10-Q 1 k66153e10-q.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2001 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 September 30, 2001 ----------------------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------------------- ----------------------- Commission file Number 0-10535 ------------------------------ CITIZENS BANKING CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2378932 ---------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 328 S. Saginaw St., Flint, Michigan 48502 ---------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) (810) 766-7500 ---------------------------------------------------- (Registrant's telephone number, including area code) None ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days X Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 09, 2001 ------------------------------- -------------------------------- Common Stock, No Par Value 45,485,905 Shares CITIZENS BANKING CORPORATION Index to Form 10-Q

Page ---- PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements..................................................................... 3 Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations.............................................................................11 Item 3 - Quantitative and Qualitative Disclosure of Market Risk................................................26 PART II - OTHER INFORMATION Item 1 - Legal Proceedings.................................................................................... 26 Item 2 - Changes in Securities................................................................................ 26 Item 3 - Defaults upon Senior Securities...................................................................... 26 Item 4 - Submission of Matters to a Vote of Security Holders.................................................. 26 Item 5 - Other Information.................................................................................... 26 Item 6 - Exhibits and Reports on Form 8-K..................................................................... 26 SIGNATURES......................................................................................................... 27

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

CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES SEPTEMBER 30, December 31, (in thousands) 2001 2000 --------------------------------------------- ------------- ------------ (UNAUDITED) (Note 1) ASSETS Cash and due from banks $ 212,210 $ 318,115 Money market investments: Federal funds sold 4,306 24,986 Commercial paper 36,262 -- Interest-bearing deposits with banks 2,502 2,547 ----------- ----------- Total money market investments 43,070 27,533 Securities available-for-sale: U.S. Treasury and federal agency securities 744,442 873,235 State and municipal securities 460,612 430,775 Other securities 73,834 80,098 ----------- ----------- Total investment securities 1,278,888 1,384,108 Loans: Commercial 3,266,045 3,332,156 Real estate construction 203,663 235,096 Real estate mortgage 976,553 1,282,834 Consumer 1,535,381 1,572,720 ----------- ----------- Total loans 5,981,642 6,422,806 Less: Allowance for loan losses (81,355) (80,070) ----------- ----------- Net loans 5,900,287 6,342,736 Premises and equipment 130,551 137,094 Intangible assets 82,616 90,808 Other assets 67,019 104,697 ----------- ----------- TOTAL ASSETS $ 7,714,641 $ 8,405,091 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 854,334 $ 973,938 Interest-bearing 5,035,902 5,270,203 ----------- ----------- Total deposits 5,890,236 6,244,141 Federal funds purchased and securities sold under agreements to repurchase 155,213 394,466 Other short-term borrowings 201,969 538,784 Other liabilities 100,066 76,604 Long-term debt 645,967 471,117 ----------- ----------- Total liabilities 6,993,451 7,725,112 Shareholders' Equity: Preferred stock - No par value -- -- Common stock - No par value 175,288 201,549 Retained earnings 508,013 466,692 Accumulated other comprehensive income 37,889 11,738 ----------- ----------- Total shareholders' equity 721,190 679,979 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,714,641 $ 8,405,091 =========== ===========

See notes to consolidated financial statements. 3

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- (in thousands, except per share amounts) 2001 2000 2001 2000 --------- --------- --------- --------- INTEREST INCOME Interest and fees on loans $ 121,137 $ 138,835 $ 381,614 $ 395,506 Interest and dividends on investment securities: Taxable 12,973 16,380 44,562 50,024 Nontaxable 5,499 5,094 16,238 15,210 Money market investments 797 38 1,810 99 --------- --------- --------- --------- Total interest income 140,406 160,347 444,224 460,839 --------- --------- --------- --------- INTEREST EXPENSE Deposits 48,653 59,676 164,314 166,284 Short-term borrowings 4,761 14,959 24,821 44,251 Long-term debt 8,732 6,087 24,784 11,690 --------- --------- --------- --------- Total interest expense 62,146 80,722 213,919 222,225 --------- --------- --------- --------- NET INTEREST INCOME 78,260 79,625 230,305 238,614 Provision for loan losses 8,500 4,642 18,911 15,088 --------- --------- --------- --------- Net interest income after provision for loan losses 69,760 74,983 211,394 223,526 --------- --------- --------- --------- NONINTEREST INCOME Service charges on deposit accounts 6,960 6,825 20,844 19,553 Trust fees 5,096 5,901 15,860 18,312 Mortgage and other loan income 2,840 1,402 9,395 3,485 Bankcard fees 2,922 2,865 9,032 8,226 Brokerage and investment fees 2,030 1,752 5,933 5,770 Investment securities gains (losses) 49 (5) 5,772 (6) Gain on sale of NYCE stock 11,017 -- 11,017 -- Gain on sale of credit card assets -- -- 2,623 -- Other 3,793 4,470 10,983 11,983 --------- --------- --------- --------- Total noninterest income 34,707 23,210 91,459 67,323 --------- --------- --------- --------- NONINTEREST EXPENSE Salaries and employee benefits 32,304 31,309 95,348 94,501 Equipment 4,655 4,824 14,686 14,222 Occupancy 4,174 4,009 13,554 12,660 Data processing fees 3,496 3,223 9,959 8,936 Professional services 3,646 2,771 9,058 7,779 Intangible asset amortization 2,704 2,615 8,163 7,858 Bankcard fees 2,334 2,202 7,178 6,713 Postage and delivery 1,930 1,750 5,817 5,147 Advertising and public relations 1,661 1,493 4,854 4,534 Special charge -- (99) -- 7,189 Other 7,366 7,474 21,980 22,292 --------- --------- --------- --------- Total noninterest expense 64,270 61,571 190,597 191,831 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 40,197 36,622 112,256 99,018 Income taxes 12,235 10,893 33,341 28,713 --------- --------- --------- --------- NET INCOME $ 27,962 $ 25,729 $ 78,915 $ 70,305 ========= ========= ========= ========= NET INCOME PER SHARE: Basic $ 0.60 $ 0.54 $ 1.70 $ 1.48 Diluted 0.60 0.54 1.69 1.47 AVERAGE SHARES OUTSTANDING: Basic 46,102 47,235 46,321 47,495 Diluted 46,670 47,518 46,799 47,659

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

Accumulated Other Common Retained Comprehensive (in thousands except per share amounts) Stock Earnings Income Total --------------------------------------- --------- --------- ------------- --------- BALANCE - SEPTEMBER 30, 2000 $ 213,720 $ 458,615 $ (7,382) $ 664,953 Net income 20,355 20,355 Net unrealized gain on securities available-for-sale, net of tax effect 19,120 19,120 --------- Total comprehensive income 39,475 Exercise of stock options, net of shares purchased 596 596 Shares acquired for retirement (12,767) (12,767) Cash dividends - $0.26 per share (12,278) (12,278) --------- --------- --------- --------- BALANCE - DECEMBER 31, 2000 $ 201,549 $ 466,692 $ 11,738 $ 679,979 Net income 23,805 23,805 Net unrealized gain on securities available-for-sale, net of tax effect 13,575 13,575 --------- Total comprehensive income 37,380 Exercise of stock options, net of shares purchased 2,960 2,960 Shares acquired for retirement (5,872) (5,872) Cash dividends - $0.26 per share (12,098) (12,098) --------- --------- --------- --------- BALANCE - MARCH 31, 2001 $ 198,637 $ 478,399 $ 25,313 $ 702,349 Net income 27,148 27,148 Net unrealized loss on securities available-for-sale, net of tax effect (5,706) (5,706) --------- Total comprehensive income 21,442 Exercise of stock options, net of shares purchased 626 626 Shares acquired for retirement (4,970) (4,970) Cash dividends - $0.275 per share (12,771) (12,771) --------- --------- --------- --------- BALANCE - JUNE 30, 2001 $ 194,293 $ 492,776 $ 19,607 $ 706,676 Net income 27,962 27,962 Net unrealized gain on securities available-for-sale, net of tax effect 18,282 18,282 --------- Total comprehensive income 46,244 Exercise of stock options, net of shares purchased 4,401 4,401 Shares acquired for retirement (23,406) (23,406) Cash dividends - $0.275 per share (12,725) (12,725) --------- --------- --------- --------- BALANCE - SEPTEMBER 30, 2001 $ 175,288 $ 508,013 $ 37,889 $ 721,190 ========= ========= ========= =========

