10-Q 1 k86602e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 or | | 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 (I.R.S. Employer incorporation or organization) 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 |X| Yes | | No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |X| Yes | | No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class Outstanding at July 30, 2004 ----- ---------------------------- Common Stock, No Par Value 43,256,145 Shares

CITIZENS BANKING CORPORATION Index to Form 10-Q

Page ---- PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements................................................... 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 14 Item 3 - Quantitative and Qualitative Disclosures about Market Risk.......................... 33 Item 4 - Controls and Procedures............................................................. 33 PART II - OTHER INFORMATION Item 2 -Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities..... 34 Item 4 -Submission of Matters to a Vote of Security Holders.................................. 34 Item 6 -Exhibits and Reports on Form 8-K..................................................... 34 SIGNATURES........................................................................................ 35 EXHIBIT INDEX..................................................................................... 36

2 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES

JUNE 30, December 31, (in thousands) 2004 2003 ----------- ----------- (UNAUDITED) (Note 1) ASSETS Cash and due from banks $ 173,117 $ 182,545 Interest-bearing deposits with banks 2,169 2,223 Investment Securities: Available-for-Sale: U.S. Treasury and federal agency securities 1,452,159 1,452,582 State and municipal securities 410,635 437,003 Other securities 70,763 75,616 Held-to-maturity: State and municipal securities (fair value of $41,232 and $19,913, respectively) 42,523 19,857 ----------- ----------- Total investment securities 1,976,080 1,985,058 Mortgage loans held for sale 36,994 44,677 Loans: Commercial 2,785,733 2,885,868 Real estate construction 175,948 192,759 Real estate mortgage 396,094 402,910 Consumer 1,932,303 1,764,165 ----------- ----------- Total loans 5,290,078 5,245,702 Less: Allowance for loan losses (123,805) (123,545) ----------- ----------- Net loans 5,166,273 5,122,157 Premises and equipment 118,675 112,784 Goodwill 54,785 54,785 Other intangible assets 15,482 16,932 Bank owned life insurance 81,452 80,461 Other assets 122,880 109,448 ----------- ----------- TOTAL ASSETS $ 7,747,907 $ 7,711,070 =========== =========== LIABILITIES Noninterest-bearing deposits $ 919,924 $ 882,429 Interest-bearing deposits 4,441,510 4,559,838 ----------- ----------- Total deposits 5,361,434 5,442,267 Federal funds purchased and securities sold under agreements to repurchase 700,279 588,593 Other short-term borrowings 47,641 43,077 Other liabilities 79,415 65,112 Long-term debt 931,390 936,859 ----------- ----------- Total liabilities 7,120,159 7,075,908 SHAREHOLDERS' EQUITY Preferred stock - no par value -- -- Common stock - no par value 99,333 100,314 Retained earnings 523,581 512,045 Accumulated other comprehensive income 4,834 22,803 ----------- ----------- Total shareholders' equity 627,748 635,162 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,747,907 $ 7,711,070 =========== ===========

See notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES

Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share amounts) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- INTEREST INCOME Interest and fees on loans $ 74,073 $ 82,519 $ 147,779 $ 167,023 Interest and dividends on investment securities: Taxable 16,021 17,107 31,463 31,541 Tax-exempt 5,279 5,045 10,523 10,229 Money market investments 2 12 4 99 ---------- ---------- ---------- ---------- Total interest income 95,375 104,683 189,769 208,892 ---------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 15,892 22,522 32,343 47,559 Short-term borrowings 1,798 1,414 3,070 2,034 Long-term debt 8,467 7,827 16,810 14,873 ---------- ---------- ---------- ---------- Total interest expense 26,157 31,763 52,223 64,466 ---------- ---------- ---------- ---------- NET INTEREST INCOME 69,218 72,920 137,546 144,426 Provision for loan losses 4,500 25,650 11,500 44,642 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 64,718 47,270 126,046 99,784 ---------- ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts 9,069 7,549 17,111 14,139 Trust fees 4,528 4,324 8,838 8,544 Mortgage and other loan income 3,047 5,409 5,303 10,563 Brokerage and investment fees 2,651 1,914 4,433 3,682 Bankcard fees 911 814 1,694 1,549 Other 4,650 4,826 9,989 9,598 ---------- ---------- ---------- ---------- Total fees and other income 24,856 24,836 47,368 48,075 Investment securities (losses) gains (2,053) 11 (2,053) 59 ---------- ---------- ---------- ---------- Total noninterest income 22,803 24,847 45,315 48,134 NONINTEREST EXPENSE Salaries and employee benefits 33,185 31,400 65,124 61,512 Occupancy 4,922 4,314 10,264 9,009 Professional services 4,281 3,959 8,209 7,667 Equipment 3,668 3,869 7,310 8,038 Data processing services 3,440 3,058 7,086 6,374 Advertising and public relations 2,038 623 4,183 2,672 Postage and delivery 1,862 1,683 3,418 3,361 Telephone 1,451 1,135 2,985 2,310 Other loan fees 1,631 1,146 2,760 2,287 Stationery and supplies 916 873 1,758 1,768 Other 4,749 4,301 9,580 7,944 ---------- ---------- ---------- ---------- Total noninterest expense 62,143 56,361 122,677 112,942 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 25,378 15,756 48,684 34,976 Income tax provision 6,656 2,542 12,519 6,704 ---------- ---------- ---------- ---------- NET INCOME $ 18,722 $ 13,214 $ 36,165 $ 28,272 ========== ========== ========== ========== NET INCOME PER SHARE: Basic 0.43 0.30 $ 0.83 $ 0.65 Diluted 0.43 0.30 0.83 0.65 CASH DIVIDENDS DECLARED PER SHARE 0.285 0.285 0.570 0.570 AVERAGE SHARES OUTSTANDING: Basic 43,292 43,248 43,303 43,376 Diluted 43,752 43,478 43,806 43,612

See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES

Accumulated Other Common Retained Comprehensive (in thousands except per share amounts) Stock Earnings Income Total ---------- ---------- ------------- ---------- BALANCE - JUNE 30, 2003 101,723 499,044 38,401 639,168 Comprehensive income: Net income 19,605 19,605 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(5,974) (11,095) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $15 (27) Net change in unrealized gain on cash flow hedges 122 (11,000) ---------- ---------- Total comprehensive income 8,605 Exercise of stock options, net of shares purchased 622 622 Shares acquired for retirement (1,951) (1,951) Net change in deferred compensation, net of tax effect 31 31 Cash dividends - $0.285 per share (12,331) (12,331) ---------- ---------- ---------- ---------- BALANCE - SEPTEMBER 30, 2003 100,425 506,318 27,401 634,144 Comprehensive income: Net income 18,074 18,074 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(2,784) (5,171) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $1 (1) Net change in unrealized gain on cash flow hedges, net of tax effect of $280 398 Minimum pension liability, net of tax effect of $95 176 (4,598) ---------- ---------- Total comprehensive income 13,476 Tax benefit on non-qualified stock options 2,500 2,500 Exercise of stock options, net of shares purchased 2,293 2,293 Shares acquired for retirement (5,144) (5,144) Net change in deferred compensation, net of tax effect 240 240 Cash dividends - $0.285 per share (12,347) (12,347) ---------- ---------- ---------- ---------- BALANCE - DECEMBER 31, 2003 100,314 512,045 22,803 635,162 Comprehensive income: Net income 17,443 17,443 Other comprehensive income: Net unrealized gain on securities available-for-sale, net of tax effect of $7,227 13,422 Net change in unrealized loss on cash flow hedges, net of tax effect of $(90) (168) 13,254 ---------- ---------- Total comprehensive income 30,697 Exercise of stock options, net of shares purchased 4,015 4,015 Shares acquired for retirement (3,387) (3,387) Net change in deferred compensation, net of tax effect 40 40 Cash dividends - $0.285 per share (12,345) (12,345) ---------- ---------- ---------- ---------- BALANCE - MARCH 31, 2004 100,982 517,143 36,057 654,182 Comprehensive income: Net income 18,722 18,722 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(16,638) (30,898) Net change in unrealized loss on cash flow hedges, net of tax effect of $(175) (325) (31,223) ---------- ---------- Total comprehensive income (12,501) Exercise of stock options, net of shares purchased 477 477 Tax benefit on non-qualified stock options 1,045 1,045 Shares acquired for retirement (3,242) (3,242) Net change in deferred compensation, net of tax effect 71 71 Cash dividends - $0.285 per share (12,284) (12,284) ---------- ---------- ---------- ---------- Balance - June 30, 2004 $ 99,333 $ 523,581 $ 4,834 $ 627,748 ========== ========== ========== ==========

See notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES

Six Months Ended June 30, (in thousands) 2004 2003(1) ----------- ----------- Operating Activities: Net income $ 36,165 $ 28,272 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 11,500 44,642 Depreciation 6,081 7,151 Amortization of intangibles 1,450 1,449 Net amortization on investment securities 5,174 3,066 Investment securities losses (gains) 2,053 (59) Loans originated for sale (187,732) (693,658) Proceeds from sales of mortgage loans held for sale 197,916 724,735 Net gains from loan sales (2,501) (6,763) Stock-based compensation -- 200 Net change in deferred compensation, net of tax effect 111 79 Other 6,475 12,092 ----------- ----------- Net cash provided by operating activities 76,692 121,206 Investing Activities: Net decrease in money market investments 54 64,952 Securities available-for-sale: Proceeds from sales 5,001 1,396 Proceeds from maturities 209,001 322,320 Purchases (216,475) (780,058) Purchases of securities held-to-maturity (22,663) -- Net (increase) decrease in loans (55,616) 117,195 Net increase in premises and equipment (11,972) (2,992) ----------- ----------- Net cash used in investing activities (92,670) (277,187) FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits 140,834 (40,351) Net decrease in time deposits (221,667) (236,803) Net increase in short-term borrowings 116,250 162,464 Proceeds from issuance of long-term debt 25,000 370,332 Principal reductions in long-term debt (27,101) (30,209) Cash dividends paid (24,629) (24,798) Proceeds from stock options exercised 4,492 3,419 Shares acquired for retirement (6,629) (14,228) ----------- ----------- Net cash provided by financing activities 6,550 189,826 ----------- ----------- Net (decrease) increase in cash and due from banks (9,428) 33,845 Cash and due from banks at beginning of period 182,545 171,864 ----------- ----------- Cash and due from banks at end of period $ 173,117 $ 205,709 =========== ===========

See notes to consolidated financial statements. (1) Certain amounts have been reclassified to conform with current year presentation. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Citizens Banking Corporation ("Citizens") have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 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 thereto included in Citizens' 2003 Annual Report on Form 10-K. STOCK-BASED COMPENSATION: Citizens' stock-based compensation plans are accounted for based on the intrinsic value method set forth in Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. The following table illustrates the effect on net income and earnings per share if Citizens had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, to its stock option awards.

Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share amounts) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income, as reported $ 18,722 $ 13,214 $ 36,165 $ 28,272 Less pro forma expense related to options granted (562) (511) (1,177) (1,067) ---------- ---------- ---------- ---------- Pro forma net income $ 18,160 $ 12,703 $ 34,988 $ 27,205 ========== ========== ========== ========== Net income per share: Basic - as reported $ 0.43 $ 0.30 $ 0.83 $ 0.65 Basic - pro forma 0.42 0.29 0.81 0.63 Diluted - as reported 0.43 0.30 0.83 0.65 Diluted - pro forma 0.42 0.29 0.80 0.62

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS: In December 2003, the FASB issued a revised SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS 87, 88, and 106 which revises employers' disclosures about pension plans and other postretirement benefit plans. SFAS 132 does not change the measurement or recognition of those plans required by SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS 132, as revised, retains the disclosure requirements contained in the original SFAS 132, which it replaces. Additional disclosures, however, have been added to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. In addition, SFAS 132 requires interim period disclosure of the components of net period benefit cost and contributions if significantly different from previously reported amounts - see Note 7 to the Consolidated Financial Statements in this report. The new disclosures required by SFAS 132 became effective for Citizens as of December 31, 2003 and do not impact our results of operations, financial position, or liquidity. 7 ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003: In January 2004, The FASB issued FASB Staff Position ("FSP"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," subsequently revised in May 2004. The FSP permits sponsors of postretirement healthcare plans that provide prescription drug benefits to elect a one-time deferral of accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Act") and requires certain disclosures pending further consideration of the underlying accounting issues. The Act provides a federal subsidy to companies which sponsor postretirement benefit plans that provide prescription drug benefits. The FSP is effective for financial statements of interim or annual periods beginning after June 15, 2004. Citizens is in the process of analyzing the impact the Act will have on its employee benefit plans. Citizens has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is analyzed. Citizens anticipates its benefits costs will be somewhat lower as a result of the new Medicare provision, however, the adoption of this standard is not expected to have a material impact on results of operations, financial position or liquidity. NOTE 3. BUSINESS RESTRUCTURING AND SPECIAL CHARGE In the third quarter of 2002, Citizens recorded a special charge of $13.8 million ($9.0 million after-tax) for restructuring, impairment and other costs associated with the reorganization of Citizens' consumer, commercial and wealth management lines of business. The reorganization was the result of a detailed review of Citizens' consumer banking, commercial banking and wealth management areas by key members of management with assistance from industry consultants. This review revealed opportunities for process change, staff reassignment, reporting structure changes, branch closures, expense reduction and business growth. As a result of the reorganization, Citizens displaced 134 employees. Displaced employees were offered severance packages and outplacement assistance. Twelve banking offices were closed in the fourth quarter of 2002 and six additional offices were closed during the second quarter of 2003. The following provides details on the remaining liability from the special charge as of June 30, 2004.

Reserve 2004 Reserve Balance ------------- Balance December 31, Cash Payment June 30, (in thousands) 2003 Reductions 2004 ------------ ------------ -------- Employee benefits and severance $ 325 $ (100) $ 225 Professional fees 9 (5) 4 Facilities and lease impairment 276 (16) 260 -------- -------- -------- Total $ 610 $ (121) $ 489 ======== ======== ========

NOTE 4. OTHER INTANGIBLE ASSETS Citizens' other intangible assets as of June 30, 2004, December 31, 2003 and June 30, 2003 are shown in the table below.

JUNE 30, December 31, June 30, (in thousands) 2004 2003 2003 -------- ------------ -------- Core deposit intangibles $ 28,989 $ 28,989 $ 28,989 Accumulated amortization 13,508 12,058 10,609 -------- -------- -------- Net core deposit intangibles 15,481 16,931 18,380 Minimum pension liability 1 1 33 -------- -------- -------- Total other intangibles $ 15,482 $ 16,932 $ 18,413 ======== ======== ========

The estimated annual amortization expense for core deposit intangibles for each of the next five years is $2.9 million. NOTE 5. LINES OF BUSINESS INFORMATION Citizens is managed along the following business lines: Commercial Banking, Consumer Banking, Wealth Management, and Other. In 2003, Citizens allocated its core deposit intangible and the related amortization to the Commercial Banking and Consumer Banking business lines. The core deposit intangible and the related amortization was previously recorded in the 8 Other business line. Prior period information has been restated to reflect this change. In the third quarter of 2003, Citizens reallocated the investment security portfolio held in our mortgage company from Consumer Banking to Treasury, which is a component of Other. In the first quarter of 2004, Citizens transferred the credit administration function from Other to Commercial Banking. The effect on net income of the reallocation of the investment security portfolio and the transfer of the credit administration function for the prior periods presented were not material to the segments and they were not restated. Selected line of business segment information, as adjusted, for the three and six months ended June 30, 2004 and 2003 is provided below. There are no significant intersegment revenues.

Commercial Consumer Wealth (in thousands) Banking Banking Management Other Total ---------- -------- ---------- -------- -------- EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30, 2004 Net interest income (taxable equivalent) $ 29,254 $ 37,837 $ 191 $ 5,292 $ 72,574 Provision for loan losses 2,484 2,018 (2) -- 4,500 -------- -------- -------- -------- -------- Net interest income after provision 26,770 35,819 193 5,292 68,074 Noninterest income 3,387 14,546 6,070 (1,200) 22,803 Noninterest expense 17,659 34,078 5,352 5,054 62,143 -------- -------- -------- -------- -------- Income (loss) before income taxes 12,498 16,287 911 (962) 28,734 Income tax (benefit) expense (taxable equivalent) 4,421 5,697 405 (511) 10,012 -------- -------- -------- -------- -------- Net income (loss) $ 8,077 $ 10,590 $ 506 $ (451) $ 18,722 ======== ======== ======== ======== ======== Average Assets (in millions) $ 2,824 $ 2,479 $ 18 $ 2,448 $ 7,769 ======== ======== ======== ======== ======== EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30, 2003(1) Net interest income (taxable equivalent) $ 31,839 $ 39,005 $ 51 $ 5,378 $ 76,273 Provision for loan losses 22,586 3,313 -- (249) 25,650 -------- -------- -------- -------- -------- Net interest income after provision 9,253 35,692 51 5,627 50,623 Noninterest income 4,040 14,055 5,603 1,149 24,847 Noninterest expense 16,182 34,150 5,475 554 56,361 -------- -------- -------- -------- -------- Income (loss) before income taxes (2,889) 15,597 179 6,222 19,109 Income tax (benefit) expense (taxable equivalent) (1,054) 5,453 59 1,437 5,895 -------- -------- -------- -------- -------- Net income (loss) $ (1,835) $ 10,144 $ 120 $ 4,785 $ 13,214 ======== ======== ======== ======== ======== Average Assets (in millions) $ 3,050 $ 3,090 $ 14 $ 1,655 $ 7,809 ======== ======== ======== ======== ========

(1) Certain amounts have been reclassified to conform to current year presentation. 9

Commercial Consumer Wealth (in thousands) Banking Banking Management Other Total ---------- --------- ---------- --------- --------- EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 2004 Net interest income (taxable equivalent) $ 58,242 $ 75,458 $ 380 $ 10,184 $ 144,264 Provision for loan losses 7,473 4,032 (5) -- 11,500 --------- --------- --------- --------- --------- Net interest income after provision 50,769 71,426 385 10,184 132,764 Noninterest income 6,909 26,974 11,567 (135) 45,315 Noninterest expense 34,738 66,394 10,994 10,551 122,677 --------- --------- --------- --------- --------- Income (loss) before income taxes 22,940 32,006 958 (502) 55,402 Income tax (benefit) expense (taxable equivalent) 8,098 11,203 339 (403) 19,237 --------- --------- --------- --------- --------- Net income (loss) $ 14,842 $ 20,803 $ 619 $ (99) $ 36,165 ========= ========= ========= ========= ========= Average Assets (in millions) $ 2,838 $ 2,424 $ 18 $ 2,425 $ 7,705 ========= ========= ========= ========= ========= EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 2003(1) Net interest income (taxable equivalent) $ 66,662 $ 74,861 $ 68 $ 9,664 $ 151,255 Provision for loan losses 38,084 6,729 -- (171) 44,642 --------- --------- --------- --------- --------- Net interest income after provision 28,578 68,132 68 9,835 106,613 Noninterest income 8,362 26,604 10,925 2,243 48,134 Noninterest expense 30,168 67,153 10,003 5,618 112,942 --------- --------- --------- --------- --------- Income before income taxes 6,772 27,583 990 6,460 41,805 Income tax expense (taxable equivalent) 2,372 9,646 343 1,172 13,533 --------- --------- --------- --------- --------- Net income $ 4,400 $ 17,937 $ 647 $ 5,288 $ 28,272 ========= ========= ========= ========= ========= Average Assets (in millions) $ 3,107 $ 2,839 $ 8 $ 1,679 $ 7,633 ========= ========= ========= ========= =========

(1) Certain amounts have been reclassified to conform to current year presentation. NOTE 6. LONG-TERM DEBT The components of long-term debt as of June 30, 2004, December 31, 2003 and June 30, 2003 are presented below.

JUNE 30, December 31, June 30, (in thousands) 2004 2003 2003 ---------- ------------ ---------- Federal Home Loan Bank advances $ 785,856 $ 787,930 $ 788,953 Subordinated debt: Notes maturing February 2013 119,693 123,061 132,779 Deferrable interest debenture maturing June 2033 25,774 25,774 25,774 Other borrowed funds 67 94 151 ---------- ---------- ---------- Total long-term debt $ 931,390 $ 936,859 $ 947,657 ========== ========== ==========

10 NOTE 7. PENSION BENEFIT COST The components of pension expense for the three and six months ended June 30, 2004 and June 30, 2003 are presented below.

Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 ------- ------- ------- ------- DEFINED BENEFIT PENSION PLANS Service cost $ 1,164 $ 1,101 $ 2,312 $ 2,199 Interest cost 1,311 1,361 2,610 2,722 Expected return on plan assets (1,770) (1,975) (3,540) (3,950) Amortization of unrecognized: Net transition asset (2) (4) (5) (5) Prior service cost 58 56 116 110 Net actuarial loss 173 16 342 32 ------- ------- ------- ------- Net pension cost $ 934 $ 555 $ 1,835 $ 1,108 ======= ======= ======= =======

Citizens previously disclosed in Note 13 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003, that it expected to contribute approximately $0.5 million to its pension plans in 2004. As of June 30, 2004, $0.2 million of contributions have been made. Citizens anticipates that $0.5 million of contributions will be made in 2004. NOTE 8. 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") establish 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. The ineffectiveness of the hedge is recorded in current earnings. 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. Citizens may use derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. Citizens uses interest rate contracts such as interest rate swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets or liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The following table summarizes the derivative financial instruments held or issued by Citizens. 11 DERIVATIVE FINANCIAL INSTRUMENTS:

JUNE 30, 2004 December 31, 2003 ----------------------------------------------------------- NOTIONAL FAIR Notional Fair (dollars in thousands) AMOUNT VALUE Amount Value ---------- ---------- ---------- ---------- Interest rate swaps $ 204,800 $ (4,595) $ 190,000 $ 499 Interest rate lock commitments 12,252 105 14,683 109 Forward mortgage loan contracts 26,500 (150) 29,000 (161) ---------- ---------- ---------- ---------- TOTAL $ 243,552 $ (4,640) $ 233,683 $ 447 ========== ========== ========== ==========

DERIVATIVE CLASSIFICATIONS AND HEDGING RELATIONSHIPS:

JUNE 30, 2004 December 31, 2003 ----------------------------------------------------------- NOTIONAL FAIR Notional Fair (dollars in thousands) AMOUNT VALUE Amount Value ---------- ---------- ---------- ---------- Derivatives Designated as Cash Flow Hedges: Hedging repurchase agreements $ 20,000 $ 57 $ 25,000 $ 339 Derivatives Designated as Fair Value Hedges: Hedging time deposits 45,000 (463) 40,000 31 Hedging long-term debt 125,000 (4,189) 125,000 129 Derivatives Not Designated as Hedges: Customer initiated swaps 14,800 -- -- -- ---------- ---------- ---------- ---------- TOTAL $ 204,800 $ (4,595) $ 190,000 $ 499 ========== ========== ========== ==========

NOTE 9. EARNINGS PER SHARE Net income per share is computed based on the weighted-average number of shares outstanding, including the dilutive effect of stock options, as follows:

Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share amounts) 2004 2003 2004 2003 --------- --------- --------- --------- NUMERATOR: Basic and dilutive earnings per share -- net income available to common shareholders $ 18,722 $ 13,214 $ 36,165 $ 28,272 ========= ========= ========= ========= DENOMINATOR: Basic earnings per share -- weighted average shares 43,292 43,248 43,303 43,376 Effect of dilutive securities -- potential conversion of employee stock options 460 230 503 236 --------- --------- --------- --------- Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 43,752 43,478 43,806 43,612 ========= ========= ========= ========= BASIC EARNINGS PER SHARE $ 0.43 $ 0.30 $ 0.83 $ 0.65 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE $ 0.43 $ 0.30 $ 0.83 $ 0.65 ========= ========= ========= =========

During the second quarter of 2004, employees exercised stock options to acquire 23,996 shares at an average exercise price of $19.88 per share. For the six months ended June 30, 2004, employees have exercised stock options to acquire 226,961 shares at an average exercise price of $19.79 per share. 12 NOTE 10. 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 90 days and unused lines of credit are reviewed at least annually. Financial standby letters of credit guarantee future payment of client financial obligations to third parties. They are issued primarily for services provided. Performance standby letters of credit are irrevocable guarantees to make payment in the event a specified third party fails to perform under a nonfinancial contractual obligation. Commercial letters of credit facilitate the shipment of goods or enable clients to access public bond financing. 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. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on management's assessment of the client and may include receivables, inventories, real property and equipment. Amounts available to clients under loan commitments and standby letters of credit follow:

JUNE 30, December 31, (in thousands) 2004 2003 ------------ ------------ LOAN COMMITMENTS AND LETTERS OF CREDIT: Commitments to extend credit $ 1,776,267 $ 1,593,426 Financial standby letters of credit 44,984 42,086 Performance standby letters of credit 6,055 6,782 Commercial letters of credit 200,476 183,665 ------------ ------------ $ 2,027,782 $ 1,825,959 ============ ============

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income, net of tax, for the three and six month periods ended June 30, 2004 and 2003 are presented below.

Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 -------- -------- -------- -------- Balance at beginning of period $ 36,057 $ 38,887 $ 22,803 $ 42,646 Net unrealized loss on securities for the quarter, net of tax effect of $(17,357) in 2004 and $(258) in 2003 (32,232) (479) Less: Reclassification adjustment for net (gains) losses included in net income for the quarter, net of tax effect of $719 in 2004 and $(4) in 2003 1,334 (7) Net unrealized loss on securities for the period, net of tax effect of $(10,130) in 2004 and $(2,265) in 2003 (18,810) (4,207) Less: Reclassification adjustment for net gains (losses) included in net income for the period, net of tax effect of $719 in 2004 and $(21) in 2003 1,334 (38) Net change in unrealized loss on cash flow hedges for the quarter and six month period, net of tax effect of $(175) and $(265), respectively (325) -- (493) -- -------- -------- -------- -------- Accumulated other comprehensive income, net of tax $ 4,834 $ 38,401 $ 4,834 $ 38,401 ======== ======== ======== ========

13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION CITIZENS BANKING CORPORATION AND SUBSIDIARIES

FOR THE QUARTER ENDED ------------------------------------------------------------------- JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 2004 2004 2003 2003 2003 --------- ---------- ------------ ----------- --------- SUMMARY OF OPERATIONS (THOUSANDS) Interest income $ 95,375 $ 94,394 $ 97,398 $ 99,687 $ 104,683 Net interest income 69,218 68,328 70,678 71,154 72,920 Provision for loan losses 4,500 7,000 8,020 10,300 25,650 Total fees and other income 24,856 22,512 21,629 25,012 24,836 Investment securities (losses) gains (2,053) -- 2 42 11 Noninterest expense 62,143 60,534 60,446 59,600 56,361 Income tax provision 6,656 5,863 5,769 6,703 2,542 Net income 18,722 17,443 18,074 19,605 13,214 Cash dividends 12,284 12,345 12,347 12,331 12,343 PER COMMON SHARE DATA Basic net income $ 0.43 $ 0.40 $ 0.42 $ 0.45 $ 0.30 Diluted net income 0.43 0.40 0.41 0.45 0.30 Cash dividends 0.285 0.285 0.285 0.285 0.285 Market value (end of period) 31.05 32.63 32.72 26.41 27.01 Book value (end of period) 14.51 15.09 14.69 14.67 14.77 AT PERIOD END (MILLIONS) Assets $ 7,748 $ 7,692 $ 7,711 $ 7,787 $ 7,789 Portfolio Loans (1) 5,290 5,200 5,246 5,226 5,287 Deposits 5,361 5,461 5,442 5,482 5,660 Shareholders' equity 628 654 635 634 639 AVERAGE FOR THE QUARTER (MILLIONS) Assets $ 7,769 $ 7,640 $ 7,697 $ 7,812 $ 7,809 Portfolio Loans (1) 5,269 5,197 5,220 5,183 5,253 Deposits 5,435 5,474 5,481 5,610 5,723 Shareholders' equity 628 644 626 620 639 RATIOS (ANNUALIZED) Return on average assets 0.97% 0.92% 0.93% 1.00% 0.68% Return on average shareholders' equity 12.00 10.89 11.45 12.55 8.29 Net interest margin (FTE) 3.98 4.01 4.07 4.06 4.17 Efficiency ratio (2) 63.78 64.26 63.16 59.90 55.74 Net loans charged off to average loans 0.33 0.53 0.59 0.80 0.92 Allowance for loan losses as a percent of loans 2.34 2.38 2.36 2.36 2.33 Nonperforming assets to loans plus ORAA (end of period) 1.10 1.20 1.47 1.74 1.82 Nonperforming assets to total assets (end of period) 0.75 0.81 1.00 1.17 1.24 Average equity to average assets 8.08 8.43 8.13 7.94 8.18 Leverage ratio 7.52 7.79 7.45 7.25 7.20 Tier 1 capital ratio 10.00 10.31 9.80 9.64 9.55 Total capital ratio 13.42 13.77 13.23 13.07 13.10

(1) Balances exclude mortgage loans held for sale. (2) Excludes investment securities gains (losses). 14 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 six month periods ended June 30, 2004. 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 our 2003 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 our 2003 Annual Report on Form 10-K, which contains important additional information that is necessary to understand our Company 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," the "Company," "our," "us" and "we" refer to Citizens Banking Corporation and its subsidiaries. FORWARD -LOOKING STATEMENTS Discussions in this report that are not statements of historical fact (including statements that include terms such as "may," "should," "believe," "expect," "anticipate," "estimate," "intend," and "plan") are forward-looking statements that involve risks and uncertainties, and our 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 our filings with the Securities and Exchange Commission, as well as the following. - We face the risk that loan losses, including unanticipated loan losses due to changes in our loan portfolios, fraud and economic factors, will exceed our 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 our capital. - While we attempt to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, we may not be able to economically hedge our interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect our 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 our loan portfolio and could reduce our customer base, our level of deposits, and demand for financial products such as loans. - If we are unable to continue to attract core deposits or unable to continue to obtain third party financing on favorable terms, our cost of funds will increase, adversely affecting our ability to generate the funds necessary for lending operations, reducing our net interest margin and negatively affecting our results of operations. - Increased competition with other financial institutions could reduce our net income by decreasing the number and size of loans that we originate, the interest rates we may charge on these loans and the fees we are able to charge for services to our customers. - The financial services industry is undergoing rapid technological changes. If we are unable to adequately invest in and implement new technology-driven products and services, we may not be able to compete effectively, or our cost to provide products and services may increase significantly. - Our business may be adversely affected by the highly regulated environment in which we operate. Changes in banking or tax laws, regulations and regulatory practices at either the federal or state level may adversely affect us, including our ability to offer new products and services, obtain financing, move funds from our subsidiaries to our parent company, attract deposits, make loans and leases and achieve satisfactory spreads, and may also result in the imposition of additional costs on us. - The products and services offered by the banking industry and customer expectations regarding them are subject to change. We attempt to respond to perceived customer needs and expectations by offering new products and services, such as our new wealth management capabilities, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on our results of operations. In addition, our potential inability to successfully expand our Oakland County operations would have a negative effect on our results of operations. - New accounting pronouncements may be issued by the accounting profession, regulators or other government bodies which could change our existing accounting methods. Changes in accounting methods could negatively impact our results of operations and capital. 15 - We could face unanticipated environmental liabilities or costs related to both real property that we own or that we acquire through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, may increase our capital costs and operating expenses. - As a bank holding company that conducts substantially all of its operations through its subsidiaries, the ability of the parent 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 parent company. Dividends paid by these subsidiaries are subject to limits imposed by federal and state law. Other factors not currently anticipated by management may also materially and adversely affect our results of operations. There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law. CRITICAL ACCOUNTING POLICIES Citizens' Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates, assumptions, and 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. 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. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the benefit obligation and net periodic pension expense for our employee pension and postretirement benefit plans to be the accounting areas that require the most subjective or complex judgments, and, therefore, are the most likely to vary materially as new information becomes available. Our significant accounting policies are more fully described in Note 1 to the audited Consolidated Financial Statements contained in our 2003 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 our 2003 Annual Report on Form 10-K. There have been no material changes to those policies or the estimates made pursuant to those policies during the most recent quarter. SALE OF SUBSIDIARY BANK AND PREPAYMENT OF FHLB ADVANCES On August 5, 2004 Citizens completed the sale of its subsidiary bank, Citizens Bank-Illinois, N.A. ("Illinois Bank"), to Metropolitan Bank Group, Inc., of Chicago, Illinois in a cash transaction valued at $26,250,000. The Illinois Bank had three locations with $179 million of assets, $79 million of loans and $159 million of deposits as of June 30, 2004. Citizens realized a gain of approximately $12 million on the transaction. In addition, Citizens prepaid $235 million of high cost Federal Home Loan Bank advances during the third quarter of 2004, which will improve Citizens' net interest margin. Prepayment penalties on the debt largely offset the gain on sale of the Illinois Bank, resulting in a relatively neutral effect on earnings per share for the third quarter. In addition, the anticipated improvement in the net interest margin, along with other potential balance sheet strategies that Citizens is still evaluating, are expected to largely offset the negative impact on future results of operations from the sale of the Illinois Bank. RESULTS OF OPERATIONS EARNINGS SUMMARY Citizens earned net income of $18,722,000, or $0.43, per diluted share for the three months ended June 30, 2004, compared with $13,214,000, or $0.30 per diluted share, for the same quarter of 2003. Annualized returns on average assets and average equity for the quarter were 0.97% and 12.00%, respectively, compared with 0.68% and 8.29%, respectively, in 2003. For the six months ended June 30, 2004, net income was $36,165,000 or $0.83 per diluted share compared with net income of $28,272,000 or $0.65 per diluted share for the same period of 2003. Annualized returns on average assets and average equity during the first six months of 2004 were 0.94% and 11.44%, respectively, compared with 0.75% and 8.89%, respectively, in 2003. Net income for the three and six months ended June 30, 2004 increased from the comparable periods in 2003 due to a lower loan loss provision, partially offset by lower net interest income, a loss on investment securities designated for sale and 16 higher noninterest expense. The provision for loan losses decreased to $4.5 million in the second quarter of 2004 compared with $25.7 million in the same quarter of 2003. The lower loan loss provision in 2004 reflects a lower level of charge-offs, the decline in nonperforming assets, and fewer risk rating downgrades within the commercial loan portfolio. In addition, the first quarter of 2003 included an unanticipated credit-related charge-off of $11.5 million on a single commercial credit in which collateral value was materially overstated (based on borrowing base reports falsified by the borrower). NET INTEREST INCOME AND NET INTEREST MARGIN An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the three and six months ended June 30, 2004 and 2003 is presented below. 17 AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2004 2003 --------------------------------- ----------------------------------- Three Months Ended June 30 AVERAGE INTEREST AVERAGE Average Interest Average (in thousands) BALANCE (1) RATE (2) Balance (3) (1) Rate (2)(3) ---------- -------- -------- ----------- -------- ----------- EARNING ASSETS Money market investments: Federal funds sold $ -- $ -- --% $ 5,873 $ 9 0.60% Other 1,904 2 0.38 1,842 3 0.65 Investment securities (4): Taxable 1,579,623 16,021 4.06 1,484,937 17,107 4.61 Tax-exempt 427,115 5,279 7.61 396,288 5,045 7.83 Mortgage loans held for sale 43,839 669 6.10 183,545 2,615 5.70 Loans: Commercial 2,900,981 38,333 5.38 3,164,230 44,750 5.75 Real estate mortgage 483,023 6,930 5.74 548,778 8,503 6.19 Direct consumer 1,114,663 15,265 5.51 890,033 14,618 6.59 Indirect consumer 769,978 12,876 6.73 649,677 12,033 7.43 ---------- -------- ---------- -------- Total earning assets 7,321,126 95,375 5.41 7,325,203 104,683 5.91 NONEARNING ASSETS Cash and due from banks 161,584 163,210 Bank premises and equipment 118,846 114,220 Investment security fair value adjustment 17,220 62,182 Other nonearning assets 275,225 262,726 Allowance for loan losses (125,200) (118,463) ---------- ---------- Total assets $7,768,801 $7,809,078 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $1,315,875 $ 2,366 0.72 1,289,092 3,070 0.96 Savings deposits 1,383,164 2,210 0.64 1,355,646 2,659 0.79 Time deposits 1,818,784 11,316 2.50 2,209,352 16,793 3.05 Short-term borrowings 687,927 1,798 1.05 476,878 1,414 1.19 Long-term debt 935,479 8,467 3.64 877,184 7,827 3.58 ---------- -------- ---------- -------- Total interest-bearing liabilities 6,141,229 26,157 1.71 6,208,152 31,763 2.05 -------- -------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 917,203 869,347 Other liabilities 82,768 92,470 Shareholders' equity 627,601 639,109 ---------- ---------- Total liabilities and shareholders' equity $7,768,801 $7,809,078 ========== ========== INTEREST SPREAD $ 69,218 3.70% $ 72,920 3.86% ======== ======== Contribution of net noninterest bearing sources of funds 0.28 0.31 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 3.98% 4.17%

