real estate, and repossessed assets are recorded at fair value on a nonrecurring basis. Goodwill and core deposit intangibles are measured for impairment on a nonrecurring basis and are written down when the value of the individual asset has declined.

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The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2011.

March 31, 2011
(in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Collateralized mortgage obligations	$	624,256	$	—	$	624,246	$	10
Mortgage-backed		1,327,735		—		1,327,735		—
State and municipal		166,510		—		162,819		3,691
Other		915		—		657		258
Total available for sale		2,119,416		—		2,115,457		3,959
Other assets:
Derivatives designated as hedging instruments		473		—		473		—
Derivatives not designated as hedging instruments		20,614		—		20,614		—
Deferred compensation assets		10,341		7,569		2,772		—
Total other assets		31,428		7,569		23,859		—
Total	$	2,150,844	$	7,569	$	2,139,316	$	3,959
Other liabilities:
Derivatives not designated as hedging instruments	$	20,840	$	—	$	20,840	$	—
Total other liabilities		20,840		—		20,840		—
Total	$	20,840	$	—	$	20,840	$	—

There were no transfers between levels within the fair value hierarchy during the three month period ended March 31, 2011. The following table presents the reconciliation of Level 3 assets held by Citizens at March 31, 2011.

			Net Realized/Unrealized Gains (Losses)
							Recorded in
	Balance at						Other										Balance at
	December 31,		Recorded in Earnings				Comprehensive										March 31,
(in thousands)	2010		Realized (1)		Unrealized		Income (Pretax)			Settlements			Transfers In		Transfers Out		2011
| | | | | | | |
Securities available for sale
Collateralized mortgage obligations	$	11	$	—	$	—	$	—		$	(1	)	$	—	$	—	$	10
State and municipal		3,812		48		—		(19	)		(150	)		—		—		3,691
Other		336		22		—		—			(100	)		—		—		258
Total	$	4,159	$	70	$	—	$	(19	)	$	(251	)	$	—	$	—	$	3,959

⁽¹⁾ Recorded through Interest Income on the Consolidated Statement of Operations. No purchases, sales, or issuances for the period.

The following table includes assets measured at fair value on a nonrecurring basis that have had a fair value adjustment as of March 31, 2011.

March 31, 2011	Initial Carrying		Fair Value
(in thousands)	Value		Total		Level 1		Level 2		Level 3
Impaired loans	$	172,338	$	21,302	$	—	$	—	$	21,302
Commercial loans held for sale		5,379		3,111		—		—		3,111
Residential mortgage loans held for sale		12		—		—		—		—
Other real estate		8,753		4,261		—		—		4,261
Repossessed assets		2,571		1,311		—		—		1,311
Total	$	189,053	$	29,985	$	—	$	—	$	29,985

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Note 9. Pension Benefit Cost

Citizens recognizes the change in the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its retirement plans as an adjustment to accumulated other comprehensive income, net of tax. This adjustment represents the unrecognized actuarial losses and unrecognized prior service costs. The components of retirement benefit cost for the three months ended March 31, 2011 and 2010 are presented below.

	Three Months Ended
	March 31,
(in thousands)	2011			2010
Defined Benefit Pension Plans
Interest cost	$	955		$	1,039
Expected return on plan assets		(1,018	)		(1,200	)
Amortization of unrecognized:
Prior service cost		8			8
Net actuarial loss		832			556
Net pension cost		777			403
Supplemental Pension Plans
Interest cost		189			188
Amortization of unrecognized:
Net actuarial loss		5			3
Net pension cost		194			191
Postretirement Benefit Plans
Interest cost		144			152
Amortization of unrecognized:
Prior service cost		(72	)		(67	)
Net actuarial gain		(72	)		(8	)
Net postretirement benefit cost		—			77
Total periodic benefit cost	$	971		$	671

Citizens maintains multiple employee benefit plans, including defined benefit pension, supplemental pension, postretirement healthcare, and defined contribution retirement 401(k) plans. Citizens made a cash contribution of $0.1 million to the defined benefit pension plan during the first three months of 2011 and expects to make a contribution of $0.2 million during the remaining nine months of the year. During the first three months of 2011, Citizens contributed $0.1 million to the supplemental pension plans and anticipates that an additional $0.4 million of contributions will be made during the remaining nine months of the year. Citizens contributed $0.1 million to the postretirement benefit plan during the first three months of 2011 and anticipates making an additional $0.4 million in contributions for the remaining portion of the year. Citizens suspended the 401(k) matching funds and annual discretionary contributions during the third quarter of 2009.

The pension plan assets for which Citizens determines fair value include short-term pooled money fund, equity, and fixed income securities, all of which fall into Level 2 in the fair value hierarchy at March 31, 2011. Citizens’ pension plan assets are invested solely in pooled separate account funds, which are managed by Prudential. The net asset values (“NAV”) are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAV’s unit price of the pooled separate accounts is not quoted on any market; however, the unit price is based on the underlying investments which are traded in an active market and are priced by independent providers. Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in Citizens’ principal markets. Further, Citizens has developed an internal, independent price verification function that performs annual testing on valuations received from third parties. There are no significant restrictions on Citizens’ ability to sell any of the investments in the pension plan.

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The estimated fair values of Citizens’ pension plan assets at March 31, 2011 are as follows:

March 31, 2011
(in thousands)	Total		Level 1		Level 2		Level 3
Asset Category
Short-term pooled money fund	$	2,495	$	—	$	2,495	$	—
Equity securities
Large cap(1)		19,736		—		19,736		—
Mid-cap		5,002		—		5,002		—
Small-cap		7,230		—		7,230		—
International equity		10,281		—		10,281		—
Fixed income securities
Intermediate term fixed(2)		22,112		—		22,112		—
Total	$	66,856	$	—	$	66,856	$	—

(1)	This category is comprised of not actively managed low-cost equity index funds that track the S&P 500 and Russell 1000.
(2)	This category represents investment grade bonds of U.S. issuers from diverse industries.

Note 10. Stock-Based Compensation

Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, nonvested stock awards (also known as restricted stock), restricted stock units, and performance awards to employees and non-employee directors. At March 31, 2011, Citizens had 16,536,230 shares of common stock reserved for future issuance under the current plan. The compensation cost for share based awards is recognized over the requisite service period of the award. The requisite service period is presumed to be the stated vesting period or the estimated time that will be required to satisfy any performance conditions. Restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights. Restricted stock units have no voting or dividend rights but have dividend equivalent rights entitling them to additional shares at the time the units are settled for common stock. There have been no options granted since 2006 and no amortized costs associated with stock options since 2009.

The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock units, and restricted stock awards included in the Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010.

	Three Months Ended
	March 31,
(in thousands)	2011			2010
Restricted stock compensation and restricted stock unit compensation	$	486		$	502
Stock-based compensation expense before income taxes		486			502
Income tax benefit(1)		(170	)		(176	)
Total stock-based compensation expense after income taxes	$	316		$	326

⁽¹⁾ The income tax benefit is calculated based on the statutory rate. Due to the fact that Citizens has a valuation allowance, the income tax benefit may not be realized.

New shares are issued when stock options are exercised. Citizens presents excess tax benefits from the exercise of stock

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options, if any, as financing cash inflows and as operating cash outflows on the Consolidated Statement of Cash Flows.

As of March 31, 2011, $2.4 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 1.8 years.

The following table summarizes restricted stock activity for the three months ended March 31, 2011.

				Weighted-Average
	Number of			Per Share Grant
	Shares			Date Fair Value
Restricted stock at December 31, 2010		3,109,998		$	1.33
Granted		724,308			0.81
Vested		(14,727	)		9.02
Forfeited		(107,248	)		1.54
Restricted stock at March 31, 2011(1)		3,712,331		$	1.19

⁽¹⁾ Includes 273,374 vested shares under restriction prohibiting sale until conditions are met, inluding two years from grant date and certain TARP payments are made.

The total fair value of restricted stock vested during the three months ended March 31, 2011 was less than $0.1 million.

Note 11. Shareholders’ Equity and Earnings Per Share

During the first quarter of 2010, Citizens suspended quarterly cash dividend payments on its Series A Preferred Stock. While Citizens accrues for this obligation, it is currently in arrears in the amount of $19.3 million and $15.4 million with the dividend payments on the Series A Preferred Stock as of March 31, 2011 and December 31, 2010, respectively.

Earnings per common share is computed using the two-class method. As of March 31, 2011, potential common stock that would be generated from restrictions lapsing on unvested shares as well as additional shares issued through the exercise of stock options and warrants totaled 25,041,895 shares. As a result of being anti-dilutive, these shares were excluded from the computation of dilutive earnings per share. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations follows.

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	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2011			2010
Numerator:
Loss from continuing operations	$	(68,678	)	$	(76,023	)
Dividend on redeemable preferred stock		(5,627	)		(5,282	)
Net loss from continuing operations available to common shareholders		(74,305	)		(81,305	)
Loss from discontinued operations (net of income tax)		—			(8,973	)
Net loss attributable to common shareholders	$	(74,305	)	$	(90,278	)
Denominator:
Weighted average shares outstanding		397,298			394,393
Less: participating securities included in weighted average shares outstanding		(3,238	)		(614	)
Weighted average shares outstanding for basic and dilutive earnings per common share		394,060			393,779
Basic loss per common share from continuing operations	$	(0.19	)	$	(0.21	)
Diluted loss per common share from continuing operations	$	(0.19	)	$	(0.21	)
Basic loss per common share from discontinued operations	$	—		$	(0.02	)
Diluted loss per common share from discontinued operations	$	—		$	(0.02	)
Basic net loss per common share	$	(0.19	)	$	(0.23	)
Diluted net loss per common share	$	(0.19	)	$	(0.23	)

Note 12. Lines of Business

Citizens is managed along the following business lines: Regional Banking, Specialty Consumer, Specialty Commercial, Wealth Management, and Other. Selected line of business information for the three months ended March 31, 2011 and 2010 is provided below. Certain amounts have been reclassified to conform with the current year presentation. These reclassifications do not have a significant effect on any one line of business and do not change the total for the Corporation. There are no significant intersegmental revenues.

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	Regional			Specialty			Specialty			Wealth
(in thousands)	Banking			Consumer			Commercial			Mgmt		Other			Total
Earnings Summary — Three Months Ended March 31, 2011
Net interest income (taxable equivalent)	$	56,279		$	8,615		$	9,962		$	144	$	5,716		$	80,716
Provision for loan losses		40,419			8,222			40,083			—		—			88,724
Net interest income after provision		15,860			393			(30,121	)		144		5,716			(8,008	)
Noninterest income		17,572			1,435			(1,557	)		3,923		1,770			23,143
Noninterest expense		57,286			14,646			5,588			2,343		1,793			81,656
Income (loss) before income taxes		(23,854	)		(12,818	)		(37,266	)		1,724		5,693			(66,521	)
Income tax expense-taxable equivalent		(8,114	)		(4,486	)		(12,992	)		610		27,139			2,157
Net (loss) income	$	(15,740	)	$	(8,332	)	$	(24,274	)	$	1,114	$	(21,446	)	$	(68,678	)
Average assets(in millions)	$	3,229		$	1,620		$	1,125		$	17	$	3,908		$	9,899
Earnings Summary — Three Months Ended March 31, 2010
Net interest income (taxable equivalent)	$	64,016		$	7,491		$	16,477		$	145	$	(3,583	)	$	84,546
Provision for loan losses		23,067			35,987			42,301			—		—			101,355
Net interest income after provision		40,949			(28,496	)		(25,824	)		145		(3,583	)		(16,809	)
Noninterest income		16,478			(1,023	)		(5,007	)		3,850		8,095			22,393
Noninterest expense		53,023			13,242			4,283			3,082		4,473			78,103
Income (loss) before income taxes		4,404			(42,761	)		(35,114	)		913		39			(72,519	)
Income tax expense-taxable equivalent		1,865			(14,952	)		(11,797	)		326		28,062			3,504
Net income (loss) from continuing operations		2,539			(27,809	)		(23,317	)		587		(28,023	)		(76,023	)
Income (loss) from discontinued operations		986			(89	)		162			78		(10,110	)		(8,973	)
Net income (loss)	$	3,525		$	(27,898	)	$	(23,155	)	$	665	$	(38,133	)	$	(84,996	)
Average assets(in millions)	$	4,513		$	1,861		$	1,700		$	13	$	3,816		$	11,903

Note 13. Commitments, Contingent Liabilities and Guarantees

The unaudited Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. Generally, new loan commitments do not extend beyond 90 days and unused lines of credit are reviewed at least annually. Letters of credit guarantee future payment of client financial obligations to third parties. They are normally issued for services provided or to facilitate the shipment of goods, and generally expire within one year. Both arrangements have essentially the same level of credit risk as that associated with extending loans to clients and are subject to Citizens’ normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on Citizens’ assessment of the client and may include receivables, inventories, real property and equipment.

Amounts available to clients under loan commitments and standby letters of credit follow.

