10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009.

or

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

For the transition period from                      to                     

Commission File Number 001-33063

CITIZENS REPUBLIC BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

Registrant’s telephone number, including area code: (810) 766-7500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, no par value	The NASDAQ Global Select Market®
7.50% Trust Preferred Securities (issued by Citizens Funding Trust I)	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2009 was $87,949,671. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are assumed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.

The number of shares outstanding of the registrant’s no par value common stock as of February 25, 2010 was 394,395,139.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Citizens Republic Bancorp, Inc.’s Proxy Statement for its 2010 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

CITIZENS REPUBLIC BANCORP, INC.
2009 Annual Report on Form 10-K

TABLE OF CONTENTS

	Page
PART I
Item 1. Business		3
Item 1A. Risk Factors		13
Item 1B. Unresolved Staff Comments		25
Item 2. Properties		25
Item 3. Legal Proceedings		25
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		26
Item 6. Selected Financial Data		28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		67
Item 8. Financial Statements and Supplementary Data		68
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		116
Item 9A. Controls and Procedures		116
Item 9B. Other Information		119
PART III
Item 10. Directors, Executive Officers and Corporate Governance		119
Item 11. Executive Compensation		119
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		119
Item 13. Certain Relationships and Related Transactions, and Director Independence		120
Item 14. Principal Accounting Fees and Services		120
PART IV
Item 15. Exhibits and Financial Statement Schedules		121
SIGNATURES		122
EXHIBIT INDEX		124
EX-10.55
EX-10.56
EX-12.1
EX-21
EX-23
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1
EX-99.2

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PART I

ITEM 1. BUSINESS

Unless the context indicates otherwise, all references in this Form 10-K to “Citizens” or the “Corporation,” refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the “Holding Company” refer to Citizens Republic Bancorp, Inc. alone. Citizens’ common stock is traded on the NASDAQ (“NASDAQ”) Global Select Market^® under the symbol “CRBC.” Citizens’ principal executive offices are located at 328 South Saginaw Street, Flint, Michigan 48502, and the telephone number is (810) 766-7500. 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 “SEC”), which are also available at the SEC’s website www.sec.gov. The information on Citizens’ website does not constitute a part of this report. Investors may also contact Kristine Brenner, Director of Investor Relations, at the corporate address listed above to receive copies of these reports without charge.

GENERAL

Citizens Republic Bancorp, Inc., incorporated in the State of Michigan in 1980, is a diversified banking and financial services company that is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). Citizens provides a full range of banking and financial services to individuals and businesses through its subsidiaries Citizens Bank and F&M Bank—Iowa (“F&M”). These services include deposit products, loan products, and other consumer-oriented financial services such as safe deposit and night depository facilities, and Automated Teller Machines (“ATMs”). Among the services designed specifically to meet the needs of businesses are various types of specialized financing, treasury management services, and transfer/collection facilities. Citizens also provides wealth management services through Citizens Bank Wealth Management, N.A., and through the affiliate trust department of F&M. The Corporation is not dependent upon any single or limited number of customers, the loss of which would have a material adverse effect on the Corporation. No material portion of the business is seasonal.

At December 31, 2009, Citizens directly or indirectly owned the following subsidiaries:

				Total		Date
	Principal	Number of		Assets		Acquired /
Subsidiary	Office	Offices		(in millions)		Established
Citizens Bank (1)	Flint, MI		219	$	11,318.5		1871
F&M Bank — Iowa (1)	Marshalltown, IA		10		467.9		11/01/99
Citizens Bank Wealth Management, N.A.	Flint, MI		(2)		(2)		03/01/02

(1)	Consolidated totals include its non-bank subsidiaries. F&M had total trust assets under administration of $22.8 million at December 31, 2009. Citizens signed an agreement on January 29, 2010 to sell F&M. See “Recent Developments.”
(2)	Citizens Bank Wealth Management, N.A. conducts business at most Citizens Bank locations and had total assets under administration of $2.1 billion at December 31, 2009.

RECENT DEVELOPMENTS

On January 29, 2010, Citizens entered into a stock purchase agreement with Great Western Bank whereby Great Western Bank agreed to acquire all of the stock of Citizens’ wholly owned subsidiary, F&M. Great Western Bank will pay a purchase price of approximately $50 million in cash, subject to a possible adjustment based upon F&M’s net worth at closing. The transaction includes approximately $132.5 million in net portfolio loans and $408.6 million in deposits. The transaction is expected to close in the second quarter of 2010, subject to certain required regulatory approvals and fulfillment of customary conditions.

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As part of the stock purchase agreement, Citizens will be required to exchange selected loans with F&M at or near the closing date for a cash payment equal to the book value of the specified loans less related allowance for loan losses. As of December 31, 2009, the loans to be exchanged had a net book value of $9.9 million.

On September 23, 2009, Citizens was notified by the NASDAQ Listing Qualifications Department that they could initiate steps to delist Citizens’ common stock from trading on the NASDAQ anytime after March 22, 2010 if the closing bid price of Citizens’ common stock does not exceed $1.00 per share for at least 10 consecutive trading days. The notice was a result of Citizens failing to satisfy the NASDAQ listing requirements that the bid price of Citizens’ common shares not close below $1.00 per share for more than 30 consecutive trading days. Citizens is considering several alternatives, including applying to transfer its stock listing to the NASDAQ Capital Market, which would maintain an active trading market for Citizens’ stock and provide an additional six month grace period to regain compliance, and certain other actions. However, there can be no assurance that these actions will be successful in maintaining the NASDAQ listing.

GEOGRAPHIC LOCATIONS

As of December 31, 2009, Citizens conducts operations through 229 offices and 267 ATM locations throughout Michigan, Wisconsin, Ohio, Iowa, and Indiana with 2,125 full-time equivalent employees. In Michigan, the primary markets are concentrated in the Lower Peninsula, with a small presence in the Upper Peninsula. In Wisconsin, the primary markets include the greater Green Bay Metropolitan area, the Fox Valley region which extends from Appleton to Oshkosh, suburban Milwaukee, and also rural markets in southern and northern Wisconsin. In Ohio, the primary market is the greater Cleveland area. In Iowa, the primary market is the central region of the state. In Indiana, the primary market is Indianapolis.

PRINCIPAL SOURCES OF REVENUE

The Corporation’s primary source of revenue is interest income. The table below shows the amount of total consolidated revenues resulting from interest and fees on loans, interest and dividends on investment securities, money market investments, FHLB and Federal Reserve stock, and noninterest income for each of the last three years:

	Year Ended December 31,
(in thousands)	2009		2008		2007
Interest and fees on loans	$	456,347	$	586,073	$	684,047
Interest and dividends on investment securities, money market investments, FHLB and Federal Reserve stock		112,332		114,838		123,864
Noninterest income		67,421		101,742		122,568
Total revenues	$	636,100	$	802,653	$	930,479

Citizens’ revenue tends to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, and competitive conditions within the marketplace, as well as residential housing markets in the communities Citizens serves.

LINES OF BUSINESS

Citizens’ performance is monitored by an internal profitability measurement system that provides line of business results and key performance measures. Citizens operates along four major business lines: Regional Banking, Specialty Consumer, Specialty Commercial, and Wealth Management. The Regional Banking, Specialty Consumer, and Specialty Commercial business lines are involved in lending activity. Lending involves credit risk which is controlled and monitored through active asset quality management, the use of lending standards, and thorough review of potential borrowers. Credit risk management is discussed in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “Critical Accounting

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Policies,” “Loan Portfolio,” “Credit Risk Management,” “Nonperforming Assets,” “Allowance for Loan Losses,” and “Contractual Obligations and Off-Balance Sheet Arrangements” and under Notes 1, 4, and 16 to the Consolidated Financial Statements.

Additional information regarding the business lines is incorporated herein by reference from “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Line of Business Results” and in Note 15 of the Consolidated Financial Statements.

COMPETITION

The financial services industry is highly competitive. Citizens’ banking subsidiaries compete with other commercial banks, many of which are subsidiaries of other bank holding companies, for loans, deposits, trust accounts and other business on the basis of interest rates, fees, convenience and quality of service. Major competitors include commercial banks, community banks, savings associations and thrifts, finance companies, mortgage banking companies, brokerage firms, insurance companies, credit unions and other organizations.

Mergers between financial institutions and the expansion of financial institutions both within and outside of the primary Midwest banking markets have provided significant competitive pressure in those markets. In addition, the passage of Federal interstate banking legislation has expanded the banking market and heightened competitive forces. The effect of this legislation is further discussed under the caption “Supervision and Regulation.”

Many of Citizens’ offices are located in small cities and rural areas that have diverse economies and a mix of manufacturing, service, retail and agricultural businesses. In many of these localities, Citizens is the largest bank, which is believed to be a competitive advantage. In other markets, Citizens’ competitors may enjoy a competitive advantage, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. Citizens’ competitors may also offer higher interest rates, which could decrease Citizens’ ability to retain existing deposits or attract new deposits or require Citizens to increase its rates to attract deposits.

Other factors such as employee relations and environmental laws also impact the Corporation’s competitiveness. Citizens maintains a favorable relationship with its employees and none of its employees are represented by a collective bargaining group.

SUPERVISION AND REGULATION

General

The banking industry is subject to extensive state and federal regulation and continues to undergo significant change. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on Citizens are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of Citizens. Citizens expects that the financial services industry will remain heavily regulated and that additional laws or regulations may be adopted. The following discussion summarizes certain aspects of the banking laws and regulations that affect Citizens. To the extent that the following information describes statutory or regulatory provisions, it is qualified entirely by reference to the particular statutory or regulatory provision.

The Holding Company is a bank holding company registered with the Federal Reserve Board (“FRB”) and is subject to regulation under the Bank Holding Company Act. The Bank Holding Company Act requires the FRB’s prior approval of an acquisition of assets or of ownership or control of voting shares of any bank or bank holding company if the acquisition would give the holder more than 10% of the voting shares of that bank or bank holding company. It also imposes restrictions, summarized below, on the assets or voting shares of non-banking companies that Citizens may acquire.

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Under FRB policy, a bank holding company is expected to serve as a source of financial strength to each of its subsidiary banks and to stand prepared to commit resources to support each of them. There are no specific quantitative rules on a holding company’s potential liability. If one of Citizens’ subsidiary banks were to encounter financial difficulty, the FRB could invoke the doctrine and require a capital contribution from the Holding Company. In addition, and as a separate legal matter, a holding company is required to guarantee the capital plan of an undercapitalized subsidiary bank. See “Capital Adequacy and Prompt Corrective Action” below.

Citizens’ subsidiary banks are subject to the provisions of the banking laws of their respective states of organization or the National Bank Act. Both of Citizens’ banking subsidiaries are state-chartered banks and are therefore subject to supervision, regulation and examination by state banking regulators; Citizens Bank by the Michigan Office of Financial and Insurance Regulation and F&M by the Iowa Division of Banking. Citizens Bank and F&M are also subject to supervision and examination by the FRB because they are members of the Federal Reserve System and by the Federal Deposit Insurance Corporation (“FDIC”), because the FDIC insures their deposits to the extent provided by law. Citizens Bank Wealth Management, N.A., a national non-depository trust bank, is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (“OCC”). Additionally, the other non-bank subsidiaries are supervised and examined by the FRB and various other federal and state agencies.

Citizens’ insured depository institution subsidiaries are also subject to cross-guaranty liability under federal law. This means that if one FDIC-insured depository institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess “commonly controlled” depository institutions for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed subsidiary institution and on Citizens as the common parent. While the FDIC’s cross-guaranty claim is generally junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is generally superior to the claims of shareholders and affiliates.

Payment of Dividends

There are various statutory restrictions on the ability of Citizens’ banking subsidiaries to pay dividends or make other payments to the Holding Company. Each of the state-chartered banking subsidiaries is subject to dividend limits under the laws of the state in which it is chartered. In addition, Citizens Bank and F&M are member banks of the Federal Reserve System, subject to the dividend limits of the FRB. The FRB allows a member bank 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 approval of the FRB. FRB policy provides that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition.

As a national non-depository trust bank, Citizens Bank Wealth Management, N.A. (“CB Wealth Management”) is subject to the regulations of the OCC regarding limits on dividends paid to the Holding Company. Under such regulations, CB Wealth Management may declare dividends only from its undivided profits, dividends can not reduce surplus funds to a level less than common capital, and dividends may not be declared unless at least 10% of net income for a given time period has been carried to the surplus fund, depending on the frequency of dividend payments in a given year. Approval of the OCC is required if the total of all dividends declared by CB Wealth Management in any calendar year exceed the sum of its net income combined with its retained net income for the preceding two years.

Refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity Risk Management” for Citizens banking subsidiaries’ current dividend capacity to the Holding Company.

On April 17, 2008, Citizens’ Board of Directors voted to suspend the common stock quarterly dividend. On December 12, 2008, Citizens issued fixed-rate cumulative perpetual preferred stock, Series A (the “TARP Preferred Stock”) with liquidation value of $300 million to the U.S. Department of the Treasury (“Treasury”) as part of the Treasury’s Capital Purchase Program. Terms of the issuance prohibit the payment of dividends by the Holding Company without the prior approval of the Treasury until the earlier of December 12, 2011 or such time as Treasury no longer holds the preferred stock.

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On January 28, 2010 Citizens announced that it will suspend the dividend payments on its trust preferred securities and on its TARP Preferred Stock, issued to the Treasury. Refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity Risk Management” for additional information.

Capital Adequacy and Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Regulatory capital requirements for bank holding companies are evaluated using three capital measures: (i) leverage capital expressed as a percentage of total assets, (ii) risk-based capital expressed as a percentage of total risk-weighted assets, and (iii) Tier 1 leverage capital expressed as a percentage of total assets.

Pursuant to the FRB’s regulations implementing the prompt corrective action provisions of FDICIA, a bank will be deemed to be: (i) well-capitalized if the bank has a total risk-based capital ratio of 10% or greater, Tier 1 risk-based capital ratio of 6% or greater and leverage ratio of 5% or greater; (ii) adequately capitalized if the bank has a total risk-based capital ratio of 8% or greater, Tier 1 risk-based capital ratio of 4% or greater and leverage ratio of 4% or greater (3% for the most highly rated banks); (iii) undercapitalized if the bank has a total risk-based capital ratio of less than 8%, Tier 1 risk-based capital ratio of less than 4% or leverage ratio of less than 4% (less than 3% for the most highly rated banks); (iv) significantly undercapitalized if the bank has a total risk-based capital ratio of less than 6%, Tier 1 risk-based capital ratio of less than 3% or leverage ratio of less than 3%; and (v) critically undercapitalized if the bank has a ratio of tangible equity to total assets of 2% or less.

Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately but not well-capitalized cannot accept, renew or rollover brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or rollover brokered deposits.

The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agencies’ corrective powers include, among other things:

• prohibiting the payment of principal and interest on subordinated debt;

• prohibiting the holding company from making distributions without prior regulatory approval;

• placing limits on asset growth and restrictions on activities;

• placing additional restrictions on transactions with affiliates;

• restricting the interest rate the institution may pay on deposits;

• prohibiting the institution from accepting deposits from correspondent banks; and

• in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is in any of the three undercapitalized categories is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

FDICIA also contains a variety of other provisions that may affect Citizens’ operations, including reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.

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At December 31, 2009 and 2008, the most recent notification from the FRB categorized Citizens and all of its depository institution subsidiaries as “well-capitalized” under the regulatory framework for prompt corrective action. Information concerning capital adequacy guidelines for Citizens and its banking subsidiaries including their regulatory capital position at December 31, 2009 and maintenance of minimum average reserve balances by the banking subsidiaries with the FRB is incorporated herein by reference from “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “Capital Resources” and “Liquidity Risk Management” and Note 18 to the Consolidated Financial Statements.

FDIC Insurance Assessments

The FDIC calculates deposit insurance based on a risk-based system that places a bank in one of four risk categories, principally on the basis of its capital level and an evaluation of the bank’s risk to the relevant deposit insurance fund, and bases premiums on the probability of loss to the FDIC with respect to each individual bank. Under the Federal Deposit Insurance Act, depository institutions such as Citizens’ subsidiary banks may not pay interest on indebtedness, if such interest is required to be paid out of net profits, or distribute any of its capital assets while it remains in default on any assessment due to the FDIC.

The calculation of the FDIC assessment includes the Financing Corporation (“FICO”) assessment. FICO was established to finance the Federal Savings and Loan Insurance Corporation resolution fund. All FDIC insured banks are required to pay into this resolution fund through the Deposit Insurance Fund (“DIF”).

Temporary Liquidity Guarantee Program

On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC on October 14, 2008, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for noninterest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participating FDIC-insured institutions through June 30, 2010. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage was 10 basis points per quarter during 2009 on amounts in covered accounts exceeding $250,000 and will increase for the first six months of 2010. The Corporation and two of its subsidiaries, Citizens Bank and F&M participate in these guarantee programs.

Interstate Banking

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal Act”), as amended, a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time (not to exceed five years) and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state, or such lesser or greater amount set by the state. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish de novo branches in other states where authorized under the laws of those states.

Transactions with Affiliates

Transactions between Citizens’ subsidiary banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. The affiliates of the banks include any entity controlled by Citizens. Generally, Sections 23A and 23B (i) limit the extent to which the subsidiary banks may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the Corporation’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of the bank’s capital stock and surplus, (ii) require that a bank’s extensions of credit to such affiliates be fully collateralized (with 100% to 130% collateral coverage, depending on the type of collateral), (iii) prohibit the bank from purchasing or accepting as collateral from an affiliate any “low quality assets” (including nonperforming loans) and (iv) require that all “covered transactions” be on terms substantially the same, or at least as favorable, to the bank or its subsidiary as those

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provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other types of similar transactions.

Loans to Insiders

The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal stockholders of banks. Under Section 22(h) of the Federal Reserve Act and its implementing regulations, loans to a director, an executive officer or a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one-borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed the bank’s unimpaired capital and unimpaired surplus. Section 22(h) and its implementing regulations also prohibit loans, above amounts prescribed by the appropriate federal banking agency to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. Section 22(h) generally requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate income areas, consistent with safe and sound banking practice. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiary.

Fair Lending and Consumer Laws

In addition to CRA, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that in some cases prospective borrowers experience unlawful discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against some depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.

These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act. These factors include evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.

Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of certain loans to customers.

Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. The following description summarizes some of its significant provisions.

The GLBA repealed sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become financial holding

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companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment, merchant banking, insurance underwriting, sales and brokerage activities. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory CRA rating. Citizens has determined not to become certified as a financial holding company at this time. The Corporation may reconsider this determination in the future.

The GLBA provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a non-discriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in specific areas identified under the law. The federal bank regulatory agencies adopted insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures.

The GLBA repealed the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Securities Exchange Act of 1934, as amended. It also identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker,” and a set of activities in which a bank may engage without being deemed a “dealer.” Additionally, the law makes conforming changes in the definitions of “broker” and “dealer” for purposes of the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended.

The GLBA also contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The new law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to “opt out” of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are more strict than those contained in the GLBA.

Anti-Money Laundering and the USA Patriot Act of 2001

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial services companies implement policies and procedures with respect to additional measures designed to address the following matters: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

The Patriot Act also substantially broadened existing anti-money laundering legislation, imposed new compliance and due diligence obligations, created new crimes and penalties, and compelled the production of documents located both inside and outside the United States. The Treasury has issued a number of regulations that apply some of these requirements to financial institutions such as Citizens’ banking subsidiaries. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Pursuant to the Patriot Act and the related regulations, Citizens has established anti-money laundering compliance and due diligence programs that include, among other things, the designation of a Bank Secrecy Act officer, employee training programs and an independent audit function to review and test the program.

EESA and Troubled Asset Relief Capital Purchase Program

In response to the financial crises affecting the financial markets and the banking system, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law and established the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the Treasury announced the Capital Purchase Program (“CPP”) to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and

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consumers and to support the U.S. economy. Under CPP, the Treasury made $250 billion of capital available to U.S. financial institutions in the form of senior preferred stock (“preferred stock”) and warrants which qualify as Tier 1 capital. On December 12, 2008, Citizens issued $300.0 million of TARP Preferred Stock and a warrant to purchase 17,578,125 shares of its common stock at $2.56 per share to the Treasury as part of this program. The preferred stock pays a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The preferred stock is callable at par after three years. Prior to the end of three years, the preferred stock may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Participating financial institutions were required to adopt the Treasury’s standard for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the CPP. These standards generally apply to our chief executive officer, chief financial officer, and our next three most highly compensated executive officers.

The Treasury has been given authority to promulgate regulations under the EESA. Any new regulations implemented by the Treasury under the EESA may be applied retroactively to recipients of TARP funding under the CPP. In addition, the U.S. government could in the future pass new legislation which may have a similar effect. In either case, any such new regulations or legislation may have the effect of imposing additional economic restrictions or obligations on Citizens under the TARP CPP, at least for as long as any of Citizens’ obligations under the CPP remain outstanding.

The Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) was established pursuant to Section 121 of the EESA, and has the duty among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets by the Treasury under TARP and the CPP including the preferred stock purchased from Citizens.

American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on February 17, 2009. ARRA includes a wide variety of programs intended to stimulate the economy. In addition, ARRA imposes new executive compensation and expenditure limits on all previous and future TARP CPP recipients, such as Citizens, and expands the class of employees to whom the limits and restrictions apply. ARRA also provides the opportunity for additional repayment flexibility for existing TARP CPP recipients. The Treasury published interim final rules to implement the compensation and corporate governance provisions of the ARRA effective as of June 15, 2009.

Among other things, ARRA prohibits the payment of bonuses, other incentive compensation and severance to certain of Citizens’ most highly paid employees (except in the form of restricted stock subject to specified limitations and conditions), and requires each TARP recipient to comply with certain other executive compensation related requirements. These provisions modify the executive compensation provisions that were included in the EESA, and in most instances apply retroactively for so long as any obligation arising from financial assistance provided to the recipient under TARP remains outstanding. The new ARRA guidelines generally supersede the executive compensation and corporate governance standards for TARP recipients set forth in the EESA.

In addition, the ARRA directs the Secretary of the Treasury to review previously-paid bonuses, retention awards and other compensation paid to the senior executive officers and certain other highly-compensated employees of each TARP recipient to determine whether any such payments were excessive, inconsistent with the purposes of the ARRA or the TARP, or otherwise contrary to the public interest. If the Secretary determines that any such payments have been made by a TARP recipient, the Secretary will seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursements to the U.S. government (not the TARP recipient) with respect to any such compensation or bonuses. The ARRA also permits the Secretary, subject to consultation with the appropriate federal banking agency, to allow a TARP recipient to repay any assistance previously provided to such TARP recipient under the TARP, without regard to whether the TARP recipient has replaced such funds from any source, and without regard to any waiting period. Any TARP recipient that repays its TARP assistance pursuant to this provision would no longer be subject to the executive compensation provisions under the ARRA.

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Proposed Regulatory Reform

In June 2009, the U.S. President’s administration proposed a wide range of regulatory reforms that, if enacted, may have significant effects on the financial services industry. Significant aspects of the administration’s proposals that may affect Citizens include proposals: (i) to reassess and increase capital requirements for banks and bank holding companies and examine the types of instruments that qualify as regulatory capital; (ii) to combine the OCC and the Office of Thrift Supervision into a National Bank Supervisor with a unified federal bank charter; (iii) to expand the current eligibility requirements for financial holding companies so that they must be “well-capitalized” and “well managed” on a consolidated basis; (iv) to create a federal consumer financial protection agency to be the primary federal consumer protection supervisor with broad examination, supervision, and enforcement authority with respect to consumer financial products and services; (v) to further limit banks’ ability to engage in transactions with affiliates; and (vi) to subject all “over-the-counter” derivatives markets to comprehensive regulation.

The U.S. Congress, state lawmaking bodies, and federal and state regulatory agencies continue to consider a number of wide-ranging and comprehensive proposals to alter the structure, regulation and competitive relationships of the nation’s financial institutions, including rules and regulations related to the administration’s proposals. Separate comprehensive financial reform bills intended to address the proposals set forth by the administration were introduced in both houses of Congress during the second half of 2009 and remain under review. In addition, both the Treasury and the Basel Committee have issued policy statements regarding significant proposed changes to the regulatory capital framework for banking organizations. Citizens cannot predict whether or in what form further legislation or regulations may be adopted or the extent to which Citizens may be affected.

In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies (the “Incentive Compensation Proposal”) intended to ensure that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect a bank’s risk profile, either individually or as part of a group, is based upon the key principles that incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the board of directors. Banks were instructed to begin an immediate review of their incentive compensation policies to ensure that they do not encourage excessive risk-taking and implement corrective programs as needed. Where deficiencies in incentive compensation arrangements exist, they must be immediately addressed.

The Federal Reserve will review, as part of its regular, risk-focused examination process, the incentive compensation of banks, such as Citizens, that are not “large, complex banking organizations.” These reviews will be tailored based on the scope and complexity of the bank’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in its examination reports and deficiencies will be incorporated into the bank’s supervisory ratings, which can affect the bank’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a bank if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and it is not taking prompt and effective measures to correct the deficiencies.

In January 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged with higher deposit assessment rates than such banks would otherwise be charged. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect Citizens’ ability to hire, retain and motivate its key employees.

In addition to the specific proposals described above, various legislative and regulatory initiatives are introduced in Congress and state legislatures from time to time, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change

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banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Citizens cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any impending regulations, would have on Citizens’ financial condition and results of operations. A change in statutes, regulations or regulatory policies applicable to Citizens or any of its subsidiaries could have a material effect on Citizens’ business.

Potential Administrative Action

The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary, recently completed an interim supervisory assessment, pursuant to their continuous supervisory program, based on data as of September 30, 2009. As a result of that examination and based on recent communications with these regulatory authorities, Citizens expects that the Holding Company and Citizens Bank will become subject to the issuance of a formal administrative action, probably in the form of a written agreement, due to their high level of nonperforming assets and the resulting impact on its earnings.

ECONOMIC FACTORS AND MONETARY POLICY

Citizens’ earnings and business are affected by the general economic and political conditions in the United States and abroad and by the monetary and fiscal policies of various federal regulatory authorities, including the Federal Reserve System. Citizens’ policy for addressing credit risk, the effect of the economy on credit risk in 2009, 2008, and 2007 and its potential effect on future periods is discussed in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations under the captions “Critical Accounting Policies,” “Loan Portfolio,” “Credit Risk Management,” “Nonperforming Assets,” and “Allowance for Loan Losses” and incorporated herein by reference. Through open market securities transactions, variations in the Federal Funds rate and the establishment of reserve requirements, the Board of Governors of the Federal Reserve System exerts considerable influence on interest rates and the supply of money and credit. Citizens strives to manage the effects of interest rates through its asset/liability management process but the effect of fluctuating economic conditions and federal regulatory policies on Citizens’ future profitability cannot be predicted with any certainty. The effect of the economy and changes in interest rates on Citizens’ net interest margin and net interest income in 2009, 2008, and 2007 and their potential effect on future periods is discussed in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Interest Income” and is incorporated herein by reference. Citizens’ sensitivity to changes in interest rates and the potential effect of changes in interest rates on net interest income is presented in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk” and incorporated herein by reference.

ENVIRONMENTAL MATTERS

Citizens’ primary exposure to environmental risk is through lending activities and trust services. In each instance, policies and procedures are in place to mitigate environmental risk exposures. With respect to lending activities, Citizens requires environmental site assessments at the time of loan origination to confirm collateral quality on commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are also mandated prior to any foreclosure activity involving non-residential real estate collateral. In the case of trust services, Citizens utilizes various types of environmental transaction screening to identify actual and potential risks arising from any proposed holding of non-residential real estate for trust accounts. Consequently, the Corporation does not anticipate any material effect on capital expenditures, earnings or the competitive position of Citizens or any of its subsidiaries with regard to compliance with federal, state or local environmental protection laws or regulations. Additional information is provided in “Item 3. Legal Proceedings.”

ITEM 1A. RISK FACTORS

Unless otherwise noted or the context indicates otherwise, all references in this Item to “we,” “us,” or “our,” refer to Citizens and its subsidiaries. An investment in our common stock is subject to risks inherent to our business.

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The material risks and uncertainties that we believe affect us are described below. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are not aware of or focused on or currently deem immaterial may also impair business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

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

Making loans is an essential element of our business, and there is a risk that customer loans will not be repaid. The risk of nonpayment is affected by a number of factors, including:

• the duration of the loan;

• credit risks of a particular borrower;

• changes in economic and industry conditions; and

• in the case of a collateralized loan, the potential inadequacy of the value of the collateral in the event of default, such as has resulted from the deterioration in commercial and residential real estate values.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors including, among others, the ongoing review and grading of the loan portfolio, consideration of past loan loss experience as well as that of the banking industry, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, the size and diversity of individual credits, and other qualitative and quantitative factors which could affect probable credit losses. We determine the amount of the allowance for loan losses by considering these factors and by using estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on our historical loss experience with additional qualitative factors for various issues, and allocation of reserves for special situations that are unique to the measurement period with consideration of current economic trends and conditions, all of which are susceptible to significant change. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.

A significant portion of our loan portfolio is secured by commercial and residential real estate. These portfolios are comprised of borrowers primarily located in Michigan, Wisconsin, and Northern Ohio. The Michigan and Northern Ohio markets have been particularly adversely affected by job josses, declines in real estate value, declines in home sale volumes, and declines in new home building. Declining real estate values in our markets have resulted in sharp increases in losses on certain segments of our portfolio, particularly the land hold, land development, and construction loan portfolios. We have ceased extending land hold and land development loans and are working actively to manage our remaining land hold, land development, and construction portfolios. The credit performance of loans secured by commercial income producing properties has recently been negatively affected by tenant losses and reduced rental rates, contributing to the decline in values associated with the income producing loan portfolio. We may suffer further losses in these segments if market conditions continue to deteriorate and our efforts to limit losses through execution of prudent workout strategies are unsuccessful. Although we do not engage in subprime lending, the credit performance of the residential mortgage portfolio has been negatively impacted by borrowers’ loss of or reduction in income. The decline in the residential real estate values, particularly in Michigan and Northern Ohio, and the extended time frame associated with the sale of repossessed residential properties has led to increased loss severity in this loan portfolio.

Increased stress on borrowers’ cash flow due to job loss, reduced rental income, higher interest rates or other factors could lead to even higher payment delinquencies and defaults. Continued declines in real estate values could lead to higher loss severity. Although our most significant loan losses to date have been concentrated in

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our commercial real estate loan portfolio, continued adverse economic conditions could adversely affect other portions of our loan portfolio.

There is no precise method of predicting loan losses, and therefore we always face the risk that charge-offs in future periods will exceed our allowance for loan losses or that additional increases in the allowance for loan losses will otherwise be required. Additions to the allowance for loan losses would cause net income to decline in the period(s) in which such additions occur and could also have a material adverse impact on our capital and financial position.

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

Our businesses face substantial challenges for the foreseeable future. In particular:

• A substantial amount of our lending business originates in Michigan. Of our total portfolio loans, approximately 70% are to borrowers located, or secured by properties, in Michigan and approximately 10% are to borrowers located, or secured by properties, in Ohio. These states have been severely and disproportionately affected by the economic downturn in general, and by the bankruptcy filings of General Motors Corporation, Chrysler LLC and a number of automobile parts suppliers in particular. Unemployment rates in these states have been substantially higher than the national average and real estate collateral values have fallen significantly.

• Our ability to return to a positive net income is largely dependent upon our future credit costs. Our loan portfolios — particularly our commercial real estate and residential mortgage loan portfolios, which have accounted for a disproportionate amount of our loan loss provisions since the fourth quarter of 2008 — continue to be adversely affected by economic conditions and the on-going correction in real estate prices in our markets. A significant portion of our commercial loan portfolio is classified as nonperforming loans or watchlist loans. The latter are loans that have migrated within our loan rating system to a level that requires increased oversight. We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolios. In view of the weakness and uncertainties in the national and regional economies in which we operate and the inherent difficulty in predicting future events, we may find it necessary to continue to take loan loss provisions in future periods in amounts that substantially exceed loan loss provisions in prior periods in order to maintain our allowance for loan losses at a level we deem appropriate.

As a result of the weakness in the economy nationally and particularly in our primary markets, and the effect of this weakness on unemployment rates and the value of real estate collateralizing many of our loans, we have incurred substantial losses, our nonperforming assets and charged-off loans have increased substantially and our capital levels have been adversely affected. These effects have, in turn, hampered our ability to comply with various standards and policies of our various banking regulators which are intended primarily for the protection of depositors and the FDIC, not shareholders or holders of subordinated debt or trust preferred securities. Any failure to comply with laws, regulations or regulatory policies or standards, such as maintenance of capital ratios and reduction of nonperforming asset levels due to the deterioration in our financial condition and operating results, could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business, could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition, results of operations, and stock price.

The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary, recently completed an interim

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supervisory assessment, pursuant to their continuous supervisory program, based on data as of September 30, 2009. As a result of that examination and based on recent communications with these regulatory authorities, we expect that the Holding Company and Citizens Bank will become subject to the issuance of a formal administrative action, probably in the form of a written agreement, due to their high level of nonperforming assets and the resulting impact on its earnings.

Although we do not currently anticipate that compliance with any such administrative action would materially impact our operations, we cannot provide any assurance as to the potential impact of such action on our business, financial condition and results of operations. Any administrative action proposed by the regulators would be designed to remediate certain deficiencies noted by the regulators for the protection of depositors rather than the benefit of shareholders or debt holders. Moreover, if we are unable to comply with the terms of the anticipated supervisory action, we could become subject to additional, heightened supervisory actions and orders. If our regulators were to take such additional actions, we could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities, which could have a material adverse effect on our business, financial condition and results of operations.

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

The banking industry is heavily regulated, and such regulations are intended primarily for the protection of depositors and the federal deposit insurance funds, not shareholders or holders of subordinated debt or trust preferred securities. As a bank holding company, the Holding Company is subject to regulation by the FRB. Our bank subsidiaries are subject to federal regulation primarily by the FRB and are also subject to regulation by the state banking departments of the state in which they are chartered. These regulations affect lending practices, capital structure, investment practices, dividend policy and growth. In addition, we have non-bank operating subsidiaries from which we derive income. Certain of these non-bank subsidiaries engage in providing investment management and insurance brokerage services, which industries are also heavily regulated on both a state and federal level.

Various legislative and regulatory initiatives have been introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any impending regulations, would have on our financial condition and results of operation. A change in statutes, regulations or regulatory policies applicable to us could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things, any of which could have a material effect on our business.

In addition, changes in laws, regulations and regulatory practices affecting the financial services industry could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

While we attempt to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, we may not be able to economically hedge our interest rate risk. A

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rapid or substantial increase or decrease in interest rates could adversely affect our net interest income and results of operations.

Our net income depends primarily upon our net interest income. Net interest income is income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans, investment securities and short-term investments. The amount of interest income is dependent on many factors including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates and the levels of nonperforming loans. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds and the levels of noninterest-bearing demand deposits and equity capital.

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. We are unable to predict changes in market interest rates which are affected by many factors beyond our control including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, relationships between interest sensitive instruments and key driver rates, as well as balance sheet growth, client loan and deposit preferences and the timing of changes in these variables.

We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. We continually review our interest rate risk position and modify our strategies based on projections to minimize the impact of future interest rate changes. We also use derivative financial instruments to modify our exposure to changes in interest rates. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect results of operations and financial performance.

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

High inflation, natural disasters, acts of terrorism, an escalation of hostilities or other international or domestic occurrences, and other factors could have a negative impact on the economy of the Upper Midwest regions in which we operate. A sustained economic downturn in our markets would likely contribute to the deterioration of the quality of our loan portfolio by impacting the ability of our customers to repay loans, the value of the collateral securing loans, and may reduce the level of deposits in our banking subsidiaries and the stability of our deposit funding sources. A sustained economic downturn could also have a significant impact on the demand for our products and services. The cumulative effect of these matters on our results of operations and financial condition would likely be adverse and material.

If we are unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources (as a result of rating agency downgrades or other market factors), our 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.

Our subsidiary banks derive liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, our subsidiary banks have access to financial market borrowing sources on an unsecured, and a collateralized basis for both short-term and long-term purposes including, but not limited to, the Federal Reserve, Federal Home Loan Banks of which the subsidiary banks are members, and other correspondent banks. If these funding sources are not sufficient or available, we may have to acquire funds through higher-cost sources.

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Our credit rating was downgraded by Moody’s Investor Service, Standard and Poor’s, Dominion Bond Rating Service, and Fitch Ratings throughout 2009. Although we currently have the ability to borrow funds on both a short-term and long-term basis as an additional source of liquidity, our ability to borrow funds at favorable rates may be negatively impacted if our ratings were downgraded from their current level, and could adversely affect our results of operations and financial condition.

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

Our banking subsidiaries face substantial competition in originating commercial and consumer loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors have competitive advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of the loans that we originate and the interest rates we charge on these loans.

In attracting business and consumer deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns and better brand recognition and more branch locations. These competitors may offer higher interest rates, which could decrease the deposits that we attract or require us to increase rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations which could increase our cost of funds.

We also compete for deposits with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance companies and governmental organizations which may offer more favorable terms. Some non-bank competitors are not subject to the same extensive regulations that govern banking operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking and non-banking services, reduce our market share and adversely affect our earnings and financial condition.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.

Events such as significant adverse changes in the business climate, adverse action by a regulator, unanticipated changes in the competitive environment, and a decision to change our operations or dispose of an operating unit could have a negative effect on our goodwill or other intangible assets such that we may need to record an impairment charge, which could have a material adverse impact on our results of operations.

Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are assessed at least annually for impairment, or more frequently when impairment indicators are present. After evaluating goodwill and other intangible assets, we may determine that one or both are deemed to be impaired for accounting purposes. During the second quarter of 2009, we performed an interim goodwill impairment test and determined that the goodwill allocated to the Regional Banking line of business was impaired due to continued deterioration in commercial real estate collateral values and continued challenges in the Midwest economy. As a result, we recorded a $266.5 million goodwill impairment charge, which contributed significantly to our loss for the year. We will continue to evaluate the remaining goodwill on a frequent basis if events or circumstances indicate that it is more likely than not that the fair values of our reporting units are below their respective carrying amounts.

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Further deterioration in the outlook for credit quality, changes in the value of the loan or deposit portfolios, or increases in the discount rates could have a material impact on future goodwill impairment testing results. If we identify any impairment, it would be reflected as a charge to earnings in the period during which such impairment is identified and could have a material adverse effect on our results of operations. If any impairment is significant enough to result in net loss for the period, it might affect the banks’ ability to pay dividends to the Holding Company, which could have a material adverse effect on our liquidity and ability to pay dividends to shareholders or repurchase outstanding shares of our common stock.

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

During 2008 and continuing in 2009, higher levels of bank failures and temporary programs increasing deposit insurance limits have dramatically increased resolution costs for the FDIC and depleted its deposit insurance fund.

In order to maintain a strong funding position and restore reserve ratios for the deposit insurance fund, the FDIC increased assessment rates for all insured institutions by 7 cents for every $100 of deposits, beginning with the first quarter of 2009. Beginning April 1, 2009, additional rule changes required institutions to pay their premiums using a risk-weighted factor, which increased our FDIC insurance premiums for 2009 and is likely to further increase our future premiums. On May 22, 2009, the FDIC voted to amend the restoration plan and impose a special assessment of 10 cents for every $100 of deposits at June 30, 2009, which was payable on September 30, 2009. The interim rule also permits the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 5 cents per $100 of deposits, if necessary.

If there are additional financial institution failures, we may be required to pay even higher FDIC insurance premiums than the recently increased levels. These announced increases and any future increase in FDIC insurance premiums may materially adversely affect our results of operations and financial condition.

We may not realize our deferred income tax assets and certain built-in losses.

The realization of our deferred income tax assets is dependent on utilizing taxable income in prior carryback years, generating future taxable income, executing tax planning strategies, and reversing existing taxable temporary differences. As of December 31, 2009, we maintained a $235.5 million valuation allowance. The valuation allowance may be adjusted as conditions change and the underlying tax assets remain available to potentially offset future taxable income. In the event that future taxable income does not occur in the manner projected, it could affect the valuation allowance and have a material impact on our financial position and results of operations.

Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of ownership carryforward as well as the ability to use certain unrealized built-in losses. A change of ownership occurred under Section 382 as a result of the exchange offers of common stock for long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock immediately before the ownership change. Our ability to utilize deductions related to credit losses during the twelve-month period following such an ownership change would also be limited under Section 382, together with net operating loss carryforwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change.

Because the exchange offers triggered an ownership change, our ability to use the net operating loss carryforwards and certain built-in losses existing at the time of the deemed change in ownership to offset future income will be substantially limited. Therefore, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years.

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Our stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

• Actual or anticipated negative variations in quarterly results of operations;

• Negative recommendations by securities analysts;

• Poor operating and stock price performance of other companies that investors deem comparable to us;

• News reports relating to negative trends, concerns and other issues in the financial services industry;

• Negative perceptions in the marketplace regarding us and/or our competitors;

• New technology used, or services offered, by competitors;

• Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

• Our failure to integrate acquisitions or realize anticipated benefits from acquisitions;

• Adverse changes in government regulations;

• Delisting of our common stock from NASDAQ; and

• Geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger financial services companies.

Although our common stock is listed for trading on NASDAQ, the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Corporation’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

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

Our common stock is currently listed on the NASDAQ Global Select Market under the symbol “CRBC”. The NASDAQ’s listing requirements include a requirement that, for continued listing, an issuer’s common shares trade at a minimum bid price of $1.00 per share. This requirement is deemed breached when the bid price of an issuer’s common shares closes below $1.00 per share for 30 consecutive trading days. We were notified on September 23, 2009 that our shares failed to meet the requirement for the specified time period and NASDAQ’s Listing Qualifications Department notified us that they could initiate steps to delist our common stock from trading on the NASDAQ anytime after March 22, 2010 unless our closing bid price exceeds $1.00 per share for at least 10 consecutive trading days prior to that date. Although we may transfer our stock listing to the NASDAQ Capital Market following receipt of a notice of delisting and receive an additional six month grace period to regain compliance, take certain other actions to increase our stock price prior to being delisted from NASDAQ or otherwise challenge any action by NASDAQ to delist our common stock, there can be no assurance that these actions will be successful in maintaining our listing on NASDAQ or the trading market for our stock. A delisting of our common stock from the NASDAQ or a transfer to the Capital Market tier of NASDAQ could adversely affect the liquidity of the trading market for our stock and therefore the market price of our common stock.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

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

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.

We could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on results of operations.

We are party to various lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

From time to time, customers and others make claims and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action are legitimate or unfounded, if such claims and legal actions are not resolved in our favor they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

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

The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to providing better customer service, the effective use of technology increases efficiency and enables financial service institutions to reduce costs. Our future success will depend, in part, upon our ability to address the customer needs by using technology to provide products and services to enhance customer convenience, as well as to create additional operational efficiencies. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete and, in turn, have a material adverse effect on our financial condition and results of operations.

The products and services offered by the banking industry and customer expectations regarding them are subject to change. We attempt 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 our financial condition and results of operations.

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From time to time, we implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. We may not achieve initial timetables for the introduction and development of new lines of business and/or new products or services and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on business, results of operations and financial condition.

As a bank holding company that conducts substantially all of our operations through our subsidiaries, the ability of our Holding Company to pay dividends, repurchase our shares or to repay our indebtedness depends upon the results of operations of our subsidiaries and their ability to pay dividends to our Holding Company. Dividends paid by these subsidiaries are subject to limits imposed by federal and state law.

The Holding Company is a separate and distinct legal entity from our subsidiaries and it receives substantially all of its revenue from dividends from its subsidiaries and sales of its securities to investors. Dividends from subsidiaries are an important source of funds to pay dividends on common stock and interest and principal on debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank subsidiaries and certain non-bank subsidiaries may pay to the Holding Company. At January 1, 2010, our subsidiaries were permitted to pay $4.3 million in dividends. Also, our Holding Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event its subsidiaries are unable to pay dividends to our Holding Company, we may not be able to service debt, pay obligations or, should we have the ability to do so in the future, pay dividends on common stock.

On April 17, 2008, our Board of Directors voted to suspend the common stock quarterly dividend. On December 12, 2008, we issued TARP Preferred Stock with a liquidation value of $300 million to the Treasury as part of the Treasury’s Capital Purchase Program. Prior to December 12, 2011, and unless we have redeemed all of the TARP Preferred Stock or Treasury has transferred all of the TARP Preferred Stock to a third party, the approval of Treasury will be required for us to pay any common stock dividend or, except in limited circumstances, repurchase our common stock or other equity or capital securities.

As of December 31, 2009, the Holding Company’s cash resources totaled $110.7 million. During 2009, the Holding Company contributed an aggregate amount of $74.0 million to Citizens Bank to bolster capital levels at the bank. The Holding Company’s interest and preferred dividend payment obligations are approximately $21 million annually, down from approximately $35 million annually at December 31, 2008 due to the completion of the exchange offers that occurred in the third quarter of 2009.

On January 28, 2010 we announced that we will suspend the dividend payments on our trust preferred securities and on our TARP Preferred Stock issued to the Treasury. This action will preserve $4.9 million in cash on a quarterly basis and reduces the need for us to raise additional capital.

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

We regularly perform a variety of analyses on our assets and the impact of credit losses on our capital base, including the preparation of stress case scenarios. Due to continuing economic conditions in the markets in which we operate and the challenges posed to our business, including those described in other Risk Factors, we may determine, based on these analyses, that we need to raise additional Tier 1 common equity to maintain and strengthen our capital base as the effects of these events impact our business over the coming months and years. Any potential capital raising transaction could be highly dilutive to our common shareholders. The market price of our common stock could decline as a result of the dilutive effect of the capital raising transactions we may enter into, or the perception that such transactions could occur.

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In connection with the issuance of the TARP Preferred Stock, we also issued a warrant to Treasury to purchase approximately 17.6 million additional shares of our common stock at an initial per share exercise price of $2.56, subject to adjustment, which expires ten years from the issuance date. Even if we were to redeem the TARP Preferred Stock, we may not fully retire this warrant and, therefore, this warrant may be exercised, in whole or part, prior to its expiration date. Furthermore, the terms of the warrant provide that, if we issue common stock or securities convertible or exercisable into, or exchangeable for, common stock at a price that is less than 90% of the market price of such shares on the last trading day preceding the date of the agreement to sell such shares, the number and the per share price of common stock to be purchased pursuant to the warrant will be adjusted pursuant to its terms. As part of our potential capital raising efforts, we could issue securities convertible into or exercisable for our common stock, which may trigger the anti-dilution provisions of the warrant issued to the Treasury. If we issue such securities and they are subsequently exercised, converted into or exchanged for common stock such transactions would have a further dilutive effect on other holders of our common stock.

Also, if we determine that we need to raise additional capital, our capital raising efforts may not be successful, or we may be required to raise additional capital on terms that are unfavorable to us. A failure to maintain capital above “well-capitalized” levels could require us to reduce the size of our business and would likely have serious negative consequences for our business.

Our Holding Company may not have sufficient resources to make capital contributions to our bank subsidiaries if required by bank regulatory agencies, or if we might otherwise wish to do so, in order to maintain the bank subsidiaries’ capital ratios at acceptable levels.

