10-Q 1 k88649e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/04 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, 2004 ----------------------------------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- ------------- Commission file Number 000-10535 --------------------------------------- CITIZENS BANKING CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2378932 ----------------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 328 S. Saginaw St., Flint, Michigan 48502 ----------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) (810) 766-7500 ---------------------------------------------------- (Registrant's telephone number, including area code) None ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 29, 2004 -------------------------- ------------------------------- Common Stock, No Par Value 43,245,286 Shares CITIZENS BANKING CORPORATION Index to Form 10-Q

Page ---- PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements................................................. 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 14 Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................ 34 Item 4 - Controls and Procedures........................................................... 34 PART II - OTHER INFORMATION Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds........................ 35 Item 6 -Exhibits........................................................................... 35 SIGNATURES...................................................................................... 36 EXHIBIT INDEX................................................................................... 37

2 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES SEPTEMBER 30, December 31, (in thousands) 2004 2003 ------------- ------------- (UNAUDITED) (Note 1) ASSETS Cash and due from banks $ 166,936 $ 182,545 Interest-bearing deposits with banks 1,933 2,223 Investment Securities: Available-for-Sale: U.S. Treasury and federal agency securities 1,384,546 1,452,582 State and municipal securities 407,226 437,003 Other securities 70,902 75,616 Held-to-maturity: State and municipal securities (fair value of $49,646 and $19,913, respectively) 48,878 19,857 ------------- ------------- Total investment securities 1,911,552 1,985,058 Mortgage loans held for sale 15,715 42,561 Loans: Commercial 2,718,129 2,885,868 Real estate construction 204,881 192,759 Real estate mortgage 409,113 405,026 Consumer 1,971,308 1,764,165 ------------- ------------- Total loans 5,303,431 5,247,818 Less: Allowance for loan losses (122,184) (123,545) ------------- ------------- Net loans 5,181,247 5,124,273 Premises and equipment 117,743 112,784 Goodwill 54,527 54,785 Other intangible assets 14,758 16,932 Bank owned life insurance 82,022 80,461 Other assets 113,017 109,448 ------------- ------------- TOTAL ASSETS $ 7,659,450 $ 7,711,070 ============= ============= LIABILITIES Noninterest-bearing deposits $ 933,864 $ 882,429 Interest-bearing deposits 4,333,475 4,559,838 ------------- ------------- Total deposits 5,267,339 5,442,267 Federal funds purchased and securities sold under agreements to repurchase 707,219 588,593 Other short-term borrowings 44,266 43,077 Other liabilities 64,588 65,112 Long-term debt 926,318 936,859 ------------- ------------- Total liabilities 7,009,730 7,075,908 SHAREHOLDERS' EQUITY Preferred stock - no par value -- -- Common stock - no par value 97,882 100,314 Retained earnings 530,896 512,045 Accumulated other comprehensive income 20,942 22,803 ------------- ------------- Total shareholders' equity 649,720 635,162 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,659,450 $ 7,711,070 ============= =============

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) 2004 2003 2004 2003 ------------ ------------ ------------ ------------ INTEREST INCOME Interest and fees on loans $ 75,470 $ 80,371 $ 223,249 $ 247,394 Interest and dividends on investment securities: Taxable 15,312 14,254 46,775 45,795 Tax-exempt 5,243 5,059 15,766 15,288 Money market investments 4 3 8 102 ------------ ------------ ------------ ------------ Total interest income 96,029 99,687 285,798 308,579 ------------ ------------ ------------ ------------ INTEREST EXPENSE Deposits 15,634 18,851 47,977 66,410 Short-term borrowings 2,701 1,463 5,771 3,497 Long-term debt 8,393 8,219 25,203 23,092 ------------ ------------ ------------ ------------ Total interest expense 26,728 28,533 78,951 92,999 ------------ ------------ ------------ ------------ NET INTEREST INCOME 69,301 71,154 206,847 215,580 Provision for loan losses 4,985 10,300 16,485 54,942 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 64,316 60,854 190,362 160,638 ------------ ------------ ------------ ------------ NONINTEREST INCOME Service charges on deposit accounts 9,196 7,703 26,307 21,842 Trust fees 4,222 4,368 13,060 12,912 Mortgage and other loan income 1,750 5,404 7,053 15,967 Brokerage and investment fees 1,719 2,333 6,152 6,015 Bankcard fees 853 761 2,547 2,310 Gain on sale of Illinois bank subsidiary 11,650 -- 11,650 -- Other 5,158 4,443 15,147 14,041 ------------ ------------ ------------ ------------ Total fees and other income 34,548 25,012 81,916 73,087 Investment securities (losses) gains 534 42 (1,519) 101 ------------ ------------ ------------ ------------ Total noninterest income 35,082 25,054 80,397 73,188 NONINTEREST EXPENSE Salaries and employee benefits 32,649 31,036 97,773 92,548 Occupancy 4,859 4,328 15,123 13,337 Professional services 4,131 4,946 12,340 12,613 Equipment 3,486 4,060 10,796 12,098 Data processing services 3,192 3,225 10,278 9,599 Advertising and public relations 2,090 1,395 6,273 4,067 Postage and delivery 1,516 1,739 4,934 5,100 Telephone 1,543 1,169 4,528 3,479 Other loan fees 384 1,360 3,144 3,647 Stationery and supplies 947 911 2,705 2,679 Prepayment penalty on FHLB advances 17,959 -- 17,959 -- Other 6,217 5,431 15,797 13,375 ------------ ------------ ------------ ------------ Total noninterest expense 78,973 59,600 201,650 172,542 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 20,425 26,308 69,109 61,284 Income tax provision 779 6,703 13,298 13,407 ------------ ------------ ------------ ------------ NET INCOME $ 19,646 $ 19,605 $ 55,811 $ 47,877 ============ ============ ============ ============ NET INCOME PER SHARE: Basic 0.46 0.45 $ 1.29 $ 1.10 Diluted 0.45 0.45 1.28 1.10 CASH DIVIDENDS DECLARED PER SHARE 0.285 0.285 0.855 0.855 AVERAGE SHARES OUTSTANDING: Basic 43,224 43,227 43,277 43,326 Diluted 43,677 43,501 43,763 43,574

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 - SEPTEMBER 30, 2003 $ 100,425 $ 506,318 $ 27,401 $ 634,144 Comprehensive income: Net income 18,074 18,074 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(2,784) (5,171) Less: Reclassification adjustment for net gains included in net income, net of tax effect of $1 (1) Net change in unrealized gain on cash flow hedges, net of tax effect of $280 398 Minimum pension liability, net of tax effect of $95 176 (4,598) --------------- ------------- Total comprehensive income 13,476 Tax benefit on non-qualified stock options 2,500 2,500 Exercise of stock options, net of shares purchased 2,293 2,293 Shares acquired for retirement (5,144) (5,144) Net change in deferred compensation, net of tax effect 240 240 Cash dividends - $0.285 per share (12,347) (12,347) ------------- ------------- --------------- ------------- BALANCE - DECEMBER 31, 2003 100,314 512,045 22,803 635,162 Comprehensive income: Net income 17,443 17,443 Other comprehensive income: Net unrealized gain on securities available-for-sale, net of tax effect of $7,227 13,422 Net change in unrealized loss on cash flow hedges, net of tax effect of $(90) (168) 13,254 --------------- ------------- Total comprehensive income 30,697 Exercise of stock options, net of shares purchased 4,015 4,015 Shares acquired for retirement (3,387) (3,387) Net change in deferred compensation, net of tax effect 40 40 Cash dividends - $0.285 per share (12,345) (12,345) ------------- ------------- --------------- ------------- BALANCE - MARCH 31, 2004 100,982 517,143 36,057 654,182 Comprehensive income: Net income 18,722 18,722 Other comprehensive income: Net unrealized loss on securities available-for-sale, net of tax effect of $(16,638) (30,898) Net change in unrealized loss on cash flow hedges, net of tax effect of $(175) (325) (31,223) --------------- ------------- Total comprehensive income (12,501) Exercise of stock options, net of shares purchased 477 477 Tax benefit on non-qualified stock options 1,045 1,045 Shares acquired for retirement (3,242) (3,242) Net change in deferred compensation, net of tax effect 71 71 Cash dividends - $0.285 per share (12,284) (12,284) ------------- ------------- --------------- ------------- BALANCE - JUNE 30, 2004 99,333 523,581 4,834 627,748 Comprehensive income: Net income 19,646 19,646 Other comprehensive income: Net unrealized gain on securities available-for-sale, net of tax effect of $8,757 16,263 Net change in unrealized loss on cash flow hedges, net of tax effect of $(83) (155) 16,108 --------------- ------------- Total comprehensive income 35,754 Exercise of stock options, net of shares purchased 1,662 1,662 Tax benefit on non-qualified stock options 325 325 Shares acquired for retirement (3,484) (3,484) Net change in deferred compensation, net of tax effect 46 46 Cash dividends - $0.285 per share (12,331) (12,331) ------------- ------------- --------------- ------------- BALANCE - SEPTEMBER 30, 2004 $ 97,882 $ 530,896 $ 20,942 $ 649,720 ============= ============= =============== =============

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) 2004 2003(1) ----------- ----------- OPERATING ACTIVITIES: Net income $ 55,811 $ 47,877 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 16,485 54,942 Depreciation 9,105 10,590 Amortization of intangibles 2,174 2,174 Net amortization on investment securities 7,084 7,270 Investment securities losses (gains) 1,519 (101) Gain on sale of Illinois bank (11,650) -- Loans originated for sale (296,932) (1,103,644) Proceeds from sales of mortgage loans held for sale 325,332 1,141,965 Net gains from loan sales (3,441) (10,205) Stock-based compensation -- 200 Net change in deferred compensation, net of tax effect 157 79 Other (17,036) 8,736 ----------- ----------- Net cash provided by operating activities 88,608 159,883 INVESTING ACTIVITIES: Net decrease in money market investments 290 68,964 Securities available-for-sale: Proceeds from sales 150,701 1,438 Proceeds from maturities 276,369 633,417 Purchases (332,246) (1,196,213) Purchases of securities held-to-maturity (31,788) (7,262) Proceeds from sale of Illinois bank 26,250 -- Net (increase) decrease in loans (71,572) 167,721 Net increase in premises and equipment (14,064) (4,975) ----------- ----------- Net cash used in investing activities 3,940 (336,910) FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits 179,456 (82,218) Net decrease in time deposits (354,384) (372,502) Net increase in short-term borrowings 119,815 350,078 Proceeds from issuance of long-term debt 325,000 370,332 Principal reductions in long-term debt (337,125) (30,364) Cash dividends paid (36,960) (37,129) Proceeds from stock options exercised 6,154 4,041 Shares acquired for retirement (10,113) (16,179) ----------- ----------- Net cash provided by financing activities (108,157) 186,059 ----------- ----------- Net (decrease) increase in cash and due from banks (15,609) 9,032 Cash and due from banks at beginning of period 182,545 171,864 ----------- ----------- Cash and due from banks at end of period $ 166,936 $ 180,896 =========== ===========

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 months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Citizens' 2003 Annual Report on Form 10-K. STOCK-BASED COMPENSATION: Citizens' stock-based compensation plans are accounted for based on the intrinsic value method set forth in Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. The following table illustrates the effect on net income and earnings per share if Citizens had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, to its stock option awards.

Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income, as reported $ 19,646 $ 19,605 $ 55,811 $ 47,877 Less pro forma expense related to options granted (583) (582) (1,760) (1,649) ------------ ------------ ------------ ------------ Pro forma net income $ 19,063 $ 19,023 $ 54,051 $ 46,228 ============ ============ ============ ============ Net income per share: Basic - as reported $ 0.46 $ 0.45 $ 1.29 $ 1.10 Basic - pro forma 0.44 0.44 1.25 1.07 Diluted - as reported 0.45 0.45 1.28 1.10 Diluted - pro forma 0.43 0.44 1.23 1.06

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

Reserve 2004 Reserve Balance ------------- Balance December 31, Cash Payment September 30, (in thousands) 2003 Reductions 2004 ------------- ------------- ------------- Employee benefits and severance $ 325 $ 141 $ 184 Professional fees 9 5 4 Facilities and lease impairment 276 28 248 ------------- ------------- ------------- Total $ 610 $ 174 $ 436 ============= ============= =============

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

September 30, December 31, September 30, (in thousands) 2004 2003 2003 ------------- ------------- ------------- Core deposit intangibles $ 28,989 $ 28,989 $ 28,989 Accumulated amortization 14,232 12,058 11,334 ------------- ------------- ------------- Net core deposit intangibles 14,757 16,931 17,655 Minimum pension liability 1 1 33 ------------- ------------- ------------- Total other intangibles $ 14,758 $ 16,932 $ 17,688 ============= ============= =============

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

Commercial Consumer Wealth (in thousands) Banking Banking Management Other Total ---------- ----------- ----------- ------- -------- EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2004 Net interest income (taxable equivalent) $ 29,213 $ 37,732 $ 194 $ 5,512 $ 72,651 Provision for loan losses 719 4,266 -- -- 4,985 ---------- ----------- ----------- ------- -------- Net interest income after provision 28,494 33,466 194 5,512 67,666 Noninterest income 3,481 12,216 5,463 13,922 35,082 Noninterest expense 17,195 32,503 5,107 24,168 78,973 ---------- ----------- ----------- ------- -------- Income (loss) before income taxes 14,780 13,179 550 (4,734) 23,775 Income tax (benefit) expense (taxable equivalent) 5,190 4,604 189 (5,854) 4,129 ---------- ----------- ----------- ------- -------- Net income $ 9,590 $ 8,575 $ 361 $ 1,120 $ 19,646 ========== =========== =========== ======= ======== Average Assets (in millions) $ 2,761 $ 2,524 $ 19 $ 2,365 $ 7,669 ========== =========== =========== ======= ======== EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2003(1) Net interest income (taxable equivalent) $ 29,101 $ 41,442 $ 34 $ 3,868 $ 74,445 Provision for loan losses 3,913 6,402 -- (15) 10,300 ---------- ----------- ----------- ------- -------- Net interest income after provision 25,188 35,040 34 3,883 64,145 Noninterest income 3,507 14,805 5,715 1,027 25,054 Noninterest expense 16,799 32,758 5,540 4,503 59,600 ---------- ----------- ----------- ------- -------- Income before income taxes 11,896 17,087 209 407 29,599 Income tax (benefit) expense (taxable equivalent) 4,662 5,931 56 (655) 9,994 ---------- ----------- ----------- ------- -------- Net income $ 7,234 $ 11,156 $ 153 $ 1,062 $ 19,605 ========== =========== =========== ======= ======== Average Assets (in millions) $ 2,967 $ 3,277 $ 7 $ 1,561 $ 7,812 ========== =========== =========== ======= ========

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

Commercial Consumer Wealth (in thousands) Banking Banking Management Other Total ------------ -------- ------------ -------- -------- EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2004 Net interest income (taxable equivalent) $ 87,455 $113,190 $ 574 $ 15,696 $216,915 Provision for loan losses 8,192 8,298 (5) -- 16,485 ------------ -------- ------------ -------- -------- Net interest income after provision 79,263 104,892 579 15,696 200,430 Noninterest income 10,390 39,190 17,030 13,787 80,397 Noninterest expense 51,933 98,897 16,101 34,719 201,650 ------------ -------- ------------ -------- -------- Income (loss) before income taxes 37,720 45,185 1,508 (5,236) 79,177 Income tax (benefit) expense (taxable equivalent) 13,288 15,807 528 (6,257) 23,366 ------------ -------- ------------ -------- -------- Net income $ 24,432 $ 29,378 $ 980 $ 1,021 $ 55,811 ============ ======== ============ ======== ======== Average Assets (in millions) $ 2,812 $ 2,457 $ 18 $ 2,406 $ 7,693 ============ ======== ============ ======== ======== EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2003(1) Net interest income (taxable equivalent) $ 95,572 $114,265 $ 100 $ 15,763 $225,700 Provision for loan losses 41,997 12,995 -- (50) 54,942 ------------ -------- ------------ -------- -------- Net interest income after provision 53,575 101,270 100 15,813 170,758 Noninterest income 11,875 41,432 16,457 3,424 73,188 Noninterest expense 48,514 100,200 15,445 8,383 172,542 ------------ -------- ------------ -------- -------- Income before income taxes 16,936 42,502 1,112 10,854 71,404 Income tax expense (taxable equivalent) 7,174 14,860 399 1,094 23,527 ------------ -------- ------------ -------- -------- Net income $ 9,762 $ 27,642 $ 713 $ 9,760 $ 47,877 ============ ======== ============ ======== ======== Average Assets (in millions) $ 3,078 $ 2,986 $ 7 $ 1,622 $ 7,693 ============ ======== ============ ======== ========

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

SEPTEMBER 30, December 31, September 30, (in thousands) 2004 2003 2003 ------------- ------------- ------------- Federal Home Loan Bank advances $ 775,846 $ 787,930 $ 788,810 Subordinated debt: Notes maturing February 2013 124,645 123,061 125,882 Deferrable interest debenture maturing June 2033 25,774 25,774 25,774 Other borrowed funds 53 94 139 ------------- ------------- ------------- Total long-term debt $ 926,318 $ 936,859 $ 940,605 ============= ============= =============

As previously mentioned, during the third quarter of 2004 Citizens prepaid $235 million of fixed rate FHLB advances and incurred an $18 million prepayment penalty. Additionally, Citizens issued $275 million of new fixed rate FHLB advances at approximately 150 basis points below the annual cost of the retired debt. The retired fixed rate advances were convertible to floating rate at the option of the FHLB while the new fixed rate debt is not subject to conversion or any other options. 10 NOTE 7. PENSION BENEFIT COST The components of pension expense for the three and nine months ended September 30, 2004 and September 30, 2003 are presented below.

Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2004 2003 2004 2003 -------------- ------- ------- ------- ------- DEFINED BENEFIT PENSION PLANS Service cost $ 988 $ 1,099 $ 3,300 $ 3,298 Interest cost 1,205 1,361 3,815 4,083 Expected return on plan assets (1,767) (1,976) (5,307) (5,926) Amortization of unrecognized: Net transition asset (3) (2) (8) (7) Prior service cost 56 56 172 166 Net actuarial loss 169 16 511 48 ------- ------- ------- ------- Net pension cost $ 648 $ 554 $ 2,483 $ 1,662 ======= ======= ======= =======

Citizens previously disclosed in Note 13 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003, that it expected to contribute approximately $0.5 million to its pension plans in 2004. As of September 30, 2004, $1.1 million of contributions have been made in 2004. Citizens anticipates that an additional $1.2 million of contributions will be made in the fourth quarter of 2004. Returns of the financial markets affect current and future contributions. NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138 and SFAS 149, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively referred to as "SFAS 133") establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Citizens designates its derivatives based upon criteria established by SFAS 133. For a derivative designated as a fair value hedge, the derivative is recorded at fair value on the consolidated balance sheet. Any difference between the fair value change of the hedge versus the fair value change of the hedged item is considered to be the "ineffective" portion of the hedge. The ineffectiveness of the hedge is recorded in current earnings. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. Citizens may use derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded in its balance sheet from changes in interest rates. Citizens uses interest rate contracts such as interest rate swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets or liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The following table summarizes the derivative financial instruments held or issued by Citizens. 11 DERIVATIVE FINANCIAL INSTRUMENTS:

SEPTEMBER 30, 2004 December 31, 2003 -------------------- -------------------- NOTIONAL FAIR Notional Fair (dollars in thousands) AMOUNT VALUE Amount Value ---------------------- -------- -------- -------- -------- Interest rate swaps $288,800 $ (332) $190,000 $ (1,291) Interest rate lock commitments 18,924 74 14,683 109 Forward mortgage loan contracts 34,000 (134) 29,000 (161) -------- -------- -------- -------- TOTAL $341,724 $ (392) $233,683 $ (1,343) -------- -------- ======== ========

DERIVATIVE CLASSIFICATIONS AND HEDGING RELATIONSHIPS:

SEPTEMBER 30, 2004 December 31, 2003 -------------------- -------------------- NOTIONAL FAIR Notional Fair (dollars in thousands) AMOUNT VALUE Amount Value ----------------------- -------- -------- -------- -------- Derivatives Designated as Cash Flow Hedges: Hedging repurchase agreements $ 80,000 $ (196) $ 25,000 $ 339 Derivatives Designated as Fair Value Hedges: Hedging time deposits 65,000 (163) 40,000 (100) Hedging long-term debt 125,000 27 125,000 (1,530) Derivatives Not Designated as Hedges: Customer initiated swaps 18,800 -- -- -- -------- -------- -------- -------- TOTAL $288,800 $ (332) $190,000 $ (1,291) -------- -------- ======== ========

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

Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ (in thousands, except per share amounts) 2004 2003 2004 2003 ---------------------------------------- ------- ------- ------- ------- NUMERATOR: Basic and dilutive earnings per share -- net income available to common shareholders $19,646 $19,605 $55,811 $47,877 ======= ======= ======= ======= DENOMINATOR: Basic earnings per share -- weighted average shares 43,224 43,227 43,277 43,326 Effect of dilutive securities -- potential conversion of employee stock options 453 274 486 248 ------- ------- ------- ------- Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 43,677 43,501 43,763 43,574 ======= ======= ======= ======= BASIC EARNINGS PER SHARE $ 0.46 $ 0.45 $ 1.29 $ 1.10 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 0.45 $ 0.45 $ 1.28 $ 1.10 ======= ======= ======= =======

During the third quarter of 2004, employees exercised stock options to acquire 82,408 shares at an average exercise price of $20.16 per share. For the nine months ended September 30, 2004, employees have exercised stock options to acquire 309,369 shares at an average exercise price of $19.89 per share. 12 NOTE 10. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES The Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. Generally, new loan commitments do not extend beyond 180 days prior to being funded and unused lines of credit are reviewed on a regular basis. Financial standby letters of credit guarantee future payment of client financial obligations to third parties. They are issued primarily for goods and services provided. Performance standby letters of credit are irrevocable guarantees to various beneficiaries for the performance of contractual obligations of our clients. Commercial letters of credit may facilitate the shipment of goods and may also include direct pay letters of credit which afford our clients access to the public financing market. Standby letters of credit arrangements generally expire within one year and have essentially the same level of credit risk as extending loans to clients and are subject to Citizens' normal credit policies. Inasmuch as these arrangements have fixed expiration dates, most expire unfunded and do not necessarily represent future liquidity requirements. Appropriate collateral is obtained based on management's assessment of the client and may include receivables, inventories, real property and equipment. Amounts available to clients under loan commitments and standby letters of credit follow:

SEPTEMBER 30, December 31, (in thousands) 2004 2003 -------------- ------------- ------------- LOAN COMMITMENTS AND LETTERS OF CREDIT: Commitments to extend credit $ 1,660,336 $ 1,593,426 Financial standby letters of credit 40,588 42,086 Performance standby letters of credit 6,169 6,782 Commercial letters of credit 201,649 183,665 ------------- ------------- $ 1,908,742 $ 1,825,959 ============= =============

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

Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2004 2003 2004 2003 -------------- -------- -------- -------- -------- Balance at beginning of period $ 4,834 $ 38,401 $ 22,803 $ 42,646 Net unrealized gain (loss) on securities for the quarter, net of tax effect of $8,944 in 2004 and $(5,974) in 2003 16,610 (11,095) Less: Reclassification adjustment for net (gains) losses included in net income for the quarter, net of tax effect of $187 in 2004 and $15 in 2003 (347) (27) Net unrealized loss on securities for the period, net of tax effect of $(1,185) in 2004 and $(8,269) in 2003 (2,201) (15,302) Less: Reclassification adjustment for net (gains) losses included in net income for the period, net of tax effect of $531 in 2004 and $36 in 2003 988 (65) Net change in unrealized gain (loss) on cash flow hedges for the quarter, net of tax effect of $(83) in 2004 (155) 122 Net change in unrealized gain (loss) on cash flow hedges for the period, net of tax effect of $(348) in 2004 (648) 122 -------- -------- -------- -------- Accumulated other comprehensive income, net of tax $ 20,942 $ 27,401 $ 20,942 $ 27,401 ======== ======== ======== ========

