Citizens Republic Bancorp (CTZ+A) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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 Number 000-10535

CITIZENS REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(810) 766-7500

(Registrant’s telephone number, including area code)

(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 October 26, 2007
Common Stock, No Par Value	75,632,076 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		44
Item 4 — Controls and Procedures		44
Part II — Other Information
Item 1A — Risk Factors		45
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 6 — Exhibits		46
Signatures		47
Exhibit Index		48
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Certification Pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b)

2

Consolidated Balance Sheets
Citizens Republic Bancorp and Subsidiaries

	September 30,			December 31,			September 30,
(in thousands)	2007			2006			2006
	(unaudited)			(Note 1)			(unaudited)
Assets
Cash and due from banks	$	224,683		$	223,747		$	151,591
Money market investments		5,193			203			165
Investment Securities:
Securities available for sale, at fair value		2,177,516			2,839,456			1,379,240
Securities held to maturity, at amortized cost (fair value of $122,186, $110,283 and $104,397, respectively)		122,610			109,744			102,667
Total investment securities		2,300,126			2,949,200			1,481,907
FHLB and Federal Reserve stock		142,107			132,895			58,193
Portfolio loans:
Commercial		2,236,131			2,004,894			1,788,922
Commercial real estate		3,068,540			3,120,613			1,468,952
Total commercial		5,304,671			5,125,507			3,257,874
Residential mortgage		1,460,993			1,543,533			545,171
Direct consumer		1,602,126			1,721,410			1,090,757
Indirect consumer		851,436			840,632			859,573
Total portfolio loans		9,219,226			9,231,082			5,753,375
Less: Allowance for loan losses		(176,958	)		(169,104	)		(113,076	)
Net portfolio loans		9,042,268			9,061,978			5,640,299
Loans held for sale		76,384			172,842			11,689
Premises and equipment		130,148			139,490			117,821
Goodwill		778,516			781,635			54,527
Other intangible assets		33,206			46,071			8,959
Bank owned life insurance		212,243			206,851			86,580
Other assets		278,275			287,700			135,803
Total assets	$	13,223,149		$	14,002,612		$	7,747,534
Liabilities
Noninterest-bearing deposits	$	1,104,992		$	1,223,113		$	893,320
Interest-bearing demand deposits		795,950			923,848			739,895
Savings deposits		2,136,082			2,280,496			1,467,622
Time deposits		3,904,715			4,270,604			2,524,509
Total deposits		7,941,739			8,698,061			5,625,346
Federal funds purchased and securities sold under agreements to repurchase		764,527			922,328			342,736
Other short-term borrowings		33,274			16,551			13,298
Other liabilities		120,968			169,022			73,752
Long-term debt		2,800,768			2,638,964			1,018,095
Total liabilities		11,661,276			12,444,926			7,073,227
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 - 75,633,669 at 9/30/07, 75,675,944 at 12/31/06, and 42,904,289 at 9/30/06		973,619			980,772			79,730
Retained earnings		591,306			584,289			596,040
Accumulated other comprehensive loss		(3,052	)		(7,375	)		(1,463	)
Total shareholders’ equity		1,561,873			1,557,686			674,307
Total liabilities and shareholders’ equity	$	13,223,149		$	14,002,612		$	7,747,534

See notes to consolidated financial statements.

3

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2007		2006		2007			2006
Interest Income
Interest and fees on loans	$	171,650	$	102,871	$	514,814		$	294,415
Interest and dividends on investment securities:
Taxable		21,238		11,960		67,337			37,267
Tax-exempt		7,310		5,278		21,947			15,854
Dividends on FHLB and Federal Reserve stock		1,603		614		4,736			1,981
Money market investments		53		21		89			34
Total interest income		201,854		120,744		608,923			349,551
Interest Expense
Deposits		64,380		40,004		195,015			106,301
Short-term borrowings		5,439		3,596		25,504			12,727
Long-term debt		37,162		11,499		98,413			31,413
Total interest expense		106,981		55,099		318,932			150,441
Net Interest Income		94,873		65,645		289,991			199,110
Provision for loan losses		3,765		1,190		39,122			5,329
Net interest income after provision for loan losses		91,108		64,455		250,869			193,781
Noninterest Income
Service charges on deposit accounts		12,515		9,674		35,701			28,070
Trust fees		4,973		4,633		14,931			14,647
Mortgage and other loan income		2,939		2,267		13,334			6,383
Brokerage and investment fees		2,141		1,885		5,872			5,103
ATM network user fees		1,601		988		4,820			2,993
Bankcard fees		1,695		1,213		4,318			3,399
Other income		4,732		2,884		14,321			12,203
Total fees and other income		30,596		23,544		93,297			72,798
Investment securities gains (losses)		8		—		(25	)		61
Total noninterest income		30,604		23,544		93,272			72,859
Noninterest Expense
Salaries and employee benefits		42,115		32,569		132,251			97,515
Occupancy		7,377		5,604		23,363			16,837
Professional services		5,096		3,486		13,599			11,267
Equipment		3,227		3,191		10,793			9,658
Data processing services		3,724		3,779		12,360			11,232
Advertising and public relations		1,003		1,211		6,070			4,179
Postage and delivery		1,777		1,559		5,937			4,650
Telephone		2,155		1,394		5,937			4,250
Other loan expenses		1,245		1,407		3,237			3,040
Stationery and supplies		466		653		2,111			2,011
Intangible asset amortization		2,803		725		8,875			2,174
Restructuring and merger-related expenses		1,009		—		8,603			—
Other expense		5,346		3,824		15,407			14,226
Total noninterest expense		77,343		59,402		248,543			181,039
Income Before Income Taxes		44,369		28,597		95,598			85,601
Income tax provision		12,605		7,616		22,723			22,957
Net Income	$	31,764	$	20,981	$	72,875		$	62,644
Net Income Per Common Share:
Basic	$	0.42	$	0.49	$	0.97		$	1.47
Diluted		0.42		0.49		0.96			1.46
Cash Dividends Declared Per Common Share		0.290		0.290		0.870			0.865
Average Common Shares Outstanding:
Basic		75,353		42,587		75,391			42,658
Diluted		75,501		42,709		75,688			42,795

See notes to consolidated financial statements.

4

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
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								72,875						72,875
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											5,120
Net change in unrealized gain/(loss) on qualifying cash flow hedges											(797	)
Other comprehensive income total														4,323
Total comprehensive income														77,198
Proceeds from stock options exercised and restricted stock activity		621			3,934									3,934
Recognition of stock-based compensation					2,427									2,427
Cash dividends declared on common shares — $0.870 per share								(65,858	)					(65,858	)
Shares acquired for retirement		(663	)		(13,514	)								(13,514	)
Balance — September 30, 2007		75,634		$	973,619		$	591,306		$	(3,052	)	$	1,561,873
Balance at January 1, 2006		42,968		$	85,526		$	570,483		$	454		$	656,463
Comprehensive income, net of tax:
Net income								62,644						62,644
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(1,406	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											(511	)
Other comprehensive income total														(1,917	)
Total comprehensive income														60,727
Proceeds from stock options exercised and restricted stock activity		71			1,568									1,568
Recognition of stock-based compensation		200			1,584									1,584
Cash dividends declared on common shares — $0.865 per share								(37,087	)					(37,087	)
Shares acquired for retirement		(335	)		(8,948	)								(8,948	)
Balance — September 30, 2006		42,904		$	79,730		$	596,040		$	(1,463	)	$	674,307

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows (Unaudited)
Citizens Republic Bancorp and Subsidiaries

	Nine Months Ended
	September 30,
(in thousands)	2007			2006
Operating Activities:
Net income	$	72,875		$	62,644
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		39,122			5,329
Depreciation and software amortization		10,094			8,897
Amortization of intangibles		8,874			2,174
Amortization and fair value adjustments of purchase accounting mark-to-market, net		(35,636	)		—
Discount accretion and amortization of issuance costs on long term debt		691			—
Net (accretion) amortization on investment securities		(3,306	)		152
Investment securities losses (gains)		25			(61	)
Loans originated for sale		(405,033	)		(170,352	)
Proceeds from sales of loans held for sale		489,028			177,662
Net gains from loan sales		(7,756	)		(2,747	)
Net (gain) loss on sale of other real estate		(440	)		492
Excess tax benefits from stock-based compensation arrangements		—			(173	)
Recognition of stock-based compensation		2,427			1,584
Other		(60,587	)		(22,088	)
Net cash provided by operating activities		110,378			63,513
Investing Activities:
Net (increase) decrease in money market investments		(4,990	)		215
Securities available-for-sale:
Proceeds from sales		364,421			114
Proceeds from maturities and payments		443,750			200,647
Purchases		(144,280	)		(82,468	)
Securities held-to-maturity:
Purchases		(12,869	)		(20,308	)
Sale of branches, net of cash received		(163,592	)		—
Net increase (decrease) in loans and leases		1,494			(145,909	)
Proceeds from sales of other real estate		11,571			2,756
Net increase in properties and equipment		(1,677	)		(4,988	)
Net cash provided (used) by investing activities		493,828			(49,941	)
Financing Activities:
Net decrease in demand and savings deposits		(189,529	)		(196,574	)
Net (decrease) increase in time deposits		(370,863	)		348,081
Net decrease in short-term borrowings		(139,076	)		(173,087	)
Proceeds from issuance of long-term debt		1,341,750			225,453
Principal reductions in long-term debt		(1,170,114	)		(216,308	)
Cash dividends paid		(65,858	)		(37,087	)
Proceeds from stock options exercised and restricted stock activity		3,934			1,568
Excess tax benefits related to stock-based compensation arrangements		—			173
Shares acquired for retirement		(13,514	)		(8,948	)
Net cash used by financing activities		(603,270	)		(56,729	)
Net increase (decrease) in cash and due from banks		936			(43,157	)
Cash and due from banks at beginning of period		223,747			194,748
Cash and due from banks at end of period	$	224,683		$	151,591
Supplemental Cash Flow Information:
Loans transferred to other real estate owned	$	23,540		$	4,446

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 nine months ended September 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 has yet to determine the impact of adoption 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

7

yet to determine which assets and liabilities (if any) will be selected. At adoption, the difference between the carrying amount and fair value of existing eligible assets and liabilities (if any) would be recognized as an accumulated adjustment to beginning retained earnings.