Our Holding Company is required by banking regulation to act as a “source of strength” to our bank subsidiaries. If losses at our bank subsidiaries continue, whether because credit costs continue at high levels or for other reasons, and regulatory capital levels at the bank subsidiaries decline, our Holding Company may be required by the bank regulatory agencies to contribute capital to our bank subsidiaries. Although we currently have substantial liquidity at our Holding Company level that would be available for that purpose, we may not have sufficient funds at our Holding Company level to make required capital contributions to our bank subsidiaries if the weakness in the economies in which we operate continues over a substantial period of time and our bank subsidiaries continue to incur losses.

We may not be able to attract and retain skilled people. If we were to lose key employees, we may experience a disruption our relationship with certain customers.

Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in most of our business activities can be intense, and we may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of customers if they were to follow that employee to a competitor. While we believe that our relationship with our key producers is good, we cannot guarantee that all of our key personnel will remain with us.

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 our results of operations and financial condition.

Current accounting and tax rules, standards, policies, and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on us, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting

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pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.

Our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, our business and a negative impact on our results of operations.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems. While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.

Our vendors could fail to fulfill their contractual obligations, resulting in a material interruption in, or disruption to, our business and a negative impact on our results of operations.

We have entered into subcontracts for the supply of current and future services, such as data processing and certain property management functions. These services must be available on a continuous and timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our business.

We often purchase services from vendors under agreements that typically can be terminated on a periodic basis. There can be no assurance, however, that vendors will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on vendors include the following.

• If an existing agreement expires or a certain service is discontinued by a vendor, then we may not be able to continue to offer our customers the same breadth of products and our operating results would likely suffer unless we are able to find an alternate supply of a similar service.

• Agreements we may negotiate in the future may commit us to certain minimum spending obligations. It is possible we will not be able to create the market demand to meet such obligations.

• If market demand for our products increases suddenly, our current vendors might not be able to fulfill our commercial needs, which would require us to seek new arrangements or new sources of supply, and may result in substantial delays in meeting market demand.

• We may not be able to control or adequately monitor the quality of services we receive from our vendors. Poor quality services could damage our reputation with our customers.

Potential problems with vendors such as those discussed above could have a significant adverse effect on our business, lead to higher costs and damage our reputation with our customers and, in turn, have a material adverse effect on our financial condition and results of operations.

Our potential inability to integrate companies we may acquire in the future could have a negative effect on our expenses and results of operations.

On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to strengthen and expand our business. To fully benefit from such acquisition, however, we must integrate the administrative, financial, sales, lending, collections, and marketing functions of the acquired company. If we are unable to successfully integrate an acquired company, we may not realize the benefits of the acquisition, and our financial results may be negatively affected. A completed acquisition may adversely affect our financial condition and results of operations, including our capital requirements and the accounting treatment of the acquisition. Completed acquisitions may also lead to significant unexpected liabilities after the consummation of these acquisitions.

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Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business, results of operations and financial condition.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Our articles of incorporation and bylaws as well as certain banking laws may have an anti-takeover effect.

Provisions of our articles of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire our Holding Company, even if doing so would be perceived to be beneficial to shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Citizens’ executive offices are located at 328 South Saginaw Street, Flint, Michigan in the main office building of Citizens Bank, the largest bank subsidiary. The bank subsidiaries operate through 229 offices. Of these, 59 are leased and the remainder are owned and not subject to any material liens. Rent expense on the leased properties totaled $5.8 million in 2009. The banking offices are located in various communities throughout the states of Michigan and Wisconsin, and in parts of Ohio, Iowa, and Indiana and are used by all of Citizens’ business segments. At certain Citizens Bank and F&M locations a portion of the office buildings are leased to tenants. Additional information related to the property and equipment owned or leased by Citizens and its subsidiaries is incorporated herein by reference from Notes 1 and 5 to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

Citizens is party to a number of lawsuits incidental to its business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to many of these matters cannot be ascertained, Citizens does not believe the ultimate outcome of these matters will have a material adverse effect on its financial condition or liquidity.

From time to time, certain of the Corporation’s subsidiaries are notified by applicable environmental regulatory agencies, pursuant to state or federal environmental statutes or regulations, that they may be potentially responsible parties (“PRP”) for environmental contamination on or emanating from properties currently or formerly owned. Typically, exact costs of remediation of the contamination cannot be fully determined at the time of initial notification. While, as PRPs, these subsidiaries are potentially liable for the costs of remediation, in most cases, a number of other PRPs have been identified as being jointly and severally liable for remediation costs. Additionally, in certain cases, statutory defenses to liability for remediation costs may be asserted based on the subsidiaries’ status as lending institutions that acquired ownership of the contaminated property through foreclosure. Citizens is not presently aware of any environmental liabilities that pose a reasonable possibility of future material impact on its earnings. It is Citizens’ policy to establish and accrue appropriate reserves for all such identified exposures during the accounting period in which a loss is deemed to be probable and the amount is determinable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Holding Company’s common stock is traded on NASDAQ under the symbol “CRBC”. There were approximately 32,000 shareholders of the Holding Company’s common stock as of December 31, 2009, which includes record holders and individual participants in security position listings.

Information regarding the Holding Company’s high and low stock prices and cash dividends declared during each quarter of the last two fiscal years is set forth in the table below. The Holding Company is currently prohibited from paying cash dividends or repurchasing shares of common stock pursuant to the Letter Agreement, dated December 12, 2008 (the “CPP Letter Agreement”), pursuant to which the Holding Company completed its sale to the Treasury as part of the Treasury’s CPP of certain preferred shares and a warrant to purchase common shares. This restriction will remain in effect until the earlier of December 12, 2011 or such time as Treasury no longer holds the preferred shares. Other restrictions on the Holding Company’s ability to pay dividends are incorporated herein by reference from Note 18 to the Consolidated Financial Statements.

	Dividends		Common Stock
	Declared		Price Range				Closing
	Per Share		High		Low		Price
2009
First quarter	$	—	$	3.26	$	0.65	$	1.55
Second quarter		—		2.25		0.71		0.71
Third quarter		—		1.18		0.50		0.76
Fourth quarter		—		0.78		0.48		0.69
Year	$	—	$	3.26	$	0.48	$	0.69
2008
First quarter	$	0.290	$	14.74	$	10.41	$	12.43
Second quarter		—		13.97		2.67		2.82
Third quarter		—		11.00		1.75		3.08
Fourth quarter		—		4.75		1.34		2.98
Year	$	0.290	$	14.74	$	1.34	$	2.98

In addition, the information under the caption “Equity Compensation Plan Information” under Item 12 of this Report is incorporated herein by reference.

Stock Performance Graph

The following graph summarizes the annual percentage change in the cumulative total shareholder return of the Holding Company’s common stock for the last five years compared with the S&P 500 Index (Ticker: SPX), the Keefe, Bruyette & Woods Regional Banking Index (Ticker: KRX), and the Keefe, Bruyette & Woods, Inc. 50 Bank Index (KBW50). Effective December 31, 2009, the KBW50 Index is no longer being calculated and will be replaced with the KRX Index, which is a modified capitalization weighted index, created by Keefe, Bruyette & Woods, designed to effectively represent the performance of the broad and diverse U.S. Regional banking industry. The graph assumes the investment in Citizens’ common stock and each index was $100 on December 31, 2004 and the reinvestment of all dividends. The returns shown are not necessarily indicative of future performance.

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* KBW50 Index was discontinued effective 12/31/2009.

The information furnished under the heading “Stock Performance Graph” shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, and such information shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

Issuer Repurchases of Equity Securities

						Total Number of		Maximum Number of
						Shares Purchased as		Shares That May Yet
						Part of Publicly		Be Purchased Under
	Total Number of			Average Price Paid		Announced Plans or		The Plans or Programs
Period	Shares Purchased			Per Share		Programs		(2)
October 2009		940	(1)		0.71		—		1,241,154
November 2009		2,434	(1)		0.76		—		1,241,154
December 2009		871	(1)		0.61		—		1,241,154
Total		4,245			0.72		—		1,241,154

(1)

Shares repurchased in connection with taxes due from employees as a result of the vesting of certain restricted share awards in accordance with the related grant agreements. These repurchases were not part of the repurchase program approved in October 2003.

(2)

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

The stock repurchase program is discussed in more detail in Note 14 to the Consolidated Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below is derived from Citizens’ audited consolidated financial statements and should be read in conjunction with its Consolidated Financial Statements for the years ended December 31, 2009, 2008, and 2007, and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report. Material events or changes that affect the comparability of information in the table are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments in 2009” and “Significant Developments in 2008 and 2007.”

Citizens completed its merger with Republic Bancorp Inc. (“Republic”) on December 29, 2006. As a result, balances in the following table beginning as of December 31, 2006 include all of Republic’s assets and liabilities at estimated fair value. Average balances and income and expense amounts for 2006 and 2005, however, reflect only legacy Citizens results.

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Five Year Summary of Selected Financial Data
(in thousands, except per share data)	2009			2008			2007			2006			2005
For The Year
Net interest income	$	317,368		$	348,932		$	382,179		$	263,120		$	275,749
Provision for loan losses(1)		325,955			282,054			45,177			11,265			1,109
Noninterest income(2)		67,421			101,742			122,568			90,627			80,508
Noninterest expense(3)		603,021			490,702			327,423			259,827			243,042
Income tax (benefit) provision(4)		(29,974	)		70,970			31,305			19,319			31,581
Net (loss) income		(514,213	)		(393,052	)		100,842			63,336			80,525
Net (loss) income attributable to common shareholders(5)		(533,990	)		(405,016	)		100,842			63,336			80,525
Taxable equivalent adjustment		16,450			18,402			18,547			13,717			13,392
Cash dividends		—			21,959			87,798			49,530			49,311
Per Common Share Data
Net income (loss):
Basic	$	(2.75	)	$	(4.30	)	$	1.33		$	1.48		$	1.87
Diluted		(2.75	)		(4.30	)		1.33			1.47			1.85
Cash dividends		—			0.290			1.160			1.155			1.140
Market value		0.69			2.98			14.51			26.50			27.75
Common book value		2.69			10.60			20.84			20.58			15.28
Tangible book value(6)		2.50			7.80			10.20			9.65			13.75
Tangible common book value(7)		1.81			5.69			10.20			9.65			13.75
Shares outstanding		394,397			125,997			75,722			75,676			42,968
At Year End
Assets	$	11,931,631		$	13,086,016		$	13,505,983		$	14,002,612		$	7,750,688
Total earning assets		11,169,458			11,973,735			11,969,389			12,483,630			7,274,057
Portfolio loans		7,905,859			9,102,598			9,501,244			9,231,082			5,616,119
Allowance for loan losses		342,370			255,321			163,353			169,104			116,400
Deposits		8,909,340			9,052,406			8,301,925			8,698,061			5,473,839
Shareholders’ equity		1,331,036			1,601,321			1,577,880			1,557,686			656,463
Average For The Year
Assets	$	12,483,109		$	13,241,553		$	13,320,121		$	7,704,231		$	7,776,522
Total earning assets		11,555,721			11,888,252			11,847,221			7,259,956			7,338,328
Portfolio loans		8,473,946			9,433,952			9,212,066			5,657,476			5,493,280
Allowance for loan losses		306,971			189,072			173,148			114,613			119,925
Deposits		8,913,811			8,715,210			8,168,893			5,587,967			5,286,390
Shareholders’ equity		1,444,733			1,558,414			1,549,961			660,996			653,004
Financial Ratios
Return on average assets		(4.12)	%		(2.97	)%		0.76	%		0.82	%		1.04	%
Return on average shareholders’ equity		(35.59	)		(25.22	)		6.51			9.58			12.33
Average shareholders’ equity/avg. assets		11.57			11.77			11.64			8.58			8.40
Net interest margin (FTE)(8)		2.89			3.09			3.38			3.81			3.94
Efficiency ratio(9)		83.88			66.64			62.57			70.71			65.75
Allowance for loan losses as a percent of portfolio loans		4.33			2.80			1.72			1.83			2.07
Allowance for loan losses as a percent of nonperforming loans		72.01			83.43			86.27			286.44			359.50
Nonperforming loans as a percent of portfolio loans		6.01			3.36			1.99			0.64			0.58
Nonperforming assets as a percent of portfolio loans plus ORAA		7.48			4.79			2.64			1.10			0.71
Nonperforming assets as a percent of total assets		4.99			3.36			1.86			0.73			0.51
Net loans charged off as a percent of average portfolio loans		2.82			2.01			0.55			0.29			0.13
Tier 1 leverage(10)		9.21			9.66			7.53			7.22			7.98
Tier 1 risk-based capital		12.52			12.21			9.18			9.41			9.94
Total risk-based capital		13.93			14.49			11.66			11.90			13.22

(1)	Provision for loan losses in 2005 includes a $9.1 million insurance settlement relating to a claim for recovery of fraud losses suffered in connection with two loans made by the Corporation and subsequently charged-off in 2002 and 2003.
(2)	Noninterest income includes a net loss on debt extinguishment of $15.9 million in 2009, a fair-value adjustment on loans held for sale of $20.1 million and $9.4 million in 2009 and 2008, respectively and a charge of $3.6 million related to a fair value change in CD swap derivatives in 2005.
(3)	Noninterest expense includes goodwill impairment of $266.5 million and $178.1 million in 2009 and 2008, respectively; fair-value adjustments on ORE properties of $23.5 million and $8.1 million in 2009 and 2008, respectively; and restructuring and merger-related expenses of $8.2 million in 2007 and $11.3 million in 2006, related to the Republic merger.
(4)	Income tax (benefit) provision includes a deferred tax valuation allowance of $79.8 million and $136.6 million in 2009 and 2008, respectively.
(5)	Net loss attributable to common shareholders includes the following items: $19.8 million dividend to preferred shareholders in 2009, $0.2 million dividend on redeemable preferred stock and $11.7 million deemed dividend on convertible preferred stock in 2008.
(6)	Tangible book value is an estimate of a company’s worth, if liquidated, to shareholders. The calculation using ending balances is as follows: (Shareholder’s equity - Goodwill - Intangible assets)/Common shares outstanding.
(7)	Tangible common book value is an estimate of a company’s worth, if it was liquidated, to common shareholders. The calculation using ending balances is as follows: (Shareholder’s equity - - Preferred stock - Goodwill - Intangible assets)/Common shares outstanding.
(8)	Net interest margin includes taxable equivalent adjustments to interest income based on a tax rate of 35%.
(9)	Efficiency ratio is calculated as follows: (Noninterest expense - Goodwill impairment)/(Net interest income + Taxable equivalent adjustment + Noninterest income).
(10)	In 2006, the Tier 1 leverage is calculated using ending assets instead of average assets due to the Republic merger on December 29, 2006.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents management’s discussion and analysis of Citizens’ financial condition and results of operations for each of the past three years and should be read in conjunction with the accompanying Consolidated Financial Statements and Notes. The discussion highlights the principal factors affecting earnings (loss) for the years 2009, 2008, and 2007 and the significant changes in balance sheet items from December 31, 2008 to December 31, 2009 and is intended to help the reader understand, from management’s perspective, the consolidated financial statements, notes to financial statements, and the accompanying tables, charts and financial statistics appearing elsewhere in this report. Where applicable, this discussion also reflects management’s insights regarding known events and trends that have or may reasonably be expected to have a material effect on the Corporation’s operations and financial condition.

Forward–Looking Statements

Discussions and statements in this report that are not statements of historical fact, including without limitation statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan,” and statements regarding Citizens’ future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and uncertainties, many of which are beyond Citizens’ control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in Citizens’ filings with the SEC, including those listed in “Item 1A. Risk Factors” of this report.

Other factors not currently anticipated may also materially and adversely affect Citizens’ results of operations, cash flows, financial position, and prospects. There can be no assurance that future results will meet expectations. While Citizens believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. Citizens does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.

OVERVIEW

Nature of Citizens’ Business

Citizens is a diversified banking and financial services company that provides a full range of banking and financial services to individuals and businesses through its subsidiaries, Citizens Bank and F&M. The Corporation also provides wealth management services through CB Wealth Management and through the affiliate trust department of F&M. Citizens conducts operations through 229 offices and 267 ATM locations throughout Michigan, Wisconsin, Ohio, Iowa, and Indiana. Citizens operates in four major business lines: Regional Banking, Specialty Consumer, Specialty Commercial, and Wealth Management. Citizens’ performance is monitored by an internal profitability measurement system that provides line of business results as presented in “ – Line of Business Results” and Note 15 to the Consolidated Financial Statements, incorporated herein by reference.

The Corporation’s primary source of revenue is net interest income, which is the difference between interest income on earning assets (such as loans and securities) and interest expense on liabilities (such as interest-bearing deposits and borrowings) used to fund those assets. Net interest income is affected by fluctuations in the amount and composition of earning assets and funding sources and in the yields earned and rates paid, respectively, on these assets and liabilities. The Corporation measures the level of interest income relative to earning assets and interest bearing liabilities through two statistics — interest spread and net interest margin. The interest spread represents the difference between yields on earning assets and the rates paid for interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income to average earning assets. Citizens’ sensitivity to changes in interest rates and the potential effect of changes in interest rates on net interest income is presented in more detail in “ – Interest Rate Risk”.

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Proper management of the volume and composition of the Corporation’s earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. Citizens’ investment securities portfolio is structured to provide a source of liquidity principally through the maturity of the securities held in the portfolio and to generate an income stream with relatively low levels of principal risk. Loans comprise the largest component of earning assets and are the highest yielding assets. Client deposits are the primary source of funding for earning assets while short-term debt and other managed sources of funds are utilized as market conditions and liquidity needs change.

The Corporation monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet client cash flow needs, while maintaining funds available for loan and investment opportunities as well as to service debt, invest in subsidiaries, finance business expansion, satisfy other operating requirements and take advantage of unforeseen opportunities. Citizens derives its liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. The Corporation also has access to market borrowing sources for both short-term and long-term purposes.

Citizens’ other principal source of revenue is noninterest income, particularly fees and other revenue from financial services provided to customers. Citizens’ noninterest income includes service charges on deposit accounts, trust fees related to personal, institutional and employee benefit products and services, revenue related to loan products, including commercial loan fees and mortgage banking revenue, and fees for various other services, such as brokerage and investment services, ATM network use, and other financial services.

Use of Non-GAAP Financial Measures

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

Net Interest Margin and Efficiency Ratio

In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. Citizens believes the presentation of net interest margin on a taxable equivalent basis allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt investments.

Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios

Citizens believes the exclusion of goodwill and other intangible assets to create “tangible assets” and “tangible equity” facilitates the period to period comparison of results for Citizens’ ongoing business operations. Citizens’ management internally assesses the company’s performance based, in part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity ratio have become a focus of some investors and management believes that these ratios may assist investors in analyzing Citizens’ capital position absent the effects of intangible assets and preferred stock. Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts and banking regulators may assess Citizens’ capital adequacy using tangible common equity and Tier 1 common equity, Citizens believes that it is useful to provide investors the ability to assess its capital adequacy on these same bases. Tier 1 common equity is often expressed as a percentage of net risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad

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risk categories. The aggregated dollar amount in each category is then multiplied by the risk weight assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (net risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity. The amounts disclosed as net risk-weighted assets are calculated consistent with banking regulatory requirements.

Pre-tax Pre-Provision Core Operating Earnings

Pre-tax pre-provision core operating earnings, as defined by management, represents net income (loss) excluding income tax provision (benefit), the provision for loan losses, and any impairment charges or special assessments (including goodwill, credit writedowns, fair-value adjustments, and FDIC special assessments). Citizens believes presenting pre-tax pre-provision core operating earnings provides investors with the ability to better understand Citizens’ underlying operating trends separate from the direct effects of the impairment charges, net loss on debt extinguishment, credit issues, fair value adjustments, challenges inherent in the real estate downturn and other economic cycle issues and displays a consistent core operating earnings trend before the impact of these challenges. The “ — Allowance for Loan Losses” section of this report isolates the challenges and issues related to the credit quality of Citizens’ loan portfolio and their impact on Citizens’ earnings as reflected in the provision for loan losses.

The following table displays the calculation for the past three years of these non-GAAP measures other than pre-tax pre-provision core operating earnings, the calculation of which is set forth in the “Performance Summary” section.

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Non-GAAP Reconciliation
Citizens Republic Bancorp and Subsidiaries

(in thousands)	2009			2008			2007
Net Interest Income (A)	$	317,368		$	348,932		$	382,179
Taxable equivalent adjustment (B)		16,450			18,402			18,547
Noninterest income (C)		67,421			101,742			122,568
Noninterest expense (D)		603,021			490,702			327,423
Goodwill impairment (E)		266,474			178,089			—
Efficiency Ratio: (D-E)/(A+B+C)		83.88	%		66.64	%		62.57	%
Ending Balances (in millions)
Tangible Common Equity
Total assets	$	11,932		$	13,086		$	13,506
Goodwill		(331	)		(597	)		(775	)
Other intangible assets		(14	)		(21	)		(31	)
Tangible assets (non-GAAP)	$	11,587		$	12,468		$	12,700
Total shareholders’ equity	$	1,331		$	1,601		$	1,578
Goodwill		(331	)		(597	)		(775	)
Other intangible assets		(14	)		(21	)		(31	)
Tangible equity (non-GAAP)	$	986		$	983		$	772
Tangible equity	$	986		$	983		$	772
Preferred Stock		(272	)		(266	)		—
Tangible common equity (non-GAAP)	$	714		$	717		$	772
Tier 1 Common Equity
Total shareholders’ equity	$	1,331		$	1,601		$	1,578
Qualifying capital securities		73			174			175
Goodwill		(331	)		(597	)		(775	)
Accumulated other comprehensive loss (income)		7			50			(5	)
Other intangible assets		(14	)		(21	)		(31	)
Tier 1 capital (regulatory)	$	1,066		$	1,207		$	942
Tier 1 capital (regulatory)	$	1,066		$	1,207		$	942
Qualifying capital securities		(73	)		(174	)		(175	)
Preferred Stock		(272	)		(266	)		—
Total Tier 1 common equity (non-GAAP)	$	721		$	767		$	767
Net risk-weighted assets (regulatory)	$	8,516		$	9,883		$	10,258
Equity to Assets		11.16	%		12.24	%		11.68	%
Tangible Equity to Tangible Assets		8.51			7.88			6.08
Tangible Common Equity to Tangible Assets		6.16			5.75			6.08
Tier 1 Common Equity		8.47			7.76			7.48

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Performance Summary

An analysis of the major components of net income for 2009, 2008 and 2007 is presented below.

Three Year Summary of Net Income Components

(in thousands)	2009			2008			2007
Interest income	$	568,679		$	700,911		$	807,911
Interest expense		251,311			351,979			425,732
Net interest income		317,368			348,932			382,179
Provision for loan losses		325,955			282,054			45,177
Noninterest income		67,421			101,742			122,568
Noninterest expense		603,021			490,702			327,423
Income tax (benefit) provision		(29,974	)		70,970			31,305
Net (loss) income		(514,213	)		(393,052	)		100,842
Deemed dividend on convertible preferred stock		—			(11,737	)		—
Dividend on redeemable preferred stock		(19,777	)		(227	)		—
Net (loss) income attributable to common shareholders	$	(533,990	)	$	(405,016	)	$	100,842
Pre-tax pre-provision core operating earnings
Net (loss) income	$	(514,213	)	$	(393,052	)	$	100,842
Income tax (benefit) provision		(29,974	)		70,970			31,305
Provision for loan losses		325,955			282,054			45,177
Goodwill impairment		266,474			178,089			—
Net loss on debt extinguishment		15,929			—			—
FDIC special assessment		5,533			—			—
Fair value adjustment on loans held for sale		20,086			9,373			508
Fair value adjustment on ORE		23,453			8,063			(866	)
Fair value adjustment on bank owned life insurance		(144	)		3,447			—
Loss on auction rate securities repurchase		—			2,406			—
(Gain) loss related to Visa USA shares		—			(2,124	)		872
Fair value adjustment on swaps		606			(1,287	)		—
Captive insurance impairment charge		—			1,053			—
Expenses related to merger activities but not treated as restructuring or merger-related		—			—			10,142
Restructuring and merger related expenses		—			—			8,247
Loss on 1998 venture capital investment in limited partnership		—			—			1,085
Pre-tax pre-provision core operating earnings	$	113,705		$	158,992		$	197,312

Key factors behind the results for 2009 compared with 2008 were:

• The decrease in net interest income from 2008 was primarily a result of a decline in net interest margin from 3.09% to 2.89% and a $332.5 million decrease in average earning assets. The decrease in the net interest margin was primarily the result of deposit price competition, the transfer of loans to nonperforming status, and an increase in short-term investments to provide additional on-balance sheet liquidity. The decrease was partially offset by expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The decrease in average earning assets was primarily the result of lower loan demand in the current Midwest economic environment, partially offset by an increase in investment securities and money market investments.

• The increase in the provision for loan losses over 2008 was primarily a result of higher net charge-offs and the continued migration of commercial real estate and residential mortgage loans to nonperforming status during 2009. Total net charge-offs increased $48.8 million or 25.7% over 2008 to 2.82% of average portfolio

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	loans outstanding compared with 2.01% for 2008. The increase was primarily the result of higher charge-offs on commercial and industrial loans related to stress on the automotive industry in 2009.
•	The decrease in noninterest income from 2008 was primarily due to a net loss on debt extinguishment ($15.9 million) in connection with the exchange offers completed in the third quarter of 2009 and higher net losses on loans held for sale ($10.7 million), as well as lower service charges on deposit accounts ($3.5 million), and lower trust fees ($2.9 million).
•	The increase in noninterest expense over 2008 was primarily the result of a higher goodwill impairment charge ($88.4 million), as well as higher other expense ($20.3 million), Other Real Estate (“ORE”) expense and losses ($16.8 million), and other loan expense ($11.5 million), partially offset by lower salaries and employee benefits ($19.0 million) and a net decline in all other noninterest expense categories.
•	The decrease in the income tax expense from 2008 was primarily the result of recording a valuation allowance against deferred tax assets during the fourth quarter of 2008, as well as recognizing the tax impact of changes in other comprehensive income during 2009.
•	The decrease in pre-tax pre-provision core operating earnings from 2008 was primarily the result of lower net interest income (primarily due to a decline in average earning assets), lower noninterest income (primarily due to reductions in most categories) and higher noninterest expense (due to higher FDIC insurance premiums). The increase in noninterest expense was partially offset by various expense management initiatives implemented throughout the company.

Citizens maintains a strong liquidity position due to its on-balance sheet liquidity sources and very stable funding base, comprised of approximately 75% deposits, 13% long-term debt, 11% equity, and 1% short-term liabilities. Citizens also has access to high levels of untapped liquidity through collateral-based borrowing capacity provided by portions of both the loan and investment securities portfolios. Additionally, money market investments and securities available-for-sale could be sold for cash to provide liquidity, if necessary.

Citizens continues to maintain a strong capital position, and its regulatory capital ratios are above “well-capitalized” standards, as evidenced by the increases in the tangible equity to tangible assets, tangible common equity to tangible assets and Tier 1 common equity ratios over 2008.

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, goodwill, fair value measurements, pension and postretirement benefits, income taxes, derivative financial instruments and hedging activities. Citizens believes that these estimates and the related policies discussed below are important to the portrayal of the Corporation’s financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. Citizens’ significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.

Allowance for Loan Losses

The allowance for loan losses represents Citizens’ estimate of probable losses inherent in the loan portfolio, the largest asset category on the consolidated balance sheet. Determining the amount of the allowance for loan

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losses is considered a critical accounting policy because it requires significant judgment and the evaluation of several factors: the ongoing review and grading of the loan portfolio, consideration of past Citizens’ and relevant banking industry loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, the size and diversity of individual large credits, and other qualitative and quantitative factors which could affect probable credit losses. Other considerations include the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on Citizens’ historical loss experience and additional qualitative factors for various issues. Additionally, an allocation of reserves is established for special situations that are unique to the measurement period with consideration of current economic trends and conditions. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.

The Corporation’s allowance for loan loss methodology is based on GAAP and SEC guidance. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including the performance of the Corporation’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. See “ — Allowance for Loan Losses” for further details of the risk factors considered by management in estimating the necessary level of the allowance for loan losses.

The Corporation’s allowance for loan losses consists of three elements: (i) specific allocated allowances based on probable losses on specific commercial or commercial real estate loans or restructured residential mortgage or consumer loans; (ii) risk allocated allowance which is comprised of several loan pool valuation allowances based on Citizens’ historical quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks and (iii) general valuation allowances based on existing regional and local economic factors, including deterioration in commercial and residential real estate values, a macroeconomic adjustment factor used to calibrate for the current economic cycle the Corporation is experiencing, and other judgmental factors supported by qualitative documentation such as the inherent imprecision of loan loss projection models.

Specific allocated allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate it is probable that Citizens will be unable to collect all amounts due according to the contractual terms of the loan. The specific credit allocations are based on a regular analysis of all commercial and commercial real estate loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification and on all restructured residential mortgage and consumer loans over a fixed dollar amount.

Citizens’ risk allocated allowance, which is comprised of several loan pool valuation allowances is calculated based on historical data with additional qualitative risk determined by the judgment of management. Qualitative factors, both internal and external to the Corporation, considered by management include: (i) the experience, ability and effectiveness of Citizens’ lending management and staff; (ii) the effectiveness of the Corporation’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on the portfolio (ix) the impact of rising interest rates on the portfolio and (x) the impact of loan modification programs. Citizens evaluates the degree of risk that these components have on the quality of the loan portfolio on a quarterly basis. Based upon the Corporation’s analysis, appropriate estimates for qualitative risks are established. Included in the qualitative valuations are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits. Concentration risk guidelines have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships, and loans originated with policy exceptions. Qualitative allowances may also include estimates of inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation

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factors. The historical losses used may not be representative of actual losses inherent in the portfolio that have not yet been realized.

The general valuation allowance is based on management’s estimate of the effect of current general economic conditions on current loan pools and the inherent imprecision in loan loss projection models. The uncertainty surrounding the strength and timing of economic cycles, including concerns over the effects of the prolonged economic downturn for the Corporation’s business footprint in the current cycle, also affects the estimates of loss.

Continuous credit monitoring processes and the analysis of loss components are the principal methods relied upon by management to ensure that changes in estimated credit loss levels are reflected in Citizens’ allowance for loan losses on a timely basis. Citizens utilizes regulatory guidance and its own experience in this analysis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgment on information available to them at the time of their examination.

Actual loss ratios experienced in the future may vary from those projected. In the event that management overestimates future cash flows or underestimates losses on loan pools, the Corporation may be required to increase the allowance for loan losses through the provision for loan losses, which would have a negative impact on the results of operations in the period in which the increase occurred. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under “Allowance for Loan Losses.”

Goodwill

Goodwill arises from business acquisitions and is initially measured as the excess of the cost of the acquired business over the sum of the amounts assigned to assets acquired less liabilities assumed. Goodwill, which resides almost entirely in the Regional Banking reporting unit, is evaluated at least annually for impairment and Citizens performs this annual test on its major reporting units (lines of business) as of October 1 of each year. Goodwill impairment analyses are performed on a more frequent basis if events or circumstances indicate that it is more likely than not that the fair values of the reporting units are below their respective carrying amounts. Such events could include a significant adverse change in legal factors or in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment, an unanticipated loss of key employees, a decision to change the operations or dispose of a reporting unit, cash or operating losses, significant revisions to forecasts, or a long-term negative outlook for the industry.

In Step 1 of the test, Citizens estimates the fair value of the reporting units using discounted cash flow models derived from internal earnings forecasts. The primary assumptions used by Citizens include ten-year earnings forecasts, terminal values based on estimated future growth rates, and discount rates based on capital asset pricing models. A Step 1 analysis is prepared for each reporting unit, including those without goodwill, in order to analyze the implied control premium, which measures the difference between the combined fair value of Citizens’ reporting units calculated in Step 1 and Citizens’ total market value as a percentage of total market value. If the carrying amount of a reporting unit exceeds its estimated fair value, Step 2 is required for those reporting units that have goodwill to measure the amount of impairment, if any.

In Step 2 of the test, Citizens estimates the fair value of a reporting unit’s assets and liabilities in the same manner as if a purchase of the reporting unit was taking place using exit pricing, which includes estimating the fair value of other implied intangibles. Any excess of this hypothetical purchase price over the fair value of the reporting unit’s net assets (excluding goodwill) represents the implied fair value of the goodwill. If the implied fair value of goodwill calculated in Step 2 is less than the carrying amount of goodwill, an impairment loss is charged to noninterest expense to reduce the carrying amount to the implied fair value. The writedown cannot exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of previously recognized goodwill writedowns.

As a result of ongoing volatility in the financial industry, the challenging economic conditions in Michigan and the Upper Midwest, and continued deterioration in the credit quality of Citizens loan portfolios, Citizens determined that it was more likely than not that the fair value of a reporting unit may have been reduced below its carrying

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amount. Therefore, Citizens performed an interim goodwill impairment test during the second quarter of 2009. The Step 1 analysis indicated that the carrying amount exceeded estimated fair value for the Regional Banking reporting unit; therefore, Step 2 testing was required. Citizens determined, as a result of the Step 2 analysis, that the goodwill allocated to Regional Banking was impaired. During the second quarter of 2009, Citizens recorded a non-cash goodwill impairment charge against the goodwill allocated to the Regional Banking reporting unit of $266.5 million. The goodwill impairment charge was not tax deductible, did not impact Citizens’ tangible equity or regulatory capital ratios, and did not adversely affect Citizens’ overall liquidity position.

The interim goodwill analysis did not change the timing of Citizens’ annual goodwill impairment test, which was performed during the fourth quarter of 2009. As of October 1, 2009, the annual impairment test was performed and concluded that no additional impairment existed as the implied fair value of goodwill allocated to Regional Banking exceeded its carrying value by over 30%. In estimating the fair value of the reporting units in the annual review, a 13% discount rate was used based on a capital asset pricing model. Simulations were performed to evaluate the impact of discount rate changes on the fair value of the reporting unit. If the discount rate was to increase by 100 or 200 basis points the fair value would be expected to decrease by 13% and 23%, respectively. Simulations for 100 and 200 basis point decrease in the discount rate were not performed as the results would increase the implied value of goodwill.

Citizens performed an evaluation to determine if events or circumstances indicated additional goodwill impairment at December 31, 2009. As the key inputs and drivers remained consistent with those used as of the annual impairment testing date, Citizens concluded that no additional impairment was indicated.

Citizens’ management believes that the estimates and assumptions used in its goodwill impairment analyses are reasonable. Further deterioration in the outlook for credit quality, changes in the value of the loan or deposit portfolios, or increases in the discount rates could have a material impact on future goodwill impairment testing results. Due to the ongoing uncertainty regarding market conditions, which may continue to negatively impact the performance of the Regional Banking line of business, Citizens will continue to monitor the goodwill impairment indicators and perform additional interim tests, if necessary. Since this evaluation process requires Citizens to make estimates and assumptions with regard to the fair value of the Corporation’s reporting units, actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the business segments where the goodwill is recorded. For more information on goodwill, see Note 6 to the Consolidated Financial Statements.

Fair Value Measurements

A number of valuation techniques are used to determine the fair value of assets and liabilities in Citizens’ financial statements. These include quoted market prices for securities, interest rate swap valuations based upon the modeling of termination values adjusted for credit spreads with counterparties and appraisals of real estate from independent licensed appraisers, among other valuation techniques. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment will be recognized in the income statement. If an impairment is determined, it could limit the ability of Citizens’ banking subsidiaries to pay dividends or make other payments to the Holding Company. See Note 10 to the Consolidated Financial Statements for more information on fair value measurements.

Pension and Postretirement Benefits

Pension liabilities are established and pension costs are charged to current operations based on actuarially determined present value calculations. The valuation of the pension obligation and net periodic pension expense is considered critical as it requires management to make estimates regarding the amount and timing of expected future cash outflows including assumptions about employee mortality, assumed return on cash balances, assumed discount rate used to determine the current benefit obligation, and the long-term rate of return expected on plan assets. The long-term rate of return expected on plan assets is finalized after considering long-term

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returns in the general market, long-term returns experienced by the assets in the plan, and projected plan expenses. The assets are invested in certain investment funds administered by a third party. Citizens reviews its pension plan assumptions on an annual basis with an actuarial consultant to determine if the assumptions are reasonable and adjusts the assumptions to reflect changes in expectations. If Citizens were to determine that more conservative assumptions were necessary, costs would likely increase and have a negative impact on results of operations in the period in which the increase occurred.

The assumed future earnings on cash balance pension plan accounts were reduced from 5.25% for 2008 to 5.00% for 2009, which reflects the current rate environment, and will cause a slight decrease in pension expense for future periods. The determination of the discount rate used for calculating pension benefit and postretirement benefit obligations was based on a cash flow matching method. A spot yield curve for high quality bonds rated AA- or better was converted to zero coupon equivalent bond rates. These zero coupon bond rates were matched to the actuarially determined benefit obligation annual cash flows. The resulting single discount rate was rounded to a 25 basis point increment. Based on this methodology, the discount rate used for the pension obligation decreased to 5.75% at the end of 2009 from 6.00% at the end of 2008 and 2007, which resulted in an increase to the associated liability for 2009. The discount rate used for the postretirement healthcare obligation as well as the supplemental pension benefit plans decreased to 5.25% at the end of 2009 from 6.00% at the end of 2008 and 2007 also resulting in an increase to the associated liabilities. Rates are set at the end of each year for use in determining the following year’s expense.

Citizens has recognized the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents the net unrecognized actuarial losses and unrecognized prior service costs that will be subsequently recognized as net periodic pension cost pursuant to Citizens’ historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost. Note 11 to the Consolidated Financial Statements provides further discussion on the accounting for Citizens’ employee benefit plans and the estimates used in determining the actuarial present value of the benefit obligations and the net periodic pension expense.

Income Taxes

Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. Citizens assesses whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. For example, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of evidence on projections of future taxable income to support the recovery of deferred tax assets. As of December 31, 2009, Citizens held a $235.5 million valuation allowance. Despite the valuation allowance, these assets remain available to potentially offset future taxable income.

The valuation of current and deferred tax liabilities and assets is considered critical as it requires management to make estimates based on provisions of the enacted tax laws and other future events. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Corporation believes its tax assets and liabilities are adequate and are properly recorded in the consolidated financial statements. For more information regarding income tax accounting, see Notes 1 and 13 to the Consolidated Financial Statements.

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Derivative Financial Instruments and Hedging Activities

In various aspects of its business, Citizens uses derivative financial instruments to modify its exposure to changes in interest rates and market prices for other financial instruments. Many of these derivative financial instruments are designated as hedges for financial accounting purposes. Citizens’ hedge accounting policy requires the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. If in the future the derivative financial instruments identified as hedges no longer qualify for hedge accounting treatment, changes in the fair value of these hedged items would be recognized in current period earnings, and the impact on the consolidated results of operations and reported earnings could be significant. For more information on derivative financial instruments and hedge accounting, see Notes 1 and 17 to the Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

Notes 1 and 2 to the Consolidated Financial Statements discuss new accounting policies adopted by Citizens during 2009 and 2008 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects Citizens’ financial condition, results of operations or liquidity, the impact is discussed elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

SUBSEQUENT EVENTS

On January 29, 2010, Citizens entered into a stock purchase agreement with Great Western Bank whereby Great Western Bank agreed to acquire all of the stock of Citizens’ wholly owned subsidiary, F&M. Great Western Bank will pay a purchase price of approximately $50 million in cash, subject to a possible adjustment based upon F&M’s net worth at closing. The transaction includes $132.5 million in net portfolio loans and $408.6 million in deposits. The transaction is expected to close in the second quarter of 2010, subject to certain required regulatory approvals and fulfillment of customary conditions.

As part of the stock purchase agreement, Citizens will be required to exchange selected loans with F&M at or near the closing date for a cash payment equal to the book value of the specified loans less related allowance for loan losses. As of December 31, 2009, the loans to be exchanged had a net book value of $9.9 million. For more information regarding the sale of F&M, see Note 20 to the Consolidated Financial Statements.

The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary, recently completed an interim supervisory assessment, pursuant to their continuous supervisory program, based on data as of September 30, 2009. As a result of that examination and based on recent communications with these regulatory authorities, Citizens expects that the Holding Company and Citizens Bank will become subject to the issuance of a formal administrative action, probably in the form of a written agreement, due to their high level of nonperforming assets and the resulting impact on its earnings.

SIGNIFICANT DEVELOPMENTS IN 2009

Goodwill Impairment Charge

During the second quarter of 2009, Citizens recorded a non-cash, not tax-deductible goodwill impairment charge of $266.5 million against the goodwill allocated to Regional Banking (which had no impact on regulatory capital ratios or Citizens’ overall liquidity). For more information regarding this goodwill impairment charge, see the “Goodwill” headings under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and — Financial Condition” as well as Note 6 to the Consolidated Financial Statements.

Exchange of Common Stock for Long-Term Debt

On September 30, 2009, Citizens completed its exchange offers to issue common stock in exchange for its outstanding 5.75% Subordinated Notes due 2013 (the “Subordinated Notes”) and outstanding 7.50% Enhanced

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Trust Preferred Securities of Citizens Funding Trust I (the “Exchange Offers”). In aggregate, 268.2 million shares at a fair value of $219.9 million ($0.82 per common share as of the expiration date of the Exchange Offers) were issued in exchange for long term debt with a carrying value of $204.0 million. The consummation of the Exchange Offers created a net loss on the early extinguishment of debt totaling $15.9 million, which represented the difference between the fair value of Citizens’ common stock issued and the carrying value of the retired debt. After taking into account $6.4 million of issuance costs, the transaction resulted in an increase to common equity of $197.6 million. For more information regarding this transaction, see “Management’s Discussion and Analysis of Financial Condition and results of Operations — Liquidity Risk Management” and Notes 9 and 14 to the Consolidated Financial Statements.

SIGNIFICANT DEVELOPMENTS IN 2008 AND 2007

Issuances of Capital in 2008

On June 11, 2008, Citizens issued $79.6 million of common stock and $120.4 million of contingent convertible perpetual non-cumulative preferred stock that together increased shareholders’ equity by $189.0 million (net of issuance costs and the underwriting discount). The preferred stock subsequently converted to common stock in September 2008 after shareholders approved a charter amendment to increase authorized common shares by 50 million.

On December 12, 2008, Citizens issued an aggregate of $300.0 million of TARP Preferred Stock and a ten-year warrant to purchase up to 17,578,125 shares of Citizens’ common stock to the Treasury as part of the Treasury’s Capital Purchase Program.

For more information regarding these issuances, see Note 14 to the Consolidated Financial Statements.

Goodwill Impairment Charge

During the second quarter of 2008, Citizens recorded a non-cash goodwill impairment charge of $178.1 million, representing the entire amount of goodwill previously allocated to Specialty Commercial. The goodwill impairment charge was not tax deductible and did not impact Citizens’ tangible equity or regulatory capital ratios and did not adversely affect Citizens’ overall liquidity position. For more information regarding this goodwill impairment charge, see “Goodwill” headings under “Management’s Discussion and Analysis of Financial Condition and results of Operations — Critical Accounting Policies and — Financial Condition” as well as Note 6 to the Consolidated Financial Statements.

Branch Consolidation and Sale

During the second quarter of 2007, Citizens consolidated eighteen branches due to market overlap and divested seven branches in the Flint, Michigan banking market. The branch sales included $26.4 million in loans and $200.9 million in deposits.

Strategic Business Alliance for the Mortgage Operations and Secondary Marketing Functions

On December 10, 2007, Citizens entered into a contract with PHH Mortgage Corporation (“PHH”) to perform mortgage loan processing, mortgage loan servicing, secondary marketing functions, and other mortgage-related loan origination services. The strategic business alliance was fully implemented in March 2008. PHH served in a similar capacity from March 2006 until the Republic merger in December 2006.

RESULTS OF OPERATIONS

NET INTEREST INCOME

An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the full years of 2009, 2008, and 2007 is presented below.

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Average Balances/Net Interest Income/Average Rates

	2009								2008								2007
	Average					Average			Average					Average			Average					Average
(in thousands)	Balance			Interest(1)		Rate(2)			Balance			Interest (1)		Rate (2)			Balance			Interest (1)		Rate (2)
Earning Assets
Money market investments	$	519,224		$	1,300		0.25	%	$	40,551		$	384		0.95	%	$	1,940		$	104		5.37	%
Investment securities (3):
Taxable		1,715,605			80,437		4.69			1,503,983			78,089		5.19			1,726,042			88,078		5.10
Tax-exempt		617,070			26,340		6.57			673,395			29,096		6.65			671,753			29,268		6.70
FHLB and Federal Reserve stock		153,951			4,255		2.76			148,806			7,269		4.89			137,676			6,414		4.66
Portfolio Loans (4):
Commercial and industrial		2,237,534			103,434		4.72			2,656,982			144,025		5.52			2,138,853			155,182		7.38
Commercial real estate		2,921,569			154,991		5.31			3,104,815			200,071		6.45			3,103,082			238,240		7.68
Residential mortgage		1,147,921			57,819		5.04			1,334,706			81,610		6.11			1,490,447			98,678		6.62
Direct consumer		1,355,078			82,215		6.07			1,507,073			101,509		6.74			1,638,084			127,768		7.80
Indirect consumer		811,844			55,144		6.79			830,376			56,067		6.75			841,600			56,881		6.76
Total portfolio loans		8,473,946			453,603		5.38			9,433,952			583,282		6.21			9,212,066			676,749		7.38
Loans held for sale (4)		75,925			2,744		3.61			87,565			2,791		3.19			97,744			7,298		7.42
Total earning assets (3)		11,555,721			568,679		5.06			11,888,252			700,911		6.05			11,847,221			807,911		6.98
Nonearning Assets
Cash and due from banks		165,294								203,431								198,908
Bank premises and equipment		121,392								126,255								136,135
Investment security fair value adjustment		24,524								6,544								3,879
Other nonearning assets		923,149								1,206,143								1,307,126
Allowance for loan losses		(306,971	)							(189,072	)							(173,148	)
Total assets	$	12,483,109							$	13,241,553							$	13,320,121
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand		979,590			4,226		0.43			771,735			5,076		0.66			831,983			5,742		0.69
Savings deposits		2,610,246			20,309		0.78			2,551,570			44,046		1.73			2,188,296			63,942		2.92
Time deposits		4,097,896			135,263		3.30			4,268,931			171,761		4.02			4,008,919			187,510		4.68
Short-term borrowings		61,638			227		0.37			317,404			8,191		2.58			719,791			34,700		4.81
Long-term debt		1,904,955			91,286		4.79			2,521,181			122,905		4.87			2,729,476			133,838		4.90
Total interest-bearing liabilities		9,654,325			251,311		2.60			10,430,821			351,979		3.37			10,478,465			425,732		4.06
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		1,226,079								1,122,974								1,139,695
Other liabilities		157,972								129,344								152,000
Shareholders’ equity		1,444,733								1,558,414								1,549,961
Total liabilities and shareholders’ equity	$	12,483,109							$	13,241,553							$	13,320,121
Net Interest Income				$	317,368							$	348,932							$	382,179
Interest Spread (5)							2.46	%							2.68	%							2.92	%
Contribution of noninterest bearing sources of funds							0.43								0.41								0.46
Net Interest Margin (5)(6)							2.89	%							3.09	%							3.38	%

(1)	Interest income is shown on an unadjusted basis and therefore does not include taxable equivalent adjustments.
(2)	Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $16.4 million, $18.4 million, and $18.5 million for the years ended December 31, 2009, 2008, and 2007, repectively, based on a tax rate of 35%.
(3)	For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(4)	Nonaccrual loans are included in average balances for each applicable loan category.
(5)	The interest spread and net interest margin are presented on a tax-equivalent basis.
(6)	Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity supporting earning assets.