(1) Interest income 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 $3,356,000 and $3,353,000 for the three months ended June 30, 2004 and 2003, respectively, based on a tax rate of 35%. (3) Certain amounts have been reclassified to conform with current year presentation. (4) 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. 18 AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2004 2003 --------------------------------- ------------------------------------ Six Months Ended June 30 AVERAGE INTEREST AVERAGE Average Interest Average (in thousands) BALANCE (1) RATE (2) Balance (3) (1) Rate (2)(3) ------- -------- -------- ----------- -------- ----------- EARNING ASSETS Money market investments: Federal funds sold $ -- $ -- --% $ 17,457 $ 93 1.06% Other 1,941 4 0.43 1,870 6 0.66 Investment securities (4): Taxable 1,554,226 31,463 4.05 1,274,279 31,541 4.95 Tax-exempt 424,352 10,523 7.63 400,880 10,229 7.85 Mortgage loans held for sale 37,892 1,110 5.86 161,035 4,637 5.76 Loans: Commercial 2,910,782 77,034 5.39 3,209,850 90,963 5.80 Real estate mortgage 489,707 14,077 5.75 568,128 17,816 6.27 Direct consumer 1,077,603 30,015 5.60 873,819 29,251 6.75 Indirect consumer 754,594 25,543 6.81 645,630 24,356 7.61 ---------- -------- ---------- -------- Total earning assets 7,251,097 189,769 5.44 7,152,948 208,892 6.07 NONEARNING ASSETS Cash and due from banks 161,174 167,327 Bank premises and equipment 116,495 115,236 Investment security fair value adjustment 32,131 63,131 Other nonearning assets 269,058 250,577 Allowance for loan losses (125,419) (116,588) ---------- ---------- Total assets $7,704,536 $7,632,631 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $1,337,216 $ 4,837 0.73 1,301,783 6,780 1.05 Savings deposits 1,335,716 3,872 0.58 1,362,502 5,570 0.82 Time deposits 1,886,910 23,634 2.52 2,262,726 35,209 3.14 Short-term borrowings 598,090 3,070 1.03 346,556 2,034 1.18 Long-term debt 937,078 16,810 3.61 784,170 14,873 3.82 ---------- -------- ---------- -------- Total interest-bearing liabilities 6,095,010 52,223 1.72 6,057,737 64,466 2.15 -------- -------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 894,704 860,686 Other liabilities 78,939 72,985 Shareholders' equity 635,883 641,223 ---------- ---------- Total liabilities and shareholders' equity $7,704,536 $7,632,631 ========== ========== INTEREST SPREAD $137,546 3.72% $144,426 3.92% ======== ======== Contribution of net noninterest bearing sources of funds 0.27 0.33 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 3.99% 4.25%

(1) Interest income 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 $6,718,000 and $6,829,000 for the six months ended June 30, 2004 and 2003, respectively, based on a tax rate of 35%. (3) Certain amounts have been reclassified to conform with current year presentation. (4) 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. Net interest income decreased $3.7 million to $69.2 million in the second quarter of 2004 compared with $72.9 million in the same quarter of 2003. The decrease in net interest income compared with the second quarter of 2003 resulted from a decline in the net interest margin and lower average earning assets. For the six months ended June 30, 2004, net interest income declined $6.9 million to $137.5 million compared with the same period of the prior year due to a decline in net interest margin, partially offset by higher earning assets. Earning assets increased due to the $500 million expansion of the investment portfolio which began late in the first quarter of 2003. Excluding the effects of the Illinois Bank sale, which 19 closed in the third quarter, Citizens anticipates that its net interest income in the third and fourth quarters will be comparable to or slightly higher than the second quarter level due to an increased volume of earning assets. Net interest margin declined to 3.98% in the second quarter of 2004 compared with 4.17% in the second quarter of 2003. The decrease in net interest margin from the second quarter of 2003 resulted from declines in yields on all earning asset categories, with the exception of mortgage loans held for sale, as a result of the lower interest rate environment, as well as a shift in the mix of earning assets from loans to lower yielding investment securities. For the six months ended June 30, 2004, net interest margin declined to 3.99% compared with 4.25% for the same period of 2003. The 63 basis point decline in the yield on earning assets for the first six months of 2004 was partially offset by a 43 basis point decline in the cost of interest bearing liabilities as the cost of all funding sources declined in the lower interest rate environment. The recent increase in short term interest rates by the Federal Reserve is anticipated to have a negligible impact on our net interest margin. The table below shows the effect of changes in average balances ("volume") and market rates of interest ("rate") on interest income, interest expense and net interest income for major categories of earning assets and interest-bearing liabilities. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- ---------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in 2004 Compared With 2003, Net ------------------------ Net ------------------------ (in thousands) Change (1) Rate (2) Volume (2) Change (1) Rate (2) Volume (2) ---------- -------- ---------- --------- -------- ---------- INTEREST INCOME Money market investments $ (10) $ (1) $ (9) $ (95) $ (49) $ (46) Investment securities: Taxable (1,086) (2,131) 1,045 (78) (6,318) 6,240 Tax-exempt 234 (150) 384 294 (293) 587 Mortgage loans held for sale (1,946) 172 (2,118) (3,527) 78 (3,605) Loans: Commercial (6,417) (3,228) (3,189) (13,929) (6,621) (7,308) Real estate (1,573) (601) (972) (3,739) (1,408) (2,331) Direct consumer 647 (1,887) 2,534 764 (3,828) 4,592 Indirect consumer 843 (1,243) 2,086 1,187 (2,660) 3,847 -------- -------- -------- -------- -------- -------- Total (9,308) (9,069) (239) (19,123) (21,099) 1,976 -------- -------- -------- -------- -------- -------- INTEREST EXPENSE Deposits: Demand (704) (767) 63 (1,943) (2,123) 180 Savings (449) (475) 26 (1,698) (2,097) 399 Time (5,477) (2,831) (2,646) (11,575) (6,346) (5,229) Short-term borrowings 384 (183) 567 1,036 (282) 1,318 Long-term debt 640 114 526 1,937 (841) 2,778 -------- -------- -------- -------- -------- -------- Total (5,606) (4,142) (1,464) (12,243) (11,689) (554) -------- -------- -------- -------- -------- -------- NET INTEREST INCOME $ (3,702) $ (4,927) $ 1,225 $ (6,880) $ (9,410) $ 2,530 ======== ======== ======== ======== ======== ========

(1) Changes are based on actual interest income and do not reflect taxable equivalent adjustments. (2) Changes not solely due to changes in volume or rates have been allocated in proportion to the absolute dollar amounts of the change in each. The decrease in net interest income for the three and six month periods of 2004 compared with the same periods of 2003 reflects unfavorable rate-related variances, partially offset by net favorable volume-related variances. Favorable volume-related variances in the investment securities portfolio are attributable to the 2003 portfolio expansion program, and favorable volume variances in the direct and indirect consumer loan portfolios are due to loan growth. The favorable variances were partially offset by lower volumes of commercial and mortgage loans, and mortgage loans held for sale. Commercial loan volumes declined due to lower demand for commercial credit, high repayment activity and continued reduction of exposure on credits not meeting our risk parameters. Mortgage loan volumes declined due to continued refinance and repayment activity and our strategy to sell most new mortgage loan production into the secondary market. Favorable volume variances from lower time deposit balances, were partially offset by unfavorable volume variances in other deposit categories, short-term borrowings and long term debt. The unfavorable rate-related variances were due to lower yields on virtually all asset 20 categories as fixed rate loans and investment securities portfolios continued to reprice lower throughout 2003 and into the first half of 2004 due to the extended low interest rate environment. Lower yields on earning assets were only partially offset by lower funding costs. While the cost of most funding categories declined in the three and six month periods ended June 30, 2004 compared with the same periods of the prior year, interest expense on such interest-bearing funds declined less than interest income on earning assets as the cost of certain interest-bearing demand and savings deposits declined to levels which approached practical lower limits. NONINTEREST INCOME Noninterest income for the second quarter of 2004 declined $2.0 million, or 8.2%, to $22.8 million compared with the second quarter of 2003. The decrease occurred as a result of a $2.1 million loss on investment securities designated for sale during the second quarter. The market value of these available-for-sale securities was below cost due to an increase in market interest rates. The anticipated proceeds of approximately $75 million from the sale of these agency-backed collateralized mortgage obligation securities are expected to be reinvested into securities with a more favorable prepayment risk profile at higher yields, which should benefit net interest income in future periods. Compared with the prior quarter, all major categories of fee income increased, led by significantly higher deposit service charges, increased brokerage and investment fees, higher mortgage and other loan income, and higher trust fees and bankcard fees. Noninterest income for the six months ended June 30, 2004 decreased $2.8 million to $45.3 million compared with $48.1 million in the first six months of 2003 due largely to a $5.3 million decrease in mortgage and other loan income and the $2.1 million loss on investment securities designated for sale in the second quarter of 2004. The significant decline in mortgage and other loan income in the first six months of 2004 compared with the same period of 2003 was mostly offset by sharply higher deposit service charges, increased brokerage and investment fees, and higher trust and bankcard fees. An analysis of the sources of noninterest income during the three and six months ended June 30, 2004 and 2003 is summarized in the table below. NONINTEREST INCOME

