CITIZENS BANKING CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the period ended June 30, 2002
-----------------------

or

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

For the transition period from to
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Commission file Number 0-10535
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CITIZENS BANKING CORPORATION
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(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
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(Registrant's telephone number, including area code)

None
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(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
X Yes No
--- ---

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at August 09, 2002
- -------------------------- ------------------------------
Common Stock, No Par Value 44,625,979 Shares

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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 11

Item 3. - Quantitative and Qualitative Disclosures about Market Risk 25

PART II - OTHER INFORMATION

Item 4 - Submission of Matters to a Vote of Security Holders 25

Item 6 - Exhibits and Reports on Form 8-K 25

SIGNATURE 26

2

PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES

- ----------------------------------------------------------------------------------------------
JUNE 30, December 31,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------
(UNAUDITED) (Note 1)

ASSETS
Cash and due from banks $ 180,139 $ 224,416
Money market investments:
Federal funds sold -- 891
Interest-bearing deposits with banks 3,952 3,455
Term federal funds sold 15,000 --
---------- ----------
Total money market investments 18,952 4,346
Securities available-for-sale:
U.S. Treasury and federal agency securities 931,944 739,792
State and municipal securities 451,879 443,956
Other securities 110,682 113,948
---------- ----------
Total investment securities 1,494,505 1,297,696
Mortgage loans held for sale 79,662 150,443
Loans:
Commercial 3,254,365 3,246,380
Real estate construction 202,185 216,041
Real estate mortgage 605,249 821,090
Consumer 1,505,104 1,488,452
---------- ----------
Total loans 5,566,903 5,771,963
Less: Allowance for loan losses (80,447) (80,299)
----------
Net loans 5,486,456 5,691,664
Premises and equipment 125,160 128,805
Goodwill 54,785 54,785
Other intangible assets 24,583 26,191
Other assets 82,786 100,529
----------- ----------
TOTAL ASSETS $7,547,028 $7,678,875
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 872,734 $ 903,900
Interest-bearing 4,993,204 5,061,226
---------- ----------
Total deposits 5,865,938 5,965,126
Federal funds purchased and securities sold
under agreements to repurchase 176,705 233,077
Other short-term borrowings 81,538 81,353
Other liabilities 78,615 72,756
Long-term debt 629,548 629,099
---------- ----------
Total liabilities 6,832,344 6,981,411
Shareholders' Equity:
Preferred stock - No par value -- --
Common stock - No par value 135,729 155,720
Retained earnings 545,410 521,191
Accumulated other comprehensive income 33,545 20,553
---------- ----------
Total shareholders' equity 714,684 697,464
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,547,028 $7,678,875
========== ==========

- ----------------------------------------------------------------------------------------------

See notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES

- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------

INTEREST INCOME
Interest and fees on loans $ 96,825 $126,657 $196,988 $260,477
Interest and dividends on investment securities:
Taxable 14,602 14,534 26,971 31,604
Nontaxable 5,335 5,408 10,719 10,739
Money market investments 231 661 590 998
-------- -------- -------- --------
Total interest income 116,993 147,260 235,268 303,818
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 32,865 54,782 67,435 115,661
Short-term borrowings 904 8,014 1,869 20,060
Long-term debt 7,815 8,039 15,596 16,052
-------- -------- -------- --------
Total interest expense 41,584 70,835 84,900 151,773
-------- -------- -------- --------
NET INTEREST INCOME 75,409 76,425 150,368 152,045
Provision for loan losses 9,400 6,362 14,650 10,411
-------- -------- -------- --------
Net interest income after provision for loan losses 66,009 70,063 135,718 141,634
-------- -------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts 6,515 7,181 13,147 13,884
Trust fees 5,030 5,269 9,888 10,764
Mortgage and other loan income 2,872 4,461 6,897 6,555
Bankcard fees 1,929 3,204 4,687 6,110
Brokerage and investment fees 2,633 2,035 4,683 3,903
Investment securities gains (59) 245 (57) 351
Gain on sale of merchant business 5,400 -- 5,400 --
Gain on securitized mortgages 2,436 3,259 2,436 5,372
Gain on sale of credit card assets --- 2,623 -- 2,623
Other 3,859 3,814 8,260 7,190
-------- -------- -------- --------
Total noninterest income 30,615 32,091 55,341 56,752
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 31,844 31,526 64,044 63,044
Equipment 4,956 5,077 9,814 10,031
Occupancy 4,584 4,453 9,199 9,380
Data processing services 3,250 3,288 6,375 6,463
Professional services 3,354 3,030 6,189 5,412
Bankcard expenses 1,571 2,556 3,653 4,844
Advertising and public relations 1,856 1,632 3,687 3,193
Postage and delivery 1,757 1,924 3,515 3,887
Intangible asset amortization 724 2,531 1,449 5,060
Other 7,625 7,599 14,787 15,013
-------- -------- -------- --------
Total noninterest expense 61,521 63,616 122,712 126,327
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 35,103 38,538 68,347 72,059
Income taxes 9,764 11,390 18,905 21,106
-------- -------- -------- --------
NET INCOME $ 25,339 $ 27,148 $ 49,442 $ 50,953
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.57 $ 0.59 $ 1.10 $ 1.10
Diluted 0.56 0.58 1.09 1.09
CASH DIVIDENDS DECLARED PER SHARE 0.29 0.28 0.56 0.54
AVERAGE SHARES OUTSTANDING:
Basic 44,789 46,388 44,925 46,431
Diluted 45,282 46,789 45,462 46,866

- ------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements

4

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES

- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Income Total
- ----------------------------------------------------------------------------------------------------------------------------

BALANCE - JUNE 30, 2001 $194,293 $492,776 $ 19,607 $706,676
Net income 27,962 27,962
Net unrealized gain on securities available-for-sale,
net of tax effect 18,282 18,282
--------
Total comprehensive income 46,244
Exercise of stock options, net of shares purchased 4,401 4,401
Shares acquired for retirement (23,406) (23,406)
Cash dividends - $0.275 per share (12,725) (12,725)
-------- -------- -------- --------
BALANCE - SEPTEMBER 30, 2001 $175,288 $508,013 $ 37,889 $721,190
Net income 25,742 25,742
Net unrealized loss on securities available-for-sale,
net of tax effect (15,609)
Minimum pension liability (1,727) (17,336)
-------- --------
Total comprehensive income 8,406
Exercise of stock options, net of shares purchased 4,675 4,675
Shares acquired for retirement (24,243) (24,243)
Cash dividends - $0.275 per share (12,564) (12,564)
-------- -------- -------- --------
BALANCE - DECEMBER 31, 2001 $155,720 $521,191 $ 20,553 $697,464
Net income 24,103 24,103
Net unrealized loss on securities available-for-sale,
net of tax effect (4,491) (4,491)
--------
Total comprehensive income 19,612
Exercise of stock options, net of
shares purchased 2,625 2,625
Shares acquired for retirement (7,322) (7,322)
Cash dividends - $0.275 per share (12,405) (12,405)
-------- -------- -------- --------
BALANCE - MARCH 31, 2002 $151,023 $532,889 $ 16,062 $699,974
Net income 25,339 25,339
Net unrealized gain on securities available-for-sale,
net of tax effect 17,483 17,483
--------
Total comprehensive income 42,822
Exercise of stock options, net of shares purchased 3,756 3,756
Shares acquired for retirement (19,198) (19,198)
Net change in deferred compensation, net of tax effect 148 148
Cash dividends - $0.285 per share (12,818) (12,818)
-------- -------- -------- --------
BALANCE - JUNE 30, 2002 $135,729 $545,410 $ 33,545 $714,684
======== ======== ======== ========

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See notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES

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Six Months Ended
June 30,
------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES:
Net income $ 49,442 $ 50,953
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 14,650 10,411
Depreciation 8,167 8,203
Amortization of intangibles 1,449 5,060
Net amortization on investment securities 315 (591)
Investment securities gains (2,379) (5,723)
Loans originated for sale (393,253) (325,628)
Proceeds from loan sales 467,398 227,402
Net gain from loan sales (3,364) (4,047)
Accrued merger related and other charges -- (2,088)
Other 16,766 23,085
--------- ---------
Net cash provided (used) by operating activities 159,191 (12,963)

INVESTING ACTIVITIES:
Net increase in money market investments (14,606) (51,261)
Securities available-for-sale:
Proceeds from sales 65,989 283,106
Proceeds from maturities 117,749 220,711
Purchases (358,496) (362,271)
Net decrease in loans 190,558 406,140
Net increase in premises and equipment (4,522) (2,643)
--------- ---------
Net cash provided by investing activities (3,328) 493,782

FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 20,963 (107,652)
Net decrease in time deposits (120,151) (214,459)
Net decrease in short-term borrowings (56,187) (344,920)
Proceeds from issuance of long-term debt 26,000 150,000
Principal reductions in long-term debt (25,551) (114)
Cash dividends paid (25,223) (24,869)
Net change in deferred compensation, net of tax effect 148 --
Proceeds from stock options exercised 6,381 3,586
Shares acquired for retirement (26,520) (10,842)
--------- ---------
Net cash used by financing activities (200,140) (549,270)
--------- ---------
Net decrease in cash and due from banks (44,277) (68,451)
Cash and due from banks at beginning of period 224,416 318,115
--------- ---------
Cash and due from banks at end of period $ 180,139 $ 249,664
========= =========

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See notes to consolidated financial statements.

6

CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and the instructions for Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. The balance sheet at December 31, 2001 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Citizens' 2001 Annual Report on Form 10-K.

NOTE 2. LINES OF BUSINESS INFORMATION
Citizens is managed along the following business lines: Business Banking,
Consumer Banking, Wealth Management, and Other. Selected lines of business
segment information for the three and six month periods ended June 30, 2002 are
provided below. Prior to January 1, 2002 Citizens managed five lines of
business; Commercial Banking, Retail Banking, Financial Services, F&M and Other.
Beginning in 2002 the F&M line of business was combined into the remaining four
lines of business. In the second quarter of 2002 three of the business lines:
Commercial Banking, Retail Banking and Financial services were renamed to
Business Banking, Consumer Banking and Wealth Management, respectively. The
components of the renamed business lines remained the same. Prior year amounts
have been restated to reflect the current business unit structure and cost
allocation methodology. There are no significant intersegment revenues.

- -----------------------------------------------------------------------------------------------------------------
Business Consumer Wealth
(in thousands) Banking Banking Management Other Total
- -----------------------------------------------------------------------------------------------------------------

EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30,
2002
Net interest income (taxable equivalent) $35,174 $38,687 $ 22 $5,139 $79,022
Provision for loan losses 7,345 2,732 -- (677) 9,400
------- ------- ------ ------ -------
Net interest income after provision 27,829 35,955 22 5,816 69,622
Noninterest income 4,374 17,957 6,359 1,925 30,615
Noninterest expense 17,935 37,004 4,511 2,071 61,521
------- ------- ------ ------ -------
Income (loss) before income taxes 14,268 16,908 1,870 5,670 38,716
Income tax expense (taxable equivalent) 4,995 5,909 654 1,819 13,377
------- ------- ------ ------ -------
Net income (loss) $ 9,273 $10,999 $1,216 $3,851 $25,339
======= ======= ====== ====== =======
Average Assets (in millions) $ 3,398 $ 2,682 $ 4 $1,449 $ 7,533
=================================================================================================================
EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30,
2001
Net interest income (taxable equivalent) $35,132 $43,147 $ 393 $1,463 $80,135
Provision for loan losses 4,286 1,942 -- 134 6,362
------- ------- ------ ------ -------
Net interest income after provision 30,846 41,205 393 1,329 73,773
Noninterest income 4,014 16,992 6,684 4,401 32,091
Noninterest expense 16,957 36,812 4,792 5,055 63,616
------- ------- ------ ------ -------
Income (loss) before income taxes 17,903 21,385 2,285 675 42,248
Income tax expense (taxable equivalent) 6,267 7,484 800 549 15,100
------- ------- ------ ------ -------
Net income (loss) $11,636 $13,901 $1,485 $ 126 $27,148
======= ======= ====== ====== =======
Average Assets (in millions) $ 3,535 $ 3,442 $ 5 $ 996 $ 7,977
=================================================================================================================

7

- ------------------------------------------------------------------------------------------------------------------
Business Consumer Wealth
(in thousands) Banking Banking Management Other Total
- ------------------------------------------------------------------------------------------------------------------

EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 2002
Net interest income (taxable equivalent) $69,679 $77,617 $ 239 $10,086 $157,621
Provision for loan losses 10,436 5,475 -- (1,261) 14,650
------- ------- ------- ------- --------
Net interest income after provision 59,243 72,142 239 11,347 142,971
Noninterest income 8,727 31,617 12,259 2,738 55,341
Noninterest expense 34,507 71,605 8,655 7,945 122,712
------- ------- ------- ------- --------
Income (loss) before income taxes 33,463 32,154 3,843 6,140 75,600
Income tax expense (taxable equivalent) 11,714 11,245 1,345 1,854 26,158
------- ------- ------- ------- --------
Net income (loss) $21,749 $20,909 $ 2,498 $ 4,286 $ 49,442
======= ======= ======= ======= ========
Average Assets (in millions) $ 3,398 $ 2,755 $ 5 $ 1,391 $7,549
==================================================================================================================

EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 2001
Net interest income (taxable equivalent) $70,180 $87,679 $ 728 $ 882 $159,469
Provision for loan losses 6,079 4,663 -- (331) 10,411
------- ------- ------- ------- --------
Net interest income after provision 64,101 83,016 728 1,213 149,058
Noninterest income 7,975 29,352 13,006 6,419 56,752
Noninterest expense 33,610 72,613 8,929 11,175 126,327
------- ------- ------- ------- --------
Income (loss) before income taxes 38,466 39,755 4,805 (3,543) 79,483
Income tax expense (taxable equivalent) 13,466 13,914 1,682 (532) 28,530
------- ------- ------- ------- --------
Net income (loss) $25,000 $25,841 $ 3,123 $(3,011) $ 50,953
======= ======= ======= ======= ========
Average Assets (in millions) $ 3,539 $ 3,406 $ 4 $ 1,170 $ 8,120
==================================================================================================================

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

- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------

NUMERATOR:
Basic and dilutive earnings per share -- net income
available to common shareholders $25,339 $27,148 $49,442 $50,953
======= ======= ======= =======
DENOMINATOR:
Basic earnings per share -- weighted average
shares 44,789 46,388 44,925 46,431

Effect of dilutive securities -- potential conversion
of employee stock options 493 401 537 435
------- ------- ------- -------
Diluted earnings per share -- adjusted weighted-average
shares and assumed conversions 45,282 46,789 45,462 46,866
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.57 $ 0.59 $ 1.10 $ 1.10
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.58 $ 1.09 $ 1.09
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------

During the second quarter of 2002, employees exercised stock options to acquire
180,943 shares at an average exercise price of $20.76 per share.

8

NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002 Citizens Banking Corporation adopted SFAS No. 142 which
changed the accounting for intangible assets. The effect of this statement was
to eliminate amortization of indefinite life intangibles (i.e. goodwill)
beginning January 1, 2002. The following table reflects the reconciliation of
reported net earnings and earnings per share to the amounts adjusted for the
exclusion of goodwill amortization.