Note 3. Merger and Acquisition Activity

Effective December 29, 2006, Citizens acquired 100% of the outstanding stock of Republic Bancorp Inc. in a merger. Republic’s results of operations for the three and nine months ended September 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 September 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 nine months ended September 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				Nine Months Ended
	September 30, 2006				September 30, 2006
	Pro-forma		Citizens historical		Pro-forma		Citizens historical
(in thousands)	combined		without Republic		combined		without Republic
Net interest income	$	102,446	$	65,645	$	315,844	$	199,110
Provision for loan losses		3,640		1,190		10,929		5,329
Noninterest income		33,233		23,544		97,261		72,859
Other noninterest expense		78,114		59,402		238,734		181,039
Income before income taxes		53,925		28,597		163,442		85,601
Net Income	$	38,484	$	20,981	$	116,043	$	62,644
Net income per common share:
Basic	$	0.51	$	0.49	$	1.54	$	1.47
Diluted		0.51		0.49		1.53		1.46
Weighted average shares outstanding during the period:
Basic		75,246		42,587		75,353		42,658
Diluted		75,666		42,709		75,776		42,795

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 nine months ended September 30, 2007.

8

Restructuring Reserve

	Balance		Changes in 2007								Balance
	December 31,				Cash			Other			September 30,
(in thousands)	2006		Additions		Payments			Adjustments			2007
Personnel	$	4,323	$	2,384	$	(4,348	)	$	—		$	2,359
Facilities/Branches		3,895		1,928		(995	)		(32	)		4,796
Systems/Other		791		384		(1,138	)		—			37
	$	9,009	$	4,696	$	(6,481	)	$	(32	)	$	7,192

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

Merger-related Reserve

	Balance		Changes in 2007								Balance
	December 31,				Cash			Other			September 30,
(in thousands)	2006		Additions		Payments			Adjustments			2007
Personnel	$	17,603	$	1,778	$	(15,468	)	$	(1,339	)	$	2,574
Professional		7,621		—		(6,603	)		(750	)		268
Facilities/Branches		2,205		17		(968	)		413			1,667
Systems/Other		351		60		(411	)		—			—
		27,780		1,855		(23,450	)		(1,676	)		4,509
Other Transaction and System Reserves		9,088		2,052		(11,089	)		(6	)		45
	$	36,868	$	3,907	$	(34,539	)	$	(1,682	)	$	4,554

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.

As displayed in the tables above, restructuring charges and merger-related charges of $8.6 million were recorded for the nine months ended September 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:

	September 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		298,215		301,146		3,304		373		436,679		436,315		1,044		1,408
Collateralized Mortgage Obligations		610,264		611,369		2,735		1,630		794,395		791,739		242		2,898
Mortgage-backed		698,937		698,909		4,415		4,443		998,871		994,767		393		4,497
State and municipal		559,222		565,640		8,329		1,911		566,230		575,907		10,328		651
Other		407		452		45		—		835		874		40		1
Total available for sale	$	2,167,045	$	2,177,516	$	18,828	$	8,357	$	2,836,864	$	2,839,456	$	12,047	$	9,455
Held to Maturity:
State and municipal
Total held to maturity	$	122,610	$	122,186	$	613	$	1,037	$	109,744	$	110,283	$	905	$	366
FHLB and Fed Reserve stock	$	142,107	$	142,107	$	—	$	—	$	132,895	$	132,895	$	—	$	—

9

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

As of September 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		—		—		59,765		373		59,765		373
Collateralized Mortgage Obligations		141,446		728		127,824		902		269,270		1,630
Mortgage-backed		71,321		534		117,735		3,909		189,056		4,443
State and municipal		155,939		1,393		18,909		518		174,848		1,911
Other		—		—		—		—		—		—
Total available for sale		368,706		2,655		324,233		5,702		692,939		8,357
Held to Maturity:
State and municipal		56,945		734		15,808		303		72,753		1,037
Total held to maturity		56,945		734		15,808		303		72,753		1,037
Total	$	425,651	$	3,389	$	340,041	$	6,005	$	765,692	$	9,394

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.

10

Note 5. Allowance for Loan Losses and Impaired Loans

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

Analysis of Allowance for Loan Losses

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2007		2006		2007		2006
Allowance for loan losses — beginning of period	$	181,118	$	114,560	$	169,104	$	116,400
Provision for loan losses		3,765		1,190		39,122		5,329
Charge-offs:
Commercial		1,618		597		4,400		2,372
Commercial real estate		1,270		585		15,975		1,807
Total commercial		2,888		1,182		20,375		4,179
Residential mortgage		1,602		252		3,128		755
Direct consumer		3,188		983		8,301		3,868
Indirect consumer		2,312		1,840		6,397		6,244
Charge-offs		9,990		4,257		38,201		15,046
Recoveries:
Commercial		1,026		543		2,796		2,719
Commercial real estate		100		50		814		614
Total commercial		1,126		593		3,610		3,333
Residential mortgage		1		22		108		125
Direct consumer		500		485		1,353		1,102
Indirect consumer		438		483		1,862		1,833
Recoveries		2,065		1,583		6,933		6,393
Net charge-offs		7,925		2,674		31,268		8,653
Allowance for loan losses — end of period	$	176,958	$	113,076	$	176,958	$	113,076

Nonperforming loans totaled $154.8 million at September 30, 2007. Certain 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 September 30, 2007, December 31, 2006 and September 30, 2006 follow:

Impaired Loan Information

	Balances						Valuation Reserve
	September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
(in thousands)	2007		2006		2006		2007		2006		2006
Balances -
Impaired loans with valuation reserve	$	44,527	$	20,737	$	18,540	$	18,497	$	7,550	$	6,373
Impaired loans with no valuation reserve		20,943		21,641		465		—		—		—
Total impaired loans	$	65,470	$	42,378	$	19,005	$	18,497	$	7,550	$	6,373
Impaired loans on nonaccrual basis	$	54,658	$	11,321	$	4,099	$	18,425	$	2,104	$	1,746
Impaired loans on accrual basis		10,812		31,057		14,906		72		5,446		4,627
Total impaired loans	$	65,470	$	42,378	$	19,005	$	18,497	$	7,550	$	6,373

The average balance of impaired loans for the three months ended September 30, 2007 was $56.4 million and $16.6 million for the three months ended September 30, 2006. Of the $39.8 million increase, $27.6 million was due to incorporating Republic balances. Interest income recognized on impaired loans during the third quarter of 2007 and the third quarter of 2006 was $0.2 million. Cash collected and applied to outstanding principal during the third quarter of 2007 was $0.8 million. Cash collected and applied to outstanding principal in the same period of 2006 was immaterial.

11

Note 6. Long-term Debt

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

	September 30,		December 31,		September 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		118,883		117,788		118,474
Variable rate junior subordinated debenture due June 2033		25,702		25,628		24,738
7.50% junior subordinated debentures due September 2066		145,749		145,254		—
8.60% junior subordinated debentures due December 2031		—		51,546		—
Subsidiaries:
Federal Home Loan Bank advances		2,167,469		1,715,132		874,430
Other borrowed funds		292,965		583,616		453
Total long-term debt	$	2,800,768	$	2,638,964	$	1,018,095

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 September 30, 2007.

Note 7. Income Taxes

Citizens adopted FIN 48 on January 1, 2007. The adoption had no significant effect upon the Corporation’s financial condition. Unrecognized tax benefits as of January 1, 2007 and September 30, 2007 totaled $6.8 million and $6.4 million, respectively ($5.1 million and $5.0 million after the federal tax impact on state items). If ultimately recognized into income, these unrecognized tax benefits would increase net income by $4.4 million and $4.1 million, respectively, and thus impact the Corporation’s effective tax rate.

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 September 30, 2007 totaled $0.5 million and $0.4 million, respectively. No penalties have been accrued.

Citizens and its subsidiaries file U.S. federal income tax returns, as well as various returns in the states where its banking offices are located. The following tax years remain subject to examination as of September 30, 2007:

Jurisdiction	Tax Years
Federal		2004 – 2006
Indiana		2003 – 2006
Wisconsin		1999 – 2006
Iowa		1999 – 2006

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

12

Note 8. Accumulated Other Comprehensive Income

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2007			2006			2007			2006
Balance at beginning of period	$	(20,674	)	$	(16,542	)	$	(7,375	)	$	454
Net unrealized gain on securities for the quarter, net of tax effect of $9,608 in 2007 and $8,398 in 2006, and net unrealized gain (loss) on securities for the nine month period, net of tax effect of $2,749 in 2007 and $(735) in 2006		17,842			15,596			5,104			(1,367	)
Less: Reclassification adjustment for net (gains) losses on securities included in net income for the quarter, net of tax effect of $(3) in 2007, and included in net income for the nine month period, net of tax effect of $9 in 2007 and $(22) in 2006.		(5	)		—			16			(39	)
Net change in unrealized loss on cash flow hedges for the quarter, net of tax effect of $ (115) in 2007 and $(278) in 2006, and net change in unrealized loss for the nine month period, net of tax effect of $(429) in 2007 and $(275) in 2006.		(215	)		(517	)		(797	)		(511	)
Accumulated other comprehensive income, net of tax	$	(3,052	)	$	(1,463	)	$	(3,052	)	$	(1,463	)

13

Note 9. Pension Benefit Cost

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2007			2006			2007			2006
Defined Benefit Pension Plans
Service cost	$	—		$	768		$	—		$	2,819
Interest cost		1,265			930			3,640			3,407
Expected return on plan assets		(1,956	)		(1,890	)		(5,869	)		(5,669	)
Amortization of unrecognized:
Prior service cost		3			48			8			142
Net actuarial loss		133			194			383			721
Net pension cost	$	(555	)	$	50		$	(1,838	)	$	1,420
Supplemental Pension Plans
Service cost	$	—		$	210		$	—		$	631
Interest cost		192			160			577			481
Amortization of unrecognized:
Prior service cost		42			—			126			—
Net actuarial loss		32			35			98			104
Net pension cost	$	266		$	405		$	801		$	1,216
Postretirement Benefit Plans
Service cost	$	1		$	1		$	3		$	4
Interest cost		124			55			372			392
Expected return on plan assets Amortization of unrecognized:
Prior service cost		(67	)		(68	)		(202	)		(203	)
Net actuarial loss		—			(3	)		—			(21	)
Net pension cost	$	58		$	(15	)	$	173		$	172
Defined contribution retirement and 401K Plans
Employer contributions	$	1,746		$	909		$	4,380		$	2,318
Total periodic benefit cost	$	1,515		$	1,349		$	3,516		$	5,126

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’ 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 for 2007 decreased from 2006 as a result of the full vesting and accrual of participant benefits during 2006. The increase in the prior service cost for 2007 was the result of amortizing the cost of plan amendments made during 2007, which allowed for payment of benefits from corporate assets and provided a joint survivor benefit. As of September 30, 2007, $0.4 million of contributions have been made to the supplemental pension plans and Citizens anticipates that an additional $0.1 million of contributions will be made during the fourth quarter of 2007. As of September 30, 2007, $0.7 million of contributions

14

have been made to the postretirement benefit plan and Citizens anticipates that an additional $0.3 million of contributions will be made during the fourth quarter 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 September 30, 2007, Citizens had 3,657,562 shares of common stock reserved for future issuance under our current plan.

