UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

or

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

For the transition period from                      to                     

Commission file Number 000-10535

CITIZENS 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 October 27, 2006
Common Stock, No Par Value	42,906,011 Shares

Citizens Banking Corporation
Index to Form 10-Q

	Page
Part I — Financial Information (unaudited)
Item 1 — Financial Statements (unaudited)
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3 — Quantitative and Qualitative Disclosures about Market Risk	40
Item 4 — Controls and Procedures	40
Part II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6 — Exhibits	41
Signatures	42
Exhibit Index	43
Retention Agreement, dated August 16, 2006
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

2

Consolidated Balance Sheets

Citizens Banking Corporation and Subsidiaries

	September 30,			December 31,			September 30,
(in thousands)	2006			2005			2005
	(unaudited)			(Note 1)			(unaudited)
Assets
Cash and due from banks	$	151,591		$	194,748		$	184,135
Interest-bearing deposits with banks		165			380			1,366
Investment Securities:
Available-for-sale (amortized cost $1,381,225, $1,501,819 and $1,662,299, respectively) U.S. Treasury and federal agency securities		1,002,893			1,122,306			1,283,574
State and municipal securities		367,721			378,235			381,914
Other securities		8,626			1,456			537
Held-to-maturity:
State and municipal securities (fair value of $104,397, $82,364 and $75,333, respectively)		102,667			82,431			74,943
FHLB and Federal Reserve stock		58,193			55,911			55,143
Total investment securities		1,540,100			1,640,339			1,796,111
Mortgage loans held for sale		11,689			16,252			29,847
Portfolio loans:
Commercial		1,788,922			1,688,079			1,623,857
Commercial real estate		1,468,952			1,402,128			1,377,082
Residential mortgage loans		545,171			539,824			531,953
Direct consumer		1,090,757			1,142,002			1,171,388
Indirect consumer		859,573			844,086			864,994
Total portfolio loans		5,753,375			5,616,119			5,569,274
Less: Allowance for loan losses		(113,076	)		(116,400	)		(118,626	)
Net portfolio loans		5,640,299			5,499,719			5,450,648
Premises and equipment		117,821			121,730			120,755
Goodwill		54,527			54,527			54,527
Other intangible assets		8,959			11,133			11,858
Bank owned life insurance		86,580			84,435			83,773
Other assets		136,839			128,620			118,330
Total assets	$	7,748,570		$	7,751,883		$	7,851,350
Liabilities
Noninterest-bearing deposits	$	893,320		$	969,074		$	939,560
Interest-bearing demand deposits		739,895			891,313			962,893
Savings deposits		1,467,622			1,437,024			1,445,838
Time deposits		2,524,509			2,176,428			1,878,180
Total deposits		5,625,346			5,473,839			5,226,471
Federal funds purchased and securities sold under agreements to repurchase		342,736			505,879			916,816
Other short-term borrowings		13,298			23,242			11,825
Other liabilities		73,752			86,351			83,553
Long-term debt		1,019,131			1,006,109			957,836
Total liabilities		7,074,263			7,095,420			7,196,501
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 — 42,904,289 at 9/30/06, 42,967,649 at 12/31/05, and 43,043,845 at 9/30/05		79,730			85,526			87,405
Retained earnings		596,040			570,483			563,597
Accumulated other comprehensive income		(1,463	)		454			3,847
Total shareholders’ equity		674,307			656,463			654,849
Total liabilities and shareholders’ equity	$	7,748,570		$	7,751,883		$	7,851,350

See notes to consolidated financial statements.

3

Consolidated Statements of Income (Unaudited)

Citizens Banking Corporation and Subsidiaries

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2006		2005		2006			2005
Interest Income
Interest and fees on loans	$	102,871	$	88,536	$	294,415		$	251,283
Interest and dividends on investment securities:
Taxable		12,574		14,845		39,248			44,512
Tax-exempt		5,278		5,109		15,854			15,453
Money market investments		21		16		34			43
Total interest income		120,744		108,506		349,551			311,291
Interest Expense
Deposits		40,004		21,859		106,301			59,052
Short-term borrowings		3,596		7,707		12,727			18,848
Long-term debt		11,499		9,298		31,413			26,737
Total interest expense		55,099		38,864		150,441			104,637
Net Interest Income		65,645		69,642		199,110			206,654
Provision for loan losses		1,190		4,000		5,329			8,396
Net interest income after provision for loan losses		64,455		65,642		193,781			198,258
Noninterest Income
Service charges on deposit accounts		9,674		9,343		28,070			26,452
Trust fees		4,633		4,541		14,647			13,456
Mortgage and other loan income		2,267		2,450		6,383			6,884
Brokerage and investment fees		1,885		1,974		5,103			5,857
ATM network user fees		988		1,194		2,993			3,291
Bankcard fees		1,213		976		3,399			2,777
Fair value change in CD swap derivatives		—		—		(207	)		—
Other		2,884		3,463		12,410			10,788
Total fees and other income		23,544		23,941		72,798			69,505
Investment securities gains		—		—		61			43
Total noninterest income		23,544		23,941		72,859			69,548
Noninterest Expense
Salaries and employee benefits		32,569		34,060		97,515			99,762
Occupancy		5,604		5,255		16,837			16,500
Professional services		3,486		4,517		11,267			12,442
Equipment		3,191		3,133		9,658			11,371
Data processing services		3,779		3,188		11,232			10,056
Advertising and public relations		1,211		1,717		4,179			5,283
Postage and delivery		1,559		1,512		4,650			4,622
Telephone		1,394		1,242		4,250			4,148
Other loan expenses		1,407		720		3,040			1,969
Stationery and supplies		653		726		2,011			2,247
Intangible asset amortization		725		725		2,174			2,174
Other		3,824		3,755		14,226			11,567
Total noninterest expense		59,402		60,550		181,039			182,141
Income Before Income Taxes		28,597		29,033		85,601			85,665
Income tax provision		7,616		8,041		22,957			24,028
Net Income	$	20,981	$	20,992	$	62,644		$	61,637
Net Income Per Common Share:
Basic	$	0.49	$	0.49	$	1.47		$	1.43
Diluted		0.49		0.48		1.46			1.41
Cash Dividends Declared Per Common Share		0.290		0.285		0.865			0.855
Average Common Shares Outstanding:
Basic		42,587		43,099		42,658			43,161
Diluted		42,709		43,453		42,795			43,507

See notes to consolidated financial statements.

4

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								61,637						61,637
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(15,231	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											1,084
Other comprehensive income total														(14,147	)
Total comprehensive income														47,490
Proceeds from stock options exercised and restricted stock activity		167			3,711									3,711
Tax benefit on non-qualified stock options					327									327
Net change in deferred compensation, net of tax					401									401
Recognition of stock-based compensation		111						(126	)					(126	)
Cash dividends declared on common shares — $0.855 per share								(37,042	)					(37,042	)
Shares acquired for retirement		(474	)		(14,214	)								(14,214	)
Balance — September 30, 2005		43,044		$	87,405		$	563,597		$	3,847		$	654,849
Balance at January 1, 2006		42,968		$	85,526		$	570,483		$	454		$	656,463
Comprehensive income, net of tax:
Net income								62,644						62,644
Other comprehensive income:
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification adjustment for net gains included in net income											(1,406	)
Net change in unrealized gain/(loss) on qualifying cash flow hedges											(511	)
Other comprehensive income total														(1,917	)
Total comprehensive income														60,727
Proceeds from stock options exercised and restricted stock activity		71			1,568									1,568
Recognition of stock-based compensation		200			1,584									1,584
Cash dividends declared on common shares — $0.865 per share								(37,087	)					(37,087	)
Shares acquired for retirement		(335	)		(8,948	)								(8,948	)
Balance — September 30, 2006		42,904		$	79,730		$	596,040		$	(1,463	)	$	674,307

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows

Citizens Banking Corporation and Subsidiaries

	Nine Months Ended
	September 30,
(in thousands)	2006			2005
Operating Activities:
Net income	$	62,644		$	61,637
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,329			8,396
Depreciation and amortization		8,897			10,863
Amortization of goodwill and other intangibles		2,174			2,174
Net amortization on investment securities		152			2,716
Investment securities gains		(61	)		(43	)
Loans originated for sale		(170,352	)		(253,129	)
Proceeds from sales of mortgage loans held for sale		177,662			255,136
Net gains from mortgage loan sales		(2,747	)		(3,816	)
Net loss on sale of other real estate		492			99
Stock-based compensation		1,584			275
Other		(22,088	)		3,350
Net cash provided by operating activities		63,686			87,658
Investing Activities:
Net decrease in money market investments		215			403
Securities available-for-sale:
Proceeds from sales		114			—
Proceeds from maturities and payments		200,647			294,877
Purchases		(82,468	)		(227,588	)
Securities held-to-maturity:
Purchases		(20,308	)		(20,946	)
Net increase in loans and leases		(145,909	)		(187,863	)
Proceeds from sales of other real estate		2,756			4,848
Net increase in properties and equipment		(4,988	)		(13,674	)
Net cash used by investing activities		(49,941	)		(149,943	)
Financing Activities:
Net decrease in demand and savings deposits		(196,574	)		(339,156	)
Net increase in time deposits		348,081			265,867
Net (decrease) increase in short-term borrowings		(173,087	)		203,867
Proceeds from issuance of long-term debt		225,453			225,000
Principal reductions in long-term debt		(216,308	)		(215,087	)
Cash dividends paid		(37,087	)		(37,042	)
Proceeds from stock options exercised and restricted stock activity		1,568			3,711
Shares acquired for retirement		(8,948	)		(14,214	)
Net cash (used) provided by financing activities		(56,902	)		92,946
Net (decrease) increase in cash and due from banks		(43,157	)		30,661
Cash and due from banks at beginning of period		194,748			153,474
Cash and due from banks at end of period	$	151,591		$	184,135

See notes to consolidated financial statements.

6

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 and Accounting Policies

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 and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending 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.

Statements of Financial Accounting Standards

Statement 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.

Note 2. New Accounting Pronouncements

Final FASB Statements

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

SFAS No. 157, “Fair Value Measurements.” In October 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about

7

fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Citizens does not anticipate the adoption of SFAS 157 will have a significant impact on its financial statements.

SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” In October 2006, the FASB issued SFAS 158, which represents the completion of the first phase in the FASB’s postretirement benefits accounting project. SFAS 158 does not change the amount of net periodic benefit cost included in net income or address the various measurement issued associated with postretirement benefit plan accounting. SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS 158 is effective for fiscal years ending after December 15, 2006. Citizens is in the process of evaluating the impact of SFAS 158 on its financial condition and results of operations.

