10-Q 1 k69716e10-q.txt QUARTERLY REPORT FOR PERIOD ENDED 03/31/02 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 period ended March 31, 2002 --------------------------------- 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 0-10535 ------------------------------ 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 --- ---- 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 May 10, 2002 ------------------------------- --------------------------- Common Stock, No Par Value 44,890,639 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................................... 9 Item 3. - Quantitative and Qualitative Disclosure of Market Risk...... 22 PART II - OTHER INFORMATION Item 1 - Legal Proceedings........................................... 22 Item 2 - Changes in Securities....................................... 22 Item 3 - Defaults upon Senior Securities............................. 22 Item 4 - Submission of Matters to a Vote of Security Holders......... 22 Item 5 - Other Information........................................... 22 Item 6 - Exhibits and Reports on Form 8-K............................ 22 SIGNATURES................................................................. 23 2 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES MARCH 31, December 31, (in thousands) 2002 2001 -------------------------------------------------------------------------------- (UNAUDITED) (Note 1) ASSETS Cash and due from banks $ 162,231 $ 224,416 Money market investments: Federal funds sold 42 891 Interest-bearing deposits with banks 32,865 3,455 ----------- ----------- Total money market investments 32,907 4,346 Securities available-for-sale: U.S. Treasury and federal agency securities 791,645 739,792 State and municipal securities 439,600 443,956 Other securities 115,270 113,948 ----------- ----------- Total investment securities 1,346,515 1,297,696 Mortgage loans held for sale 109,912 150,443 Loans: Commercial 3,219,493 3,246,380 Real estate construction 212,309 216,041 Real estate mortgage 709,828 821,090 Consumer 1,471,069 1,488,452 ----------- ----------- Total loans 5,612,699 5,771,963 Less: Allowance for loan losses (80,425) (80,299) ----------- ----------- Net loans 5,532,274 5,691,664 Premises and equipment 127,838 128,805 Goodwill 54,785 54,785 Other intangible assets 25,308 26,191 Other assets 90,522 100,529 ----------- ----------- TOTAL ASSETS $ 7,482,292 $ 7,678,875 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 810,792 $ 903,900 Interest-bearing 5,049,990 5,061,226 ----------- ----------- Total deposits 5,860,782 5,965,126 Federal funds purchased and securities sold under agreements to repurchase 150,161 233,077 Other short-term borrowings 50,559 81,353 Other liabilities 90,669 72,756 Long-term debt 630,147 629,099 ----------- ----------- Total liabilities 6,782,318 6,981,411 Sharlders' Equity: Preferred stock - No par value --- --- Common stock - No par value 151,023 155,720 Retained earnings 532,889 521,191 Accumulated other comprehensive income 16,062 20,553 ----------- ----------- Total shareholders' equity 699,974 697,464 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,482,292 $ 7,678,875 =========== ===========

================================================================================ See notes to consolidated financial statements. 3

-------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended March 31, (in thousands, except per share amounts) 2002 2001 -------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $100,163 $133,820 Interest and dividends on investment securities: Taxable 12,369 17,107 Nontaxable 5,384 5,331 Money market investments 359 300 -------- -------- Total interest income 118,275 156,558 -------- -------- INTEREST EXPENSE Deposits 34,570 60,879 Short-term borrowings 965 12,046 Long-term debt 7,781 8,013 -------- -------- Total interest expense 43,316 80,938 -------- -------- NET INTEREST INCOME 74,959 75,620 Provision for loan losses 5,250 4,049 -------- -------- Net interest income after provision for loan losses 69,709 71,571 -------- -------- NONINTEREST INCOME Service charges on deposit accounts 6,632 6,703 Trust fees 4,858 5,495 Mortgage and other loan income 4,025 2,094 Bankcard fees 2,758 2,906 Brokerage and investment fees 2,050 1,868 Investment securities gains 2 2,219 Other 4,401 3,376 -------- -------- Total noninterest income 24,726 24,661 -------- -------- NONINTEREST EXPENSE Salaries and employee benefits 32,200 31,518 Equipment 4,858 4,954 Occupancy 4,615 4,927 Data processing services 3,125 3,175 Professional services 2,835 2,382 Bankcard fees 2,082 2,288 Advertising and public relations 1,831 1,561 Postage and delivery 1,758 1,963 Intangible asset amortization 725 2,530 Other 7,162 7,413 -------- -------- Total noninterest expense 61,191 62,711 -------- -------- INCOME BEFORE INCOME TAXES 33,244 33,521 Income taxes 9,141 9,716 -------- -------- NET INCOME $ 24,103 $ 23,805 ======== ======== NET INCOME PER SHARE: Basic $ 0.53 $ 0.51 Diluted 0.53 0.51 AVERAGE SHARES OUTSTANDING: Basic 45,062 46,476 Diluted 45,642 46,944 ================================================================================

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

Accumulated Other Common Retained Comprehensive (in thousands except per share amounts) Stock Earnings Income Total ------------------------------------------------------------------------------------------------------- BALANCE - MARCH 31, 2001 $ 198,637 $ 478,399 $ 25,313 $ 702,349 Net income 27,148 27,148 Net unrealized loss on securities available-for-sale, net of tax effect (5,706) (5,706) --------- Total comprehensive income 21,442 Exercise of stock options, net of shares purchased 626 626 Shares acquired for retirement (4,970) (4,970) Cash dividends - $0.275 per share (12,771) (12,771) --------- --------- --------- --------- BALANCE - JUNE 30, 2001 $ 194,293 $ 492,776 $ 19,607 $ 706,676 Net income 27,962 27,962 Net unrealized gain on securities available-for-sale, net of tax effect 18,282 18,282 --------- Total comprehensive income 46,244 Exercise of stock options, net of shares purchased 4,401 4,401 Shares acquired for retirement (23,406) (23,406) Cash dividends - $0.275 per share (12,725) (12,725) --------- --------- --------- --------- BALANCE - SEPTEMBER 30, 2001 $ 175,288 $ 508,013 $ 37,889 $ 721,190 Net income 25,742 25,742 Net unrealized loss on securities available-for-sale, net of tax effect (15,609) Minimum pension liability (1,727) (17,336) --------- --------- Total comprehensive income 8,406 Exercise of stock options, net of shares purchased 4,675 4,675 Shares acquired for retirement (24,243) (24,243) Cash dividends - $0.275 per share (12,564) (12,564) --------- --------- --------- --------- BALANCE - DECEMBER 31, 2001 $ 155,720 $ 521,191 $ 20,553 $ 697,464 Net income 24,103 24,103 Net unrealized loss on securities available-for-sale, net of tax effect (4,491) (4,491) --------- Total comprehensive income 19,612 Exercise of stock options, net of shares purchased 2,625 2,625 Shares acquired for retirement (7,322) (7,322) Cash dividends - $0.275 per share (12,405) (12,405) --------- --------- --------- --------- BALANCE - MARCH 31, 2002 $ 151,023 $ 532,889 $ 16,062 $ 699,974 ========= ========= ========= =========

