e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2006


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

For the transition period from to

Commission file Number 000-10535

CITIZENS BANKING CORPORATION

(Exact name of registrant as specified in its charter)


MICHIGAN		38-2378932

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

328 S. Saginaw St., Flint, Michigan		48502

(Address of principal executive offices)		(Zip Code)

(810) 766-7500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year,

if changed since last report)

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

þ Yes o No

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


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

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

o Yes þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Class		Outstanding at April 30, 2006

Common Stock, No Par Value		42,728,083 Shares

Consolidated Balance Sheets

Citizens Banking Corporation and Subsidiaries


	March 31,			December 31,			March 31,
(in thousands)	2006			2005			2005
	(unaudited)			(Note 1)			(unaudited)
*Assets*
Cash and due from banks	$	152,077		$	194,748		$	145,707
Interest-bearing deposits with banks		1,503			380			1,596
Investment Securities:
Available-for-sale (amortized cost $1,479,417, $1,501,819 and $1,761,586, respectively) U.S. Treasury and federal agency securities		1,087,099			1,122,306			1,377,766
State and municipal securities		378,454			378,235			386,515
Other securities		1,243			1,456			963
Held-to-maturity:
State and municipal securities (fair value of $89,699, $82,364 and $58,622, respectively)		90,346			82,431			58,942
FHLB and Federal Reserve stock		55,975			55,911			68,020

Total investment securities		1,613,117			1,640,339			1,892,206
Mortgage loans held for sale		13,399			16,252			34,627
Portfolio loans:
Commercial		1,688,970			1,688,079			1,626,541
Commercial real estate		1,418,596			1,402,128			1,313,825
Residential mortgage loans		549,116			539,824			495,953
Direct consumer		1,109,249			1,142,002			1,173,234
Indirect consumer		826,060			844,086			820,289

Total portfolio loans		5,591,991			5,616,119			5,429,842
Less: Allowance for loan losses		(115,423	)		(116,400	)		(120,945	)

Net portfolio loans		5,476,568			5,499,719			5,308,897
Premises and equipment		120,719			121,730			121,107
Goodwill		54,527			54,527			54,527
Other intangible assets		10,408			11,133			13,307
Bank owned life insurance		85,142			84,435			83,072
Other assets		135,857			128,620			121,690

*Total assets*	$	7,663,317		$	7,751,883		$	7,776,736

*Liabilities*
Noninterest-bearing deposits	$	899,850		$	969,074		$	891,849
Interest-bearing demand deposits		816,293			891,313			1,106,744
Savings deposits		1,452,638			1,437,024			1,578,058
Time deposits		2,355,206			2,176,428			1,712,883

Total deposits		5,523,987			5,473,839			5,289,534
Federal funds purchased and securities sold under agreements to repurchase		401,702			505,879			853,926
Other short-term borrowings		852			23,242			6,157
Other liabilities		82,203			86,351			79,656
Long-term debt		1,003,029			1,006,109			901,875

Total liabilities		7,011,773			7,095,420			7,131,148
*Shareholders’ Equity*
Preferred stock — no par value
Authorized — 5,000,000 shares; Issued — none		—			—			—
Common stock — no par value
Authorized — 100,000,000 shares; Issued and outstanding - 42,769,821 at 3/31/06, 42,967,649 at 12/31/05, and 43,172,892 at 3/31/05		80,341			85,526			94,966
Retained earnings		578,980			570,483			546,882
Accumulated other comprehensive income		(7,777	)		454			3,740

Total shareholders’ equity		651,544			656,463			645,588

*Total liabilities and shareholders’ equity*	$	7,663,317		$	7,751,883		$	7,776,736

See notes to consolidated financial statements.

Consolidated Statements of Income (Unaudited)

Citizens Banking Corporation and Subsidiaries


	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2006			2005

*Interest Income*
Interest and fees on loans	$	93,451		$	79,272
Interest and dividends on investment securities:
Taxable		13,611			14,688
Tax-exempt		5,317			5,197
Money market investments		12			9

Total interest income		112,391			99,166


*Interest Expense*
Deposits		30,992			18,071
Short-term borrowings		3,736			4,441
Long-term debt		10,188			8,421

Total interest expense		44,916			30,933

*Net Interest Income*		67,475			68,233
Provision for loan losses		3,000			3,000

Net interest income after provision for loan losses		64,475			65,233


*Noninterest Income*
Service charges on deposit accounts		8,875			8,287
Trust fees		5,042			4,412
Mortgage and other loan income		2,010			2,360
Brokerage and investment fees		1,515			1,599
ATM network user fees		987			873
Bankcard fees		1,057			840
Fair value change in CD swap derivatives		(207	)		—
Other		6,284			4,084

Total fees and other income		25,563			22,455
Investment securities gains		7			6

Total noninterest income		25,570			22,461

*Noninterest Expense*
Salaries and employee benefits		32,256			33,351
Occupancy		5,942			5,560
Professional services		4,078			4,199
Equipment		3,166			3,301
Data processing services		3,739			3,369
Advertising and public relations		2,034			1,746
Postage and delivery		1,462			1,590
Telephone		1,464			1,441
Other loan expenses		416			375
Stationery and supplies		727			919
Intangible asset amortization		725			725
Other		5,563			4,025

Total noninterest expense		61,572			60,601

*Income Before Income Taxes*		28,473			27,093
Income tax provision		7,717			7,013

*Net Income*	$	20,756		$	20,080


*Net Income Per Common Share:*
Basic	$	0.49		$	0.46
Diluted		0.48			0.46
*Cash Dividends Declared Per Common Share*		0.285			0.285

*Average Common Shares Outstanding:*
Basic		42,784			43,224
Diluted		42,941			43,646

See notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

Citizens Banking Corporation and Subsidiaries


										Accumulated
										Other
	Common Stock						Retained			Comprehensive
(in thousands, except per share amounts)	Shares			Amount			Earnings			Income (Loss)			Total

*Balance at January 1, 2005*		43,240		$	97,180		$	539,128		$	17,994		$	654,302
Comprehensive income, net of tax:
Net income								20,080						20,080
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(15,275	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											1,021

Other comprehensive income total														(14,254	)

Total comprehensive income														5,826
Exercise of stock options		19			374									374
Net change in deferred compensation, net of tax					30									30
Cash dividends declared on common shares — $0.285 per share								(12,326	)					(12,326	)
Shares acquired for retirement		(86	)		(2,618	)								(2,618	)

*Balance — March 31, 2005*		43,173		$	94,966		$	546,882		$	3,740		$	645,588


*Balance at January 1, 2006*		42,968		$	85,526		$	570,483		$	454		$	656,463
Comprehensive income, net of tax:
Net income								20,756						20,756
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(8,319	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											88

Other comprehensive income total														(8,231	)

Total comprehensive income														12,525
Exercise of stock options		56			1,256									1,256
Recognition of stock-based compensation		1			409									409
Cash dividends declared on common shares — $0.285 per share								(12,259	)					(12,259	)
Shares acquired for retirement		(255	)		(6,850	)								(6,850	)

*Balance — March 31, 2006*		42,770		$	80,341		$	578,980		$	(7,777	)	$	651,544

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

Citizens Banking Corporation and Subsidiaries


	Three Months Ended
	March 31,
(in thousands)	2006			2005

*Operating Activities:*
Net income	$	20,756		$	20,080
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,000			3,000
Depreciation and amortization		2,993			2,953
Amortization of goodwill and other intangibles		725			725
Net amortization on investment securities		207			1,455
Investment securities gains		(7	)		(6	)
Loans originated for sale		(41,452	)		(92,262	)
Proceeds from sales of mortgage loans held for sale		45,097			87,120
Net gains from loan sales		(792	)		(1,447	)
Net loss on sale of other real estate		292			148
Stock-based compensation		409			30
Other		(5,883	)		(1,591	)

Net cash provided by operating activities		25,345			20,205
*Investing Activities:*
Net (increase) decrease in money market investments		(1,123	)		173
Securities available-for-sale:
Proceeds from maturities and payments		52,747			116,207
Purchases		(30,578	)		(159,892	)
Securities held-to-maturity:
Purchases		(7,947	)		(4,911	)
Net decrease (increase) in loans and leases		20,151			(40,716	)
Proceeds from sales and pay-offs of other real estate		1,274			1,813
Net increase in properties and equipment		(1,982	)		(6,116	)

Net cash provided (used) by investing activities		32,542			(93,442	)
*Financing Activities:*
Net decrease in demand and savings deposits		(128,630	)		(110,795	)
Net increase in time deposits		178,778			100,570
Net (decrease) increase in short-term borrowings		(126,567	)		135,309
Proceeds from issuance of long-term debt		—			25,000
Principal reductions in long-term debt		(6,286	)		(70,044	)
Cash dividends paid		(12,259	)		(12,326	)
Proceeds from stock options exercised		1,256			374
Shares acquired for retirement		(6,850	)		(2,618	)

Net cash (used) provided by financing activities		(100,558	)		65,470

Net decrease in cash and due from banks		(42,671	)		(7,767	)
Cash and due from banks at beginning of period		194,748			153,474

Cash and due from banks at end of period	$	152,077		$	145,707

See notes to consolidated financial statements.

Part I – Financial Information

Item 1 – Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Citizens Banking Corporation and Subsidiaries

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Citizens Banking Corporation (“Citizens” or the “Corporation”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in Citizens’ 2005 Annual Report on Form 10-K. Citizens maintains an internet website at www.citizensonline.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the U.S. Securities and Exchange Commission. The information on Citizens’ website does not constitute a part of this report.

Note 2. Recent Accounting Pronouncements
Statements of Financial Accounting Standards

SFAS No. 123R, “Stock-Based Compensation (Revised 2004).” In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, “Share-Based Payment, (Revised 2004),” which was required to be adopted by January 1, 2006. Among other things, SFAS 123R eliminated the ability to continue to account for stock-based compensation using APB 25 and required that such transactions be measured based on their fair values on the date of grant. Effective January 1, 2006, the Corporation adopted the provisions of SFAS 123R using the modified prospective method of transition. This method required the provisions of SFAS 123R be applied to new awards and awards modified, repurchased or cancelled after the effective date. Under this method, Citizens’ compensation cost is recognized for share-based payments based on their fair value at grant date. Stock-based compensation will be included for those awards granted prior to the adoption of SFAS 123R but not yet vested at the date of adoption. The fair value of stock option awards will be estimated using the Black-Scholes model and compensation expense will be recognized for stock options and restricted stock awards on a straight-line basis over the requisite service periods of the awards. Determining the appropriate fair value model and calculating the fair value of stock options requires judgment, including estimating stock price volatility, forfeiture rates, expected life, and anticipated dividend yield. SFAS 123R also requires compensation expense to be recognized net of awards expected to be forfeited and adjusted as actual experience differs from estimates.

