UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009

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

For the transition period from                      to                      

CITIZENS REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

MICHIGAN		38-2378932
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
328 S. Saginaw St., Flint, Michigan		48502
(Address of principal executive offices)		(Zip Code)

(810) 766-7500

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

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class		Outstanding at May 1, 2009
Common Stock, No Par Value		126,298,743 Shares

 

 

Citizens Republic Bancorp, Inc.
Index to Form 10-Q

		Page
Part I — Financial Information (unaudited)
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statements of Changes in Shareholders’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			44
Item 4. Controls and Procedures			44
Part II — Other Information
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6. Exhibits			46
Signatures			47
Exhibit Index			48
EX-10.52
EX-10.53
EX-31.1
EX-31.2
EX-32.1

Consolidated Balance Sheet
Citizens Republic Bancorp and Subsidiaries

		March 31,				December 31,				March 31,
(in thousands)		2009				2008				2008
		(unaudited)				(Note 1)				(unaudited)
Assets
Cash and due from banks		$	163,456			$	171,695			$	222,677
Money market investments:
Federal funds sold			—				—				20,000
Interest-bearing deposits with banks			481,489				214,925				2,488
Total money market investments			481,489				214,925				22,488
Investment Securities:
Securities available for sale, at fair value			2,271,998				2,248,772				2,085,867
Securities held to maturity, at amortized cost (fair value of $138,840, $137,846 and $134,233, respectively)			138,581				138,575				132,905
Total investment securities			2,410,579				2,387,347				2,218,772
FHLB and Federal Reserve stock			148,764				148,764				148,838
Portfolio loans:
Commercial and industrial			2,394,436				2,602,334				2,653,799
Commercial real estate			2,944,265				2,964,721				3,174,384
Total commercial			5,338,701				5,567,055				5,828,183
Residential mortgage			1,207,973				1,262,841				1,393,801
Direct consumer			1,405,659				1,452,166				1,531,905
Indirect consumer			802,116				820,536				818,901
Total portfolio loans			8,754,449				9,102,598				9,572,790
Less: Allowance for loan losses			(282,647	)			(255,321	)			(176,528	)
Net portfolio loans			8,471,802				8,847,277				9,396,262
Loans held for sale			89,820				91,362				81,537
Premises and equipment			122,810				124,217				127,329
Goodwill			597,218				597,218				775,308
Other intangible assets			19,377				21,414				28,099
Bank owned life insurance			218,917				218,333				216,336
Other assets			258,058				263,464				301,645
Total assets		$	12,982,290			$	13,086,016			$	13,539,291
Liabilities
Noninterest-bearing deposits		$	1,174,392			$	1,143,294			$	1,113,773
Interest-bearing demand deposits			865,441				780,176				751,130
Savings deposits			2,683,425				2,504,320				2,592,214
Time deposits			4,396,266				4,624,616				4,029,860
Total deposits			9,119,524				9,052,406				8,486,977
Federal funds purchased and securities sold under agreements to repurchase			53,086				65,015				503,430
Other short-term borrowings			13,845				10,377				36,859
Other liabilities			163,887				164,274				136,193
Long-term debt			2,064,575				2,192,623				2,798,802
Total liabilities			11,414,917				11,484,695				11,962,261
Shareholders’ Equity
Preferred stock — no par value Authorized - 5,000,000 shares; Issued and outstanding - 300,000 at 3/31/09 and 12/31/08, redemption value of $300 million			267,566				266,088				—
Common stock — no par value Authorized - 150,000,000 shares; Issued and outstanding - 126,298,743 at 3/31/09, 125,996,938 at 12/31/08, and 75,747,627 at 3/31/08			1,214,173				1,214,469				976,445
Retained earnings			121,106				170,358				586,502
Accumulated other comprehensive (loss) income			(35,472	)			(49,594	)			14,083
Total shareholders’ equity			1,567,373				1,601,321				1,577,030
Total liabilities and shareholders’ equity		$	12,982,290			$	13,086,016			$	13,539,291

See notes to consolidated financial statements.

Consolidated Statements of Operations (Unaudited)
Citizens Republic Bancorp and Subsidiaries