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

Three Months Ended March 31, (in thousands) 2002 2001 -------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 24,103 $ 23,805 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,250 4,049 Depreciation 4,054 4,174 Amortization of intangibles 725 2,530 Net amortization on investment securities 76 (171) Investment securities gains (2) (2,219) Loans originated for sale (220,234) (143,164) Proceeds from loan sales 262,819 62,138 Net gain from loan sales (2,054) (1,126) Accrued merger related and other charges --- (993) Other 30,496 21,562 --------- --------- Net cash provided (used) by operating activities 105,233 (29,415) INVESTING ACTIVITIES: Net increase in money market investments (28,561) (77,921) Securities available-for-sale: Proceeds from sales 2 148,302 Proceeds from maturities 75,203 87,925 Purchases (131,007) (294,968) Net decrease in loans 154,140 318,699 Net increase in premises and equipment (3,087) (1,160) --------- --------- Net cash provided by investing activities 66,690 180,877 FINANCING ACTIVITIES: Net decrease in demand and savings deposits (43,216) (131,698) Net increase (decrease) in time deposits (61,128) 5,097 Net decrease in short-term borrowings (113,710) (193,320) Proceeds from issuance of long-term debt 26,000 75,000 Principal reductions in long-term debt (24,952) (78) Cash dividends paid (12,405) (12,098) Proceeds from stock options exercised 2,625 2,960 Shares acquired for retirement (7,322) (5,872) --------- --------- Net cash used by financing activities (234,108) (260,009) --------- --------- Net decrease in cash and due from banks (62,185) (108,547) Cash and due from banks at beginning of period 224,416 318,115 --------- --------- Cash and due from banks at end of period $ 162,231 $ 209,568 ========= ========= ======================================================================================

See notes to consolidated financial statements. 6 CITIZENS BANKING CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements 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 month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 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 the Corporation's 2001 Annual Report on Form 10-K. NOTE 2. LINES OF BUSINESS INFORMATION The Corporation is managed along the following business lines: Commercial Banking, Retail Banking, Financial Services, and all Other. Selected lines of business segment information for the three month period ended March 31, 2002 is provided below. Prior to January 1, 2002 Citizens managed five lines of business; Commercial Banking, Retail Banking, Financial Services, F&M and Other. Beginning in 2002 the F&M line of business was combined into the remaining four lines of business. Prior year amounts have been restated to reflect the current business unit structure and cost allocation methodology. There are no significant intersegment revenues.

-------------------------------------------------------------------------------------------------------------------------- Commercial Retail Financial (in thousands) Banking Banking Services Other Total -------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 2002 Net interest income (taxable equivalent) $34,505 $38,930 $ 217 $ 4,947 $78,599 Provision for loan losses 3,091 2,743 --- (584) 5,250 ------- ------- ------- ------- ------- Net interest income after provision 31,414 36,187 217 5,531 73,349 Noninterest income 4,353 13,660 5,900 813 24,726 Noninterest expense 16,572 34,601 4,144 5,874 61,191 ------- ------- ------- ------- ------- Income (loss) before income taxes 19,195 15,246 1,973 470 36,884 Income tax expense (taxable equivalent) 6,719 5,336 691 35 12,781 ------- ------- ------- ------- ------- Net income (loss) $12,476 $ 9,910 $ 1,282 $ 435 $24,103 ======= ======= ======= ======= ======= Average Assets (in millions) $ 3,398 $ 2,829 $ 7 $ 1,331 $ 7,565 -------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 2001 Net interest income (taxable equivalent) $35,048 $44,532 $ 335 $ (581) $79,334 Provision for loan losses 1,793 2,721 --- (465) 4,049 ------- ------- ------- ------- ------- Net interest income after provision 33,255 41,811 335 (116) 75,285 Noninterest income 3,961 14,473 6,322 (95) 24,661 Noninterest expense 16,653 35,801 4,137 6,120 62,711 ------- ------- ------- ------- ------- Income (loss) before income taxes 20,563 20,483 2,520 (6,331) 37,235 Income tax expense (taxable equivalent) 7,199 7,169 882 (1,820) 13,430 ------- ------- ------- ------- ------- Net income (loss) $13,364 $13,314 $ 1,638 $(4,511) $23,805 ======= ======= ======= ======= ======= Average Assets (in millions) $ 3,544 $ 3,368 $ 5 $ 1,347 $ 8,264 --------------------------------------------------------------------------------------------------------------------------

7 NOTE 3. EARNINGS PER SHARE Net income per share is computed based on the weighted-average number of shares outstanding, including the dilutive effect of stock options, as follows: ------------------------------------------------------------------------------

Three Months Ended March 31, (in thousands, except per share amounts) 2002 2001 ----------------------------------------------------------------------------------------------------------- NUMERATOR: Basic and dilutive earnings per share -- net income available to common shareholders $24,103 $23,805 ======= ======= DENOMINATOR: Basic earnings per share -- weighted average shares 45,062 46,476 Effect of dilutive securities -- potential conversion of employee stock options 580 468 ------- ------- Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 45,642 46,944 ======= ======= BASIC EARNINGS PER SHARE $ 0.53 $ 0.51 ======= ======= DILUTED EARNINGS PER SHARE $ 0.53 $ 0.51 ======= =======

During the first quarter of 2002, employees exercised stock options to acquire 137,054 shares at an average exercise price of $19.16 per share. NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002 Citizens Banking Corporation adopted SFAS No. 142 which changed the accounting for intangible assets. The effect of this statement was to eliminate amortization of indefinite life intangibles (i.e. goodwill) beginning January 1, 2002. The following table reflects the reconciliation of reported net earnings and earnings per share to the amounts adjusted for the exclusion of goodwill amortization. ------------------------------------------------------------------------------

For the Year Ended For the Quarter Ended December 31, 2001 March 31, 2001 ------------------------ ----------------------- Net Earnings Net Earnings (in thousands, except per share amounts) Income Per Share Income Per Share --------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share computation: Net income/diluted EPS as reported $104,657 $2.25 $ 23,805 $0.51 Add back: Goodwill amortization, net of tax effect 5,545 0.12 1,376 0.03 -------- ----- -------- ----- Adjusted net income/diluted EPS $110,202 $2.37 $ 25,181 $0.54 ======== ===== ======== ===== ---------------------------------------------------------------------------------------------------------------------

SFAS No. 142 also requires that goodwill be tested for impairment at least annually. As of March 31, 2002 Citizens is in the process of completing it's transitional impairment testing and anticipates no impairment under statement No. 142. Citizens' Other intangible assets as of March 31, 2002 and 2001 are shown in the table below.

