UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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 001-33063

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

(Registrant’s telephone number, including area code)

(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.    Yes  x    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).    Yes  x    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	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨    No  x

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 July 27, 2012
Common Stock, No Par Value	40,506,288 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 Comprehensive Income		5
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		41
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		67
Item 4 - Controls and Procedures		67
Part II - Other Information
Item 1 - Legal Proceedings		68
Item 1A - Risk Factors		68
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		69
Item 3 - Defaults Upon Senior Securities		69
Item 6 - Exhibits		69
Signatures		70
Exhibit Index		71

2

Consolidated Balance Sheets (Unaudited)

Citizens Republic Bancorp, Inc.

(in thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Assets
Cash and due from banks	$	145,432		$	153,418		$	145,126
Money market investments		203,861			313,632			176,847
Investment Securities:
Securities available for sale, at fair value		1,480,290			1,312,733			1,368,530
Securities held to maturity, at amortized cost (fair value of $1,349,429, $1,487,550 and $1,489,461, respectively)		1,296,164			1,444,054			1,482,787
Total investment securities		2,776,454			2,756,787			2,851,317
FHLB and Federal Reserve stock		122,123			117,943			125,635
Portfolio loans:
Commercial and industrial		1,711,411			1,543,529			1,349,803
Commercial real estate		1,417,409			1,544,361			1,722,242
Total commercial		3,128,820			3,087,890			3,072,045
Residential mortgage		588,144			637,245			708,164
Direct consumer		881,070			933,314			978,319
Indirect consumer		923,714			871,086			869,109
Total portfolio loans		5,521,748			5,529,535			5,627,637
Less: Allowance for loan losses		(136,120	)		(172,726	)		(206,292	)
Net portfolio loans		5,385,628			5,356,809			5,421,345
Loans held for sale		14,518			10,402			19,515
Premises and equipment		93,646			97,970			100,596
Goodwill		318,150			318,150			318,150
Other intangible assets		6,305			7,428			8,848
Bank owned life insurance		221,965			220,280			218,854
Other assets		382,411			110,030			109,397
Total assets	$	9,670,493		$	9,462,849		$	9,495,630
Liabilities
Noninterest-bearing deposits	$	1,796,531		$	1,614,311		$	1,486,970
Interest-bearing demand deposits		1,025,305			951,590			917,522
Savings deposits		2,607,718			2,627,665			2,592,176
Core deposits		5,429,554			5,193,566			4,996,668
Time deposits		1,858,155			2,201,375			2,448,035
Total deposits		7,287,709			7,394,941			7,444,703
Federal funds purchased and securities sold under agreements to repurchase		39,169			40,098			43,244
Other short-term borrowings		—			—			680
Other liabilities		154,718			154,088			146,169
Long-term debt		853,042			854,185			881,112
Total liabilities		8,334,638			8,443,312			8,515,908
Shareholders’ Equity
Preferred stock - no par value
Authorized - 5,000,000 shares; Issued and outstanding - 300,000 at 6/30/12, 12/31/11, and 6/30/11, redemption value of $300 million		288,723			285,114			281,642
Common stock - no par value
Authorized - 105,000,000 shares at 6/30/12,12/31/11, and 6/30/11; Issued and outstanding - 40,174,721 at 6/30/12, 40,049,198 at 12/31/11 and 40,039,657 at 6/30/11		1,435,920			1,434,803			1,433,094
Retained deficit		(378,520	)		(694,560	)		(734,091	)
Accumulated other comprehensive (loss) income		(10,268	)		(5,820	)		(923	)
Total shareholders’ equity		1,335,855			1,019,537			979,722
Total liabilities and shareholders’ equity	$	9,670,493		$	9,462,849		$	9,495,630

See notes to consolidated financial statements.

3

Consolidated Statements of Operations (Unaudited)

Citizens Republic Bancorp, Inc.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share amounts)	2012			2011			2012			2011
Interest Income
Interest and fees on loans	$	73,950		$	77,677		$	148,829		$	158,388
Interest and dividends on investment securities:
Taxable		16,013			20,546			33,322			40,156
Tax-exempt		2,199			2,713			4,453			5,799
Dividends on FHLB and Federal Reserve stock		1,151			1,044			2,291			2,169
Money market investments		114			249			329			502
Total interest income		93,427			102,229			189,224			207,014
Interest Expense
Deposits		9,367			15,042			20,464			31,417
Short-term borrowings		13			19			31			37
Long-term debt		8,367			9,562			16,931			19,340
Total interest expense		17,747			24,623			37,426			50,794
Net Interest Income		75,680			77,606			151,798			156,220
Provision for loan losses		5,299			17,596			13,696			106,320
Net interest income after provision for loan losses		70,381			60,010			138,102			49,900
Noninterest Income
Service charges on deposit accounts		9,355			9,753			18,340			19,182
Trust fees		3,582			3,811			7,184			7,734
Mortgage and other loan income		1,952			1,883			3,810			4,825
Brokerage and investment fees		1,331			1,533			2,654			2,641
Card-based and other nondeposit fees		4,444			4,394			8,709			8,387
Net gains on loans held for sale		6			1,179			923			73
Investment securities gains (losses)		—			(993	)		—			(1,376	)
Other income		1,675			1,765			4,965			5,002
Total noninterest income		22,345			23,325			46,585			46,468
Noninterest Expense
Salaries and employee benefits		32,801			31,265			66,099			62,283
Occupancy		6,140			6,047			12,837			13,609
Professional services		2,465			2,407			4,488			4,626
Equipment		2,904			2,841			6,206			5,893
Data processing services		3,721			4,247			7,769			8,599
Advertising and public relations		1,708			1,802			3,043			2,371
Postage and delivery		1,119			1,120			2,218			2,236
Other loan expenses		3,266			3,314			6,452			8,569
(Gains) losses on other real estate (ORE)		(173	)		1,355			(559	)		10,477
ORE expenses		266			1,029			716			2,797
Intangible asset amortization		545			778			1,123			1,606
Other expense		11,577			13,239			23,047			28,034
Total noninterest expense		66,339			69,444			133,439			151,100
Income (Loss) before Income Taxes		26,387			13,891			51,248			(54,732	)
Income tax benefit		(276,789	)		(10,266	)		(276,789	)		(10,211	)
Net Income (Loss)		303,176			24,157			328,037			(44,521	)
Dividend on redeemable preferred stock		(6,042	)		(5,701	)		(11,997	)		(11,328	)
Net Income (Loss) Attributable to Common Shareholders	$	297,134		$	18,456		$	316,040		$	(55,849	)
Net Income (Loss) Per Common Share:
Basic	$	7.35		$	0.46		$	7.84		$	(1.42	)
Diluted		7.35			0.46			7.84			(1.42	)
Average Common Shares Outstanding:
Basic		39,472			39,417			39,459			39,412
Diluted		39,472			39,417			39,459			39,412

See notes to consolidated financial statements.

