Citizens Republic Bancorp (CTZ+A) 10-Q 2007 Q2 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 endedJune 30, 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 Number000-10535

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)

 

(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 daysþ 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 July 31, 2007
Common Stock, No Par Value	75,647,384 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		21
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		43
Item 4 - Controls and Procedures		43
Part II – Other Information
Item 1A – Risk Factors		44
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 4 – Submission of Matters to a Vote of Security Holders		45
Item 5 – Other Information		45
Item 6 - Exhibits		46
Signatures		47
Exhibit Index		48
Form of Restricted Stock Agreement
Form of Restricted Stock Agreement
2007 Management Incentive Plan
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certification

2

Consolidated Balance Sheets

Citizens Republic Bancorp and Subsidiaries

	June 30,			December 31,			June 30,
(in thousands)	2007			2006			2006
	(unaudited)			(Note 1)			(unaudited)
Assets
Cash and due from banks	$	213,469		$	223,747		$	205,117
Interest-bearing deposits with banks		144			203			1,478
Investment Securities:
Securities available for sale, at fair value		2,217,549			2,839,456			1,408,615
Securities held to maturity, at amortized cost (fair value of $116,838, $110,283 and $94,559, respectively)		117,939			109,744			96,789
Total investment securities		2,335,488			2,949,200			1,505,404
FHLB and Federal Reserve stock		132,895			132,895			55,235
Portfolio loans:
Commercial		2,153,269			2,004,894			1,789,583
Commercial real estate		3,085,967			3,120,613			1,443,851
Total commercial		5,239,236			5,125,507			3,233,434
Residential mortgage		1,494,450			1,543,533			551,048
Direct consumer		1,636,026			1,721,410			1,099,146
Indirect consumer		846,252			840,632			844,411
Total portfolio loans		9,215,964			9,231,082			5,728,039
Less: Allowance for loan losses		(181,118	)		(169,104	)		(114,560	)
Net portfolio loans		9,034,846			9,061,978			5,613,479
Loans held for sale		85,930			172,842			18,013
Premises and equipment		133,021			139,490			120,154
Goodwill		780,914			781,635			54,527
Other intangible assets		36,008			46,071			9,684
Bank owned life insurance		210,265			206,851			85,921
Other assets		283,839			287,700			144,069
Total assets	$	13,246,819		$	14,002,612		$	7,813,081
Liabilities
Noninterest-bearing deposits	$	1,169,095		$	1,223,113		$	954,907
Interest-bearing demand deposits		807,605			923,848			744,744
Savings deposits		2,139,929			2,280,496			1,537,098
Time deposits		3,964,988			4,270,604			2,447,820
Total deposits		8,081,617			8,698,061			5,684,569
Federal funds purchased and securities sold under agreements to repurchase		675,440			922,328			443,651
Other short-term borrowings		11,749			16,551			24,073
Other liabilities		135,262			169,022			78,881
Long-term debt		2,808,610			2,638,964			932,035
Total liabilities		11,712,678			12,444,926			7,163,209
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 - 75,642,232 at 6/30/07, 75,675,944 at 12/31/06, and 42,887,320 at 6/30/06		973,339			980,772			78,920
Retained earnings		581,476			584,289			587,494
Accumulated other comprehensive income		(20,674	)		(7,375	)		(16,542	)
Total shareholders’ equity		1,534,141			1,557,686			649,872
Total liabilities and shareholders’ equity	$	13,246,819		$	14,002,612		$	7,813,081

See notes to consolidated financial statements.

3

Consolidated Statements of Income (Unaudited)

Citizens Republic Bancorp and Subsidiaries

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(in thousands, except per share amounts)	2007			2006		2007			2006
Interest Income
Interest and fees on loans	$	171,320		$	98,093	$	343,164		$	191,544
Interest and dividends on investment securities:
Taxable		22,308			12,356		46,099			25,307
Tax-exempt		7,309			5,259		14,637			10,576
Dividends on FHLB and Federal Reserve stock		1,397			707		3,133			1,367
Money market investments		19			1		36			13
Total interest income		202,353			116,416		407,069			228,807
Interest Expense
Deposits		64,201			35,305		130,635			66,297
Short-term borrowings		9,064			5,395		20,065			9,131
Long-term debt		32,311			9,726		61,251			19,914
Total interest expense		105,576			50,426		211,951			95,342
Net Interest Income		96,777			65,990		195,118			133,465
Provision for loan losses		31,857			1,139		35,357			4,139
Net interest income after provision for loan losses		64,920			64,851		159,761			129,326
Noninterest Income
Service charges on deposit accounts		12,080			9,521		23,186			18,396
Trust fees		5,003			4,972		9,958			10,014
Mortgage and other loan income		4,258			2,106		10,395			4,116
Brokerage and investment fees		2,182			1,703		3,731			3,218
ATM network user fees		1,640			1,018		3,219			2,005
Bankcard fees		1,443			1,129		2,623			2,186
Other income		4,672			3,242		9,589			9,319
Total fees and other income		31,278			23,691		62,701			49,254
Investment securities gains		—			54		(33	)		61
Total noninterest income		31,278			23,745		62,668			49,315
Noninterest Expense
Salaries and employee benefits		45,971			32,690		90,136			64,946
Occupancy		8,076			5,291		15,986			11,233
Professional services		4,351			3,703		8,503			7,781
Equipment		3,655			3,301		7,566			6,467
Data processing services		4,506			3,714		8,636			7,453
Advertising and public relations		3,292			934		5,067			2,968
Postage and delivery		2,196			1,629		4,160			3,091
Telephone		1,718			1,392		3,782			2,856
Other loan expenses		1,080			1,217		1,992			1,633
Stationery and supplies		868			631		1,645			1,358
Intangible asset amortization		2,954			724		6,072			1,449
Restructuring and merger-related expenses		3,408			—		7,594			—
Other expense		5,415			4,839		10,061			10,402
Total noninterest expense		87,490			60,065		171,200			121,637
Income Before Income Taxes		8,708			28,531		51,229			57,004
Income tax provision (benefit)		(911	)		7,624		10,118			15,341
Net Income	$	9,619		$	20,907	$	41,111		$	41,663
Net Income Per Common Share:
Basic	$	0.13		$	0.49	$	0.55		$	0.98
Diluted		0.13			0.49		0.54			0.97
Cash Dividends Declared Per Common Share		0.290			0.290		0.580			0.575
Average Common Shares Outstanding:
Basic		75,374			42,606		75,411			42,694
Diluted		75,649			42,738		75,782			42,839

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								41,111						41,111
Other comprehensive income:
Net unrealized loss on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(12,717	)
Net change in unrealized loss on qualifying cash flow hedges											(582	)
Other comprehensive income total														(13,299	)
Total comprehensive income														27,812
Proceeds from stock options exercised and restricted stock activity		519			2,682									2,682
Recognition of stock-based compensation					1,451									1,451
Cash dividends declared on common shares — $0.580 per share								(43,924	)					(43,924	)
Shares acquired for retirement		(553	)		(11,566	)								(11,566	)
Balance — June 30, 2007		75,642		$	973,339		$	581,476		$	(20,674	)	$	1,534,141
Balance at January 1, 2006		42,968		$	85,526		$	570,483		$	454		$	656,463
Comprehensive income, net of tax:
Net income								41,663						41,663
Other comprehensive income:
Net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(17,002	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											6
Other comprehensive income total														(16,996	)
Total comprehensive income														24,667
Proceeds from stock options exercised and restricted stock activity		69			1,529									1,529
Recognition of stock-based compensation		185			813									813
Cash dividends declared on common shares — $0.575 per share								(24,652	)					(24,652	)
Shares acquired for retirement		(335	)		(8,948	)								(8,948	)
Balance — June 30, 2006		42,887		$	78,920		$	587,494		$	(16,542	)	$	649,872

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows

Citizens Republic Bancorp and Subsidiaries

	Six Months Ended
	June 30,
(in thousands)	2007			2006
Operating Activities:
Net income	$	41,111		$	41,663
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		35,357			4,139
Depreciation and software amortization		7,120			5,979
Amortization of intangibles		6,072			1,449
Amortization and fair value adjustments of purchase accounting mark-to-market, net		(26,524	)		—
Discount accretion and amortization of issuance costs on long term debt		404			—
Net (accretion) amortization on investment securities		(1,917	)		604
Investment securities losses (gains)		33			(61	)
Loans originated for sale		(277,346	)		(97,844	)
Proceeds from sales of loans held for sale		346,962			97,596
Net gains from loan sales		(6,028	)		(1,513	)
Net (gain) loss on sale of other real estate		(555	)		354
Excess tax benefits from stock-based compensation arrangements		—			(168	)
Recognition of stock-based compensation, net of tax		1,451			813
Other		(38,973	)		(15,920	)
Net cash provided by operating activities		87,167			37,091
Investing Activities:
Net decrease (increase) in money market investments		59			(1,098	)
Securities available-for-sale:
Proceeds from sales		364,414			113
Proceeds from maturities and payments		363,104			125,688
Purchases		(122,615	)		(58,396	)
Securities held-to-maturity:
Purchases		(8,870	)		(14,406	)
Sale of branches, net of cash received		(163,592	)		—
Net increase in loans and leases		7,792			(117,899	)
Proceeds from sales of other real estate		7,577			2,261
Net increase in properties and equipment		(1,577	)		(4,403	)
Net cash provided (used) by investing activities		446,292			(68,140	)
Financing Activities:
Net decrease in demand and savings deposits		(109,924	)		(60,662	)
Net (decrease) increase in time deposits		(311,021	)		271,392
Net decrease in short-term borrowings		(249,771	)		(61,397	)
Proceeds from issuance of long-term debt		1,050,000			75,453
Principal reductions in long-term debt		(870,213	)		(151,297	)
Cash dividends paid		(43,924	)		(24,652	)
Proceeds from stock options exercised and restricted stock activity		2,682			1,361
Excess tax benefits related to stock-based compensation arrangements		—			168
Shares acquired for retirement		(11,566	)		(8,948	)
Net cash (used) provided by financing activities		(543,737	)		41,418
Net (decrease) increase in cash and due from banks		(10,278	)		10,369
Cash and due from banks at beginning of period		223,747			194,748
Cash and due from banks at end of period	$	213,469		$	205,117
Supplemental Cash Flow Information:
Loans transferred to other real estate owned	$	12,807		$	3,773

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 and six months ended June 30, 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. Certain amounts have been reclassified to conform with the current year presentation. 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. 157, “Fair Value Measurements.”In September 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is applicable to accounting pronouncements that require or permit fair value measurements, where the FASB previously concluded in those accounting pronouncements that fair value is the most relevant measurement attribute. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Citizens is in the process of evaluating the guidance in SFAS 157 and does not anticipate the adoption will have a material impact on its financial condition, results of operations, or liquidity.

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.

7

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 and six months ended June 30, 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 are finalized within one year from the merger date. As of June 30, 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- and six-months ended June 30, 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				Six Months Ended
(in thousands)	June 30, 2006				June 30, 2006
	Pro-forma		Citizens historical		Pro-forma		Citizens historical
	combined		without Republic		combined		without Republic
Net interest income	$	105,215	$	65,990	$	213,399	$	133,465
Provision for loan losses		2,889		1,139		7,289		4,139
Noninterest income		31,141		23,745		64,029		49,315
Other noninterest expense		78,837		60,065		160,619		121,637
Income before income taxes		54,630		28,531		109,520		57,004
Net Income	$	38,743	$	20,907	$	77,561	$	41,663
Net income per common share:
Basic	$	0.51	$	0.49	$	1.03	$	0.98
Diluted		0.51		0.49		1.02		0.97
Weighted average shares outstanding during the period:
Basic		75,248		42,606		75,408		42,694
Diluted		75,636		42,738		75,832		42,839

As of December 31, 2006, Citizens had reserves of $9.0 million for restructuring and $27.8 million for merger-related costs. In addition, Citizens assumed $9.1 million in other transaction and system-related reserves from Republic. 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 merger integration and restructuring plans. The following table presents the activity in the restructuring reserve during the six months ended June 30, 2007.