Emerging Issues Task Force (EITF) Consensuses

EITF Issue 06-5 “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.” In September 2006, the EITF agreed that in determining the amount recognized as an asset pursuant to FASB Technical Bulletin No. 85-4, the policyholder should consider the cash surrender value as well as any additional amounts included in the contractual terms of the policy that will be paid upon surrender. When it is probable (as defined in SFAS No. 5 “Accounting for Contingencies"), contractual provisions would limit the amount that could be realized and such limitations should be considered when determining the amount that could be realized. Issue 06-5 is effective for fiscal years beginning after December 15, 2006. Citizens is currently using this methodology and does not anticipate any impact on its financial condition or results of operations.

SEC Staff Accounting Bulletins

Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” In September 2006, the SEC issued SAB 108 which addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 is effective for fiscal years ending after November 15, 2006. Citizens does not anticipate the adoption of SAB 108 will have a material impact on its financial condition or results of operations.

Note 3. Investment Securities

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

8

	September 30, 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		706,380		692,486		723		14,617		825,933		811,898		985		15,020
Other		310,942		310,407		1,209		1,744		309,681		310,408		2,046		1,319
State and municipal		355,315		367,721		12,667		261		364,853		378,235		14,391		1,009
Mortgage and asset-backed		186		186		—		—		280		280		1		1
Other		8,402		8,440		38		—		1,072		1,176		107		3
Total available for sale	$	1,381,225	$	1,379,240	$	14,637	$	16,622	$	1,501,819	$	1,501,997	$	17,530	$	17,352
Held to Maturity:
State and municipal Total held to maturity	$	102,667	$	104,397	$	1,832	$	102	$	82,431	$	82,364	$	590	$	657
Other Investment Securities:
FHLB and Fed Reserve stock
Total Other Securities	$	58,193	$	58,193	$	—	$	—	$	55,911	$	55,911	$	—	$	—

Securities with unrealized losses, segregated by length of impairment, as of September 30, 2006 and December 31, 2005 are displayed in the following tables.

As of September 30, 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		486,687		11,267		132,992		3,350		619,679		14,617
Other		243,695		1,299		25,175		445		268,870		1,744
State and municipal		3,333		24		15,270		237		18,603		261
Mortgage and asset-backed		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total available for sale		733,715		12,590		173,437		4,032		907,152		16,622
Held to Maturity:
State and municipal		5,255		25		8,929		77		14,184		102
Total held to maturity		5,255		25		8,929		77		14,184		102
Total	$	738,970	$	12,615	$	182,366	$	4,109	$	921,336	$	16,724

9

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.

10

Note 4. Allowance for Loan Losses and Impaired Loans

A summary of loan loss experience during the three and nine months ended September 30, 2006 and 2005 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2006		2005		2006		2005
Allowance for loan losses — beginning of period	$	114,560	$	119,967	$	116,400	$	122,184
Provision for loan losses		1,190		4,000		5,329		8,396
Charge-offs:
Commercial		597		1,912		2,372		7,097
Commercial real estate		585		1,965		1,807		2,843
Total commercial		1,182		3,877		4,179		9,940
Residential mortgage		252		182		755		633
Direct consumer		983		1,257		3,868		3,908
Indirect consumer		1,840		2,640		6,244		6,410
Charge-offs		4,257		7,956		15,046		20,891
Recoveries:
Commercial		543		1,334		2,719		4,613
Commercial real estate		50		232		614		1,166
Total commercial		593		1,566		3,333		5,779
Residential mortgage		22		32		125		32
Direct consumer		485		370		1,102		1,090
Indirect consumer		483		647		1,833		2,036
Recoveries		1,583		2,615		6,393		8,937
Net charge-offs		2,674		5,341		8,653		11,954
Allowance for loan losses — end of period	$	113,076	$	118,626	$	113,076	$	118,626

Nonperforming loans totaled $32.3 million at September 30, 2006, a decrease of $0.1 million or 0.4% from December 31, 2005 and a decrease of $3.4 million or 9.5% from September 30, 2005. Some of the Corporation’s nonperforming loans are considered to be impaired. SFAS 114, “Accounting by Creditors for Impairment of a Loan,” considers a loan to be impaired when it is probable that all the contractual principal and interest due under the loan may not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The Corporation maintains a valuation reserve for impaired loans, referred to as the specific allowance. Total loans considered impaired and their related reserve balances at September 30, 2006, December 31, 2005 and September 30, 2005 follow:

Impaired Loan Information

	Balances						Valuation Reserve
	September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
(in thousands)	2006		2005		2005		2006		2005		2005
Balances —
Impaired loans with valuation reserve	$	18,540	$	7,989	$	16,698	$	6,373	$	5,059	$	8,462
Impaired loans with no valuation reserve		465		908		1,893		—		—		—
Total impaired loans	$	19,005	$	8,897	$	18,591	$	6,373	$	5,059	$	8,462
Impaired loans on nonaccrual basis	$	4,099	$	4,728	$	6,188	$	1,746	$	2,747	$	3,179
Impaired loans on accrual basis		14,906		4,169		12,403		4,627		2,312		5,283
Total impaired loans	$	19,005	$	8,897	$	18,591	$	6,373	$	5,059	$	8,462

The average balance of impaired loans for the three months ended September 30, 2006 was $16.6 million and $18.7 million for the three months ended September 30, 2005. Interest income recognized on impaired loans during the third quarter of 2006 was $0.4 million compared with $0.2 million for the same period of 2005. Cash collected and applied to outstanding principal during the third quarters of 2006 and 2005 was immaterial.

11

Note 5. Long-term Debt

The components of long-term debt as of September 30, 2006, December 31, 2005 and September 30, 2005 are presented below.

	September 30,		December 31,		September 30,
(in thousands)	2006		2005		2005
Citizens (Parent only):
Subordinated debt:
Notes maturing February 2013	$	118,474	$	120,852	$	121,951
Deferrable interest debenture maturing June 2033		25,774		25,774		25,774
Subsidiaries:
Federal Home Loan Bank advances		874,430		859,483		810,111
Other borrowed funds		453		—		—
Total long-term debt	$	1,019,131	$	1,006,109	$	957,836

Note 6. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, for the three and nine month periods ended September 30, 2006 and 2005 are presented below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2006			2005			2006			2005
Balance at beginning of period	$	(16,542	)	$	13,032		$	454		$	17,994
Net unrealized gain (loss) on securities for the quarter, net of tax effect of $8,398 in 2006 and $(5,264) in 2005, and net unrealized loss on securities for the nine month period, net of tax effect of $(735) in 2006 and $(8,186) in 2005		15,596			(9,776	)		(1,367	)		(15,203	)
Less: Reclassification adjustment for net losses included in net income or the nine month period, net of tax effect of $(22) in 2006 and $(15) in 2005								(39	)		(28	)
Net change in unrealized (loss) gain on cash flow hedges for the quarter, net of tax effect of $(278) in 2006 and $318 in 2005, and net change in unrealized (loss) gain for the nine month period, net of tax effect of $(275) in 2006 and $584 in 2005.		(517	)		591			(511	)		1,084
Accumulated other comprehensive income, net of tax	$	(1,463	)	$	3,847		$	(1,463	)	$	3,847

12

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-based compensation, as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2006		2005		2006		2005
Numerator:
Basic and dilutive earnings per share — net income available to common shareholders	$	20,981	$	20,992	$	62,644	$	61,637
Denominator:
Basic earnings per share — weighted average shares		42,587		43,099		42,658		43,161
Effect of dilutive securities — potential conversion of employee stock options		122		354		137		346
Diluted earnings per share — adjusted weighted-average shares and assumed conversions		42,709		43,453		42,795		43,507
Basic earnings per share	$	0.49	$	0.49	$	1.47	$	1.43
Diluted earnings per share	$	0.49	$	0.48	$	1.46	$	1.41

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 September 30, 2006, Citizens had 3,819,116 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. For shares issued in 2005, restrictions on nonvested stock generally lapse on the third anniversary of the grant date. Beginning in 2006, restrictions on nonvested stock generally lapse in three annual installments beginning on the first anniversary of the grant date. Canceled and expired options become available for future grants. Although not included in the calculation of basic earnings per share, restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights.

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 and $0.2 million of additional stock-based compensation expense was recognized for the three and nine months ended September 30, 2006, respectively, with less than $0.01 per share impact to basic and 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.

13

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			Nine Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
(in thousands)	2006			2006			2005			2005
Stock Option Compensation	$	8		$	43		$	—		$	(126	)
Restricted Stock Compensation		763			1,541			278			401
Stock-based compensation expense before income taxes		771			1,584			278			275
Income tax benefit		(270	)		(554	)		(97	)		(96	)
Total stock-based compensation expense after income taxes	$	501		$	1,030		$	181		$	179

The 2005 stock option compensation includes an adjustment to more appropriately reflect the intrinsic value related to the early vesting of stock options.

Cash proceeds from the exercise of stock options were less than $0.1 million and $1.4 million for the three and nine months ended September 30, 2006, respectively, and $1.3 million and $3.7 million for the three and nine months ended September 30, 2005, respectively. New shares are issued when stock options are exercised. In accordance with SFAS 123R, Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows on the Consolidated Statement of Cash Flows.

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 and nine months ended September 30, 2005.

	Three Months			Nine Months
	Ended			Ended
(in thousands, except per share amounts)	September 30, 2005			September 30, 2005
Net income, as reported	$	20,992		$	61,637
Less pro forma expense related to options granted		(304	)		(3,019	)
Pro forma Net Income	$	20,688		$	58,618
Net income per share
Basic — as reported	$	0.49		$	1.43
Basic — pro forma		0.48			1.36
Diluted — as reported		0.48			1.41
Diluted — pro forma		0.47			1.34

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three and nine months ended September 30, 2006 and September 30, 2005, respectively. There was a single grant for 500 nonqualified stock options during the three and nine month periods ended September 30, 2006.

14

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Weighted Average Assumptions	2006			2005			2006			2005
Dividend yield		4.0	%		3.5	%		4.0	%		3.5	%
Expected volatility		15.1	%		26.1	%		15.1	%		26.9	%
Risk-free interest rate		4.72	%		3.68	%		4.72	%		3.77	%
Expected lives	3 yrs			2 yrs			3 yrs			2 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 rates used ranged from 3.25% to 4.13%, during 2005. The expected life computation is based on historical exercise patterns.

