10-Q 1 k80616e10vq.txt FORM 10-Q 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 September 30, 2003 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 November 3, 2003 -------------------------- ------------------------------- Common Stock, No Par Value 43,293,253 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........................................................................... 13 Item 3. - Quantitative and Qualitative Disclosures about Market Risk........................................... 32 Item 4. - Controls and Procedures.............................................................................. 32 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K...................................................................... 33 SIGNATURES.......................................................................................................... 34 EXHIBIT INDEX....................................................................................................... 35

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

SEPTEMBER 30, December 31, (in thousands) 2003 2002 ------------------------------------------------------------------------------------------------- (UNAUDITED) (Note 1) ASSETS Cash and due from banks $ 180,896 $ 171,864 Money market investments: Federal funds sold -- 69,000 Interest-bearing deposits with banks 2,368 2,332 ------------- ------------- Total money market investments 2,368 71,332 Investment Securities: Available-for-Sale: U.S. Treasury and federal agency securities 1,472,582 942,643 State and municipal securities 441,175 444,951 Other securities 74,071 69,687 Held-to-maturity: State and municipal securities (fair value of $7,186) 7,262 -- ------------- ------------- Total investment securities 1,995,090 1,457,281 Mortgage loans held for sale 132,627 160,743 Loans: Commercial 2,931,023 3,111,208 Real estate construction 181,164 262,363 Real estate mortgage 408,038 545,834 Consumer 1,706,161 1,513,156 ------------- ------------- Total loans 5,226,386 5,432,561 Less: Allowance for loan losses (125,955) (109,467) ------------- ------------- Net loans 5,100,431 5,323,094 Premises and equipment 112,089 117,704 Goodwill 54,785 54,785 Other intangible assets 17,688 19,862 Bank owned life insurance 79,929 78,434 Other assets 108,461 66,935 ------------- ------------- TOTAL ASSETS $ 7,784,364 $ 7,522,034 ============= ============= LIABILITIES Noninterest-bearing deposits $ 878,536 $ 900,674 Interest-bearing deposits 4,603,657 5,036,239 ------------- ------------- Total deposits 5,482,193 5,936,913 Federal funds purchased and securities sold under agreements to repurchase 610,865 223,289 Other short-term borrowings 41,564 79,062 Other liabilities 74,993 32,988 Long-term debt 940,605 599,313 ------------- ------------- Total liabilities 7,150,220 6,871,565 SHAREHOLDERS' EQUITY Preferred stock - no par value -- -- Common stock - no par value 100,425 112,253 Retained earnings 506,318 495,570 Other accumulated comprehensive net income 27,401 42,646 ------------- ------------- Total shareholders' equity 634,144 650,469 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,784,364 $ 7,522,034 ============= =============

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

Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2003 2002 2003 2002 -------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 80,371 $ 95,924 $ 247,394 $ 292,912 Interest and dividends on investment securities: Taxable 14,254 14,150 45,795 41,121 Tax-exempt 5,059 5,319 15,288 16,038 Money market investments 3 165 102 755 ---------- ---------- ---------- ---------- Total interest income 99,687 115,558 308,579 350,826 ---------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 18,851 31,725 66,410 99,160 Short-term borrowings 1,463 1,007 3,497 2,876 Long-term debt 8,219 7,644 23,092 23,240 ---------- ---------- ---------- ---------- Total interest expense 28,533 40,376 92,999 125,276 ---------- ---------- ---------- ---------- NET INTEREST INCOME 71,154 75,182 215,580 225,550 Provision for loan losses 10,300 89,250 54,942 103,900 ---------- ---------- ---------- ---------- Net interest income (loss) after provision for loan losses 60,854 (14,068) 160,638 121,650 ---------- ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts 7,703 6,620 21,842 19,767 Trust fees 4,368 4,372 12,912 14,260 Mortgage and other loan income 5,404 2,928 15,967 9,825 Brokerage and investment fees 2,333 2,337 6,015 7,020 Bankcard fees 761 672 2,310 5,359 Investment securities gains (losses) 42 45 101 (12) Gain on sale of merchant business -- -- -- 5,400 Gain on securitized mortgages -- -- -- 2,436 Other 4,443 2,760 14,041 11,020 ---------- ---------- ---------- ---------- Total noninterest income 25,054 19,734 73,188 75,075 ---------- ---------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 31,036 32,218 92,548 96,262 Equipment 4,060 5,167 12,098 14,981 Occupancy 4,328 4,307 13,337 13,506 Professional services 4,946 3,524 12,613 9,713 Data processing services 3,225 3,066 9,599 9,441 Postage and delivery 1,739 1,860 5,100 5,375 Advertising and public relations 1,395 1,848 4,067 5,535 Telephone 1,169 1,268 3,479 4,103 Stationery and supplies 911 907 2,679 3,021 Bankcard expenses 79 134 261 3,787 Special charge (370) 13,807 (691) 13,807 Prepayment penalty on FHLB advances -- 3,300 -- 3,300 Contribution to charitable trust -- 2,000 -- 2,000 Other 7,082 6,139 17,452 17,426 ---------- ---------- ---------- ---------- Total noninterest expense 59,600 79,545 172,542 202,257 ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 26,308 (73,879) 61,284 (5,532) Income tax provision (benefit) 6,703 (27,950) 13,407 (9,045) ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ 19,605 $ (45,929) $ 47,877 $ 3,513 ========== ========== ========== ========== NET INCOME (LOSS) PER SHARE: Basic $ 0.45 $ (1.03) $ 1.10 $ 0.08 Diluted 0.45 (1.03) 1.10 0.08 CASH DIVIDENDS DECLARED PER SHARE 0.285 0.285 0.855 0.845

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

Other Accumulated Common Retained Comprehensive (in thousands except per share amounts) Stock Earnings Net Income Total ----------------------------------------------------------------------------------------------------------------------- BALANCE - SEPTEMBER 30, 2002 $ 135,833 $ 486,762 $ 45,658 $ 668,253 Comprehensive income: Net income 21,525 21,525 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(2,343) (4,352) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $4 (8) Minimum pension liability 1,348 (3,012) --------- ---------- Total comprehensive income 18,513 Exercise of stock options, net of shares purchased 131 131 Shares acquired for retirement (23,776) (23,776) Net change in deferred compensation, net of tax effect 65 65 Cash dividends - $0.285 per share (12,717) (12,717) ---------- ---------- --------- ---------- BALANCE - DECEMBER 31, 2002 $ 112,253 $ 495,570 $ 42,646 $ 650,469 Comprehensive income: Net income 15,058 15,058 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(2,007) (3,728) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $17 (31) (3,759) --------- ---------- Total comprehensive income 11,299 Exercise of stock options, net of shares purchased 1,991 1,991 Shares acquired for retirement (11,177) (11,177) Net change in deferred compensation, net of tax effect 47 47 Stock issued for compensation 200 200 Cash dividends - $0.285 per share (12,455) (12,455) ---------- ---------- --------- ---------- BALANCE - MARCH 31, 2003 $ 103,314 $ 498,173 $ 38,887 $ 640,374 Comprehensive income: Net income 13,214 13,214 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(258) (479) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $4 (7) (486) --------- ---------- Total comprehensive income 12,728 Exercise of stock options, net of shares purchased 1,428 1,428 Shares acquired for retirement (3,051) (3,051) Net change in deferred compensation, net of tax effect 32 32 Cash dividends - $0.285 per share (12,343) (12,343) ---------- ---------- --------- ---------- 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 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 ========== ========== ========= ==========

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

Nine Months Ended September 30, (in thousands) 2003 2002 -------------------------------------------------------------- ----------------------------- OPERATING ACTIVITIES: Net income $ 47,877 $ 3,513 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 54,942 103,900 Depreciation 10,590 12,617 Amortization of intangibles 2,174 2,174 Net amortization on investment securities 7,270 1,125 Investment securities gains (101) (2,424) Loans originated for sale (1,103,644) (613,359) Proceeds from loan sales 1,141,965 647,197 Net gain from loan sales (10,205) (4,683) Other 9,015 9,052 ------------- ------------- Net cash provided by operating activities 159,883 159,112 INVESTING ACTIVITIES: Net decrease in money market investments 68,964 1,848 Securities available-for-sale: Proceeds from sales 1,438 69,334 Proceeds from maturities 633,417 217,158 Purchases (1,196,213) (449,602) Purchases of securities held-to-maturity (7,262) -- Purchase of bank owned life insurance -- (78,000) Net decrease in loans 167,721 167,899 Net increase in premises and equipment (4,975) (5,818) ------------- ------------- Net cash used in investing activities (336,910) (77,181) FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits (82,218) 112,188 Net decrease in time deposits (372,502) (173,592) Net increase in short-term borrowings 350,078 133,908 Proceeds from issuance of long-term debt 370,332 26,000 Principal reductions in long-term debt (30,364) (125,602) Cash dividends paid (37,129) (37,942) Proceeds from stock options exercised 4,041 6,431 Shares acquired for retirement (16,179) (26,520) ------------- ------------- Net cash provided by (used in) financing activities 186,059 (85,129) ------------- ------------- Net increase (decrease) in cash and due from banks 9,032 (3,198) Cash and due from banks at beginning of period 171,864 224,416 ------------- ------------- Cash and due from banks at end of period $ 180,896 $ 221,218 ============= =============

See notes to consolidated financial statements. 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 nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 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' 2002 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 Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2003 2002 2003 2002 ------------------------------------------------- -------------------------------------------------- Net income, as reported $ 19,605 $ (45,929) $ 47,877 $ 3,513 Less pro forma expense related to options granted (582) (679) (1,649) (1,798) ---------- ---------- ---------- ---------- Pro forma net income $ 19,023 $ (46,608) $ 46,228 $ 1,715 ========== ========== ========== ========== Net income per share: Basic - as reported $ 0.45 $ (1.03) $ 1.10 $ 0.08 Basic - pro forma 0.44 (1.04) 1.07 0.04 Diluted - as reported 0.45 (1.03) 1.10 0.08 Diluted - pro forma 0.44 (1.04) 1.06 0.04

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS AMENDMENT OF SFAS 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 149 ("SFAS 149") which amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133. The statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to language used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other, and amends certain other existing pronouncements. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003. These changes required by SFAS 149 did not have a material impact on Citizens' results of operations, financial position, or liquidity. CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant 7 variable interest holders. The provisions of this interpretation, as applied to VIE's created after January 31, 2003, became effective upon issuance in January 2003. Citizens must apply the provisions of FIN 46 to existing variable interests in a VIE no later than December 31, 2003. Citizens adopted the provisions of FIN 46 for new VIE's effective January 1, 2003. Based on Citizens' current understanding of FIN 46, the adoption of this interpretation for pre-existing VIE's will not materially impact Citizens' financial position, results of operations or cash flows. NOTE 3. SPECIAL CHARGE In the third quarter of 2002, Citizens recorded a special charge of $13.8 million ($9.0 million after-tax) that included restructuring and impairment costs associated with the reorganization of our consumer, business and wealth management lines of business. The reorganization resulted from a detailed review of our consumer banking, business 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. Additionally, 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 special charge and the related remaining liability as of September 30, 2003.