FASB Staff Position (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” In November 2005, the FASB issued FSP 115-1, which provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also required certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP is effective for fiscal years beginning after December 15, 2005 and Citizens applied this guidance in 2006. The adoption of FSP 115-1 did not have a material impact to Citizens’ financial condition, results of operations, or liquidity.

Note 3. Investment Securities

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


	March 31, 2006								December 31, 2005
			Estimated								Estimated
	Amortized		Fair		Gross Unrealized				Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		Losses		Cost		Value		Gains		Losses

*Available For Sale:*
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies:
Mortgage-backed		800,287		779,164		364		21,487		825,933		811,898		985		15,020
Other		309,852		307,935		1,346		3,263		309,681		310,408		2,046		1,319
State and municipal		368,134		378,454		11,804		1,484		364,853		378,235		14,391		1,009
Mortgage and asset-backed		265		265		1		1		280		280		1		1
Other		879		978		102		3		1,072		1,176		107		3

Total available for sale	$	1,479,417	$	1,466,796	$	13,617	$	26,238	$	1,501,819	$	1,501,997	$	17,530	$	17,352


*Held to Maturity:*
State and municipal Total held to maturity	$	90,346	$	89,699	$	452	$	1,099	$	82,431	$	82,364	$	590	$	657


*Other Investment Securities:*
FHLB and Fed Reserve stock
Total Other Securities	$	55,975	$	55,975	$	—	$	—	$	55,911	$	55,911	$	—	$	—

Securities with unrealized losses, segregated by length of impairment, as of March 31, 2006 and December 31, 2005 are displayed in the following tables.

As of March 31, 2006


	Less than 12 Months				More than 12 Months				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

*Available For Sale:*
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies:
Mortgage-backed		266,868		3,775		491,186		17,712		758,054		21,487
Other		267,101		3,263		—		—		267,101		3,263
State and municipal		42,607		1,016		12,643		468		55,250		1,484
Mortgage and asset-backed		—		—		105		1		105		1
Other		—		—		6		3		6		3

Total available for sale		576,576		8,054		503,940		18,184		1,080,516		26,238


*Held to Maturity:*
State and municipal		50,222		910		5,780		189		56,002		1,099

Total held to maturity		50,222		910		5,780		189		56,002		1,099


Total	$	626,798	$	8,964	$	509,720	$	18,373	$	1,136,518	$	27,337

As of December 31, 2005


	Less than 12 Months				More than 12 Months				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

*Available For Sale:*
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Federal agencies:
Mortgage-backed		320,048		3,669		440,599		11,351		760,647		15,020
Other		173,266		1,319		—		—		173,266		1,319
State and municipal		36,539		658		10,046		351		46,585		1,009
Mortgage and asset-backed		197		1		—		—		197		1
Other		—		—		6		3		6		3

Total available for sale		530,050		5,647		450,651		11,705		980,701		17,352


*Held to Maturity:*
State and municipal		41,471		544		3,660		113		45,131		657

Total held to maturity		41,471		544		3,660		113		45,131		657


Total	$	571,521	$	6,191	$	454,311	$	11,818	$	1,025,832	$	18,009

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

Note 4. Allowance for Loan Losses and Impaired Loans

A summary of loan loss experience during the three months ended March 31, 2006 and 2005 is provided below.

Analysis of Allowance for Loan Losses


	Three Months Ended
	March 31,
(in thousands)	2006		2005

Allowance for loan losses — beginning of period	$	116,400	$	122,184
Provision for loan losses		3,000		3,000
Charge-offs:
Commercial		921		2,463
Commercial real estate		616		678

Total commercial		1,537		3,141
Residential mortgage		198		324
Direct consumer		1,669		1,424
Indirect consumer		2,829		2,236

Total charge-offs		6,233		7,125

Recoveries:
Commercial		1,175		1,162
Commercial real estate		79		707

Total commercial		1,254		1,869
Residential mortgage		55		—
Direct consumer		285		343
Indirect consumer		662		674

Total recoveries		2,256		2,886

Net charge-offs		3,977		4,239

Allowance for loan losses — end of period	$	115,423	$	120,945

Nonperforming loans totaled $30.1 million at March 31, 2006. Some of the Corporation’s nonperforming loans are considered to be impaired. SFAS 114, “Accounting by Creditors for Impairment of a Loan,” considers a loan to be impaired when it is probable that all the principal and interest due under the loan may not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The Corporation maintains a valuation reserve for impaired loans, referred to as the specific allowance. Total loans considered impaired and their related reserve balances at March 31, 2006, December 31, 2005 and March 31, 2005 follow:

Impaired Loan Information


	Balances						Valuation Reserve
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
(in thousands)	2006		2005		2005		2006		2005		2005

Balances -
Impaired loans with valuation reserve	$	12,936	$	7,989	$	35,416	$	5,454	$	5,059	$	14,266
Impaired loans with no valuation reserve		2,592		908		2,739		—		—		—

Total impaired loans	$	15,528	$	8,897	$	38,155	$	5,454	$	5,059	$	14,266


Impaired loans on nonaccrual basis	$	5,646	$	4,728	$	5,955	$	2,061	$	2,747	$	2,179
Impaired loans on accrual basis		9,882		4,169		32,200		3,393		2,312		12,087

Total impaired loans	$	15,528	$	8,897	$	38,155	$	5,454	$	5,059	$	14,266

The average balance of impaired loans for the three months ended March 31, 2006 was $12.2 million and $36.6 million for the three months ended March 31, 2005. Interest income recognized on impaired loans during the first quarter of 2006 was $0.2 million compared with $0.5 million for the same period of 2005. Cash collected and applied to outstanding principal during the first quarter of 2006 totaled $0.3 million compared with $0.2 million for the same period of 2005.

Note 5. Long-term Debt

The components of long-term debt as of March 31, 2006, December 31, 2005 and March 31, 2005 are presented below.


	March 31,		December 31,		March 31,
(in thousands)	2006		2005		2005

Citizens (Parent only):
Subordinated debt:
Notes maturing February 2013	$	117,803	$	120,852	$	120,948
Deferrable interest debenture maturing June 2033		25,774		25,774		25,774
Subsidiaries:
Federal Home Loan Bank advances		859,452		859,483		755,131
Other borrowed funds		—		—		22

Total long-term debt	$	1,003,029	$	1,006,109	$	901,875

Note 6. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, for the three month period ended March 31, 2006 and 2005 are presented below.


	Three Months Ended
	March 31,
(in thousands)	2006			2005

Balance at beginning of period	$	454		$	17,994
Net unrealized loss on securities for the quarter, net of tax effect of $(4,477) in 2006 and $(8,223) in 2005		(8,315	)		(15,271	)
Less: Reclassification adjustment for net gains on securities included in net income for the quarter, net of tax effect of $(3) in 2006 and $(2) in 2005		(4	)		(4	)
Net change in unrealized gain on cash flow hedges for the quarter, net of tax effect of $48 in 2006 and $549 in 2005		88			1,021


Accumulated other comprehensive income, net of tax	$	(7,777	)	$	3,740

Note 7. Earnings Per Share

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


	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2006		2005

Numerator:
Basic and dilutive earnings per share — net income available to common shareholders	$	20,756	$	20,080


Denominator:
Basic earnings per share — weighted average shares		42,784		43,224
Effect of dilutive securities — potential conversion of employee stock options		157		422

Diluted earnings per share — adjusted weighted-average shares and assumed conversions		42,941		43,646


Basic earnings per share	$	0.49	$	0.46


Diluted earnings per share	$	0.48	$	0.46

Note 8. Stock-Based Compensation

Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, nonvested stock awards (also known as restricted stock), restricted stock units, and performance awards to employees and non-employee directors. Aggregate grants under the current shareholder approved plan may not exceed 7,000,000 shares, and grants other than stock options are further limited to 2,000,000 shares. At March 31, 2006, Citizens had 3,992,501 shares of common stock reserved for future issuance under our current plan.

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

On January 1, 2006, Citizens adopted the provisions of SFAS 123R, requiring Citizens to recognize expense related to the fair value of its stock-based compensation awards. Citizens elected to use the modified prospective transition method as permitted by SFAS 123R and therefore has not restated its financial results for prior periods. Under this method, Citizens is required to recognize compensation cost for share-based payments using their fair value at grant date. Stock-based compensation is included in salary expense for those awards granted prior to the adoption of SFAS 123R but not yet vested at the date of adoption. Stock-based compensation expense for all awards granted subsequent to the adoption of SFAS 123R was based on the fair value at grant-date, estimated in accordance with the provisions of the statement. Citizens recognizes compensation expense for stock options and restricted stock awards on a straight-line basis over the requisite service periods of the awards. As a result of the adoption of SFAS 123R, $0.1 million of additional stock-based compensation expense was recognized for the three months ended March 31, 2006, with no impact to basic or dilutive earnings per share.

During the second and fourth quarters of 2005, prior to the adoption of SFAS 123R, Citizens’ Compensation and Human Resources Committee of its Board of Directors approved the acceleration of vesting all nonvested stock options previously awarded to employees, officers and directors. Consequently, the majority of nonvested stock options were early vested. The purpose of the vesting acceleration was to reduce compensation expense associated with these options in future periods. Additionally, Citizens believes that because most of the options that were accelerated had exercise prices close to or in excess of the current market value of its common stock, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention.

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

Analysis of Stock-Based Compensation Expense


	Three Months Ended
	March 31,
(in thousands)	2006			2005

Stock Option Compensation	$	19		$	—
Restricted Stock Compensation		390			30


Stock-based compensation expense before income taxes		409			30
Income tax benefit		(143	)		(10	)


Total stock-based compensation expense after income taxes	$	266		$	20

Cash proceeds from the exercise of stock options were $1.1 million and $0.4 million for the three months ended March 31, 2006 and 2005, respectively. When stock options are exercised, the shares are purchased on the open market. In accordance with SFAS 123R, Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows on the Consolidated Statement of Cash Flows.