		Three Months Ended
		March 31,
(in thousands, except per share amounts)		2009				2008
Interest Income
Interest and fees on loans		$	119,191			$	157,001
Interest and dividends on investment securities:
Taxable			21,912				21,023
Tax-exempt			6,957				7,370
Dividends on FHLB and Federal Reserve stock			1,366				1,693
Money market investments			263				30
Total interest income			149,689				187,117
Interest Expense
Deposits			47,140				61,578
Short-term borrowings			67				4,971
Long-term debt			25,536				32,256
Total interest expense			72,743				98,805
Net Interest Income			76,946				88,312
Provision for loan losses			64,017				30,619
Net interest income after provision for loan losses			12,929				57,693
Noninterest Income
Service charges on deposit accounts			10,268				11,466
Trust fees			3,419				4,784
Mortgage and other loan income			3,079				3,344
Brokerage and investment fees			1,327				1,916
ATM network user fees			1,454				1,413
Bankcard fees			1,894				1,744
Gains (losses) on loans held for sale			(6,152	)			1
Other income			3,944				6,257
Total noninterest income			19,233				30,925
Noninterest Expense
Salaries and employee benefits			33,917				42,225
Occupancy			7,923				7,675
Professional services			3,136				3,763
Equipment			2,850				3,230
Data processing services			4,274				4,304
Advertising and public relations			1,425				1,838
Postage and delivery			1,575				1,727
Other loan expenses			5,937				1,811
Other real estate (ORE) expenses			8,360				1,242
Intangible asset amortization			2,037				2,447
Other expense			9,344				6,300
Total noninterest expense			80,778				76,562
Income (Loss) Before Income Taxes			(48,616	)			12,056
Income tax provision (benefit)			(3,467	)			929
Net Income (Loss)			(45,149	)			11,127
Dividend on redeemable preferred stock			(4,103	)			—
Net Income (Loss) Attributable to Common Shareholders		$	(49,252	)		$	11,127
Net Income (Loss) Per Common Share:
Basic		$	(0.39	)		$	0.15
Diluted			(0.39	)			0.15
Cash Dividends Declared Per Common Share			—				0.29
Average Common Shares Outstanding:
Basic			125,400				75,248
Diluted			125,400				75,273

See notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity
Citizens Republic Bancorp and Subsidiaries

																		Accumulated
																		Other
		Preferred				Common Stock								Retained				Comprehensive
(in thousands, except per share amounts)		Stock				Shares				Amount				Earnings				Income (Loss)				Total
Balance at December 31, 2008		$	266,088				125,997			$	1,214,469			$	170,358			$	(49,594	)		$	1,601,321
Comprehensive income, net of tax:
Net loss															(45,149	)							(45,149	)
Other comprehensive income (loss):
Net unrealized loss on securities available-for-sale																			18,838
Net change in unrealized gain on qualifying cash flow hedges																			(1,212	)
Net change in unrecognized pension and postretirement costs																			(3,504	)
Other comprehensive income total																							14,122
Total comprehensive loss																							(31,027	)
Accretion of preferred stock discount			1,478												(1,478	)							—
Dividends on preferred stock															(2,625	)							(2,625	)
Proceeds from stock options exercised and restricted stock activity							312																—
Recognition of stock-based compensation											(275	)											(275	)
Shares purchased for taxes							(10	)			(21	)											(21	)
Balance — March 31, 2009		$	267,566				126,299			$	1,214,173			$	121,106			$	(35,472	)		$	1,567,373
Balance at December 31, 2007		$	—				75,722			$	975,446			$	597,333			$	5,101			$	1,577,880
Comprehensive income, net of tax:
Net income															11,127								11,127
Other comprehensive income:
Net unrealized loss on securities available-for-sale, net of reclassification adjustment for net gains included in net income																			8,570
Net change in unrealized loss on qualifying cash flow hedges																			412
Other comprehensive income total																							8,982
Total comprehensive income																							20,109
Proceeds from stock options exercised and restricted stock activity							31																—
Recognition of stock-based compensation											1,068												1,068
Cash dividends declared on common shares - $0.29 per share															(21,958	)							(21,958	)
Shares purchased for taxes							(5	)			(69	)											(69	)
Balance — March 31, 2008		$	—				75,748			$	976,445			$	586,502			$	14,083			$	1,577,030

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows
Citizens Republic Bancorp and Subsidiaries