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

FOR THE QUARTER ENDED ----------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 2004 2004 2004 2003 2003 ------------ --------- --------- ------------ ------------- SUMMARY OF OPERATIONS (THOUSANDS) Interest income $ 96,029 $ 95,375 $ 94,394 $ 97,398 $ 99,687 Net interest income 69,301 69,218 68,328 70,678 71,154 Provision for loan losses 4,985 4,500 7,000 8,020 10,300 Total fees and other income 34,548 24,856 22,512 21,629 25,012 Investment securities gains (losses) 534 (2,053) -- 2 42 Noninterest expense 78,973 62,143 60,534 60,446 59,600 Income tax provision 779 6,656 5,863 5,769 6,703 Net income 19,646 18,722 17,443 18,074 19,605 Cash dividends 12,331 12,284 12,345 12,347 12,331 PER COMMON SHARE DATA Basic net income $ 0.46 $ 0.43 $ 0.40 $ 0.42 $ 0.45 Diluted net income 0.45 0.43 0.40 0.41 0.45 Cash dividends 0.285 0.285 0.285 0.285 0.285 Market value (end of period) 32.57 31.05 32.63 32.72 26.41 Book value (end of period) 15.03 14.51 15.09 14.69 14.67 AT PERIOD END (MILLIONS) Assets $ 7,659 $ 7,748 $ 7,692 $ 7,711 $ 7,787 Total loans including held for sale 5,319 5,327 5,237 5,290 5,359 Deposits 5,267 5,361 5,461 5,442 5,482 Shareholders' equity 650 628 654 635 634 AVERAGE FOR THE QUARTER (MILLIONS) Assets $ 7,669 $ 7,769 $ 7,640 $ 7,697 $ 7,812 Total loans including held for sale 5,289 5,312 5,229 5,285 5,418 Deposits 5,336 5,435 5,474 5,481 5,610 Shareholders' equity 637 628 644 626 620 RATIOS (ANNUALIZED) Return on average assets 1.02 0.97 0.92% 0.93% 1.00% Return on average shareholders' equity 12.27 12.00 10.89 11.45 12.55 Net interest margin (FTE) 4.02 3.98 4.01 4.07 4.03 Efficiency ratio (1) 63.86 63.78 64.26 63.16 59.90 Net loans charged off to average loans 0.38 0.33 0.53 0.59 0.80 Allowance for loan losses as a percent of portfolio loans 2.30 2.34 2.38 2.35 2.36 Nonperforming assets to loans plus ORAA (end of period) 0.99 1.10 1.20 1.47 1.74 Nonperforming assets to total assets (end of period) 0.68 0.75 0.81 1.00 1.17 Average equity to average assets 8.31 8.08 8.43 8.13 7.94 Leverage ratio 7.77 7.52 7.79 7.45 7.25 Tier 1 capital ratio 10.18 10.00 10.31 9.80 9.64 Total capital ratio 13.61 13.42 13.77 13.23 13.07

(1) Efficiency Ratio = Noninterest expense/(Net interest income + Total fees and other income). It measures how efficient a bank spends its revenues. Third quarter 2004 excludes investment securities gains of $534,000, gain on sale of Illinois bank subsidiary of $11,650,000 and prepayment penalty on FHLB advances of $17.959,000. The efficiency ratio would equal 73.67% if the Illinois bank sale and FHLB prepayment penalty were included in the calculation. 14 INTRODUCTION The following commentary presents management's discussion and analysis of Citizens Banking Corporation's financial condition and results of operations for the three and nine month periods ended September 30, 2004. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in our 2003 Annual Report on Form 10-K. In addition, the following discussion and analysis should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our 2003 Annual Report on Form 10-K, which contains important additional information that is necessary to understand our Company and its financial condition and results of operations for the periods covered by this report. Unless the context indicates otherwise, all references in the discussion to "Citizens," the "Company," "our," "us" and "we" refer to Citizens Banking Corporation and its subsidiaries. FORWARD-LOOKING STATEMENTS Discussions in this report that are not statements of historical fact (including statements that include terms such as "will," "may," "should," "believe," "expect," "anticipate," "estimate," "intend," and "plan") are forward-looking statements that involve risks and uncertainties, and our actual future results could materially differ from those discussed. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, as well as the following. o We face the risk that loan losses, including unanticipated loan losses due to changes in our loan portfolios, fraud and economic factors, will exceed our allowance for loan losses and that additional increases in the allowance will be required. Additions to the allowance would cause net income to decline and could have a negative impact on our capital. o While we attempt to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, we may not be able to economically hedge our interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect our net interest income and results of operations. o An economic downturn or changes in consumer spending and savings habits, and the negative economic effects caused by terrorist attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of our loan portfolio and could reduce our customer base, our level of deposits, and demand for financial products such as loans. o If we are unable to continue to attract core deposits or unable to continue to obtain third party financing on favorable terms, our cost of funds will increase, adversely affecting our ability to generate the funds necessary for lending operations, reducing our net interest margin and negatively affecting our results of operations. o Increased competition with other financial institutions could reduce our net income by decreasing the number and size of loans that we originate, the interest rates we may charge on these loans and the fees we are able to charge for services to our customers. o The financial services industry is undergoing rapid technological changes. If we are unable to adequately invest in and implement new technology-driven products and services, we may not be able to compete effectively, or our cost to provide products and services may increase significantly. o Our business may be adversely affected by the highly regulated environment in which we operate. Changes in banking or tax laws, regulations and regulatory practices at either the federal or state level may adversely affect us, including our ability to offer new products and services, obtain financing, move funds from our subsidiaries to our parent company, attract deposits, make loans and leases and achieve satisfactory spreads, and may also result in the imposition of additional costs on us. o The products and services offered by the banking industry and customer expectations regarding them are subject to change. We attempt to respond to perceived customer needs and expectations by offering new products and services, such as our new wealth management capabilities, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on our results of operations. In addition, our potential inability to successfully expand our Oakland County operations would have a negative effect on our results of operations. 15 o New accounting pronouncements may be issued by the accounting profession, regulators or other government bodies which could change our existing accounting methods. Changes in accounting methods could negatively impact our results of operations and capital. o Our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in or disruption to our business and a negative impact on our results of operations. o Our external vendors could fail to fulfill their contractual obligations to us, resulting in a material interruption in or disruption to our business that negatively impacts our results of operations. o Our potential inability to integrate acquired operations or complete our restructuring could have a negative effect on our expenses and results of operations. o We could face unanticipated environmental liabilities or costs related to both real property that we own or that we acquire through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, may increase our capital costs and operating expenses. o As a bank holding company that conducts substantially all of its operations through its subsidiaries, the ability of the parent company to pay dividends, repurchase its shares or to repay its indebtedness depends upon the results of operations of its subsidiaries and their ability to pay dividends to the parent company. Dividends paid by these subsidiaries are subject to limits imposed by federal and state law. Other factors not currently anticipated by management may also materially and adversely affect our results of operations. There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law. CRITICAL ACCOUNTING POLICIES Citizens' Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the benefit obligation and net periodic pension expense for our employee pension and postretirement benefit plans to be the accounting areas that require the most subjective or complex judgments, and, therefore, are the most likely to vary materially as new information becomes available. Our significant accounting policies are more fully described in Note 1 to the audited Consolidated Financial Statements contained in our 2003 Annual Report on Form 10-K and the more significant assumptions and estimates made by management are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our 2003 Annual Report on Form 10-K. There have been no material changes to those policies or the estimates made pursuant to those policies during the most recent quarter. SALE OF ILLINOIS BANK On August 5, 2004, Citizens completed the sale of its subsidiary bank, Citizens Bank-Illinois, N.A. (the "Illinois Bank"), to Metropolitan Bank Group, Inc., of Chicago, Illinois in a cash transaction valued at $26.25 million. The Illinois Bank had three locations with $173.2 million of assets, $78.5 million of loans and $155.3 million of deposits as of August 5, 2004. Citizens realized a pre-tax gain of $11.7 million on the sale of the stock of the Illinois Bank. The sale of the Illinois Bank generated a tax loss because Citizens' tax basis in the stock of the Illinois Bank was greater than the Illinois Bank's sale price. 16 PREPAYMENT OF FHLB ADVANCES AND ISSUANCE OF NEW FHLB DEBT Citizens prepaid $235 million of Federal Home Loan Bank ("FHLB") advances that were convertible to a floating rate at the option of the FHLB during the third quarter of 2004. The after-tax effect of the prepayment penalties on the debt largely offset the pre-tax gain on the sale of the Illinois Bank, resulting in a relatively neutral effect on earnings per share for the third quarter. Additionally, during the third quarter of 2004, Citizens issued $275 million of new FHLB fixed rate advances at approximately 150 basis points below the annual cost of the retired debt. The improved structure and lower cost is expected to improve Citizens' net interest margin and interest rate sensitivity and to offset the negative impact on future results of operations from the sale of the Illinois Bank. The tax loss from the Illinois Bank sale along with lower pre-tax earnings resulting from the prepayment penalties of FHLB advances contributed to reduced income tax expense for the third quarter. REORGANIZATION OF GOLDEN OAK FUNDS On September 29, 2004, Citizens Bank Wealth Management, N.A. completed its reorganization of the seven Golden Oak Funds managed by its affiliate CB Capital Management, Inc. into two leading fund groups: Goldman Sachs Asset Management and Federated Mutual Fund Services. Six of the Golden Oak portfolios merged with comparable portfolios managed by Goldman Sachs, and one portfolio merged with a comparable portfolio offered by Federated. The assets of the Golden Oak funds have been exchanged for shares of the acquiring funds. Golden Oak mutual fund portfolios had approximately $450 million in assets under management. Citizens does not anticipate to experience any material financial impact from this reorganization. REPLACEMENT OF BROKER/DEALER SERVICES VENDOR On July 26, 2004, the brokerage and investment areas located at Citizens Bank and F&M Bank completed a conversion that will better position the banks to compete with national brokerage firms and in the local investment arena. The new program will be marketed under the names of Investment Center At Citizens Bank, and Investment Center At F&M Bank. In addition, Citizens replaced its broker/dealer services vendor with Independent Financial Marketing Group, Inc. ("IFMG"), which will provide marketing support, advanced technology and improved processing capabilities. Citizens anticipates enhanced brokerage and investment fee revenue and improved brokerage unit profitability beginning in subsequent periods as a result of this relationship. RESULTS OF OPERATIONS EARNINGS SUMMARY Citizens earned net income of $19,646,000, or $0.45, per diluted share for the three months ended September 30, 2004, compared with $19,605,000, or $0.45 per diluted share, for the same quarter of 2003. Annualized returns on average assets and average equity for the quarter were 1.02% and 12.27%, respectively, compared with 1.00% and 12.55%, respectively, in 2003. For the nine months ended September 30, 2004, net income was $55,811,000 or $1.28 per diluted share compared with net income of $47,877,000 or $1.10 per diluted share for the same period of 2003. Annualized returns on average assets and average equity during the first nine months of 2004 were 0.97% and 11.72%, respectively, compared with 0.83% and 10.10%, respectively, in 2003. Results for the third quarter of 2004 reflect continued improvement in credit quality, consistent growth in consumer loans, strong performance in core deposits, and reduced noninterest expense, on a linked quarter basis, excluding the FHLB prepayment penalties. Total assets decreased from December 31, 2003 due to the sale of the Illinois Bank (which had $173.2 million in assets at the date of the sale) and from declines in both the investment portfolio and mortgage loans held for sale, while total portfolio loans increased. Net interest income for the quarter was down from the same quarter last year due to decreases in mortgage loans held for sale and commercial loans. The provision for loan losses decreased significantly from the same quarter last year due to a lower level of net charge-offs as Citizens continues to fund provision based on its ongoing quarterly assessments of the allowance for loan loss adequacy, the significant decline in nonperforming assets, and fewer risk rating downgrades within the commercial loan portfolio. Noninterest income increased $10.0 million compared with the third quarter of 2003 due to the $11.7 million pre-tax gain on the sale of the Illinois Bank, partially offset by a decline in mortgage fees. Citizens' retirement of $235 million of the FHLB debt resulted in an $18 million prepayment penalty, which contributed to the increased noninterest expense compared to the third quarter of 2003. 17 NET INTEREST INCOME AND NET INTEREST MARGIN An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates for the three and nine months ended September 30, 2004 and 2003 is presented below.

AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES 2004 2003 ----------------------------------- ----------------------------------------- Three Months Ended September 30 AVERAGE AVERAGE Average Average (in thousands) BALANCE INTEREST (1) RATE (2) Balance (3) Interest (1) Rate (2)(3) ------------------------------------- --------- ------------ -------- ----------- ------------ ----------- EARNING ASSETS Money market investments: Federal funds sold $ -- $ -- --% $ 1,509 $ 1 0.38% Other 2,592 4 0.57 2,418 2 0.25 Investment securities (4) Taxable 1,491,699 15,312 4.11 1,526,583 14,254 3.73 Tax-exempt 426,893 5,243 7.56 401,302 5,059 7.76 Mortgage loans held for sale 21,640 343 6.35 234,793 3,090 5.26 Loans: Commercial 2,829,373 38,583 5.50 3,049,878 42,110 5.55 Real estate mortgage 489,608 7,008 5.73 481,337 7,626 6.34 Direct consumer 1,124,344 15,748 5.57 937,133 14,648 6.20 Indirect consumer 824,030 13,788 6.66 714,302 12,897 7.16 ----------- ----------- ----------- ----------- Total portfolio loans 5,267,355 75,127 5.72 5,182,650 77,281 5.97 ----------- ----------- ----------- ----------- Total earning assets 7,210,179 96,029 5.49 7,349,255 99,687 5.57 NONEARNING ASSETS Cash and due from banks 170,013 183,214 Bank premises and equipment 118,110 112,812 Investment security fair value adjustment 24,664 28,909 Other nonearning assets 270,491 262,373 Allowance for loan losses (124,197) (124,964) ----------- ----------- Total assets $ 7,669,260 $ 7,811,599 =========== =========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $ 1,269,994 $ 2,427 0.76 1,334,765 2,483 0.74 Savings deposits 1,493,434 3,163 0.84 1,332,519 1,839 0.55 Time deposits 1,634,243 10,044 2.44 2,054,257 14,529 2.81 Short-term borrowings 694,850 2,701 1.55 561,427 1,463 1.03 Long-term debt 923,476 8,393 3.62 937,941 8,219 3.48 ----------- ----------- ----------- ----------- Total interest-bearing liabilities 6,015,997 26,728 1.77 6,220,909 28,533 1.82 ----------- ----------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 938,155 888,440 Other liabilities 77,905 82,150 Shareholders' equity 637,203 620,100 ----------- ----------- Total liabilities and shareholders' equity $ 7,669,260 $ 7,811,599 =========== =========== INTEREST SPREAD $ 69,301 3.72% $ 71,154 3.75% =========== =========== Contribution of net noninterest bearing sources of funds 0.30 0.28 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.02% 4.03%

---------- (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 $3,350,000 and $3,291,000 for the three months ended September 30, 2004 and 2003, respectively, based on a tax rate of 35%. (3) Certain amounts have been reclassified to conform with current year presentation. (4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. 18

AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES 2004 2003 ---------------------------------------- ---------------------------------------- Nine Months Ended September 30 AVERAGE AVERAGE Average Average (in thousands) BALANCE INTEREST (1) RATE (2) Balance (3) Interest (1) Rate (2)(3) ----------------------------------------- ---------- ------------ -------- ----------- ------------ ----------- EARNING ASSETS Money market investments: Federal funds sold $ -- $ -- --% $ 12,083 $ 95 1.05% Other 2,159 8 0.49 2,054 7 0.50 Investment securities (4): Taxable 1,533,232 46,775 4.07 1,359,305 45,795 4.49 Tax-exempt 425,205 15,766 7.61 401,022 15,288 7.82 Mortgage loans held for sale 32,463 1,453 5.97 185,891 7,727 5.54 Loans: Commercial 2,883,448 115,617 5.43 3,155,940 133,073 5.72 Real estate mortgage 489,646 21,085 5.74 538,880 25,442 6.30 Direct consumer 1,093,297 45,763 5.59 895,155 43,899 6.56 Indirect consumer 777,908 39,331 6.75 668,772 37,253 7.45 ---------- -------- ---------- -------- Total portfolio loans 5,244,299 221,796 5.69 5,258,747 239,667 6.14 ---------- -------- ---------- -------- Total earning assets 7,237,358 285,798 5.46 7,219,102 308,579 5.90 NONEARNING ASSETS Cash and due from banks 164,142 172,681 Bank premises and equipment 117,037 114,419 Investment security fair value adjustment 29,624 51,598 Other nonearning assets 269,539 254,554 Allowance for loan losses (125,008) (119,411) ---------- ---------- Total assets $7,692,692 $7,692,943 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $1,314,645 $ 7,264 0.74 1,312,898 9,263 0.94 Savings deposits 1,388,673 7,035 0.68 1,352,398 7,408 0.73 Time deposits 1,802,073 33,678 2.50 2,192,473 49,739 3.03 Short-term borrowings 630,578 5,771 1.22 418,967 3,497 1.12 Long-term debt 932,511 25,203 3.61 835,990 23,092 3.69 ---------- -------- ---------- -------- Total interest-bearing liabilities 6,068,480 78,951 1.74 6,112,726 92,999 2.03 -------- -------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing demand 909,293 870,039 Other liabilities 78,593 76,073 Shareholders' equity 636,326 634,105 ---------- ---------- Total liabilities and shareholders' equity $7,692,692 $7,692,943 ========== ========== INTEREST SPREAD $206,847 3.72% $215,580 3.87% ======== ======== Contribution of net noninterest bearing sources of funds 0.28 0.30 ---- ---- NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.00% 4.17%

---------- (1) Interest income shown on actual basis and does not include taxable equivalent adjustments. (2) Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $10,068,000 and $10,120,000 for the nine months ended September 30, 2004 and 2003, respectively, based on a tax rate of 35%. (3) Certain amounts have been reclassified to conform with current year presentation. (4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. Net interest income decreased $1.9 million to $69.3 million in the third quarter of 2004 compared with $71.2 million in the same quarter of 2003. The decrease in net interest income compared with the third quarter of 2003 resulted from a decline in the net interest margin, the sale of the Illinois Bank and lower average earning assets. At August 5, 2004, the earning assets for the Illinois Bank were $169.4 million. For the nine months ended September 30, 2004, net interest income declined $8.7 million to $206.8 million compared with the same period of the prior year due to a decline in net interest margin percentage. Earning assets declined in the third quarter of 2004 compared with the same quarter of 2003 due to a decline in mortgage 19 loans held for sale from lower refinancing activity and the sale of the Illinois Bank. The Illinois Bank contributed approximately $60 million to average earning assets during the third quarter of 2004. In the fourth quarter Citizens anticipates its net interest margin to be slightly higher while its net interest income will be comparable to or slightly lower than the third quarter levels as earning assets and net interest income in the fourth quarter will fully reflect the August sale of the Illinois Bank. Net interest margin decreased to 4.02% in the third quarter of 2004 compared with 4.03% in the third quarter of 2003. The decrease in net interest margin from the third quarter of 2003 resulted from declines in yields on the loan portfolio, reflecting the normal margin compression in a flat rate environment, substantially offset by lower funding costs, which increased more slowly than asset yields following the second and third quarter 2004 Federal Reserve increases in short term interest rates and a higher yield on the investment portfolio. For the nine months ended September 30, 2004, net interest margin declined to 4.00% compared with 4.17% for the same period of 2003. The 44 basis point decline in the yield on earning assets for the first nine months of 2004 was partially offset by a 29 basis point decline in the cost of interest bearing liabilities as the cost of all funding sources, with the exception of short-term borrowings, declined in the lower interest rate environment. 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 2004 Compared With 2003, Net ----------------------- Net ------------------------ (in thousands) Change (1) Rate (2) Volume (2) Change (1) Rate (2) Volume (2) -------------------------------------- ---------- -------- ---------- ----------- ---------- ---------- INTEREST INCOME Money market investments $ 1 $ 2 $ (1) $ (94) $ (47) $ (47) Investment securities: Taxable 1,058 1,390 (332) 980 (4,562) 5,542 Tax-exempt 184 (134) 318 478 (427) 905 Mortgage loans held for sale (2,747) 529 (3,276) (6,274) 552 (6,826) Loans: Commercial (3,527) (810) (2,717) (17,456) (7,458) (9,998) Real estate (618) (747) 129 (4,357) (2,137) (2,220) Direct consumer 1,100 (896) 1,996 1,864 (4,732) 6,596 Indirect consumer 891 (992) 1,883 2,078 (3,642) 5,720 -------- -------- -------- -------- -------- -------- Total (3,658) (1,658) (2,000) (22,781) (22,453) (328) -------- -------- -------- -------- -------- -------- INTEREST EXPENSE Deposits: Demand (56) 67 (123) (1,999) (2,011) 12 Savings 1,324 (44) 1,368 (373) (2,126) 1,753 Time (4,485) (1,847) (2,638) (16,061) (8,148) (7,913) Short-term borrowings 1,238 834 404 2,274 365 1,909 Long-term debt 174 302 (128) 2,111 (507) 2,618 -------- -------- -------- -------- -------- -------- Total (1,805) (688) (1,117) (14,048) (12,427) (1,621) -------- -------- -------- -------- -------- -------- NET INTEREST INCOME $ (1,853) $ (970) $ (883) $ (8,733) $(10,026) $ 1,293 ======== ======== ======== ======== ======== ========

(1) Changes are based on actual interest income and do not reflect taxable equivalent adjustments. (2) Changes not solely due to changes in volume or rates have been allocated in proportion to the absolute dollar amounts of the change in each. The decrease in net interest income for the three months ended September 30, 2004 compared with the same period of 2003 reflects both unfavorable rate-related variances and unfavorable volume-related variances. The unfavorable volume-related variance in the mortgage loans held for sale category was driven by a decrease in mortgage loan origination volume. Declines in commercial loan volume were offset by direct and indirect consumer loan growth. Volume declines in time deposits were partially offset by increases in savings and short-term borrowings. The favorable rate-related variance in taxable investment securities was driven by lower purchase premium amortization expense than in the comparable period. Unfavorable rate-related variances across the four loan portfolio categories persist as fixed rate loans continued to reprice lower due to the low rate environment. Low long-term rates also resulted in favorable rate variances in time deposits. Short- 20 term borrowings and long-term debt yields repriced higher with the recent increases in short-term market interest rates pursuant to Federal Reserve actions during the third quarter of 2004. The decrease in net interest income for the nine month period ended September 30, 2004 compared with the same periods of 2003 reflects unfavorable rate-related variances, partially offset by net favorable volume-related variances. The favorable volume-related variance in the investment securities portfolio was attributable to the 2003 portfolio expansion program, and the favorable volume variance in the direct and indirect consumer loan portfolios was due to loan growth. The favorable variances were partially offset by lower volumes of commercial and mortgage loans, and mortgage loans held for sale. Commercial loan volumes declined due to lower demand for commercial credit, high repayment activity and continued reduction of exposure on credits not meeting our risk parameters. Mortgage loan volumes declined due to continued refinance and repayment activity and our strategy to sell most new mortgage loan production into the secondary market. The favorable volume variance from lower time deposit balances was partially offset by unfavorable volume variances in other deposit categories, short-term borrowings and long term debt. The unfavorable rate-related variances were due to lower yields on virtually all asset categories as fixed rate loans and investment securities portfolios continued to reprice lower throughout 2003 and into the first nine months of 2004 due to the extended low interest rate environment. Lower yields on earning assets were only partially offset by lower funding costs. While the cost of most funding categories declined in the nine month period ended September 30, 2004 compared with the same periods of the prior year, interest expense on such interest-bearing funds declined less than interest income on earning assets. NONINTEREST INCOME Noninterest income for the third quarter of 2004 increased $10.0 million or 40.0% to $35.1 million compared with the third quarter of 2003. The increase occurred as a result of an $11.7 million pre-tax gain on the sale of the Illinois Bank and a $1.5 million increase in deposit service charges, partially offset by a $3.7 million decline in mortgage and other loan income. Noninterest income for the nine months ended September 30, 2004 increased $7.2 million or 9.8% to $80.4 million compared with $73.2 million in the first nine months of 2003 due to the $11.7 million pre-tax gain on the sale of the Illinois Bank and an increase in deposit service charges of $4.5 million, partially offset by an $8.9 million decrease in mortgage and other loan income and the $2.1 million loss on investment securities designated for sale in the second quarter of 2004. An analysis of the sources of noninterest income during the three and nine months ended September 30, 2004 and 2003 is summarized in the table below.