Prior to the adoption of SFAS 123R, Citizens applied SFAS 123, amended by SFAS 148, “Accounting for Stock-Based Compensation–Transition and Disclosure,” which allowed companies to apply the existing accounting rules under APB 25, “Accounting for Stock Issued to Employees,” and related Interpretations. In general, as the exercise price of options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based

compensation cost was recognized in Citizens’ net income for periods prior to the adoption of SFAS 123R. As required by SFAS 148 prior to the adoption of SFAS 123R, Citizens provides pro forma net income and pro forma net income per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.

The following table illustrates the effect on net income and net income per common share as if Citizens had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the three months ended March 31, 2005.


	Three Months Ended
(in thousands, except per share amounts)	March 31, 2005

Net income, as reported	$	20,080
Less pro forma expense related to options granted		(505	)

Pro forma Net Income	$	19,575


Net income per share
Basic — as reported	$	0.46
Basic — pro forma		0.45
Diluted — as reported		0.46
Diluted — pro forma		0.45

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three months ended March 31, 2006 and March 31, 2005, respectively. There were no stock options granted during the three month period ended March 31, 2006.


	Three Months Ended
	March 31,
*Weighted Average Assumptions*	2006		2005

Dividend yield		—		3.5	%
Expected volatility		—		28.8	%
Risk-free interest rate		—		3.84	%
Expected lives		—	5 yrs

The dividend yield computation is based on historical payments and the related yield. The expected volatility computation is based on historical volatility. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant and the range of rates used during the period was 3.64% to 4.13%. The expected life computation is based on historical exercise patterns.

Stock option activity for the three months ended March 31, 2006, is as follows:

Options

Weighted

Average

Aggregate

Exercise

Remaining

Intrinsic

Price

Contractual Term

Value

Outstanding at December 31, 2005

3,917,891

27.91

Granted

—

Exercised

(55,982

)

19.88

Forfeitures or Expirations

(35,514

)

32.39

Outstanding at March 31, 2006

3,826,395

27.99

6.1 yrs

4,629,632

Exercisable

3,787,834

28.00

6.1 yrs

4,591,960

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between Citizens’ average closing stock price as of the date of this report and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised those options on March 31, 2006 if the exercise price exceeded the average closing stock price. This amount fluctuates with changes in the fair market value of Citizens’ stock. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $0.4 million. No options were vested during the three months ended March 31, 2006.

As of March 31, 2006, $2.6 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes restricted stock activity for the three months ended March 31, 2006.


				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value

Outstanding restricted stock at December 31, 2005		129,180		$	27.19
Granted		500			27.74
Vested		(4,155	)		33.35
Forfeited		(104	)		29.02


Restricted stock at March 31, 2006		125,421		$	26.99

The total fair value of shares vested during the three months ended March 31, 2006 was $0.1 million.

Note 9. Pension Benefit Cost

The components of pension expense for the three months ended March 31, 2006 and 2005 are presented below.


	Three Months Ended
	March 31,
(in thousands)	2006			2005

Defined Benefit Pension Plans
Service cost	$	1,189		$	1,198
Interest cost		1,371			1,311
Expected return on plan assets		(1,890	)		(1,757	)
Amortization of unrecognized:
Net transition asset		—			(1	)
Prior service cost		48			49
Net actuarial loss		291			301

Net pension cost	$	1,009		$	1,101

Citizens expects to contribute approximately $0.5 million to the nonqualified supplemental benefit plans during 2006. As of March 31, 2006, $0.2 million of contributions have been made. Citizens anticipates that an additional $0.3 million of contributions will be made during the next three quarters of 2006. Financial market returns affect current and future contributions.

Note 10. Lines of Business Information

Citizens is managed along the following business lines: Commercial Banking, Consumer Banking, Wealth Management, and Other. Selected line of business segment information, as adjusted, for the three months ended March 31, 2006 and 2005 is provided below. There are no significant intersegment revenues.

Line of Business Information


	Commercial		Consumer		Wealth
(in thousands)	Banking		Banking		Mgmt			Other			Total

Earnings Summary — Three Months Ended March 31, 2006

Net interest income (taxable equivalent)	$	30,939	$	35,570	$	332		$	4,050		$	70,891
Provision for loan losses		1,188		1,812		—			—			3,000

Net interest income after provision		29,751		33,758		332			4,050			67,891
Noninterest income		3,466		14,453		6,503			1,148			25,570
Noninterest expense		18,309		31,807		5,398			6,058			61,572

Income before income taxes		14,908		16,404		1,437			(860	)		31,889
Income tax expense (taxable equivalent)		5,254		5,747		509			(377	)		11,133

Net income	$	9,654	$	10,657	$	928		$	(483	)	$	20,756


Average assets *(in millions)*	$	3,006	$	2,591	$	28		$	2,029		$	7,654


Earnings Summary — Three Months Ended March 31, 2005 ⁽¹⁾
Net interest income (taxable equivalent)	$	28,644	$	37,308	$	216		$	5,417		$	71,585
Provision for loan losses		1,753		1,248		(1	)		—			3,000

Net interest income after provision		26,891		36,060		217			5,417			68,585
Noninterest income		3,058		11,778		6,007			1,618			22,461
Noninterest expense		18,186		33,134		5,530			3,751			60,601

Income before income taxes		11,763		14,704		694			3,284			30,445
Income tax expense (taxable equivalent)		4,154		5,146		246			819			10,365

Net income	$	7,609	$	9,558	$	448		$	2,465		$	20,080


Average assets *(in millions)*	$	2,858	$	2,569	$	22		$	2,279		$	7,728


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

Note 11. Derivatives and Hedging Activities

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

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

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

Derivative Financial Instruments:


	March 31, 2006					December 31, 2005
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value

Received fixed swaps	$	285,000	$	(903	)	$	530,000	$	(7,429	)
Pay fixed swaps		124,000		2,622			124,000		2,486
Customer initiated swaps and corresponding offsets		300,914		—			233,104		—
Interest rate lock commitments		27,586		27			17,897		37
Forward mortgage loan contracts		27,500		161			22,000		(66	)

Total	$	765,000	$	1,907		$	927,001	$	(4,972	)

Derivative Classifications and Hedging Relationships:


	March 31, 2006					December 31, 2005
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value

Derivatives Designated as Cash Flow Hedges:
Hedging repurchase agreements	$	124,000	$	2,622		$	124,000	$	2,486
Derivatives Designated as Fair Value Hedges:
Hedging time deposits		185,000		(277	)		25,000		(10	)
Hedging long-term debt		100,000		(626	)		225,000		(3,815	)
Derivatives Not Designated as Hedges:
Receive fixed swaps		—		—			280,000		(3,604	)
Customer initiated swaps		300,914		—			233,104		—

Total	$	709,914	$	1,719		$	887,104	$	(4,943	)

Note 12. Commitments, Contingent Liabilities and Guarantees

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

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


	March 31,		December 31,
(in thousands)	2006		2005

Loan commitments and letters of credit:
Commitments to extend credit	$	1,626,348	$	1,762,259
Financial standby letters of credit		45,077		44,739
Performance standby letters of credit		8,206		11,557
Commercial letters of credit		219,562		223,269

Total loan commitments and letters of credit	$	1,899,193	$	2,041,824

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

Selected Quarterly Information
Citizens Banking Corporation and Subsidiaries


	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2006			2005			2005			2005			2005

*Summary of Operations (thousands)*
Interest income	$	112,391		$	111,958		$	108,506		$	103,619		$	99,166
Net interest income		67,475			69,095			69,642			68,779			68,233
Provision for loan losses ⁽¹⁾		3,000			(7,287	)		4,000			1,396			3,000
Total fees and other income ⁽²⁾		25,563			19,930			23,941			23,109			22,455
Investment securities gains (losses) ⁽³⁾		7			(8,970	)		—			37			6
Noninterest expense ⁽⁴⁾		61,572			60,901			60,550			60,990			60,601
Income tax provision		7,717			7,553			8,041			8,974			7,013
Net income		20,756			18,888			20,992			20,565			20,080
Taxable equivalent adjustment		3,416			3,432			3,284			3,324			3,353
Cash dividends		12,259			12,269			12,412			12,304			12,326

*Per Common Share Data*
Basic net income	$	0.49		$	0.44		$	0.49		$	0.48		$	0.46
Diluted net income		0.48			0.44			0.48			0.47			0.46
Cash dividends		0.285			0.285			0.285			0.285			0.285
Market value (end of period)		26.85			27.75			28.40			30.22			29.36
Book value (end of period)		15.23			15.28			15.21			15.31			14.95

*At Period End (millions)*
Assets	$	7,663		$	7,752		$	7,851		$	7,826		$	7,777
Portfolio loans		5,592			5,616			5,569			5,523			5,430
Deposits		5,524			5,474			5,226			5,201			5,290
Shareholders’ equity		652			656			655			662			646

*Average for the Quarter (millions)*
Assets	$	7,654		$	7,754		$	7,821		$	7,807		$	7,728
Portfolio loans		5,561			5,575			5,531			5,472			5,393
Deposits		5,513			5,305			5,239			5,254			5,349
Shareholders’ equity		655			654			655			654			649

*Ratios (annualized)*
Return on average assets		1.10	%		0.97	%		1.06	%		1.06	%		1.05	%
Return on average shareholders’ equity		12.86			11.46			12.71			12.62			12.54
Net interest margin (FTE) ⁽⁵⁾		3.97			3.95			3.93			3.92			3.96
Efficiency ratio ⁽⁶⁾		63.84			65.87			62.51			64.06			64.44
Net loans charged off to average portfolio loans ⁽¹⁾		0.29			(0.36	)		0.38			0.17			0.32
Allowance for loan losses to portfolio loans		2.06			2.07			2.13			2.17			2.23
Nonperforming assets to portfolio loans plus ORAA (end of period)		0.65			0.71			0.76			0.89			0.80
Nonperforming assets to total assets (end of period)		0.48			0.51			0.54			0.63			0.56
Average equity to average assets		8.55			8.43			8.38			8.37			8.40
Leverage ratio		8.14			7.98			7.86			7.85			7.83
Tier 1 capital ratio		10.09			9.94			9.91			10.00			9.97
Total capital ratio		13.39			13.22			13.20			13.31			13.32


⁽¹⁾		The provision for loan losses and net loans charged off during the fourth quarter of 2005 reflect an insurance settlement of $9.1 million accounted for as a loan loss recovery.