- ------------------------------------------------------------------------------------------------------------------
For the Year Ended Three Months Ended Six Months Ended
December 31, 2001 June 30, 2001 June 30, 2001
--------------------- ------------------- -----------------
Net Earnings Net Earnings Net Earnings
(in thousands, except per share amounts) Income Per Share Income Per Share Income Per Share
- ------------------------------------------------------------------------------------------------------------------

Diluted earnings per common share
computation:
Net income/diluted EPS as $104,657 $2.25 $27,148 $0.58 $50,953 $1.09
reported
Add back: Goodwill amortization,
net of tax effect 5,545 0.12 1,399 0.03 2,775 0.06
-------- ----- ------- ----- ------- -----
Adjusted net income/diluted EPS $110,202 $2.37 $28,547 $0.61 $53,728 $1.15
======== ===== ======= ===== ======= =====
- ------------------------------------------------------------------------------------------------------------------

SFAS No. 142 also requires that goodwill be tested for impairment at least
annually. As of June 30, 2002 Citizens has completed it's transitional
impairment testing and no impairment under SFAS No. 142 was identified.

Goodwill at June 30, 2002 was allocated to Citizens' lines of business as
follows:

JUNE 30,
(in thousands) 2002
- ------------------------------------------------

Business Banking $23,982
Consumer Banking 29,002
Wealth Management 1,801
Other --
-------
Total Goodwill $54,785
=======
================================================

No changes in the carrying amount of goodwill have been recorded during the six
months ended June 30, 2002.

Citizens' other intangible assets as of June 30, 2002 and 2001 are shown in the
table below.

- -----------------------------------------------------------------------
JUNE 30, June 30,
(in thousands) 2002 2001
- -----------------------------------------------------------------------

Core deposit intangibles $28,989 $28,989
Accumulated amortization 7,710 4,811
------- -------
Net core deposit intangibles 21,279 24,178
Minimum pension liability 3,304 --
------- -------
Total other intangibles $24,583 $24,178
======= =======
======================================================================

The estimated annual amortization expense for core deposit intangibles for each
of the next five years is $2.9 million. As part of adopting SFAS No. 142
Citizens has had no material reclassifications or adjustments to the useful
lives of finite-lived (core deposit) intangible assets.

9

NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the three and six month
periods are presented below.

- ----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------

Net unrealized gains (losses) on investment
securities available for sale:
Balance at beginning of period $16,062 $25,313 $20,553 $11,738
Net change in unrealized gains (losses), net of tax 17,483 (5,706) 12,992 7,869
------- ------- ------- -------
Accumulated other comprehensive income, net of tax $33,545 $19,607 $33,545 $19,607
======= ======= ======= =======
====================================================================================================

NOTE 6. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.

10

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

11

INTRODUCTION
The following is a review of Citizens Banking Corporation's ("Citizens")
performance during the three and six months ended June 30, 2002. This discussion
should be read in conjunction with the accompanying unaudited financial
statements and notes thereto appearing on pages 3 through 10 of this report and
Citizens' 2001 Annual Report on Form 10-K. A quarterly summary of selected
financial data for the five-quarter period ended June 30, 2002 is presented in
the table on page 11 of this report.

EARNINGS SUMMARY
Citizens earned net income of $25,339,000 for the three months ended June 30,
2002, or $0.56 per share, compared with net income of $27,148,000, or $0.58 per
share, for the same quarter of 2001. Returns on average assets and average
equity for the quarter were 1.35% and 14.48%, respectively, compared with 1.37%
and 15.56%, respectively, in 2001. For the first six months of 2002, net income
was $49,442,000 or $1.09 per share, compared to $50,953,000 or $1.09 per share
for the same period in 2001. Return on average assets and average equity during
the first six months of 2002 were 1.32% and 14.22%, respectively, compared with
1.27% and 14.81%, respectively, in 2001.

Net income for the three and six months ended June 30, 2002 declined from the
comparable periods in 2001 due to higher provisions for loan losses and
decreased net interest income and noninterest income, which were partially
offset by lower noninterest expenses and income taxes. The decline in net
interest income resulted from a lower level of earning assets partially offset
by an improvement in the net interest margin due to lower funding costs.
Noninterest income decreased in the three and six month periods ended June 30,
2002 over the comparable periods in 2001 primarily due to lower bankcard fees as
a result of the second quarter 2002 sale of the merchant services business and
the second quarter 2001 sale of the credit card portfolio. Noninterest expenses
decreased for both the three and six month periods as a result of lower
intangible asset amortization due to adoption of SFAS No. 142 and lower bankcard
expenses as a result of the previously mentioned sales of the merchant services
business and the credit card portfolio.

LINES OF BUSINESS REPORTING
Citizens has four major business segments: Business Banking, Consumer Banking,
Wealth Management and Other. For more information about each line of business,
see Note 18 to Citizens' 2001 Annual Report on Form 10-K and Note 2 of this
Quarterly Report on Form 10-Q. A summary of net income by each business line is
presented below.

- ----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------

Business Banking $ 9,273 $11,636 $21,749 $25,000
Consumer Banking 10,999 13,901 20,909 25,841
Wealth Management 1,216 1,485 2,498 3,123
Other 3,851 126 4,286 (3,011)
------- ------- ------- -------
Net income $25,339 $27,148 $49,442 $50,953
======= ======= ======= =======
====================================================================================================

Business Banking net income declined in the three and six months ended June 30,
2002 compared to the same periods in the prior year due primarily to higher loan
loss provisions and, to a lessor extent, increased operating expenses. Higher
loan loss provisions were attributable to increased charge-offs and
nonperforming loans in the commercial portfolio. Net interest income remained
relatively flat in both periods as average loan balances declined slightly while
the net interest spread improved. Noninterest income increased in both the three
and six month periods due in large part to higher deposit service charges.

The decrease in Consumer Banking net income for the three and six month periods
ended June 30, 2002 versus the comparable periods of the prior year was
primarily due to lower net interest income and higher provisions for loan
losses. The decrease in net interest income was due to a decline in average loan
balances and narrower margin on deposits. Loan balances declined due to the sale
of new mortgage loan production, the current and prior year securitization of
portfolio mortgage loans, the June 2001 sale of the Michigan credit card
portfolio and a decline in indirect loans. Higher loan loss provisions were
attributable to increased charge-offs in the direct and indirect loan
portfolios.

Wealth Management net income declined in both the three and six month periods
due in part to lower trust fees. Trust fees decreased due to a lower level of
assets under administration resulting primarily from weak equity markets.

The increase in net income in the Other category is the result of higher net
interest income and reduced operating expenses. Higher net interest income is
the result of the lower interest rate environment and the balance sheet
restructuring initiatives begun in 2001. Reduced operating expenses are
primarily due to the elimination of goodwill amortization which totaled $1.8

12

million and $3.6 million for the three and six month periods ended June 30,
2001, respectively. See Note 4 for additional information.

NET INTEREST INCOME
Tax equivalent net interest income decreased to $79.0 million in the second
quarter of 2002 from $80.1 million in the comparable period in 2001. For the six
months ended June 30, 2002 tax equivalent net interest income decreased 1.2% to
$157.6 million from $159.5 million for the same period in 2001. A lower level of
earning assets partially offset by an improved net interest margin, led to the
decline. An analysis of how changes in average balances ("volume") and market
rates of interest ("rates") have effected net interest income appears in the
table below. Detailed analyses of net interest income, with average balances and
related interest rates for the three and six months ended June 30, 2002 and 2001
are presented on pages 14 and 15.