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

Nine Months Ended September 30, ---------------------- (in thousands) 2001 2000 -------------- --------- --------- OPERATING ACTIVITIES: Net income $ 78,915 $ 70,305 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 18,911 15,088 Depreciation 12,255 11,611 Amortization of intangibles 8,163 7,858 Net amortization on investment securities (568) (8) Investment securities (gains) losses (5,772) 6 Loans originated for sale (544,820) (70,211) Proceeds from loan sales 545,293 70,395 Donation of equity security -- 1,116 Decrease in accrued merger related and other charges (2,329) (13,439) Other 51,443 11,881 --------- --------- Net cash provided by operating activities 161,491 104,602 INVESTING ACTIVITIES: Net (increase) decrease in money market investments (15,537) 56,734 Securities available-for-sale: Proceeds from sales 286,412 5,766 Proceeds from maturities 264,093 140,525 Purchases (398,697) (94,075) Net (increase) decrease in loans 421,023 (498,901) Net increase in premises and equipment (5,712) (10,151) Acquisitions (net of cash acquired) -- 26,008 --------- --------- Net cash provided (used) by investing activities 551,582 (374,094) FINANCING ACTIVITIES: Net decrease in demand and savings deposits (82,039) (247,155) Net increase (decrease) in time deposits (271,866) 241,530 Net decrease in short-term borrowings (576,068) (10,382) Proceeds from issuance of long-term debt 175,000 690,000 Principal reductions in long-term debt (150) (370,017) Cash dividends paid (37,594) (35,830) Proceeds from stock options exercised 7,987 1,283 Shares acquired for retirement (34,248) (14,535) --------- --------- Net cash provided (used) by financing activities (818,978) 254,894 --------- --------- Net decrease in cash and due from banks (105,905) (14,598) Cash and due from banks at beginning of period 318,115 250,745 --------- --------- Cash and due from banks at end of period $ 212,210 $ 236,147 ========= =========

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 nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's 2000 Annual Report on Form 10-K. NOTE 2. ACQUISITIONS AND MERGER-RELATED EXPENSES On May 12, 2000, Citizens Banking Corporation completed the purchase of three Jackson, Michigan offices of Great Lakes National Bank with approximately $31 million in deposits. In the fourth quarter of 1999, Citizens merged with F&M Bancorporation, Inc. ("F&M"), a $2.7 billion bank holding company headquartered in Kaukauna, Wisconsin and completed the acquisition of seventeen (17) former Bank One offices located in the northern section of Michigan's Lower Peninsula (the "Branch Purchase"). The Branch Purchase added approximately $88 million in loans and $442 million in deposits. Merger-related and other costs recorded in the fourth quarter of 1999 totaled $50.6 million ($35.2 million after tax) of which $40.2 million was recorded as a separate component of noninterest expense (the "Special Charge"), $6.8 million as additional provision for loan losses and $3.6 million as securities losses. Actions incorporated in the business combination and restructuring plan for the Branch Purchase were completed in 1999. At September 30, 2001, the remaining reserve balance related to the F&M merger and initiatives approved in 1999 totaled $300,000. In the fourth quarter of 2000, Citizens recorded an additional pre-tax charge of $3.2 million ($2.1 million after-tax) for restructuring costs of $2.0 million and asset impairment and other charges of $1.2 million associated with new corporate and organizational re-engineering initiatives. The $2.0 million charge for restructuring consisted primarily of involuntary employee termination costs, representing 44 terminations. The related restructuring reserve at September 30, 2001 totaled $700,000. The combined remaining reserves totaled $1.0 million at September 30, 2001 and consisted of involuntary employee termination benefits to be paid over the remaining severance period. The following table shows the remaining reserve balance through September 30, 2001.

DESCRIPTION OF COSTS December 31, September 30, December 31, September 30, (in thousands) 1999 2000 2000 2001 -------------- ------------ ------------- ------------ ------------- Employee benefits and severance $ 7,337.9 $3,613.1 $3,316.0 $1,008.3 Contract termination and other conversion costs 9,356.9 253.2 19.0 -- Professional fees 634.5 81.5 2.0 -- Other 57.6 -- -- -- --------- -------- -------- -------- Total $17,386.9 $3,947.8 $3,337.0 $1,008.3 ========= ======== ======== ========

Changes in the reserve balance reflects cash payments of $2.3 million for the first nine months of 2001 and $8.5 million for the same period of 2000. 7 NOTE 3. LINES OF BUSINESS INFORMATION The Corporation is managed along the following business lines: Commercial Banking, Retail Banking, Financial Services, F&M and all other. Selected lines of business segment information for the three and nine month periods ended September 30, 2001 and 2000 is provided below. Prior year amounts have been restated to reflect the current business unit structure and cost allocation methodology. There are no significant intersegment revenues.

Special Charge Net And Commercial Retail Financial Operating Other (in thousands) Banking Banking Services F&M Other Income Items Total ------------- ---------- -------- --------- -------- --------- --------- --------- --------- EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2001 Net interest income (taxable equivalent) $ 23,472 $ 30,742 $ 197 $ 23,495 $ 4,062 $ 81,968 -- $ 81,968 Provision for loan losses 1,688 1,676 -- 5,156 (20) 8,500 -- 8,500 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision 21,784 29,066 197 18,339 4,082 73,468 -- 73,468 Noninterest income 3,565 9,531 5,628 4,752 11,231 34,707 -- 34,707 Noninterest expense 10,619 24,880 3,352 17,863 7,556 64,270 -- 64,270 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 14,730 13,717 2,473 5,228 7,757 43,905 -- 43,905 Income tax expense (taxable equivalent) 5,156 4,802 866 1,824 3,295 15,943 -- 15,943 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 9,574 $ 8,915 $ 1,607 $ 3,404 $ 4,462 $ 27,962 -- $ 27,962 ======== ======== ======== ======== ======== ======== ======== ======== Average assets (in millions) $ 2,181 $ 1,966 $ 16 $ 2,562 $ 1,084 $ 7,809 ======== ======== ======== ======== ======== ======== EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 2000 Net interest income (taxable equivalent) $ 22,462 $ 35,530 $ 337 $ 26,208 $ (1,373) $ 83,164 -- $ 83,164 Provision for loan losses 1,671 2,190 -- 832 (51) 4,642 -- 4,642 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision 20,791 33,340 337 25,376 (1,322) 78,522 -- 78,522 Noninterest income 2,815 9,054 6,466 4,161 714 23,210 -- 23,210 Noninterest expense 10,055 24,376 4,470 17,319 5,450 61,670 (99) 61,571 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 13,551 18,018 2,333 12,218 (6,058) 40,062 99 40,161 Income tax expense (taxable equivalent) 4,741 6,307 816 4,571 (2,062) 14,373 59 14,432 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) 8,810 11,711 1,517 7,647 (3,996) $ 25,689 40 25,729 ======== ======== Allocation of special charge and other unusual items -- -- -- 313 (273) (40) -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 8,810 $ 11,711 $ 1,517 $ 7,960 $ (4,269) -- $ 25,729 ======== ======== ======== ======== ======== ======== ======== Average assets (in millions) $ 2,114 $ 2,691 $ 13 $ 2,735 $ 611 $ 8,164 ======== ======== ======== ======== ======== ========