4

Consolidated Statements of Comprehensive Income (Unaudited)

Citizens Republic Bancorp, Inc.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2012			2011			2012			2011
Net Income (Loss)	$	303,176		$	24,157		$	328,037		$	(44,521	)
Other comprehensive income
Unrealized (loss) gain on securities available for sale		(2,761	)		6,199			3,057			13,679
Unrealized gain on securities transferred from available for sale to held to maturity		—			18,510			—			18,510
Amortization of unrealized gain on securities transferred to held to maturity		(1,887	)		(150	)		(3,856	)		(212	)
Unrealized loss on qualifying cash flow hedges, net of change and reclassifications		(6,061	)		(848	)		(6,045	)		(2,388	)
Other comprehensive (loss) income, before income taxes		(10,709	)		23,711			(6,844	)		29,589
Income tax (benefit) provision related to other comprehensive income items		(2,396	)		10,356			(2,396	)		10,356
Other comprehensive (loss) income		(8,313	)		13,355			(4,448	)		19,233
Comprehensive income (loss)	$	294,863		$	37,512		$	323,589		$	(25,288	)

See notes to consolidated financial statements

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Citizens Republic Bancorp, Inc.

(in thousands)	Preferred Stock		Common Stock						Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
			Shares			Amount
Balance at December 31, 2011	$	285,114		40,049		$	1,434,803		$	(694,560	)	$	(5,820	)	$	1,019,537
Comprehensive income, net of tax:
Net income										328,037						328,037
Other comprehensive loss, net of tax effect of $2,396													(4,448	)		(4,448	)
Total comprehensive income																323,589
Accretion of preferred stock discount		3,609								(3,609	)					—
Accrued dividend on redeemable preferred stock										(8,388	)					(8,388	)
Proceeds from restricted stock activity				151			—									—
Recognition of stock-based compensation							1,516									1,516
Shares purchased				(25	)		(399	)								(399	)
Balance at June 30, 2012	$	288,723		40,175		$	1,435,920		$	(378,520	)	$	(10,268	)	$	1,335,855
Balance at December 31, 2010	$	278,300		39,635		$	1,431,829		$	(678,242	)	$	(20,156	)	$	1,011,731
Comprehensive income, net of tax:
Net loss										(44,521	)					(44,521	)
Other comprehensive income, net of tax effect of ($10,356)													19,233			19,233
Total comprehensive loss																(25,288	)
Accretion of preferred stock discount		3,342								(3,342	)					—
Accrued dividend on redeemable preferred stock										(7,986	)					(7,986	)
Proceeds from restricted stock activity				406			—									—
Recognition of stock-based compensation							1,277									1,277
Shares purchased				(1	)		(12	)								(12	)
Balance at June 30, 2011	$	281,642		40,040		$	1,433,094		$	(734,091	)	$	(923	)	$	979,722

See notes to consolidated financial statements.

5

Consolidated Statements of Cash Flows (Unaudited)

Citizens Republic Bancorp, Inc.

	Six Months Ended June 30,
(in thousands)	2012			2011
Operating Activities:
Net income (loss)	$	328,037		$	(44,521	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		13,696			106,320
Net (increase) decrease in current and deferred income taxes		(286,126	)		145
Depreciation and amortization		5,239			5,651
Amortization of intangibles		1,123			1,606
Amortization and fair value adjustments of purchase accounting mark to market, net		(2,070	)		(2,781	)
Fair value adjustment on loans held for sale and other real estate		1,046			6,945
Net amortization on investment securities		19,320			8,567
Investment securities losses		—			1,376
Loans originated for sale		(92,419	)		(82,171	)
Proceeds from loans held for sale		89,252			94,208
Net gains from loan sales		(2,091	)		(2,071	)
Net (gains) losses on other real estate		(1,609	)		3,474
Recognition of stock-based compensation expense		1,516			1,277
Other		(6,162	)		(12,236	)
Net cash provided by operating activities		68,752			85,789
Investing Activities:
Net decrease in money market investments		109,771			232,232
Securities available for sale:
Proceeds from sales		2,500			7,819
Proceeds from maturities and payments		186,859			302,469
Purchases		(365,843	)		(528,486	)
Securities held to maturity:
Proceeds from maturities and payments		136,374			17,133
Purchases		—			(85,407	)
Net (increase) decrease in loans and leases		(43,587	)		392,776
Proceeds from sales of other real estate		6,710			25,329
Net increase in properties and equipment		(916	)		(1,533	)
Net cash provided by investing activities		31,868			362,332
Financing Activities:
Net decrease in deposits		(107,233	)		(282,131	)
Net (decrease) increase in short-term borrowings		(929	)		1,605
Principal reductions in long-term debt		(45	)		(150,042	)
Shares purchased		(399	)		(12	)
Net cash used in financing activities		(108,606	)		(430,580	)
Net (decrease) increase in cash and due from banks		(7,986	)		17,541
Cash and due from banks at beginning of period		153,418			127,585
Cash and due from banks at end of period	$	145,432		$	145,126
Supplemental Cash Flow Information:
Interest paid	$	36,411		$	49,675
Income tax paid, net		5,100			3,000
Supplemental Disclosures of noncash items
Securities transferred to held to maturity from available for sale		—			943,092
Properties transferred to other real estate owned		—			1,347
Loans transferred to other real estate owned		3,310			8,707
Loans transferred to held for sale		13,801			78,503
Held for sale loans transferred to other real estate		—			486
Accretion of preferred stock discount		3,609			3,342
Accrued dividend on redeemable preferred stock		8,388			7,986

See notes to consolidated financial statements.

6

Part I – Financial Information

Item 1 – Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Citizens Republic Bancorp, Inc.