Stock option activity for the nine months ended September 30, 2006, is as follows:

	Options
				Weighted
				Average		Weighted Average	Aggregate
				Exercise		Remaining	Intrinsic
	Shares			Price		Contractual Term	Value
Outstanding at December 31, 2005		3,917,891		$	27.91
Granted		500			25.98
Exercised		(71,332	)		19.72
Forfeitures or Expirations		(62,669	)		30.11
Outstanding at September 30, 2006		3,784,390		$	28.03	5.6 yrs	$	4,269,209
Exercisable		3,773,750		$	28.02	5.6 yrs	$	4,266,180

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between Citizens’ average closing stock price as of the date of this report and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised those options on September 30, 2006 if the average closing stock price exceeded the exercise price. This amount fluctuates with changes in the fair market value of Citizens’ stock. The total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was less than $0.1 million and $0.5 million, respectively. No options vested during the three month period ended September 30, 2006. The fair value of options vested for the nine month period ended September 30, 2006 was less than $0.1 million.

As of September 30, 2006, $6.7 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 2.4 years.

The following table summarizes restricted stock activity for the nine months ended September 30, 2006.

				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value
Outstanding restricted stock at December 31, 2005		129,180		$	27.19
Granted		200,703			24.21
Vested		(5,987	)		31.49
Forfeited		(827	)		29.02
Restricted stock at September 30, 2006		323,069		$	25.95

15

Included in the restricted shares granted during the nine-months ended September 30, 2006 were the annual awards to directors and certain officers totaling 180,122 shares, which were awarded on June 28, 2006. The expense related to this grant was $0.4 million for both the three and nine month periods ended September 30, 2006. The total fair value of shares vested during the nine months ended September 30, 2006 was $0.2 million.

Note 9. Pension Benefit Cost

The components of pension expense for the three and nine months ended September 30, 2006 and 2005 are presented below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2006			2005			2006			2005
Defined Benefit Pension Plans
Service cost	$	979		$	1,322		$	3,450		$	3,733
Interest cost		1,090			1,317			3,888			3,928
Expected return on plan assets		(1,890	)		(1,757	)		(5,669	)		(5,271	)
Amortization of unrecognized:
Net transition asset		—			(2	)		—			(4	)
Prior service cost		47			49			142			148
Net actuarial loss		229			263			825			864
Net pension cost	$	455		$	1,192		$	2,636		$	3,398

Citizens expects to contribute approximately $0.5 million to the nonqualified supplemental benefit plans during 2006. As of September 30, 2006, $0.4 million of contributions have been made. Citizens anticipates that an additional $0.1 million of contributions will be made during the fourth quarter 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 and nine months ended September 30, 2006 and 2005 is provided below. There are no significant intersegment revenues.

16

Line of Business Information

	Commercial			Consumer		Wealth
(in thousands)	Banking			Banking		Mgmt			Other			Total
Earnings Summary — Three Months Ended September 30, 2006
Net interest income (taxable equivalent)	$	30,978		$	35,617	$	248		$	2,215		$	69,058
Provision for loan losses		(2,574	)		3,764		—			—			1,190
Net interest income after provision		33,552			31,853		248			2,215			67,868
Noninterest income		3,523			12,056		6,653			1,312			23,544
Noninterest expense		18,347			30,238		5,752			5,065			59,402
Income before income taxes		18,728			13,671		1,149			(1,538	)		32,010
Income tax expense (taxable equivalent)		6,593			4,849		408			(821	)		11,029
Net income	$	12,135		$	8,822	$	741		$	(717	)	$	20,981
Average assets (in millions)	$	3,113		$	2,612	$	28		$	1,971		$	7,724
Earnings Summary — Three Months Ended September 30, 2005 (1)
Net interest income (taxable equivalent)	$	31,622		$	38,041	$	240		$	3,022		$	72,925
Provision for loan losses		(177	)		4,180		(3	)		—			4,000
Net interest income after provision		31,799			33,861		243			3,022			68,925
Noninterest income		3,360			12,885		6,176			1,520			23,941
Noninterest expense		18,752			33,490		5,606			2,702			60,550
Income before income taxes		16,407			13,256		813			1,840			32,316
Income tax expense (taxable equivalent)		5,825			4,639		287			573			11,324
Net income	$	10,582		$	8,617	$	526		$	1,267		$	20,992
Average assets (in millions)	$	2,933		$	2,645	$	25		$	2,218		$	7,821

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

Line of Business Information

	Commercial			Consumer		Wealth
(in thousands)	Banking			Banking		Mgmt			Other			Total
Earnings Summary — Nine Months Ended September 30, 2006
Net interest income (taxable equivalent)	$	92,330		$	106,786	$	887		$	9,320		$	209,323
Provision for loan losses		(2,228	)		7,557		—			—			5,329
Net interest income after provision		94,558			99,229		887			9,320			203,994
Noninterest income		10,518			38,071		20,255			4,015			72,859
Noninterest expense		54,033			93,756		17,337			15,913			181,039
Income before income taxes		51,043			43,544		3,805			(2,578	)		95,814
Income tax expense (taxable equivalent)		17,976			15,260		1,348			(1,414	)		33,170
Net income	$	33,067		$	28,284	$	2,457		$	(1,164	)	$	62,644
Average assets (in millions)	$	3,055		$	2,596	$	29		$	2,003		$	7,683
Earnings Summary — Nine Months Ended September 30, 2005 (1)
Net interest income (taxable equivalent)	$	90,240		$	113,177	$	672		$	12,525		$	216,614
Provision for loan losses		3,771			4,633		(8	)		—			8,396
Net interest income after provision		86,469			108,544		680			12,525			208,218
Noninterest income		9,470			36,649		18,939			4,490			69,548
Noninterest expense		53,948			100,054		17,197			10,942			182,141
Income before income taxes		41,991			45,139		2,422			6,073			95,625
Income tax expense (taxable equivalent)		14,818			15,799		859			2,512			33,988
Net income	$	27,173		$	29,340	$	1,563		$	3,561		$	61,637
Average assets (in millions)	$	2,901		$	2,601	$	24		$	2,260		$	7,786

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

17

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 noninterest income section of the income statement.

Citizens may use derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. Citizens uses interest rate contracts such as interest rate swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets or liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. As of September 30, 2006, Citizens has transitioned its mortgage secondary marketing function to PHH mortgage. The market value risk of committing to fund residential mortgage loan applications and carrying loans held for sale has been fully transferred to PHH Mortgage. The following tables summarize the derivative financial instruments held or issued by Citizens.

Derivative Financial Instruments:

	September 30, 2006					December 31, 2005
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Received fixed swaps	$	260,000	$	(294	)	$	530,000	$	(7,429	)
Pay fixed swaps		104,000		1,699			124,000		2,486
Customer initiated swaps and corresponding offsets		353,708		—			233,104		—
Interest rate lock commitments		—		—			17,897		37
Forward mortgage loan contracts		—		—			22,000		(66	)
Total	$	717,708	$	1,405		$	927,001	$	(4,972	)

Derivative Classifications and Hedging Relationships:

	September 30, 2006					December 31, 2005
	Notional		Fair			Notional		Fair
(dollars in thousands)	Amount		Value			Amount		Value
Derivatives Designated as Cash Flow Hedges:
Hedging repurchase agreements	$	104,000	$	1,699		$	124,000	$	2,486
Derivatives Designated as Fair Value Hedges:
Hedging time deposits		160,000		48			25,000		(10	)
Hedging long-term debt		100,000		(342	)		225,000		(3,815	)
Derivatives Not Designated as Hedges:
Receive fixed swaps		—		—			280,000		(3,604	)
Customer initiated swaps		353,708		—			233,104		—
Total	$	717,708	$	1,405		$	887,104	$	(4,943	)

18

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:

	September 30,		December 31,
(in thousands)	2006		2005
Loan commitments and letters of credit:
Commitments to extend credit	$	1,675,777	$	1,762,259
Financial standby letters of credit		42,629		44,739
Performance standby letters of credit		14,798		11,557
Commercial letters of credit		209,799		223,269
Total loan commitments and letters of credit	$	1,943,003	$	2,041,824

At September 30, 2006 and again on December 31, 2005, a liability of $3.0 million was recorded for possible losses on commitments to extend credit. As of September 30, 2006 and December 31, 2005, in accordance with FIN 45, a liability of $0.2 million and $0.2 million, respectively, was recorded representing the value of the guarantee obligations associated with certain letters of credit. The guarantee obligation liability will be amortized into income over the life of the commitments. These balances are included in other liabilities on the Consolidated Balance Sheets.

Note 13. Pending Transaction

On June 27, 2006, Citizens and Republic Bancorp (NASDAQ symbol RBNC) announced that they had agreed to merge Republic into Citizens to create the new Citizens Republic Bancorp. On October 24, 2006, Citizens filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the “SEC”) that included a definitive proxy statement/prospectus. The definitive proxy statement/prospectus was also sent to shareholders for their review. Citizens and Republic will each hold a special shareholders’ meeting on November 30, 2006 to approve the issuance of Citizens stock and to approve and adopt the merger agreement, respectively. The merger is still expected to be completed in the fourth quarter of 2006, subject to regulatory and shareholder approvals and other customary closing conditions.

Note 14. Subsequent Events

On October 2, 2006, the Compensation Committee of the Board of Directors of Citizens Banking Corporation approved various changes to Citizens’ employee benefits programs. Effective December 31, 2006, Citizens’ current defined benefit pension plans (the “DB Plans”) will be “frozen,” preserving prior earned benefits and replacing the future accrual of benefits with additional benefits under the defined contribution plan (the “DC Plan”). All employees eligible to participate in the Citizens Banking Corporation Amended and Restated Cash Balance Pension Plan for Employees and the Citizens Banking Corporation Cash Balance Pension Plan have been impacted.

On October 3, 2006, Citizens Funding Trust I (the “Trust”) completed an offering of $150.0 million aggregate liquidation amount of enhanced trust preferred securities. The enhanced trust preferred securities are listed on the New York Stock Exchange (NYSE symbol CTZ-PA). Distributions on the securities, which represent undivided beneficial interests in the assets of the Trust, will accrue from the original issue date and will be payable quarterly in arrears at an annual rate of 7.50%, beginning December 15, 2006. The proceeds from the offering will be used to finance the cash portion of the consideration to be paid in Citizens’ merger with Republic and for general corporate purposes.