8

Special Charge Net And Commercial Retail Financial Operating Other (in thousands) Banking Banking Services F&M Other Income Items Total -------------- ---------- --------- ---------- -------- -------- ---------- --------- -------- EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2001 Net interest income (taxable equivalent) $ 69,783 $ 96,929 $ 881 $ 71,619 $ 2,225 $241,437 -- $241,437 Provision for loan losses 2,965 5,447 -- 11,122 (623) 18,911 -- 18,911 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision 66,818 91,482 881 60,497 2,848 222,526 -- 222,526 Noninterest income 10,172 37,663 17,467 14,530 11,627 91,459 -- 91,459 Noninterest expense 33,012 76,526 10,655 53,212 17,192 190,597 -- 190,597 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 43,978 52,619 7,693 21,815 (2,717) 123,388 -- 123,388 Income tax expense (taxable equivalent) 15,393 18,417 2,693 7,912 58 44,473 -- 44,473 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 28,585 $ 34,202 $ 5,000 $ 13,903 $ (2,775) $ 78,915 -- $ 78,915 ======== ======== ======== ======== ======== ======== ======== ======== AVERAGE ASSETS (IN MILLIONS) $ 2,179 $ 2,373 $ 14 $ 2,671 $ 778 $ 8,015 ======== ======== ======== ======== ======== ======== ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 2000 Net interest income (taxable equivalent) $ 64,654 $101,476 $ 995 $ 79,965 $ 1,977 $249,067 $ -- $249,067 Provision for loan losses 3,997 7,934 -- 1,708 1,449 15,088 -- 15,088 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision 60,657 93,542 995 78,257 528 233,979 -- 233,979 Noninterest income 8,335 24,859 19,939 11,837 2,353 67,323 67,323 Noninterest expense 30,494 77,085 13,719 47,862 15,482 184,642 7,189 191,831 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 38,498 41,316 7,215 42,232 (12,601) 116,660 (7,189) 109,471 Income tax expense (taxable equivalent) 13,485 14,461 2,525 15,454 (3,933) 41,992 (2,826) 39,166 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) 25,013 26,855 4,690 26,778 (8,668) $ 74,668 (4,363) 70,305 ======== Allocation of special charge and other unusual items -- -- -- (3,744) (619) 4,363 -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 25,013 $ 26,855 $ 4,690 $ 23,034 $ (9,287) $ -- $ 70,305 ======== ======== ======== ======== ======== ======== ======== AVERAGE ASSETS (IN MILLIONS) $ 2,014 $ 2,568 $ 17 $ 2,728 $ 689 $ 8,016 ======== ======== ======== ======== ======== ======== -----------------------------------------------------------------------------------------------------------------------------------

9 NOTE 4. EARNINGS PER SHARE Net income per share is computed based on the weighted-average number of shares outstanding, including the dilutive effect of stock options, as follows:

Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (in thousands, except per share amounts) 2001 2000 2001 2000 ------- ------- ------- ------- NUMERATOR: Basic and dilutive earnings per share -- net income available to common shareholders $27,962 $25,729 $78,915 $70,305 ======= ======= ======= ======= DENOMINATOR: Basic earnings per share -- weighted average shares 46,102 47,235 46,321 47,495 Effect of dilutive securities -- potential conversion of employee stock options 568 283 478 164 ------- ------- ------- ------- Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 46,670 47,518 46,799 47,659 ======= ======= ======= ======= BASIC EARNINGS PER SHARE $ 0.60 $ 0.54 $ 1.70 $ 1.48 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 0.60 $ 0.54 $ 1.69 $ 1.47 ======= ======= ======= =======

During the third quarter of 2001, employees exercised stock options to acquire 220,283 shares at an average exercise price of $19.98 per share. NOTE 5. 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

FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION CITIZENS BANKING CORPORATION AND SUBSIDIARIES FOR QUARTER ENDED ---------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 2001 2001 2001 2000 (1) 2000 (1) ------------- --------- --------- ----------- ------------- SUMMARY OF OPERATIONS (THOUSANDS) Interest income $140,406 $147,260 $156,558 $161,169 $160,347 Net interest income 78,260 76,425 75,620 76,260 79,625 Provision for loan losses 8,500 6,362 4,049 5,895 4,642 Investment securities gains (losses) 49 3,504 2,219 6 (5) Other noninterest income 34,658 28,587 22,442 23,015 23,215 Noninterest expense before special charge 64,270 63,616 62,711 57,579 61,670 Special charge: Before-tax -- -- -- 8,352 (99) After-tax -- -- -- 5,101 (40) Income taxes 12,235 11,390 9,716 7,100 10,893 Net income 27,962 27,148 23,805 20,355 25,729 Net operating income (2) 27,962 27,148 23,805 25,456 25,689 Cash dividends 12,725 12,771 12,098 12,278 12,295 -------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic net income $0.60 $0.59 $0.51 $0.44 $0.54 Diluted net income 0.60 0.58 0.51 0.44 0.54 Diluted - net operating income (2) 0.60 0.58 0.51 0.54 0.54 Cash dividends 0.275 0.275 0.26 0.26 0.26 Market value (end of period) 32.08 29.25 26.69 29.06 23.00 Book value (end of period) 15.77 15.27 15.13 14.62 14.15 -------------------------------------------------------------------------------------------------------------------------------- AT PERIOD END (MILLIONS) Assets $7,715 $7,924 $8,199 $8,405 $8,276 Loans 5,982 6,110 6,183 6,423 6,406 Deposits 5,890 5,922 6,118 6,244 6,154 Shareholders' equity 721 707 702 680 665 -------------------------------------------------------------------------------------------------------------------------------- AVERAGE FOR THE QUARTER (MILLIONS) Assets $7,809 $7,977 $8,264 $8,244 $8,164 Loans 6,025 6,169 6,329 6,393 6,311 Deposits 5,944 6,007 6,155 6,180 6,159 Shareholders' equity 713 700 688 668 657 -------------------------------------------------------------------------------------------------------------------------------- RATIOS (ANNUALIZED) Return on average assets 1.42 % 1.37 % 1.17 % 0.98 % 1.25 % Net operating return on average assets (2) 1.42 1.37 1.17 1.23 1.25 Return on average shareholders' equity 15.56 15.56 14.03 12.12 15.58 Net operating return on average shareholders' equity (2) 15.56 15.56 14.03 15.16 15.56 Net interest margin (FTE) 4.44 4.26 4.10 4.09 4.31 Net loans charged off to average loans 0.56 0.36 0.23 0.43 0.23 Average equity to average assets 9.13 8.78 8.33 8.10 8.05 Allowance for loan losses ratio 1.36 1.33 1.30 1.25 1.27 Nonperforming assets to loans plus ORAA (end of period) 1.32 1.40 1.19 1.03 0.84 Nonperforming assets to total assets (end of period) 1.02 1.08 0.90 0.79 0.65 Leverage ratio 7.84 7.71 7.25 7.11 7.19 Tier 1 capital ratio 10.06 9.91 9.52 9.05 9.20 Total capital ratio 11.31 11.16 10.77 10.30 10.45 --------------------------------------------------------------------------------------------------------------------------------

(1) Certain amounts have been reclassified to conform with current year presentation. (2) Net operating income is based on net income that excludes special charges incurred in connection with acquisitions and other corporate initiatives. 11 INTRODUCTION The following is a review of Citizens Banking Corporation's ("Citizens") performance during the three and nine months ended September 30, 2001. 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' 2000 Annual Report on Form 10-K. A quarterly summary of selected financial data for the five-quarter period ended September 30, 2001 is presented in the table on page 11. EARNINGS SUMMARY Citizens earned net income of $28.0 million for the three months ended September 30, 2001, or $0.60 per share, compared with net income of $25.7 million, or $0.54 per share, for the same quarter of 2000. Returns on average assets and average equity for the quarter were 1.42% and 15.56%, respectively, compared with 1.25% and 15.58%, respectively, in 2000. For the first nine months of 2001, net income was $78.9 million or $1.69 per share, compared to $70.3 million or $1.47 per share for the same period in 2000. Returns on average assets and average equity during the first nine months of 2001 were 1.32% and 15.05%, respectively, compared with 1.17% and 14.58%, respectively, in 2000. Net income for the nine months ended September 30, 2000 includes a special charge of $7.2 million ($4.4 million after-tax) related to the merger and integration of F&M Bancorporation, Inc. (F&M), which merged with Citizens on November 1, 1999. See Note 2. Acquisitions and Merger-Related Expenses to Citizens' consolidated financial statements for additional details. Net income in the three and nine months ended September 30, 2001 is higher than the same periods in 2000 primarily due to an increase in noninterest income partially offset by lower net interest income and higher provision for loan losses. Noninterest income increased in both the three and nine months ended September 30, 2001 over the comparable periods in 2000 due to an $11.0 million pre-tax gain from the sale of NYCE stock during the third quarter, significant increases in securities gains, mortgage-related fee income, deposit service charges and bankcard fees partially offset by a decrease in trust fees. In addition during the second quarter of 2001, Citizens recognized a gain of $2.6 million on the sale of $30 million of credit card loans. Noninterest expense increased 4.2% and 3.2%, respectively, for both the three and nine months ended September 30, 2001 compared with the same periods in 2000, excluding the special charge of $7.2 million in the prior year period. Noninterest expense increases in the three and nine month periods are primarily attributable to higher compensation, occupancy, data processing and professional services expenses. Variances in operating expenses are summarized in the table on page 19. LINES OF BUSINESS REPORTING Citizens operates along four major business segments: Commercial Banking, Retail Banking, Financial Services and F&M. For more information about each line of business, see Note 18 to the Corporation's 2000 Annual Report on Form 10-K and Note 3 of this Quarterly Report on Form 10Q. A summary of net income by each business line is presented below.

Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- (in thousands) 2001 2000 2001 2000 -------------- ------- -------- ------- ------- Commercial Banking $9,574 $8,810 $28,585 $25,013 Retail Banking 8,915 11,711 34,202 26,855 Financial Services 1,607 1,517 5,000 4,690 F&M 3,404 7,960 13,903 23,034 Other 4,462 (4,269) (2,775) (9,287) ----- ------- ------- ------- Net income $27,962 $25,729 $78,915 $70,305 ======= ======= ======= =======

The increase in Commercial Banking for the three and nine months ended September 30, 2001 was due to higher net interest income from loan growth, improved noninterest income from increased deposit service charges and a lower loan loss provision on a year to date basis, offset in part by higher operating expenses. Retail Banking decreased for the three month period ended September 30, 2001 over the comparable period in 2000 due to lower net interest income from declining rates and lower average loan balances due to the sale of credit card loans and the securitization of mortgage loans. For the nine month period ended September 30, 2001 Retail Banking has increased over the comparable period in 2000 due to higher noninterest income and a decrease in the provision for loan losses. Noninterest income increased primarily from a $5.7 million gain on the sale of securitized mortgages in the first and second quarters of 2001, a gain of $2.6 million on the sale of credit card portfolio, increased gains on sale of new mortgage production and higher deposit service charges and bankcard fees. 12 Financial Services income improved slightly despite lower revenue due to a decline in operating costs in both trust and brokerage services. Trust fees have decreased as the market value of managed assets is lower due to the decline in equity markets. Net income in the Other category increased due to the $11.0 million pre-tax gain on the sale of NYCE stock. The decrease in net income at F&M is due primarily to lower net interest income and a higher provision for loan losses. Net interest income declined as a result of lower net interest margin due to the decline in short-term interest rates and lower average earning assets. Earning assets have decreased due to the transition of the commercial loan portfolio and implementation of Citizens' credit standards and loan structuring criteria in the F&M markets. The provision for loan losses increased due to higher commercial and direct consumer loan charge-offs. NET INTEREST INCOME Tax equivalent net interest income, decreased 1.4%, to $82.0 million in the third quarter of 2001 from $83.2 million in the comparable period in 2000. A decline in earning assets offset, in part, by an improvement in the net interest margin due to the balance sheet restructuring and lower interest rate environment, contributed to the decrease in net interest income. Earning assets declined as a result of the sale of securitized mortgages and credit card loans, and slower growth in commercial loans as Citizens continues to transition and refocus the commercial loan portfolio at F&M to target markets consistent with its overall business strategy and implement Citizens' credit standards and loan structuring criteria. For the nine months ended September 30, 2001 tax equivalent net interest income decreased 3.1% to $241.4 million from $249.1 million for the same period in 2000. A lower net interest margin resulted in decreased net interest income as yields on loans and money market investments declined more than the average cost of interest bearing liabilities during the first half of 2001. Detailed analyses of net interest income, with average balances and related interest rates for the three and nine months ended September 30, 2001 and 2000 are presented on page 15 and 16. An analysis of how changes in average balances ("volume") and market rates of interest ("rates") have effected net interest income appears in the table on page 14. Yields on earning assets for the three and nine months ended September 30, 2001 decreased to 7.80%, and 8.05%, respectively, from 8.48% and 8.33%, for the same periods in the prior year. Lower funding costs resulted in a favorable rate variance for the three month period ended September 30, 2001 compared to the same period of the prior year. For the nine month period ended September 20, 2001, earning asset yields declined faster than funding costs resulting in an unfavorable rate variance. Decreases to Citizens' prime lending rate resulting from a market decline in short-term interest rates was a major factor of this decrease. The unfavorable volume variances for both the three and nine month periods ended September 30, 2001 reflects lower average real estate loan and taxable investment security balances from increased sales of mortgages and mortgage-backed securities. Average short-term borrowings were down as Citizens extended debt maturities in response to the lower interest rate environment and reduced overall borrowed funds in the third quarter. Net interest margin, the difference between yields earned on earning assets compared to the rates paid on supporting funds, was 4.44% for the third quarter, an increase of 13 basis points over the same period in 2000. The improvement in net interest margin is due to a decrease in funding costs offset in part by a decrease in asset yields as a result of the declining interest rate environment. Net interest margin increased 18 basis points in the third quarter 2001 from the second quarter 2001, and 34 basis points from the first quarter of 2001. The increase is due to the balance sheet restructuring efforts as well as decreased funding costs. However, future decreases in short-term interest rates may effect Citizens' ability to continue the improvements in the net interest margin. Net interest margin was 4.27% for the first nine months of 2001, a decline of 13 basis points over the same period in 2000. The decline in net interest margin from the comparable nine month period last year is the result of yields on earning assets declining more rapidly than interest bearing liabilities in the first half of 2001. Management continually monitors Citizens' balance sheet to insulate net interest income from significant swings caused by interest rate volatility. Citizens' policies in this regard are further discussed in the section titled "Interest Rate Risk". 13 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

2001 Compared with 2000 ------------------------------------------------------------------------------------ Three Months Ended September 30, Nine Months Ended September 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 $ 759 $ (15) $ 774 $ 1,711 $ (26) $ 1,737 Investment securities: Taxable (3,407) (321) (3,086) (5,462) 337 (5,799) Tax-exempt 405 (53) 458 1,028 (38) 1,066 Loans: Commercial (7,735) (10,319) 2,584 6,847 (17,612) 24,459 Real estate (6,859) (55) (6,804) (20,892) 380 (21,272) Consumer (3,104) (1,979) (1,125) 153 (954) 1,107 -------- -------- -------- -------- -------- -------- Total (19,941) (12,742) (7,199) (16,615) (17,913) 1,298 -------- -------- -------- -------- -------- -------- INTEREST EXPENSE Deposits: Demand 2,377 1,356 1,021 3,543 2,397 1,146 Savings (6,169) (4,885) (1,284) (11,604) (9,332) (2,272) Time (7,231) (5,383) (1,848) 6,091 213 5,878 Short-term borrowings (10,198) (3,915) (6,283) (19,430) (5,195) (14,235) Long-term debt 2,645 (1,017) 3,662 13,094 (1,311) 14,405 -------- -------- -------- -------- -------- -------- Total (18,576) (13,844) (4,732) (8,306) (13,228) 4,922 -------- -------- -------- -------- -------- -------- NET INTEREST INCOME $ (1,365) $ 1,102 $ (2,467) $ (8,309) $ (4,685) $ (3,624) ======== ======== ======== ======== ======== ========

(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. 14 AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2001 2000 ------------------------------- --------------------------------- Three Months Ended September 30 AVERAGE AVERAGE Average Average (in thousands) BALANCE INTEREST(1) RATE (2) Balance Interest(1) Rate (2) ------------------------------- --------- ----------- -------- --------- ----------- --------- EARNING ASSETS Money market investments: Federal funds sold $49,910 $453 3.55 % $997 $16 6.48 % Other 38,819 344 3.52 2,084 22 4.19 Investment securities(3): Taxable 801,660 12,973 6.47 991,962 16,380 6.60 Tax-exempt 429,847 5,499 7.87 394,115 5,094 7.95 Loans: Commercial 3,418,443 66,288 7.78 3,311,636 74,023 8.99 Real estate 1,080,452 21,051 7.78 1,429,646 27,910 7.80 Consumer 1,525,911 33,798 8.79 1,569,271 36,902 9.36 --------- ------ --------- ------ Total earning assets(3) 7,345,042 140,406 7.80 7,699,711 160,347 8.48 NONEARNING ASSETS Cash and due from banks 205,544 223,415 Bank premises and equipment 131,482 141,666 Investment security fair value adjustment 43,086 (17,044) Other nonearning assets 165,746 197,330 Allowance for loan losses (81,807) (80,881) -------- -------- Total assets $7,809,093 $8,164,197 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Demand deposits 805,186 4,362 2.15 568,706 1,985 1.39 Savings deposits 1,420,092 7,663 2.14 1,662,669 13,832 3.31 Time deposits 2,829,613 36,628 5.14 2,966,068 43,859 5.88 Short-term borrowings 420,964 4,761 4.48 888,866 14,959 6.68 Long-term debt 638,912 8,732 5.42 379,073 6,087 6.39 ---------- ------ --------- ------ ---- Total interest-bearing liabilities 6,114,767 62,146 4.03 6,465,382 80,722 4.96 ------ ------ NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 888,822 961,961 Other liabilities 92,450 79,759 Shareholders' equity 713,054 657,095 ---------- ------- Total liabilities and shareholders' equity $7,809,093 $8,164,197 ========== ========== NET INTEREST INCOME $78,260 $79,625 ======= ======= NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.44 % 4.31 %