		Three Months Ended
		March 31,
(in thousands)		2009				2008
Operating Activities:
Net (loss) income		$	(45,149	)		$	11,127
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			64,017				30,619
Depreciation and software amortization			2,953				3,005
Amortization of intangibles			2,037				2,447
Net (increase) decrease in current and deferred income taxes			(3,359	)			934
Amortization and fair value adjustments of purchase accounting mark-to-market, net			(2,690	)			(5,556	)
Fair value adjustment on loans held for sale and other real estate			13,153				—
Discount accretion and amortization of issuance costs on long term debt			302				304
Net accretion on investment securities			(537	)			(2,306	)
Loans originated for sale			(102,055	)			(107,965	)
Proceeds from loans held for sale			95,995				104,814
Net gains from loan sales			(2,170	)			(2,234	)
Net loss on other real estate			79				937
Recognition of stock-based compensation expense			(275	)			1,068
Other			(7,180	)			(13,489	)
Net cash provided by operating activities			15,121				23,705
Investing Activities:
Net increase in money market investments			(266,564	)			(22,316	)
Securities available-for-sale:
Proceeds from maturities and payments			174,699				144,339
Purchases			(168,412	)			(81,729	)
Securities held-to-maturity:
Proceeds from maturities and payments			—				475
Purchases			—				(5,076	)
Net decrease (increase) in loans and leases			305,149				(102,590	)
Proceeds from sales of other real estate			5,688				4,545
Net increase in properties and equipment			(1,546	)			(586	)
Net cash provided (used) by investing activities			49,014				(62,938	)
Financing Activities:
Net increase in demand and savings deposits			295,468				326,449
Net decrease in time deposits			(228,590	)			(141,110	)
Net decrease in short-term borrowings			(8,434	)			(1,795	)
Proceeds from issuance of long-term debt			—				250,000
Principal reductions in long-term debt			(128,172	)			(390,711	)
Cash dividends paid on common stock			—				(21,958	)
Cash dividends paid on preferred stock			(2,625	)			—
Shares acquired for retirement and purchased for taxes			(21	)			(69	)
Net cash (used) provided by financing activities			(72,374	)			20,806
Net decrease in cash and due from banks			(8,239	)			(18,427	)
Cash and due from banks at beginning of period			171,695				241,104
Cash and due from banks at end of period		$	163,456			$	222,677
Supplemental Cash Flow Information:
Interest paid		$	73,977			$	103,243
Income tax (refund) paid, net			(108	)			5
Loans transferred to other real estate			8,786				17,860
Loans held for sale transferred to other real estate			4,546				—
Accretion on redeemable preferred stock			1,478				—

See notes to consolidated financial statements.

Part I — Financial Information

Item 1 — Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Citizens Republic Bancorp, Inc. and Subsidiaries

Note 1. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc. (“Citizens” or the “Corporation”) have been prepared in accordance with U.S. generally accepted accounting principles (“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 months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The balance sheet at December 31, 2008 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. Certain amounts have been reclassified to conform with the current year presentation. For further information, refer to the consolidated financial statements and footnotes included in Citizens’ 2008 Annual Report on Form 10-K. Citizens maintains an internet website at www.citizensbanking.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the U.S. Securities and Exchange Commission. The information on Citizens’ website does not constitute a part of this report.

The Corporation has two active wholly owned trusts formed for the purpose of issuing securities which qualify as regulatory capital and are considered VIEs. The Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in the consolidated financial statements. Each of the two active trusts has issued separate offerings of trust preferred securities to investors in 2006 and 2003 for $150.0 million and $25.8 million, respectively. The gross proceeds from the issuances were used to purchase junior subordinated deferrable interest debentures issued by Citizens, which is the sole asset of each trust.

Statements of Financial Accounting Standards

SFAS 161 “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133”. On January 1, 2009, Citizens adopted SFAS 161, which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. The adoption of SFAS 161 had no impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 15 to the consolidated financial statements for additional disclosures.

As required by SFAS 133, Citizens records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether Citizens has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Citizens may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under SFAS 133.

FASB Staff Position (FSP) on SFAS No. 157-2. In 2008, Citizens adopted FSP 157-2, which delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods beginning after November 15, 2008. The adoption of FSP 157-2 had no impact on Citizens’ results of operations. Refer to Note 9 to the consolidated financial statements for additional disclosures.

FSP EITF 03-6-1 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. On January 1, 2009, Citizens adopted FSP EITF 03-6-1. The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of the FSP did not have a material impact on Citizens’ financial condition, results of operations, or liquidity. Refer to Note 12 to the consolidated financial statements for additional disclosures.

Note 2. New Accounting Pronouncements

FASB Staff Position (“FSP”)

FSP-SFAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. On April 9, 2009 the FASB posted FSP SFAS 157-4, which affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 also provides additional disclosure requirements and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted. Citizens will adopt FSP SFAS 157-4 in the second quarter of 2009, and, when adopted, it is not expected to have a material impact on Citizens’ financial condition, results of operations or liquidity.

FSP-SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”.

On April 9, 2009 the FASB posted FSP SFAS 115-2 and SFAS 124-2, which changes existing guidance for determining whether an impairment is other than temporary to debt securities, replaces the existing requirement that Citizens’ management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and 124-2, declines in fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Citizens will adopt FSP SFAS 115-2 and SFAS 124-2 in the second quarter of 2009, and, when adopted, it is not expected to have a material impact on Citizens’ financial condition, results of operations or liquidity.

FSP-SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. On April 9, 2009 the FASB posted FSP SFAS 107-1 and APB 28-1, which amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require Citizens to provide disclosures about fair value of financial instruments in interim financial information. This FSP also amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. Under this FSP, Citizens will need to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, Citizens will need to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The new interim disclosures required by FSP SFAS 107-1 and APB 28-1 will be included in Citizens’ interim financial statements beginning with the second quarter of 2009.