Original 2002 Reserve 2003 Reserve Reserve/ ---------- Balance ------------------------ Balance Special Net December 31, Cash Noncash September 30, (in thousands) Charge Activity(1) 2002 Payments Reductions(2) 2003 ---------------------------------------------------------------------------------------------------------------------------------- Employee benefits and severance $ 8,072 $(3,791) $ 4,281 $(3,187) $ (378) $ 716 Professional fees 2,369 (1,961) 408 (83) (316) 9 Facilities and lease impairment 2,358 (2,036) 322 (34) -- 288 Contract termination fees and write-off of obsolete equipment, software and supplies 1,008 (826) 182 (51) (131) -- ------- ------- ------- ------- ------- ------- Total $13,807 $(8,614) $ 5,193 $(3,355) $ (825) $ 1,013 ======= ======= ======= ======= ======= =======

(1) Includes cash payments of $6,134,000 and a reversal of $404,600 for items included in the original charge that are no longer expected to be paid -- primarily employee benefits and severance and professional fees. (2) Includes a reversal of $691,000 for employee benefits, severance, professional fees and obsolete supplies included in the original charge that are no longer expected to be paid. NOTE 4. OTHER INTANGIBLE ASSETS Citizens' other intangible assets as of September 30, 2003, December 31, 2002 and September 30, 2002 are shown in the table below.

SEPTEMBER 30, December 31, September 30, (in thousands) 2003 2002 2002 --------------------------------------------------------------------------------- Core deposit intangibles $28,989 $28,989 $28,989 Accumulated amortization 11,334 9,160 8,435 ------- ------- ------- Net core deposit intangibles 17,655 19,829 20,554 Minimum pension liability 33 33 3,304 ------- ------- ------- Total other intangibles $17,688 $19,862 $23,858 ======= ======= =======

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: Business Banking, Consumer Banking, Wealth Management, and Other. In 2003, Citizens allocated its core deposit intangible and the related amortization to the Business 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 also reallocated the investment security portfolio held in our mortgage company from Consumer Banking to Treasury, which is a component of Other. The affect on net income for the prior periods presented was not material to the segments and they were not restated. Selected line of business segment information, as adjusted, for the three- and nine-month periods ended September 30, 2003 and 2002 is provided below. There are no significant intersegment revenues.

Business Consumer Wealth (in thousands) Banking Banking Management Other Total ------------------------------------------------------------------------------------------------------------------------ EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2003 Net interest income (taxable equivalent) $ 29,193 $ 41,436 $ 32 $ 3,784 $ 74,445 Provision for loan losses 3,913 6,763 -- (376) 10,300 -------- -------- -------- -------- -------- Net interest income after provision 25,280 34,673 32 4,160 64,145 Noninterest income 3,504 14,793 5,712 1,045 25,054 Noninterest expense 15,412 32,541 5,577 6,070 59,600 -------- -------- -------- -------- -------- Income before income taxes 13,372 16,925 167 (865) 29,599 Income tax (benefit) expense (taxable equivalent) 4,662 5,931 56 (655) 9,994 -------- -------- -------- -------- -------- Net income $ 8,710 $ 10,994 $ 111 $ (210) $ 19,605 ======== ======== ======== ======== ======== Average Assets (in millions ) $ 2,960 $ 2,454 $ 8 $ 2,390 $ 7,812 ======== ======== ======== ======== ======== EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2002 Net interest income (taxable equivalent) $ 35,346 $ 36,949 $ 6 $ 6,471 $ 78,772 Provision for loan losses 86,041 3,523 -- (314) 89,250 -------- -------- -------- -------- -------- Net interest income after provision (50,695) 33,426 6 6,785 (10,478) Noninterest income 4,097 10,997 5,689 (1,049) 19,734 Noninterest expense 17,467 31,375 4,475 26,228 79,545 -------- -------- -------- -------- -------- Income before income taxes (64,065) 13,048 1,220 (20,492) (70,289) Income tax expense (taxable equivalent) (22,422) 4,577 427 (6,942) (24,360) -------- -------- -------- -------- -------- Net income $(41,643) $ 8,471 $ 793 $(13,550) $(45,929) ======== ======== ======== ======== ======== Average Assets (in millions ) $ 3,422 $ 2,696 $ 4 $ 1,494 $ 7,616 ======== ======== ======== ======== ========

Business Consumer Wealth (in thousands) Banking Banking Management Other Total ------------------------------------------------------------------------------------------------------------------------ EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2003 Net interest income (taxable equivalent) $ 95,855 $114,247 $ 100 $ 15,498 $225,700 Provision for loan losses 41,997 13,492 -- (547) 54,942 -------- -------- -------- -------- -------- Net interest income after provision 53,858 100,755 100 16,045 170,758 Noninterest income 11,866 41,397 16,637 3,288 73,188 Noninterest expense 45,580 99,694 15,580 11,688 172,542 -------- -------- -------- -------- -------- Income before income taxes 20,144 42,458 1,157 7,645 71,404 Income tax expense (taxable equivalent) 7,174 14,860 399 1,094 23,527 -------- -------- -------- -------- -------- Net income $ 12,970 $ 27,598 $ 758 $ 6,551 $ 47,877 ======== ======== ======== ======== ======== Average Assets (in millions ) $ 3,057 $ 2,394 $ 8 $ 2,234 $ 7,693 ======== ======== ======== ======== ======== EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2002 Net interest income (taxable equivalent) $105,025 $114,566 $ 245 $ 16,557 $236,393 Provision for loan losses 96,477 8,998 -- (1,575) 103,900 -------- -------- -------- -------- -------- Net interest income after provision 8,548 105,568 245 18,132 132,493 Noninterest income 12,824 42,614 17,948 1,689 75,075 Noninterest expense 51,974 102,980 13,130 34,173 202,257 -------- -------- -------- -------- -------- Income before income taxes (30,602) 45,202 5,063 (14,352) 5,311 Income tax expense (taxable equivalent) (10,708) 15,822 1,772 (5,088) 1,798 -------- -------- -------- -------- -------- Net income $(19,894) $ 29,380 $ 3,291 $ (9,264) $ 3,513 ======== ======== ======== ======== ======== Average Assets (in millions ) $ 3,405 $ 2,735 $ 5 $ 1,426 $ 7,571 ======== ======== ======== ======== ========

9 NOTE 6. LONG-TERM DEBT The components of long-term debt as of September 30, 2003, December 31, 2002 and September 30, 2002 are presented below.

SEPTEMBER 30, December 31, September 30, (in thousands) 2003 2002 2002 ------------------------------------------------------------------------------------------------------- Federal Home Loan Bank advances (1) $ 788,810 $ 599,139 $ 529,279 Subordinated debt: Notes maturing February 2013(2) 125,882 -- -- Deferrable interest debenture maturing June 2033(3) 25,774 -- -- Other borrowed funds 139 174 218 ---------- ---------- ---------- Total long-term debt $ 940,605 $ 599,313 $ 529,497 ========== ========== ==========

(1) At September 30, 2003, rates on FHLB advances are fixed and variable ranging from 1.12% to 7.10% maturing in 2003 through 2021. In 2002 rates on FHLB advances were fixed and variable ranging from 1.82% to 7.10% maturing in 2002 through 2021. The majority of the fixed rate FHLB advances are convertible to a floating rate at the option of the Federal Home Loan Bank. (2) On January 27, 2003, Citizens issued $125 million of 5.75% subordinated notes maturing February 1, 2013. Citizens also entered into an interest rate swap to hedge the interest rate risk on the subordinated debt. The carrying value of the subordinated notes has been adjusted to reflect the gain or loss attributable to the risk hedged. Issuance costs of $1.3 million were capitalized and are included in other assets on the balance sheet. The issuance costs are being amortized over 10 years as a component of interest expense. The subordinated debt qualifies under the risk-based capital guidelines as Tier 2 supplementary capital for regulatory purposes. (3) On June 26, 2003, Citizens issued $25 million of floating rate, 30 year trust preferred securities through an unconsolidated special purpose trust to unrelated institutional investors. The gross proceeds from issuance were used to purchase a floating rate junior subordinated deferrable interest debenture (the "Debenture") issued by Citizens, which is the sole asset of the trust. The Debenture matures in thirty years and bears interest at an annual rate equal to the three-month LIBOR plus 3.10%, payable quarterly beginning in September, 2003. Interest is adjusted on a quarterly basis provided that prior to May 2008, the interest rate shall not exceed 11.75%. The Debenture is an unsecured obligation of Citizens and is junior in the right of payment to all future senior indebtedness of Citizens. Citizens has guaranteed that interest payments on the Debenture made to the trust will be distributed by the trust to the holders of the trust preferred securities. Issuance costs of $490,000 were incurred related to the issuance. These costs have been capitalized and are included in other assets on the balance sheet. The issuance costs are being amortized over five years as a component of interest expense. The trust preferred securities of the special purpose trust are callable after five years at par and must be redeemed in 30 years after issuance. For regulatory purposes, these trust preferred securities qualify under the risk-based capital guidelines as Tier 1 capital. NOTE 7. 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. 10 DERIVATIVE FINANCIAL INSTRUMENTS:

SEPTEMBER 30, 2003 ----------------------------------------------- NOTIONAL RECEIVE PAY FAIR (dollars in thousands) AMOUNT RATE RATE VALUE -------------------------------------------------------------------------------------------------------------- Received fixed swaps $165,000 4.66% 1.96% $ 1,820 Interest rate lock commitments 29,940 -- -- 700 Forward mortgage loan contracts 110,000 -- -- (652) -------- -------- TOTAL $304,940 $ 1,868 ======== ========

DERIVATIVE CLASSIFICATIONS AND HEDGING RELATIONSHIPS:

SEPTEMBER 30, 2003 ----------------------------------------------- NOTIONAL FAIR VALUE (dollars in thousands) AMOUNT GAIN LOSS -------------------------------------------------------------------------- -------------------- Derivatives Designated as Cash Flow Hedges: Hedging commercial loans $ 25,000 $ 398 $ -- Derivatives Designated as Fair Value Hedges: Hedging time deposits 15,000 122 -- Hedging long-term debt 125,000 1,300 -- -------- --------- -------- TOTAL $165,000 $ 1,820 $ -- ======== ========= ========

NOTE 8. 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 Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2003 2002 2003 2002 ---------------------------------------------------------------------------------------------------- NUMERATOR: Basic and dilutive earnings per share -- net income available to common shareholders $ 19,605 $(45,929) $ 47,877 $ 3,513 ======== ======== ======== ======== DENOMINATOR: Basic earnings per share -- weighted average shares 43,227 44,610 43,326 44,819 Effect of dilutive securities -- potential conversion of employee stock options 274 -- 248 476 -------- -------- -------- -------- Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 43,501 44,610 43,574 45,295 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ 0.45 $ (1.03) $ 1.10 $ 0.08 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ 0.45 $ (1.03) $ 1.10 $ 0.08 ======== ======== ======== ========

During the third quarter of 2003, employees exercised stock options to acquire 34,852 shares at an average exercise price of $17.83 per share. 11 NOTE 9. OBLIGATIONS UNDER STANDBY LETTERS OF CREDIT AND OTHER CONTINGENT GUARANTEES In the normal course of business Citizens provides financial and performance standby letters of credit to its clients. Financial standby letters of credit guarantee future payment of client financial obligations to third parties. They are issued primarily for services provided or to facilitate the shipment of goods. 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. 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 standby letters of credit follow:

SEPTEMBER 30, December 31, (in thousands) 2003 2002 ------------------------------------------------------------------------------------------------- CONTINGENT GUARANTEES: Financial standby letters of credit $ 36,803 $ 28,783 Performance standby letters of credit 6,080 7,613

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of other accumulated comprehensive income, net of tax, for the three and nine month periods ended September 30, 2003 and 2002 are presented below.

Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2003 2002 2003 2002 ---------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 38,401 $ 33,545 $ 42,646 $ 20,553 Net unrealized gain (loss) on securities for the quarter, net of tax effect of $(5,974) in 2003 and $6,538 in 2002. (11,095) 12,142 Less: Reclassification adjustment for net gains included in net income for the quarter, net of tax effect of $15 in 2003 and $16 in 2002 (27) (29) Net unrealized gain (loss) on securities for the period, net of tax effect of $(8,269) in 2003 and $14,366 in 2002 (15,302) 26,680 Less: Reclassification adjustment for net gains included in net income for the period, net of tax effect of $36 in 2003 and $849 in 2002 (65) (1,575) Net unrealized gain on cash flow hedges 122 122 ---------- ---------- -------- ---------- Accumulated other comprehensive income, net of tax $ 27,401 $ 45,658 $ 27,401 $ 45,658 ========== ========== ======== ==========

12 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 ----------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 2003 2003 2003 2002 2002 ----------------------------------------------------------------------- SUMMARY OF OPERATIONS (THOUSANDS) Interest income $ 99,687 $ 104,683 $ 104,209 $ 112,558 $ 115,558 Net interest income 71,154 72,920 71,506 76,232 75,182 Provision for loan losses 10,300 25,650 18,992 16,300 89,250 Noninterest income 25,054 24,847 23,287 26,701 19,734 Noninterest expense 59,600 56,361 56,581 57,126 79,545 (1) Income tax provision (benefit) 6,703 2,542 4,162 7,982 (27,950) Net income (loss) 19,605 13,214 15,058 21,525 (45,929) Cash dividends 12,331 12,343 12,455 12,717 12,719 ----------------------------------------------------------------------- PER COMMON SHARE DATA Basic net income (loss) $ 0.45 $ 0.30 $ 0.35 $ 0.49 $ (1.03) Diluted net income (loss) 0.45 0.30 0.34 0.48 (1.03) Cash dividends 0.285 0.285 0.285 0.285 0.285 Market value (end of period) 26.41 27.01 23.62 24.78 24.17 Book value (end of period) 14.67 14.77 14.79 14.88 14.97 ----------------------------------------------------------------------- AT PERIOD END (MILLIONS) Assets $ 7,784 $ 7,786 $ 7,765 $ 7,522 $ 7,614 Portfolio Loans (2) 5,226 5,287 5,303 5,433 5,524 Deposits 5,482 5,660 5,812 5,937 5,904 Shareholders' equity 634 639 640 650 668 ----------------------------------------------------------------------- AVERAGE FOR THE QUARTER (MILLIONS) Assets $ 7,812 $ 7,809 $ 7,454 $ 7,564 $ 7,616 Portfolio Loans (2) 5,183 5,253 5,343 5,470 5,577 Deposits 5,610 5,723 5,853 5,922 5,951 Shareholders' equity 620 639 643 654 711 ----------------------------------------------------------------------- RATIOS (ANNUALIZED) Return on average assets 1.00% 0.68% 0.82% 1.13% (2.39)% Return on average shareholders' equity 12.55 8.29 9.50 13.06 (25.63) Net interest margin (FTE) 4.03 4.17 4.33 4.49 4.40 Efficiency ratio 59.90 55.74 57.58 53.61 80.75 Net loans charged off to average loans 0.80 0.92 1.20 0.80 4.70 Average equity to average assets 7.94 8.18 8.63 8.65 9.34 Allowance for loan losses as a percent of loans 2.41 2.38 2.12 2.02 1.89 Nonperforming assets to loans plus ORAA (end of period) 1.74 1.82 1.76 1.76 1.95 Nonperforming assets to total assets (end of period) 1.17 1.24 1.20 1.27 1.42 Leverage ratio 7.25 7.20 7.21 7.18 7.26 Tier 1 capital ratio 9.64 9.55 9.15 9.18 9.27 Total capital ratio 13.07 13.10 12.59 10.43 10.52

(1) Includes special charge of $13.8 million -- see Note 3 to the consolidated financial statements included in this report. (2) Balances exclude mortgage loans held for sale. 13 INTRODUCTION The following commentary presents management's discussion and analysis of Citizens Banking Corporation's financial condition and results of operations for the three and nine month periods ended September 30, 2003 and 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 2002 Annual Report on Form 10-K. 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 quarterly report that are not statements of historical fact (including statements that include terms such as "believe", "expect", and "anticipate") 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, but are not limited to, adverse changes in our loan portfolios (including losses due to fraud and economic factors) and the resulting credit risk-related losses and expenses, our future lending and collections experience and the potential inadequacy of our loan loss reserves, interest rate fluctuations and other adverse changes in economic or financial market conditions, the potential inability to hedge certain risks economically, adverse changes in competition and pricing environments, our potential failure to maintain or improve loan quality levels and origination volume, our potential inability to continue to attract core deposits, the potential lack of market acceptance of our products and services, adverse changes in our relationship with major customers, unanticipated technological changes that require major capital expenditures, adverse changes in applicable laws and regulatory requirements, unanticipated environmental liabilities or costs, our potential inability to complete our restructuring, the effects of terrorist attacks and potential attacks, our success in managing the risks involved in the foregoing, and other risks and uncertainties detailed in this report and from time to time in our other filings with the Securities and Exchange Commission. Other factors not currently anticipated by management may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our forward-looking 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 it operates. 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, the most subject to revision as new information becomes available. Our significant accounting policies are more fully described in Item 7 of our 2002 Annual Report on Form 10-K and in Note 1 to the audited consolidated financial statements contained in that report. There have been no material changes to those policies or the estimates made pursuant to those policies during the most recent quarter. RESULTS OF OPERATIONS EARNINGS SUMMARY Citizens earned net income of $19,605,000, or $0.45, per diluted share for the three months ended September 30, 2003, compared with a net loss of $(45,929,000), or $(1.03) per diluted share, for the same quarter of 2002. Returns on average assets and average equity for the quarter were 1.00% and 12.55%, respectively, compared with negative returns of (2.39)% and (25.63)%, respectively, in 2002. For the nine months ended September 30, 2003, net income was $47,877,000 or $1.10 per diluted share, compared to $3,513,000 or $0.08 per diluted share for the same period of 2002. Returns on average assets and average equity during the first nine months of 2003 were 0.83% and 10.10%, respectively, compared with 0.06% and 0.67%, respectively, in 2002. 14 The improvement in net income for the three and nine months ended September 30, 2003 compared to the same periods in 2002 resulted primarily from lower loan loss provision and noninterest expense partially offset by lower net interest income. Noninterest income improved for the quarter but was down for the nine months ended September 30, 2003. Gains recorded in the second quarter of 2002 of $5.4 million from the sale of our merchant services business and $2.4 million from the sale of securitized mortgages contributed to the decline in noninterest income for the nine months ended September 30, 2003. The provision for losses declined to $10.3 million in the third quarter of 2003 from $89.3 million in the third quarter of 2002. For the nine months ended September 30, 2003, the provision for loan losses was $54.9 million compared with $103.9 million for the same period in 2002. The large loan loss provision for the third quarter of 2002 was primarily in response to an unusually high amount of commercial credits that deteriorated to charge-off status during the quarter, as well as increases in nonperforming and impaired commercial credits. Higher loss factors, based on more recent loan loss experience, applied to the formula portion of the allowance also increased the third quarter 2002 provision. The lower loan loss provision in 2003 reflects a decline in nonperforming assets, lower net charge-offs and fewer risk rating downgrades within the commercial loan portfolio. Changes in net interest income, noninterest income and noninterest expense were also impacted by a third quarter 2002 special charge of $13.8 million ($9.0 million after-tax) to restructure Citizens' consumer, business and wealth management lines of business and other charges of $9.4 million ($6.1 million after-tax) in the same quarter for various items we considered unusual in nature. Net interest income was charged $0.7 million, noninterest income was charged $1.6 million and noninterest expense was charged $20.9 million for these charges. NET INTEREST INCOME AND NET INTEREST MARGIN The primary source of our revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, including interest-bearing deposits and borrowings, used to fund those assets. The amount of net interest income is affected by fluctuations in the amount and composition of earning assets and funding sources and in the yields earned and rates paid, respectively, on these assets and liabilities. The level of net interest income relative to our interest bearing liabilities and our earning assets can be measured through two statistics - interest spread and net interest margin. The interest spread represents the difference between yields on earning assets and the rates paid for interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income to average earning assets. Both the interest spread and net interest margin are presented on a tax-equivalent basis. Because noninterest-bearing funding sources, such as demand deposits and shareholders' equity, also support earning assets, the net interest margin exceeds the interest spread. Net interest income decreased $4.0 million in the third quarter of 2003 compared to the third quarter of 2002, as a lower net interest margin more than offset the effects of an increase in average earning assets. Average earning assets increased $221.6 million in the third quarter compared with the same quarter a year ago as growth in the investment portfolio of $502.0 million more than offset declines in loan balances and money market investments. This growth was due to our strategy, beginning late in the first quarter of 2003, to expand our investment securities portfolio to offset the effects of weak loan demand and the prospect of net interest margin pressure from continued low interest rates, while moving us to a more neutral interest rate risk position. For the first nine months of 2003, net interest income declined $10.0 million from the same period a year ago due to a 28 basis point decline in net interest margin partially offset by an increase of $100.9 million in average earning assets. Net interest margin in the third quarter of 2003 declined to 4.03% from 4.40% in the third quarter of 2002. Net interest margin for the first nine months of 2003 declined to 4.15% from 4.43% for the same period in 2002. These declines are attributable to the asset sensitive position held prior to the second quarter of 2003, accelerated prepayments in both the fixed rate commercial loan portfolio and the mortgage related securities portfolio, plus a shift in the mix of earning assets from loans to lower yielding securities. The low rates available for reinvestment of fixed rate asset maturities and prepayments, and the lack of material loan growth are expected to continue to put pressure on our net interest income and net interest margin. As a result, we expect our margin to decline in the fourth quarter of 2003, but to a lesser extent than in the second and third quarters. 15 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 September 30, Nine Months Ended September 30, --------------------------------------- --------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in 2003 COMPARED WITH 2002 Net ------------------------ Net ------------------------ (in thousands) Change (1) Rate (2) Volume (2) Change (1) Rate (2) Volume (2) ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Money market investments $ (162) $ (74) $ (88) $ (653) $ (233) $ (420) Investment securities: Taxable 104 (5,682) 5,786 4,674 (10,737) 15,411 Tax-exempt (260) (66) (194) (750) (98) (652) Mortgage loans held for sale 1,374 (817) 2,191 1,435 (2,088) 3,523 Loans: Commercial (9,966) (5,819) (4,147) (24,864) (17,172) (7,692) Real estate (4,372) (1,109) (3,263) (13,529) (4,146) (9,383) Direct consumer (1,656) (2,564) 908 (5,032) (6,622) 1,590 Indirect consumer (933) (1,619) 686 (3,528) (3,700) 172 -------- -------- ------- -------- -------- -------- Total (15,871) (17,750) 1,879 (42,247) (44,796) 2,549 -------- -------- ------- -------- -------- -------- INTEREST EXPENSE Deposits: Demand (2,277) (2,941) 664 (4,157) (5,572) 1,415 Savings (2,288) (2,142) (146) (4,681) (4,759) 78 Time (8,309) (4,423) (3,886) (23,912) (15,092) (8,820) Short-term borrowings 456 (456) 912 621 (941) 1,562 Long-term debt 575 (2,680) 3,255 (148) (5,994) 5,846 -------- -------- ------- -------- -------- -------- Total (11,843) (12,642) 799 (32,277) (32,358) 81 -------- -------- ------- -------- -------- -------- NET INTEREST INCOME $ (4,028) $ (5,108) $ 1,080 $ (9,970) $(12,438) $ 2,468 ======== ======== ======= ======== ======== ========