	March 31,		December 31,
(in thousands)	2011		2010
Loan commitments and letters of credit:
Commitments to extend credit	$	897,321	$	953,340
Financial standby letters of credit		162,747		164,640
Performance standby letters of credit		5,885		7,015
Total loan commitments and letters of credit	$	1,065,953	$	1,124,995

Commitments outstanding to extend credit include home equity credit lines which totaled $363.8 million and $376.2 million at March 31, 2011 and December 31, 2010, respectively.

At March 31, 2011 and December 31, 2010, a liability of $1.9 million was recorded for possible losses on commitments to extend credit. A liability of $1.1 million and $1.5 million was recorded at March 31, 2011 and December 31, 2010, respectively, representing the deferred revenue associated with certain letters of credit, which

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are amortized into income over the life of the commitments. These balances are included in other liabilities on the Consolidated Balance Sheets.

Note 14. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

Citizens is exposed to certain risks arising from both its business operations and economic conditions. Citizens manages economic risks, including interest rate, liquidity, and credit risk, primarily through the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, Citizens enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and cash payments principally related to certain variable-rate loan assets and fixed-rate borrowings.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of Citizens’ derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010.

	Other Assets				Other Liabilities
	March 31,		December 31,		March 31,		December 31,
(in thousands)	2011		2010		2011		2010
Derivatives designated as hedging instruments Interest rate products	$	473	$	1,976	$	—	$	—
Derivativesnotdesignated as hedging instruments Interest rate products		20,614		26,409		20,840		26,523
Total derivatives	$	21,087	$	28,385	$	20,840	$	26,523

Cash Flow Hedges of Interest Rate Risk

Citizens’ objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, Citizens primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2011 and December 31, 2010, Citizens had 2 interest rate swaps with an aggregate notional amount of $60.0 million and 3 interest rate swaps with an aggregate notional amount of $160.0 million, respectively, that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2011, such derivatives were used to hedge the variable cash inflows associated with existing pools of prime and LIBOR-based loan assets. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three months ended March 31, 2011 and 2010.

In addition, one swap failed to qualify for hedge accounting due to a mismatch between the swap notional and the aggregate principal amount of the designated loan during the first quarter of 2010 and was subsequently terminated in April 2010. Accordingly, the change in fair value of this swap during the period from failure through termination was recognized directly in earnings. The fair value of this swap at March 31, 2010 and the change in fair value during the three months ended March 31, 2010 are disclosed under the section entitled “Derivatives Not Designated as Hedging Instruments” throughout this footnote.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest income as interest payments are received on Citizens’ variable-rate assets. Citizens accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $0.5 million and $1.2 million for the three

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months ended March 31, 2011 and 2010, respectively, to earnings as a result of the hedged forecasted transactions becoming probable not to occur. During the next twelve months, Citizens estimates that $2.2 million will be reclassified as an increase to interest income.

The following tables summarize the impact of cash flow hedges on the unaudited Consolidated Financial Statements for the three months ended March 31, 2011 and 2010.

	Derivative Impact on OCI Gain (Loss)									Derivative Ineffectiveness Gain (Loss)
					Location					Location
					Reclassified in	Reclassified from				Recognized in
Derivatives Relationship					Statement of	Accumulated OCI into				Statement of
(in thousands)	Recognized in OCI				Operations	Statement of Operations				Operations	Amount
	Three Months Ended					Three Months Ended					Three Months Ended
	March 31,					March 31,					March 31,
	2011		2010			2011		2010			2011		2010
Cash flow hedges:
Interest rate products	$	18	$	2,554	Interest income	$	1,046	$	2,052
					Other income		513		1,199	Other income	$	—	$	—
Total	$	18	$	2,554		$	1,559	$	3,251		$	—	$	—

Fair Value Hedges of Interest Rate Risk

Citizens is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in LIBOR, the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2011 and December 31, 2010, Citizens had 2 fair value interest rate swaps with an aggregate notional balance of $35.0 million and 4 fair value interest rate swaps with an aggregate notional balance of $170.0 million, respectively.

For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Citizens includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2011 and 2010, Citizens recognized gains of $0.5 million, and $1.6 million, respectively, in interest expense related to hedge ineffectiveness. Citizens also recognized a net reduction to interest expense of $0.6 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively, related to Citizens’ fair value hedges, which includes net settlements on the derivatives and any amortization adjustment in the basis of the hedged items.

The following table summarizes the impact of fair value hedges on the unaudited Consolidated Financial Statements for the three months ended March 31, 2011 and 2010.

	Derivative Contract (Loss) Gain						Hedged Item Gain (Loss)
	Location in	Three Months Ended					Location in	Three Months Ended
Derivatives Relationship	Statement of	March 31,					Statement of	March 31,
(in thousands)	Operations	2011			2010		Operations	2011		2010
Fair value hedges:
Interest rate products	Interest expense	$	(990	)	$	89	Interest expense	$	1,460	$	1,524

Non-designated Hedges

Citizens does not use derivatives for trading or speculative purposes and does not use credit derivatives for any purpose. Derivatives not designated as hedges are used to manage Citizens’ exposure to interest rate movements and other identified risks but do not satisfy the conditions for hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly into earnings. Additionally, Citizens holds interest rate derivatives, including interest rate swaps and option products, resulting from a service Citizens provides to certain clients. Citizens executes interest rate derivatives with commercial banking clients to facilitate their

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respective risk management strategies. Those derivatives are simultaneously hedged by offsetting derivatives that Citizens executes with a third party, such that Citizens minimizes its net risk exposure resulting from such transactions. As of March 31, 2011 and December 31, 2010, Citizens had 200 derivative transactions with an aggregate notional amount of $712.1 million and 230 derivative transactions with an aggregate notional amount of $765.5 million, respectively, related to this program.

The following table summarizes the impact of derivatives not designated as hedges on the unaudited Consolidated Financial Statements for the three months ended March 31, 2011 and 2010.

		Amount of (Loss) Gain
		Recognized in Statement
		of Operations
	Location of (Loss) Gain	Three Months Ended
Derivatives Relationship	Recognized in	March 31,
(in thousands)	Statement of Operations	2011			2010
Derivativesnotdesignated as hedges — Interest rate products	Other income	$	(112	)	$	(490	)

Credit-Risk-Related Contingent Features

Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain derivative counterparties that contain a provision where if it fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and Citizens would be required to settle its obligations under the agreements.

As of March 31, 2011, the fair value of derivatives in a net liability position with all counterparties, which includes accrued interest, but excludes any adjustment for non performance risk related to these agreements was $20.4 million. As of March 31, 2011, Citizens had minimum collateral posting with its derivative counterparties and assigned collateral of $20.9 million. If credit risk related contingent features underlying these agreements had been triggered as of March 31, 2011, Citizens would not be required to pledge any additional collateral.

In addition, if Citizens’ credit rating is reduced below investment grade, then a termination event is deemed to have occurred with one of its counterparties and the counterparty has the right to terminate all affected transactions under the related agreement. Citizens has breached these provisions with respect to a Moody’s rating below investment grade at August 6, 2009 and may be required to settle its obligations under the agreement at the termination value. Citizens may be required to pay additional amounts due in excess of amounts previously posted as collateral. As of March 31, 2011, the aforementioned termination value approximated $0.7 million.

Citizens does not offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against recognized fair value amounts of derivatives executed with the same counterparty under a master netting agreement. The Corporation has the right to reclaim collateral assigned of $20.9 million.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Quarterly Information
	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2011			2010			2010			2010			2010
Summary of Operations (in thousands)
Net interest income	$	78,614		$	81,731		$	81,558		$	84,586		$	81,189
Provision for loan losses		88,724			131,296			89,617			70,614			101,355
Noninterest income(1)		23,143			24,028			25,956			22,282			22,393
Noninterest expense		81,656			77,234			74,740			77,010			78,103
Income tax provision from continuing operations		55			3,383			5,628			3,700			147
Loss from continuing operations before income taxes		(68,678	)		(106,154	)		(62,471	)		(44,456	)		(76,023	)
Income (loss) from discontinued operations (after tax)		—			—			—			5,151			(8,973	)
Net loss		(68,678	)		(106,154	)		(62,471	)		(39,305	)		(84,996	)
Net loss attributable to common shareholders(2)		(74,305	)		(111,699	)		(67,922	)		(44,711	)		(90,278	)
Taxable equivalent adjustment		2,102			2,247			2,372			2,605			3,357
Per Common Share Data
Loss from continuing operations:
Basic	$	(0.19	)	$	(0.28	)	$	(0.17	)	$	(0.12	)	$	(0.21	)
Diluted		(0.19	)		(0.28	)		(0.17	)		(0.12	)		(0.21	)
Discontinued operations:
Basic	$	—		$	—		$	—		$	0.01		$	(0.02	)
Diluted		—			—			—			0.01			(0.02	)
Net loss:
Basic	$	(0.19	)	$	(0.28	)	$	(0.17	)	$	(0.11	)	$	(0.23	)
Diluted		(0.19	)		(0.28	)		(0.17	)		(0.11	)		(0.23	)
Common book value		1.67			1.85			2.22			2.37			2.46
Tangible book value (non-GAAP)		1.55			1.72			2.08			2.24			2.28
Tangible common book value (non-GAAP)		0.85			1.02			1.39			1.54			1.59
Shares outstanding, end of period (000)(3)		397,783			397,167			397,071			396,979			394,392
At Period End (millions)
Assets	$	9,724		$	9,966		$	10,639		$	10,834		$	11,328
Earning assets		9,010			9,303			9,932			10,098			10,595
Portfolio loans		5,704			6,217			6,888			7,138			7,439
Allowance for loan losses		224			296			324			322			322
Deposits		7,692			7,727			8,101			8,222			8,481
Long-term debt		907			1,033			1,185			1,211			1,338
Shareholders’ equity		945			1,012			1,157			1,218			1,244
Average for the Quarter (millions)
Assets	$	9,899		$	10,468		$	10,803		$	11,156		$	11,575
Earning assets		9,231			9,769			10,065			10,432			10,839
Portfolio loans		6,051			6,682			7,059			7,318			7,654
Allowance for loan losses		295			324			322			322			336
Deposits		7,730			7,965			8,198			8,431			8,544
Long-term debt		971			1,160			1,203			1,315			1,450
Shareholders’ equity		1,002			1,145			1,215			1,239			1,323
Financial Ratios (annualized)(4)
Return on average assets		(2.81	)%		(4.02)	%		(2.29)	%		(1.60)	%		(2.66	)%
Return on average shareholders’ equity		(27.79	)		(36.78	)		(20.40	)		(14.40	)		(23.30	)
Average shareholders’ equity / average assets		10.13			10.94			11.25			11.10			11.43
Net interest margin (FTE)(5)		3.53			3.42			3.32			3.35			3.14
Efficiency ratio (non-GAAP)(6)		78.33			71.39			68.02			75.93			77.39
Allowance for loan losses as a percent of portfolio loans		3.93			4.76			4.70			4.51			4.33
Allowance for loan losses as a percent of nonperforming loans		165.56			134.39			88.98			83.67			77.94
Allowance for loan losses as a percent of nonperforming assets		119.18			103.30			73.10			68.11			57.96
Nonperforming loans as a percent of portfolio loans		2.37			3.54			5.29			5.39			5.56
Nonperforming assets as a percent of portfolio loans plus ORAA(7)		3.26			4.55			6.35			6.53			7.32
Nonperforming assets as a percent of total assets		1.93			2.88			4.17			4.36			4.91
Net loans charged off as a percent of average portfolio loans (annualized)		10.77			9.46			4.91			3.90			6.25
Leverage ratio		7.39			7.71			8.50			8.72			8.47
Tier 1 capital ratio		11.90			12.11			12.41			12.79			12.12
Total capital ratio		13.24			13.51			13.80			14.17			13.49

(1)	Noninterest income includes a gain on investment securities of $8.0 million and $6.0 million in the second and first quarter of 2010.
(2)	Net loss attributable to common shareholders includes a non-cash dividend to preferred shareholders of $5.6 million in the first quarter of 2011 and $5.5 million, $5.4 million, $5.4 million and $5.3 million in the fourth, third, second and first quarters of 2010.
(3)	Includes participating shares, which are restricted stock units and restricted shares.
(4)	Financial ratios are based on continuing operations.
(5)	Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%.
(6)	The Efficiency Ratio measures how efficiently a bank spends its revenues. The formula is: (Noninterest expense - Goodwill impairment)/(Net interest income + taxable equivalent adjustment + Total noninterest income - Investment securities (losses) gains).
(7)	Other real estate assets acquired (“ORAA”) include loans held for sale.

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Introduction

The following presents management’s discussion and analysis of Citizens Republic Bancorp, Inc.’s financial condition and results of operations for the three months ended March 31, 2011. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in the Corporation’s 2010 Annual Report on Form 10-K. In addition, the following discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Citizens’ 2010 Annual Report on Form 10-K, which contains important additional information that is necessary to understand the Corporation and its financial condition and results of operations for the periods covered by this report. Unless the context indicates otherwise, all references in the discussion to “Citizens” or the “Corporation” refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the “Holding Company” refer solely to Citizens Republic Bancorp, Inc. References to the “Bank” refer solely to the Corporation’s banking subsidiary, Citizens Bank.