Restructuring Reserve

	Balance		Changes in 2007
	December 31,				cash			other			Balance
(in thousands)	2006		new charges		payments			adjustments			June 30, 2007
Personnel	$	4,323	$	1,987	$	(2,547	)	$	—		$	3,763
Facilities/Branches		3,895		1,900		(840	)		(20	)		4,935
Systems/Other		791		201		(995	)		—			(3	)
	$	9,009	$	4,088	$	(4,382	)	$	(20	)	$	8,695

8

The following table presents the activity in the merger reserve during the six months ended June 30, 2007.

Merger-related Reserve

	Balance		Changes in 2007
	December 31,				cash			other			Balance
(in thousands)	2006		new charges		payments			adjustments			June 30, 2007
Personnel	$	17,603	$	1,524	$	(11,441	)	$	(1,397	)	$	6,289
Professional		7,621				(6,532	)		(750	)		339
Facilities/Branches		2,205		17		(648	)		413			1,987
Systems/Other		351		60		(411	)		—			—
		27,780		1,601		(19,032	)		(1,734	)		8,615
Other Transaction and System Reserves		9,088		1,905		(9,841	)		—			1,152
	$	36,868	$	3,506	$	(28,873	)	$	(1,734	)	$	9,767

The other adjustment of $1.7 million to the merger-related reserve represents a reduction in projected severance and professional services payments, partially offset by higher projected facilities/branch payments and resulted in a corresponding reduction to goodwill.

As displayed in the tables above, restructuring charges and merger-related charges of $7.6 million were recorded for the six months ended June 30, 2007. Citizens projects additional restructuring expenses and merger-related expenses will be immaterial for the remainder of 2007.

Note 4. Investment Securities

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

	June 30, 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		298,259		296,006		652		2,905		436,679		436,315		1,044		1,408
Collateralized Mortgage Obligations		644,978		639,343		915		6,550		794,395		791,739		242		2,898
Mortgage-backed		727,093		717,928		771		9,936		998,871		994,767		393		4,497
State and municipal		562,568		562,484		6,962		7,046		566,230		575,907		10,328		651
Other		1,734		1,788		54		—		835		874		40		1
Total available for sale	$	2,234,632	$	2,217,549	$	9,354	$	26,437	$	2,836,864	$	2,839,456	$	12,047	$	9,455
Held to Maturity:
State and municipal
Total held to maturity	$	117,939	$	116,838	$	204	$	1,305	$	109,744	$	110,283	$	905	$	366
FHLB and Fed Reserve stock	$	132,895	$	132,895	$	—	$	—	$	132,895	$	132,895	$	—	$	—

Securities with unrealized losses as of June 30, 2007 and December 31, 2006 are displayed in the following tables.

9

As of June 30, 2007

	Less than 12 Months				More than 12 Months				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available For Sale:
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies		200,817		1,775		59,104		1,130		259,921		2,905
Collateralized Mortgage Obligations		364,084		3,825		180,687		2,725		544,771		6,550
Mortgage-backed		404,805		4,072		121,192		5,864		525,997		9,936
State and municipal		269,205		6,359		18,417		687		287,622		7,046
Other		—		—		—		—		—		—
Total available for sale		1,238,911		16,031		379,400		10,406		1,618,311		26,437
Held to Maturity:
State and municipal		80,912		910		16,061		395		96,973		1,305
Total held to maturity		80,912		910		16,061		395		96,973		1,305
Total	$	1,319,823	$	16,941	$	395,461	$	10,801	$	1,715,284	$	27,742

As of December 31, 2006

	Less than 12 Months				More than 12 Months					Total
	Estimated		Unrealized		Estimated		Unrealized			Estimated		Unrealized
(in thousands)	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 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 and six months ended June 30, 2007 and 2006 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2007		2006		2007		2006
Allowance for loan losses — beginning of period	$	169,239	$	115,423	$	169,104	$	116,400
Provision for loan losses		31,857		1,139		35,357		4,139
Charge-offs:
Commercial		2,419		854		2,782		1,775
Commercial real estate		14,284		606		14,705		1,223
Total commercial		16,703		1,460		17,487		2,998
Residential mortgage		735		305		1,526		502
Direct consumer		3,029		1,216		5,113		2,885
Indirect consumer		1,868		1,575		4,085		4,404
Charge-offs		22,335		4,556		28,211		10,789
Recoveries:
Commercial		640		1,001		1,770		2,176
Commercial real estate		539		485		714		564
Total commercial		1,179		1,486		2,484		2,740
Residential mortgage		56		48		107		102
Direct consumer		482		332		853		618
Indirect consumer		640		688		1,424		1,350
Recoveries		2,357		2,554		4,868		4,810
Net charge-offs		19,978		2,002		23,343		5,979
Allowance for loan losses — end of period	$	181,118	$	114,560	$	181,118	$	114,560

Nonperforming loans totaled $116.4 million at June 30, 2007, an increase of $57.4 million or 97.2% from December 31, 2006 and an increase of $89.1 million from June 30, 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 June 30, 2007, December 31, 2006 and June 30, 2006 follow:

Impaired Loan Information

	Balances						Valuation Reserve
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
(in thousands)	2007		2006		2006		2007		2006		2006
Balances -
Impaired loans with valuation reserve	$	32,624	$	20,737	$	13,649	$	12,036	$	7,550	$	6,093
Impaired loans with no valuation reserve		14,820		21,641		526		—		—		—
Total impaired loans	$	47,444	$	42,378	$	14,175	$	12,036	$	7,550	$	6,093
Impaired loans on nonaccrual basis	$	27,920	$	11,321	$	3,884	$	7,020	$	2,104	$	2,220
Impaired loans on accrual basis		19,524		31,057		10,291		5,016		5,446		3,873
Total impaired loans	$	47,444	$	42,378	$	14,175	$	12,036	$	7,550	$	6,093

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 Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer, (SOP 03-3).” Additional disclosures required by SOP 03-3 are not provided because the amounts are not significant.

11

The average balance of impaired loans for the three months ended June 30, 2007 was $49.0 million and $14.9 million for the three months ended June 30, 2006. Of the $34.1 million increase, $27.6 million was due to incorporating Republic balances. Interest income recognized on impaired loans during the second quarter of 2007 and the second quarter of 2006 was $0.2 million. Cash collected and applied to outstanding principal during the second quarter of 2007 was $0.4 million. Cash collected and applied to outstanding principal in the same period of 2006 was immaterial.

Note 6. Long-term Debt

The components of long-term debt as of June 30, 2007, December 31, 2006 and June 30, 2006 are presented below.

	June 30,		December 31,		June 30,
(in thousands)	2007		2006		2006
Citizens (Parent only):
Variable rate promissary notes payable due May 1, 2011	$	50,000	$	—	$	—
Subordinated debt:
5.75% subordinated notes due February 2013		118,268		117,788		117,456
Variable rate junior subordinated debenture due June 2033		25,677		25,628		24,685
7.50% junior subordinated debentures due September 2066		145,527		145,254		—
8.60% junior subordinated debentures due December 2031		—		51,546		—
Subsidiaries:
Federal Home Loan Bank advances		2,194,896		1,715,132		789,441
Other borrowed funds		274,242		583,616		453
Total long-term debt	$	2,808,610	$	2,638,964	$	932,035

On March 2, 2007, Citizens retired $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 at a cost of LIBOR plus 45 basis points on the same date. The credit agreement requires Citizens to maintain certain financial and non-financial covenants including capital adequacy, nonperforming asset levels, and loan loss reserve adequacy. Citizens was in full compliance with all covenants as of June 30, 2007.

Note 7. Income Taxes

The effective tax rate for the first six months of 2007 was 19.75% compared with 26.91% for the same period of 2006. The decrease was primarily the result of lower pre-tax income for the second quarter of 2007 and a $0.5 million ($0.4 million after-tax) deferred state income tax benefit related to multi-state nexus issues recorded in the first quarter of 2007, partially offset by incorporating Republic’s results of operations. In addition, the tax benefit of $0.9 million in the second quarter of 2007 was the result of tax-exempt income exceeding pre-tax income for the quarter.

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 and June 30, 2007 totaled $5.1 million and $4.6 million, respectively, of which $4.4 million and $4.0 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 tax accounts. The accrued interest as of January 1, 2007 and June 30, 2007 totaled $0.5 million and $0.4 million, respectively. No penalties have been accrued.

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, in the first quarter, Citizens recorded a $0.4 million benefit, net of federal taxes, to reverse the remaining reserve related to this matter.

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 June 30, 2007:

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

Note 8. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, for the three and six month periods ended June 30, 2007 and 2006 are presented below.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Balance at beginning of period	$	(150	)	$	(7,777	)	$	(7,375	)	$	454
Net unrealized loss on securities for the quarter, net of tax effect of $(10,908) in 2007 and $(4,657) in 2006, and net unrealized loss on securities for the six months period, net of tax effect of $(6,859) in 2007 and $(9,134) in 2006		(20,258	)		(8,648	)		(12,738	)		(16,963	)
Less: Reclassification adjustment for net (gains) losses on securities included in net income for the quarter, net of tax effect of $(19) in 2006, and included in net income for the six month period, net of tax effect of $12 in 2007 and $(21) in 2006.		—			(35	)		21			(39	)
Net change in unrealized (loss) gain on cash flow hedges for the quarter, net of tax effect of $(144) in 2007 and $(44) in 2006, and net change in unrealized (loss) gain for the six month period, net of tax effect of $(314) in 2007 and $4 in 2006.		(266	)		(82	)		(582	)		6
Accumulated other comprehensive income, net of tax	$	(20,674	)	$	(16,542	)	$	(20,674	)	$	(16,542	)

Note 9. Pension Benefit Cost

The components of pension expense for the three and six months ended June 30, 2007 and 2006 are presented below.

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	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Defined Benefit Pension Plans
Service cost	$	—			1,035		$	—			2,050
Interest cost		1,187			1,251			2,375			2,478
Expected return on plan assets		(1,956	)		(1,890	)		(3,913	)		(3,780	)
Amortization of unrecognized:
Prior service cost		3			48			6			95
Net actuarial loss		125			266			250			527
Net pension cost	$	(641	)	$	710		$	(1,282	)	$	1,370
Supplemental Pension Plans
Service cost	$	—			247		$	—			421
Interest cost		193			176			385			321
Amortization of unrecognized:
Prior service cost		42			—			84			—
Net actuarial loss		33			39			65			69
Net pension cost	$	268		$	462		$	534		$	811
Postretirement Benefit Plans
Service cost	$	1			1		$	3			3
Interest cost		160			129			320			258
Expected return on plan assets
Amortization of unrecognized:
Prior service cost		(67	)		(68	)		(135	)		(135	)
Net actuarial loss		—			(7	)		—			(14	)
Net pension cost	$	94		$	55		$	188		$	112
Defined contribution retirement and 401K Plans
Employer contributions	$	1,394		$	724		$	3,031		$	1,730
Total periodic benefit cost	$	1,115		$	1,951		$	2,471		$	4,023

On December 31, 2006, Citizens adopted the recognition and disclosure provisions of SFAS 158,“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement required Citizens to recognize the funded status of its pension plan in the December 31, 2006 consolidated balance sheet, with a 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 will review plan funding needs during 2007 and will make a contribution if appropriate. Citizens does not currently anticipate contributing to the defined benefit pension plan in 2007.