2009 compared with 2008

The decrease in net interest margin was primarily a result of deposit price competition, the transfer of loans to nonperforming status during 2009, and an increase in short-term investments to provide additional on-balance sheet liquidity. The decrease was partially offset by expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The decrease in net interest income was primarily a result of the lower net interest margin and a decrease in average earning assets due to a decline in loan portfolio balances caused by lower demand in the current Midwest economic environment, partially offset by the effects of an increase in investment securities and money market investments.

2008 compared with 2007

The decrease in net interest margin was primarily a result of deposit price competition, the movement of loans to nonperforming status during 2008, and increased funding costs related to extending short-term borrowings, partially offset by expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The decrease in net interest income was primarily a result of the lower net interest margin, partially offset by

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a small increase in average earning assets. The increase in average earning assets was the result of an increase in commercial loan balances due to new relationships and money market investments balances to provide liquidity, partially offset by decreases in the investment portfolio due to using portfolio cash flow to reduce short-term borrowings, and declines in residential mortgage and consumer loan portfolio balances due to low customer demand.

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

	2009 Compared to 2008									2008 Compared to 2007
				Increase (Decrease)									Increase (Decrease)
	Net			Due to Change in						Net			Due to Change in
(in thousands)	Change(1)			Rate(2)			Volume(2)			Change(1)			Rate (2)			Volume(2)
Interest Income on Earning Assets:
Money market investments	$	916		$	(476	)	$	1,392		$	280		$	(154	)	$	434
Investment securities:
Taxable		2,348			(8,009	)		10,357			(9,989	)		1,517			(11,506	)
Tax-exempt		(2,756	)		(348	)		(2,408	)		(172	)		(243	)		71
FHLB and Federal Reserve stock		(3,014	)		(3,257	)		243			855			321			534
Loans:
Commercial and industrial		(40,591	)		(19,396	)		(21,195	)		(11,157	)		(44,331	)		33,174
Commercial real estate		(45,080	)		(33,662	)		(11,418	)		(38,169	)		(38,304	)		135
Residential mortgage		(23,791	)		(13,261	)		(10,530	)		(17,068	)		(7,212	)		(9,856	)
Direct consumer		(19,294	)		(9,434	)		(9,860	)		(26,259	)		(16,677	)		(9,582	)
Indirect consumer		(923	)		444			(1,367	)		(814	)		(178	)		(636	)
Total portfolio loans		(129,679	)		(75,309	)		(54,370	)		(93,467	)		(106,702	)		13,235
Loans held for sale		(47	)		349			(396	)		(4,507	)		(3,814	)		(693	)
Total		(132,232	)		(87,050	)		(45,182	)		(107,000	)		(109,075	)		2,075
Interest Expense on Interest Bearing Liabilities:
Deposits:
Interest-bearing demand		(850	)		(2,004	)		1,154			(666	)		(271	)		(395	)
Savings		(23,737	)		(24,723	)		986			(19,896	)		(29,314	)		9,418
Time		(36,498	)		(29,758	)		(6,740	)		(15,749	)		(27,540	)		11,791
Short-term borrowings		(7,964	)		(4,099	)		(3,865	)		(26,509	)		(12,072	)		(14,437	)
Long-term debt		(31,619	)		(1,744	)		(29,875	)		(10,933	)		(1,103	)		(9,830	)
Total		(100,668	)		(62,328	)		(38,340	)		(73,753	)		(70,300	)		(3,453	)
Net Interest Income	$	(31,564	)	$	(24,722	)	$	(6,842	)	$	(33,247	)	$	(38,775	)	$	5,528

(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.

2009 compared with 2008

The decrease in net interest income reflects rate and volume variances that were unfavorable in the aggregate. The unfavorable rate variance was primarily the result of lower market interest rates in 2009 and deposit price competition, partially offset by expanding commercial and consumer loan spreads. The unfavorable volume variance was primarily due to weak customer demand from credit worthy clients in all loan categories, growth in the commercial on-balance sheet sweep product, and a strategic shift in the funding mix from wholesale borrowings to customer deposits. This was partially offset by an increase in the investment securities and money market investment portfolios as a result of using the proceeds from the preferred stock issuance in the fourth quarter of 2008 and a decrease in short-term borrowings and long-term debt due to the aforementioned shift in funding.

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2008 compared with 2007

The decrease in net interest income reflects rate variances that were unfavorable in the aggregate and volume variances that were favorable in the aggregate. The unfavorable rate variance was primarily the result of lower market interest rates in 2008, deposit price competition, the movement of loans to nonperforming status, and increased funding costs related to extending short-term borrowings, partially offset by expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The favorable volume variances were primarily the result of growth in commercial and industrial loans due to new client relationships and a decline in short-term and long-term borrowings due to a shift in funding mix to time deposits and paying down the outstanding debt, partially offset by growth in savings accounts due to a new on-balance sweep product for Citizens’ commercial clients introduced in late 2007 and growth in time deposits due to the aforementioned shift in funding mix and focused deposit generation during 2008.

PROVISION FOR LOAN LOSSES

After determining what Citizens believes is an adequate allowance for loan losses based on the risk in the portfolio, the provision for loan losses is calculated each quarter as a result of the net effect of the quarterly change in the allowance for loan losses and the quarterly net charge-offs. The increases in the provision for loan losses for 2009 as compared with 2008 and 2008 as compared with 2007 were primarily a result of higher net charge-offs and the continued migration of commercial real estate and residential mortgage loans to nonperforming status during 2009. This migration, and evaluation of the underlying collateral supporting these loans, caused an increase in the allowance for loan losses due to the higher likelihood that portions of these loans may eventually be charged-off. See “ — Critical Accounting Policies — Allowance for Loan Losses” and “ — Allowance for Loan Losses” for a discussion of the calculation of the allowance and the related methodology.

NONINTEREST INCOME

An analysis of the components of noninterest income is presented in the table below.

Noninterest Income
										2009-2008						2008-2007
(in thousands)	2009			2008			2007			$ Change			% Change			$ Change			% Change
Service charges on deposit accounts	$	43,927		$	47,470		$	48,051		$	(3,543	)		(7.5	)%	$	(581	)		(1.2	)%
Trust fees		15,082			17,967			20,106			(2,885	)		(16.1	)		(2,139	)		(10.6	)
Mortgage and other loan income		12,609			11,443			16,021			1,166			10.2			(4,578	)		(28.6	)
Brokerage and investment fees		5,445			7,109			7,901			(1,664	)		(23.4	)		(792	)		(10.0	)
ATM network user fees		6,607			6,319			6,283			288			4.6			36			0.6
Bankcard fees		7,972			7,440			6,124			532			7.2			1,316			21.5
Losses on loans held for sale		(20,086	)		(9,373	)		(508	)		(10,713	)		114.3			(8,865	)		N/M
Net loss on debt extinguishment		(15,929	)		—			—			(15,929	)		—			—			—
Other income		11,794			13,367			18,590			(1,573	)		(11.8	)		(5,223	)		(28.1	)
Total noninterest income	$	67,421		$	101,742		$	122,568		$	(34,321	)		(33.7	)%	$	(20,826	)		(17.0	)%

N/M  —  Not meaningful

2009 compared with 2008

The decrease in noninterest income was primarily due to a net loss on the early extinguishment of debt created when Citizens completed settlement of the Exchange Offers, higher net losses on loans held for sale, and to a lesser extent, lower service charges on deposit accounts, trust fees, and brokerage and investment fees. The increase in net losses on loans held for sale was primarily the result of higher writedowns to reflect market-value declines for the underlying collateral. The decrease in service charges on deposit accounts was primarily the result of a decline in customer transaction volume. The decline in trust fees as well as brokerage and investment fees were primarily the result of negative market conditions.

2008 compared with 2007

The decrease in noninterest income was primarily due to a higher net loss on loans held for sale, lower other income, lower mortgage and other loan income, lower trust fees, and a net decrease from minor changes in several other categories, partially offset by higher bankcard fees. The net loss on loans held for sale was primarily the result of higher writedowns to reflect market-value declines for the underlying collateral. The decrease in the other income category was primarily the result of lower swap income recognition and lower

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revenue on bank owned life insurance policies, both of which declined due to negative market conditions in 2008, partially offset by a $2.1 million gain in the first quarter of 2008 due to Citizens’ receipt of proceeds from the partial redemption of its Visa USA shares. The decrease in mortgage and other loan income was primarily the result of lower mortgage sales during 2008. The decline in trust fees was primarily the result of negative market conditions and lower demand for investment products due to attractively-priced traditional certificates of deposit in Citizens’ markets. Bankcard fees increased as a result of higher client debit card volume.

NONINTEREST EXPENSE

An analysis of the components of noninterest expense is presented in the table below.

Noninterest Expense
							2009-2008						2008-2007
(in thousands)	2009		2008		2007		$ Change			% Change			$ Change			% Change
Salaries and employee benefits	$	139,193	$	158,193	$	175,895	$	(19,000	)		(12.0	)%	$	(17,702	)		(10.1	)%
Occupancy		27,820		28,592		30,971		(772	)		(2.7	)		(2,379	)		(7.7	)
Professional services		11,996		15,184		18,031		(3,188	)		(21.0	)		(2,847	)		(15.8	)
Equipment		11,989		12,966		14,650		(977	)		(7.5	)		(1,684	)		(11.5	)
Data processing services		18,017		16,470		16,234		1,547			9.4			236			1.5
Advertising and public relations		7,146		5,897		7,282		1,249			21.2			(1,385	)		(19.0	)
Postage and delivery		5,844		7,342		7,800		(1,498	)		(20.4	)		(458	)		(5.9	)
Other loan expenses		24,913		13,381		5,518		11,532			86.2			7,863			142.5
Other real estate (ORE) expenses and losses		27,852		11,008		325		16,844			153.0			10,683			N/M
Intangible asset amortization		7,036		9,132		11,534		(2,096	)		(23.0	)		(2,402	)		(20.8	)
Goodwill impairment		266,474		178,089		—		88,385			49.6			178,089			100.0
Restructuring and merger related expenses		—		—		8,247		—			—			(8,247	)		(100.0	)
Other expense		54,741		34,448		30,936		20,293			58.9			3,512			11.4
Total noninterest expense	$	603,021	$	490,702	$	327,423	$	112,319			22.9	%	$	163,279			49.9	%

N/M  — Not meaningful

2009 compared with 2008

The increase in noninterest expense was primarily the result of a higher goodwill impairment charge, as well as higher other expense, ORE expenses and losses, and other loan expenses, partially offset by lower salaries and employee benefits, as well as a net decline in all other noninterest expense categories. The increase in other expense was primarily the result of an increase in FDIC insurance premiums due to an industry-wide rate increase and special assessment. The increase in ORE expenses and losses was primarily the result of higher carrying costs related to holding the ORE properties and mark-to-market charges related to additional declines in market values on the ORE assets. The increase in other loan expense was primarily the result of higher foreclosure expenses associated with repossessing collateral underlying commercial and residential real estate loans. The decrease in salaries and employee benefits was primarily due to lower staffing levels and suspending employer contributions to the 401(k) plan in 2009. The net decline in all other noninterest expense categories was primarily the result of various expense management initiatives implemented throughout the company.

2008 compared with 2007

The increase in noninterest expense was primarily the result of the goodwill impairment charge, as well as higher ORE expenses and losses, higher other loan expenses, and higher other expense, partially offset by the general decline in all other expense categories due to cost savings and efficiencies implemented during 2007 and 2008 as well as the effect of $8.2 million in restructuring and merger-related expenses incurred in 2007. The increase in ORE expenses and losses was primarily the result of higher carrying costs related to holding the ORE properties and mark-to-market charges related to additional declines in market values on the ORE assets. The increase in other loan expenses was primarily the result of higher mortgage processing fees due to the alliance with PHH Mortgage being implemented in the first quarter of 2008 and higher foreclosure expenses associated with repossessing collateral underlying commercial and residential real estate loans, partially offset by lower provisioning to fund the reserve for unused loan commitments, which fluctuates with the amount of unadvanced customer lines of credit. The increase in the other expense category was primarily the result of: a $2.4 million loss related to the repurchase of all auction rate securities sold to wealth management clients ($8.5 million in par

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value) to restore liquidity to their accounts, higher FDIC premiums due to a mandatory phase out of FDIC credits and industry-wide increases on FDIC insurance, and a loss on a captive insurance program.

FDIC insurance premiums

In December 2008, the FDIC increased the assessment rate for all insured institutions by 7 cents for every $100 of qualifying deposits in order to maintain a strong funding position and restore reserve ratios for the deposit insurance fund. This increase was included in Citizens’ 2009 noninterest expense. Beginning April 1, 2009, additional rule changes required institutions, including Citizens, to pay their premiums using a risk-weighted factor. As a result, Citizens’ 2009 FDIC insurance premium increased again and this methodology is likely to further increase future insurance premiums.

Additionally, on May 22, 2009, the FDIC voted to impose an emergency special assessment of 10 cents for every $100 of deposits at June 30, 2009, which was payable on September 30, 2009. As a result, Citizens recorded $5.5 million for the assessment during 2009.

Potential additional emergency special assessments of up to 5 cents for every $100 of deposits may be charged at the end of any calendar quarter hereafter. Citizens cannot provide any assurance as to the ultimate amount or timing of any such emergency special assessments, should such special assessments occur, as such special assessments are dependent upon a variety of factors which are beyond Citizens’ control.

FEDERAL AND STATE INCOME TAXES

Citizens recorded an income tax benefit of $30.0 million for 2009 compared with a tax expense of $71.0 million for 2008 and $31.3 million in 2007. The decrease in the tax expense from 2008 was primarily the result of establishing a $155.7 million valuation allowance against deferred tax assets during the fourth quarter of 2008 as well as recognizing the tax impact of changes in other comprehensive income during 2009. The increase in the 2008 expense over 2007 was due to recording the aforementioned valuation allowance, partially offset by the effect of the pre-tax loss, excluding the non-tax deductible goodwill impairment charge recorded in the second quarter of 2008. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 5.51% in 2009, compared with (22.03%) in 2008 and 23.69% in 2007. The 2009 effective rate is less than the statutory rate and more than the effective rate in 2008, primarily due to the relationships between the pre-tax losses and the adjustments for the valuation allowance. The 2008 effective rate is less than the effective rate in 2007 primarily due to differences in pre-tax income as well as the adjustments for the valuation allowance and the goodwill impairment in 2008.

In accordance with GAAP, Citizens assessed whether a valuation allowance needed to be established against its deferred tax assets at the end of 2008 based on the consideration of all available evidence using a “more likely than not” standard. Due to the significant pre-tax loss in 2008, its impact on cumulative pre-tax income, and the uncertain economic environment affecting estimates of future taxable income, Citizens determined it must establish a valuation allowance against the entire net deferred tax assets, excluding the deferred tax liability for tax deductible goodwill, which has an indefinite life.

As of December 31, 2009, Citizens maintained a $235.5 million valuation allowance. Despite the valuation allowance, these assets remain available to potentially offset future taxable income. The deferred tax asset are analyzed quarterly for changes affecting realizability and the valuation allowance may be adjusted in future periods accordingly. In making such judgments, significant weight is given to evidence that can be objectively verified. Citizens analyzes changes in near-term market conditions and considers both positive and negative evidence as well as other factors which may impact future operating results in making the decision to adjust the valuation allowance.

Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of ownership carryforward as well as the ability to use certain unrealized built-in losses. A change of ownership occurred under Section 382 as a result of the exchange offers of common stock for long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock immediately before the ownership change. Our ability to utilize deductions related to credit losses during the

46

twelve-month period following such an ownership change would also be limited under Section 382, together with net operating loss carryforwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change.

For further discussion of federal and state income taxes, see Note 13 to the Consolidated Financial Statements.

LINE OF BUSINESS RESULTS

Net (loss) income by line of business is presented in the table below. A description of each business line, important financial performance data and the methodologies used to measure financial performance are presented in Note 15 to the Consolidated Financial Statements. Certain amounts have been reclassified between segments to conform to current year presentation.

(in thousands)	2009			2008			2007
Regional Banking	$	(163,741	)	$	21,658		$	85,444
Specialty Consumer		(66,589	)		(35,667	)		7,828
Specialty Commercial		(71,174	)		(174,115	)		23,074
Wealth Management		2,790			547			3,327
Other		(215,499	)		(205,475	)		(18,832	)
Net (loss) income	$	(514,213	)	$	(393,052	)	$	100,842

2009 compared with 2008

Net income for Regional Banking declined primarily as the result of higher provision for loan losses, lower noninterest income and higher noninterest expense, partially offset by higher net interest income. The increase in the provision for loan losses was primarily due to higher net charge-offs. Noninterest income declined primarily due to lower service charges on deposit accounts. Noninterest expense increased primarily because of the aforementioned goodwill impairment charge in the second quarter of 2009 and the industry-wide increase in FDIC insurance rates. The increase in net interest income was primarily the result of expanding loan spreads, clients holding higher deposit balances in transaction accounts and declining deposit costs, partially offset by lower earning assets and increased nonaccrual commercial loans.

Net losses for Specialty Consumer increased primarily as the result of lower net interest income, higher provision for loan losses, and higher noninterest expense. The decrease in net interest income was primarily the result of lower residential mortgage loan balances as this portfolio is primarily in a runoff pattern as over 90% of new origination is sold into the secondary market. The increase in the loan loss provision was due to higher nonperforming residential mortgage loan levels throughout 2009. The increase in noninterest expense was primarily the result of higher expenses related to ORE properties.

Net losses for Specialty Commercial declined primarily as the result of lower noninterest expense, partially offset by higher provision for loan losses and lower noninterest income. The decrease in noninterest expense was primarily due to the effects of the aforementioned goodwill impairment charge in the second quarter of 2008. The increase in loan loss provision was due to higher nonperforming commercial loan levels throughout 2009. The decrease in noninterest income was primarily a result of higher net losses on loans held for sale.

Net income for Wealth Management increased primarily as the result of lower noninterest expense, partially offset by lower noninterest income. The decrease in noninterest expense was primarily due to lower salary expense as a result of lower staffing levels and commission-based compensation. The decrease in noninterest income was primarily due to lower trust fees as a result of declines in average market valuation for these assets, as well as a decrease in brokerage income due to lower demand for investment products. Trust assets under administration were $2.1 billion at December 31, 2009, an increase of $0.1 billion over December 31, 2008.

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Activities that are not directly attributable to one of the primary lines of business are included in the Other business line. Included in this category are the Holding Company; the shared services unit; Citizens’ treasury unit, including the securities portfolio, short-term borrowing and asset/liability management activities; inter-company eliminations; and the economic impact of certain assets, capital and support functions not specifically identifiable with the four primary lines of business. Net loss for Other increased primarily as the result of lower net interest income, lower noninterest income, and higher noninterest expense, partially offset by a lower income tax provision. The decline in net interest income was primarily the result of the internal profitability methodology utilized at Citizens that insulates the other lines of business from interest-rate risk and assigns the risk to the asset/liability management function, which is a component of this segment. The declines in net interest income were partially offset by income provided by higher short-term investment balances. The decrease in noninterest income was primarily the result of a decline in income from bank owned life insurance policies due to decreased returns on the underlying investments. Noninterest expense increased due to an arbitration award payout and higher volume-based data processing expense. The income tax provision decreased primarily as a result of lower pre-tax income as well as recognizing changes in other comprehensive income during 2009.

2008 compared with 2007

Net income for Regional Banking declined primarily as the result of lower net interest income and lower noninterest income, along with an increase in provision for loan losses. The decrease in net interest income was primarily a result of narrower spreads on deposits due to competitive pricing pressure, partially offset by an increase in both commercial and consumer loan spreads. The decrease in noninterest income was primarily a result of lower mortgage origination income, driven by overall lower demand for residential mortgages. The increase in provision for loan losses was due to an increase in net charge-offs, primarily in the commercial loan portfolio and, to a lesser extent, in the direct consumer loan portfolio.

Net income for Specialty Consumer decreased primarily as the result of lower net interest income, higher provision for loan losses, and higher noninterest expense. The decrease in net interest income was primarily the result lower residential mortgage loan balances as this portfolio is primarily in a runoff pattern. The increase in the loan loss provision was due to higher nonperforming residential mortgage loan levels throughout 2008 and an increase in net charge-offs. The increase in noninterest expense was primarily the result of higher expenses related to ORE properties.

Net income for Specialty Commercial decreased primarily as the result of lower net interest income, higher provision for loan losses, lower noninterest income and higher noninterest expense. The decrease in net interest income was driven by increased nonaccrual commercial real estate loans. The increase in loan loss provision was a result of higher net charge-offs related to the commercial real estate loan portfolio. The decrease in noninterest income was primarily a result of higher net losses on loans held for sale. The increase in noninterest expense was primarily the result of the aforementioned goodwill impairment charge in the second quarter of 2008 as well as higher foreclosure related expenses, partially offset by lower compensation costs.

The net income for Wealth Management decreased primarily as the result of lower noninterest income and an increase in noninterest expense. The decrease in noninterest income was primarily the result of lower trust fee income due to a decline in assets under administration driven by ongoing declines in market valuation. The increase in noninterest expense was primarily the result of a $2.4 million loss related to the repurchase of all auction rate securities sold to wealth management clients to restore liquidity to their accounts. Trust assets under administration were $2.0 billion at December 31, 2008, a decline of $0.7 billion from $2.7 billion at December 31, 2007.

The net loss for the Other business line increased primarily as the result of lower net interest income, lower noninterest income and higher income tax provision, partially offset by lower noninterest expense. The decrease in net interest income was primarily due to the internal profitability methodology utilized at Citizens, which insulates the other lines of business from interest-rate risk and assigns the risk to the asset/liability management function, which is a component of this segment. The decrease in noninterest income was primarily due to a decrease in income from bank owned life insurance policies due to lower market interest rates and decreases in mortgage and other loan income. The increase in the income tax provision was primarily due to establishing the aforementioned deferred tax valuation allowance in 2008. The decrease in noninterest expense was primarily due to lower compensation expense.

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FINANCIAL CONDITION

TOTAL ASSETS

Total assets at December 31, 2009 were $11.9 billion, a decrease of $1.2 billion or 8.8% from December 31, 2008. The decline was primarily the result of reductions in total portfolio loans and a non-cash and not tax-deductible goodwill impairment charge recorded in the second quarter of 2009, partially offset by higher money market investments.

MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES

Objectives in managing the securities portfolio are driven by the dynamics of the balance sheet, including growth, maturity, management of interest rate risk and maximizing return. Interest-bearing deposits with banks increased $491.2 million in 2009. On October 6, 2008 the Federal Reserve announced that it would pay interest on required and excess reserve balances at rates close to the targeted federal funds rates. Citizens has chosen to utilize this program while adverse conditions exist in the credit markets. Securities are classified as available for sale or held to maturity and as of December 31, 2009, 94.2% of the securities in Citizens’ investment securities portfolio were classified as available for sale. A summary of investment securities balances at December 31, 2009, 2008 and 2007 is provided below:

Investment Securities

			December 31,
(in thousands)	2009		2008		2007
Securities available for sale, at fair value
Federal agencies	$	149,033	$	257,445	$	304,074
Collaterized mortgage obligations		442,989		471,010		586,954
Mortgage-backed		1,164,450		973,961		670,565
State and municipal		450,647		538,761		569,466
Other		17,946		7,595		1,105
Total available for sale	$	2,225,065	$	2,248,772	$	2,132,164
Securities held to maturity, at amortized cost
State and municipal	$	137,094	$	138,575	$	129,126
Total investment securities	$	2,362,159	$	2,387,347	$	2,261,290

Total investment securities at December 31, 2009 were essentially unchanged from December 31, 2008. The increase in investment securities at December 31, 2008 over December 31, 2007 was primarily due to the investment of the proceeds from the sale of the TARP Preferred Stock and warrant in the fourth quarter of 2008, partially offset by paydowns and maturities received during the year.

The collateralized mortgage obligations (“CMO”) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At December 31, 2009, the whole loan CMOs had a market value of $188.7 million with gross unrealized losses of $15.0 million. Citizens performs a thorough credit review on a quarterly basis on the underlying mortgage collateral as well as the supporting credit enhancement and structure. The results of the December 31, 2009 credit review demonstrated continued strength and no material degradation to the holdings. Additionally, Citizens determined there is no other-than-temporary impairment on the entire investment portfolio at December 31, 2009.

Maturities and average yields of investment securities at December 31, 2009 are presented in the table below:

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Maturity Distribution of Investment Securities Portfolio ⁽¹⁾

	Due Within					One to					Five to					After
	One Year					Five Years					Ten Years					Ten Years					Total
December 31, 2009			Avg.					Avg.					Avg.					Avg.					Avg.
(in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available for sale, at fair value (2)
Federal agencies(3)	$	97,591		4.88	%	$	36,309		3.55	%	$	15,133		4.46	%	$	—		—	%	$	149,033		4.51	%
Collateralized mortgage obligations (3)		35,368		4.72			272,240		4.65			135,351		4.80			30		6.83			442,989		4.70
Mortgage-backed(3)		4,661		6.59			659,511		4.80			430,607		4.46			69,671		4.63			1,164,450		4.67
State and municipal(4)		45,698		5.14			115,340		4.28			184,308		4.13			105,301		3.99			450,647		4.24
Other		17,616		1.02			—		—			—		—			330		10.47			17,946		1.20
Total securities available for sale	$	200,934		4.61	%	$	1,083,400		4.66	%	$	765,399		4.45	%	$	175,332		4.26	%	$	2,225,065		4.55	%
Securities held to maturity, at amortized cost
State and municipal(2)(4)
Total securities held to maturity	$	—		0.00	%	$	3,905		0.92	%	$	55,973		3.51	%	$	77,216		4.05	%	$	137,094		3.74	%

(1)	This table excludes stock holdings of the Federal Home Loan Bank and Federal Reserve.
(2)	Yields are based on amortized cost.
(3)	Maturity distributions for collateralized mortgage obligations and mortgage-backed securities are based on estimated average lives.
(4)	Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

As of December 31, 2009, the estimated aggregate fair value of the investment securities portfolio was $44.0 million above amortized cost, consisting of gross unrealized gains of $61.8 million and gross unrealized losses of $17.8 million. A summary of estimated fair values and unrealized gains and losses for the major components of the investment securities portfolio is provided in Note 3 to the Consolidated Financial Statements. Citizens’ policies with respect to the classification of investments in debt and equity securities are discussed in Note 1 to the Consolidated Financial Statements.

LOAN PORTFOLIO

Citizens primarily extends credit within the local markets of its banking subsidiaries located in Michigan, Wisconsin, Ohio, and Iowa. Citizens generally lends to consumers and small to mid-sized businesses and, consistent with its emphasis on relationship banking, most of these credits represent core, multi-relationship customers who also maintain deposit relationships and utilize other banking services such as treasury management. The loan portfolio is diversified by borrower and industry, with no concentration within a single industry that exceeds 10% of total portfolio loans. Citizens has minimal loans to foreign debtors and does not actively solicit nationally syndicated loans or participate in highly leveraged transactions. Citizens seeks to limit its credit risk by establishing guidelines to review the aggregate outstanding commitments and loans to particular borrowers and industries. Citizens obtains and monitors collateral based on the nature of the credit and the risk assessment of the customer.

Loan balances by category for the past five years and an analysis of the maturity and interest rate sensitivity of commercial and industrial, commercial real estate, and real estate construction loans at December 31, 2009 are presented below.

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Portfolio Loans					December 31,
(in millions)	2009		2008		2007		2006		2005
Commercial and industrial	$	1,976.1	$	2,602.3	$	2,557.1	$	2,004.9	$	1,688.1
Commercial real estate (1)		2,504.0		2,565.9		2,549.6		2,442.5		1,190.4
Real estate construction (2)		322.7		398.9		547.6		678.1		211.7
Total commercial		4,802.8		5,567.1		5,654.3		5,125.5		3,090.2
Residential mortgage		1,036.5		1,262.8		1,445.2		1,543.5		539.8
Direct consumer		1,261.4		1,452.2		1,572.3		1,721.4		1,142.0
Indirect consumer		805.2		820.5		829.4		840.6		844.1
Total	$	7,905.9	$	9,102.6	$	9,501.2	$	9,231.0	$	5,616.1

Commercial Loan Maturities and Interest Rate Sensitivity at December 31, 2009

	Within		One to		After
	One Year		Five Years		Five Years		Total
Commercial and industrial	$	575.7	$	1,216.6	$	183.8	$	1,976.1
Commercial real estate		830.0		1,452.5		221.5		2,504.0
Real estate construction		164.0		156.9		1.8		322.7
Total commercial	$	1,569.7	$	2,826.0	$	407.1	$	4,802.8
Loans above:
With floating interest rates	$	1,067.6	$	1,762.7	$	327.6	$	3,157.9
With predetermined interest rates		502.1		1,004.8		138.0		1,644.9
Total	$	1,569.7	$	2,767.5	$	465.6	$	4,802.8

(1)	Commercial real estate consists of income producing and owner occupied loan types
(2)	Real estate construction consists of land hold, land development, and commercial real estate construction loan types

The decrease in all categories comprising total portfolio loans from December 31, 2008 was primarily the result of a decline in customer demand from credit-worthy clients, paydowns as a result of normal client activity, and charge-offs. Also contributing to the decrease was the transfer of $55.5 million of nonperforming land hold, land development, and commercial construction loans to loans held for sale ($35.2 million after market-value adjustments) during the fourth quarter of 2009.

Citizens transferred $127.9 million of nonperforming commercial real estate and residential mortgage loans to loans held for sale ($92.8 million after market-value adjustments) during the second quarter of 2008.

Commercial and Industrial. The commercial and industrial loan portfolio includes a diverse group of loans largely to in-market business banking (relationships less than $3.0 million) and corporate banking (relationships over $3.0 million) companies in a variety of businesses across many industries. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment purchases. While some short-term loans may be made on an unsecured basis, the large majority are secured by the assets being financed with collateral margins consistent with the Corporation’s loan underwriting guidelines. Commercial and industrial loans are evaluated for adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in the ability of the borrower to repay on agreed terms. Credit risk in commercial and industrial loans arises due to fluctuations in borrowers’ financial condition, deterioration in collateral values, and changes in market conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s financial need and ability to repay any loans on a basis and within a timetable that makes sense for both the borrower and Citizens. Having determined that the borrower’s management possesses sound business acumen, the Corporation’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Underwriting guidelines are designed to promote ongoing relationship banking which allows both the customer and the Corporation to make changes commensurate with current economic and performance results.

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Commercial Real Estate. The majority of this portfolio consists of commercial real estate intermediate-term loans to developers and owners of commercial real estate for single and multiple family residential as well as multi-unit commercial properties. These loans are viewed first as cash-flow loans and secondarily as loans secured by real estate.

Commercial real estate loans are subject to underwriting standards and processes specific to the risks embedded in each of the geographic markets served by Citizens, with approximately 40% of the portfolio located in southeast Michigan and 20% located in Ohio. As detailed in the discussion of real estate construction loans below, the properties securing the Corporation’s commercial real estate portfolio are diverse in both type and geographic location. This diversity reduces the Corporation’s exposure to adverse economic events that impact any individual market. Management monitors commercial real estate loans based on sustainable cash flow, collateral, geography, and risk rating criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied “investment” real estate loans. At December 31, 2009, approximately 35% of the Corporation’s commercial real estate loans were secured by owner-occupied properties.

The credit performance of loans secured by commercial income producing properties has recently been negatively affected by tenant losses and reduced rental rates; contributing to the decline in values associated with the income producing loan portfolio. Citizens may suffer further losses in these segments if market conditions continue to deteriorate and efforts to limit losses through execution of prudent workout strategies are unsuccessful.

Real Estate Construction. Loans in this classification are short-term interim loans that provide financing for the acquisition or development of commercial real estate, such as multifamily or other commercial development projects. Real estate construction loans are made to developers and project managers who are generally well known to the Corporation, have prior successful project experience, and are well-capitalized. Projects undertaken by these developers are carefully reviewed by the Corporation to ensure that they are economically viable and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Loans of this type are generally made to customers based in the Corporation’s markets in which the Corporation has a thorough knowledge of the local market economy. The credit risk associated with real estate construction loans is generally confined to specific geographic areas, but is also influenced by general economic conditions. These loans are considered to have higher risks than other real estate loans due to the inherent construction risk and their ultimate repayment being sensitive to interest rate changes, general economic conditions, absorption dynamics, and the availability of long-term financing. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, underwriting the loans to meet the requirements of institutional investors in the secondary market, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances. Sources of repayment for these types of loans may be pre-committed permanent take out loans from long-term lenders, residential mortgage financing, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained.

This portfolio has been particularly adversely affected by job josses, declines in real estate value, declines in home sale volumes, and declines in new home building. Declining real estate values have resulted in sharp increases in losses, particularly in the land hold, land development, and construction loan portfolios. Since January 1, 2007, Citizens no longer underwrites new commercial real estate, land hold and land development construction loans and is actively managing the remaining portfolio. However, Citizens underwrites new construction loans supporting owner-occupied projects where these loans are viewed first as cash-flow loans and secondarily as loans secured by real estate.

Residential Mortgage Loans. The residential mortgage loan category is predominately comprised of owner-occupied residential properties of which over 85% were located in Michigan and Ohio . Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios and loan-to-collateral value ratios. They are predominately originated in accordance with underwriting standards set forth by the government-sponsored entities (“GSE”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation

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(“FHLMC”) and the Government National Mortgage Association (“GNMA”), who serve as the primary purchasers of loans sold in the secondary market by mortgage lenders. These underwriting standards generally require that the loans be collateralized by one-to-four family residential real estate. Automated underwriting engines deployed by a GSE are used to determine creditworthiness of the vast majority of borrowers. Maximum allowable loan-to-value (“LTV”)/combined loan-to-value (“CLTV”) on these loan products do not exceed 95% at origination. At December 31, 2009, Citizens had $226.9 million of loans that were originated in excess of 80%, which were generally covered by mortgage insurance providing at least 20% of coverage, except as noted below.

Citizens sells over 90% of new mortgage originations into the secondary market. The right to service the loans and receive servicing fee income is typically sold along with the underlying mortgages. All residential mortgage loans that were sold in 2009 were sold without recourse. However, for loans that were sold prior to the second quarter of 2008, Citizens remains contractually liable for credit risk for such loans experiencing early payment defaults, and loans containing errors and/or omissions in documentation according to the standards delineated within the loan sale agreements. Citizens believes these risks are immaterial.

Residential Mortgage Loan Balances By Category

	December 31,
(in thousands)	2009		2008
| |
Fixed rate mortgages	$	339,019	$	423,698
Adjustable rate mortgages		679,577		795,482
Construction mortgages		17,847		43,661
Total residential mortgages	$	1,036,443	$	1,262,841

In 2009 a total of $2.6 million in originated loans had characteristics (other than loan amount or new construction) that made them non-GSE eligible. These loans were underwritten with compensating factors such as mortgage insurance, maximum debt to income ratios, maximum loan-to-value ratios and minimum credit scores which Citizens believed offset the additional risks.

Residential Mortgage Loan Origination Volume

(In thousands)	2009		2008
Fixed rate mortgages	$	298,743	$	273,901
Adjustable rate mortgages		2,399		48,593
Construction mortgages		3,878		20,325
Total	$	305,020	$	342,819

Citizens has not originated subprime, initial teaser rate, or negative amortization loans in over three years. The credit performance of the residential mortgage portfolio has been negatively impacted by borrowers’ loss of or reduction in income during 2008 and 2009. The decline in the residential real estate values, particularly in Michigan and Northern Ohio, and the extended time frame associated with the sale of repossessed residential properties has led to increased loss severity in this loan portfolio. Increased stress on borrowers’ cash flow due to job loss, reduced rental income, higher interest rates or other factors could lead to higher payment delinquencies and defaults. Continued declines in real estate values could lead to higher loss severity.

Direct Consumer. The direct consumer loan category includes home equity loans, and direct installment loans to individuals used to purchase boats, recreational vehicles, automobiles, and other personal items. At December 31, 2009, Citizens had $1.0 billion of home equity loans, of which 76% were secured by residential real estate located in Michigan. Over 67% of the home equity portfolio has refreshed FICO scores of 720 or better. Home equity loans consist of revolving lines of credit and fixed rate loans to consumers that are secured by residential real estate. These loans are generally in a junior lien position and are originated through Citizens’ branches with loan-to-value ratios generally less than 80% of appraised collateral value. Individual borrowers may be required to provide additional collateral or a satisfactory endorsement or guaranty from another person, depending on the

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creditworthiness of the borrower. Credit risks for these types of loans are influenced by general economic conditions, the financial strength of individual borrowers, and the value of the loan collateral. Credit risk in the direct consumer loan portfolio arises from the borrowers potentially being unable to repay the loan on agreed terms, or by a shortfall in the collateral value in relation to the outstanding loan balance in the event of default and subsequent liquidation of collateral. Credit risk is generally controlled by evaluating the creditworthiness of the borrowers as well as taking appropriate collateral and guaranty positions.

The Corporation originates consumer loans utilizing a credit scoring model to supplement the underwriting process. To monitor and manage consumer loan risk, policies and underwriting guidelines are developed and modified as market conditions require. This monitoring activity, coupled with relatively small loan amounts spread across many individual borrowers, reduces risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting guidelines for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to maximum loan-to-value ratios, credit scoring results, ability to service overall debt, and documentation requirements.

Indirect Consumer. The indirect consumer loan category includes indirect installment loans used by customers to purchase boats and recreational vehicles. These loans are originated mainly within Citizens’ markets and through its centralized underwriting group that has established relationships with certain dealers which meet Citizens’ underwriting guidelines and adhere to prudent business practices. The dealers are evaluated on their creditworthiness and business practices with performance monitored on an annual basis. The dealers refer customers to the centralized underwriting group, which utilizes a credit scoring model to supplement the underwriting process, and then complete the loans utilizing Citizens’ loan documents. Credit risks for these types of loans, are influenced by general economic conditions, the characteristics of individual borrowers, and the value of loan collateral. Additionally, credit risk may include the dealer’s ability to collect proper customer information, and adhere to appropriate lending guidelines, including but not limited to evaluating collateral value, accurately capturing property identification numbers, and following related documentation guidelines. Credit risk in the indirect consumer loan portfolio arises from a borrower’s potential inability to repay their loan and by a potential shortfall in the collateral value in relation to the outstanding loan balance in the event of default and subsequent liquidation of collateral. Credit risk is generally controlled by reviewing the creditworthiness of the borrowers as well as taking appropriate collateral and guaranty positions.

LOANS HELD FOR SALE

Loans held for sale are comprised of commercial real estate and residential mortgage loans. Held for sale loans at December 31, 2009 totaled $80.5 million, a decrease of $10.9 million or 11.9% from December 31, 2008. The decrease reflects a decline in commercial loans held for sale due to customer paydowns, workout activities, writedowns to reflect market-value declines for the underlying collateral and transfers to ORE. The decrease was partially offset by the aforementioned transfer of nonperforming land hold, land development, and commercial construction loans from the loan portfolio at fair value.

CREDIT RISK MANAGEMENT

Extending credit to businesses and consumers exposes the Corporation to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected under the original underwriting terms due to the inability or unwillingness of the borrower to repay the loan. Citizens has a platform of lending policies and underwriting guidelines that are designed to maximize loan income within an acceptable level of risk. Credit risk is mitigated through a comprehensive system of internal controls, which includes adherence to conservative lending practices, underwriting guidelines, collateral monitoring, and oversight of financial performance. Credit risk associated with fluctuations in economic conditions is mitigated through portfolio diversification that limits exposure to any single industry or customer. Lending policies and guidelines are reviewed by credit administration and modified on an ongoing basis as conditions change and new credit products are offered. The commercial and industrial and commercial real estate credit administration policies include a two-tier loan rating system that incorporates probability of default and loss given default to estimate a borrower’s ability to repay and the strength of the collateral behind their loan obligation. To strengthen and monitor loan structuring and collateral position, collateral field audits are regularly performed on those credits that have a significant reliance on accounts receivable and inventory. Additionally, a reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan

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delinquencies and nonperforming and potentially problematic loans. Citizens monitors its loans in an effort to proactively identify, manage, and mitigate any potential credit quality issues and losses.

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

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

As part of the overall credit underwriting and review process, Citizens carefully monitors commercial and industrial and commercial real estate 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 increased oversight, at management’s discretion, are considered ‘watchlist’ loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) and include loans that are in accruing or nonperforming status. Citizens utilizes the watchlist process as a proactive credit risk management practice to help mitigate the migration of commercial loans to nonperforming status and potential loss. Once a loan is placed on the watchlist, it is reviewed quarterly by the chief credit officer, senior credit officers, senior market managers, and commercial relationship officers to assess cash flows, collateral valuations, guarantor liquidity, and other pertinent trends. During these reviews, action plans are developed to address emerging problem loans or to implement specific actions for alternatives to strengthen the credit and/or for removing the loans from the portfolio. Additionally, loans viewed as substandard or doubtful are transferred to Citizens’ Special Loans or small business workout groups and are subjected to an even higher level of monitoring and workout activity. During 2009, Citizens expanded the watchlist process to include non-watch commercial credits with significant credit exposure, businesses affected by the automotive industry, other manufacturers in stressed industries, and additional segments of income producing commercial real estate.

The following table illustrates the commercial loans on the watchlist at December 31, 2009, 2008, and 2007 that, while still accruing interest, may be at risk due to general economic conditions or changes in borrower’s financial status.

						December 31,
Commercial Watchlist	2009					2008					2007
Accruing loans only			% of					% of					% of
(in millions)	$		Portfolio			$		Portfolio			$		Portfolio
Land Hold	$	24.8		68.99	%	$	18.5		41.11	%	$	25.1		40.81	%
Land Development		88.0		80.78			49.3		37.15			66.3		41.72
Construction		63.5		35.68			74.8		28.39			81.6		25.59
Income Producing		521.9		34.37			401.0		25.77			211.2		14.12
Owner-Occupied		247.3		25.09			178.4		18.44			184.1		17.34
Total Commercial Real Estate		945.5		33.45			722.0		24.35			568.3		18.35
Commercial and Industrial		475.3		24.05			436.8		16.78			387.4		15.15
Total Watchlist Loans	$	1,420.8		29.58	%	$	1,158.8		20.82	%	$	955.7		16.90	%

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The annual increases in watchlist loans were primarily the result of proactive commercial real estate downgrades as Citizens closely monitors borrowers’ repayment capacity in this environment and continued declines in commercial real estate values in Michigan and Northern Ohio. Additionally, the increase over December 31, 2008 was the result of proactive downgrades to commercial and industrial relationships related to the automotive industry due to the uncertainty of that industry during the first half of 2009. Some of the automotive-related credits continued to perform during 2009, and were subsequently upgraded and removed from the watchlist during the fourth quarter of 2009.

The following table illustrates loans where the contractual payment is 30 to 89 days past due and interest is still accruing at December 31, 2009, 2008, and 2007. While these loans are actively worked to bring them current, past due loan trends may be a leading indicator of potential future nonperforming loans and charge-offs.

						December 31,
Delinquency Rates By Loan Portfolio	2009					2008					2007
30 to 89 days Past Due			% of					% of					% of
(in millions)	$		Portfolio			$		Portfolio			$		Portfolio
Land Hold	$	0.6		1.56	%	$	3.9		8.67	%	$	4.6		7.48	%
Land Development		4.7		4.34			5.2		3.92			28.7		18.06
Construction		1.7		0.95			27.3		10.36			31.7		9.94
Income Producing		40.8		2.69			76.7		4.93			54.0		3.61
Owner-Occupied		25.0		2.53			37.5		3.88			20.3		1.91
Total Commercial Real Estate		72.8		2.57			150.6		5.08			139.3		4.50
Commercial and Industrial		17.0		0.86			56.5		2.17			39.0		1.53
Total Commercial Loans		89.8		1.87			207.1		3.72			178.3		3.15
Residential Mortgage		22.2		2.15			39.5		3.13			46.4		3.21
Direct Consumer		27.0		2.14			25.5		1.76			24.3		1.55
Indirect Consumer		16.3		2.02			18.5		2.25			15.9		1.92
Total Consumer Loans		65.5		2.11			83.5		2.36			86.6		2.25
Total Delinquent Loans	$	155.3		1.96	%	$	290.6		3.19	%	$	264.9		2.79	%

The decrease in delinquent loans from December 31, 2008 was primarily the result of continued emphasis on proactively managing all delinquent loans, with particular emphasis on delinquent commercial and residential mortgage loans. The majority of the delinquent direct consumer loans represent loans in a junior lien position. The increase in delinquent loans at December 31, 2008 as compared with December 31, 2007 was primarily the result of the continued weak economy in the Midwest, which primarily affected delinquencies in the commercial loan portfolios while total consumer loan delinquencies decreased slightly.

NONPERFORMING ASSETS

Loans are placed on nonaccrual status when there is substantial doubt regarding collection of principal or interest based on Citizens’ credit policies and practices or when principal or interest is past due in excess of 90 days. When a loan is placed on nonaccrual status, interest that is accrued but not collected is reversed and charged against income. Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days and still accruing interest, restructured loans, nonperforming loans held for sale, and other repossessed assets acquired. Although these assets have more than a normal risk of loss, they may not necessarily result in future losses. A five-year history of nonperforming assets is presented below. The nonperforming commercial loans in this table are also reviewed as part of the watchlist process.

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Nonperforming Assets and Past Due Loans							December 31,
(in thousands)	2009			2008			2007			2006			2005
Nonperforming Portfolio Loans (1)
Nonaccrual
Less than 30 days past due	$	89,241		$	35,168		$	8,133		$	4,305		$	4,206
From 30 to 89 days past due		63,464			25,257			11,617			1,413			1,136
90 or more days past due		317,048			243,868			165,647			52,174			26,798
Total		469,753			304,293			185,397			57,892			32,140
Loans 90 days or more past due and still accruing		3,039			1,486			3,650			767			238
Restructured loans and still accruing		2,629			256			315			378			—
Total nonperforming portfolio loans		475,421			306,035			189,362			59,037			32,378
Nonperforming loans held for sale		65,247			75,142			21,676			22,846			—
Other repossessed assets acquired		54,394			58,037			40,502			20,165			7,351
Total nonperforming assets(2)	$	595,062		$	439,214		$	251,540		$	102,048		$	39,729
Nonperforming loans as a percent of portfolio loans		6.01	%		3.36	%		1.99	%		0.64	%		0.58	%
Nonperforming assets as a percent of portfolio loans plus other repossessed assets acquired		7.48			4.79			2.64			1.10			0.71
Nonperforming assets as a percent of total assets		4.99			3.36			1.86			0.73			0.51
Nonperforming Portfolio Loans by Type (1) (3)
Commercial and industrial	$	86,337		$	66,285		$	16,581		$	8,843		$	12,118
Commercial real estate		236,753			162,544			110,159			14,915			5,068
Total commercial		323,090			228,829			126,740			23,758			17,186
Residential mortgage		127,100			59,515			46,865			28,428			8,412
Direct Consumer		22,601			15,076			13,700			6,041			4,326
Indirect Consumer		2,630			2,615			2,057			810			2,454
Total nonperforming portfolio loans	$	475,421		$	306,035		$	189,362		$	59,037		$	32,378

(1)	Refer to Note 4 for a summary of interest income foregone on nonaccrual and restructured loans, as of December 31, 2009, 2008 and 2007.
(2)	December 31, 2006 amounts include the following nonperforming asset balances acquired in the Republic merger: Less than 30 days past due and nonaccrual $0.6 million, from 30 to 89 days past due and nonaccrual $0.9 million, 90 days or more past due and nonaccrual $29.2 million, no 90 days or more past due and still accruing and no restructured loans, nonperforming held for sale $21.6 million, and other repossessed assets acquired $12.6 million.
(3)	December 31, 2006 amounts include the following nonperforming loan balances acquired in the Republic merger: Commercial $0.2 million, commercial real estate $8.4 million, residential mortgage $19.4 million, direct consumer $2.6 million, indirect consumer $0.1 million.