(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 reflected unfavorable rate-related variances partially offset by favorable volume-related variances. The net unfavorable rate-related variance reflects the asset-sensitive interest rate risk position held prior to the second quarter of 2003 coupled with the Federal Reserve's actions in the fourth quarter of 2002 to lower short-term interest rates by 50 basis points, a shift in the mix of earning assets toward lower yielding securities and higher prepayment levels on fixed rate loans and investments. Yields on commercial loans and consumer home equity loans were impacted as many of these loans are tied to the prime interest rate, which declined in step with the decline in short-term interest rates. Lower interest rates have also led to a decrease in funding costs which have further benefited from a shift in mix from higher cost time deposits to lower cost demand deposits. The net favorable volume variance reflected our previously mentioned strategy to expand the investment portfolio, growth in home equity and indirect consumer lending, and mortgage loans awaiting sale in the secondary market. Partially offsetting these increases were declines in real estate and commercial loans. Real estate loans declined due to high prepayment activity, sale of most new mortgage loan production into the secondary market, and securitization in 2002 of $28.6 million of mortgage loan originations and $114.3 million of seasoned portfolio mortgage loans through the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). During the first nine months of 2003, 83.4% of total mortgage loans originated were designated for sale into the secondary market. 16 An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the three and nine months ended September 30, 2003 and 2002 is presented below. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2003 2002 --------------------------------------- -------------------------------- Three Months Ended September 30 AVERAGE AVERAGE AVERAGE AVERAGE (in thousands) BALANCE INTEREST(1) RATE(2) BALANCE INTEREST(1) RATE(2) ------------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Money market investments: Federal funds sold $ 1,509 $ 1 0.38% $ 33,802 $ 140 1.61% Other 2,418 2 0.25 7,736 25 1.29 Investment securities(3): Taxable 1,526,583 14,254 3.73 1,009,300 14,150 5.61 Tax-exempt 401,302 5,059 7.76 416,550 5,319 7.86 Mortgage loans held for sale 234,793 3,090 5.26 82,804 1,716 8.29 Loans: Commercial 3,049,878 42,110 5.54 3,368,262 52,076 6.21 Real estate mortgage 481,337 7,626 6.34 681,658 11,998 7.03 Direct consumer 937,133 14,648 6.27 848,198 16,304 7.63 Indirect consumer 714,302 12,897 7.24 679,362 13,830 8.17 ----------- ----------- ---------- -------- Total earning assets(3) 7,349,255 99,687 5.58 7,127,672 115,558 6.65 NONEARNING ASSETS Cash and due from banks 183,214 182,153 Bank premises and equipment 112,812 123,920 Investment security fair value adjustment 28,909 65,960 Other nonearning assets 262,373 198,045 Allowance for loan losses (124,964) (82,244) ----------- ---------- Total assets $ 7,811,599 $7,615,506 ----------- ---------- INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $ 1,334,765 $ 2,483 0.75 $1,151,589 $ 4,760 1.64 Savings deposits 1,332,519 1,839 0.55 1,374,149 4,127 1.19 Time deposits 2,054,257 14,529 2.84 2,539,356 22,838 3.57 Short-term borrowings 561,427 1,463 1.03 249,531 1,007 1.60 Long-term debt 937,941 8,219 3.47 615,124 7,644 4.93 ----------- ----------- ---------- -------- Total interest-bearing liabilities 6,220,909 28,533 1.83 5,929,749 40,376 2.70 ----------- -------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 888,440 886,387 Other liabilities 82,150 88,392 Shareholders' equity 620,100 710,978 ----------- ---------- Total liabilities and shareholders' equity $ 7,811,599 $7,615,506 ----------- ---------- INTEREST SPREAD $ 71,154 3.75% $ 75,182 3.95% =========== ======== Contribution of net noninterest bearing sources of funds 0.28 0.45 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.03% 4.40%

(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 $3,291,000 and $3,590,000 for the three months ended September 30, 2003 and 2002, respectively, based on a tax rate of 35%. (3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. 17 AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2003 2002 -------------------------------------- ------------------------------------ Nine Months Ended September 30 AVERAGE AVERAGE AVERAGE AVERAGE (in thousands) BALANCE INTEREST(1) RATE(2) BALANCE INTEREST(1) RATE(2) ---------------------------------------- --------- ------------ ------- -------- ----------- -------- EARNING ASSETS Money market investments: Federal funds sold $ 12,083 $ 95 1.03% $ 41,942 $ 526 1.65% Other 2,054 7 0.49 26,901 229 1.12 Investment securities(3): Taxable 1,359,305 45,795 4.49 943,410 41,121 5.81 Tax-exempt 401,022 15,288 7.82 418,108 16,038 7.87 Mortgage loans held for sale 185,891 7,727 5.54 109,458 6,292 7.66 Loans: Commercial 3,155,940 133,073 5.64 3,350,474 157,937 6.31 Real estate mortgage 538,880 25,442 6.30 729,941 38,971 7.11 Direct consumer 895,155 43,899 6.56 832,054 48,931 7.86 Indirect consumer 668,772 37,253 7.45 665,952 40,781 8.19 ---------- ----------- ---------- ----------- Total earning assets(3) 7,219,102 308,579 5.86 7,118,240 350,826 6.79 NONEARNING ASSETS Cash and due from banks 172,681 180,701 Bank premises and equipment 114,419 126,393 Investment security fair value adjustment 51,598 48,796 Other nonearning assets 254,554 178,132 Allowance for loan losses (119,411) (81,146) ---------- ---------- Total assets $7,692,943 $7,571,116 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $1,312,898 $ 9,263 0.94 $1,112,259 $ 13,420 1.61 Savings deposits 1,352,398 7,408 0.73 1,364,617 12,089 1.18 Time deposits 2,192,473 49,739 3.03 2,584,035 73,651 3.81 Short-term borrowings 418,967 3,497 1.10 231,807 2,876 1.66 Long-term debt 835,990 23,092 3.65 624,349 23,240 4.98 ---------- ----------- ---------- ----------- Total interest-bearing liabilities 6,112,726 92,999 2.02 5,917,067 125,276 2.83 ----------- ----------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 870,039 864,238 Other liabilities 76,073 85,273 Shareholders' equity 634,105 704,538 ---------- ---------- Total liabilities and shareholders' equity $7,692,943 $7,571,116 ========== ========== INTEREST SPREAD $ 215,580 3.84% $ 225,550 3.96% =========== =========== Contribution of net noninterest bearing sources of funds 0.31 0.47 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.15% 4.43%

-------------------------- (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 $10,120,000 and $10,843,000 for the nine months ended September 30, 2003 and 2002, respectively, based on a tax rate of 35%. (3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. 18 NONINTEREST INCOME Noninterest income for the third quarter of 2003 was $25.1 million, an increase of $5.3 million or 27.0% from the third quarter of 2002. Noninterest income for the nine months ended September 30, 2003 was $73.2 million, down $1.9 million or 2.5% from the first nine months of 2002. The increase for the quarter reflected higher service charges on deposit accounts and mortgage banking revenue. Also contributing to the increase was a charge of $1.6 million recorded in the third quarter of 2002, which included market valuation adjustments of $662,000 to an equity investment and $650,000 to life insurance cash surrender values, and write-offs of $200,000 for obsolete assets and $75,000 for cash management fees accrued but not collectible. The year-to-date decline in 2003 was largely due to gains recorded in 2002 of $5.4 million from the sale of Citizens' merchant services business and $2.4 million from the sale of securitized mortgages partially offset by the aforementioned one-time charge of $1.6 million. The other components of noninterest income increased $4.4 million as higher service charges on deposits, mortgage banking revenue and income from bank owned life insurance more than offset lower trust, brokerage and investment fees and bankcard fees. An analysis of the sources of noninterest income during the three and nine months ended September 30, 2003 and 2002 is summarized in the table below. NONINTEREST INCOME