Beginning in 2006, restrictions on nonvested stock generally lapse in three annual installments beginning on the first anniversary of the grant date. Options expire ten years from the date of grant. 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 nine months ended September 30, 2007 and September 30, 2006:

Analysis of Stock-Based Compensation Expense

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2007			2006			2007			2006
Stock Option Compensation	$	9		$	8		$	26		$	43
Restricted Stock Compensation		967			763			2,401			1,541
Stock-based compensation expense before income taxes		976			771			2,427			1,584
Income tax benefit		(342	)		(270	)		(849	)		(554	)
Total stock-based compensation expense after income taxes	$	634		$	501		$	1,578		$	1,030

The increase in restricted stock compensation expense is due to the annual awards to directors and certain officers totaling 259,937 shares, which were awarded on May 23, 2007. The expense related to this grant was $0.4 million and $0.7 million for the three and nine months ended September 30, 2007, respectively.

Cash proceeds from the exercise of stock options were $1.3 million and $5.2 million for the three and nine months ended September 30, 2007 and less than $0.1 million and $1.4 million for the three and nine months ended September 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.

15

There were no stock options granted in the three and nine months ended September 30, 2007 and a single grant for 500 shares of nonqualified stock options during the three and nine month periods ended September 30, 2006. Stock option activity for the nine months ended September 30, 2007 follows:

	Options
				Weighted		Weighted
				Average		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		(382,816	)		13.71
Forfeitures or Expirations		(200,522	)		28.28
Outstanding at September 30, 2007		4,192,362		$	25.82	4.2 yrs	$	1,435
Exercisable		4,184,717		$	25.81	4.2 yrs	$	1,435

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 September 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 nine months ended September 30, 2007 was $0.3 million and $3.2 million, respectively. The fair value of options vested was less than $0.1 million for both the three and nine month periods ended September 30, 2007.

As of September 30, 2007, $8.2 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes restricted stock activity for the nine months ended September 30, 2007.

				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value
Outstanding restricted stock at December 31, 2006		293,087		$	25.13
Granted		294,449			19.13
Vested		(88,542	)		24.81
Forfeited		(30,599	)		25.81
Restricted stock at September 30, 2007		468,395		$	21.35

The total fair value of shares vested during the nine months ended September 30, 2007 was $1.8 million.

16

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:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2007		2006		2007		2006
Numerator:
Basic and dilutive earnings per share — net income available to common shareholders	$	31,764	$	20,981	$	72,875	$	62,644
Denominator:
Basic earnings per share — weighted average shares		75,353		42,587		75,391		42,658
Effect of dilutive securities — potential conversion of employee stock options		148		122		297		137
Diluted earnings per share — adjusted weighted-average shares and assumed conversions		75,501		42,709		75,688		42,795
Basic earnings per share	$	0.42	$	0.49	$	0.97	$	1.47
Diluted earnings per share	$	0.42	$	0.49	$	0.96	$	1.46

Note 12. Lines of Business

On July 31, 2007, Citizens announced a new management structure designed to expand and grow client relationships and focus on revenue generation. The Commercial, Regional Banking and Wealth Management lines of business are now served through six geographic regions, each managed by a region president. The commercial real estate, asset based lending, commercial products sales, and trust teams continue to be managed centrally. Additionally, a new shared services group has been developed to support Citizens’ sales and service efforts. At this time, Citizens is beginning to transition its management reporting to the new management structure and is expected to be complete by the end of 2007.

For the three and nine months ended September 30, 2007 and 2006, Citizens believes that the previous Commercial Banking, Consumer Banking, Wealth Management and Other business lines are still a valid means of segmenting the Corporation and provide meaningful information. This view aligns with the reporting currently being used by its key decision makers in evaluating the performance of the Corporation. For the three and nine months ended September 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.

17

Line of Business Information

	Commercial			Consumer		Wealth
(in thousands)	Banking			Banking		Mgmt			Other			Total
Earnings Summary — Three Months Ended September 30, 2007
Net interest income (taxable equivalent)	$	47,837		$	49,116	$	209		$	2,331		$	99,493
Provision for loan losses		(2,934	)		6,730		(31	)		—			3,765
Net interest income after provision		50,771			42,386		240			2,331			95,728
Noninterest income		4,550			16,336		7,029			2,689			30,604
Noninterest expense		22,892			40,579		5,453			8,419			77,343
Income before income taxes		32,429			18,143		1,816			(3,399	)		48,989
Income tax expense (taxable equivalent)		10,560			6,350		635			(320	)		17,225
Net income	$	21,869		$	11,793	$	1,181		$	(3,079	)	$	31,764
Average assets(in millions)	$	5,072		$	1,847	$	27		$	6,219		$	13,165
Earnings Summary — Three Months Ended September 30, 2006(1)
Net interest income (taxable equivalent)	$	30,959		$	35,743	$	256		$	2,100		$	69,058
Provision for loan losses		(2,574	)		3,764		—			—			1,190
Net interest income after provision		33,533			31,979		256			2,100			67,868
Noninterest income		3,738			12,057		6,438			1,311			23,544
Noninterest expense		18,466			30,002		5,559			5,375			59,402
Income before income taxes		18,805			14,034		1,135			(1,964	)		32,010
Income tax expense (taxable equivalent)		6,619			4,912		397			(899	)		11,029
Net income	$	12,186		$	9,122	$	738		$	(1,065	)	$	20,981
Average assets(in millions)	$	3,115		$	1,096	$	27		$	3,485		$	7,723

Line of Business Information

	Commercial			Consumer		Wealth
(in thousands)	Banking			Banking		Mgmt		Other			Total
Earnings Summary — Nine Months Ended September 30, 2007
Net interest income (taxable equivalent)	$	143,218		$	144,247	$	614	$	15,786		$	303,865
Provision for loan losses		25,553			13,566		3		—			39,122
Net interest income after provision		117,665			130,681		611		15,786			264,743
Noninterest income		13,435			51,833		20,439		7,565			93,272
Noninterest expense		64,494			129,589		17,023		37,437			248,543
Income before income taxes		66,606			52,925		4,027		(14,086	)		109,472
Income tax expense (taxable equivalent)		23,312			18,524		1,409		(6,648	)		36,597
Net income	$	43,294		$	34,401	$	2,618	$	(7,438	)	$	72,875
Average assets(in millions)	$	5,054		$	1,984	$	27	$	6,260		$	13,325
Earnings Summary — Nine Months Ended September 30, 2006(1)
Net interest income (taxable equivalent)	$	92,281		$	106,075	$	905	$	10,062		$	209,323
Provision for loan losses		(2,228	)		7,557		—		—			5,329
Net interest income after provision		94,509			98,518		905		10,062			203,994
Noninterest income		11,256			38,074		19,512		4,017			72,859
Noninterest expense		54,321			93,084		16,852		16,782			181,039
Income before income taxes		51,444			43,508		3,565		(2,703	)		95,814
Income tax expense (taxable equivalent)		18,116			15,228		1,248		(1,422	)		33,170
Net income	$	33,328		$	28,280	$	2,317	$	(1,281	)	$	62,644
Average assets(in millions)	$	3,057		$	1,047	$	28	$	3,550		$	7,682

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

18

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:

	September 30,		December 31,
(in thousands)	2007		2006
Loan commitments and letters of credit:
Commitments to extend credit	$	2,574,520	$	2,559,121
Financial standby letters of credit		112,396		146,863
Performance standby letters of credit		26,630		24,609
Commercial letters of credit		260,885		194,834
Total loan commitments and letters of credit	$	2,974,431	$	2,925,427

At September 30, 2007 and December 31, 2006, a liability of $5.6 million and $6.1 million, respectively, was recorded for possible losses on commitments to extend credit. In accordance with FIN 45, the liability representing the value of the guarantee obligations associated with certain letters of credit was $0.4 million at September 30, 2007 and totaled $0.6 million at December 31, 2006. 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.