The increase in nonperforming assets over December 31, 2008 was primarily the result of deterioration in the real estate secured portfolios, especially residential mortgage loans due to the effects of the national mortgage foreclosure moratorium in early 2009, and general economic conditions in the Midwest during 2009. Nonperforming assets at December 31, 2009 include $152.7 million of loans that were proactively moved to nonperforming status by their respective relationship officer prior to the loans becoming 90 days past due and $30.9 million of restructured residential mortgage loans. The increase in nonperforming assets at December 31, 2008 as compared with December 31, 2007 was primarily the result of significant deterioration in the real estate secured portfolios (particularly commercial) and general economic deterioration in the Midwest.

Certain of the nonperforming loans included in the table above are considered to be impaired. A loan is considered impaired when Citizens determines it is probable that the principal and interest due under the original underwriting terms of 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 measures impairment on all nonaccrual commercial and industrial and commercial real estate loans for which it has established specific

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reserves. This policy does not apply to large groups of smaller balance homogeneous loans, such as smaller balance commercial loans, direct and indirect consumer loans and residential mortgage loans, which are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. The Corporation maintains a valuation reserve for impaired loans as a part of the specific allocated allowance component of the allowance for loan losses. Cash collected on impaired nonaccrual loans is generally applied to outstanding principal. At December 31, 2009 and 2008, all of the impaired loans were on a nonaccrual basis so there was no interest income recognized in these years after they were identified as impaired. For further discussion, see Note 4 to the Consolidated Financial Statements.

ALLOWANCE FOR LOAN LOSSES

A summary of Citizens’ loan loss experience for the past five years appears below.

Summary of Loan Loss Experience
(in thousands)	2009			2008			2007			2006			2005
Allowance for loan losses at January 1	$	255,321		$	163,353		$	169,104		$	116,400		$	122,184
Provision for loan losses		325,955			282,054			45,177			11,265			1,109
Charge-offs:
Commercial and industrial		63,849			27,001			6,123			4,468			9,165
Commercial real estate		123,858			112,478			27,194			2,826			3,755
Residential mortgage		18,965			24,569			5,141			1,640			1,152
Direct consumer		24,901			16,995			11,007			5,823			5,290
Indirect consumer		21,234			16,889			10,126			9,062			9,485
Total charge-offs		252,807			197,932			59,591			23,819			28,847
Recoveries:
Commercial and industrial		6,392			3,153			3,144			3,022			16,526
Commercial real estate		3,590			716			1,303			648			1,195
Residential mortgage		34			29			184			154			69
Direct consumer		1,557			1,726			1,723			1,389			1,419
Indirect consumer		2,328			2,222			2,309			2,342			2,745
Total recoveries		13,901			7,846			8,663			7,555			21,954
Net charge-offs		238,906			190,086			50,928			16,264			6,893
Allowance of acquired bank		—			—			—			57,703			—
Allowance for loan losses at December 31	$	342,370		$	255,321		$	163,353		$	169,104		$	116,400
Allowance for losses on lending-related commitments at December 31	$	3,166		$	3,941		$	5,571		$	6,119		$	3,023
Portfolio loans at year-end	$	7,905,859		$	9,102,598		$	9,501,244		$	9,231,082		$	5,616,119
Average portfolio loans		8,473,946			9,433,952			9,212,066			5,657,476			5,493,280
Allowance for loan losses as a percent of nonperforming loans		72.01	%		83.43	%		86.27	%		286.44	%		359.50	%
Allowance for loan losses as a percent of loans outstanding at year-end		4.33			2.80			1.72			1.83			2.07
Net loans charged off as a percent of average loans		2.82			2.01			0.55			0.29			0.13

Loan losses are charged against, and recoveries are credited to, the allowance for loan losses. The increase in net charge-offs for 2009 as compared with 2008 was primarily the result of higher charge-offs on commercial and industrial loans related to continued stress on the economic conditions in the markets Citizens’ serves. In 2008, commercial real estate charge-offs were recorded primarily in the land development, construction, and income producing categories portfolios. While the land development and construction losses for 2009 remained higher than historical trends, the losses on these portfolios decreased from 2008. Citizens also began to experience higher losses in the income producing and owner-occupied portfolios during 2009, which represents a shift in the risk profile in Citizens’ commercial real estate portfolio that was consistent with the experience of other financial institutions.

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

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portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical losses on each portfolio category and other qualitative and quantitative factors which could affect probable loan losses. 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. Citizens did not substantively change its overall approach in the calculation of the allowance for loan losses in 2009 from 2008 and the allocation methods used at December 31, 2009 and December 31, 2008 were consistent. The methodology used for measuring the adequacy of the allowance relies on 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 calculation. Management also considers overall portfolio indicators, including trends in historical charge-offs, a review of industry, geographic and portfolio performance, and other qualitative factors. This methodology is discussed in “Critical Accounting Policies” and Note 1 to the Consolidated Financial Statements.

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

Allocation of the Allowance for Loan Losses ⁽¹⁾

	2009					2008					2007					2006					2005
			% of					% of					% of					% of					% of
December 31,			Total					Total					Total					Total					Total
(in millions)	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
Specific allocated allowance:
Commercial (2)	$	45.9				$	39.9				$	17.8				$	7.6				$	5.1
Residential mortgage		6.9					—					—					—					—
Risk allocated allowances:
Commercial (2)		158.5		60.8	%		112.0		61.2	%		85.4		59.5	%		94.8		55.5	%		55.2		55.1	%
Residential mortgage		51.2		13.1			25.4		13.9			14.2		15.2			15.1		16.7			6.3		9.6
Direct Consumer		34.0		15.9			29.2		15.9			16.3		16.6			16.7		18.7			12.4		20.3
Indirect Consumer		39.5		10.2			35.9		9.0			23.6		8.7			25.5		9.1			27.5		15.0
Total risk allocated allowance		283.2					202.5					139.5					152.1					101.4
Total allocated		336.0		100.0	%		242.4		100.0	%		157.3		100.0	%		159.7		100.0	%		106.5		100.0	%
General valuation allowances		6.4					12.9					6.1					9.4					9.9
Total	$	342.4				$	255.3				$	163.4				$	169.1				$	116.4

(1)

The allocation of the allowance for loan losses in the above table is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. Citizens and its subsidiaries do not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified.

(2)

The commercial category includes both commercial and commercial real estate loans.

Specific Allocated Allowance. The specific allocated allowance is determined based on probable losses on specific commercial and industrial or commercial real estate loans as well as impairment on restructured residential mortgage loans. The increase over December 31, 2008 was primarily the result of the continued general economic conditions in the Midwest, and Citizens’ proactive credit culture to identify and reserve for commercial credits with material collateral shortfalls. During 2009, Citizens restructured $30.9 million of residential mortgage loans and the specific allocated allowance for these loans represents the potential shortfall in interest and principal as a result of the new loan terms. Appraisals are refreshed at least annually on commercial real estate loans and quarterly on residential mortgage loans, or more frequently if changes in the borrower’s financial condition or market conditions warrant.

Risk Allocated Allowance. The risk allocated allowance is comprised of several loan pool valuation allowances determined based on Citizens’ quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks such as changes in asset quality; the experience, ability and effectiveness of Citizens’ lending management; and the composition and concentrations of credit as well as other factors based upon the best judgment of management. The increase over December 31, 2008 was primarily the result of an

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increase in the recent loss migration rates and extended duration of commercial real estate, residential mortgage and consumer loans.

General Valuation Allowances. The general valuation allowances are based on existing regional and local economic factors, a macroeconomic adjustment factor used to calibrate for the current economic cycle the Corporation is experiencing, and other judgmental factors supported by qualitative documentation such as the inherent imprecision of the loan loss projection models. These factors could have a potentially negative impact on credit quality and result in future additional losses. These factors, coupled with an increase in other credits that are current in terms of principal and interest payments, but which may deteriorate in quality if economic conditions change, indicate that additional undetected losses exist in the loan portfolios. Based on these factors and recognizing the inherent imprecision of any loan loss allocation models, management believes that the general valuation reserve allowances at December 31, 2009 appropriately reflect probable inherent but undetected losses in the portfolio. The decrease in the general valuation allowance from December 31, 2008 reflects a shift from perceived risks in the manufacturing sector associated with the automotive industry from one year ago to uncertainty in the severity of losses related to residential mortgage loans due to the continued economic conditions in the markets Citizens serves.

GOODWILL

Goodwill at December 31, 2009 was $330.7 million, a decrease of $266.5 million or 44.6% from December 31, 2008. The decline was due to a non-cash and non-tax deductible $266.5 million goodwill impairment charge recorded in the second quarter of 2009 related to the Regional Banking line of business described in Note 6 to the Consolidated Financial Statements. Citizens will continue to perform evaluations on an interim basis if events or circumstances indicate that impairment may exist. There can be no assurance that such tests will not result in additional material impairment charges due to further developments in the banking industry or Citizens’ markets.

DEPOSITS

The table below provides a year-to-year comparison of average deposit balances over the last three years. Average, rather than period-end, balances can be more meaningful in analyzing deposit funding sources because of inherent fluctuations that occur on a monthly basis within most deposit categories.

Average Deposits	2009					2008					2007
	Average		Average			Average		Average			Average		Average
(in thousands)	Balance		Rate			Balance		Rate			Balance		Rate
Noninterest-bearing deposits	$	1,226,079		—	%	$	1,122,974		—	%	$	1,139,695		—	%
Interest-bearing demand deposits		979,590		0.43			771,735		0.66			831,983		0.69
Savings deposits		2,610,246		0.78			2,551,570		1.73			2,188,296		2.92
Time deposits		4,097,896		3.30			4,268,931		4.02			4,008,919		4.68
Total deposits	$	8,913,811		1.79	%	$	8,715,210		2.53	%	$	8,168,893		3.15	%

The increase in noninterest-bearing demand and interest-bearing demand balances over 2008 was primarily the result of customers holding higher balances in transaction accounts due to changes in FDIC coverage thresholds and a shift in funding mix from customer time deposits. Average time deposits declined primarily due to the aforementioned shift in funding mix. Savings deposits increased primarily as a result of growth in the new commercial on-balance sheet sweep product. The decrease in the average cost of the deposit portfolio resulted from the lower interest rate environment, partially offset by competitive deposit pricing pressures and a shift in deposit mix from lower cost noninterest-bearing demand and interest-bearing demand deposits to higher cost savings and time deposits.

As of December 31, 2009, certificates of deposit of $100,000 or more accounted for approximately 20.6% of total deposits. The maturities of these deposits are summarized below.

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Maturity of Time Certificates of Deposit of $100,000 or more at December 31, 2009

(in thousands)
Three months or less	$	293,700
After three but within six months		188,828
After six but within twelve months		225,518
After twelve months		1,130,142
Total	$	1,838,188

Citizens gathers deposits from the local markets of its banking subsidiaries and has used brokered deposits from time to time when cost effective. Time deposits greater than $100,000 decreased by $595.5 million at December 31, 2009 over the prior year-end primarily as a result of a planned reduction in brokered deposits and a shift in funding mix from customer time deposits to core deposits. The Corporation will continue to evaluate the use of alternative funding sources such as brokered deposits to best meet its funding objectives. Citizens continues to promote relationship driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies.

BORROWED FUNDS

Short-term borrowings are comprised of Federal funds purchased, securities sold under agreements to repurchase, other bank borrowings, and Treasury Tax and Loan borrowings. Short-term borrowings totaled $51.1 million at December 31, 2009 compared with $74.4 million at December 31, 2008. The decrease from December 31, 2008 was primarily the result of a decrease in short-term repurchase agreements. See Note 8 to the Consolidated Financial Statements for additional information on short-term borrowings.

Long-term debt is comprised of FHLB debt, subordinated notes, other promissory notes and other borrowed funds. Long-term debt totaled $1.5 billion at December 31, 2009, compared with $2.2 billion at December 31, 2008. FHLB debt decreased $347.8 million or 20.9% to $1.3 billion at December 31, 2009, primarily due to a run-off of FHLB debt. As of December 31, 2009, other borrowed funds decreased $332.3 million or 63.0% compared with December 31, 2008. This decrease was due primarily to Citizens’ Exchange Offers for long-term debt with a carrying value of $204.0 million and to a $128.6 million reduction in long-term securities repurchase agreements. The extinguished long-term debt was comprised of $107.8 million principal amount of its 5.75% Subordinated Notes ($104.2 million, net of early amortization of prior debt issuance costs) and $101.3 million aggregate liquidation amount of the 7.50% trust preferred securities of Citizens Funding Trust I ($99.8 million, net of early amortization of prior debt issuance costs). See Note 9 to the Consolidated Financial Statements for additional information.

CAPITAL RESOURCES

Citizens continues to maintain a strong capital position which supports current needs and provides a sound foundation to support further expansion. Regulatory capital ratios are consistently at or above the “well-capitalized” standards and all bank subsidiaries have sufficient capital to maintain a well-capitalized designation. The Corporation’s capital ratios for the past three years are presented below.

	Regulatory Minimum
	Adequately			Well-						December 31,
	Capitalized			Capitalized			2009			2008			2007
Risk based:
Tier 1 capital		4.00	%		6.00	%		12.52	%		12.21	%		9.18	%
Total capital		8.00			10.00			13.93			14.49			11.66
Tier 1 Leverage		4.00			5.00			9.21			9.66			7.53

Shareholders’ equity at December 31, 2009 decreased $270.3 million or 16.9% from December 31, 2008 to $1.3 billion. The decrease was primarily the result of the net losses incurred during 2009, partially offset by $197.6

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million of common equity generated in the Exchange Offers in the third quarter of 2009. Book value per common share at December 31, 2009 and 2008 was $2.69 and $10.60, respectively. The decrease in book value per common share from December 31, 2008 was due to the increase in the number of outstanding shares of Citizens common stock as a result of the Exchange Offers and, to a lesser extent, the net loss incurred for the year. See Note 14 to the Consolidated Financial Statements for additional information on the Exchange Offers.

During 2009, the Holding Company did not purchase any shares of common stock pursuant to the Corporation’s share repurchase program and is not likely to do so for the foreseeable future. Information regarding the Corporation’s share repurchase program is set forth later in this report under Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

In the ordinary course of business, Citizens has entered into certain contractual arrangements that require future cash payments and may impact liquidity. These obligations include deposits, issuance of debt to fund operations, purchase obligations to acquire goods or services, and property leases. The table below summarizes contractual obligations and future required minimum payments as of December 31, 2009. Refer to Notes 5, 7, 8, and 9 to the Consolidated Financial Statements for further discussion of these contractual obligations.

Contractual Obligations

	Minimum Payments Due by Period
December 31, 2009			Less than						More than
(in thousands)	Total		1 year		1-3 years		4-5 years		5 years
Deposits without stated maturities(1)(2)	$	5,018,203	$	5,018,203	$	—	$	—	$	—
Deposits with stated maturities(1)(2)		3,890,363		1,941,417		1,254,705		688,920		5,321
Fed funds purchased and securities sold under agreements to repurchase(1)		43,780		43,780		—		—		—
Other short-term borrowings(1)		7,283		7,283		—		—		—
FHLB borrowings(1)( 2)		1,305,627		475,210		487,822		500		342,095
Other borrowed debt(1)(2)		104,154		—		—		—		104,154
Subordinated debt(1)(2)		91,717		—		—		17,266		74,451
Purchase obligations		143,277		46,355		81,944		12,565		2,413
Operating leases and non-cancelable contracts		26,914		5,868		8,882		5,291		6,873
Total	$	10,631,318	$	7,538,116	$	1,833,353	$	724,542	$	535,307

(1)	In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from interest-bearing assets.
(2)	This schedule excludes all carrying value adjustments, such as purchase accounting fair value adjustments, hedge accounting fair value adjustments, and unamortized premiums and discounts, that will not affect future cash payments associated with the maturity of this debt.

At December 31, 2009, the Corporation’s liability for uncertain tax positions, including associated interest and penalties and net of related federal tax benefits, was $2.3 million. This liability represents an estimate of income taxes and other state tax matters which may ultimately not be sustained upon examination by the tax authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability has been excluded from the contractual obligations table.

Citizens has obligations not included in the above table under its retirement plans as described in Note 11 to the Consolidated Financial Statements. At December 31, 2009, the under funded status of the Cash Balance Pension Plan for Employees, the Retirement Health Plan and the Supplemental Pension Plans is recognized in the Corporation’s consolidated balance sheet as an accrued liability. Under current ERISA funding rules there is no required contribution to the defined benefit pension plan during calendar year 2010.

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Off-Balance Sheet Arrangements

In the normal course of business, in order to meet the financing needs of customers and to manage exposure to interest rate risk, Citizens enters into various transactions, which, in accordance with U.S. generally accepted accounting principles, are not included in its consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, commercial letters of credit; forward commitments to sell mortgage loans, and interest rate swaps. These transactions involve, to varying degrees, elements of credit risk, market risk and liquidity risk in excess of the amount recognized in the consolidated balance sheets, however, they do not represent unusual risks. The Corporation minimizes its exposure to loss under these transactions by subjecting them to credit approval and monitoring procedures.

The following table presents the total notional amounts and expected maturity of off-balance sheet financial instruments outstanding at December 31, 2009 and the notional amounts outstanding at December 31, 2008.

Off Balance Sheet Financial Instruments

			Expected Expiration Dates by Period
	December 31,		Less than						More than		December 31,
(in thousands)	2009		1 year		1-3 years		4-5 years		5 years		2008
Financial instruments whose contract amounts represent credit risk:
Loan commitments to extend credit	$	1,371,626	$	874,080	$	173,450	$	126,918	$	197,178	$	2,048,258
Standby letters of credit		236,006		111,524		79,698		9,940		34,844		247,367
Commercial letters of credit		23		23		—		—		—		—
Financial instruments subject to interest rate risk:
Receive fixed and pay fixed swaps		845,000		135,000		710,000		—		—		1,005,000
Customer initiated swaps and corresponding offsets		1,040,336		115,292		418,195		307,913		198,936		1,120,348
Total	$	3,492,991	$	1,235,919	$	1,381,343	$	444,771	$	430,958	$	4,420,973

Commitments to extend credit are legally binding agreements to lend cash to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Commitments to extend credit at December 31, 2009 decreased from December 31, 2008 primarily as a result of the current economic climate and reduced customer demand.

Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Corporation would be required to fund the commitment. The maximum potential amount of future payments the Corporation could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Corporation would be entitled to seek recovery from the customer. Standby letters of credit at December 31, 2009 decreased from December 31, 2008 primarily as a result of the current economic climate and reduced customer demand.

Commercial letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. These guarantees are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party.

The credit risk associated with commitments to extend credit and letters of credit is essentially the same as that involved with direct lending. Therefore, these agreements are subject to loan review and approval procedures and credit policies. Based upon management’s credit evaluation of the counter-party, collateral may be required as security for the agreement, including real estate, accounts receivable, inventories, and investment securities. The maximum credit risk associated with these instruments is equal to their contractual amounts, assuming that the counter-party defaults and the collateral proves to be worthless. The total contractual amounts of commitments to extend credit and letters of credit do not necessarily represent future cash requirements, since many of these agreements may expire without being drawn upon. Citizens’ commitments to extend credit and letters of credit are described in further detail in Note 16 to the Consolidated Financial Statements.

Refer to Notes 1 and 16 to the Consolidated Financial Statements for further discussion of derivative instruments.

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The Corporation has two active wholly owned trusts formed for the purpose of issuing securities which qualify as regulatory capital and are considered Variable Interest Entities (“VIEs”). The Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in the consolidated financial statements. Each of the two active trusts issued trust preferred securities to investors in 2006 and 2003, with respect to which there remain $48.7 million and $25.8 million in aggregate liquidation amounts outstanding, respectively. The trust preferred securities held by these entities qualify as Tier 1 capital and are classified as “long-term debt” on the Consolidated Balance Sheets, with the associated interest expense recorded in “long-term debt” on the Consolidated Statements of Operations. The expected losses and residual returns of these entities are absorbed by the trust preferred stock holders, and consequently the Corporation is not exposed to loss related to these VIEs. Refer to Note 9 to the Consolidated Financial Statements for further discussion.

At December 31, 2009, the unpaid principal balance of mortgage loans serviced for others was $372.1 million. These loans are not recorded on the Consolidated Financial Statements. Capitalized servicing rights relating to the serviced loans were $2.1 million at December 31, 2009.

Assets held in a fiduciary or agency capacity are not included in the Consolidated Financial Statements because they are not assets of Citizens. The total assets managed or administered by Citizens at December 31, 2009, in its fiduciary or agency capacity, were $2.1 billion.

LIQUIDITY RISK MANAGEMENT

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

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

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

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Credit Ratings

			Moody’s				Dominion
	Standard &		Investor		Fitch		Bond Rating
	Poor’s		Service		Ratings		Service
Citizens Republic Bancorp (Holding Company)
Long-Term Debt		B-		B2		B-		B (high)
Short-Term Debt		C		Not Prime		B		R-4
Trust Preferred		C		Caa2		C		B
Citizens Bank
Certificate of Deposit		—		Ba3		B		BB
F&M Bank-Iowa
Certificate of Deposit		—		—		B		BB

The primary sources of liquidity for the Holding Company are dividends from and returns on investments in its subsidiaries and existing cash resources. Banking regulations limit the amount of dividends a financial institution may declare to a parent company in any calendar year. 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. Throughout 2009, the Holding Company chose not to receive dividends from subsidiaries and paid no dividends to its common shareholders. In April 2008, the Holding Company’s board voted to suspend the common stock quarterly cash dividend as a means of bolstering the Holding Company’s capital position and strengthening its balance sheet. As of January 1, 2010 the subsidiary banks had the capacity to pay dividends of $4.3 million to the Holding Company without prior regulatory approval. The ability to borrow funds on both a short-term and long-term basis and to sell equity securities provides an additional source of liquidity for the Holding Company.

As of December 31, 2009, the Holding Company’s cash resources totaled $110.7 million. During 2009, the Holding Company contributed an aggregate amount of $74.0 million to Citizens Bank to bolster capital levels. The Holding Company’s interest and preferred dividend payment obligations are approximately $21 million annually, down from approximately $35 million annually at December 31, 2008 due to the completion of the Exchange Offers. Citizens monitors the relationship between cash obligations and available cash resources, and believes that the Holding Company has sufficient liquidity to meet its currently anticipated short and long-term needs.

In January 2010, Citizens suspended the dividend payments on its trust preferred securities and on the TARP Preferred Stock issued to the Treasury. This action will preserve $4.9 million in cash on a quarterly basis and reduces the need for Citizens to raise additional capital.

In January 2010, Citizens agreed to sell its F&M subsidiary to Great Western Bank. This transaction is expected to close in the second quarter of 2010 and will increase the Holding Company’s cash resources by approximately $50 million, improving its liquidity and strengthening its capital position.

The primary source of liquidity for the banking subsidiaries is customer deposits raised through the branch offices. Additional sources are wholesale borrowing, unencumbered or unpledged investment securities, and access to secured borrowing at the Federal Reserve Bank of Chicago, the Federal Home Loan Bank of Indianapolis, and the Federal Home Loan Bank of Des Moines.

Citizens maintains a very strong liquidity position due to its on-balance sheet liquidity sources and very stable funding base comprised of approximately 75% deposits, 13% long-term debt, 11% equity, and 1% short-term liabilities. Citizens also has access to high levels of untapped liquidity through collateral-based borrowing

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capacity provided by portions of both the loan and investment securities portfolios. Additionally, money market investments and securities available-for-sale could be sold for cash to provide liquidity.

The Corporation’s long-term debt to equity ratio was 114.0% as of December 31, 2009 compared with 137.0% at December 31, 2008. Changes in deposit obligations and short-term and long-term debt during 2009 are further discussed in the sections titled “Deposits” and “Borrowed Funds.” The Corporation believes that it has sufficient liquidity to meet presently known short and long-term cash-flow requirements arising from ongoing business transactions.

INTEREST RATE RISK

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

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

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

Rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing within one year by $886.8 million or 7.4% of total assets as of December 31, 2009 compared with $215.6 million or 1.6% of total assets at December 31, 2008. This reflects a more asset-sensitive position than at December 31, 2008 primarily due to the renewal and extension of a large amount of retail time deposits during 2009. These results incorporate the impact of off-balance sheet derivatives and reflect interest rates consistent with December 31, 2009 levels. Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis.

Citizens utilizes a net interest income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model measures the impact to net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions including prepayment speeds on various loan and investment assets, cash flows and maturities of financial instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and Citizens’ financial capital plans. These assumptions are inherently uncertain and subject to fluctuation and revision in a dynamic environment and as a result the model cannot perfectly forecast net interest

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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 December 31, 2009 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming expected changes in balance sheet composition over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to increase by 0.5% and 1.0%, respectively, from what it would be if rates were to remain at December 31, 2009 levels. Net interest income simulation for 100 and 200 basis point parallel declines in market rates were not performed at December 31, 2009 as the results would not have been meaningful given the current levels of short term market interest rates. These measurements represent less exposure to rising interest rates than at December 31, 2008, resulting from a reduction in fixed-rate assets and the aforementioned extension of retail time deposit maturities. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.

From time to time, derivative contracts are used to help manage or hedge exposure to interest rate risk and market value risk. Citizens enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and expected cash payments principally related to certain variable-rate loan assets and fixed-rate borrowings. Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain of its derivative counterparties that contain a provision where if it fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and Citizens would be required to settle its obligations under the agreements. Citizens has agreements with certain of its derivative counterparties containing provisions that require its debt to maintain an investment grade credit rating from each of the major credit rating agencies. Further discussion of derivative instruments is included in Note 17 to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated by reference from “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
Citizens Republic Bancorp and Subsidiaries

	December 31,
(in thousands, except share amounts)	2009			2008
Assets
Cash and due from banks	$	163,137		$	171,695
Money market investments		706,163			214,925
Investment Securities:
Securities available for sale, at fair value		2,225,065			2,248,772
Securities held to maturity, at amortized cost (fair value of $139,665 and $137,846, respectively)		137,094			138,575
Total investment securities		2,362,159			2,387,347
FHLB and Federal Reserve stock		156,278			148,764
Portfolio loans:
Commercial and industrial		1,976,105			2,602,334
Commercial real estate		2,826,741			2,964,721
Total commercial		4,802,846			5,567,055
Residential mortgage		1,036,443			1,262,841
Direct consumer		1,261,389			1,452,166
Indirect consumer		805,181			820,536
Total portfolio loans		7,905,859			9,102,598
Less: Allowance for loan losses		(342,370	)		(255,321	)
Net portfolio loans		7,563,489			8,847,277
Loans held for sale		80,459			91,362
Premises and equipment		117,095			124,217
Goodwill		330,744			597,218
Other intangible assets		14,378			21,414
Bank owned life insurance		220,190			218,333
Other assets		217,539			263,464
Total assets	$	11,931,631		$	13,086,016
Liabilities
Noninterest-bearing deposits	$	1,330,707		$	1,143,294
Interest-bearing demand deposits		1,114,863			780,176
Savings deposits		2,561,819			2,504,320
Time deposits		3,901,951			4,624,616
Total deposits		8,909,340			9,052,406
Federal funds purchased and securities sold under agreements to repurchase		43,780			64,072
Other short-term borrowings		7,283			10,377
Other liabilities		126,705			164,274
Long-term debt		1,513,487			2,193,566
Total liabilities		10,600,595			11,484,695
Shareholders’ Equity
Preferred stock — no par value:
Authorized - 5,000,000 shares; Issued and outstanding - 300,000 at 12/31/09 and 12/31/08, redemption value of $300 million		271,990			266,088
Common stock — no par value
Authorized - 1,050,000,000 shares at 12/31/09, 150,000,000 shares at 12/31/08;
Issued and outstanding - 394,397,406 at 12/31/09; 125,996,938 at 12/31/08		1,429,771			1,214,469
Retained (deficit) earnings		(363,632	)		170,358
Accumulated other comprehensive loss		(7,093	)		(49,594	)
Total shareholders’ equity		1,331,036			1,601,321
Total liabilities and shareholders’ equity	$	11,931,631		$	13,086,016

See notes to consolidated financial statements.

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Consolidated Statements of Operations
Citizens Republic Bancorp and Subsidiaries

(in thousands, except per share amounts)	2009			2008			2007
Interest Income
Interest and fees on loans	$	456,347		$	586,073		$	684,047
Interest and dividends on investment securities:
Taxable		80,437			78,089			88,078
Tax-exempt		26,340			29,096			29,268
Dividends on FHLB and Federal Reserve stock		4,255			7,269			6,414
Money market investments		1,300			384			104
Total interest income		568,679			700,911			807,911
Interest Expense
Deposits		159,798			220,883			257,194
Short-term borrowings		227			8,191			34,700
Long-term debt		91,286			122,905			133,838
Total interest expense		251,311			351,979			425,732
Net Interest Income		317,368			348,932			382,179
Provision for loan losses		325,955			282,054			45,177
Net interest (loss) income after provision for loan losses		(8,587	)		66,878			337,002
Noninterest Income
Service charges on deposit accounts		43,927			47,470			48,051
Trust fees		15,082			17,967			20,106
Mortgage and other loan income		12,609			11,443			16,021
Brokerage and investment fees		5,445			7,109			7,901
ATM network user fees		6,607			6,319			6,283
Bankcard fees		7,972			7,440			6,124
Losses on loans held for sale		(20,086	)		(9,373	)		(508	)
Net loss on debt extinguishment		(15,929	)		—			—
Other income		11,794			13,367			18,590
Total noninterest income		67,421			101,742			122,568
Noninterest Expense
Salaries and employee benefits		139,193			158,193			175,895
Occupancy		27,820			28,592			30,971
Professional services		11,996			15,184			18,031
Equipment		11,989			12,966			14,650
Data processing services		18,017			16,470			16,234
Advertising and public relations		7,146			5,897			7,282
Postage and delivery		5,844			7,342			7,800
Other loan expenses		24,913			13,381			5,518
Other real estate (ORE) expenses and losses		27,852			11,008			325
Intangible asset amortization		7,036			9,132			11,534
Goodwill impairment		266,474			178,089			—
Restructuring and merger related expenses		—			—			8,247
Other expense		54,741			34,448			30,936
Total noninterest expense		603,021			490,702			327,423
(Loss) Income Before Income Taxes		(544,187	)		(322,082	)		132,147
Income tax (benefit) provision		(29,974	)		70,970			31,305
Net (Loss) Income		(514,213	)		(393,052	)		100,842
Deemed dividend on convertible preferred stock		—			(11,737	)		—
Dividend on redeemable preferred stock		(19,777	)		(227	)		—
Net (Loss) Income Attributable to Common Shareholders	$	(533,990	)	$	(405,016	)	$	100,842
Net (Loss) Income Per Common Share:
Basic	$	(2.75	)	$	(4.30	)	$	1.33
Diluted		(2.75	)		(4.30	)		1.33
Average Common Shares Outstanding:
Basic		193,832,747			94,155,551			75,339,430
Diluted		193,853,037			94,169,844			75,522,807

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity
Citizens Republic Bancorp and Subsidiaries

													Accumulated
	Preferred												Other
	Stock			Common Stock						Retained			Comprehensive
(in thousands, except per share amounts)	Amount			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											100,842						100,842
Other comprehensive income:
Net unrealized gain on securities available-for-sale, net of tax effect of $5,380														9,991
Less: Reclassification adjustment for net losses included in net income, net of tax effect of $9														16
Net change in unrealized loss on qualifying cash flow hedges, net of tax effect of ($451)														(838	)
Net change in unrecognized pension and post retirement costs, net of tax effect of $1,781														3,307
Other comprehensive income total																	12,476
Total comprehensive income																	113,318
Proceeds from stock options exercised and restricted stock activity					709			4,833									4,833
Recognition of stock-based compensation								3,355									3,355
Cash dividends declared on common shares — $1.160 per share											(87,798	)					(87,798	)
Shares acquired for retirement and purchased for taxes					(663	)		(13,514	)								(13,514	)
Balance at December 31, 2007	$	—			75,722		$	975,446		$	597,333		$	5,101		$	1,577,880
Comprehensive loss, net of tax:
Net income											(393,052	)					(393,052	)
Other comprehensive (loss) income:
Net unrealized loss on securities available-for-sale														(46,725	)
Net change in unrealized gain on qualifying cash flow hedges														19,578
Net change in unrecognized pension and post retirement costs														(27,548	)
Other comprehensive income total																	(54,695	)
Total comprehensive loss																	(447,747	)
Issuance of preferred stock (2,408 shares), net of costs of $6,221		114,161															114,161
Deemed dividend on preferred stock		11,737									(11,737	)					—
Conversion of preferred stock to common stock		(125,898	)		30,096			125,898									—
Issuance of common stock, net of costs of $4,774					19,904			74,844									74,844
Issuance of redeemable preferred stock and warrant (300,000 shares)		265,861						34,139									300,000
Dividend on redeemable preferred stock		227									(227	)					—
Proceeds from stock options exercised and restricted stock activity					307			66									66
Recognition of stock-based compensation								4,520									4,520
Cash dividends declared on common shares — $0.290 per share											(21,959	)					(21,959	)
Shares purchased for taxes					(32	)		(444	)								(444	)
Balance — December 31, 2008	$	266,088			125,997		$	1,214,469		$	170,358		$	(49,594	)	$	1,601,321
Comprehensive income, net of tax:
Net loss											(514,213	)					(514,213	)
Other comprehensive income (loss):
Net unrealized gain on securities available-for-sale, net of tax effect of ($24,572)														45,626
Net change in unrealized loss on qualifying cash flow hedges, net of tax effect $3,478														(6,459	)
Net change in unrecognized pension and post retirement costs,														3,334
net of tex effect of ($1,795)
Other comprehensive income total																	42,501
Total comprehensive loss																	(471,712	)
Exchange of subordinated debt and trust preferred stock for common stock, net of costs of $6,368					268,216			213,569									213,569
Cash dividend on preferred stock											(13,875	)					(13,875	)
Accretion of preferred stock discount		5,902									(5,902	)					—
Proceeds from restricted stock activity					235												—
Recognition of stock-based compensation								1,803									1,803
Shares purchased for taxes					(51	)		(70	)								(70	)
Balance — December 31, 2009	$	271,990			394,397		$	1,429,771		$	(363,632	)	$	(7,093	)	$	1,331,036

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows
Citizens Republic Bancorp and Subsidiaries

	Year Ended December 31,
(in thousands)	2009			2008			2007
Operating Activities:
Net (loss) income	$	(514,213	)	$	(393,052	)	$	100,842
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for loan losses		325,955			282,054			45,177
Goodwill impairment		266,474			178,089			—
Net increase in deferred tax asset valuation allowance		79,788			136,568			—
Net (decrease) increase in current and deferred income taxes		(95,138	)		(55,697	)		21,782
Depreciation and software amortization		12,472			11,646			13,108
Amortization of intangibles		7,036			9,132			11,534
Amortization and fair value adjustments of purchase accounting mark to market, net		(10,270	)		(15,588	)		(24,847	)
Fair value adjustment on loans held for sale and other real estate		26,307			15,341			—
Discount accretion and amortization of issuance costs on long term debt		1,062			1,176			978
Net amortization (accretion) on investment securities		803			(4,509	)		(4,517	)
Net loss on debt extinguishment		15,929			—			—
Loans originated for sale		(300,677	)		(280,475	)		(504,672	)
Proceeds from loans held for sale		311,185			328,500			590,283
Net gains from loan sales		(7,280	)		(6,473	)		(9,036	)
Net loss (gain) on other real estate		2,653			2,068			(866	)
Recognition of stock-based compensation expense		1,803			4,520			3,355
Restructure and merger related		—			(3,260	)		(34,435	)
Other		(7,884	)		(14,961	)		3,537
Net cash provided by operating activities		116,005			195,079			212,223
Investing Activities:
Net (decrease) increase in money market investments		(491,238	)		(214,753	)		31
Securities available-for-sale:
Proceeds from sales		1,945			3			364,421
Proceeds from maturities and payments		656,564			453,033			521,453
Purchases		(572,948	)		(610,964	)		(174,633	)
Securities held-to-maturity:
Proceeds from maturities and payments		1,508			2,505			—
Purchases		—			(12,777	)		(19,387	)
Sale of branches, net of cash received		—			—			(163,592	)
Net decrease (increase) in loans and leases		900,129			99,357			(339,498	)
Proceeds from sales of other real estate		43,347			31,476			13,385
Net increase in properties and equipment		(6,878	)		(6,771	)		(7,043	)
Net cash provided (used) by investing activities		532,429			(258,891	)		195,137
Financing Activities:
Net increase (decrease) in demand and savings deposits		579,599			297,122			(95,886	)
Net (decrease) increase in time deposits		(724,070	)		451,391			(97,431	)
Net decrease in short-term borrowings		(23,385	)		(466,613	)		(396,420	)
Proceeds from issuance of long-term debt		—			1,550,000			1,591,750
Principal reductions in long-term debt		(475,191	)		(2,304,165	)		(1,295,537	)
Net proceeds from issuance of preferred convertible stock		—			114,161			—
Proceeds from issuance of preferred redeemable stock and warrant		—			300,000			—
Net proceeds from issuance of common stock		—			74,844			—
Cash dividends paid on common stock		—			(21,959	)		(87,798	)
Cash dividends paid on preferred stock		(13,875	)		—			—
Proceeds from stock options exercised and restricted stock activity		—			66			4,833
Shares acquired for retirement and purchased for taxes		(70	)		(444	)		(13,514	)
Net cash used by financing activities		(656,992	)		(5,597	)		(390,003	)
Net (decrease) increase in cash and due from banks		(8,558	)		(69,409	)		17,357
Cash and due from banks at beginning of period		171,695			241,104			223,747
Cash and due from banks at end of period	$	163,137		$	171,695		$	241,104
Supplemental Cash Flow Information:
Interest paid	$	261,523		$	359,685		$	430,064
Exchange of long-term debt for common stock		209,067			—			—
Exchange of subordinated debt and preferred stock for common stock		(219,937	)		—			—
Income taxes (refund) paid, net		(14,624	)		(9,902	)		9,523
Loans transferred to other real estate owned		53,320			46,826			37,868
Loans transferred to held-for-sale		35,221			80,044			—
Held for sale loans transferred to other real estate		13,167			12,453			—
Deemed dividend on convertible preferred stock		—			11,737			—
Dividend on redeemable preferred stock		5,902			227			—

See notes to consolidated financial statements.

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Citizens Republic Bancorp, Inc.

Notes To Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Unless the context indicates otherwise, all references in this Form 10-K to “Citizens” or the “Corporation,” refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the “Holding Company” refer to Citizens Republic Bancorp, Inc. alone. Citizens was incorporated in the State of Michigan in 1980, is a diversified banking and financial services company that is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Citizens provides a full range of banking and financial services to individuals and businesses through its subsidiaries Citizens Bank and F&M Bank-Iowa (“F&M”). These services include deposit products, loan products, and other consumer-oriented financial services such as safe deposit and night depository facilities, and Automated Teller Machines (“ATMs”). Among the services designed specifically to meet the needs of businesses are various types of specialized financing, treasury management services, and transfer/collection facilities. Citizens also provides wealth management services through Citizens Bank Wealth Management, N.A., and through the affiliate trust department of F&M. The Corporation is not dependent upon any single or limited number of customers, the loss of which would have a material adverse effect on the Corporation. No material portion of the business of the Corporation is seasonal.

Note 1. Summary of Significant Accounting Policies

The accounting and reporting policies for Citizens conform to U.S. generally accepted accounting principles (“GAAP”). The following describes Citizens’ policies:

Basis of Financial Statement Presentation

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, loans held for sale, other real estate owned, goodwill and core deposit intangible assets, fair value measurements, pension and postretirement benefits, derivative instruments and income taxes.

In the third quarter of 2009, Citizens adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 105 “FASB Accounting Standards Codification^TM”. ASC Topic 105 establishes the ASC as the single source of authoritative GAAP recognized by the FASB, superseding existing FASB, American Institute of Certified Public Accounts (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature for all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption did not have an impact on Citizens’ financial condition, results of operations or liquidity.

The Corporation also determines whether it should consolidate other entities or account for them on the equity method of accounting depending on whether it has a controlling financial interest in an entity of less than 100% of the voting interest of that entity to determine if it is a Variable Interest Entity (“VIE”). A VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. An entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns or both. VIE treatment is considered for entities in which the total equity investment at

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risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make financial and operating decisions.

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

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Generally, U.S. government and Federal agency securities are pledged as collateral under these financing arrangements and cannot be sold or repledged by the secured party. The fair value of collateral either received from or provided to a third party is continually monitored and additional collateral is obtained or requested to be returned to Citizens as deemed appropriate.

Investment Securities

At the time of purchase, securities are classified as held to maturity or available for sale. Investment securities classified as held to maturity, which management has the positive intent and ability to hold to maturity, are reported at amortized cost, and adjusted for amortization of premiums and accretion of discounts, using the effective yield method. The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts, or in the case of mortgage-related securities, over the estimated life of the security. Such amortization and accretion is included in interest income from the related security. Available for sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in shareholders’ equity as a separate component of other comprehensive income. The cost of securities sold is based on the specific identification method. An investment is considered impaired if its fair value is less than its amortized cost. Impairment is considered temporary if there is no intent or requirement to sell the impaired security. Any security for which there has been an other-than-temporary impairment of value is written down to its estimated fair value through a charge to earnings for the amount representing the credit loss on the security and a charge recognized in other comprehensive income related to all other factors. Realized securities gains or losses and declines in value judged to be other-than-temporary representing credit losses are included in investment securities gains (losses), net, in the consolidated statements of income.

In April 2009, Citizens adopted new guidance for determining whether an impairment is other than temporary to debt securities, which replaced existing requirements that Citizens’ management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Declines in fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. The new guidance was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Citizens adopted this guidance in the second quarter of 2009, and it did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

Loans

Loans are reported at the principal amount outstanding, net of unearned income. Interest income is recognized on an accrual basis. Loan origination fees, certain direct and indirect costs, unamortized premiums and unearned discounts are deferred and amortized into interest income as an adjustment to the yield over the term of the loan.

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Loan commitment fees are generally deferred and amortized into fee income on a straight-line basis over the commitment period. Other credit-related fees, including letter and line of credit fees, are amortized into fee income on a straight-line basis over their contractual life.

Loans are placed on nonaccrual status when the collection of principal or interest is considered doubtful or payment of principal or interest is past due 90 days or more. When loans are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Loans are normally restored to accrual status when interest and principal payments are current and it is believed that the financial condition of the borrower has improved to the extent that future principal and interest payments will be met on a timely basis.

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

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that will be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including the performance of the Corporation’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Corporation’s allowance for loan losses consists of three elements: (i) specific allocated allowances determined based on probable losses on specific commercial loans; (ii) risk allocated allowance which is comprised of several loan pool valuation allowances based on quantitative Citizens’ loan loss experience for similar loans with similar risk characteristics, with additional qualitative risks determined by the judgment of management; and (iii) general valuation allowances determined based on existing regional and local economic factors, including deterioration in commercial and residential real estate values, a macroeconomic adjustment factor used to calibrate for the current economic cycle the bank is experiencing, and other judgmental factors supported by qualitative documentation such as the inherent imprecision of the loan loss projection models.

Based on internal credit rating, commercial and industrial and commercial real estate loans exceeding certain fixed dollar amounts are evaluated for impairment on a loan-by-loan basis whereby an allowance is established as a component of the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. In most instances the fair value is measured based on the fair value of the collateral. Fair value may also be measured using the present value of expected future cash flows discounted at the loan’s effective interest rate.

Loans Held for Sale

Loans that the Corporation has the intent to sell are classified as held for sale and are carried at the lower of cost or fair value, net of estimated costs to sell. The fair value of commercial real estate loans held for sale is measured based on the fair value of the underlying collateral adjusted for management’s best estimate due to current market conditions. The fair value of residential mortgage loans originated for sale in the secondary market is based on purchase commitments or quoted prices for the same or similar loans. The fair value of nonperforming residential mortgage loans is based on the fair value of the underlying collateral adjusted for management’s best estimate due to current market conditions. Gains and losses on the sales of loans are

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determined using the specific identification method. Subsequent valuation adjustments to reflect current fair value, as well as gains and losses on disposal of these loans are charged to noninterest income as incurred.

On December 10, 2007, Citizens entered into a contract with PHH Mortgage Corporation (“PHH”). In March 2008, PHH began performing mortgage loan processing, servicing, secondary market functions and other mortgage-related loan origination services. Citizens sells substantially all of its mortgage originations to PHH at a contractual price, generally within 10 days after closing. Prior to the PHH alliance, Citizens sold substantially all fixed-rate single-family mortgage loans originated, including adjustable-rate loans that convert to fixed-rate loans within 60 days after closing.

Premises and Equipment

Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis and are charged to expense over the lesser of the estimated useful life of the assets or lease term. Useful lives range from three to seven years for furniture, fixtures, and equipment and seven to forty years for buildings and improvements. Maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions are charged to income as incurred.

Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, Citizens recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis.

Other Real Estate Owned

Other real estate owned is comprised of commercial and residential real estate properties acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. These properties are carried at the lower of cost or fair value at the time of acquisition, net of estimated costs to sell, based upon current appraised value adjusted for management’s best estimate due to current market conditions. Losses arising from the initial acquisition of such properties are charged against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to reflect the lower of cost or fair value, as well as gains and losses on disposal of these properties are charged to noninterest expense as incurred.

Bank Owned Life Insurance

Bank Owned Life Insurance is recorded as an asset at the amount that could be realized under the insurance contracts as of the date of the consolidated balance sheets. The change in cash surrender value during the period is an adjustment of premiums paid in determining the expense or income to be recognized under the contracts for the period. This change is recorded in noninterest income as cash surrender value of life insurance revenue.

Goodwill and Core Deposit Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is tested at least annually for impairment and Citizens performs its annual impairment test as of October 1 each year. Evaluations are also performed on a more frequent basis if events or circumstances indicate that it is more likely than not that the fair values of the reporting units are below their respective carrying amounts. Such events could include a significant adverse change in legal factors or in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment, an unanticipated loss of key employees, a decision to change the operations or dispose of a reporting unit, cash or operating losses, significant revision to forecasts, or a long-term negative outlook for the industry.