Note 1. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc. (“Citizens”, the “Company”, 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 and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain amounts have been reclassified to conform with the current year presentation. Citizens’ significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Citizens’ 2011 Annual Report on Form 10-K. For interim reporting purposes, Citizens follows the same basic accounting policies, as updated by the information contained in this report. For further information, refer to the Consolidated Financial Statements and footnotes included in Citizens’ 2011 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 (“SEC”). 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 Variable Interest Entities (“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 issued trust preferred securities to investors in 2006 and 2003, with respect to which there remain $48.7 million and $25.8 million in aggregate liquidation amounts outstanding, respectively, as of June 30, 2012. 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. The trust preferred securities held by these entities qualify as Tier 1 capital and are classified as “long-term debt” on the Consolidated Balance Sheets, with the associated interest expense recorded in “long-term debt” on the Consolidated Statements of Operations. The expected losses and residual returns of these entities are absorbed by the trust preferred security holders, and consequently the Corporation is not exposed to loss related to these VIEs.

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) Accounting Standard Update (“ASU”)

FASB ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”

The amendments in this ASU defer the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements. This ASU also defers the requirement to report reclassification adjustments in interim periods.

FASB ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment”

The amendments in this ASU are intended to simplify goodwill impairment testing by permitting assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test currently required under Topic 350. Entities will not be required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the unit’s carrying

7

value is greater than its fair value based on an assessment of events and circumstances; however, they may bypass the qualitative assessment during any reporting period. The amendment also provides examples of events and circumstances that entities should consider. This ASU was adopted by Citizens in the first quarter of 2012. The adoption of the amendments did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

FASB ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”

The amendments in this ASU will result in more converged guidance on how comprehensive income is presented under GAAP and International Financial Reporting Standards (“IFRS”), although some differences remain. The new guidance gives companies two choices of how to present items of net income, items of other comprehensive income and total comprehensive income: They can create one continuous statement of comprehensive income or two separate consecutive statements. Companies will no longer be allowed to present OCI only in the statement of shareholders’ equity. Earnings per share would continue to be based on net income attributable to common shareholders. Although existing guidance related to items that must be presented in OCI has not changed, companies will be required to display reclassification adjustments for each component of OCI in both net income and OCI. Also, companies will need to present the components of OCI in their interim and annual financial statements. This ASU was adopted by Citizens in the first quarter of 2012, applied retrospectively. The adoption of the amendments did not have a material impact on Citizens’ financial condition, results of operations or liquidity; however, the adoption did have an impact on Citizens’ presentation of comprehensive income.

FASB ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

The ASU amends the fair value measurement and disclosure guidance in Topic 820 to converge GAAP and IFRS requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in significant changes to how Citizens applies the fair value principles. This ASU was adopted by Citizens in the first quarter of 2012, applied prospectively. The adoption of the amendments did not have a material impact on Citizens’ financial condition, results of operations or liquidity; however, the adoption did require additional fair value disclosures.

FASB ASU 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”

The amendments in this ASU are intended to improve the accounting for repurchase agreements by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. This ASU was adopted by Citizens in the first quarter of 2012 and applies prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. The adoption of the amendments did not have a material impact on Citizens’ financial condition, results of operations or liquidity.

Pending Accounting Pronouncements

FASB ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”

The amendments in this ASU allow existing GAAP guidance for balance sheet offsetting, including industry-specific guidance. However, new disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under GAAP and IFRS related to the offsetting of financial instruments. ASU 2011-11 is effective for Citizens in the first quarter of 2013, and will be applied retrospectively for all prior periods presented. Citizens does not expect the adoption of the amendments to have a material impact on Citizens’ financial condition, results of operations or liquidity.

8

Note 2. Investment Securities

The amortized cost, estimated fair value and gross unrealized gains and losses on investment securities follow.

	June 30, 2012								December 31, 2011
	Amortized Cost		Estimated Fair Value		Gross Unrealized				Amortized Cost		Estimated Fair Value		Gross Unrealized
(in thousands)					Gains		Losses						Gains		Losses
Securities available for sale:
Collateralized mortgage obligations	$	332,865	$	337,563	$	6,918	$	2,220	$	364,262	$	365,302	$	6,811	$	5,771
Mortgage-backed		989,136		1,028,455		39,319		—		784,476		823,852		39,408		32
State and municipal		107,642		113,986		6,461		117		116,411		123,308		7,019		122
Other		286		286		52		52		280		271		24		33
Total available for sale	$	1,429,929	$	1,480,290	$	52,750	$	2,389	$	1,265,429	$	1,312,733	$	53,262	$	5,958
Securities held to maturity:
Collateralized mortgage obligations(1)	$	321,477	$	329,279	$	7,802	$	—	$	350,160	$	356,031	$	5,871	$	—
Mortgage-backed(1)		872,552		910,595		38,043		—		988,930		1,018,765		29,883		48
State and municipal		102,135		109,555		7,420		—		104,964		112,754		7,836		46
Total held to maturity	$	1,296,164	$	1,349,429	$	53,265	$	—	$	1,444,054	$	1,487,550	$	43,590	$	94
FHLB and Federal Reserve stock	$	122,123	$	122,123	$	—	$	—	$	117,943	$	117,943	$	—	$	—

⁽¹⁾  Amortized cost includes adjustments for the unamortized portion of unrealized gains on securities transferred from available for sale.

Securities with amortized cost of $590.7 million at June 30, 2012 and $665.8 million at December 31, 2011 were pledged to secure public deposits, repurchase agreements and other liabilities.

In June 2011, Citizens transferred certain mortgage-backed securities from the available for sale to the held to maturity category in accordance with Topic 320 “Investments-Debt and Equity Securities.” Management determined that it had the positive intent and ability to hold these investments to maturity. The securities transferred had a total amortized cost of $924.6 million and a fair value of $943.1 million. The unrealized gain of $18.5 million is being amortized over the remaining life of the securities as an adjustment of the yield, offset against the amortization of the unrealized gain maintained in accumulated other comprehensive income.

9

The amortized cost and estimated fair value of debt securities by maturity are shown below.