19

Derivative Financial Instruments:

	September 30, 2007					December 31, 2006
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Receive fixed swaps	$	235,000	$	223		$	268,300	$	(1,839	)
Pay fixed swaps		24,000		14			104,000		1,242
Customer initiated swaps and corresponding offsets		505,332		—			378,590		—
Interest rate lock commitments		36,102		(21	)		29,875		(11	)
Forward mortgage loan contracts		75,220		(162	)		78,498		257
Total	$	875,654	$	54		$	859,263	$	(351	)

Derivative Classifications and Hedging Relationships:

	September 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	$	24,000	$	14	$	104,000	$	1,242
Derivatives Designated as Fair Value Hedges:
Hedging time deposits		85,000		192		95,000		47
Hedging long-term debt		150,000		31		100,000		(390	)
Derivatives Not Designated as Hedges:
Receive fixed swaps		—		—		73,300		(1,496	)
Customer initiated swaps and corresponding offsets		505,332		—		378,590		—
Total	$	764,332	$	237	$	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
	September 30,			June 30,			March 31,			December 31,			September 30,
	2007			2007			2007			2006			2006
Summary of Operations (thousands)
Net interest income	$	94,873		$	96,777		$	98,341		$	64,010		$	65,645
Provision for loan losses		3,765			31,857			3,500			5,936			1,190
Total fees and other income		30,596			31,278			31,423			24,931			23,544
Investment securities gains (losses)(1)		8			—			(33	)		(7,163	)		—
Noninterest expense(2)		77,343			87,490			83,710			78,788			59,402
Income tax provision		12,605			(911	)		11,029			(3,638	)		7,616
Net income		31,764			9,619			31,492			692			20,981
Taxable equivalent adjustment		4,620			4,629			4,625			3,505			3,413
Cash dividends		21,934			21,960			21,964			12,443			12,435
Per Common Share Data
Basic net income	$	0.42		$	0.13		$	0.42		$	0.02		$	0.49
Diluted net income		0.42			0.13			0.41			0.02			0.49
Cash dividends		0.290			0.290			0.290			0.290			0.290
Market value (end of period)		16.11			18.30			22.16			26.50			26.26
Book value (end of period)		20.65			20.28			20.78			20.58			15.72
At Period End (millions)
Assets	$	13,223		$	13,247		$	13,317		$	14,003		$	7,748
Portfolio loans		9,219			9,216			9,178			9,231			5,753
Deposits		7,942			8,082			8,461			8,698			5,625
Shareholders’ equity		1,562			1,534			1,572			1,558			674
Average for the Quarter (millions)
Assets	$	13,165		$	13,241		$	13,574		$	7,770		$	7,723
Portfolio loans		9,163			9,170			9,179			5,762			5,694
Deposits		8,049			8,157			8,525			5,597			5,680
Shareholders’ equity		1,536			1,551			1,552			683			659
Ratios (annualized)
Return on average assets		0.96	%		0.29	%		0.94	%		0.04	%		1.08	%
Return on average shareholders’ equity		8.20			2.49			8.23			0.40			12.63
Average equity to average assets		11.67			11.72			11.43			8.79			8.53
Net interest margin (FTE)(3)		3.39			3.44			3.44			3.67			3.78
Efficiency ratio(4)		59.45			65.94			62.29			85.23			64.15
Net loans charged off to average portfolio loans		0.34			0.87			0.15			0.52			0.19
Allowance for loan losses to portfolio loans		1.92			1.97			1.84			1.83			1.97
Nonperforming assets to portfolio loans plus ORAA (end of period)		2.06			1.58			1.25			1.10			0.69
Nonperforming assets to total assets (end of period)		1.44			1.10			0.86			0.73			0.52
Leverage ratio(5)		7.49			7.33			7.64			7.22			8.29
Tier 1 capital ratio		9.28			9.09			9.89			9.41			10.13
Total capital ratio		11.78			11.59			12.42			11.90			13.37

(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 $1.0 million during the third quarter of 2007, $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 29, 2006.

21

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 nine month periods ended September 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 and residential 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.

22

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

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

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

• 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

23

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.

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 $31.8 million for the three months ended September 30, 2007, which includes restructuring and merger-related expenses associated with the Republic merger. The results for the third quarter of 2007 represent an increase of $22.1 million over the third quarter of 2006 net income of $9.6 million. Diluted net income per share was $0.42, a decrease of $0.07 per share from the same quarter of last year. Annualized returns on average assets and average equity during the third quarter of 2007 were 0.96% and 8.20%, respectively, compared with 1.08% and 12.63% for the third quarter of 2006.

Net income for the first nine months of 2007 totaled $72.9 million or $0.96 per diluted share, which represents an increase in net income of $10.2 million and a decrease of $0.50 per diluted share from the same period of 2006.

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. For example, Citizens’ noninterest expenses decreased by $10.1 million during the third quarter of 2007 compared with the previous quarter. The third quarter of 2007 included $1.0 million in restructuring and merger-related expenses, compared with $8.0 million of restructuring and merger-related and other expenses related to integration activities in the second quarter of 2007.

Total assets at September 30, 2007 were $13.2 billion, a decrease of $779.5 million or 5.6% from December 31, 2006 and an increase of $5.5 billion over September 30, 2006. Total assets decreased from December 31, 2006 primarily as a result of selling $362.7 million in investment securities, using maturing investment securities cash flow to reduce short-term borrowings, 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 reducing loans held for sale by $26.0 million 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 September 30, 2006. The increase in total portfolio loans over September 30, 2006 was almost entirely due to the Republic merger and, to a lesser extent, growth in legacy Citizens commercial loans, partially offset by declines in the legacy Citizens residential mortgage and direct consumer loan portfolios.

Total deposits at September 30, 2007 decreased $756.3 million or 8.7% from December 31, 2006 to $7.9 billion and increased $2.3 billion over September 30, 2006. Core deposits, which exclude all time deposits, totaled $4.0 billion at September 30, 2007, a decrease of $390.4 million or 8.8% from December 31, 2006 and an increase of $936.2 million over September 30, 2006. The decrease in core deposits from December 31, 2006 was primarily a result of divesting seven branches at the time of the computer system conversion during the second quarter of 2007, 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 in the second quarter of 2007, Citizens not renewing a $40.0 million wholesale money market deposit account, and, to a lesser extent, clients holding lower transaction account balances and 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. The increase over September 30, 2006 was primarily the result of incorporating Republic balances. Time deposits totaled $3.9 billion at September 30, 2007, a decrease of $365.9 million or 8.6% from December 31, 2006 and an increase of $1.4 billion over September 30, 2006. The decrease from December 31, 2006 was primarily the result of a $294.0 million decline in brokered certificates of deposit, the aforementioned branch divestiture and, to a lesser extent, new production from clients not exceeding maturities. In addition to the impact of the Republic merger, the increase over September 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.

24

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 nine months ended September 30, 2007 and 2006 is presented below.

25

Average Balances/Net Interest Income/Average Rates

	2007								2006
Three Months Ended September 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	2,822		$	53		7.44	%	$	2,048		$	21		4.08	%
Investment securities(3):
Taxable		1,650,012			21,238		5.15			1,059,177			11,960		4.52
Tax-exempt		672,679			7,310		6.69			449,364			5,278		7.23
FHLB and Federal Reserve stock		139,504			1,603		4.56			56,782			614		4.30
Portfolio Loans(4):
Commercial		2,135,927			38,704		7.31			1,740,592			32,523		7.54
Commercial real estate		3,084,792			60,203		7.75			1,458,104			26,674		7.26
Residential mortgage		1,472,544			24,276		6.59			545,907			7,852		5.75
Direct consumer		1,617,340			32,110		7.88			1,093,724			21,213		7.69
Indirect consumer		852,885			14,511		6.75			855,229			14,356		6.66
Total portfolio loans		9,163,488			169,804		7.39			5,693,556			102,618		7.20
Loans held for sale		79,333			1,846		9.18			16,743			253		6.04
Total earning assets(3)		11,707,838			201,854		7.01			7,277,670			120,744		6.78
Nonearning Assets
Cash and due from banks		209,278								165,403
Bank premises and equipment		132,459								119,246
Investment security fair value adjustment		(5,393	)							(12,203	)
Other nonearning assets		1,301,482								287,431
Allowance for loan losses		(180,394	)							(114,302	)
Total assets	$	13,165,270							$	7,723,245
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	811,955		$	1,325		0.65	%	$	753,412		$	1,219		0.64	%
Savings deposits		2,165,386			16,384		3.00			1,511,956			10,724		2.81
Time deposits		3,928,215			46,671		4.71			2,489,653			28,061		4.47
Short-term borrowings		465,980			5,439		4.63			321,140			3,596		4.44
Long-term debt		2,982,035			37,162		4.95			979,522			11,499		4.67
Total interest-bearing liabilities		10,353,571			106,981		4.10			6,055,683			55,099		3.61
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,143,917								925,004
Other liabilities		131,837								83,749
Shareholders’ equity		1,535,945								658,809
Total liabilities and shareholders’ equity	$	13,165,270							$	7,723,245
Net Interest Income				$	94,873							$	65,645
Interest Spread(5)							2.91	%							3.17	%
Contribution of noninterest bearing sources of funds							0.48								0.61
Net Interest Margin(5)(6)							3.39	%							3.78	%

(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 September 30, 2007 and 2006, respectively, based on a 35% tax rate.
(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
Nine Months Ended September 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest(1)		Rate(2)
Earning Assets
Money market investments	$	2,150		$	89		5.53	%	$	1,703		$	34		2.69	%
Investment securities(3):
Taxable		1,770,676			67,337		5.07			1,095,624			37,267		4.54
Tax-exempt		670,504			21,947		6.71			447,842			15,854		7.26
FHLB and Federal Reserve stock		135,122			4,736		4.68			56,235			1,981		4.71
Portfolio Loans(4):
Commercial		2,055,575			113,988		7.54			1,697,656			90,834		7.28
Commercial real estate		3,112,813			179,722		7.72			1,433,563			75,996		7.09
Residential mortgage loans		1,504,709			74,947		6.64			544,065			23,354		5.72
Direct consumer		1,656,050			97,239		7.85			1,106,930			61,825		7.47
Indirect consumer		841,640			42,400		6.74			839,972			41,621		6.62
Total portfolio loans		9,170,787			508,296		7.44			5,622,186			293,630		7.02
Loans held for sale		105,815			6,518		8.17			18,191			785		5.75
Total earning assets(3)		11,855,054			608,923		7.02			7,241,781			349,551		6.64
Nonearning Assets
Cash and due from banks		195,503								162,992
Bank premises and equipment		137,428								120,407
Investment security fair value adjustment		(677	)							(11,377	)
Other nonearning assets		1,310,611								283,619
Allowance for loan losses		(172,711	)							(115,235	)
Total assets	$	13,325,208							$	7,682,187
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	851,704		$	4,389		0.69	%	$	799,570		$	3,854		0.64	%
Savings deposits		2,202,134			48,827		2.96			1,477,773			28,154		2.55
Time deposits		4,046,052			141,799		4.69			2,386,736			74,293		4.16
Short-term borrowings		702,992			25,504		4.85			399,412			12,727		4.26
Long-term debt		2,676,820			98,413		4.91			958,992			31,413		4.38
Total interest-bearing liabilities		10,479,702			318,932		4.07			6,022,483			150,441		3.34
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,142,272								920,992
Other liabilities		156,845								85,182
Shareholders’ equity		1,546,389								653,530
Total liabilities and shareholders’ equity	$	13,325,208							$	7,682,187
Net Interest Income				$	289,991							$	199,110
Interest Spread(5)							2.95	%							3.30	%
Contribution of noninterest bearing sources of funds							0.47								0.56
Net Interest Margin(5)(6)							3.42	%							3.86	%

(1)	Interest income is shown on actual basis and does not include taxable equivalent adjustments.
(2)	Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $13.9 million and $10.2 million for the nine months ended September 30, 2007 and 2006, respectively, based on a 35% tax rate.
(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.