19

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

Selected Quarterly Information
Citizens Banking Corporation and Subsidiaries

	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2006			2006			2006			2005			2005
Summary of Operations (thousands)
Interest income	$	120,744		$	116,416		$	112,391		$	111,958		$	108,506
Net interest income		65,645			65,990			67,475			69,095			69,642
Provision for loan losses (1)		1,190			1,139			3,000			(7,287	)		4,000
Total fees and other income (2)		23,544			23,691			25,563			19,930			23,941
Investment securities gains (losses) (3)		—			54			7			(8,970	)		—
Noninterest expense (4)		59,402			60,065			61,572			60,901			60,550
Income tax provision		7,616			7,624			7,717			7,553			8,041
Net income		20,981			20,907			20,756			18,888			20,992
Taxable equivalent adjustment		3,413			3,383			3,416			3,432			3,284
Cash dividends		12,435			12,393			12,259			12,269			12,412
Per Common Share Data
Basic net income	$	0.49		$	0.49		$	0.49		$	0.44		$	0.49
Diluted net income		0.49			0.49			0.48			0.44			0.48
Cash dividends		0.290			0.290			0.285			0.285			0.285
Market value (end of period)		26.26			24.41			26.85			27.75			28.40
Book value (end of period)		15.72			15.15			15.23			15.28			15.21
At Period End (millions)
Assets	$	7,749		$	7,814		$	7,663		$	7,752		$	7,851
Portfolio loans		5,753			5,728			5,592			5,616			5,569
Deposits		5,625			5,685			5,524			5,474			5,226
Shareholders’ equity		674			650			652			656			655
Average for the Quarter (millions)
Assets	$	7,724		$	7,671		$	7,654		$	7,754		$	7,821
Portfolio loans		5,694			5,610			5,561			5,575			5,531
Deposits		5,680			5,560			5,513			5,305			5,239
Shareholders’ equity		659			647			655			654			655
Ratios (annualized)
Return on average assets		1.08	%		1.09	%		1.10	%		0.97	%		1.06	%
Return on average shareholders’ equity		12.63			12.96			12.86			11.46			12.71
Net interest margin (FTE) (5)		3.78			3.84			3.97			3.95			3.93
Efficiency ratio (6)		64.15			64.54			63.84			65.87			62.51
Net loans charged off to average portfolio loans (1)		0.19			0.14			0.29			(0.36	)		0.38
Allowance for loan losses to portfolio loans		1.97			2.00			2.06			2.07			2.13
Nonperforming assets to portfolio loans plus ORAA (end of period)		0.69			0.61			0.65			0.71			0.76
Nonperforming assets to total assets (end of period)		0.52			0.44			0.48			0.51			0.54
Average equity to average assets		8.53			8.44			8.55			8.43			8.38
Leverage ratio		8.29			8.21			8.14			7.98			7.86
Tier 1 capital ratio		10.13			9.96			10.09			9.94			9.91
Total capital ratio		13.37			13.20			13.39			13.22			13.20

(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).

20

Introduction

The following commentary presents management’s discussion and analysis of Citizens Banking Corporation’s financial condition and results of operations for the three and nine month periods ended September 30, 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.

21

• 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, including those associated with the pending merger with Republic Bancorp, 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 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 since the most recent fiscal year end.

Citizens Republic Bancorp

On June 27, 2006, Citizens and Republic Bancorp (NASDAQ symbol RBNC) (“Republic”) announced that they had agreed to merge Republic into Citizens to create the new Citizens Republic Bancorp. On October 24, 2006, Citizens filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the “SEC”) that included a definitive proxy statement/prospectus. The definitive proxy statement/prospectus was also sent to shareholders for their review. Citizens and Republic will each hold a special shareholders’ meeting on November 30, 2006 to approve the issuance of Citizens stock and to approve and adopt the merger agreement, respectively. The merger is still expected to be completed in the fourth quarter of 2006, subject to regulatory and shareholder approvals and other customary closing conditions.

22

Subsequent Events

On October 2, 2006, the Compensation Committee of the Board of Directors of Citizens Banking Corporation approved various changes to Citizens’ employee benefits programs. Effective December 31, 2006, Citizens’ current defined benefit pension plans (the “DB Plans”) will be “frozen,” preserving prior earned benefits and replacing the future accrual of benefits with additional benefits under the defined contribution plan (the “DC Plan”). All employees eligible to participate in the Citizens Banking Corporation Amended and Restated Cash Balance Pension Plan for Employees and the Citizens Banking Corporation Cash Balance Pension Plan have been impacted. By freezing the DB Plans, Citizens estimates it will record a net curtailment loss in the range of $0.8 million to $1.5 million in the fourth quarter of 2006. Citizens estimates total pension expense (defined benefit and defined contribution) for 2007 will be lower than in 2006.

On October 3, 2006, Citizens Funding Trust I (the “Trust”) completed an offering of $150.0 million aggregate liquidation amount of enhanced trust preferred securities. The enhanced trust preferred securities are listed on the New York Stock Exchange (NYSE symbol CTZ-PA). Distributions on the securities, which represent undivided beneficial interests in the assets of the Trust, will accrue from the original issue date and will be payable quarterly in arrears at an annual rate of 7.50%, beginning December 15, 2006. The proceeds from the offering will be used to finance the cash portion of the consideration to be paid in Citizens’ merger with Republic and for general corporate purposes.

Results of Operations

Summary
Citizens earned net income of $21.0 million for the three months ended September 30, 2006. This is consistent with the third quarter of 2005 net income of $21.0 million. Diluted net income per share was $0.49, an increase of 2.1% over the same quarter of last year. Annualized returns on average assets and average equity during the third quarter of 2006 were 1.08% and 12.63%, respectively, compared with 1.06% and 12.71% for the third quarter of 2005.

Net income for the first nine months of 2006 totaled $62.6 million or $1.46 per diluted share, which represents an increase in net income of $1.0 million or 1.6% and $0.05 or 3.5% per diluted share over the same period of 2005.

Results for the third quarter of 2006 reflect another quarter of consistent earnings in a challenging banking environment. Improvements in the provision for loan losses, noninterest expense, and income tax provision over the third quarter of 2005 were offset by lower net interest income and noninterest income. The effects of a flattened yield curve are expected to place continued pressure on net interest margin, which Citizens will try to mitigate by continuing to grow earning assets.

Citizens’ total assets at September 30, 2006 were $7.7 billion, essentially unchanged from December 31, 2005 and a decrease of $102.8 million or 1.3% from September 30, 2005. Total portfolio loans increased $137.3 million or 2.4% over December 31, 2005 and $184.1 million or 3.3% over September 30, 2005 due to growth in the commercial and commercial real estate portfolios, partially offset by a reduction in the direct consumer loan portfolio. The increases in total portfolio loans were partially offset by declines in the investment portfolio as a result of using portfolio cash flow to reduce short-term borrowings and declines in the direct consumer loan portfolio due to weak consumer demand in most of Citizens’ markets.

Total deposits at September 30, 2006 increased $151.5 million or 2.8% from December 31, 2005 to $5.6 billion and increased $398.9 million or 7.6% from September 30, 2005. Core deposits, which exclude all time deposits, totaled $3.1 billion at September 30, 2006, a decrease of $196.6 million or 6.0% from December 31, 2005 and a decrease of $247.5 million or 7.4% from September 30, 2005. The decreases in core deposits were largely the result of clients migrating their funds from lower cost savings and transaction accounts into other savings and time deposits with higher yields. Time deposits totaled $2.5 billion at September 30, 2006, an increase of $348.1 million or 16.0% compared with December 31, 2005 and an increase of $646.3 million or 34.4% over September 30, 2005. The increases were largely the result of clients migrating their funds from lower-cost deposits and some new client growth. Additionally, the increase in time deposits from September 30, 2005 was partially due to an additional $86.6 million in brokered certificates of deposit, primarily added in the fourth quarter of 2005, 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 and nine months ended September 30, 2006 and 2005 is presented below.

23

Average Balances/Net Interest Income/Average Rates

	2006								2005
Three Months Ended September 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest (1)		Rate (2)			Balance			Interest (1)		Rate (2)
Earning Assets
Money market investments	$	2,048		$	21		4.08		$	2,691		$	16		2.30
Investment securities (3):
Taxable		1,115,959			12,574		4.51			1,381,469			14,845		4.30
Tax-exempt		449,364			5,278		7.23			428,534			5,109		7.34
Mortgage loans held for sale		16,743			253		6.04			40,836			529		5.18
Portfolio Loans (4):
Commercial		1,740,592			32,523		7.54			1,622,724			25,491		6.36
Commercial real estate		1,458,104			26,674		7.26			1,352,733			21,910		6.43
Residential mortgage loans		545,907			7,852		5.75			520,861			7,218		5.54
Direct consumer		1,093,724			21,213		7.69			1,178,476			19,194		6.46
Indirect consumer		855,229			14,356		6.66			856,207			14,194		6.58
Total portfolio loans		5,693,556			102,618		7.20			5,531,001			88,007		6.36
Total earning assets (3)		7,277,670			120,744		6.78			7,384,531			108,506		6.02
Nonearning Assets
Cash and due from banks		165,403								158,631
Bank premises and equipment		119,246								121,142
Investment security fair value adjustment		(12,203	)							8,321
Other nonearning assets		288,493								267,861
Allowance for loan losses		(114,302	)							(119,695	)
Total assets	$	7,724,307							$	7,820,791
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	753,412		$	1,219		0.64		$	1,016,366		$	1,705		0.67
Savings deposits		1,511,956			10,724		2.81			1,471,878			5,742		1.55
Time deposits		2,489,653			28,061		4.47			1,810,928			14,412		3.16
Short-term borrowings		321,140			3,596		4.44			900,520			7,707		3.40
Long-term debt		980,584			11,499		4.66			942,624			9,298		3.92
Total interest-bearing liabilities		6,056,745			55,099		3.61			6,142,316			38,864		2.51
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		925,004								939,668
Other liabilities		83,749								83,671
Shareholders’ equity		658,809								655,136
Total liabilities and shareholders’ equity	$	7,724,307							$	7,820,791
Net Interest Income				$	65,645							$	69,642
Interest Spread (5)							3.17	%							3.51	%
Contribution of noninterest bearing sources of funds							0.61								0.42
Net Interest Margin (5)(6)							3.78	%							3.93	%

(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 $3.3 million for the three months ended September 30, 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.