Discontinued Operations

As a result of the sale of Citizens’ wholly-owned subsidiary, F&M Bank-Iowa (“F&M”) on April 23, 2010, the financial condition and operating results for this subsidiary have been segregated from the financial condition and operating results of Citizens’ continuing operations throughout this report and, as such, are presented as a discontinued operation. While all prior periods have been revised retrospectively to align with this treatment, these changes do not affect Citizens’ reported consolidated financial condition or operating results for any of the prior periods.

Forward — Looking Statements

Discussions and statements in this report that are not statements of historical fact, including without limitation statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan,” and statements regarding Citizens’ future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and uncertainties, many of which are beyond Citizens’ control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially.

Factors that could cause or contribute to such differences include, without limitation, the following:

• Citizens faces the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, could 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 its capital and financial position.

• Citizens’ core lending and other businesses continue to be adversely affected by the historic weakness in the national and regional economies in which it operates, particularly Michigan. Citizens’ ability to generate earnings and maintain regulatory capital ratios at acceptable levels at the Holding Company and the Bank depends substantially on developments in those economies. Also, Citizens’ potential inability to comply with applicable laws, regulations and regulatory policies or standards due to the effects of these conditions on its results of operations and financial condition may result in heightened regulatory scrutiny and require Citizens to take actions to protect depositors that are not in the best interests of its shareholders.

• Citizens’ business may be adversely affected by the highly regulated environment in which it operates. Changes in applicable laws, regulations, and regulatory practices at either the federal or state level may result in the imposition of additional costs or restrict Citizens’ ability to operate its business in the manner most beneficial to its shareholders.

• 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.

• The negative economic effects caused by terrorist attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of Citizens’ loan portfolio and could reduce its customer base, its level of deposits, and demand for its financial products such as loans.

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• 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 its ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting its results of operations.

• Increased competition with other financial institutions or an adverse change in Citizens’ relationship with a number of major customers could reduce its 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.

• 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 its goodwill or other intangible assets such that it may need to record an impairment charge, which could have a material adverse impact on its results of operations.

• If the FDIC raises the assessment rate charged to its insured financial institutions, Citizens’ FDIC insurance premium may increase, which could have a negative effect on expenses and results of operations.

• Citizens may not realize its deferred income tax assets and loss carryforwards.

• Citizens’ stock price can be volatile.

• If Citizens’ common stock fails to meet the listing requirements of NASDAQ and is delisted from trading on the NASDAQ, the market price of its common stock could be adversely affected.

• An investment in Citizens’ common stock is not an insured deposit.

• Citizens may be adversely affected by the soundness of other financial institutions.

• In order to maintain and strengthen its capital base, Citizens may need to raise additional capital in transactions that may be highly dilutive to its common shareholders. If such capital becomes needed, Citizens’ failure to raise additional capital could have serious consequences for its business.

• The Holding Company may not have sufficient resources to make capital contributions to the Bank if required by bank regulatory agencies, or if it might otherwise wish to do so, in order to maintain the Bank’s capital ratios at acceptable levels.

• 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 and are restricted by a supervisory agreement with its regulators.

• Our efforts to resolve problem assets in a manner beneficial to the Corporation may not be successful.

• 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 expenses and results of operations.

• 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.

• 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

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	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 its financial condition and results of operations.
•	Citizens may not be able to attract and retain skilled people. If Citizens were to lose key employees, it may experience a disruption in its relationship with certain customers.
•	The recently enacted Dodd-Frank Act may adversely impact Citizens’ results of operations, financial condition or liquidity.
•	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 condition.
•	Citizens’ business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, its 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’ 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.

These factors also include risks and uncertainties detailed from time to time in Citizens’ other filings with the Securities and Exchange Commission (“SEC”), such as the risk factors listed in “Item 1A, Risk Factors,” of Citizens’ 2010 Annual Report on Form 10-K and subsequent Forms 10-Q, which are available at the SEC’s web site www.sec.gov. Other factors not currently anticipated may also materially and adversely affect Citizens’ results of operations, cash flows, financial position and prospects. There can be no assurance that future results will meet expectations. While Citizens believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. Citizens does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Critical Accounting Policies

Citizens’ Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which the Corporation operates. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Actual results could differ significantly from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include those relating to the allowance for loan losses, goodwill, fair value measurements, pension and postretirement benefits, and income taxes. Citizens believes that these estimates and the related policies are important to the portrayal of the Corporation’s financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. Citizens’ significant accounting policies are more fully described in Note 1 to the audited Consolidated Financial Statements contained in the Corporation’s 2010 Annual Report on Form 10-K and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in the Corporation’s 2010 Annual Report on Form 10-K. For additional information regarding updates during 2011, see Notes 1 and 2 to the unaudited Consolidated Financial Statements in this report.

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Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as net interest margin, efficiency ratio, tangible equity to tangible assets ratio, tangible common equity to tangible assets ratio, Tier 1 common equity ratio and pre-tax pre-provision profit. Citizens believes these non-GAAP financial measures provide additional information that is useful to investors in understanding the underlying performance of Citizens, its business, and performance trends and, to a lesser degree, such measures may help facilitate performance comparisons with others in the banking industry. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious as to their use of such measures. To mitigate these limitations, Citizens has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that Citizens’ performance is properly reflected to facilitate consistent period-to-period comparisons. Although Citizens believes the non-GAAP financial measures disclosed in this report enhance investors’ understanding of its business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.

Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)

In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. Citizens believes the presentation of net interest margin on a taxable equivalent basis using a 35% effective tax rate allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt investments. See the Selected Quarterly Information Table, the Non-GAAP Reconciliation Table, and the Average Balances/Net Interest Income/Average Rates Table later in this report for additional information.

Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios (non-GAAP financial measures)

Citizens believes the exclusion of goodwill and other intangible assets to create “tangible assets” and “tangible equity” facilitates the comparison of results for ongoing business operations. Citizens’ management internally assesses the company’s performance based, in part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity ratio have become a focus of some investors and management believes that these ratios may assist investors in analyzing Citizens’ capital position absent the effects of intangible assets and preferred stock. Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts and banking regulators may assess Citizens’ capital adequacy using tangible common equity and Tier 1 common equity, Citizens believes that it is useful to provide investors the ability to assess its capital adequacy on the same bases. Tier 1 common equity is often expressed as a percentage of net risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weight assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (net risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity as shown in the Non-GAAP Reconciliation Table below. The amounts disclosed as net risk-weighted assets are calculated consistent with banking regulatory requirements.

Pre-Tax Pre-Provision Profit (non-GAAP financial measure)

Pre-tax pre-provision profit (“PTPP”), as defined by Citizens’ management represents total revenue (total net interest income and noninterest income) excluding any securities gains/losses, fair-value adjustments on loans held for sale, interest rate swaps, and bank owned life insurance, less noninterest expense excluding any goodwill impairment charges, credit writedowns, fair-value adjustments and special assessments. While certain of these items are an integral part of Citizens’ banking operations, in each case, the excluded items are items that management believes are particularly impacted by economic stress or significant changes in the credit cycle and are therefore likely to make it more difficult to understand our underlying performance trends and the ability of our banking operations to generate revenue. Net interest income, noninterest income and noninterest expense are all calculated in accordance with GAAP and are presented in the consolidated statement of operations. While noninterest income and noninterest expense are adjusted for the specific items listed above in the calculation of PTPP, these adjustments represent the excluded items in their entirety for each period presented to better facilitate period to period comparisons.

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Viewed together with Citizens’ GAAP results, PTPP provides management, investors and others with a useful metric to evaluate and better understand trends in Citizens’ period-to-period earnings power and ability to generate capital to cover credit losses, in each case exclusive of the effects of the current and recent economic stress and the credit cycle. As recent results for the banking industry demonstrate, loan charge-offs, related credit provision, and credit writedowns can vary significantly from period to period, making a measure that helps isolate the impact of credit costs on profitability all the more important to investors. The “Credit Quality” section of this report isolates the challenges and issues related to the credit quality of Citizens’ loan portfolio and their impact on Citizens’ earnings as reflected in the provision for loan losses.

A portion of the compensation awarded to Citizens’ Named Executive Officers and certain other management employees for their performance in 2010 and 2011 is measured against a PTPP performance target as Citizens believes that PTPP is a key measurement that helps keep revenue generation as a focus for its business and a particularly valuable measure during challenging credit cycles. Based on 2010 full year results, the total cash compensation award linked to PTPP was $1.1 million. Additionally, during 2010, approximately 1,129,000 shares of restricted stock and restricted stock units were granted which have a two-year vesting period based partially on PTPP results and partially on total provision expense. The grants are designed so that a portion of the compensation is based on provision expense while the remainder does not depend on management’s performance with regard to managing loan losses, securities impairments, and other asset impairments. The total potential cash compensation award linked to PTPP for 2011 is $0.9 million.

Like all non-GAAP metrics, PTPP’s usefulness is inherently limited. Because Citizens’ calculation of PTPP may differ from the calculation of similar measures used by other bank holding companies, PTPP should be used to determine and evaluate period to period trends in Citizens’ performance and in comparison to Citizens’ loan charge-offs, related credit provision, and credit writedowns, rather than in comparison to non-GAAP metrics used by other companies. In addition, investors should bear in mind that income tax expense (benefit), the provision for loan losses, and the other items excluded from revenues and expenses in the PTPP calculation are recurring and integral expenses to Citizens’ banking operations, and that these expenses will still accrue under GAAP, thereby reducing GAAP earnings and, ultimately, shareholders’ equity.

The following table displays the calculation of the efficiency ratio for the past five quarters and the calculation of the remainder of these non-GAAP measures other than pre-tax pre-provision profit, the calculation of which is set forth in the “Results of Operations — Summary” section, as of the end of each of those periods.

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Non-GAAP Reconciliation
	March 31,			December 31,			September 30,			June 30,			March 31,
	2011			2010			2010			2010			2010
Efficiency Ratio (non-GAAP)(in thousands)
Net interest income (A)	$	78,614		$	81,731		$	81,558		$	84,586		$	81,189
Taxable equivalent adjustment (B)		2,102			2,247			2,372			2,605			3,357
Investment securities (losses) gain (C)		(383	)		(171	)		—			8,051			6,016
Noninterest income (D)		23,143			24,028			25,956			22,282			22,393
Noninterest expense (E)		81,656			77,234			74,740			77,010			78,103
Efficiency ratio: E/(A+B-C+D) (non-GAAP)		78.33	%		71.39	%		68.02	%		75.93	%		77.39	%
Tangible Common Equity to Tangible Assets (non-GAAP) (in millions)
Total assets(1)	$	9,724		$	9,966		$	10,639		$	10,834		$	11,652
Goodwill(2)		(318	)		(318	)		(318	)		(318	)		(331	)
Other intangible assets		(10	)		(11	)		(11	)		(12	)		(13	)
Tangible assets (non-GAAP)	$	9,396		$	9,637		$	10,310		$	10,504		$	11,308
Total shareholders’ equity	$	945		$	1,012		$	1,157		$	1,218		$	1,244
Goodwill(2)		(318	)		(318	)		(318	)		(318	)		(331	)
Other intangible assets		(10	)		(11	)		(11	)		(12	)		(13	)
Tangible equity (non-GAAP)	$	617		$	683		$	828		$	888		$	900
Tangible equity	$	617		$	683		$	828		$	888		$	900
Preferred stock		(280	)		(278	)		(277	)		(275	)		(274	)
Tangible common equity (non-GAAP)	$	337		$	405		$	551		$	613		$	626
Tier 1 Common Equity (non-GAAP)(in millions)
Total shareholders’ equity	$	945		$	1,012		$	1,157		$	1,218		$	1,244
Qualifying capital securities		74			74			74			74			74
Goodwill(2)		(318	)		(318	)		(318	)		(318	)		(331	)
Accumulated other comprehensive loss (income)		14			20			(16	)		(10	)		6
Other intangible assets		(10	)		(11	)		(11	)		(12	)		(13	)
Tier 1 capital (regulatory)	$	705		$	777		$	886		$	952		$	980
Tier 1 capital (regulatory)	$	705		$	777		$	886		$	952		$	980
Qualifying capital securities		(74	)		(74	)		(74	)		(74	)		(74	)
Preferred stock		(280	)		(278	)		(277	)		(275	)		(274	)
Total Tier 1 common equity (non-GAAP)	$	351		$	425		$	535		$	603		$	632
Net risk-weighted assets (regulatory)(3)	$	5,930		$	6,417		$	7,133		$	7,432		$	8,083
Equity to assets		9.72	%		10.15	%		10.88	%		11.24	%		10.68	%
Tier 1 common equity (non-GAAP)		5.93			6.62			7.50			8.10			7.82
Tangible equity to tangible assets (non-GAAP)		6.57			7.09			8.03			8.45			7.96
Tangible common equity to tangible assets (non-GAAP)		3.59			4.20			5.34			5.83			5.54

(1)	Total asset represents assets for continuing operations, as shown on the balance sheet, and includes assets of discontinued operations of $324 million in the first quarter of 2010.
(2)	Goodwill represents goodwill for continuing operations, as shown on the balance sheet, and includes goodwill for discontinued operations of $12.6 million in the first quarter of 2010.
(3)	Net risk-weighted assets (regulatory) for second quarter 2010 were calculated on a combined basis.