27

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 $94.9 million for the third quarter of 2007 compared with $65.6 million for the third quarter of 2006. The increase in net interest income resulted from an increase in average earning assets of $4.4 billion, partially offset by a decrease in net interest margin to 3.39% compared with 3.78% in the third 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 third 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, the movement of commercial loans to nonperforming status, 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 nine months ended September 30, 2007, net interest income was $290.0 million compared with $199.1 million for the same period 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 3.42% compared with 3.86% for the nine months ended September 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 third quarter of 2006.

28

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

Analysis of Changes in Interest Income and Interest Expense

	Three Months Ended September 30,								Nine Months Ended September 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	$	32	$	22		$	10		$	55	$	44		$	11
Investment securities:
Taxable		9,278		1,860			7,418			30,070		4,834			25,236
Tax-exempt		2,032		(420	)		2,452			6,093		(1,273	)		7,366
FHLB and Federal Reserve stock		989		41			948			2,755		(10	)		2,765
Loans:
Commercial		6,181		(1,009	)		7,190			23,154		3,409			19,745
Commercial real estate		33,529		1,895			31,634			103,726		7,333			96,393
Residential mortgage loans		16,424		1,302			15,122			51,593		4,295			47,298
Direct consumer		10,897		513			10,384			35,414		3,318			32,096
Indirect consumer		155		194			(39	)		779		696			83
Total portfolio loans		67,186		2,895			64,291			214,666		19,051			195,615
Loans held for sale		1,593		201			1,392			5,733		467			5,266
Total		81,110		4,599			76,511			259,372		23,113			236,259
Interest Expense:
Deposits:
Interest-bearing demand		106		11			95			535		275			260
Savings		5,660		757			4,903			20,673		5,178			15,495
Time		18,610		1,594			17,016			67,506		10,350			57,156
Short-term borrowings		1,843		158			1,685			12,777		1,970			10,807
Long-term debt		25,663		750			24,913			67,000		4,285			62,715
Total		51,882		3,270			48,612			168,491		22,058			146,433
Net Interest Income	$	29,228	$	1,329		$	27,899		$	90,881	$	1,055		$	89,826

(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 increases in net interest income of $29.2 million and $90.9 million for the three and nine months ended September 30, 2007, respectively, compared with the same periods of 2006 reflect rate and volume variances which were favorable in the aggregate.

For both comparison periods, 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 Republic merger as well as organic growth in time deposits.

For both comparison periods, favorable rate variances on assets were partially offset by unfavorable rate variances on liabilities. 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. The unfavorable rate variance for commercial loans in the three month period was the result of commercial loans moving to nonperforming status.

For the fourth quarter of 2007, Citizens anticipates net interest income will be slightly lower than the third quarter of 2007 due to the continued migration of funds from lower yielding deposit products into higher yielding deposit products, as well as the effects of loan pricing pressure, the full-quarter impact of the movement of commercial real estate loans to nonperforming status during the third quarter of 2007, the flat interest rate curve, and stable to declining average earning assets due to the economic environment.

29

Noninterest Income

Noninterest income for the third quarter of 2007 was $30.6 million, an increase of $7.1 million over the third quarter of 2006. The increase over the third quarter of 2006 was almost entirely due to incorporating Republic revenue and, to a lesser extent, growth in legacy Citizens’ revenue stream. For the first nine months of 2007, noninterest income totaled $93.3 million, an increase of $20.4 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									Nine Months Ended
	September 30,				Change in 2007					September 30,					Change in 2007
(dollars in thousands)	2007		2006		Amount		Percent			2007			2006		Amount			Percent
Service charges on deposit accounts	$	12,515	$	9,674	$	2,841		29.4	%	$	35,701		$	28,070	$	7,631			27.2	%
Trust fees		4,973		4,633		340		7.3			14,931			14,647		284			1.9
Mortgage and other loan income		2,939		2,267		672		29.6			13,334			6,383		6,951			108.9
Brokerage and investment fees		2,141		1,885		256		13.6			5,872			5,103		769			15.1
ATM network user fees		1,601		988		613		62.1			4,820			2,993		1,827			61.0
Bankcard fees		1,695		1,213		482		39.7			4,318			3,399		919			27.0
Other income		4,732		2,884		1,848		64.1			14,321			12,203		2,118			17.4
Total fees and other income		30,596		23,544		7,052		30.0			93,297			72,798		20,499			28.2
Investment securities gains		8		—		8		—			(25	)		61		(86	)		(140.4	)
Total noninterest income	$	30,604	$	23,544	$	7,060		30.0		$	93,272		$	72,859	$	20,413			28.0

The increases in service charges on deposit accounts over the three- and nine-month periods of 2006 were almost entirely due to incorporating Republic activity and, to a lesser extent, legacy Citizens’ revenue enhancement initiatives implemented in the first quarter of 2006.

The increases in trust fees over the three- and nine-month periods of 2006 were primarily a result of the overall strength in the financial markets during 2007. Total trust assets under administration were $2.8 billion at September 30, 2007, an increase of $0.2 billion over September 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 nine month periods of 2006 were primarily due to incorporating Republic activity.

The increases in brokerage and investment fees over the three- and nine-month periods of 2006 were primarily the result of promoting the financial consultants as “retirement income professionals” through community seminars and targeted mailings, training legacy Republic branch staff and hiring new financial consultants to support the Republic franchise on this product line during the first quarter of 2007.

The increases in ATM network user fees and Bankcard fees over the three- and nine-month periods of 2006 were primarily the result of incorporating Republic activity and additional transaction-based ATM and bankcard usage fees due to a rate increase during 2007.

For the third quarter of 2007, all other noninterest income categories, which includes other income and investment securities gains (losses), totaled $4.7 million, an increase of $1.9 million over the third quarter of 2006. The increase over the third quarter of 2006 was primarily the result of incorporating Republic activity. For the first nine months of 2007, all other noninterest income categories totaled $14.3 million, an increase of $2.0 million over the same period of 2006. In addition to incorporating Republic activity, the increase was the result of a $1.0 million unrealized gain on deferred compensation plan assets (with an offset in salaries and employee benefits) recorded in the second quarter of 2007, partially offset by the aforementioned deferred gain on the former downtown Royal Oak, Michigan office and a $0.6 million loss related to the holding company’s 1998 venture capital investment in a limited partnership which occurred in the second quarter of 2007.

Citizens anticipates total noninterest income for the fourth quarter of 2007 will be consistent with or slightly lower than the third quarter of 2007 due to an anticipated decrease in mortgage loan origination.

30

Noninterest Expense

Noninterest expense for the third quarter of 2007 was $77.3 million, an increase of $17.9 million over the third quarter of 2006. This increase was primarily the result of incorporating Republic activity and restructuring and merger-related expenses, as well as higher professional services expenses. The third quarter of 2007 included $1.0 million in restructuring and merger-related expenses.

For the first nine months of 2007, noninterest expense totaled $248.5 million, compared with $181.0 million for the same period of 2006. The increase was primarily the result of incorporating Republic activity, $8.6 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, and to a lesser extent higher professional services and legacy Citizens data processing services and telephone expenses, 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										Nine Months Ended
	September 30,				Change in 2007						September 30,				Change in 2007
(dollars in thousands)	2007		2006		Amount			Percent			2007		2006		Amount		Percent
Salaries and employee benefits	$	42,115	$	32,569	$	9,546			29.3	%	$	132,251	$	97,515	$	34,736		35.6	%
Occupancy		7,377		5,604		1,773			31.6			23,363		16,837		6,526		38.8
Professional services		5,096		3,486		1,610			46.2			13,599		11,267		2,332		20.7
Equipment		3,227		3,191		36			1.1			10,793		9,658		1,135		11.8
Data processing services		3,724		3,779		(55	)		(1.4	)		12,360		11,232		1,128		10.0
Advertising and public relations		1,003		1,211		(208	)		(17.2	)		6,070		4,179		1,891		45.2
Postage and delivery		1,777		1,559		218			14.1			5,937		4,650		1,287		27.7
Telephone		2,155		1,394		761			54.5			5,937		4,250		1,687		39.7
Other loan expenses		1,245		1,407		(162	)		(11.5	)		3,237		3,040		197		6.5
Stationery and supplies		466		653		(187	)		(28.7	)		2,111		2,011		100		4.9
Intangible asset amortization		2,803		725		2,078			286.6			8,875		2,174		6,701		308.2
Restructuring and merger-related expenses		1,009		—		1,009			—			8,603		—		8,603		—
Other expenses		5,346		3,824		1,522			39.8			15,407		14,226		1,181		8.3
Total noninterest expense	$	77,343	$	59,402	$	17,941			30.2		$	248,543	$	181,039	$	67,504		37.3

The increase in salaries and employee benefits over the third quarter of 2006 was due to incorporating Republic activity and higher legacy Citizens costs related to incentive expense and hospitalization expenses, partially offset by lower pension expense. Salary costs included $0.2 million in severance for the third quarter of 2007 and $0.3 million for the third quarter of 2006. Citizens had 2,332 full-time equivalent employees at September 30, 2007. For the first nine months of 2007, salaries and employee benefits totaled $132.3 million, an increase of $34.7 million over the same period of 2006. The increase was primarily the result of incorporating Republic activity as well as a $1.0 million increase in the deferred compensation obligation (with an offset in other income) which occurred in the second quarter of 2007 and $2.4 million in employee separation agreements paid during the second quarter of 2007 (including the settlement between Citizens and its former chief operating officer).

The increases in occupancy costs over the three- and nine-month periods of 2006 were primarily the result of incorporating Republic activity, partially offset by the cost savings associated with the nineteen branch locations closed at the time of the computer system conversion during the second quarter of 2007.