⁽²⁾		Total fees and other income includes a cumulative charge of $3.6 million on swaps related to brokered certificates during the fourth quarter of 2005 and a $2.9 million gain on the sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006.

⁽³⁾		Investment securities gains (losses) includes a net loss of $9.0 million on the sale of securities as a result of restructuring the investment portfolio during the fourth quarter of 2005.

⁽⁴⁾		Noninterest expense includes a contribution to Citizens charitable foundation of $1.5 million during the first quarter of 2006.

⁽⁵⁾		Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%.

⁽⁶⁾		The Efficiency Ratio measures how efficiently a bank spends its revenues. The formula is: Noninterest expense/(Net interest income + Taxable equivalent adjustment + Total fees and other income).

Introduction

The following commentary presents management’s discussion and analysis of Citizens Banking Corporation’s financial condition and results of operations for the three month period ended March 31, 2006. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in the Corporation’s 2005 Annual Report on Form 10-K. In addition, the following discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Citizens’ 2005 Annual Report on Form 10-K, which contains important additional information that is necessary to understand the Corporation and its financial condition and results of operations for the periods covered by this report. Unless the context indicates otherwise, all references in the discussion to “Citizens” or the “Corporation” refer to Citizens Banking Corporation and its subsidiaries. References to the “Holding Company” refer solely to Citizens Banking Corporation.

Forward – Looking Statements

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” and “plan”) are forward-looking statements that involve risks and uncertainties, and actual future results could materially differ from those discussed. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Holding Company’s filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of Citizens’ 2005 Annual Report on Form 10-K, as well as the following.

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

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

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

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

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

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

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

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

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

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

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

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

	•		Citizens’ potential inability to integrate acquired operations could have a negative effect on Citizens’ expenses and results of operations.

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

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

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

	•		Citizens’ articles of incorporation, by-laws and shareholder rights agreement, as well as certain banking laws, may have an anti-takeover effect.

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

Critical Accounting Policies

Citizens’ Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which the Corporation operates. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Actual results could differ significantly from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, the benefit obligation and net periodic pension expense for employee pension and postretirement benefit plans, derivative financial instruments and hedging activities, and income taxes. Citizens believes that these estimates and the related policies are important to the portrayal of the Corporation’s financial condition and results. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. Citizens’ significant accounting policies are more fully described in Note 2 to the audited Consolidated Financial Statements contained in the Corporation’s 2005 Annual Report on Form 10-K and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Corporation’s 2005 Annual Report on Form 10-K. There have been no material changes to those policies or the estimates made pursuant to those policies during the most recent quarter.

Results of Operations

Summary

Citizens earned net income of $20.8 million for the three months ended March 31, 2006. This represents an increase of $0.7 million or 3.4% over the first quarter of 2005 net income of $20.1 million. Diluted net income per share was $0.48, compared with $0.46 for the same quarter of last year. Annualized returns on average assets and average equity during the first quarter of 2006 were 1.10% and 12.86%, respectively, compared with 1.05% and 12.54% for the first quarter of 2005.

Results for the first quarter of 2006 reflect another quarter of earnings growth in a challenging interest rate environment. Improvements in total fees and other income were partially offset by lower net interest income and higher noninterest expense and income tax provision. The effects of a flattened yield curve, continued pressure on net interest margin, and

current economic conditions in the Midwestern United States (including recent negative developments in the automotive industry) are expected to continue to have a dampening effect on the Corporation’s results from operations in future periods.

Citizens’ total assets at March 31, 2006 were $7.7 billion, a decrease of $88.6 million or 1.1% compared with December 31, 2005 and a decrease of $113.4 million or 1.5% from March 31, 2005. Commercial loan growth in several traditional Michigan and Wisconsin markets, along with Southeast Michigan, was partially offset by declines in other markets, resulting in total growth in average commercial loans of $36.3 million or 1.2% over the fourth quarter of 2005 and growth of $155.2 million or 4.0% over the first quarter of 2005. The decrease in total assets from December 31, 2005 was due to a decline in the investment portfolio as a result of using portfolio cash flow to reduce short-term borrowings and a decline in the consumer loan portfolio due to weak consumer demand in most of Citizens’ markets. The decrease in total assets from March 31, 2005 was due to a decline in the investment portfolio, partially offset by growth in the commercial loan portfolio.

Total deposits at March 31, 2006 increased $50.1 million or 0.9% from December 31, 2005 to $5.5 billion and increased $234.5 million or 4.4% from March 31, 2005. Core deposits, which exclude all time deposits, totaled $3.2 billion at March 31, 2006, a decrease of $128.6 million or 3.9% from December 31, 2005 and a decrease of $407.9 million or 11.4% from March 31, 2005. The decreases in core deposits were largely the result of clients migrating their funds into time deposits with higher yields. Time deposits totaled $2.4 billion at March 31, 2006, an increase of $178.8 million or 8.2% compared with December 31, 2005 and an increase of $642.3 million or 37.5% from March 31, 2005. The increases were largely the result of clients migrating their funds from lower-cost deposits and some new client growth. The increase from the fourth quarter of 2005 also included the effect of municipalities maintaining higher balances due to the timing of tax receipts. Additionally, the increase in time deposits from March 31, 2005 was partially due to an increase in brokered certificates of deposit, which is one of many wholesale funding alternatives used by Citizens.

Net Interest Income and Net Interest Margin

An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the three months ended March 31, 2006 and 2005 is presented below.

Average Balances/Net Interest Income/Average Rates


	2006								2005
Three Months Ended March 31,	Average					Average			Average					Average
(dollars in thousands )	Balance			Interest ⁽¹⁾		Rate ⁽²⁾			Balance			Interest ⁽¹⁾		Rate ⁽²⁾

*Earning Assets*
Money market investments	$	1,684		$	12		2.82		$	1,799		$	9		2.01
Investment securities ⁽³⁾:
Taxable		1,181,397			13,611		4.61			1,435,683			14,688		4.09
Tax-exempt		446,657			5,317		7.33			420,931			5,197		7.60
Mortgage loans held for sale		16,471			232		5.64			31,341			430		5.49
Portfolio Loans ⁽⁴⁾:
Commercial		1,646,899			27,982		7.02			1,615,304			21,842		5.62
Commercial real estate		1,415,201			23,985		6.88			1,291,629			19,358		6.08
Residential mortgage loans		541,390			7,664		5.66			497,925			6,813		5.47
Direct consumer		1,124,379			20,011		7.22			1,167,894			17,363		6.03
Indirect consumer		833,436			13,577		6.61			820,291			13,466		6.66

Total portfolio loans		5,561,305			93,219		6.83			5,393,043			78,842		5.96

Total earning assets ⁽³⁾		7,207,514			112,391		6.49			7,282,797			99,166		5.68
*Nonearning Assets*
Cash and due from banks		165,909								158,195
Bank premises and equipment		121,348								120,902
Investment security fair value adjustment		(3,305	)							18,974
Other nonearning assets		278,550								268,861
Allowance for loan losses		(116,151	)							(121,267	)

Total assets	$	7,653,865							$	7,728,462

*Interest-Bearing Liabilities*
Deposits:
Interest-bearing demand	$	857,273		$	1,362		0.64		$	1,153,239		$	2,002		0.70
Savings deposits		1,448,866			7,973		2.23			1,626,232			5,092		1.27
Time deposits		2,281,926			21,657		3.85			1,662,673			10,977		2.68
Short-term borrowings		390,307			3,736		3.88			717,971			4,441		2.51
Long-term debt		1,004,948			10,188		4.10			927,497			8,421		3.67

Total interest-bearing liabilities		5,983,320			44,916		3.04			6,087,612			30,933		2.06
*Noninterest-Bearing Liabilities and Shareholders’ Equity*
Noninterest-bearing demand		924,788								906,615
Other liabilities		91,150								84,766
Shareholders’ equity		654,607								649,469

Total liabilities and shareholders’ equity	$	7,653,865							$	7,728,462

*Net Interest Income*				$	67,475							$	68,233

*Interest Spread* ⁽⁵⁾							3.45	%							3.62	%
Contribution of noninterest bearing sources of funds							0.52								0.34

*Net Interest Margin* ⁽⁵⁾⁽⁶⁾							3.97	%							3.96	%


⁽¹⁾		Interest income is shown on actual basis and does not include taxable equivalent adjustments.

⁽²⁾		Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $3.4 million and $3.4 million for the three months ended March 31, 2006 and 2005, respectively, based on a tax rate of 35%.

⁽³⁾		For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

⁽⁴⁾		Nonaccrual loans are included in average balances for each applicable loan category.

⁽⁵⁾		The interest spread and net interest margin are presented on a tax-equivalent basis.

⁽⁶⁾		Because noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity also support earning assets, the net interest margin exceeds the interest spread.

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

Net interest income was $67.5 million in the first quarter of 2006, down slightly from $68.2 million in the same quarter of 2005. The decrease in net interest income resulted from a $75.3 million decrease in average earning assets, as decreases of $228.6 million in investment securities balances and $30.4 million in the consumer loan portfolio outpaced growth in the commercial and residential mortgage loan portfolios of $155.2 million and $43.5 million, respectively. The decrease in earning assets was partially offset by a one basis point expansion in the net interest margin to 3.97% in the first quarter of 2006 compared with 3.96% in the same quarter of 2005. This increase was due to the restructuring of the investment portfolio in the fourth quarter of 2005, a shift in asset mix from investment securities to higher yielding loans and growth in noninterest-bearing sources of funds, substantially offset by shifts within the deposit portfolio from lower cost savings and transaction products to higher cost savings products and time deposits and continued pricing pressure on loans.

The table below shows the effect of changes in average balances (“volume”) and yield (“rate”) on interest income, interest expense and net interest income for major categories of earning assets and interest-bearing liabilities.

