Citizens Republic Bancorp (CTZ+A) 10-Q 2007 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, 2007

or

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

For the transition period from                    to                    

Commission file Number 000-10535

CITIZENS 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)

Citizens Banking Corporation

(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

þ Yeso No

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

Large accelerated filerþ      Accelerated filero      Non-accelerated filero

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

o Yesþ No

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 30, 2007
Common Stock, No Par Value	75,708,583 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 Income		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		20
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		37
Item 4 - Controls and Procedures		37
Part II — Other Information
Item 1A — Risk Factors		38
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 6 - Exhibits		38
Signatures		39
Exhibit Index		40
Amended and Restated Articles of Incorporation
Release and Settlement Agreement
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certification

2

Consolidated Balance Sheets

Citizens Republic Bancorp and Subsidiaries

	March 31,			December 31,			March 31,
(in thousands)	2007			2006			2006
	(unaudited)			(Note 1)			(unaudited)
Assets
Cash and due from banks	$	197,834		$	223,747		$	152,077
Interest-bearing deposits with banks		191			203			1,503
Investment Securities:
Securities available for sale, at fair value		2,326,257			2,839,456			1,466,796
Securities held to maturity, at amortized cost (fair value of $113,294, $110,283 and $89,699, respectively)		112,613			109,744			90,346
Total investment securities		2,438,870			2,949,200			1,557,142
FHLB and Federal Reserve stock		132,895			132,895			55,975
Portfolio loans:
Commercial		1,993,672			2,004,894			1,688,970
Commercial real estate		3,157,185			3,120,613			1,418,596
Total commercial		5,150,857			5,125,507			3,107,566
Residential mortgage		1,518,198			1,543,533			549,116
Direct consumer		1,677,842			1,721,410			1,109,249
Indirect consumer		831,302			840,632			826,060
Total portfolio loans		9,178,199			9,231,082			5,591,991
Less: Allowance for loan losses		(169,239	)		(169,104	)		(115,423	)
Net portfolio loans		9,008,960			9,061,978			5,476,568
Loans held for sale		103,922			172,842			13,399
Premises and equipment		141,689			139,490			120,719
Goodwill		780,021			781,635			54,527
Other intangible assets		42,953			46,071			10,408
Bank owned life insurance		208,801			206,851			85,142
Other assets		261,111			287,700			134,715
Total assets	$	13,317,247		$	14,002,612		$	7,662,175
Liabilities
Noninterest-bearing deposits	$	1,146,673		$	1,223,113		$	899,850
Interest-bearing demand deposits		875,579			923,848			816,293
Savings deposits		2,263,659			2,280,496			1,452,638
Time deposits		4,174,995			4,270,604			2,355,206
Total deposits		8,460,906			8,698,061			5,523,987
Federal funds purchased and securities sold under agreements to repurchase		453,230			922,328			401,702
Other short-term borrowings		4,565			16,551			852
Other liabilities		133,175			169,022			82,203
Long-term debt		2,693,459			2,638,964			1,001,887
Total liabilities		11,745,335			12,444,926			7,010,631
Shareholders’ Equity
Preferred stock — no par value Authorized - 5,000,000 shares; Issued — none		—			—			—
Common stock — no par value Authorized - 100,000,000 shares; Issued and outstanding - 75,656,564 at 3/31/07, 75,675,944 at 12/31/05, and 42,769,821 at 3/31/06		978,245			980,772			80,341
Retained earnings		593,817			584,289			578,980
Accumulated other comprehensive loss		(150	)		(7,375	)		(7,777	)
Total shareholders’ equity		1,571,912			1,557,686			651,544
Total liabilities and shareholders’ equity	$	13,317,247		$	14,002,612		$	7,662,175

See notes to consolidated financial statements.

3

Consolidated Statements of Income (Unaudited)
Citizens Republic Bancorp and Subsidiaries

	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2007		2006
Interest Income
Interest and fees on loans	$	171,844	$	93,451
Interest and dividends on investment securities:
Taxable		23,791		12,951
Tax-exempt		7,328		5,317
Dividends on FHLB and Federal Reserve stock		1,736		660
Money market investments		17		12
Total interest income		204,716		112,391
Interest Expense
Deposits		66,434		30,992
Short-term borrowings		11,001		3,736
Long-term debt		28,940		10,188
Total interest expense		106,375		44,916
Net Interest Income		98,341		67,475
Provision for loan losses		3,500		3,000
Net interest income after provision for loan losses		94,841		64,475
Noninterest Income
Service charges on deposit accounts		11,106		8,875
Trust fees		4,955		5,042
Mortgage and other loan income		6,137		2,010
Brokerage and investment fees		1,549		1,515
ATM network user fees		1,579		987
Bankcard fees		1,180		1,057
Fair value change in CD swap derivatives		—		(207	)
Other income		4,807		6,284
Total fees and other income		31,313		25,563
Investment securities gains		77		7
Total noninterest income		31,390		25,570
Noninterest Expense
Salaries and employee benefits		44,165		32,256
Occupancy		7,910		5,942
Professional services		4,152		4,078
Equipment		3,911		3,166
Data processing services		4,130		3,739
Advertising and public relations		1,775		2,034
Postage and delivery		1,964		1,462
Telephone		2,064		1,464
Other loan expenses		912		416
Stationery and supplies		777		727
Intangible asset amortization		3,118		725
Restructuring and merger-related expenses		4,186		—
Other expense		4,646		5,563
Total noninterest expense		83,710		61,572
Income Before Income Taxes		42,521		28,473
Income tax provision		11,029		7,717
Net Income	$	31,492	$	20,756
Net Income Per Common Share:
Basic	$	0.42	$	0.49
Diluted		0.41		0.48
Cash Dividends Declared Per Common Share		0.290		0.285
Average Common Shares Outstanding:
Basic		75,448		42,784
Diluted		75,918		42,941

See notes to consolidated financial statements.

4

Consolidated Statements of Changes in Shareholders’ Equity

Citizens Republic Bancorp and Subsidiaries

										Accumulated
										Other
	Common Stock						Retained			Comprehensive
(in thousands, except per share amounts)	Shares			Amount			Earnings			Income (Loss)			Total
Balance at January 1, 2007		75,676		$	980,772		$	584,289		$	(7,375	)	$	1,557,686
Comprehensive income, net of tax:
Net income								31,492						31,492
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											7,541
Net change in unrealized gain/(loss) on qualifying cash flow hedges											(316	)
Other comprehensive income total														7,225
Total comprehensive income														38,717
Proceeds from stock options exercised and restricted stock activity		184			1,613									1,613
Recognition of stock-based compensation		—			613									613
Cash dividends declared on common shares — $0.290 per share								(21,964	)					(21,964	)
Shares acquired for retirement		(203	)		(4,753	)								(4,753	)
Balance — March 31, 2007		75,657		$	978,245		$	593,817		$	(150	)	$	1,571,912
Balance at January 1, 2006		42,968		$	85,526		$	570,483		$	454		$	656,463
Comprehensive income, net of tax:
Net income								20,756						20,756
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(8,319	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											88
Other comprehensive income total														(8,231	)
Total comprehensive income														12,525
Proceeds from stock options exercised and restricted stock activity		56			1,256									1,256
Recognition of stock-based compensation		1			409			—						409
Cash dividends declared on common shares — $0.285 per share								(12,259	)					(12,259	)
Shares acquired for retirement		(255	)		(6,850	)								(6,850	)
Balance — March 31, 2006		42,770		$	80,341		$	578,980		$	(7,777	)	$	651,544

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows

Citizens Republic Bancorp and Subsidiaries

	Three Months Ended
	March 31,
(in thousands)	2007			2006
Operating Activities:
Net income	$	31,492		$	20,756
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,500			3,000
Depreciation and amortization		3,775			2,993
Amortization of intangibles		3,118			725
Amortization and fair value adjustments of purchase accounting mark-to-market, net		(25,923	)		—
Discount accretion and amortization of issuance costs on long term debt		120			—
Net amortization on investment securities		(718	)		207
Investment securities gains		(77	)		(7	)
Loans originated for sale		(156,458	)		(41,452	)
Proceeds from sales of mortgage loans held for sale		230,893			45,097
Net gains from mortgage loan sales		(4,016	)		(792	)
Net (gain) loss on sale of other real estate		(334	)		292
Recognition of stock-based compensation, net of tax		613			409
Other		(16,724	)		(5,883	)
Net cash provided by operating activities		69,261			25,345
Investing Activities:
Net (increase) decrease in money market investments		12			(1,123	)
Securities available-for-sale:
Proceeds from sales		364,391			—
Proceeds from maturities and payments		225,355			52,747
Purchases		(64,253	)		(30,578	)
Securities held-to-maturity:
Purchases		(2,876	)		(7,947	)
Net decrease in loans and leases		56,098			20,151
Proceeds from sale of commercial and residential real estate loans		5,140			—
Proceeds from sales of other real estate		3,611			1,274
Net increase in properties and equipment		(5,973	)		(1,982	)
Net cash used by investing activities		581,505			32,542
Financing Activities:
Net decrease in demand and savings deposits		(141,546	)		(128,630	)
Net (decrease) increase in time deposits		(95,080	)		178,778
Net decrease in short-term borrowings		(479,248	)		(126,567	)
Proceeds from issuance of long-term debt		750,000			—
Principal reductions in long-term debt		(685,701	)		(6,286	)
Cash dividends paid		(21,964	)		(12,259	)
Proceeds from stock options exercised and restricted stock activity		1,613			1,256
Shares acquired for retirement		(4,753	)		(6,850	)
Net cash provided by financing activities		(676,679	)		(100,558	)
Net decrease in cash and due from banks		(25,913	)		(42,671	)
Cash and due from banks at beginning of period		223,747			194,748
Cash and due from banks at end of period	$	197,834		$	152,077
Supplemental Cash Flow Information:
Loans transferred to other real estate owned	$	1,796		$	1,095

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. and Subsidiaries

Note 1. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc., formerly Citizens Banking Corporation, (“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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in Citizens’ 2006 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. The information on Citizens’ website does not constitute a part of this report.

Statements of Financial Accounting Standards

FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes.”In July 2006, the FASB issued FIN 48, which creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more likely than not to be sustained). Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized on ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. Citizens adopted FIN 48 as of January 1, 2007 as required. Refer to “Note 7. Income Taxes” for further details.

Note 2. New Accounting Pronouncements

Final FASB Statements

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”In February 2007, the FASB issued SFAS 159 which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Citizens is in the process of evaluating the guidance in SFAS 159, and has yet to determine which assets and liabilities (if any) will be selected. At adoption, the difference between the carrying amount and fair value of existing eligible assets and liabilities (if any) would be recognized as an accumulated adjustment to beginning retained earnings.

Note 3. Merger and Acquisition Activity

Effective December 29, 2006, Citizens acquired 100% of the outstanding stock of Republic Bancorp Inc. in a merger. The merger creates meaningful cost reduction opportunities and strengthens Citizens’ management and market teams. Republic’s results of operations for the three months ended March 31, 2007 were included with Citizens’ results.

Details of the merger, including the allocation of the purchase price, are included in Citizens’ 2006 Annual Report on Form 10-K. The allocation of the purchase price is subject to change as the determination of Republic’s asset and liability values

7

are finalized within one year from the merger date. As of March 31, 2007, the allocation had not significantly changed from December 31, 2006.

The following unaudited pro-forma condensed combined financial information presents Citizens’ results of operations for the three months ended March 31, 2006, assuming the merger had taken place as of January 1, 2006 and was compiled under the same assumptions as used in “Note 4. Business Combinations” in Citizens’ 2006 Annual Report on Form 10-K. For comparative purposes, the historical results of operations for Citizens without Republic are displayed in the following table.