NONINTEREST INCOME Three Months Ended Nine Months Ended September 30, September 30, $ Change in 2004 % Change in 2004 ------------------ ------------------ ----------------- ------------------ (in thousands) 2004 2003 2004 2003 3 Mos 9 Mos 3 Mos 9 Mos ------- ------- ------- ------- ------- ------- ------- ------- Service charges on deposit accounts $ 9,196 $ 7,703 $26,307 $21,842 $ 1,493 $ 4,465 19.4% 20.4% Trust fees 4,222 4,368 13,060 12,912 (146) 148 (3.3) 1.1 Mortgage and other loan income 1,750 5,404 7,053 15,967 (3,654) (8,914) (67.6) (55.8) Brokerage and investment fees 1,719 2,333 6,152 6,015 (614) 137 (26.3) 2.3 Bankcard fees 853 761 2,547 2,310 92 237 12.1 10.3 Gain on sale of Illinois bank subsidiary 11,650 -- 11,650 -- 11,650 11,650 N/M N/M Other, net 5,158 4,443 15,147 14,041 715 1,106 16.1 7.9 ------- ------- ------- -------- -------- ------- Total fees and other income 34,548 25,012 81,916 73,087 9,536 8,829 38.1 12.1 Investment securities (losses) gains 534 42 (1,519) 101 492 (1,620) N/M N/M ------- ------- ------- -------- -------- ------- Total noninterest income $35,082 $25,054 $80,397 $73,188 $10,028 $ 7,209 40.0 9.8 ======= ======= ======= ======== ======== =======

N/M - Not Meaningful Deposit service charges increased in both the three and nine months ended September 30, 2004 compared with the same periods of the prior year due to higher overdraft fee income. Initiatives implemented over the last six quarters have improved the revenue generated from deposit service charges through enhanced waiver management and slight increases in certain fees. Trust fees decreased in the three month period ended September 30, 2004 compared with the same period of the prior year due to the merger of the Golden Oak Funds and a reduction of a large relationship. Trust fees increased in the first nine months of 2004 compared with the same period in 2003 due to stronger financial markets and Citizens' sales and sales management processes implemented in the first quarter of 2004, which are focused on relationship management and new business development strategies. Total trust assets under administration decreased $6.2 million to $2.6 billion at September 30, 2004 compared to September 30, 2003. 21 Mortgage and other loan income declined in both the three and nine months ended September 30, 2004 compared with the same periods of the prior year. The decline in revenue is reflective of the decrease in mortgage loan origination volume in the three and nine months ended September 30, 2004 compared with the same periods of the prior year. Loans originated for sale declined $821 million to $252 million in the nine month period ended September 30, 2004 compared with the same period of the prior year. The decrease in brokerage and investment fees in the three month period ended September 30, 2004 compared with the same period of the prior year was due to a shorter brokerage sales campaign cycle, staffing changes and the replacement of Citizens' broker/dealer services vendor with Independent Financial Marketing Group, Inc. The change to IFMG was made to provide enhanced marketing support, advanced technology and improved processing capabilities. Brokerage and investment fees increased in the nine month period ended September 30, 2004 compared with the same period in 2003. The increases in brokerage and investment fees were due to a successful brokerage sales campaign conducted in the second quarter of 2004 in which the Consumer and Wealth Management lines of business collaborated to generate $34 million in brokerage and investment sales and $1.4 million in fee income. Bankcard fees increased in both the three and nine months ended September 30, 2004 compared with the same periods of the prior year due to interchange income related to debit card transactions. A distribution of $0.8 million received in the third quarter of 2004 related to venture capital investments made beginning in 1998 contributed to the increase in other noninterest income. Additionally, profit on the sales of closed bank premises was $0.3 million and $1.3 million for three and nine month periods, respectively. Citizens recognized a $0.2 million gain on the reorganization of its Golden Oak Funds in the third quarter of 2004 and a $0.3 million gain on the sale of credit card loans in the second quarter of 2004. Offsetting these gains was a reduction of title insurance fee income of $0.4 million and $1.0 million for the three and nine month periods, respectively. Title insurance fee income is down as a result of lower mortgage originations. The third quarter of 2004 included securities gains of $0.5 million reflecting the actual trading of some securities designated for sale during the second quarter of 2004 that generated a $2.1 million loss during that quarter. Excluding the pre-tax gain on the sale of the Illinois Bank, Citizens anticipates total noninterest income in the fourth quarter to be slightly higher than the third quarter level based on current business trends. NONINTEREST EXPENSE Noninterest expense increased $19.4 million or 32.5% to $79.0 million in the third quarter of 2004 compared with $59.6 million in the third quarter of 2003. This increase was primarily due to an $18 million prepayment penalty on high cost Federal Home Loan Bank ("FHLB") debt and, to a lesser extent, to higher compensation, occupancy, advertising, telephone and other costs relating to the Oakland County initiative launched during the fourth quarter of 2003. For the nine month period ended September 30, 2004, noninterest expense increased $29.1 million or 16.9% to $201.7 million compared with the same period in 2003 reflecting the same increases caused by the prepayment penalty on the FHLB debt and the impact of the Oakland County initiatives. An analysis of the components of noninterest expense during the three and nine months ended September 30, 2004 and 2003 is summarized in the table below. 22

NONINTEREST EXPENSE Three Months Ended Nine Months Ended September 30, September 30, $ Change in 2004 % Change in 2004 ------------------ ------------------ ----------------- ------------------ (in thousands) 2004 2003 2004 2003 3 Mos 9 Mos 3 Mos 9 Mos ------- ------- -------- -------- ------- ------- ------- ------- Salaries and employee benefits $32,649 $31,036 $ 97,773 $ 92,548 $ 1,613 $ 5,225 5.2% 5.6% Occupancy 4,859 4,328 15,123 13,337 531 1,786 12.3 13.4 Professional services 4,131 4,946 12,340 12,613 (815) (273) (16.5) (2.2) Equipment 3,486 4,060 10,796 12,098 (574) (1,302) (14.1) (10.8) Data processing services 3,192 3,225 10,278 9,599 (33) 679 (1.0) 7.1 Advertising and public relations 2,090 1,395 6,273 4,067 695 2,206 49.8 54.2 Postage and delivery 1,516 1,739 4,934 5,100 (223) (166) (12.8) (3.3) Telephone 1,543 1,169 4,528 3,479 374 1,049 32.0 30.2 Other loan fees 384 1,360 3,144 3,647 (976) (503) (71.8) (13.8) Stationery and supplies 947 911 2,705 2,679 36 26 4.0 1.0 Prepayment penalty on FHLB 17,959 -- 17,959 -- 17,959 17,959 N/M N/M Other, net 6,217 5,431 15,797 13,375 786 2,422 14.5 18.1 ------- ------- -------- -------- ------- ------- Total noninterest expense $78,973 $59,600 $201,650 $172,542 $19,373 $29,108 32.5 16.9 ======= ======= ======== ======== ======= =======

N/M - Not Meaningful Salaries and employee benefits increased due to higher salaries and benefits in Oakland County of $1.2 million and $3.9 million in the three and nine month periods, respectively, resulting from the previously announced Oakland County expansion initiative. Employee benefits increased in both the three and nine month periods due to higher pension, medical and other employee benefits expenses. Normal salary merit increases were offset by a reduction in staffing levels. Citizens had 2,260 full time equivalent employees at September 30, 2004, down from 2,353 at September 30, 2003. Occupancy costs increased in both the three and nine month periods ended September 30, 2004 compared with the same periods of the prior year. Building rent and other occupancy costs increased $0.3 million and $0.5 million for the three and nine month periods, respectively, due to the opening of new branches and two regional hubs in Oakland County. Other occupancy costs increased $0.1 million and $1.0 million in the three and nine month periods, respectively, largely due to higher maintenance, insurance, energy and real estate tax expenses. Professional services expense decreased for the three and nine month periods ended September 30, 2004 due to lower executive recruiting and relocation costs and a decline in costs associated with banking industry consultants, partially offset by higher costs related to new internal control evaluation procedures to comply with Section 404 of the Sarbanes-Oxley Act. Equipment expense decreased and telephone expense increased for the three and nine month periods ended September 30, 2004 due to the reclassification of data transmission costs from equipment expense to telephone expense in connection with a new services contract. Data processing services were unchanged for the three month period and increased during the nine month period ended September 30, 2004 compared with the same periods of the prior year. The increase in the nine month period is due to higher processing costs related to the fourth quarter 2003 implementation of the new trust and investment accounting systems and operations with SEI Investments, and retirement services recordkeeping systems and operations with EPIC Advisors, Inc. These increases were offset in the three month period and were partially offset in the nine month period by lower processing costs on Citizens' core loan and deposit systems. Advertising and public relations expense increased in both the three and nine month periods ended September 30, 2004 compared with the same periods of the prior year. Advertising to support Citizens' Oakland County initiative accounted for $1.3 million and deposit-focused promotions and the new brand introduction accounted for $0.9 million of the nine month period increase. Other loan fee expense decreased $1.0 million and $0.5 million for the three and nine month periods ended September 30, 2004, respectively, compared with the same periods of the prior year. Loan fee expenses decreased due to a lower provision for losses on unfunded loan commitments and lower mortgage loan expenses due to the lower mortgage loan origination volume. Other noninterest expense increased $0.8 million and $2.4 million for the three and nine month periods ended September 30, 2004, respectively, compared with the same periods of the prior year. Contributing to the increases for the three and nine 23 month periods were higher expenses from reconciliation items, including certain tax related items, identified during the current quarter, training and travel expenses and lower deferred loan origination costs, partially offset by lower expenses for other real estate. Service fees are lower both in the quarter and in the nine month period ended September 30, 2004 due to implementation costs associated with Wealth Management's strategic alliances with SEI Investments, EnvestnetPMC, Inc., and EPIC Advisors, Inc. incurred in the third and fourth quarter of 2003. Excluding the effects of the prepayment penalty on FHLB debt, Citizens anticipates that noninterest expense in the fourth quarter will be less than the third quarter level. INCOME TAXES Income tax provision decreased to $0.8 million and $13.3 million in the three and nine months ended September 30, 2004, respectively, compared with $6.7 million and $13.4 million in the same periods in 2003. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 3.8% and 19.2% for the three and nine months ended September 30, 2004, respectively, compared with 25.5% and 21.9% for the same periods of 2003. Income tax provision for the three months ended September 30, 2004 was significantly lower compared to the same period of the prior year due to the sale of the Illinois Bank, as the tax basis on the stock of the bank was greater than the sale price, resulting in a tax loss. The remaining reduction in income tax provision was due to lower pre-tax earnings in the third quarter of 2004 largely as a result of the prepayment penalties on the FHLB debt. LINES OF BUSINESS RESULTS We monitor our financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Our business line results are divided into four major business segments: Commercial Banking, Consumer Banking, Wealth Management and Other. For additional information about each line of business, see Note 20 to the Consolidated Financial Statements of our 2003 Annual Report on Form 10-K and Note 5 to the unaudited Consolidated Financial Statements in this report. A summary of net income by each business line is presented below.

Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2004 2003 2004 2003 ------- ------- ------- ------- Commercial Banking $ 9,590 $ 7,234 $24,432 $ 9,762 Consumer Banking 8,575 11,156 29,378 27,642 Wealth Management 361 153 980 713 Other 1,120 1,062 1,021 9,760 ------- ------- ------- ------- Net income $19,646 $19,605 $55,811 $47,877 ======= ======= ======= =======

COMMERCIAL BANKING The increases in net income in both the three and nine month periods ended September 30, 2004 were attributable to a decrease in the provision for loan losses, partially offset by declines in net interest income and noninterest income and higher noninterest expenses. The significant decline in the loan loss provision was due to lower net charge-offs, largely resulting from a single credit of $11.5 million in the first quarter of 2003, fewer commercial loan risk rating downgrades and improving non-performing asset levels. Net interest income declined in both the three and nine month periods ended September 30, 2004 as a result of lower average commercial loan balances due to lower demand for commercial credit, high repayment activity and continued reduction of exposure on credits not meeting our risk parameters. The decline in loans occurred in most markets with the exception of Oakland County, which experienced strong growth. Noninterest income declined due to lower deposit service charges and cash management fees as certain commercial account relationships were transferred from Commercial Banking to Consumer Banking beginning in the second quarter of 2003, based upon the client's assigned office. Noninterest expense increased due to higher compensation costs as a result of an increase in commercial banking staff, lower deferred origination-related compensation and higher recruiting-related incentives in Oakland County and other markets. CONSUMER BANKING The decrease in net income for the three months ended September 30, 2004 compared to the same period of the prior year was due to a decrease in net interest income and noninterest income, partially offset by a decrease in provision for loan losses. Lower mortgage portfolio loans and mortgage loans held for sale contributed to the decline in net interest income. Noninterest income decreased as a result of decreased mortgage income from lower refinance activity, partially offset by increases in deposit service charges. The decrease in provision for loan losses reflected a higher loss allocation for our 24 wholesale mortgage business in 2003. The increase in net income for the nine months ended September 30, 2004 compared to the same period a year ago was due to decreases in provision for loan losses offset by decreases in net interest income and noninterest income. Noninterest income decreased due to lower mortgage income resulting from lower refinance volumes, partially offset by net gains related to the sale of branch properties and an increase in deposit service charge income as a result of changes in fee structure and some shifted commercial accounts. The decline in the provision for loan losses reflected the lower level of net charge-offs. Net interest income was lower as a result of declines in the mortgage portfolio compared to the same period a year ago. This decline was partially offset by successful home equity campaigns managed through the consumer line of business which resulted in 17.7% growth in the home equity loan portfolio during the nine month period ended September 30, 2004. Noninterest expense declined reflecting the prior year efforts to improve efficiency levels in the branches which were partially offset by the expansion into Oakland County. WEALTH MANAGEMENT The increase in net income for the three month period ended September 30, 2004 was due to an increase in net interest income and a decline in noninterest expense partially offset by lower noninterest income. Net interest income increased due to the internal transfer of loans and deposits to Wealth Management from the Commercial Banking and Consumer Banking lines of business to better align customer relationships. Noninterest income declined due to lower trust and brokerage fees partially offset by a gain on the reorganization of the Golden Oak Funds. Trust fees decreased due to the merger of the Golden Oak Funds and a reduction of a large relationship. Brokerage and investment fees decreased due to a shorter brokerage sales campaign cycle, the IFMG conversion, and staffing changes. Noninterest expense declined due to implementation costs associated with Wealth Management's strategic alliances with SEI Investments, EnvestnetPMC, Inc., and EPIC Advisors, Inc. incurred in 2003 partially offset by higher incentive-based compensation and higher runrate data processing costs related to implementation of the new trust and investment accounting systems and operations with SEI Investments and retirement services recordkeeping systems and operations with EPIC Advisors, Inc.. The increase in net income for the nine month period ended September 30, 2004 was due to increases in net interest income and noninterest income partially offset by an increase in noninterest expense. Net interest income increased due to the internal transfer of loans and deposits to Wealth Management from the Commercial Banking and Consumer Banking lines of business to better align customer relationships. Noninterest income increased due to higher trust fees, brokerage fees, and a gain on the reorganization of the Golden Oak Funds. Trust fees increased due to stronger financial markets and Citizens' sales and sales management processes implemented in the first quarter of 2004, which are focused on relationship management and new business development strategies. The increases in brokerage and investment fees were due to a successful brokerage sales campaign conducted in the second quarter of 2004 in which the Consumer and Wealth Management lines of business collaborated to generate $34 million in brokerage and investment sales and $1.4 million in fee income. Noninterest expense increased due to higher incentive-based compensation and higher runrate data processing costs related to implementation of the new trust and investment accounting systems and operations with SEI Investments and retirement services recordkeeping systems and operations with EPIC Advisors, Inc. partially offset by lower implementation costs associated with Wealth Management's strategic alliances with SEI Investments, EnvestnetPMC, Inc., and EPIC Advisors, Inc. and a net loss related to the settlement of a lawsuit incurred in 2003. OTHER Net income for the three month period ended September 30, 2004 was virtually unchanged compared to the same period of 2003. Included in the third quarter was the pre-tax gain on the sale of the Illinois Bank partially offset by the prepayment penalty associated with the retirement of $235 million of high cost FHLB advances. Net income declined $8.7 million in the nine month period ended September 30, 2004 compared to the same period a year ago due to the loss generated on the sale of investment securities during the second quarter. In addition, higher noninterest expense resulted from increases in employee benefits expense, occupancy related costs, and reconciliation items including certain tax related items. FINANCIAL CONDITION Total assets were $7.659 billion at September 30, 2004, a decrease of $51.6 million or 0.7% compared with December 31, 2003. Total assets decreased due to the sale of the Illinois Bank which had $173.2 million in assets at the date of sale, and declines in both the investment portfolio and mortgage loans held for sale, partially offset by growth in total portfolio loans. Portfolio loans increased $53.7 million or 1.0% compared with year end 2003 as consumer loans and mortgage loans increased while commercial loans declined. Total deposits at September 30, 2004 decreased $174.9 million or 3.2% to $5.267 billion compared with December 31, 2003 largely due to the Illinois Bank sale which had $155.3 million in deposits at the date of sale, and a decline in time deposits reflecting Citizens' less aggressive pricing posture during the low interest rate environment. 25 INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total average investments, including money market investments, comprised 27.1% of average earning assets during the first nine months of 2004 compared with 24.4% for the same period of 2003, a $198 million increase from the prior year average levels. The increase was due to purchases of securities beginning in March 2003, when Citizens implemented an investment portfolio expansion plan to help offset the effect on net interest income of weak loan demand. In accordance with the plan, Citizens purchased approximately $500 million of mortgage backed securities and collateralized mortgage obligations with average lives of three to five years and an average duration of two to four years, resulting in interest spreads of up to 250 basis points over funding sources. The purchases were funded with cash flow from loan repayments, runoff of investments and short- and medium-term borrowings. PORTFOLIO LOANS Portfolio loans increased $55.6 million or 1.1% compared with December 31, 2003 as consumer loans increased while commercial loans declined. Consumer loans, excluding mortgage loans, increased $207.1 million or 11.7% at September 30, 2004 compared with December 31, 2004 due to strong growth in home equity loans. Home equity loans increased $132.4 million or 17.7% in the nine months ended September 30, 2004. The recreational vehicle and marine segments of the indirect loan portfolio also experienced strong growth due to continued emphasis on service and maintaining strong relationships with existing dealers. The home equity and indirect lending growth has been partially offset by declines in direct installment and bankcard loans of $12.0 million and $7.0 million, respectively, since December 31, 2003. Real Estate mortgage loans increased $4.1 million or 1.0% compared to December 31, 2003. The increase in the mortgage portfolio occurred due to slower repayment and refinance activity coupled with Citizens' strategy to sell most new mortgage loan production into the secondary market. Closed mortgage loan volume declined to $125 million in the third quarter of 2004 compared with $444 million in the third quarter of 2003. New mortgage loan production was spurred during the second and third quarters of 2003 by a strong refinance market as a result of the low interest rate environment. Compared with September 30, 2003, mortgage loans increased $9.7 million or 2.0% at September 30, 2004 as a result of decreases in prepayments from refinancing. Commercial loans, including real estate construction loans, decreased $155.6 million or 5.1% at September 30, 2004 compared with December 31, 2003, due to lower demand for commercial credit, high repayment activity, the sale of the Illinois Bank (which equated to $52.9 million at the date of sale) and continued reduction of exposure on credits not meeting Citizens' risk parameters. Excluding the reduction as a result of the sale of the Illinois Bank, commercial loans declined by $5.1 million in the third quarter of 2004 from the second quarter of 2004. This is the second consecutive quarter that the continued strong growth in Michigan's Oakland County market nearly offset the decline in all of Citizens' other markets and represents the lowest overall quarterly reduction since September 2002. Growth in consumer loans is anticipated to continue during the remainder of 2004 led by strong growth in home equity loans and more moderate growth in indirect loans, primarily marine and recreational vehicle loans, consistent with the trend in consumer loan growth over the past twelve months. Mortgage loans are expected to remain flat through year end. Commercial loans are anticipated to flatten during the remainder of 2004 with improvement in new business development led by the Oakland County market offsetting expected reductions in other markets. At September 30, 2004 and 2003, $47.1 million and $65.6 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 were fully amortized in June 2003. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale were $15.7 million at September 30, 2004, down $26.8 million compared with December 31, 2003 and $114.9 million lower compared with September 30, 2003. These balances generally track with the level of originations, as we sell most of our new residential mortgage loan production into the secondary market due to the low interest rate environment. Closed mortgage loan volume declined to $125 million in the third quarter of 2004 compared with $444 million in the third quarter of 2003. New mortgage loan production was spurred during the third quarter of 2003 by a strong refinance market as a result of the low interest rate environment. Average mortgage loans held for sale during the first nine months of 2004 comprised 0.5% of average earning assets compared with 2.6% during the same period in 2003. Mortgage loans held for sale are accounted for on the lower of cost or market basis. 26 PROVISION AND ALLOWANCE FOR LOAN LOSSES A summary of loan loss experience during the three and nine months ended September 30, 2004 and 2003 is provided below.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- (in thousands) 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Allowance for loan losses - beginning of period $ 123,805 $ 123,302 $ 123,545 $ 106,777 Less: Allowance on loans sold with Illinois bank (1,621) -- (1,621) -- Provision for loan losses 4,985 10,300 16,485 54,942 Charge-offs: Commercial 2,698 9,539 11,383 31,249 Commercial real estate 1,763 1,531 4,832 6,807 Small business 518 348 903 885 ----------- ----------- ----------- ----------- Total commercial 4,979 11,418 17,118 38,941 Real estate mortgage 324 213 822 914 Consumer - Direct 1,471 1,628 4,321 5,166 Consumer - Indirect 1,888 1,941 5,409 6,604 ----------- ----------- ----------- ----------- Total charge-offs 8,662 15,200 27,670 51,625 ----------- ----------- ----------- ----------- Recoveries: Commercial 2,315 2,882 6,849 7,029 Commercial real estate 339 595 996 1,683 Small business 29 139 153 594 ----------- ----------- ----------- ----------- Total commercial 2,683 3,616 7,998 9,306 Real estate mortgage 34 27 70 36 Consumer - Direct 342 504 1,340 1,422 Consumer - Indirect 618 716 2,037 2,407 ----------- ----------- ----------- ----------- Total recoveries 3,677 4,863 11,445 13,171 ----------- ----------- ----------- ----------- Net charge-offs 4,985 10,337 16,225 38,454 ----------- ----------- ----------- ----------- Allowance for loan losses - end of period $ 122,184 $ 123,265 $ 122,184 $ 123,265 =========== =========== =========== =========== Portfolio loans outstanding at period end (1) $ 5,303,431 $ 5,228,412 $ 5,303,431 $ 5,228,412 Average portfolio loans outstanding during period (1) 5,267,355 5,182,650 5,244,299 5,258,747 Allowance for loan losses as a percentage of portfolio loans 2.30% 2.36% 2.30% 2.36% Ratio of net charge-offs during period to average portfolio loans (annualized) 0.38 0.80 0.41 0.97 Loan loss coverage (allowance as a multiple of net charge- offs, annualized) 6.1X 3.0x 5.6X 2.4