------------------------------------------------------------------------------------ MARCH 31, March 31, (in thousands) 2002 2001 ------------------------------------------------------------------------------------ Core deposit intangibles $28,989 $ 28,989 Accumulated amortization 6,985 4,086 ------ -------- Net core deposit intangibles 22,004 24,903 Minimum pension liability 3,304 - ------- -------- Total other intangibles $25,308 $ 24,903 ======= ======== ------------------------------------------------------------------------------------

The estimated annual amortization expense for core deposit intangibles for each of the next five years is $2.9 million. As part of adopting Statement No. 142 Citizens has had no material reclassifications or adjustments to the useful lives of finite-lived (core deposit) intangible assets. NOTE 5. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. 8 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 QUARTER ENDED -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 2002 2001 2001 2001 2001 ----------------------------------------------------------------------------------------------------------------------------------- Summary of Operations (thousands) Interest income $118,275 $129,335 $140,406 $147,260 $156,558 Net interest income 74,959 77,676 78,260 76,425 75,620 Provision for loan losses 5,250 7,496 8,500 6,362 4,049 Investment securities gains 2 423 49 3,504 2,219 Other noninterest income 24,724 25,599 34,658 28,587 22,442 Noninterest expense 61,191 60,586 64,270 63,616 62,711 Income taxes 9,141 9,874 12,235 11,390 9,716 Net income 24,103 25,742 27,962 27,148 23,805 Cash dividends 12,405 12,564 12,725 12,771 12,098 ----------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic net income $ 0.53 $ 0.57 $ 0.60 $ 0.59 $ 0.51 Diluted net income 0.53 0.56 0.60 0.58 0.51 Cash dividends 0.275 0.275 0.275 0.275 0.260 Market value (end of period) 32.47 32.88 32.08 29.25 26.69 Book value (end of period) 15.55 15.46 15.77 15.27 15.13 ----------------------------------------------------------------------------------------------------------------------------------- AT PERIOD END (MILLIONS) Assets $ 7,482 $ 7,679 $ 7,715 $ 7,924 $ 8,199 Loans 5,613 5,772 5,866 6,008 6,100 Deposits 5,861 5,965 5,890 5,922 6,118 Shareholders' equity 700 697 721 707 702 ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE FOR THE QUARTER (MILLIONS) Assets $ 7,565 $ 7,701 $ 7,809 $ 7,977 $ 8,264 Loans 5,623 5,786 5,918 6,068 6,271 Deposits 5,924 5,930 5,944 6,007 6,155 Shareholders' equity 701 708 713 700 688 ----------------------------------------------------------------------------------------------------------------------------------- RATIOS (ANNUALIZED) Return on average assets 1.29 % 1.33 % 1.42 % 1.37 % 1.17 % Return on average shareholders' equity 13.94 14.42 15.56 15.56 14.03 Net interest margin (FTE) 4.45 4.48 4.44 4.26 4.10 Net loans charged off to average loans 0.37 0.57 0.57 0.36 0.24 Average equity to average assets 9.27 9.19 9.13 8.78 8.33 Allowance for loan losses as a percent of loans 1.43 1.39 1.39 1.35 1.32 Nonperforming assets to loans plus ORAA (end of period) 1.43 1.37 1.35 1.42 1.20 Nonperforming assets to total assets (end of period) 1.07 1.03 1.02 1.08 0.90 Leverage ratio 8.08 7.79 7.84 7.71 7.25 Tier 1 capital ratio 10.17 9.87 10.06 9.91 9.52 Total capital ratio 11.42 11.12 11.31 11.16 10.77 -----------------------------------------------------------------------------------------------------------------------------------

9 INTRODUCTION The following is a review of Citizens Banking Corporation's ("Citizens") performance during the three months ended March 31, 2002. This discussion should be read in conjunction with the accompanying unaudited financial statements and notes thereto appearing on pages 3 through 9 of this report and Citizens' 2001 Annual Report on Form 10-K. A quarterly summary of selected financial data for the five-quarter period ended March 31, 2002 is presented in the table on page 9. EARNINGS SUMMARY Citizens earned net income of $24,103,000 for the three months ended March 31, 2002, or $0.53 per share, compared with net income of $23,805,000, or $0.51 per share, for the same quarter of 2001. Returns on average assets and average equity for the quarter were 1.29% and 13.94%, respectively, compared with 1.17% and 14.03%, respectively, in 2001. Net income in the first quarter of 2002 is higher than the same period in 2001 primarily due to an increase in noninterest income and decreases in noninterest expense and income taxes. Partially offsetting these increases were lower net interest income and investment securities gains and a higher provision for loan losses. Noninterest income before securities gains was $24,724,000, an increase of $2,282,000, or 10.2% compared to the same period in 2001. Noninterest income increased in the three month period ended March 31, 2002 over the comparable period in 2001 primarily due to higher mortgage and other loan income and increased brokerage and investment fees. These increases were partially offset by decreases in trust and bankcard fees and lower securities gains. Noninterest expenses decreased by $1,520,000, or 2.4% for the three month period ended March 31, 2002 compared with the prior year. The decrease is a result of lower intangible asset amortization due to the adoption of Financial Accounting Statement No. 142 in the first quarter of 2002, as well as lower equipment, occupancy, bankcard, postage and delivery and data processing costs. These decreases were partially offset by increases in compensation of $682,000, professional services of $453,000 and advertising expenses of $270,000. LINES OF BUSINESS REPORTING Citizens is managed along four major business segments: Commercial Banking, Retail Banking, Financial Services and Other. For more information about each line of business, see Note 18 to the Corporation's 2001 Annual Report on Form 10-K and Note 2 of this Quarterly Report on Form 10Q. A summary of net income by each business line is presented below.