- ----------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2002 Compared with 2001
--------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
Increase(Decrease) (Increase(Decrease)
Due to Change in Due to Change in
Net --------------------- Net ---------------------
(in thousands) Change(1) Rate(2) Volume(2) Change(1) Rate(2) Volume(2)
- ----------------------------------------------------------------------------------------------------

INTEREST INCOME:
Money market investments $ (430) $ (383) $ (47) $ (408) $ (868) $ 460
Investment securities:
Taxable 68 (1,740) 1,808 (4,633) (3,597) (1,036)
Tax-exempt (73) (123) 50 (20) (222) 202
Mortgage loans held for sale (367) (321) (46) 1,288 (335) 1,623
Loans:
Commercial (17,424) (14,881) (2,543) (37,676) (32,306) (5,370)
Real estate (6,836) (841) (5,995) (15,706) (2,349) (13,357)
Consumer (5,205) (3,629) (1,576) (11,395) (7,716) (3,679)
-------- ------- ------- -------- -------- --------
Total (30,267) (21,918) (8,349) (68,550) (47,393) (21,157)
-------- ------- ------- -------- -------- --------
INTEREST EXPENSE
Deposits:
Demand 1,226 (666) 1,892 3,133 (666) 3,799
Savings (5,533) (4,452) (1,081) (13,925) (11,092) (2,833)
Time (17,610) (12,746) (4,864) (37,434) (26,304) (11,130)
Short-term borrowings (7,110) (3,618) (3,492) (18,191) (9,223) (8,968)
Long-term debt (224) (1,073) 849 (456) (2,525) 2,069
-------- ------- ------- -------- -------- --------
Total (29,251) (22,555) (6,696) (66,873) (49,810) (17,063)
-------- ------- ------- -------- -------- --------
NET INTEREST INCOME $ (1,016) $ 637 $(1,653) $ (1,677) $ 2,417 $ (4,094)
======== ======= ======= ======== ======== ========
====================================================================================================

(1) Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.

(2) The change in interest due to both rate and volume are allocated between
the factors in proportion to the relationship of the absolute amount of the
change in each.

For the three and six month periods ended June 30, 2002, net unfavorable volume
and net favorable rate related variances in net interest income resulted in
decreases in net interest income of $1,016,000 and $1,677,000, respectively, as
compared to the same periods in 2001. Yields on earning assets for the three and
six month periods ended June 30, 2002 declined to 6.80% and 6.86%, respectively,
from 8.04% and 8.18%, for the same periods in the prior year. The cost of
interest-bearing liabilities for the three and six month periods ended June 30,
2002 decreased to 2.83% and 2.90%, respectively, from 4.50% and 4.74%, for the
same periods in 2001. Lower yields on earning assets were more than offset by
decreased rates on interest-bearing liabilities. Lower loan volumes were
partially offset by decreased levels of deposits and short-term borrowings.
Decreased funding costs resulted from a decline in borrowed funds, a shift in
deposit accounts from higher cost savings and time deposits to lower cost demand
deposits, and the lower interest rate environment.

Net interest margin, the difference between yields earned on earning assets
compared to the rates paid on supporting funds, was 4.45% for both the second
quarter and first six months of 2002, an increase of 19 and 27 basis points,
respectively, over the same periods in 2001. The improvement in net interest
margin is a result of lower funding costs due to the current interest rate
environment and the balance sheet restructuring efforts initiated in 2001.
Management continually monitors Citizens' balance sheet to insulate net interest
income from significant swings caused by interest rate volatility. Citizens'
policies in this regard are further discussed in "Interest Rate Risk".

13

- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2002 2001
------------------------------------ -----------------------------------------
Three Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- -----------------------------------------------------------------------------------------------------------------------------------

EARNING ASSETS
Money market investments:
Federal funds sold $ 24,255 $ 103 1.68% $ 28,699 $ 346 4.78%
Other 30,365 128 1.69 30,384 315 4.15
Investment securities(3):
Taxable 1,001,223 14,602 5.83 884,114 14,534 6.58
Tax-exempt 418,178 5,335 7.85 414,254 5,408 8.03

Mortgage loans held for sale 99,097 1,864 7.52 101,237 2,231 8.81

Loans:
Commercial 3,348,395 52,572 6.39 3,491,726 69,996 8.13
Real estate 702,178 12,701 7.23 1,031,758 19,537 7.56
Direct consumer 830,479 16,243 7.84 851,823 19,833 9.34
Indirect consumer 654,580 13,445 8.24 691,980 15,060 8.73
---------- -------- ---------- --------
Total earning assets(3) 7,108,750 116,993 6.80 7,525,975 147,260 8.04

NONEARNING ASSETS
Cash and due from banks 172,645 191,927
Bank premises and equipment 126,531 133,003
Investment security fair value adjustment 41,128 30,615
Other nonearning assets 163,771 176,190
Allowance for loan losses (80,246) (81,070)
---------- ----------
Total assets $7,532,579 $7,976,640
========== ==========

INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 1,115,440 4,520 1.63 668,939 3,294 1.98
Savings deposits 1,350,890 3,953 1.17 1,497,909 9,486 2.54
Time deposits 2,581,794 24,392 3.79 2,968,206 42,002 5.68
Short-term borrowings 213,653 904 1.69 614,617 8,014 5.21
Long-term debt 629,671 7,815 4.98 566,075 8,039 5.70
---------- -------- ---------- --------
Total interest-bearing liabilities 5,891,448 41,584 2.83 6,315,746 70,835 4.50
-------- --------

NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 851,867 871,553
Other liabilities 87,341 89,463
Shareholders' equity 701,923 699,878
---------- ----------
Total liabilities and shareholders' equity $7,532,579 $7,976,640
========== ==========

NET INTEREST INCOME $ 75,409 $ 76,425
======== ========
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.45% 4.26%
- -----------------------------------------------------------------------------------------------------------------------------------

(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 $3,613,000 and $3,710,000 for
the three months ended June 30, 2002 and 2001, respectively, based on a tax
rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.

14

- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2002 2001
------------------------------------- -------------------------------------
Six Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- -----------------------------------------------------------------------------------------------------------------------------------

EARNING ASSETS
Money market investments:
Federal funds sold $ 46,080 $ 387 1.67% $ 25,568 $ 632 4.91%
Other 24,183 203 1.70 15,827 366 4.67
Investment securities(3):
Taxable 922,378 26,971 5.85 954,525 31,604 6.62
Tax-exempt 418,899 10,719 7.87 411,083 10,739 8.04

Mortgage loans held for sale 123,007 4,576 7.44 80,060 3,288 8.21

Loans:
Commercial 3,344,717 105,861 6.47 3,491,399 143,537 8.39
Real estate 754,483 26,972 7.15 1,124,711 42,678 7.58
Direct consumer 823,849 32,628 7.99 853,292 40,524 9.57
Indirect consumer 655,852 26,951 8.29 699,073 30,450 8.78
---------- -------- ---------- --------
Total earning assets(3) 7,113,448 235,268 6.86 7,655,538 303,818 8.18

NONEARNING ASSETS
Cash and due from banks 179,963 199,782
Bank premises and equipment 127,651 134,266
Investment security fair value adjustment 40,072 30,245
Other nonearning assets 168,008 180,613
Allowance for loan losses (80,588) (80,960)
---------- ----------
Total assets $7,548,554 $8,119,484
========== ==========

INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 1,092,268 8,659 1.60 620,400 5,526 1.80
Savings deposits 1,359,772 7,963 1.18 1,542,476 21,888 2.86
Time deposits 2,606,745 50,813 3.93 3,037,908 88,247 5.86
Short-term borrowings 222,798 1,869 1.69 707,000 20,060 5.73
Long-term debt 629,039 15,596 5.00 552,397 16,052 5.86
------- -------- ---------- --------
Total interest-bearing liabilities 5,910,622 84,900 2.90 6,460,181 151,773 4.74
-------- --------

NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 852,980 879,553
Other liabilities 83,687 85,580
Shareholders' equity 701,265 694,170
---------- ----------
Total liabilities and shareholders' equity $7,548,554 $8,119,484
========== ==========

NET INTEREST INCOME $150,368 $152,045
======== ========
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.45% 4.18%
- -----------------------------------------------------------------------------------------------------------------------------------

(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 $7,253,000 and $7,424,000 for
the six months ended June 30, 2002 and 2001, respectively, based on a tax
rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.