Written Agreement with FRBC and OFIR

In the third quarter of 2010, the Holding Company and the Bank, entered into a written supervisory agreement (the “Written Agreement”) with the Federal Reserve Bank of Chicago (“FRBC”) and the Michigan Office of Financial and Insurance Regulation (“OFIR”). The Written Agreement requires the Holding Company and the Bank to take various actions intended by the regulators to improve the operations of the Holding Company and the Bank, requires capital and liquidity plans be submitted that are acceptable to the regulators, and prohibits taking certain actions, such as paying dividends and amounts owed in connection with their outstanding trust preferred securities, without regulatory approval.

During the first quarter of 2011, Citizens submitted a modified capital plan within the required timeframe that was approved by the regulators. Enhancements to the ALLL methodology continue to be made, primarily related to additional documentation, but did not have an impact on the overall methodology or the recorded balance for the allowance for loan losses.

Citizens and the Bank continue to address the ongoing affirmative obligations and negative covenants and are committed to resolving the matters raised in the Written Agreement on a timely basis and maintaining the safety and soundness of the Bank. Citizens has complied with the requirements of the Written Agreement to date and is on target in meeting all other required deadlines included in the Written Agreement. Because substantially all of the requirements of the Written Agreement relate to operational improvements or codify actions already being taken by Citizens at the time the Written Agreement became binding, Citizens does not currently anticipate that compliance with the Written Agreement will have a material adverse impact on its business, financial condition or results of operations. For a more detailed description of the Written Agreement, see “Item 1 Business — Supervision and Regulation” in the Corporation’s 2010 Annual Report on Form 10-K.

Results of Operations

Summary

Citizens reported a net loss from continuing operations of $68.7 million for the three months ended March 31, 2011, compared with net loss of $76.0 million for the first quarter of 2010. After incorporating the $5.6 million accrued but unpaid dividend to the preferred shareholder, Citizens reported a net loss attributable to common shareholders of $74.3 million for the three months ended March 31, 2011, compared with $90.3 million for the first quarter of 2010. Results for the first quarter of 2010 included net loss from discontinued operations of $9.0 million. Diluted net loss from continuing operations per share was $0.19 for the first quarter of 2011, compared with $0.21 for the first quarter of 2010.

Key factors behind the results for the first quarter of 2011 compared with the first quarter of 2010 were:

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• The decrease in net interest income from 2010 was primarily a result of a decrease of $1.6 billion in average earning assets, partially offset by an increase in net interest margin from 3.14% to 3.53%.

• The decrease in the provision for loan losses over 2010 was primarily a result of resolving $466.2 million and $460.0 million in problem assets through a combination of bulk sales and individual workouts during the fourth quarter of 2010 and the first quarter of 2011, respectively which significantly reduced the outstanding amount of nonperforming loans and watchlist loans and improved the credit quality of our loan portfolio.

• The increase in noninterest income from 2010 was primarily the result of fewer writedowns to reflect fair-value declines of the underlying collateral on commercial loans held for sale.

• The increase in noninterest expense from 2010 was primarily the result of increased valuation writedowns and losses incurred as a result of the increase in property dispositions in the first quarter of 2011.

The following table displays pre-tax pre-provision profit (non-GAAP) for each of the last five quarters.

Pre-tax pre-provision profit (non-GAAP )

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
(in thousands)	2011			2010			2010			2010			2010
Loss from continuing operations	$	(68,678	)	$	(106,154	)	$	(62,471	)	$	(44,456	)	$	(76,023	)
Income tax provision from continuing operations		55			3,383			5,628			3,700			147
Provision for loan losses		88,724			131,296			89,617			70,614			101,355
Net loss on loans held for sale		1,106			3,069			1,441			8,405			7,702
Investment securities losses (gains)		383			171			—			(8,051	)		(6,016	)
Losses on other real estate (ORE)		9,122			930			1,967			3,778			6,763
Fair-value adjustment on bank owned life insurance(1)		(100	)		(105	)		(159	)		280			(83	)
Fair-value adjustment on swaps(1)		114			(535	)		202			279			836
Pre-tax pre-provision profit (non-GAAP)	$	30,726		$	32,055		$	36,225		$	34,549		$	34,681

⁽¹⁾ Fair-value adjustment amounts contained in line item “Other income” on Consolidated Statements of Operations

Total assets at March 31, 2011 were $9.7 billion, a decrease of $241.5 million or 2.4% from December 31, 2010 and a decrease of $1.9 billion or 16.5% from March 31, 2010. The declines were primarily due to reductions in total portfolio loans as a result of the accelerated resolution of problem assets, which consisted primarily of substandard commercial real estate loans. The decrease from March 31, 2010 was also due to the sale of Citizens’ wholly-owned subsidiary, F&M during the second quarter of 2010.

Citizens maintains a strong liquidity position, with on- and off-balance sheet liquidity sources and a stable funding base comprised of approximately 79% deposits, 9% long-term debt, 10% equity, and 2% short-term liabilities. Citizens also continues to maintain a strong capital position, and its regulatory capital ratios are above “well-capitalized” standards.

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Net Interest Income and Net Interest Margin

An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the three months ended March 31, 2011 and 2010 is presented below.

Average Balances/Net Interest Income/Average Rates
						Three Months Ended
						March 31,
	2011								2010
	Average					Average			Average					Average
(in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	416,756		$	253		0.25	%	$	696,016		$	424		0.25	%
Investment securities:(3)
Taxable		2,313,467			19,610		3.39			1,756,812			18,261		4.16
Tax-exempt		278,679			3,086		6.81			492,968			5,285		6.60
FHLB and Federal Reserve stock		143,873			1,125		3.16			155,084			1,002		2.61
Portfolio Loans:(4)
Commercial and industrial		1,422,574			15,673		4.59			1,874,944			22,047		4.87
Commercial real estate		2,045,360			26,707		5.30			2,791,395			36,049		5.24
Residential mortgage		741,818			8,818		4.76			988,859			11,820		4.78
Direct consumer		1,024,979			15,463		6.12			1,201,799			17,921		6.05
Indirect consumer		816,676			13,681		6.79			797,482			13,509		6.87
Total portfolio loans		6,051,407			80,342		5.40			7,654,479			101,346		5.39
Loans held for sale(4)		26,860			369		5.50			83,972			396		1.90
Total earning assets(3)		9,231,042			104,785		4.67			10,839,331			126,714		4.85
Nonearning Assets
Cash and due from banks		143,957								209,126
Bank premises and equipment		104,399								109,696
Investment security fair value adjustment		32,229								42,462
Other nonearning assets		682,526								710,158
Assets of discontinued operations		—								328,378
Allowance for loan losses		(295,232	)							(335,970	)
Total assets	$	9,898,921							$	11,903,181
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand deposits	$	951,770			548		0.23		$	1,075,943			814		0.31
Savings deposits		2,629,296			2,594		0.40			2,490,158			4,215		0.69
Time deposits		2,753,306			13,233		1.95			3,709,529			24,482		2.68
Short-term borrowings		41,187			18		0.18			36,542			24		0.27
Long-term debt		971,076			9,778		4.08			1,449,748			15,990		4.47
Total interest-bearing liabilities		7,346,635			26,171		1.44			8,761,920			45,525		2.11
Noninterest-Bearing Liabilities and
Shareholders’ Equity
Noninterest-bearing demand		1,395,588								1,268,583
Other liabilities		154,408								134,510
Liabilities of discontinued operations		—								415,154
Shareholders’ equity		1,002,290								1,323,014
Total liabilities and shareholders’ equity	$	9,898,921							$	11,903,181
Net Interest Income				$	78,614							$	81,189
Interest Spread(5)							3.23	%							2.74	%
Contribution of noninterest bearing sources of funds							0.30								0.40
Net Interest Margin(5)(6)							3.53	%							3.14	%

(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 $2.1 million and $3.4 million for the three months ended March 31, 2011 and 2010, 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)	Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity supporting earning assets.

The increase in net interest margin in the three months ended March 31, 2011 over the comparable period of 2010 was the result of declining deposit costs, reductions in high-cost funding, and wholesale funding repricing to lower fixed rates, partially offset by the effect of replacing declining loan balances with lower-yielding investment securities.

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The decrease in net interest income in the three months ended March 31, 2011 from the comparable period of 2010 was the result of lower average earning assets, partially offset by the effects of the higher net interest margin.

The table below shows changes in interest income, interest expense and net interest income due to rate and volume variances for major categories of earning assets and interest-bearing liabilities.

Analysis of Changes in Interest Income and Interest Expense

	Three Months Ended March 31,
				Increase (Decrease)
2011 compared with 2010	Net			Due to Change in
(in thousands)	Change(1)			Rate(2)			Volume(2)
Interest Income on Earning Assets:
Money market investments	$	(171	)	$	(1	)	$	(170	)
Investment securities:
Taxable		1,349			(3,762	)		5,111
Tax-exempt		(2,199	)		169			(2,368	)
FHLB and Federal Reserve stock		123			199			(76	)
Loans:
Commercial and industrial		(6,374	)		(1,321	)		(5,053	)
Commercial real estate		(9,342	)		395			(9,737	)
Residential mortgage loans		(3,002	)		(65	)		(2,937	)
Direct consumer		(2,458	)		207			(2,665	)
Indirect consumer		172			(151	)		323
Total portfolio loans		(21,004	)		(935	)		(20,069	)
Loans held for sale		(27	)		377			(404	)
Total		(21,929	)		(3,953	)		(17,976	)
Interest Expense on Interest-Bearing Liabilities:
Deposits:
Interest-bearing demand deposits		(266	)		(179	)		(87	)
Savings deposits		(1,621	)		(1,845	)		224
Time deposits		(11,249	)		(5,773	)		(5,476	)
Short-term borrowings		(6	)		(9	)		3
Long-term debt		(6,212	)		(1,296	)		(4,916	)
Total		(19,354	)		(9,102	)		(10,252	)
Net Interest Income	$	(2,575	)	$	5,149		$	(7,724	)

(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.

The decrease in net interest income in the three months ended March 31, 2011 from the comparable period of 2010 reflects volume variances that were unfavorable in the aggregate, partially offset by rate variances that were favorable in the aggregate. The unfavorable volume variances were primarily due to the reduction in the loan portfolios as a result of the accelerated problem asset resolution initiative, partially offset by an increase in the taxable investment securities portfolios and a decrease in brokered time deposits and long term debt. The rate variances were primarily the result of borrowings repricing to lower rates as a result of the lower market interest rates and reduced deposit price competition, partially offset by lower reinvestment yields for investment securities and intensified price competition for commercial and industrial loans.

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Noninterest Income

The components of noninterest income for the three months ended March 31, 2011 and 2010 are presented below.

Noninterest Income

	Three Months Ended
	March 31,						Change in 2011
(dollars in thousands)	2011			2010			Amount			Percent
Service charges on deposit accounts	$	9,429		$	9,684		$	(255	)		(2.6	)%
Trust fees		3,923			3,795			128			3.4
Mortgage and other loan income		2,942			2,589			353			13.6
Brokerage and investment fees		1,108			933			175			18.8
ATM network user fees		1,755			1,597			158			9.9
Bankcard fees		2,238			2,007			231			11.5
Losses on held for sale loans		(1,106	)		(7,702	)		6,596			85.6
Investment securities (losses) gains		(383	)		6,016			(6,399	)		N/M
Other income		3,237			3,474			(237	)		(6.8	)
Total noninterest income	$	23,143		$	22,393		$	750			3.4

N/M — Not Meaningful

The increase in noninterest income from the first quarter of 2010 was primarily a result of lower losses on loans held for sale, and to a lesser extent was due to higher mortgage and other loan income as well as increases in most other categories. The increase was partially offset by losses on investment securities as compared to gains in the first quarter of 2010. The decrease in losses on loans held for sale was primarily the result of fewer writedowns to reflect fair-value declines of the underlying collateral. The higher mortgage and other loan income was primarily the result of higher residential mortgage origination volume as compared to the first quarter of 2010. The loss on investment securities as compared to a gain in the first quarter of 2010 was directly related to the sale of $147.6 million of municipal bonds in the first quarter of 2010, completed in accordance with Citizens policy.

Noninterest Expense

The components of noninterest expense for the three months ended March 31, 2011 and 2010 are presented below.