	Three Months Ended
	March 31, 2006
	Pro-forma		Citizens historical
(in thousands)	combined		without Republic
Net interest income	$	108,185	$	67,475
Provision for loan losses		4,400		3,000
Noninterest income		32,888		25,570
Other noninterest expense		81,783		61,572
Income before income taxes		54,890		28,473
Net Income	$	38,818	$	20,756
Net income per common share:
Basic	$	0.51	$	0.49
Diluted		0.51		0.48
Weighted average shares outstanding during the period:
Basic		75,571		42,784
Diluted		76,030		42,941

As disclosed in Citizens’ 2006 Annual Report on Form 10-K, Citizens accrued $9.0 million to create a reserve for restructuring costs and $27.8 million to create a reserve for merger-related costs. The restructuring and merger-related reserves were established for integration activity costs associated with severance expenses, computer system conversions and branch consolidations. Refinement of the reserves will occur throughout 2007 as Citizens executes its restructuring plan. The following table presents the activity in the restructuring reserve during the three months ended March 31, 2007.

Restructuring Reserve	Balance		Changes in 2007							Balance
	December 31,				cash			other		March 31,
(in thousands)	2006		new charges		payments			adjustments		2007
Personnel	$	4,323	$	2,353	$	(1,094	)	$	—	$	5,582
Facilities/Branches		3,895		—		—			—		3,895
Systems/Other		791		474		(478	)		—		787
	$	9,009	$	2,827	$	(1,572	)	$	—	$	10,264

The following table presents the activity in the merger reserve during the three months ended March 31, 2007.

8

Merger-related Reserve	Balance		Changes in 2007								Balance
	December 31,				cash			other			March 31,
(in thousands)	2006		new charges		payments			adjustments			2007
Personnel	$	17,603	$	1,296	$	(10,018	)	$	(960	)	$	7,921
Professional		7,667		—		(7,641	)		—			26
Facilities/Branches		2,205		3		(30	)		15			2,193
Systems/Other		351		59		(325	)		—			85
	$	27,826	$	1,358	$	(18,014	)	$	(945	)	$	10,225

The other adjustment of $1.0 million to the personnel component of the merger-related reserve represents a reduction to projected severance payments and resulted in a corresponding reduction to goodwill.

As displayed in the tables above, restructuring charges and merger-related charges of $4.2 million were recorded for the three months ended March 31, 2007. Citizens projects additional restructuring expenses of $1.4 million, primarily facilities and branch costs, throughout the remainder of 2007. Additional merger-related expenses of $2.9 million are projected throughout the remainder of 2007.

Note 4. Investment Securities

The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities follow:

	March 31, 2007								December 31, 2006
			Estimated								Estimated
	Amortized		Fair		Gross Unrealized				Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		Losses		Cost		Value		Gains		Losses
Available For Sale:
U.S. Treasury	$	—	$	—	$	—	$	—	$	39,854	$	39,854	$	—	$	—
Federal Agencies		314,109		315,047		1,845		907		436,679		436,315		1,044		1,408
Collateralized Mortgage Obligations		662,430		662,792		2,393		2,031		794,395		791,739		242		2,898
Mortgage-backed		762,563		766,400		7,708		3,871		998,871		994,767		393		4,497
State and municipal		565,510		574,527		9,872		855		566,230		575,907		10,328		651
Other		7,450		7,491		41		—		835		874		40		1
Total available for sale	$	2,312,062	$	2,326,257	$	21,859	$	7,664	$	2,836,864	$	2,839,456	$	12,047	$	9,455
Held to Maturity:
State and municipal
Total held to maturity	$	112,613	$	113,294	$	1,017	$	336	$	109,744	$	110,283	$	905	$	366
FHLB and Fed Reserve stock	$	132,895	$	132,895	$	—	$	—	$	132,895	$	132,895	$	—	$	—

Securities with unrealized losses, segregated by length of impairment, as of March 31, 2007 and December 31, 2006 are displayed in the following tables.

9

As of March 31, 2007

	Less than 12 Months				More than 12 Months				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available For Sale:
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies		70,163		603		25,185		304		95,348		907
Collateralized Mortgage Obligations		162,786		965		79,818		1,065		242,604		2,030
Mortgage-backed		139,932		2,733		42,122		1,138		182,054		3,871
State and municipal		177,297		503		17,497		352		194,794		855
Other		—		—		91		1		91		1
Total available for sale		550,178		4,804		164,713		2,860		714,891		7,664
Held to Maturity:
State and municipal		27,850		170		12,832		166		40,682		336
Total held to maturity		27,850		170		12,832		166		40,682		336
Total	$	578,028	$	4,974	$	177,545	$	3,026	$	755,573	$	8,000

As of December 31, 2006

	Less than 12 Months				More than 12 Months				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available For Sale:
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies		129,466		892		129,864		516		259,330		1,408
Collateralized Mortgage Obligations		166,655		1,476		91,594		1,422		258,249		2,898
Mortgage-backed		202,468		3,217		40,629		1,280		243,097		4,497
State and municipal		37,016		345		15,200		306		52,216		651
Other		—		—		103		1		103		1
Total available for sale		535,605		5,930		277,390		3,525		812,995		9,455
Held to Maturity:
State and municipal		33,278		207		10,252		159		43,530		366
Total held to maturity		33,278		207		10,252		159		43,530		366
Total	$	568,883	$	6,137	$	287,642	$	3,684	$	856,525	$	9,821

The unrealized losses are mostly due to increases in market interest rates over yields at the time the underlying securities were purchased. Recovery of fair value is expected as the securities approach their maturity date or re-pricing date or if valuations for such securities improve as market yields change. Management considers the length of time and the extent to which fair value is less than cost, the credit worthiness and near-term prospects of the issuer, among other things, in determining Citizens’ intent and ability to retain the investment in the issuer for a period of time sufficient to allow for recovery of amortized cost. Factors considered in the determination of intent and ability include capital adequacy, interest rate risk profile, liquidity and business plans. As such, Citizens has the intent and ability to hold impaired securities to anticipated recovery, but may change its intent in response to significant, unanticipated changes in policies, regulations, statutory legislation, or other aforementioned criteria.

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Note 5. Allowance for Loan Losses and Impaired Loans

A summary of loan loss experience during the three months ended March 31, 2007 and 2006 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended
	March 31,
(in thousands)	2007		2006
Allowance for loan losses — beginning of period	$	169,104	$	116,400
Provision for loan losses		3,500		3,000
Charge-offs:
Commercial		363		921
Commercial real estate		421		616
Total commercial		784		1,537
Residential mortgage		791		198
Direct consumer		2,084		1,669
Indirect consumer		2,217		2,829
Total charge-offs		5,876		6,233
Recoveries:
Commercial		1,130		1,175
Commercial real estate		175		79
Total commercial		1,305		1,254
Residential mortgage		51		55
Direct consumer		371		285
Indirect consumer		784		662
Total recoveries		2,511		2,256
Net charge-offs		3,365		3,977
Allowance for loan losses — end of period	$	169,239	$	115,423

Nonperforming loans totaled $90.6 million at March 31, 2007, an increase of $31.5 million or 53.4% from December 31, 2006 and an increase of $60.5 million from March 31, 2006. Some of the Corporation’s nonperforming loans are considered to be impaired. SFAS 114,“Accounting by Creditors for Impairment of a Loan,”considers a loan to be impaired when it is probable that all the contractual principal and interest due under the loan may not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The Corporation maintains a valuation reserve for impaired loans, referred to as the specific allowance. Total loans considered impaired and their related reserve balances at March 31, 2007, December 31, 2006 and March 31, 2006 follow:

Impaired Loan Information

	Balances						Valuation Reserve
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
(in thousands)	2007		2006		2006		2007		2006		2006
Balances -
Impaired loans with valuation reserve	$	40,753	$	20,737	$	12,936	$	15,904	$	7,550	$	5,454
Impaired loans with no valuation reserve		9,777		21,641		2,592		—		—		—
Total impaired loans	$	50,530	$	42,378	$	15,528	$	15,904	$	7,550	$	5,454
Impaired loans on nonaccrual basis	$	37,189	$	11,321	$	5,646	$	12,099	$	2,104	$	2,061
Impaired loans on accrual basis		13,341		31,057		9,882		3,805		5,446		3,393
Total impaired loans	$	50,530	$	42,378	$	15,528	$	15,904	$	7,550	$	5,454

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Citizens acquired $25.8 million of impaired loans in the Republic acquisition which closed on December 29, 2006. These loans were recorded at their fair value of $21.6 million with no associated allowance for loan losses in accordance with the provisions of SOP 03-3. Additional disclosures required by SOP 03-3 are not provided because the amounts are not significant.

The average balance of impaired loans for the three months ended March 31, 2007 was $46.5 million and $12.2 million for the three months ended March 31, 2006. Of the $34.3 million increase, $26.4 million was due to incorporating Republic balances. Interest income recognized on impaired loans during the first quarter of 2007 was $0.3 million compared with $0.2 million for the same period of 2006. Cash collected and applied to outstanding principal during the first quarter of 2007 was $0.3 million compared with $0.3 million in the same period of 2006.

Note 6. Long-term Debt

The components of long-term debt as of March 31, 2007, December 31, 2006 and March 31, 2006 are presented below.

	March 31,		December 31,		March 31,
(in thousands)	2007		2006		2006
Citizens (Parent only):
Subordinated debt:
5.75% subordinated notes due February 2013	$	118,243	$	117,788	$	116,880
Variable rate junior subordinated debenture due June 2033		25,653		25,628		25,555
7.50% junior subordinated debentures due September 2066		145,309		145,254		—
8.60% junior subordinated debentures due December 2031		51,546		51,546		—
Subsidiaries:
Federal Home Loan Bank advances		1,980,826		1,715,132		859,452
Other borrowed funds		371,882		583,616		—
Total long-term debt	$	2,693,459	$	2,638,964	$	1,001,887

On March 2, 2007, Citizens called $50.0 million of trust preferred securities at 8.60%, originally due in 2031. This transaction settled on April 2, 2007 and Citizens issued a five year variable rate term note for $50.0 million with an initial rate of 5.77% on the same date.

Note 7. Income Taxes

Citizens adopted FIN 48 on January 1, 2007. The adoption had no effect upon the Corporation’s financial condition. The amount of unrecognized tax benefits as of January 1, 2007 totaled $5.1 million, of which $4.4 million of this amount would increase net income, and thus impact the Company’s effective tax rate, if ultimately recognized into income. Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

It is Citizens’ policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts. As of January 1, 2007, $0.5 million in interest had been accrued, and no penalties have been accrued.

Citizens and its subsidiaries file U.S. federal income tax returns, as well as various returns in the states where its banking offices are located. The following tax years remain subject to examination as of March 31, 2007:

Jurisdiction	Tax Years
Federal	2003 - 2006
Indiana	2003 - 2006
Wisconsin	1999 - 2006
Iowa	1999 - 2006

On March 31, 2007, Citizens finalized agreements under voluntary disclosure programs with three states in which certain subsidiaries had conducted lending activities but had not filed income tax returns and paid $0.5 million in state tax. Additionally, Citizens recorded a $0.4 million benefit, net of federal tax impact, to reverse the remaining reserve related to this matter.

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Note 8. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, for the three month periods ended March 31, 2007 and 2006 are presented below.

	Three Months Ended
	March 31,
(in thousands)	2007			2006
Balance at beginning of period	$	(7,375	)	$	454
Net unrealized gain (loss) on securities for the quarter, net of tax effect of $4,049 in 2007 and $(4,477) in 2006		7,520			(8,315	)
Less: Reclassification adjustment for net gains on securities included in net income for the quarter, net of tax effect of $12 in 2007 and $(3) in 2006		21			(4	)
Net change in unrealized (loss) gain on cash flow hedges for the quarter, net of tax effect of $(170) in 2007 and $48 in 2006		(316	)		88
Accumulated other comprehensive income, net of tax	$	(150	)	$	(7,777	)

Note 9. Pension Benefit Cost

The components of pension expense for the three months ended March 31, 2007 and 2006 are presented below.