--------------- (1) Balances exclude mortgage loans held for sale. Net charge-offs declined in the third quarter of 2004 compared with the third quarter of 2003 due primarily to lower net charge-offs in the commercial loan portfolio and, to a lesser extent, lower consumer loan net charge-offs. Net charge-offs declined in the nine month period compared to the same period a year ago due to an $11.5 million charge-off on a single commercial credit in the first quarter of 2003 coupled with a lower level of net charge-offs resulting from improvement in credit quality in the portfolio. Citizens has made an aggressive effort over the last two years to appropriately identify and address criticized and classified assets. The decrease in the provision for loan losses reflects the lower level of net charge-offs, a reduction in nonperforming assets and fewer risk rating downgrades on commercial credits during the quarter. Citizens anticipates both net charge-offs and provision expense to be approximately the same level in the fourth quarter of 2004 as in the third quarter. 27 The allowance for loan losses represents our estimate of potential 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 potential loan losses identified with specific customer relationships and for potential losses believed to be inherent in the loan portfolio that have not been specifically identified. Our evaluation process is inherently subjective as it requires estimates that may be susceptible to significant change and have the potential to materially affect net income. Default frequency, internal risk ratings, expected future cash collections, loss recovery rates, and general economic factors, among other things, are considered in this evaluation, as are the size and diversity of individual large credits. While we continue to enhance our loan loss allocation model and risk rating process, we have not substantively changed our overall approach in the determination of the allowance for loan losses in 2004 from 2003. Our methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, a formula-based risk-allocated allowance for the remainder of the portfolio and an unallocated allowance that reflects our evaluation of a number of other risk factors discussed below. This methodology is discussed in our 2003 Annual Report on Form 10-K. The allowance for loan losses totaled $122.2 million or 2.30% of loans at September 30, 2004, consistent with the December 31, 2003 level of $123.5 million or 2.35% of loans. At September 30, 2004, the allowance allocated to specific commercial and commercial real estate credits was $21.0 million compared with $18.3 million at December 31, 2003. The increase was attributable to a re-evaluation of the underlying collateral values of a number of substandard credits. Criticized and classified credits subject to specific reserves are relatively flat at $52.1 million as of September 30, 2004 compared with $54.0 million at September 30, 2003. The total formula risk-allocated allowance was $80.4 million at September 30, 2004, down from $101.4 million at September 30, 2003. The amount allocated to commercial and commercial real estate loans, including construction loans, decreased to $57.0 million at September 30, 2004 compared with $69.7 million at December 31, 2003. The decrease reflected a lower level of nonperforming assets in these categories as well as the previously mentioned increase in the allowance related to specific identified credits. The risk-allocated allowance for residential real estate loans increased to $6.0 million at September 30, 2004 compared with $4.7 million at December 31, 2003, reflecting a higher loss allocation factor applied to the mortgage portfolio. The risk-allocated allowance for consumer loans, excluding mortgage loans, increased to $17.4 million at September 30, 2004 compared with $14.6 million at December 31, 2003, due to growth in the home equity loan portfolio and reserves established to cover indirect dealer issues. The unallocated allowance increased to $20.8 million at September 30, 2004, compared with $15.7 million at December 31, 2003. The unallocated portion of the allowance is maintained to address the uncertainty relating to factors affecting the determination of potential losses inherent in the loan portfolio that may not have yet manifested themselves in our specific allowances or in the historical loss factors used to determine the formula allowances, such as geographic expansion, the possible imprecision of internal risk-ratings within the portfolios, continued weak general economic and business conditions, uncertainties related to interpreting our internal underwriting guidelines, illegal activities by customers, and changes in the composition of our portfolio. The increase in unallocated allowance resulted from additional uncertainty in high-risk energy-dependent industries such as trucking and tourism and additional uncertainty regarding agricultural businesses. 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 potential credit losses. While we consider the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or loss rates. The methods we use to determine the provision for loan losses and the factors we consider are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2003 Annual Report on Form 10-K. 28 NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual loans, loans with restructured terms and repossessed assets that are mostly real estate related. 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, 2004, December 31, 2003 and September 30, 2003.

NONPERFORMING ASSETS SEPTEMBER 30, December 31, September 30, (in thousands) 2004 2003 2003 ------------- ------------ ------------- Nonperforming Loans Nonaccrual Commercial: Commercial $ 13,491 $ 37,171 $ 51,158 Commercial real estate 12,290 16,385 17,379 Small business 2,916 1,603 1,648 --------- --------- --------- Total commercial 28,697 55,159 70,185 Nonaccrual Consumer: Direct 3,682 3,177 3,291 Indirect 1,158 1,247 1,625 --------- --------- --------- Total consumer 4,840 4,424 4,916 Nonaccrual Mortgage 8,169 9,161 8,177 --------- --------- --------- Total nonaccrual loans 41,706 68,744 83,278 Loans 90 days past due and still accruing 324 345 601 Restructured loans 52 -- -- --------- --------- --------- Total nonperforming loans 42,082 69,089 83,879 Other Repossessed Assets Acquired (ORAA) 10,303 7,943 7,350 --------- --------- --------- Total nonperforming assets $ 52,385 $ 77,032 $ 91,229 ========= ========= ========= Nonperforming assets as a percent of portfolio loans plus ORAA (1) 0.99% 1.47% 1.74% Nonperforming assets as a percent of total assets 0.68 1.00 1.17 Allowance for loan loss as a percent of nonperforming loans 290.35 178.82 146.96 Allowance for loan loss as a percent of nonperforming assets 233.24 160.38 135.12

--------- (1) Portfolio loans exclude mortgage loans held for sale. The level of nonperforming commercial loans at September 30, 2004 continued to decline compared to December 31, 2003 as a result of focused aggressive collection and workout efforts as well as the sale of one of our two largest nonperforming assets and the receipt of a significant cash payment on the other during the first quarter of 2004. These two credits reduced nonperforming assets by $8.4 million. Changes in nonperforming loans are reflected in the allowance for loan losses through specific and risk allocated allowances. As of September 30, 2004, the total allocated allowance for nonaccrual commercial loans was approximately $4.9 million compared with $11.2 million at September 30, 2003. In addition to loans classified as nonperforming, we carefully monitor other credits that are current in terms of principal and interest payments but which we believe may deteriorate in quality if economic conditions change. As of September 30, 2004, such loans amounted to $161.3 million, or 3.1% of total portfolio loans, compared with $189.8 million, or 3.6%, of total portfolio loans as of December 31, 2003. These loans are mostly commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry or geographic location. 29 Some of our nonperforming loans included in the nonperforming loan table above are considered to be impaired. Total loans considered impaired and their related reserve balances at September 30, 2004, December 31, 2003 and September 30, 2003 as well as their effect on interest income for the third quarter of 2004 and 2003 and fourth quarter of 2003 follows:

IMPAIRED LOAN INFORMATION Balances Valuation Reserve ---------------------------------------------- --------------------------------------------- September 30, December 31, September 30, September 30, December 31, September 30, (in thousands) 2004 2003 2003 2004 2003 2003 ------------- ------------ ------------- ------------- ------------ ------------- Balances - September 30, Impaired loans with valuation reserve $ 34,069 $ 36,603 $ 31,887 $ 14,489 $ 12,449 $ 8,438 Impaired loans with no valuation reserve 14,325 35,155 47,303 -- -- -- --------- --------- --------- --------- --------- --------- Total impaired loans $ 48,394 $ 71,758 $ 79,190 $ 14,489 $ 12,449 $ 8,438 ========= ========= ========= ========= ========= ========= Impaired loans on nonaccrual basis $ 28,697 $ 55,159 $ 70,185 $ 5,554 $ 3,913 $ 3,659 Impaired loans on accrual basis 19,697 16,599 9,005 8,935 8,536 4,779 --------- --------- --------- --------- --------- --------- Total impaired loans $ 48,394 $ 71,758 $ 79,190 $ 14,489 $ 12,449 $ 8,438 ========= ========= ========= ========= ========= ========= Average balance for the quarter $ 48,153 $ 75,474 $ 87,786 Interest income recognized for the quarter 223 185 226 Cash collected applied to outstanding principal 478 1,110 876

DEPOSITS Total deposits decreased $174.9 million or 3.2% to $5.267 billion at September 30, 2004 compared with $5.442 billion at December 31, 2003. The decline in deposits occurred largely within time deposits, reflecting Citizens' less aggressive pricing posture during the low interest rate environment. Time deposits declined $354.4 million to $1.606 billion at September 30, 2004 compared with $1.960 billion at December 31, 2003. Total deposits at the Illinois Bank as of August 5, 2004 were $155.3 million. Core deposits, which exclude time deposits, totaled $3.662 billion at September 30, 2004, an increase of $179.5 million or 5.2% compared with December 31, 2003. The increase in core deposits occurred largely as a result of the growth in a new market rate savings product, which has increased $435.9 million since December 31, 2003. Additionally, noninterest bearing deposits have increased $51.4 million since December 31, 2003. Offsetting these increases were declines in interest-bearing checking deposits and savings account deposits. Total core deposits at the Illinois Bank as of August 5, 2004 were $102.8 million. 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, 2004, we had approximately $184 million in brokered deposits, up slightly from $159 million at December 31, 2003. We will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. In addition to brokered deposits, we had approximately $424 million of time deposits greater than $100,000, a decrease of $36 million from December 31, 2003. Time deposits greater than $100,000 consist of commercial, consumer and public fund deposits derived almost exclusively from our local markets. We continue to promote relationship-based core deposit growth and stability through focused marketing efforts and competitive pricing strategies. BORROWED FUNDS Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, other bank borrowings, FHLB advances and Treasury Tax and Loan notes. As of September 30, 2004, short-term borrowed funds totaled $751.5 million, an increase of $119.8 million or 19.0% compared with December 31, 2003. For the nine months ended September 30, 2004, average short-term borrowed funds totaled $630.6 million, an increase of $211.6 million, or 30 50.5% from the same period of 2003. The increased short-term borrowings provided funding to support expansion of the investment portfolio, which commenced in the first quarter of 2003, and partially offset a decrease in average deposits. Long-term debt consists almost entirely of advances from the FHLB to our subsidiary banks, and subordinated notes issued by our holding company parent. Average long-term debt totaled $932.5 million for the first nine months of 2004, an increase of $96.5 million or 11.5% compared with the same period in 2003. The increases resulted from the issuance of $125 million of subordinated debt in the first quarter of 2003, $25 million of junior subordinated debentures in the second quarter of 2003, and increases in FHLB advances. The $125 million of subordinated debt and the $25 million of junior subordinated debentures qualify as Tier II and Tier I capital, respectively, for regulatory risk-based capital purposes and were issued to improve liquidity and risk-based capital ratios. The increase in FHLB advances provided funding to support the expansion of the investment portfolio and the decline in deposits during 2003. For further information on the two subordinated debt issuances, refer to Note 12 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K. New issuance of FHLB debt during the third quarter included (1) a $25 million two year maturity non-amortizing fixed rate advance on July 2, 2004, (2) a $145 million four year maturity amortizing fixed rate advance on August 5, 2004, and (3) a $130 million 4.5 year maturity amortizing fixed rate advance on August 5, 2004. Amortization does not begin until the 24th month after issuance on the $145 million transaction, and does not begin until the 27th month after issuance on the $130 million transaction. None of the three new FHLB debt issuances are subject to conversion, put or call options. Prepayments, amortization and terminations pursuant to put and call exercises exceeded new issuance of FHLB debt by $10 million during the third quarter of 2004. Refer to Note 6 of this quarterly report for further information about long-term debt. CAPITAL RESOURCES We continue to maintain a strong capital position, which supports our current needs and provides a sound foundation to support further expansion. Our regulatory capital ratios are consistently at or above the "well-capitalized" standards and all of our bank subsidiaries have sufficient capital to maintain a well capitalized designation. Our capital ratios as of September 30, 2004, December 31, 2003 and September 30, 2003 are presented below.