The increases in professional services over the three- and nine-month periods of 2006 were primarily the result of incorporating Republic activity, as well as higher professional services expenses due to utilizing external providers for several operational functions and higher legal, audit and examination fees.

The increase in equipment costs over the nine month period of 2006 was 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 the removal of legacy Republic computer systems and equipment in connection with the second quarter of 2007 computer system conversion.

The increase in data processing services over the nine month period of 2006 was the result of implementing enhanced technology initiatives related to customer online banking functionality.

31

The decrease in advertising and public relations expense from the third quarter of 2006 was due to fewer advertising campaigns. The increase in advertising and public relations expense over the nine month period of 2006 was primarily the result of a $1.3 million advertising campaign to introduce Citizens’ brand in new Michigan markets and Ohio during the second quarter of 2007 and expenses related to the Citizens 400 NASCAR race sponsorship.

The increases in postage and delivery over the three- and nine-month periods of 2006 were primarily the result of incorporating Republic activity, partially offset by the cost savings associated with the aforementioned branch closures.

The increases in telephone expense over the three and nine month periods of 2006 were due to incorporating Republic activity.

The decrease in other loan expenses from the third quarter of 2006 was primarily the result of the lower provisioning to fund the reserve for unused loan commitments, partially offset by incorporating Republic activity. For the first nine months of 2007, other loan expenses increased as a result of incorporating the Republic activity and higher other mortgage processing fees due to the alliance with PHH Mortgage, partially offset by lower expenses related to processing commercial loans. Citizens discontinued its alliance with PHH Mortgage in the second quarter of 2007. This change did not have a material impact on other loan expense for the nine month period.

The increases in intangible asset amortization over the three- and nine-month periods of 2006 were the result of amortizing the implied premium on the Republic core deposits, which was established as part of the purchase accounting fair market value adjustments, over the estimated term of the underlying deposits.

For the third quarter of 2007, all other noninterest expense categories, which include stationery and supplies, restructuring and merger-related expenses, and other expense, totaled $6.8 million, an increase of $2.3 million over the third quarter of 2006. The increase over the third quarter of 2006 was primarily the result of incorporating the Republic activity, $1.0 million in restructuring and merger-related expenses, and higher lockbox expenses due to increased customer transaction volume. For the first nine months of 2007, all other noninterest expense categories totaled $26.1 million, an increase of $9.9 million over the same period of 2006. The increase was primarily the result of incorporating Republic activity, $8.6 million in restructuring and merger-related expenses, 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 fourth quarter of 2007 will be slightly lower than the third quarter of 2007 due to lower salaries and employee benefits and professional services.

Income Taxes

Income tax provision for the third quarter of 2007 was $12.6 million, an increase of $5.0 million over the third quarter of 2006. The effective tax rate for the third quarter of 2007 was 28.41% compared with 26.63% for the third quarter of 2006. The increases were mainly due to higher pre-tax income. For the first nine months of 2007, income tax provision totaled $22.7 million, a decrease of $0.2 million from the same period of 2006. The effective tax rate for the first nine months of 2007 was 23.77% compared with 26.82% for the same period of 2006. The decreases were primarily the result of an increase in permanent favorable tax adjustments to pre-tax income in 2007 compared with 2006 resulting from higher tax-exempt interest and bank owned life insurance from the Republic merger and a reduction in taxes payable from the resolution of certain multi-state nexus issues.

Citizens’ anticipates the effective tax rate for the full year of 2007 to be approximately 22% - 25%.

Lines of Business Results

On July 31, 2007, Citizens announced a new management structure designed to expand and grow client relationships and focus on revenue generation. The Commercial, Regional Banking and Wealth Management lines of business are now served through six geographic regions, each managed by a region president. The commercial real estate, asset based lending, commercial products sales, and trust teams continue to be managed centrally. Additionally, a new shared services group has been developed to support Citizens’ sales and service efforts. At this time, Citizens is beginning to transition its management reporting to the new management structure and is expected to be complete by the end of 2007.

32

For the three and nine months ended September 30, 2007 and 2006, Citizens believes that the previous Commercial Banking, Consumer Banking, Wealth Management and Other business lines are still a valid means of segmenting the Corporation and provide meaningful information. This view aligns with the reporting currently being used by its key decision makers in evaluating the performance of the Corporation. For the three and nine months ended September 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.

Citizens monitors financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. For additional information about each line of business, see Note 17 to the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K and Note 12 to the unaudited Consolidated Financial Statements in this report. A summary of net income by each business line is presented below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2007			2006			2007			2006
Commercial Banking	$	21,869		$	12,186		$	43,294		$	33,328
Consumer Banking		11,793			9,122			34,401			28,280
Wealth Management		1,181			738			2,618			2,317
Other		(3,079	)		(1,065	)		(7,438	)		(1,281	)
Net Income	$	31,764		$	20,981		$	72,875		$	62,644

Commercial Banking

Net income increased for both the three- and nine-month periods ended September 30, 2007, compared with the same periods of the prior year. The increase in net income for both periods was a result of higher net interest income and higher noninterest income, partially offset by higher noninterest expense. Provision for loan losses was essentially unchanged for the three month period and higher in the nine month period. The increase in net interest income for both the three- and nine-month periods was primarily a result of incorporating Republic activity as well as from growth of commercial loan balances in the legacy Citizens Wisconsin and Southeast Michigan markets. The increases in noninterest income and noninterest expense in both the three- and nine-month periods was almost entirely the result of incorporating Republic activity. The increase in provision for loan losses in the nine month period was primarily the result of higher commercial real estate charge-offs, primarily in the land development and construction segments as a result of credit quality issues in the post-merger commercial real estate loan portfolio.

Consumer Banking

Net income increased for both the three- and nine-month periods ended September 30, 2007, compared with the same periods of the prior year. The increase in net income for both periods was a result of higher net interest income and higher noninterest income, partially offset by higher provision for loan losses and higher noninterest expense. The increase in net interest income for both the three- and nine-month periods was primarily the result of incorporating Republic activity, partially offset by declining balances in the consumer loan portfolio due to weak consumer demand. For both the three- and nine-month periods, increases in noninterest income were almost entirely the result of incorporating Republic activity. The increase in noninterest expense in both periods was primarily the result of incorporating Republic activity along with higher intangible asset amortization expense related to the amortization of the implied premium on the Republic core deposits, partially offset by the effect of closing nineteen branch locations during the second quarter of 2007. The increase in provision for loan losses in both the three- and nine-month periods was primarily the result of higher residential mortgage and other direct consumer loan related charge-offs.

Wealth Management

Net income increased for both the three- and nine-month periods ended September 30, 2007, compared with the same periods of the prior year. The increase in net income for both periods was primarily a result of higher noninterest income, partially offset by slightly lower net interest income. The increase in noninterest income in

33

both the three- and nine-month periods was primarily the result of increased brokerage fees due to hiring new financial consultants in 2007 to support the Republic branches and higher trust fees due to the overall strength of the financial markets during 2007. Noninterest expense was essentially unchanged in both the three and six month periods.

Other

Net income decreased for the three- and nine-month periods ended September 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 higher noninterest income. The increase in noninterest expense was primarily 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 primarily 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 September 30, 2007 were $13.2 billion, a decrease of $779.5 million or 5.6% from December 31, 2006 and an increase of $5.5 billion over September 30, 2006. Total assets decreased from December 31, 2006 primarily as a result of selling $362.7 million in investment securities, using maturing investment securities cash flow to reduce short-term borrowings, 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 September 30, 2006. The increase in total portfolio loans over September 30, 2006 was almost entirely due to the Republic merger and, to a lesser extent, growth in legacy Citizens commercial loans, partially offset by declines in the legacy Citizens residential mortgage and direct consumer loan portfolios.

Investment Securities

Investment securities at September 30, 2007 decreased $649.1 million or 22.0% from December 31, 2006 to $2.3 billion and increased $818.2 million over September 30, 2006. The decrease from December 31, 2006 was primarily the result of selling $362.7 million of mortgage-backed securities, collateralized mortgage obligations, and callable agency bonds and using portfolio cash flow to reduce short-term borrowings. The increase over September 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 September 30, 2006. The increase over September 30, 2006 was almost entirely due to the Republic merger and, to a lesser extent, growth in legacy Citizens commercial loans, partially offset by declines in the legacy Citizens residential mortgage and direct consumer loan portfolios.

Total commercial loans at September 30, 2007 were $5.3 billion, an increase of $179.2 million or 3.5% over December 31, 2006 and an increase of $2.0 billion over September 30, 2006. The increases were a result of new relationships in Ohio, Wisconsin and central and northern Michigan and continued strong growth in the Southeast Michigan market. Additionally, the increase over September 30, 2006 was primarily due to the impact of incorporating Republic loans and, to a lesser extent, growth in legacy Citizens markets.

34

The following table displays historical commercial loan portfolios by segment:

Commercial Loan Portfolio

	Sept 30,		Dec 31,		Sept 30,
in millions	2007		2006		2006*
Land Hold	$	78.9	$	102.4	$	22.1
Land Development		161.0		203.6		65.7
Construction		376.3		445.5		135.3
Income Producing		1,338.8		1,237.1		501.4
Owner-Occupied		1,113.5		1,132.0		744.5
Total Commercial Real Estate		3,068.5		3,120.6		1,469.0
Commercial and Industrial		2,236.2		2,004.9		1,788.9
Total Commercial Loans	$	5,304.7	$	5,125.5	$	3,257.9

* Legacy Citizens only

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 September 30, 2007 were $1.5 billion, a decrease of $82.5 million or 5.4% from December 31, 2006 and an increase of $915.8 million over September 30, 2006. The decrease from December 31, 2006 was primarily due to weak consumer demand in Citizens’ markets and selling over 75% of new fixed rate production into the secondary market. The increase over September 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 of fixed and adjustable rate mortgages and the related transfer to the investment securities portfolio during the fourth quarter of 2006.

Total consumer loans, which are comprised of direct and indirect loans, were $2.5 billion at September 30, 2007, a decrease of $108.5 million or 4.2% from December 31, 2006 and an increase of $503.2 million over September 30, 2006. Direct consumer loans, which include direct installment, home equity, and other consumer loans, decreased $119.3 million or 6.9% from December 31, 2006 as balances continue to decline due to weak consumer demand that is being experienced throughout the industry. Direct consumer loans increased over September 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 $851.4 million, essentially unchanged from December 31, 2006 and September 30, 2006.