Three Months Ended Six Months Ended June 30, June 30, $ Change in 2004 % Change in 2004 --------------------- --------------------- --------------------- ---------------- (in thousands) 2004 2003 2004 2003 3 Mos 6 Mos 3 Mos 6 Mos -------- -------- -------- -------- -------- -------- ----- ----- Service charges on deposit accounts $ 9,069 $ 7,549 $ 17,111 $ 14,139 $ 1,520 $ 2,972 20.1% 21.0% Trust fees 4,528 4,324 8,838 8,544 204 294 4.7 3.4 Mortgage and other loan income 3,047 5,409 5,303 10,563 (2,362) (5,260) (43.7) (49.8) Brokerage and investment fees 2,651 1,914 4,433 3,682 737 751 38.5 20.4 Bankcard fees 911 814 1,694 1,549 97 145 11.9 9.4 Other, net 4,650 4,826 9,989 9,598 (176) 391 (3.6) 4.1 -------- -------- -------- -------- -------- -------- Total fees and other income 24,856 24,836 47,368 48,075 20 (707) 0.1 (1.5) Investment securities (losses) gains (2,053) 11 (2,053) 59 (2,064) (2,112) N/M N/M -------- -------- -------- -------- -------- -------- Total noninterest income $ 22,803 $ 24,847 $ 45,315 $ 48,134 $ (2,044) $ (2,819) (8.2) (5.9) ======== ======== ======== ======== ======== ========

N/M - Not Meaningful Deposit service charges increased in both the three and six months ended June 30, 2004 compared with the same periods of the prior year due primarily to higher overdraft fee income. Initiatives implemented over the last twelve months have improved the revenue generated from overdrafts and, to a lesser extent, other transaction-based charges. Trust fees increased in both the three and six months ended June 30, 2004 compared with the same periods of the prior year primarily due to stronger financial markets and Citizens' sales and sales management processes implemented in the first quarter of 2004, which are focused on relationship management and new business development strategies. Total trust assets under administration increased $6 million to $2.626 billion at June 30, 2004 from $2.620 billion at June 30, 2003. Mortgage and other loan income declined in both the three and six months ended June 30, 2004 compared with the same periods of the prior year. The decline in revenue is reflective of the decrease in mortgage loan origination volume in the current year periods. Loans sold declined $527 million to $198 million in the six month period ended June 30, 2004 compared with the same period of the prior year. The increases in brokerage and investment fees in both the three and six months ended June 30, 2004 compared with the same periods of the prior year were primarily due to a successful brokerage sales campaign. The brokerage sales campaign was a collaborative effort between the Consumer Banking and Wealth Management business units which generated $34 million in sales and $1.4 million in fee income. 21 Other noninterest income declined in the three month period ended June 30, 2004 as a $500,000 gain on the sale of a branch property and a $250,000 gain on sale of credit card loans were offset by lower title insurance fees, cash management services, ATM fees and other income. For the six months ended June 30, 2004, other noninterest income increased as net gains on sales of branch properties and equipment of $1.1 million and the credit card gain of $250,000 offset the decline in the title insurance fees, cash management services, ATM fees and other income. Excluding the effects of the Illinois Bank sale which closed in the third quarter, and excluding the effects of the second quarter securities loss and gain on sale of the branch property, Citizens anticipates total noninterest income in the third and fourth quarters to be comparable to the second quarter level. NONINTEREST EXPENSE Noninterest expense increased $5.8 million or 10.3% to $62.1 million in the second quarter of 2004 compared with $56.4 million in the second quarter of 2003. For the six month period ended June 30, 2004, noninterest expense increased $9.7 million or 8.6% to $122.7 million compared with the same period in 2003. All categories of noninterest expense except equipment increased in the three months ended June 30, 2004 compared to the same period of the prior year,while all categories except equipment and supplies and stationery increased in the six months ended June 30, 2004 compared to the same period of the prior year. An analysis of the components of noninterest expense during the three and six months ended June 30, 2004 and 2003 is summarized in the table below. NONINTEREST EXPENSE

Three Months Ended Six Months Ended June 30, June 30, $ Change in 2004 % Change in 2004 -------------------- -------------------- --------------------- ----------------- (in thousands) 2004 2003 2004 2003 3 Mos 6 Mos 3 Mos 6 Mos -------- -------- -------- -------- -------- -------- ----- ----- Salaries and employee benefits $ 33,185 $ 31,400 $ 65,124 $ 61,512 $ 1,785 $ 3,612 5.7% 5.9% Occupancy 4,922 4,314 10,264 9,009 608 1,255 14.1 13.9 Professional services 4,281 3,959 8,209 7,667 322 542 8.1 7.1 Equipment 3,668 3,869 7,310 8,038 (201) (728) (5.2) (9.1) Data processing services 3,440 3,058 7,086 6,374 382 712 12.5 11.2 Advertising and public relations 2,038 623 4,183 2,672 1,415 1,511 227.1 56.5 Postage and delivery 1,862 1,683 3,418 3,361 179 57 10.6 1.7 Telephone 1,451 1,135 2,985 2,310 316 675 27.8 29.2 Other loan fees 1,631 1,146 2,760 2,287 485 473 42.3 20.7 Stationery and supplies 916 873 1,758 1,768 43 (10) 4.9 (0.6) Other, net 4,749 4,301 9,580 7,944 448 1,636 10.4 20.6 -------- -------- -------- -------- -------- -------- Total noninterest expense $ 62,143 $ 56,361 $122,677 $112,942 $ 5,782 $ 9,735 10.3 8.6 ======== ======== ======== ======== ======== ========

Salaries and employee benefits increased due to higher salaries in Oakland County of $1.0 million and $2.3 million in the three and six month periods, respectively, resulting from the previously announced Oakland County expansion initiative. Salaries and employee benefits also increased in both the three and six month periods due to higher pension and other employee benefits expenses. Normal salary merit increases were offset by a reduction in staffing levels. Citizens had 2,272 full time equivalent employees at June 30, 2004, down from 2,376 at June 30, 2003. Occupancy costs increased in both the three and six month periods ended June 30, 2004 compared with the same periods of the prior year. Building rent and other occupancy costs increased $0.2 million and $0.3 million for the three and six month periods, respectively, due to the opening of new branches and an administrative office in Oakland County. Building repair increased $0.1 million and $0.3 million in the three and six month periods, respectively, due to a change in Citizens' capitalization policy during the fourth quarter of 2003 incorporating higher capitalization thresholds on new expenditures. Other occupancy costs increased $0.3 million and $0.7 million in the three and six month periods, respectively, largely due to higher maintenance, energy and real estate tax expenses. Professional services expense increased for the three and six month periods ended June 30, 2004 due to higher legal and other professional fees related to loan collection activity, and higher audit costs related to new control evaluation procedures to comply with section 404 of the Sarbanes-Oxley Act. Equipment expense decreased $0.2 million and $0.7 million, and telephone expense increased $0.3 million and $0.7 million for the three and six month periods ended June 30, 2004, respectively, due to the reclassification of data transmission costs from equipment expense to telephone expense in connection with a new services contract. 22 Data processing services increased in both the three and six month periods ended June 30, 2004 due to higher processing costs related to the fourth quarter 2003 implementation of the new trust and investment accounting systems and operations with SEI Investments, and retirement services recordkeeping systems and operations with EPIC Advisors, Inc. These increases were partially offset by lower processing costs in both periods on Citizens' core loan and deposit systems. Advertising and public relations expense increased in both the three and six month periods ended June 30, 2004 compared with the same periods of the prior year. Advertising to support Citizens' Oakland County initiative accounted for $1.0 million and deposit-focused promotions accounted for $0.5 million of the six month period increase. Other loan fee expense increased in both the three and six month periods ended June 30, 2004 compared with the same periods of the prior year due to a higher provision for losses on unfunded loan commitments, waiver of certain client-paid mortgage loan fees and lower deferral of mortgage loan expenses due to the lower mortgage loan origination volume. Contributing to the increases in other noninterest expense were higher non-credit related losses of $0.3 million and $0.8 million for the three and six month periods ended June 30, 2004, respectively, due to higher losses in the current year periods and an unusually low level of such losses in the prior year periods. In addition, training and travel expenses increased $0.3 and $0.6 million in the three and six month periods, respectively, while lower deferred loan origination costs also increased other expenses by $0.3 million and $0.5 million in the three and six month periods, respectively. Partially offsetting these increases were lower expenses for other real estate which declined $0.5 million and $0.7 million in the three and six month periods, respectively. Excluding the effects of the Illinois Bank sale which closed in the third quarter, Citizens anticipates that noninterest expense in the third and fourth quarters will remain comparable to the second quarter level. INCOME TAXES Income tax provision increased to $6.7 million and $12.5 million in the three and six months ended June 30, 2004, respectively, compared with $2.5 million and $6.7 million in the same periods in 2003. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 26.2% and 25.7% for the three and six months ended June 30, 2004, respectively, compared with 16.1% and 19.2% for the same periods of 2003. In both the three and six month periods, the effective tax rates increased due to a higher ratio of taxable income to total income, attributable to the lower provision for loan losses. The effective tax rate is lower than the statutory tax rate due to tax-exempt interest and noninterest income and, to a lesser extent, other permanent income tax differences. LINES OF BUSINESS RESULTS We monitor our financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Our 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 20 to the Consolidated Financial Statements of our 2003 Annual Report on Form 10-K and Note 5 to the unaudited Consolidated Financial Statements in this report. A summary of net income by each business line is presented below.

Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 -------- -------- -------- -------- Commercial Banking $ 8,077 $ (1,835) $ 14,842 $ 4,400 Consumer Banking 10,590 10,144 20,803 17,937 Wealth Management 506 120 619 647 Other (451) 4,785 (99) 5,288 -------- -------- -------- -------- Net income $ 18,722 $ 13,214 $ 36,165 $ 28,272 ======== ======== ======== ========