FSP SFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. On April 1, 2009 the FASB issued FSP SFAS 141(R)-1, which amends the guidance in SFAS 141 (Revised December 2007), “Business Combinations,” to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS 5, “Accounting for Contingencies,” and FIN 14, “Reasonable Estimation of the Amount of a Loss.” FSP SFAS 141(R)-1 removes the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS 141R, and carries forward without significant revision, the guidance in SFAS 141. FSP SFAS 141(R)-1 eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required by SFAS 5 and those disclosures should be included in the business combination footnote. FSP SFAS 141 (R)-1 requires that contingent consideration arrangements be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with SFAS 141R. The FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is January 1, 2009 or later.

FSP SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. On December 30, 2008 the FASB issued FSP SFAS 132 (R)-1, which amends SFAS 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by the FSP will be provided in Citizens’ financial statements beginning with periods ending on or after December 15, 2009.

Note 3. Investment Securities

The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities as of March 31, 2009 and December 31, 2008 follow:

		March 31, 2009																December 31, 2008
						Estimated																Estimated
		Amortized				Fair				Gross Unrealized								Amortized				Fair				Gross Unrealized
(in thousands)		Cost				Value				Gains				Losses				Cost				Value				Gains				Losses
Available For Sale:
Federal Agencies		$	219,912			$	226,027			$	6,115			$	—			$	248,819			$	257,445			$	8,626			$	—
Collateralized Mortgage Obligations			519,305				476,886				5,337				47,756				528,626				471,010				4,147				61,763
Mortgage-backed			1,002,249				1,030,363				28,134				20				960,841				973,961				13,929				809
State and municipal			519,055				527,493				11,169				2,731				531,625				538,761				10,990				3,854
Other			11,234				11,229				—				5				7,598				7,595				—				3
Total available for sale		$	2,271,755			$	2,271,998			$	50,755			$	50,512			$	2,277,509			$	2,248,772			$	37,692			$	66,429
Held to Maturity:
State and municipal
Total held to maturity		$	138,581			$	138,840			$	2,024			$	1,765			$	138,575			$	137,846			$	1,708			$	2,437
FHLB and Fed Reserve stock		$	148,764			$	148,764			$	—			$	—			$	148,764			$	148,764			$	—			$	—

As of March 31, 2009, 408 securities had unrealized losses compared with 486 securities as of December 31, 2008. Securities with unrealized losses, categorized by length of time the security has been in an unrealized loss position, as of March 31, 2009 and December 31, 2008 are displayed in the following tables.

As of March 31, 2009		Less than 12 Months								More than 12 Months								Total
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
(in thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Available For Sale:
Collateralized Mortgage Obligations		$	50,857			$	6,354			$	177,186			$	41,402			$	228,043			$	47,756
Mortgage-backed			1,521				6				639				14				2,160				20
State and municipal			93,324				2,463				6,024				268				99,348				2,731
Other			7				5				—				—				7				5
Total available for sale			145,709				8,828				183,849				41,684				329,558				50,512
Held to Maturity:
State and municipal			49,987				1,415				5,206				350				55,193				1,765
Total held to maturity			49,987				1,415				5,206				350				55,193				1,765
Total		$	195,696			$	10,243			$	189,055			$	42,034			$	384,751			$	52,277

As of December 31, 2008		Less than 12 Months								More than 12 Months								Total
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
(in thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Available For Sale:
Collateralized Mortgage Obligations		$	231,892			$	61,436			$	3,085			$	327			$	234,977			$	61,763
Mortgage-backed			74,081				796				421				13				74,502				809
State and municipal			112,353				3,688				3,220				166				115,573				3,854
Other			7				3				—				—				7				3
Total available for sale			418,333				65,923				6,726				506				425,059				66,429
Held to Maturity:
State and municipal			51,896				1,967				6,481				470				58,377				2,437
Total held to maturity			51,896				1,967				6,481				470				58,377				2,437
Total		$	470,229			$	67,890			$	13,207			$	976			$	483,436			$	68,866

Citizens performs a review of securities with unrealized losses at each reporting period. The review centers on an assessment of whether and when a security will recover in value, and whether or not the company has the positive intent and ability to hold that security until the anticipated recovery of value. In assessing the recovery of value, the primary factors evaluated are the degree to which fair value is below carrying cost, the length of time the fair value has remained continuously below carrying cost, and credit quality factors affecting the issuer or the underlying collateral. Credit quality factors can include the financial condition of the issuer or the insurer, which are often evidenced in credit ratings, regulatory, tax, or industry-related issues. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases. As of March 31, 2009, management has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above table are believed to be temporary and thus no impairment loss has been realized in the Consolidated Statements of Operations. Citizens has the intent and ability to hold the impaired securities to anticipated recovery, but may change its intent in response to significant, unanticipated changes in policies, regulations, statutory legislation or other aforementioned criteria.