-------------------------------------------------------------------------------- Three Months Ended March 31, (in thousands) 2002 2001 -------------------------------------------------------------------------------- Commercial Banking $12,476 $13,364 Retail Banking 9,910 13,314 Financial Services 1,282 1,638 Other 435 (4,511) ------- ------- Net income $24,103 $23,805 ======= ======= --------------------------------------------------------------------------------

The decrease in Commercial Banking for the three months ended March 31, 2002 was due to lower net interest income from weak loan demand and increased loan loss provision. These decreases were offset, in part, by higher noninterest income from deposit service charges. The decrease in Retail Banking is due to a reduction in net interest income from lower loan and deposit levels, narrower margin on deposits due to the current interest rate environment and a decline in noninterest income. The decrease in noninterest income was primarily a result of lower gains on the sale of securitized mortgage loans in 2002 compared to the same period in 2001. The first quarter of 2001 included $2.1 million in gains on the securitization and sale of portfolio mortgages while the first quarter of 2002 included no such gains. Financial Services income decreased as a result of lower revenue from trust fees due to the weak equity markets and lower levels of assets under management. The increase in the Other category is the result of higher net interest income due to a reduced reliance on borrowed funds and an improved net interest margin. Operating expenses are lower due to the adoption of SFAS No. 142 in 2002, which eliminated the amortization of goodwill. 10 NET INTEREST INCOME Tax equivalent net interest income, decreased to $78.6 million in the first quarter of 2002 from $79.3 million in the comparable period in 2001. A lower level of earning assets led to the decline. Detailed analyses of net interest income, with average balances and related interest rates for the three months ended March 31, 2002 and 2001 are presented on page 13. An analysis of how changes in average balances ("volume") and market rates of interest ("rates") have effected net interest income appears in the table on page 12. For the three month period ended March 31, 2002, net unfavorable volume and net favorable rate related variances in net interest income resulted in a decrease of $661,000 in net interest income, as compared to the same period in 2001. Interest income declined $38.3 million and interest expense declined $37.6 million due to the lower interest rate environment and reductions in the volumes of earning assets and interest bearing liabilities. Yields on earning assets for the three months ended March 31, 2002 declined 139 basis points to 6.92% from 8.31%, for the first quarter of 2001. The cost of interest-bearing liabilities for the three months ended March 31, 2002 declined 201 basis points to 2.96% from 4.97%, as compared with the same period in 2001. Unfavorable rate and volume related variances for loans were offset by favorable rate and volume related variances for deposits and borrowings. Lower funding costs resulted from a decline in borrowed funds, a shift in deposit accounts from higher cost savings and time deposits to lower cost demand deposits and the lower interest rate environment. Net interest margin, the difference between yields earned on earning assets compared to the rates paid on supporting funds, was 4.45% for the first quarter of 2002, an increase of 35 basis points over the same period in 2001. The improvement in net interest margin is a result of the lower interest rate environment and the balance sheet restructuring efforts initiated in 2001. Management continually monitors Citizens' balance sheet to insulate net interest income from significant swings caused by interest rate volatility. Citizens' policies in this regard are further discussed in the section titled "Interest Rate Risk". 11 -------------------------------------------------------------------------------- ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

2002 Compared with 2001 ----------------------------------- Increase (Decrease) Due to Change in Three Months Ended March 31 Net --------------------- (in thousands) Change (1) Rate (2) Volume (2) -------------------------------------------------------------------- INTEREST INCOME: Money market investments $ 59 $ (306) $ 365 Investment securities: Taxable (4,738) (1,904) (2,834) Tax-exempt 53 (99) 152 Mortgages loans held for sale 1,654 23 1,631 Loans: Commercial (20,252) (17,385) (2,867) Real estate (8,869) (1,507) (7,362) Consumer (6,190) (4,065) (2,125) -------- -------- -------- Total (38,283) (25,243) (13,040) -------- -------- -------- INTEREST EXPENSE Deposits: Demand 1,908 (19) 1,927 Savings (8,393) (6,602) (1,791) Time (19,824) (13,533) (6,291) Short-term borrowings (11,081) (5,593) (5,488) Long-term debt (232) (1,458) 1,226 -------- -------- -------- Total (37,622) (27,205) (10,417) -------- -------- -------- NET INTEREST INCOME $ (661) $ 1,962 $ (2,623) ======== ======== ======== --------------------------------------------------------------------

----------- (1) Changes are based on actual interest income and do not reflect taxable equivalent adjustments. (2) The change in interest due to both rate and volume are allocated between the factors in proportion to the relationship of the absolute amount of the change in each. 12 -------------------------------------------------------------------------------- AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2002 2001 -------------------------------------- -------------------------------- Three Months Ended March 31 AVERAGE AVERAGE Average Average (in thousands) BALANCE INTEREST (1) RATE (2) Balance Interest (1) Rate (2) ------------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Money market investments: Federal funds sold $ 68,149 $ 283 1.66 % $ 22,400 $ 285 5.09 % Other 17,930 76 1.71 1,109 15 5.33 Investment securities(3): Taxable 842,657 12,369 5.87 1,025,718 17,107 6.67 Tax-exempt 419,629 5,384 7.89 407,877 5,331 8.04 Mortgage loans held for sale 147,181 2,712 7.37 58,647 1,058 7.22 Loans: Commercial 3,340,999 53,288 6.56 3,491,068 73,541 8.64 Real estate 807,369 14,272 7.07 1,218,698 23,141 7.60 Direct consumer 817,145 16,385 8.12 854,778 20,690 9.81 Indirect consumer 657,138 13,506 8.34 706,244 15,390 8.84 ----------- ----------- ----------- ---------- Total earning assets(3) 7,118,197 118,275 6.92 7,786,539 156,558 8.31 NONEARNING ASSETS Cash and due from banks 187,363 207,724 Bank premises and equipment 128,782 135,544 Investment security fair value adjustment 39,004 29,871 Other nonearning assets 172,294 185,085 Allowance for loan losses (80,933) (80,849) ----------- ----------- Total assets $ 7,564,707 $ 8,263,914 =========== =========== INTEREST-BEARING LIABILITIES Deposits: Demand deposits 1,068,838 4,140 1.57 571,321 2,232 1.58 Savings deposits 1,368,753 4,009 1.19 1,587,539 12,402 3.17 Time deposits 2,631,974 26,421 4.07 3,108,385 46,245 6.03 Short-term borrowings 232,045 965 1.69 800,410 12,046 6.09 Long-term debt 628,399 7,781 5.02 538,566 8,013 6.03 ----------- ----------- ----------- ---------- Total interest-bearing liabilities 5,930,009 43,316 2.96 6,606,221 80,938 4.97 ----------- ---------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 854,106 887,642 Other liabilities 79,994 81,652 Shareholders' equity 700,598 688,399 ----------- ----------- Total liabilities and shareholders' equity $ 7,564,707 $ 8,263,914 =========== =========== NET INTEREST INCOME $ 74,959 $ 75,620 =========== ========== NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.45 % 4.10 % ------------------------------------------------------------------------------------------------------------------------------------

(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 $3,640,000 and $3,714,000 for the three months ended March 31, 2002 and 2001, 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. 13 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. The provision for loan losses was $5,250,000 in the first quarter of 2002, an increase of $1,201,000 over the same period in 2001. Net charge-offs were 0.37% of average loans in the first quarter of 2002, up from 0.24% in the same period a year ago. The increase primarily reflects higher charge-offs in the commercial loan portfolio. A summary of loan loss experience during the three months ended March 31, 2002 and 2001 is provided below. ------------------------------------------------------------------------------ ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