COMMERCIAL BANKING The increases in net income in both the three and six month periods ended June 30, 2004 was attributable to a decrease in the provision for loan losses, partially offset by declines in net interest income and noninterest income and higher noninterest expenses. The significant decline in the loan loss provision was due to lower net charge-offs, fewer commercial loan risk rating downgrades and improving non-performing asset levels. Net loan charge-offs in Commercial Banking declined to $2.7 million and $7.3 million in the three and six month periods ended June 30, 2004, respectively, compared with $9.4 million 23 and $21.9 million in the same periods of 2003 due largely to a single credit charge-off of $11.5 million in the first quarter of 2003. Net interest income declined in both the three and six month periods ended June 30, 2004 as a result of lower average commercial loan balances due to lower demand for commercial credit, high repayment activity and continued reduction of exposure on credits not meeting our risk parameters. The decline in loans occurred in most markets with the exception of Southeast Michigan, including Oakland County, which experienced moderate growth. Noninterest income declined due to lower deposit service charges and cash management fees as certain commercial account relationships were transferred from Commercial Banking to Consumer Banking beginning in the second quarter of 2003, based upon the client's assigned office. Noninterest expense increased primarily due to higher compensation costs as a result of an increase in commercial banking staff, lower deferred origination-related compensation and higher recruiting-related incentives in Oakland County and other markets. CONSUMER BANKING The increase in net income for the three months ended June 30, 2004 compared to the same period of the prior year was due to a decrease in provision for loan losses and an increase in noninterest income. Noninterest income increased as a result of increased income from deposit service charges and net gains on sales of branch properties, offset by decreases in mortgage income from lower refinance activities. Noninterest income also increased due to the transfer of certain commercial account relationships from Commercial Banking to Consumer Banking beginning in the second quarter of 2003 resulting in higher deposit service charges and cash management fees. The decrease in provision for loan losses reflected a reduced level of net loan charge-offs. Lower mortgage portfolio loans and mortgage loans held for sale contributed to a decline in net interest income which partially offset the increases from higher noninterest income and lower provision for loan losses. The increase in net income for the six months ended June 30, 2004 compared to the same period a year ago was due to increases in net interest income and noninterest income and decreases in provision for loan losses and noninterest expense. Net interest income improved as a result of growing home equity and indirect loan portfolios and improved deposit spreads due to lower rates on deposit products, partially offset by lower mortgage portfolio loans and mortgage loans held for sale. Noninterest income increased due to higher deposit service charge income and net gains related to the sale of branch properties, partially offset by a decrease in mortgage income due to lower refinance volumes. The provision for loan losses declined reflecting a lower level of net charge-offs. Noninterest expense declined reflecting the prior year efforts to improve efficiency levels in the branches which was partially offset by increased advertising for Oakland County. WEALTH MANAGEMENT The increase in net income for the three month period ended June 30, 2004 was due to increases in net interest income and noninterest income and a decline in noninterest expense. Net interest income increased due to the internal transfer of loans and deposits to Wealth Management from the Commercial Banking and Consumer Banking lines of business to better align customer relationships. Noninterest income increased due to higher trust and brokerage fees. Trust fees increased primarily due to stronger financial markets and Citizens' sales and sales management processes implemented in the first quarter of 2004, which are focused on relationship management and new business development strategies. The increases in brokerage and investment fees were primarily due to a successful brokerage sales campaign in which the Consumer and Wealth Management lines of business collaborated to generate $34 million in brokerage and investment sales and $1.4 million in fee income. The decline in net income for the six month period ended June 30, 2004 was due to an increase in noninterest expense partially offset by increases in net interest income and noninterest income. Noninterest expense increased primarily due to higher incentive-based compensation and due to increased data processing costs related to implementation of the new trust and investment accounting systems and operations with SEI Investments and retirement services recordkeeping systems and operations with EPIC Advisors, Inc. Net interest income increased due to the internal transfer of loans and deposits mentioned above, and noninterest income increased due to higher trust and brokerage fees. On July 22, 2004, Citizens Bank Wealth Management, N.A. announced that the Board of Trustees of the company-managed Golden Oak mutual funds has given preliminary approval to a proposal to reorganize on a tax-free basis the Golden Oak Funds into two leading fund groups: Goldman Sachs Trust and Federated Investors, Inc.'s family of funds. Six of the Golden Oak portfolios will merge with comparable portfolios managed by Goldman Sachs, and one portfolio will merge with a comparable portfolio offered by Federated. Golden Oak mutual fund portfolios currently have approximately $465 million in assets under management. The acquiring funds have filed registration statements with the Securities and Exchange Commission. The reorganization is expected to be completed at the end of September. At that time, the assets of the Golden Oak funds will be exchanged for shares of the acquiring funds. Citizens' expects to recognize a small gain upon completion of the reorganization, with minimal impact to its future results of operations and cash flow as a result of this transaction. Early in the third quarter of 2004, Citizens replaced its broker/dealer services vendor with Independent Financial Marketing Group, Inc. (IFMG). IFMG will provide marketing support, advanced technology and improved processing capabilities. Citizens anticipates no significant change in cash flows or results of operations in the third quarter as a result of this new 24 alliance, and anticipates enhanced brokerage and investment fee revenue and improved brokerage unit profitability beginning in subsequent periods as a result of this relationship. OTHER The decline in net income in both the three and six month periods ended June 30, 2004 was due to lower noninterest income and higher noninterest expense. Noninterest income declined due to the previously mentioned loss on sale of investment securities during the second quarter of 2004. Noninterest expense increased in both the three and six month periods due to higher salaries and employee benefits expense, increased marketing expenses, higher loan fee expense and increased non-credit related losses in the current year periods compared with an unusually low level of such losses in the prior year periods, and increased professional services expense. FINANCIAL CONDITION Total assets were $7.748 billion at June 30, 2004, an increase of $36.8 million or 0.5% compared with December 31, 2003. Total assets increased due to growth in portfolio loans. Portfolio loans increased $44.4 million or 0.8% compared with year end 2003 as consumer loans, excluding mortgage loans, increased, while mortgage and commercial loans declined. Total deposits at June 30, 2004 decreased $80.8 million or 1.5% compared with December 31, 2003 largely due to a decline in time deposits. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total average investments, including money market investments, comprised 27.3% of average earning assets during the first six months of 2004 compared with 23.7% for the same period of 2003, a $286 million increase from the prior year average levels. The increase was due to purchases of securities beginning in March 2003, when Citizens implemented an investment portfolio expansion plan to help offset the effect on net interest income of weak loan demand. In accordance with the plan, Citizens purchased approximately $500 million of mortgage backed securities and collateralized mortgage obligations with average lives of three to five years and an average duration of two to four years, resulting in interest spreads of up to 250 basis points over funding sources. The purchases were funded with cash flow from loan repayments, runoff of investments and short- and medium-term borrowings. PORTFOLIO LOANS Portfolio loans increased $44.4 million or 0.8% compared with December 31, 2003 as consumer loans, excluding mortgage loans, increased, while mortgage and commercial loans declined. Commercial loans, including commercial real estate construction loans, decreased $99.6 million or 3.3% at June 30, 2004 compared with December 31, 2003, due to lower demand for commercial credit, high repayment activity and continued reduction of exposure on credits not meeting Citizens' risk parameters. The decline moderated in the second quarter as commercial loans decreased only $9.1 million compared with the $90.5 million reduction in the first quarter of 2004. Continued declines in Citizens' Wisconsin and Iowa markets during the second quarter of 2004 were nearly offset by accelerating growth in Michigan's Oakland County market. Consumer loans, excluding mortgage loans, increased $168.1 million or 9.5% at June 30, 2004 compared with December 31, 2003 due to strong growth in home equity loans. Home equity loans increased $124 million or 16.6% in the six months ended June 30, 2004. The recreational vehicle and marine segments of the indirect loan portfolio also experienced strong growth due to higher seasonal demand in the second quarter. Mortgage loans declined $24.1 million or 4.9% compared to December 31, 2003. The decline in the mortgage portfolio occurred due to ongoing repayment and refinance activity coupled with Citizens' strategy to sell most new mortgage loan production into the secondary market. Compared with June 30, 2003, mortgage loans declined $111.5 million or 19.2% at June 30, 2004 as a result of prepayments from refinancing. Growth in consumer loans is anticipated to continue during the remainder of 2004 led by strong growth in home equity loans and more moderate growth in indirect loans, primarily marine and recreational vehicle loans, consistent with the trend in consumer loan growth over the past twelve months. Mortgage loans are expected to continue to decline due to ongoing refinance and repayment activity combined with our strategy to sell most new mortgage loan production. Commercial loans are anticipated to flatten during the second half of the year and begin to grow prior to year end with improvement in new business development led by the Oakland County market. At June 30, 2004 and 2003, $50.1 million and $87.8 million, respectively, of residential real estate loans originated and subsequently sold in the secondary market were being serviced by Citizens. Capitalized servicing rights relating to the serviced loans were fully amortized in June 2003. 25 MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale were $37.0 million at June 30, 2004, down $7.7 million compared with December 31, 2003 and $99.4 million lower compared with June 30, 2003. These balances generally track the level of originations, as we sell most of our new residential mortgage loan production into the secondary market due to the low interest rate environment. Closed mortgage loan volume declined to $217 million in the second quarter of 2004 compared with $491 million in the second quarter of 2003. New mortgage loan production was spurred during the second quarter of 2003 by a strong refinance market as a result of the low interest rate environment. Average mortgage loans held for sale during the first six months of 2004 comprised 0.5% of average earning assets compared with 2.3% during the same period in 2003. Mortgage loans held for sale are accounted for on the lower of cost or market basis. PROVISION AND ALLOWANCE FOR LOAN LOSSES A summary of loan loss experience during the three and six months ended June 30, 2004 and 2003 is provided below. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (in thousands) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Allowance for loan losses - beginning of period $ 123,703 $ 109,695 $ 123,545 $ 106,777 Provision for loan losses 4,500 25,650 11,500 44,642 Charge-offs: Commercial 2,982 7,577 8,685 21,710 Commercial real estate 1,918 4,321 3,069 5,276 Small business 167 273 385 537 ---------- ---------- ---------- ---------- Total commercial 5,067 12,171 12,139 27,523 Real estate mortgage 305 76 498 701 Consumer - Direct 1,220 1,790 2,850 3,538 Consumer - Indirect 1,630 2,152 3,521 4,663 ---------- ---------- ---------- ---------- Total charge-offs 8,222 16,189 19,008 36,425 ---------- ---------- ---------- ---------- Recoveries: Commercial 2,202 2,115 4,534 4,147 Commercial real estate 225 623 657 1,088 Small business 107 93 124 455 ---------- ---------- ---------- ---------- Total commercial 2,534 2,831 5,315 5,690 Real estate mortgage 23 8 36 9 Consumer - Direct 560 479 998 918 Consumer - Indirect 707 828 1,419 1,691 ---------- ---------- ---------- ---------- Total recoveries 3,824 4,146 7,768 8,308 ---------- ---------- ---------- ---------- Net charge-offs 4,398 12,043 11,240 28,117 ---------- ---------- ---------- ---------- Allowance for loan losses - end of period $ 123,805 $ 123,302 $ 123,805 $ 123,302 ========== ========== ========== ========== Portfolio loans outstanding at period end (1) $5,290,078 $5,287,249 $5,290,078 $5,287,249 Average portfolio loans outstanding during period (1) 5,268,645 5,252,718 5,232,686 5,297,426 Allowance for loan losses as a percentage of portfolio loans 2.34% 2.33% 2.34% 2.33% Ratio of net charge-offs during period to average portfolio loans (annualized) 0.33 0.92 0.43 1.06 Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 7.0X 2.6x 5.5X 2.2x