The service cost related to Citizens’ supplemental pension plans decreased from 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 2007, allowing for payment of benefits from corporate assets and providing a joint

14

survivor benefit. As of June 30, 2007, $0.2 million of contributions have been made to the supplemental pension plans and Citizens anticipates that an additional $0.3 million of contributions will be made during the remaining two quarters of 2007.

As of June 30, 2007, $0.5 million of contributions have been made to the postretirement benefit plan and Citizens anticipates that an additional $0.6 million of contributions will be made during the next two 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 further limited to 2,000,000 shares. At June 30, 2007, Citizens had 3,654,128 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 for the three and six months ended June 30, 2007 and June 30, 2006:

Analysis of Stock-Based Compensation Expense

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Stock Option Compensation	$	9		$	15		$	17		$	35
Restricted Stock Compensation		829			389			1,434			778
Stock-based compensation expense before income taxes		838			404			1,451			813
Income tax benefit		(294	)		(141	)		(508	)		(285	)
Total stock-based compensation expense after income taxes	$	544		$	263		$	943		$	528

Cash proceeds from the exercise of stock options were $1.5 million and $4.0 million for the three and six months ended June 30, 2007 and $0.3 million and $1.4 million for the three and six months ended June 30, 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 inflows and operating cash outflows on the Consolidated Statement of Cash Flows.

There were no stock options granted in the three and six months ended June 30, 2007 and June 30, 2006. Stock option activity for the six months ended June 30, 2007 is as follows:

15

	Options
				Weighted
				Average		Weighted Average	(in thousands)
	Number of			Exercise		Remaining	Aggregate
	Shares			Price		Contractual Term	Intrinsic Value
Outstanding at December 31, 2006		4,775,700		$	24.95
Granted		—			—
Exercised		(296,385	)		13.48
Forfeitures or Expirations		(169,111	)		27.77
Outstanding at June 30, 2007		4,310,204		$	25.63	4.5 yrs	$	3,568
Exercisable		4,301,915		$	25.62	4.5 yrs	$	3,568

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 June 30, 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 and six months ended June 30, 2007 was $0.7 million and $2.8 million, respectively. The fair value of options vested was less than $0.1 million for both the three and six month periods ended June 30, 2007.

As of June 30, 2007, $8.9 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 2.4 years.

The following table summarizes restricted stock activity for the six months ended June 30, 2007.

				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value
Outstanding restricted stock at December 31, 2006		293,087		$	25.13
Granted		270,029			19.24
Vested		(87,084	)		24.82
Forfeited		(21,185	)		26.43
Restricted stock at June 30, 2007		454,847		$	21.61

The total fair value of shares vested during the six months ended June 30, 2007 was $1.8 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:

16

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except per share amounts)	2007		2006		2007		2006
Numerator:
Basic and dilutive earnings per share — net income available to common shareholders	$	9,619	$	20,907	$	41,111	$	41,663
Denominator:
Basic earnings per share — weighted average shares		75,374		42,606		75,411		42,694
Effect of dilutive securities — potential conversion of employee stock options		275		132		371		144
Diluted earnings per share — adjusted weighted-average shares and assumed conversions		75,649		42,738		75,782		42,839
Basic earnings per share	$	0.13	$	0.49	$	0.55	$	0.98
Diluted earnings per share	$	0.13	$	0.49	$	0.54	$	0.97

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 and six months ended June 30, 2007 and 2006 is provided below. For the three and six months ended June 30, 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. The restructure and merger-related expenses were recorded in the Other business line. 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 June 30, 2007
Net interest income (taxable equivalent)	$	47,117		$	44,554	$	170	$	9,564		$	101,405
Provision for loan losses		27,403			4,447		7		(0	)		31,857
Net interest income after provision		19,714			40,107		163		9,564			69,548
Noninterest income		4,219			17,069		7,136		2,854			31,278
Noninterest expense		19,448			42,832		5,787		19,423			87,490
Income before income taxes		4,485			14,344		1,512		(7,005	)		13,336
Income tax expense (taxable equivalent)		1,570			5,020		480		(3,353	)		3,717
Net income	$	2,915		$	9,324	$	1,032	$	(3,652	)	$	9,619
Average assets(in millions)	$	5,024		$	1,681	$	26	$	6,510		$	13,241
Earnings Summary — Three Months Ended June 30, 2006(1)
Net interest income (taxable equivalent)	$	30,396		$	35,627	$	317	$	3,033		$	69,373
Provision for loan losses		(842	)		1,981		—		—			1,139
Net interest income after provision		31,238			33,646		317		3,033			68,234
Noninterest income		3,768			11,848		6,570		1,559			23,745
Noninterest expense		17,703			31,240		5,803		5,319			60,065
Income before income taxes		17,303			14,254		1,084		(727	)		31,914
Income tax expense (taxable equivalent)		6,093			4,939		383		(408	)		11,007
Net income	$	11,210		$	9,315	$	701	$	(319	)	$	20,907
Average assets(in millions)	$	3,048		$	1,033	$	30	$	3,559		$	7,670

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

Line of Business Information

	Commercial		Consumer		Wealth
(in thousands)	Banking		Banking		Mgmt		Other			Total
Earnings Summary — Six Months Ended June 30, 2007
Net interest income (taxable equivalent)	$	95,382	$	95,130	$	405	$	13,455		$	204,372
Provision for loan losses		28,488		6,836		35		(2	)		35,357
Net interest income after provision		66,894		88,294		370		13,457			169,015
Noninterest income		8,885		35,498		13,409		4,876			62,668
Noninterest expense		41,603		89,010		11,569		29,018			171,200
Income before income taxes		34,176		34,782		2,210		(10,685	)		60,483
Income tax expense (taxable equivalent)		11,962		12,174		783		(5,547	)		19,372
Net income	$	22,214	$	22,608	$	1,427	$	(5,138	)	$	41,111
Average assets(in millions)	$	5,044	$	2,054	$	27	$	6,282		$	13,407
Earnings Summary — Six Months Ended June 30, 2006(1)
Net interest income (taxable equivalent)	$	61,322	$	70,332	$	649	$	7,961		$	140,264
Provision for loan losses		346		3,793		0		—			4,139
Net interest income after provision		60,976		66,539		649		7,961			136,125
Noninterest income		7,518		26,017		13,074		2,706			49,315
Noninterest expense		35,856		63,081		11,203		11,497			121,637
Income before income taxes		32,638		29,475		2,520		(830	)		63,803
Income tax expense (taxable equivalent)		11,497		10,272		891		(520	)		22,140
Net income	$	21,141	$	19,203	$	1,629	$	(310	)	$	41,663
Average assets(in millions)	$	3,028	$	1,022	$	29	$	3,582		$	7,661

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

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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.

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

	June 30,		December 31,
(in thousands)	2007		2006
Loan commitments and letters of credit:
Commitments to extend credit	$	2,634,511	$	2,559,121
Financial standby letters of credit		115,990		146,863
Performance standby letters of credit		26,991		24,609
Commercial letters of credit		246,458		194,834
Total loan commitments and letters of credit	$	3,023,951	$	2,925,427

At June 30, 2007 and December 31, 2006, a liability of $5.7 million and $6.1 million, respectively, was recorded for possible losses on commitments to extend credit. As of June 30, 2007 and December 31, 2006, in accordance with FIN 45, a liability of $0.3 million and $0.6 million, respectively, was recorded representing the value of the guarantee obligations associated with certain letters of credit. 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, SFAS 149 and SFAS 155,“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:

	June 30, 2007					December 31, 2006
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Receive fixed swaps	$	270,000	$	(386	)	$	268,300	$	(1,839	)
Pay fixed swaps		84,000		345			104,000		1,242
Customer initiated swaps and corresponding offsets		480,748		—			378,590		—
Interest rate lock commitments		46,205		(66	)		29,875		(11	)
Forward mortgage loan contracts		85,639		625			78,498		257
Total	$	966,592	$	518		$	859,263	$	(351	)

Derivative Classifications and Hedging Relationships:

	June 30, 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	$	345		$	104,000	$	1,242
Derivatives Designated as Fair Value Hedges:
Hedging time deposits		120,000		(10	)		95,000		47
Hedging long-term debt		150,000		(376	)		100,000		(390	)
Derivatives Not Designated as Hedges:
Receive fixed swaps		—		—			73,300		(1,496	)
Customer initiated swaps and corresponding offsets		480,748		—			378,590		—
Total	$	834,748	$	(41	)	$	750,890	$	(597	)

20

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

Selected Quarterly Information
Citizens Banking Corporation and Subsidiaries

	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2007			2007			2006			2006			2006
Summary of Operations (thousands)
Net interest income	$	96,777		$	98,341		$	64,010		$	65,645		$	65,990
Provision for loan losses		31,857			3,500			5,936			1,190			1,139
Total fees and other income		31,278			31,423			24,931			23,544			23,691
Investment securities gains (losses)(1)		—			(33	)		(7,163	)		—			54
Noninterest expense(2)		87,490			83,710			78,788			59,402			60,065
Income tax provision		(911	)		11,029			(3,638	)		7,616			7,624
Net income		9,619			31,492			692			20,981			20,907
Taxable equivalent adjustment		4,629			4,625			3,505			3,413			3,383
Cash dividends		21,960			21,964			12,443			12,435			12,394
Per Common Share Data
Basic net income	$	0.13		$	0.42		$	0.02		$	0.49		$	0.49
Diluted net income		0.13			0.41			0.02			0.49			0.49
Cash dividends		0.290			0.290			0.290			0.290			0.290
Market value (end of period)		18.30			22.16			26.50			26.26			24.41
Book value (end of period)		20.28			20.78			20.58			15.72			15.15
At Period End (millions)
Assets	$	13,247		$	13,317		$	14,003		$	7,748		$	7,813
Portfolio loans		9,216			9,178			9,231			5,753			5,728
Deposits		8,082			8,461			8,698			5,625			5,685
Shareholders’ equity		1,534			1,572			1,558			674			650
Average for the Quarter (millions)
Assets	$	13,241		$	13,574		$	7,770		$	7,723		$	7,670
Portfolio loans		9,170			9,179			5,762			5,694			5,610
Deposits		8,157			8,525			5,597			5,680			5,560
Shareholders’ equity		1,551			1,552			683			659			647
Ratios (annualized)
Return on average assets		0.29	%		0.94	%		0.04	%		1.08	%		1.09	%
Return on average shareholders’ equity		2.49			8.23			0.40			12.63			12.96
Average equity to average assets		11.72			11.43			8.79			8.53			8.44
Net interest margin (FTE)(3)		3.44			3.44			3.67			3.78			3.84
Efficiency ratio(4)		65.94			62.29			85.23			64.15			64.54
Net loans charged off to average portfolio loans		0.87			0.15			0.52			0.19			0.14
Allowance for loan losses to portfolio loans		1.97			1.84			1.83			1.97			2.00
Nonperforming assets to portfolio loans plus ORAA (end of period)		1.58			1.25			1.10			0.69			0.61
Nonperforming assets to total assets (end of period)		1.10			0.86			0.73			0.52			0.44
Leverage ratio(5)		7.33			7.64			7.22			8.29			8.21
Tier 1 capital ratio		8.91			9.89			9.41			10.13			9.96
Total capital ratio		11.38			12.42			11.90			13.37			13.20

(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 $3.4 million during the second quarter of 2007, $4.2 million during the first quarter of 2007 and $11.3 million during the fourth quarter of 2006 related to the Republic merger.
(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 26, 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- and six-month periods ended June 30, 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 Republic 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, Michigan automobile-related industry changes and shortfalls, deterioration in commercial real estate values, 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.