	Three Months Ended
	March 31,
(in thousands)	2007			2006
Defined Benefit Pension Plans
Service cost	$	—			1,015
Interest cost		1,187			1,226
Expected return on plan assets		(1,956	)		(1,890	)
Amortization of unrecognized:
Prior service cost		3			48
Net actuarial loss		125			261
Net pension cost	$	(641	)	$	660
Supplemental Pension Plans
Service cost	$	—			174
Interest cost		192			145
Amortization of unrecognized:
Prior service cost		42			—
Net actuarial loss		32			30
Net pension cost	$	266		$	349
Postretirement Benefit Plans
Service cost	$	1			1
Interest cost		160			129
Expected return on plan assets Amortization of unrecognized:
Prior service cost		(67	)		(68	)
Net actuarial loss		—			(7	)
Net pension cost	$	94		$	55
Defined contribution retirement and 401K Plans
Employer contributions	$	1,636		$	1,006
Total periodic benefit cost	$	1,355		$	2,070

On December 31, 2006, Citizens adopted the recognition and disclosure provisions of SFAS 158. This statement required Citizens to recognize the funded status of its pension plan in the December 31, 2006 consolidated balance sheet, with a

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corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represented the net unrecognized actuarial losses and unrecognized prior service costs remaining from the initial adoption of SFAS 87, all of which were previously netted against the plan’s funded status in Citizens’ consolidated balance sheet. These amounts will be subsequently recognized as net periodic pension cost pursuant to Citizens’ historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS 158.

During 2006, the Compensation Committee of the Board of Directors approved various changes to Citizens’ employee benefit programs. Effective December 31, 2006, Citizens’ defined benefit pension plan was “frozen,” preserving prior earned benefits and replacing the future accrual of benefits with additional benefits under the defined contribution plan. As a result of the “freeze,” Citizens no longer has service costs related to the defined benefit pension plan. Citizens does not currently anticipate contributing to the defined benefit pension plan in 2007. Citizens will review plan funding needs during 2007 and will make a contribution if appropriate.

The service cost related to Citizens’ supplemental pension plans decreased from the first quarter of 2006 as a result of the full vesting and accrual of participant benefits during 2006. In addition, the increase in the prior service cost is the result of amortizing the cost of plan amendments made during February 2007, allowing for payment of benefits from corporate assets and providing a joint survivor benefit. As of March 31, 2007, $0.1 million of contributions have been made to the supplemental pension plans and Citizens anticipates that an additional $0.4 million of contributions will be made during the remaining three quarters of 2007.

As of March 31, 2007, $0.2 million of contributions have been made to the postretirement benefit plan and Citizens anticipates that an additional $0.8 million of contributions will be made during the next three quarters of 2007.

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. Aggregate grants under the current shareholder approved plan may not exceed 7,000,000 shares, with grants other than stock options are further limited to 2,000,000 shares. At March 31, 2007, Citizens had 3,846,179 shares of common stock reserved for future issuance under our current plan.

In 2005, as an enhancement to the current compensation program, Citizens began awarding a combination of stock options and restricted stock. Options expire ten years from the date of grant. Beginning in 2006, restrictions on nonvested stock generally lapse in three annual installments beginning on the first anniversary of the grant date. Canceled and expired options become available for future grants. Although not included in the calculation of basic earnings per share, restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights.

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock awards included in the Consolidated Statements of Income for the three months ended March 31, 2007 and March 31, 2006:

Analysis of Stock-Based Compensation Expense

	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
(in thousands)	2007			2006
Stock Option Compensation	$	8		$	19
Restricted Stock Compensation		605			390
Stock-based compensation expense before income taxes		613			409
Income tax benefit		(215	)		(143	)
Total stock-based compensation expense after income taxes	$	398		$	266

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Cash proceeds from the exercise of stock options were $2.5 million for the three months ended March 31, 2007 and $1.1 million for the three months ended March 31, 2006. New shares are issued when stock options are exercised. In accordance with SFAS 123R, Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows on the Consolidated Statement of Cash Flows.

There were no stock options granted in the three months ended March 31, 2007 and March 31, 2006. Stock option activity for the three months ended March 31, 2007 is as follows:

	Options
				Weighted
				Average		Weighted Average	(in thousands)
				Exercise		Remaining	Aggregate
	Shares			Price		Contractual Term	Intrinsic Value
Outstanding at December 31, 2006		4,775,700		$	24.95
Granted		—			—
Exercised		(188,674	)		13.41
Forfeitures or Expirations		(19,263	)		27.80
Outstanding at March 31, 2007		4,567,763		$	25.42	4.5 yrs	$	8,405
Exercisable		4,556,200		$	25.42	4.5 yrs	$	8,404

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between Citizens’ average closing stock price as of the date of this report and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised those options on March 31, 2007 if the average closing stock price exceeded the exercise price. This amount fluctuates with changes in the fair market value of Citizens’ stock. The total intrinsic value of options exercised during the three months ended March 31, 2007 was $2.0 million. The fair value of options vested for the three month period ended March 31, 2007 was less than $0.1 million.

As of March 31, 2007, $4.5 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes restricted stock activity for the three months ended March 31, 2007.

				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value
Outstanding restricted stock at December 31, 2006		293,087		$	25.13
Granted		2,700			24.14
Vested		(30,282	)		24.67
Forfeited		(9,002	)		27.89
Restricted stock at March 31, 2007		256,503		$	24.87

The total fair value of shares vested during the three months ended March 31, 2007 was $0.7 million.

Note 11. Earnings Per Share

Net income per share is computed based on the weighted-average number of shares outstanding, including the dilutive effect of stock-based compensation, as follows:

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	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2007		2006
Numerator:
Basic and dilutive earnings per share — net income available to common shareholders	$	31,492	$	20,756
Denominator:
Basic earnings per share — weighted average shares		75,448		42,784
Effect of dilutive securities — potential conversion of employee stock options		470		157
Diluted earnings per share — adjusted weighted-average shares and assumed conversions		75,918		42,941
Basic earnings per share	$	0.42	$	0.49
Diluted earnings per share	$	0.41	$	0.48

Note 12. Lines of Business

Citizens is managed along the following business lines: Commercial Banking, Consumer Banking, Wealth Management, and Other. Selected line of business segment information for the three months ended March 31, 2007 and 2006 is provided below. As a result of the Republic merger, Citizens reviewed and affirmed its segment reporting definitions. For the three months ended March 31, 2007, Republic results of operations and average balances were incorporated into the existing lines of business, with the legacy Republic mortgage line of business included in Consumer Banking. There are no significant intersegment revenues.

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Line of Business Information

	Commercial		Consumer		Wealth
(in thousands)	Banking		Banking		Mgmt		Other			Total
Earnings Summary — Three Months Ended March 31, 2007
Net interest income (taxable equivalent)	$	46,077	$	65,339	$	235	$	(8,684	)	$	102,967
Provision for loan losses		1,084		2,389		27		—			3,500
Net interest income after provision		44,993		62,950		208		(8,684	)		99,467
Noninterest income		4,666		17,700		6,273		2,751			31,390
Noninterest expense		22,154		44,331		5,750		11,475			83,710
Income before income taxes		27,505		36,319		731		(17,408	)		47,147
Income tax expense (taxable equivalent)		9,627		12,711		315		(6,998	)		15,655
Net income	$	17,878	$	23,608	$	416	$	(10,410	)	$	31,492
Average assets(in millions)	$	5,065	$	2,395	$	28	$	6,086		$	13,574
Earnings Summary — Three Months Ended March 31, 2006(1)
Net interest income (taxable equivalent)	$	30,926	$	35,654	$	332	$	3,979		$	70,891
Provision for loan losses		1,188		1,812		—		—			3,000
Net interest income after provision		29,738		33,842		332		3,979			67,891
Noninterest income		3,750		13,728		6,504		1,588			25,570
Noninterest expense		18,153		31,264		6,171		5,984			61,572
Income before income taxes		15,335		16,306		665		(417	)		31,889
Income tax expense (taxable equivalent)		5,403		5,713		239		(222	)		11,133
Net income	$	9,932	$	10,593	$	426	$	(195	)	$	20,756
Average assets(in millions)	$	3,007	$	1,001	$	28	$	3,617		$	7,653

⁽¹⁾ Certain amounts have been reclassified to conform to current year presentation.

Note 13. Commitments, Contingent Liabilities and Guarantees

The 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 180 days prior to being funded and unused lines of credit are reviewed on a regular basis. Financial standby letters of credit guarantee future payment of client financial obligations to third parties. They are issued primarily for goods and services provided. Performance standby letters of credit are irrevocable guarantees to various beneficiaries for the performance of contractual obligations of the Corporation’s clients. Commercial letters of credit may facilitate the shipment of goods and may also include direct pay letters of credit which afford Citizens’ clients access to the public financing market. Standby letters of credit arrangements generally expire within one year and have essentially the same level of credit risk as extending loans to clients and are subject to Citizens’ normal credit policies. These arrangements have fixed expiration dates and most expire unfunded, so they do not necessarily represent future liquidity requirements. Appropriate collateral is obtained based on Citizens’ assessment of the client and may include receivables, inventories, real property and equipment.

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

	March 31,		December 31,
(in thousands)	2007		2006
Loan commitments and letters of credit:
Commitments to extend credit	$	2,554,130	$	2,559,121
Financial standby letters of credit		152,146		146,863
Performance standby letters of credit		18,511		24,609
Commercial letters of credit		187,811		194,834
Total loan commitments and letters of credit	$	2,912,598	$	2,925,427

At March 31, 2007 and December 31, 2006, a liability of $6.1 million was recorded for possible losses on commitments to extend credit. As of March 31, 2007 and December 31, 2006, in accordance with FIN 45, a liability of $0.4 million and $0.6 million, respectively, was recorded representing the value of the guarantee obligations associated with certain letters of credit. The guarantee obligation liability will be 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

SFAS 133,“Accounting for Derivative Instruments and Hedging Activities,”as amended by SFAS 138 and SFAS 149,“Accounting for Certain Derivative Instruments and Certain Hedging Activities” (collectively referred to as SFAS 133), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value.

Citizens designates its derivatives based upon criteria established by SFAS 133. For a derivative designated as a fair value hedge, the derivative is recorded at fair value on the consolidated balance sheet. Any difference between the fair value change of the hedge versus the fair value change of the hedged item is considered to be the “ineffective” portion of the hedge. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the noninterest income section of the income statement.

Citizens may use derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. Citizens uses interest rate contracts such as interest rate swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets or liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The following tables summarize the derivative financial instruments held or issued by Citizens.

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Derivative Financial Instruments:

	March 31, 2007					December 31, 2006
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Receive fixed swaps	$	245,000	$	(150	)	$	268,300	$	(1,839	)
Pay fixed swaps		84,000		746			104,000		1,242
Customer initiated swaps and corresponding offsets		411,596		—			378,590		—
Interest rate lock commitments		30,090		(37	)		29,875		(11	)
Forward mortgage loan contracts		46,420		50			78,498		257
Total	$	817,106	$	609		$	859,263	$	(351	)

Derivative Classifications and Hedging Relationships:

	March 31, 2007					December 31, 2006
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Derivatives Designated as Cash Flow Hedges:
Hedging repurchase agreements	$	84,000	$	746		$	104,000	$	1,242
Derivatives Designated as Fair Value Hedges:
Hedging time deposits		95,000		22			95,000		47
Hedging long-term debt		150,000		(172	)		100,000		(390	)
Derivatives Not Designated as Hedges:
Receive fixed swaps		—		—			73,300		(1,496	)
Customer initiated swaps and corresponding offsets		411,596		—			378,590		—
Total	$	740,596	$	596		$	750,890	$	(597	)

Note 15. Subsequent Events

On April 27, 2007, Citizens completed the computer system conversion and integration of all legacy Republic locations and consolidated 19 branch locations throughout Michigan with minimal disruption to clients and daily operations. As of May 4, 2007, no material losses have occurred as a result of the computer system conversion. Additionally, Citizens’ divestiture of seven Republic branches in the Flint, Michigan market was completed on April 27, 2007. These branches had $26.9 million of consumer loans and $206.5 million in deposits as of March 31, 2007. Citizens will complete a final close statement with the purchaser during May 2007. Finally, the bank charter for Republic Bank was consolidated into Citizens Bank as of April 28, 2007.