(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 $3,708,000 and $3,539,000 for the three months ended September 30, 2001 and 2000, 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 AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES

2001 2000 -------------------------------- ----------------------------------- Nine Months Ended September 30 AVERAGE AVERAGE Average Average (in thousands) BALANCE INTEREST(1) RATE (2) Balance Interest(1) Rate(2) ------------------------------ --------- ----------- -------- ----------- ----------- -------- EARNING ASSETS Money market investments: Federal funds sold $33,771 $1,084 4.23 % $822 $38 6.18 % Other 24,107 726 4.02 1,730 61 4.68 Investment securities(3): Taxable 902,479 44,562 6.58 1,019,957 50,024 6.54 Tax-exempt 417,406 16,238 7.98 390,014 15,210 7.99 Loans: Commercial 3,466,813 209,824 8.18 3,086,807 202,977 8.88 Real estate 1,162,876 67,018 7.68 1,532,014 87,910 7.65 Consumer 1,543,450 104,772 9.08 1,519,124 104,619 9.20 --------- ------- --------- ------- Total earning assets(3) 7,550,902 444,224 8.05 7,550,468 460,839 8.33 NONEARNING ASSETS Cash and due from banks 201,724 224,719 Bank premises and equipment 133,328 142,350 Investment security fair value adjustment 34,572 (27,950) Other nonearning assets 175,602 206,007 Allowance for loan losses (81,245) (80,090) ---------- ---------- Total assets $8,014,883 $8,015,504 ========== ========== INTEREST-BEARING LIABILITIES Deposits: Demand deposits 682,672 9,888 1.94 587,167 6,345 1.44 Savings deposits 1,501,233 29,551 2.63 1,726,156 41,155 3.18 Time deposits 2,967,714 124,875 5.63 2,835,445 118,784 5.60 Short-term borrowings 610,607 24,821 5.42 947,365 44,251 6.22 Long-term debt 581,552 24,784 5.70 246,212 11,690 6.34 --------- ------- --------- ------- Total interest-bearing liabilities 6,343,778 213,919 4.51 6,342,345 222,225 4.68 ------- ------- NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 882,677 952,773 Other liabilities 87,894 75,944 Shareholders' equity 700,534 644,442 ---------- ---------- Total liabilities and shareholders' equity $8,014,883 $8,015,504 ========== ========== NET INTEREST INCOME $230,305 $238,614 ======== ======== NET INTEREST INCOME AS A PERCENT OF 4.27 % 4.40 % EARNING ASSETS

(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 $11,132,000 and $10,453,000 for the nine months ended September 30, 2001 and 2000, 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. 16 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 $8.5 million in the third quarter of 2001 and $18.9 million for the first nine months of the year, an increase of $3.9 million and $3.8 million, respectively over the same periods in 2000. Net charge-offs were 0.56% of average loans in the third quarter of 2001, up from 0.23% in the same period a year ago. The increase reflects higher charge-offs in the commercial loan portfolio. For the nine month period ended September 30, 2001, net charge-offs were 0.38% of average loans, up from 0.23% in the first nine months of 2000. A summary of loan loss experience during the three and nine months ended September 30, 2001 and 2000 is provided below. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ---------------------------- (in thousands) 2001 2000 2001 2000 -------------- ---------- --------- ---------- ---------- Allowance for loan losses - beginning of period $ 81,351 $ 80,047 $ 80,070 $ 76,397 Charge-offs 9,913 5,223 22,635 15,850 Recoveries 1,417 1,608 5,009 5,439 ---------- ---------- ---------- ---------- Net charge-offs 8,496 3,615 17,626 10,411 Provision for loan losses 8,500 4,642 18,911 15,088 ---------- ---------- ---------- ---------- Allowance for loan losses - end of period $ 81,355 $ 81,074 $ 81,355 $ 81,074 ========== ========== ========== ========== Loans outstanding at period end $5,981,642 $6,406,037 $5,981,642 $6,406,037 Average loans outstanding during period 6,024,807 6,310,553 6,173,139 6,137,945 Allowance for loan losses as a percentage of loans outstanding at period end 1.36% 1.27% 1.36% 1.27% Ratio of net charge-offs during period to average loans outstanding (annualized) 0.56 0.23 0.38 0.23 Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 2.4X 5.6x 3.5X 5.8x

Citizens maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on a regular, quarterly assessment of the probable losses inherent in the loan portfolios. The allowance is increased by the provision charged to income and reduced by the amount charged-off, net of recoveries. Citizens' methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, reserves by formula and an unallocated allowance. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate it is probable that a loss has been or will be incurred. The specific credit allocations are based on a regular analysis of all commercial and commercial mortgage loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. The allowance amount is determined by analyzing the financial condition, collateral value and other qualitative factors as well as by a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan". The formula allowance is calculated by applying loss factors to outstanding loans (excluding specifically identified credits) based on loan type, accrual status and internal risk grade of such loans and pools of loans. The loss factors are determined based on recent and historical (generally three-year) loss experience in the specific portfolios. The unallocated portion of the allowance is determined based upon management's assessment of general economic conditions, as well as specific economic factors in the individual markets in which Citizens operates. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Company's specific allowances or in the historical loss factors used to determine the formula allowances. The unallocated portion of the loan loss reserve at September 30, 2001 is $19.0 million and at December 31, 2000 was $21.5 million. The decrease is due to improved identification of potential losses and specific allocation of the reserve. 17 Citizens maintains formal policies and procedures to monitor and control credit risk. Citizens' loan portfolio has no significant concentrations in any one industry or any exposure to foreign loans. Citizens has generally not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Based on present information, management believes the allowance for loan losses is adequate to meet known risks in the loan portfolio. Employment levels and other economic conditions in the Corporation's local markets may have a significant impact on the level of credit losses. Management has identified and devotes appropriate attention to credits that may not be performing as well as expected. Nonperforming loans are further discussed in the section entitled "Nonperforming Assets." NONINTEREST INCOME A summary of significant sources of noninterest income during the first three and nine months of 2001 and 2000 follows:

NONINTEREST INCOME Percent Three Months Ended Nine Months Ended Change in 2001 September 30, September 30, ---------------------- --------------------- --------------------- Three Nine (in thousands ) 2001 2000 2001 2000 Months Months -------------- ------- ------- ------- ------- --------- --------- Service charges on deposit accounts $ 6,960 $ 6,825 $20,844 $19,553 2.0% 6.6% Trust fees 5,096 5,901 15,860 18,312 (13.6) (13.4) Mortgage and other loan income 2,840 1,402 9,395 3,485 102.6 169.6 Bankcard fees 2,922 2,865 9,032 8,226 2.0 9.8 Brokerage and investment fees 2,030 1,752 5,933 5,770 15.9 2.8 ATM network user fees 937 836 2,618 2,388 12.1 9.6 Cash management services 729 686 2,070 2,018 6.3 2.6 Other, net 2,127 2,948 6,295 7,577 (27.8) (16.9) ------- ------- ------- ------- Noninterest income before asset gains 23,641 23,215 72,047 67,329 1.8 7.0 Investment securities gains (losses) 49 (5) 5,772 (6) (1) (1) Gain on sale of NYCE stock 11,017 -- 11,017 -- (1) (1) Gain on sale of credit card assets -- -- 2,623 -- (1) (1) ------- ------- ------- ------- Total noninterest income $34,707 $23,210 $91,459 $67,323 49.5 35.9 ======= ======= ======= =======