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• The products and services offered by the banking industry and customer expectations regarding them are subject to change. Citizens attempts to respond to perceived customer needs and expectations by offering new products and services, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on Citizens’ financial condition and results of operations.

• New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact Citizens’ results of operations and financial position.

• Citizens’ business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, Citizens’ business and a negative impact on 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.

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Results of Operations

Financial Statement Impact as a Result of the Republic Merger

The merger with Republic closed on December 29, 2006. As a result, 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 $9.6 million for the three months ended June 30, 2007, which includes a credit-related charge as well as restructuring and merger-related expenses associated with the Republic merger. The results for the second quarter of 2007 represent a decrease of $11.3 million from the second quarter of 2006 net income of $20.9 million. Diluted net income per share was $0.13, a decrease of $0.36 per share from the same quarter of last year. Annualized returns on average assets and average equity during the second quarter of 2007 were 0.29% and 2.49%, respectively, compared with 1.09% and 12.96% for the second quarter of 2006.

Net income for the first six months of 2007 totaled $41.1 million or $0.54 per diluted share, which represents a decrease in net income of $0.6 million and $0.43 per diluted share from the same period of 2006.

The challenges of the Midwest economy and continued deterioration of the commercial real estate markets, primarily land development and construction, impacted Citizens’ second quarter of 2007 results, primarily through the provision for loan losses, net charge-offs, and nonperforming loans. In the second quarter of 2007, the provision for loan losses totaled $31.9 million, an increase of $28.4 million over the first quarter of 2007, and net charge-offs totaled $20.0 million, an increase of $16.6 million over the first quarter of 2007. At June 30, 2007, nonperforming loans totaled $116.4 million, an increase of $25.9 million over the first quarter of 2007.

During the second quarter of 2007, Citizens recorded restructuring and merger-related expenses of $3.4 million related to additional employee severance and retention, computer system conversion, training, and client communications regarding product changes. Citizens incurred additional expenses of $4.6 million in compensation, an advertising campaign to build awareness of the Citizens’ brand, and other expenses related to integration activities which were not treated as restructuring or merger related. Citizens is on track to achieve the projected annual cost savings of $31.0 million in connection with the 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 387 or 14.2% in the second quarter of 2007 from March 31, 2007. In addition, during the second quarter of 2007, Citizens began to recognize the impact of revenue synergies from the merger. The combined organization has shown improvement in treasury management, Small-Business Administration (SBA) lending, and wealth management revenue.

On April 27, 2007, Citizens successfully completed its computer system conversion for all legacy Republic locations, consolidated nineteen branches, and completed the divestiture of seven Republic branches in the Flint, Michigan market. As of March 31, 2007, the seven divested branches had $26.0 million of consumer loans and $206.5 million of deposits.

Total assets at June 30, 2007 were $13.2 billion, a decrease of $755.8 million or 5.4% from December 31, 2006 and an increase of $5.4 billion over June 30, 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, selling $23.3 million in commercial loans held for sale to better align Republic’s assets with Citizens’ interest rate risk and lending philosophies, and a reduction of $26.0 million in loans held for sale due to the aforementioned branch divestiture. Total portfolio loans were essentially unchanged from December 31, 2006 and increased $3.5 billion over June 30, 2006. The increase over June 30, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

Total deposits at June 30, 2007 decreased $616.4 million or 7.1% from December 31, 2006 to $8.1 billion and increased $2.4 billion over June 30, 2006. Core deposits, which exclude all time deposits, totaled $4.1 billion at June 30, 2007, a decrease of $310.8 million or 7.0% from December 31, 2006 and an increase of $879.9 million over June 30, 2006, primarily as a result of incorporating Republic balances. The decrease in core deposits from December 31, 2006 was primarily a result of the aforementioned branch divestiture, the transfer of $49.9 million in legacy Republic deposits to securities sold under agreements to repurchase as a result of product changes at the time of the computer system conversion, Citizens not renewing a $40.0 million wholesale money market deposit account, and, to a lesser extent, some legacy Republic clients migrating their funds elsewhere in the market. 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 $4.0 billion at June 30, 2007, a decrease of $305.6 million or 7.2% from December 31, 2006 and an increase of $1.5 billion over June 30, 2006. The decrease from December 31, 2006 was primarily the result of the aforementioned branch divestiture and Citizens not

24

renewing $297.0 million in brokered 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 June 30, 2006 reflected the continued migration of funds from lower-cost deposits and some new client growth, partially offset by the reduction as a result of the aforementioned branch divestiture.

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 and six months ended June 30, 2007 and 2006 is presented below.

25

Average Balances/Net Interest Income/Average Rates

	2007								2006
Three Months Ended June 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	2,765		$	19		2.64	%	$	1,373		$	1		0.45	%
Investment securities(3):
Taxable		1,726,754			22,308		5.17			1,103,031			12,356		4.48
Tax-exempt		668,647			7,309		6.73			447,476			5,259		7.23
FHLB and Federal Reserve stock		132,895			1,397		4.22			55,908			707		5.07
Portfolio Loans(4):
Commercial		2,068,195			38,065		7.51			1,704,447			30,328		7.26
Commercial real estate		3,100,675			59,916		7.76			1,426,911			25,337		7.13
Residential mortgage		1,506,639			25,111		6.67			544,526			7,836		5.76
Direct consumer		1,655,217			32,409		7.85			1,103,024			20,602		7.49
Indirect consumer		838,899			13,953		6.67			831,012			13,689		6.61
Total portfolio loans		9,169,625			169,454		7.44			5,609,920			97,792		7.03
Loans held for sale		94,817			1,866		7.83			21,680			301		5.54
Total earning assets(3)		11,795,503			202,353		7.03			7,239,388			116,416		6.63
Nonearning Assets
Cash and due from banks		188,244								157,670
Bank premises and equipment		140,277								120,650
Investment security fair value adjustment		300								(18,523	)
Other nonearning assets		1,286,255								285,933
Allowance for loan losses		(169,830	)							(115,274	)
Total assets	$	13,240,749							$	7,669,844
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	841,026		$	1,400		0.67	%	$	789,168		$	1,273		0.65	%
Savings deposits		2,170,649			15,870		2.93			1,471,803			9,457		2.58
Time deposits		4,007,354			46,931		4.70			2,386,346			24,575		4.13
Short-term borrowings		741,617			9,064		4.90			487,549			5,395		4.44
Long-term debt		2,631,605			32,311		4.92			893,941			9,726		4.36
Total interest-bearing liabilities		10,392,251			105,576		4.07			6,028,807			50,426		3.35
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,138,134								913,181
Other liabilities		159,015								80,727
Shareholders’ equity		1,551,349								647,129
Total liabilities and shareholders’ equity	$	13,240,749							$	7,669,844
Net Interest Income				$	96,777							$	65,990
Interest Spread(5)							2.96	%							3.28	%
Contribution of noninterest bearing sources of funds							0.48								0.56
Net Interest Margin(5)(6)							3.44	%							3.84	%

(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 June 30, 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, adjusted for amortization of premiums and accretion of discounts.
(4)	Nonaccrual loans are included in average balances for each applicable loan category.
(5)	The interest spread and net interest margin are presented on a tax-equivalent basis.
(6)	Because noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity also support earning assets, the net interest margin exceeds the interest spread.

26

Average Balances/Net Interest Income/Average Rates

	2007								2006
Six Months Ended June 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	1,808		$	36		4.01	%	$	1,528		$	13		1.75	%
Investment securities(3):
Taxable		1,832,008			46,099		5.03			1,114,149			25,307		4.54
Tax-exempt		669,399			14,637		6.73			447,069			10,576		7.28
FHLB and Federal Reserve stock		132,895			3,133		4.75			55,956			1,367		4.91
Portfolio Loans(4):
Commercial		2,014,734			75,284		7.67			1,675,832			58,311		7.14
Commercial real estate		3,127,056			119,519		7.71			1,421,089			49,322		7.00
Residential mortgage loans		1,521,057			50,671		6.66			542,966			15,501		5.71
Direct consumer		1,675,725			65,129		7.84			1,113,643			40,613		7.35
Indirect consumer		835,925			27,889		6.73			832,217			27,265		6.61
Total portfolio loans		9,174,497			338,492		7.46			5,585,747			191,012		6.93
Loans held for sale		119,275			4,672		7.83			19,090			532		5.58
Total earning assets(3)		11,929,882			407,069		7.02			7,223,539			228,807		6.56
Nonearning Assets
Cash and due from banks		188,502								161,767
Bank premises and equipment		139,954								120,997
Investment security fair value adjustment		1,719								(10,956	)
Other nonearning assets		1,315,251								281,681
Allowance for loan losses		(168,806	)							(115,710	)
Total assets	$	13,406,502							$	7,661,318
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	871,908		$	3,064		0.71	%	$	823,032		$	2,635		0.65	%
Savings deposits		2,220,812			32,443		2.95			1,460,399			17,430		2.41
Time deposits		4,105,947			95,128		4.67			2,334,424			46,232		3.99
Short-term borrowings		823,462			20,065		4.91			439,197			9,131		4.19
Long-term debt		2,521,684			61,251		4.89			948,556			19,914		4.23
Total interest-bearing liabilities		10,543,813			211,951		4.05			6,005,608			95,342		3.20
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,141,435								918,952
Other liabilities		169,556								85,910
Shareholders’ equity		1,551,698								650,848
Total liabilities and shareholders’ equity	$	13,406,502							$	7,661,318
Net Interest Income				$	195,118							$	133,465
Interest Spread(5)							2.97	%							3.36	%
Contribution of noninterest bearing sources of funds							0.47								0.54
Net Interest Margin(5)(6)							3.44	%							3.90	%

(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 $9.3 million and $6.8 million for the six months ended June 30, 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, adjusted for amortization of premiums and accretion of discounts.
(4)	Nonaccrual loans are included in average balances for each applicable loan category.
(5)	The interest spread and net interest margin are presented on a tax-equivalent basis.
(6)	Because noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity also support earning assets, the net interest margin exceeds the interest spread.

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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.

Net interest income was $96.8 million for the second quarter of 2007 compared with $66.0 million for the second quarter of 2006. The increase in net interest income resulted from an increase in average earning assets of $4.6 billion, partially offset by a decrease in net interest margin to 3.44% compared with 3.84% in the second quarter of 2006. The increase in average earning assets resulted from the merger with Republic and, to a lesser extent, organic growth in the commercial and commercial real estate loan portfolios, partially offset by a reduction in investment securities balances due to maturing balances not being fully reinvested and a portfolio restructuring during the first quarter of 2007. The decrease in net interest margin from the second quarter of 2006 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, partially offset by a shift in asset mix from investment securities to higher yielding commercial loans.

For the six months ended June 30, 2007, net interest income was $195.1 million compared with $133.5 million for the same period of 2006. The increase in net interest income resulted from an increase in average earning assets of $4.7 billion, partially offset by a decrease in net interest margin to 3.44% compared with 3.90% for the six months ended June 30, 2006. Both the increase in average earning assets and the reduction in net interest margin compared with the prior year period are a result of the factors that caused the changes from the second quarter of 2006.