24

Average Balances/Net Interest Income/Average Rates

	2006								2005
Nine Months Ended September 30,	Average					Average			Average					Average
(dollars in thousands)	Balance			Interest (1)		Rate (2)			Balance			Interest (1)		Rate (2)
Earning Assets
Money market investments	$	1,703		$	34		2.69		$	2,570		$	43		2.22
Investment securities (3):
Taxable		1,151,859			39,248		4.54			1,417,647			44,512		4.19
Tax-exempt		447,842			15,854		7.26			423,564			15,453		7.48
Mortgage loans held for sale		18,191			785		5.75			36,920			1,497		5.41
Portfolio Loans (4):
Commercial		1,697,656			90,834		7.28			1,626,133			70,942		5.96
Commercial real estate		1,433,563			75,996		7.09			1,321,703			61,923		6.27
Residential mortgage loans		544,065			23,354		5.72			506,154			21,068		5.55
Direct consumer		1,106,930			61,825		7.47			1,176,047			54,686		6.22
Indirect consumer		839,972			41,621		6.62			835,741			41,167		6.59
Total portfolio loans		5,622,186			293,630		7.02			5,465,778			249,786		6.15
Total earning assets (3)		7,241,781			349,551		6.64			7,346,479			311,291		5.84
Nonearning Assets
Cash and due from banks		162,992								156,556
Bank premises and equipment		120,407								121,303
Investment security fair value adjustment		(11,377	)							14,168
Other nonearning assets		284,734								267,881
Allowance for loan losses		(115,235	)							(120,502	)
Total assets	$	7,683,302							$	7,785,885
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand	$	799,570		$	3,854		0.64		$	1,079,770		$	5,506		0.68
Savings deposits		1,477,773			28,154		2.55			1,536,209			15,643		1.36
Time deposits		2,386,736			74,293		4.16			1,739,284			37,903		2.91
Short-term borrowings		399,412			12,727		4.26			836,980			18,848		3.01
Long-term debt		960,107			31,413		4.37			932,035			26,737		3.83
Total interest-bearing liabilities		6,023,598			150,441		3.34			6,124,278			104,637		2.28
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing demand		920,992								924,737
Other liabilities		85,182								84,084
Shareholders’ equity		653,530								652,786
Total liabilities and shareholders’ equity	$	7,683,302							$	7,785,885
Net Interest Income				$	199,110							$	206,654
Interest Spread (5)							3.30	%							3.56	%
Contribution of noninterest bearing sources of funds							0.56								0.38
Net Interest Margin (5)(6)							3.86	%							3.94	%

(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 $10.2 million and $10.0 million for the nine months ended September 30, 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.

25

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

Net interest income was $65.6 million in the third quarter of 2006, down from $69.6 million in the same quarter of 2005. The decrease in net interest income resulted from a decline in the net interest margin and a decrease in average earning assets of $106.9 million. The decline in average earning assets resulted from a $244.7 million reduction in the investment portfolio, a $24.1 million reduction in mortgage loans held for sale, and a $85.7 million decrease in the consumer loan portfolios, partially offset by growth of $223.2 million in the commercial and commercial real estate loan portfolios and growth of $25.0 million in the residential mortgage portfolio. For the nine months ended September 30, 2006, net interest income was $199.1 million, compared with $206.7 million for the same period of 2005. The decrease resulted from a lower net interest margin and a decrease in average earning assets of $104.7 million. The decline in average earning assets resulted from a $241.5 million reduction in the investment portfolio, a $18.7 million reduction in mortgage loans held for sale, and a $64.9 million decrease in the consumer loan portfolio, partially offset by growth of $183.4 million in the commercial and commercial real estate loan portfolios and growth of $37.9 million in the residential mortgage portfolio. The decreases in investment securities balances were the result of the fourth quarter of 2005 portfolio restructuring and maturing balances not being fully reinvested.

Net interest margin was 3.78% for the third quarter of 2006 compared with 3.93% for the third quarter of 2005. For the nine months ended September 30, 2006, net interest margin declined to 3.86% compared with 3.94% for the same period of 2005. The decreases were due to funds migrating within the deposit portfolio from lower cost savings and transaction accounts to higher cost savings and time deposits, continued pricing pressure on loans, and the continued effects of the interest rate environment, partially offset by the restructuring of the investment portfolio in the fourth quarter of 2005 and a shift in asset mix from investment securities to higher yielding commercial 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.

26

Analysis of Changes in Interest Income and Interest Expense

	Three Months Ended September 30,									Nine Months Ended September 30,
				Increase (Decrease)									Increase (Decrease)
2006 compared with 2005	Net			Due to Change in						Net			Due to Change in
(in thousands)	Change(1)			Rate (2)			Volume(2)			Change(1)			Rate (2)			Volume(2)
Interest Income:
Money market investments		5			10			(5	)		(9	)		7			(16	)
Investment securities:
Taxable		(2,271	)		693			(2,964	)		(5,264	)		3,570			(8,834	)
Tax-exempt		169			(77	)		246			401			(467	)		868
Mortgage loans held for sale		(276	)		77			(353	)		(712	)		91			(803	)
Loans:
Commercial		7,032			5,083			1,949			19,892			16,657			3,235
Commercial real estate		4,764			2,974			1,790			14,073			8,562			5,511
Residential mortgage loans		634			280			354			2,286			673			1,613
Direct consumer		2,019			3,471			(1,452	)		7,139			10,499			(3,360	)
Indirect consumer		162			178			(16	)		454			245			209
Total portfolio loans		14,611			11,986			2,625			43,844			36,636			7,208
Total		12,238			12,689			(451	)		38,260			39,837			(1,577	)
Interest Expense:
Deposits:
Interest-bearing demand		(486	)		(59	)		(427	)		(1,652	)		(288	)		(1,364	)
Savings		4,982			4,822			160			12,511			13,128			(617	)
Time		13,649			7,182			6,467			36,390			19,470			16,920
Short-term borrowings		(4,111	)		1,881			(5,992	)		(6,121	)		6,012			(12,133	)
Long-term debt		2,201			1,814			387			4,676			3,851			825
Total		16,235			15,640			595			45,804			42,173			3,631
Net Interest Income	$	(3,997	)	$	(2,951	)	$	(1,046	)	$	(7,544	)	$	(2,336	)	$	(5,208	)

(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 $4.0 million for the three months ended September 30, 2006 compared with the same period of 2005 reflects rate and volume variances which were unfavorable in the aggregate.

Unfavorable volume variances in the taxable investments, mortgage loans held for sale and consumer loan portfolios were partially offset by favorable volume variances in the commercial, commercial real estate, residential mortgage, and tax-exempt investment portfolios. Unfavorable volume variances in the taxable investment portfolio were the result of the restructuring of the portfolio in the fourth quarter of 2005 and maturing balances not being fully reinvested. Unfavorable volume variances in time deposits, savings, and long-term debt were partially offset by favorable volume variances in interest-bearing demand and short-term borrowings. The unfavorable variances were the result of customers migrating funds from lower yielding deposit products into higher yielding savings and time deposits in response to increases in short and intermediate 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.

Unfavorable rate variances on liabilities were partially offset by favorable rate variances on assets. The unfavorable rate variances for tax-exempt investment securities was 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 the fourth quarter of 2005 portfolio restructuring. Favorable rate variances on the remaining asset categories and unfavorable rate variances on liabilities were the result of increases in short and intermediate term market interest rates.

The decrease in net interest income of $7.5 million for the nine months ended September 30, 2006 reflects rate and volume variances which were unfavorable in the aggregate.

27

Unfavorable volume variances in the taxable investments, mortgage loans held for sale and direct consumer loan portfolios were partially offset by favorable volume variances in the commercial, commercial real estate, residential mortgage, indirect consumer, and tax-exempt investment portfolios. Unfavorable volume variances in the taxable investment portfolio were the result of the restructuring of the portfolio in the fourth quarter of 2005 and maturing balances not being fully reinvested. Unfavorable volume variances in time deposits, and long-term debt were partially offset by favorable volume variances in interest-bearing demand, savings, and short-term borrowings. The unfavorable variances were the result of customers migrating funds from lower yielding deposit products into higher yielding time deposits in response to increases in short and intermediate 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.

Unfavorable rate variances on liabilities were partially offset by favorable rate variances on assets. The unfavorable rate variances for tax-exempt investment securities was 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 the restructuring of the portfolio during the fourth quarter of 2005. Favorable rate variances on the remaining asset categories and unfavorable rate variances on liabilities were the result of increases in short and intermediate term market interest rates.

Excluding the interest expense related to the $150.0 million of enhanced trust preferred securities issued on October 3, 2006, Citizens anticipates net interest income for the fourth quarter of 2006 will be slightly lower than the third quarter of 2006 due to anticipated margin compression driven by the continued migration of funds by customers from lower yielding deposit products into higher yielding deposit products.

Noninterest Income

Noninterest income for the third quarter of 2006 was $23.5 million, a decrease of $0.4 million or 1.7% from the third quarter of 2005. The decrease from the third quarter of 2005 was primarily the result of decreases in mortgage and other loan income, ATM network user fees, and other income, partially offset by increases in service charges on deposit accounts and bankcard fees. For the first nine months of 2006, noninterest income totaled $72.9 million, an increase of $3.3 million or 4.8% over the same period of 2005. The increase was primarily the result of higher service charges on deposit accounts, trust fees, bankcard fees and fully recognizing a deferred gain of $2.9 million on the 2004 sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006, partially offset by decreases in mortgage and other loan income, brokerage and investment fees, and ATM network user fees.

Noninterest Income

	Three Months Ended										Nine Months Ended
	September 30,				Change in 2006						September 30,					Change in 2006
(dollars in thousands)	2006		2005		Amount			Percent			2006			2005		Amount			Percent
Service charges on deposit accounts	$	9,674	$	9,343	$	331			3.5	%	$	28,070		$	26,452	$	1,618			6.1	%
Trust fees		4,633		4,541		92			2.0			14,647			13,456		1,191			8.9
Mortgage and other loan income		2,267		2,450		(183	)		(7.5	)		6,383			6,884		(501	)		(7.3	)
Brokerage and investment fees		1,885		1,974		(89	)		(4.6	)		5,103			5,857		(754	)		(12.9	)
ATM network user fees		988		1,194		(206	)		(17.3	)		2,993			3,291		(298	)		(9.0	)
Bankcard fees		1,213		976		237			24.5			3,399			2,777		622			22.4
Investment securities gains		—		—		—			—			61			43		18			42.8
Fair value change in CD swap derivatives		—		—		—			—			(207	)		—		(207	)		N/M
Other		2,884		3,463		(579	)		(16.7	)		12,410			10,788		1,622			15.0
Total noninterest income	$	23,544	$	23,941	$	(397	)		(1.7	)	$	72,859		$	69,548	$	3,311			4.8

N/M — Not Meaningful

The increases in service charges on deposit accounts were the result of revenue enhancement initiatives implemented in the first quarter of 2006.