(1) Not Meaningful Noninterest income, before gains on sale of securities and the gain on the sale of NYCE stock, was $23.6 million during the third quarter of 2001, an increase of 1.8% compared to the same period in 2000. Mortgage income continued to experience strong growth with an increase of 102.6% resulting from significantly higher loan volume and a higher percentage of loans sold in the secondary market. Brokerage and investment fees increased 15.9% resulting from deeper penetration in the F&M markets. Trust fees declined by 13.6% in the third quarter from the same period a year ago due to the continued weakening in the equity markets, lowering the value of managed assets upon which the fees are based. In the third quarter of this year, Citizens realized an $11.0 million pre-tax gain on the cash sale of NYCE stock. NYCE Corporation, an ATM provider in which Citizens held an equity interest, was acquired by First Data Corporation. For the nine months ended September 30, 2001, noninterest income, before asset gains, increased 7.0% over the comparable period last year. This growth came primarily from mortgage and other loan income, which increased 169.6%, while bankcard fees were up 9.8% and deposit service charges increased 6.6%. 18 NONINTEREST EXPENSE Significant changes in noninterest expense during the three and nine months ended September 30, 2001 and 2000 are summarized in the table below.

NONINTEREST EXPENSE Percent Three Months Ended Nine Months Ended Change in 2001 September 30, September 30, --------------------- ---------------------- ----------------------- Three Nine (in thousands) 2001 2000 2001 2000 Months Months -------------- ------- ------- ------- ------- --------- ---------- Salaries and employee benefits $32,304 $31,309 $95,348 94,501 3.2 % 0.9 % Equipment 4,655 4,824 14,686 14,222 (3.5) 3.3 Occupancy 4,174 4,009 13,554 12,660 4.1 7.1 Data processing services 3,496 3,223 9,959 8,936 8.5 11.4 Professional services 3,646 2,771 9,058 7,779 31.6 16.4 Intangible asset amortization 2,704 2,615 8,163 7,858 3.4 3.9 Bankcard fees 2,334 2,202 7,178 6,713 6.0 6.9 Postage and delivery 1,930 1,750 5,817 5,147 10.3 13.0 Advertising and public relations 1,661 1,493 4,854 4,534 11.3 7.1 Stationery and supplies 1,033 1,341 3,284 4,329 (23.0) (24.1) Other, net 6,333 6,133 18,696 17,963 3.3 4.1 ------- ------- -------- -------- Noninterest expense - operating basis 64,270 61,670 190,597 184,642 4.2 3.2 Special charge --- (99) --- 7,189 (1) (1) ------- ------- -------- -------- Total noninterest expense $64,270 $61,571 $190,597 $191,831 4.4 (0.6) ======= ======= ======== ========

(1) Not Meaningful For the quarter, operating expenses before the prior year special charge, increased 4.2%, or $2.6 million from third quarter 2000 levels. Salaries and employee benefits increased 3.2% from the same period in 2000 due to normal merit increases and higher sales-based incentive compensation. Professional services increased $875,000 or 31.6% due to higher legal costs for loan and other collection activities, increased cost of technical support in the F&M banks and other corporate initiatives. Data processing costs were up 8.5% due to the effect of processing all F&M banks on Citizens' outsourced operating systems. Postage and delivery expense increased 10.3% due to higher postal rates and increased utilization of outside courier services. Advertising and public relations increased 11.3% as a result of additional marketing campaigns and more concentrated advertising in the F&M markets. Stationery and supplies expense decreased 23.0% from third quarter 2000 levels due to merger and restructuring efficiencies. For the nine months ended September 30, 2001, noninterest expenses before the special charge increased by 3.2%, compared to the same period of the prior year. Special Charge -------------- Costs of $7.2 million ($4.4 million after-tax), in the first nine months of 2000, were recorded as a "Special Charge" for system conversions, business unit integration, branch closures and other items associated with the F&M merger. In the third quarter of 2000, Citizens successfully settled its contract with a former vendor of F&M and, as a result, reversed against the Special Charge approximately $3.9 million of previously accrued contract termination costs. All activities related to the F&M merger were completed by year-end 2000. Restructuring reserves related to the F&M merger totaled $1.0 million at September 30, 2001 and consisted of involuntary employee termination benefits to be paid over the remaining severance period. See Note 2. Acquisitions and Merger-Related Expenses for additional details. INCOME TAXES Income tax expense was $12.2 million in the third quarter of 2001, an increase of 12.3% over the same period last year. For the nine months ended September 30, 2001, income tax expense was $33.3 million, an increase of 16.1% over the same period in 2000. Higher pre-tax earnings resulted in the increase for both the three and nine months periods ended September 30, 2001, as compared to the same periods in the prior year. The effective tax rate for the nine months ended September 30, 2001 is 29.7% compared to 29.0% for the same period last year. 19 FINANCIAL CONDITION BALANCE SHEET RESTRUCTURING Citizens' total assets declined $690 million or 8.2% to $7.7 billion at September 30, 2001 from $8.4 billion as of December 31, 2000. The decline reflects Citizens' continued efforts to restructure its balance sheet to reduce interest rate risk and decrease reliance on higher cost borrowed funds. Citizens has reduced borrowed funds by selling the majority of new mortgage loan production into the secondary market and through the securitization and subsequent sale of $247 million of mortgage loans in the first half of 2001. These actions have decreased mortgage loan balances 23.9% at September 30, 2001 from December 31, 2000, reduced reliance on borrowed funds and increased noninterest income and net interest margin. Citizens is continuing to transition and refocus its commercial loan portfolio at F&M to target markets consistent with its overall business strategy and at the same time implement Citizens' credit standards and loan structuring criteria. As a result, commercial loans in the F&M markets have declined 10.0% since December 31, 2000. The decline in the F&M markets along with generally slower growth in other markets due to the current economic conditions resulted in an overall decrease of 2.0% in commercial loans at September 30, 2001 from December 31, 2000. In further restructuring efforts, Citizens sold F&M Bank-Minnesota on November 9, 2001 and realized a pre-tax gain of $800,000. Consumer loan balances in the third quarter were 2.4% lower than the December 31, 2000 balances primarily due to the sale of $30 million of credit card loans in the Michigan market at the end of the second quarter. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total average investments, including money market investments, comprised 18.2% of average earning assets during the first nine months of 2001, compared with 18.7% for the same period of 2000. Average investment security balances for the nine months ended September 30, 2001 were down $90.1 million over the same period in 2000 while average money market investments were up $55.3 million from 2000 levels. LOANS Citizens extends credit primarily within the local markets of its banking subsidiaries located in Michigan, Wisconsin, Iowa, Illinois and Minnesota. Citizens does not lend out of its market areas or participate in loan syndications. The loan portfolio is widely diversified by borrower and industry groups with no foreign loans or significant concentrations in any industry. Total loans declined $441 million, or 6.9%, to $6.0 billion at September 30, 2001 from $6.4 billion at year-end 2000. The decline reflects the balance sheet restructuring described above. Mortgage loans declined due to the sale of a majority of the current mortgage origination volume and the securitization of $247 million of mortgages at the end of the first quarter. Commercial loans declined slightly from year end levels. Citizens continued to experience commercial loan growth in its Michigan market during the first nine months of 2001, but at a slower rate than in the prior year. The increase in commercial loans in Michigan was offset by a reduction in the F&M markets due to the business loan portfolio restructuring and the implementation of Citizens' credit standards in those markets. Consumer loan balances declined $37 million at September 30, 2001 from year end levels. The sale of $30 million of credit card loans and a $8 million decline in the indirect loan portfolio led to the decrease. NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual loans, restructured loans, loans 90 days past due and still accruing interest, and other real estate owned. Certain of these loans, as defined below, are considered to be impaired. Under Citizens' credit policies and practices, a loan is placed on nonaccrual status when there is doubt regarding collection of principal or interest, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected is reversed and charged against income when the loan is placed on nonaccrual status. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loans will not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Citizens maintains a valuation allowance for impaired loans. Interest income on impaired nonaccrual loans is recognized on a cash basis. Interest income on all other impaired loans is recorded on an accrual basis. Certain of the Corporation's nonperforming loans included in the following table are considered to be impaired. The Corporation measures impairment on all large balance nonaccrual commercial and commercial real estate loans. Certain large balance accruing loans rated substandard or worse are also measured for impairment. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment losses are included in the provision for loan losses. The policy does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for 20 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 data in the following paragraphs. At September 30, 2001, loans considered to be impaired totaled $109.0 million (of which $43.2 million were on a nonaccrual basis). Included within this amount was $88.2 million of impaired loans for which the related allowance for loan losses was $25.2 million and $20.8 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the quarter ended September 30, 2001 was approximately $110 million. For the quarter ended September 30, 2001, Citizens recognized interest income of approximately $1.2 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $1.5 million all of which was applied to principal. At September 30, 2000, loans considered to be impaired totaled $79.1 million (of which $29.0 million were on a nonaccrual basis). Included within this amount was $42.5 million of impaired loans for which the related allowance for loan losses was $5.4 million and $36.6 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the quarter ended September 30, 2000 was approximately $53.4 million. For the quarter ended September 30, 2000, Citizens recognized interest income of approximately $1.0 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $0.6 million of which $0.3 million was applied to principal and $0.3 million was recognized using the cash method of income recognition. The table below provides a summary of nonperforming assets as of September 30, 2001, December 31, 2000 and September 30, 2000. Total nonperforming assets amounted to $79.0 million as of September 30, 2001 compared with $66.3 million as of December 31, 2000 and $54.1 million as of September 30, 2000. The increase in nonperforming assets occurred primarily within the commercial loan portfolio of the F&M banks. The ratio of nonperforming assets to total assets is 0.51% in the Michigan markets versus 2.05% in the F&M banks. Employment levels and other economic conditions in the Citizens' local markets; however, can impact the level and composition of nonperforming assets. In a deteriorating or weak economy, higher levels of nonperforming assets, charge-offs and provisions for loan losses could result which may adversely impact the Corporation's results. NONPERFORMING ASSETS