The collateralized mortgage obligations (“CMO”) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At March 31, 2009, the CMOs were substantially comprised of whole loan CMOs, which had a market value of $225.0 million with gross unrealized losses of $47.6 million. Management continued to perform thorough credit reviews on the underlying mortgage collateral as well as the supporting credit enhancement and structure and determined that none of its whole loan CMO securities had an other-than-temporary-impairment as of March 31, 2009. The results of the credit review demonstrated continued strength and no material degradation in the holdings. All of the securities have investment grade ratings of and 93% were rated AAA by two rating agencies, further supporting management’s assessment.

Note 4. Allowance for Loan Losses and Impaired Loans

A summary of loan loss experience during the three months ended March 31, 2009 and 2008 is provided below.

Analysis of Allowance for Loan Losses

		Three Months Ended
		March 31,
(in thousands)		2009				2008
Allowance for loan losses — beginning of period		$	255,321			$	163,353
Provision for loan losses			64,017				30,619
Charge-offs:
Commercial and industrial			8,108				1,045
Commercial real estate			18,977				9,132
Total commercial			27,085				10,177
Residential mortgage			804				1,769
Direct consumer			4,707				3,522
Indirect consumer			5,507				3,141
Charge-offs			38,103				18,609
Recoveries:
Commercial			128				142
Commercial real estate			404				50
Total commercial			532				192
Residential mortgage			3				—
Direct consumer			334				472
Indirect consumer			543				501
Recoveries			1,412				1,165
Net charge-offs			36,691				17,444
Allowance for loan losses — end of period		$	282,647			$	176,528

Nonperforming loans totaled $428.6 million at March 31, 2009 and $306.0 million at December 31, 2008. Some of Citizens’ nonperforming loans are considered to be impaired. SFAS 114, “Accounting by Creditors for Impairment of a Loan,” considers a loan to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may 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 measures impairment on all nonaccrual commercial and commercial real estate loans for which it has established specific reserves. This policy does not apply to large groups of smaller balance homogeneous loans, such as smaller balance commercial loans, direct and indirect consumer loans, and residential mortgage loans, which are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Citizens maintains a valuation reserve for impaired loans as part of the specific allocated allowance component of the allowance for loan losses. Cash collected on impaired nonaccrual loans is applied to outstanding principal. Total loans considered impaired and their related reserve balances at March 31, 2009 and December 31, 2008 follow:

Impaired Loan Information		Balances								Valuation Reserve
		March 31,				December 31,				March 31,				December 31,
(in thousands)		2009				2008				2009				2008
Balances
Impaired loans with valuation reserve		$	148,039			$	101,671			$	46,567			$	39,885
Impaired loans with no valuation reserve			123,576				87,330				—				—
Total impaired loans		$	271,615			$	189,001			$	46,567			$	39,885
Impaired loans on nonaccrual basis		$	271,615			$	189,001			$	46,567			$	39,885
Impaired loans on accrual basis			—				—				—				—
Total impaired loans		$	271,615			$	189,001			$	46,567			$	39,885

The average balance of impaired loans for the three months ended March 31, 2009 was $230.3 million and $60.6 million for the three months ended March 31, 2008. The increase is due to the continued migration of commercial real estate loans to nonperforming status. Interest income recognized on impaired loans in both periods was immaterial. Cash collected and applied to outstanding principal during the first quarter of 2009 was $2.0 million compared with $0.2 million in the same period of 2008.

Note 5. Goodwill

Citizens performed an evaluation to determine if events or circumstances had occurred since the last evaluation which would indicate goodwill impairment at March 31, 2009. As the key inputs and drivers remained consistent with those used as of the annual impairment testing date, Citizens concluded that no additional impairment was indicated. The last time Citizens recorded a goodwill impairment was during the second quarter of 2008, when it determined that the fair value of the Specialty Commercial reporting unit was below its carrying value. At that time, Citizens recorded a non-cash, not tax-deductible goodwill impairment charge of $178.1 million, representing the entire amount of goodwill allocated to the Specialty Commercial reporting unit.

A summary of goodwill allocated to the lines of business as of March 31, 2009 and December 31, 2008 follows:

		March 31,				December 31,
(in thousands)		2009				2008
Regional Banking		$	595,417			$	595,417
Wealth Management			1,801				1,801
Total Goodwill		$	597,218			$	597,218

Note 6. Long-Term Debt

The components of long-term debt as of March 31, 2009 and December 31, 2008 are presented below.