Analysis of Changes in Interest Income and Interest Expense

Three Months Ended March 31,

Increase (Decrease)

2006 compared with 2005

Net

Due to Change in

(in thousands)

Change⁽¹⁾

Rate ⁽²⁾

Volume⁽²⁾

Interest Income:

Money market investments

)

Investment securities:

Taxable

(1,077

)

1,716

(2,793

)

Tax-exempt

120

(190

)

310

Mortgage loans held for sale

(198

)

(209

)

Loans:

Commercial

6,140

5,705

435

Commercial real estate

4,627

2,673

1,954

Residential mortgage loans

851

242

609

Direct consumer

2,648

3,315

(667

)

Indirect consumer

111

(104

)

215

Total portfolio loans

14,377

11,831

2,546

Total

13,225

13,372

(147

)

Interest Expense:

Deposits:

Interest-bearing demand

(640

)

(159

)

(481

)

Savings

2,881

3,489

(608

)

Time

10,680

5,769

4,911

Short-term borrowings

(705

)

1,826

(2,531

)

Long-term debt

1,767

1,030

737

Total

13,983

11,955

2,028

Net Interest Income

(758

)

1,417

(2,175

)


⁽¹⁾		Changes are based on actual interest income and do not reflect taxable equivalent adjustments.

⁽²⁾		The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each.

The decrease in net interest income of $0.8 million in the first quarter of 2006 compared with the same period of 2005 reflects rate variances which were favorable in the aggregate and volume variances which were unfavorable in the aggregate.

Unfavorable volume variances in the investments and consumer portfolios were partially offset by growth in the commercial, commercial real estate, and residential mortgage portfolios. Unfavorable volume variances in the investment portfolio were the result of restructuring the portfolio in the fourth quarter of 2005 and maturing balances not being fully reinvested.

Favorable volume variances in interest-bearing demand, savings, and short-term borrowings partially offset unfavorable volume variances in time deposits and long-term debt. The variances were the result of customers migrating funds from

lower yielding deposit products into higher yielding time deposits in response to increases in short-term interest rates. The favorable volume variance in short-term borrowings was the result of reduced funding needs driven by declines in investment securities balances.

Favorable rate variances on assets were partially offset by unfavorable rate variances on liabilities. Unfavorable rate variances for tax-exempt investment securities and indirect consumer loans were the result of yields on maturing balances being higher than yields on new volume due to continued low long-term interest rates. The favorable rate variance for taxable investment securities was the result of restructuring the portfolio during the fourth quarter of 2005. Favorable rate variances on the remaining asset categories and unfavorable rate variances on total liabilities were the result of increases in short- and intermediate-term market interest rates.

For the second quarter of 2006, Citizens anticipates net interest income will be slightly lower than the first quarter of 2006 as a result of anticipated margin compression driven by the continuation of customers migrating funds from lower yielding deposit products into higher yielding deposit products.

Noninterest Income

Noninterest income for the first quarter of 2006 was $25.6 million, an increase of $3.1 million or 13.8% from the first quarter of 2005. The increase was primarily the result of a $2.9 million gain as well as increases in service charges on deposits and trust fees, partially offset by a decrease in mortgage and other loan income. The $2.9 million gain in the first quarter of 2006 was the result of fully recognizing a deferred gain on the 2004 sale of the former downtown Royal Oak, Michigan office, which was deferred due to leaseback restrictions.

Noninterest Income


	Three Months Ended
	March 31,					Change in 2006
(dollars in thousands)	2006			2005		Amount			Percent

Service charges on deposit accounts	$	8,875		$	8,287	$	588			7.1	%
Trust fees		5,042			4,412		630			14.3
Mortgage and other loan income		2,010			2,360		(350	)		(14.8	)
Brokerage and investment fees		1,515			1,599		(84	)		(5.2	)
ATM network user fees		987			873		114			13.0
Bankcard fees		1,057			840		217			25.8
Financial services		774			730		44			6.1
Investment securities gains		7			6		1			15.0
Fair value change in CD swap derivatives		(207	)		—		(207	)		N/M
Other		5,510			3,354		2,156			64.3

Total noninterest income	$	25,570		$	22,461	$	3,109			13.8

N/M — Not Meaningful

Service charges on deposit accounts for the first quarter of 2006 were $8.9 million, an increase of $0.6 million or 7.1% from the first quarter of 2005. The increase was largely due to higher overdraft fee income related to revenue enhancement initiatives that were implemented in the first quarter of 2006.

Trust fees for the first quarter of 2006 were $5.0 million, an increase of $0.6 million or 14.3% from the first quarter of 2005. This marks the fourth consecutive quarterly increase in trust fees. The increase was attributable to stronger financial markets, continued execution of the sales management process and improved pricing discipline, partially offset by attrition. Total trust assets under administration of $2.6 billion at March 31, 2006 were essentially unchanged from March 31, 2005.

Mortgage and other loan income for the first quarter of 2006 was $2.0 million, a decrease of $0.4 million or 14.8% from the first quarter of 2005. The decrease reflects the impact of an unfavorable rate environment since the first quarter of 2005.

Brokerage and investment fees for the first quarter of 2006 were $1.5 million, a decrease of $0.1 million or 5.2% from the first quarter of 2005. The decrease was the result of Citizens shifting a large portion of its brokerage fee production from reliance on referrals from the branch network to its Investment Center financial consultants. This change supports Citizens’ strategy of growing low-cost deposits, as the financial consultants increase their focus on attracting funds from new sources outside of Citizens and the branch network continues to improve on providing an enhanced client experience. While the

long-term impact is expected to be positive, these changes reduced revenue in the first quarter of 2006 as the financial consultants adjusted their sales process to create new opportunities.

For the first quarter of 2006, all other noninterest income categories, which include ATM network user fees, bankcard fees, fair value change in CD swap derivatives, other income, and investment securities gains (losses), was $8.1 million, an increase of $2.3 million or 40.1% over the first quarter of 2005. The increase over the first quarter of 2005 was primarily the result of the aforementioned $2.9 million gain on the sale of the former downtown Royal Oak, Michigan office, partially offset by the effects of two items received in the first quarter of 2005, specifically, a performance-related penalty received from a third party vendor and a preference payment on Citizens’ membership interest in the PULSE ATM network.

Excluding the effect of the aforementioned $2.9 million gain, Citizens anticipates total noninterest income for the second quarter of 2006 will be consistent with or slightly higher than the first quarter of 2006 due to anticipated increases in deposit service charges and brokerage fees.

Noninterest Expense

Noninterest expense for the first quarter of 2006 was $61.6 million, essentially unchanged from the first quarter of 2005, even though Citizens contributed $1.5 million to its charitable foundation to sustain future giving levels. Increases in occupancy, data processing fees, advertising and public relations expenses, and other expenses over the first quarter of 2005 were offset by decreases in salaries and benefits.

Noninterest Expense


	Three Months Ended
	March 31,				Change in 2006
(dollars in thousands)	2006		2005		Amount			Percent

Salaries and employee benefits	$	32,256	$	33,351	$	(1,095	)		(3.3	)%
Occupancy		5,942		5,560		382			6.9
Professional services		4,078		4,199		(121	)		(2.9	)
Equipment		3,166		3,301		(135	)		(4.1	)
Data processing services		3,739		3,369		370			11.0
Advertising and public relations		2,034		1,746		288			16.5
Postage and delivery		1,462		1,590		(128	)		(8.0	)
Telephone		1,464		1,441		23			1.6
Other loan expenses		416		375		41			10.8
Stationery and supplies		727		919		(192	)		(20.8	)
Intangible asset amortization		725		725		—			—
Other		5,563		4,025		1,538			38.2

Total noninterest expense	$	61,572	$	60,601	$	971			1.6

Salaries and employee benefits for the first quarter of 2006 were $32.3 million, a decrease of $1.1 million or 3.3% from the first quarter of 2005. The decrease was the result of lower incentive expense and postretirement benefits, partially offset by higher salaries due to merit increases awarded in 2005 and higher self-funded hospitalization expenses. Salary costs included $0.7 million in severance for the first quarter of 2006 and $0.9 million for the first quarter of 2005. Citizens adopted Statements of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment (Revised 2004),” on January 1, 2006, which resulted in an expense of $0.1 million for the quarter. Citizens had 2,119 full-time equivalent employees at March 31, 2006, down from 2,175 at March 31, 2005.

Occupancy costs for the first quarter of 2006 were $5.9 million, an increase of $0.4 million or 6.9% over the first quarter of 2005. The increase was largely the result of higher energy and building depreciation expense related to the new branches opened in Southeast Michigan during 2005, and higher depreciation as a result of the Michigan and Wisconsin re-branding projects which were completed in the first and second quarters of 2005.

Professional services for the first quarter of 2006 were $4.1 million, a decrease of $0.1 million or 2.9% compared with the first quarter of 2005. The first quarter of 2005 included higher legal expense, associated with the fourth quarter 2005 insurance settlement, and higher audit fees, associated with testing internal controls and issuance of the related reports to comply with the requirements of Sarbanes-Oxley Section 404. This decrease was substantially offset by higher consulting expense in the first quarter of 2006 as a result of developing corporate strategies to produce enhanced profitability and revenue momentum.

Advertising and public relations expense for the first quarter of 2006 was $2.0 million, an increase of $0.3 million or 16.5% over the first quarter of 2005. The increase was primarily related to targeted direct mailing campaigns conducted during the first quarter of 2006.

For the first quarter of 2006, all other noninterest expense categories, which include equipment, data processing services, postage and delivery, telephone, other loan expense, stationery and supplies, intangible asset amortization, and other expenses, totaled $17.3 million, an increase of $1.5 million or 9.6% from the first quarter of 2005. The increase was primarily a result of the $1.5 million contribution to Citizens’ charitable foundation and higher data processing services, travel and training expenses, partially offset by lower supplies and stationery expenses and non-credit related losses.

On March 13, 2006, Citizens announced a strategic alliance with PHH Mortgage, a leading provider of private label mortgage services. PHH Mortgage will provide mortgage loan processing, servicing, secondary marketing functions, and other mortgage-related loan services. The alliance is expected to be fully implemented by the end of June 2006. Once fully implemented, Citizens expects the PHH alliance will improve cost-effectiveness, expand product capability and enhance sales execution by increasing opportunities for origination through multiple channels. In connection with this initiative, Citizens expects to reduce its workforce by 27 employees (approximately 1.2% of its workforce). This reduction is expected to result in approximately $0.7 million in severance and other costs for the full year of 2006.