15

PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge against income and a
corresponding increase in the allowance for loan losses. The provision for loan
losses was $9,400,000 in the second quarter of 2002, an increase of $3,038,000
over the same period in 2001. Net charge-offs were 0.68% of average loans in the
second quarter of 2002, up from 0.36% in the same period a year ago. The
increase in charge-offs occurred primarily in the commercial loan portfolio. A
summary of loan loss experience during the three and six months ended June 30,
2002 and 2001 is provided below.

- -----------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------

Allowance for loan losses - beginning of period $ 80,425 $ 80,470 $ 80,299 $ 80,070
Charge-offs (10,963) (7,407) (17,695) (12,722)
Recoveries 1,585 1,926 3,193 3,592
---------- ---------- ---------- ----------
Net charge-offs (9,378) (5,481) (14,502) (9,130)
Provision for loan losses 9,400 6,362 14,650 10,411
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 80,447 $ 81,351 $ 80,447 $ 81,351
========== ========== ========== ==========

Loans outstanding at period end(1) $5,566,903 $6,008,009 $5,566,903 $6,008,009
Average loans outstanding during period(1) 5,535,632 6,067,286 5,578,901 6,168,475

Allowance for loan losses as a percentage of
loans outstanding at period end 1.45% 1.35 1.45% 1.35%
Ratio of net charge-offs during period to average
loans outstanding (annualized) 0.68 0.36 0.52 0.29
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 2.1x 3.7 2.8x 4.5x
- -----------------------------------------------------------------------------------------------------------------------------------

(1) Loans outstanding and average loans outstanding excludes loans held for
sale.

Citizens maintains an allowance for credit losses to absorb losses inherent in
the loan portfolios. The allowance is based on a regular, quarterly assessment
of the probable losses inherent in the loan portfolios. The allowance is
increased by the provision charged to income and reduced by the amount
charged-off, net of recoveries. Citizens' methodology for measuring the adequacy
of the allowance relies on several key elements, which include specific
allowances for identified problem loans, allowance by formula and an unallocated
allowance.

Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate it is probable that a loss has been or will be incurred. The
specific credit allocations are based on a regular analysis of all commercial
and commercial mortgage loans over a fixed dollar amount where the internal
credit rating is at or below a predetermined classification. The allowance
amount is determined by analyzing the financial condition, collateral value and
other qualitative factors as well as by a method prescribed by SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan".

The formula allowance is calculated by applying loss factors to outstanding
loans (excluding specifically identified credits) based on loan type, accrual
status and internal risk grade of such loans and pools of loans. Minimum loss
factors for criticized loan categories are consistent with regulatory agency
factors. Loss factors for non-criticized loan categories are determined based on
historical (generally three-year) averages adjusted quarterly for recent loss
experience in the specific portfolios. In addition, adjustments are made to any
loss factor used in the computation of the formula allowance in the event that,
in management's judgment, significant factors which affect the collectibility of
the portfolio as of the valuation date, are not reflected in the loss factors.

The unallocated portion of the allowance is determined based upon management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the specific and formula allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific credits. The
conditions evaluated in connection with the unallocated allowance include
general economic and business conditions in Citizens' key lending markets, the
level and composition of nonperforming loans, underwriting standards within
specific portfolio segments, specific industry conditions within portfolio
segments, collateral values, loan

16

volumes and concentrations, regulatory examination results, internal credit
examination results and other factors. This determination inherently involves a
higher degree of uncertainty and considers current risk factors that may not
have yet manifested themselves in Citizens' specific allowances or in the
historical loss factors used to determine the formula allowances. The
unallocated allowance was $6.1 million and $18.1 million as of June 30, 2002 and
December 31, 2001, respectively.

Citizens maintains formal policies and procedures to monitor and control credit
risk. Citizens' loan portfolio has no significant concentrations in any one
industry nor any exposure to foreign loans. Citizens has generally not extended
credit to finance highly leveraged transactions nor does it intend to do so in
the future.

Based on present information, management believes the allowance for loan losses
is adequate to meet known risks in the loan portfolio. Employment levels and
other economic conditions in Citizens' local markets may have a significant
impact on the level of credit losses. Management has identified and devotes
appropriate attention to credits that may not be performing as well as expected.
Nonperforming loans are further discussed in the section entitled "Nonperforming
Assets."

NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
and six months of 2002 and 2001 follows:

- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Percent
Change in 2002
Three Months Ended Six Months Ended ----------------------
June 30, June 30, Three Six
(in thousands) 2002 2001 2002 2001 Months Months
- ----------------------------------------------------------------------------------------------------------------------------

Service charges on deposit accounts $ 6,515 $ 7,181 $13,147 $13,884 (9.3)% (5.3)%
Trust fees 5,030 5,269 9,888 10,764 (4.5) (8.1)
Mortgage and other loan income 2,872 4,461 6,897 6,555 (35.6) 5.2
Brokerage and investment fees 2,633 2,035 4,683 3,903 29.4 20.0
Bankcard fees 1,929 3,204 4,687 6,110 (39.8) (23.3)
ATM network user fees 932 880 1,684 1,681 5.9 0.2
Cash management services 660 697 1,376 1,341 (5.3) 2.6
Other, net 2,267 2,237 5,200 4,168 1.3 24.8
------- ------- ------- -------
Noninterest income before gains on sales 22,838 25,964 47,562 48,406 (12.0) (1.7)
Investment securities gains (59) 245 (57) 351 (1) (1)
Gain on sale of merchant business 5,400 --- 5,400 --- (1) (1)
Gain on sale of securitized mortgages 2,436 3,259 2,436 5,372 (1) (1)
Gain on sale of credit card assets --- 2,623 --- 2,623 (1) (1)
------- ------- ------- -------
Total noninterest income $30,615 $32,091 $55,341 $56,752 (4.6) (2.5)
======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------

(1) Not Meaningful

Noninterest income for the second quarter of 2002, before gains on sales,
decreased $3,126,000, or 12.0% over the same period of 2001. Bankcard fees were
down $1,275,000 or 39.8% due to the sale of the merchant services business in
the second quarter of 2002 and sale of the credit card portfolio during 2001.
Mortgage and other loan income declined $1,589,000 or 35.6% from the second
quarter a year ago due to narrower gains on sales of new loan production and
related servicing rights. Service charges on deposit accounts decreased $606,000
or 9.3% in the second quarter from the same period in 2001 due to a decline in
overdraft fees. Trust fees were down $239,000 or 4.5% reflecting the lower value
of managed assets primarily due to weak equity markets. Brokerage and investment
fees increased $598,000 or 29.4% over the same period of 2001 due to higher
retail sales of fixed annuities. Also during the second quarter of 2002,
Citizens realized gains of $2.4 million on the sale of securitized mortgages and
$5.4 million on the sale of the merchant services business. During the second
quarter of the prior year Citizens recognized gains of $3.3 million on the sale
of securitized mortgages and $2.6 million on the sale of the credit card
portfolio.

For the six months ended June 30, 2002, noninterest income, before gains on
sales, decreased $844,000 or 1.7% from the same period a year ago. The decline
was largely due to a decrease in bankcard fees of $1,423,000 or 23.3% resulting
from the aforementioned sales of the merchant services business in the second
quarter of 2002 and the credit card portfolio in the second quarter of the prior
year. In addition, trust fees declined $876,000 or 8.1% due primarily to weak
equity markets, and

17

deposit service charges decreased $737,000 or 5.3% due to
lower overdraft fees. Brokerage and investment fees increased $780,000 or 20%
primarily from annuity sales and other income increased $1,032,000 or 24.8% due
to higher revenue from check orders, title insurance fees and other sources.

NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and six months ended
June 30, 2002 and 2001 are summarized in the table below.

- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Change in 2002
Three Months Ended Six Months Ended ----------------------
June 30, June 30, Three Six
(in thousands) 2002 2001 2002 2001 Months Months
- -----------------------------------------------------------------------------------------------------------------------------------

Salaries and employee benefits $31,844 $31,526 $ 64,044 $ 63,044 1.0% 1.6%
Equipment 4,956 5,077 9,814 10,031 (2.4) (2.2)
Occupancy 4,584 4,453 9,199 9,380 2.9 (1.9)
Data processing services 3,250 3,288 6,375 6,463 (1.2) (1.4)
Professional services 3,354 3,030 6,189 5,412 10.7 14.4
Bankcard expenses 1,571 2,556 3,653 4,844 (38.5) (24.6)
Advertising and public relations 1,856 1,632 3,687 3,193 13.7 15.5
Postage and delivery 1,757 1,924 3,515 3,887 (8.7) (9.6)
Telephone 1,459 1,440 2,835 3,015 1.3 (6.0)
Stationery and supplies 1,036 1,060 2,114 2,251 (2.3) (6.1)
Intangible asset amortization 724 2,531 1,449 5,060 (71.4) (71.4)
Other, net 5,130 5,099 9,838 9,747 0.6 0.9
------- ------- -------- --------
Total noninterest expense $61,521 $63,616 $122,712 $126,327 (3.3) (2.9)
======= ======= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------

For the quarter noninterest expense decreased $2,095,000, or 3.3% from the
second quarter 2001. Intangible asset amortization declined $1,807,000, or 71.4%
from the same quarter of the prior year primarily due to the adoption of SFAS
No. 142 that eliminated goodwill amortization as an operating expense. Bankcard
expenses declined by $985,000 or 38.5% as a result of the sale of the credit
card portfolio during the second quarter of 2001 and the second quarter 2002
sale of the merchant services business. In addition, operating expenses for data
processing, postage and delivery, and stationery and supplies declined due to
improved pricing from new or renegotiated contracts. Professional service
expenses increased 10.7% in the second quarter 2002 over the comparable period
last year due to higher loan collection and consulting costs. Citizens has
engaged banking industry consultants to help analyze the profitability and mix
of its consumer, business banking and wealth management businesses. As a result
of this review which will continue throughout 2002, Citizens anticipates future
improvement in customer service levels, lower operating expenses, increased
revenue generation capacity, improved credit quality and enhanced risk
management techniques. However, in the near term this review will result in
higher operating expenses as actions are taken to implement these improvements.
Advertising and public relations expense increased 13.7% over the same period a
year ago due to the introduction of a new marketing campaign in February 2002 to
promote Citizens deposit services and loan products. For the six months ended
June 30, 2002, noninterest expenses decreased 2.9% from the same period of the
prior year due primarily to the same factors.

INCOME TAXES
Income tax expense was $9.8 million in the second quarter of 2002, a decrease of
14.3% over the same period last year. For the six months ended June 30, 2002,
income tax expense was $18.9 million, a decrease of 10.4% over the same period
in 2001. Lower pre-tax earnings and the change in goodwill amortization
accounted for the decrease for the three month period ended June 30, 2002, as
compared to the same period in the prior year. The same factors and a recent tax
law change resulting in a $342,000 nonrecurring tax benefit accounted for the
decrease for the six month period ended June 30, 2002 as compared to the prior
year.

FINANCIAL CONDITION
Citizens had total assets of $7.547 billion as of June 30, 2002, a decrease of
$132 million, or 1.7% from $7.679 billion as of December 31, 2001. Total assets
declined due to balance sheet restructuring efforts begun in 2001 and reduced
loan demand from a soft economy. Citizens continues to sell current mortgage
loan production into the secondary market during this low

18

interest rate environment to reduce interest rate risk. Average earning assets
comprised 94.2% of average total assets during the first six months of 2002
compared with 94.3% in the first six months of 2001.

INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 19.8%
of average earning assets during the first half of 2002, compared with 18.4% for
the same period of 2001. YTD average investment security balances in the first
six months of 2002 were down $24.3 million over the same period in 2001. YTD
average money market investments were up $28.9 million from 2001 levels.
Citizens held higher levels of money market investments during the first half of
2002 in anticipation of purchasing bank owned life insurance. Citizens completed
a $78 million purchase of bank owned life insurance in the third quarter of
2002.

MORTGAGE LOANS HELD FOR SALE
Average mortgage loans held for sale during the first six months of 2002
comprised 1.7% of average earning assets compared with 1.1% at June 30, 2001.
This increase primarily reflects a higher percentage of loans available for sale
during the first six months of 2002. As part of Citizens' balance sheet
restructuring initiatives begun in the first quarter of 2001, Citizens is
selling most of its new residential mortgage loan production into the secondary
market. Mortgages held for sale are accounted for on the lower of cost or market
basis.

LOANS
Citizens extends credit primarily within the local markets of its banking
subsidiaries located in Michigan, Wisconsin, Iowa and Illinois. The loan
portfolio is widely diversified by borrower and industry groups with no foreign
loans or significant concentrations in any industry. Total loans at June 30,
2002 were down $205 million, or 3.6%, from year-end 2001. The decline in total
loans is attributable to a $230 million decrease in the mortgage loan portfolio.
Mortgage loans declined due to the ongoing sale of new mortgage loan production,
continued pay-down of the existing portfolio loans and the securitization of $63
million of portfolio loans in the second quarter. Commercial loan balances at
June 30, 2002 remained flat with year end 2001 due to weak demand, while
consumer loans increased modestly. Average loans declined by $532 million, or
8.8%, for the second quarter of 2002 as compared with the same period in 2001.
Average real estate mortgage loans declined $330 million from the second quarter
of 2001 due to the on going sale of new mortgage loan production and the
securitization of a portion of the portfolio loans. Commercial and consumer
loans decreased from second quarter 2001 due to weakened loan demand and the
sale of $30 million of credit card assets in the second quarter of 2001.

At June 30, 2002 and 2001, $215.4 million and $320.9 million, respectively, of
residential real estate loans originated and subsequently sold in the secondary
market were being serviced by Citizens. Capitalized servicing rights relating to
the serviced loans totaled $1.1 million at June 30, 2002 and $2.3 million at
June 30, 2001.

NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
loans 90 days past due and still accruing interest, and other real estate owned.
Certain of these loans, as defined below, are considered to be impaired. Under
Citizens' credit policies and practices, a loan is placed on nonaccrual status
when there is doubt regarding collection of principal or interest, or when
principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection. Interest accrued but not collected is
reversed and charged against income when the loan is placed on nonaccrual
status. A loan is considered impaired when management determines it is probable
that all the principal and interest due under the contractual terms of the loans
will not be collected. In most instances, impairment is measured based on the
fair value of the underlying collateral. Impairment may also be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate. Citizens maintains a valuation allowance for impaired
loans. Interest income on impaired nonaccrual loans is recognized on a cash
basis. Interest income on all other impaired loans is recorded on an accrual
basis.

Certain of Citizens' nonperforming loans included in the following table are
considered to be impaired. Citizens measures impairment on all large balance
nonaccrual commercial and commercial real estate loans. Certain large balance
accruing loans rated substandard or worse are also measured for impairment. In
most instances, impairment is measured based on the fair value of the underlying
collateral. Impairment losses are included in the provision for loan losses. The
policy does not apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment, except for those loans restructured
under a troubled debt restructuring. Loans collectively evaluated for impairment
include certain smaller balance commercial loans, consumer loans, residential
real estate loans, and credit card loans, and are not included in the impaired
loan analysis.

19

The following table provides a summary analysis of impaired loans as of June 30,
2002 and 2001.