Impairment of goodwill is evaluated by reporting unit, which is the equivalent to Citizens’ lines of business. For the Step 1 analysis, the fair value of the reporting units is estimated using discounted cash flow models derived from internal earnings forecasts. The primary assumptions used by Citizens include ten-year earnings forecasts,

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terminal values based on estimated future growth rates, and discount rates based on capital asset pricing models. A Step 1 analysis is prepared for each reporting unit, including those without goodwill, in order to analyze the implied control premium, which measures the difference between the combined fair value of Citizens’ reporting units calculated in Step 1 and Citizens’ total market value as a percentage of total market value. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step (Step 2) of the goodwill impairment test is required for those reporting units that have goodwill to measure the amount of impairment, if any. In Step 2 of the test, Citizens estimates the fair value of a reporting unit’s assets and liabilities in the same manner as if a purchase of the reporting unit was taking place using exit pricing, which includes estimating the fair value of other implied intangibles. Any excess of this hypothetical purchase price over the fair value of the reporting unit’s net assets (excluding goodwill) represents the implied fair value of goodwill. If the implied fair value of goodwill calculated in Step 2 is less than the carrying amount of goodwill, an impairment loss is charged to noninterest expense to reduce the carrying amount to the implied fair value. The writedown cannot exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of previously recognized goodwill writedowns.

Core deposit intangible assets represent the present value of the cost savings obtained from funding associated with the purchase of core deposits through an acquisition. Core deposit intangible assets are valued using a discounted cost savings approach. All of Citizens’ core deposit intangible assets have finite lives, are amortized on an accelerated basis corresponding with the anticipated lives of the underlying deposits over varying periods not exceeding 10 years, and are subject to impairment testing.

Pension and Postretirement Benefits

Citizens has recognized the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents the net unrecognized actuarial losses and unrecognized prior service costs that will be subsequently recognized as net periodic pension cost pursuant to Citizens’ historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost.

As of December 31, 2009, Citizens adopted new guidance that requires fair value disclosures for each major pension asset category on the basis of the net asset value per share of the investment (or its equivalent). The adoption did not have an impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 11 for additional disclosures.

Fair Value Measurements

Fair value is defined as the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which Citizens would complete a transaction. Fair value is based on management’s best estimate of the assumptions market participants would use when pricing an asset or liability and a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Citizens bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For assets and liabilities recorded at fair value, it is Citizens’ policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates which require significant judgment, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. There are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction and considers additional factors for determining

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whether there has been a significant decrease in market activity for an asset when the market for that asset is not active.

In February 2007, the FASB issued new guidance, which was effective January 1, 2008, allowing an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. To date, Citizens has not elected to adopt the fair value option for any financial assets or financial liabilities at this time.

In 2009, Citizens adopted new guidance to expand its fair value disclosures to include nonfinancial assets and liabilities, enhance its fair value disclosures for financial assets and liabilities, and provide disclosures on financial instruments in interim financial reports. Citizens discloses in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the balance sheet. These changes did not have a material impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 10 for additional disclosures.

Derivative Instruments

Citizens enters into derivative transactions from time to time to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Under the guidelines of ASC 815, as amended, all derivative instruments are required to be carried at fair value on the balance sheet. ASC 815 also provides special hedge accounting provisions. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the balance sheet with corresponding offsets recorded in the income statement. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the interest income or expense recorded on the hedged asset or liability.

Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders’ equity, net of tax. Amounts are reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction 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 noninterest income.

Prior to the PHH alliance, Citizens sold substantially all fixed-rate single-family mortgage loans originated, including adjustable-rate loans that convert to fixed-rate loans. Citizens utilized mandatory forward commitments to protect against changes in interest rates and prices on its mortgage pipeline. These derivatives were marked to market through earnings. Citizens was also required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments met the definition of a derivative. Citizens also recorded as derivatives, residential loan commitments associated with loans held for sale. These derivatives were marked to market through earnings.

Citizens enters into various derivative agreements with customers desiring protection from possible adverse future fluctuations in interest rates. As an intermediary, Citizens generally maintains a portfolio of matched offsetting derivative agreements. These contracts are marked to market through earnings.

In January 2009, Citizens adopted new guidance to enhance required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding (a) how and why an entity uses derivative

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instruments; (b) how derivative instruments and related hedged items are accounted for; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Disclosures include objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments. Citizens records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether Citizens has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Citizens may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The adoption had no impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 17 for additional disclosures.

Income Taxes

Amounts provided for income tax expense (benefit) are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable (receivable) under tax laws. Deferred income taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent on utilizing taxable income in prior carryback years, generating future taxable income, executing tax planning strategies, and reversing existing taxable temporary differences. Currently, the ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible.

The Corporation 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.

The Corporation files a consolidated federal income tax return and various Holding Company and subsidiary state income tax returns. When income and expenses are recognized in different periods for tax purposes, applicable deferred taxes are provided in the Consolidated Financial Statements. Accordingly, amounts equal to the tax benefits of those subsidiaries having taxable federal losses or credits are offset by other subsidiaries that incur federal tax liabilities. Citizens recognizes interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts.

Stock-Based Compensation

Compensation expense for stock options and restricted stock awards are recognized in salaries and employee benefits based on the fair value at the date of grant and is recognized on a straight line basis over the requisite service period of the awards. Refer to Note 12 for additional disclosures.

Net Income per Common Share

Basic net income (loss) per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in each period. Diluted net income per common share shows the dilutive effect of additional common shares issuable upon the assumed exercise of stock options granted under Citizens’ stock option plans, using the treasury stock method, and restricted stock awards granted but not yet vested. In January 2009, Citizens adopted new guidance which provides that unvested share-based

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payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method, which was applied retrospectively to all periods presented. The adoption did not have a material impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 14 for additional disclosures.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents are considered to include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and securities purchased under agreements to resell.

Reclassifications

Certain amounts have been reclassified to conform to the current year presentation.

Note 2. Pending Accounting Pronouncements

Accounting Standard Updates (“ASU”)

Statements of Financial Accounting Standards (“SFAS”)

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

This ASU requires new disclosures and clarifies existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting, as well as clarify the requirements of existing disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the certain disclosure requirements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 is expected to have a significant impact on Citizens future fair value disclosures.

SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (subsequently codified by ASU 2009-17, Consolidations — Topic 810)

This ASU replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, is the primary beneficiary and is required to consolidate a VIE with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the entity. In addition, ASU 2009-17 requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE and requires enhanced disclosures about an enterprise’s involvement with a VIE. ASU 2009-17 is effective at the start of fiscal years beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. The adoption is not expected to have a material impact on Citizens’ financial condition, results of operations, or liquidity.

SFAS No. 166, “Accounting for Transfers of Financial Assets” (subsequently codified by ASU 2009-16, Transfers and Servicing — Topic 860)

This ASU was issued in response to the FASB’s concerns about certain transfers of financial assets that should not qualify as sales. The most significant amendment resulting from this statement consists of removing the concept of a qualifying special-purpose entity. It also changes the requirements for derecognizing financial assets, and requires additional disclosures as well as more information about transfers of financial assets, including securitization transactions, where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of fiscal years beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. The adoption is not expected to have a material impact on Citizens’ financial condition, results of operations, or liquidity.

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Note 3. Investment Securities

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

						December 31, 2009						December 31, 2008
			Estimated								Estimated
	Amortized		Fair		Gross Unrealized				Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		Losses		Cost		Value		Gains		Losses
Securities available for sale:
Federal agencies	$	145,782	$	149,033	$	3,251	$	—	$	248,819	$	257,445	$	8,626	$	—
Collateralized mortgage obligations		451,134		442,989		7,202		15,347		528,626		471,010		4,147		61,763
Mortgage-backed		1,129,146		1,164,450		36,521		1,217		960,841		973,961		13,929		809
State and municipal		439,587		450,647		11,741		681		531,625		538,761		10,990		3,854
Other		17,951		17,946		—		5		7,598		7,595		—		3
Total available for sale	$	2,183,600	$	2,225,065	$	58,715	$	17,250	$	2,277,509	$	2,248,772	$	37,692	$	66,429
Securities held to maturity:
State and municipal
Total held to maturity	$	137,094	$	139,665	$	3,116	$	545	$	138,575	$	137,846	$	1,708	$	2,437
FHLB and Fed Reserve stock	$	156,278	$	156,278	$	—	$	—	$	148,764	$	148,764	$	—	$	—

Securities with amortized cost of $1.1 billion at December 31, 2009, and $1.3 billion at December 31, 2008 were pledged to secure public deposits, repurchase agreements and other liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of securities of any single issuer exceeded 10% of consolidated shareholders equity at December 31, 2009 or 2008.

The amortized cost, estimated fair value, and weighted average yields of debt securities by maturity at December 31, 2009 are shown below. Maturities of mortgage-backed securities are based upon current industry prepayment schedules.

December 31, 2009	Amortized		Estimated Fair
(in thousands)	Cost		Value
Securities available for sale:
Federal agencies and state and municipal
Contractual maturity within one year	$	139,841	$	143,289
After one year through five years		146,717		151,649
After five years through ten years		194,403		199,441
After ten years		104,408		105,301
Subtotal		585,369		599,680
Collateralized mortgage obligations and mortgage-backed		1,580,280		1,607,439
Other		17,951		17,946
Total available for sale	$	2,183,600	$	2,225,065
Securities held to maturity:
State and municipal
After one year through five years	$	3,905	$	4,106
After five years through ten years		55,973		57,611
After ten years		77,216		77,948
Total held to maturity	$	137,094	$	139,665

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A total of 239 securities had unrealized losses at December 31, 2009 compared with 486 securities at December 31, 2008. These securities, with unrealized losses aggregated by investment category and length of time in a continuous unrealized loss position, are as follows:

December 31, 2009	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
| | | | | |
Securities available for sale:
Collateralized mortgage obligations	$	51,985	$	452	$	146,052	$	14,895	$	198,037	$	15,347
Mortgage-backed		110,191		1,211		264		6		110,455		1,217
State and municipal		29,398		402		9,471		279		38,869		681
Other		324		5		—		—		324		5
Total available for sale	$	191,898	$	2,070	$	155,787	$	15,180	$	347,685	$	17,250
Securities held to maturity:
State and municipal
Total held to maturity	$	20,271	$	319	$	2,290	$	226	$	22,561	$	545
Total	$	212,169	$	2,389	$	158,077	$	15,406	$	370,246	$	17,795

December 31, 2008	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
| | | | | |
Securities available for sale:
Collateralized mortgage obligations	$	231,892	$	61,436	$	3,085	$	327	$	234,977	$	61,763
Mortgage-backed		74,081		796		421		13		74,502		809
State and municipal		112,353		3,688		3,220		166		115,573		3,854
Other		7		3		—		—		7		3
Total available for sale	$	418,333	$	65,923	$	6,726	$	506	$	425,059	$	66,429
Securities held to maturity:
State and municipal
Total held to maturity	$	51,896	$	1,967	$	6,481	$	470	$	58,377	$	2,437
Total	$	470,229	$	67,890	$	13,207	$	976	$	483,436	$	68,866

Citizens performs a review of securities with unrealized losses at each reporting period. Citizens assesses each holding to determine whether and when a security will recover in value, whether it intends to sell the security and whether it is more likely than not that Citizens will be required to sell the security before the value is recovered. In assessing the recovery of value, the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, historical payment history of the security, changes to the credit rating of the security, recoveries or declines in value subsequent to the balance sheet date or any other relevant factors. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost, increases. As of December 31, 2009, Citizens has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above table are believed to be temporary and thus no impairment loss has been realized in the Consolidated Statement of Operations. Citizens has not decided to sell

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securities with unrealized losses nor does Citizens believe it will be required to sell securities before the value is recovered, but may change its intent in response to significant, unanticipated changes in policies, regulations, statutory legislation or other aforementioned criteria.

The collateralized mortgage obligations (“CMO”) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At December 31, 2009, the whole loan CMOs had a market value of $188.7 million with gross unrealized losses of $15.0 million. Citizens performs a thorough credit review on a quarterly basis for the underlying mortgage collateral as well as the supporting credit enhancement and structure. The results of the December 31, 2009 credit review demonstrated continued strength and no material degradation in the holdings.

Citizens has determined there is no other-than-temporary impairment at December 31, 2009.

For the year ending December 31, 2009, Citizens sold available for sale securities with proceeds of $1.9 million and recorded a loss of less than $0.1 million. Citizens completed security sales of $0.3 million and recorded a loss of less than $0.1 million in 2008.

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

Citizens primarily extends credit within the Midwestern states of Michigan, Wisconsin, Ohio, Iowa, and Indiana. In Michigan, the primary market is concentrated in the Lower Peninsula with a small presence in the Upper Peninsula. In Wisconsin, the primary markets include the greater Green Bay Metropolitan area, the Fox Valley region which extends from Appleton to Oshkosh, suburban Milwaukee, and also rural markets in southern and northern Wisconsin. In Ohio, the primary market is the greater Cleveland area. In Iowa, the primary market is the central region of the state. In Indiana, the primary market is Indianapolis. Citizens seeks to limit its credit risk by using established guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries and geographic areas. Collateral is secured based on the nature of the credit and management’s credit assessment of the customer. Total portfolio loans outstanding are recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments.

The majority of Citizens’ commercial real estate loans consist of mortgages on non-owner occupied properties. Those borrowers are involved in real estate business activities and the sources of repayment are dependent on the performance of the real estate market. In such cases, Citizens generally requires the borrower to have a proven record of success and to meet Citizens’ underwriting criteria for this type of credit risk. Citizens does not have a concentration in any single industry that exceeds 10% of total loans which is not disclosed on the face of the balance sheet.

A summary of nonperforming assets follows:

	December 31,
(in thousands)	2009		2008
Nonperforming portfolio loans:
Nonaccrual	$	469,753	$	304,293
Loans 90 days or more past due and still accruing		3,039		1,486
Restructured loans and still accruing		2,629		256
Total nonperforming portfolio loans		475,421		306,035
Nonperforming loans held for sale		65,247		75,142
Other repossessed assets acquired		54,394		58,037
Total nonperforming assets	$	595,062	$	439,214

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There are no significant commitments outstanding to lend additional funds to clients whose loans were classified as nonaccrual or restructured at December 31, 2009.

The effect of nonperforming portfolio loans on interest income follows:

(in thousands)	2009		2008		2007
Interest income:
At contract rates	$	29,963	$	25,131	$	13,557
As actually recognized		6,801		7,987		6,307
Interest foregone	$	23,162	$	17,144	$	7,250

A summary of impaired loans and their effect on interest income follows:

					Valuation Reserve
(in thousands)	2009		2008		2009		2008
Balances at December 31
Impaired loans with valuation reserve	$	162,962	$	101,671	$	52,840	$	39,885
Impaired loans with no valuation reserve		141,408		87,330		—		—
Total impaired loans	$	304,370	$	189,001	$	52,840	$	39,885
Impaired loans on nonaccrual basis	$	304,370	$	189,001	$	52,840	$	39,885
Impaired loans on accrual basis		—		—		—		—
Total impaired loans	$	304,370	$	189,001	$	52,840	$	39,885
Average balance for the year	$	318,709	$	113,553
Interest income recognized for the year		403		—
Cash collected applied to outstanding principal		11,560		11,163

The Consolidated Financial Statements do not include loans serviced for others, which totaled $372.1 million, and $450.2 million at December 31, 2009 and 2008, respectively.

A summary of changes in the allowance for loan losses follows:

(in thousands)	2009			2008			2007
Allowance for loan losses at January 1	$	255,321		$	163,353		$	169,104
Provision for loan losses		325,955			282,054			45,177
Charge-offs		(252,807	)		(197,932	)		(59,591	)
Recoveries		13,901			7,846			8,663
Net charge-offs		(238,906	)		(190,086	)		(50,928	)
Allowance for loan losses at December 31	$	342,370		$	255,321		$	163,353
Allowance for losses on lending-related commitments — December 31	$	3,166		$	3,941		$	5,571

Loans Held for Sale. Loans held for sale are comprised of commercial real estate and residential mortgage loans. Held for sale loans at December 31, 2009 totaled $80.5 million, a decrease of $10.9 million or 11.9% from December 31, 2008. The decrease reflects a decline in commercial loans held for sale due to customer paydowns, workout activities, writedowns to reflect market-value declines for the underlying collateral and transfers to ORE. The decrease was partially offset by the transfer of $35.2 million in nonperforming land hold, land development, and commercial construction loans from the loan portfolio at fair value.

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Note 5. Premises and Equipment

A summary of premises and equipment follows:

	December 31,
(in thousands)	2009			2008
Land	$	28,320		$	29,621
Buildings		163,637			164,177
Leasehold improvements		13,718			13,234
Furniture and equipment		132,739			131,961
		338,414			338,993
Accumulated depreciation and amortization		(221,319	)		(214,776	)
Total	$	117,095		$	124,217

Certain branch facilities and equipment are leased under various operating contracts. Total rental expense, including expenses related to these operating leases, was $6.3 million in 2009, $6.8 million in 2008, and $7.7 million in 2007. Future minimum rental commitments under non-cancelable operating leases are as follows at December 31, 2009:

	Rental
(in thousands)	Commitments
2010	$	5,868
2011		4,783
2012		4,099
2013		3,318
2014		1,973
Thereafter		6,873
Total	$	26,914

Note 6. Goodwill and Core Deposit Intangible Assets

As a result of ongoing volatility in the financial industry, the challenging economic conditions in Michigan and the Upper Midwest, and continued deterioration in the credit quality of Citizens loan portfolios, Citizens determined that it was more likely than not that the fair value of a reporting unit may have been reduced below its carrying amount. Therefore, Citizens performed an interim goodwill impairment test during the second quarter of 2009. The Step 1 analysis indicated that the carrying amount exceeded estimated fair value for the Regional Banking line of business; therefore, Step 2 testing was required. Citizens determined, as a result of the Step 2 analysis, that the goodwill allocated to Regional Banking was impaired. During the second quarter of 2009, Citizens recorded a non-cash goodwill impairment charge against the goodwill allocated to the Regional Banking line of business of $266.5 million. The goodwill impairment charge was not tax deductible, did not impact Citizens’ tangible equity or regulatory capital ratios, and did not adversely affect Citizens’ overall liquidity position. Previously, Citizens recorded a goodwill impairment charge during the second quarter of 2008, when it determined that the fair value of the Specialty Commercial reporting unit was below its carrying value. At that time, Citizens recorded a non-cash, not tax-deductive goodwill impairment charge of $178.1 million, representing the entire amount of goodwill allocated to the Specialty Commercial reporting unit.

The interim goodwill analysis performed did not change the timing of Citizens’ annual goodwill impairment test, which was performed during the fourth quarter of 2009.

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As of October 1, 2009, the annual impairment test was performed using management’s most recent long-term financial projections and current risk-adjusted discount rates. The Step 1 analysis indicated that the carrying amount exceeded estimated fair value for the Regional Banking reporting unit; therefore, Step 2 testing was required. Citizens determined, as a result of the Step 2 analysis, that the remaining goodwill allocated to Regional Banking was not impaired due to the implied fair value of goodwill exceeding the carrying amount of goodwill. Citizens performed an evaluation to determine if events or circumstances indicated additional goodwill impairment at December 31, 2009. As the key inputs and drivers remained consistent with those used as of the annual impairment testing date, Citizens concluded that no additional impairment was indicated.

A summary of goodwill allocated to the lines of business as of December 31, 2009 and December 31, 2008 follows:

	Regional			Specialty			Wealth		Total
(in thousands)	Banking			Commercial			Management		Goodwill
Balance at December 31, 2007	$	595,418		$	178,089		$	1,801	$	775,308
Impairment Loss		—			(178,089	)		—		(178,089	)
Tax Benefits on Share Based Payments		(1	)		—			—		(1	)
Balance at December 31, 2008	$	595,417		$	—		$	1,801	$	597,218
Impairment Loss		(266,474	)		—			—		(266,474	)
Balance at December 31, 2009	$	328,943		$	—		$	1,801	$	330,744

A summary of core deposit intangibles at December 31, 2009 and 2008 follows:

	December 31,
(in thousands)	2009			2008
Core deposit intangibles	$	62,835		$	62,835
Accumulated amortization		(48,457	)		(41,421	)
Total other intangibles	$	14,378		$	21,414

The following presents the estimated future amortization expense of core deposit intangible assets.

	Intangible
	Amortization
(in thousands)	Expense
2010	$	3,923
2011		3,027
2012		2,120
2013		1,727
2014		1,421
Thereafter		2,160
Total	$	14,378

All of Citizens’ core deposit intangible assets have finite lives and are amortized on an accelerated basis corresponding with the anticipated lives of the underlying deposits over varying periods not exceeding 10 years. The weighted-average amortization period for core deposit intangible assets is 2.6 years.

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Note 7. Deposits

Overdrafts on demand accounts are classified as loans, rather than deposits, on the face of the balance sheet and totaled $10.2 million and $23.7 million at December 31, 2009 and 2008, respectively. Time deposits over $100,000 totaled $1.8 billion at December 31, 2009, compared with $2.4 billion at December 31, 2008. The scheduled maturities for time deposits over $100,000 at December 31, 2009 were as follows:

	Deposit
(in millions)	Maturities
2010	$	708.0
2011		371.0
2012		316.6
2013		246.8
2014		194.8
Thereafter		1.0
Total	$	1,838.2

Note 8. Short-Term Borrowings

Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings (which consist primarily of Treasury, Tax and Loan borrowings). Federal funds purchased are overnight borrowings from other financial institutions. Securities sold under agreements to repurchase are secured transactions done principally with investment banks. Maturities of securities sold under agreements to repurchase are generally 90 days or less.

Information relating to federal funds purchased and securities sold under agreements to repurchase follows:

(in thousands)	2009			2008			2007
At December 31:
Balance	$	43,780		$	64,072		$	486,934
Weighted average interest rate paid		0.33	%		0.47	%		3.89	%
During the year:
Maximum outstanding at any month-end	$	60,873		$	662,726		$	1,274,000
Daily average		52,030			303,931			652,825
Weighted average interest rate paid		0.37	%		2.60	%		4.98	%
Weighted average interest rate paid, including effects of swaps		0.37	%		2.60	%		4.77	%

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Note 9. Long-Term Debt

A summary of long-term debt follows:

	December 31,
(in thousands)	2009		2008
Citizens (Parent only):
Subordinated debt:
5.75% subordinated notes due February 2013	$	16,773	$	120,136
Variable rate junior subordinated debenture due June 2033		25,774		25,774
7.50% junior subordinated debentures due September 2066		48,010		146,927
Subsidiaries:
Federal Home Loan Bank advances		1,318,700		1,666,483
Other borrowed funds		104,230		234,246
Total long-term debt	$	1,513,487	$	2,193,566

On January 27, 2003, Citizens issued $125.0 million of 5.75% subordinated notes, maturing February 1, 2013. Issuance costs were capitalized and are included in the long-term debt total on the balance sheet. The issuance costs are being amortized over ten years as a component of interest expense. Under the risk-based capital guidelines, the subordinated debt currently qualifies as Tier 2 supplementary capital.

On June 26, 2003, Citizens issued $25.8 million of floating rate, 30 year trust preferred securities through an unconsolidated special purpose trust to unrelated institutional investors. The gross proceeds from issuance were used to purchase a floating rate junior subordinated deferrable interest debenture (the “Debenture”) issued by Citizens, which is the sole asset of the trust. The Debenture matures in thirty years and bears interest at an annual rate equal to the three-month LIBOR plus 3.10%, payable quarterly beginning in September, 2003. Interest is adjusted on a quarterly basis not to exceed 11.75%. The Debenture is an unsecured obligation of Citizens and is junior in right of payment to all future senior indebtedness of Citizens. Citizens has guaranteed that interest payments on the Debenture made to the trust will be distributed by the trust to the holders of the trust preferred securities. The trust preferred securities of the special purpose trust are callable at par and must be redeemed in thirty years after issuance. The issuance costs were amortized to the call date over five years as a component of interest expense, as Citizens believed this was the most probable life of these securities. Under the risk-based capital guidelines, the trust preferred securities currently qualify as Tier 1 capital.

On October 3, 2006, Citizens Funding Trust I (the “2006 Trust”) completed an offering of $150.0 million aggregate liquidation amount of enhanced trust preferred securities. The gross proceeds from issuance were used to purchase a junior subordinated deferrable interest debenture issued by Citizens, which is the sole asset of the 2006 Trust. The 2006 debentures rank junior to Citizens’ outstanding debt, including the other outstanding junior subordinated debentures. The enhanced trust preferred securities are listed on the New York Stock Exchange (NYSE symbol CTZ-PA). Distributions on the securities, which represent undivided beneficial interests in the assets of the 2006 Trust, accrue from the original issue date and are payable quarterly in arrears at an annual rate of 7.50%, beginning December 15, 2006. The securities are callable on or after September 15, 2011 and mature on September 15, 2066. Issuance costs of $5.1 million were capitalized and are amortized through the long-term debt total on the balance sheet. The issuance costs are amortized to the call date over five years as a component of interest expense. The proceeds were used to finance the cash portion of the consideration paid in Citizens’ merger with Republic and for general corporate purposes.

On September 30, 2009, Citizens exchanged shares of common stock for long-term debt with a carrying value of $204.0 million. The extinguished long-term debt was comprised of $107.8 million principal amount of its 5.75% subordinated notes ($104.2 million, net of early amortization of prior debt issuance costs) and $101.3 million aggregate liquidation amount of the 7.50% trust preferred securities of the 2006 Trust ($99.8 million, net of early amortization of prior debt issuance costs). Refer to Note 14 for additional information.

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On January 28, 2010 Citizens announced that it was suspending the dividend payments on its trust preferred securities and on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred Stock”), issued to the Treasury.

As of December 31, 2009, advances from the FHLB are at fixed rates ranging from 4.28% to 7.10% and mature from 2010 through 2021. FHLB advances totaling $240.0 million may be put back to Citizens at the option of the FHLB. Advances totaling $1.1 billion are non-convertible and subject to neither put nor call options. Citizens’ advances from the FHLB were collateralized at December 31, 2009 with $3.5 billion of residential and commercial loans secured by real estate and securities held for pledging.

As of December 31, 2009, $103.4 million of long-term repurchase agreements with interest rates up to 4.69%, maturing between August 2015 and May 2016 were outstanding. Long-term repurchase agreements are classified under Other borrowed funds.

The par value of long-term debt is scheduled to mature as shown in the table below. This schedule excludes all carrying value adjustments, such as purchase accounting fair value adjustments, hedge accounting fair value adjustments, and unamortized premiums and discounts, that will not affect future cash payments associated with the maturity of this debt.

Par Value of Long Term Debt
(in thousands)	Parent		Subsidiaries		Consolidated
2010	$	—	$	475,230	$	475,230
2011		—		300,022		300,022
2012		—		187,847		187,847
2013		17,266		527		17,793
2014		—		30		30
Thereafter		74,451		446,126		520,577
Total	$	91,717	$	1,409,782	$	1,501,499

Note 10. Fair Values of Assets and Liabilities

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

The fair value estimates are based on existing on- and off-balance sheet financial instruments and do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. For example, Citizens has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include Citizens’ brokerage network, net deferred tax assets (and the related valuation reserves), and premises and equipment. In addition, tax ramifications related to the recognition of unrealized gains and losses such as those within the investment securities portfolio can have a significant effect on estimated fair values and have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of the value of the Corporation.

Citizens groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the

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fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

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

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

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

The estimated fair values of Citizens’ financial instruments follow.

	December 31, 2009						December 31, 2008
	Carrying			Estimated			Carrying			Estimated
(in thousands)	Amount			Fair Value			Amount			Fair Value
Financial assets:
Cash and due from banks	$	163,137		$	163,137		$	171,695		$	171,695
Money market investments		706,163			706,163			214,925			214,925
Securities available for sale		2,225,065			2,225,065			2,248,772			2,248,772
Securities held to maturity		137,094			139,665			138,575			137,846
FHLB and Federal Reserve stock		156,278			156,278			148,764			148,764
Net portfolio loans		7,563,489			6,545,517			8,847,277			7,606,291
Deferred compensation assets		11,138			11,138			10,652			10,652
Loans held for sale		80,459			80,459			91,362			91,362
Accrued interest receivable		43,270			43,270			55,663			55,663
Financial liabilities:
Deposits		8,909,340			8,945,262			9,052,406			9,103,392
Short-term borrowings		51,063			51,063			74,449			74,449
Long-term debt		1,513,487			1,566,212			2,193,566			2,248,060
Accrued interest payable		10,292			10,292			20,268			20,268
Financial instruments with off-balance sheet risk(1) :
Letters of credit(2)		(913	)		(5,185	)		(521	)		(6,080	)
Derivative instruments		17,959			17,959			34,097			34,097

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

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

Securities Available for Sale. Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds, and default rates. The securities in the available for sale portfolio are priced by independent providers. In obtaining such valuation information from third parties, Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in Citizens’ principal markets. Further, Citizens has developed an internal, independent price verification function that performs testing on valuations received from third parties. Citizens’ principal markets for

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its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets.

Recurring Level 3 securities include auction rate securities issued by student-loan authorities and a taxable municipal Qualified Zone Academy Bond (“QZAB”). Due to the nature of the auction rate securities and the current illiquid market, Citizens used unobservable inputs (Level 3) in the valuation process. In conducting the fair value analysis Citizens relies on a model to estimate the transaction price between market participants for each group of securities as of the valuation date. Due to the current illiquid market for QZAB bonds, Citizens relies on models containing significant unobservable market-based inputs to determine the fair-value of these bonds.

Securities Held to Maturity. The fair value of securities classified as held to maturity are based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using model based valuation techniques requiring observable inputs such as yield curves, prepayment speeds, and default rates.

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

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

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

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

Derivative Instruments. Substantially all derivative instruments held or issued by Citizens are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments are priced by independent providers using observable market assumptions with adjustments based on widely accepted valuation techniques. For those derivatives, Citizens measures fair value with models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk (credit valuation adjustments). Citizens assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.

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

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Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may not be collected. Impairment is measured based on the fair value of the underlying collateral, adjusted based on management’s judgment due to current market conditions. Citizens measures impairment on all nonaccrual commercial and industrial and commercial real estate loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses.

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

Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. The value is determined through a discounted cash flow analysis which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. Adjustments are only made when the discounted cash flows are less than the carrying amount.

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

The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2009.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

			December 31, 2009
(in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Federal agencies	$	149,033	$	—	$	149,033	$	—
Collateralized mortgage obligations		442,989		—		442,974		15
Mortgage-backed		1,164,450		—		1,164,450		—
State and municipal		450,647		—		445,294		5,353
Other		17,946		—		17,623		323
Total securities available for sale		2,225,065		—		2,219,374		5,691
Other assets:
Derivative instruments		47,054		—		47,054		—
Deferred compensation assets		11,138		7,295		3,843		—
Total other assets		58,192		7,295		50,897		—
Total assets at fair value	$	2,283,257	$	7,295	$	2,270,271	$	5,691
Other liabilities:
Derivative instruments	$	29,095	$	—	$	29,095	$	—
Total other liabilities		29,095		—		29,095		—
Total liabilities at fair value	$	29,095	$	—	$	29,095	$	—

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The following table presents the reconciliation of Level 3 assets held by Citizens on December 31, 2009.

			Net Realized/Unrealized Gains (Losses)
							Recorded in
	Balance at						Other			Purchases, Sales			Transfers		Balance at
	December 31,		Recorded in Earnings				Comprehensive			Issuances and			In/(Out)		December 31,
(in thousands)	2008		Realized		Unrealized		Income (Pre-tax)			Settlements, Net			of Level 3, Net		2009
Securities available for sale
Collateralized mortgage obligations	$	—	$	—	$	—	$	—		$	(2	)	$	17	$	15
State and municipal		5,733		145		—		(55	)		(857	)		387		5,353
Other		312		11		—		—			—			—		323
Total securities
available for sale	$	6,045	$	156	$	—	$	(55	)	$	(859	)	$	404	$	5,691

The following table includes assets measured at fair value on a nonrecurring basis that have had a fair value adjustment as of December 31, 2009.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

			December 31, 2009
(in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans (1)	$	177,696	$	—	$	—	$	177,696
Commercial loans held for sale (2)		18,653		—		—		18,653
Goodwill (3)		330,744		—		—		330,744
Mortgage servicing rights (4)		2,081		—		—		2,081
Other real estate (5)		20,548		—		—		20,548
Repossessed assets (6)		3,598		—		—		3,598
Total assets	$	553,320	$	—	$	—	$	553,320

(1)	Impaired loans with an initial carrying value of $378.7 million were written down to their fair value of $177.7 million.
(2)	Commercial loans held for sale with an initial carrying value of $36.3 million were written down to their fair value of $18.7 million.
(3)	Goodwill with an initial carrying value of $597.2 million was written down to its fair value of $330.7 million.
(4)	Mortgage servicing rights with an initial carrying value of $2.2 million were written down to their fair value of $2.1 million.
(5)	ORE properties with an initial carrying value of $37.5 million were written down to their fair value of $20.5 million.
(6)	Repossessed assets with an initial carrying value of $8.0 million were written down to their fair value of $3.6 million.

Note 11. Employee Benefit Plans

Pension and Postretirement Benefits: Citizens maintains a cash balance defined benefit pension plan. Pension retirement benefits are based on the employees’ length of service and salary levels. Under the defined benefit plan, employees are eligible for early retirement at age 55 with at least 3 years of service. It is Citizens’ policy to fund pension costs in an amount sufficient to meet or exceed the minimum funding requirements of applicable laws and regulations, plus such additional amounts as Citizens deems appropriate up to the level allowed by federal tax regulations. Actuarially determined pension costs are charged to current operations.

Effective December 31, 2006, Citizens’ defined benefit pension plan was “frozen,” preserving prior earned benefits but discontinuing the accrual of further benefits. Citizens did not make a cash contribution to the defined benefit pension plan during 2009 but reviews plan funding needs periodically and will make a contribution if appropriate.

Citizens also maintains nonqualified supplemental benefit plans for certain former key employees. These plans are provided for by charges to earnings sufficient to meet the projected benefit obligation under applicable accounting standards. Benefits under the nonqualified supplemental plans are based primarily on years of

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service, age and compensation before retirement. The defined pension benefits provided under these plans are unfunded and any payments to plan participants are made by Citizens. During 2009, Citizens contributed $8.0 million to the supplemental pension plans.

Citizens’ postretirement benefit plan provides postretirement health and dental care to full-time employees who retired with eligibility for coverage based on historical plan terms. Current employees are not eligible to participate in the bank subsidized plan. Citizens contributed $1.0 million to the postretirement benefit plan during 2009.

The estimated portion of balances included in accumulated other comprehensive income at December 31, 2009 and 2008 that have not been recognized prior to December 31 are presented below.

	Cumulative Balance
	at December 31,
(in thousands)	2009			2008
Defined Benefit Pension Plans
Prior service cost	$	198		$	199
Net actuarial loss		32,906			35,400
Unrecognized balance		33,104			35,599
Supplemental Pension Plans
Prior service cost		—			447
Net actuarial loss (gain)		534			(12	)
Unrecognized balance		534			435
Postretirement Benefit Plans
Prior service credit		(1,678	)		(1,120	)
Net actuarial gain		(1,186	)		(806	)
Unrecognized balance		(2,864	)		(1,926	)
Unrecognized net prior service credit	$	(1,480	)	$	(474	)
Unrecognized net actuarial loss	$	32,254		$	34,582

An actuarial measurement date of December 31 was utilized in the following table to determine the projected benefit obligations, fair value of plan assets, and accumulated benefit obligation at December 31, 2009 and 2008.

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	Pension						Supplemental						Postretirement
	Benefits						Pension Plan						Benefits
(in thousands)	2009			2008			2009			2008			2009			2008
Change in Benefit Obligation
Projected benefit obligation, beginning of year	$	75,705		$	78,421		$	12,173		$	12,949		$	9,986		$	10,195
Interest cost		4,366			4,586			588			761			571			583
Participant contribution		—			—			—			—			337			307
Actuarial losses (gains)		1,126			(422	)		488			(1,022	)		10			60
Plan amendments		—			158			—			—			(241	)		(114	)
Benefits paid		(7,190	)		(7,038	)		(7,957	)		(515	)		(1,368	)		(1,045	)
Projected benefit obligation, end of year	$	74,007		$	75,705		$	5,292		$	12,173		$	9,295		$	9,986
Accumulated benefit obligation, end of year	$	74,007		$	75,705		$	5,292		$	11,922		$	9,295		$	9,986
Change in Plan Assets
Fair value of plan assets, beginning of year	$	60,914		$	89,656		$	—		$	—		$	—		$	—
Actual return on plan assets		10,397			(21,705	)		—			—			—			—
Employer contribution		—			—			7,957			515			1,031			738
Participant contribution		—			—			—			—			337			307
Benefits paid		(7,190	)		(7,037	)		(7,957	)		(515	)		(1,368	)		(1,045	)
Fair value of plan assets, end of year	$	64,121		$	60,914		$	—		$	—		$	—		$	—
Reconciliation of Funded Status
Underfunded status of plan	$	(9,886	)	$	(14,791	)	$	(5,292	)	$	(12,173	)	$	(9,295	)	$	(9,986	)
Net amount recognized in the
consolidated balance sheets	$	(9,886	)	$	(14,791	)	$	(5,292	)	$	(12,173	)	$	(9,295	)	$	(9,986	)

At December 31, 2009, the underfunded status of the Cash Balance Pension Plan for Employees, the Supplemental Pension Plans, and the Retirement Health Plan is recognized in the Corporation’s consolidated balance sheet as an accrued liability. No plan assets are expected to be returned to Citizens during the year ending December 31, 2010.

During the first quarter of 2009, Citizens recognized a curtailment charge as a result of a reduction in the expected years of future service for the supplemental pension plan participants.

The components of net periodic benefit cost charged to operations each year for all plans follow:

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(in thousands)	2009			2008			2007
| | |
Defined Benefit Pension Plans
Interest cost	$	4,366		$	4,586		$	4,761
Expected return on plan assets		(6,282	)		(7,601	)		(7,709	)
Settlement charge related to lump sum payments		—			—			832
Amortization of unrecognized:
Prior service cost		26			26			11
Net actuarial loss		1,261			194			499
Net pension cost		(629	)		(2,795	)		(1,606	)
Supplemental Pension Plans
Interest cost		588			761			768
Settlement charge related to lump sum payments		455			—			—
Curtailment loss		941			—			—
Amortization of unrecognized:
Prior service cost		—			471			167
Net actuarial loss		12			20			130
Net pension cost		1,996			1,252			1,065
Postretirement Benefit Plans
Service cost		—			—			1
Interest cost		571			583			578
Amortization of unrecognized:
Prior service cost		(267	)		(256	)		(256	)
Net actuarial gain		(31	)		(37	)		(45	)
Net postretirement benefit cost		273			290			278
Total pension and postretirement benefit cost		1,640			(1,252	)		(264	)
Defined contribution retirement and 401(k) plans
Employer contributions		2,253			6,452			6,533
Total periodic benefit cost	$	3,893		$	5,199		$	6,270

The assumptions used in determining the actuarial present value of the benefit obligations and the net periodic pension expense follow:

	Pension						Supplemental						Postretirement
	Benefits						Pension Plan						Benefits
	2009			2008			2009			2008			2009			2008
Assumptions used to compute projected benefit obligation
Discount rate		5.75	%		6.00	%		5.25	%		6.00	%		5.25	%		6.00	%
Rate of compensation increase		—			—			—			3.00			—			—
Assumptions used to compute net benefit costs
Discount rate		6.00			6.00			5.25			6.00			6.00			6.00
Expected return on plan assets		8.25			8.75			—			—			—			—
Rate of compensation increase		—			—			3.00			3.00			—			—

At December 31, 2009, the projected benefit payments for the employee benefit plans over the next ten years follow:

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Projected Benefit Payments

	Defined
	Benefit		Supplemental		Postretirement		Total
(in thousands)	Pension Plan		Pension Plan		Benefit Plan		Benefits
2010	$	5,130	$	515	$	681	$	6,326
2011		5,407		500		686		6,593
2012		5,259		484		690		6,433
2013		5,163		467		758		6,388
2014		5,394		451		751		6,596
2015 to 2019		27,658		1,923		3,417		32,998
Total	$	54,011	$	4,340	$	6,983	$	65,334

The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations listed above. The projected benefit payments for the postretirement benefit plan are net of the projected Medicare Part D Subsidy.

Investment Policy and Strategy: Management’s investment policy and strategy for managing defined benefit plan assets is described as growth with income. Management analyzes the potential risks and rewards associated with the asset allocation strategies on a quarterly basis. Implementation of the strategies includes regular rebalancing to the target asset allocation. For 2008, the strategy target mix consisted of 70% invested in equity securities and 30% invested in fixed income debt securities and in cash or short-term equivalents. During 2009, the target mix was adjusted to 60% and 40%, respectively. This strategy was enacted to better match the current characteristics of the plan and reduce funding volatility. The long-term rate of return expected on plan assets is finalized after considering long-term returns in the general market, long-term returns experienced by the assets in the plan, and projected plan expenses.

The plans’ target asset allocation and the actual asset allocation at December 31, 2009 is presented below.

	Target			2009
	Allocation			Allocation
Asset Category:
Equity securities		60	%		61	%
Debt securities		34			35
Short-term pooled money fund		6			4
		100	%		100	%

The pension plan assets for which Citizens determines fair value include short-term pooled money fund, equity, and fixed income securities, all of which fall into Level 2 in the fair value hierarchy at December 31, 2009. Citizens’ pension plan assets are invested solely in pooled separate account funds, which are managed by Prudential. The net asset values (NAV) are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAV’s unit price of the pooled separate accounts is not quoted on any market; however, the unit price is based on the underlying investments which are traded in an active market and are priced by independent providers. Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in Citizens’ principal markets. Further, Citizens has developed an internal, independent price verification function that performs testing on valuations received from third parties. There are no significant restrictions on Citizens’ ability to sell any of the investments in the pension plan.

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The estimated fair values of Citizens’ pension plan assets at December 31, 2009 are as follows:

			December 31, 2009
(in thousands)	Total		Level 1		Level 2		Level 3
Asset Category
Short-term pooled money fund	$	2,647	$	—	$	2,647	$	—
Equity securities
Large cap (1)		18,506		—		18,506		—
Mid-cap		4,711		—		4,711		—
Small-cap		6,578		—		6,578		—
International Equity		9,518		—		9,518		—
Fixed income securities
Intermediate term fixed (2)		22,161		—		22,161		—
Total	$	64,121	$	—	$	64,121	$	—

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

Citizens does not anticipate making a contribution to the defined benefit pension plan during calendar year 2010. Citizens will review the funding of this plan during 2010 and will make a contribution, if appropriate. The Corporation anticipates making a contribution of $0.5 million to the nonqualified supplemental benefit plans during 2010. In addition, Citizens expects to pay $0.9 million in contributions to the postretirement healthcare benefit plan during 2010.

Prior service pension costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans. For the postretirement health care benefit plan, Citizens assumed a 9.0% annual health care cost trend rate for 2009, which grades down to the ultimate trend of 5.0% by 2032. This assumption can have a significant effect on the amounts reported. A one-percentage-point change in assumed health care trend rates would have the following effects:

	One Percentage		One Percentage
(in thousands)	Point Increase		Point Decrease
Effect on total of service and interest cost components	$	47	$	(42	)
Effect on the postretirement benefit obligation		809		(721	)

Defined Contribution Retirement and 401(k) Plans: Substantially all employees are eligible to contribute a portion of their pre-tax salary to a defined contribution 401(k) savings plan. Citizens suspended the 401(k) matching funds and annual discretionary contributions effective July 17, 2009.

Note 12. Stock-Based Compensation

Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, non-vested 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 6,000,000 shares, and grants other than stock options are further limited to 2,000,000 shares. At December 31, 2009, Citizens had 1,349,763 shares of common stock reserved for future issuance under the current plan.

Stock options awarded under the plan expire ten years from the date of grant. Restrictions on nonvested stock generally lapse in three annual installments beginning on the first anniversary of the grant date. Forfeited and expired options and forfeited shares of restricted stock become available for future grants.

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Compensation expense for stock options and restricted stock awards is recognized in salaries and employee benefits based on the fair value at the date of grant and is recognized on a straight line basis over the requisite service period of the awards.

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock awards included in the Consolidated Statements of Operations.

Analysis of Stock-Based Compensation Expense
(in thousands)	2009			2008			2007
| | |
Stock option compensation	$	11		$	24		$	34
Restricted stock compensation		1,792			4,496			3,321
Stock-based compensation expense before income taxes		1,803			4,520			3,355
Income tax benefit (1)		(631	)		(1,582	)		(1,174	)
Total stock-based compensation expense after income taxes	$	1,172		$	2,938		$	2,181

⁽¹⁾ The income tax benefit is calculated based on the statutory rate. Due to the fact that Citizens has a valuation allowance, the income tax benefit may not be realized. Refer to Note 13 for additional information.

During the first quarter of 2009, a pre-tax expense reversal of $1.3 million was made to stock-based compensation as a result of actual forfeitures exceeding the estimated forfeiture rate for restricted stock.

There were no stock options exercised during the year ended December 31, 2009. Cash proceeds from the exercise of stock options during 2008 and 2007 was $0.1 million and $6.1 million, respectively. New shares are issued when stock options are exercised. Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash inflows and as operating cash outflows on the Consolidated Statement of Cash Flows.

The following table summarizes stock option activity for 2009, 2008 and 2007.

	Options					Weighted
				Weighted		Average
				Average		Remaining	Aggregate
				Exercise		Contractual	Intrinsic
	Shares			Price		Term	Value
Outstanding at January 1, 2007		4,775,700		$	24.95
Exercised		(452,863	)		13.57
Forfeitures or Expirations		(292,795	)		27.75
Outstanding at December 31, 2007		4,030,042			26.03
Exercised		(12,134	)		11.77
Forfeitures or Expirations		(567,251	)		25.24
Outstanding at December 31, 2008		3,450,657			26.21
Forfeitures or Expirations		(383,909	)		26.15
Outstanding at December 31, 2009		3,066,748		$	26.22	2.8 yrs	$	—
Exercisable		3,066,676		$	26.21	2.8 yrs	$	—

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 December 31, 2009 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

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options on December 31, 2009 if the average closing stock price exceeded the exercise price. This amount fluctuates with changes in the fair value of Citizens’ stock. The total intrinsic value of options exercised during 2008 and 2007 was less than $0.1 million and $3.3 million, respectively. The fair value of options vested during 2009, 2008 and 2007 was less than $0.1 million, $0.2 million and $0.1 million, respectively.

The following table sets forth the actual tax benefit realized for the tax deductions from vested stock options converted in the Republic acquisition and exercised.

(in thousands)	2009		2008			2007
Tax benefit realized from reduction of income tax payable:
Reduction of goodwill for tax benefit of vested stock options converted in Republic acquisition and exercised	$	—	$	1		$	904
Included in common stock as net stock options exercised		—		(76	)		(106	)
Tax benefit from vested stock options converted in Republic acquisition and exercised	$	—	$	(75	)	$	798

As of December 31, 2009, $1.5 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 1.1 years.

The following table summarizes restricted stock activity for 2009, 2008 and 2007.

				Weighted-Average
	Number of			Per Share Grant
	Shares			Date Fair Value
Restricted stock at January 1, 2007		293,087		$	25.13
Granted		324,441			19.38
Vested		(88,542	)		24.92
Forfeited		(42,144	)		25.27
Restricted stock at December 31, 2007		486,842			21.32
Granted		338,995			8.56
Vested		(171,197	)		22.02
Forfeited		(45,608	)		15.80
Restricted stock at December 31, 2008		609,032			14.43
Granted		384,818			1.29
Vested		(225,151	)		15.58
Forfeited		(149,940	)		12.31
Restricted stock at December 31, 2009		618,759		$	6.35

The total fair value of restricted stock vested during 2009, 2008, and 2007 was $0.3 million, $0.9 million, and $1.8 million respectively.