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.

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Analysis of Changes in Interest Income and Interest Expense

	Three Months Ended June 30,							Six Months Ended June 30,
			Increase (Decrease)							Increase (Decrease)
2007 compared with 2006	Net		Due to Change in					Net		Due to Change in
(in thousands)	Change(1)		Rate(2)			Volume(2)		Change(1)		Rate(2)			Volume(2)
Interest Income:
Money market investments		18		16			2		23		20			3
Investment securities:
Taxable		9,952		2,123			7,829		20,792		2,980			17,812
Tax-exempt		2,050		(390	)		2,440		4,061		(853	)		4,914
FHLB and Federal Reserve stock		690		(137	)		827		1,766		(49	)		1,815
Loans:
Commercial		7,737		1,073			6,664		16,973		4,543			12,430
Commercial real estate		34,579		2,419			32,160		70,197		5,460			64,737
Residential mortgage loans		17,275		1,420			15,855		35,170		2,982			32,188
Direct consumer		11,807		1,039			10,768		24,516		2,825			21,691
Indirect consumer		264		133			131		624		502			122
Total portfolio loans		71,662		6,084			65,578		147,480		16,312			131,168
Loans held for sale		1,565		172			1,393		4,140		297			3,843
Total		85,937		7,868			78,069		178,262		18,707			159,555
Interest Expense:
Deposits:
Interest-bearing demand		127		42			85		429		267			162
Savings		6,413		1,443			4,970		15,013		4,516			10,497
Time		22,356		3,757			18,599		48,896		8,943			39,953
Short-term borrowings		3,669		613			3,056		10,934		1,797			9,137
Long-term debt		22,585		1,401			21,184		41,337		3,574			37,763
` Total		55,150		7,256			47,894		116,609		19,097			97,512
Net Interest Income	$	30,787	$	612		$	30,175	$	61,653	$	(390	)	$	62,043

(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 $30.8 million in the second quarter of 2007 compared with the same period of 2006 reflects rate and volume variances which were favorable in the aggregate. The increase in net interest income of $61.7 million for the six months ended June 30, 2007 compared with the same period of 2006 reflects volume variances which were favorable in the aggregate and rate variances which were slightly unfavorable in the aggregate.

For the three- and six-month comparisons, favorable volume variances on assets were partially offset by unfavorable volume variances on liabilities. Favorable volume variances on assets resulted from the Republic merger and 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.

For the three-month comparisons, favorable rate variances on assets were partially offset by unfavorable rate variances on liabilities. For the six-month comparison, unfavorable rate variances on liabilities were partially 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. The unfavorable rate variances for tax-exempt investment securities were the result of yields on acquired securities being lower than the yield on the pre-merger portfolio.

For the third quarter of 2007, Citizens anticipates net interest income will be slightly lower than the second quarter of 2007 due to the continued migration of funds from lower yielding deposit products into higher yielding deposit products, as well as

29

the effects of loan pricing pressure, the interest rate environment, stable to declining average earning assets due to the economic environment, and a full quarter impact of the branch divestiture.

Noninterest Income

Noninterest income for the second quarter of 2007 was $31.3 million, an increase of $7.5 million over the second quarter of 2006. The increase was almost entirely due to incorporating Republic revenue and, to a lesser extent, growth in legacy Citizens’ revenue stream. For the first six months of 2007, noninterest income totaled $62.7 million, an increase of $13.4 million over the same period of 2006. The increase was primarily due to incorporating Republic revenue, 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 on the 2004 sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006.

Noninterest Income

	Three Months Ended										Six Months Ended
	June 30,				Change in 2007						June 30,					Change in 2007
(dollars in thousands)	2007		2006		Amount			Percent			2007			2006		Amount			Percent
Service charges on deposit accounts	$	12,080	$	9,521	$	2,559			26.9	%	$	23,186		$	18,396	$	4,790			26.0	%
Trust fees		5,003		4,972		31			0.6			9,958			10,014		(56	)		(0.6	)
Mortgage and other loan income		4,258		2,106		2,152			102.1			10,395			4,116		6,279			152.6
Brokerage and investment fees		2,182		1,703		479			28.1			3,731			3,218		513			15.9
ATM network user fees		1,640		1,018		622			61.0			3,219			2,005		1,214			60.5
Bankcard fees		1,443		1,129		314			27.9			2,623			2,186		437			20.0
Other income		4,672		3,242		1,430			44.1			9,589			9,319		270			2.9
Total fees and other income		31,278		23,691		7,587			32.0			62,701			49,254		13,447			27.3
Investment securities gains		—		54		(54	)		(100.0	)		(33	)		61		(94	)		(153.9	)
Total noninterest income	$	31,278	$	23,745	$	7,533			31.7		$	62,668		$	49,315	$	13,353			27.1

The increases in service charges on deposit accounts over the three- and six-month periods of 2006 were 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 three- and six-month periods of 2006. Total trust assets under administration were $2.8 billion at June 30, 2007, an increase of $0.2 billion over June 30, 2006. Trust fees were unaffected by the merger as Republic did not have a trust portfolio.

The increases in mortgage and other loan income over the three- and six-month periods of 2006 were primarily due to incorporating Republic activity.

The increases in brokerage and investment fees over the three- and six-month periods of 2006 were primarily the result of 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 second quarter of 2007, all other noninterest income categories, which include ATM network user fees, bankcard fees, other income, and investment securities gains (losses), totaled $7.8 million, an increase of $2.3 million over the second quarter of 2006. The increase over the second quarter of 2006 was primarily the result of incorporating Republic activity, a $1.0 million unrealized gain on deferred compensation plan assets (with an offset in salaries and employee benefits) and higher ATM network user fees and bankcard fees, partially offset by a $0.6 million loss related to the holding company’s 1998 venture capital investment in a limited partnership. For the first six months of 2007, all other noninterest income categories totaled $15.4 million, an increase of $1.8 million over the same period of 2006. In addition to incorporating Republic activity, the increase was the result of the aforementioned unrealized gain on deferred compensation plan assets and ATM network and bankcard fee increases, partially offset by the aforementioned losses on the capital investment in a limited partnership and the 2006 sale of a former branch location.

Citizens anticipates total noninterest income for the third quarter of 2007 will be consistent with the second quarter of 2007.

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Noninterest Expense

Noninterest expense for the second quarter of 2007 was $87.5 million, an increase of $27.4 million over the second quarter of 2006. The increase was primarily the result of incorporating Republic activity and restructuring and merger-related expenses, as well as higher advertising and public relations and higher legacy Citizens salaries and employee benefits, occupancy, professional services, and data processing services, partially offset by decreases in legacy Citizens equipment expense. The second quarter of 2007 included $3.4 million in restructuring and merger-related expenses and $4.6 million in additional compensation, brand awareness advertising and other expenses that are related to merger activities but not treated as restructuring or merger-related for accounting purposes.

For the first six months of 2007, noninterest expense totaled $171.2 million, compared with $121.6 million for the same period of 2006. The increase was primarily the result of incorporating Republic activity, $7.6 million in restructuring and merger-related expenses, and $6.8 million in additional expenses that are related to merger activities but not treated as restructuring or merger-related for accounting purposes, and to a lesser extent higher postage and delivery and legacy Citizens data processing services, partially offset by the effect of a $1.5 million contribution to Citizens’ charitable foundation during the first quarter of 2006.

Noninterest Expense

	Three Months Ended										Six Months Ended
	June 30,				Change in 2007						June 30,				Change in 2007
(dollars in thousands)	2007		2006		Amount			Percent			2007		2006		Amount			Percent
Salaries and employee benefits	$	45,971	$	32,690	$	13,281			40.6	%	$	90,136	$	64,946	$	25,190			38.8	%
Occupancy		8,076		5,291		2,785			52.7			15,986		11,233		4,753			42.3
Professional services		4,351		3,703		648			17.5			8,503		7,781		722			9.3
Equipment		3,655		3,301		354			10.7			7,566		6,467		1,099			17.0
Data processing services		4,506		3,714		792			21.3			8,636		7,453		1,183			15.9
Advertising and public relations		3,292		934		2,358			252.3			5,067		2,968		2,099			70.7
Postage and delivery		2,196		1,629		567			34.8			4,160		3,091		1,069			34.6
Telephone		1,718		1,392		326			23.4			3,782		2,856		926			32.4
Other loan expenses		1,080		1,217		(137	)		(11.3	)		1,992		1,633		359			21.9
Stationery and supplies		868		631		237			37.7			1,645		1,358		287			21.1
Intangible asset amortization		2,954		724		2,230			307.7			6,072		1,449		4,623			319.0
Restructuring and merger-related expenses		3,408		—		3,408			—			7,594		—		7,594			—
Other expenses		5,415		4,839		576			11.9			10,061		10,402		(341	)		(3.3	)
Total noninterest expense	$	87,490	$	60,065	$	27,425			45.7		$	171,200	$	121,637	$	49,563			40.7

The increase in salaries and employee benefits over the second quarter of 2006 was due to incorporating Republic activity, higher legacy Citizens costs related to incentive expense and hospitalization insurance cost, and a $1.0 million increase in Citizens’ deferred compensation obligation (with an offset in other income), partially offset by lower pension expense. Salary costs included $2.8 million in severance for the second quarter of 2007 and $0.5 million in the second quarter of 2006. Severance payments in the second quarter of 2007 included $2.4 million paid pursuant to employee separation agreements, including the settlement between Citizens and Dana Cluckey, former president and chief operating officer, as reported in the Form 8-K filed by Citizens with the SEC on May 1, 2007. Salaries and employee benefits in the second quarter of 2007 also included $0.7 million in expenses related to employees who left the Company during the second quarter of 2007 after the successful completion of the computer system conversion on April 27, 2007. Citizens had 2,348 full-time equivalent employees at June 30, 2007 compared with 2,735 at March 31, 2007. For the first six months of 2007, salaries and employee benefits totaled $90.1 million, an increase of $25.2 million over the same period of 2006. The increase was primarily the result of incorporating Republic activity and the aforementioned increase in the deferred compensation obligation and employee separation agreements.

The increases in occupancy costs over the three- and six-month periods of 2006 were primarily the result of incorporating Republic activity. The cost savings associated with the nineteen branch locations closed at the time of the computer system conversion and the seven branch divestitures will not be fully realized until the third quarter due to the timing of fully vacating the facilities and trailing operating expenses.

The increases in professional services over the three- and six-month periods of 2006 were primarily the result of incorporating Republic activity and higher legal fees, partially offset by lower audit and examination fees.

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The increases in equipment costs over the three- and six-month periods of 2006 were the result of incorporating Republic activity, partially offset by lower depreciation expense at legacy Citizens due to the fourth quarter of 2006 service life alignment and disposing of the legacy Republic computer systems after the April 27, 2007 computer system conversion.

The increases in advertising and public relations expense over three- and six-month periods of 2006 were primarily the result of a $1.3 million advertising campaign to introduce Citizens’ brand in new Michigan markets and Ohio.

The increase in telephone expense over the three- and six-month periods of 2006 were due to incorporating Republic activity.

The decrease in other loan expenses from the second quarter of 2006 was primarily the result of lower provisioning to fund the reserve for unused loan commitments, which fluctuates with the amount of unadvanced customer lines of credit, partially offset by incorporating Republic activity. In addition to incorporating the Republic activity, the increase over the first six months of 2006 was the result of higher other mortgage processing fees due to the alliance with PHH Mortgage, partially offset by lower expenses related to processing commercial loans. Citizens discontinued its alliance with PHH Mortgage in the second quarter of 2007. This change did not have a material impact on other loan expense.