		March 31,				December 31,
(in thousands)		2009				2008
Citizens (Parent only):
Subordinated debt:
5.75% subordinated notes due February 2013		$	120,400			$	120,136
Variable rate junior subordinated debenture due June 2033			25,774				25,774
7.50% junior subordinated debentures due September 2066			147,183				146,927
Subsidiaries:
Federal Home Loan Bank advances			1,666,507				1,666,483
Other borrowed funds			104,711				233,303
Total long-term debt		$	2,064,575			$	2,192,623

Note 7. Income Taxes

The income tax provision (benefit) for the first quarter of 2009 was $(3.5) million, compared with $0.9 million for the first quarter of 2008. The decrease was primarily due to the effect of lower pre-tax income and current period adjustments to other comprehensive income (“OCI”). The effective tax rate for the first quarter of 2009 was 7.13%, which includes adjustments for tax-exempt income, adjustments to the deferred tax asset valuation allowance, and changes in other comprehensive income.

Generally, the calculation for the income tax provision (benefit) does not consider the tax effects of changes in other comprehensive income, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a pre-tax loss from continuing operations. In such case, pre-tax income from other categories (such as changes in OCI) is included in the calculation of the tax provision for the current year. For the first quarter of 2009, this resulted in an increase to the income tax benefit.

Note 8. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2009 and 2008 are presented below.

		Three Months Ended
		March 31,
(in thousands)		2009				2008
Balance at beginning of period		$	(49,594	)		$	5,101
Net change in unrealized gain on securities, net of tax effect of $10,143 in 2009 and $4,615 in 2008			18,838				8,570
Net change in unrealized (loss) gain on cash flow hedges, net of tax effect of ($652) in 2009 and $222 in 2008			(1,212	)			412
Net change in unrecognized pension and postretirement costs, net of tax effect of ($1,887) in 2009			(3,504	)			—
Accumulated other comprehensive (loss) income, net of tax		$	(35,472	)		$	14,083

The accumulated net unrealized gain on cash flow hedges was $18.3 million at March 31, 2009 and $19.5 million at December 31, 2008.

Note 9. Fair Values of Assets and Liabilities

Certain assets and liabilities are recorded at fair value to provide financial statement users additional insight into the quality of Citizens’ earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, investment securities available for sale, derivative financial instruments and deferred compensation assets are recorded at fair value on a recurring basis. Other assets, such as mortgage servicing rights, loans held for sale, impaired loans, goodwill, other intangible assets, other real estate (“ORE”), and repossessed assets are recorded at fair value on a nonrecurring basis using the lower of cost or market value to determine impairment of individual assets.

Under SFAS 157, Citizens groups assets and liabilities which are recorded at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.

The most significant instruments that Citizens fair values include securities and derivative instruments, most of which fall into Level 2 in the fair value hierarchy with the remainder included in Level 3. The securities in the available for sale portfolio which are included in Level 2 are priced by independent providers. In obtaining such valuation information from third parties, Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in Citizens’ principal markets. Further, Citizens has developed an internal, independent price verification function that performs testing on valuations received from third parties. Citizens’ principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Derivative instruments are priced by independent providers using observable market assumptions with adjustments based on widely accepted valuation techniques. A discounted cash flow analysis on the expected cash flows of each derivative reflects the contractual terms of the derivative, including the period to maturity, and uses market-based inputs, including interest rate curves, implied volatilities, and credit valuation adjustments.

ASSETS AND LIABILITIES RECORDED AT FAIR VALUE ON A RECURRING BASIS

Investment Securities Available for Sale. Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds, and default rates. Recurring Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Recurring Level 2 securities include federal agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal bonds and corporate debt securities.

Recurring Level 3 securities include auction rate securities issued by student-loan authorities. An auction rate security typically refers to a debt instrument with a long-term nominal maturity for which the interest rate is regularly reset through a Dutch auction. Since February 2008, most such auctions have failed, and the auction market has been frozen, with holders unable to dispose of their securities. Due to the nature of the auction rate securities and the current illiquid market, Citizens uses unobservable inputs (Level 3) in the valuation process. In conducting the fair value analysis Citizens relies on a model to estimate the price that each group of securities would transact for between market participants as of the valuation date. The model relies on information from various sources in making market participant assumptions, particularly with regard to the discount rate that would be applied to the securities’ expected cash flow and the term over which this discount rate would stabilize. As of March 31, 2009, the market for auction rate securities had not recovered and the fair value of these securities did not significantly change from December 31, 2008.

Derivative Financial Instruments. Substantially all derivative financial instruments held or issued by Citizens are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, Citizens measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk (credit valuation adjustments). Citizens assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.