Noninterest Expense

	Three Months Ended
	March 31,				Change in 2011
(dollars in thousands)	2011		2010		Amount			Percent
Salaries and employee benefits	$	31,018	$	29,947	$	1,071			3.6	%
Occupancy		7,562		7,461		101			1.4
Professional services		2,219		2,253		(34	)		(1.5	)
Equipment		3,052		3,072		(20	)		(0.7	)
Data processing services		4,352		4,629		(277	)		(6.0	)
Advertising and public relations		569		1,297		(728	)		(56.1	)
Postage and delivery		1,116		1,014		102			10.1
Other loan expenses		5,255		5,974		(719	)		(12.0	)
Losses on other real estate (ORE)		9,122		6,763		2,359			34.9
ORE expenses		1,768		1,190		578			48.6
Intangible asset amortization		828		1,130		(302	)		(26.7	)
Other expense		14,795		13,373		1,422			10.6
Total noninterest expense	$	81,656	$	78,103	$	3,553			4.5

The increase over the first quarter of 2010 was primarily the result of higher losses on other real estate, higher ORE expenses, higher other expenses, and higher salaries and employee benefits expense, partially offset by a net decline in most other noninterest expense categories. The increase in losses on other real estate was primarily the result of additional writedowns in 2011 to reflect fair-value declines for the underlying collateral related to the problem asset resolution initiatives. The increase in ORE expenses was the result of additional carrying costs related to holding the ORE properties. The increase in other expenses was related to higher fraud and other losses, but partially offset by

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savings on FDIC insurance from opting out of the Transaction Account Guarantee Program. The increase in salaries and employee benefits was related to higher pension costs primarily due to the decrease in discount rate and amortization of losses from previous years as well as higher incentive and commission costs. The net decline in other noninterest expense categories was primarily the result of various expense management initiatives implemented throughout the company.

Income Taxes

The income tax provision for the first quarter of 2011 was $0.1 million, essentially unchanged from the first quarter of 2010. The effective tax rate for the first quarter of 2011 was (0.08)% compared to (0.19%) in the first quarter of 2010, which includes adjustments for tax-exempt income and the deferred tax asset valuation allowance.

Discontinued Operations

For the first three months of 2010, the net loss from discontinued operations was $9.0 million. During the first quarter of 2010, the carrying value of F&M’s equity exceeded the contractual sales price, therefore Citizens recorded a $10.2 million loss to mark the assets (primarily loans) and liabilities being sold to fair-value, less cost to sell.

Lines of Business Results

Citizens monitors financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Business line results are divided into five major business segments: Regional Banking, Specialty Consumer, Specialty Commercial, Wealth Management and Other. For additional information about each line of business, see Note 15 to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K and Note 12 to the unaudited Consolidated Financial Statements in this report.

Regional Banking recorded a net loss for the three months ended March 31, 2011 compared to net income in same period of the prior year, primarily due to higher provision for loan losses, lower net interest income and higher noninterest expense. The variances were the result of Citizens’ accelerated problem asset resolution initiatives which were substantially completed in the first quarter of 2011.

Net losses for Specialty Consumer for the three months ended March 31, 2011 decreased as compared with the same period of the prior year, primarily due to a decrease in the provision for loan losses. The variance in the provision was the result of the credit writedowns during the first quarter of 2010 associated with nonperforming residential mortgage loans.

Net losses for Specialty Commercial for the three months ended March 31, 2011 increased as compared with the same period of the prior year primarily due to a decrease in net interest income, partially offset by an increase in noninterest income. The decrease in net interest income was the result of declining loan balances due to the resolution of problem assets. The increase in noninterest income was due to the better execution on loans held for sale.

Net income for Wealth Management for the three months ended March 31, 2011 was increased over the prior year primarily due to a decrease in noninterest expense relating to a decrease in salaries and employee benefits expense and lower data processing expenses.

Net losses for the Other line of business for the three months ended March 31, 2011 decreased as compared with the same period of the prior year primarily as a result of higher net interest income, lower noninterest expenses, and losses from discontinued operations in 2010, partially offset by lower noninterest income. The increase in net interest income was primarily the result of the internal profitability methodology utilized at Citizens that insulates the other lines of business from interest-rate risk and assigns the risk to the asset/liability management function, which is a component of this segment. The decrease in noninterest expense was primarily the result of a decrease in the FDIC insurance costs. The 2010 loss on discontinued operations was directly related to the fair-value adjustment in the first quarter of 2010 related to the sale of F&M. The decrease in noninterest income was primarily the result of a net gain on investment securities sales of $6.0 million in the first quarter of 2010.

Financial Condition

Total assets at March 31, 2011 were $9.7 billion, a decrease of $241.5 million or 2.4% from December 31, 2010 and a decrease of $1.9 billion or 16.5% from March 31, 2010. The declines were primarily due to reductions in total portfolio loans as a result of the accelerated resolution of problem assets. The decrease from March 31, 2010 was also due to the sale of Citizens’ wholly-owned subsidiary, F&M during the second quarter of 2010.

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Money Market Investments

Money market investments at March 31, 2011 totaled $495.6 million, an increase of $86.5 million or 21.1% from December 31, 2010 and a decrease of $265.2 million or 34.9% from March 31, 2010. The increase from December 31, 2010 was directly related to reinvesting a portion of the loan portfolio paydowns and proceeds from loan sales into money market investments. The decrease from March 31, 2010 was primarily the result of using money market investments to payoff maturing wholesale funding.

Investment Securities

Investment securities at March 31, 2011 totaled $2.7 billion, an increase of $142.5 million or 5.6% from December 31, 2010 and an increase of $496.0 million or 22.8% over March 31, 2010. Increases in investment securities were largely due to reinvesting a portion of the loan portfolio paydowns and proceeds from loan sales.

Portfolio Loans

The following definitions are provided to clarify the types of loans included in each of the commercial real estate segments identified in the table below. Land hold loans are secured by undeveloped land which has been acquired for future development. Land development loans are secured by land being developed in terms of infrastructure improvements to create finished marketable lots for commercial or residential construction. Construction loans are secured by commercial, retail and residential real estate in the construction phase with the intent to be sold or become an income producing property. Income producing loans are secured by non-owner occupied real estate leased to one or more tenants. Owner occupied loans are secured by real estate occupied by the owner.

Loan Portfolios

(in millions)	March 31, 2011		December 31, 2010		September 30, 2010		June 30, 2010		March 31, 2010
Land hold	$	17.3	$	28.3	$	37.1	$	37.8	$	39.3
Land development		22.7		34.8		73.8		84.3		101.0
Construction		23.3		103.7		155.4		156.3		164.4
Income producing		1,038.7		1,171.0		1,382.3		1,481.7		1,532.1
Owner-occupied		692.3		783.0		855.1		886.1		931.5
Total commercial real estate		1,794.3		2,120.8		2,503.7		2,646.2		2,768.3
Commercial and industrial		1,353.2		1,474.2		1,657.4		1,686.8		1,824.8
Total commercial		3,147.5		3,595.0		4,161.1		4,333.0		4,593.1
Residential mortgage		727.3		756.2		800.5		858.9		877.2
Direct consumer		1,006.4		1,045.5		1,091.7		1,132.2		1,174.7
Indirect consumer		823.0		819.9		834.7		814.0		794.2
Total consumer		2,556.7		2,621.6		2,726.9		2,805.1		2,846.1
Total portfolio loans	$	5,704.2	$	6,216.6	$	6,888.0	$	7,138.1	$	7,439.2

Decreases in total portfolio loans in the first quarter of 2011 compared to the prior quarters reflect the results of the accelerated problem asset resolution initiatives, paydowns as a result of normal client activity, and charge-offs.

Underwriting

Citizens’ Commercial Credit Policy and Underwriting Guidelines and Citizens’ Consumer Loan Credit Policy and Underwriting Guidelines (together, the “Underwriting Guidelines”) are written in a manner that is consistent with prudent banking practices and regulatory guidance applicable to each loan product. Citizens’ Underwriting Guidelines outline loan requirements and structuring parameters to determine the borrower’s financial capacity to repay under the terms of the loan and evaluate the collateral pledged to secure the loan and are designed to provide an adequate margin of safety for full collection of both principal and interest, within contractual terms. The Underwriting Guidelines provide the framework to determine that the borrower has the financial capacity to fully repay the loan, structurally mitigate credit risks and monitor the loan’s credit performance over the term of the loan. Additionally, the Underwriting Guidelines are updated periodically in response to market and economic conditions and are reviewed by the Risk Management Committee of the Board as well as Citizens’ full Board of Directors.

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The commercial Underwriting Guidelines outline product- and collateral-specific acceptable loan terms and conditions, including maximum loan to value ratios for real estate collateral, advance rates for non-real estate collateral, and debt service coverage. Acceptable credit management practices require that the borrower’s financial capacity to repay the loan be analyzed based on the most recent financial information as specified by the loan’s documented structure. It is Citizens’ general practice to obtain personal guarantees and underwrite the guarantor’s capacity to support the loan no less frequently than annually, and more frequently if changes occur in the borrower’s capacity to repay or in general economic conditions that might affect the borrower. Citizens’ Underwriting Guidelines for non-owner occupied commercial real estate loans delineates maximum terms, amortizations and loan to value ratios as well as minimum equity investments and debt service coverage ratios based on property type. Generally, maximum loan terms are five years, maximum amortizations are 25 years, minimum equity requirements range from 10% to 25%, debt service coverage ratios range from 1.2 to 1.5 times and loan to value ratios range from 65% to 80%. Currently, new commercial land hold and land development loans are not being originated by Citizens. Citizens’ Real Estate Appraisal and Environmental Policy specifies the Bank’s requirements for obtaining appraisals from licensed or certified appraisers to assess the value of the underlying collateral. New variable rate commercial loans are underwritten at fully indexed rates. Additionally, variable rate commercial loan underwriting includes stress tests of the borrower’s debt service capabilities with higher than existing interest rates and fluctuations in the underlying cash flows available for repayment.

The consumer Underwriting Guidelines outline product- and collateral-specific loan terms and conditions, including maximum debt ratios and advance rates based on the borrower’s credit score. Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios and loan-to-collateral value ratios. They are predominately originated in accordance with underwriting standards set forth by the government-sponsored entities (“GSEs”) Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”), which serve as the primary purchasers of loans sold in the secondary market by mortgage lenders. These underwriting standards generally require that the loans be collateralized by one-to-four family residential real estate. Automated underwriting engines deployed by a GSE are used to determine creditworthiness of the vast majority of borrowers. Maximum allowable loan-to-value (“LTV”)/combined loan-to-value (“CLTV”) on these loan products generally do not exceed 95% at origination. Citizens has not offered “no-doc/low doc” and “stated income/stated asset” loans since January 1, 2007 and does not have any of these loans in its residential mortgage portfolio. Sub-prime, initial teaser rate and negative amortization loans were originated on an exception basis prior to 2007 and have not been offered since January 1, 2007. At March 31, 2011, December 31, 2010 and March 31, 2010, the outstanding balance of these loans was $0.8 million or 0.1%, $1.9 million or 0.3%, and $2.4 million or 0.3% of the total residential mortgage portfolio, respectively. The interest income associated with these loans was immaterial.

In June 2008, Citizens entered into a master sales agreement to sell its residential mortgage originations to its third-party servicer at a fixed rate with no recourse. Under this agreement, Citizens sells more than 90% of new mortgage origination, resulting in minimal new loans being retained in the residential mortgage portfolio. During 2011, the amount of new mortgage loans underwritten to non-GSE standards, all of which are retained in the residential mortgage loan portfolio, was immaterial. Prior to June 2008, when Citizens sold its residential mortgage originations to several secondary market participants, it made various standard representations and warranties. The specific representations and warranties made by Citizens depended on the nature of the transaction and the requirements of the buyer. In the event of a breach of the representations and warranties, Citizens may be required to either repurchase the mortgage loans (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify the investor. During the first three months of 2011 and 2010, Citizens repurchased $0.1 million and $1.2 million of loans, respectively, pursuant to such provisions. Citizens estimates its exposure to losses from its obligation to repurchase previously sold loans based on the individual circumstances applicable to each loan submitted for potential repurchase by an investor, and as a result, Citizens maintains a liability included in Other Liabilities on the balance sheet for estimated losses on loans expected to be repurchased or on which indemnification is expected to be provided. Citizens recorded $1.1 million and $0.4 million in the first three months of 2011 and 2010, respectively in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans.

Direct consumer loans include home equity loans, and direct installment loans to individuals used to purchase boats, recreational vehicles, automobiles and other personal items. Underwriting guidelines for these loans are heavily influenced by statutory requirements, which include, but are not limited to maximum loan-to-value ratios, credit scoring results, ability to service overall debt, and documentation requirements. Individual borrowers may be required to provide additional collateral or a satisfactory endorsement or guaranty from another person, depending on the creditworthiness of the borrower. Home equity loans consist of fully-indexed variable rate revolving lines of credit and fixed rate loans to consumers that are secured by residential real estate. Home equity loans are generally in a junior

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lien position and are originated through Citizens’ branches with cumulative loan-to-value ratios generally at or less than 80% of appraised collateral value. As of March 31, 2011, Citizens’ home equity portfolio totaled $821.9 million, and had an average loan size of $36,871 with average refreshed FICO score of 738. As of March 31, 2011, other direct installment loans totaled $184.5 million and had an average loan size of $18,894 with an average refreshed FICO score of 718.

Indirect consumer loans are originated through our centralized underwriting group that has established relationships with certain dealers which meet Citizens’ underwriting guidelines and adhere to prudent business practices. The dealers are evaluated on their creditworthiness and business practices with performance monitored on an annual basis. The dealers refer customers to the centralized underwriting group, which utilizes a credit scoring model to supplement the underwriting process, and then complete the loans utilizing Citizens’ loan documents. As of March 31, 2011, indirect consumer loans had an average loan size of $22,730 with an average refreshed FICO score of 734.