On March 13, 2006, Citizens announced a plan to consolidate the consumer and commercial loan operations groups into a functional, centrally located operation at its Flint, Michigan headquarters. Best practice deployment will lead to an enhanced client experience by improving workflow, efficiency and productivity through standardization and specialization. Full implementation is expected by the end of June 2006. In connection with this initiative, Citizens expects to reduce its workforce by 17 employees (approximately 1.0% of its workforce). This reduction is expected to result in approximately $0.6 million in severance, other process improvement measures, and technology enhancement costs for the full year of 2006.

Excluding the aforementioned contribution to the charitable foundation, Citizens anticipates noninterest expenses for the second quarter of 2006 will be consistent with the first quarter of 2006.

Income Taxes

Income tax provision for the first quarter of 2006 was $7.7 million, an increase of $0.7 million or 10.0% over the first quarter of 2005. The increase was due to higher pre-tax income and higher ongoing state taxes as a result of the April 2005 merger of the Michigan and Wisconsin bank charters.

The effective tax rate was 27.10% for the first quarter of 2006 compared with 25.89% for the first quarter of 2005. The increase was due to higher ongoing state taxes as a result of the April 2005 merger of the Michigan and Wisconsin bank charters.

Citizens anticipates the effective income tax rate for the second quarter of 2006 will be consistent with the first quarter of 2006.

Lines of Business Results

Citizens monitors financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Business line results are divided into four major business segments: Commercial Banking, Consumer Banking, Wealth Management and Other. For additional information about each line of business, see Note 21 to the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K and Note 10 to the unaudited Consolidated Financial Statements in this report. A summary of net income by each business line is presented below.


	Three Months Ended
	March 31,
(in thousands)	2006			2005
Commercial Banking	$	9,654		$	7,609
Consumer Banking		10,657			9,558
Wealth Management		928			448
Other		(483	)		2,465

Net Income	$	20,756		$	20,080

Commercial Banking

The increase in net income in the three month period ended March 31, 2006 was due to increases in net interest income and noninterest income, along with a decrease in the provision for loan losses, partially offset by higher noninterest expenses. Net interest income increased in the three month period ended March 31, 2006 as a result of higher average commercial loan balances, driven by growth in several traditional Michigan and Wisconsin markets along with the Southeast Michigan market. Higher average time deposit and noninterest bearing deposit balances along with higher spreads on demand deposits due to the rising rate environment also contributed to the increase in net interest income. The reduction in the provision for loan losses reflects a decrease in the level of net charge-offs as well as continued improvement in the overall risk of the commercial loan portfolio. Noninterest income increased for the quarter as a result of higher deposit service charges and higher loan commitment fees. The increase in noninterest expense was primarily a result of increased provisioning to fund the reserve for unused loan commitments, which fluctuates with the amount of unadvanced customer lines of credit, and higher advertising and marketing costs. These increases were partially offset by lower salary and benefit expenses.

Consumer Banking

Net income increased for the three months ended March 31, 2006 compared to the same period of the prior year due to an increase in noninterest income and reductions in noninterest expense, partially offset by higher provision for loan losses and lower net interest income. Noninterest income increased largely due to the aforementioned $2.9 million gain on sale of the former downtown Royal Oak, Michigan office. Aside from the gain on sale, noninterest income was relatively unchanged, as higher service charges on deposit accounts due to fee enhancement initiatives implemented during the first quarter of 2006 and higher ATM network and bankcard fee income were offset by decreases in mortgage income and brokerage income. The reduction in noninterest expense was largely due to lower salary and benefit expenses, lower equipment related costs, and lower loan processing costs, partially offset by increases in occupancy and advertising expenses. The reduction in net interest income was largely the result of lower spreads on consumer loan products due to continued competitive pressure on rates, partially offset by increased average balances in the indirect and mortgage loan portfolios. The increase in the provision for loan losses was a result of higher net charge-offs for direct and indirect consumer loans, due to an unusually high level of bankruptcy filings in October 2005 prior to the October 17, 2005 effective date of the recent revisions to the federal bankruptcy code.

Wealth Management

The increases in net income for the three month period ended March 31, 2006 was due to increases in net interest income and noninterest income along with a reduction in noninterest expense. Noninterest income increased mainly as a result of higher trust fees, partially offset by the effects of the aforementioned performance-related penalty received from a third party vendor in the first quarter of 2005. Trust fees increased due to stronger financial markets, continued execution of Citizens’ sales management process, and improved pricing discipline, partially offset by attrition. Noninterest expense declined during the first quarter of 2006 due mainly to lower trust losses

Other

Net income decreased for the three month period ended March 31, 2006 compared with the same period of the prior year as a result of lower net interest income, lower noninterest income and higher noninterest expense. The reduction in net interest income was the result of Citizens’ interest rate risk position, an internal profitability methodology and reductions in the investment portfolio, partially offset by the beneficial impact of restructuring the investment portfolio in the fourth quarter of 2005. The internal profitability methodology utilized at Citizens 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 due to the effect of the aforementioned preference payment on Citizens’ membership interest in the PULSE ATM network in the first quarter of 2005, lower payouts received from bank owned life insurance policies, and from the change in the market value of swaps hedging brokered certificates of deposit that did not qualify for hedge accounting. These swaps were sold during the first quarter of 2006. All remaining swaps hedging brokered certificates of deposit qualified for hedge accounting treatment as of the end of January 2006. Noninterest expense increased as a result of the aforementioned $1.5 million contribution to Citizens’ charitable foundation, higher data processing expenses and higher severance expenses.

Financial Condition

consumer loan portfolio due to weak consumer demand in most of Citizens’ markets. The decrease in total assets from March 31, 2005 was due to a decline in the investment portfolio, partially offset by growth in the commercial loan portfolio.

Investment Securities and Money Market Investments

Total investments, including interest-bearing deposits with banks, were $1.6 billion at March 31, 2006, a decrease of $26.1 million or 1.6% from December 31, 2005 and a decrease of $279.2 million or 14.7% from March 31, 2005. The decreases were the result of maturing balances not being fully reinvested. Additionally, the decrease includes the effect of restructuring the investment portfolio in the fourth quarter of 2005.

Portfolio Loans

Portfolio loans decreased $24.1 million or 0.4% compared with December 31, 2005 and increased $162.1 million or 3.0% over March 31, 2005. The decrease from the fourth quarter of 2005 was the result of declines in direct and indirect consumer loans, partially offset by increases in commercial, commercial real estate and residential mortgage loans. The increase from March 31, 2005 was the result of growth in commercial and residential mortgage loan portfolios.

Commercial and commercial real estate loans at March 31, 2006 increased $17.4 million or 0.6% from December 31, 2005 to $3.1 billion and increased $167.2 million or 5.7% compared with March 31, 2005. These improvements were a result of the sales management process, new relationships in traditional Michigan and Wisconsin markets, and continued strong growth in the Southeast Michigan market.

Residential mortgage loans at March 31, 2006 increased $9.3 million or 1.7% from December 31, 2005 to $549.1 million and increased $53.2 million or 10.7% compared with March 31, 2005. The increases in the mortgage portfolio were primarily the result of retaining most new adjustable-rate mortgage (ARM) production. Citizens continues to sell most new fixed rate production into the secondary market.

Total consumer loans, which are comprised of direct and indirect loans, were $1.9 billion at March 31, 2006, a decrease of $50.8 million or 2.6% from December 31, 2005 and a decrease of $58.2 million or 2.9% from March 31, 2005. Direct consumer loans declined by $32.8 million or 2.9% from December 31, 2005 and decreased $64.0 million or 5.5% from March 31, 2005. The declines were due to a decrease in historically strong activity where consumers repay their installment loans using home equity loans and weaker consumer demand in Citizens’ markets. Indirect consumer loans declined $18.0 million or 2.1% from December 31, 2005 as a result of a decrease in seasonal interest in indirect products and increased $5.8 million or 0.7% from March 31, 2005 as a result of Citizens’ emphasis on strong relationships with the dealer network.

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

Mortgage Loans Held for Sale

Mortgage loans held for sale were $13.4 million at March 31, 2006, a decrease of $2.9 million or 17.6% compared with December 31, 2005 and a decrease of $21.2 million or 61.3% over March 31, 2005. Citizens sells most fixed rate new residential mortgage loan production into the secondary market due to the long-term interest rate risk.

Provision and Allowance for Loan Losses

A summary of loan loss experience during the three months ended March 31, 2006 and 2005 is provided below.

Analysis of Allowance for Loan Losses


	Three Months Ended
	March 31,
(in thousands)	2006			2005

Allowance for loan losses — beginning of period	$	116,400		$	122,184
Provision for loan losses		3,000			3,000
Charge-offs		6,233			7,125
Recoveries		2,256			2,886

Net charge-offs		3,977			4,239

Allowance for loan losses — end of period	$	115,423		$	120,945


Portfolio loans outstanding at period end ⁽¹⁾	$	5,591,991		$	5,429,842
Average portfolio loans outstanding during period ⁽¹⁾		5,561,305			5,393,043
Allowance for loan losses as a percentage of portfolio loans		2.06	%		2.23	%
Ratio of net charge-offs during period to average portfolio loans (annualized)		0.29			0.32


⁽¹⁾		Balances exclude mortgage loans held for sale.

Net charge-offs decreased to $4.0 million or 0.29% of average portfolio loans in the first quarter of 2006 compared with $4.2 million or 0.32% of average portfolio loans in the first quarter of 2005. The decrease was due to lower commercial net charge-offs, partially offset by higher direct and indirect consumer net charge-offs. The higher direct and indirect consumer net charge-offs were caused by the unusually high level of bankruptcy filings in October 2005 prior to the October 17, 2005 effective date of the recent revisions to the federal bankruptcy code.