Note 13. Income Taxes

Significant components of income taxes are as follows:

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(in thousands)	2009			2008			2007
Current tax (benefit) expense:
Federal	$	(7,993	)	$	(19,351	)	$	10,913
State		(895	)		(684	)		151
Total current tax (benefit) expense		(8,888	)		(20,035	)		11,064
Deferred tax (benefit) expense		(100,874	)		(45,563	)		20,241
Change in valuation allowance		79,788			136,568			—
Total income tax (benefit) expense	$	(29,974	)	$	70,970		$	31,305

Generally, the calculation for the income tax provision (benefit) does not consider the tax effects of changes in other comprehensive income (“OCI”), which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a pre-tax loss from continuing operations and income in other components of the financial statements. In such a case, pre-tax income from other categories (such as changes in OCI) is included in the calculation of the tax provision for the current year. For 2009, this resulted in an increase to the income tax benefit of $22.9 million.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Citizens’ deferred tax assets and liabilities as of December 31, 2009 and 2008 follow:

	December 31,
(in thousands)	2009			2008
Deferred tax assets:
Allowance for loan losses	$	122,804		$	91,060
Accrued postemployment benefits other than pensions		4,419			4,365
Deferred compensation		6,057			9,662
Accrued expenses		4,176			9,037
Net operating loss carryforwards		91,378			9,621
Tax credit carryforwards		3,411			12,483
Minimum pension liability		11,379			13,175
Purchase accounting adjustments		16,830			21,840
Unrealized losses on securities and derivatives		—			3,222
Other deferred tax assets		12,281			6,329
Deferred tax assets		272,735			180,794
Deferred tax liabilities:
Pension		8,998			8,723
Acquisition premium on loans		2,193			3,268
Fixed assets		1,852			4,563
Basis difference in FHLB stock		3,637			3,618
Purchase accounting adjustments		975			2,452
Tax deductible goodwill		13,986			12,183
Unrealized gains on securities and derivatives		17,872			—
Mortgage servicing rights		747			1,033
Other deferred tax liabilities		962			1,426
Deferred tax liabilities		51,222			37,266
Net deferred tax assets		221,513			143,528
Valuation allowance		(235,499	)		(155,711	)
Total net deferred tax liabilities	$	(13,986	)	$	(12,183	)

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Citizens reviewed its deferred tax assets and determined that, due to the significant pre-tax loss in 2009, the impact on cumulative pre-tax income, and the uncertain economic environment affecting estimates of future taxable income, it must continue to carry a valuation allowance against the entire net deferred tax asset, excluding the deferred tax liability for tax deductible goodwill.

The deferred tax asset are analyzed quarterly for changes affecting realizability and the valuation allowance may be adjusted in future periods accordingly. The ultimate realization of these deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on Citizens’ consolidated results of operations or financial position.

At December 31, 2009, Citizens had a gross federal net operating loss carryforward of $248.7 million that expires in 2028 and 2029, a gross state net operating loss carryforward of $82.9 million that expires in the years 2014 through 2024, general business tax credits of $0.9 million that expire in the years 2026 through 2029, and $2.6 million of federal alternative minimum tax credits with an indefinite life.

Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of ownership carryforward as well as the ability to use certain unrealized built-in losses. A change of ownership occurred under Section 382 as a result of the exchange offers of common stock for long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock immediately before the ownership change. Our ability to utilize deductions related to credit losses during the twelve-month period following such an ownership change would also be limited under Section 382, together with net operating loss carryforwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change.

A reconciliation of income tax expense from continuing operations to the amount computed by applying the federal statutory rate of 35% to income from continuing operations before income taxes follows:

(in thousands)	2009			2008			2007
Tax at federal statutory rate applied to income before income taxes	$	(190,466	)	$	(112,728	)	$	46,252
Increase (decrease) in taxes resulting from:
Tax-exempt income		(9,803	)		(10,764	)		(10,694	)
Officers life insurance		(1,114	)		(1,508	)		(2,934	)
Goodwill impairment		93,266			62,331			—
Net change in valuation allowance		79,788			136,568			—
Other		(1,645	)		(2,929	)		(1,319	)
Total income tax (benefit) expense	$	(29,974	)	$	70,970		$	31,305

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

(in thousands)	2009			2008			2007
Balance at January 1	$	1,852		$	7,093		$	6,786
Additions based on tax positions related to the current year		—			34			1,158
Additions for tax positions of prior years		—			—			1,244
Reductions for tax positions of prior years		(28	)		(1,436	)		(892	)
Reductions due to the statute of limitations		(302	)		—			(269	)
Settlements		—			(3,839	)		(934	)
Balance at December 31	$	1,522		$	1,852		$	7,093

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It is Citizens’ policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. Accrued interest as of December 31, 2009 and 2008 totaled $0.4 million at each year-end. Citizens recognized less than $0.1 million in expense for interest in each of those years. No penalties have been accrued.

During 2009, Citizens settled its 2004 and 2005 federal examinations and paid less than $0.2 million in interest expense as a result of changes in the timing of deductions between the two years. In August 2008, the Corporation settled an outstanding issue with the State of Wisconsin and recorded a $3.8 million decrease in unrecognized tax benefits, a reduction to operating loss carryforward, and a $0.5 million net benefit to the income statement. In the first quarter of 2008, Citizens recognized a $1.3 million previously unrecognized tax benefit, and reversed $0.2 million in previously accrued interest, when the Internal Revenue Service announced it would not appeal a taxpayer-favorable U.S. Tax Court decision regarding the tax effect of holding municipal securities in an investment subsidiary.

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 December 31, 2009:

Jurisdiction	Tax Years
Federal		2006 - 2009
Indiana		2003 - 2009
Wisconsin		2002 - 2009
Iowa		2003 - 2009

Note 14. Shareholders’ Equity and Earnings Per Share

On September 17, 2009, Citizens filed with the State of Michigan the amendment to its articles of incorporation approved by shareholders on September 16, 2009. The amendment increased the total authorized common shares from 150 million shares to 1.05 billion shares.

On September 30, 2009, Citizens completed the settlement of its exchange offers to issue common stock in exchange for its outstanding 5.75% Subordinated Notes due 2013 and outstanding 7.50% Enhanced Trust Preferred Securities of the 2006 Trust (the “Exchange Offers”). In aggregate, 268.2 million shares at a fair value of $219.9 million ($0.82 per common share as of the expiration date of the Exchange Offers) were issued in exchange for long term debt with a carrying value of $204.0 million. The consummation of the Exchange Offers created a net loss on the early extinguishment of debt totaling $15.9 million, which represented the difference between the fair value of Citizens’ common stock issued and the carrying value of the retired debt. After taking into account $6.4 million of issuance costs, the transaction resulted in an increase to common equity of $197.6 million.

In June 2008, Citizens issued $79.6 million of common stock and $120.4 million of contingent convertible perpetual non-cumulative preferred stock that together increased shareholders’ equity by $189.0 million (net of issuance costs and the underwriting discount). The preferred stock was converted into 30.1 million shares of common stock upon shareholder approval of a charter amendment authorizing 50 million additional shares of common stock in September 2008.

On December 12, 2008, Citizens issued 300,000 shares of TARP Preferred Stock to the Treasury as part of the Treasury’s Capital Purchase Program. In addition, Citizens issued a ten-year warrant to the Treasury to purchase up to 17,578,125 shares of Citizens’ common stock, no par value at an exercise price of $2.56 per share. The aggregate proceeds from the transaction were $300.0 million. The TARP Preferred Stock has no par value, carries a liquidation price of $1,000 per share, and pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Citizens cannot redeem the preferred securities during the first three years after issuance except with the proceeds from an offering of perpetual preferred or common stock that qualifies as and may be included in Tier 1 capital. After three years, Citizens may redeem the preferred stock at the

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liquidation price plus accrued and unpaid dividends. Citizens is accreting the book value of the preferred stock issued under the TARP using the effective interest method up to the par value of $300 million. The preferred shares are non-voting, other than class voting rights on matters that could adversely affect the shares. The preferred shares qualify as Tier 1 capital. The warrant is immediately exercisable, qualifies as Tier 1 capital and expires in December 2018.

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding, excluding outstanding participating securities. Participating securities include nonvested stock awards (also known as restricted stock) because holders of these securities have the right to receive non-forfeitable dividends at the same rate as holders of common stock and have voting rights. Diluted earnings per common share is computed based on the weighted-average number of common shares outstanding including the dilutive effect of stock-based compensation. Potential common stock that would be generated from restrictions lapsing on unvested shares as well as additional shares issued through the exercise of stock options and warrant were anti-dilutive and therefore excluded from the computation of dilutive earnings per share.

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations follows:

(in thousands, except per share data)	2009			2008			2007
Numerator:
Basic and dilutive earnings per share — net (loss) income	$	(514,213	)	$	(393,052	)	$	100,842
Deemed dividend on convertible preferred stock		—			(11,737	)		—
Dividend on redeemable preferred stock		(19,777	)		(227	)		—
Net (loss) income available to common shareholders		(533,990	)		(405,016	)		100,842
Net (loss) income allocated to participating securities		—			—			523
Net (loss) income allocated to common shareholders		(533,990	)		(405,016	)		100,319
Weighted average shares outstanding		194,577			94,731			75,733
Less: Participating securities included in weighted average shares outstanding		(744	)		(575	)		(393	)
Weighted average shares outstanding for basic earnings per common share		193,833			94,156			75,340
Effect of dilutive securities — potential conversion of employee stock options and restricted stock awards		—			—			183
Weighted average shares outstanding for dilutive earnings per common share		193,833			94,156			75,523
Basic (loss) earnings per common share	$	(2.75	)	$	(4.30	)	$	1.33
Diluted (loss) earnings per common share	$	(2.75	)	$	(4.30	)	$	1.33

Stock Repurchase Program: Citizens purchased shares under a stock repurchase program initiated October 2003. This program authorizes Citizens to repurchase up to 3,000,000 shares. There were no shares purchased under this plan in 2009. Shares purchased in connection with the exercise of certain employee stock options and the vesting of certain share awards were not part of the repurchase program. In 2009, Citizens purchased 50,571 shares in connection with taxes due from employees as a result of the vesting of certain share awards.

Note 15. Lines of Business

The financial performance of Citizens is monitored by an internal profitability measurement system, which provides line of business results and key performance measures. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodology, product, and/or management organizational changes. Further, these policies measure financial results that

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support the strategic objectives and internal organizational structure of Citizens. Consequently, the information presented is not necessarily comparable with similar information for other institutions.

During 2009, Citizens refined its lines of business to more closely align with the delivery of its products and services. A description of each business line, selected financial performance and the methodologies used to measure financial performance are presented below.

• Regional Banking — Regional Banking provides a wide range of lending, depository, and other related financial services to both individual consumers and businesses. The products and services offered to consumer clients include: direct loans, home equity loans and lines of credit, checking, savings and money market accounts, certificates of deposit, and fixed and variable annuities, as well as private banking services for affluent clients. Citizens partners with outside providers to offer to consumer clients the availability of nationwide ATM, debit, and credit card networks as well as mortgage origination services. The transaction-based income and expense associated with these services are included in Regional Banking. The products and services offered to commercial and industrial clients include: term loans, revolving credit arrangements, inventory and accounts receivable financing, commercial mortgages, letters of credit, and small business loans. Noncredit services for commercial clients include deposit accounts, treasury management, corporate cash management, international banking services, advice and assistance in the placement of securities, and financial planning.

• Specialty Consumer — Specialty Consumer includes the indirect consumer and the residential mortgage portfolios. The indirect lending team partners with dealerships across the Midwest to provide primarily marine and recreational vehicle loans to consumers. As nearly all of new mortgage volume is originated through the Regional Banking delivery channel and sold into the secondary market, the residential mortgage loan portfolio residing in Specialty Consumer consists primarily of historical loan production as well as the minimal new production that is retained.

• Specialty Commercial — Specialty Commercial provides a full range of lending, depository, and related financial services to commercial real estate developers, owners of multi-unit commercial properties, middle-market companies, local governments and municipalities. Products and services offered include commercial mortgages, real estate construction lending, term loans, revolving credit arrangements, inventory and accounts receivable financing, and letters of credit. Noncredit services for these customers include deposit accounts, treasury management, corporate cash management, international banking services, advice and assistance in the placement of securities, and financial planning.

• Wealth Management — Wealth Management offers a broad array of asset management, financial planning, estate settlement and administration, credit and deposit products and services. Trust and investment services include personal trust and planning, investment management, estate settlement and administration services. Retirement plan services focus on investment management and fiduciary activities with special emphasis on 401(k) plans. Brokerage and insurance delivers retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and discounted brokerage services.

• Other — The Other line of business includes activities that are not directly attributable to one of the primary business lines. Included in this category are the Holding Company; shared services unit; Citizens’ treasury unit, including the securities portfolio, short-term borrowing and asset/liability management activities; inter-company eliminations; and the economic impact of certain assets, capital and support functions not specifically identifiable with the four primary lines of business.

The accounting policies of the individual business units are the same as those of Citizens described in Note 1 to the Consolidated Financial Statements. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or repricing characteristics. As a result, the Regional Banking, Specialty Consumer, Specialty Commercial, and Wealth Management units are largely insulated from changes in interest rates. Changes in net interest income due to changes in interest rates are reported in Citizens’ treasury unit. The provision for loan losses is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest

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income and expenses directly attributable to a line of business are assigned to that business. Expenses for centrally provided services are allocated to the business lines as follows: product processing and technology expenditures are allocated based on standard unit costs applied to actual volume measurements; corporate overhead is allocated based on the ratio of a line of business’ noninterest expenses to total noninterest expenses incurred by all business lines. There are no significant intersegmental revenues. Selected segment information is included in the following table.

Line of Business Information
	Regional			Specialty			Specialty			Wealth
(in thousands)	Banking			Consumer			Commercial			Mgmt			Other			Total
Earnings Summary — 2009
Net interest income (taxable equivalent)	$	276,108		$	25,500		$	64,155		$	585		$	(32,530	)	$	333,818
Provision for loan losses		105,784			80,366			139,805			—			—			325,955
Net interest income after provision		170,324			(54,866	)		(75,650	)		585			(32,530	)		7,863
Noninterest income		73,381			31			(16,438	)		20,501			(10,054	)		67,421
Noninterest expense (1)		495,615			47,609			17,411			16,794			25,592			603,021
(Loss) Income before income taxes		(251,910	)		(102,444	)		(109,499	)		4,292			(68,176	)		(527,737	)
Income tax (benefit) provision (taxable equivalent)		(88,169	)		(35,855	)		(38,325	)		1,502			147,323			(13,524	)
Net (loss) income	$	(163,741	)	$	(66,589	)	$	(71,174	)	$	2,790		$	(215,499	)	$	(514,213	)
Average assets (in millions)	$	5,120		$	2,206		$	1,625		$	12		$	3,520		$	12,483
Earnings Summary — 2008
Net interest income (taxable equivalent)	$	273,987		$	33,690		$	64,112		$	43		$	(4,498	)	$	367,334
Provision for loan losses		96,286			58,775			126,993			—			—			282,054
Net interest income after provision		177,701			(25,085	)		(62,881	)		43			(4,498	)		85,280
Noninterest income		77,357			674			(7,596	)		25,037			6,270			101,742
Noninterest expense (1)		221,738			30,461			197,393			24,239			16,871			490,702
(Loss) Income before income taxes		33,320			(54,872	)		(267,870	)		841			(15,099	)		(303,680	)
Income tax provision (taxable equivalent)		11,662			(19,205	)		(93,755	)		294			190,376			89,372
Net (loss) income	$	21,658		$	(35,667	)	$	(174,115	)	$	547		$	(205,475	)	$	(393,052	)
Average assets (in millions)	$	5,993		$	2,370		$	2,039		$	13		$	2,827		$	13,242
Earnings Summary — 2007
Net interest income (taxable equivalent)	$	290,113		$	38,649		$	69,140		$	(45	)	$	2,869		$	400,726
Provision for loan losses		17,736			9,054			18,387			—			—			45,177
Net interest income after provision		272,377			29,595			50,753			(45	)		2,869			355,549
Noninterest income		81,040			2,100			2,341			27,410			9,677			122,568
Noninterest expense		221,965			19,652			17,595			22,246			45,965			327,423
Income before income taxes		131,452			12,043			35,499			5,119			(33,420	)		150,694
Income tax provision (taxable equivalent)		46,008			4,215			12,425			1,792			(14,588	)		49,852
Net income	$	85,444		$	7,828		$	23,074		$	3,327		$	(18,832	)	$	100,842
Average assets (in millions)	$	6,183		$	2,082		$	2,005		$	13		$	3,037		$	13,320

⁽¹⁾ Noninterest expense includes the $266.5 million goodwill impairment charge for Regional Banking in 2009 and $178.1 million for Specialty Commercial in 2008

Note 16. Commitments, Contingent Liabilities and Guarantees

Commitments: 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 90 days and unused lines of credit are reviewed at least annually. Letters of credit guarantee future payment of client financial obligations to third parties. They are normally issued for services provided or to facilitate the shipment of goods, and generally expire within one year. Both arrangements have essentially the

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same level of credit risk as that associated with extending loans to clients and are subject to Citizens’ normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on management’s assessment of the client and may include receivables, inventories, real property and equipment.

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

	December 31,
(in thousands)	2009		2008
Loan commitments and letters of credit:
Commitments to extend credit	$	1,371,626	$	2,048,258
Financial standby letters of credit		228,483		225,675
Performance standby letters of credit		7,523		21,692
Commercial letters of credit		23		—
	$	1,607,655	$	2,295,625

Commitments outstanding to extend credit include home equity credit lines which totaled $468.0 million and $579.6 million at December 31, 2009 and December 31, 2008, respectively.

At December 31, 2009 and December 31, 2008, a liability of $3.2 million and $3.9 million, respectively, was recorded for possible losses on commitments to extend credit. A liability of $1.1 million and $0.7 million was recorded at December 31, 2009 and December 31, 2008, respectively, representing the value of the guarantee obligations associated with certain letters of credit, which are amortized into income over the life of the commitments. These balances are included in other liabilities on the Consolidated Balance Sheets.

Contingent Liabilities and Guarantees: Citizens and its subsidiaries are parties to litigation arising in the ordinary course of business. Management believes that the aggregate liability, if any, resulting from these proceedings would not have a material effect on Citizens’ consolidated financial position or results of operations. Citizens has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements.

Purchase Obligations: Citizens has entered into contracts for the supply of current and future services incurred in the ordinary course of business, such as data processing and certain property management functions. Citizens often purchases services from vendors under agreements that typically can be terminated on a periodic basis.

Change in Control Agreements: The Corporation has change-in-control agreements with certain executive officers. Under these agreements, each covered person could receive, upon the effectiveness of a change-in-control, up to three times (i) his or her base compensation plus (ii) the greater of the target bonus established for the year or the highest bonus paid to the executive in the last three years. Additionally, subject to certain conditions, the executive’s insurance benefits will continue for up to three full years after the termination and all long-term incentive awards will immediately vest. The provisions of the EESA and ARRA, and Treasury regulations promulgated thereunder, limit Citizens’ ability to make payments under these agreements while the preferred stock issued to Treasury remains outstanding.

Note 17. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

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rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and cash payments principally related to certain variable-rate loan assets and fixed-rate borrowings.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of Citizens’ derivative financial instruments as well as their classification on the Consolidated Balance Sheets for years ended December 31, 2009 and 2008.

Fair Value of Derivatives

	Other Assets				Other Liabilities
	December 31,				December 31,
(in thousands)	2009		2008		2009		2008
Derivatives designated as hedging instruments under FASB ASC 815 Interest rate products	$	17,279	$	30,984	$	—	$	—
Derivatives not designated as hedging instruments under FASB ASC 815 Interest rate products		29,775		47,950		29,095		44,837
Total derivatives	$	47,054	$	78,934	$	29,095	$	44,837

Cash Flow Hedges of Interest Rate Risk

Citizens’ objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, Citizens primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. As of December 31, 2009 and December 31, 2008, Citizens had 13 interest rate swaps with an aggregate notional amount of $460.0 million and 19 interest rate swaps with an aggregate notional amount of $700.0 million, respectively, that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2008 and 2009, such derivatives were used to hedge the variable cash inflows associated with existing pools of prime and LIBOR-based loan assets. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the year ended December 31 2009, Citizens recognized a gain of less than $0.1 million for hedge ineffectiveness attributable to a mismatch between the swap notional amount and the aggregate principal amount of the designated loan pools. Additionally, during the year ended December 31, 2009, Citizens recognized gains of $0.6 million related to the ineffective portion of the derivative net settlements on Citizens’ cash flow hedges. No hedge ineffectiveness was recognized during the year ended December 31, 2008.

In addition, two swaps failed to qualify for hedge accounting due to this mismatch during the fourth quarter of 2008 and were subsequently terminated in January 2009. Accordingly, the change in fair value for these swaps is recognized in earnings as a gain of $1.7 million in 2008. The fair value of these swaps and their change in fair value during the years ended December 31, 2009 and 2008 are disclosed as “Derivatives Not Designated as Hedges” throughout this footnote.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest income as interest payments are received on Citizens’ variable-rate assets. During the years ended December 31, 2009 and 2008, Citizens accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $0.2 million to earnings for both years as a result of the hedged forecasted

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transactions becoming probable not to occur. During 2010, Citizens estimates that $7.5 million will be reclassified as an increase to interest income.

The following tables summarize the impact of cash flow hedges on the Consolidated Financial Statements for the years ended December 31, 2009 and 2008.

	Derivative Impact on OCI Gain (Loss)									Derivative Ineffectiveness Gain (Loss)
					Location					Location
					Reclassified in	Reclassified from				Recognized in
Derivatives Relationship					Statement of	Accumulated OCI into				Statement of
(in thousands)	Recognized in OCI				Operations	Statement of Operations				Operations	Amount
	December 31,					December 31,					December 31,
	2009		2008			2009		2008			2009		2008
Cash flow hedges:
Interest rate products	$	2,936	$	23,366	Interest income	$	12,629	$	3,591
					Other income		244		196	Other income	$	—	$	—
Total	$	2,936	$	23,366		$	12,873	$	3,787		$	—	$	—

Fair Value Hedges of Interest Rate Risk

Citizens is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in LIBOR, the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of December 31, 2009 and December 31, 2008, Citizens had 8 fair value interest rate swaps with an aggregate notional balance of $385.0 million and 9 fair value interest rate swaps with an aggregate notional balance of $305.0 million, respectively.

For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Citizens includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the year ended December 31, 2009, Citizens recognized gains of $6.3 million in interest expense related to hedge ineffectiveness. No hedge ineffectiveness was recognized during the year ended December 31, 2008. Citizens also recognized a net reduction to interest expense of $8.7 million and $1.4 million for the years ended December 31, 2009 and 2008, respectively, related to Citizens’ fair value hedges, which includes net settlements on the derivatives, ineffectiveness and any amortization adjustment in the basis of the hedged items.

The following table summarizes the impact of fair value hedges on the Consolidated Financial Statements for the years ended December 31, 2009 and 2008.

	Derivative Contract (Loss) Gain						Hedged Item Gain (Loss)
	Location in						Location in
Derivatives Relationship	Statement of						Statement of
(in thousands)	Operations	2009			2008		Operations	2009		2008
Fair value hedges:
Interest rate products	Interest expense	$	(3,846	)	$	8,202	Interest expense	$	10,151	$	(8,202	)

Non-designated Hedges

Citizens does not use derivatives for trading or speculative purposes and does not use credit derivatives for any purpose. Derivatives not designated as hedges are used to manage Citizens’ exposure to interest rate movements and other identified risks but do not satisfy the conditions of ASC 815 for hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. Additionally, Citizens holds interest rate derivatives, including interest rate swaps and option products, resulting from a service Citizens provides to certain clients. Citizens executes interest rate derivatives with commercial

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banking clients to facilitate their respective risk management strategies. Those derivatives are simultaneously hedged by offsetting derivatives that Citizens executes with a third party, such that Citizens minimizes its net risk exposure resulting from such transactions. As of December 31, 2009 and December 31, 2008, Citizens had 284 derivative transactions with an aggregate notional amount of $1.0 billion related to this program and 300 derivative transactions with an aggregate notional amount of $1.1 billion, respectively.

The following table summarizes the impact of derivatives not designated as hedges on the Consolidated Financial Statements for the years ended December 31, 2009 and 2008.

		Amount of (Loss) Gain
		Recognized in Statement
		of Operations
	Location of (Loss)
	Gain Recognized in
Derivatives Relationship	Statement of
(in thousands)	Operations	2009			2008
Derivatives not designated as hedges
Interest rate products	Other income	$	(661	)	$	3,194

Credit-Risk-Related Contingent Features

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

As of December 31, 2009, the fair value of derivatives in a net liability position with all counterparties, which includes accrued interest, but excludes any adjustment for non performance risk related to these agreements was $17.3 million. As of December 31, 2009, Citizens had minimum collateral posting with its derivative counterparties and assigned collateral of $14.3 million. If credit risk related contingent features underlying these agreements had been triggered as of December 31, 2009, Citizens would have assigned additional collateral of $3.0 million.

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

Citizens does not offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against recognized fair value amounts of derivatives executed with the same counterparty under a master netting agreement. The Corporation has the right to reclaim collateral assigned of $14.3 million.

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Note 18. Regulatory Matters

Citizens’ banking subsidiaries are required to maintain a combination of cash on hand and non-interest-bearing deposits with the Federal Reserve Bank (“FRB”) to meet regulatory reserve requirements. These reserve balances vary depending upon the level of client deposits in the subsidiary banks. During 2009 and 2008, the average reserve balances were $28.3 million and $20.7 million, respectively.

The banking subsidiaries are also subject to statutory limitations on extensions of credit to members of the affiliate group. Generally, extensions of credit are limited to 10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary bank’s capital and surplus (net assets) as defined.

The principal source of cash flows for the Holding Company is dividends from its banking subsidiaries. Citizens’ subsidiaries are state, federal or national chartered financial institutions. Banking regulations limit the amount of dividends a financial institution may declare to a parent company in any calendar year. Citizens’ subsidiary banks’ dividends may not exceed the retained net profit, as defined, of that year plus the retained net profit of the preceding two years, unless prior regulatory approval is obtained. As of January 1, 2010, the F&M and CB Wealth subsidiaries are able to distribute dividends of $4.3 million to the Holding Company without prior regulatory approval. FRB policy provides that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition.

The banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined). As of December 31, 2009, the banking subsidiaries meet all capital adequacy requirements to which they are subject.

As of December 31, 2009, the banking subsidiaries were well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the banking subsidiaries must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since December 31, 2009, that management believes would cause Citizens to fall below the well-capitalized level.

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Risk Based Capital Requirements
	Actual					Adequately Capitalized						Well-Capitalized
(in thousands)	Amount		Ratio			Amount			Ratio			Amount			Ratio
Citizens Republic Bancorp
As of December 31, 2009
Total Capital to risk weighted assets (1)	$	1,186,174		13.9	%	$	681,270	>		8.0	%	$	851,587	>		10.0	%
Tier 1 Capital to risk weighted assets(1)		1,066,414		12.5			340,635	>		4.0			510,952	>		6.0
Tier 1 Leverage (2)		1,066,414		9.2			463,376	>		4.0			579,220	>		5.0
As of December 31, 2008:
Total Capital to risk weighted assets (1)		1,432,080		14.5			790,628	>		8.0			988,285	>		10.0
Tier 1 Capital to risk weighted assets (1)		1,206,869		12.2			395,314	>		4.0			592,971	>		6.0
Tier 1 Leverage (2)		1,206,869		9.7			499,613	>		4.0			624,517	>		5.0
Citizens Bank
As of December 31, 2009
Total Capital to risk weighted assets (1)	$	1,024,154		12.3	%	$	666,647	>		8.0	%	$	833,309	>		10.0	%
Tier 1 Capital to risk weighted assets (1)		917,063		11.0			333,324	>		4.0			499,986	>		6.0
Tier 1 Leverage (2)		917,063		8.2			449,080	>		4.0			561,350	>		5.0
As of December 31, 2008:
Total Capital to risk weighted assets (1)		1,177,172		12.1			777,397	>		8.0			971,746	>		10.0
Tier 1 Capital to risk weighted assets (1)		1,054,035		10.8			388,698	>		4.0			583,048	>		6.0
Tier 1 Leverage (2)		1,054,035		8.7			487,181	>		4.0			608,976	>		5.0

(1)	Total Capital is comprised of Tier 1 Capital, a portion of the allowance for loan losses and qualifying subordinated debt. Tier 1 Capital is calculated as follows: total shareholders’ equity + trust preferred securities — goodwill — accumulated other comprehensive income (loss) — other intangible assets.
(2)	Tier 1 Capital to quarterly average assets.

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Note 19. Citizens Republic Bancorp (Parent Only) Statements

Balance Sheets
Citizens Republic Bancorp (Parent Only)
	December 31,
(in thousands)	2009		2008
Assets
Cash and due from banks	$	2,957	$	7,754
Money market investments		107,713		253,637
Investment securities		5,295		6,054
Investment in subsidiaries		1,058,109		1,182,374
Goodwill		250,672		492,488
Other assets		12,297		11,671
Total assets	$	1,437,043	$	1,953,978
Liabilities and Shareholders’ Equity
Long-term debt	$	90,557	$	292,837
Other liabilities		15,450		59,820
Total liabilities		106,007		352,657
Shareholders’ equity		1,331,036		1,601,321
Total liabilities and shareholders’ equity	$	1,437,043	$	1,953,978

Statements of Operations
Citizens Republic Bancorp (Parent Only)

(in thousands)	2009			2008			2007
Income
Dividends from subsidiaries	$	—		$	28,500		$	111,500
Interest on taxable investment securities		289			—			—
Interest from bank subsidiary		4,118			5,368			3,118
Service fees from bank subsidiaries		13,825			14,526			14,334
Other		(15,286	)		(3,257	)		(53	)
Total		2,946			45,137			128,899
Expenses
Interest		17,722			23,742			25,637
Salaries and employee benefits		17,817			18,481			20,922
Service fees paid to bank subsidiaries		955			955			2,767
Restructuring and merger related expenses		—			—			270
Goodwill impairment		241,817			161,611			—
Other noninterest expense		1,490			2,301			2,231
Total		279,801			207,090			51,827
(Loss) income before income tax (benefit) provision and equity in undistributed (loss) income		(276,855	)		(161,951	)		77,072
Income tax (benefit) provision		(2,241	)		11,785			(12,650	)
Equity in undistributed net (loss) income of subsidiaries		(239,599	)		(219,316	)		11,120
Net (loss) income		(514,213	)		(393,052	)		100,842
Deemed divided on convertible preferred stock		—			(11,737	)		—
Dividend on redeemable preferred stock		(19,777	)		(227	)		—
Net (loss) income attributable to common shareholders	$	(533,990	)	$	(405,016	)	$	100,842

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Statements of Cash Flows
Citizens Republic Bancorp (Parent Only)

(in thousands)	2009			2008			2007
Operating Activities
Net (loss) income	$	(514,213	)	$	(393,052	)	$	100,842
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment		241,817			161,611			—
Deferred tax asset valuation allowance		(1,020	)		20,853			—
Net decrease (increase) in current and deferred income taxes		70			(18,476	)		21,306
(Decrease) increase in long-term debt interest		(2,919	)		(720	)		651
(Decrease) in pension non-qualified		(6,874	)		(738	)		(1,671	)
Net loss on debt extinguishment		15,929			—			—
Recognition of stock-based compensation expense		1,803			4,520			3,355
Restructure and merger-related expense		—			(53	)		(27,257	)
Decrease (increase) in equity in undistributed net (loss) income of subsidiaries		239,599			219,316			(11,120	)
Other		(4,345	)		311			3,841
Net cash (used) provided by operating activities		(30,153	)		(6,428	)		89,947
Investing Activities
Net decrease (increase) in money market investments		112,534			(146,441	)		6,588
Sales (purchases) of investment securities		767			(6,045	)		—
Investments in and advances to subsidiaries		—			—			1,546
Net cash provided (used) by investing activities		113,301			(152,486	)		8,134
Financing Activities
Net decrease in short-term borrowings		—			(50,000	)		(51,790	)
Proceeds from issuance of long-term borrowings		—			—			50,000
Capital contribution to subsidiary bank		(74,000	)		(250,000	)		—
Net proceeds from issuance of preferred convertible stock		—			114,161			—
Proceeds from issuance of preferred redeemable stock and warrant		—			300,000			—
Net proceeds from issuance of common stock		—			74,844			—
Cash dividends paid on common stock		—			(21,959	)		(87,798	)
Cash dividends paid on preferred stock		(13,875	)		—			—
Proceeds from stock options exercised and restricted stock activity		—			66			4,833
Shares acquired for retirement and purchased for taxes		(70	)		(444	)		(13,514	)
Net cash (used) provided by financing activities		(87,945	)		166,668			(98,269	)
Net (decrease) increase in cash and due from banks		(4,797	)		7,754			(188	)
Cash and due from banks at beginning of year		7,754			—			188
Cash and due from banks at end of year	$	2,957		$	7,754		$	—

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Note 20. Subsequent Events

On January 29, 2010 Citizens entered into a stock purchase agreement with Great Western Bank whereby Great Western Bank agreed to acquire all of the stock of Citizens’ wholly owned subsidiary, F&M. F&M has 10 offices located in the central region of Iowa and its operations are reported primarily within Citizens’ Regional Banking and Other reporting units. Great Western Bank will pay a purchase price of approximately $50 million in cash, subject to a possible adjustment based upon F&M’s tangible net worth at the closing date. The transaction is expected to close by the end of the second quarter of 2010, and is subject to certain required regulatory approvals and fulfillment of customary conditions. After the sale closes, Citizens does not expect to have any involvement in F&M’s continuing operations.

F&M qualified as a held for sale asset on January 29, 2010, when Citizens’ Board of Directors authorized the sale. As of December 31, 2009, the assets and liabilities of F&M consisted of the following:

F&M Bank — Iowa Balance Sheet
(in thousands)

	December 31,
Assets	2009
Cash and due from banks	$	22,657
Money market investments		129,878
Investment securities		171,115
FHLB and Federal Reserve stock		1,194
Net portfolio loans		132,544
Loans held for sale		241
Other assets		10,318
Total assets	$	467,947

	December 31,
Liabilities and Shareholders' Equity	2009
Deposits	$	408,577
Short-term borrowings		11,263
Long-term debt		500
Other liabilities		2,572
Total liabilities		422,912
Shareholder’s equity		45,035
Total liabilities and shareholders’ equity	$	467,947

As part of the sale, Citizens will allocate $12.6 million of goodwill to F&M and will exchange selected loans with F&M at or near the closing date for a cash payment equal to the book value of the specified loans less related allowance for loan losses. As of December 31, 2009, the loans to be exchanged had a net book value of $9.9 million.

As a result of the disposition, Citizens expects to record a pre-tax tangible gain of approximately $3.4 million. After allocating goodwill to F&M, the carrying value of F&M’s equity will exceed the contractual sales price, and Citizens will be required to record a market value adjustment of approximately $9.2 million in the first quarter of 2010. This adjustment represents the difference between the sales price and F&M’s carrying value, including the allocated goodwill. This potential charge will be based upon management’s best estimate of the fair value on the underlying assets and liabilities, less the cost to sell, and could change based on final closing adjustments.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of Citizens Republic Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Citizens Republic Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of Citizens Republic Bancorp, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Republic Bancorp, Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens Republic Bancorp, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.

Detroit, Michigan
March 1, 2010

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SELECTED QUARTERLY INFORMATION (unaudited)

The table below sets forth selected quarterly financial information for each calendar quarter during 2009 and 2008.

Selected Quarterly Information

	2009												2008
(in thousands, except per share amounts)	Fourth			Third			Second			First			Fourth			Third			Second			First
Interest income	$	135,812		$	141,046		$	142,132		$	149,689		$	167,677		$	171,723		$	174,394		$	187,117
Interest expense		51,876			60,161			66,531			72,743			81,990			84,405			86,779			98,805
Net interest income		83,936			80,885			75,601			76,946			85,687			87,318			87,615			88,312
Provision for loan losses		84,193			77,783			99,962			64,017			118,565			58,390			74,480			30,619
Noninterest income (1)		15,380			11,842			20,966			19,233			15,754			28,005			27,058			30,925
Noninterest expense (2)		83,196			83,614			355,433			80,778			78,611			74,301			261,228			76,562
Net (loss) income (3)		(64,728	)		(56,923	)		(347,413	)		(45,149	)		(195,369	)		(7,176	)		(201,634	)		11,127
Deemed dividend on convertible preferred stock		—			—			—			—			—			(11,737	)		—			—
Dividend on redeemable preferred stock		(5,254	)		(5,224	)		(5,196	)		(4,103	)		(227	)		—			—			—
Net (loss) income attributable to common shareholders		(69,982	)		(62,147	)		(352,609	)		(49,252	)		(195,596	)		(18,913	)		(201,634	)		11,127
Shares outstanding (end of period)		394,397			394,470			126,258			126,299			125,997			126,017			95,899			75,748
Per Common Share Data
Net (loss) income:
Basic	$	(0.18	)	$	(0.48	)	$	(2.81	)	$	(0.39	)	$	(1.56	)	$	(0.20	)	$	(2.53	)	$	0.15
Diluted		(0.18	)		(0.48	)		(2.81	)		(0.39	)		(1.56	)		(0.20	)		(2.53	)		0.15

(1)	Noninterest income includes a net loss on debt extinguishment of $15.9 million in the third quarter of 2009, and $8.7 million, $0.9 million, $4.4 million and $6.2 million in fair-value adjustments on loans held for sale in the fourth, third, second and first quarters of 2009, respectively. Fair-value adjustments on loans held for sale of $5.9 million, $1.3 million and $2.2 million were included in noninterest income in the fourth, third and second quarters of 2008, respectively.
(2)	Noninterest expense includes a goodwill impairment charge of $266.5 million and $178.1 million in the second quarters of 2009 and 2008, respectively, and $8.2 million, $3.9 million, $3.3 million and $8.0 million in fair-value adjustments on ORE properties in the fourth, third, second and first quarters of 2009. Fair-value adjustments on ORE properties for 2008 were $5.9 million, $1.3 million and $2.2 million in the fourth, third and second quarters, respectively.
(3)	Net income (loss) includes a deferred tax valuation allowance of $79.8 million and $136.6 million in the fourth quarters of 2009 and 2008, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

116

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.

Report on Management’s Assessment of Internal Control over Financial Reporting

The management of Citizens Republic Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined under applicable Securities and Exchange Commission rules as a process designed under the supervision of the Corporation’s Chief Executive Officer and Chief Financial Officer and effected by the Corporation’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Corporation’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Corporation’s internal control over financial reporting includes those policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and the directors of the Corporation; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As of December 31, 2009, management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Corporation’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that the Corporation’s internal control over financial reporting was effective as of December 31, 2009.

Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Corporation included in this Annual Report on Form 10-K, has issued a report on the Corporation’s internal control over financial reporting as of December 31, 2009. The report, which expresses an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2009, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control Over Financial Reporting.”

/s/ Charles D. Christy	/s/ Cathleen H. Nash
Charles D. Christy Executive Vice President and Chief Financial Officer	Cathleen H. Nash President and Chief Executive Officer

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.

117

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of Citizens Republic Bancorp, Inc.

We have audited Citizens Republic Bancorp, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Citizens Republic Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Citizens Republic Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Citizens Republic Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 1, 2010 expressed an unqualified opinion thereon.

Detroit, Michigan
March 1, 2010

118

ITEM 9B. OTHER INFORMATION

None.

Part III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item appears under the captions “Proposal 1 – Election of Directors” (excluding the information under the heading “Compensation of Directors”); “Corporate Governance — Executive Officers, — Meetings of Directors and Committees of the Board of Directors, — Shareholder Nomination of Director Candidates, and – Code of Ethics;” and “Section 16(a) Beneficial Ownership Reporting Compliance” in Citizens’ proxy statement for its 2010 annual meeting of shareholders (the “Proxy Statement”) and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item appears under the caption “Proposal 1 — Election of Directors — Compensation of Directors,” and under the caption “Executive Compensation” of the Proxy Statement, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item appears under the caption “Security Ownership” of the Proxy Statement, and is incorporated herein by reference.

Equity Compensation Plan Information

Citizens has two stock-based compensation plans pursuant to which it grants incentive and nonqualified stock options, non vested stock awards, restricted stock units, and performance awards to employees, officers and directors. The Stock Compensation Plan (the “2002 Plan”) was approved by Citizens’ shareholders in 2002. The All-Employee Stock Option Plan (the “All-Employee Plan”) was not submitted to Citizens’ shareholders for approval. The 2002 Plan replaced the Third Amended Stock Option Plan which has expired and the Citizens Stock Option Plan for Directors which was terminated. Both of these plans were approved by Citizens’ shareholders and there continue to be options outstanding that were granted under these plans. In connection with the Republic merger in 2006, Citizens assumed Republic’s active stock option plans which had previously been approved by Republic’s shareholders. Citizens has not made any awards under the assumed plans and treats these plans as if they are terminated as to future grants. The following table sets forth, with respect to all of the stock-based compensation plans, (i) the number of shares of common stock to be issued upon the exercise of outstanding options, (ii) the weighted average exercise price of outstanding options, and (iii) the number of shares remaining available for future issuance, as of December 31, 2009.

Citizens grants incentive and nonqualified stock options, restricted stock, restricted stock units, and performance awards to employees, officers, and directors pursuant to the Stock Compensation Plan (the “Stock Plan”), which was first approved by Citizens’ shareholders in 2002. There are also options outstanding that were granted under the All-Employee Plan, which was not submitted to our shareholders for approval, and under the Third Amended Stock Option Plan and the Citizens Stock Option Plan for Directors, which were approved by our shareholders. No future grants may be made under any of these plans other than the Stock Plan. The following table sets forth, with respect to all of our stock-based compensation plans, (i) the number of shares of common stock to be issued upon the exercise of outstanding options, (ii) the weighted average exercise price of outstanding options, and (iii) the number of shares remaining available for future issuance.

119

At December 31, 2009

					Number of shares
					remaining available for
					future issuance under
	Number of shares to be issued		Weighted-average		equity compensation
	upon exercise of outstanding		exercise price of		plans (excluding shares
Plan Category	options		outstanding options		reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by shareholders		3,013,248(1)	$	26.38		1,349,763(2)
Equity compensation plans not approved by shareholders		53,500(3)		16.66		—
Total		3,066,748	$	26.21		1,349,763

(1)	Options for 266,296 Citizens common shares with a weighted-average exercise price of $14.64 per share were outstanding under the assumed Republic plans as of December 31, 2009 and are included in the table.
(2)	Includes 591,441 shares that may be granted under the Stock Plan in the form of restricted stock, restricted stock units or performance shares. Does not include shares that would be available for future grants if the proposed amendment and restatement of the Stock Plan is approved by shareholders.
(3)	Issued under the All-Employee Plan. Under this plan, on May 18, 2000, Citizens granted stock options to all employees who did not receive grants under the then existing but since expired Third Amended Stock Option Plan. Each full-time employee received options for 200 shares of common stock and each part-time employee received options for 100 shares. The $16.66 exercise price of the grant was the market price of the common stock on the grant date. The options became exercisable three years after the date of grant. The options expire ten years from the date of grant. Options for a total of 550,700 shares were granted of which options for 53,500 shares were outstanding as of December 31, 2009.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item appears under the caption “Executive Compensation – Compensation Committee Interlocks and Certain Transactions and Relationships” of the Proxy Statement, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item appears under the captions “Proposal 3 — Appointment of Independent Certified Public Accountants” and “Corporate Governance — Meetings of Directors and Committees of the Board of Directors” of the Proxy Statement, and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1.   Financial Statements:

The following Consolidated Financial Statements of Citizens and Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements are incorporated by reference under Item 8 “Financial Statements and Supplementary Data” of this document:

Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Information
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

2.	Financial Statement Schedules: All schedules are omitted — see Item 15(c) below.
3.	Exhibits: The exhibits listed on the “Exhibit Index” of this report are filed herewith and are incorporated herein by reference.

(b) Exhibits:

The exhibits listed on the “Exhibit Index” of this report are filed herewith and are incorporated herein by reference. At the request of any shareholder, the Corporation will furnish any exhibit upon the payment of a fee of $0.10 per page to cover the costs of furnishing the exhibit.

(c) Financial Statement Schedules

All financial statement schedules normally required by regulation S-X are omitted since they are either not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)

by	/s/ Cathleen H. Nash	Date: March 1, 2010
	Cathleen H. Nash
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Capacity	Date
/s/ Charles D. Christy	Executive Vice President and	March 1, 2010
Charles D. Christy	Chief Financial Officer
/s/ Cathleen H. Nash	President and Chief Executive Officer	March 1, 2010
Cathleen H. Nash
/s/ Joseph C. Czopek	Controller and	March 1, 2010
Joseph C. Czopek	Principal Accounting Officer
/s/ Lizabeth A. Ardisana	Director	March 1, 2010
Lizabeth A. Ardisana
/s/ George J. Butvilas	Director	March 1, 2010
George J. Butvilas
/s/ Robert S. Cubbin	Director	March 1, 2010
Robert S. Cubbin
/s/ Richard J. Dolinski	Director	March 1, 2010
Richard J. Dolinski
/s/ Gary J. Hurand	Director	March 1, 2010
Gary J. Hurand
/s/ Dennis J. Ibold	Director	March 1, 2010
Dennis J. Ibold

122

SIGNATURES (continued)

/s/ Benjamin W. Laird	Director	March 1, 2010
Benjamin W. Laird
/s/ Stephen J. Lazaroff	Director	March 1, 2010
Stephen J. Lazaroff
/s/ Kendall B. Williams	Director	March 1, 2010
Kendall B. Williams
/s/ James L. Wolohan	Chairman of the Board	March 1, 2010
James L. Wolohan
/s/ Steven E. Zack	Director	March 1, 2010
Steven E. Zack

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EXHIBIT INDEX

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

Exhibit
No.		Exhibit
	2.2	Agreement and Plan of Merger, dated as of June 26, 2006, by and between Republic Bancorp, Inc. and Citizens Republic Bancorp, Inc. (Citizens’ Form 8-K filed June 30, 2006).
	2.3	Stock Purchase Agreement, dated as of January 29, 2010, by and between Citizens Republic Bancorp, Inc. and Great Western Bank (Citizens’ Form 8-K filed February 2, 2010).
	3.1	Amended and Restated Articles of Incorporation of Citizens Republic Bancorp, Inc., as amended as of September 17, 2009 (Citizens’ 2009 Third Quarter Report on Form 10-Q).
	3.2	Bylaws of Citizens Republic Bancorp, Inc., amended and restated as of September 24, 2009 (Citizens’ 2009 Third Quarter Report on Form 10-Q).
	4.2	Indenture, dated as of January 27, 2003 among Citizens Republic Bancorp, Inc. and JP Morgan Chase Bank, as Trustee (Citizens’ registration statement on Form S-4, registration no. 333-104472).
	4.3	Registration Rights Agreement, dated as of January 27, 2003 among Citizens Republic Bancorp, Inc. and Morgan Stanley, Keefe, Bruyette & Woods, Inc., Robert W. Baird & Co., Credit Suisse First Boston, Fahnestock & Co. Inc., Howe Barnes Investments, Inc. and McDonald Investments, as Initial Purchasers (Citizens’ registration statement on Form S-4, registration no. 333-104472).
	4.4	Floating Rate Junior Subordinated Deferrable Interest Debentures dated as of June 26, 2003 (Citizens’ 2003 Second Quarter Report on Form 10-Q).
	4.5	Form of Indenture between Republic Bancorp Inc. (“Republic”) and Wilmington Trust Company for Republic’s 8.60% Subordinated Debentures due 2031 (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.6	Form of Republic’s 8.60% Subordinated Debenture due 2031 (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.7	Certificate of Trust of Republic Capital Trust I, a subsidiary of Republic (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.8	Trust Agreement of Republic Capital Trust I, a subsidiary of Republic (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.9	Form of Amended and Restated Trust Agreement of Republic Capital Trust I, a subsidiary of Republic (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.10	Form of Trust Preferred Securities Certificate of Republic Capital Trust I, a subsidiary of Republic (Republic’s registration statement on Form S-3, registration no. 333-70062).