The increases in intangible asset amortization over the three- and six-month periods of 2006 were 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 second 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 expense, totaled $16.4 million, an increase of $5.6 million over the second quarter of 2006. The increase was primarily the result of $3.4 million in restructuring and merger-related expenses, incorporating the Republic activity, and higher data processing services. For the first six months of 2007, all other noninterest expense categories totaled $32.1 million, an increase of $9.8 million over the same period of 2006. The increase was primarily the result of the $7.6 million in restructuring and merger-related expenses, incorporating Republic activity and higher data processing services due to implementing enhanced technology initiatives related to customer online banking functionality, partially offset by the effect of the aforementioned contribution to Citizens’ charitable foundation during the first quarter of 2006 and, to a lesser extent, lower legacy Citizens expenses.

Excluding the restructuring and merger-related expenses and additional expenses related to merger activities, Citizens anticipates total noninterest expense for the third quarter of 2007 will be slightly lower than the second quarter of 2007 due to realizing the full quarter impact of the computer system conversion, branch divestitures and cost savings initiatives.

Income Taxes

Income tax provision for the second quarter of 2007 was $(0.9) million, a decrease of $8.5 million from the second quarter of 2006. For the first six months of 2007, income tax provision totaled $10.1 million, a decrease of $5.2 million from the same period of 2006. The effective tax rate for the first six months of 2007 was 19.75% compared with 26.91% for the same period of 2006. The decreases were primarily the result of the lower pre-tax income for the second quarter of 2007 and a $0.5 million ($0.4 million after-tax) deferred state income tax benefit related to multi-state nexus issues recorded in the first quarter of 2007, partially offset by incorporating Republic’s results of operations. In addition, the tax benefit of $0.9 million in the second quarter of 2007 was the result of tax-exempt income exceeding pre-tax income for the quarter.

Citizens’ anticipates the effective tax rate for the full year of 2007 will be approximately 21% — 24%.

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. For the three and six months ended June 30, 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.

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	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Commercial Banking	$	3,646		$	11,210		$	22,255		$	21,141
Consumer Banking		8,388			9,315			23,157			19,203
Wealth Management		1,032			701			1,427			1,629
Other		(3,447	)		(319	)		(5,728	)		(310	)
Net Income	$	9,619		$	20,907		$	41,111		$	41,663

Commercial Banking

Net income declined in the three month period ended June 30,2007 and increased slightly for the six month period ended June 30, 2007, compared with the same periods of the prior year. The decrease for the three month period was largely the result of higher provision for loan losses, and higher noninterest expense, partially offset by higher net interest income and noninterest income. The increase for the six month period was due mainly to higher net interest income and noninterest income as a result of incorporating Republic activity, partially offset by higher provision for loan losses and noninterest expense. The increase in provision for loan losses in both the three and six month periods was primarily the result of higher commercial and commercial real estate charge-offs, primarily in the land development and construction segments.

Consumer Banking

Net income was essentially unchanged for the three month period ended June 30,2007 and increased for the six month period ended June 30, 2007, compared with the same periods of the prior year. For both the three- and six-month periods, increases in net interest income, noninterest income, and noninterest expense were primarily a result of incorporating Republic activity. The increase in provision for loan losses in both the three and six month periods was primarily the result of incorporating Republic activity along with an increase in commercial real estate charge-offs assigned to the Consumer Banking line of business.

Wealth Management

Net income increased in the three month period ended June 30, 2007 and decreased for the six month period ended June 30, 2007, compared with the same periods of the prior year. The increase for the three month period was a result of higher noninterest income, partially offset by a decline in net interest income, with noninterest expense essentially unchanged. The decrease for the six month period was due mainly to higher noninterest expense and lower net interest income, partially offset by higher noninterest income. The increases in noninterest income in both the three and six month periods was due to higher brokerage and investment fees resulting from the training of legacy Republic branch staff and new financial consultants to support the Republic franchise on this product line. The increase in noninterest expense in the six month period was primarily a result of increased compensation and data processing costs.

Other

Net income decreased for the three and six month periods ended June 30, 2007, compared to the same periods of the prior year. Net income declined from the prior year periods as a result of higher noninterest expense, partially offset by higher net interest income and noninterest income. The increase in noninterest expense was mainly the result of restructuring and merger-related expenses, additional expenses that are related to merger activities but not treated as restructuring or merger-related for accounting purposes, and the impact of adding the Republic activity. The increase in net interest income was mainly the result of incorporating Republic activity and 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.

Financial Condition

Total assets at June 30, 2007 were $13.2 billion, a decrease of $755.8 million or 5.4% from December 31, 2006 and an increase of $5.4 billion over June 30, 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, selling $23.3 million in commercial loans held for sale to better align Republic’s assets with Citizens’ interest rate risk and lending philosophies, and a reduction of $26.0 million in loans held for sale due to the branch divestiture completed on April 27, 2007. Total portfolio loans were essentially unchanged from December 31, 2006 and increased $3.5 billion over June 30, 2006. The increase over June 30, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

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Investment Securities

Investment securities at June 30, 2007 decreased $613.7 million or 20.8% from December 31, 2006 to $2.3 billion and increased $830.1 million over June 30, 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 using portfolio cash flow to reduce short-term borrowings. The increase over June 30, 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 $3.5 billion over June 30, 2006. The increase over June 30, 2006 was almost entirely due to the Republic merger, but also included growth in legacy Citizens commercial loans.

Total commercial loans at June 30, 2007 were $5.2 billion, an increase of $113.7 million or 2.2% over December 31, 2006 and an increase of $2.0 billion over June 30, 2006. The increases were a result of new relationships in Wisconsin and central and northern Michigan and continued strong growth in the Southeast Michigan market. Additionally, the increase over June 30, 2006 was due to the impact of incorporating Republic loans. The following table displays historical commercial loan portfolios by segment:

Commercial Loan Portfolio

in millions	June 30, 2007		December 31, 2006		June 30, 2006
Land Hold	$	81.6	$	102.4	$	23.1
Land Development		178.7		203.6		65.3
Construction		371.2		445.5		132.9
Income Producing		1,338.9		1,237.1		475.5
Owner-Occupied		1,115.6		1,132.0		747.0
Total Commercial Real Estate		3,086.0		3,120.6		1,443.8
Commercial and Industrial		2,153.2		2,004.9		1,789.6
Total Commercial Loans	$	5,239.2	$	5,125.5	$	3,233.4

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

Residential mortgage loans at June 30, 2007 were $1.5 billion, a decrease of $49.1 million or 3.2% from December 31, 2006 and an increase of $943.4 million over June 30, 2006. The decrease from December 31, 2006 was primarily due to selling most new fixed rate production into the secondary market. The increase from June 30, 2006 was almost entirely due to incorporating Republic balances, partially offset by a decrease from legacy Citizens’ residential mortgage portfolio as a result of the aforementioned securitization and transfer to the investment securities portfolio.

Total consumer loans, which are comprised of direct and indirect loans, were $2.5 billion at June 30, 2007, a decrease of $79.8 million or 3.1% from December 31, 2006 and an increase of $538.7 million over June 30, 2006. Direct consumer loans, which include direct installment, home equity, and other consumer loans, decreased $85.4 million or 5.0% from December 31, 2006 as balances continue to decline due to weak consumer demand in Citizens’ markets. Direct consumer loans increased by $536.9 million over June 30, 2006, almost entirely as 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 $846.3 million, essentially unchanged from December 31, 2006 and June 30, 2006.

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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.

Based on concerns regarding the Midwest economy and deterioration in commercial real estate values this year, Citizens has reviewed over 45% of legacy Republic commercial real estate loans and transitioned all underwriting practices to be consistent with Citizens’ credit risk management disciplines. As a result, commercial real estate nonperforming loans, watchlist loans, and 30 to 89 day delinquency rates at June 30, 2007 have increased over December 31, 2006. Citizens has incorporated additional tables in the “Nonperforming Assets” and “Provision and Allowance for Loan Losses” sections below to document its early recognition and proactive risk management practices to address this trend.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, restructured loans, loans past due over 90 days and still accruing interest, nonperforming held for sale, and 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 June 30, 2007, December 31, 2006 and June 30, 2006.

Nonperforming Assets

	June 30,			December 31,			June 30,
(in thousands)	2007			2006			2006
Nonperforming Loans
Commercial	$	8,563		$	7,709		$	8,795
Commercial real estate		60,797			14,915			4,956
Total commercial		69,360			22,624			13,751
Residential mortgage		36,130			28,428			8,179
Direct consumer		8,407			6,030			3,167
Indirect consumer		1,053			810			904
Total consumer		9,460			6,840			4,071
Total nonaccrual loans		114,950			57,892			26,001
Loans 90 days past due and still accruing		1,127			767			887
Restructured loans		348			378			406
Total nonperforming portfolio loans		116,425			59,037			27,294
Nonperforming held for sale		5,128			22,846			—
Other Repossessed Assets Acquired (ORAA)		24,811			20,165			7,472
Total nonperforming assets	$	146,364		$	102,048		$	34,766
Nonperforming assets as a percent of portfolio loans plus ORAA(1)		1.58	%		1.10	%		0.61	%
Nonperforming assets as a percent of total assets		1.10			0.73			0.44
Allowance for loan loss as a percent of nonperforming loans		155.57			286.44			419.73
Allowance for loan loss as a percent of nonperforming assets		123.74			165.71			329.52

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

Nonperforming assets totaled $146.4 million at June 30, 2007, an increase of $44.3 million over December 31, 2006 and an increase of $111.6 million over June 30, 2006. The increase over December 31, 2006 reflects higher nonperforming portfolio loans of $57.4 million, primarily in the commercial real estate portfolio, which includes commercial land development, construction, and income producing loans, and, to a lesser extent, an increase in other repossessed assets acquired which was primarily due to the transfer of one commercial real estate relationship from nonperforming loan status, partially offset by lower nonperforming held for sale, which declined by $18.2 million primarily as a result of a nonperforming loans sale completed in the first quarter of 2007. The increase over June 30, 2006 was almost entirely a result of incorporating Republic’s nonperforming assets, partially offset by declines in legacy Citizens nonperforming portfolios as well as transitioning all of Republic’s loan portfolios and underwriting practices to be consistent with Citizens’ credit risk management disciplines. Nonperforming assets at June 30, 2007 represented 1.58% of total loans plus other repossessed

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assets acquired compared with 1.10% at December 31, 2006 and 0.61% at June 30, 2006. Nonperforming commercial loan inflows were $48.4 million in the second quarter of 2007 compared with $7.9 million in the fourth quarter of 2006. Nonperforming commercial loan outflows were $28.5 million in the second quarter of 2007 compared with $10.2 million in the fourth quarter of 2006. The second quarter of 2007 outflows primarily consisted of $16.7 million in charged-off loans and a transfer of $5.1 million from nonperforming loan status to other repossessed assets acquired. The following table displays historical nonperforming commercial loans by loan segment:

Nonperforming Commercial Loans

	June 30, 2007					December 31, 2006					June 30, 2006
in millions	Balance		% of Portfolio			Balance		% of Portfolio			Balance		% of Portfolio
Land Hold	$	0.2		0.25	%	$	—		—	%	$	—		—	%
Land Development		17.7		9.90			1.6		0.79			—		—
Construction		20.9		5.63			5.3		1.19			—		—
Income Producing		14.8		1.11			0.5		0.04			1.0		0.21
Owner-Occupied		7.2		0.65			7.5		0.66			4.0		0.54
Total Commercial Real Estate		60.8		1.97			14.9		0.48			5.0		0.35
Commercial and Industrial		8.6		0.40			7.7		0.38			8.8		0.49
Total Commercial Loans	$	69.4		1.32	%	$	22.6		0.44	%	$	13.8		0.43	%

As presented in the table above, nonperforming commercial loan increases have been concentrated in the non-owner-occupied commercial real estate loan portfolios. These loans are located primarily in the southeast and central regions of Michigan and the Cleveland and Columbus markets in Ohio.