- ------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOAN ANALYSIS
Balance Outstanding Valuation Reserve
------------------------ ----------------------------
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------

Impaired loans with valuation reserve $71,098 $ 83,381 $(17,531) $(26,393)
Impaired loans with no valuation reserve 27,709 27,043 -- --
------- -------- -------- --------
Total impaired loans $98,807 $110,424 $(17,531) $(26,393)
======= ======== ======== ========
Impaired loans on nonaccrual basis $56,655 $ 54,177 $(10,331) $(11,725)
Impaired loans on accrual basis 42,152 56,247 (7,200) (14,668)
------- -------- -------- --------
Total impaired loans $98,807 $110,424 $(17,531) $(26,393)
======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------

The average recorded investment in impaired loans was $81.4 million for the
quarter ended June 30, 2002 and $81.3 million for the same quarter last year.
For the quarter ended June 30, 2002, Citizens recognized interest income of $0.5
million on impaired loans with cash collected on nonaccrual impaired loans
totaling $0.9 million, all of which was applied to principal. For the same
quarter last year, Citizens recognized interest income of approximately $0.8
million on impaired loans with cash collected on nonaccrual impaired loans of
$1.1 million, all of which was applied to principal.

The table below provides a summary of nonperforming assets as of June 30, 2002,
December 31, 2001 and June 30, 2001. Total nonperforming assets amounted to
$87.8 million as of June 30, 2002 compared with $79.2 million as of December 31,
2001 and $85.5 million as of June 30, 2001. Employment levels and other economic
conditions in the Citizens' local markets, however, can impact the level and
composition of nonperforming assets. Due to the current economic outlook and
higher levels of nonperforming loans and charge-offs, management recently began
a process to reevaluate all watch listed commercial credits over $100,000 and
other selected commercial credits over $250,000 for proper credit rating and
identification of loss exposure. This review is anticipated to be completed by
September 30, 2002. As a result of this review and the weak economy, net
charge-offs are expected to continue at higher than historical levels throughout
the remainder of 2002, which may also result in a higher loan loss provision in
the same period.

- --------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
JUNE 30, December 31, June 30,
(in thousands) 2002 2001 2001
- --------------------------------------------------------------------------------------------------------------------------

Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 4,975 $ 6,528 $10,661
From 30 to 89 days past due 6,430 5,218 7,292
90 or more days past due 66,219 57,047 57,114
------- ------- -------
Total 77,624 68,793 75,067
90 days past due and still accruing 1,207 4,168 4,460
Restructured 336 337 625
------- ------- -------
Total nonperforming loans 79,167 73,298 80,152
Other Repossessed Assets Acquired (ORAA) 8,621 5,947 5,315
------- ------- -------
Total nonperforming assets $87,788 $79,245 $85,467
======= ======= =======

Nonperforming assets as a percent of loans plus ORAA 1.57% 1.37% 1.42%
Nonperforming assets as a percent of total assets 1.16 1.03 1.08
Allowance for loan loss as a percent of nonperforming loans 101.62 109.55 101.50
Allowance for loan loss as a percent of nonperforming assets 91.64 101.33 95.18
- --------------------------------------------------------------------------------------------------------------------------

20

In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of June 30, 2002, such credits amounted to $81.2 million or 1.5% of
total loans, compared with $78.9 million or 1.3% at December 31, 2001 and $79.0
million or 1.3% of total loans as of June 30, 2001. These loans are primarily
commercial and commercial real estate loans made in the normal course of
business and do not represent a concentration in any one industry.

Also subsequent to June 30, 2002, Citizens identified additional exposure on a
$16.0 million commercial credit, which was performing as of the end of the
quarter and a $20.5 million unfunded letter of credit, which if funded may
result in a loss. The current estimated charge-off on these credits is between
$7 million and $17 million. As of June 30, 2002, $3.4 million of loan loss
reserve was specifically allocated to these credits.

DEPOSITS
Total deposits decreased $99 million to $5.866 billion at June 30, 2002
from $5.965 billion at year-end 2001. Average deposits declined $168.6 million,
or 2.8% in the first six months of 2002 over the same period in 2001. The
decline in deposits from year-end and the first six months of 2001 occurred
primarily in large denomination time deposits as Citizens was less aggressive in
pricing such deposits due to decreased funding requirements. Citizens gathers
deposits primarily in its local markets and historically has not relied on
brokered funds to sustain liquidity. At June 30, 2002 Citizens had approximately
$165 million in brokered deposits as an alternative source of funding, down from
$171 million at year-end 2001. Citizens will continue to evaluate the use of
alternative funding sources such as brokered deposits as funding needs change.

SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings decreased $484.2 million to $222.8
million during the first six months of 2002 from $707.0 million during the same
period of 2001. The decrease primarily reflects reduced reliance on short-term
borrowings as a funding source due to lower earning asset levels. Long-term debt
accounted for $629.0 million or 10.6% of average interest-bearing funds for the
first six months of 2002, compared with $552.4 million or 8.6% of average
interest-bearing funds for the same period in 2001. At June 30, 2002, $629.3
million of the long-term debt consists of borrowings from the Federal Home Loan
Bank with $321.0 million maturing at different intervals over the next five
years and the remaining maturing over the next 15 years. These borrowings are
utilized to fund Citizens' loan portfolio. Borrowed funds are expected to remain
an important, reliable and cost-effective funding vehicle for Citizens and its
subsidiary banks.

CAPITAL RESOURCES
Citizens continues to maintain a strong capital position which supports its
current needs and provides a sound foundation to support further expansion. At
June 30, 2002, shareholders' equity was $714.7 million compared with $697.5
million at December 31, 2001 and $706.7 million as of June 30, 2001. Book value
per common share at June 30, 2002, December 31, 2001 and June 30, 2001 was
$16.02, $15.46 and $15.27, respectively.

Citizens has consistently maintained regulatory capital ratios at or above the
"well-capitalized" standards and all bank subsidiaries of Citizens have
sufficient capital to maintain a well-capitalized designation. Citizens' capital
ratios as of June 30, 2002, December 31, 2001 and June 30, 2001 are presented
below.

- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum
For "Well JUNE 30, December 31, June 30,
Capitalized" 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------------

Risk based capital:
Tier I 6.0% 10.2% 9.9% 9.9%
Total capital 10.0 11.4 11.1 11.2
Tier I leverage 5.0 8.1 7.8 7.7
- -------------------------------------------------------------------------------------------------------------------------------

In October 2001, Citizens' board of directors approved a plan to repurchase up
to 3,000,000 shares of Citizens common stock for general purposes. At June 30,
2002, 998,400 shares of common stock had been repurchased under this plan at an
average price of $32.61.

Citizens declared cash dividends of $0.285 per share in the second quarter of
2002, an increase of 3.6% over the $0.275 declared during the same period of
2001.

21

LIQUIDITY AND DEBT CAPACITY
The liquidity position of Citizens is monitored to ensure that funds are
available at a reasonable cost to meet financial commitments, to finance
business expansion and to take advantage of unforeseen opportunities. Citizens'
subsidiary banks derive liquidity primarily through core deposit growth,
maturity of money market investments, and maturity and sale of investment
securities and loans. Additionally, Citizens' subsidiary banks have access to
market borrowing sources on an unsecured, as well as a collateralized basis, for
both short-term and long-term purposes including, but not limited to, the
Federal Reserve and Federal Home Loan Banks where the subsidiary banks are
members. Another source of liquidity is the ability of the parent company to
borrow funds on both a short-term and long-term basis. The parent company has
established borrowing facilities with a group of unaffiliated banks and has used
portions of this revolving credit agreement for various corporate purposes. As
of June 30, 2002, the parent company had $75 million available in the credit
agreement of which $30 million was outstanding. The interest rate on the $30
million outstanding at June 30, 2002 reprices daily and is based on the Federal
funds rate.

Management believes that the key to successful balance sheet liquidity is the
establishment and subsequent utilization of sufficient sources of liquidity.
Proactive management of Citizens' liquidity capacity and generation has
increased sources of funds and borrowing capacities enabling Citizens and its
subsidiary banks to operate effectively, safely and with improved profitability.
At June 30, 2002, Citizens had sufficient liquidity to meet presently known
short and long term cash flow requirements arising from ongoing business
transactions.

INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing structure of
Citizens' assets and liabilities differs significantly. Asset/liability
management, which among other things addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income, maintain sufficient liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring
contractual and expected repricing of assets and liabilities as well as
forecasting earnings under different interest rate scenarios and balance sheet
structures. Generally, management seeks a structure that insulates net interest
income from large swings attributable to changes in market interest rates.
Citizens' static interest rate sensitivity ("GAP") as of June 30, 2002 and 2001
is illustrated in the following table.

22

- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
1-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------

JUNE 30, 2002
RATE SENSITIVE ASSETS(1)
Loans(2) $2,666.5 $ 259.8 $ 466.7 $3,393.0 $1,924.7 $ 328.9 $5,646.6
Investment securities 129.5 28.5 52.6 210.6 657.7 626.2 1,494.5
Short-term investments 19.0 -- -- 19.0 -- -- 19.0
-------- -------- -------- -------- -------- -------- --------
Total $2,815.0 $ 288.3 $ 519.3 $3,622.6 $2,582.4 $ 955.1 $7,160.1
======== ======== ======== ======== ======== ======== ========
RATE SENSITIVE LIABILITIES
Deposits(3) $ 807.5 $ 673.7 $1,080.4 $2,561.6 $2,113.6 $ 318.0 $4,993.2
Other interest bearing liabilities 408.3 0.1 25.1 433.5 146.0 308.3 887.8
-------- -------- -------- -------- -------- -------- --------
Total $1,215.8 $ 673.8 $1,105.5 $2,995.1 $2,259.6 $ 626.3 $5,881.0
======== ======== ======== ======== ======== ======== ========
Period GAP(4) $1,599.2 $ (385.5) $ (586.2) $ 627.5 $ 322.8 $ 328.8 $1,279.1
Cumulative GAP 1,599.2 1,213.7 627.5 950.3 1,279.1
Cumulative GAP to Total Assets 21.19% 16.08% 8.31% 8.31% 12.59% 16.95% 16.95%
Multiple of Rate Sensitive Assets
to Liabilities 2.32 0.43 0.47 1.21 1.14 1.52 1.22

- -----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2001
RATE SENSITIVE ASSETS(1)
Loans(2) $2,339.0 $ 353.6 $ 561.7 $3,254.3 $2,350.5 $ 505.5 $6,110.3
Investment securities 59.5 25.5 52.0 137.0 507.7 616.3 1,261.0
Short-term investments 78.8 -- -- 78.8 -- -- 78.8
-------- -------- -------- -------- -------- -------- --------
Total $2,477.3 $ 379.1 $ 613.7 $3,470.1 $2,858.2 $1,121.8 $7,450.1
======== ======== ======== ======== ======== ======== ========
RATE SENSITIVE LIABILITIES
Deposits(3) $1,188.8 $ 757.2 $1,114.3 $3,060.3 $1,562.2 $ 411.5 $5,034.0
Other interest bearing liabilities 959.1 85.2 120.4 1,164.7 36.0 8.6 1,209.3
-------- -------- -------- -------- -------- -------- --------
Total $2,147.9 $ 842.4 $1,234.7 $4,225.0 $1,598.2 $ 420.1 $6,243.3
======== ======== ======== ======== ======== ======== ========

Period GAP(4) $ 329.4 $ (463.3) $ (621.0) $ (754.9) $1,260.0 $ 701.7 $1,206.8
Cumulative GAP 329.4 (133.9) (754.9) 505.1 1,206.8
Cumulative GAP to Total Assets 4.16% (1.69)% (9.53)% (9.53)% 6.37% 15.23% 15.23%
Multiple of Rate Sensitive Assets
to Liabilities 1.15 0.45 0.50 0.82 1.79 2.67 1.19
- -----------------------------------------------------------------------------------------------------------------------------------

(1) Incorporates prepayment projections for certain assets which may shorten
the time frame for repricing or maturity compared to contractual runoff.

(2) Includes loans held for sale.

(3) Includes interest bearing savings and demand deposits of $764 million and
$691 million in 2002 and 2001, respectively, in the less than one year
category, and $1.694 billion and $1.480 billion, respectively in the over
one year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.

(4) GAP is the excess of rate sensitive assets (liabilities).

As shown, Citizens' interest rate risk position at June 30, 2002 is asset
sensitive in the less than one year time frame with rate sensitive assets
exceeding rate sensitive liabilities by $627.5 million. Citizens' interest rate
risk position at June 30, 2001 was liability sensitive in the less than one year
time frame with rate sensitive liabilities exceeding rate sensitive assets by
$754.9 million. Application of GAP theory would suggest that in an asset
sensitive position Citizens' net interest income could rise if interest rates
rise; i.e., liabilities are likely to reprice slower than assets, resulting in
an increase in net income in a rising rate environment. Conversely, net income
should decrease in a falling rate environment in an asset sensitive position.
Net interest income is not only affected by the level and direction of interest
rates, but also by the shape of the yield curve, relationships between interest
sensitive instruments and key driver rates, as well as balance sheet growth and
the timing of changes in these variables.

23

Management is continually reviewing its interest rate risk position and
modifying its strategies based on projections to minimize the impact of future
interest rate changes. While traditional GAP analysis does not always
incorporate adjustments for the magnitude or timing of non-contractual
repricing, the table above does incorporate appropriate adjustments as indicated
in footnotes 1 and 3 to the table. Because of these and other inherent
limitations of any GAP analysis, management utilizes net interest income
simulation modeling as its primary tool to evaluate the impact of changes in
interest rates and balance sheet strategies. Management uses these simulations
to develop strategies that can limit interest rate risk and provide liquidity to
meet client loan demand and deposit preferences.

FORWARD-LOOKING STATEMENTS
The foregoing disclosure contains "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
both as amended, with respect to expectations for future periods. These
forward-looking statements represent Citizens' outlook only as of the date of
this report. While Citizens believes that its forward-looking statements are
reasonable, actual results could differ materially since the statements are
based on Citizens' current expectations, which are subject to risks and
uncertainties. These risks and uncertainties are detailed from time to time in
reports filed by Citizens with the Securities and Exchange Commission, including
8-K, 10-Q and 10-K, and include, among others, unanticipated changes in the
competitive environment, relationships with third party vendors, clients, the
effect of terrorist attacks and potential attacks and certain other factors
discussed in this report.

Other factors not currently anticipated by management may also be materially and
adversely affect Citizens results of operations. Citizens does not undertake,
and expressly disclaim any obligation, to update or alter its forward-looking
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.

24

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 and incorporated by
reference in Item 7A of Citizens' 2001 Annual Report on Form 10-K.

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Citizens held its Annual Meeting of Shareholders on April 16, 2002 at which the
shareholders considered the following:

The results were as follows with respect to each of the four director nominees:

Director For Withheld
- -------- ---------- ---------

Edward P Abbott 37,284,605 548,684
Jonathan E. Burroughs II 37,253,477 579,812
Lawrence O. Erickson 37,283,274 550,015
Robert J. Vitito 34,729,450 3,103,839

The results were as follows with respect to the approval of Citizens Banking
Corporation Stock Compensation Plan:

For: 21,529,567 Against: 5,159,455 Abstentions: 553,661 Broker non-votes: 10,590,606

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

3(i) Restated Articles of Incorporation, as amended.

99.1 Certification of Quarterly Report by Chief Executive Officer

99.2 Certification of Quarterly Report by Chief Financial Officer

(b) Reports on Form 8-K

No report on Form 8-K was filed during the three-month period ended
June 30, 2002.

25

SIGNATURE

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

CITIZENS BANKING CORPORATION

Date August 14, 2002 By /s/ John W. Ennest
----------------- -----------------------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial
Officer
(Principal Financial Officer)
(Duly Authorized Signatory)

26

Exhibit Index