	June 30, 2012
	Amortized		Estimated Fair
(in thousands)	Cost		Value
Securities available for sale:
State and municipal
Contractual maturity within one year	$	12,527	$	12,684
After one year through five years		14,914		15,494
After five years through ten years		60,570		64,614
After ten years		19,631		21,194
Subtotal		107,642		113,986
Collateralized mortgage obligations and mortgage-backed		1,322,001		1,366,018
Other		286		286
Total available for sale	$	1,429,929	$	1,480,290
Securities held to maturity:
State and municipal
Contractual maturity within one year	$	1,426	$	1,445
After one year through five years		10,728		11,361
After five years through ten years		60,244		64,250
After ten years		29,737		32,499
Subtotal		102,135		109,555
Collateralized mortgage obligations and mortgage-backed		1,194,029		1,239,874
Total held to maturity	$	1,296,164	$	1,349,429

A total of 38 securities had unrealized losses at June 30, 2012, compared with 45 securities as of December 31, 2011. These securities, with unrealized losses aggregated by investment category and length of time in a continuous unrealized loss position, are as follows.

	Less than 12 Months				More than 12 Months				Total
June 30, 2012	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Securities available for sale:
Collateralized mortgage obligations	$	34,643	$	272	$	37,079	$	1,948	$	71,722	$	2,220
Mortgage-backed		—		—		115		—		115		—
State and municipal		251		1		972		116		1,223		117
Other		—		—		147		52		147		52
Total available for sale	$	34,894	$	273	$	38,313	$	2,116	$	73,207	$	2,389

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	Less than 12 Months				More than 12 Months				Total
December 31, 2011	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Securities available for sale:
Collateralized mortgage obligations	$	56,326	$	2,858	$	20,097	$	2,913	$	76,423	$	5,771
Mortgage-backed		26,016		31		122		1		26,138		32
State and municipal		1,191		27		1,062		95		2,253		122
Other		—		—		234		33		234		33
Total available for sale	$	83,533	$	2,916	$	21,515	$	3,042	$	105,048	$	5,958
Securities held to maturity:
Mortgage-backed	$	9,093	$	48	$	—	$	—	$	9,093	$	48
State and municipal		—		—		950		46		950		46
Total held to maturity	$	9,093	$	48	$	950	$	46	$	10,043	$	94

Citizens performs a review of securities with unrealized losses at each reporting period. Citizens assesses each holding to determine whether and when a security will recover in value, whether it intends to sell the security and whether it is more likely than not that Citizens will be required to sell the security before the value is recovered. In assessing the recovery of value, the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, payment history of the security, changes to the credit rating of the security, recoveries or declines in value subsequent to the balance sheet date or any other relevant factors. 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 June 30, 2012, Citizens has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above tables are believed to be temporary and thus no impairment loss has been realized in the Consolidated Statements of Operations. Citizens has not decided to sell securities with any significant unrealized losses nor does Citizens believe it will be required to sell securities before the value is recovered, but may change its intent in response to significant, unanticipated changes in policies, regulations, legislation or other previously mentioned criteria.

The collateralized mortgage obligations (“CMO”) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At June 30, 2012, the whole loan CMOs had a market value of $71.7 million with gross unrealized losses of $2.2 million. Citizens performs a thorough credit review on a quarterly basis for the underlying mortgage collateral as well as the supporting credit enhancement and structure. The results of the June 30, 2012 credit review demonstrated no material degradation in the holdings.

Citizens has determined there is no other-than-temporary impairment at June 30, 2012.

Citizens maintains several nonqualified deferred compensation plans for its executive officers, senior management, and directors permitting the deferral of a portion of compensation. Citizens obligation under the plans represents an unsecured promise to pay benefits in the future. Changes in this obligation are recognized as salaries and employee benefits expense in the Consolidated Statements of Operations. In the event of bankruptcy or insolvency, assets of the plans would be available to satisfy the claims of general creditors. Plan participants choose to receive a return on their account balances equal to the return on various investment options. The assets held by the plans as well as the corresponding obligations were $8.8 million and $8.5 million at June 30, 2012 and December 31, 2011, respectively. The assets of the plans are classified as trading securities and are carried at fair value within Other Assets in the Consolidated Balance Sheets. Realized and unrealized gains and losses from plan assets are recorded in Other Income in the Consolidated Statements of Operations. Realized gains of $0.5 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively, were recognized during the period for trading assets as of the report date.

No security sales were completed during 2012. During the second quarter of 2011, Citizens completed sales of available for sale securities with an amortized cost of $6.4 million, recording a net loss of $1.0 million. Citizens completed sales of available for sale securities with an amortized cost of $9.2 million during the first six months ended June 30, 2011, recording a net loss of $1.4 million.

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Note 3. Loans

Citizens has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Citizens seeks to control its credit risk by using established guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries, and geographic areas. Collateral is secured based on the nature of the credit and management’s credit assessment of the customer. Total portfolio loans outstanding are recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments.

The quality of Citizens loan portfolios is assessed as a function of net loan losses, levels of nonperforming loans and delinquencies, and credit quality ratings. These credit quality ratings are an important part of the overall credit risk management process and evaluation of the allowance for loan losses (see Note 4 – Allowance for Loan Losses).

Past Due Loans, Nonaccrual Loans and Nonperforming Assets. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are generally placed on nonaccrual status when the collection of principal or interest, in full, is considered doubtful or payment of principal or interest is past due 90 days or more. When loans are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Cash collected on nonaccrual loans is generally applied to outstanding principal. Loans are normally restored to accrual status if and when interest and principal payments are current, it is believed that the financial condition of the borrower has improved to the extent that future principal and interest payments will be met on a timely basis, and the borrower has maintained the loan in a current status for a period of not less than six months. Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days and still accruing interest, nonperforming loans held for sale, and other repossessed assets acquired.

The following tables provide a summary of loans by class, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual.