(1) Balances exclude mortgage loans held for sale. Net charge-offs declined to $4.4 million in the second quarter of 2004 compared with $12.0 million in the second quarter of 2003. The decline was due primarily to lower net charge-offs in the commercial loan portfolio, and to a lesser extent, lower consumer loan net charge-offs. For the six month period net charge-offs were $11.2 million compared with $28.1 million in the same period a year ago. The significant decline in net charge-offs was largely due to an $11.5 million charge-off on a single commercial credit in the first quarter of 2003. 26 The provision for loan losses declined to $4.5 million compared with $25.7 million in the same quarter of 2003. The decline in the provision for loan losses reflects the lower level of net charge-offs, a reduction in nonperforming assets and fewer risk rating downgrades on commercial credits during the quarter. Citizens anticipates both net charge-offs and provision expense to be somewhat higher in the third quarter than in the second quarter of 2004, due to the unusually low level of consumer loan charge-offs in the second quarter and anticipated higher commercial loan net charge-offs in the third quarter of 2004. The allowance for loan losses represents our estimate of probable losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments and is maintained at a level management considers to be adequate to absorb probable loan losses identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio that have not been specifically identified. Our evaluation process is inherently subjective as it requires estimates that may be susceptible to significant change and have the potential to materially affect net income. Default frequency, internal risk ratings, expected future cash collections, loss recovery rates, and general economic factors, among other things, are considered in this evaluation, as are the size and diversity of individual large credits. While we continue to enhance our loan loss allocation model and risk rating process, we have not substantively changed our overall approach in the determination of the allowance for loan losses in 2004 from 2003. Our methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, a formula-based risk-allocated allowance for the remainder of the portfolio and an unallocated allowance. This methodology is discussed in our 2003 Annual Report on Form 10-K. The allowance for loan losses totaled $123.8 million or 2.34% of loans at June 30, 2004, consistent with the December 31, 2003 level of $123.5 million or 2.36% of loans. At June 30, 2004, the allowance allocated to specific commercial and commercial real estate credits was $16.4 million compared with $18.3 million at December 31, 2003. The decrease was primarily attributable to a decline in criticized and classified credits (i.e., those internally risk rated 7 - special mention, 8 - substandard or 9 - doubtful). Criticized and classified credits subject to specific reserves declined $23.0 million to $43.7 million at June 30, 2004 compared with $66.7 million at December 31, 2003. The total formula risk-allocated allowance was $86.2 million at June 30, 2004, down from $89.5 million at December 31, 2003. The amount allocated to commercial and commercial real estate loans, including construction loans, decreased to $64.9 million at June 30, 2004 compared with $69.7 million at December 31, 2003. The decrease reflected a lower level of nonperforming assets in these categories. The risk-allocated allowance for residential real estate loans increased to $5.8 million at June 30, 2004 compared with $4.7 million at December 31, 2003, reflecting a higher loss allocation factor applied to the mortgage portfolio. The risk-allocated allowance for consumer loans, excluding mortgage loans, increased to $15.5 million at June 30, 2004 compared with $15.1 million at December 31, 2003, due to growth in home equity loans. The unallocated allowance increased to $21.2 million at June 30, 2004, compared with $15.7 million at December 31, 2003. The unallocated portion of the allowance is maintained to address the uncertainty relating to factors affecting the determination of probable losses inherent in the loan portfolio that may not have yet manifested themselves in our specific allowances or in the historical loss factors used to determine the formula allowances, such as geographic expansion, the possible imprecision of internal risk-ratings within the portfolios, continued weak general economic and business conditions and changes in the composition of our portfolio. The increase in the unallocated allowance resulted from additional uncertainty in high risk energy-dependent industries such as trucking and tourism, and additional uncertainty regarding the agricultural loan portfolio. The amount of the provision for loan losses is based on our review of the historical credit loss experience and such factors that, in our judgment, deserve consideration under existing economic conditions in estimating probable credit losses. While we consider the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or loss rates. The methods we use to determine the provision for loan losses and the factors we consider are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2003 Annual Report on Form 10-K. 27 NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms and repossessed assets, primarily real estate. Although these assets have more than a normal risk of loss, they will not necessarily result in a higher level of losses in the future. The table below provides a summary of nonperforming assets as of June 30, 2004, December 31, 2003 and June 30, 2003. NONPERFORMING ASSETS

JUNE 30, December 31, June 30, (in thousands) 2004 2003 2003 -------- ------------ -------- Nonperforming Loans Nonaccrual Commercial: Commercial $ 18,066 $ 37,171 $ 52,760 Commercial real estate 14,982 16,385 19,568 Small business 2,749 1,603 1,466 -------- -------- -------- Total commercial 35,797 55,159 73,794 Nonaccrual Consumer: Direct 4,042 3,177 3,208 Indirect 655 1,247 1,094 -------- -------- -------- Total consumer 4,697 4,424 4,302 Nonaccrual Mortgage 7,697 9,161 9,832 -------- -------- -------- Total nonaccrual loans 48,191 68,744 87,928 Loans 90 days past due and still accruing 298 345 607 Restructured loans 52 -- -- -------- -------- -------- Total nonperforming loans 48,541 69,089 88,535 Other Repossessed Assets Acquired (ORAA) 9,673 7,943 8,044 -------- -------- -------- Total nonperforming assets $ 58,214 $ 77,032 $ 96,579 ======== ======== ======== Nonperforming assets as a percent of portfolio loans plus ORAA (1) 1.10% 1.47% 1.82% Nonperforming assets as a percent of total assets 0.75 1.00 1.24 Allowance for loan loss as a percent of nonperforming loans 255.05 178.82 139.27 Allowance for loan loss as a percent of nonperforming assets 212.67 160.38 127.67

(1) Portfolio loans exclude mortgage loans held for sale. The level of nonperforming commercial loans at June 30, 2004 declined as we sold one of our two largest nonperforming assets and received a significant cash payment on the other during the first quarter of 2004, reducing nonperforming assets by a total of $8.4 million on these two credits alone. In addition, nonperforming commercial loans declined as a result of continued aggressive collection and workout efforts. Changes in nonperforming loans are reflected in the allowance for loan losses through specific and risk allocated allowances. As of June 30, 2004, the total allocated allowance for nonaccrual commercial loans was approximately $5.2 million compared with $7.7 million at June 30, 2003. In addition to loans classified as nonperforming, we carefully monitor other credits that are current in terms of principal and interest payments but which we believe may deteriorate in quality if economic conditions change. As of June 30, 2004, such loans amounted to $165.3 million, or 3.1% of total portfolio loans, compared with $189.8 million, or 3.6%, of total portfolio loans as of December 31, 2003. These loans are primarily 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. 28 Some of our nonperforming loans included in the nonperforming loan table above are considered to be impaired. Total loans considered impaired and their related reserve balances at June 30, 2004 and 2003 as well as their effect on interest income for the first quarter of 2004 and 2003 follows: IMPAIRED LOAN INFORMATION

Valuation Reserve ---------------------- (in thousands) 2004 2003 2004 2003 --------- --------- --------- --------- Balances - June 30, Impaired loans with valuation reserve $ 29,420 $ 52,315 $ 11,294 $ 17,767 Impaired loans with no valuation reserve 18,492 44,068 -- -- --------- --------- --------- --------- Total impaired loans $ 47,912 $ 96,383 $ 11,294 $ 17,767 ========= ========= ========= ========= Impaired loans on nonaccrual basis $ 35,797 $ 73,794 $ 5,161 $ 7,658 Impaired loans on accrual basis 12,115 22,589 6,133 10,109 --------- --------- --------- --------- Total impaired loans $ 47,912 $ 96,383 $ 11,294 $ 17,767 ========= ========= ========= ========= Average balance for the quarter $ 57,687 $ 91,479 Interest income recognized for the quarter 249 283 Cash collected applied to outstanding principal 384 1,076

DEPOSITS Total deposits decreased $80.8 million, or 1.5% to $5.361 billion at June 30, 2004 compared with $5.442 billion at December 31, 2003. The decline in deposits occurred largely within time deposits, reflecting our less aggressive pricing posture during the low interest rate environment. Time deposits declined $222 million to $1.738 billion at June 30, 2004 compared with $1.960 billion at December 31, 2003. Core deposits, which exclude time deposits, totaled $3.623 billion at June 30, 2004 an increase of $141 million or 4.0% compared with December 31, 2003. The increase in core deposits occurred primarily as a result of the growth in market rate savings, and to a lesser extent, growth in noninterest checking deposits. A decline in interest-bearing checking deposits partially offset the increase in other core deposits. We gather deposits primarily within our local markets and have not traditionally relied on brokered or out of market purchased deposits for any significant portion of our funding. At June 30, 2004, we had approximately $164 million in brokered deposits, up slightly from $159 million at December 31, 2003. We will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. In addition to brokered deposits, we had approximately $417 million of time deposits greater than $100,000, a decrease of $43 million from December 31, 2003. Time deposits greater than $100,000 consist of commercial, consumer and public fund deposits derived almost exclusively from our local markets. We continue to promote relationship driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies. BORROWED FUNDS Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, other bank borrowings, FHLB advances and Treasury Tax and Loan notes. As of June 30, 2004, short-term borrowed funds totaled $747.9 million, an increase of $116.3 million or 18.4% compared with December 31, 2003. For the six months ended June 30, 2004, average short-term borrowed funds totaled $598.1 million, an increase of $251.5 million, or 72.6% from the same period of 2003. The increased short-term borrowings provided funding to support expansion of the investment portfolio, which commenced in the first quarter of 2003, and partially offset a decrease in average deposits. Long-term debt consists almost entirely of advances from the Federal Home Loan Bank ("FHLB") to our subsidiary banks, and subordinated notes issued by our holding company parent. Average long-term debt totaled $937.1 million for the first six months of 2004, an increase of $152.9 million or 19.5% compared with the same period in 2003. The increases resulted from the issuance of $125 million of subordinated debt in the first quarter of 2003, $25 million of junior subordinated debentures in the second quarter of 2003, and increases in FHLB advances. The $125 million of subordinated debt and the $25 million of junior subordinated debentures qualify as Tier II and Tier I capital, respectively, for regulatory risk-based capital purposes and were issued to improve liquidity and risk-based capital ratios. The increase in FHLB advances provided funding to support the expansion of the investment portfolio and the decline in deposits during 2003. For further information on the two subordinated debt issuances, refer to Note 12 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K. 29 CAPITAL RESOURCES We continue to maintain a strong capital position, which supports our current needs and provides a sound foundation to support further expansion. Our regulatory capital ratios are consistently at or above the "well capitalized" standards and all of our bank subsidiaries have sufficient capital to maintain a well capitalized designation. Our capital ratios as of June 30, 2004, December 31, 2003 and June 30, 2003 are presented below. CAPITAL RATIOS

Regulatory Minimum For "Well JUNE 30, December 31, June 30, Capitalized" 2004 2003 2003 ------------ ---- ---- ---- Risk based capital: Tier I 6.0% 10.0% 9.8% 9.6% Total capital 10.0 13.4 13.2 13.1 Tier I leverage 5.0 7.5 7.5 7.2

Shareholders' equity at June 30, 2004 was $627.7 million, compared with $635.2 million at December 31, 2003 and $639.2 million as of June 30, 2003. Book value per common share at June 30, 2004, December 31, 2003 and June 30, 2003 was $14.51, $14.69 and $14.77, respectively. We declared and paid cash dividends of $0.285 per share in the second quarter of 2004, the same as we declared and paid in the second quarter of 2003. Shareholders' equity decreased as accumulated other comprehensive income, a component of capital, declined due to a decrease in the fair value of our available for sale securities. During the second quarter of 2004, we purchased a total of 108,000 shares for $3.2 million. Information regarding the Company's share repurchase program is set forth later in this report under Part II, Item 2 "Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities." CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS Our contractual obligations and off-balance sheet arrangements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our 2003 Annual Report on Form 10-K. In the first quarter of 2004, we entered into long term leases on new branch and administrative offices in Oakland County with minimum annual lease commitments of approximately $1.0 million and total lease commitments over the life of the contracts of approximately $10.4 million under the non-cancelable operating leases for these facilities. Except for these new leases and as described elsewhere in this Report on Form 10-Q, there have been no material changes to those obligations or arrangements outside the ordinary course of business during the most recent quarter. LIQUIDITY AND DEBT CAPACITY We monitor and manage our 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. We manage the liquidity of our parent company to pay dividends to shareholders, service debt, invest in subsidiaries and to satisfy other operating requirements. We manage the liquidity of our subsidiary banks to meet client cash flow needs while maintaining funds available for loan and investment opportunities. Our subsidiary banks derive liquidity primarily through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, our subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks where the subsidiary banks are members. The primary sources of liquidity for the parent company are dividends from and returns on investment in its subsidiaries. Each of our banking subsidiaries is subject to dividend limits under the laws of the state in which it is chartered and, as a member bank of the Federal Reserve System, is 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 approval of the Federal Reserve Board. As of July 1, 2004, the banking subsidiaries could distribute to Citizens approximately $33.2 million in dividends without regulatory approval. 30 An additional source of liquidity is the ability of our parent company to borrow funds on both a short-term and long-term basis. Our parent company maintains a $50 million short-term revolving credit facility with two unaffiliated banks. As of June 30, 2004, we had no outstanding balance under this credit facility. The current facility will mature in August 2004 and is expected to be renewed at that time on substantially the same terms. The credit agreement also requires Citizens to maintain certain financial covenants related to asset quality and capital levels. We were in full compliance with all debt covenants as of June 30, 2004. Downgrades in the first quarter of 2003 by FitchRatings and Standard & Poor's Rating Service of our long-term credit rating to BBB from BBB+ due to asset quality deterioration and increased nonperforming assets have not and are not expected to materially affect our liquidity position. Our short-term credit rating remained unchanged at F2 and A-2, respectively. Separately, in the second quarter of 2003, Moody's Investors Service affirmed our outstanding ratings of Baa-1 (long term) and P-2 (short term), after their review for a possible downgrade. We believe that our capital position provides enough financial flexibility to deal with a degree of additional credit deterioration, if such were to occur. Our Oakland County branch expansion plan will pose a challenge to liquidity as both the capital investment and loan growth will require incremental funding. We anticipate that through a combination of wholesale funding and deposit generation of both the new Oakland County branches and the existing branch network, we will be able to fund all aspects of the expansion plan. In addition, the combined effect of the third quarter 2004 sale of the Illinois Bank and the prepayment of Federal Home Loan Bank advances had a neutral impact on liquidity. We also have contingent letter of credit commitments that may impact liquidity. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent our future cash requirements in connection with them. Further information on these commitments is presented in Note 10 to the Consolidated Financial Statements in this report. We have sufficient liquidity and capital resources to meet presently known short and long-term cash flow requirements. INTEREST RATE RISK Interest rate risk arises when the repricing structures of our assets and liabilities differ significantly. Interest rate risk can result from a mismatch in the timing of the repricing of assets and liabilities, option risk which can alter the expected timing of repricing of certain assets or liabilities, or basis risk. Basis risk occurs when assets and liabilities reprice at the same time but based on different market rates, and when those market rates change by different amounts. Many assets and liabilities contain embedded options which allow customers, and entities associated with our investments and wholesale funding, the opportunity to prepay loans or securities prior to maturity, or to withdraw or reprice deposits or other funding instruments prior to maturity. Our Asset / Liability Committee (ALCO) monitors asset, liability, and off-balance-sheet portfolios to ensure comprehensive management of interest rate risk. The Asset / Liability management process includes monitoring contractual and expected repricing of assets and liabilities as well as forecasting earnings under different interest rate scenarios and balance sheet structures with the objective of insulating net interest income from large swings attributable to changes in market interest rates. Our static interest rate sensitivity, commonly referred to as repricing "GAP," as of June 30, 2004 and 2003 is illustrated in the table on the following page. 31 INTEREST RATE SENSITIVITY