Three Months Ended March 31, (in thousands) 2002 2001 ------------------------------------------------------------------------------------------------------------- Allowance for loan losses - beginning of period $ 80,299 $ 80,070 Charge-offs (6,732) (5,315) Recoveries 1,608 1,666 ----------- ----------- Net charge-offs (5,124) (3,649) Provision for loan losses 5,250 4,049 ----------- ----------- Allowance for loan losses - end of period $ 80,425 $ 80,470 =========== =========== Loans outstanding at period end (1) $ 5,612,699 $ 6,100,382 Average loans outstanding during period (1) 5,575,430 6,270,834 Allowance for loan losses as a percentage of loans outstanding at period end 1.43 % 1.32 % Ratio of net charge-offs during period to average loans outstanding (annualized) 0.37 0.24 Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 3.9 x 5.5 x -------------------------------------------------------------------------------------------------------------

(1) Loans outstanding and average loans outstanding excludes loans held for sale. Citizens maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on a regular, quarterly assessment of the probable losses inherent in the loan portfolios. The allowance is increased by the provision charged to income and reduced by the amount charged-off, net of recoveries. Citizens' methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, reserves by formula and an unallocated allowance. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate it is probable that a loss has been or will be incurred. The specific credit allocations are based on a regular analysis of all commercial and commercial mortgage loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. The allowance amount is determined by analyzing the financial condition, collateral value and other qualitative factors as well as by a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan". The formula allowance is calculated by applying loss factors to outstanding loans (excluding specifically identified credits) based on loan type, accrual status and internal risk grade of such loans and pools of loans. Minimum loss factors for criticized loan categories are consistent with regulatory agency factors. Loss factors for non-criticized loan categories are determined based on historical (generally three-year) averages adjusted quarterly for recent loss experience in the specific portfolios. In addition, adjustments are made to any loss factor used in the computation of the formula allowance in the event that, in management's judgement, significant factors which affect the collectibility of the portfolio as of the valuation date, are not reflected in the loss factors. The unallocated portion of the allowance is determined based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the specific and formula allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance include general economic and business conditions in Citizens' key lending markets, the level and composition of nonperforming loans, underwriting standards within specific portfolio segments, specific industry conditions within portfolio segments, collateral values, loan volumes and concentrations, regulatory examination results, internal credit examination results and other factors. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Company's specific allowances or in the historical loss factors used to determine the formula allowances. The unallocated allowance was $19.2 million and $18.1 million as of March 31, 2002 and December 31, 2001, respectfully. 14 Citizens maintains formal policies and procedures to monitor and control credit risk. Citizens' loan portfolio has no significant concentrations in any one industry or any exposure to foreign loans. Citizens has generally not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Based on present information, management believes the allowance for loan losses is adequate to meet known risks in the loan portfolio. Employment levels and other economic conditions in the Corporation's local markets may have a significant impact on the level of credit losses. Management has identified and devotes appropriate attention to credits that may not be performing as well as expected. Nonperforming loans are further discussed in the section entitled "Nonperforming Assets." NONINTEREST INCOME A summary of significant sources of noninterest income during the first three months of 2002 and 2001 follows: ------------------------------------------------------------------------------ NONINTEREST INCOME

Change in 2002 Three Months Ended ------------------ March 31, (in thousands) 2002 2001 Amount Percent -------------------------------------------------------------------------------- Service charges on deposit accounts $ 6,632 $ 6,703 $ (71) (1.1)% Trust fees 4,858 5,495 (637) (11.6) Bankcard fees 2,758 2,906 (148) (5.1) Brokerage and investment fees 2,050 1,868 182 9.7 Mortgage and other loan income 4,025 2,094 1,931 92.2 ATM network user fees 752 801 (49) (6.1) Cash management services 716 644 72 11.2 Other, net 2,933 1,931 1,002 51.9 ------- ------- ------- Noninterest income before asset gains 24,724 22,442 2,282 10.2 Investment securities gains 2 106 (104) (1) Gain on sale of securitized mortgages --- 2,113 (2,113) (1) ------- ------- ------- Total noninterest income $24,726 $24,661 $ 65 0.3 ======= ======= ======= --------------------------------------------------------------------------------

Noninterest income for the first quarter of 2002, before securities gains, increased $2,282,000, or 10.2% over the same period of 2001. During the first quarter of 2002, Citizens realized significant increases in mortgage and other loan income, cash management service fees, and brokerage and investment fees while trust, ATM network and bankcard fees declined. Mortgage and other loan income was up $1.9 million or 92.2% due to higher origination volume and gains realized upon the sale of new mortgage production. Cash management fees increased 11.2% over the comparable period in 2001 due to higher account balances. Brokerage and investment fees increased 9.7% in the first quarter of 2002 compared to 2001. Other income increased 51.9% in the first quarter of 2002 compared to the same period last year due to higher revenue from check orders, title insurance fees and other sources. The first quarter of 2001 includes $2.2 million in gains on the sale of securitized portfolio mortgages and other investment securities. 15 NONINTEREST EXPENSE Significant changes in noninterest expense during the three months ended March 31, 2002 and 2001 are summarized in the table below. -------------------------------------------------------------------------------- NONINTEREST EXPENSE

Change in 2002 Three Months Ended ----------------- March 31, (in thousands) 2002 2001 Amount Percent -------------------------------------------------------------------------------- Salaries and employee benefits $32,200 $31,518 $ 682 2.2 % Equipment 4,858 4,954 (96) (1.9) Occupancy 4,615 4,927 (312) (6.3) Data processing services 3,125 3,175 (50) (1.6) Professional services 2,835 2,382 453 19.0 Bankcard fees 2,082 2,288 (206) (9.0) Advertising and public relations 1,831 1,561 270 17.3 Postage and delivery 1,758 1,963 (205) (10.4) Telephone 1,376 1,575 (199) (12.6) Stationery and supplies 1,078 1,191 (113) (9.5) Intangible asset amortization 725 2,530 (1,805) (71.3) Other, net 4,708 4,647 61 1.3 ------- ------- ------- Total noninterest expense $61,191 $62,711 $(1,520) (2.4) ======= ======= ======= --------------------------------------------------------------------------------