	June 30, 2012
(in thousands)	Loans Accruing 30-89 Days Past Due		Loans 90+ Days Past Due & Still Accruing		Non-Accruing Loans		Total Past Due Loans		Current Portfolio Loans		Total Portfolio Loans
Land hold	$	—	$	—	$	326	$	326	$	4,793	$	5,119
Land development		—		—		3		3		7,003		7,006
Construction		—		—		—		—		4,591		4,591
Income producing		1,519		—		19,408		20,927		782,619		803,546
Owner-occupied		936		—		18,187		19,123		578,024		597,147
Total commercial real estate		2,455		—		37,924		40,379		1,377,030		1,417,409
Commercial and industrial		51		58		15,482		15,591		1,413,064		1,428,655
Small business(1)		1,514		—		6,194		7,708		275,048		282,756
Total commercial		4,020		58		59,600		63,678		3,065,142		3,128,820
Residential mortgage		7,731		—		13,474		21,205		566,939		588,144
Direct consumer		12,396		1		9,263		21,660		859,410		881,070
Indirect consumer		8,504		—		1,875		10,379		913,335		923,714
Total consumer		28,631		1		24,612		53,244		2,339,684		2,392,928
Total financing receivables	$	32,651	$	59	$	84,212	$	116,922	$	5,404,826	$	5,521,748

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

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	December 31, 2011
(in thousands)	Loans Accruing 30-89 Days Past Due		Loans 90+ Days Past Due & Still Accruing		Non-Accruing Loans		Total Past Due Loans		Current Portfolio Loans		Total Portfolio Loans
Land hold	$	21	$	—	$	—	$	21	$	6,521	$	6,542
Land development		—		—		213		213		12,891		13,104
Construction		—		—		150		150		5,697		5,847
Income producing		2,508		—		21,171		23,679		890,076		913,755
Owner-occupied		2,345		—		23,798		26,143		578,970		605,113
Total commercial real estate		4,874		—		45,332		50,206		1,494,155		1,544,361
Commercial and industrial		212		766		10,633		11,611		1,235,180		1,246,791
Small business(1)		2,242		—		6,313		8,555		288,183		296,738
Total commercial		7,328		766		62,278		70,372		3,017,518		3,087,890
Residential mortgage		9,544		—		11,312		20,856		616,389		637,245
Direct consumer		17,810		4		12,115		29,929		903,385		933,314
Indirect consumer		13,067		—		953		14,020		857,066		871,086
Total consumer		40,421		4		24,380		64,805		2,376,840		2,441,645
Total financing receivables	$	47,749	$	770	$	86,658	$	135,177	$	5,394,358	$	5,529,535

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

	June 30, 2011
(in thousands)	Loans Accruing 30-89 Days Past Due		Loans 90+ Days Past Due & Still Accruing		Non-Accruing Loans		Total Past Due Loans		Current Portfolio Loans		Total Portfolio Loans
Land hold	$	571	$	—	$	167	$	738	$	6,688	$	7,426
Land development		—		—		379		379		22,128		22,507
Construction		1,722		—		559		2,281		5,830		8,111
Income producing		1,597		—		20,180		21,777		997,774		1,019,551
Owner-occupied		6,524		—		21,169		27,693		636,954		664,647
Total commercial real estate		10,414		—		42,454		52,868		1,669,374		1,722,242
Commercial and industrial		838		1,598		15,906		18,342		1,019,415		1,037,757
Small business(1)		2,799		—		5,089		7,888		304,158		312,046
Total commercial		14,051		1,598		63,449		79,098		2,992,947		3,072,045
Residential mortgage		11,564		—		30,693		42,257		665,907		708,164
Direct consumer		20,393		6		13,944		34,343		943,976		978,319
Indirect consumer		10,681		—		1,281		11,962		857,147		869,109
Total consumer		42,638		6		45,918		88,562		2,467,030		2,555,592
Total financing receivables	$	56,689	$	1,604	$	109,367	$	167,660	$	5,459,977	$	5,627,637

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

Credit Quality Indicators. Citizens categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Citizens analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million and non-homogeneous loans, such as commercial and industrial and commercial real estate loans. Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with Citizens’ credit policy. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation for full value, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Commercial loans considered doubtful are evaluated for impairment as part of the specific allocated allowance.

Loans not meeting the criteria above are considered to be pass rated loans. Commercial loans by risk category of class follow.

	June 30, 2012
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Land hold	$	2,089	$	763	$	2,267	$	—	$	5,119
Land development		6,587		210		209		—		7,006
Construction		4,591		—		—		—		4,591
Income producing		549,814		152,022		100,433		1,277		803,546
Owner-occupied		479,699		66,631		49,864		953		597,147
Total commercial real estate		1,042,780		219,626		152,773		2,230		1,417,409
Commercial and industrial		1,252,111		133,186		43,155		203		1,428,655
Small business(1)		241,843		18,634		22,208		71		282,756
Total commercial	$	2,536,734	$	371,446	$	218,136	$	2,504	$	3,128,820

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

	December 31, 2011
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Land hold	$	2,427	$	803	$	3,312	$	—	$	6,542
Land development		12,087		252		765		—		13,104
Construction		4,039		1,508		300		—		5,847
Income producing		633,855		164,756		112,458		2,686		913,755
Owner-occupied		475,604		66,576		61,429		1,504		605,113
Total commercial real estate		1,128,012		233,895		178,264		4,190		1,544,361
Commercial and industrial		1,059,316		113,126		74,307		42		1,246,791
Small business(1)		251,790		21,803		22,925		220		296,738
Total commercial	$	2,439,118	$	368,824	$	275,496	$	4,452	$	3,087,890

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

14

	June 30, 2011
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Land hold	$	2,906	$	883	$	3,637	$	—	$	7,426
Land development		12,697		330		9,480		—		22,507
Construction		3,490		4,180		402		39		8,111
Income producing		662,536		176,412		178,175		2,428		1,019,551
Owner-occupied		517,977		65,719		80,059		892		664,647
Total commercial real estate		1,199,606		247,524		271,753		3,359		1,722,242
Commercial and industrial		846,375		101,597		89,387		398		1,037,757
Small business(1)		260,758		25,412		25,702		174		312,046
Total commercial	$	2,306,739	$	374,533	$	386,842	$	3,931	$	3,072,045

⁽¹⁾  Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

For residential and consumer loans, Citizens evaluates credit quality based on the aging status of the loan and by payment activity. Performing loans are considered to have a lower risk of loss and are on accruing status. Nonperforming loans are comprised of nonaccrual loans and loans past due over 90 days and still accruing interest. The following table presents the recorded investment in residential and consumer loans based on payment activity.