In recognition of the evolving developments in the automotive sector, Citizens monitors the Corporation’s commercial exposure to the manufacturers and tier suppliers in that industry. Citizens also reviews consumer loan exposure with respect to loans to borrowers who have some level of income reliance from this sector. As a result of these analyses, Citizens has determined that the combined commercial and consumer exposure for this industry is less than ten percent of the total loan exposure for the Corporation and the risk associated with this industry has been appropriately considered in the Allowance for Loan Losses.

Based on concerns regarding the Midwest economy and deterioration in commercial real estate values this year, Citizens has reviewed the legacy Republic commercial real estate loan portfolio 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 September 30, 2007 have increased over December 31, 2006 and the risk associated with this industry has been appropriately considered in the Allowance for Loan Losses. Citizens has incorporated 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.

35

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days, restructured loans, 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 loss in the future. The table below provides a summary of nonperforming assets as of September 30, 2007, December 31, 2006 and September 30, 2006.

Nonperforming Assets

	September 30,			December 31,			September 30,
(in thousands)	2007			2006			2006
Nonperforming Loans
Commercial	$	9,386		$	7,709		$	8,440
Commercial real estate		97,557			14,915			7,835
Total commercial		106,943			22,624			16,275
Residential mortgage		32,824			28,428			10,536
Direct consumer		10,926			6,030			3,972
Indirect consumer		1,806			810			781
Total consumer		12,732			6,840			4,753
Total nonaccrual loans		152,499			57,892			31,564
Loans 90 days past due and still accruing		1,923			767			303
Restructured loans		332			378			391
Total nonperforming portfolio loans		154,754			59,037			32,258
Nonperforming held for sale		5,846			22,846			—
Other Repossessed Assets Acquired (ORAA)		30,395			20,165			7,767
Total nonperforming assets	$	190,995		$	102,048		$	40,025
Nonperforming assets as a percent of portfolio loans plus ORAA(1)		2.06	%		1.10	%		0.69	%
Nonperforming assets as a percent of total assets		1.44			0.73			0.52
Allowance for loan loss as a percent of nonperforming loans		114.35			286.44			350.54
Allowance for loan loss as a percent of nonperforming assets		92.65			165.71			282.51

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

Nonperforming assets totaled $191.0 million at September 30, 2007, an increase of $88.9 million over December 31, 2006 and an increase of $151.0 million over September 30, 2006. The increase over December 31, 2006 reflects higher nonperforming portfolio loans of $95.7 million, primarily in the commercial real estate portfolio, which includes land development, construction and income producing loans. To a lesser extent, the increase reflects higher other repossessed assets acquired which was primarily due to higher foreclosures on residential mortgage loans. These increases were partially offset by lower nonperforming held for sale, which declined by $17.0 million primarily as a result of a nonperforming loans sale completed in the first quarter of 2007. The increase in nonperforming assets over September 30, 2006 was primarily the result of incorporating Republic’s nonperforming assets as well as transitioning all of Republic’s loan portfolios and underwriting practices to be consistent with Citizens’ credit risk management disciplines, partially offset by declines in legacy Citizens nonperforming portfolios. Nonperforming assets at September 30, 2007 represented 2.06% of total loans plus other repossessed assets acquired compared with 1.10% at December 31, 2006 and 0.69% at September 30, 2006. Nonperforming commercial loan inflows were $60.0 million in the third quarter of 2007 compared with $7.5 million in the third quarter of 2006. Nonperforming commercial loan outflows were $22.5 million in the third quarter of 2007 compared with $5.0 million in the third quarter of 2006. Outflows in the third quarter of 2007 primarily consisted of $9.8 million in loans that returned to accruing status, $8.2 million in loan payoffs, and $1.4 million in charged-off loans.

36

The following table displays historical nonperforming commercial loans by loan segment:

Nonperforming Assets

	September 30, 2007					December 31, 2006					September 30, 2006*
			% of					% of					% of
in millions	$		Portfolio			$		Portfolio			$		Portfolio
Land Hold	$	3.0		3.80	%	$	—		—	%	$	—		—	%
Land Development		40.4		25.09			1.6		0.79		$	1.5		2.28
Construction		18.6		4.94			5.3		1.19			—		—
Income Producing		26.5		1.98			0.5		0.04			1.2		0.24
Owner-Occupied		9.0		0.81			7.5		0.66			5.2		0.70
Total Commercial Real Estate		97.5		3.18			14.9		0.48			7.9		0.54
Commercial and Industrial		9.4		0.42			7.7		0.38			8.4		0.47
Total Commercial Loans	$	106.9		2.02	%	$	22.6		0.44	%	$	16.3		0.50	%

* Legacy Citizens only

As presented in the table above, the majority of the nonperforming loan increases have been concentrated in the non-owner-occupied commercial real estate portfolios, with the other loan portfolios showing only slight increases or remaining relatively constant. The commercial real estate nonperforming loans are located primarily in the southeast and central regions of Michigan and the Cleveland and Columbus markets.

Some of the Corporation’s nonperforming loans included in the nonperforming asset table above are considered to be impaired. A loan is considered impaired when Citizens determines that it is probable that all 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. By being consistently proactive in monitoring credits and pre-emptively remediating potential loan issues, Citizens strives to protect shareholder value through all economic cycles. 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
	September 30, 2007					December 31, 2006					September 30, 2006*
			% of					% of					% of
in millions	$		Portfolio			$		Portfolio			$		Portfolio
Land Hold	$	27.0		34.22	%	$	13.8		13.48	%	$	4.3		19.46	%
Land Development		52.3		32.48			50.3		24.71			1.7		2.59
Construction		91.7		24.37			57.0		12.79			5.0		3.70
Income Producing		173.8		12.98			143.0		11.56			44.2		8.82
Owner-Occupied		213.0		19.13			202.9		17.92			107.8		14.48
Total Commercial Real Estate		557.8		18.18			467.0		14.97			163.0		11.10
Commercial and Industrial		362.4		16.21			319.5		15.94			226.2		12.64
Total Watchlist Loans	$	920.2		17.35	%	$	786.5		15.34	%	$	389.2		11.95	%

* Legacy Citizens only

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, a high majority of the accruing watchlist loans are successfully remediated and returned to the commercial relationship officers for ongoing relationship management.

37

In view of Citizens’ analysis of its commercial real estate loans, it will continue its current hands-on watchlist monitoring process and has begun to 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 include comparing lot release schedules to actual performance and early identification of loans with potential collateral deterioration. Of the loans falling within these parameters and already reviewed, less than 15% of the outstanding loans were found to be outside of acceptable parameters and rated a watchlist loan.

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
	September 30, 2007					December 31, 2006					September 30, 2006*
			% of					% of					% of
in millions	$		Portfolio			$		Portfolio			$		Portfolio
Land Hold	$	4.2		5.32	%	$	—		—	%	$	—		—	%
Land Development		18.4		11.43			1.1		0.54			1.6		2.44
Construction		17.6		4.68			11.4		2.56			3.5		2.59
Income Producing		31.2		2.33			6.4		0.52			2.6		0.52
Owner-Occupied		10.8		0.97			12.5		1.10			12.0		1.61
Total Commercial Real Estate		82.2		2.68			31.4		1.01			19.7		1.34
Commercial and Industrial		22.0		0.98			16.8		0.84			23.7		1.32
Total Commercial Loans		104.2		1.96			48.2		0.94			43.4		1.33
Residential Mortgage		37.7		2.58			37.2		2.41			9.0		1.65
Direct Consumer		21.5		1.34			22.4		1.30			10.3		0.94
Indirect Consumer		14.7		1.73			14.8		1.76			12.7		1.48
Total Delinquent Loans	$	178.1		1.93	%	$	122.6		1.33	%	$	75.4		1.31	%

* Legacy Citizens only

The commercial and industrial, residential mortgage, and direct consumer delinquency rates have remained relatively constant since the Republic merger. However, commercial real estate delinquencies have increased 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 nine months ended September 30, 2007 and 2006 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2007			2006			2007			2006
Allowance for loan losses — beginning of period	$	181,118		$	114,560		$	169,104		$	116,400
Provision for loan losses		3,765			1,190			39,122			5,329
Charge-offs		9,990			4,257			38,201			15,046
Recoveries		2,065			1,583			6,933			6,393
Net charge-offs		7,925			2,674			31,268			8,653
Allowance for loan losses — end of period	$	176,958		$	113,076		$	176,958		$	113,076
Portfolio loans outstanding at period end(1)	$	9,219,226		$	5,753,375		$	$9,219,226		$	5,753,375
Average portfolio loans outstanding during period(1)		9,163,488			5,693,556			9,170,787			5,622,186
Allowance for loan losses as a percentage of portfolio loans		1.92	%		1.97	%		1.92	%		1.97	%
Ratio of net charge-offs during period to average portfolio loans (annualize		0.34			0.19			0.46			0.21

⁽¹⁾   Balances exclude mortgage loans held for sale.

38

Net charge-offs totaled $7.9 million or 0.34% of average portfolio loans in the third quarter of 2007 compared with $2.7 million or 0.19% of average portfolio loans in the third quarter of 2006. The increase over the third quarter of 2006 was primarily the result of incorporating the Republic loan portfolios. The following table displays historical net charge-offs by loan segment:

Net Charge-Offs

	Three Months Ended
	September 30, 2007					December 31, 2006*					September 30, 2006*
			% of					% of					% of
in millions	$		Portfolio**			$		Portfolio**			$		Portfolio**
Land Hold	$	—		—	%	$	—		—	%	$	—		—	%
Land Development		0.4		0.99			—		—			—		—
Construction		0.1		0.11			—		—			—		—
Income Producing		0.1		0.03			—		—			—		—
Owner-Occupied		0.6		0.22			1.0		0.35			0.5		0.27
Total Commercial Real Estate		1.2		0.15			1.0		0.26			0.5		0.14
Commercial and Industrial		0.6		0.12			1.8		0.40			0.1		0.02
Total Commercial Loans		1.8		0.14			2.8		0.34			0.6		0.08
Residential Mortgage		1.6		0.43			0.9		0.65			0.2		0.17
Direct Consumer		2.6		0.63			1.6		0.59			0.5		0.18
Indirect Consumer		1.9		0.89			2.3		1.09			1.4		0.65
Total Net Charge-offs	$	7.9		0.34	%	$	7.6		0.52	%	$	2.7		0.19	%

*	Legacy Citizens only
**	Represents an annualized rate.