On April 26, 2007, Dana M. Cluckey, President, Chief Operating Officer and a director of Citizens resigned for personal reasons from all positions he held as an officer and director of Citizens and each of its subsidiaries, effective May 31, 2007 (the “Separation Date”). Citizens is unaware of any disagreements between Mr. Cluckey and the Company on any matter relating to the Company’s operations, policies or practices. William R. Hartman, Citizens’ Chief Executive Officer, will assume the title of President and Chief Executive Officer. There are no plans to fill the position of Chief Operating Officer.

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

Selected Quarterly Information
Citizens Republic Bancorp and Subsidiaries

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2007			2006			2006			2006			2006
Summary of Operations (thousands)
Net interest income		98,341			64,010			65,645			65,990			67,475
Provision for loan losses		3,500			5,936			1,190			1,139			3,000
Total fees and other income		31,313			24,358			23,544			23,691			25,563
Investment securities gains (losses)(1)		77			(6,590	)		—			54			7
Noninterest expense(2)		83,710			78,788			59,402			60,065			61,572
Income tax provision		11,029			(3,638	)		7,616			7,624			7,717
Net income		31,492			692			20,981			20,907			20,756
Taxable equivalent adjustment		4,625			3,505			3,413			3,383			3,416
Cash dividends		21,964			12,443			12,435			12,394			12,258
Per Common Share Data
Basic net income	$	0.42		$	0.02		$	0.49		$	0.49		$	0.49
Diluted net income		0.41			0.02			0.49			0.49			0.48
Cash dividends		0.290			0.290			0.290			0.290			0.285
Market value (end of period)		22.16			26.50			26.26			24.41			26.85
Book value (end of period)		20.78			20.58			15.72			15.15			15.23
At Period End (millions)
Assets	$	13,317		$	14,003		$	7,748		$	7,813		$	7,662
Portfolio loans		9,178			9,231			5,753			5,728			5,592
Deposits		8,461			8,698			5,625			5,685			5,524
Shareholders’ equity		1,572			1,558			674			650			652
Average for the Quarter (millions)
Assets	$	13,574		$	7,770		$	7,723		$	7,670		$	7,653
Portfolio loans		9,179			5,762			5,694			5,610			5,561
Deposits		8,525			5,597			5,680			5,560			5,513
Shareholders’ equity		1,552			683			659			647			655
Ratios (annualized)
Return on average assets		0.94	%		0.04	%		1.08	%		1.09	%		1.10	%
Return on average shareholders’ equity		8.23			0.40			12.63			12.96			12.86
Average equity to average assets		11.43			8.79			8.53			8.44			8.55
Net interest margin (FTE)(3)		3.44			3.67			3.78			3.84			3.97
Efficiency ratio(4)		62.34			85.76			64.15			64.54			63.84
Net loans charged off to average portfolio loans		0.15			0.52			0.19			0.14			0.29
Allowance for loan losses to portfolio loans		1.84			1.83			1.97			2.00			2.06
Nonperforming assets to portfolio loans plus ORAA (end of period)		1.25			1.10			0.69			0.61			0.65
Nonperforming assets to total assets (end of period)		0.86			0.73			0.52			0.44			0.48
Leverage ratio(5)		7.64			7.22			8.29			8.21			8.14
Tier 1 capital ratio		9.89			9.41			10.13			9.96			10.09
Total capital ratio		12.42			11.90			13.37			13.20			13.39

(1)	Investment securities gains (losses) includes a $7.2 million impairment charge in the fourth quarter of 2006 related to the Republic merger.
(2)	Noninterest expense includes restructuring and merger related expenses of $4.2 during the first quarter of 2007 and $11.3 million related to the Republic merger during the fourth quarter of 2006.
(3)	Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%.
(4)	The Efficiency Ratio measures how efficiently a bank spends its revenues. The formula is: Noninterest expense/(Net interest income + Taxable equivalent adjustment + Total fees and other income).
(5)	The Tier I leverage ratio is calculated using ending assets instead of average assets in the fourth quarter of 2006 due to the Republic merger on December 29, 2006

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Introduction

The following commentary presents management’s discussion and analysis of Citizens Republic Bancorp, Inc.’s financial condition and results of operations for the three month period ended March 31, 2007. 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 2006 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’ 2006 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.

Forward — Looking Statements

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan,”) and statements about the benefits of the merger, including future financial and operating results, plans, objectives, expectations and intentions and other statements that are not historical facts, are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Holding Company’s filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of Citizens’ 2006 Annual Report on Form 10-K, as well as the following.

• Citizens faces the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, will exceed the allowance for loan losses and that additional increases in the allowance will be required. Additions to the allowance would cause net income to decline and could have a negative impact on capital and financial position.

• While Citizens attempts to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, Citizens may not be able to economically hedge its interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect net interest income and results of operations.

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

• If Citizens is unable to continue to attract core deposits or continue to obtain third party financing on favorable terms, its cost of funds will increase, adversely affecting the ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting results of operations.

• If Citizens is unable to retain legacy loans and deposits of Republic Bancorp Inc. (“Republic”) as a result of the conversion of Republic’s computer systems to Citizens’ systems and as a result of branch consolidations, it may not have the ability to retain and grow the Republic customer base and capture revenue synergies.

• Increased competition with other financial institutions or an adverse change in Citizens’ relationship with a number of major customers could reduce Citizens’ net interest margin and net income by decreasing the number and size of loans originated, the interest rates charged on these loans and the fees charged for services to customers. If Citizens were to lend to customers who are less likely to pay in order to maintain historical origination levels, it may not be able to maintain current loan quality levels.

• Citizens is a party to various lawsuits incidental to its business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

• The financial services industry is undergoing rapid technological changes. If Citizens is unable to adequately invest in and implement new technology-driven products and services, it may not be able to compete effectively, or the cost to provide products and services may increase significantly.

• Citizens’ business may be adversely affected by the highly regulated environment in which it operates. Changes in banking or tax laws, regulations and regulatory practices at either the federal or state level may adversely affect the Corporation, including its ability to offer new products and services, obtain financing, pay dividends from the subsidiaries to the Holding Company, attract deposits, make loans and leases at satisfactory spreads, and may also result in the imposition of additional costs.

• The products and services offered by the banking industry and customer expectations regarding them are subject to change. Citizens attempts to respond to perceived customer needs and expectations by offering new products and

21

	services, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on Citizens’ financial condition and results of operations.
•	New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact Citizens’ results of operations and financial position.
•	Citizens’ business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, Citizens’ business and a negative impact on the results of operations.
•	Citizens’ vendors could fail to fulfill their contractual obligations, resulting in a material interruption in, or disruption to, its business and a negative impact on its results of operations.
•	Citizens’ potential inability to integrate acquired operations could have a negative effect on Citizens’ expenses and results of operations.
•	Citizens could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on Citizens’ expenses and results of operations.
•	As a bank holding company that conducts substantially all of its operations through its subsidiaries, the ability of the Holding Company to pay dividends, repurchase its shares or to repay its indebtedness depends upon the results of operations of its subsidiaries and their ability to pay dividends to the Holding Company. Dividends paid by these subsidiaries are subject to limits imposed by federal and state law.
•	Citizens’ controls and procedures may fail or be circumvented, which could have a material adverse effect on its business, results of operations, and financial condition.
•	Citizens’ articles of incorporation, by-laws and shareholder rights agreement, as well as certain banking laws, may have an anti-takeover effect.

Other factors not currently anticipated may also materially and adversely affect Citizens’ results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Corporation 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 the determination of the allowance for loan losses, the benefit obligation and net periodic pension expense for employee pension plans, derivative financial instruments and hedging activities, 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. 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 2006 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 2006 Annual Report on Form 10-K. There have been no material changes to those policies or the estimates made pursuant to those policies since the most recent fiscal year end.

Subsequent Events

On April 27, 2007, Citizens completed the computer system conversion and integration of all legacy Republic locations and consolidated 19 branch locations throughout Michigan with minimal disruption to clients and daily operations. As of May 4, 2007, no material losses have occurred as a result of the computer system conversion. Additionally, Citizens’ divestiture of

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seven Republic branches in the Flint, Michigan market was completed on April 27, 2007. These branches had $26.9 million of consumer loans and $206.5 million in deposits as of March 31, 2007. Citizens will complete a final close statement with the purchaser during May 2007. Finally, the bank charter for Republic Bank was consolidated into Citizens Bank as of April 28, 2007.

On April 26, 2007, Dana M. Cluckey, President, Chief Operating Officer and a director of Citizens, resigned for personal reasons from all positions he held as an officer and director of Citizens and each of its subsidiaries, effective May 31, 2007 (the “Separation Date”). Citizens is unaware of any disagreements between Mr. Cluckey and the Company on any matter relating to the Company’s operations, policies or practices. William R. Hartman, Citizens’ Chief Executive Officer, will assume the title of President and Chief Executive Officer. There are no plans to fill the position of Chief Operating Officer.

In connection with his resignation and in consideration of, among other things, Mr. Cluckey’s release of Citizens from payments required to be made under the Employment Agreement between Mr. Cluckey and Citizens dated June 26, 2006 (the “Employment Agreement”), Mr. Cluckey entered into a Release and Settlement Agreement with Citizens (the “Agreement”). The Agreement provides that Mr. Cluckey will receive a lump sum payment from Citizens on January 2, 2008 of $1.125 million and that the stock options previously awarded to him will remain exercisable through their termination date as if he remained employed by Citizens. All of such options became exercisable prior to April 26, 2007. The Agreement further provides that in lieu of medical, dental and prescription coverage, Citizens will pay to Mr. Cluckey on the Separation Date an additional amount equal to (i) 36 months of premiums for continuation of Mr. Cluckey’s existing medical and dental coverage for Mr. Cluckey and his eligible dependents, plus (ii) $36,000 to cover prescription coverage costs. The Agreement also provides that Mr. Cluckey shall not disclose confidential information of Citizens and that, for a period of two years from the Separation Date, he will not solicit employees of Citizens, nor, pursuant to the terms of the Employment Agreement which are incorporated into the Agreement, compete against Citizens.

Pursuant to the Agreement, Mr. Cluckey and Citizens have mutually agreed to release one another from any claims they may have against each other arising out of Mr. Cluckey’s employment or director relationship with Citizens, including any claims for payments or benefits that might arise under the Employment Agreement, other than (i) any claims by Mr. Cluckey which may arise in connection with unpaid salary and benefits related to periods prior to the Separation Date, indemnification rights under articles of incorporation and bylaws of Citizens, or Citizens’ directors and officers insurance policies; and (ii) any claims by Citizens which may arise due to acts on the part of Cluckey involving fraud, dishonesty, gross negligence, willful malfeasance, violation of securities laws, or for which he would not be entitled to be indemnified under Citizens’ articles of incorporation or bylaws.