	June 30, 2012
(in thousands)	Residential Mortgage		Direct Consumer		Indirect Consumer		Total Consumer Loans
Performing	$	574,670	$	871,806	$	921,839	$	2,368,315
Nonperforming		13,474		9,264		1,875		24,613
Total	$	588,144	$	881,070	$	923,714	$	2,392,928

	December 31, 2011
(in thousands)	Residential Mortgage		Direct Consumer		Indirect Consumer		Total Consumer Loans
Performing	$	625,933	$	921,195	$	870,133	$	2,417,261
Nonperforming		11,312		12,119		953		24,384
Total	$	637,245	$	933,314	$	871,086	$	2,441,645

	June 30, 2011
(in thousands)	Residential Mortgage		Direct Consumer		Indirect Consumer		Total Consumer Loans
Performing	$	677,471	$	964,369	$	867,828	$	2,509,668
Nonperforming		30,693		13,950		1,281		45,924
Total	$	708,164	$	978,319	$	869,109	$	2,555,592

Note 4. Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a risk-allocated allowance for the remainder of the portfolio and a general valuation allowance estimate. For additional information regarding Citizens policies and methodology used to estimate the allowance for loan losses, see Note 1 to the Consolidated Financial Statements of Citizens’ 2011 Annual Report on Form 10-K.

15

The activity within the allowance for loan losses is presented below.

	Three Months Ended
	June 30, 2012
(in thousands)	Allowance for Loan Losses at December 31, 2011		Provision for Loan Losses			Charge-offs			Recoveries		Net charge-offs			Allowance for Loan Losses at March 31, 2012
Commercial and industrial	$	12,626	$	(636	)	$	(3,667	)	$	577	$	(3,090	)	$	8,900
Small business		13,059		(1,198	)		(2,271	)		112		(2,159	)		9,702
Commercial real estate		54,897		(790	)		(8,093	)		2,553		(5,540	)		48,567
Total commercial		80,582		(2,624	)		(14,031	)		3,242		(10,789	)		67,169
Residential mortgage		28,786		2,406			(3,972	)		466		(3,506	)		27,686
Direct consumer		34,700		2,702			(7,168	)		1,502		(5,666	)		31,736
Indirect consumer		8,939		2,815			(3,157	)		932		(2,225	)		9,529
Total	$	153,007	$	5,299		$	(28,328	)	$	6,142	$	(22,186)		$	136,120

	Three Months Ended
	June 30, 2011
(in thousands)	Allowance for Loan Losses at March 31, 2011		Provision for Loan Losses			Charge-offs			Recoveries		Net charge-offs			Allowance for Loan Losses at June 30, 2011
Commercial and industrial	$	16,145	$	4,965		$	(4,016	)	$	524	$	(3,492	)	$	17,618
Small business		13,925		2,692			(3,853	)		169		(3,684	)		12,933
Commercial real estate		95,240		4,520			(16,371	)		238		(16,133	)		83,627
Total commercial		125,310		12,177			(24,240	)		931		(23,309	)		114,178
Residential mortgage		51,902		(3,546	)		(4,659	)		228		(4,431	)		43,925
Direct consumer		31,996		6,297			(6,522	)		917		(5,605	)		32,688
Indirect consumer		14,909		2,668			(2,639	)		563		(2,076	)		15,501
Total	$	224,117	$	17,596		$	(38,060	)	$	2,639	$	(35,421	)	$	206,292

	Six Months Ended
	June 30, 2012
(in thousands)	Allowance for Loan Losses at December 31, 2011		Provision for Loan Losses			Charge-offs			Recoveries		Net charge-offs			Allowance for Loan Losses at June 30, 2012
Commercial and industrial	$	14,044		(42	)	$	(6,055	)	$	953	$	(5,102	)	$	8,900
Small business		12,230		649			(3,537	)		360		(3,177	)		9,702
Commercial real estate		63,999		(3,388	)		(17,090	)		5,046		(12,044	)		48,567
Total commercial		90,273		(2,781	)		(26,682	)		6,359		(20,323	)		67,169
Residential mortgage		36,460		(192	)		(9,182	)		600		(8,582	)		27,686
Direct consumer		33,020		15,317			(18,695	)		2,094		(16,601	)		31,736
Indirect consumer		12,973		1,352			(6,407	)		1,611		(4,796	)		9,529
Total	$	172,726	$	13,696		$	(60,966	)	$	10,664	$	(50,302	)	$	136,120

	Six Months Ended
	June 30, 2011
(in thousands)	Allowance for Loan Losses at December 31, 2010		Provision for Loan Losses		Charge-offs			Recoveries		Net charge-offs			Allowance for Loan Losses at June 30, 2011
Commercial and industrial	$	26,619	$	22,599	$	(33,727	)	$	2,127	$	(31,600	)	$	17,618
Small business		16,334		4,187		(7,931	)		343		(7,588	)		12,933
Commercial real estate		156,623		60,946		(135,092	)		1,150		(133,942	)		83,627
Total commercial		199,576		87,732		(176,750	)		3,620		(173,130	)		114,178
Residential mortgage		47,623		4,132		(8,062	)		232		(7,830	)		43,925
Direct consumer		32,255		11,536		(12,991	)		1,888		(11,103	)		32,688
Indirect consumer		16,577		2,920		(5,111	)		1,115		(3,996	)		15,501
Total	$	296,031	$	106,320	$	(202,914	)	$	6,855	$	(196,059	)	$	206,292

16

A summary of the allowance for loan losses, segregated by portfolio segment follows.

	June 30, 2012
(in thousands)	Allowance for Loans Individually Evaluated for Impairment		Allowance for Loans Collectively Evaluated for Impairment		General Allowance		Total Allowance for Loan Losses
Commercial and industrial	$	204	$	8,562	$	134	$	8,900
Small business		41		9,512		149		9,702
Commercial real estate		2,273		45,581		713		48,567
Total commercial		2,518		63,655		996		67,169
Residential mortgage		3,332		23,979		375		27,686
Direct consumer		443		30,811		482		31,736
Indirect consumer		—		9,382		147		9,529
Total allowance for loan losses	$	6,293	$	127,827	$	2,000	$	136,120