Citizens maintains an independent loan review department that reviews the quality, trends, collectibility and collateral margins within the loan portfolio. The loan review department validates the credit risk profile on a regular basis by sampling loans using criteria such as loan size, delinquency status, loan officer coverage and other factors. This process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and to the Risk Committee of the Board of Directors.

Credit Quality

The quality of Citizens’ loan portfolio is impacted by numerous factors, including the economic environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an effort to identify and mitigate any potential credit quality issues and losses in a proactive manner. Citizens performs quarterly reviews of the non-watchlist commercial credit portfolio focusing on industry segments and asset classes that have or may be expected to experience stress due to economic conditions. This process seeks to validate each such credit’s risk rating, underwriting structure and exposure management under current and stressed economic scenarios while strengthening these relationships and improving communication with these clients.

The following tables represent four qualitative aspects of the loan portfolio that illustrate the overall level of quality and risk inherent in the loan portfolio.

• Delinquency Rates by Loan Portfolio — 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 — Commercial loans that, while still accruing interest, Citizens believes may be at risk due to general economic conditions or changes in a borrower’s financial status and therefore require increased oversight. Watchlist loans that are in nonperforming status are included in the nonperforming assets table below.

• Nonperforming Assets — Loans that are in nonaccrual status, loans past due 90 days or more on which interest is still accruing, restructured loans, nonperforming loans that are held for sale, and other repossessed assets acquired. The commercial loans included in this table are reviewed as part of the watchlist process in addition to the loans displayed in the commercial watchlist table below.

• Net Charge-Offs — The portion of loans that have been charged-off during each quarter, net of recoveries.

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Delinquency Rates By Loan Portfolio

	March 31, 2011					December 31, 2010					September 30, 2010					June 30, 2010					March 31, 2010
30 to 89 days past due			% of					% of					% of					% of					% of
(in millions)	$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio
Land hold	$	0.5		2.95	%	$	2.2		7.90	%	$	—		—	%	$	1.3		3.34	%	$	0.6		1.64	%
Land development		—		—			0.2		0.62			4.5		6.04			2.0		2.43			3.0		3.00
Construction		—		—			0.5		0.45			2.4		1.53			6.4		4.07			0.9		0.55
Income producing		4.8		0.46			20.7		1.76			35.2		2.55			22.9		1.55			51.7		3.37
Owner-occupied		2.0		0.29			14.7		1.88			18.3		2.14			16.4		1.85			13.6		1.46
Total commercial real estate		7.3		0.41			38.3		1.80			60.4		2.41			49.0		1.85			69.8		2.52
Commercial and industrial		6.2		0.46			9.0		0.61			23.8		1.43			10.3		0.61			15.1		0.83
Total commercial		13.5		0.43			47.3		1.32			84.2		2.02			59.3		1.37			84.9		1.85
Residential mortgage		10.3		1.41			15.4		2.03			14.6		1.82			20.8		2.42			21.5		2.45
Direct consumer		17.2		1.71			22.4		2.14			20.5		1.88			20.2		1.79			21.9		1.86
Indirect consumer		10.2		1.24			13.3		1.62			12.2		1.46			11.4		1.40			14.8		1.86
Total consumer		37.7		1.47			51.1		1.95			47.3		1.73			52.4		1.87			58.2		2.05
Total delinquent loans	$	51.2		0.90		$	98.4		1.58		$	131.5		1.91		$	111.7		1.57		$	143.1		1.92

The decreases in total delinquencies as of March 31, 2011 compared to December 31, 2010 and March 31, 2010 were primarily the result of continued emphasis on proactively managing and resolving delinquent commercial and consumer loans.

As part of its overall credit underwriting and review process and loss mitigation strategy, Citizens carefully monitors commercial credits that are current in terms of principal and interest payments but may deteriorate in quality as economic conditions decline. Commercial relationship officers monitor their clients’ financial condition and initiate changes in loan ratings based on their findings. Loans that have migrated within the loan rating system to a level that requires increased oversight are considered watchlist loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) and include loans that are accruing or nonperforming (included in the other tables in this section). Citizens utilizes the watchlist process as a proactive credit risk management practice to help mitigate the migration of commercial loans to nonperforming status and potential loss. Once a loan is placed on the watchlist, it is reviewed quarterly by the chief credit officer, senior credit officers, senior market managers, and commercial relationship officers to assess cash flows, collateral valuations, guarantor liquidity, and other pertinent trends. During these meetings, action plans are implemented or reviewed to address emerging problem loans or to remove loans from the portfolio. Additionally, loans viewed as substandard or doubtful are transferred to Citizens’ special loans or small business workout groups and are subjected to more intensive monitoring and workout activity.

Commercial Watchlist

	March 31, 2011					December 31, 2010					September 30, 2010					June 30, 2010					March 31, 2010
Accruing loans only			% of					% of					% of					% of					% of
(in millions)	$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio
Land hold	$	12.7		73.41	%	$	21.5		76.35	%	$	27.6		74.32	%	$	27.8		73.58	%	$	29.0		73.73	%
Land development		9.9		43.28			18.7		53.66			45.4		61.54			40.5		47.97			50.4		49.95
Construction		4.6		19.89			33.2		32.05			46.5		29.90			52.5		33.61			54.4		33.07
Income producing		325.8		31.37			444.5		37.96			543.7		39.33			553.9		37.38			523.5		34.17
Owner-occupied		136.6		19.73			196.9		25.15			225.7		26.40			224.1		25.29			237.0		25.44
Total commercial real estate		489.6		27.29			714.8		33.71			888.9		35.50			898.8		33.96			894.3		32.31
Commercial and industrial		267.0		19.73			347.2		23.55			432.8		26.11			445.5		26.41			484.7		26.56
Total watchlist loans	$	756.6		24.04		$	1,062.0		29.54		$	1,321.7		31.76		$	1,344.3		31.02		$	1,379.0		30.02

Watchlist credits declined $305.4 million from December 31, 2010 and $622.4 million from March 31, 2010 to $756.6 million at March 31, 2011. The decrease was primarily due to the accelerated problem asset resolution initiatives along with a decrease in the level of new inflows.

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Nonperforming Assets

	March 31, 2011						December 31, 2010						September 30, 2010						June 30, 2010						March 31, 2010
				% of						% of						% of						% of						% of
(in millions)	$			Portfolio			$			Portfolio			$			Portfolio			$			Portfolio			$			Portfolio
Land hold	$	1.2			6.68	%	$	3.2			11.50	%	$	5.6			15.13	%	$	5.2			13.76	%	$	4.9			12.49	%
Land development		0.1			0.35			3.1			8.82			16.0			21.64			22.3			26.48			27.1			26.86
Construction		0.4			1.70			7.5			7.21			27.4			17.65			25.0			15.99			35.2			21.39
Income producing		28.2			2.72			62.0			5.30			147.7			10.69			148.4			10.02			144.0			9.40
Owner-occupied		21.7			3.14			42.8			5.47			63.3			7.40			59.5			6.71			89.0			9.56
Total commercial real estate		51.6			2.88			118.6			5.59			260.0			10.39			260.4			9.84			300.2			10.85
Commercial and industrial		25.8			1.91			57.8			3.92			61.5			3.71			67.0			3.97			69.7			3.82
Total nonaccruing commercial		77.4			2.46			176.4			4.91			321.5			7.73			327.4			7.56			369.9			8.05
Residential mortgage		30.4			4.18			22.1			2.92			16.9			2.11			31.0			3.61			17.6			2.01
Direct consumer		13.0			1.30			12.5			1.20			15.5			1.42			18.7			1.65			16.5			1.41
Indirect consumer		1.2			0.14			1.3			0.16			1.7			0.20			1.5			0.18			2.4			0.30
Total nonaccruing consumer		44.6			1.74			35.9			1.37			34.1			1.25			51.2			1.82			36.5			1.28
Total nonaccruing loans		122.0			2.14			212.3			3.42			355.6			5.16			378.6			5.30			406.4			5.46
Loans 90+ days still accruing		0.7			0.01			1.6			0.03			1.6			0.02			1.5			0.02			2.4			0.03
Restructured loans still accruing		12.7			0.22			6.4			0.10			7.0			0.10			4.6			0.06			4.8			0.06
Total nonperforming portfolio loans		135.4			2.37			220.3			3.54			364.2			5.29			384.7			5.39			413.6			5.56
Nonperforming held for sale		30.4						24.1						38.4						44.0						95.3
Other repossessed assets acquired		22.2						42.2						40.7						43.9						47.3
Total nonperforming assets	$	188.0					$	286.6					$	443.3					$	472.6					$	556.2
Commercial inflows	$	29.5					$	110.9					$	95.6					$	75.9					$	124.8
Commercial outflows		(128.5	)					(256.0	)					(101.5	)					(118.6	)					(74.8	)
Net change	$	(99.0	)				$	(145.1	)				$	(5.9	)				$	(42.7	)				$	50.0

Nonperforming assets decreased from December 31, 2010 and March 31, 2010, primarily due to the accelerated problem asset resolution initiatives. In addition, nonperforming commercial inflows dropped to $29.5 million during the first quarter of 2011. The nonperforming commercial loan outflows were $128.5 million in the first quarter of 2011, primarily due to previously mentioned asset resolutions. In addition, the decrease in nonperforming held for sale assets from the first quarter of 2010 was primarily the result of the movement of certain residential nonperforming loans to held for sale in the first quarter of 2010, that were subsequently sold in the second quarter of 2010.

Some of the nonperforming loans included in the nonperforming asset table above are considered to be impaired. A loan is considered impaired when Citizens determines that it is probable that all of the contractual principal and interest due under the loan may not be collected. Citizens recognizes that, in the current economic environment, elevated levels of unemployment and depressed real estate values have resulted in many customers facing difficult financial situations. Distressed homeowners are identified and offered assistance. In order to avoid foreclosure, residential mortgage loans may be restructured for certain qualified borrowers who have the ability to make payments under the new terms of the loan. Citizens’ residential mortgage foreclosure abatement program includes several different options to modify contractual payments. Modified consumer and residential mortgage loans are considered troubled debt restructures (“TDRs”) when the debt restructure, for economic or legal reasons related to the borrower’s financial difficulties, results in a concession to the debtor that otherwise would not be considered by the bank. Citizens classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of the restructure, or the loan has performed according to the new contractual terms for at least six months. To qualify for accruing status at the time of the restructure, the original loan must have been less than 90 days past due at the time of the restructure and the modification must not have resulted in an impairment. At March 31, 2011, Citizens had $17.5 million of TDRs, 30.6% of which involved both reduced interest rate and term extensions, 44.4% of which involved only an interest rate reduction and 25.0% of which received only a term extension. Of the total TDRs, $11.9 million are considered impaired and carry a specific allocated reserve and $5.6 million do not carry a specific allocated reserve. See Note 4 to the unaudited Consolidated Financial Statements in this report for information on impaired loans.

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Net Charge-Offs

											Three Months Ended
	March 31, 2011					December 31, 2010					September 30, 2010					June 30, 2010					March 31, 2010
			% of					% of					% of					% of					% of
(in millions)	$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio			$		Portfolio
Land hold	$	4.9		N/M	%	$	5.2		73.54	%	$	0.3		3.30	%	$	0.4		3.72	%	$	—		—	%
Land development		4.4		79.15			19.7		N/M			9.0		48.29			9.8		46.68			0.1		0.49
Construction		5.6		97.09			10.0		38.44			0.4		1.10			8.7		22.23			—		—
Income producing		77.6		30.30			64.2		21.74			30.8		8.85			12.6		3.41			7.6		2.01
Owner-occupied		25.3		14.80			18.1		9.16			4.8		2.21			18.9		8.57			6.9		3.01
Total commercial real estate		117.8		26.63			117.2		21.92			45.3		7.18			50.4		7.63			14.6		2.13
Commercial and industrial		32.0		9.59			26.0		7.01			6.8		1.62			11.4		2.71			12.9		2.86
Total commercial		149.8		19.30			143.2		15.81			52.1		4.97			61.8		5.72			27.5		2.43
Residential mortgage		3.4		1.90			6.1		3.20			23.3		11.57			0.6		0.29			80.1		37.05
Direct consumer		5.5		2.21			7.1		2.70			9.8		3.56			5.5		1.96			7.1		2.44
Indirect consumer		1.9		0.95			2.9		1.39			2.2		1.05			3.3		1.61			3.2		1.63
Total consumer		10.8		1.72			16.1		2.43			35.3		5.14			9.4		1.35			90.4		12.88
Total net charge-offs	$	160.6		10.77		$	159.3		9.46		$	87.4		4.91		$	71.2		3.90		$	117.9		6.25

* Represents an annualized rate.

N/M — Not Meaningful

The increase in net charge-offs compared to the first quarter of 2010 was primarily the result of the resolution of certain problem assets through both bulk sale and individual workout efforts. Net charge-offs were essentially unchanged from December 31, 2010.

Nonperforming commercial and industrial and commercial real estate loans are generally charged off to the extent principal due exceeds the net realizable value of the collateral, with the charge-off occurring when the loss is reasonably quantifiable, but not later than when the loan becomes 180 days past due. Nonperforming residential mortgage loans are generally charged off to the extent principal exceeds the current appraised value less estimated costs to sell when the loan becomes 180 days past due. Nonperforming direct and indirect consumer loans (open and closed end) are generally charged off before the loan becomes 120 days past due.