The Employment Agreement provided for Mr. Cluckey to serve as president and chief operating officer of Citizens until December 31, 2010 and as president and chief executive officer of Citizens from January 1, 2011 to December 31, 2011. Mr. Cluckey was also entitled to serve as a director during his employment with Citizens. While serving as president and chief operating officer, Mr. Cluckey would have received an annual base salary at a rate of at least 90% of the annual base salary of Mr. Hartman, Citizens’ chief executive officer, but in no event less than $667,000, would have been entitled to a target bonus of not less than 90% of Mr. Hartman’s target bonus and would have received annual equity incentive awards with a value of not less than 90% of those awarded to Mr. Hartman. While serving as president and chief executive officer, Mr. Cluckey’s annual base salary and annual bonus would have been no less than those in effect as of December 31, 2010, with annual equity incentive awards to be determined by the compensation committee of Citizens’ board of directors. Mr. Cluckey would also have been entitled to employee benefits, fringe benefits and perquisites through 2011 on a basis no less favorable than those provided to other senior executives of Citizens, including tax grossed-up club fees and dues. Citizens had also entered into a change in control agreement, under which Citizens will have no further obligation after the Separation Date.

In the event that, during the term, Mr. Cluckey’s employment were terminated by Citizens without “cause” or by Mr. Cluckey for “good reason”, Mr. Cluckey would have been entitled to be paid a lump sum cash payment equal to the sum of (i) accrued amounts, including a pro-rata target bonus for the year of termination and (ii) three times the sum of his base salary and target bonus. In addition, upon such termination (i) equity compensation awards would have vested and generally remained exercisable for their full term, (ii) Mr. Cluckey and his eligible dependents would have been entitled to continued health and welfare benefits for the three-year period following the date of termination and (iii) Mr. Cluckey’s club membership would have been transferred to him.

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Results of Operations

Financial Statement Impact as a Result of the Republic Merger

The merger with Republic Bancorp Inc. closed on December 29, 2006. As a result, March 31, 2007 and December 31, 2006 ending balances incorporate all of Republic’s assets and liabilities while only the first quarter of 2007 financial statements incorporate Republic average balances, revenues and expenses. All pre-merger financial data include only legacy Citizens performance and do not incorporate results of Republic prior to the merger.

Summary

Citizens earned net income of $31.5 million for the three months ended March 31, 2007, which includes restructuring and merger-related expenses associated with the Republic merger. The results for the first quarter of 2007, which include the effects of Republic revenue and expenses for the first time, represent an increase of $10.7 million over the first quarter of 2006 net income of $20.8 million. Diluted net income per share was $0.41, a decrease of $0.07 per share from the same quarter of last year. Annualized returns on average assets and average equity during the first quarter of 2007 were 0.94% and 8.23%, respectively, compared with 1.10% and 12.86% for the first quarter of 2006.

The challenges of the Midwest economy and the banking industry operating environment continue to impact Citizens’ results. Citizens completed its post-merger balance sheet restructuring strategies in the first quarter of 2007, which were conducted to help achieve market risk reduction objectives and improve earnings quality. Citizens recorded restructuring and merger-related expenses of $4.2 million related to additional employee severance and retention, computer system conversion, training, and client communications regarding product changes. Citizens incurred additional expenses of $2.4 million in compensation, re-branding of marketing materials, and other expenses related to integration activities which were not treated as restructuring or merger related. Citizens still projects annual cost savings of $31.0 million related to the Republic merger, with 70% of the savings expected to be realized in 2007 and 100% in 2008 and thereafter. Citizens’ full-time equivalent employee count declined 205 in the first quarter from December 31, 2006.

Total assets at March 31, 2007 were $13.3 billion, a decrease of $685.4 million or 4.9% from December 31, 2006 and an increase of $5.7 billion over March 31, 2006. Total assets decreased from December 31, 2006 primarily as a result of selling $362.7 million in investment securities, not reinvesting $147.6 million of maturing investment securities, and selling $23.3 million in commercial loans held for sale to better align Republic’s assets with Citizens’ interest rate risk and lending philosophies. Total portfolio loans were essentially unchanged from December 31, 2006 and increased $3.6 billion over March 31, 2006. The increase over March 31, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

Total deposits at March 31, 2007 decreased $237.2 million or 2.7% from December 31, 2006 to $8.5 billion and increased $2.9 billion over March 31, 2006. Core deposits, which exclude all time deposits, totaled $4.3 billion at March 31, 2007, a decrease of $141.5 million or 3.2% from December 31, 2006 and an increase of $1.1 billion over March 31, 2006, primarily as a result of incorporating Republic balances. The decrease in core deposits from December 31, 2006 was primarily a result of commercial clients maintaining lower balances and Citizens not renewing a $40.0 million wholesale money market deposit account. Core deposits also continue to be negatively affected by the migration of client funds from lower cost savings and transaction accounts into time deposits with higher yields. Time deposits totaled $4.2 billion at March 31, 2007, a decrease of $95.6 million or 2.2% from December 31, 2006 and an increase of $1.8 billion over March 31, 2006. The decrease from December 31, 2006 was primarily the result of Citizens not renewing $219.9 million in brokered certificates of deposit, partially offset by growth in client certificates of deposit. This decrease was partially offset by the continued migration of client funds from lower-cost deposits into time deposits and some new client growth. In addition to the impact of the Republic merger, the increase over March 31, 2006 reflected the continued migration of funds from lower-cost deposits and some new client growth.

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, 2007 and 2006 is presented below.

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Average Balances/Net Interest Income/Average Rates

	2007								2006
Three Months Ended March 31,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	840		$	17		8.55	%	$	1,684		$	12		2.82	%
Investment securities(3):
Taxable		1,938,432			23,791		4.91			1,125,391			12,951		4.60
Tax-exempt		670,159			7,328		6.73			446,657			5,317		7.33
FHLB and Federal Reserve stock		132,895			1,736		5.23			56,006			660		4.71
Portfolio Loans(4):
Commercial		1,960,678			37,219		7.83			1,646,899			27,982		7.02
Commercial real estate		3,153,730			59,603		7.67			1,415,201			23,985		6.88
Residential mortgage		1,535,636			25,560		6.66			541,390			7,664		5.66
Direct consumer		1,696,461			32,720		7.82			1,124,379			20,011		7.22
Indirect consumer		832,917			13,937		6.79			833,436			13,577		6.61
Total portfolio loans		9,179,422			169,039		7.48			5,561,305			93,219		6.83
Loans held for sale		144,006			2,805		7.82			16,471			232		5.64
Total earning assets(3)		12,065,754			204,716		7.01			7,207,514			112,391		6.49
Nonearning Assets
Cash and due from banks		188,763								165,909
Bank premises and equipment		139,628								121,348
Investment security fair value adjustment		3,154								(3,305	)
Other nonearning assets		1,344,570								277,382
Allowance for loan losses		(167,771	)							(116,151	)
Total assets	$	13,574,098							$	7,652,697
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	903,134		$	1,663		0.75	%	$	857,273		$	1,362		0.64	%
Savings deposits		2,271,532			16,573		2.96			1,448,866			7,973		2.23
Time deposits		4,205,636			48,198		4.65			2,281,926			21,657		3.85
Short-term borrowings		906,216			11,001		4.92			390,307			3,736		3.88
Long-term debt		2,410,542			28,940		4.84			1,003,780			10,188		4.10
Total interest-bearing liabilities		10,697,060			106,375		4.03			5,982,152			44,916		3.04
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,144,773								924,788
Other liabilities		180,214								91,150
Shareholders’ equity		1,552,051								654,607
Total liabilities and shareholders’ equity	$	13,574,098							$	7,652,697
Net Interest Income				$	98,341							$	67,475
Interest Spread(5)							2.98	%							3.45	%
Contribution of noninterest bearing sources of funds							0.46								0.52
Net Interest Margin(5)(6)							3.44	%							3.97	%

(1)	Interest income is shown on actual basis and does not include taxable equivalent adjustments.
(2)	Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $4.6 million and $3.4 million for the three months ended March 31, 2007 and 2006, 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, a for amortization of premiums and accretion of discounts.
(4)	Nonaccrual loans are included in average balances for each applicable loan category.
(5)	The interest spread and net interest margin are presented on a tax-equivalent basis.
(6)	Because noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity also support earning assets, the net int margin exceeds the interest spread.

Average interest rates, net interest margin and net interest spread are presented in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” on a fully taxable equivalent basis. This presentation is customary in the banking industry because it permits comparability of yields on both taxable and tax-exempt sources of interest income.

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Net interest income was $98.3 million for the first quarter of 2007 compared with $67.5 million for the first quarter of 2006. The increase resulted from an increase in average earning assets of $4.9 billion almost entirely due to incorporating Republic’s average earning assets and, to a lesser extent, organic growth in the commercial and commercial real estate loan portfolios, partially offset by a decrease in net interest margin to 3.44% compared with 3.97% in the first quarter of 2006. The decrease in net interest margin was primarily due to the merger with Republic and, to a lesser extent, funds migrating within the deposit portfolio from lower cost savings and transaction accounts to higher cost savings and time deposits, pricing pressure on loans, the continued effects of the interest rate environment, and the issuance of $150.0 million of enhanced trust preferred securities in the fourth quarter of 2006, partially offset by a shift in asset mix from investment securities to higher yielding commercial loans.

The table below shows changes in interest income, interest expense and net interest income due to volume and rate 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)
2007 compared with 2006	Net		Due to Change in
(in thousands)	Change(1)		Rate(2)			Volume(2)
Interest Income:
Money market investments		5		13			(8	)
Investment securities:
Taxable		10,840		914			9,926
Tax-exempt		2,011		(463	)		2,474
FHLB and Federal Reserve stock		1,076		79			997
Loans:
Commercial		9,237		3,519			5,718
Commercial real estate		35,618		3,052			32,566
Residential mortgage loans		17,896		1,563			16,333
Direct consumer		12,709		1,796			10,913
Indirect consumer		360		368			(8	)
Total portfolio loans		75,820		10,298			65,522
Loans held for sale		2,573		121			2,452
Total		92,325		10,962			81,363
Interest Expense:
Deposits:
Interest-bearing demand		301		225			76
Savings		8,600		3,136			5,464
Time		26,541		5,243			21,298
Short-term borrowings		7,265		1,226			6,039
Long-term debt		18,752		2,164			16,588
Total		61,459		11,994			49,465
Net Interest Income	$	30,866	$	(1,032	)	$	31,898

(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 increase in net interest income of $30.9 million in the first quarter of 2007 compared with the same period of 2006 reflects volume variances which were favorable in the aggregate and rate variances which were unfavorable in the aggregate.

Favorable volume variances on assets were partially offset by unfavorable volume variances on liabilities. Favorable volume variances on assets resulted from the merger as well as organic commercial and commercial real estate loan growth. Unfavorable volume variances on liabilities resulted from the merger as well as organic growth in time deposits.

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Unfavorable rate variances on liabilities were largely offset by favorable rate variances on assets. Favorable rate variances on assets and unfavorable rate variances on liabilities were the result of increases in market interest rates.

For the second quarter of 2007, Citizens anticipates net interest income will be slightly lower than the first quarter of 2007 due to the continued migration of client funds from lower yielding deposit products into higher yielding deposit products, as well as the effects of loan pricing pressure, the interest rate environment, stable to declining average earning assets due to the economic environment, and the impact of the branch divestiture.

Noninterest Income

Noninterest income for the first quarter of 2007 was $31.4 million, an increase of $5.8 million over the first quarter of 2006. The increase was almost entirely due to incorporating Republic revenue, primarily mortgage and other loan income and service charges on deposit accounts and, to a lesser extent, growth in legacy Citizens’ revenue stream, partially offset by the effect of fully recognizing a deferred gain of $2.9 million (in other income) on the 2004 sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006.