	June 30, 2012
(in thousands)	Recorded Investment of Loans Individually Evaluated for Impairment		Recorded Investment of Loans Collectively Evaluated for Impairment		Deferred (Fees)/Costs			Total Recorded Investment
Commercial and industrial	$	14,298	$	1,429,972	$	(15,615	)	$	1,428,655
Small business (1)		194		282,307		255			282,756
Commercial real estate		46,085		1,372,629		(1,305	)		1,417,409
Total commercial		60,577		3,084,908		(16,665	)		3,128,820
Residential mortgage		15,121		577,132		(4,109	)		588,144
Direct consumer		7,984		871,262		1,824			881,070
Indirect consumer		—		900,684		23,030			923,714
Total portfolio loans	$	83,682	$	5,433,986	$	4,080		$	5,521,748

⁽¹⁾ Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

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	December 31, 2011
(in thousands)	Allowance for Loans Individually Evaluated for Impairment		Allowance for Loans Collectively Evaluated for Impairment		General Allowance		Total Allowance for Loan Losses
Commercial and industrial	$	42	$	13,302	$	700	$	14,044
Small business		—		11,730		500		12,230
Commercial real estate		4,110		58,589		1,300		63,999
Total commercial		4,152		83,621		2,500		90,273
Residential mortgage		2,837		33,623		—		36,460
Direct consumer		70		32,950		—		33,020
Indirect consumer		—		12,973		—		12,973
Total allowance for loan losses	$	7,059	$	163,167	$	2,500	$	172,726

	December 31, 2011
(in thousands)	Recorded Investment of Loans Individually Evaluated for Impairment		Recorded Investment of Loans Collectively Evaluated for Impairment		Deferred (Fees)/Costs			Total Recorded Investment
Commercial and industrial	$	8,842	$	1,245,902	$	(7,953	)	$	1,246,791
Small business (1)		557		295,972		209			296,738
Commercial real estate		57,562		1,488,657		(1,858	)		1,544,361
Total commercial		66,961		3,030,531		(9,602	)		3,087,890
Residential mortgage		15,140		623,779		(1,674	)		637,245
Direct consumer		4,607		928,930		(223	)		933,314
Indirect consumer		478		850,868		19,740			871,086
Total portfolio loans	$	87,186	$	5,434,108	$	8,241		$	5,529,535

⁽¹⁾ Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

	June 30, 2011
(in thousands)	Allowance for Loans Individually Evaluated for Impairment		Allowance for Loans Collectively Evaluated for Impairment		General Allowance		Total Allowance for Loan Losses
Commercial and industrial	$	165	$	17,453	$	—	$	17,618
Small business		4		12,929		—		12,933
Commercial real estate		3,706		76,921		3,000		83,627
Total commercial		3,875		107,303		3,000		114,178
Residential mortgage		2,388		41,537		—		43,925
Direct consumer		184		32,504		—		32,688
Indirect consumer		—		15,501		—		15,501
Total allowance for loan losses	$	6,447	$	196,845	$	3,000	$	206,292

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	June 30, 2011
(in thousands)	Recorded Investment of Loans Individually Evaluated for Impairment		Recorded Investment of Loans Collectively Evaluated for Impairment		Deferred (Fees)/Costs			Total Recorded Investment
Commercial and industrial	$	13,316	$	1,026,836	$	(2,395	)	$	1,037,757
Small business (1)		569		311,284		193			312,046
Commercial real estate		44,272		1,680,050		(2,080	)		1,722,242
Total commercial		58,157		3,018,170		(4,282	)		3,072,045
Residential mortgage		15,248		703,410		(10,494	)		708,164
Direct consumer		3,566		975,282		(529	)		978,319
Indirect consumer		474		849,606		19,029			869,109
Total portfolio loans	$	77,445	$	5,546,468	$	3,724		$	5,627,637

⁽¹⁾ Amounts contained in “Commercial and industrial” on Consolidated Balance Sheets.

Impaired loans. A loan is considered impaired when Citizens determines that it is probable that all the contractual principal and interest due under the loan may not be collected. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Citizens recognized interest income on nonperforming loans of $0.3 million and $1.5 million for the three and six months ended June 30, 2012, respectively, and $0.6 million and $0.9 million for the three and six months ended June 30, 2011, respectively. Had nonaccrual loans performed in accordance with their original contract terms, Citizens would have recognized additional interest income of approximately $1.7 million and $3.5 million for the three and six months ended June 30, 2012, respectively, and approximately $1.2 million and $3.3 million for the three and six months ended June 30, 2011, respectively. There were no significant commitments outstanding to lend additional funds to clients whose loans were classified as restructured at June 30, 2012, December 31, 2011, or June 30, 2011.

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A summary of information regarding loans individually reviewed for impairment, segregated by class are set forth in the following table.

	June 30, 2012
											Average Recorded Investment
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with No Specific Allowance		Recorded Investment with Specific Allowance		Total Recorded Investment		Specific Related Allowance		Quarter To Date		Year To Date
Nonaccrual loans (impaired)
Income producing	$	23,100	$	8,751	$	8,693	$	17,444	$	1,277	$	16,631	$	17,091
Owner-occupied		18,166		8,466		4,795		13,261		992		13,927		14,949
Total commercial real estate		41,266		17,217		13,488		30,705		2,269		30,558		32,040
Commercial and industrial		21,266		13,863		435		14,298		204		10,411		9,884
Small business		196		—		194		194		41		197		153
Total commercial		62,728		31,080		14,117		45,197		2,514		41,166		42,077
Residential mortgage		4,371		149		4,222		4,371		1,122		4,350		5,109
Direct consumer		1,133		406		726		1,132		84		1,026		1,066
Indirect consumer		—		—		—		—		—		239		320
Total consumer		5,504		555		4,948		5,503		1,206		5,615		6,495
Total nonaccrual loans (impaired)		68,232		31,635		19,065		50,700		3,720		46,781		48,572
Accrual loans (impaired)
Income producing		—		—		—		—		—		3,737		4,993
Owner-occupied		15,380		14,727		653		15,380		4		15,410		15,310
Total commercial real estate		15,380		14,727		653		15,380		4		19,147		20,303
Small business		—		—		—		—		—		243		327
Total commercial		15,380		14,727		653		15,380		4		19,390		20,630
Residential mortgage		10,750		2,454		8,296		10,750		2,210		10,766		10,015
Direct consumer		6,851		4,495		2,357		6,852		359		6,445		5,443
Total consumer		17,601		6,949		10,653		17,602		2,569		17,211		15,458
Total accrual loans (impaired)		32,981		21,676		11,306		32,982		2,573		36,601		36,088
Total impaired loans	$	101,213	$	53,311	$	30,371	$	83,682	$	6,293	$	83,382	$	84,660