The increases in trust fees were 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 September 30, 2006 were essentially unchanged from September 30, 2005.

The decreases in mortgage and other loan income reflect the impact of an unfavorable rate environment since the first quarter of 2005.

28

The decreases in brokerage and investment fees were 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 nine months of 2006 as the financial consultants adjusted their sales process to create new opportunities.

For the third 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), totaled $5.1 million, a decrease of $0.5 million or 9.7% from the third quarter of 2005. The decrease was primarily the result of lower ATM network user fees, lower title insurance fees as a result of lower mortgage origination volume and closing Citizens’ title company in conjunction with the PHH Mortgage alliance, and $0.4 million received in the third quarter of 2005 related to the Holding Company’s venture capital investment in a limited partnership. For the first nine months of 2006, all other noninterest income categories totaled $18.7 million, an increase of $1.8 million or 10.4% over the same period of 2005. The increase was primarily the result of the aforementioned $2.9 million gain, partially offset by the effects of three items received in 2005: a performance-related penalty received from a third party vendor, a preference payment on Citizens’ membership interest in the PULSE ATM network, and income recognized in conjunction with the aforementioned venture capital investment by the Holding Company.

Citizens anticipates total noninterest income for the fourth quarter of 2006 will be consistent with or slightly higher than the third quarter of 2006 due to anticipated increases in trust income and mortgage and other loan income.

Noninterest Expense

Noninterest expense for the third quarter of 2006 was $59.4 million, a decrease of $1.1 million or 1.9% from the third quarter of 2005. The decrease resulted from lower salaries and employee benefits, professional services, and advertising and public relations, partially offset by increases in occupancy, data processing, telephone, and other loan expenses. For the first nine months of 2006, noninterest expense totaled $181.0 million, a decrease of $1.1 million or 0.6% from the same period of 2005 as reductions in salaries and employee benefits, professional services, equipment, and advertising and public relations were substantially offset by increases in data processing fees, other loan expenses, and other expenses.

Noninterest Expense

	Three Months Ended										Nine Months Ended
	September 30,				Change in 2006						September 30,				Change in 2006
(dollars in thousands)	2006		2005		Amount			Percent			2006		2005		Amount			Percent
Salaries and employee benefits	$	32,569	$	34,060	$	(1,491	)		(4.4	)%	$	97,515	$	99,762	$	(2,247	)		(2.3	)%
Occupancy		5,604		5,255		349			6.7			16,837		16,500		337			2.0
Professional services		3,486		4,517		(1,031	)		(22.8	)		11,267		12,442		(1,175	)		(9.4	)
Equipment		3,191		3,133		58			1.9			9,658		11,371		(1,713	)		(15.1	)
Data processing services		3,779		3,188		591			18.5			11,232		10,056		1,176			11.7
Advertising and public relations		1,211		1,717		(506	)		(29.5	)		4,179		5,283		(1,104	)		(20.9	)
Postage and delivery		1,559		1,512		47			3.1			4,650		4,622		28			0.6
Telephone		1,394		1,242		152			12.2			4,250		4,148		102			2.5
Other loan expenses		1,407		720		687			95.3			3,040		1,969		1,071			54.4
Stationery and supplies		653		726		(73	)		(10.0	)		2,011		2,247		(236	)		(10.5	)
Intangible asset amortization		725		725		—			—			2,174		2,174		—			—
Other		3,824		3,755		69			1.8			14,226		11,567		2,659			23.0
Total noninterest expense	$	59,402	$	60,550	$	(1,148	)		(1.9	)	$	181,039	$	182,141	$	(1,102	)		(0.6	)

The decrease in salary and employee benefits for the three month period was due to lower hospitalization, pension, and employee post-retirement benefit expenses. Salary costs included $0.3 million in severance for the third quarter of 2006, and $0.4 million in the third quarter of 2005. Citizens had 2,070 full-time equivalent employees at September 30, 2006, down from 2,144 at September 30, 2005. The decrease for the nine month period was the result of lower hospitalization, pension, and employee post-retirement benefit expenses, partially offset by increases in salary costs due to merit increases awarded in 2006 and higher stock-based compensation resulting from a 2005 plan enhancement awarding primarily restricted stock to employees.

The increases in occupancy costs were the result of higher seasonal maintenance costs, higher rent expense associated with new facilities in two Michigan markets, and higher energy costs incurred at Citizens’ properties.

29

The decreases in professional services were the result of several initiatives during late 2005 and early 2006 targeted at developing corporate strategies to produce enhanced profitability and revenue momentum, enhancing overall corporate risk management and ensuring regulatory compliance.

The decrease in equipment costs for the nine month period was due to $1.5 million in additional depreciation during the second quarter of 2005 as a result of aligning the service life for these items with the current capitalization policy.

The increases in data processing fees were the result of implementing enhanced technology initiatives related to customer online banking functionality.

The decreases in advertising and public relations expense were the result of media campaigns conducted during the third quarter of 2005 and an overall reduction in the amount of market-specific advertising completed in 2006.

The increases in other loan expenses were due to higher other mortgage processing fees due to the alliance with PHH Mortgage and higher expenses related to processing commercial loans, partially offset by lower provisioning to fund the reserve for unused loan commitments, which fluctuates with the amount of unadvanced customer lines of credit.

For the third quarter of 2006, all other noninterest expense categories, which include postage and delivery, telephone, stationery and supplies, intangible asset amortization, and other expenses, totaled $8.2 million, an increase of $0.2 million or 2.4% from the third quarter of 2005. The increase was primarily a result of higher training and travel expenses, telephone, expenses related to other real estate owned, and state taxes, partially offset by lower service fees and non-credit related losses. For the first nine months of 2006, all other noninterest expense categories totaled $27.3 million, an increase of $2.6 million or 10.3% over the same period of 2005. The increase was primarily the result of Citizens contributing $1.5 million to its charitable foundation during the first quarter of 2006 and the non-credit related losses from a third party vendor contract and write downs of tax-credit related investments in low income housing and community development projects incurred in the second quarter of 2006.

Excluding the pension curtailment expense described above in “Subsequent Events,” Citizens anticipates noninterest expenses for the fourth quarter of 2006 will be consistent with or slightly higher than the third quarter of 2006 due to increases in salaries and employee benefits and advertising and public relations.

Income Taxes

Income tax provision for the third quarter of 2006 was $7.6 million, a decrease of $0.4 million or 5.3% from the third quarter of 2005. For the first nine months of 2006, income tax provision totaled $23.0 million, a decrease of $1.1 million or 4.5% from the same period of 2005. The decreases were the result of a $1.3 million ($0.8 million after-tax) reduction in the deferred Wisconsin state income tax asset during the second quarter of 2005 as a result of the April 2005 merger of the Michigan and Wisconsin bank charters.

The effective tax rate was 26.63% for the third quarter of 2006 compared with 27.70% for the third quarter of 2005.

Citizens anticipates the effective income tax rate for the fourth quarter of 2006 will be consistent with or slightly lower than the third 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.

30

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands)	2006			2005		2006			2005
Commercial Banking	$	12,135		$	10,582	$	33,067		$	27,173
Consumer Banking		8,822			8,617		28,284			29,340
Wealth Management		741			526		2,457			1,563
Other		(717	)		1,267		(1,164	)		3,561
Net Income	$	20,981		$	20,992	$	62,644		$	61,637

Commercial Banking

The increase in net income in both the three and nine month periods ended September 30, 2006 was due to increases in noninterest income, along with a decrease in the provision for loan losses, partially offset by higher income tax expenses. During the three month period ended September 30, 2006 a slight decline in net interest income was largely offset by a decline in noninterest expenses. For the nine month period ended September 30, 2006, net interest income increased while noninterest expense remained essentially flat. The decrease in net interest income for the three month period was the result of lower net interest margin, partially offset by growth in balances in both the commercial and commercial real estate portfolios. For the nine month period ended September 30, 2006, the increase in net interest income was a result of growth in both the commercial and commercial real estate portfolios, partially offset by lower net interest margin. The provision for loan losses decreased in both periods, reflecting the lower overall risk profile of portfolio loans. The increases in noninterest income for both periods were largely the result of higher fees associated with commercial lines of credit. The decrease in noninterest expense during the three month period was due to lower allocations of information technology and loan processing related costs, partially offset by higher compensation costs.

Consumer Banking

Net income increased for the three month period ended September 30, 2006 and decreased for the nine month period ended September 30, 2006, compared to the same periods of the prior year. The increase in net income for the three month period was due to lower noninterest expense and lower provision for loan losses, partially offset by lower net interest income and lower noninterest income. The decrease in net income for the nine month period ended September 30, 2006, was due to lower net interest income and higher provision for loan losses, partially offset by higher noninterest income and lower noninterest expense. The decline in net interest income in both periods was a result of lower net interest spreads on loans, a decline in balances in the consumer loan portfolio, and the continuing migration of deposits to higher rate products with lower spreads. The provision for loan losses was slightly lower during the three month period due to an improvement in net chargeoffs. For the nine month period ended September 30, 2006, the increase in provision for loan losses was mainly a result of negative provision expense in the prior year period partially offset by lower net chargeoffs. The decrease in noninterest income for the three month period ended September 30, 2006 was due to lower title fee income, related to the closing of Citizens’ title company in conjunction with the PHH Mortgage Alliance, lower mortgage income due to a decline in mortgage volume, and decreased brokerage and investment fees. These decreases were partially offset by increases in service charges on deposit accounts and bankcard fee income. The increase in noninterest income for the nine month period ended September 30, 2006 was largely due to recognizing the $2.9 million gain on the 2004 sale of the former downtown Royal Oak, Michigan office during the first quarter of 2006, partially offset by lower mortgage, title, and brokerage fee income. The decreases in noninterest expense compared to both prior year periods were mainly the result of lower salary and benefits, equipment expense, advertising and marketing expenses, and non-credit related losses, which were partially offset by increases in travel and training, and postage and delivery expenses.