Noninterest Income

	Three Months Ended
	March 31,					Change in 2007
(dollars in thousands)	2007		2006			Amount			Percent
Service charges on deposit accounts	$	11,106	$	8,875		$	2,231			25.1	%
Trust fees		4,955		5,042			(87	)		(1.7	)
Mortgage and other loan income		6,137		2,010			4,127			205.4
Brokerage and investment fees		1,549		1,515			34			2.2
ATM network user fees		1,579		987			592			60.0
Bankcard fees		1,180		1,057			123			11.6
Fair value change in CD swap derivatives		—		(207	)		207			100.0
Other income		4,807		6,284			(1,477	)		(23.5	)
Total fees and other income		31,313		25,563			5,750			22.5
Investment securities gains		77		7			70			952.8
Total noninterest income	$	31,390	$	25,570		$	5,820			22.8

The increase in service charges on deposit accounts was almost entirely due to incorporating Republic activity and, to a significantly lesser extent, legacy Citizens revenue enhancement initiatives implemented in the first quarter of 2006.

Trust fees were essentially unchanged from the first quarter of 2006. Total trust assets under administration were $2.7 billion at March 31, 2007, an increase of $0.1 billion over March 31, 2006. Trust fees were unaffected by the merger as Republic did not have a trust portfolio.

The increase in mortgage and other loan income was primarily due to incorporating Republic activity but also reflected the impact of the mid-2006 alliance with PHH Mortgage, pursuant to which Citizens sells substantially all of its origination volume to PHH Mortgage. Citizens will be discontinuing its alliance with PHH Mortgage in the second quarter of 2007 and migrating the legacy Citizens mortgage portfolio and all future production to the legacy Republic platform. This change is not expected to have a material impact on mortgage and other loan income.

Brokerage and investment fees were essentially unchanged from the first quarter of 2006. Brokerage fees were unaffected by the merger as Republic did not offer this product line. Citizens began training legacy Republic branch staff and new financial consultants to support the Republic franchise on this product line during the first quarter of 2007.

For the first quarter of 2007, all other noninterest income categories, which include ATM network user fees, bankcard fees, fair value change in CD swap derivatives, other income, and investment securities gains, totaled $7.6 million, a decrease of $0.5 million from the first quarter of 2006. The decrease was primarily the result of the aforementioned $2.9 million gain on the sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006, partially offset by higher ATM network user fees and bankcard fees from the legacy Citizens franchise and incorporating Republic activity.

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Citizens anticipates total noninterest income for the second quarter of 2007 will be consistent with or slightly lower than the first quarter of 2007 due to continued reductions in mortgage origination and the effect of the aforementioned Flint, Michigan market branch divestitures.

Noninterest Expense

Noninterest expense for the first quarter of 2007 was $83.7 million, an increase of $22.1 million over the first quarter of 2006. The increase was primarily the result of incorporating Republic activity and restructuring and merger-related expenses, as well as higher legacy Citizens salaries and employee benefits, and other loan expenses, partially offset by decreases in legacy Citizens occupancy, advertising and public relations, and other expense. The first quarter of 2007 included $4.2 million in restructuring and merger-related expenses and $2.4 million in additional expenses that are related to merger activities but not treated as restructuring or merger-related.

Noninterest Expense

	Three Months Ended
	March 31,				Change in 2007
(dollars in thousands)	2007		2006		Amount			Percent
Salaries and employee benefits	$	44,165	$	32,256	$	11,909			36.9	%
Occupancy		7,910		5,942		1,968			33.1
Professional services		4,152		4,078		74			1.8
Equipment		3,911		3,166		745			23.5
Data processing services		4,130		3,739		391			10.5
Advertising and public relations		1,775		2,034		(259	)		(12.7	)
Postage and delivery		1,964		1,462		502			34.3
Telephone		2,064		1,464		600			41.0
Other loan expenses		912		416		496			119.2
Stationery and supplies		777		727		50			6.8
Intangible asset amortization		3,118		725		2,393			330.2
Restructuring and merger-related expenses		4,186		—		4,186			—
Other expenses		4,646		5,563		(917	)		(16.5	)
Total noninterest expense	$	83,710	$	61,572	$	22,138			36.0

The increase in salary and employee benefits was due to incorporating Republic activity and higher legacy Citizens costs related to outside temporary staffing services, incentive expense and hospitalization insurance cost, partially offset by lower pension expense. Salary costs included $0.4 million in employee severance for the first quarter of 2007 compared with $0.7 million for the first quarter of 2006. Salaries and employee benefits in the first quarter of 2007 also included $2.3 million in expenses related to employees who will be leaving the company after the computer system conversion in the second quarter of 2007.

Occupancy costs for the first quarter of 2007 were higher than the first quarter of 2006 due to the impact of adding Republic activity, offset in part by decreases in the cost of various maintenance services.

Professional services for the first quarter of 2007 were essentially unchanged from the first quarter of 2006 as the impact of adding the Republic activity was offset by declines in legacy Citizens expenses.

The increase in equipment costs was the result of incorporating Republic activity, partially offset by lower depreciation expense at legacy Citizens due to the additional depreciation of $2.0 million in the fourth quarter of 2006 to align the service life of previously acquired equipment with the current capitalization policy.

The decrease in advertising and public relations expense was the result of several product campaigns focused on creating deposit generation during the first quarter of 2006.

The increase in telephone expense was primarily due to incorporating Republic activity and, to a lesser extent, the result of higher cell phone volume, higher usage charges, and more audio conferences among merger integration teams.

The increase in other loan expenses was due to incorporating Republic activity and higher other mortgage processing fees due to the alliance with PHH Mortgage, partially offset by lower expenses related to processing commercial loans. Citizens

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will be discontinuing its alliance with PHH Mortgage in the second quarter of 2007 and migrating the legacy Citizens mortgage portfolio and all future production to the legacy Republic platform. This change is not expected to have a material impact on other loan expense.

Intangible asset amortization increased as a result of the purchase accounting fair market value adjustments made to the Republic core deposits on December 29, 2006. The implied premium on the Republic core deposits is amortized over the estimated term of the underlying deposits through the intangible asset amortization account on the income statement.

For the first quarter of 2007, all other noninterest expense categories, which include data processing services, postage and delivery, stationery and supplies, restructuring and merger-related expenses, and other expenses, totaled $15.7 million, an increase of $4.2 million over the first quarter of 2006. The increase was primarily the result of the aforementioned restructuring and merger-related expenses, incorporating Republic activity, and higher data processing services, partially offset by a $1.5 million contribution to Citizens’ charitable foundation in the first quarter of 2006.

Excluding the restructuring and merger-related expenses and additional expenses related to merger activities, Citizens anticipates total noninterest expense for the second quarter of 2007 will be consistent with or slightly lower than the first quarter of 2007 due to completion of the computer system conversion and branch divestitures.

Income Taxes

Income tax provision for the first quarter of 2007 was $11.0 million, an increase of $3.3 million over the first quarter of 2006. The increase was due to incorporating Republic’s results of operations, partially offset by a $0.5 million ($0.4 million after-tax) deferred state income tax benefit related to multi-state related nexus issues.

The effective tax rate was 25.94% for the first quarter of 2007 compared with 27.10% for the first quarter of 2006.

Citizens anticipates the effective income tax rate for the second quarter of 2007 will be consistent with the first quarter of 2007.

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 four major business segments: Commercial Banking, Consumer Banking, Wealth Management and Other. As a result of the Republic merger, Citizens reviewed and affirmed its segment reporting definitions. For the three months ended March 31, 2007, Republic results of operations and average balances were incorporated into the existing lines of business, with the legacy Republic mortgage line of business included in Consumer Banking. For additional information about each line of business, see Note 17 to the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K and Note 12 to the unaudited Consolidated Financial Statements in this report. A summary of net income by each business line is presented below.

	Three Months Ended
	March 31,
(in thousands)	2007			2006
Commercial Banking	$	17,878		$	9,932
Consumer Banking		23,608			10,593
Wealth Management		416			426
Other		(10,410	)		(195	)
Net Income	$	31,492		$	20,756

Commercial Banking

The increase in net income was a result of higher net interest income and higher noninterest income along with lower provision for loan losses, partially offset by higher noninterest expense. Net interest income increased almost entirely as a result of the addition of the Republic commercial loan portfolio, and to a lesser extent from an increase in the legacy Citizens commercial loan portfolio. The increase in noninterest income over the prior year period was almost entirely the result of incorporating Republic activity. The increase in noninterest expense from the prior year period was almost entirely the result of incorporating Republic activity and, to a lesser extent, higher compensation costs and an increase in the provision for unused loan commitments which fluctuates with the amount of unadvanced customer lines of credits.

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Consumer Banking

Net income increased compared with the prior year as a result of higher net interest income and higher noninterest income, partially offset by higher provision for loan losses and noninterest expense. The increase in net interest income was primarily the result of adding the Republic consumer loan and deposit balances partially offset by declines in the legacy Citizens direct consumer loan and home equity portfolios and the impact of the deposit mix shift into higher rate products which occurred during 2006. Noninterest income increased primarily as a result of incorporating the Republic activity partially offset by the aforementioned gain on sale of the downtown Royal Oak office that was recognized in the first quarter of 2006. The increase in noninterest expense was almost entirely the result of incorporating the Republic activity, partially offset by lower advertising and marketing costs, as well as lower occupancy and equipment expense.

Wealth Management

Net income was down slightly from the prior year period due to lower net interest income, higher provision for loan losses, and lower noninterest income, partially offset by lower noninterest expense. The decline in noninterest income was a result of slightly lower trust and brokerage fee income. The results of this line of business were not materially affected by the Republic merger as Republic did not have a trust portfolio nor did they offer brokerage or investment services.

Other

Net income declined from the prior year period as a result of lower net interest income and higher noninterest expense, partially offset by higher noninterest income. The reduction in net interest income was mainly the result of the internal profitability methodology utilized at Citizens which 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 increase in noninterest income was almost entirely the result of incorporating the Republic activity. The increase in noninterest expense was mainly the result of $4.2 million in restructuring and merger-related expenses as well as the impact of adding the Republic activity.

Financial Condition

Total assets at March 31, 2007 were $13.3 billion, a decrease of $685.4 million or 4.9% from December 31, 2006 and an increase of $5.7 billion over March 31, 2006. Total assets decreased from December 31, 2006 primarily as a result of selling $362.7 million in investment securities, not reinvesting $147.6 million of maturing investment securities, and selling $23.3 million in commercial loans held for sale to better align Republic’s assets with Citizens’ interest rate risk and lending philosophies. Total portfolio loans were essentially unchanged from December 31, 2006 and increased $3.6 billion over March 31, 2006. The increase over March 31, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

Investment Securities

Investment securities at March 31, 2007 decreased $510.3 million or 17.3% from December 31, 2006 to $2.4 billion and increased $881.7 million over March 31, 2006. The decrease from December 31, 2006 was primarily the result of selling $362.7 million of mortgage-backed securities, collateralized mortgage obligations (“CMOs”), and callable agency bonds and not reinvesting $147.6 million of maturing investment securities. The increase over March 31, 2006 reflects the addition of the Republic investment portfolio and $214.7 million in mortgage-backed securities which Citizens converted from fixed and adjustable rate mortgages in the residential mortgage portfolio into securities during the fourth quarter of 2006. Prior to the fourth quarter of 2006, total investment securities had been declining as a result of using portfolio cash flow to reduce short-term borrowings.

Portfolio Loans

Total portfolio loans were essentially unchanged from December 31, 2006 and increased $3.6 billion over March 31, 2006. The increase over March 31, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

Total commercial loans at March 31, 2007 were $5.2 billion, essentially unchanged from December 31, 2006 and an increase of $2.0 billion over March 31, 2006. The increase was almost entirely due to the impact of incorporating Republic loans, but also resulted from new relationships in Wisconsin, central and northern Michigan and continued strong growth in the southeast Michigan market.

Residential mortgage loans at March 31, 2007 were $1.5 billion, essentially unchanged from December 31, 2006 and an increase of $969.1 million over March 31, 2006. The increase was almost entirely due to incorporating Republic balances, partially offset by a decrease from Citizens’ legacy residential mortgage portfolio as a result of the aforementioned securitization and transfer to the investment securities portfolio.