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.

In addition to loans classified as nonperforming, Citizens carefully monitors other credits that are current in terms of principal and interest payments but may deteriorate in quality as economic conditions change. Commercial relationship officers monitor their clients’ financial condition and initiate changes in loan ratings based on their findings. Loans that have migrated within the loan rating system to a level that requires remediation are considered “watchlist” loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) and are actively reviewed at quarterly meetings among the chief credit officer, senior credit officers, senior market managers, and the commercial relationship officers. At these meetings, action plans are reviewed to remediate emerging problem loans or develop a specific plan for removing the loans from the portfolio. Watchlist loans are comprised of the nonperforming loans displayed in the above table as well as accruing loans as displayed in the following table:

Commercial Watchlist
Accruing loans only

	June 30, 2007					December 31, 2006					June 30, 2006
			% of					% of					% of
in millions	Balance		Portfolio			Balance		Portfolio			Balance		Portfolio
Land Hold	$	25.2		30.88	%	$	13.8		13.48	%	$	2.6		11.26	%
Land Development		73.0		40.85			50.3		24.71			0.4		0.61
Construction		101.4		27.32			57.0		12.79			7.5		5.64
Income Producing		161.0		12.02			143.0		11.56			49.1		10.33
Owner-Occupied		219.4		19.67			202.9		17.92			105.4		14.11
Total Commercial Real Estate		580.0		18.79			467.0		14.97			165.0		11.43
Commercial and Industrial		359.8		16.71			319.5		15.94			195.0		10.90
Total Watchlist Loans	$	939.8		17.94	%	$	786.5		15.34	%	$	360.0		11.13	%

Based on concerns regarding the Midwest economy and the deterioration in commercial real estate values this year, Citizens has reviewed over $750 million or approximately 45% of the legacy Republic commercial real estate portfolio, at an

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individual loan level, utilizing the following criteria: loan size, loan-to-value in excess of 85%, delinquency pattern, dated appraisals, and noncompliance with lot release schedules. During 2007, Citizens has placed approximately $203 million of these loans on the watchlist due to applying Citizens’ risk rating methodology to the legacy Republic portfolios as well as deterioration in the credits due to the Midwest economy.

Once a loan is placed on the watchlist, it is reviewed quarterly by senior credit and market management with regular re-assessment of cash flows, collateral valuations, and performance against Citizens’ agreed upon action plans for improving or exiting the credit. Loans viewed as substandard or doubtful are transferred to Citizens’ Special Loans credit group and are subjected to a higher level of monitoring and workout activities. Due to Citizens’ proactive credit risk management practices, the majority of the accruing watchlist loans are successfully remediated and returned to the commercial relationship officers for ongoing relationship management.

In view of Citizens’ analysis of its commercial real estate loans, it will continue its current hands-on watchlist monitoring process and it will also review all non-owner-occupied commercial real estate loans defined as “pass” credits by the Federal Reserve greater than $0.5 million on a quarterly basis to ensure early identification of developing performance issues. These reviews will include comparing lot release schedules to actual performance and early identification of loans with potential collateral deterioration. Loans found to be outside of acceptable parameters will be rated a watchlist loan and monitored according to Citizens’ credit policy.

The quality of Citizens’ loan portfolio is impacted by numerous factors including, over the past several quarters, the economic environment in the markets in which Citizens operates. Past due loan trends can be a leading indicator of potential future nonperforming loans and charge-offs. The following table displays the 30 — 89 days past due delinquency trend for all loan portfolios and by loan segment:

Delinquency Rates By Loan Portfolio
30 to 89 days Past Due

	June 30, 2007					December 31, 2006					June 30, 2006
in millions	Balance		% of Portfolio			Balance		% of Portfolio			Balance		% of Portfolio
Land Hold	$	2.9		3.55	%	$	—		—	%	$	3.3		14.29	%
Land Development		22.7		12.70			1.1		0.54			0.2		0.31
Construction		11.1		2.99			11.4		2.56			4.3		3.24
Income Producing		24.1		1.80			6.4		0.52			8.4		1.76
Owner-Occupied		17.1		1.54			12.5		1.10			8.4		1.13
Total Commercial Real Estate		77.9		2.53			31.4		1.01			24.6		1.70
Commercial and Industrial		22.7		1.05			16.8		0.84			29.5		1.65
Total Commercial Loans		100.6		1.92			48.2		0.94			54.1		1.67
Residential Mortgage		38.5		2.58			37.2		2.41			7.9		1.43
Direct Consumer		19.6		1.20			22.4		1.30			10.6		0.96
Indirect Consumer		11.6		1.37			14.8		1.76			9.2		1.09
Total Delinquent Loans	$	170.3		1.85	%	$	122.6		1.33	%	$	81.8		1.43	%

The commercial and industrial, residential mortgage, and consumer delinquency rates have remained relatively constant over the past year and have not translated into increased losses. However, commercial real estate delinquencies have increased significantly as a result of the challenging Midwest economy and its related impact on real estate values and development.

Provision and Allowance for Loan Losses

A summary of loan loss experience during the three and six months ended June 30, 2007 and 2006 is provided below.

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Analysis of Allowance for Loan Losses

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Allowance for loan losses — beginning of period	$	169,239		$	115,423		$	169,104		$	116,400
Provision for loan losses		31,857			1,139			35,357			4,139
Charge-offs		22,335			4,556			28,211			10,789
Recoveries		2,357			2,554			4,868			4,810
Net charge-offs		19,978			2,002			23,343			5,979
Allowance for loan losses — end of period	$	181,118		$	114,560		$	181,118		$	114,560
Portfolio loans outstanding at period end(1)	$	9,215,964		$	5,728,039		$	9,215,964		$	5,728,039
Average portfolio loans outstanding during period(1)		9,169,625			5,609,920			9,174,497			5,585,747
Allowance for loan losses as a percentage of portfolio loans		1.97	%		2.00	%		1.97	%		2.00	%
Ratio of net charge-offs during period to average portfolio loans (annualized)		0.87			0.14			0.51			0.22

⁽¹⁾ Balances exclude mortgage loans held for sale.

Net charge-offs increased to $20.0 million or 0.87% of average portfolio loans in the second quarter of 2007 compared with $2.0 million or 0.14% of average portfolio loans in the second quarter of 2006. The increase over the second quarter of 2006 was primarily the result of higher commercial and commercial real estate charge-offs, primarily in the land development and construction segments, due to the aforementioned deterioration in commercial real estate values, as well as incorporating Republic activity. The following table displays historical net charge-offs by loan segment:

Net Charge-Offs

	Three Months Ended
	June 30, 2007					December 31, 2006					June 30, 2006
			% of					% of						% of
in millions	Balance		Portfolio*			Balance		Portfolio*			balance			Portfolio*
Land Hold	$	—		—	%	$	—		—	%	$	—			—	%
Land Development		6.4		14.33			—		—			—			—
Construction		4.1		4.43			—		—			—			—
Income Producing		2.3		0.69			—		—			—			—
Owner-Occupied		0.9		0.32			1.0		0.35			0.1			0.06
Total Commercial Real Estate		13.7		1.77			1.0		0.26			0.1			0.03
Commercial and Industrial		1.8		0.35			1.8		0.40			(0.1	)		(0.03	)
Total Commercial Loans		15.5		1.20			2.8		0.34			(0.0	)		(0.00	)
Residential Mortgage		0.7		0.18			0.9		0.65			0.3			0.19
Direct Consumer		2.6		0.63			1.6		0.59			0.8			0.29
Indirect Consumer		1.2		0.59			2.3		1.09			0.9			0.43
Total Net Charge-offs	$	20.0		0.87	%	$	7.6		0.52	%	$	2.0			0.14	%

* Represents an annualized rate.

Similar to the trend displayed in the other credit metrics, the commercial and industrial, residential mortgage, and direct and indirect consumer portfolios continue to perform well and have not resulted in increases in net charge-offs. The increases in commercial real estate net charge-offs are the result of a thorough assessment of a project’s economic viability, current collateral valuation shortfalls, guarantors’ inability to support the project, and Citizens’ philosophy to recognize and address a failed project immediately.

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,

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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 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. As of June 30, 2007, the legacy Republic allowance methodology has been fully transitioned to the legacy Citizens methodology.

The allowance for loan losses totaled $181.1 million or 1.97% of portfolio loans at June 30, 2007, an increase of $12.0 million over December 31, 2006 and an increase of $66.6 million over June 30, 2006. At June 30, 2007, the specific allowance allocated to commercial and commercial real estate credits totaled $12.0 million, compared with $7.6 million at December 31, 2006 and $6.1 million at June 30, 2006. The increases in the specific allowance were attributable to an increase in nonperforming commercial real estate credits. Additionally, the increase over June 30, 2006 was due to including the legacy Republic portfolio.

The total risk allocated allowance was $161.6 million as of June 30, 2007, compared with $152.1 million at December 31, 2006 and $101.2 million at June 30, 2006. The amount allocated to commercial and commercial real estate loans, including construction loans, totaled $110.0 million at June 30, 2007 compared with $94.8 million at December 31, 2006 and $56.1 million at June 30, 2006. The increase from December 31, 2006 was due to higher overall risk factors. The increase from June 30, 2006 was primarily due to including the legacy Republic portfolio. The risk allocated allowance for residential real estate loans totaled $13.0 million at June 30, 2007, compared with $15.1 million at December 31, 2006 and $6.2 million at June 30, 2006. The decrease over December 31, 2006 was due to a combination of lower balances and risk factors. The increase from June 30, 2006 was due to including the legacy Republic portfolio. The risk allocated allowance for consumer loans totaled $38.6 million at June 30, 2007, compared with $42.2 million at December 31, 2006 and $38.9 million at June 30, 2006. The decrease from December 31, 2006 reflected both lower balances and lower risk factors.

The general valuation allowances decreased to $7.5 million at June 30, 2007 compared with $9.4 million at December 31, 2006 and $7.3 million at June 30, 2006. The decrease from December 31, 2006 was primarily the result of a realignment of the commercial risk factors between general and quantitative classification. The increase from June 30, 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 $31.9 million in the second quarter of 2007 compared with $1.1 million in the second quarter of 2006. For the first six months of 2007, the provision for loan losses totaled $35.4 million compared with $4.1 million for the same period of 2006. The increases reflect the higher commercial net charge-offs and a higher rate of risk rating downgrades associated with the commercial real estate portfolio as well as incorporating Republic reserve requirements.