Noninterest expense for the first quarter of 2002 decreased $1,520,000, or 2.4% from the first quarter 2001. Intangible asset amortization declined $1,805,000, or 71.3% from the same quarter of the prior year primarily due to the adoption of a new accounting statement (Financial Accounting Statement No. 142) that eliminated goodwill amortization as an operating expense. In addition to goodwill amortization, operating expenses for equipment, occupancy, data processing, postage and delivery, telephone, bankcard fees and stationery and supplies declined due to operating efficiencies. Professional service expenses increased 19.0% in the first quarter 2002 over the comparable period last year due to higher loan collection and recruiting costs as well as cost associated with revenue enhancement strategies. Advertising and public relations expense increased 17.3% over the same period a year ago due to the introduction of a new marketing campaign in February 2002 to promote Citizens deposit services and loan products. INCOME TAXES Income tax expense was $9.1 million in the first quarter of 2002, a decrease of 6.0% over the same period last year. Lower pre-tax earnings and a recent change in tax law resulted in a $342,000 nonrecurring tax benefit for the three months ended March 31, 2002, as compared to the same period in the prior year. FINANCIAL CONDITION Citizens had total assets of $7.482 billion as of March 31, 2002, a decrease of $197 million, or 2.6% from $7.679 billion as of December 31, 2001. Total assets declined due to balance sheet restructuring efforts and reduced loan demand from a soft economy. Citizens continues to sell current mortgage loan production into the secondary market during this low interest rate environment to reduce interest rate risk. Average earning assets comprised 94.1% of average total assets during the first three months of 2002 compared with 94.2% in the first three months of 2001. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total average investments, including money market investments, comprised 18.9% of average earning assets during the first quarter of 2002, compared with 18.7% for the same period of 2001. Average investment security balances in the first quarter of 2002 were down $171 million over the same period in 2001. Average money market investments were up $62.6 million from first quarter 2001 levels. MORTGAGE LOANS HELD FOR SALE Average mortgage loans held for sale comprised 2.1% of average earning assets at March 31, 2002 compared with 1.0% at March 31, 2001. The increase reflects Citizens' strategy to sell current mortgage loan production in the secondary market in the low interest rate environment. Mortgages held for sale are accounted for on the lower of cost or market basis. 16 LOANS Citizens extends credit primarily within the local markets of its banking subsidiaries located in Michigan, Wisconsin, Iowa and Illinois. The loan portfolio is widely diversified by borrower and industry groups with no foreign loans or significant concentrations in any industry. Total loans at March 31, 2002 were down $159.3 million, or 2.8%, from year-end 2001. For the quarter, the decline in total loans was primarily due to decreased loan demand and the sale of mortgage loan production. Average loans declined by $648 million, or 10.3%, for the first quarter of 2002 as compared with the same period in 2001. Average real estate mortgage loans declined $411 million from the first quarter of 2001 due to the securitization and sale of $247 million of mortgage loans in 2001 and the on going sale of new mortgage loan production. Commercial and consumer loans decreased from first quarter 2001 due to weakened loan demand and the sale of $30 million of credit card assets in the second quarter of 2001. At March 31, 2002 and 2001, $232.7 million and $345.6 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 totaled $1.4 million at March 31, 2002 and $2.5 million at March 31, 2001. NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual loans, restructured loans, loans 90 days past due and still accruing interest, and other real estate owned. Certain of these loans, as defined below, are considered to be impaired. Under Citizens' credit policies and practices, a loan is placed on nonaccrual status when there is doubt regarding collection of principal or interest, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected is reversed and charged against income when the loan is placed on nonaccrual status. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loans will not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Citizens maintains a valuation allowance for impaired loans. Interest income on impaired nonaccrual loans is recognized on a cash basis. Interest income on all other impaired loans is recorded on an accrual basis. Certain of the Corporation's nonperforming loans included in the following table are considered to be impaired. The Corporation measures impairment on all large balance nonaccrual commercial and commercial real estate loans. Certain large balance accruing loans rated substandard or worse are also measured for impairment. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment losses are included in the provision for loan losses. The policy does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans, and credit card loans, and are not included in the impaired loan analysis. The following table provides a summary analysis of impaired loans as of March 31, 2002 and 2001. ------------------------------------------------------------------------------ IMPAIRED LOAN ANALYSIS

Balance Outstanding Valuation Reserve ------------------- ----------------- March 31, March 31, (in thousands) 2002 2001 2002 2001 ------------------------------------------------------------------------------------- Impaired loans with valuation reserve $ 49,103 $ 45,022 $(14,390) $(10,575) Impaired loans with no valuation reserve 15,187 21,932 --- --- -------- -------- -------- -------- Total impaired loans $ 64,290 $ 66,954 $(14,390) $(10,575) ======== ======== ======== ======== Impaired loans on nonaccrual basis $ 46,898 $ 38,851 $(10,975) $ (4,914) Impaired loans on accrual basis 17,392 28,103 (3,415) (5,661) -------- -------- -------- -------- Total impaired loans $ 64,290 $ 66,954 $(14,390) $(10,575) ======== ======== ======== ======== -------------------------------------------------------------------------------------

The average recorded investment in impaired loans was $63.7 million for the quarter ended March 31, 2002 and $57.6 million for the same quarter last year. For the quarter ended March 31, 2002, Citizens recognized interest income of $0.3 million on impaired loans with cash collected on nonaccrual impaired loans totaling $0.4 million all of which was applied to principal. For the same quarter last year, Citizens recognized interest income of approximately $0.4 million on impaired loans with cash collected on nonaccrual impaired loans of $0.4 million all of which was applied to principal. 17 The table below provides a summary of nonperforming assets as of March 31, 2002, December 31, 2001 and March 31, 2001. Total nonperforming assets amounted to $80.1 million as of March 31, 2002 compared with $79.2 million as of December 31, 2001 and $73.5 million as of March 31, 2001. Approximately $14.8 million, or 21% of nonperforming loans are residential mortgage loans. The historical loss in the residential mortgage loan portfolio has been very low. Employment levels and other economic conditions in the Citizens' local markets; however, can impact the level and composition of nonperforming assets. In a deteriorating or weak economy, higher levels of nonperforming assets, charge-offs and provisions for loan losses could result which may adversely impact the Corporation's results. ------------------------------------------------------------------------------ NONPERFORMING ASSETS

MARCH 31, December 31, March 31, (in thousands) 2002 2001 2001 ------------------------------------------------------------------------------------------------------- Nonperforming Loans Nonaccrual Less than 30 days past due $ 3,859 $ 6,528 $ 8,335 From 30 to 89 days past due 5,134 5,218 8,268 90 or more days past due 59,005 57,047 50,655 ------- ------- ------- Total 67,998 68,793 67,258 90 days past due and still accruing 3,176 4,168 872 Restructured 336 337 954 ------- ------- ------- Total nonperforming loans 71,510 73,298 69,084 Other Repossessed Assets Acquired (ORAA) 8,600 5,947 4,440 ------- ------- ------- Total nonperforming assets $80,110 $79,245 $73,524 ======= ======= ======= Nonperforming assets as a percent of loans plus ORAA 1.43 % 1.37 % 1.20 % Nonperforming assets as a percent of total assets 1.07 1.03 0.90 Allowance for loan loss as a percent of nonperforming loans 112.47 109.55 116.48 Allowance for loan loss as a percent of nonperforming assets 100.39 101.33 109.45 -------------------------------------------------------------------------------------------------------