Wealth Management

Net income increased during the three and nine month periods ended September 30, 2006 compared with the same periods of the prior year. The increases were the result of higher net interest income and noninterest income, partially offset by higher noninterest expense. The increases in noninterest income were primarily a result of higher trust fees driven by stronger financial markets, continued execution of the sales management process and improved pricing discipline, and higher brokerage fees generated by investment center financial consultants. The increases in noninterest expense during the three and nine month periods ended September 30, 2006 were related to higher professional service expense, advertising and public relations expense, travel and training expenses, and data processing expenses, partially offset by lower salary and benefits expense and lower trust related losses.

31

Other

Net income declined in both the three and nine month periods ended September 30, 2006 compared with the same periods of the prior year. The decreases were the result of lower net interest income, and lower noninterest income, and higher noninterest expense. The reductions in net interest income for both the three and nine month periods were mainly the result of the internal profitability methodology utilized at Citizens which insulates the other lines of business from interest-rate risk and assigns the risk to the asset/liability management function, which is a component of this segment. The decrease in noninterest income in the three month period ended September 30, 2006 was mainly a result of income received in the third quarter of 2005 related to Citizens’ parent company’s venture capital investment in a limited partnership. The decrease in noninterest income for the nine month period was due to the aforementioned venture capital investment income, along with 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. The increases in noninterest expense were primarily a result of higher data processing expenses, corporate and backoffice overhead allocations, and a $1.5 million contribution to Citizens’ charitable foundation which occurred in the first quarter of 2006.

Financial Condition

Citizens’ total assets at September 30, 2006 were $7.7 billion, essentially unchanged from December 31, 2005 and a decrease of $102.8 million or 1.3% from September 30, 2005. Total portfolio loans increased $137.3 million or 2.4% over December 31, 2005 and $184.1 million or 3.3% over September 30, 2005. The increases in total portfolio loans were partially offset by declines in the investment portfolio as a result of using portfolio cash flow to reduce short-term borrowings and declines in the direct consumer loan portfolio due to weak consumer demand in most of Citizens’ markets.

Investment Securities and Money Market Investments

Total investments, including interest-bearing deposits with banks, were $1.5 billion at September 30, 2006, a decrease of $100.5 million or 6.1% from December 31, 2005 and a decrease of $257.2 million or 14.3% from September 30, 2005. The decreases were the result of maturing balances not being fully reinvested. Additionally, the decrease from September 30, 2005 includes the effect of restructuring the investment portfolio in the fourth quarter of 2005.

Portfolio Loans

Portfolio loans increased $137.3 million or 2.4% compared with December 31, 2005 and increased $184.1 million or 3.3% over September 30, 2005. The increases were the result of growth in commercial and commercial real estate loans, partially offset by a decrease in the direct consumer loan portfolio.

Commercial and commercial real estate loans at September 30, 2006 increased $167.7 million or 5.4% over December 31, 2005 to $3.3 billion and increased $256.9 million or 8.6% compared with September 30, 2005. These improvements were a result of new relationships in Michigan and Wisconsin markets and continued strong growth in the Southeast Michigan market.

Residential mortgage loans at September 30, 2006 were $545.2 million, an increase of $5.3 million or 1.0% from December 31, 2005 and an increase of $13.2 million or 2.5% over September 30, 2005. The increases were primarily the result of retaining most new adjustable-rate mortgage (ARM) production. As a result of the PHH Mortgage alliance implemented in June 2006, Citizens now sells substantially all of its origination volume to PHH Mortgage.

Total consumer loans, which are comprised of direct and indirect loans, were $2.0 billion at September 30, 2006, a decrease of $35.8 million or 1.8% from December 31, 2005 and a decrease of $86.1 million or 4.2% from September 30, 2005. Direct consumer loans, which includes direct installment, home equity, and other consumer loans, declined by $51.2 million or 4.5% from December 31, 2005 and decreased $80.6 million or 6.9% from September 30, 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, which are primarily marine and recreational vehicle loans, totaled $859.6 million, an increase of $15.5 million or 1.8% over December 31, 2005 resulting from an increase in seasonal interest for indirect lending, and essentially unchanged from September 30, 2005.

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

32

Mortgage Loans Held for Sale

Mortgage loans held for sale were $11.7 million at September 30, 2006, a decrease of $4.6 million or 28.1% compared with December 31, 2005 and a decrease of $18.2 million or 60.8% from September 30, 2005. Citizens now sells substantially all of its origination volume to PHH Mortgage and receives final payment in ten days, which represents a quicker settlement than was previously achieved in the secondary market.

Provision and Allowance for Loan Losses

A summary of loan loss experience during the three and nine months ended September 30, 2006 and 2005 is provided below.

Analysis of Allowance for Loan Losses

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2006			2005			2006			2005
Allowance for loan losses — beginning of period	$	114,560		$	119,967		$	116,400		$	122,184
Provision for loan losses		1,190			4,000			5,329			8,396
Charge-offs		4,257			7,956			15,046			20,891
Recoveries		1,583			2,615			6,393			8,937
Net charge-offs		2,674			5,341			8,653			11,954
Allowance for loan losses — end of period	$	113,076		$	118,626		$	113,076		$	118,626
Portfolio loans outstanding at period end (1)	$	5,753,375		$	5,569,274		$	5,753,375		$	5,569,274
Average portfolio loans outstanding during period (1)		5,693,556			5,531,001			5,622,186			5,465,778
Allowance for loan losses as a percentage of portfolio loans		1.97	%		2.13	%		1.97	%		2.13	%
Ratio of net charge-offs during period to average portfolio loans (annualized)		0.19			0.38			0.21			0.29

⁽¹⁾ Balances exclude mortgage loans held for sale.

The decrease in net charge-offs in the third quarter 2006 was due to lower net charge-offs in all loan portfolios except residential mortgages.

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 $113.1 million or 1.97% of portfolio loans at September 30, 2006, a decrease of $3.3 million and $5.6 million from December 31, 2005 and September 30, 2005, respectively. At September 30, 2006, the specific allowance allocated to commercial and commercial real estate credits totaled $6.4 million, compared with $5.1 million at December 31, 2005 and $8.5 million at September 30, 2005. The increase over December 31, 2005 was attributable to a combination of additional small-balance credits being reclassified, partially offset by generally lower risk factors being applied. The decrease from September 30, 2005 was due to lower risk factors and smaller balance credits.

The total formula risk allocated allowance totaled $100.3 million as of September 30, 2006, compared with $101.4 million at December 31, 2005 and $83.0 million at September 30, 2005. The amount allocated to commercial and commercial real estate loans, including construction loans, totaled $53.6 million at September 30, 2006 compared with $55.2 million at December 31, 2005 and $61.8 million at September 30, 2005. The decreases from December 31, 2005 and September 30, 2005 were due to lower overall risk factors. The risk allocated allowance for residential real estate loans totaled $7.4 million

33

at September 30, 2006, compared with $6.3 million at December 31, 2005 and $5.8 million at September 30, 2005. The increases over December 31, 2005 and September 30, 2005 reflected a combination of higher balances and higher risk factors. The risk allocated allowance for consumer loans, excluding mortgage loans, totaled $39.3 million at September 30, 2006, compared with $39.9 million at December 31, 2005 and $15.4 million at September 30, 2005. The decrease from December 31, 2005 reflected both lower balances and slightly lower risk factors. The increase over September 30, 2005 reflected an increase in the risk factors and a re-classification from the general valuation allowances.

The general valuation allowances decreased to $6.4 million at September 30, 2006 compared with $9.9 million at December 31, 2005 and $27.1 million at September 30, 2005. The decrease from December 31, 2005 was the result of continued refinement in the calculation relating to the automotive industry, elimination of a commercial reserve based on a higher degree of confidence in the experience of the lending staff and refinement of indirect consumer factors. The decrease from September 30, 2005 reflected a re-classification of general reserves into the risk allocated allowance, particularly indirect consumer loans. 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, Citizens anticipates net charge-offs for the fourth quarter of 2006 will be slightly higher than the third quarter of 2006. Citizens anticipates provision expense for the fourth quarter of 2006 will be consistent with the third quarter of 2006.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms, and real estate related to repossessed assets. Although these assets have more than a normal risk of loss, they will not necessarily result in a higher level of loss in the future. The table below provides a summary of nonperforming assets as of September 30, 2006, December 31, 2005 and September 30, 2005.

34

Nonperforming Assets

	September 30,			December 31,			September 30,
(in thousands)	2006			2005			2005
Nonperforming Loans
Nonaccrual Commercial:
Commercial	$	8,440		$	11,880		$	14,457
Commercial real estate		7,835			5,068			5,720
Total commercial		16,275			16,948			20,177
Nonaccrual Consumer:
Direct		3,972			4,326			4,459
Indirect		781			2,454			962
Total consumer		4,753			6,780			5,421
Nonaccrual Mortgage:		10,536			8,412			9,929
Total nonaccrual loans		31,564			32,140			35,527
Loans 90 days past due and still accruing		303			238			92
Restructured loans		391			—			13
Total nonperforming loans		32,258			32,378			35,632
Other Repossessed Assets Acquired (ORAA)		7,767			7,351			6,984
Total nonperforming assets	$	40,025		$	39,729		$	42,616
Nonperforming assets as a percent of portfolio loans plus ORAA (1)		0.69	%		0.71	%		0.76	%
Nonperforming assets as a percent of total assets		0.52			0.51			0.54
Allowance for loan loss as a percent of nonperforming loans		350.54			359.50			332.92
Allowance for loan loss as a percent of nonperforming assets		282.51			292.98			278.36

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

Nonperforming assets totaled $40.0 million at September 30, 2006, an increase of $0.3 million or 0.7% compared with December 31, 2005 and a decrease of $2.6 million or 6.1% compared with September 30, 2005. The increase from December 31, 2005 was due to an increase in nonperforming commercial real estate loans and residential mortgages offset by a decrease in nonperforming commercial and consumer loans. The increase in nonperforming commercial real estate loans and residential mortgages reflects the weakening economy in Michigan and depressed real estate values. The decrease in nonperforming consumer loans reflected more aggressive collection workout efforts. The decrease in commercial loans reflects the second quarter of 2006 sale of nonperforming loans with balances of $4.5 million. Nonperforming assets at September 30, 2006 represented 0.69% of portfolio loans plus other repossessed assets acquired compared with 0.71% at December 31, 2005 and 0.76% at September 30, 2005. Nonperforming commercial loan inflows decreased to $7.5 million in the third quarter of 2006, compared with $10.6 million in the fourth quarter of 2005 and $9.9 million in the third quarter of 2005, while outflows decreased to $5.0 million for the third quarter of 2006 compared with $13.8 million in the fourth quarter of 2005 and decreased from $17.3 million in the third quarter of 2005. Nonperforming loans at September 30, 2006 include $0.4 million in restructured commercial loans, which have been reclassified from the commercial subtotal as a result of revising the terms of the notes in an effort to improve collectibility in future periods.