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

Loans Held for Sale

Loans held for sale at June 30, 2007 were $85.9 million, a decrease of $86.9 million or 50.3% from December 31, 2006 and an increase of $67.9 million over June 30, 2006. The decline from December 31, 2006 was primarily the result of $26.0 million in consumer loans sold as part of the branch divestiture completed on April 27, 2007, a $23.3 million commercial

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loan sale during the first quarter of 2007, partially offset by a seasonal increase in mortgage origination volume. The consumer loans were transferred to loans held for sale at the time of the Republic merger due to the pending branch divestiture which was required to obtain regulatory approval for the merger. The increase over June 30, 2006 was almost entirely due to incorporating Republic loans, which include residential mortgage loans awaiting sale in the secondary market and $43.8 million in commercial real estate loans that were transferred to loans held for sale to reflect alignment with Citizens’ lending philosophies.

Goodwill and Other Intangible Assets

Goodwill at June 30, 2007 totaled $780.9 million, essentially unchanged from December 31, 2006 and an increase of $726.4 million over June 30, 2006. Other intangible assets, which primarily represent a premium on core deposits, totaled $36.0 million at June 30, 2007, a decrease of $10.1 million or 21.8% from December 31, 2006 and an increase of $26.3 million over June 30, 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 completing the branch divestiture and continued amortization of the premium assigned to Republic’s core deposits at the merger date.

Deposits

Total deposits at June 30, 2007 decreased $616.4 million or 7.1% from December 31, 2006 to $8.1 billion and increased $2.4 billion over June 30, 2006. Core deposits, which exclude all time deposits, totaled $4.1 billion at June 30, 2007, a decrease of $310.8 million or 7.0% from December 31, 2006 and an increase of $879.9 million over June 30, 2006, primarily as a result of incorporating Republic balances. The decrease in core deposits from December 31, 2006 was primarily a result of the aforementioned branch divestiture, the transfer of $49.9 million in legacy Republic deposits to securities sold under agreements to repurchase as a result of product changes at the time of the computer system conversion, Citizens not renewing a $40.0 million wholesale money market deposit account, and, to a lesser extent, some legacy Republic clients migrating their funds elsewhere in the market, partially offset by growth in noninterest-bearing deposits. 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 $4.0 billion at June 30, 2007, a decrease of $305.6 million or 7.2% from December 31, 2006 and an increase of $1.5 billion over June 30, 2006. The decrease from December 31, 2006 was primarily the result of Citizens not renewing $297.0 million in brokered certificates of deposit and the aforementioned branch divestiture. In addition to the impact of the Republic merger, the increase over June 30, 2006 reflected the continued migration of funds from lower-cost deposits and some new client growth, partially offset by the reduction as a result of the aforementioned branch divestiture.

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 June 30, 2007, Citizens had $321.8 million in brokered deposits, compared with $594.0 million at December 31, 2006 and $312.8 million at June 30, 2006. The decrease from December 31, 2006 was primarily the result of not renewing $297.0 million in brokered certificates of deposit. The increase from June 30, 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 June 30, 2007 Citizens had approximately $1.6 billion in time deposits of $100,000 or more, compared with $2.1 billion at December 31, 2006 and $924.3 million at June 30, 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. Short-term borrowed funds at June 30, 2007 totaled $687.2 million, a decrease of $251.7 million from December 31, 2006 and an increase of $219.5 million over June 30, 2006. The decrease from December 31, 2006 was primarily the result of retiring $81.9 million in securities sold under agreements to repurchase and $165.0 million less in federal funds purchased. The increase over June 30, 2006 was due primarily to incorporating Republic balances, partially offset by maturing investment securities cash flow that was not fully reinvested in 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 June 30, 2007 totaled $2.8 billion, an increase of $169.6 million or 6.4% over December 31, 2006 due mostly to an increase in FHLB debt, and an increase of $1.9 billion over June 30, 2006. The increase over June 30, 2006 was primarily the result of the Republic merger and Citizens’ issuance of $150.0 million in enhanced trust preferred securities on October 3, 2006.

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On March 2, 2007, Citizens retired $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 at a cost of LIBOR plus 45 basis points on the same date. The credit agreement requires Citizens to maintain certain financial and non-financial covenants including capital adequacy, nonperforming asset levels, and loan loss reserve adequacy. Citizens was in full compliance with all covenants as of June 30, 2007.

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 June 30, 2007, December 31, 2006 and June 30, 2006 are presented below.

Capital Ratios

	Regulatory Minimum
				“Well-			June 30,			December 31,			June 30,
	Required			Capitalized”			2007			2006			2006
Risk based:
Tier 1 capital		4.00	%		6.00	%		8.91	%		9.41	%		9.96	%
Total capital		8.00			10.00			11.38			11.90			13.20
Tier 1 Leverage(1)		4.00			5.00			7.33			7.22			8.21

⁽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 June 30, 2007 was $1.5 billion, essentially unchanged from December 31, 2006 and an increase of $884.3 million over June 30, 2006. Book value per common share at June 30, 2007, December 31, 2006, and June 30, 2006 was $20.28, $20.58, and $15.15, respectively. Citizens declared and paid cash dividends of $0.29 per share in the second quarter of 2007, compared with $0.29 per share in the second quarter of 2006. During the first six months of 2007 the Holding Company repurchased a total of 555,046 shares of common stock for $11.5 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. For the first six months of 2007, the Holding Company received $51.0 million in dividends from subsidiaries and paid $43.9 million in dividends to its

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shareholders. As of June 30, 2007, the subsidiary banks are able to pay dividends of $46.0 million to the Holding Company without prior regulatory approval.

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 June 30, 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 June 30, 2007.

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 183.07% as of June 30, 2007 compared with 169.42% at December 31, 2006 and 143.42% as of June 30, 2006. Changes in deposit obligations and short-term and long-term debt during the second 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 in March 2007 and Fitch Ratings, Standard and Poor’s Ratings Service, and Dominion Bond Rating Service in June 2007. 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, 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 analysis 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 $323.9 million or 2.4% of total assets as of June 30, 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 rates consistent with June 30, 2007 levels. Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in different interest rate

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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 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 June 30, 2007 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming expected changes in balance sheet composition over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to decrease by 1.7% and 4.4%, respectively, from what it would be if rates were to remain at June 30, 2007 levels. An immediate 100 or 200 basis point parallel decline in market rates would be expected to increase net interest income by 0.7% and 0.4%, respectively, from what it would be if rates were to remain at June 30, 2007 levels. These measurements represent an interest rate risk position consistent with the position at December 31, 2006. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.

From time-to-time, derivative contracts are used to help manage or hedge exposure to interest rate risk and market value risk 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 been effective and has not generated any material gains or losses. As of June 30, 2007, Citizens had forward commitments to sell mortgage loans of $85.6 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

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controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, Citizens performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities 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 operations will be included in the assessment of internal controls over financial reporting 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)
April 2007		—			—		—		1,701,154
May 2007		110,029	(a)		19.34		110,000		1,591,154
June 2007		255,633	(a)		19.49		240,000		1,351,154
Total		365,662			19.44		350,000		1,351,154

(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 and included 29 shares in May at a price of $20.71 per share and 15,633 shares in June at a price of $18.56 per share.

In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. As of June 30, 2007, 1,351,154 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.

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Item 4. Submission of Matters to a Vote of Security Holders

Citizens held its Annual Meeting of Shareholders on April 26, 2007 at which the shareholders voted to amend Article I of the Corporation’s Amended and Restated Articles of Incorporation to change the name of the corporation from Citizens Banking Corporation to Citizens Republic Bancorp, Inc. and to elect five nominees to the Board of Directors. Each of the nominees for director at the meeting was an incumbent and all nominees were elected. The following table sets forth the number of votes for and withheld with respect to the name change and each nominee.

	For		Against		Abstain		Broker non-votes
Amend Articles of Incorporation to change name to Citizens Republic Bancorp, Inc.		62,378,694		915,353		821,240		0

Director	For		Withheld		% Votes For
Richard J. Dolinski		61,199,383		2,915,910		80.77
William R. Hartman		61,601,707		2,513,586		81.30
Gary J. Hurand		62,191,423		1,923,870		82.08
Dennis J. Ibold		61,896,537		2,218,757		81.69
Kendall B. Williams		60,849,506		3,265,788		80.31

Item 5. Other Information

On May 23, 2007, the Compensation and Human Resources Committee of the Corporation’s Board of Directors (the “Compensation Committee”) approved the Management Incentive Plan for 2007 (the “2007 MIP”) applicable to management employees, including the Corporation’s executive officers whose compensation was disclosed in the Corporation’s 2007 annual meeting proxy statement (the “NEOs”). The 2007 MIP is designed to motivate participants to achieve strategic goals, to strengthen links between pay and the performance of Citizens, and to align management’s interests more closely with the interests of shareholders. Seventy percent of the target bonus amounts for the NEOs is based on the performance of the Corporation and 30% is based on individual performance.

The target amount based on the performance of the Corporation is calculated by multiplying 70% of the NEO’s “targeted incentive pool” times the Corporation’s “weighted average corporate result.” An NEO’s targeted incentive pool, stated in dollars, is a function of (i) the executive’s salary, (ii) the “participation rate” established by the Compensation Committee for the executive, and (iii) the number of months the executive is employed by the Corporation. The Corporation’s weighted corporate result, stated as a percentage, will be measured in 2007 in terms of achieving at least minimum specified targets for (a) total revenue, (b) net income after taxes, (c) nonperforming assets, and (d) merger cost savings, with the Corporation’s weighted corporate result based on the extent to which each minimum target is exceeded. These performance factors are weighted so as to place the most emphasis on total revenue, less on net income after taxes, still less on nonperforming assets, and the least on merger cost savings. The Compensation Committee has discretion to adjust the numbers to exclude extraordinary items and the impact of equity compensation.

The individual performance based portion of each NEO bonus is determined through qualitative goals pertaining to the NEO’s area of responsibility and a subjective analysis of each of the executive’s performance by management or, in the case of the Chief Executive Officer, the Compensation Committee. The Compensation Committee has discretion to adjust all awards under the 2007 MIP upward or downward in appropriate circumstances. The 2007 MIP does not purport to be a contract and is subject to change or termination at any time by Citizens.

The 2007 MIP is attached to this report as Exhibit 10.39 and incorporated herein by reference. The above description of the 2007 MIP does not purport to be a complete statement of all of the terms of the 2007 MIP and is qualified in its entirety by reference to the 2007 MIP.

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Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation as amended on April 26, 2007 (incorporated by reference from Exhibit 3.1 of Citizens’ First Quarter 2007 Report on Form 10-Q)
10.36	Release and Settlement Agreement with Dana M. Cluckey, dated April 26, 2007 (incorporated by reference from Exhibit 10.36 of Citizens’ First Quarter 2007 Report on Form 10-Q)
10.37	Form of Restricted Stock Agreement (Employee Version as of May 2007)
10.38	Form of Restricted Stock Agreement (Non-Employee Director Version as of May 2007)
10.39	2007 Management Incentive Plan*
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

* Portions of this exhibit have been omitted pursuant to Citizens’ request to the Secretary of the Securities and Exchange Commission for confidential treatment pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

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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: August 3, 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 (incorporated by reference from Exhibit 3.1 of Citizens’ First Quarter 2007 Report on Form 10-Q)
10.36	Release and Settlement Agreement with Dana M. Cluckey, dated April 26, 2007 (incorporated by reference from Exhibit 10.36 of Citizens’ First Quarter 2007 Report on Form 10-Q)
10.37	Form of Restricted Stock Agreement (Employee Version as of May 2007)
10.38	Form of Restricted Stock Agreement (Non-Employee Director Version as of May 2007)
10.39	2007 Management Incentive Plan*
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

* Portions of this exhibit have been omitted pursuant to Citizens’ request to the Secretary of the Securities and Exchange Commission for confidential treatment pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

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