Three Months Ended Nine Months Ended September 30, September 30, $ Change in 2003 % Change in 2003 ------------------ ----------------- ---------------- ---------------- (in thousands) 2003 2002 2003 2002 3 Mos 9 Mos 3 Mos 9 Mos ------------------------------------- ------- -------- --------- ------- ----- ----- ----- ----- Service charges on deposit accounts $ 7,703 $ 6,620 $ 21,842 $19,767 $ 1,083 $ 2,075 16.4% 10.5% Trust fees 4,368 4,372 12,912 14,260 (4) (1,348) (0.1) (9.5) Mortgage and other loan income 5,404 2,928 15,967 9,825 2,476 6,142 84.6 62.5 Brokerage and investment fees 2,333 2,337 6,015 7,020 (4) (1,005) (0.2) (14.3) Bankcard fees 761 672 2,310 5,359 89 (3,049) 13.2 (56.9) Gain on sale of merchant business -- -- -- 5,400 -- (5,400) 0.0 (100.0) Gain on sale of securitized mortgages -- -- -- 2,436 -- (2,436) 0.0 (100.0) Investment securities gains (losses) 42 45 101 (12) (3) 113 (6.7) (941.7) Other, net 4,443 2,760 14,041 11,020 1,683 3,021 61.0 27.4 ------- -------- -------- ------- -------- -------- Total noninterest income $25,054 $ 19,734 $ 73,188 $75,075 $ 5,320 $ (1,887) 27.0 (2.5) ======= ======== ======== ======= ======== ========

Service charges on deposit accounts were up for both the three and nine-month periods ended September 30, 2003 compared to the same periods in 2002. Last year, with the assistance of banking industry consultants, we began an extensive review of our consumer bank business line. As a result of the review, we implemented a number of recommendations that have resulted in, among other things, additional overdraft fees, a new overdraft monitoring system and fewer waived fees. The increases in service charges were due to these changes. Trust fees were essentially unchanged for the quarter but decreased for the first nine months of 2003 compared to the same periods in 2002. These fees are based primarily on the market value of the average assets under administration. For the nine months ended September 30, 2003, the decline in trust fees was due to lower financial markets and, to a lesser extent, client attrition. Attrition was down in the third quarter, but outpaced new business generation for the nine month period. We expect attrition to continue to decline as we expand our product offerings and provide upgraded systems and technology. Total trust assets under administration were $2.61 billion at September 30, 2003, an increase of $123.0 million from September 30, 2002, and a decline of $13.0 million from June 30, 2003. On average, trust assets under administration were down $275 million in the first nine months of 2003 compared to the same period in 2002. Mortgage and other loan income was up due to higher mortgage loan origination volume in 2003. A strong mortgage origination market, spurred by low mortgage interest rates, helped push total mortgage originations to $444 million in the third quarter and $1.284 billion year-to-date, compared with $350 million in the third quarter of 2002 and $801 million in the first nine months of 2002. The majority of all new mortgage loan originations along with the related servicing were sold in the secondary market resulting in higher revenue. Brokerage and investment fees were unchanged for the quarter but declined for the nine months ended September 30, 2003 compared to the same periods of 2002. The decline for the first nine months of 2003 reflects slower retail sales of fixed annuity products. Bankcard fees, which include revenue generated from personal and business debit and credit cards as well as merchant services, were up slightly for the quarter but declined for the nine month period ended September 30, 2003 compared to the same periods in 2002. The decline for the first nine months of 2003 resulted from the sale of our merchant services business in the second quarter of 2002. 19 Other noninterest income increased $1.7 million for the quarter and $3.0 million for the nine months ended September 30, 2003, compared to the same periods of 2002. The increases in both periods were principally due to the aforementioned charge of $1.6 million recorded in the third quarter of 2002 and increases in life insurance income and title insurance fees. Higher life insurance income reflects the purchase of $78.0 million of separate account bank owned life insurance in the third quarter of 2002. Title insurance fees increased due to higher mortgage origination volume. Based on the current economic and interest rate environment, noninterest income is expected to decline somewhat in the fourth quarter of 2003 from third quarter levels due to lower mortgage income as mortgage origination and sale volume is expected to decline in the fourth quarter. NONINTEREST EXPENSE Noninterest expense for the third quarter was $59.6 million compared with $79.5 million for the third quarter of 2002, a decrease of $19.9 million or 25.1%. For the nine months ended September 30, 2003, total noninterest expense decreased $29.7 million or 14.7% to $172.5 million compared to the same period in 2002. The declines reflect a special charge of $13.8 million and other charges of $7.1 million recorded in the third quarter of 2002 for restructuring and other initiatives as well as decreases in most other major components of noninterest expense offset, in part, by increased professional services, and system implementation costs and other expense reflected below in other, net. An analysis of the components of noninterest expense during the three and nine months ended September 30, 2003 and 2002 is summarized in the table below. NONINTEREST EXPENSE

Three Months Ended Nine Months Ended September 30, September 30, $ Change in 2003 % Change in 2003 -------------------- --------------------- ------------------------ ------------------ (in thousands) 2003 2002 2003 2002 3 Mos 9 Mos 3 Mos 9 Mos ----------------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits $ 31,036 $ 32,218 $ 92,548 $ 96,262 $ (1,182) $ (3,714) (3.7)% (3.9)% Equipment 4,060 5,167 12,098 14,981 (1,107) (2,883) (21.4) (19.2) Occupancy 4,328 4,307 13,337 13,506 21 (169) 0.5 (1.3) Professional services 4,946 3,524 12,613 9,713 1,422 2,900 40.4 29.9 Data processing services 3,225 3,066 9,599 9,441 159 158 5.2 1.7 Postage and delivery 1,739 1,860 5,100 5,375 (121) (275) (6.5) (5.1) Advertising and public relations 1,395 1,848 4,067 5,535 (453) (1,468) (24.5) (26.5) Telephone 1,169 1,268 3,479 4,103 (99) (624) (7.8) (15.2) Stationery and supplies 911 907 2,679 3,021 4 (342) 0.4 (11.3) Bankcard expenses 79 134 261 3,787 (55) (3,526) (41.0) (93.1) Special charge (370) 13,807 (691) 13,807 (14,177) (14,498) (102.7) (105.0) Prepayment penalty on FHLB advances -- 3,300 -- 3,300 (3,300) (3,300) (100.0) (100.0) Contribution to charitable trust -- 2,000 -- 2,000 (2,000) (2,000) (100.0) (100.0) Other, net 7,082 6,139 17,452 17,426 943 26 15.4 0.1 -------- -------- --------- -------- -------- -------- Total noninterest expense $ 59,600 $ 79,545 $ 172,542 $202,257 $(19,945) $(29,715) (25.1) (14.7) ======== ======== ========= ======== ======== ========

Salaries and employee benefits were down due to lower staffing levels resulting from the restructuring initiatives announced during the third quarter of 2002 and normal attrition. Higher incentive-based compensation associated with mortgage loan origination and sales activity and increased medical costs partially offset the decline. We had 2,353 full time equivalent employees at September 30, 2003, down from 2,650 at September 30, 2002. Equipment expenses decreased due to lower depreciation and improved pricing from new or renegotiated maintenance contracts. A $0.4 million charge in the third quarter of 2002 for additional depreciation on equipment to be retired early also contributed to the decrease. The increase in professional services reflected $0.6 million incurred for the collateral field audit initiative begun in March of 2003, higher legal costs related to loan collection efforts, increased executive recruiting and relocation costs, implementation costs for Citizens' new INEA Performance Management software and additional costs associated with engagement of banking industry consultants who assisted in the restructuring. The decrease in advertising and public relations expense resulted from less media-intensive marketing campaigns as we adopted a more focused marketing strategy, seeking higher exposure at lower costs. Bankcard expense declined due to the sale of our merchant services business in the second quarter of 2002. In the third quarter of 2002, we recorded a special charge of $13.8 million for restructuring initiatives within its three major lines of business (consumer banking, business banking and wealth management) to be able to compete more effectively, reduce layers of management, be more customer oriented, and be better positioned to grow core deposits and loans. At the 20 same time, Citizens also charged to noninterest expense $7.1 million of other significant items considered unusual in nature. These charges included a $3.3 million prepayment penalty on high cost FHLB debt, a $2.0 million contribution to Citizens' charitable trust, $0.4 million of additional equipment depreciation described previously and $1.4 million included in other noninterest expense as described below. Other noninterest expense increased $0.9 million, or 15.4% for the quarter and was virtually unchanged for the nine months ended September 30, 2003 compared to the same periods in 2002. The increase in the third quarter of 2003 compared to same quarter in 2002 was primarily due to a loss of $0.5 million on the sale of other real estate ("ORE"), higher state taxes of $0.6 million due to our third quarter 2002 net loss and higher loan charge-offs in the third quarter of 2002, and $0.6 million associated with the implementation of new strategic alliances between our trust bank subsidiary, Citizens Bank Wealth Management N.A., and three third party vendors, SEI Investments, EnvestnetPMC and EPIC Advisors, Inc. Partially offsetting these increases were $1.4 million of other charges recorded in the third quarter of 2002, which included an ORE market valuation adjustment of $1.0 million and other charges of $0.4 million. For the nine months ended September 30, 2003 compared to the same period in 2002, higher ORE expenses of $1.2 million, state taxes of $0.3 million, and trust bank implementation costs of $0.8 million were essentially offset by the $1.4 million of other charges in the third quarter of 2002, a contract termination fee of $0.6 million in the first half of 2002 as servicing for our debit card portfolio was brought back in-house, and fewer fraud and other losses recorded in 2003. Noninterest expense is expected to remain relatively flat in the fourth quarter of 2003 compared to third quarter 2003 levels as additional marketing expenses targeting selected markets and deposit products are expected to be offset by lower mortgage-related compensation. INCOME TAXES Income tax provision was $6.7 million in the third quarter of 2003 compared with an income tax benefit of $28.0 million during the same period in 2002. For the nine months ended September 30, 2003, income tax provision was $13.4 million compared with an income tax benefit of $9.0 million for the same period last year. The income tax benefits in both the three and nine months ended September 30, 2002 resulted from a pretax operating loss due to a high loan loss provision, the special charge and other charges recorded in the third quarter of 2002. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 25.5% for the third quarter of 2003 and 21.9% for the first nine months of 2003. The effective tax rates for the same periods of 2002 of 37.8% and 163.5%, respectively, are essentially meaningless because of the net losses recorded. LINES OF BUSINESS REPORTING 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: Business Banking, Consumer Banking, Wealth Management and Other. For additional information about each line of business, see Note 19 to the consolidated financial statements of our 2002 Annual Report on Form 10-K and Note 5 to the consolidated financial statements of this report. A summary of net income (loss) by each business line is presented below.

Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2003 2002 2003 2002 ----------------------------------------------------------------------- Business Banking $ 8,710 $(41,643) $12,970 $(19,894) Consumer Banking 10,994 8,471 27,598 29,380 Wealth Management 111 793 758 3,291 Other (210) (13,550) 6,551 (9,264) -------- -------- ------- -------- Net income $ 19,605 $(45,929) $47,877 $ 3,513 ======== ======== ======= ========

BUSINESS BANKING The increases in net income in both the three and nine month periods ended September 30, 2003 were primarily attributed to decreases in the provision for loan losses and to a lesser extent noninterest expense. The significant declines in the loan loss provision in both the three and nine month periods were due to lower net charge-offs, fewer commercial loan risk rating downgrades and improving non-performing asset levels. Commercial loan net charge-offs totaled $7.8 million and $29.6 million in the third quarter and year-to-date periods of 2003, respectively, compared with $62.0 million and $71.3 million in the same periods of 2002. Net interest income declined in both the three and nine month periods ended September 30, 2003 21 as a result of lower average loan balances, particularly in Michigan and Wisconsin, due to the sluggish economy, on-going fixed rate loan refinancing and pay-downs, and earlier identification and reduction of exposure on credits with the potential to deteriorate. The decline in net interest income is also attributable to a decrease in commercial loan yields due to the lower prime rate as a result of the Federal Reserve's action to reduce short term interest rates. Noninterest income declined due to lower deposit service charges and cash management fees. Noninterest expense decreased due to lower compensation and other costs as a result of the third quarter 2002 line of business restructuring. CONSUMER BANKING The increase in net income for the three months ended September 30, 2003 was due to an increase in net interest income and noninterest income partially offset by higher provision for loan losses, noninterest expense and income taxes. Net interest income increased due to a lower cost of funds and higher loan volumes from growth in home equity and indirect consumer loans. Noninterest income increased due to higher mortgage income and service charges on deposits. The increase in the provision for loan losses reflected a higher loss allocation for our wholesale mortgage business. Noninterest expense was up due to higher incentive-based salary expense related to the high volume of mortgage originations. The decrease in net income for the first nine months of 2003 was caused by an increase in provision for loan losses and a decrease in noninterest income, partially offset by lower noninterest expense and income taxes. The higher provision for loan losses in the nine month period ended September 30, 2003 reflected a higher loss allocation for our wholesale mortgage business and higher charge-offs in the first quarter of 2003 due to a discount on the sale of nonperforming residential mortgage loans. The decrease in noninterest income in 2003 was due to a gain of $5.4 million recorded in the second quarter of 2002 from the sale of our merchant services business and lower bankcard fees as a result of the sale, partially offset by higher mortgage banking revenue and deposit service charges. Noninterest expense was down due to lower bankcard expense as a result of the sale of the merchant services business and lower compensation and equipment expenses due to the third quarter 2002 business line restructuring. WEALTH MANAGEMENT The decline in net income for the three month period ended September 30, 2003 was due to an increase in noninterest expense related to severance of $0.2 million and implementation costs of $0.6 million associated with our strategic alliances with SEI Investments, EnvestnetPMC, Inc, and EPIC Advisors, Inc. In the third quarter of 2003, our trust bank, Citizens Bank Wealth Management, N.A., through an arrangement with EPIC Advisors, Inc., announced plans to increase and grow its retirement plan business by offering its clients advanced state-of-the-art online employee account access, online retirement plan design and consulting options, and access to industry experts. Additionally, in the second quarter of 2003, Citizens Bank Wealth Management, N.A. formed strategic alliances with SEI Investments and EnvestnetPMC, Inc. These alliances will enable us to offer our wealth management clients a broader range of mutual fund family choices, access to separately managed accounts with specialized portfolio managers, state of the art research capabilities, and sophisticated client profiling and portfolio modeling tools. The decline in net income for the nine month period ended September 30, 2003 was caused by a decrease in noninterest income and an increase in noninterest expense. Noninterest income declined as a result of lower trust and brokerage and investment fees. The decline in trust fees was due to lower average trust assets resulting from the decline in the financial markets during the latter half of 2002 and the first quarter of 2003 and, to a lesser extent, attrition. The decline in brokerage and investment fees reflects slower retail sales of fixed annuity products. Noninterest expense increased due to implementation costs associated with the restructuring and the strategic alliances and a net loss of $0.3 million in settlement of a lawsuit. OTHER The net loss in the three month period and the net income in the nine month period ended September 30, 2003 represent significant improvements compared with the net losses recorded in the three and nine month periods ended September 30, 2002. The net losses recorded in the prior year periods resulted from the special charge to restructure Citizens' three major lines of business and other charges totaling a combined $21.5 million attributed to Other in the third quarter of 2002. Noninterest income improved in both the three and nine month periods ended September 30, 2003 due to the other charges of $1.3 million recorded in the third quarter of 2002. Noninterest expense declined in both the three and nine month periods ended 2003 due to the special and other charges of $19.5 million recorded in the third quarter of 2002 and cost savings as a result of the third quarter 2002 restructuring. Lower net interest income in both the three and nine month periods ended September 30, 2003 partially offset the reduction in noninterest expense and the increase in noninterest income. The decline in net interest income is attributable to accelerated purchase premium amortization on mortgage related securities purchased prior to 2003, partially offset by additional interest income on investment securities as a result of the expansion of the securities portfolio which began in March 2003 and $0.7 million of other charges in the third quarter of 2002. 22 FINANCIAL CONDITION Proper management of the volume and composition of our earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. Our investment securities portfolio is structured to provide a source of liquidity principally through the maturity of the securities held in the portfolio and to generate an income stream with relatively low levels of principal risk. Loans comprise the largest component of earning assets and are some of our highest yielding assets. Client deposits are the primary source of funding for earning assets while short-term debt and other managed sources of funds are used as market conditions and liquidity needs change. We had total assets of $7.784 billion as of September 30, 2003, an increase of $262 million, or 3.5%, from $7.522 billion as of December 31, 2002. Investment security balances increased $537.8 million or 36.9% from year end 2002 as Citizens began to expand its investment securities portfolio near the end of the first quarter of 2003 to offset the effects of weak loan demand and the prospect of net interest margin pressure from continued low interest rates. Loans declined $234.3 million or 4.2% compared with December 31, 2002. The decline in loans from year-end 2002 reflected a decrease in commercial and mortgage loans, partially offset by an increase in consumer loans. Increases in short-term borrowings and FHLB advances have funded the expansion of the investment portfolio. Average earning assets comprised 93.8% of average total assets during the first nine months of 2003 compared with 94.0% in the first nine months of 2002. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total average investments, including money market investments, comprised 24.6% of average earning assets during the first nine months of 2003, compared with 20.1% for the same period of 2002. Average investment securities for the nine months ended September 30, 2003 were up $398.8 million from the first nine months of 2002 average levels. The increase was primarily due to retention of securities created from mortgage loan securitizations in the second half of 2002 and purchases of securities since December 31, 2002. In March 2003, 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, we 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. Average money market investments for the first nine months of 2003 were down $54.7 million from the first nine months of 2002. We held higher levels of money market investments during most of 2002 in anticipation of purchasing bank-owned life insurance. We completed a $78 million purchase of bank-owned life insurance in the third quarter of 2002. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale were $ 132.6 million at September 30, 2003, down $28.1 million from year-end 2002 but up $11.3 million from September 30, 2002. These balances generally track the level of originations as we are selling most of our new residential mortgage loan production into the secondary market due to the low interest rate environment. A strong mortgage origination market, spurred by low mortgage interest rates, helped push total mortgage originations to $444 million and $1.284 billion for the three and nine month periods ended September 30, 2003, respectively, compared with $350 million and $801 million, respectively, for the same periods in 2002. Average mortgage loans held for sale during the nine months of 2003 comprised 2.6% of average earning assets compared with 1.5% during the same period in 2002. Mortgages held for sale are accounted for on the lower of cost or market basis. PORTFOLIO LOANS We extend credit primarily within the local markets of our banking subsidiaries located in Michigan, Wisconsin, Iowa and Illinois. We generally lend to consumers and small to mid-sized businesses and, consistent with our emphasis on relationship banking, most of these credits represent core, multi-relationship customers who also maintain deposit relationships and use other banking services such as cash management. Our loan portfolio is diversified by borrower and industry with no concentration within a single industry that exceeds 10% of the total loan balance outstanding. We do not have any loans to foreign debtors and do not purchase nationally syndicated loans or participate in highly leveraged transactions. We seek to limit our credit risk by establishing guidelines to review the aggregate outstanding commitments and loans to particular borrowers, industries, and geographic areas. We obtain collateral based on the nature of the credit and our credit assessment of the customer. Total portfolio loans at September 30, 2003 were down $206.2 million, or 3.8%, from December 31, 2002. The decline in total portfolio loans was caused primarily by lower demand for commercial loans in the current sluggish economy, tightening 23 of our credit standards, and a decline in mortgage loans, partially offset by an increase in consumer loans. Commercial loan balances at September 30, 2003 declined $180.2 million from December 31, 2002, due to lower demand caused by the sluggish economy, increased activity in fixed-rate loan refinancing, prepayments and other paydowns, and proactive identification and reduction of exposure on credits with the potential to deteriorate. Mortgage loans declined $138 million due to the continued sale of most new mortgage loan production into the secondary market and record high refinancing activity causing prepayment of existing portfolio loans in the historically low interest rate environment. Consumer loans, other than mortgage loans, increased $193 million or 12.8% from December 31, 2002 as growth in home equity loans more than offset a decline in other direct consumer loans. Home equity loans increased 23.1% from year-end 2002 and comprised $127 million of the $193 million increase in consumer loans. Two home equity line of credit campaigns contributed to this growth. The spring campaign contributed most of the growth, while the summer campaign contributed commitments of $54 million and $26 million of new balances at September 30, 2003. The campaigns have yielded over 4,500 new accounts with commitments of over $260 million and aggregate balances in excess of $131 million. Average total portfolio loans declined by $395 million, or 7.1%, for the third quarter of 2003 compared to the same period in 2002. Total loans are expected to decline slightly during the remainder of 2003 as growth in consumer loans is anticipated to be more than offset by continued declines in commercial and mortgage loans. Growth in consumer loans is expected to continue to come primarily from home equity products but will be partially offset by a decline in new indirect loans largely due to the seasonal slow down of marine and RV sales. Mortgage loans are anticipated to decline due to expected prepayments on portfolio loans and due to the sale of our current mortgage originations into the secondary market. Commercial loans are expected to decline slowly throughout the year due to lower demand and the continued implementation of our credit improvement initiatives. At September 30, 2003 and 2002, $65.6 million and $224.9 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 and were $0.8 million at September 30, 2002. CREDIT RISK MANAGEMENT Extending credit to businesses and consumers exposes us to credit risk. Credit risk is the risk that the principal balance of a loan and any related interest will not be collected due to the inability or unwillingness of the borrower to repay the loan. Credit risk is mitigated through portfolio diversification that limits exposure to any single industry or customer. Similarly, credit risk is also mitigated through the establishment of a comprehensive system of internal controls, which includes standard lending policies and procedures, underwriting criteria, collateral safeguards, and surveillance and evaluation by an independent internal loan review staff of the quality, trends, collectibility and collateral protection within the loan portfolio. Lending policies and procedures are reviewed and modified on an ongoing basis as conditions change and new credit products are offered. Our commercial and commercial real estate credit administration policies include a loan rating system and an analysis by the internal loan review staff of loans over a fixed amount and of a sampling of loans under such amount. Furthermore, account officers are vested with the responsibility of monitoring their customer relationships and act as the first line of defense in determining changes in the loan ratings on credits for which they are responsible. Loans that have migrated within the loan rating system to a level that requires remediation are actively reviewed by senior management at regularly scheduled quarterly meetings with the credit administration staff and the account officers. At these meetings, action plans are developed to either remediate any emerging problem loans or develop a specific plan for removing such loans from the portfolio within a short time frame. The collateral field audits initiated in late March are essentially complete. Based upon results of these audits, there have been no additional reserves or charge-offs although a small number of commercial customers have been requested to seek alternative financing because they were unwilling or unable to accommodate Citizens' reporting requests. We intend to continue regular audits of receivable and inventory collateral as standard practice going forward. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses represents a charge against income and a corresponding increase in the allowance for loan losses. Credit losses are charged and recoveries are credited to the allowance for loan losses. 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. See "-- Critical Accounting Policies." 24 A summary of loan loss experience during the three and nine months ended September 30, 2003 and 2002 is provided below. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- (in thousands) 2003 2002 2003 2002 ----------------------------------------------------------------------------------------------------------------------- Allowance for loan losses - beginning of period $ 125,992 $ 80,447 $ 109,467 $ 80,299 Provision for loan losses 10,300 89,250 54,942 103,900 Charge-offs: Commercial 9,539 56,042 31,249 65,734 Commercial real estate 1,531 5,452 6,807 5,452 Small business 348 1,596 885 1,941 ----------- ------------ ---------- ---------- Total commercial 11,418 63,090 38,941 73,127 Real estate mortgage 213 229 914 282 Consumer - Direct 1,628 2,478 5,166 5,982 Consumer - Indirect 1,941 2,035 6,604 6,136 ----------- ------------ ---------- ---------- Total charge-offs 15,200 67,832 51,625 85,527 ----------- ------------ ---------- ---------- Recoveries: Commercial 2,882 1,004 7,029 1,750 Commercial real estate 595 11 1,683 11 Small business 139 50 594 106 ----------- ------------ ---------- ---------- Total commercial 3,616 1,065 9,306 1,867 Real estate mortgage 27 11 36 11 Consumer - Direct 504 463 1,422 1,292 Consumer - Indirect 716 754 2,407 2,316 ----------- ------------ ---------- ---------- Total recoveries 4,863 2,293 13,171 5,486 ----------- ------------ ---------- ---------- Net charge-offs 10,337 65,539 38,454 80,041 ----------- ------------ ---------- ---------- Allowance for loan losses - end of period $ 125,955 $ 104,158 $ 125,955 $ 104,158 =========== ===========- ========== ========== Portfolio loans outstanding at period end (1) $ 5,226,386 $ 5,524,023 $5,226,386 $5,524,023 Average portfolio loans outstanding during period (1) 5,182,650 5,577,480 5,258,747 5,578,421 Allowance for loan losses as a percentage of portfolio loans 2.41% 1.89% 2.41% 1.89% Ratio of net charge-offs during period to average 0.80 4.70 0.97 1.91 portfolio loans (annualized) Loan loss coverage (allowance as a multiple of 3.0X 0.4X 2.5X 1.0X net charge-offs, annualized)