The provision for loan losses was $3.0 million in the first quarter of 2006, equal to the $3.0 million booked in the first quarter of 2005.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses inherent in the loan portfolio as of the balance sheet date. To assess the adequacy of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of the loan portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical losses on each portfolio category and other qualitative and quantitative factors which could affect probable credit losses. The evaluation process is inherently subjective, as it requires estimates that may be susceptible to significant change and have the potential to affect net income materially. While Citizens continues to enhance its loan loss allocation model and risk rating process, it has not substantially changed its overall approach in the determination of the allowance for loan losses. The Corporation’s methodology for measuring the adequacy of the allowance includes several key elements, which include specific allowances for identified problem loans, a formula-based risk allocated allowance for the remainder of the portfolio and a general valuation allowance that reflects the Corporation’s evaluation of a number of other risk factors discussed below. This methodology is discussed in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Citizens’ 2005 Annual Report on Form 10-K.

The allowance for loan losses totaled $115.4 million or 2.06% of loans at March 31, 2006, a decrease of $1.0 million and $5.5 million from December 31, 2005 and March 31, 2005 respectively. At March 31, 2006, the specific allowance allocated to commercial and commercial real estate credits increased to $5.4 million compared with $5.1 million at December 31, 2005. The increase was attributable to a combination of additional small-balance credits being reclassified, partially offset by generally lower risk factors being applied.

The total formula risk allocated allowance increased to $103.7 million as of March 31, 2006, compared with $101.4 million at December 31, 2005. The amount allocated to commercial and commercial real estate loans, including construction loans, increased to $58.5 million at March 31, 2006 compared with $55.2 million at December 31, 2005 due to some increase in the commercial and commercial real estate portfolios and a slight shift in the mix of those portfolios. The risk allocated allowance for residential real estate loans increased to $6.4 million at March 31, 2006 compared with $6.3 million at December 31, 2005, reflecting an increase in portfolio balances. Consumer loans, excluding mortgage loans, decreased

to $38.7 million at March 31, 2006 compared with $39.9 million at December 31, 2005, reflecting both lower balances and slightly lower risk factors.

The general valuation allowances decreased to $6.3 million at March 31, 2006 compared with $9.9 million at December 31, 2005. The decrease was the result of continued refinement in the calculation of the automotive industry and indirect consumer factors. The general valuation portion of the allowance is maintained to address the uncertainty of potential losses inherent in the loan portfolio that may not have yet manifested themselves in the Corporation’s specific allowances or in the historical loss factors used to determine the formula allowances, and include factors such as continued weak general economic and business conditions in the Midwest, new business lending activity, changes to the small business lending model, changes in the composition of the Corporation’s portfolio and other factors deemed relevant by management’s judgment.

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

Based on seasonal business trends and the overall risk in the loan portfolio as well as expected improvements in consumer loan net charge-offs resulting from fewer bankruptcies, Citizens anticipates net charge-offs and provision expense in the second quarter of 2006 will be lower than the first quarter of 2006.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms and primarily real estate related repossessed assets. Although these assets have more than a normal risk of loss, they will not necessarily result in a higher level of loss in the future. The table below provides a summary of nonperforming assets as of March 31, 2006, December 31, 2005 and March 31, 2005.

Nonperforming Assets


	March 31,			December 31,			March 31,
(in thousands)	2006			2005			2005

Nonperforming Loans
Nonaccrual Commercial:
Commercial	$	10,594		$	11,880		$	12,991
Commercial real estate		5,219			5,068			11,004

Total commercial		15,813			16,948			23,995
Nonaccrual Consumer:
Direct		3,911			4,326			3,474
Indirect		569			2,454			1,025

Total consumer		4,480			6,780			4,499
Nonaccrual Mortgage:		7,396			8,412			8,099

Total nonaccrual loans		27,689			32,140			36,593
Loans 90 days past due and still accruing		547			385			11
Restructured loans		1,844			—			42

Total nonperforming loans		30,080			32,525			36,646
Other Repossessed Assets Acquired (ORAA)		6,397			7,351			7,118

Total nonperforming assets	$	36,477		$	39,876		$	43,764


Nonperforming assets as a percent of portfolio loans plus ORAA⁽¹⁾		0.65	%		0.71	%		0.80	%
Nonperforming assets as a percent of total assets		0.48			0.51			0.56
Allowance for loan loss as a percent of nonperforming loans		383.72			357.88			330.04
Allowance for loan loss as a percent of nonperforming assets		316.43			291.90			276.36


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

Nonperforming assets totaled $36.5 million at March 31, 2006, a decrease of $3.4 million or 8.5% compared with December 31, 2005 and a decrease of $7.3 million or 16.7% compared with March 31, 2005. The decrease from the fourth quarter of 2005 was due to lower consumer loans as a result of the effects of the higher level of bankruptcy filings in October 2005 prior to the October 17, 2005 effective date of the recent revisions to the federal bankruptcy code and higher consumer net charge-offs in the first quarter of 2006. The decrease from the first quarter of 2005 is primarily the result of the third quarter 2005 sale of nonperforming commercial loans with a balance of $6.7 million. Nonperforming assets at March 31, 2006 represented 0.65% of portfolio loans plus other repossessed assets acquired compared with 0.71% at December 31, 2005 and 0.80% at March 31, 2005. Nonperforming commercial loan inflows decreased to $9.8 million in the first quarter of 2006 compared with $10.6 million in the fourth quarter of 2005 and $11.2 million in the first quarter of 2005 while outflows decreased to $9.1 million for the first quarter of 2006 compared with $13.8 million in the fourth quarter of 2005 and $15.4 million in the first quarter of 2005. Nonperforming assets at March 31, 2006 and December 31, 2005 reflect the sale of nonperforming commercial loans with a balance of $6.7 million during the third quarter of 2005. Nonperforming loans at March 31, 2006 include $1.8 million in restructured commercial loans, which have been reclassified from the commercial subtotal as a result of revising the terms of the notes in an effort to improve collectibility in future periods.

In addition to loans classified as nonperforming, the Corporation carefully monitors other credits that are current in terms of principal and interest payments but that the Corporation believes may deteriorate in quality if economic conditions change. As of March 31, 2006, such loans amounted to $156.6 million, or 2.8% of total portfolio loans, compared with $163.7 million, or 2.9% of total portfolio loans at December 31, 2005 and $167.4 million or 3.1% of total portfolio loans as of March 31, 2005. These loans are mostly commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry or geographic location.

Some of the Corporation’s nonperforming loans included in the nonperforming loan table above are considered to be impaired. A loan is considered impaired when Citizens determines that it is probable that all the principal and interest due under the loan may not be collected. See Note 4 to the unaudited Consolidated Financial Statements in this report for information on impaired loans.

Deposits

Citizens gathers deposits within local markets and has not traditionally relied on brokered or out of market purchased deposits for any significant portion of funding. At March 31, 2006, Citizens had approximately $328.5 million in brokered deposits, compared to $340.6 million at December 31, 2005 and $153.0 million at March 31, 2005. Citizens will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. In addition to brokered deposits, at March 31, 2006 Citizens had approximately $878.5 million of time deposits greater than $100,000, compared to $751.8 million at December 31, 2005 and $639.4 million at March 31, 2005. Time deposits greater than $100,000 consist of commercial, consumer and public fund deposits derived almost exclusively from local markets. In order to minimize use of these higher cost funding alternatives, Citizens continues to promote relationship-based core deposit growth and stability through focused marketing efforts and competitive pricing strategies.

Borrowed Funds

Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings. Short-term borrowed funds at March 31, 2006 totaled $402.6 million, a decrease of $126.6 million or 23.9% from December 31, 2005 and a decrease of $457.5 million or 53.2% compared with March 31, 2005. The decrease in short-term borrowings was the result of deposit growth in the last three quarters of 2005 that continued into the first quarter of 2006.

Long-term debt consists of advances from the FHLB to Citizens’ subsidiary banks and debt issued by the Holding Company. Long-term debt at March 31, 2006 totaled $1.0 billion, a decrease of $3.1 million or 0.3% from December 31, 2005 and an

increase of $101.2 million or 11.2% compared with March 31, 2005 as a result of shifting additional funding from short-term to long-term debt.

Capital Resources

Citizens continues to maintain a strong capital position, which supports current needs and provides a sound foundation to support further expansion. The Corporation’s regulatory capital ratios are consistently at or above the “well-capitalized” standards and all bank subsidiaries have sufficient capital to maintain a “well-capitalized” designation. The Corporation’s capital ratios as of March 31, 2006, December 31, 2005 and March 31, 2005 are presented below.

Capital Ratios


	Regulatory Minimum
				“Well-			March 31,			December 31,			March 31,
	Required			Capitalized”			2006			2005			2005

Risk based:
Tier 1 capital		4.00	%		6.00	%		10.09	%		9.94	%		9.97	%
Total capital		8.00			10.00			13.39			13.22			13.32

Tier 1 leverage		4.00			5.00			8.14			7.98			7.83

Shareholders’ equity at March 31, 2006 was $651.5 million, compared with $656.5 million at December 31, 2005 and $645.6 million at March 31, 2005. Book value per common share at March 31, 2006, December 31, 2005, and March 31, 2005 was $15.23, $15.28, and $14.95, respectively. Citizens declared and paid cash dividends of $0.285 per share in the first quarter of 2006, the same as in the fourth quarter of 2005 and the first quarter of 2005. During the first quarter of 2006, the Holding Company repurchased a total of 255,000 shares of its common stock for $6.9 million. Information regarding the Corporation’s share repurchase program is set forth later in this report under Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

On April 20, 2006, Citizens announced a dividend increase of 1.8% to $0.29 per share of common stock per quarter beginning with the May 2006 dividend.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations and off-balance sheet arrangements are described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Corporation’s 2005 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business during the most recent quarter.

Liquidity and Debt Capacity

Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance business expansion, and to take advantage of unforeseen opportunities. Citizens manages the liquidity of its Holding Company to pay dividends to shareholders, to service debt, to invest in subsidiaries, and to satisfy other operating requirements. It also manages the liquidity of its subsidiary banks to meet client cash flow needs while maintaining funds available for loan and investment opportunities.

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

The primary sources of liquidity for the Holding Company are dividends from and returns on investments in its subsidiaries. Each of the banking subsidiaries are subject to dividend limits under the laws of the state in which they are chartered and, as member banks of the Federal Reserve System, are subject to the dividend limits of the Federal Reserve Board. The Federal Reserve Board 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 regulatory approval. As of April 1, 2006, the subsidiary banks are able to pay dividends of $57.6 million to the Holding Company without prior regulatory approval.