TOTAL 1-90 91-180 181-365 WITHIN 1-5 Over (dollars in millions) Days Days Days 1 YEAR Years 5 Years Total -------- -------- --------- --------- --------- ------- --------- JUNE 30, 2004 RATE SENSITIVE ASSETS (1) Portfolio loans (2) $2,502.8 $ 239.3 $ 416.9 $ 3,159.0 $ 1,791.2 $ 339.9 $ 5,290.1 Mortgage loans held for sale 37.0 -- -- 37.0 -- -- 37.0 Investment securities 76.0 71.0 86.8 233.8 1,082.3 660.0 1,976.1 Short-term investments 2.2 -- -- 2.2 -- -- 2.2 -------- -------- --------- --------- --------- ------- --------- Total $2,618.0 $ 310.3 $ 503.7 $ 3,432.0 $ 2,873.5 $ 999.9 $ 7,305.4 ======== ======== ========= ========= ========= ======= ========= RATE SENSITIVE LIABILITIES Deposits (3) $1,383.1 $ 391.3 $ 677.1 $ 2,451.5 $ 1,719.2 $ 270.8 $ 4,441.5 Other interest bearing liabilities 823.7 0.7 215.1 1,039.5 263.4 376.4 1,679.3 -------- -------- --------- --------- --------- ------- --------- Total $2,206.8 $ 392.0 $ 892.2 $ 3,491.0 $ 1,982.6 $ 647.2 $ 6,120.8 ======== ======== ========= ========= ========= ======= ========= Period GAP (4) $ 411.2 $ (81.7) $ (388.5) $ (59.0) $ 890.9 $ 352.7 $ 1,184.6 Cumulative GAP 411.2 329.5 (59.0) 831.9 1,184.6 Cumulative GAP to Total Assets 5.31% 4.25% (0.76)% (0.76)% 10.74% 15.29% 15.29% Multiple of Rate Sensitive Assets to Liabilities 1.19 0.79 0.56 0.98 1.45 1.54 1.19 JUNE 30, 2003 RATE SENSITIVE ASSETS (1) Portfolio loans (2) $2,637.3 $ 277.9 $ 443.2 $ 3,358.4 $ 1,710.4 $ 218.5 $ 5,287.3 Mortgage loans held for sale 136.4 -- -- 136.4 -- -- 136.4 Investment securities 255.7 137.4 251.3 644.4 824.9 434.8 1,904.1 Short-term investments 6.4 -- -- 6.4 -- -- 6.4 -------- -------- --------- --------- --------- ------- --------- Total $3,035.8 $ 415.3 $ 694.5 $ 4,145.6 $ 2,535.3 $ 653.3 $ 7,334.2 ======== ======== ========= ========= ========= ======= ========= RATE SENSITIVE LIABILITIES Deposits (3) $ 667.7 $ 507.4 $ 927.6 $ 2,102.7 $ 2,142.2 $ 510.4 $ 4,755.3 Other interest bearing liabilities 564.9 0.3 25.2 590.4 425.5 396.6 1,412.5 -------- -------- --------- --------- --------- ------- --------- Total $1,232.6 $ 507.7 $ 952.8 $ 2,693.1 $ 2,567.7 $ 907.0 $ 6,167.8 ======== ======== ========= ========= ========= ======= ========= Period GAP (4) $1,803.2 $ (92.4) $ (258.3) $ 1,452.5 $ (32.4) $(253.7) $ 1,166.4 Cumulative GAP 1,803.2 1,710.8 1,452.5 1,420.1 1,166.4 Cumulative GAP to Total Assets 23.16% 21.97% 18.66% 18.66% 18.24% 14.98% 14.98% Multiple of Rate Sensitive Assets to Liabilities 2.46 0.82 0.73 1.54 0.99 0.72 1.19

(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 of $1.259 billion and $711 million in 2004 and 2003, respectively, in the less than one year category, and $1.370 billion and $1.911 billion, respectively in the over one year category, based on historical trends for these noncontractual maturity deposit types, which reflects industry standards. (4) GAP is the excess of rate sensitive assets (liabilities). As shown in the table above, as of June 30, 2004, rate sensitive liabilities repricing within one year exceeded rate sensitive assets repricing within one year by $59 million, compared with June 30, 2003 when rate sensitive assets repricing within one year exceeded rate sensitive liabilities within one year by $1.453 billion. These results suggest an interest rate risk position which is not significantly mismatched; however, embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet hedges thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis. Because of these limitations, we use income simulation modeling to evaluate the impact of market interest rate changes on the Company's net interest income. 32 We may, from time-to-time, use derivative contracts to help manage or hedge our exposure to interest rate risk and to market value risk in conjunction with our mortgage banking operations. We currently use interest rate swaps, mortgage loan commitments 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 or 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. Further discussion of derivative instruments is included in Notes 1 and 18 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K and in Note 8 to the Consolidated Financial Statements presented in this report. Holding residential mortgage loans for sale and committing to fund residential mortgage loan applications at specific rates exposes us to market value risk caused by changes in interest rates during the period from rate commitment issuance until sale. To minimize this risk, we enter into mandatory forward commitments to sell residential mortgage loans at the time a rate commitment is issued. These mandatory forward commitments and the related commitments to fund residential mortgage loan applications at specific rates are considered derivatives under SFAS 133. Our practice to hedge our market value risk with mandatory forward commitments has been effective and has not generated any material gains or losses. As of June 30, 2004, we had forward commitments to sell mortgage loans of $26.5 million. We performed simulations as of June 30, 2004 to evaluate the impact of market rate changes on net interest income over the following 12 months assuming limited changes to balance sheet levels over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift along the yield curve) net interest income is expected to be lower by 0.5% and 1.7%, respectively, of what it would be if rates were to remain at June 30, 2004 levels. An immediate 50 basis point parallel decline in market rates is expected to reduce net interest income over the following 12 months by 0.5% of what it would be if rates remain constant over the entire time period at June 30, 2004 levels. 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 flattening of the 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 these or other factors, could produce different results. 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' 2003 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. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. No changes in the Company's internal control over financial reporting occurred during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 33 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Total Number of Maximum Number of Shares Purchased as Shares that May Yet Part of Publicly Be Purchased Under Total Number of Average Price Paid Announced Plans or The Plans or Programs Period Shares Purchased Per Share Programs (a) ------ ---------------- ------------------ ------------------- --------------------- April 2004 25,000 31.61 25,000 3,127,800 May 2004 73,000 29.47 73,000 3,054,800 June 2004 10,000 30.09 10,000 3,044,800 ------- ----- ------- Total 108,000 30.02 108,000 3,044,800

(a) In October 2001, our Board of Directors approved the repurchase of up to 3,000,000 shares of our common stock from time to time in the market and in October 2003, the Board approved the repurchase of an additional 3,000,000 shares. There is no expiration date for the repurchase program. As of June 30, 2004, a total of 2,955,200 shares of common stock had been repurchased at an average price of $28.32 pursuant to this program. The purchase of our 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 our capital requirements. There can be no assurance that we will repurchase the remaining shares authorized to be repurchased, or that any additional repurchases will be authorized by our Board of Directors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Citizens held its Annual Meeting of Shareholders on April 22, 2004 at which the shareholders elected five nominees to the Board of Directors. Each of the nominees for director at the meeting was an incumbent and all nominees were elected. The following table sets forth the number of votes for and withheld with respect to each nominee.

Director For Withheld -------- --- -------- Richard J. Dolinski 32,324,527 490,703 William R. Hartman 32,539,913 275,317 Stephen J. Lazaroff 31,757,417 1,057,813 Kendall B. Williams 31,758,744 1,056,487 William B. Shedd 32,280,201 535,028

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Stock Purchase Agreement by and between Metropolitan Bank Group, Inc., and Citizens Banking Corporation, Parent of Citizens Bank-Illinois, National Association, dated as of April 2, 2004 and Amendment No. 1 thereto, dated August 4, 2004 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act 32.1 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act (b) Report on Form 8-K A report on Form 8-K, dated April 02, 2004, was filed under Items 5, 7 and 12 on April 05, 2004, announcing Citizens' signing of a definitive agreement to sell its subsidiary, Citizens Bank - Illinois, N.A. to Metropolitan Bank Group, Inc. A report on Form 8-K, dated April 22, 2004, was filed under Items 7 and 12 on April 26, 2004, announcing Citizens' results of operations for the three month period ended March 31, 2004. The information was considered furnished, rather than filed. A report on Form 8-K, dated April 23, 2004, was filed under Items 7 and 12 on April 28, 2004, disclosing the transcript of a conference call during which officers of Citizens reviewed financial results of operations for the three month period ended March 31, 2004 and certain other information. The information was considered furnished, rather than filed. No financial statements were filed with any of these reports. 34 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: August 5, 2004 By /s/ Charles D. Christy -------------------- -------------------------------- Charles D. Christy Chief Financial Officer (Principal Financial Officer and duly authorized officer) /s/ Daniel E. Bekemeier -------------------------------- Daniel E. Bekemeier Chief Accounting Officer (Principal Accounting Officer) 35 10-Q EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Stock Purchase Agreement by and between Metropolitan Bank Group, Inc., and Citizens Banking Corporation, Parent of Citizens Bank-Illinois, National Association, dated as of April 2, 2004 and Amendment No. 1 thereto, dated August 4, 2004 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

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