124

EXHIBIT INDEX (continued)

Exhibit
No.		Exhibit
	4.11	Form of Agreement as to Expenses and Liabilities between Republic and Republic Capital Trust I, a subsidiary of Republic (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.12	Form of Trust Preferred Securities Guarantee Agreement between Republic and Wilmington Trust Company (Republic’s registration statement on Form S-3, registration no. 333-70062).
	4.13	Indenture, dated October 3, 2006, between Citizens Republic Bancorp, Inc. and U.S. Bank National Association, as Trustee (Citizens’ Current Report on Form 8-K filed October 3, 2006).
	4.14	First Supplemental Indenture, dated October 3, 2006, between Citizens Republic Bancorp, Inc. and U.S. Bank National Association as Trustee (Citizens’ Current Report on Form 8-K filed on October 3, 2006).
	4.15	Amended and Restated Trust Agreement, dated October 3, 2006, among Citizens Republic Bancorp, Inc., U.S. Bank National Association, as Property Trustee, U.S. Bank Trust National Association as Delaware Trustee, and Administrative Trustees named therein (Citizens’ Current Report on Form 8-K filed October 3, 2006).
	4.16	Guarantee Agreement, dated October 3, 2006, between Citizens Republic Bancorp, Inc. as Guarantor and U.S. Bank National Association as Guarantee Trustee (Citizens’ Current Report on Form 8-K filed October 3, 2006).
	4.18	Certificate representing the Series A Preferred Stock (Citizens’ Current Report on Form 8-K filed June 11, 2008).
	4.19	Warrant to Purchase up to 17,578,125 shares of common stock, dated December 12, 2008 (Citizens’ Current Report on Form 8-K filed December 15, 2008).
	10.2*	Citizens Republic Bancorp, Inc. Third Amended Stock Option Plan (Citizens’ 1997 Second Quarter Report on Form 10-Q).
	10.3*	First Amendment to Citizens Republic Bancorp, Inc. Third Amended Stock Option Plan (Citizens’ 2000 Second Quarter Report on Form 10-Q).
	10.4*	Citizens Republic Bancorp, Inc. All-Employee Stock Option Plan (Citizens’ registration statement on Form S-8, registration no. 333-40100).
	10.5*	Citizens Republic Bancorp, Inc. Stock Option Plan for Directors (Citizens’ registration statement on Form S-8, registration no. 33-61197).
	10.6*	First Amendment to Citizens Republic Bancorp, Inc. Stock Option Plan for Directors (Citizens’ 2000 Second Quarter Report on Form 10-Q).
	10.7*	Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens’ 2001 Annual Report on Form 10-K).

125

EXHIBIT INDEX (continued)

Exhibit
No.		Exhibit
	10.8*	Post Effective Amendment No. 1 to Form S-4 on Form S-8 pertaining to “F&M Bancorporation, Inc. 1993 Incentive Stock Option Plan” and “F&M Bancorporation, Inc. 1993 Stock Option Plan for Non-employee Directors” (Citizens’ registration statement on Form S-8, registration statement no. 333-86569).
	10.9*	Citizens Republic Bancorp, Inc. Amended and Restated Section 401(k) Plan (Citizens’ registration statement on Form S-8, registration no. 333-09455).
	10.13	Amended and Restated Declaration of Trust dated as of June 26, 2003 by and among U.S. Bank National Association, as institutional Trustee, Citizens Republic Bancorp, Inc., as Sponsor, and William R. Hartman, Charles D. Christy and Thomas W. Gallagher as Administrators (Citizens’ 2003 Second Quarter Report on Form 10-Q).
	10.14	Placement Agreement, dated June 16, 2003, between Citizens, Citizens Michigan Statutory Trust I, FTN Financial Capital Markets and Keefe Bruyette & Woods, Inc. (Citizens’ 2003 Second Quarter Report on Form 10-Q).
	10.15	Guarantee Agreement dated as of June 26, 2003 by and between Citizens Republic Bancorp, Inc. and U.S. Bank National Association (Citizens’ 2003 Second Quarter Report on Form 10-Q).
	10.19*	Employment Agreement, dated as of June 26, 2006, by and between Citizens Republic Bancorp, Inc. and William R. Hartman (Citizens’ Current Report on Form 8-K filed June 30, 2006).
	10.20*	Form of Nonqualified Stock Option Agreement for Non-employee Directors under the Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens’ 2004 Third Quarter Report on Form 10-Q).
	10.21*	Form of Nonqualified Stock Option Agreement for Employees under the Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens’ 2004 Third Quarter Report on Form 10-Q).
	10.22*	Form of Restricted Stock Agreement under the Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens’ 2004 Third Quarter Report on Form 10-Q).
	10.24*	Form of Restricted Stock Agreement (Employee Version) (Citizens’ Current Report on Form 8-K filed on June 7, 2005).
	10.25*	Form of Restricted Stock Agreement (Director Version) (Citizens’ Current Report on Form 8-K filed on June 7, 2005).
	10.26*	Form of Stock Option Agreement (Employee Version) (Citizens’ Current Report on Form 8-K filed on June 7, 2005).
	10.27*	Form of Stock Option Agreement (Director Version) (Citizens’ Current Report on Form 8-K filed on June 7, 2005).
	10.28*	Form of Restricted Stock Agreement (Employee Version) (Citizens’ 2006 Second Quarter Report on Form 10-Q).

126

EXHIBIT INDEX (continued)

Exhibit
No.	Exhibit
10.29*	Form of Restricted Stock Agreement (Director Version) (Citizens’ 2006 Second Quarter Report on Form 10-Q).
10.31*	Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J. Peterson, dated August 16, 2006 (Citizens’ 2006 Third Quarter Report on Form 10-Q).
10.37*	Form of Restricted Stock Agreement (Employee Version as of May 2007) (Citizens’ 2007 Second Quarter Report on Form 10-Q).
10.38*	Form of Restricted Stock Agreement (Non-Employee Director Version as of May 2007) (Citizens’ 2007 Second Quarter Report on Form 10-Q).
10.41*	Form of Amended and Restated Change in Control Agreement between Citizens Republic Bancorp, Inc. and each of William R. Hartman, Charles D. Christy, Roy A. Eon, Thomas W. Gallagher, Martin E. Grunst, Cathleen H. Nash, Clinton A. Sampson, and John D. Schwab, dated February 26, 2008 (Citizens’ Annual Report on Form 10-K for the year ended December 31, 2007).
10.42*	Amended and Restated Change in Control Agreement between Citizens Republic Bancorp, Inc. and Randall J. Peterson, dated February 26, 2008 (Citizens’ Annual Report on Form 10-K for the year ended December 31, 2007).
10.43*	Supplemental Retirement Benefits Plan For William R. Hartman, dated September 19, 2007 (Citizens’ Annual Report on Form 10-K for the year ended December 31, 2007).
10.44*	Agreement between Citizens Republic Bancorp, Inc., and Clinton A. Sampson, dated November 4, 2008 (Citizens’ 2008 Third Quarter Report on Form 10-Q).
10.45*	2008 Management Incentive Plan (Citizens’ Current Report on Form 8-K filed September 17, 2008).1
10.46*	Letter Agreement between Citizens Republic Bancorp, Inc. and the U.S. Department of the Treasury, dated December 12, 2008 (Citizens’ Current Report on Form 8-K filed December 15, 2008).
10.47*	Form of Waiver Executed by William R. Hartman, Charles D. Christy, Cathleen H. Nash, John D. Schwab, and Clinton A. Sampson, dated December 12, 2008 (Citizens’ Current Report on Form 8-K filed December 15, 2008).
10.48*	Form of Consent Executed by William R. Hartman, Charles D. Christy, Cathleen H. Nash, John D. Schwab, and Clinton A. Sampson, dated December 12, 2008 (Citizens’ Current Report on Form 8-K filed December 15, 2008).
10.49*	Amendment to Stock Compensation Plan as of December 10, 2008 (Citizens’ 2008 Form 10-K).
10.50*	Letter Agreement dated January 22, 2009, between Citizens Republic Bancorp, Inc. and Cathleen H. Nash (Citizens’ Current Report on Form 8-K filed on January 23, 2009).
10.51*	Agreement between Citizens Republic Bancorp, Inc., and William R. Hartman, dated January 22, 2009 (Citizens’ Current Report on Form 8-K filed on January 23, 2009).
10.52*	Form of Long Term Incentive Award Agreement, dated January 29, 2009 (Citizens’ 2009 First Quarter Report on Form 10-Q).

127

EXHIBIT INDEX (continued)

Exhibit
No.		Exhibit
	10.53*	Amendment to the Citizens Banking Corporation Stock Compensation Plan, dated February 21, 2007 (Citizens’ 2009 First Quarter Report on Form 10-Q).
	10.54*	Form of Indemnification Agreement with Directors, dated as of September 24, 2009, between Citizens Republic Bancorp, Inc. and each of Lizabeth A. Ardisana, George J. Butvilas, Robert S. Cubbin, Richard J. Dolinski, Gary J. Hurand, Dennis J. Ibold, Benjamin W. Laird, Stephen J. Lazaroff, Cathleen H. Nash, Kendall B. Williams, James L. Wolohan, and Steven E. Zack (Citizens’ 2009 Third Quarter Report on Form 10-Q).
	10.55*	Amended and Restated Deferred Compensation Plan for Directors.
	10.56*	Amended and Restated Deferred Compensation Plan for Executives.
	12.1	Statement of ratio of earnings to fixed charges
	21	Subsidiaries of the Registrant
	23	Consent of Independent Registered Public Accounting Firm
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934.
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934.
	99.1	Certification of Chief Executive Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.
	99.2	Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.

*	Current management contracts or compensatory plans or arrangements.
1	Portions of this exhibit have been omitted pursuant to Citizens’ request to the Secretary of the Securities and Exchange Commission for confidential treatment pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.

128

[THIS PAGE IS INTENTIONALLY LEFT BLANK]

129

EX-10.55

Exhibit 10.55

CITIZENS REPUBLIC BANCORP

DEFERRED COMPENSATION PLAN FOR DIRECTORS

Amended and Restated
Effective January 1, 2008

Prepared by:
Rosenberger Law Group PLLC4111
Andover Road, Suite 100 West
Bloomfield Hills, Michigan 48302

TABLE OF CONTENTS

	Page
ARTICLE 1 - PREAMBLES
Section 1.01 Establishment of Plan		1
Section 1.02 Grandfathered Accounts		1
Section 1.03 Applicable Law		1
Section 1.04 Defined Terms		1
ARTICLE 2 - ELIGIBILITY, PARTICIPATION AND ENROLLMENT
Section 2.01 Eligibility		2
Section 2.02 Participation		2
Section 2.03 Enrollment		2
ARTICLE 3 - CONTRIBUTIONS
Section 3.01 Sources of Contributions and Accounting		4
Section 3.02 Before-Tax Contributions		4
Section 3.03 No Other Contributions		5
Section 3.04 Adjustment of Accounts		5
ARTICLE 4 - DISTRIBUTIONS
Section 4.01 Date of Distribution		7
Section 4.02 Form of Distribution		7
Section 4.03 Election To Defer Receipt or Change Form of Distribution		7
Section 4.04 Special Rule for Specified Employees		7
Section 4.05 Designation of Beneficiary		8
Section 4.06 Return to Service		8
ARTICLE 5 - PROVISIONS RELATING TO ADMINISTRATION
Section 5.01 Plan Administration		9
Section 5.02 Claims Procedure		9
Section 5.03 Special Ruling		11
Section 5.04 Employment of Advisers		11
Section 5.05 Delegation to Officers or Employees		11

(i)

	Page
ARTICLE 6 - AMENDMENT AND TERMINATION OF PLAN
Section 6.01 Amendment of the Plan		13
Section 6.02 Termination of the Plan		13
ARTICLE 7 - MISCELLANEOUS PROVISIONS
Section 7.01 Payments for the Benefit of Payee		14
Section 7.02 Non-Alienation of Benefits		14
Section 7.03 Nature of Plan		14
Section 7.04 Litigation		14
Section 7.05 Addresses and Mailing of Notices and Checks		14
Section 7.06 Action by Corporation		15
Section 7.07 Savings Clause		15
ARTICLE 8 - DEFINITIONS
Section 8.01 Account		16
Section 8.02 Accounting Date		16
Section 8.03 Beneficiary		16
Section 8.04 Code		16
Section 8.05 Compensation		16
Section 8.06 Corporation		16
Section 8.07 Director		16
Section 8.08 Effective Date		16
Section 8.09 ERISA		16
Section 8.10 Participant		16
Section 8.11 Plan		16
Section 8.12 Plan Administrator		16
Section 8.13 Plan Year		16
Section 8.14 Separation from Service		17
Section 8.15 Specified Employee		17

(ii)

ARTICLE 1

PREAMBLES

     Section 1.01 Establishment of Plan . Effective October 21, 1988, Citizens Banking Corporation adopted the Citizens Banking Corporation Amended and Restated Director’s Deferred Compensation Plan covering eligible directors of the corporation and its subsidiaries. That plan was amended and restated effective as of July 1, 1994, which in turn was amended as of July 1, 1998, January 1, 2001, and January 1, 2003. Citizens Republic Bancorp (“Corporation”) now amends and restates that plan effective January 1, 2008, except as otherwise provided herein, and renames the plan the Citizens Republic Bancorp Deferred Compensation Plan for Directors (“Plan”).

     Section 1.02 Grandfathered Accounts . This amendment and restatement applies only to amounts deferred under the Plan on and after January 1, 2005, and to amounts, if any, deferred under the terms of the prior document before January 1, 2005 that were not vested as of December 31, 2004. Amounts that were deferred under the prior document before January 1, 2005 that were vested as of December 31, 2004 (“Grandfathered Accounts”) shall be subject to the provisions of the plan as in effect on October 3, 2004, as the same may be amended by the Corporation without material modification, it being expressly intended that such Grandfathered Accounts are to remain exempt from the requirements of Code Section 409A.

     Section 1.03 Applicable Law . The Plan is intended to be a nonqualified deferred compensation plan satisfying the requirements for deferral of income by eligible directors under the principles of Rev. Rul. 61-60 and subsequent interpretations of the Internal Revenue Service and applicable provisions of the Internal Revenue Code of 1986, as amended (“Code”), and in particular Code Section 409A except to the extent provided by Section 1.02 above. In addition, it is intended that the Plan be exempt from the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to the extent provided by that law for an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management. Where not so governed by the principles of the Code or the limited provisions of ERISA applicable to such a plan, the Plan shall be administered and construed in accordance with Michigan law.

     Section 1.04 Defined Terms . Throughout the Plan, various terms are used repeatedly, which terms have very specific and definite meanings when capitalized in the text. For convenience, such terms are collected and defined in Article 8. Wherever such capitalized terms appear in the Plan, they shall have the meanings specified in that article.

ARTICLE 2

ELIGIBILITY, PARTICIPATION AND ENROLLMENT

     Section 2.01 Eligibility. Any Director of the Corporation is eligible to elect to participate in the Plan. Participation in the Plan is voluntary.

     Section 2.02 Participation.

     (a) Meaning of Participation. A Participant who is eligible for the Plan as described in Section 2.01, has commenced participation as provided in Section 2.02(b), has enrolled in the Plan pursuant to Section 2.03, and has not ceased participation under Section 2.02(c), will have maintained on the books and records of the Plan an Account in his/her name to which credits may be made in accordance with Article 3. However, mere participation in the Plan does not entitle a Participant to an ultimate benefit from the Plan; a Participant will receive a benefit only if credits are actually made to his/her Account over his/her period of participation pursuant to Article 3.

     (b) Commencement of Participation. An individual shall commence participation in the Plan on the first day that he/she satisfies the applicable eligibility requirements of Section 2.01.

     (c) Termination of Participation. Participation in the Plan shall not terminate for a Participant until the balance of his/her Account has been fully distributed, but the right to make before-tax contributions as provided by Section 3.02 shall end as of December 31 of the year in which the Participant ceases to meet the eligibility requirements of Section 2.01.

     (d) Resumption of Participation. An individual whose participation has terminated pursuant to paragraph (c) above, or who otherwise has been ineligible to make deferrals because of a failure to meet the eligibility requirements of Section 2.01, shall resume participation not earlier than January 1 of the year following which he/she again meets the eligibility requirements of Section 2.01, unless the individual had not made any deferrals under the Plan for the last 24 months, in which case the individual shall be treated as a new Participant entitled to make a first year election in accordance with the provisions of the Plan.

     Section 2.03 Enrollment.

     (a) Meaning of Enrollment. Enrollment is the process of submitting to the Plan Administrator an election to make contributions to the Plan, as further described in Article 3, designating a Beneficiary to receive any death benefit provided by the Plan under Section 4.04, specifying an initial set of investments by which earnings, gains and losses with respect to contributions made to his/her Account will be measured, and electing the date and form of distribution for distribution of the balance that accumulates in his/her Account.

     (b) Enrollment Date. A Participant will be enrolled in the Plan on the first regularly established date for payment of Directors’ fees following the later of the date he/she commences participation in the Plan as provided by Section 2.02(b) above, or the date the Plan Administrator receives the Participant’s properly completed enrollment form, subject to any minimum implementation period imposed by the Plan Administrator. Provided, however, that a Participant who

fails to submit an enrollment form by December 31 of the first calendar year of his/her eligibility shall not be enrolled in the Plan until the January 1 following the date he/she does submit a properly completed enrollment form.

     (c) Changes in Enrolled Status. A Participant may change his/her designated Beneficiary or set of selected investments at any time, as provided by Sections 4.05 and 3.04(d), but he/she may change the elected level of his/her contributions only as provided in Section 3.02 and may change the elected date and form of distribution only as provided in Section 4.03.

ARTICLE 3

CONTRIBUTIONS

     Section 3.01 Sources of Contributions and Accounting.

     (a) Sources and Forms of Contributions. It is contemplated that only Participants may make contributions under the Plan. Participant contributions shall be limited to elective before-tax contributions.

     (b) Crediting of Contributions and Individual Accounts. All contributions under the Plan shall be made in the form of credits to individual Accounts maintained on the books and records of the Plan for each Participant.

     (c) Nature of Accounts. Individual Accounts of Participants shall be maintained under the Plan only for accounting purposes, and the fact that individual Accounts are maintained shall not be construed to mean that any Participant or Beneficiary has title to any specific assets of the Corporation. The rights of any Participant or Beneficiary, or any person claiming through a Participant or Beneficiary under this Plan, shall be solely those of an unsecured general creditor of the Corporation. The Participant or Beneficiary, or any person claiming through either, shall have only the right to receive from the Corporation those payments as specified herein. Further, no asset used or acquired by the Corporation in connection with the liabilities it has assumed under the Plan, except as expressly provided and as permitted by applicable tax and labor laws, shall be deemed to be held under any trust for the benefit of any Participant or Beneficiary. Nor shall any such asset be considered security for the performance of the obligations of the Corporation. Any such asset shall be, and remain, a general, unpledged, and unrestricted asset of the Corporation.

     Section 3.02 Before-Tax Contributions.

     (a) Amount. A Participant whose eligibility to contribute has not ceased under Section 2.02 may (but is not required to) direct the Corporation to make contributions, by means of deduction from his/her Compensation, to his/her Account (which contributions are not includible in the Participant’s gross income for federal income tax purposes) in an amount equal to 100% of the Participant’s Compensation. However, the Plan Administrator shall reduce the elected contribution to the extent the Participant has insufficient non-deferred Compensation to cover his/her liability for other amounts normally deducted from the Participant’s Compensation, but only as allowed by Code Section 409A and Treasury Regulations issued thereunder.

     (b) Elections. Each Participant shall file an election with the Plan Administrator, in a form prescribed by the Plan Administrator, directing that his/her Compensation be deferred and contributed to the Plan on the Participant’s behalf by the Corporation pursuant to paragraph (a) of this section.

     (1) Except as provided in the subsequent parts of this paragraph (b), such election must be made by December 31 of the calendar year preceding the year the services with respect to Compensation relating to the election will be performed, and such election shall be effective beginning as of January 1 of that following year and shall continue in effect until revoked by the Participant by a written notice filed with the Plan Administrator, but any such revocation shall not be effective until the next January 1, and then only if the revocation notice is received by the Plan Administrator by December 31 of the preceding calendar year.

     (2) Notwithstanding part (1) above, a Participant’s first election as a new Participant that is made within 30 days after becoming eligible, as provided by Section 2.02, will be effective with respect to Compensation paid for services to be performed after the Plan Administrator’s receipt of the election; otherwise, the election will not be effective until the next January 1.

     (c) Vesting. A Participant’s Account shall be 100% nonforfeitable at all times subject, however, to the limitations of Section 3.01(c).

     Section 3.03 No Other Contributions. Contributions by Participants other than as provided by Section 3.02 are neither required nor permitted under the Plan, and there shall be no Corporation contributions made under the Plan.

     Section 3.04 Adjustment of Accounts.

     (a) Accounting Dates. The Plan Administrator shall establish periodic Accounting Dates within the Plan Year on which Participant Accounts shall be adjusted as provided in this section.

     (b) Credits for Contributions. As of each such Accounting Date, every Participant’s Account shall be adjusted first by crediting any contributions made since the last Accounting Date pursuant to Section 3.02.

     (c) Charges for Expenses and Distributions. Next, as of each Accounting Date, every Participant’s Account shall be adjusted by charging for any expenses properly allocable to the Account and for any distributions made to the Participant or his/her Beneficiary under Article 5.

     (d) Credits for Earnings. Finally, as of each Accounting Date, every Participant’s Account shall be adjusted by crediting to the then balance of such Account earnings at a rate equal to the rate earned on a portfolio mix selected by the Participant. The portfolio mix shall be selected by each Participant at the time of his/her enrollment in the Plan from among various mutual funds and other investments designated by the Plan Administrator from time to time. A Participant may change the portfolio mix at any time, subject to any applicable securities law restrictions and written approval of the Corporation’s General Counsel in the case of transactions by insiders in shares of Corporation Stock, by submitting an election to the Plan Administrator in such form and by such advance date as the Plan Administrator may specify. The Corporation may, but is not required, to implement a grantor trust for purposes of acquiring, retaining, and disposing, as appropriate, the mutual funds, shares of Corporation Stock and other investments designated from time to time by the Plan Administrator and selected by Participants for their individual portfolio mixes. In the event such a trust is established, all trust assets shall be held at all times within the United States.

ARTICLE 4

DISTRIBUTIONS

     Section 4.01 Date of Distribution. At the time of his/her enrollment in the Plan, a Participant may elect to have his/her Account distributed on or beginning with a specific future date or as soon as administratively feasible following his/her Separation from Service. Absent such an election by a Participant in his/her enrollment form, or notwithstanding an election by a Participant but in the event that the board or committee on which the Director serves is totally dissolved in connection with the sale, merger or other transaction involving the Corporation or for any other reason not within the sole control of the Director, the balance of such Participant’s Account shall be distributed in full, or begin to be distributed in installments, as the case may be, as soon as administratively feasible following his/her attainment of age 65. Notwithstanding a Participant’s election or the rule of default in the previous sentence, the Account of a Participant who dies shall be distributed as soon as administratively feasible following his/her date of death to the Participant’s Beneficiary. For purposes of this section, the Participant’s Account balance shall be determined as of the Accounting Date coinciding with or immediately preceding the scheduled distribution date; also for all purposes under the Plan, distribution “as soon as administratively feasible” means distribution within 60 days following the scheduled distribution date, unless special circumstances for the Corporation warrant additional time, but in no event later than 120 days after the scheduled distribution date.

     Section 4.02 Form of Distribution. At the time of his/her enrollment in the Plan, a Participant may elect to have his/her Account distributed in a single lump sum payment or in substantially equal annual installments, payable as of January 1 of each year, over a period of years specified by the Participant at the time of the election, but not to exceed ten years; during the period of the installment payments, the Participant’s Account shall continue to be adjusted on each Accounting Date as provided by paragraphs (c) and (d) of Section 3.04. Absent such an election by the Participant in his/her enrollment form, the balance of his/her Account shall be distributed in a single lump sum payment. Notwithstanding a Participant’s election of installment payments, any amount in the Participant’s Account shall be fully distributed in a single lump sum payment in the event of the Participant’s death (whether distributions had commenced or not) to his/her designated Beneficiary, or to the Participant in any other case if, at the date of distribution determined under Section 4.01, the Participant’s Account balance is less than $10,000. For purposes of Treasury Regulation Section 1.409A-3, each installment payment shall not be treated as a “separate payment.”

     Section 4.03 Election To Defer Receipt or Change Form of Distribution. Not later than 12 complete calendar months prior to the date scheduled for distribution of his/her Account in a single lump sum payment, or the commencement of installment payments from his/her Account, as the case may be, a Participant may elect to change the scheduled date to any subsequent date, or may change the form of payment from a lump sum to installments or vice versa, provided that in each case the scheduled date of distribution is at least five years later than the originally scheduled date. Any such change shall be filed with the Plan Administrator in such manner as the Plan Administrator prescribes.

     Section 4.04 Special Rule for Specified Employees. Notwithstanding the foregoing, in no event shall any distribution be made from the Account of a Director, who also is a Specified Employee (determined on the date of his/her Separation from Service), prior to the earlier of a date which is six months from his/her date of Separation from Service with the Corporation or the Participant’s date of death.

     Section 4.05 Designation of Beneficiary. A Participant’s designation of Beneficiary shall be made on a form prescribed by, provided by, and filed with the Plan Administrator. Such designation may be changed from time to time by the Participant by filing a new designation with the Plan Administrator. If any Participant fails to designate a Beneficiary, or if all Beneficiaries predecease the Participant, any balance in the Account shall be paid to the Participant’s surviving spouse, or if his/her spouse does not survive, then to his/her estate. If a Beneficiary survives the Participant but fails to collect all amounts payable on behalf of the Beneficiary from the Participant’s Account, the balance shall be paid to the Beneficiary’s estate, unless specified otherwise by the Participant in his/her Beneficiary designation.

     Section 4.06 Return to Service. The scheduled date and form of distribution of the Account of a Director who has incurred a Separation from Service shall not be affected by the Director’s subsequent return to service in any capacity with the Corporation (as provided in Section 2.03(c)), but such a Director who otherwise qualifies for participation in the Plan may enroll again in accordance with the procedures of Article 2 and elect to make contributions pursuant to Article 3 but not with respect to any distributions from his/her Account.

ARTICLE 5

PROVISIONS RELATING TO ADMINISTRATION

     Section 5.01 Plan Administration. The Corporation shall be the Plan Administrator and shall have such powers and duties as may be necessary to discharge its functions under the Plan, including, but not limited to the following:

     (a) Construction: To construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits under the Plan;

     (b) Forms: To require Participants (1) to complete and file with it such forms as the Plan Administrator finds necessary for the administration of the Plan and (2) to furnish all pertinent information requested by the Plan Administrator, and to rely upon all such forms and information furnished, including each Participant’s mailing address;

     (c) Procedures: To prescribe procedures to be followed by Participants or Beneficiaries filing applications for benefits;

     (d) Rules: To promulgate uniform rules and regulations whenever in the opinion of the Plan Administrator such rules and regulations are required by the terms of the Plan or would facilitate the effective operation of the Plan;

     (e) Information: To prepare and distribute, in such manner as the Plan Administrator determines to be appropriate, information explaining the Plan, and to receive from Participants such information as shall be necessary for the proper administration of the Plan;

     (f) Committee: To name two or more persons to constitute an administrative committee, to remove and replace any such persons, to prescribe rules and procedures of operation for the committee, and to delegate any of the powers and duties of the Plan Administrator to the committee;

     (g) Annual Reports: To prepare and furnish to Participants such annual reports with respect to the administration of the Plan as are reasonable and appropriate; and

     (h) Records Review: To receive and review the periodic accountings of the Plan, and to receive, review and keep on file (as it deems convenient and proper) reports of benefit payments and reports of disbursements for expenses.

     Section 5.02 Claims Procedure.

     (a) Initial Claims. The Plan Administrator shall make all determinations as to the right of any person to receive a distribution and as to other matters affecting benefits. Each Director, Participant, Beneficiary, or other person (collectively referred to as “claimant”) shall have the right to submit a claim with respect to any benefit sought under the Plan, or with respect to the claimant’s eligibility, vesting, or other factor affecting benefits, either personally or through a representative duly authorized in writing. All claims shall be submitted in writing to the Plan Administrator and shall be accompanied by such information and documentation as the Plan Administrator determines is required

to make a ruling on the claim. Upon receipt of a claim, the Plan Administrator shall consider the claim and shall render a decision, which shall be in writing and shall be delivered or mailed to the claimant within 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of a claim denial by the Plan Administrator shall set forth (1) the specific reasons for the denial, (2) specific reference to pertinent provisions of the Plan upon which the denial is based, (3) a description of any additional material or information necessary for the claimant to perfect his/her claim, with an explanation of why such material or information is necessary, and (4) an explanation of the claim review procedures under the Plan, all written to the best of the Plan Administrator’s ability in a manner that may be understood without legal or actuarial counsel. A failure of the Plan Administrator to render a written decision within the time specified above shall be deemed to be a denial of the claim.

     (b) Limitation on Claims Procedure. Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim, or (2) the date on which the claimant reasonably should have been expected to learn of facts sufficient to enable him to formulate such claim.

     (c) Review of Denied Claims. A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, a review of such denial. The request for review must be in writing and must be delivered to the Plan Administrator within the specified 90-day period. The request should set forth the reasons why the claimant believes the denial of his/her claim is incorrect. The claimant shall be entitled to submit such issues or comments, in writing or otherwise, as he shall consider relevant to a determination of his/her claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his/her request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his/her claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his/her choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator’s decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant’s request, unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator’s decision shall be so mailed not later than 120 days after receipt of such request. If no decision or review is rendered within this 120-day period, the claimant’s appeal shall be deemed denied and the Plan Administrator’s original denial of the claim affirmed.

     (d) Finality of Decisions. The decision of the Plan Administrator upon review of any claim under paragraph (c) above shall be binding upon the claimant, his/her heirs and assigns, and all other persons claiming by, through or under him/her.

     (e) Time Limits Affecting Jurisdiction. The timely filing of a request for review in the manner specified by paragraph (c) above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his/her administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan.

     (f) Limitation on Court Action. Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator’s final decision or from the date the appeal is deemed denied, if later. Service of legal process shall be made upon the Plan by service upon the Plan Administrator at the following address: Citizens Republic Bancorp, One Citizens Banking Center, Flint, Michigan 48502-9985. The Plan Administrator may engage legal counsel to defend the Plan against lawsuits. Attorney fees and other costs attendant to suit shall be borne by the Corporation but shall be charged to Participant Accounts upon the written direction of the Corporation. If the Corporation or Plan Administrator determines that it is in the best interests of the Plan to initiate legal action, then it may employ counsel to do so, and all expenses of suit shall be borne by the Plan as provided above. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced under Section 502(a)(1)(B) of ERISA, or under any other provision of law, whether or not statutory, until the claimant first shall have exhausted the claims and review procedures available to him/her hereunder.

     Section 5.03 Special Ruling. In order to resolve problems concerning the Plan and to apply the Plan in unusual factual circumstances, the Plan Administrator may make special rulings. Such special rulings shall be in writing on a form to be developed by the Plan Administrator. In making its rulings, the Plan Administrator may consult with legal, accounting, actuarial, investment, and other counsel or advisers. Once made, special rulings shall be applied uniformly, except that the Plan Administrator shall not be bound by such rulings in future cases unless the factual situation of a particular case is identical to that involved in the special ruling. Special rulings shall be made in accordance with all applicable law and in accordance with the Plan. It is not intended that the special ruling procedure will be a frequently used device, but that it should be followed only in extraordinary situations. The Plan Administrator at all times shall have the final decision as to whether resort shall be made to this special ruling feature.

     Section 5.04 Employment of Advisers. The Corporation shall have the authority to employ such legal, accounting, actuarial, and financial counsel and advisers, as it shall deem necessary in connection with the performance of its duties under the Plan, and to act in accordance with the advice of such counsel and advisers. Except as otherwise provided in the Plan, the fees and expenses of such counsel and advisers shall, upon approval of the Corporation’s Compensation and Human Resources Committee of the Board of Directors, be paid by the Corporation, or charged to Participants’ Accounts, as the Corporation’s Compensation and Human Resources Committee of the Board of Directors shall deem appropriate.

     Section 5.05 Delegation to Officers or Employees. The Corporation shall have the power to delegate its duties under the Plan to officers or employees of any Corporation and to other persons, all of whom, if officers or employees of the Corporation, shall serve without compensation other than their regular remuneration from their Corporation.

ARTICLE 6

AMENDMENT AND TERMINATION OF PLAN

     Section 6.01 Amendment of the Plan.

     (a) Corporation’s Right To Amend. The Corporation reserves the right to make any amendments to the Plan, with or without retroactive effect. Amendment of the Plan shall be made by resolution of the Corporation’s Compensation and Human Resources Committee of the Board of Directors, or by any person or persons authorized by resolution of the Compensation and Human Resources Committee of the Board of Directors to make amendments.

     (b) Operation of Amendments. Except as may be specifically provided otherwise in the Plan, or in any amendment to the Plan, each amendment to the Plan shall operate prospectively only from the effective date of the amendment, and the rights and obligations of a Participant, or Beneficiary of a Participant, who retires, dies or otherwise terminates employment with the Corporation prior to the effective date of any amendment, shall be determined without regard to such amendment, on the basis of the Plan terms in effect on the date of retirement, death or other termination of employment.

     Section 6.02 Termination of the Plan.

     (a) Termination. Any subsidiary of the Corporation reserves and shall have the right at any time to cease participation in the Plan, but only the Corporation shall have the authority to terminate the Plan. In the event of the dissolution, merger, consolidation, or reorganization of the Corporation, the Plan shall terminate unless the it is continued by a successor to the Corporation in accordance with Section 6.02(b).

     (b) Termination and Transfer to New Plan. If a new plan has been established providing comparable benefits to this Plan, and the Corporation intends to discontinue contributions under this Plan due to the liabilities created under the new plan, then, upon written direction from the Corporation, the Accounts attributable to Participants performing services for the Corporation or other sponsor of the new plan shall be transferred to such newly created plan. Thereafter, this Plan shall cease to have any effect with respect to Participants performing services for the Corporation or new plan sponsor and the rights of all parties shall be determined under the new plan.

     (c) Rights upon Termination. If the Plan should be terminated, or if the Corporation should liquidate and dissolve, or if a receiver of the Corporation is appointed, or if the Plan should be terminated for any other reason, the Accounts of all affected Participants as then appearing upon the records of the Plan (other than Accounts of former Directors) shall be revalued and adjusted as previously provided in the Plan, and said Accounts (after payment of expenses properly chargeable to the Plan and allocated among the Accounts) shall be distributed to affected Participants and Beneficiaries or transferred as provided in paragraph (b) above either (1) as soon as administratively feasible if no penalty will be incurred under Code Section 409A, or (2) as otherwise provided by the Plan if necessary to avoid incurring a penalty under Code Section 409A.

ARTICLE 7

MISCELLANEOUS PROVISIONS

     Section 7.01 Payments for the Benefit of Payee. In the event that the Corporation shall find that any person to whom a benefit is payable under the terms of the Plan is unable to care for his/her affairs because of illness or accident, is otherwise mentally or physically incompetent, or is unable to give a valid receipt, the Corporation may cause the payments becoming due to such person to be paid to another individual for such person’s benefit, without responsibility on the part of the Corporation to follow the application of such payment. Any such payment shall be a payment for the account of such person and shall operate as a complete discharge of the Corporation from all liability under the Plan.

     Section 7.02 Non-Alienation of Benefits. No right or benefit provided for in the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void. No such right or benefit shall be liable for or subject to the debts, contracts, liabilities, engagements, or torts of any person entitled to such right or benefit. No such right or benefit shall be subject to garnishment, attachment, execution or levy of any kind. Provided, however, if the Plan Administrator receives a domestic relations order as defined in Code Section 414(p)(1)(B) directing that all or a portion of a Participant’s Account balance be paid to an alternate payee, any amount payable to the alternate payee shall be distributed within 60 days in a single lump sum payment to the alternate payee.

     Section 7.03 Nature of Plan. The Plan is not intended to create, nor is it to be construed to constitute, a contract of employment or retention agreement between the Corporation and any of its Directors. Every Director is subject to removal and/or reelection and any limitations on term of service, in accordance with the Corporation’s bylaws, and any Director may resign at any time in accordance with those bylaws.

     Section 7.04 Litigation. In the event that any Director, Participant, Beneficiary, or spouse shall bring a legal or equitable action against the Plan or against the Corporation in connection with the Plan, the result of which shall be adverse to such Director, Participant, Beneficiary, or spouse, or in the event that the Plan or the Corporation shall find it necessary to bring any legal or equitable action against any Director, Participant, Beneficiary, or spouse, or any other person claiming an interest by or through such person, the cost to the Corporation of bringing or defending such suit, as the case may be, shall be charged, unless the Corporation determines that such course would be inequitable under all the circumstances, to such extent as is possible, directly to the Account of such Director, Participant, Beneficiary, or spouse, if any, and only the excess, if any, of such costs over and above the amount credited to such Account shall be paid by the Corporation.

     Section 7.05 Addresses and Mailing of Notices and Checks. Each recipient of benefits from the Plan shall be responsible for furnishing the Corporation with his/her address. Any notices required or permitted to be given under the Plan shall be deemed given if directed to such address and mailed by regular United States mail. If any check mailed by regular United States mail to such address is returned, mailing of checks will be suspended until a correct address is furnished by the intended recipient.

     Section 7.06 Action by Corporation. Unless otherwise provided in the Plan, whenever the Corporation under the terms of the Plan is permitted or required to do or perform any act, such act shall be done (a) by the authority of the Corporation’s board of directors or other governing body, such as the Compensation and Human Resources Committee of such board, and evidenced by proper resolution in consent form or duly certified by the secretary of the Corporation, the board or committee, or (b) by such employee of the Corporation who may, by proper resolution, be duly authorized by the board of directors or other governing body.

     Section 7.07 Savings Clause. The determination that any provision of the Plan is invalid or unenforceable shall not affect or impair the ability to enforce or the validity of any other provision of the Plan.

ARTICLE 8

DEFINITIONS

     Section 8.01 “Account” means the interest of a Participant under the Plan as determined as of each Accounting Date and as reflected in the records maintained for the Plan.

     Section 8.02 “Accounting Date” means a date on which Accounts are adjusted pursuant to Section 3.04.

     Section 8.03 “Beneficiary” means the beneficiary or beneficiaries of the Participant as designated pursuant to the provisions in the Plan.

     Section 8.04 “Code” means the Internal Revenue Code of 1986, as amended.

     Section 8.05 “Compensation” means fees paid by the Corporation or any of its subsidiaries to a Director for, including any before-tax contributions made to this Plan or any other plan by the Corporation from such Compensation amount at the election of the Participant through deferral, but excludes any other contributions made by the Corporation on behalf of the Participant under this Plan or any other plan or fringe benefit program of the Corporation.

     Section 8.06 “Corporation” means Citizens Republic Bancorp and any successor.

     Section 8.07 “Director” means a person who, on proper election or appointment, serves as a member of (i) the board of directors of the Corporation, (ii) the board of directors of any subsidiary of the Corporation, or (iii) any special advisory committee (such as a community board of directors) constituted to render advice to either of the foregoing..

     Section 8.08 “Effective Date” means October 21, 1988 with regard to the original plan described in Section 1.01 and January 1, 2008 with respect to this amendment and restatement.

     Section 8.09 “ERISA” means the Employee Retirement Income Security Act of l974, as amended.

     Section 8.10 “Participant” means a Director who has met the eligibility requirements specified in Article 2, who has commenced participation in the Plan in accordance with that article, and whose participation has not terminated under the other applicable provisions of the Plan.

     Section 8.11 “Plan” means the Citizens Republic Bancorp Deferred Compensation Plan for Directors as described in this instrument and any subsequent amendments.

     Section 8.12 “Plan Administrator” means the person(s) or organization(s) specifically designated by Article 5 as the administrator of the Plan.

     Section 8.13 “Plan Year” means the calendar year.

     Section 8.14 “Separation from Service” occurs when the term of a Director, who is not also a common-law employee of the Corporation, ends, whether because of the expiration of time or the

Director’s resignation or removal, and the Director has no reasonable expectation of renewal of his/her term as a director or of becoming an employee of the Corporation. For a Director who also is a common-law employee of the Corporation, Separation from Service occurs on the later of (i) the date determined in accordance with the previous sentence, or (ii) upon the Director’s termination of employment as an employee due to retirement, disability, death or other cause, except that the employment relationship is treated as continuing intact while the individual is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Corporation under an applicable statute or by contract. For purposes of this section, a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the employee will return to perform services for the Corporation. If the period of leave exceeds six months and the individual does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Notwithstanding the foregoing, where a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the employee to be unable to perform the duties of his/her position of employment, or any substantially similar position of employment, a 29-month period of absence may be substituted for such six-month period.

     Section 8.15 “Specified Employee” means a Participant who, as of the date of his/her Separation from Service, is a “key employee” of the Corporation. For this purpose, a key employee is a key employee as defined in Code Section 416(i)(1)(A)(i), (ii) or (iii), applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5), at any time during the calendar ending prior to his/her Separation from Service.

     IN WITNESS WHEREOF, Citizens Republic Bancorp has caused the Plan to be executed on April 13, 2008.

		CITIZENS REPUBLIC BANCORP
Witness	/s/ Laura Hobson	By:	/s/ Susan P. Brockett
			Susan P. Brockett
			Its: Executive Vice President and
			Human Resources Director

EX-10.56

Exhibit 10.56

CITIZENS REPUBLIC BANCORP
DEFERRED COMPENSATION PLAN FOR EXECUTIVES

Amended and Restated
Effective January 1, 2008

Prepared by:
Rosenberger Law Group PLLC
4111 Andover Road, Suite 100 West
Bloomfield Hills, Michigan 48302

TABLE OF CONTENTS

	Page
ARTICLE 1 - PREAMBLES
Section 1.01 Establishment of Plan	1
Section 1.02 Grandfathered Accounts	1
Section 1.03 Applicable Law	1
Section 1.04 Defined Terms	1
Section 1.05 Adoption of Plan by Related Entities	1
ARTICLE 2 - ELIGIBILITY, PARTICIPATION AND ENROLLMENT
Section 2.01 Eligibility	2
Section 2.02 Participation	2
Section 2.03 Enrollment	2
ARTICLE 3 - CONTRIBUTIONS
Section 3.01 Sources of Contributions and Accounting	4
Section 3.02 Before-Tax Employee Contributions	4
Section 3.03 Employer Matching Contributions	5
Section 3.04 No Other Contributions	6
Section 3.05 Adjustment of Accounts	6
ARTICLE 4 - FORMS OF RETIREMENT; DEATH
Section 4.01 Normal Retirement	8
Section 4.02 Early Retirement	8
Section 4.03 Disability	8
Section 4.04 Death and Designation of Beneficiary	8
ARTICLE 5 - DISTRIBUTIONS
Section 5.01 Date of Distribution	9
Section 5.02 Form of Distribution	9
Section 5.03 Election To Defer Receipt or Change Form of Distribution	9
Section 5.04 Special Rule for Specified Employees	9
Section 5.05 Return to Service	10

(i)

	Page
ARTICLE 6 - SPECIAL PROVISIONS
Section 6.01 Service Rules	11
Section 6.02 Changes in Employment Status and Transfers between Related Entities	11
ARTICLE 7 - PROVISIONS RELATING TO ADMINISTRATION
Section 7.01 Plan Administration	13
Section 7.02 Claims Procedure	13
Section 7.03 Special Ruling	15
Section 7.04 Employment of Advisers	15
Section 7.05 Delegation to Officers or Employees	15
ARTICLE 8 - AMENDMENT AND TERMINATION OF PLAN
Section 8.01 Amendment of the Plan	17
Section 8.02 Termination of the Plan	17
ARTICLE 9 - MISCELLANEOUS PROVISIONS
Section 9.01 Payments for the Benefit of Payee	19
Section 9.02 Non-Alienation of Benefits	19
Section 9.03 Employer’s Rights	19
Section 9.04 Litigation	19
Section 9.05 Addresses and Mailing of Notices and Checks	19
Section 9.06 Action by Employer	20
Section 9.07 Savings Clause	20
ARTICLE 10 - DEFINITIONS
Section 10.01 Account	21
Section 10.02 Accounting Date	21
Section 10.03 Beneficiary	21
Section 10.04 Break in Service	21
Section 10.05 Code	21
Section 10.06 Compensation	21
Section 10.07 Corporation	21
Section 10.08 Disability	21
Section 10.09 Early Retirement	21
Section 10.10 Effective Date	21
Section 10.11 Employee	21
Section 10.12 Employer	21
Section 10.13 ERISA	21

(ii)

	Page
Section 10.14 Hour of Service	22
Section 10.15 Normal Retirement	22
Section 10.16 Participant	22
Section 10.17 Plan	22
Section 10.18 Plan Administrator	22
Section 10.19 Plan Year	22
Section 10.20 Related Entity or Related Entities	22
Section 10.21 Separation from Service	22
Section 10.22 Specified Employee	22
Section 10.23 Year of Service	23

(iii)

ARTICLE 1

PREAMBLES

     Section 1.01 Establishment of Plan. Effective July 1, 1999, Citizens Banking Corporation established the Citizens Banking Corporation Deferred Compensation Plan for Executives covering eligible executive employees. That plan was amended effective January 1, 2002 and again as of January 1, 2003. Citizens Republic Bancorp (“Corporation”) now amends and restates that plan effective January 1, 2008, except as otherwise provided herein, and renames the plan the Citizens Republic Bancorp Deferred Compensation Plan for Executives (“Plan”).

     Section 1.02 Grandfathered Accounts. This amendment and restatement applies only to amounts deferred under the Plan on and after January 1, 2005, and to amounts, if any deferred under the terms of the prior document before January 1, 2005 that were not vested as of December 31, 2004. Amounts that were deferred under the prior document before January 1, 2005 that were vested as of December 31, 2004 (“Grandfathered Accounts”) shall be subject to the provisions of the plan as in effect on October 3, 2004, as the same may be amended by the Corporation without material modification, it being expressly intended that such Grandfathered Accounts are to remain exempt from the requirements of Code Section 409A.