A summary of loan loss experience during the three months ended March 31, 2011 and 2010 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended
	March 31,
(in thousands)	2011			2010
Allowance for loan losses — beginning of period	$	296,031		$	338,940
Provision for loan losses		88,724			101,355
Charge-offs		164,854			121,571
Recoveries		4,216			3,653
Net charge-offs		160,638			117,918
Allowance for loan losses — end of period	$	224,117		$	322,377
Portfolio loans outstanding at period end(1)	$	5,704,198		$	7,439,210
Average portfolio loans outstanding during period(1)		6,051,407			7,654,479
Allowance for loan losses as a percentage of portfolio loans		3.93	%		4.33	%
Net loans charged off as a percent of average portfolio loans (annualized)		10.77			6.25

(1) Balances exclude loans held for sale.

The allowance for loan losses represents management’s estimate of an amount appropriate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date. To assess the appropriateness of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of

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the loan portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical losses on each portfolio category and other qualitative and quantitative factors which could affect probable loan losses. General deterioration in real estate values is one of the factors considered when establishing valuation allowances in the allowance for loan losses. The evaluation process is inherently subjective, as it requires estimates that may be susceptible to significant change and have the potential to affect net income materially. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a formula-based risk-allocated allowance for the remainder of the portfolio and a general valuation estimate. Management also considers overall portfolio indicators, including trends in historical charge-offs, a review of industry, geographic and portfolio performance, and other qualitative factors.

The following table summarizes the allocation of the allowance for loan losses for specific allocated, risk allocated, and general valuation allowances by loan type and the proportion of total nonperforming portfolio loans represented by each loan type.

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Allocation of the Allowance for Loan Losses⁽¹⁾

	March 31, 2011					December 31, 2010					March 31, 2010
				Related					Related					Related
(in millions)	ALLL			NPL(2)		ALLL			NPL(2)		ALLL			NPL(2)
Specific allocated allowance:
Commercial and industrial	$	0.7		$	17.0	$	9.5		$	43.5	$	9.4		$	49.4
Commercial real estate		6.7			37.4		23.5			98.4		71.4			263.4
Residential mortgage		2.0			10.2		1.1			5.4		1.4			5.8
Direct Consumer		0.2			1.7		0.1			1.2		0.1			1.1
Total specific allocated allowance		9.6			66.3		34.2			148.5		82.3			319.7
Risk allocated allowance:
Commercial and industrial		29.4			9.9		33.5			16.3		34.7			22.7
Commercial real estate (CRE)		84.7			22.7		99.1			22.7		110.8			36.8
Incremental risk allocated allowance — CRE		—			—		29.5			—		—			—
Total commercial		114.1			32.6		162.1			39.0		145.5			59.5
Residential mortgage		49.9			21.6		46.5			18.6		16.2			15.1
Direct Consumer		31.8			13.7		32.1			12.9		33.9			16.5
Indirect Consumer		14.9			1.2		16.6			1.3		37.4			2.8
Total risk allocated allowance		210.7			69.1		257.3			71.8		233.0			93.9
Total allocated allowance		220.3			135.4		291.5			220.3		315.3			413.6
General valuation allowances		3.8			—		4.5			—		7.1			—
Total allowance	$	224.1		$	135.4	$	296.0		$	220.3	$	322.4		$	413.6
ALLL as a percentage of NPL
Specific allocated allowance:
Commercial and industrial		4.1	%				21.8	%				19.1	%
Commercial real estate		18.0					23.9					27.1
Residential mortgage		19.8					20.7					24.1
Direct Consumer		11.0					11.0					10.1
Total specific allocated allowance		14.5					23.1					25.8
Risk allocated allowance:
Commercial and industrial		296.1					205.1					153.1
Commercial real estate(3)		372.8					566.2					300.7
Total commercial		349.5					415.2					244.5
Residential mortgage		231.1					250.4					107.4
Direct Consumer		232.9					248.6					205.2
Indirect Consumer		N/M					N/M					N/M
Total risk allocated allowance		305.1					358.2					248.0
Total
General valuation allowances
Total		165.6					134.4					77.9
ALLL as a percentage of portfolio loans(4)
Risk allocated allowance: (5)
Commercial and industrial		2.2					2.3					2.0
Commercial real estate(3)		4.8					6.4					4.4
Total commercial		3.7					4.7					3.4
Residential mortgage		7.0					6.2					1.9
Direct Consumer		3.2					3.1					2.9
Indirect Consumer		1.8					2.0					4.7
Total risk allocated allowance		3.7					4.2					3.3
Total
General valuation allowances
Total allowance		3.9					4.8					4.3

N/M — Not Meaningful

(1)	The allocation of the allowance for loan losses in the above table is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. Citizens does not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified.
(2)	Related NPL amounts in risk allocated allowances include restructured loans and still accruing and loans 90+ days past due and still accruing but classified as nonperforming.
(3)	Commercial real estate includes an incremental risk allocated allowance — CRE of $29.5 million in the fourth quarter of 2010.
(4)	The portfolio balance of the loans with a specific allocated allowance is equal to the related NPL for said loans.
(5)	Portfolio loans only include loan balances evaluated for risk allocated allowance.

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Total Allowance for Loan Losses.The decreases in the total allowance from December 31, 2010 and March 31, 2010 were primarily the result of an overall decrease in loan balances, an improvement in risk mix of the commercial portfolio, and the continuing stability in both portfolio and economic trends, as well as lower reserves identified for specific commercial loans. In addition, the $29.5 million of incremental risk allocated reserves established at December 31, 2010 to incorporate the impact of Citizens’ initiatives to resolve problem assets was eliminated as the resolution initiatives were substantially completed during the first quarter of 2011.

The allowance as a percentage of nonperforming loans at March 31, 2011 increased from December 31, 2010 and March 31, 2010 primarily as a result of the allowance for loan losses declining at a slower pace than the decline in nonperforming loans. While nonperforming loans declined over both periods, other offsetting factors that affect the risk allocated allowance such as historical loss experience, the continued depressed values in the real estate market, and other credit metrics result in a higher proportionate allowance.

Based on current conditions and expectations, Citizens believes that the allowance for loan losses is appropriate to address the estimated loan losses inherent in the existing loan portfolio at March 31, 2011. After determining what Citizens believes is an appropriate allowance for loan losses based on the risk in the portfolio, the provision for loan losses is calculated as a result of the net effect of the quarterly change in the allowance for loan losses and the quarterly net charge-offs. The provision for loan losses was $88.7 million in the first quarter of 2011, compared with $131.3 million in the fourth quarter of 2010 and $101.4 million in the first quarter of 2010. The decreases in the provision were primarily due to the decline in the required allowance for loan losses as a result of the previously mentioned improvements in credit quality.

Specific Allocated Allowance.The specific allocated allowance is based on probable losses on specific commercial and industrial or commercial real estate loans as well as impairment on TDR loans. The allowance allocated to nonperforming commercial loans is typically based on the underlying collateral’s appraised value, updated at least annually, less management’s estimates of cost to sell. Appraisals are obtained more frequently if changes in the property or market conditions warrant. Deterioration in individual asset values evidenced by these updated appraisals is then reflected in the specific allocated allowance. The fair value of nonperforming residential mortgage loans is based on the underlying collateral’s value obtained through appraisals or broker’s price opinions, updated at least semi-annually, less management’s estimates of cost to sell. The allowance allocated to restructured nonperforming loans is typically based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, based on the original contractual rate. The specific allocated allowance decreased both in amount and as a percentage of nonperforming loans from December 31, 2010 and March 31, 2010. primarily as a result of the decline in loan portfolio balances identified and evaluated for specific reserves. The specific allowance allocated to the commercial and industrial and commercial real estate impaired loans declined by $24.6 million, or 71 .9% from December 31, 2010 which corresponds to the decline in the balance of impaired loans by $87.5 million, or 61.7%.

Risk Allocated Allowance.The risk allocated allowance is comprised of several loan pool valuation allowances based on Citizens’ quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks such as changes in asset quality; the experience, ability and effectiveness of Citizens’ lending management; the composition and concentrations of credit, changes in loss severity based on loan type, as well as other factors based upon the best judgment of management. The decreases in the risk allocated allowance from December 31, 2010 and March 31, 2010 were primarily related to the decrease in the loan portfolio balances that are evaluated for this reserve. The risk allocated allowance did not decrease to the same extent as the portfolio balance, however, in light of other factors that affect the risk allocated allowance, such as credit metrics, delinquencies, the depressed real estate market and the accelerated workout of commercial real estate loans, that made it appropriate to maintain a higher proportionate allowance. The largest decline in the risk allocated allowance from December 31, 2010 related to the $48.0 million decline in the risk allocated allowance to the commercial portfolio. The majority of this decline relates to the elimination of $29.5 million of incremental risk allocated reserves, established at December 31, 2010 to incorporate the impact of Citizens initiatives to resolve problem assets the reduction initiatives were substantially completed during the first quarter of 2011. In addition, the remaining decline relates to the improvement in credit quality of the remaining portfolio at March 31, 2011, as evidenced by the declines in watchlist loans of $305.4 million, or 28.8%, and commercial loans past due 30-89 days of $33.8 million or 71.5% as well as an overall decline in outstanding commercial loans of 12.4%.

General Valuation Allowance.The general valuation allowance is based on existing regional and local economic factors, a macroeconomic adjustment factor used to calibrate for the current economic cycle the Corporation is experiencing, and other judgmental factors. These factors could have a potentially negative impact on credit quality. Recognizing the inherent imprecision of any loan loss allocation model, management believes that the general valuation allowance at March 31, 2011 appropriately reflects probable inherent but undetected losses in the portfolio.

Loans Held for Sale

Loans held for sale at March 31, 2011 were $38.1 million, a decrease of $2.2 million or 5.5% from December 31, 2010 and a decrease of $69.7 million or 64.6% from March 31, 2010. The variances from both prior periods reflects declines due to customer paydowns, workout activities, sales, writedowns to reflect further fair-value declines of the

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underlying collateral, and transfers to ORE, partially offset by the transfer of $8.0 million of commercial loans to held for sale, net of related charge-offs in the first quarter of 2011. In addition, the variance from March 31, 2010 was primarily the result of a bulk sale of nonperforming residential mortgage loans during the second quarter of 2010.

Deposits

Total deposits at March 31, 2011 were $7.7 billion, essentially unchanged from December 31, 2010 and a decrease of $789.7 million or 9.3% from March 31, 2010. Core deposits, which exclude all time deposits, totaled $5.0 billion at March 31, 2011, an increase of $143.4 million or 2.9% over December 31, 2010 and an increase of $188.0 million or 3.9% over March 31, 2010. The increases in core deposits were the result of a continued focus on core deposit gathering. The increase over December 31, 2010 also resulted from seasonal increases in public funds balances. Time deposits totaled $2.7 billion at March 31, 2011, a decrease of $178.7 million or 6.3% from December 31, 2010 and a decrease of $977.7 million or 26.8% from March 31, 2010. The decreases were primarily the result of strategic reductions in single service high cost retail time deposits and brokered time deposits.

Citizens gathers deposits from the local markets it serves and has used brokered deposits from time to time when cost effective. Citizens had $747.3 million in time deposits of $100,000 or more at March 31, 2011, compared with $816.5 million at December 31, 2010 and $882.4 million at March 31, 2010. Time deposits greater than $100,000 decreased primarily as a result of the strategic reduction in single service high cost retail time deposits. At March 31, 2011, Citizens had $306.0 million in brokered deposits, compared with $322.6 million at December 31, 2010 and $918.4 million at March 31, 2010. The volatility in brokered deposit balances reflects strategies to optimize corporate funding costs and liquidity. Citizens continues to promote relationship-driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies.

Borrowed Funds

Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings consisting primarily of treasury, tax and loan (“TT&L”) borrowings. Short-term borrowed funds at March 31, 2011 totaled $40.8 million, a decrease of $1.6 million or 3.7% from December 31, 2010 and an increase of $7.6 million or 23.0% from March 31, 2010. The decrease from December 31, 2010 reflects fewer short-term repurchase agreements, while the increase from March 31, 2010 reflects more short-term repurchase agreements.

Long-term debt consists of advances from the Federal Home Loan Bank (“FHLB”) to the Bank, debt issued by the Holding Company, and other borrowed funds. Long-term debt at March 31, 2011 totaled $906.6 million, a decrease of $126.1 million or 12.2% from December 31, 2010 and a decrease of $431.1 million or 32.2% from March 31, 2010. The decreases were primarily the result of using excess liquidity to pay down wholesale funding at its contractual maturity.

Capital Resources

Shareholders’ equity at March 31, 2011 totaled $945.4 million, a decrease of $66.3 million or 6.6% from December 31, 2010 and a decrease of $299.0 million or 24.0% from March 31, 2010. The decreases were primarily the result of net losses incurred. Book value per common share at March 31, 2011, December 31, 2010, and March 31, 2010 was $1.67, $1.85, and $2.46, respectively.