In addition to nonperforming loans, management identifies and closely monitors other credits that are current in terms of principal and interest payments but, in management's opinion, may deteriorate in quality if economic conditions change. As of March 31, 2002, such credits amounted to $68.3 million or 1.2% of total loans, compared with $78.9 million or 1.3% at December 31, 2001 and $72.6 million or 1.2% of total loans as of March 31, 2001. 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. DEPOSITS Total deposits decreased $104 million to $5.861 billion at March 31, 2002 from $5.965 billion at year-end 2001. Average deposits declined $231 million, or 3.8% in the first quarter of 2002 over the same period in 2001. The decline in deposits from year-end and first quarter of 2001 occurred primarily in the large denomination time deposits as Citizens was less aggressive in pricing such deposits due to decreased funding requirements. The Corporation gathers deposits primarily in its local markets and historically has not relied on brokered funds to sustain liquidity. At March 31, 2002 Citizens had approximately $212 million in brokered deposits as an alternative source of funding, up from $171 million at year-end 2001. Citizens will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. Management continues to promote relationship driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies. SHORT-TERM BORROWINGS AND LONG-TERM DEBT On average, total short-term borrowings decreased $568.4 million to $232.0 million during the first three months of 2002 from $800.4 million during the same period of 2001. The decrease primarily reflects reduced reliance on short-term borrowings as a funding source due to the balance sheet restructuring. Long-term debt accounted for $628.4 million or 10.6% of average interest-bearing funds for the first three months of 2002, compared with $538.6 million or 8.2% of average interest-bearing funds for the same period in 2001. At March 31, 2002, $629.7 million of the long-term debt consists of borrowings from the Federal Home Loan Bank with $321.3 million maturing at different intervals over the next five years. These borrowings are utilized to fund the Corporation's loan growth. Borrowed funds are expected to remain an important, reliable and cost-effective funding vehicle for Citizens and its subsidiary banks as earning asset growth opportunities are expected to continue to outpace traditional deposit growth. 18 CAPITAL RESOURCES Citizens continues to maintain a strong capital position which supports its current needs and provides a sound foundation to support further expansion. At March 31, 2002, shareholders' equity was $700.0 million compared with $697.5 million at December 31, 2001 and $702.3 million as of March 31, 2001. Book value per common share at March 31, 2002, December 31, 2001 and March 31, 2001 was $15.55, $15.46 and $15.13, respectively. Citizens has consistently maintained regulatory capital ratios at or above the "well-capitalized" standards and all bank subsidiaries of Citizens have sufficient capital to maintain a well-capitalized designation. Citizens' capital ratios as of March 31, 2002, December 31, 2001 and March 31, 2001 are presented below.

----------------------------------------------------------------------------------------------- CAPITAL RATIOS Regulatory Minimum For "Well MARCH 31, December 31, March 31, Capitalized" 2002 2001 2001 ----------------------------------------------------------------------------------------------- Risk based capital: Tier I 6.0 % 10.2 % 9.9 % 9.5 % Total capital 10.0 11.4 11.1 10.8 Tier I leverage 5.0 8.1 7.8 7.3 -----------------------------------------------------------------------------------------------

In October 2001, Citizens approved a plan to repurchase up to 3,000,000 shares of Citizens common stock for general purposes. At March 31, 2002, 413,800 shares of common stock had been repurchased under this plan at an average price of $32.29. Citizens declared cash dividends of $0.275 per share in the first quarter of 2002, an increase of 5.8% over the $0.26 declared during the same period of 2001. LIQUIDITY AND DEBT CAPACITY The liquidity position of Citizens is monitored for its subsidiaries and the Parent company to ensure that funds are available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. Citizens' subsidiary banks derive liquidity primarily through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, Citizens' 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 Citizens' Parent Company to borrow funds on both a short-term and long-term basis. The Parent has established borrowing facilities with a group of unaffiliated banks and has used portions of this revolving credit agreement for various corporate purposes. Citizens experienced no liquidity or operational problems as a result of its liquidity levels. Management believes that the key to operating at lower levels of balance sheet liquidity is the establishment and subsequent utilization of sufficient sources of liquidity. Proactive management of Citizens' liquidity capacity and generation has increased sources of funds and borrowing capacities enabling Citizens and its subsidiary banks to operate effectively, safely and with improved profitability. At March 31, 2002, Citizens had sufficient liquidity to meet presently known cash flow requirements arising from ongoing business transactions. INTEREST RATE RISK Interest rate risk generally arises when the maturity or repricing structure of Citizens' assets and liabilities differs significantly. Asset/liability management, which among other things addresses such risk, is the process of developing, testing and implementing strategies that seek to maximize net interest income, maintain sufficient liquidity and minimize exposure to significant changes in interest rates. This 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. Generally, management seeks a structure that insulates net interest income from large swings attributable to changes in market interest rates. The Corporation's static interest rate sensitivity ("GAP") as of March 31, 2002 and 2001 is illustrated in the following table. 19