In addition to loans classified as nonperforming, the Corporation carefully monitors other credits that are current in terms of principal and interest payments but that the Corporation believes may deteriorate in quality if economic conditions change. As of September 30, 2006, watchlist loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) amounted to $158.2 million, or 2.7% of total portfolio loans, compared with $163.7 million or 2.9% of total portfolio loans at December 31, 2005 and $150.9 million or 2.7% of total portfolio loans as of September 30, 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 contractual 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.

35

Deposits

Total deposits at September 30, 2006 increased $151.5 million or 2.8% from December 31, 2005 to $5.6 billion and increased $398.9 million or 7.6% from September 30, 2005. Core deposits, which exclude all time deposits, totaled $3.1 billion at September 30, 2006, a decrease of $196.6 million or 6.0% from December 31, 2005 and a decrease of $247.5 million or 7.4% from September 30, 2005. The decreases in core deposits were largely the result of clients migrating their funds from lower cost savings and transaction accounts into other savings and time deposits with higher yields. Time deposits totaled $2.5 billion at September 30, 2006, an increase of $348.1 million or 16.0% compared with December 31, 2005 and an increase of $646.3 million or 34.4% from September 30, 2005. The increases were largely the result of clients migrating their funds from lower-cost deposits and some new client growth.

Citizens gathers deposits within local markets and has not traditionally relied on brokered or out of market purchased deposits for any significant portion of funding. At September 30, 2006, Citizens had $287.8 million in brokered deposits, compared to $340.6 million at December 31, 2005 and $201.2 million at September 30, 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 September 30, 2006 Citizens had approximately $979.1 million of time deposits of $100,000 or more, compared with $751.8 million at December 31, 2005 and $668.7 million at September 30, 2005. Time deposits of $100,000 or more consist of commercial, consumer and public fund deposits derived almost exclusively from local markets. In order to minimize use of these higher cost funding alternatives, Citizens continues to promote relationship-based core deposit growth and stability through focused marketing efforts and competitive pricing strategies.

Borrowed Funds

Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings. Short-term borrowed funds at September 30, 2006 totaled $356.0 million, a decrease of $173.1 million or 32.7% from December 31, 2005 and a decrease of $572.6 million or 61.7% compared with September 30, 2005. The decrease in short-term borrowings was the result of deposit growth in the final three quarters of 2005 which continued into the first three quarters of 2006.

Long-term debt consists of advances from the Federal Home Loan Bank (“FHLB”) to our subsidiary banks and debt issued by the Holding Company. Long-term debt at September 30, 2006 totaled $1.0 billion, an increase of $13.0 million or 1.3% from December 31, 2005 and an increase of $61.3 million or 6.4% over September 30, 2005.

Capital Resources

Citizens continues to maintain a strong capital position, which supports current needs and provides a sound foundation to support future expansion. The Corporation’s regulatory capital ratios are consistently at or above the “well-capitalized” standards and all bank subsidiaries have sufficient capital to maintain a “well-capitalized” designation. The Corporation’s capital ratios as of September 30, 2006, December 31, 2005 and September 30, 2005 are presented below.

Capital Ratios	Regulatory Minimum
				“Well-			September 30,			December 31,			September 30,
	Required			Capitalized”			2006			2005			2005
Risk based:
Tier 1 capital		4.00	%		6.00	%		10.13	%		9.94	%		9.91	%
Total capital		8.00			10.00			13.37			13.22			13.20
Tier 1 leverage		4.00			5.00			8.29			7.98			7.86

Shareholders’ equity at September 30, 2006 was $674.3 million, compared with $656.5 million at December 31, 2005 and $654.8 million at September 30, 2005. Book value per common share at September 30, 2006, December 31, 2005, and September 30, 2005 was $15.72, $15.28, and $15.21, respectively. Citizens declared and paid cash dividends of $0.29 per share in the third quarter of 2006 compared to $0.285 per share in the third quarter of 2005. The $0.005 increase in the dividend per share equates to an aggregate increase of $0.2 million on a quarterly basis. During the first nine months of 2006, the Holding Company repurchased a total of 335,000 shares of its common stock for $8.9 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.”

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-

36

K. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.

Liquidity and Debt Capacity

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

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 October 1, 2006, the subsidiary banks are able to pay dividends of $73.5 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 $100.0 million short-term revolving credit facility with three unaffiliated banks. As of September 30, 2006, there was no outstanding balance under this credit facility. The current facility will mature in August 2007 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 September 30, 2006.

Citizens’ planned merger with Republic Bancorp may pose a challenge to liquidity as the cash component of the transaction consideration and a portion of the restructuring costs will require incremental funding. Management anticipates that through a combination of wholesale funding, including the issuance of the $150.0 million enhanced trust preferred securities on October 3, 2006, and internal cash reserves, the Corporation will be able to fund all aspects of the merger.

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 Ratings, 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.

37

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 September 30, 2006 and 2005 is presented in the following table.

38

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
September 30, 2006
Rate Sensitive Assets(1)
Portfolio loans (2)	$	2,613.3		$	229.5		$	413.5		$	3,256.3		$	2,060.2		$	436.8	$	5,753.3
Mortgage loans held for sale		11.7			—			—			11.7			—			—		11.7
Investment securities		88.4			160.4			99.1			347.9			798.5			393.7		1,540.1
Short-term investments		0.2			—			—			0.2			—			—		0.2
Total	$	2,713.6		$	389.9		$	512.6		$	3,616.1		$	2,858.7		$	830.5	$	7,305.3
Rate Sensitive Liabilities
Deposits (3)	$	1,938.7		$	411.1		$	811.5		$	3,161.3		$	924.6		$	646.1	$	4,732.0
Other interest bearing liabilities		281.2			95.0			55.0			431.2			765.2			178.8		1,375.2
Total	$	2,219.9		$	506.1		$	866.5		$	3,592.5		$	1,689.8		$	824.9	$	6,107.2
Derivatives	$	(56.0	)	$	(20.0	)	$	—		$	(76.0	)	$	76.0		$	—	$	—
Period GAP (4)	$	437.7		$	(136.2	)	$	(353.9	)	$	(52.4	)	$	1,244.9		$	5.6	$	1,198.1
Cumulative GAP		437.7			301.5			(52.4	)					1,192.5			1,198.1
September 30, 2005
Rate Sensitive Assets(1)
Portfolio loans (2)	$	2,649.8		$	204.2		$	406.9		$	3,260.9		$	1,940.4		$	368.0	$	5,569.3
Mortgage loans held for sale		29.8			—			—			29.8			—			—		29.8
Investment securities		84.2			57.7			144.7			286.6			1,032.0			477.5		1,796.1
Short-term investments		1.4			—			—			1.4			—			—		1.4
Total	$	2,765.2		$	261.9		$	551.6		$	3,578.7		$	2,972.4		$	845.5	$	7,396.6
Rate Sensitive Liabilities
Deposits (3)	$	1,549.8		$	249.9		$	636.5		$	2,436.2		$	1,030.5		$	820.2	$	4,286.9
Other interest bearing liabilities		926.6			—			175.0			1,101.6			579.5			205.4		1,886.5
Total	$	2,476.4		$	249.9		$	811.5		$	3,537.8		$	1,610.0		$	1,025.6	$	6,173.4
Derivatives	$	(31.0	)	$	(125.0	)	$	25.0		$	(131.0	)	$	(74.0	)	$	205.0	$	—
Period GAP (4)	$	257.8		$	(113.0	)	$	(234.9	)	$	(90.1	)	$	1,288.4		$	24.9	$	1,223.2
Cumulative GAP		257.8			144.8			(90.1	)					1,198.3			1,223.2

(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 $1.2 billion in the less than one year category and $1.1 billion in the over one year category as of September 30, 2006. The same amounts as of September 30, 2005 were $1.1 billion and $1.3 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 $52.4 million or 0.7% of total assets as of September 30, 2006, compared with $90.1 million or 1.1% of total assets as of September 30, 2005. These results incorporate the impact of off-balance sheet derivatives and reflect interest rate environments consistent with September 30, 2006 and September 30, 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 12 months. These simulations incorporate assumptions regarding prepayment speeds on various loan and investment assets, cash flows and maturities of financial instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and Citizens’ financial capital plans. These assumptions are inherently uncertain and subject to fluctuation and revision in a dynamic environment and as a result the

39

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 September 30, 2006 to evaluate the impact of market rate changes on net interest income over the following 12 months assuming expected levels of balance sheet growth over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to increase by 0.6% and 0.9%, respectively, from what it would be if rates were to remain at September 30, 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 1.6% and 3.5%, respectively, from what it would be if rates were to remain constant over the entire time period at September 30, 2006 levels. These measurements represent a more asset-sensitive interest rate risk position when compared with prior year measurements, resulting from the commitment to issue $150.0 million of fixed-rate enhanced trust preferred debt announced in September of 2006. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets 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 September 30, 2006, Citizens had no forward commitments to sell mortgage loans. As Citizens transitioned its mortgage secondary marketing functions to PHH Mortgage during the third quarter of 2006, the market value risk of committing to fund residential mortgage loan applications has correspondingly declined. 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

40

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 1A. Risk Factors

For information regarding risk factors affecting Citizens, see “Risk Factors” in Item 1A of Part I of Citizens’ 2005 Annual Report on Form 10-K. There have been no material changes to the risk factors described in such Form 10-K.

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

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. In anticipation of the upcoming merger with Republic, Citizens did not repurchase any shares of its stock during the third quarter of 2006. As of September 30, 2006, 1,906,200 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

10.31	Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J. Peterson, dated August 16, 2006
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

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITIZENS BANKING CORPORATION

Date: November 3, 2006	By	/s/ Charles D. Christy Charles D. Christy
		Chief Financial Officer
		(principal financial officer and duly authorized officer)

42

10-Q EXHIBIT INDEX

Exhibit No.	Description
10.31	Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J. Peterson, dated August 16, 2006
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

43