Citizens continues to maintain a strong capital position, and its regulatory capital ratios are above “well-capitalized” standards. The Corporation’s capital ratios as of March 31, 2011, December 31, 2010 and March 31, 2010 are presented below.

	Regulatory												Excess
	Minimum for												Capital over
	“Well-			March 31,			December 31,			March 31,			Minimum
Capital Ratios	Capitalized”			2011			2010			2010			(in millions)
Leverage ratio		5.00	%		7.39	%		7.71	%		8.47	%	$	228.3
Tier 1 capital ratio		6.00			11.90			12.11			12.12			349.6
Total capital ratio		10.00			13.24			13.51			13.49			191.8
Tier 1 common equity (non-GAAP)					5.93			6.62			7.82
Tangible equity to tangible assets (non-GAAP)					6.57			7.09			7.96
Tangible common equity to tangible assets (non-GAAP)					3.59			4.20			5.54

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations and off-balance sheet arrangements are described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Corporation’s 2010 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.

Liquidity and Liquidity Risk Management

Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. Liquidity management involves projecting funding requirements and maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and liability levels due to changes in business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, and wholesale market funding.

Citizens manages liquidity at two levels. The first level is at the Holding Company which owns the Bank. The second level is at the Bank. The management of liquidity at both levels is essential because the Holding Company and Bank have different funding needs and sources, and are subject to certain regulatory guidelines and requirements. The Asset Liability Committee is responsible for establishing a liquidity policy, approving operating and contingency procedures and monitoring liquidity on an ongoing basis. In order to maintain adequate liquidity through a wide range of potential operating environments and market conditions, Citizens conducts liquidity management and business activities in a manner designed to preserve and enhance funding stability, flexibility and diversity of funding sources. Key components of this operating strategy include a strong focus on customer-based funding, maximizing secured borrowing capacity, maintaining relationships with wholesale market funding providers, and maintaining the ability to liquidate certain assets if conditions warrant.

Credit ratings by the nationally recognized statistical rating agencies are an important component of Citizens’ liquidity profile. Credit ratings relate to the Corporation’s ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and Citizens’ ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets, but also the cost of these funds. Citizens’ credit rating was downgraded by Moody’s Investor Service, Standard & Poor’s, Dominion Bond Rating Service, and Fitch Ratings throughout 2009 and 2010. During 2010, Standard & Poor’s and Dominion Bond Rating Service discontinued rating Citizens. In the first quarter of 2011, Fitch Ratings lowered Citizens’ credit ratings. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently of any other rating. The current credit ratings for the Holding Company and the Bank, the dates on which the ratings were last issued and the outlook watch

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status of the ratings are displayed in the following table. An explanation of these ratings may be obtained from the respective rating agency.

Credit Ratings	Moody’s		Fitch Ratings
Citizens Republic Bancorp (Holding Company)
Long-term Issuer		B2 (ON)		CCC
		10/1/2009		2/4/2011
Short-term/Commercial Paper		NP(ON)		C
		10/1/2009		2/4/2011
Trust Preferred		Caa2 (ON)		C
		1/28/2010		2/4/2011
Citizens Bank
Certificate of Deposit		Ba3 (ON)		B-
		10/1/2009		2/4/2011

Ratings Watch Action Legend: (WP) Watch Positive, (WN) Watch Negative, (WU) Watch Uncertain, (WR) Watch Removed, (OP) Outlook Positive, (ON) Outlook Negative, (OS) Outlook Stable, (OD) Outlook Developing

The primary sources of liquidity for the Holding Company are dividends from and returns on investment in its subsidiaries and existing cash resources. Banking regulations limit the amount of dividends a financial institution may declare to a parent company in any calendar year. The Bank is subject to dividend limits under the laws of the state in which it is chartered and to the banking regulations previously discussed. Federal and national chartered financial institutions are generally allowed to make dividends or other capital distributions in an amount not exceeding the current calendar year’s net income, plus retained net income of the preceding two years. Distributions in excess of this limit require prior regulatory approval. As described above, the Written Agreement, requires prior regulatory approval for any dividend declared by Citizens Bank or the Holding Company. Since 2009, neither the Holding Company nor any of its subsidiaries has paid any dividends. As of April 1, 2011, CB Wealth Management had the capacity to pay dividends of $7.5 million to the Holding Company without prior regulatory approval. The ability to borrow funds on both a short-term and long-term basis and to sell equity securities provides an additional source of liquidity for the Holding Company. The Holding Company’s cash totaled $61.2 million as of March 31, 2011. Citizens monitors the relationship between cash obligations and available cash resources, and believes that the Holding Company has sufficient liquidity to meet its currently anticipated short and long-term needs. Since January 1, 2010, the Holding Company contributed $100.0 million to Citizens Bank to bolster capital levels. No contributions have been made in 2011.

The primary source of liquidity for the Bank is customer deposits raised through the branch offices. Additional sources are wholesale borrowing, unencumbered or unpledged investment securities, access to secured borrowing at the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Indianapolis and contributions of capital from the Holding Company. The Written Agreement requires prior regulatory approval for Citizens and its nonbank subsidiary to incur, increase or guarantee any debt. The restrictions on borrowing have not had a negative effect on liquidity and borrowings.

Citizens maintains a strong liquidity position, with substantial on- and off-balance sheet liquidity sources and very stable funding base comprised of approximately 79% deposits, 9% long-term debt, 10% equity, and 2% short-term liabilities. Citizens’ loan-to-deposit ratio, another measure of liquidity, continues to improve with levels of 74.2%, 80.5%, and 87.7% at March 31, 2011, December 31, 2010 and March 31, 2010 respectively, as a result of the decrease in outstanding loans. Securities available-for-sale and money market investments can be sold for cash to provide additional liquidity, if necessary.

Citizens determined during the first quarter of 2010, in consultation with the Federal Reserve Bank of Chicago as required by regulatory policy, to defer regularly scheduled quarterly interest payments on its outstanding junior

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subordinated debentures relating to its two trust preferred securities and to suspend quarterly cash dividend payments on its Series A Preferred Stock. In addition, as of July 28, 2010, the Written Agreement prohibits such payments without prior regulatory approval. Deferral of these payments, which is permitted pursuant to the underlying documentation, preserves a total of $19.7 million of cash annually, although such amounts continue to accrue. Citizens reevaluates the deferral of these payments periodically and, in consultation with and subject to prior approval by its regulators, will reinstate these payments when appropriate. As of March 31, 2011, the amount of the arrearage (including interest on interest) on the dividend payments of the Series A Preferred Stock is $18.8 million and the amount of the arrearage (including interest on interest) on the payments on the subordinated debt associated with the trust preferred securities is $6.0 million.

The Corporation’s long-term debt to equity ratio was 95.9% as of March 31, 2011 compared with 102.1% as of December 31, 2010 and 107.5% at March 31, 2010. Changes in deposit obligations and short-term and long-term debt during the first quarter of 2011 are further discussed in the sections titled “Deposits” and “Borrowed Funds.” The Corporation believes that it has sufficient liquidity to meet presently known short and long-term cash-flow requirements arising from ongoing business transactions.

Interest Rate Risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. The risk of loss can be assessed by examining the potential for adverse changes in fair values, cash flows, and future earnings resulting from changes in market interest rates. Interest rate risk on Citizens’ balance sheet consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity or repricing timing of asset and liability portfolios. Option risk arises from embedded options present in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow certain of Citizens’ customers and counterparties of the investment and wholesale funding portfolios the opportunity to benefit when market interest rates change, which typically results in higher costs or lower revenues for the Corporation. Basis risk results when assets and liabilities reprice at the same time but based on different market rates or indices, which can change by different amounts, resulting in a narrowing of profit spread.

The asset/liability management process seeks to insulate net interest income from large fluctuations attributable to changes in market interest rates and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. Accordingly, the Corporation’s interest rate sensitivity is monitored on an ongoing basis by its Asset Liability Committee, which oversees interest rate risk management and establishes risk measures, limits, and policy guidelines. A combination of complementary techniques is used to measure interest rate risk exposure, the distribution of risk, the level of risk over time, and the exposure to changes in certain interest rate relationships. These measures include static repricing gap analysis, simulation of earnings, and estimates of economic value of equity.

Static repricing gap analysis provides a measurement of reprice risk on the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s rate sensitive assets and liabilities into repricing periods. The sums of assets and liabilities maturing or repricing in each of these periods are compared for mismatches within each time segment. Core deposits lacking contractual maturities or repricing frequencies are placed into repricing and maturity periods based upon historical experience. Repricing periods for assets include the effects of expected prepayments on cash flows.

Rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing within one year by $799.6 million or 8.2% of total assets as of March 31, 2011 compared with $1.1 billion or 11.2% of total assets at December 31, 2010. These results incorporate the impact of off-balance sheet derivatives and reflect interest rates consistent with March 31, 2011 levels. Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis.

Citizens utilizes a net interest income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model measures the impact to net interest income relative to a base case scenario of hypothetical changes in interest rates over the next 12 months. These simulations incorporate assumptions including prepayment speeds on various loan and investment assets, cash flows and maturities of financial instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and Citizens’ financial capital plans. These assumptions are inherently uncertain and subject to fluctuation and revision in a dynamic environment and as a result the model cannot perfectly forecast net interest income nor exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to

57

the timing, magnitude, and frequency of balance sheet component and interest rate changes, and differences in client behavior, market conditions and management strategies, among other factors.

Net interest income simulations were performed as of March 31, 2011 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming expected changes in balance sheet composition over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to increase by 1.2% and 1.8%, respectively, from what it would be if rates were to remain at March 31, 2011 levels. Net interest income simulation for 100 and 200 basis point parallel declines in market rates were not performed at March 31, 2011, as the results would not have been meaningful given the current levels of short-term market interest rates. These measurements represent similar exposure to rising interest rates as at December 31, 2010. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.

From time to time, derivative contracts are used to help manage or hedge exposure to interest rate risk and market value risk. Citizens enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and expected cash payments principally related to certain variable-rate loan assets and fixed-rate borrowings. Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain of its derivative counterparties that contain a provision where if it fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and Citizens would be required to settle its obligations under the agreements. An agreement with one of Citizens’ derivative counterparties contains provisions that require its debt to maintain an investment grade credit rating from each of the major credit rating agencies. As of August 6, 2009, Citizens was in breach of these provisions, and may be required to settle its obligations under the agreement at the termination value. Citizens may be required to pay additional amounts due in excess of amounts previously posted as collateral. As of March 31, 2011, the previously mentioned termination value approximated $0.7 million. Further discussion of derivative instruments is included in Note 14 to the unaudited Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of Citizens’ 2010 Annual Report on Form 10-K, except as set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk” of this Form 10-Q.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by Citizens in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, Citizens performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities

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Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Item 1A of Part I of Citizens’ 2010 Annual Report on Form 10-K. Those risk factors are not the only risks Citizens faces. Additional risks and uncertainties not currently known or that Citizens currently deems to be immaterial also may materially adversely impact Citizens’ business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under The Plans or Programs(2)
January 2011	819	$0.69		1,241,154
February 2011	—	—	—	1,241,154
March 2011	832	0.89	—	1,241,154
Total	1,651	$0.79	—	1,241,154

(1)

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.

(2)

In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. The repurchase of shares is generally prohibited, with certain exceptions, by the CPP Letter Agreement while Treasury continues to hold the related TARP Preferred Stock, by the Written Agreement and by the terms of Citizens’ outstanding trust preferred securities, and is also subject to limitations that may be imposed by applicable securities laws and regulations and the rules of NASDAQ. The timing of the purchases and the number of shares to be bought at any one time also depend on market conditions and Citizens’ capital requirements. There can be no assurance that Citizens will repurchase the remaining shares authorized to be repurchased.

Item 3. Defaults Upon Senior Securities

As previously disclosed, Citizens decided to defer regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities and to suspend quarterly cash dividend payments on its Series A Preferred Stock. Therefore, Citizens is currently in arrears with the dividend payments on the Series A Preferred Stock and interest payments on the junior subordinated debentures as permitted by the related documentation. As of March 31, 2011, the amount of the arrearage on the dividend payments of the Series A Preferred Stock is $18.8 million and the amount of the arrearage on the payments on the subordinated debt associated with the trust preferred securities is $6.0 million. Under the terms of the Written Agreement, Citizens is prohibited from making these interest and dividend payments without consent of the appropriate regulatory agency.

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Item 6. Exhibits

The exhibits listed on the “Exhibit Index” of this report are filed herewith and are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 5, 2011	CITIZENS REPUBLIC BANCORP, INC.
	By	/s/ Lisa T. McNeely
		Lisa T. McNeely
		Chief Financial Officer (principal financial officer and duly authorized officer)

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10-Q EXHIBIT INDEX

The following exhibits are filed as part of this report, or were previously filed and are incorporated herein by reference to the filing indicated. Exhibits not required for this report have been omitted. Citizens’ Commission file number is 001-33063.

Exhibit No.	Description
10.63	Amendment to the Amended and Restated Citizens Republic Bancorp Deferred Compensation Plan for Executives
10.64	Amendment to the Amended and Restated Citizens Republic Bancorp Deferred Compensation Plan for Directors
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1	Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934

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