(1) Balances exclude mortgage loans held for sale. The provision for losses declined to $10.3 million in the third quarter of 2003 compared to $89.3 million in the third quarter of 2002. The lower loan loss provision resulted from a decline in nonperforming assets, lower net charge-offs and fewer risk rating downgrades within the commercial loan portfolio. Additionally, in the third quarter of 2002 we recorded an incremental loan loss provision primarily in response to an unusually high amount of commercial credits that deteriorated to charge-off status, a significant migration of loans to higher risk ratings as well as increases in nonperforming and impaired commercial credits during the quarter. Higher loss factors applied to the formula portion of the allowance also affected the third quarter 2002 provision, which increased $23 million due to this change. Net loans charged-off in the third quarter of 2003 totaled $10.3 million, or 0.80%, of average loans (annualized), compared with $65.5 million, or 4.70%, in the third quarter of 2002. The decrease in net charge-offs occurred primarily in the commercial loan portfolio. Commercial net charge-offs were $7.8 million in the third quarter of 2003, down $54.2 million from the third quarter of 2002 and $1.5 million from the second quarter of 2003. Of the unusually high level of commercial charge-offs in the third quarter 2002, 60% consisted of seven credits. These seven credits were from a variety of industries, including automotive manufacturing and packaging, heavy construction, health supplement products and real estate development. Commercial charge-offs in the third quarter of 2003 included two credits totaling $5.0 million or 64% of the commercial loan amount. These two credits were in the electric power distribution and grocery industries. In the second quarter of 2003, we recorded provision expense in excess of charge-offs as a result of an in-depth risk rating review, which included a review of higher risk "pass" rated credits to conform the risk ratings of these loans and the continued application of previous 25 enhancements to our internal risk rating process. Based on these enhanced credit processes and credit administration procedures, we now expect, barring any unforeseen downturn in the economy, net charge-offs and loan loss provisions in the fourth quarter to be less than $11 million each. The allowance for credit 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 have implemented enhancements to 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 2003 from 2002. 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 at length in our 2002 Annual Report on Form 10-K. The allowance for loan losses was $126.0 million at September 30, 2003, an increase of $16.5 million compared to December 31, 2002. The higher allowance at September 30, 2003 reflects an increase in the formula based risk-allocated reserves. At September 30, 2003, the allowance allocated to specific commercial and commercial real estate credits was $11.3 million, down from $18.7 million at December 31, 2002. The decrease reflects fewer criticized and classified credits subject to specific allocation, as many of these credits have been fully or partially charged off. Criticized and classified credits (i.e., those internally risk rated 7 - special mention, 8 - substandard or 9 - doubtful) subject to specific reserves decreased to $54.0 million at September 30, 2003 from $90.4 million at December 31, 2002. The total formula risk-allocated allowance was $107.4 million at September 30, 2003, up from $83.4 million at December 31, 2002. The amount allocated to commercial and commercial real estate loans, including construction loans, increased to $86.4 million at September 30, 2003 from $65.5 million at December 31, 2002. The increase reflected a higher level of criticized and classified loans and migration of loans to higher risk ratings as well as our assessment of current economic conditions within our local markets. The risk-allocated allowance for residential real estate loans increased to $4.8 million at September 30, 2003, from $2.3 million at December 31, 2002, reflecting a higher loss allocation for our wholesale mortgage business partially offset by fewer non-accrual loans and a smaller portfolio. Lower nonaccrual loan levels were due, in part, to the sale in January 2003 of $2.1 million of nonperforming residential mortgage loans from the F&M banks and the sale of $2.8 million of nonperforming residential loans in March 2003. Even with the discounts taken for these sales, historical loss ratios in the residential mortgage portfolio remain very low. The risk-allocated allowance for consumer loans increased to $16.2 million at September 30, 2003 from $15.6 million at December 31, 2002. The increase in the allowance was due to growth in the consumer portfolio. The unallocated allowance was $7.3 million at September 30, 2003, essentially unchanged from December 31, 2002. The unallocated portion of the allowance is maintained to capture the uncertainty that factors affecting the determination of probable losses inherent in the loan portfolio may exist which have not 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. 26 NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms and other repossessed assets, primarily other 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 September 30, 2003, December 31, 2002 and September 30, 2002. NONPERFORMING ASSETS

September 30, December 31, September 30, (in thousands) 2003 2002 2002 ----------------------------------------------------------------------------------------------------------------------- Nonperforming Loans Nonaccrual Commercial: Commercial $51,158 $50,231 $ 48,374 Commercial real estate 17,379 19,301 28,488 Small business 1,648 813 588 ------- ------- -------- Total commercial 70,185 70,345 77,450 Nonaccrual Consumer: Direct 3,291 3,704 3,512 Indirect 1,625 1,803 1,657 ------- ------- -------- Total consumer 4,916 5,507 5,169 Nonaccrual Mortgage 8,177 10,865 16,113 ------- ------- -------- Total nonaccrual loans 83,278 86,717 98,732 Loans 90 days past due and still accruing 601 860 1,260 ------- ------- -------- Total nonperforming loans 83,879 87,577 99,992 Other Repossessed Assets Acquired (ORAA) 7,350 8,094 8,025 ------- ------- -------- Total nonperforming assets $91,229 $95,671 $108,017 ======= ======= ======== Nonperforming assets as a percent of portfolio loans plus ORAA (1) 1.74% 1.76% 1.95% Nonperforming assets as a percent of total assets 1.17 1.27 1.42 Allowance for loan loss as a percent of nonperforming loans 150.16 125.00 104.17 Allowance for loan loss as a percent of nonperforming assets 138.06 114.42 96.43

(1) Portfolio loans exclude mortgage loans held for sale The level of nonperforming commercial loans at September 30, 2003 was essentially unchanged from December 31, 2002, but was down $7.3 million from September 30, 2002. The decline in nonperforming commercial loans since the third quarter of 2002, reflects aggressive collection efforts and, to a lesser extent, charge-offs in the fourth quarter of 2002, which reduced nonperforming credits to the current level. Changes in nonperforming loans are reflected in the allowance for loan losses through specific and risk allocated allowances. As of September 30, 2003, the total allocated allowance for nonaccrual commercial loans was approximately $14 million, unchanged from December 31, 2002. Nonperforming loans in both the residential mortgage and consumer loan portfolios were down at September 30, 2003 from December 31, 2002. The lower level of nonperforming residential real estate loans primarily reflects the previously mentioned sales of nonperforming residential mortgage loans, which totaled $4.9 million during the first quarter of 2003. In the consumer portfolio, a change in asset mix, which included strong growth in home equity loans, has helped reduce nonperforming levels. The level and composition of nonperforming assets are affected by economic conditions in our local markets. Nonperforming assets, charge-offs and provisions for loan losses tend to decline in a strong economy and increase in a weak economy, potentially impacting our results. 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 September 30, 2003, such loans amounted to $212.6 million, or 4.1% of total portfolio loans, compared with $134.6 million, or 2.5%, of total portfolio loans as of December 31, 2002. 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. 27 Certain 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 September 30, 2003 and 2002 as well as their effect on net income for the third quarter of 2003 and 2002 follows: IMPAIRED LOAN INFORMATION

Valuation Reserve ----------------- (in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------------- Balances - September 30 Impaired loans with valuation reserve $31,887 $32,203 $8,438 $6,552 Impaired loans with no valuation reserve 47,303 57,191 -- -- ------- ------- ------ ------ Total impaired loans $79,190 $89,394 $8,438 $6,552 ======= ======= ====== ====== Impaired loans on nonaccrual basis $70,185 $77,450 $3,659 $3,618 Impaired loans on accrual basis 9,005 11,944 4,779 2,934 ------- ------- ------ ------ Total impaired loans $79,190 $89,394 $8,438 $6,552 ======= ======= ====== ====== Average balance for the quarter $87,786 $94,101 Interest income recognized for the quarter 226 446 Cash collected applied to outstanding principal 876 2,044