--------------------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2002 RATE SENSITIVE ASSETS (1) Loans (2) $ 2,502.4 $ 262.6 $ 477.5 $ 3,242.5 $ 2,061.0 $ 419.1 $ 5,722.6 Investment securities 101.4 34.5 56.3 192.2 630.4 523.9 1,346.5 Short-term investments 32.9 --- --- 32.9 --- --- 32.9 ----------- --------- ----------- ----------- ----------- ----------- ----------- Total $ 2,636.7 $ 297.1 $ 533.8 $ 3,467.6 $ 2,691.4 $ 943.0 $ 7,102.0 =========== ========= =========== =========== =========== =========== =========== RATE SENSITIVE LIABILITIES Deposits (3) $ 873.2 $ 626.5 $ 1,158.2 $ 2,657.9 $ 2,072.0 $ 320.1 $ 5,050.0 Other interest bearing liabilities 326.3 25.0 0.1 351.4 171.1 308.4 830.9 ----------- --------- ----------- ----------- ----------- ----------- ----------- Total $ 1,199.5 $ 651.5 $ 1,158.3 $ 3,009.3 $ 2,243.1 $ 628.5 $ 5,880.9 =========== ========= =========== =========== =========== =========== =========== Period GAP (4) $ 1,437.2 $ (354.4) $ (624.5) $ 458.3 $ 448.3 $ 314.5 $ 1,221.1 Cumulative GAP 1,437.2 1,082.8 458.3 906.6 1,221.1 Cumulative GAP to Total Assets 19.21% 14.47% 6.13% 6.13% 12.12% 16.32% 16.32% Multiple of Rate Sensitive Assets to Liabilities 2.20 0.46 0.46 1.15 1.20 1.50 1.21 --------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2001 RATE SENSITIVE ASSETS (1) Loans (2) $ 2,197.6 $ 325.4 $ 602.0 $ 3,125.0 $ 2,438.6 $ 618.9 $ 6,182.5 Investment securities 113.1 32.7 63.3 209.1 587.1 669.9 1,466.1 Short-term investments 105.5 --- --- 105.5 --- --- 105.5 ----------- --------- ----------- ----------- ----------- ----------- ----------- Total $ 2,416.2 $ 358.1 $ 665.3 $ 3,439.6 $ 3,025.7 $ 1,288.8 $ 7,754.1 =========== ========= =========== =========== =========== =========== =========== RATE SENSITIVE LIABILITIES Deposits (3) $ 1,214.4 $ 856.2 $ 1,195.6 $ 3,266.2 $ 1,698.6 $ 276.2 $ 5,241.0 Other interest bearing liabilities 924.8 115.0 205.3 1,245.1 36.3 4.6 1,286.0 ----------- --------- ----------- ----------- ----------- ----------- ----------- Total $ 2,139.2 $ 971.2 $ 1,400.9 $ 4,511.3 $ 1,734.9 $ 280.8 $ 6,527.0 =========== ========= =========== =========== =========== =========== =========== Period GAP (4) $ 277.0 $ (613.1) $ (735.6) $ (1,071.7) $ 1,290.8 $ 1,008.0 $ 1,227.1 Cumulative GAP 277.0 (336.1) (1,071.7) 219.1 1,227.1 Cumulative GAP to Total Assets 3.38% (4.10)% (13.07)% (13.07)% 2.67% 14.97% 14.97% Multiple of Rate Sensitive Assets to Liabilities 1.13 0.37 0.47 0.76 1.74 4.59 1.19 ---------------------------------------------------------------------------------------------------------------------------------

(1) Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff. (2) Includes loans held for sale. (3) Includes interest bearing savings and demand deposits of $762 million and $744 million in 2002 and 2001, respectively, in the less than one year category, and $1.694 billion and $1.414 billion, respectively in the over one year category, based on historical trends for these noncontractual maturity deposit types, which reflects industry standards. (4) GAP is the excess of rate sensitive assets (liabilities). As shown, Citizens' interest rate risk position at March 31, 2002 is asset sensitive in the less than one year time frame with rate sensitive assets exceeding rate sensitive liabilities by $458.3 million. Citizens' interest rate risk position at March 31, 2001 was liability sensitive in the less than one year time frame with rate sensitive liabilities exceeding rate sensitive assets by $1071.7 million. Application of GAP theory would suggest that in an asset sensitive position Citizens' net interest income could rise if interest rates rise; i.e., liabilities are likely to reprice slower than assets, resulting in an increase in net income in a rising rate environment. Conversely, net income should decrease in a falling rate environment. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, relationships between interest sensitive instruments and key driver rates, as well as balance sheet growth and the timing of changes in these variables. 20 Management is continually reviewing its interest rate risk position and modifying its strategies based on projections to minimize the impact of future interest rate changes. While traditional GAP analysis does not always incorporate adjustments for the magnitude or timing of non-contractual repricing, the table above does incorporate appropriate adjustments as indicated in footnotes 1 and 2 to the table. Because of these and other inherent limitations of any GAP analysis, management utilizes net interest income simulation modeling as its primary tool to evaluate the impact of changes in interest rates and balance sheet strategies. Management uses these simulations to develop strategies that can limit interest rate risk and provide liquidity to meet client loan demand and deposit preferences. FORWARD-LOOKING STATEMENTS The foregoing disclosure contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended, with respect to expectations for future periods. These forward-looking statements involved are subject to risk and uncertainties that could cause actual results to differ. These risks and uncertainties include unanticipated changes in the competitive environment and relationships with third party vendors and clients and certain other factors discussed in this report. Management believes that the expectations used in the forward-looking statements are reasonable, however, actual results may vary significantly. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information concerning quantitative and qualitative disclosures about market risk contained and incorporated by reference in Item 7A of Citizens' 2001 Annual Report on Form 10-K, is here incorporated by reference. Citizens faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. Citizens manages this risk with static GAP analysis and simulation modeling. Throughout the first quarter of 2002, the results of these measurement techniques were within Citizens' policy guidelines. Citizens does not believe that there has been a material change in its primary market risk exposure (i.e., the categories of market risk to which Citizens is exposed and the particular markets that present the primary risk of loss to the Citizens). As of the date of this Quarterly Report on Form 10-Q, Citizens does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which Citizens manages its primary market risk exposure, as described in the sections of its 2001 Annual Report on Form 10-K incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Quarterly Report on Form 10-Q, Citizens does not expect to change those methods in the near term. However, Citizens may change those methods in the future to adapt to changes in circumstances or to implement new techniques. In this discussion, "near term" means a period of one year following the date of the most recent balance sheet contained in this report. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - None ITEM 2. CHANGES IN SECURITIES - None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Proxies were solicited pursuant to regulation 14 under the Securities exchange act of 1934 to be voted at the annual meeting of shareholders of the Corporation held April 16, 2002. There was no solicitation in opposition to management's nominees for directors as set forth in the Corporation's Proxy Statement dated March 13, 2002 and all such nominees were elected. The results were as follows with respect to each director nominee:

Votes Against/ Shares Not Voted Director Votes For Withheld Or Abstentions -------- --------- -------- -------------- Edward P. Abbott 37,284,605 548,684 6,223,338 Jonathan E. Burroughs II 37,253,477 579,812 6,223,338 Lawrence O. Erickson 37,283,274 550,015 6,223,338 Robert J. Vitito 34,729,450 3,103,839 6,223,338

Total shares eligible to vote: 45,056,627 Broker non-votes included in non-voted shares above: none (b) The results were as follows with respect to the approval of Citizens Banking Corporation Stock Compensation Plan: Votes For: 21,529,567 Votes Against/Withheld: 5,159,455 Shares Not Voted or Abstentions: 553,661 ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K No report on Form 8-K was filed during the three-month period ended March 31, 2002. 22 SIGNATURE 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 May 15, 2002 By /s/ John W. Ennest --------------------- ------------------------------------- John W. Ennest Vice Chairman of the Board, Treasurer and Chief Financial Officer (Principal Financial Officer) (Duly Authorized Signatory) 23