Deferred Compensation Assets. Citizens has a portfolio of mutual fund investments which hedge the deferred compensation liabilities to various employees, former employees and directors. These investments are traded on active exchanges with valuations obtained from readily available pricing sources for market transactions involving identical assets and are classified as recurring Level 1. Additionally, Citizens invests in a Guaranteed Income Fund as well as pooled separate accounts which fall into the recurring Level 2 category due to the underlying assets being valued based on similar assets in an active market.

The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2009.

		March 31, 2009
(in thousands)		Total				Level 1				Level 2				Level 3
Investment Securities Available for Sale		$	2,271,998			$	—			$	2,265,947			$	6,051
Other assets (1)			84,665				3,676				80,989				—
Total Assets		$	2,356,663			$	3,676			$	2,346,936			$	6,051
Other liabilities (2)		$	40,775			$	—			$	40,775			$	—

SFAS 157 requires a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The following table presents the reconciliation of Level 3 assets held by Citizens at March 31, 2009.

		Investment
		Securities
(in thousands)		Available for Sale
Assets
Balance at 12/31/08		$	6,045
Discount Accretion			6
Balance at 3/31/09		$	6,051

ASSETS AND LIABILITIES RECORDED AT FAIR VALUE ON A NONRECURRING BASIS

Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. The value is determined through a discounted cash flow analysis which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. Adjustments are only made when the discounted cash flows are less than the carrying amount. As such, Citizens classifies mortgage servicing rights as nonrecurring Level 3. Based on Citizens’ most recent evaluation, the estimated fair value exceeded Citizens’ carrying amount so mortgage servicing rights are still carried at cost, net of amortization, and therefore are not presented in the following table at this time.

Loans Held for Sale. Mortgage loans held for sale are comprised of loans originated for sale in the ordinary course of business and portfolio loans transferred to loans held for sale for liquidation. Loans originated for sale are recorded at the lower of carrying amount or market value based on what secondary markets are currently offering for loans with similar characteristics and are classified as nonrecurring Level 2. Portfolio loans that are transferred to loans held for sale are recorded at fair value based on recent sales experience for similar loans, adjusted for management’s judgment due to current market conditions, and are classified as nonrecurring Level 3.

Commercial loans held for sale are comprised of loans identified for sale that are recorded at the lower of carrying amount or market value based on appraisals of the underlying collateral, adjusted based on management’s judgment due to current market conditions, and are classified as nonrecurring Level 3.

Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may not be collected. Impairment is measured based on the fair value of the underlying collateral, adjusted based on management’s judgment due to current market conditions. Citizens measures impairment on all nonaccrual commercial and industrial and commercial real estate loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses. As such, Citizens records impaired loans as nonrecurring Level 3.

Goodwill. Goodwill is evaluated by reporting unit, which is the equivalent of Citizens’ lines of business. The fair value of the reporting units is estimated using discounted cash flow models derived from internal earnings forecasts. The primary assumptions used by Citizens include ten-year earnings forecasts, terminal values based on estimated future growth rates, and discount rates based on capital asset pricing models. As such, Citizens records goodwill as nonrecurring Level 3. At March 31, 2009, a fair value adjustment to goodwill was not required and therefore is not included in the following table.

Core Deposit Intangible. The core deposit intangible is the asset that represents the present value of the cost savings obtained from the funding associated with the purchase of core deposits through an acquisition. The core deposit intangible was valued using a discounted cost savings approach and as such was classified as a nonrecurring Level 3. At March 31, 2009, a market value adjustment to core deposit intangible assets was not required and therefore is not included in the following table.

Other Real Estate. Other real estate is comprised of commercial and residential real estate acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure, and former branch locations. These properties are carried at the lower of cost or market value at the time of acquisition, based on current appraised value adjusted based on management’s judgment due to current market conditions. Losses arising from the initial acquisition of such properties are charged against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to reflect the lower of cost or market value, as well as gains and losses on disposal of these properties, are charged to other expenses as incurred. Citizens records ORE properties as nonrecurring Level 3.

Repossessed Assets. Repossessed assets consist of consumer assets acquired to satisfy the consumer’s outstanding delinquent debt. These assets consist of automobiles, boats, recreational vehicles and other personal items. These assets are carried at the lower of cost or market value at the time of acquisition, based on internally developed procedures. Losses arising from the initial acquisition of such assets, as well as gains and losses on disposal of these assets are charged to the allowance for loan losses. Citizens records repossessed assets as nonrecurring Level 3.

The following table includes assets measured at fair value on a nonrecurring basis that have had a fair value adjustment as of March 31, 2009.