CAPITAL RATIOS Regulatory Minimum For "Well SEPTEMBER 30, December 31, September 30, Capitalized" 2004 2003 2003 ------------ ------------- ------------ ------------- Risk based capital: Tier I 6.0% 10.2% 9.8% 9.6% Total capital 10.0 13.6 13.2 13.1 Tier I leverage 5.0 7.7 7.5 7.3

Shareholders' equity at September 30, 2004 was $649.7 million, compared with $635.2 million at December 31, 2003 and $634.1 million as of September 30, 2003. Book value per common share at September 30, 2004, December 31, 2003 and September 30, 2003 was $15.03, $14.69 and $14.67, respectively. We declared and paid cash dividends of $0.285 per share in the third quarter of 2004, the same as we declared and paid in the third quarter of 2003. During the third quarter of 2004, we repurchased a total of 111,000 shares for $3.5 million. Information regarding the Company's share repurchase program is set forth later in this report under Part II, Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds." CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS Our contractual obligations and off-balance sheet arrangements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our 2003 Annual Report on Form 10-K. In the first nine months of 2004, we entered into long term leases on new branch and administrative offices in Oakland County with minimum annual lease commitments of approximately $1.0 million and total lease commitments over the life of the contracts of approximately $12.0 million under the non-cancelable operating leases for these facilities. Except for these new leases and as described elsewhere in this Report on Form 10-Q, there have been no material changes to those obligations or arrangements outside the ordinary course of business during the most recent quarter. 31 LIQUIDITY AND DEBT CAPACITY We monitor and manage our liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. We manage the liquidity of our parent company to pay dividends to shareholders, service debt, invest in subsidiaries and to satisfy other operating requirements. We manage the liquidity of our subsidiary banks to meet client cash flow needs while maintaining funds available for loan and investment opportunities. Our subsidiary banks derive liquidity primarily through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, our subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks where the subsidiary banks are members. The primary sources of liquidity for the parent company are dividends from and returns on investment in its subsidiaries. Each of our banking subsidiaries is subject to dividend limits under the laws of the state in which it is chartered and, as a member bank of the Federal Reserve System, is subject to the dividend limits of the Federal Reserve Board. The Federal Reserve Board allows a member bank to make dividends or other capital distributions in an amount not exceeding the current calendar year's net income, plus retained net income of the preceding two years. Distributions in excess of this limit require prior approval of the Federal Reserve Board. As of October 1, 2004, the banking subsidiaries could distribute to Citizens approximately $20.8 million in dividends without regulatory approval. An additional source of liquidity is the ability of our parent company to borrow funds on both a short-term and long-term basis. Our parent company maintains a $60 million short-term revolving credit facility with three unaffiliated banks. As of September 30, 2004, we had no outstanding balance under this credit facility. The current facility will mature in August 2005 and is expected to be renewed at that time on substantially the same terms. The credit agreement also requires Citizens to maintain certain financial covenants related to asset quality and capital levels. We were in full compliance with all debt covenants as of September 30, 2004. Downgrades in the first quarter of 2003 by FitchRatings and Standard & Poor's Rating Service of our long-term credit rating to BBB from BBB+ due to asset quality deterioration and increased nonperforming assets have not and are not expected to materially affect our liquidity position. Our short-term credit rating remained unchanged at F2 and A-2, respectively. Separately, in the second quarter of 2003 and in the third quarter of 2004, Moody's Investors Service affirmed our outstanding ratings of Baa-1 (long term) and P-2 (short term), after their review for a possible downgrade. We believe that our capital position provides enough financial flexibility to deal with a degree of additional credit deterioration, if such were to occur. Our Oakland County branch expansion plan will pose a challenge to liquidity as both the capital investment and loan growth will require incremental funding. We anticipate that through a combination of wholesale funding and deposit generation from both the new Oakland County branches and the existing branch network, we will be able to fund all aspects of the expansion plan. In addition, the combined effect of the third quarter 2004 sale of the Illinois Bank, the prepayment of FHLB advances and the replacement of the prepaid advance with lower rate borrowings had a neutral impact on liquidity. We also have contingent letter of credit commitments that may impact liquidity. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent our future cash requirements in connection with them. Further information on these commitments is presented in Note 10 to the Consolidated Financial Statements in this report. We have sufficient liquidity and capital resources to meet presently known short-term and long-term cash flow requirements. INTEREST RATE RISK Interest rate risk arises when the repricing structures of our assets and liabilities differ significantly. Interest rate risk can result from a mismatch in the timing of the repricing of assets and liabilities, option risk which can alter the expected timing of repricing of certain assets or liabilities, or basis risk. Basis risk occurs when assets and liabilities reprice at the same time but based on different market rates, and when those market rates change by different amounts. Many assets and liabilities contain embedded options which allow customers, and entities associated with our investments and wholesale funding, the opportunity to prepay loans or securities prior to maturity, or to withdraw or reprice deposits or other funding instruments prior to maturity. Our Asset / Liability Committee (ALCO) monitors asset, liability, and off-balance-sheet portfolios to ensure comprehensive management of interest rate risk. The Asset / Liability management process includes monitoring contractual and expected repricing of assets and liabilities as well as forecasting earnings under different interest rate scenarios and balance sheet structures with the objective of insulating net interest income from large swings attributable to 32 changes in market interest rates. Our static interest rate sensitivity, commonly referred to as repricing "GAP," as of September 30, 2004 and 2003 is illustrated in the table below. 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, 2004 RATE SENSITIVE ASSETS (1) Portfolio loans (2) $ 2,532.0 $ 252.5 $ 434.0 $ 3,218.5 $ 1,777.3 $ 307.6 $ 5,303.4 Mortgage loans held for sale 15.7 -- -- 15.7 -- -- 15.7 Investment securities 135.0 104.7 152.7 392.4 1,008.7 510.5 1,911.6 Short-term investments 1.9 -- -- 1.9 -- -- 1.9 --------- --------- --------- --------- --------- --------- --------- Total $ 2,684.6 $ 357.2 $ 586.7 $ 3,628.5 $ 2,786.0 $ 818.1 $ 7,232.6 ========= ========= ========= ========= ========= ========= ========= RATE SENSITIVE LIABILITIES Deposits (3) $ 1,891.9 $ 223.4 $ 391.6 $ 2,506.9 $ 1,006.5 $ 820.1 $ 4,333.5 Other interest bearing liabilities 778.0 70.0 145.0 993.0 504.1 180.7 1,677.8 --------- --------- --------- --------- --------- --------- --------- Total $ 2,669.9 $ 293.4 $ 536.6 $ 3,499.9 $ 1,510.6 $ 1,000.8 $ 6,011.3 ========= ========= ========= ========= ========= ========= ========= Period GAP (4) $ 14.7 $ 63.8 $ 50.1 $ 128.6 $ 1,275.4 $ (182.7) $ 1,221.3 Cumulative GAP 14.7 78.5 128.6 1,404.0 1,221.3 Cumulative GAP to Total Assets 0.19% 1.03% 1.68% 1.68% 18.33% 15.95% 15.95% Multiple of Rate Sensitive Assets to Liabilities 1.01 1.22 1.09 1.04 1.84 0.82 1.20 SEPTEMBER 30, 2003 RATE SENSITIVE ASSETS (1) Portfolio loans (2) $ 2,607.1 $ 323.1 $ 559.7 $ 3,489.9 $ 1,522.8 $ 215.7 $ 5,228.4 Mortgage loans held for sale 130.6 -- -- 130.6 -- -- 130.6 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

(1) Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff. (2) Balances exclude mortgage loans held for sale. (3) Includes interest bearing savings and demand deposits of $1.490 billion and $906 million in 2004 and 2003, respectively, in the less than one year category, and $1.173 billion and $1.005 billion, respectively in the over one year category, based on historical trends for these noncontractual maturity deposit types, which reflects industry standards. (4) GAP is the excess of rate sensitive assets (liabilities). As shown in the table above, as of September 30, 2004, rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing within one year by $128 million, compared with September 30, 2003 when rate sensitive assets repricing within one year exceeded rate sensitive liabilities within one year by $642 million. 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, 33 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 may, from time-to-time, use derivative contracts to help manage or hedge our exposure to interest rate risk and to market value risk in conjunction with our mortgage banking operations. We currently use interest rate swaps, mortgage loan commitments and forward mortgage loan sales. Interest rate swaps are contracts with a third party (the "counter-party") to exchange interest payment streams based upon an assumed principal amount (the "notional amount"). The notional amount is not advanced from the counter-party. Swap contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair values of the contracts change daily as market interest rates change. Further discussion of derivative instruments is included in Notes 1 and 18 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K and in Note 8 to the Consolidated Financial Statements presented in this report. Holding residential mortgage loans for sale and committing to fund residential mortgage loan applications at specific rates exposes us to market value risk caused by changes in interest rates during the period from rate commitment issuance until sale. To minimize this risk, we enter into mandatory forward commitments to sell residential mortgage loans at the time a rate commitment is issued. These mandatory forward commitments and the related commitments to fund residential mortgage loan applications at specific rates are considered derivatives under SFAS 133. Our practice to hedge our market value risk with mandatory forward commitments has been effective and has not generated any material gains or losses. As of September 30, 2004, we had forward commitments to sell mortgage loans of $34.0 million. We performed simulations as of September 30, 2004 to evaluate the impact of market rate changes on net interest income over the following 12 months assuming limited changes to balance sheet levels over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift along the yield curve) net interest income is expected to be lower by 0.4% and 1.2%, respectively, of what it would be if rates were to remain at September 30, 2004 levels. An immediate 50 basis point parallel decline in market rates is expected to reduce net interest income over the following 12 months by 0.6% of what it would be if rates remain constant over the entire time period at September 30, 2004 levels. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets or liabilities, and the timing of changes in these variables. A flattening of the curve would exacerbate the negative impact on net interest income. Scenarios different from those outlined above, whether different by only timing, level, or a combination of these or other factors, could produce different results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of Citizens' 2003 Annual Report on Form 10-K, except as set forth in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. No changes in the Company's internal control over financial reporting occurred during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 34 PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Total Number of Maximum Number of Shares Purchased as Shares that May Yet Part of Publicly Be Purchased Under Total Number of Average Price Paid Announced Plans or The Plans or Programs Period Shares Purchased Per Share Programs (a) ------ ---------------- ------------------ ------------------ --------------------- July 2004 10,000 31.09 10,000 3,034,800 August 2004 101,000 31.42 101,000 2,933,800 September 2004 -- -- -- 2,933,800 --------- --------- --------- --------- Total 111,000 31.39 111,000 2,933,800 ========= ========= ========= =========

(a) In October 2001, our Board of Directors approved the repurchase of up to 3,000,000 shares of our common stock from time to time in the market and in October 2003, the Board approved the repurchase of an additional 3,000,000 shares. There is no expiration date for the repurchase program. The stock repurchase program announced in October 2001 was completed on August 12, 2004. Citizens repurchased the shares at an overall average price of $28.56. As of September 30, 2004, 2,933,800 shares remain to be purchased under the current program. The purchase of our shares is subject to limitations that may be imposed by applicable securities laws and regulations and the rules of the Nasdaq Stock Market. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and our capital requirements. There can be no assurance that we will repurchase the remaining shares authorized to be repurchased, or that any additional repurchases will be authorized by our Board of Directors. ITEM 6. EXHIBITS 10.19 Citizens Banking Corporation Management Incentive Plan, amended and restated as of January 1, 2004. 10.20 Form of Nonqualified Stock Option Agreement for Nonemployee Directors under the Citizens Banking Corporation Stock Compensation Plan 10.21 Form of Nonqualified Stock Option Agreement for Employees under the Citizens Banking Corporation Stock Compensation Plan 10.22 Form of Restricted Stock Agreement under the Citizens Banking Corporation Stock Compensation Plan 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 35 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 5, 2004 By /s/ Charles D. Christy ---------------- ------------------------------------ Charles D. Christy Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and duly authorized officer) 36 10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------- 10.19 Citizens Banking Corporation Management Incentive Plan, amended and restated as of January 1, 2004. 10.20 Form of Nonqualified Stock Option Agreement for Nonemployee Directors under the Citizens Banking Corporation Stock Compensation Plan 10.21 Form of Nonqualified Stock Option Agreement for Employees under the Citizens Banking Corporation Stock Compensation Plan 10.22 Form of Restricted Stock Agreement under the Citizens Banking Corporation Stock Compensation Plan 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32.1 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 37