SEPTEMBER 30, December 31, September 30, (IN THOUSANDS) 2001 2000 2000 -------------- ------------- ------------ ------------- Nonperforming Loans Nonaccrual Less than 30 days past due $ 3,927 $ 7,237 $ 4,431 From 30 to 89 days past due 6,763 7,297 6,840 90 or more days past due 56,185 44,881 37,151 ------- ------- ------- Total 66,875 59,415 48,422 90 days past due and still accruing 4,665 889 1,189 Restructured 171 1,068 1,295 ------- ------- ------- Total nonperforming loans 71,711 61,372 50,906 Other Repossessed Assets Acquired (ORAA) 7,325 4,917 3,178 ------- ------- ------- Total nonperforming assets $79,036 $66,289 $54,084 ======= ======= ======= Nonperforming assets as a percent of total loans plus ORAA 1.32% 1.03% 0.84% Nonperforming assets as a percent of total assets 1.02 0.79 0.65

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 September 30, 2001, such credits amounted to $77.6 million or 1.3% of total loans, compared with $70.2 million or 1.1% at December 31, 2000 and $46.4 million or 0.7% of total loans as of September 30, 2000. These loans are primarily commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry. DEPOSITS Total deposits decreased $354 million to $5.9 billion at September 30, 2001 from $6.2 billion at year-end 2000 and were down $264 million from September 30, 2000. The decline occurred in various deposit categories, however Citizens retained much of these financial assets through fee-based products such as brokerage, annuities, and cash management sweep 21 arrangements. Average deposits decreased 1.10% in the first nine months of 2001 over the same period in 2000. The Corporation gathers deposits primarily in its local markets and historically has not relied on brokered funds to sustain liquidity. At September 30, 2001 Citizens had approximately $178 million in brokered deposits as an alternative source of funding, down from $186 million at year-end 2000. Citizens will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. Management continues to promote relationship driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies. SHORT-TERM BORROWINGS AND LONG-TERM DEBT On average, total short-term borrowings decreased $336.8 million to $610.6 million during the first nine months of 2001 from $947.4 million during the same period of 2000. The decrease primarily reflects Citizens' efforts to extend debt maturities in the lower interest rate environment. Long-term debt accounted for $581.6 million or 9.2% of average interest-bearing funds for the first nine months of 2001, compared with $246.2 million or 3.9% of average interest-bearing funds for the same period in 2000. At September 30, 2001, $645.7 million of the long-term debt consists of borrowings from the Federal Home Loan Bank with $361.0 million maturing at different intervals over the next five years. 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 September 30, 2001, shareholders' equity was $721.2 million compared with $680.0 million at December 31, 2000 and $665.0 million as of September 30, 2000. Book value per common share at September 30, 2001, December 31, 2000 and September 30, 2000 was $15.77, $14.62 and $14.15, 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 September 30, 2001, December 31, 2000 and September 30, 2000 are presented below.

CAPITAL RATIOS Regulatory Minimum For "Well SEPTEMBER 30, December 31, September 30, Capitalized" 2001 2000 2000 ------------- ------------- ------------ ------------- Risk based capital: Tier I 6.0 % 10.1 % 9.1 % 9.2 % Total capital 10.0 11.3 10.3 10.5 Tier I leverage 5.0 7.8 7.1 7.2

On May 23, 2000, Citizens approved a stock repurchase plan that authorized the repurchase of up to 3,000,000 shares of Citizens common stock. Through the third quarter of 2001, Citizens repurchased 2,408,200 shares of stock under this plan at an average price of $25.28. On October 19, 2001 the Board of Directors approved a new stock repurchase plan which provides for the repurchase of up to 3,000,000 shares of outstanding common stock. This plan will begin immediately upon completion of the May 2000 plan. Citizens declared cash dividends of $0.275 per share in the third quarter of 2001, an increase of 5.8% over the $0.26 declared during the same period of 2000. LIQUIDITY AND DEBT CAPACITY The liquidity position of Citizens is monitored for its subsidiaries and the Parent company to ensure that funds are available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. Citizens' subsidiary banks have traditionally derived liquidity primarily through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, Citizens' subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks where the subsidiary banks are members. Another source of liquidity is the ability of Citizens' Parent Company to borrow funds on both a short-term and long-term basis. The Parent has established borrowing facilities with a group of unaffiliated banks and has used portions of this revolving credit agreement for various corporate purposes. Citizens has access to alternative funding sources and borrowing capacities which allows it to operate at lower levels of balance sheet liquidity. At September 30, 2001, Citizens had sufficient liquidity to meet presently known cash flow requirements arising from ongoing business transactions. 22 INTEREST RATE RISK Interest rate risk generally arises when the maturity or repricing structure of Citizens' assets and liabilities differs significantly. Asset/liability management, which among other things addresses such risk, is the process of developing, testing and implementing strategies that seek to maximize net interest income, maintain sufficient liquidity and minimize exposure to significant changes in interest rates. This process includes monitoring contractual and expected repricing of assets and liabilities as well as forecasting earnings under different interest rate scenarios and balance sheet structures. Generally, management seeks a structure that insulates net interest income from large swings attributable to changes in market interest rates. The Corporation's static interest rate sensitivity ("GAP") as of September 30, 2001 and 2000 is illustrated below. 23 INTEREST RATE SENSITIVITY