DEPOSITS Average deposits declined $197 million, or 3.3%, in the first nine months of 2003 compared to the same period in 2002. Total deposits decreased $455 million or 7.7% to $5.482 billion at September 30, 2003 compared with $5.937 billion at December 31, 2002. The decline in deposits occurred largely within time deposits, and to a lesser extent, savings deposits as clients sought higher yielding investment alternatives in the low interest rate environment. In the third quarter of 2003, Citizens completed a successful marketing campaign promoting its "Perfect Fit" checking account products to increase growth in core interest bearing and non-interest bearing checking accounts. During the 12 week "Perfect Fit" campaign, over 10,600 new accounts were opened representing nearly $61 million in new deposit balances. 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 September 30, 2003, we had approximately $134 million in brokered deposits, essentially unchanged from December 31, 2002. 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 $490 million of time deposits greater than $100,000, down $54 million from December 31, 2002. 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 primarily of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and Treasury Tax and Loan borrowings. As of September 30, 2003, short-term borrowed funds totaled $652.4 million, an increase of $350.0 million or 115.7% compared to December 31, 2002. For the nine months ending September 30, 2003, average short-term borrowed funds totaled $419.0 million, an increase of $187.2 million, or 80.7% from the same period of 2002. The increases provided funding to support expansion of the investment portfolio, which commenced in the first quarter of 2003, and to a lesser extent offset a modest decrease in average deposits. Long-term debt consists almost entirely of advances from the Federal Home Loan Bank ("FHLB") to Citizens' subsidiary banks, and subordinated notes issued by Citizens. Long-term debt totaled $940.6 million at September 30, 2003, up $341.3 million or 56.9% from December 31, 2002. Average long-term debt totaled $836.0 million for the first nine months of 2003, an increase of $211.7 million or 33.9% compared with the same period in 2002. The increases were driven by 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. See Note 6 of the Consolidated Financial Statements elsewhere in this report for a description of the two subordinated debt issuances. The growth in FHLB borrowings since December 31, 2002 was primarily in the two to three year maturity range, with remaining amounts in the one and five year maturity, and were used to fund the growth in the investment portfolio. 28 CAPITAL RESOURCES Citizens continues 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 September 30, 2003, December 31, 2002 and September 30, 2002 are presented below. CAPITAL RATIOS

Regulatory Minimum For "Well SEPTEMBER 30, December 31, September 30, Capitalized" 2003 2002 2002 ------------------------------------------------------------------------------ Risk based capital: Tier I 6.0% 9.6% 9.2% 9.3% Total capital 10.0 13.1 10.4 10.5 Tier I leverage 5.0 7.3 7.2 7.3

Shareholders' equity at September 30, 2003 was $634.1 million, compared with $650.5 million at December 31, 2002 and $668.3 million as of September 30, 2002. Book value per common share at September 30, 2003, December 31, 2002 and September 30, 2002 was $14.67, $14.88 and $14.97, respectively. We declared and paid cash dividends of $0.285 per share in the third quarter of 2003, the same as declared and paid in the third quarter of 2002. Shareholders' equity decreased as cash dividends and the capital requirements of our share repurchase program exceeded net income. In October 2001, our board of directors approved a plan to repurchase up to 3,000,000 shares of our common stock from time to time in the market. During the third quarter of 2003, we purchased a total of 75,000 shares for $2.0 million. As of September 30, 2003, a total of 2,578,200 shares of common stock had been repurchased under the plan at an average price of $28.13. In October of 2003, Citizens' board of directors approved a new plan to repurchase an additional 3,000,000 shares of common stock. These shares are in addition to the 421,800 shares still available under the plan approved in October 2001. 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. LIQUIDITY AND DEBT CAPACITY We monitor 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. 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. Another source of liquidity is the ability of our parent company to borrow funds on both a short-term and long-term basis. In the first quarter of 2003, as discussed above, we issued $125 million of subordinated debt maturing on February 1, 2013. A portion of the proceeds from this offering were used to repay amounts outstanding under our short-term revolving credit facility. The remainder of the net proceeds was used or is available for general corporate purposes. The subordinated debt requires semi-annual interest payments beginning in August 2003 and qualifies as a component of our capital, bolstering our overall capital ratios. The higher capital ratios are viewed favorably by regulators and credit rating agencies. In June 2003, we also issued approximately $25 million of floating rate, 30 year trust preferred securities through a special purpose trust with an initial interest rate of 4.16%. Interest only payments are due quarterly beginning September 1, 2003 and payment in full of the principal is due in June 2033. Our rights and obligations in connection with these securities are described --in Note 6 of the Consolidated Financial Statements elsewhere in this report. Citizens' parent company also has a short-term revolving credit facility with two unaffiliated banks and has used this facility for various corporate purposes from time to time. In August 2003, the parent company refinanced this facility, reducing the borrowing limit from $75 million to $50 million and extending the maturity to August 2004. The credit agreement also requires Citizens to maintain certain financial covenants related to asset quality and capital levels. There were no borrowings outstanding under this credit facility as of September 30, 2003. 29 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. We manage the liquidity of our subsidiary banks to meet client cash flow needs while maintaining funds available for loan and investment 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. The primary sources of liquidity for the parent company are dividends 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 member banks 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. At September 30, 2003, the banking subsidiaries could distribute to Citizens approximately $26 million in dividends without regulatory approval. 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 9 to the Consolidated Financial Statements in this report. 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 September 30, 2003 and 2002 is illustrated in the table on the following page. As shown, as of September 30, 2003 rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing within one year by $642.1 million, compared to $786.5 million as of September 30, 2002. 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. We performed simulations as of September 30, 2003 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. Net interest income is expected to decline modestly over the period if rates remain at September 30, 2003 levels. See "-- Net Interest Income and Net Interest Margin." 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 within 1% of what it would be if rates were to remain at September 30, 2003 levels. An immediate 50 basis point parallel decline in market rates is expected to reduce net interest income over the following 12 months by less than 1% of what it would be if rates remain constant over the entire time period at September 30, 2003 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 factors, could produce different results. 30 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 ----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 2003 RATE SENSITIVE ASSETS (1) Portfolio loans (2) $ 2,605.1 $ 323.1 $ 559.7 $3,487.9 $1,522.8 $ 215.7 $ 5,226.4 Mortgage loans held for sale 132.6 -- -- 132.6 -- -- 132.6 Investment securities 178.4 72.4 112.5 363.3 951.7 680.1 1,995.1 Short-term investments 2.4 -- -- 2.4 -- -- 2.4 --------- --------- --------- -------- -------- -------- --------- Total $ 2,918.5 $ 395.5 $ 672.2 $3,986.2 $2,474.5 $ 895.8 $ 7,356.5 ========= ========= ========= ======== ======== ======== ========= RATE SENSITIVE LIABILITIES Deposits(3) $ 1,098.1 $ 447.9 $ 1,070.2 $2,616.2 $1,752.9 $ 234.6 $ 4,603.7 Other interest bearing liabilities 596.6 106.2 25.1 727.9 475.5 389.6 1,593.0 --------- --------- --------- -------- -------- -------- --------- Total $ 1,694.7 $ 554.1 $ 1,095.3 $3,344.1 $2,228.4 $ 624.2 $ 6,196.7 ========= ========= ========= ======== ======== ======== ========= Period GAP (4) $ 1,223.8 $ (158.6) $ (423.1) $ 642.1 $ 246.1 $ 271.6 $ 1,159.8 Cumulative GAP 1,223.8 1,065.2 642.1 888.2 1,159.8 Cumulative GAP to Total Assets 15.72% 13.68% 8.25% 8.25% 11.41% 14.90% 14.90% Multiple of Rate Sensitive Assets to Liabilities 1.72 0.71 0.61 1.19 1.11 1.44 1.19 SEPTEMBER 30, 2002 RATE SENSITIVE ASSETS (1) Portfolio loans(2) $ 2,616.4 $ 272.3 $ 484.8 $3,373.5 $1,859.9 $ 290.6 $ 5,524.0 Mortgage loans held for sale 121.3 -- -- 121.3 -- -- 121.3 Investment securities 117.4 56.7 136.5 310.6 706.2 483.9 1,500.7 Short-term investments 2.5 -- -- 2.5 -- -- 2.5 --------- --------- --------- -------- -------- -------- --------- Total $ 2,857.6 $ 329.0 $ 621.3 $3,807.9 $2,566.1 $ 774.5 $ 7,148.5 ========= ========= ========= ======== ======== ======== ========= RATE SENSITIVE LIABILITIES Deposits(3) 782.9 $ 564.0 $ 1,075.8 $2,422.7 $2,265.4 $ 327.0 $ 5,015.1 Other interest bearing liabilities 573.5 -- 25.2 598.7 95.9 283.2 977.8 --------- --------- --------- -------- -------- -------- --------- Total $ 1,356.4 $ 564.0 $ 1,101.0 $3,021.4 $2,361.3 $ 610.2 $ 5,992.9 ========= ========= ========= ======== ======== ======== ========= Period GAP (4) $ 1,501.2 $ (235.0) $ (479.7) $ 786.5 $ 204.8 $ 164.3 $ 1,155.6 Cumulative GAP 1,501.2 1,266.2 786.5 991.3 1,155.6 Cumulative GAP to Total Assets 19.72% 16.63% 10.33% 10.33% 13.02% 15.18% 15.18% Multiple of Rate Sensitive Assets to Liabilities 2.11 0.58 0.56 1.26 1.09 1.27 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 $906 million and $789 million in 2003 and 2002, respectively, in the less than one year category, and $1.005 billion and $1.745 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). 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 Note 1 to the Consolidated Financial Statements in our 2002 Annual Report on Form 10-K and in Note 7 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 Citizens to market value risk caused by changes in interest rates during the period from rate commitment issuance 31 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 are considered derivatives under SFAS 133. These forward commitments qualify and have been designated as fair value hedges of our portfolio of loans held for sale and our new mortgage loan commitments. 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 September 30, 2003, we had forward commitments to sell mortgage loans of $110 million. 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' 2002 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. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 32 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 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) Reports on Form 8-K A report on Form 8-K, dated July 11, 2003, was filed disclosing information under Items 7, 9 and 12 on July 11, 2003, announcing Citizens' results of operations for the three month period ended June 30, 2003. The information was considered furnished, rather than filed. No financial statements were filed with this report. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS BANKING CORPORATION Date November 10, 2003 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 Controller (Principal Accounting Officer) 34 10-Q EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act 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

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