		March 31, 2009
(in thousands)		Total				Level 1				Level 2				Level 3
Loans (1)		$	114,828			$	—			$	—			$	114,828
Commercial Loans Held For Sale (2)			4,926				—				—				4,926
Other Real Estate (3)			7,859				—				—				7,859
Repossessed Assets (4)			2,884				—				—				2,884
Total Assets		$	130,497			$	—			$	—			$	130,497

Note 10. Pension Benefit Cost

Citizens recognizes changes in the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan as adjustments to accumulated other comprehensive income, net of tax. The components of pension expense for the three months ended March 31, 2009 and 2008 are presented below.

		Three Months Ended
		March 31,
(in thousands)		2009				2008
| |
Defined Benefit Pension Plans
Interest cost		$	1,105			$	1,165
Expected return on plan assets			(1,570	)			(1,900	)
Amortization of unrecognized:
Prior service cost			8				10
Net actuarial loss			335				75
Net pension cost		$	(122	)		$	(650	)
Supplemental Pension Plans
Interest cost		$	189			$	190
Curtailment loss			941				—
Amortization of unrecognized:
Prior service cost			—				118
Net actuarial loss			3				5
Net pension cost		$	1,133			$	313
Postretirement Benefit Plans
Interest cost		$	152			$	129
Amortization of unrecognized:
Prior service cost			(67	)			(64	)
Net actuarial gain			(8	)			(9	)
Net pension cost		$	77			$	56
Defined contribution retirement and 401K Plans
Employer contributions		$	1,349			$	1,845
Total periodic benefit cost		$	2,437			$	1,564

Citizens maintains multiple employee benefit plans, including defined benefit pension, supplemental pension, postretirement healthcare, and defined contribution retirement and 401(k) plans. Citizens has not made a cash contribution to the defined benefit pension plan during the first three months of 2009 but reviews plan funding needs periodically and will make a contribution if appropriate. During the first three months of 2009, Citizens

contributed $0.1 million to the supplemental pension plans and anticipates that an additional $7.7 million of contributions will be made during the remaining nine months of the year. Citizens contributed $0.2 million to the postretirement benefit plan during the first three months of 2009 and anticipates making an additional $0.7 million in contributions for the remaining portion of the year. Citizens contributed $3.8 million to the defined contribution retirement and 401(k) plan for employer matching funds and annual discretionary contributions during the first three months of 2009 and anticipates contributing an additional $3.0 million during the remaining portion of the year.

During the first quarter of 2009, Citizens recognized a curtailment charge of $0.9 million as a result of a reduction of the expected years of future service for the supplemental pension plan participants.

Note 11. Stock-Based Compensation

Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, nonvested stock awards (also known as restricted stock), restricted stock units, and performance awards to employees and non-employee directors. Aggregate grants under the current shareholder approved plan may not exceed 7,000,000 shares, with grants other than stock options further limited to 2,000,000 shares. In December 2008, the Board of Directors approved an amendment to the stock-based compensation plan to reduce the number of shares reserved for future issuance by 1,000,000 shares in order to provide sufficient authorized shares to establish a share reserve for the warrant issued to the U.S. Department of Treasury. At March 31, 2009, Citizens had 2,157,956 shares of common stock reserved for future issuance under the current plan. Restrictions on nonvested stock generally lapse in three annual installments beginning on the first anniversary of the grant date. Restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights.

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock awards included in the Consolidated Statements of Operations for the three months ended March 31, 2009 and March 31, 2008.

		Three Months Ended
Analysis of Stock-Based Compensation Expense		March 31,
(in thousands)		2009				2008
Stock Option Compensation		$	4			$	8
Restricted Stock Compensation			(279	)			1,060
Stock-based compensation expense before income taxes			(275	)			1,068
Income tax provision (benefit)			96				(374	)
Total stock-based compensation expense after income taxes		$	(179	)		$	694

During the first quarter of 2009, a pre-tax expense reversal of $1.3 million was made to stock-based compensation as a result of actual forfeitures exceeding the estimated forfeiture rate for restricted stock.

There were no stock option exercises for the three months ended March 31, 2009. Cash proceeds from the exercise of stock options was less than $0.1 million for the three months ended March 31, 2008. New shares are issued when stock options are exercised. In accordance with SFAS 123R, “Stock-Based Compensation,” Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash inflows and as operating cash outflows on the Consolidated Statement of Cash Flows.

There were no stock options granted in the three months ended March 31, 2009. As of March 31, 2009, $3.7 million of total unrecognized compensation cost related to stock options and restricted stock is expected to be recognized over a weighted average period of 1.7 years.

The following table summarizes restricted stock activity for the three months ended March 31, 2009.

						Weighted-Average
		Number of				Grant Date Fair
		Shares				Value
| |
Outstanding restricted stock at December 31, 2008			609,032			$	14.43
Granted			384,818				1.29
Vested			(37,352	)			19.19
Forfeited			(72,354	)			18.98
Restricted stock at March 31, 2009			884,144				8.14