TOTAL 1-90 91-180 181-365 WITHIN 1-5 Over (dollars in millions) Days Days Days 1 YEAR Years 5 Years Total --------------------- -------- -------- --------- --------- -------- --------- -------- SEPTEMBER 30, 2001 RATE SENSITIVE ASSETS (1) Loans $2,276.9 $342.8 $581.0 $3,200.7 $2,310.0 $470.9 $5,981.6 Investment securities 88.8 23.3 46.5 158.6 640.7 479.6 1,278.9 Short-term investments 43.1 -- -- 43.1 -- -- 43.1 -------- ------ ------ -------- -------- ------ -------- Total $2,408.8 $366.1 $627.5 $3,402.4 $2,950.7 $950.5 $7,303.6 ======== ====== ====== ======== ======== ====== ======== RATE SENSITIVE LIABILITIES Deposits (2) $1,068.3 $640.2 $1,187.0 $2,895.5 $1,618.5 $521.9 $5,035.9 Other interest bearing liabilities 783.2 100.1 25.3 908.6 86.0 8.6 1,003.2 -------- ------ -------- -------- -------- ------ -------- Total $1,851.5 $740.3 $1,212.3 $3,804.1 $1,704.5 $530.5 $6,039.1 ======== ====== ======== ======== ======== ====== ======== Period GAP (3) $557.3 $(374.2) $(584.8) $ (401.7) $1,246.2 $420.0 $1,264.5 Cumulative GAP 557.3 183.1 (401.7) 844.5 1,264.5 Cumulative GAP to Total Assets 7.22% 2.37% (5.21)% (5.21)% 10.95% 16.39% 16.39% Multiple of Rate Sensitive Assets to 1.30 0.49 0.52 0.89 1.73 1.79 1.21 Liabilities SEPTEMBER 30, 2000 RATE SENSITIVE ASSETS (1) Loans $2,002.7 $354.8 $654.7 $3,012.2 $2,660.3 $733.5 $6,406.0 Investment securities 36.5 16.2 55.7 108.4 542.0 710.6 1,361.0 Short-term investments 7.1 -- -- 7.1 -- -- 7.1 -------- ------ ------ -------- -------- -------- -------- Total $2,046.3 $371.0 $710.4 $3,127.7 $3,202.3 $1,444.1 $7,774.1 ======== ====== ====== ======== ======== ======== ======== RATE SENSITIVE LIABILITIES Deposits (2) $950.7 $698.3 $1,428.3 $3,077.3 $1,889.2 $234.9 $5,201.4 Other interest bearing liabilities 986.9 190.0 100.0 1,276.9 82.6 14.6 1,374.1 -------- ------ -------- -------- -------- ------ -------- Total $1,937.6 $888.3 $1,528.3 $4,354.2 $1,971.8 $249.5 $6,575.5 ======== ====== ======== ======== ======== ====== ======== Period GAP (3) $108.7 $(517.3) $(817.9) $(1,226.5) $1,230.5 $1,194.6 $1,198.6 Cumulative GAP 108.7 (408.6) (1,226.5) 4.0 1,198.6 Cumulative GAP to Total Assets 1.31% (4.94)% (14.82)% (14.82)% 0.05% 14.48% 14.48% Multiple of Rate Sensitive Assets to Liabilities 1.06 0.42 0.46 0.72 1.62 5.79 1.18

(1) Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff. (2) Includes interest bearing savings and demand deposits of $665 million and $778 million in 2001 and 2000, respectively, in the less than one year category, and $1.565 billion and $1.420 billion, respectively in the over one year category, based on historical trends for these noncontractual maturity deposit types, which reflects industry standards. (3) GAP is the excess of rate sensitive assets (liabilities). As shown, Citizens' interest rate risk position is liability sensitive in the less than one year time frame with rate sensitive liabilities exceeding rate sensitive assets by $401.7 million at September 30, 2001 and by $1.2 billion at September 30, 2000. Application of GAP theory would suggest that with such a position Citizens' net interest income could decline if interest rates rise; i.e., liabilities are likely to reprice faster than assets, resulting in a decrease in net income in a rising rate environment. Conversely, net income should increase in a falling rate environment. However, in the near short term (1-90 days) Citizens is asset sensitive which would indicate a narrowing interest rate margin in the first three months of a declining rate environment followed by improvement over the next nine months. 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 24 and key driver rates, as well as balance sheet growth and the timing of changes in these variables. Management is continually reviewing its interest rate risk position and modifying its strategies based on projections to minimize the impact of future interest rate changes. While traditional GAP analysis does not always incorporate adjustments for the magnitude or timing of non-contractual repricing, the table above does incorporate appropriate adjustments as indicated in footnotes 1 and 2 to the table. Because of these and other inherent limitations of any GAP analysis, management utilizes net interest income simulation modeling as its primary tool to evaluate the impact of changes in interest rates and balance sheet strategies. Management uses these simulations to develop strategies that can limit interest rate risk and provide liquidity to meet client loan demand and deposit preferences. OTHER ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for hedging activities and for derivative instruments, including certain derivative instruments embedded in other contracts. This statement requires a company to recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair value. Citizens adopted this statement as amended effective January 1, 2001. Citizens does not have any material outstanding derivatives or hedging activities. Therefore, the impact of adopting the provisions of this statement on Citizens' financial position, results of operations and cash flow was not material. In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125." SFAS No. 140, like SFAS No.125, establishes accounting and reporting standards to assist in determining when to recognize or derecognize financial assets and liabilities in the financial statements after a transfer of financial assets has occurred. SFAS No. 140, however, requires certain additional disclosures related to transferred assets and is more retrictive in defining what constitutes a qualified special purpose entity (QSPE) as well as when transfers to a QSPE will be accorded sales treatment. Citizens adopted this statement effective April 1, 2001. The impact of the adoption of this statement was not material to Citizens' financial position, results of operations or cash flow. In June, FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 supersedes APB Opinion No. 16, "Business Combinations", and Financial Accounting Standards Board ("FASB") No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises", establishes financial accounting and reporting for all business combinations. This statement requires all business combinations be accounted for by a single method, the purchase method. The statement also requires that intangible assets be recognized apart from goodwill if they meet certain criteria and the disclosure of the primary reasons for the business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The statement is effective for all business combinations initiated after June 30, 2001. Citizens adopted this statement July 1, 2001 and will apply its provisions to any future business combination. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" - a replacement of APB Opinion No. 17, "Intangible Assets", which addresses the financial accounting and reporting for acquired goodwill and other intangible assets. This statement addresses how intangible assets should be accounted for that are acquired outside of a business combination and also addresses how intangibles should be accounted for once the intangibles have been initially recognized in the financial statements. The statement no longer assumes a finite life for all intangibles, but now requires that intangible assets with indefinite lives be tested at least annually for impairment with impairment losses recognized immediately and intangible assets with finite lives be amortized over an appropriate period. The statement requires disclosures about the change in the carrying amount of the intangible assets and an estimate of amortization expense for the next five years. The statement is effective for fiscal years beginning after December 15, 2001, however, goodwill and intangible assets acquired after June 30, 2001 will be subjected immediately to the nonamortization and amortization provisions of this statement. Citizens has adopted this statement to the extent permitted and will adopt the remaining provisions effective January 1, 2002. Citizens expects the adoption of this statement will positively impact the results of its' financial operations and currently estimates the amount to be $7.2 million ($5.4 million after-tax). FORWARD-LOOKING STATEMENTS The foregoing disclosure contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended, with respect to expectations for future periods. These forward-looking statements involved are subject to risk and uncertainties that could cause actual results to differ. These risks and uncertainties include unanticipated changes in the competitive environment and relationships with third party vendors and clients and certain other factors discussed in this report. Management believes that the expectations used in the forward-looking statements are reasonable, however, actual results may vary significantly. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information concerning quantitative and qualitative disclosures about market risk contained and incorporated by reference in Item 7A of Citizens' 2000 Annual Report on Form 10-K, is here incorporated by reference. Citizens faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. Citizens manages this risk with static GAP analysis and simulation modeling. Throughout the first six months of 2001, the results of these measurement techniques were within Citizens' policy guidelines. Citizens does not believe that there has been a material change in its primary market risk exposure (i.e., the categories of market risk to which Citizens is exposed and the particular markets that present the primary risk of loss to the Citizens). As of the date of this Quarterly Report on Form 10-Q, Citizens does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which Citizens manages its primary market risk exposure, as described in the sections of its 2000 Annual Report on Form 10-K incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this Quarterly Report on Form 10-Q, Citizens does not expect to change those methods in the near term. However, Citizens may change those methods in the future to adapt to changes in circumstances or to implement new techniques. In this discussion, "near term" means a period of one year following the date of the most recent balance sheet contained in this report. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - None ITEM 2. CHANGES IN SECURITIES - None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5. OTHER INFORMATION On July 23, 2001 Citizens signed a definitive agreement for the sale of F&M Bank-Minnesota to Frandsen Financial Corporation. F&M Bank-Minnesota has total assets of $25 million and operates out of one location in Dundas, Minnesota. The sale of the bank received regulatory approval in early October and closed on November 9, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K No report on Form 8-K was filed during the three-month period ended September 30, 2001. 26 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 November 14, 2001 By /s/ John W. Ennest -------------------------- -------------------------------------- John W. Ennest Vice Chairman of the Board, Treasurer and Chief Financial Officer (Principal Financial Officer) (Duly Authorized Signatory) 27