     Section 1.03 Applicable Law. The Plan is intended to be a nonqualified deferred compensation plan satisfying the requirements for deferral of income by eligible employees under the principles of Rev. Rul. 61-60 and subsequent interpretations of the Internal Revenue Service and applicable provisions of the Internal Revenue Code of 1986, as amended (“Code”), and in particular Code Section 409A except to the extent provided by Section 1.02 above. In addition, it is intended that the Plan be exempt from the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to the extent provided by that law for an unfunded plan maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Where not so governed by the principles of the Code or the limited provisions of ERISA applicable to such a plan, the Plan shall be administered and construed in accordance with Michigan law.

     Section 1.04 Defined Terms. Throughout the Plan, various terms are used repeatedly, which terms have very specific and definite meanings when capitalized in the text. For convenience, such terms are collected and defined in Article 10. Wherever such capitalized terms appear in the Plan, they shall have the meanings specified in that article.

     Section 1.05 Adoption of Plan by Related Entities. Any parent, direct or indirect subsidiary, brother-sister corporation, or division of the Corporation (all being Related Entities within the meaning of Section 10.20), with the approval of the Corporation’s Compensation and Human Resources Committee of the Board of Directors, and by resolution of such Related Entity’s board of directors (or other authority in the case of an unincorporated division), may adopt the Plan and any trust created with respect to the Plan. In such case, the Related Entity shall be deemed an “Employer” hereunder as of the effective date specified in its resolution. Any special terms applicable to the Related Entity shall be set forth in an appendix to the Plan.

ARTICLE 2

ELIGIBILITY, PARTICIPATION AND ENROLLMENT

     Section 2.01 Eligibility. In order to be eligible to participate in the Plan, an individual must be an Employee who is among a select group of management or highly compensated employees, as determined under Section 201(2) of ERISA, and who has been designated as eligible to participate in the Plan by the Corporation’s Compensation and Human Resources Committee of the Board of Directors.

     Section 2.02 Participation.

     (a) Meaning of Participation. A Participant who is eligible for the Plan as described in Section 2.01, has commenced participation as provided in Section 2.02(b), has enrolled in the Plan pursuant to Section 2.03, and has not ceased participation under Section 2.02(c), will have maintained on the books and records of the Plan an Account in his/her name to which credits may be made in accordance with Article 3. However, mere participation in the Plan does not entitle a Participant to an ultimate benefit from the Plan; a Participant will receive a benefit only if credits are actually made to his/her Account over his/her period of participation pursuant to Article 3.

     (b) Commencement of Participation. An individual shall commence participation in the Plan on the first day that he/she satisfies the applicable eligibility requirements of Section 2.01.

     (c) Termination of Participation. Participation in the Plan shall not terminate for a Participant until the balance of his/her Account, to the extent vested, has been fully distributed, but the right to make before-tax contributions as provided by Section 3.02 shall end as of December 31 of the year in which the Participant ceases to meet the eligibility requirements of Section 2.01.

     (d) Resumption of Participation. An individual whose participation has terminated pursuant to paragraph (c) above, or who otherwise has been ineligible to make deferrals because of a failure to meet the eligibility requirements of Section 2.01, shall resume participation not earlier than January1 of the year following which he/she again meets the eligibility requirements of Section 2.01, unless the individual had not deferred any compensation under the Plan for the last 24 months, in which case the individual shall be treated as a new Participant entitled to make a first year election in accordance with the provisions of the Plan.

     Section 2.03 Enrollment.

     (a) Meaning of Enrollment. Enrollment is the process of submitting to the Plan Administrator an election to make contributions to the Plan through payroll withholding, as further described in Article 3, designating a Beneficiary to receive any death benefit provided by the Plan under Section 4.04, specifying an initial set of investments by which earnings, gains and losses with respect to contributions made to his/her Account will be measured, and electing the date and form of distribution for distribution of the balance that accumulates in his/her Account.

     (b) Enrollment Date. In the first calendar year within which an individual commences participation in the Plan as provided in Section 2.02(b), he/she may enroll effective on the first regular

payroll date following the date on which the Plan Administrator receives the Participant’s properly completed enrollment form, subject to any minimum implementation period imposed by the Plan Administrator. Provided, however, that a Participant who fails to submit an enrollment form by December 31 of the first calendar year of his/her eligibility shall not be enrolled in the Plan until the January 1 following the date he/she does submit and the Plan Administrator receives a properly completed enrollment form.

     (c) Changes in Enrolled Status. A Participant may change his/her designated Beneficiary or set of selected investments at any time, as provided by Sections 4.04 and 3.05(d), but he/she may change the elected level of his/her contributions only as provided in Section 3.02 and may change the elected date and form of distribution only as provided in Section 5.03.

ARTICLE 3

CONTRIBUTIONS

     Section 3.01 Sources of Contributions and Accounting.

     (a) Sources and Forms of Contributions. It is contemplated that both Participants and the Employer may make contributions under the Plan. Participant contributions shall be limited to elective before-tax contributions; Employer contributions shall be limited to discretionary matching contributions made on behalf of selected Participants.

     (b) Crediting of Contributions and Individual Accounts. All contributions under the Plan shall be made in the form of credits to individual Accounts maintained on the books and records of the Plan for each Participant.

     (c) Nature of Accounts. Individual Accounts of Participants shall be maintained under the Plan only for accounting purposes, and the fact that individual Accounts are maintained shall not be construed to mean that any Participant or Beneficiary has title to any specific assets of the Employer. The rights of any Participant or Beneficiary, or any person claiming through a Participant or Beneficiary under this Plan, shall be solely those of an unsecured general creditor of the Employer. The Participant or Beneficiary, or any person claiming through either, shall have only the right to receive from the Employer those payments as specified herein. Further, no asset used or acquired by the Employer in connection with the liabilities it has assumed under the Plan, except as expressly provided and as permitted by applicable tax and labor laws, shall be deemed to be held under any trust for the benefit of any Participant or Beneficiary. Nor shall any such asset be considered security for the performance of the obligations of the Employer. Any such asset shall be, and remain, a general, unpledged, and unrestricted asset of the Employer.

     Section 3.02 Before-Tax Employee Contributions.

     (a) Amount. For each Plan Year, a Participant whose eligibility to contribute has not ceased under Section 2.02 may (but is not required to) direct the Employer to make contributions by means of payroll deduction to his/her Account (which contributions are not includible in the Participant’s gross income for federal income tax purposes) in any whole dollar amount or whole percentage, from 1% to a maximum percentage of 50%, of the Participant’s Base Compensation for the Plan Year, and up to 100% of any Bonus. In each case, however, the Plan Administrator shall reduce the elected contribution to the extent the Participant has insufficient non-deferred compensation from the particular payroll payment to cover his/her liability for FICA and Medicare taxes, income tax withholding, employee benefit plan co-payments or deductions, reimbursements for personal use of fringe benefits or other amounts normally deducted from the Participant’s Compensation. Changes to a Participant’s payroll withholding that affect the amount of Compensation being deferred to the Plan shall be permitted only to the extent allowed by Code Section 409A and Treasury Regulations issued thereunder.

     (b) Elections. Each Participant shall file an annual election with the Plan Administrator, in a form prescribed by the Plan Administrator, specifying the amounts or percentages of his/her Base Compensation and any Bonus to be contributed to the Plan on the Participant’s behalf by the Employer pursuant to paragraph (a) of this section.

     (1) Except as provided in the subsequent parts of this paragraph (b), each such election must be made by December 31 of the year preceding the year the services with respect to Compensation relating to the election will be performed, and such election shall be irrevocable until the next December 31, with any change made by that date not being effective until the January 1 immediately thereafter. Each election shall be effective only with respect to compensation for services performed during a particular calendar year, such that the amount to be contributed in any subsequent year will be zero unless the Participant has timely filed a new election for such subsequent year.

     (2) Notwithstanding part (1) above, a Participant’s first election as a new Participant that is made within 30 days after becoming eligible, as provided by Section 2.02, will be effective with respect to Base Compensation paid for services to be performed after the Plan Administrator’s receipt of the election if the election so provides; otherwise, the election will not be effective until the next January 1. Any election with respect to a Bonus for the first calendar year of participation made within 30 days of becoming eligible shall apply only to the amount of the Bonus for that year, multiplied by a fraction, the numerator of which is the number of days in the year remaining after the Plan Administrator’s receipt of the election and the denominator of which is 365.

     (3) Further notwithstanding part (1) above, a Participant’s election to defer all or part on any Bonus which qualifies as a 12-month performance-based bonus, as defined in Code Section 409A and the Treasury Regulations thereunder, may be made at any time up until six months prior to the end of the 12-month performance period, provided that the Participant performs service for the Employer continuously from the later of the beginning of the performance period or the date the criteria are established through the date of the Participant’s election, and the Bonus amount is not readily ascertainable as of the date of the election.

     (c) Vesting. The portion of a Participant’s Account attributable to his/her own contributions shall be 100% nonforfeitable at all times subject, however, to the limitations of Section 3.01(c).

     Section 3.03 Employer Matching Contributions.

     (a) Amount. Subject to approval each year by the Corporation’s Compensation and Human Resources Committee of the Board of Directors, the Employer shall make a matching contribution to the Account of each Participant who has been specified as eligible that year for matching contributions, not exceeding in value 30% of that Participant’s own contribution made to the Plan with respect to any Bonus for that year. Such employer matching contribution shall be credited to the Participant’s Account as provided by Section 3.05.

     (b) Form of Match. Any Employer’s matching contribution made pursuant to paragraph (a) of this section shall be made in Corporation Stock.

     (c) Vesting. The portion of a Participant’s Account attributable to Employer matching contributions shall vest at the rate of one-third of the amount of the last contribution for each Year of Service completed by the Participant following the year for which the contribution was made, except that the Participant’s Account attributable to Employer matching contributions shall fully vest upon his/her Normal, Early or Disability Retirement, or upon his/her death prior to termination of employment with the Employer. For example, the portion of a Participant’s Account attributable to a matching contribution made on May 15, 2009 with respect to a before-tax contribution from a Bonus earned in 2008 shall be one-third vested upon the Participant’s completion of one Year of Service after 2008, two-thirds vested upon the Participant’s completion of two Years of Service after 2008, and fully vested upon the Participant’s completion of three Years of Service after 2008. Any amounts forfeited due to application of the foregoing class year vesting provisions shall applied to matching contributions allocable to other Participants in the current and succeeding years, until fully applied.

     Section 3.04 No Other Contributions. Contributions by Participants other than as provided by Section 3.02 are neither required nor permitted under the Plan, and there shall be no Employer contributions made under the Plan other than as provided by Section 3.03.

     Section 3.05 Adjustment of Accounts.

     (a) Accounting Dates. The Plan Administrator shall establish periodic Accounting Dates within the Plan Year on which Participant Accounts shall be adjusted as provided in this section.

     (b) Credits for Contributions. As of each such Accounting Date, every Participant’s Account shall be adjusted first by crediting any contributions made since the last Accounting Date pursuant to Sections 3.02 or 3.03.

     (c) Charges for Expenses and Distributions. Next, as of each Accounting Date, every Participant’s Account shall be adjusted by charging for any expenses properly allocable to the Account and for any distributions made to the Participant or his/her Beneficiary under Article 5.

     (d) Credits for Earnings. Finally, as of each Accounting Date, every Participant’s Account shall be adjusted by crediting to the then balance of such Account earnings at a rate equal to the rate earned on a portfolio mix selected by the Participant. The portfolio mix shall be selected by each Participant at the time of his/her enrollment in the Plan from among various mutual funds and other investments designated by the Plan Administrator from time to time. A Participant may change the portfolio mix at any time, subject to any applicable securities law restrictions and written approval of the Corporation’s General Counsel in the case of transactions by insiders in shares of Corporation Stock, by submitting an election to the Plan Administrator in such form and by such advance date as the Plan Administrator may specify, but such change shall not apply to the portion of the Participant’s Account, if any, that is attributable to matching contributions that are not fully vested. The Corporation may, but is not required, to implement a grantor trust for purposes of acquiring, retaining, and disposing, as appropriate, the mutual funds, shares of Corporation Stock and other investments designated from time to time by the Plan Administrator and selected by Participants for their individual portfolio mixes. In the event such a trust is established, all trust assets shall be held at all times within the United States.

ARTICLE 4

FORMS OF RETIREMENT; DEATH

     Section 4.01 Normal Retirement. A Participant who attains age 65 may retire as of the first day of the month coincident with or next following his/her attainment of such age, which day shall be called the Participant’s Normal Retirement Date.

     Section 4.02 Early Retirement. A Participant who attains age 55 and has completed 10 or more Years of Service may retire as of the first day of the month coincident with or next following his/her completion of these requirements, which day shall be called the Participant’s Early Retirement Date. A Participant who continues to be actively employed by the Employer after his/her Early (or Normal) Retirement Date may continue to be a Participant in the Plan as long as he/she remains so employed by the Employer and continues to meet the eligibility requirements of Section 2.01.

     Section 4.03 Disability. A Participant who is determined by the Plan Administrator to be disabled, as defined in this section, shall be considered to have taken a disability retirement as of the date the Plan Administrator so determines the Participant to be disabled. “Disability” means, and “disabled” occurs when, a physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder renders him/her incapable of continuing his/her usual and customary employment with the Employer and is expected to continue for at least twelve months, and has, in fact, lasted for at least three full calendar months. Disability of a Participant shall be determined by a licensed physician chosen by the Plan Administrator. Standards for the determination of disability shall be uniformly applied to all Participants.

     Section 4.04 Death and Designation of Beneficiary. In the event of a Participant’s death prior to his/her termination of employment with the Employer, the entire balance of such Participant’s Account shall become payable to the Participant’s Beneficiary as designated to the Plan Administrator and shall be distributed at the time and in the manner provided by Article 5. A Participant’s designation of Beneficiary shall be made on a form prescribed by, provided by, and filed with the Plan Administrator. Such designation may be changed from time to time by the Participant by filing a new designation with the Plan Administrator. If any Participant fails to designate a Beneficiary, or if all Beneficiaries predecease the Participant, any balance in the Account shall be paid to the Participant’s surviving spouse, or if his/her spouse does not survive, then to his/her estate. If a Beneficiary survives the Participant but fails to collect all amounts payable on behalf of the Beneficiary from the Participant’s Account, the balance shall be paid to the Beneficiary’s estate, unless specified otherwise by the Participant in his/her Beneficiary designation.

ARTICLE 5

DISTRIBUTIONS

     Section 5.01 Date of Distribution. At the time of his/her enrollment in the Plan, a Participant may elect to have his/her Account distributed on or beginning with either (a) a specific future date or (b) as soon as administratively feasible following his/her Separation from Service. Absent such an election by the Participant in his/her enrollment form, the vested balance of his/her Account shall be distributed in full, or begin to be distributed in installments, as the case may be, as soon as administratively feasible following the earliest of his/her Normal Retirement under Section 4.01, Disability Retirement under Section 4.03 or death. For this purpose, the Participant’s Account balance shall be determined as of the Accounting Date coinciding with or immediately preceding the scheduled distribution date also for all purposes under the Plan, distribution “as soon as administratively feasible” means distribution within 60 days following the scheduled distribution date, unless special circumstances for the Corporation warrant additional time, but in no event later than 120 days after the scheduled distribution date.

     Section 5.02 Form of Distribution. At the time of his/her enrollment in the Plan, a Participant may elect to have his/her Account distributed in a single lump sum payment or in substantially equal annual installments, payable as of January 1 of each year, over a period of years specified by the Participant at the time of the election, but not to exceed ten years; during the period of the installment payments, the Participant’s Account shall continue to be adjusted on each Accounting Date as provided by paragraphs (c) and (d) of Section 3.05. Absent such an election by the Participant in his/her enrollment form, the vested balance of his/her Account shall be distributed in a single lump sum payment. Notwithstanding a Participant’s election of installment payments, any amount in the Participant’s Account shall be fully distributed in a single lump sum payment in the event of the Participant’s death to his/her designated Beneficiary, or to the Participant in any other case if, at the date of distribution determined under Section 5.01, the Participant’s vested Account balance is less than $10,000. For purposes of Treasury Regulation Section 1.409A-3, each installment payment shall not be treated as a “separate payment.”

     Section 5.03 Election To Defer Receipt or Change Form of Distribution. Not later than 12 complete calendar months prior to the date scheduled for distribution of his/her Account in a single lump sum payment, or the commencement of installment payments from his/her Account, as the case may be, a Participant may elect to change the scheduled date to any subsequent date, or may change the form of payment from a lump sum to installments or vice versa, provided that in each case the scheduled date of distribution is at least five years later than the originally scheduled date. Any such change shall be filed with the Plan Administrator in such manner as the Plan Administrator prescribes.

     Section 5.04 Special Rule for Specified Employees. Notwithstanding the foregoing, in no event shall any distribution be made from the Account of a Participant who is a Specified Employee (determined on the date of his/her Separation from Service) prior to the earlier of a date which is six months from his/her date of Separation from Service with the Employer or the Participant’s date of death.

     Section 5.05 Return to Service. The scheduled date and form of distribution of the Account of a Participant who has incurred a Separation from Service shall not be affected by his/her subsequent return to service in any capacity with the Corporation (as provided in Section 2.03(c)), but such an individual who otherwise qualifies for participation in the Plan may enroll again in accordance with the procedures of Article 2 and elect to make contributions pursuant to Article 3 but not with respect to any distributions from his/her Account.

ARTICLE 6

SPECIAL PROVISIONS

     Section 6.01 Service Rules. The terms “Hours of Service,” “Year of Service,” and “Break in Service” shall have the meanings and be governed by the rules set forth in the Citizens Republic Bancorp Amended and Restated Section 401(k) Plan (a qualified plan under Code Section 401(a)).

     Section 6.02 Changes in Employment Status and Transfers between Related Entities.

     (a) Changes in Employment Status. As provided in Article 2, certain classifications of Employees are excluded from participation in the Plan. However, an Employee who is transferred from non-covered status to covered status may become a Participant provided that the Employee meets the other requirements for participation under Section 2.01. Participation shall commence as of the date of transfer if all of the requirements for participation under Section 2.01 are met. In no event shall the Employee’s Compensation earned while employed in a non-covered employment position be considered under the Plan for contribution purposes. In the case of a transfer of a Participant to non-covered status, or a suspension of his/her eligibility by the Compensation and Human Resources Committee of the Corporation’s Board of Directors, his/her Account shall be valued and frozen, (except for allocation of subsequent earnings and expenses) as of the date on which his/her employment status changes or his/her eligibility has been suspended. He shall not be entitled to any distribution of his/her Account under Article 5 until his/her date of retirement, disability, death, or other termination of employment with the Employer, after which date distribution may be made in accordance with the vesting and distribution provisions of the Plan as they would otherwise apply to an Employee or his/her Beneficiary.

     (b) Transfers between Related Entities. Employees from time to time may transfer or may be transferred to Related Entities or may transfer or be transferred from such Entities to an Employer. Such Employees are referred to in this paragraph (b) as “transferred Employees.” The participation status of any such transferred Employee who transfers from one Employer maintaining the Plan to another Employer maintaining the Plan shall not change as a result of such transfer, except that the Employer to whom the Employee transfers shall assume any liability for contributions on behalf of such Employee on the date of such employment transfer with respect to Compensation earned by the Employee on and after the date of transfer.

     The participation status of any transferred Employee who transfers from one Employer maintaining the Plan to a Related Entity that does not maintain the Plan shall be determined in accordance with the following rules:

     (1) A transferred Employee shall cease to be a Participant in the Plan for purposes of contributions as of the date of his/her transfer, and his/her Account shall be distributed only upon occurrence of the events prescribed in the Plan, but

     (2) For purposes of determining the amount of any allocation under Article 3 of the Plan, a transferred Employee’s Account balance shall be limited to his/her Account balance in the Plan at the time of the allocation, adjusted from time to time for earnings and expenses, and his/her Compensation shall be restricted to the Compensation earned during the Plan Year from the Employer.

     (3) In no event shall any of the foregoing provisions be interpreted in such a way as to result in the duplication of contributions or benefits for any transferred Employee under the Plan and any other plan maintained by a Related Entity for the same period of employment.

ARTICLE 7

PROVISIONS RELATING TO ADMINISTRATION

     Section 7.01 Plan Administration. The Corporation shall be the Plan Administrator and shall have such powers and duties as may be necessary to discharge its functions under the Plan, including, but not limited to the following:

     (a) Construction: To construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits under the Plan;

     (b) Forms: To require Participants (1) to complete and file with it such forms as the Plan Administrator finds necessary for the administration of the Plan and (2) to furnish all pertinent information requested by the Plan Administrator, and to rely upon all such forms and information furnished, including each Participant’s mailing address;

     (c) Procedures: To prescribe procedures to be followed by Participants or Beneficiaries filing applications for benefits;

     (d) Rules: To promulgate uniform rules and regulations whenever in the opinion of the Plan Administrator such rules and regulations are required by the terms of the Plan or would facilitate the effective operation of the Plan;

     (e) Information: To prepare and distribute, in such manner as the Plan Administrator determines to be appropriate, information explaining the Plan, and to receive from Participants such information as shall be necessary for the proper administration of the Plan;

     (f) Committee: To name two or more persons to constitute an administrative committee, to remove and replace any such persons, to prescribe rules and procedures of operation for the committee, and to delegate any of the powers and duties of the Plan Administrator to the committee;

     (g) Annual Reports: To prepare and furnish to Participants such annual reports with respect to the administration of the Plan as are reasonable and appropriate; and

     (h) Records Review: To receive and review the periodic accountings of the Plan, and to receive, review and keep on file (as it deems convenient and proper) reports of benefit payments and reports of disbursements for expenses.

     Section 7.02 Claims Procedure.

     (a) Initial Claims. The Plan Administrator shall make all determinations as to the right of any person to receive a distribution and as to other matters affecting benefits. Each Employee, Participant, Beneficiary, or other person (collectively referred to as “claimant”) shall have the right to submit a claim with respect to any benefit sought under the Plan, or with respect to the claimant’s eligibility, vesting, or other factor affecting benefits, either personally or through a representative duly authorized in writing. All claims shall be submitted in writing to the Plan Administrator and shall be accompanied by such information and documentation as the Plan Administrator determines is required

to make a ruling on the claim. Upon receipt of a claim, the Plan Administrator shall consider the claim and shall render a decision, which shall be in writing and shall be delivered or mailed to the claimant within 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of a claim denial by the Plan Administrator shall set forth (1) the specific reasons for the denial, (2) specific reference to pertinent provisions of the Plan upon which the denial is based, (3) a description of any additional material or information necessary for the claimant to perfect his/her claim, with an explanation of why such material or information is necessary, and (4) an explanation of the claim review procedures under the Plan, all written to the best of the Plan Administrator’s ability in a manner that may be understood without legal or actuarial counsel. A failure of the Plan Administrator to render a written decision within the time specified above shall be deemed to be a denial of the claim.

     (b) Limitation on Claims Procedure. Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim, or (2) the date on which the claimant reasonably should have been expected to learn of facts sufficient to enable him to formulate such claim.

     (c) Review of Denied Claims. A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, a review of such denial. The request for review must be in writing and must be delivered to the Plan Administrator within the specified 90-day period. The request should set forth the reasons why the claimant believes the denial of his/her claim is incorrect. The claimant shall be entitled to submit such issues or comments, in writing or otherwise, as he shall consider relevant to a determination of his/her claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his/her request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his/her claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his/her choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator’s decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant’s request, unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator’s decision shall be so mailed not later than 120 days after receipt of such request. If no decision or review is rendered within this 120-day period, the claimant’s appeal shall be deemed denied and the Plan Administrator’s original denial of the claim affirmed.

     (d) Finality of Decisions. The decision of the Plan Administrator upon review of any claim under paragraph (c) above shall be binding upon the claimant, his/her heirs and assigns, and all other persons claiming by, through or under him/her.

     (e) Time Limits Affecting Jurisdiction. The timely filing of a request for review in the manner specified by paragraph (c) above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his/her administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan.

     (f) Limitation on Court Action. Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator’s final decision or from the date the appeal is deemed denied, if later. Service of legal process shall be made upon the Plan by service upon the Plan Administrator at the following address: Citizens Republic Bancorp, One Citizens Banking Center, Flint, Michigan 48502-9985. The Plan Administrator may engage legal counsel to defend the Plan against lawsuits. Attorney fees and other costs attendant to suit shall be borne by the Corporation but shall be charged to Participant Accounts upon the written direction of the Corporation. If the Employer or Plan Administrator determines that it is in the best interests of the Plan to initiate legal action, then it may employ counsel to do so, and all expenses of suit shall be borne by the Plan as provided above. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced under Section 502(a)(1)(B) of ERISA, or under any other provision of law, whether or not statutory, until the claimant first shall have exhausted the claims and review procedures available to him/her hereunder.

     Section 7.03 Special Ruling. In order to resolve problems concerning the Plan and to apply the Plan in unusual factual circumstances, the Plan Administrator may make special rulings. Such special rulings shall be in writing on a form to be developed by the Plan Administrator. In making its rulings, the Plan Administrator may consult with legal, accounting, actuarial, investment, and other counsel or advisers. Once made, special rulings shall be applied uniformly, except that the Plan Administrator shall not be bound by such rulings in future cases unless the factual situation of a particular case is identical to that involved in the special ruling. Special rulings shall be made in accordance with all applicable law and in accordance with the Plan. It is not intended that the special ruling procedure will be a frequently used device, but that it should be followed only in extraordinary situations. The Plan Administrator at all times shall have the final decision as to whether resort shall be made to this special ruling feature.

     Section 7.04 Employment of Advisers. The Corporation shall have the authority to employ such legal, accounting, actuarial, and financial counsel and advisers, as it shall deem necessary in connection with the performance of its duties under the Plan, and to act in accordance with the advice of such counsel and advisers. Except as otherwise provided in the Plan, the fees and expenses of such counsel and advisers shall, upon approval of the Corporation’s Compensation and Human Resources Committee of the Board of Directors, be paid by the Corporation and Related Entities that have adopted the Plan, or charged to Participants’ Accounts, as the Corporation’s Compensation and Human Resources Committee of the Board of Directors shall deem appropriate.

     Section 7.05 Delegation to Officers or Employees. The Corporation shall have the power to delegate its duties under the Plan to officers or employees of any Employer and to other persons, all of whom, if officers or employees of the Corporation or any Employer, shall serve without compensation other than their regular remuneration from their Employer.

ARTICLE 8

AMENDMENT AND TERMINATION OF PLAN

     Section 8.01 Amendment of the Plan.

     (a) Corporation’s Right To Amend. The Corporation reserves the right to make any amendments to the Plan, with or without retroactive effect. Amendment of the Plan shall be made by resolution of the Corporation’s Compensation and Human Resources Committee of the Board of Directors, or by any person or persons authorized by resolution of the Compensation and Human Resources Committee of the Board of Directors to make amendments.

     (b) Operation of Amendments. Except as may be specifically provided otherwise in the Plan, or in any amendment to the Plan, each amendment to the Plan shall operate prospectively only from the effective date of the amendment, and the rights and obligations of an Employee, Participant, or Beneficiary of a Participant, who retires, becomes disabled, dies, or otherwise terminates employment with the Employer prior to the effective date of any amendment, shall be determined without regard to such amendment, on the basis of the Plan terms in effect on the date of retirement, disability, death, or other termination of employment.

     Section 8.02 Termination of the Plan.

     (a) Termination. Any Employer reserves and shall have the right at any time to cease participation in the Plan, but only the Corporation shall have the authority to terminate the Plan. In the event of the dissolution, merger, consolidation, or reorganization of the Employer, the Plan shall terminate, unless the Plan is continued by a successor to the Employer in accordance with Section 8.02(b).

     (b) Termination and Transfer to New Plan. If the Employer has established another plan providing comparable benefits to this Plan, and the Employer intends to discontinue contributions under this Plan due to the liabilities created under the new plan, then, upon further written direction from the Employer, the Accounts attributable to Participants employed by that Employer shall be transferred to such newly created plan. Thereafter, this Plan shall cease to have any effect with respect to Participants employed by that Employer, and the rights of all parties shall be determined under the new plan.

     (c) Rights upon Termination. If the Plan should be terminated, or if the Employer should liquidate and dissolve, or if a receiver of the Employer is appointed, or if the Plan should be terminated for any other reason, the Accounts of all affected Participants as then appearing upon the records of the Plan (other than Accounts of former Employees who have terminated employment and who have incurred a Break in Service), shall be revalued and adjusted as previously provided in the Plan, and said Accounts (after payment of expenses properly chargeable to the Plan and allocated among the Accounts) shall be distributed to affected Participants and Beneficiaries or transferred as provided in paragraph (b) above either (1) as soon as administratively feasible if no penalty will be incurred under Code Section 409A, or (2) as otherwise provided by the Plan if necessary to avoid incurring a penalty under Code Section 409A.

ARTICLE 9

MISCELLANEOUS PROVISIONS

     Section 9.01 Payments for the Benefit of Payee. In the event that the Employer shall find that any person to whom a benefit is payable under the terms of the Plan is unable to care for his/her affairs because of illness or accident, is otherwise mentally or physically incompetent, or is unable to give a valid receipt, the Employer may cause the payments becoming due to such person to be paid to another individual for such person’s benefit, without responsibility on the part of the Employer to follow the application of such payment. Any such payment shall be a payment for the account of such person and shall operate as a complete discharge of the Employer from all liability under the Plan.

     Section 9.02 Non-Alienation of Benefits. No right or benefit provided for in the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void. No such right or benefit shall be liable for or subject to the debts, contracts, liabilities, engagements, or torts of any person entitled to such right or benefit. No such right or benefit shall be subject to garnishment, attachment, execution or levy of any kind. Provided, however, if the Plan Administrator receives a domestic relations order as defined in Code Section 414(p)(1)(B) directing that all or a portion of a Participant’s vested Account balance be paid to an alternate payee, any amount payable to the alternate payee shall be distributed within 60 days in a single lump sum payment to the alternate payee.

     Section 9.03 Employer’s Rights. While the Employer believes in the benefits, policies and procedures described in the Plan, the language used in the Plan is not intended to create, nor is it to be construed to constitute, a contract of employment between the Employer and any of its Employees. The Employer retains all of its rights to discipline or discharge Employees or to exercise its rights as to incidents and tenure of employment. Employees retain the right to terminate their employment at any time and for any reason, and the Employer retains a similar right.

     Section 9.04 Litigation. In the event that any Participant, Employee, Beneficiary, or spouse shall bring a legal or equitable action against the Plan or against the Employer in connection with the Plan, the result of which shall be adverse to such Participant, Employee, Beneficiary, or spouse, or in the event that the Plan or the Employer shall find it necessary to bring any legal or equitable action against any Participant, Employee, Beneficiary, or spouse, or any other person claiming an interest by or through such person, the cost to the Employer of bringing or defending such suit, as the case may be, shall be charged, unless the Employer determines that such course would be inequitable under all the circumstances, to such extent as is possible, directly to the Account of such Participant, Employee, Beneficiary, or spouse, if any, and only the excess, if any, of such costs over and above the amount credited to such Account shall be paid by the Employer.

     Section 9.05 Addresses and Mailing of Notices and Checks. Each recipient of benefits from the Plan shall be responsible for furnishing the Employer with his/her address. Any notices required or permitted to be given under the Plan shall be deemed given if directed to such address and mailed by regular United States mail. If any check mailed by regular United States mail to such address is returned, mailing of checks will be suspended until a correct address is furnished by the intended recipient.

     Section 9.06 Action by Employer. Unless otherwise provided in the Plan, whenever the Employer under the terms of the Plan is permitted or required to do or perform any act, such act shall be done (a) by the authority of the Employer’s board of directors or other governing body and evidenced by proper resolution in consent form or duly certified by the secretary of the Employer, or (b) by such employee of the Employer who may, by proper resolution, be duly authorized by the board of directors or other governing body.

     Section 9.07 Savings Clause. The determination that any provision of the Plan is invalid or unenforceable shall not affect or impair the ability to enforce or the validity of any other provision of the Plan.

ARTICLE 10

DEFINITIONS

     Section 10.01 “Account” means the interest of a Participant under the Plan as determined as of each Accounting Date and as reflected in the records maintained for the Plan.

     Section 10.02 “Accounting Date” means a date on which Accounts are adjusted pursuant to Section 3.05.

     Section 10.03 “Beneficiary” means the beneficiary or beneficiaries of the Participant as designated pursuant to the provisions in the Plan.

     Section 10.04 “Break in Service” means a Break in Service as described under Section 6.01.

     Section 10.05 “Code” means the Internal Revenue Code of 1986, as amended.

     Section 10.06 “Compensation” means the Participant’s total of base salary or other wages, plus bonuses, as reported on IRS Form W-2. “Base Compensation” means that portion of a Participant’s Compensation that constitutes base salary which is paid regularly throughout the year to the Participant. “Bonus” means awards that are paid to the Participant in cash on a nonrecurring basis under the Corporation’s Bonus Award Plan. In all cases, Compensation of either type shall include any before-tax contributions made to this Plan or any other plan by the Employer from such Compensation amount at the election of the Participant through deferral, but excludes any other contributions made by the Employer on behalf of the Participant under this Plan or any other plan or fringe benefit program of the Employer.

     Section 10.07 “Corporation” means Citizens Republic Bancorp and any successor.

     Section 10.08 “Disability” means a condition of the Participant described in Section 4.03.

     Section 10.09 “Early Retirement” means retirement as of the date specified by Section 4.02.

     Section 10.10 “Effective Date” means July 1, 1999 with regard to the original plan described in Section 1.01 and January 1, 2008 with respect to this amendment and restatement.

     Section 10.11 “Employee” means any common-law employee of the Employer.

     Section 10.12 “Employer” means the Corporation and each Related Entity that has adopted the Plan pursuant to Section 1.05.

     Section 10.13 “ERISA” means the Employee Retirement Income Security Act of l974, as amended.

     Section 10.14 “Hour of Service” means an Hour of Service as described under Section 6.01.

     Section 10.15 “Normal Retirement” means retirement at or after age 65 in accordance with Section 4.01.

     Section 10.16 “Participant” means an Employee who has met the eligibility requirements specified in Article2, who has commenced participation in the Plan in accordance with that article, and whose participation has not terminated under the other applicable provisions of the Plan.

     Section 10.17 “Plan” means the Citizens Republic Bancorp Deferred Compensation Plan for Executives as described in this instrument and any subsequent amendments.

     Section 10.18 “Plan Administrator” means the person(s) or organization(s) specifically designated by Article 7 as the administrator of the Plan.

     Section 10.19 “Plan Year” means the calendar year.

     Section 10.20 “Related Entity” or “Related Entities” means the Employer and all corporations, partnerships, sole proprietorships, divisions, or other entities that are affiliated with or under common ownership or control with the Employer.

     Section 10.21 “Separation from Service” occurs if the Participant, who is an employee of the Employer, dies, retires, or otherwise has a termination of employment with the Employer, except that the employment relationship is treated as continuing intact while the individual is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Employer under an applicable statute or by contract. For purposes of this section, a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the employee will return to perform services for the Employer. If the period of leave exceeds six months and the individual does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Notwithstanding the foregoing, where a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the employee to be unable to perform the duties of his/her position of employment, or any substantially similar position of employment, a 29-month period of absence may be substituted for such six-month period.

     Section 10.22 “Specified Employee” means a Participant who, as of the date of his/her Separation from Service, is a “key employee” of the Employer. For this purpose, a key employee is a key employee as defined in Code Section 416(i)(1)(A)(i), (ii) or (iii), applied in accordance with the Treasury Regulations there under and disregarding Section 416(i)(5),at any time during the calendar ending prior to his/her Separation from Service.

     Section 10.22 “Year of Service” means a Year of Service as described under Section 6.01.

     IN WITNESS WHEREOF, Citizens Republic Bancorp has caused the Plan to be executed on April 13, 2008.

		CITIZENS REPUBLIC BANCORP
Witness	/s/ Laura Hobson	By:	/s/ Susan P. Brockett
			Susan P. Brockett
		Its:	Executive Vice President and
			Human Resources Director

APPENDIX TO THECITIZENS REPUBLIC BANCORP
DEFERRED COMPENSATION PLAN FOR EXECUTIVES

     Effective as of the dates indicated, the following subsidiaries of Citizens Republic Bancorp have adopted the Plan pursuant to Section 1.05 thereof:

Subsidiary	Effective Date
Citizens Republic Bancorp
(formerly Citizens Banking Corporation)	July 1, 1999
Citizens Bank	July 1, 1999
F&M Bank-Iowa	January 1, 2000
Citizens Bank Wealth Management, N.A.	March 1, 2002

EX-12.1

Exhibit 12.1
(Form 10-K)

Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Dividends

	2009			2008			2007		2006		2005
(Loss) income before income tax	$	(544,187	)	$	(322,082	)	$	132,147	$	82,655	$	112,106
Preferred stock dividend		(13,875	)		—			—		—		—
(Loss) income available to common shareholders, before income tax		(558,062	)		(322,082	)		132,147		82,655		112,106
Fixed charges:
Interest on short-term borrowings		227			8,191			34,700		16,017		25,929
Interest on long-term debt		91,286			122,905			133,838		46,083		36,417
Estimated interest component of net rental expense		1,832			1,992			2,258		1,120		1,196
Preferred stock dividend requirements		13,875			—			—		—		—
Combined fixed charges and preferred stock dividends, excluding interest on deposits		107,220			133,088			170,796		63,220		63,542
Interest on deposits		159,798			220,883			257,194		147,132		85,154
Combined fixed charges and preferred stock dividends, including interest on deposits	$	267,018		$	353,971		$	427,990	$	210,352	$	148,696
Ratio of earnings to combined fixed charges and preferred stock dividend requirements:
Excluding interest on deposits		—	(1)		—	(1)		1.77		2.31		2.76
Including interest on deposits		—	(1)		0.09	(1)		1.31		1.39		1.75

⁽¹⁾ For the years ended December 31, 2009 and 2008, earnings were insufficient to cover fixed charges by $558.1 million and $332.1 million, respectively.

EX-21

Exhibit 21
(Form 10-K)

SUBSIDIARIES OF
CITIZENS REPUBLIC BANCORP, INC.

				Jurisdiction or
	Ownership			Incorporation of
Subsidiaries	Percentage			Organization
Citizens Bank		100	%	Michigan
CB Financial Services, Inc.		100	%	Michigan
F&M Bank—Iowa		100	%	Iowa
Security Banc Services Group, Inc.		100	%	Iowa
Citizens Bank Wealth Management, N.A.		100	%	National Association
Citizens Funding Trust I		100	%	Delaware

132

EX-23

Exhibit 23
(Form 10-K)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the inclusion in the Annual Report (Form 10-K) of Citizens Republic Bancorp, Inc. for the year ended December 31, 2009 of our reports dated February 27, 2009, with respect to the consolidated financial statements of Citizens Republic Bancorp, Inc., and the effectiveness of internal control over financial reporting of Citizens Republic Bancorp, Inc.

We consent to the incorporation by reference into the following Registration Statements:

Registration Statement No. 33-47686 on Form S-8 dated May 5, 1992

     Citizens Republic Bancorp, Inc. Second Amended Stock Option Plan;

Registration Statement No. 33-61197 on Form S-8 dated July 21, 1995

     Citizens Banking Corporation Stock Plan for Directors;

Registration Statement No. 333-09455 on Form S-8 dated August 2, 1996

     Citizens Republic Bancorp, Inc. Amended and Restated Section 401(k) Plan;

Registration Statement No. 333-27565 on Form S-4 dated May 21, 1997

     Registration of securities, business combinations;

Registration Statement No. 333-86569 on Form S-8 to Form S-4 dated December 22, 1999

     F&M Bancorporation, Inc. Stock Option Plans;

Registration Statement No. 333-40100 on Form S-8 dated June 26, 2000

     Citizens Republic Bancorp, Inc. All-Employee Stock Option Plan;

Registration Statement No. 333-86326 on Form S-8 dated April 16, 2002

     Citizens Republic Bancorp, Inc. Stock Compensation Plan;

Post Effective Amendment No. 1 to Registration Statement No. 33-61197 on Form S-8 dated February 24, 2003

     Citizens Banking Corporation Stock Plan for Directors;

Registration Statement No. 333-104472 on Form S-4 dated June 10, 2003

     pertaining to the registration of $125,000,000 of subordinated notes;

Registration Statement No. 333-136946 on Form S-4 dated August 28, 2006

     pertaining to the registration of securities, business combinations;

Registration Statement No. 333-137490 on Form S-3 dated September 21, 2006

     pertaining to the automatic shelf registration statement of securities of well-known seasoned issuers;

Registration Statement No. 333-136946 on Form S-4/A dated October 24, 2006

     pertaining to the registration of securities, business combinations;

Registration Statement No. 333-136946 on Form S-8 dated January 22, 2007

     pertaining to securities to be offered to employees in employee benefit plans, post-effective amendments,

Registration Statement No. 333-156662 on Form S-3 dated January 9, 2009

     pertaining to the registration of securities, business combinations,

Draft 8 - February 25, 2010

Registration Statement No. 333-160508 on Form S-4/A dated August 27, 2009 pertaining to the registration of securities, business combinations.

Registration Statement No. 333-162693 on Form S-3 dated October 27, 2009 pertaining to the shelf registration statement of securities

of our reports dated March 1, 2010, with respect to the consolidated financial statements of Citizens Republic Bancorp, Inc. and the effectiveness of internal control over financial reporting of Citizens Republic Bancorp, Inc., for the year ended December 31, 2009.

Detroit, Michigan
March 1, 2010

134

EX-31.1

Exhibit 31.1
(Form 10-K)

CERTIFICATIONS

I, Cathleen H. Nash, certify that:

1.	I have reviewed this annual report on Form 10-K of Citizens Republic Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have;

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 1, 2010

/s/ Cathleen H. Nash  

Cathleen H. Nash 

President and Chief Executive Officer 

EX-31.2

Exhibit 31.2
(Form 10-K)

CERTIFICATIONS

I, Charles D. Christy, certify that:

1.	I have reviewed this annual report on Form 10-K of Citizens Republic Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have;

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 1, 2010	/s/ Charles D. Christy
	Charles D. Christy
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1
(Form 10-K)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AND RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT OF 1934

In connection with the Annual Report of Citizens Republic Bancorp, Inc. (“Citizens”) on Form 10-K for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cathleen H. Nash, President and Chief Executive Officer of Citizens, certify, pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934, that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Citizens.

Dated: March 1, 2010

/s/ Cathleen H. Nash  

Cathleen H. Nash 

President and Chief Executive Officer 

EX-32.2

Exhibit 32.2
(Form 10-K)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AND RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT OF 1934

In connection with the Annual Report of Citizens Republic Bancorp, Inc. (“Citizens”) on Form 10-K for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles D. Christy, Chief Financial Officer of Citizens, certify, pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934, that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Citizens.

Dated: March 1, 2010

/s/ Charles D. Christy  

Charles D. Christy 

Executive Vice President and
Chief Financial Officer 

EX-99.1

Exhibit 99.1
(Form 10-K)

CERTIFICATION PURSUANT TO
SECTION 111(b)(4) OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

I, Cathleen H. Nash, certify, based on my knowledge, that:

i.	The compensation committee of Citizens Republic Bancorp, Inc. (“Citizens”) has discussed, reviewed, and evaluated with senior risk officers on December 9, 2009, which date is within six months of September 14, 2009 (the later of September 14, 2009, or ninety days after the closing date of the Agreement between the TARP recipient and Treasury) (the “Applicable Period”) , senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Citizens;
ii.	The compensation committee of Citizens has identified and limited during the Applicable Period , the features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Citizens and identified any features in the employee compensation plans that pose risks to Citizens and limited those features to ensure that Citizens is not unnecessarily exposed to risks;
iii.	The compensation committee has reviewed, at least every six months during the Applicable Period , the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of Citizens to enhance the compensation of an employee and has limited those features that would encourage the manipulation of reported earnings of Citizens;
iv.	The compensation committee of Citizens will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;
v.	The compensation committee of Citizens will provide a narrative description of how it limited during the period beginning on June 15, 2009 and ending with the last day of Citizens’ fiscal year containing that date (“TARP Period”) the features in

A.	SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Citizens;
B.	Employee compensation plans that unnecessarily expose Citizens to risks; and
C.	Employee compensation plans that could encourage the manipulation of reported earnings of Citizens to enhance the compensation of an employee;

vi.	Citizens has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or ''clawback’’ provision during the TARP Period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
vii.	Citizens has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the TARP Period;
viii.	Citizens has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the TARP Period ;

ix. The board of directors of Citizens has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency, and Citizens and its employees have complied with this policy during the Applicable Period, and any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

x.	Citizens will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the TARP Period;
xi.	Citizens will disclose the amount, nature, and justification for the offering during the TARP Period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (vii);
xii.	Citizens will disclose whether Citizens, the board of directors of Citizens, or the compensation committee of Citizens has engaged during the TARP Period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;
xiii.	Citizens has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the TARP Period;
xiv.	Citizens has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Citizens and Treasury, including any amendments;
xv.	Citizens will submit to Treasury on March 25, 2010, a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of compensation, and with the name, title, an employer of each SEO and most highly compensated employee identified; and
xvi.	I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Dated: March 1, 2010

/s/ Cathleen H. Nash  

Cathleen H. Nash 

President and Chief Executive Officer 

EX-99.2

Exhibit 99.2
(Form 10-K)

CERTIFICATION PURSUANT TO
SECTION 111(b)(4) OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

I, Charles D. Christy, certify, based on my knowledge, that:

i.	The compensation committee of Citizens Republic Bancorp, Inc. (“Citizens”) has discussed, reviewed, and evaluated with senior risk officers on December 9, 2009, which date is within six months of September 14, 2009 (the later of September 14, 2009, or ninety days after the closing date of the Agreement between the TARP recipient and Treasury) (the “Applicable Period”) , senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Citizens;
ii.	The compensation committee of Citizens has identified and limited during the Applicable Period , the features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Citizens and identified any features in the employee compensation plans that pose risks to Citizens and limited those features to ensure that Citizens is not unnecessarily exposed to risks;
iii.	The compensation committee has reviewed, at least every six months during the Applicable Period , the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of Citizens to enhance the compensation of an employee and has limited those features that would encourage the manipulation of reported earnings of Citizens;
iv.	The compensation committee of Citizens will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;
v.	The compensation committee of Citizens will provide a narrative description of how it limited during the period beginning on June 15, 2009 and ending with the last day of Citizens’ fiscal year containing that date (“TARP Period”) the features in

A.	SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Citizens;
B.	Employee compensation plans that unnecessarily expose Citizens to risks; and
C.	Employee compensation plans that could encourage the manipulation of reported earnings of Citizens to enhance the compensation of an employee;

vi.	Citizens has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or ''clawback’’ provision during the TARP Period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
vii.	Citizens has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the TARP Period;
viii.	Citizens has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the TARP Period ;

ix.	The board of directors of Citizens has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency, and Citizens and its employees have complied with this policy during the Applicable Period, and any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;
x.	Citizens will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the TARP Period;
xi.	Citizens will disclose the amount, nature, and justification for the offering during the TARP Period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (vii);
xii.	Citizens will disclose whether Citizens, the board of directors of Citizens, or the compensation committee of Citizens has engaged during the TARP Period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;
xiii.	Citizens has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the TARP Period;
xiv.	Citizens has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Citizens and Treasury, including any amendments;
xv.	Citizens will submit to the Treasury on March 25, 2010 a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of compensation, and with the name, title, an employer of each SEO and most highly compensated employee identified; and
xvi.	I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Dated: March 1, 2010

/s/ Charles D. Christy  

Charles D. Christy 

Executive Vice President and
Chief Financial Officer