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Total consumer loans, which are comprised of direct and indirect loans, were $2.5 billion at March 31, 2007, a decrease of $52.9 million or 2.1% from December 31, 2006 and an increase of $573.8 million over March 31, 2006. Direct consumer loans, which include direct installment, home equity, and other consumer loans, decreased $43.6 million or 2.5% from December 31, 2006 as balances continue to decline due to weak consumer demand in Citizens’ markets. The increase in direct consumer loans over March 31, 2006 was almost entirely a result of incorporating the Republic balances, partially offset by weak consumer demand. Indirect consumer loans, which are primarily marine and recreational vehicle loans, were $831.3 million, essentially unchanged from December 31, 2006 and March 31, 2006.

In recognition of the evolving developments in the automotive sector, Citizens monitors the Corporation’s commercial exposure to the manufacturers and tier suppliers in that industry. Citizens also reviews consumer loan exposure with respect to loans to borrowers who have some level of income reliance from this sector. As a result of these analyses, Citizens has determined that the combined commercial and consumer exposure for this industry is less than ten percent of the total loan exposure for the Corporation. Additionally, at March 31, 2007, commercial real estate nonperforming loans increased $25.7 million to $40.6 million. Citizens is currently in the process of reviewing its land development and commercial real estate portfolios and its exposure to developers in that industry and will continue to proactively pursue early recognition of credit issues as they are identified.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms, and real estate related to repossessed assets. Although these assets have more than a normal risk of loss, they will not necessarily result in a higher level of loss in the future. The table below provides a summary of nonperforming assets as of March 31, 2007, December 31, 2006 and March 31, 2006.

Nonperforming Assets

	March 31,			December 31,			March 31,
(in thousands)	2007			2006			2006
Nonperforming Loans
Commercial	$	8,827		$	7,709		$	10,594
Commercial real estate		40,621			14,915			5,219
Total commercial		49,448			22,624			15,813
Residential mortgage		30,591			28,428			7,396
Direct consumer		8,166			6,030			3,911
Indirect consumer		595			810			569
Total consumer		8,761			6,840			4,480
Total nonaccrual loans		88,800			57,892			27,689
Loans 90 days past due and still accruing		1,388			767			547
Restructured loans		363			378			1,844
Total nonperforming portfolio loans		90,551			59,037			30,080
Nonperforming held for sale		4,630			22,846			—
Other Repossessed Assets Acquired (ORAA)		19,482			20,165			6,397
Total nonperforming assets	$	114,663		$	102,048		$	36,477
Nonperforming assets as a percent of portfolio loans plus ORAA(1)		1.25	%		1.10	%		0.65	%
Nonperforming assets as a percent of total assets		0.86			0.73			0.48
Allowance for loan loss as a percent of nonperforming loans		186.90			286.44			383.72
Allowance for loan loss as a percent of nonperforming assets		147.60			165.71			316.43

⁽¹⁾ Portfolio loans exclude mortgage loans held for sale.

Nonperforming assets totaled $114.7 million at March 31, 2007, an increase of $12.6 million compared with December 31, 2006 and an increase of $78.2 million compared with March 31, 2006. The increase over December 31, 2006 reflects higher nonperforming portfolio loans of $31.5 million, primarily in the commercial real estate portfolio which includes commercial land development and construction loans. The increase was partially offset by lower nonperforming held for sale, which declined by $18.2 million primarily as a result of a nonperforming loan sale completed in the first quarter of 2007. The increase over March 31, 2006 was almost entirely a result of incorporating Republic’s nonperforming assets, partially offset

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by declines in legacy Citizens nonperforming portfolios. Nonperforming assets at March 31, 2007 represented 1.25% of portfolio loans plus other repossessed assets acquired compared with 1.10% at December 31, 2006 and 0.65% at March 31, 2006. Nonperforming commercial loan inflows were $37.4 million in the first quarter of 2007 compared with $16.6 million in the fourth quarter of 2006, with three commercial credits accounting for $15.0 million of the increase. Nonperforming commercial loan outflows were $10.6 million for the first quarter of 2007 compared with $10.2 million in the fourth quarter of 2006. Nonperforming loans at March 31, 2007 include $0.4 million in restructured commercial loans, which have been reclassified from the commercial subtotal as a result of revising the terms of the notes in an effort to improve collectibility in future periods.

In addition to loans classified as nonperforming, the Corporation carefully monitors other credits that are current in terms of principal and interest payments but that the Corporation believes may deteriorate in quality if economic conditions change. As of March 31, 2007, watchlist loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) amounted to $318.8 million, or 3.5% of total portfolio loans, compared with $294.2 million or 3.2% of total portfolio loans at December 31, 2006 and $156.6 million or 2.8% of total portfolio loans as of March 31, 2006. These loans are mostly commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry or geographic location.

Some of the Corporation’s nonperforming loans included in the nonperforming loan table above are considered to be impaired. 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. See Note 5 to the unaudited Consolidated Financial Statements in this report for information on impaired loans.

Provision and Allowance for Loan Losses

A summary of loan loss experience during the three months ended March 31, 2007 and 2006 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended
	March 31,
(in thousands)	2007			2006
Allowance for loan losses — beginning of period	$	169,104		$	116,400
Provision for loan losses		3,500			3,000
Charge-offs		5,876			6,233
Recoveries		2,511			2,256
Net charge-offs		3,365			3,977
Allowance for loan losses — end of period	$	169,239		$	115,423
Portfolio loans outstanding at period end(1)	$	9,178,199		$	5,591,991
Average portfolio loans outstanding during period(1)		9,179,422			5,561,305
Allowance for loan losses as a percentage of portfolio loans		1.84	%		2.06	%
Ratio of net charge-offs during period to average portfolio loans (annualized)		0.15			0.29

⁽¹⁾ Balances exclude mortgage loans held for sale.

The decrease in net charge-offs in the first quarter of 2007 was primarily due to lower commercial and indirect loan net charge-offs, partially offset by higher residential mortgage and direct consumer loan net charge-offs.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date. To assess the adequacy of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of 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 credit 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. While Citizens continues to enhance its loan loss allocation model and risk rating process, it has not substantially changed its overall approach in the determination of the allowance for loan losses. The Corporation’s methodology for measuring the

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adequacy of the allowance includes several key elements, which include specific allowances for identified problem loans, a formula-based risk allocated allowance for the remainder of the portfolio and a general valuation allowance that reflects the Corporation’s evaluation of a number of other risk factors discussed below. This methodology is discussed in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Citizens’ 2006 Annual Report on Form 10-K.

The allowance for loan losses totaled $169.2 million or 1.84% of portfolio loans at March 31, 2007, essentially unchanged from December 31, 2006 and an increase of $53.8 million over March 31, 2006. At March 31, 2007, the specific allowance allocated to commercial and commercial real estate credits totaled $15.9 million, compared with $7.6 million at December 31, 2006 and $5.5 million at March 31, 2006. The increase in the specific allowance over December 31, 2006 was attributable to an increase in nonperforming commercial real estate credits. The increase from March 31, 2006 was due to including the legacy Republic portfolio.

The total risk allocated allowance was $143.2 million as of March 31, 2007, compared with $152.1 million at December 31, 2006 and $103.6 million at March 31, 2006. The amount allocated to commercial and commercial real estate loans, including construction loans, totaled $90.1 million at March 31, 2007 compared with $94.8 million at December 31, 2006 and $58.5 million at March 31, 2006. The decrease from December 31, 2006 was due to lower overall risk factors. The increase from March 31, 2006 was due to including the legacy Republic portfolio. The risk allocated allowance for residential real estate loans totaled $14.4 million at March 31, 2007, compared with $15.1 million at December 31, 2006 and $6.4 million at March 31, 2006. The decrease over December 31, 2006 was due to lower overall portfolio balances. The increase from March 31, 2006 was due to the including legacy Republic portfolio. The risk allocated allowance for consumer loans totaled $38.7 million at March 31, 2007, compared with $42.2 million at December 31, 2006 and $38.7 million at March 31, 2006. The decrease from December 31, 2006 reflected both lower balances and lower risk factors.

The general valuation allowances increased to $10.1 million at March 31, 2007 compared with $9.4 million at December 31, 2006 and $6.3 million at March 31, 2006. The increase from December 31, 2006 was the result of an increase in the overall risk factor assigned to the portfolio. The increase from March 31, 2006 is due to including the legacy Republic portfolio. The general valuation portion of the allowance is maintained to address the uncertainty of losses inherent in the loan portfolio that may not have yet manifested themselves in the Corporation’s specific allowances or in the historical loss factors used to determine the formula allowances, and include factors such as continued weak general economic and business conditions in the Midwest, new business lending activity, changes to the small business lending model, changes in the composition of the Corporation’s portfolio, and other factors deemed relevant by management’s judgment.

The amount of the provision for loan losses is based on the Corporation’s review of the historical credit loss experience and such factors that, in Citizens’ judgment, deserve consideration under existing economic conditions in estimating potential credit losses. While the Corporation considers the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or loss rates.

The provision for loan losses was $3.5 million in the first quarter of 2007 compared with $3.0 million in the first quarter of 2006. The increase reflected incorporating Republic reserve requirements.

In light of the challenging economic environment in the Midwest and further industry-wide pressure on the consumer and commercial loan portfolios, particularly those supported by real estate, Citizens anticipates net charge-offs and provision expense for the second quarter of 2007 will be higher than the first quarter of 2007.

Loans Held for Sale

Loans held for sale at March 31, 2007 were $103.9 million, a decrease of $68.9 million or 39.9% from December 31, 2006 and an increase of $90.5 million over March 31, 2006. The decline from December 31, 2006 was primarily the result of a seasonal decline in mortgage origination volume and a $23.3 million commercial loan sale during the first quarter of 2007. The increase over March 31, 2006 was almost entirely due to incorporating Republic loans, which included residential mortgage loans awaiting sale in the secondary market, $43.8 million in commercial real estate loans that were transferred to loans held for sale to reflect alignment with Citizens’ lending philosophies and $26.9 million in consumer loans that were transferred to loans held for sale as a result of the pending branch divestitures.

Goodwill and Other Intangible Assets

Goodwill at March 31, 2007 totaled $780.0 million, essentially unchanged from December 31, 2006 and an increase of $725.5 million over March 31, 2006. Other intangible assets, which primarily represent a premium on core deposits, totaled $43.0 million at March 31, 2007, a decrease of $3.1 million or 6.8% from December 31, 2006 and an increase of $32.5

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million over March 31, 2006. The increases were the result of accounting for the Republic merger as a purchase, where all assets and liabilities were recorded at their respective estimated fair market values as of December 29, 2006. The decrease in other intangible assets from December 31, 2006 was primarily the result of Citizens beginning to amortize the premium assigned to Republic’s core deposits at the merger date.

Deposits

Total deposits at March 31, 2007 decreased $237.2 million or 2.7% from December 31, 2006 to $8.5 billion and increased $2.9 billion over March 31, 2006. Core deposits, which exclude all time deposits, totaled $4.3 billion at March 31, 2007, a decrease of $141.5 million or 3.2% from December 31, 2006 and an increase of $1.1 billion over March 31, 2006, primarily as a result of incorporating Republic balances. The decrease in core deposits from December 31, 2006 was primarily a result of commercial clients maintaining lower balances and Citizens not renewing a $40.0 million wholesale money market deposit account. Core deposits also continue to be negatively affected by the migration of client funds from lower cost savings and transaction accounts into time deposits with higher yields. Time deposits totaled $4.2 billion at March 31, 2007, a decrease of $95.6 million or 2.2% from December 31, 2006 and an increase of $1.8 billion over March 31, 2006. The decrease from December 31, 2006 was primarily the result of Citizens not renewing $219.9 million in brokered certificates of deposit, partially offset by growth in client certificates of deposit. This decrease was partially offset by the continued migration of client funds from lower-cost deposits into time deposits and some new client growth. In addition to the impact of the Republic merger, the increase over March 31, 2006 reflected the continued migration of funds from lower-cost deposits and some new client growth.