An additional source of liquidity is the ability of the Holding Company to borrow funds on both a short-term and long-term basis. The Holding Company maintains a $75.0 million short-term revolving credit facility with four unaffiliated banks. As of March 31, 2006, there was no outstanding balance under this credit facility. The current facility will mature in August

2006 and is expected to be renewed at that time on substantially the same terms. The credit agreement also requires Citizens to maintain certain covenants including covenants related to asset quality and capital levels. The Corporation was in full compliance with all debt covenants as of March 31, 2006.

Citizens’ ongoing Southeast Michigan branch expansion may pose a challenge to liquidity as both the capital investment and loan growth will require incremental funding. Management anticipates that through a combination of wholesale funding and deposit generation from both the new Southeast Michigan branches and the existing branch network, the Corporation will be able to fund all aspects of the expansion plan.

Citizens also has contingent letter of credit commitments that may impact liquidity. Since many of these commitments have historically expired without being drawn upon, the total amount of these commitments does not necessarily represent the Corporation’s future cash requirements in connection with them. Further information on these commitments is presented in Note 12 to the Consolidated Financial Statements in this report. Citizens has sufficient liquidity and capital resources to meet presently known short-term and long-term cash flow requirements.

Wholesale funding represents an important source of liquidity to the Corporation, and credit ratings affect the availability and cost of this funding. The credit ratings for the Holding Company and its banks are typically reviewed annually by Moody Investor Services, Standard and Poor’s, Fitch, and Dominion Bond Rating Service. None of the ratings have changed during the last twelve months. Credit ratings relate to the Corporation’s ability to issue long-term debt and should not be viewed as an indication of future stock performance.

Interest Rate Risk

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

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

Static repricing gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s rate sensitive assets and liabilities into repricing periods. The sum of assets and liabilities maturing or repricing in each of these periods are compared for mismatches within each time segment. Core deposits lacking contractual maturities or repricing frequencies are placed into repricing periods based upon historical experience. Repricing for assets includes the effect of expected prepayments on cash flows. Citizens’ static repricing gap as of March 31, 2006 and 2005 is presented in the following table.

Static Repricing Gap


										Total
	0 - 3			4 - 6			7 - 12			Within			1 - 5			Over
(dollars in millions)	Months			Months			Months			1 Year			Years			5 Years			Total

March 31, 2006
*Rate Sensitive Assets*⁽¹⁾
Portfolio loans⁽²⁾	$	2,615.4		$	231.1		$	408.6		$	3,255.1		$	1,917.1		$	419.8		$	5,592.0
Mortgage loans held for sale		13.4			—			—			13.4			—			—			13.4
Investment securities		65.7			57.1			240.7			363.5			866.3			383.3			1,613.1
Short-term investments		1.5			—			—			1.5			—			—			1.5

Total	$	2,696.0		$	288.2		$	649.3		$	3,633.5		$	2,783.4		$	803.1		$	7,220.0

*Rate Sensitive Liabilities*
Deposits⁽³⁾	$	1,712.0		$	457.8		$	708.0		$	2,877.8		$	990.9		$	755.4		$	4,624.1
Other interest bearing liabilities		540.7			55.0			176.9			772.6			479.2			153.8			1,405.6

Total	$	2,252.7		$	512.8		$	884.9		$	3,650.4		$	1,470.1		$	909.2		$	6,029.7


*Derivatives*	$	(166.0	)	$	70.0		$	80.0		$	(16.0	)	$	16.0		$	—		$	—

Period GAP⁽⁴⁾	$	277.3		$	(154.6	)	$	(155.6	)	$	(32.9	)	$	1,329.3		$	(106.1	)	$	1,190.3
Cumulative GAP		277.3			122.7			(32.9	)					1,296.4			1,190.3

March 31, 2005
*Rate Sensitive Assets*⁽¹⁾
Portfolio loans⁽²⁾	$	2,626.3		$	217.7		$	364.2		$	3,208.2		$	1,868.9		$	352.7		$	5,429.8
Mortgage loans held for sale		34.6			—			—			34.6			—			—			34.6
Investment securities		65.6			38.2			86.1			189.9			1,147.4			554.9			1,892.2
Short-term investments		1.6			—			—			1.6			—			—			1.6

Total	$	2,728.1		$	255.9		$	450.3		$	3,434.3		$	3,016.3		$	907.6		$	7,358.2

*Rate Sensitive Liabilities*
Deposits⁽³⁾	$	1,891.9		$	244.9		$	397.3		$	2,534.1		$	1,077.7		$	785.9		$	4,397.7
Other interest bearing liabilities		1,002.2			—			0.7			1,002.9			579.3			179.8			1,762.0

Total	$	2,894.1		$	244.9		$	398.0		$	3,537.0		$	1,657.0		$	965.7		$	6,159.7


*Derivatives*	$	44.0		$	(135.0	)	$	—		$	(91.0	)	$	(104.0	)	$	195.0		$	—

Period GAP⁽⁴⁾	$	(122.0	)	$	(124.0	)	$	52.3		$	(193.7	)	$	1,255.3		$	136.9		$	1,198.5
Cumulative GAP		(122.0	)		(246.0	)		(193.7	)					1,061.6			1,198.5


⁽¹⁾		Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff.

⁽²⁾		Balances exclude mortgage loans held for sale.

⁽³⁾		Includes interest bearing savings and demand deposits without contractual maturities of $1.1 billion in the less than one year category and $1.2 billion in the over one year category as of March 31, 2006. The same amounts as of March 31, 2005 were $1.5 billion and $1.2 billion, respectively. These amounts reflect management’s assumptions regarding deposit repricing behavior and tenor.

⁽⁴⁾		GAP is rate sensitive assets less rate sensitive liabilities plus the effect of derivatives.

Rate sensitive liabilities repricing within one year exceeded rate sensitive assets repricing within one year by $32.9 million or 0.4% of total assets as of March 31, 2006, compared with $193.7 million or 2.5% of total assets as of March 31, 2005. These results incorporate the impact of off-balance sheet derivatives and reflect interest rate environments consistent with March 31, 2006 and March 31, 2005, respectively. Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing GAP analysis.

Citizens utilizes a net interest income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next twelve months. These simulations incorporate assumptions regarding prepayment speeds on various loan and investment assets, cash flows and maturities of financial instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and Citizens’ financial capital plans. These assumptions are inherently uncertain and subject to fluctuation and revision in a dynamic environment and as a

result the model cannot perfectly forecast net interest income nor exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of balance sheet component and interest rate changes, and differences in client behavior, market conditions and management strategies, among other factors.

Net interest income simulations were performed as of March 31, 2006 to evaluate the impact of market rate changes on net interest income over the following twelve months assuming expected levels of balance sheet growth over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to decline by 0.3% and 0.8%, respectively, from what it would be if rates were to remain at March 31, 2006 levels. An immediate 100 or 200 basis point parallel decline in market rates would be expected to reduce net interest income over the following 12 months by 0.5% and 1.5%, respectively, from what it would be if rates were to remain constant over the entire time period at March 31, 2006 levels. These measurements represent little change from prior year results. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets or liabilities, and the timing of changes in these variables. A further flattening or inversion of the yield curve would exacerbate the negative impact on net interest income. Scenarios different from those outlined above, whether different by only timing, level, or a combination of factors, could produce different results.

From time-to-time, derivative contracts are used to help manage or hedge exposure to interest rate risk and market value risk in conjunction with mortgage banking operations. These currently include interest rate swaps and forward mortgage loan sales. Interest rate swaps are contracts with a third party (the “counter-party”) to exchange interest payment streams based upon an assumed principal amount (the “notional amount”). The notional amount is not advanced from the counter-party. Swap contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts and payments based on market interest rates as of the balance sheet date. The fair values of the contracts change daily as market interest rates change.

Holding residential mortgage loans for sale and committing to fund residential mortgage loan applications at specific rates exposes Citizens to market value risk caused by changes in interest rates during the period from rate commitment issuance until sale. To minimize this risk, Citizens enters into mandatory forward commitments to sell residential mortgage loans at the time a rate commitment is issued. These mandatory forward commitments are considered derivatives under SFAS 133. The practice of hedging market value risk with mandatory forward commitments has been effective and has not generated any material gains or losses. As of March 31, 2006, Citizens had forward commitments to sell mortgage loans of $27.5 million. Further discussion of derivative instruments is included in Note 11 to the Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of Citizens’ 2005 Annual Report on Form 10-K, except as set forth in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk of this Form 10-Q.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As of the end of the period covered by this report, Citizens performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

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


					Total Number of		Maximum Number of
					Shares Purchased as		Shares That May Yet
					Part of Publicly		Be Purchased Under
	Total Number of		Average Price Paid		Announced Plans or		The Plans or Programs
Period	Shares Purchased		Per Share		Programs		(a)
January 2006		30,000		28.06		30,000		2,211,200
February 2006		105,000		27.31		105,000		2,106,200
March 2006		120,000		26.17		120,000		1,986,200


Total		255,000		26.86		255,000		1,986,200


(a)		In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. As of March 31, 2006, 1,986,200 shares remain to be purchased under this program. The purchase of shares is subject to limitations that may be imposed by applicable securities laws and regulations and the rules of the Nasdaq Stock Market. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and Citizens’ capital requirements. There can be no assurance that Citizens will repurchase the remaining shares authorized to be repurchased, or that any additional repurchases will be authorized by the Board of Directors.

Item 6. Exhibits

	31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

	31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

	32.1		Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934


CITIZENS BANKING CORPORATION

Date: May 5, 2006	By	/s/ Charles D. Christy
		Charles D. Christy
		Chief Financial Officer
		(principal financial officer and duly authorized officer)

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Part I – Financial Information (unaudited)

Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Changes in Shareholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3 - Quantitative and Qualitative Disclosures about Market Risk		35

Item 4 - Controls and Procedures		35

Part II – Other Information

Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 6 -Exhibits		36

Signatures		37

Exhibit Index		38
Certification of Chief Executive Officer to Rule 13a-14(a)
Certification of Chief Financial Officer to Rule 13a-14(a)
Certification Pursuant to 18 U.S.C. Section 1350


Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1		Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934