Similar to the trend displayed in the other credit metrics, the commercial and industrial and direct consumer portfolios continue to perform well and have not resulted in increases in net charge-offs.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date. To assess the adequacy of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of the loan portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical losses on each portfolio category and other qualitative and quantitative factors which could affect probable credit losses. The evaluation process is inherently subjective, as it requires estimates that may be susceptible to significant change and have the potential to affect net income materially. While Citizens continues to enhance its loan loss allocation model and risk rating process, it has not substantially changed its overall approach in the determination of the allowance for loan losses. The Corporation’s methodology for measuring the 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 September 30, 2007, the legacy Republic allowance methodology has been fully transitioned to the legacy Citizens methodology.

The allowance for loan losses totaled $177.0 million or 1.92% of portfolio loans at September 30, 2007, an increase of $7.9 million over December 31, 2006 and an increase of $63.9 million over September 30, 2006. At September 30, 2007, the specific allowance allocated to commercial and commercial real estate credits totaled $18.5 million, compared with $7.6 million at December 31, 2006 and $6.4 million at September 30, 2006. The increases in the specific allowance were attributable to an increase in nonperforming commercial real estate credits. Additionally, the increase over September 30, 2006 was due to including the legacy Republic portfolio.

The total risk allocated allowance was $153.6 million as of September 30, 2007, compared with $152.1 million at December 31, 2006 and $100.3 million at September 30, 2006. The amount allocated to commercial and commercial real estate loans, including construction loans, totaled $100.7 million at September 30, 2007 compared with $94.8 million at December 31, 2006 and $53.6 million at September 30, 2006. The increase from December 31, 2006 was due to higher overall risk factors. The increase from September 30, 2006 was primarily due to including the legacy Republic portfolio. The risk allocated allowance for residential mortgage loans totaled $13.6 million at September 30, 2007, compared with $15.1 million at December 31, 2006 and $7.4 million at

39

September 30, 2006. The decrease from December 31, 2006 was due to a combination of lower balances and risk factors. The increase over September 30, 2006 was due to including the legacy Republic portfolio. The risk allocated allowance for consumer loans totaled $39.3 million at September 30, 2007, compared with $42.2 million at December 31, 2006 and $39.3 million at September 30, 2006. The decrease from December 31, 2006 reflected both lower balances and lower risk factors.

The general valuation allowances decreased to $4.9 million at September 30, 2007 compared with $9.4 million at December 31, 2006 and $6.4 million at September 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 and a reduction in the non real estate consumer factors. The increase over September 30, 2006 was 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 allowance for loan losses is based on the Corporation’s review of the historical credit loss experience and such factors that, in Citizens’ judgment, deserve consideration under existing economic conditions in estimating potential credit losses. While the Corporation considers the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or loss rates.

The provision for loan losses was $3.8 million in the third quarter of 2007 compared with $1.2 million in the third quarter of 2006. For the first nine months of 2007, the provision for loan losses totaled $39.1 million compared with $5.3 million for the same period of 2006. The increases over the three- and nine-month periods of 2006 were due to higher net charge-offs as a result of the credit quality issues in the post-merger commercial real estate loan portfolio.

Citizens anticipates net charge-offs for the fourth quarter of 2007 will be similar to net charge-offs in the second quarter of 2007. However, most of the projected commercial real estate charge-offs already have a specific reserve assigned to them. The provision expense for the fourth quarter of 2007 will be consistent with to higher than the third quarter of 2007 primarily as a result of continued industry-wide pressure on consumer and commercial loan portfolios, particularly those supported by real estate.

Loans Held for Sale

Loans held for sale at September 30, 2007 were $76.4 million, a decrease of $96.5 million or 55.8% from December 31, 2006 and an increase of $64.7 million over September 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 loan sale during the first quarter of 2007 and, to a lesser extent, a reduction in residential mortgage loans held for sale due to weak consumer demand for residential mortgage loan originations and a reduction in the commercial loans held for sale as Citizens reclassified one loan as no longer held for sale and transferred it to the commercial loan portfolio. 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 September 30, 2006 was almost entirely due to incorporating Republic loans, which include residential mortgage loans awaiting sale in the secondary market and $40.1 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 September 30, 2007 totaled $778.5 million, essentially unchanged from December 31, 2006 and an increase of $724.0 million over September 30, 2006. Other intangible assets, which primarily represent a premium on core deposits, totaled $33.2 million at September 30, 2007, a decrease of $12.9 million or 27.9% from December 31, 2006 and an increase of $24.2 million over September 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 continued amortization of the premium assigned to Republic’s core deposits at the merger date and completing the aforementioned branch divestiture.

40

Deposits

Total deposits at September 30, 2007 decreased $756.3 million or 8.7% from December 31, 2006 to $7.9 billion and increased $2.3 billion over September 30, 2006. Core deposits, which exclude all time deposits, totaled $4.0 billion at September 30, 2007, a decrease of $390.4 million or 8.8% from December 31, 2006 and an increase of $936.2 million over September 30, 2006. 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 in the second quarter of 2007, Citizens not renewing a $40.0 million wholesale money market deposit account, and, to a lesser extent, clients holding lower transaction account balances and 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. The increase over September 30, 2006 was primarily the result of incorporating Republic balances. Time deposits totaled $3.9 billion at September 30, 2007, a decrease of $365.9 million or 8.6% from December 31, 2006 and an increase of $1.4 billion over September 30, 2006. The decrease from December 31, 2006 was primarily the result of a $294.0 million decline in brokered certificates of deposit and the aforementioned branch divestiture and, to a lesser extent, new production from clients not exceeding maturities. In addition to the impact of the Republic merger, the increase over September 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 September 30, 2007, Citizens had $300.0 million in brokered deposits, compared with $594.0 million at December 31, 2006 and $287.8 million at September 30, 2006. The decrease from December 31, 2006 was primarily the result a $294.0 million decline in brokered certificates of deposit. The increase from September 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 September 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 $979.1 million at September 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 September 30, 2007 totaled $797.8 million, a decrease of $141.1 million from December 31, 2006 and an increase of $441.8 million over September 30, 2006. The decrease from December 31, 2006 was primarily a result of using maturing investment securities cash flow to reduce short-term borrowings. The increase over September 30, 2006 was due primarily to incorporating Republic balances, partially offset by using maturing investment securities cash flow to reduce short-term borrowings.

Long-term debt consists of advances from the Federal Home Loan Bank (“FHLB”) to the subsidiary banks, debt issued by the Holding Company, and other borrowed funds. Long-term debt at September 30, 2007 totaled $2.8 billion, an increase of $161.8 million or 6.1% over December 31, 2006 due mostly to an increase in FHLB debt, and an increase of $1.8 billion or over September 30, 2006. The increase over September 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.

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 September 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”

41

designation. The Corporation’s capital ratios as of September 30, 2007, December 31, 2006 and September 30, 2006 are presented below.

Capital Ratios

	Regulatory Minimum
				“Well-			September 30,			December 31,			September 30,
	Required			Capitalized”			2007			2006			2006
Risk based:
Tier 1 capital		4.00	%		6.00	%		9.28	%		9.41	%		10.13	%
Total capital		8.00			10.00			11.79			11.90			13.37
Tier 1 Leverage(1)		4.00			5.00			7.49			7.22			8.29

⁽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 September 30, 2007 was $1.6 billion, essentially unchanged from December 31, 2006 and an increase of $887.6 million over September 30, 2006. Book value per common share at September 30, 2007, December 31, 2006, and September 30, 2006 was $20.65, $20.58, and $15.72, respectively. Citizens declared and paid cash dividends of $0.29 per share in the third quarter of 2007, compared with $0.29 per share in the third quarter of 2006. During the first nine months of 2007 the Holding Company repurchased a total of 665,046 shares of common stock for $13.5 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 nine months of 2007, the Holding Company received $76.5 million in dividends from subsidiaries and paid $65.9 million in dividends to its shareholders. As of September 30, 2007, the subsidiary banks are able to pay dividends of $58.3 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 September 30, 2007, there was no outstanding balance on this credit facility. The facility matured in August 2007 and was renewed at that time on substantially similar terms. The credit agreement requires Citizens to maintain certain financial and non-financial covenants including capital adequacy,

42

nonperforming asset levels, and loan loss reserve adequacy. Citizens was in full compliance with all covenants as of September 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 179.32% as of September 30, 2007 compared with 169.42% at December 31, 2006 and 150.98% as of September 30, 2006. Changes in deposit obligations and short-term and long-term debt during the third 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 counterparties to Citizens’ investments and wholesale funding portfolios 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. 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 $108.9 million or 0.8% of total assets as of September 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 September 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 scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis.

43

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

Net interest income simulations were performed as of September 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 1.4% and 4.4%, respectively, from what it would be if rates were to remain at September 30, 2007 levels. An immediate 100 or 200 basis point parallel decline in market rates would be expected to decrease net interest income by 0.5% and 1.7%, respectively, from what it would be if rates were to remain at September 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 Sheets 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 September 30, 2007, Citizens had forward commitments to sell mortgage loans of $75.2 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

44

and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

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

							Maximum Number of
					Total Number of		Shares That May Yet
					Shares Purchased as		Be Purchased Under
					Part of Publicly		The Plans or
	Total Number of		Average Price Paid		Announced Plans or		Programs
Period	Shares Purchased		Per Share		Programs		(a)
July 2007		—		—		—		1,351,154
August 2007		40,000		18.14		40,000		1,311,154
September 2007		70,000		17.45		70,000		1,241,154
Total		110,000		17.70		110,000		1,241,154

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 September 30, 2007, 1,241,154 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^(R). 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.

45

Item 6. Exhibits

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

46

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: November 2, 2007	By	/s/ Charles D. Christy
	Charles D. Christy
	Chief Financial Officer         (principal financial officer and duly authorized officer)

47

10-Q EXHIBIT INDEX

Exhibit No.	Description
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

48