Citizens gathers deposits within local markets and has not traditionally relied on brokered or out of market purchased deposits for any significant portion of funding. At March 31, 2007, Citizens had $374.2 million in brokered deposits, compared with $594.0 million at December 31, 2006 and $328.5 million at March 31, 2006. The decrease from December 31, 2006 was primarily the result of not renewing $219.9 million in brokered certificates of deposit. The increase from March 31, 2006 was a result of incorporating the Republic balances. Citizens will continue to evaluate the use of alternative funding sources, such as brokered deposits, as funding needs change. In addition to brokered deposits, at March 31, 2007 Citizens had approximately $1.8 billion in time deposits of $100,000 or more, compared with $2.1 billion at December 31, 2006 and $878.5 million at March 31, 2006. Time deposits of $100,000 or more consist of commercial, consumer and public fund deposits derived almost exclusively from local markets. In order to minimize use of these higher cost funding alternatives, Citizens continues to promote relationship-based 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 which consists of treasury tax and loans and borrowed funds from the City of Flint. Short-term borrowed funds at March 31, 2007 totaled $457.8 million, a decrease of $481.1 million from December 31, 2006 and an increase of $55.2 million over March 31, 2006. The decrease from December 31, 2006 was primarily the result of retiring $234.4 million in securities sold under agreements to repurchase and lower federal funds purchased due to reductions in the investment securities portfolio. The increase over March 31, 2006 was due to incorporating Republic balances, substantially offset by legacy Citizens’ lower wholesale funding needs resulting from maturing investment securities cash flow not being fully reinvested during 2006.

Long-term debt consists of advances from the Federal Home Loan Bank (“FHLB”) to our subsidiary banks, debt issued by the Holding Company, and other borrowed funds. Long-term debt at March 31, 2007 totaled $2.7 billion, an increase of $54.5 million or 2.1% from December 31, 2006 due mostly to an increase in FHLB debt, and an increase of $1.7 billion or 168.8% over March 31, 2006 as result of the Republic merger.

Capital Resources

Citizens continues to maintain a strong capital position, which supports current needs and provides a sound foundation to support future expansion. The Corporation’s regulatory capital ratios are consistently at or above the “well-capitalized” standards and all bank subsidiaries have sufficient capital to maintain a “well-capitalized” designation. The Corporation’s capital ratios as of March 31, 2007, December 31, 2006 and March 31, 2006 are presented below.

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Capital Ratios

	Regulatory Minimum
				“Well-			March 31,			December 31,			March 31,
	Required			Capitalized”			2007			2006			2006
Risk based:
Tier 1 capital		4.00	%		6.00	%		9.89	%		9.41	%		10.09	%
Total capital		8.00			10.00			12.42			11.90			13.39
Tier 1 Leverage(1)		4.00			5.00			7.64			7.22			8.14

⁽¹⁾ For December 31, 2006, the Tier 1 leverage ratio is calculated using ending assets instead of average assets due to the Republic merger on December 29, 2006

Shareholders’ equity at March 31, 2007 was $1.6 billion, essentially unchanged from December 31, 2006 and an increase over $651.5 million at March 31, 2006. Book value per common share at March 31, 2007, December 31, 2006, and March 31, 2006 was $20.78, $20.58, and $15.23, respectively. Citizens declared and paid cash dividends of $0.29 per share in the first quarter of 2007, compared with $0.285 per share in the first quarter of 2006. During the first quarter of 2007 the Holding Company repurchased a total of 205,046 shares of common stock for $4.7 million as part of the Corporation’s share repurchase program approved by the Board of Directors in October 2003. Information regarding the Corporation’s share repurchase program is set forth later in this report under Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

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 2006 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 Debt Capacity

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. Citizens manages the liquidity of its Holding Company to pay dividends to shareholders, to service debt, to invest in subsidiaries and to satisfy other operating requirements. It also manages the liquidity of its subsidiary banks to meet client cash flow needs while maintaining funds available for loan and investment opportunities.

The Holding Company’s subsidiary banks derive liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, its subsidiary banks have access to financial market borrowing sources on an unsecured, as well as a collateralized basis, for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks of which the subsidiary banks are members.

The primary sources of liquidity for the Holding Company are dividends from and returns on investment in its subsidiaries. Banking regulations limit the amount of dividends a financial institution may declare to a parent company in any calendar year. Each of the banking subsidiaries is subject to dividend limits under the laws of the state in which it is chartered and to the banking regulations mentioned above. Federal and national chartered financial institutions are 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. During the first quarter of 2007, the Holding Company received $25.5 million in dividends from subsidiaries and paid $22.0 million in dividends to its shareholders. As of March 31, 2007, the subsidiary banks are able to pay dividends of $211.8 million to the Holding Company without prior regulatory approval. However, the consolidation of the Republic Bank charter into the Citizens Bank charter on April 28, 2007 resulted in a change in the regulatory limits used for calculation of dividend availability. Under the new regulatory limits, the amount of dividends the subsidiary banks could pay under Federal Reserve Board regulations would be $82.1 million.

The ability of the Holding Company to borrow funds on both a short-term and long-term basis provides an additional source of liquidity. The Holding Company maintains a $100.0 million short-term revolving credit facility with three unaffiliated banks. As of March 31, 2007, there was no outstanding balance on this credit facility. The current facility will mature in August 2007 and is expected to be renewed at that time on substantially similar terms. The credit agreement requires Citizens to maintain certain financial and non-financial covenants including capital adequacy, non-performing asset levels, and loan loss reserve adequacy. Citizens was in full compliance with all covenants as of March 31, 2007.

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On March 2, 2007, Citizens called $50.0 million of trust preferred securities at 8.60%, originally due in 2031. This transaction settled on April 2, 2007 and Citizens issued a five year variable rate term note for $50.0 million with an initial rate of 5.77% on the same date.

Citizens also has contingent letter of credit commitments that may impact liquidity. Since many of these commitments have historically expired without being drawn upon, the total amount of these commitments does not necessarily represent the Corporation’s future cash requirements in connection with them.

The Corporation’s long-term debt to equity ratio was 171.35% as of March 31, 2007 compared with 169.41% at December 31, 2007 and 153.77% as of March 31, 2006. Changes in short-term and long-term debt and deposit obligations during the first quarter of 2007 are further discussed in the sections titled “Deposits” and “Borrowed Funds.” The Corporation believes that it has sufficient liquidity and capital sources to meet presently known short-term and long-term cash flow requirements arising from ongoing business transactions.

Wholesale funding represents an important source of liquidity to the Corporation, and credit ratings affect the availability and cost of this funding. Citizens’ credit ratings were reviewed and affirmed by Moody’s Investor Service, Standard and Poor’s Ratings Service, and Dominion Bond Rating Service in June 2006. In January 2007, Fitch Ratings affirmed its ratings for Citizens. Credit ratings relate to the Corporation’s ability to issue long-term debt and should not be viewed as an indication of future stock performance.

Interest Rate Risk

Interest rate risk refers to the risk of loss arising from adverse 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 customers and entities associated with Citizens’ investments and wholesale funding the opportunity to benefit when market interest rates change, which typically results in higher costs or lower revenue 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 and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”), which oversees interest rate risk management and establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A combination of complementary techniques are 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 provides a measurement of repricing risk in 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 sum 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 periods based upon historical experience. Repricing for assets includes the effect of expected prepayments on cash flows.

Rate sensitive liabilities repricing within one year exceeded rate sensitive assets repricing within one year by $69.7 million or 0.5% of total assets as of March 31, 2007. This reflects a less liability-sensitive position than at December 31, 2006 due to the reduction of the fixed-rate investment portfolio and the replacement of short-term variable rate funding with longer-term fixed rate funding. These results incorporate the impact of off-balance sheet derivatives and reflect interest rate environments consistent with March 31, 2007. 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 on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions

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regarding 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 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, 2007 to evaluate the impact of market rate changes on net interest income over the following 12 months assuming expected levels of balance sheet growth 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 decrease by 0.8% and 3.1%, respectively, from what it would be if rates were to remain at March 31, 2007 levels. An immediate 100 or 200 basis point parallel decline in market rates would be expected to leave net interest income unchanged over the following 12 months and decrease net interest income by 1.9%, respectively, from what it would be if rates were to remain constant over the entire time period at March 31, 2007 levels. These measurements represent a less liability-sensitive interest rate risk position (less exposure to rising interest rates) when compared to the position at December 31, 2006 as a result of the reduction of the fixed-rate investment portfolio and the replacement of short-term variable rate funding with longer-term fixed rate funding. 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 or 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 in conjunction with mortgage banking operations. These currently include interest rate swaps and forward mortgage loan sales. Interest rate swaps are contracts with a third party (the “counter-party”) to exchange interest payment streams based upon an assumed principal amount (the “notional amount”). The notional amount is not advanced from the counter-party. Swap contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts and payments based on market interest rates as of the balance sheet date. The fair values of the contracts change daily as market interest rates change.

Holding residential mortgage loans for sale and committing to fund residential mortgage loan applications at specific rates exposes Citizens to market value risk caused by changes in interest rates during the period from rate commitment issuance until sale. To minimize this risk, Citizens enters into mandatory forward commitments to sell residential mortgage loans at the time a rate commitment is issued. These mandatory forward commitments are considered derivatives under SFAS 133. The practice of hedging market value risk with mandatory forward commitments has not generated any material gains or losses. As of March 31, 2007, Citizens had forward commitments to sell mortgage loans of $46.4 million. Further discussion of derivative instruments is included in Note 14 to the 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’ 2006 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.

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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 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. As permitted by applicable interpretations of Rule 13a-15, management’s assessment of internal control over financial reporting as of December 31,2006 did not include an assessment of the internal control over financial reporting of Republic as of such date. Republic’s internal control over financial reporting will be assessed as of December 31, 2007.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

For information regarding risk factors affecting Citizens, see “Risk Factors” in Item 1A of Part I of Citizens’ 2006 Annual Report on Form 10-K. There have been no material changes to the risk factors described in such Form 10-K.

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

						Total Number of		Maximum Number of
						Shares Purchased as		Shares That May Yet
						Part of Publicly		Be Purchased Under
	Total Number of			Average Price Paid		Announced Plans or		The Plans or Programs
Period	Shares Purchased			Per Share		Programs		(a)
January 2007		471	(a)		25.58		—		1,906,200
February 2007		9,783	(a)		24.69		—		1,906,200
March 2007		205,046			22.97		205,046		1,701,154
Total		215,300			23.05		205,046		1,701,154

(a) Shares repurchased in connection with taxes due from employees as a result of the vesting of certain share awards were not part of the repurchase program approved in October 2003.

In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. As of March 31, 2007, 1,701,154 shares remain to be purchased under this program. The purchase of shares is subject to limitations that may be imposed by applicable securities laws and regulations and the rules of the NASDAQ Global Select Market^®. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and Citizens’ capital requirements. There can be no assurance that Citizens will repurchase the remaining shares authorized to be repurchased, or that any additional repurchases will be authorized by the Board of Directors.

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation as amended on April 26, 2007
10.36	Release and Settlement Agreement with Dana M. Cluckey, dated April 26, 2007.
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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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.

	CITIZENS REPUBLIC BANCORP, INC.
Date:May 4, 2007	By	/s/ Charles D. Christy
		Charles D. Christy
		Chief Financial Officer (principal financial officer and duly authorized officer)

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10-Q EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation as amended on April 26, 2007
10.36	Release and Settlement ,Agreement with Dana M. Cluckey, dated April 26, 2007.
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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