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	December 31, 2011
											Average Recorded Investment
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with No Specific Allowance		Recorded Investment with Specific Allowance		Total Recorded Investment		Specific Related Allowance		Quarter To Date		Year To Date
Nonaccrual loans (impaired)
Land hold	$	—	$	—	$	—	$	—	$	—	$	—	$	45
Land development		—		—		—		—		—		—		85
Construction		—		—		—		—		—		129		224
Income producing		23,394		9,163		8,838		18,001		2,686		18,989		19,516
Owner-occupied		22,338		13,276		3,694		16,970		1,424		19,267		17,069
Total commercial real estate		45,732		22,439		12,532		34,971		4,110		38,385		36,939
Commercial and industrial		17,197		8,196		646		8,842		42		10,215		12,499
Small business		131		66		—		66		—		66		269
Total commercial		63,060		30,701		13,178		43,879		4,152		48,666		49,707
Residential mortgage		6,610		587		6,023		6,610		1,346		9,075		10,592
Direct consumer		1,168		647		500		1,147		55		1,757		1,519
Indirect consumer		478		478		—		478		—		476		474
Total consumer		8,256		1,712		6,523		8,235		1,401		11,308		12,585
Total nonaccrual loans (impaired)		71,316		32,413		19,701		52,114		5,553		59,974		62,292
Accrual loans (impaired)
Income producing		7,476		7,476		—		7,476		—		7,497		7,524
Owner-occupied		15,115		15,115		—		15,115		—		9,125		6,166
Total commercial real estate		22,591		22,591		—		22,591		—		16,622		13,690
Small business		491		491		—		491		—		494		500
Total commercial		23,082		23,082		—		23,082		—		17,116		14,190
Residential mortgage		8,530		2,088		6,442		8,530		1,491		5,691		3,966
Direct consumer		3,460		3,360		100		3,460		15		2,854		2,570
Total consumer		11,990		5,448		6,542		11,990		1,506		8,545		6,536
Total accrual loans (impaired)		35,072		28,530		6,542		35,072		1,506		25,661		20,726
Total impaired loans	$	106,388	$	60,943	$	26,243	$	87,186	$	7,059	$	85,635	$	83,018

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	June 30, 2011
											Average Recorded Investment
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with No Specific Allowance		Recorded Investment with Specific Allowance		Total Recorded Investment		Specific Related Allowance		Quarter To Date		Year To Date
Nonaccrual loans (impaired)
Land hold	$	—	$	—	$	—	$	—	$	—	$	92	$	737
Land development		340		—		340		340		33		170		1,017
Construction		635		238		164		402		16		319		2,493
Income producing		24,267		9,351		7,683		17,034		2,231		20,052		31,647
Owner-occupied		21,030		9,767		6,030		15,797		1,426		14,835		20,785
Total commercial real estate		46,272		19,356		14,217		33,573		3,706		35,468		56,679
Commercial and industrial		21,537		12,169		1,147		13,316		165		14,822		24,065
Small business		131		—		66		66		4		475		911
Total commercial		67,940		31,525		15,430		46,955		3,875		50,765		81,655
Residential mortgage		14,121		2,157		11,964		14,121		2,356		13,218		10,694
Direct consumer		1,372		254		1,035		1,289		114		1,296		1,384
Indirect consumer		474		474		—		474		—		472		471
Total consumer		15,967		2,885		12,999		15,884		2,470		14,986		12,549
Total nonaccrual loans (impaired)		83,907		34,410		28,429		62,839		6,345		65,751		94,204
Accrual loans (impaired)
Income producing		7,547		7,547		—		7,547		—		7,550		5,006
Owner-occupied		3,152		3,152		—		3,152		—		3,162		3,684
Total commercial real estate		10,699		10,699		—		10,699		—		10,712		8,690
Small business		503		503		—		503		—		506		335
Total commercial		11,202		11,202		—		11,202		—		11,218		9,025
Residential mortgage		1,127		965		162		1,127		32		1,129		1,375
Direct consumer		2,277		1,659		618		2,277		70		2,280		2,030
Total consumer		3,404		2,624		780		3,404		102		3,409		3,405
Total accrual loans (impaired)		14,606		13,826		780		14,606		102		14,627		12,430
Total impaired loans	$	98,513	$	48,236	$	29,209	$	77,445	$	6,447	$	80,378	$	106,634

Troubled Debt Restructurings. A modified loan is considered a Troubled Debt Restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made that would not otherwise be considered for a borrower with similar credit characteristics. While commercial loan modifications vary depending on circumstances, the most common types of modifications for residential and consumer loans include below market rate reductions and/or maturity extensions, and generally do not include forgiveness of principal balances. Modified terms are dependent upon the financial position and needs of the individual borrower.

Citizens classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of the restructure, or the loan has performed according to the new contractual terms for at least six months. To qualify for accruing status at the time of the restructure, the original loan must have been less than 90 days past due at the time of the restructure and the modification must not have resulted in an impairment loss. At June 30, 2012 the majority of Citizens’ TDRs were on accrual status and all were reported as impaired. TDR classifications may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. Otherwise, the loans remain classified as TDRs.

The recorded investment balance of TDRs approximated $28.3 million at June 30, 2012. TDRs of $18.2 million were on accrual status and TDRs of $10.1 million were on nonaccrual status at June 30, 2012. TDRs are evaluated separately in Citizens’ allowance for loan loss methodology based on the expected cash flows or underlying collateral of loans in this status. At June 30, 2012, the allowance for loan losses included specific reserves of $3.9 million related to TDRs, which included $3.3 million related to mortgage TDRs and $0.4 million related to direct consumer TDRs. For the three and six months ended June 30, 2012, Citizens charged off $1.0 million and $1.5 million, respectively for the portion of TDRs deemed to be uncollectible.

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The following table provides information on loans modified as a TDR in 2012.

	Three Months Ended
	June 30, 2012
(in thousands)	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Average Coupon Rate
Commercial real estate		1	$	901	$	901		6.84	%
Residential mortgage		5		587		587		2.00
Direct consumer		14		1,001		998		4.30
Total portfolio loans		20	$	2,489	$	2,486		4.68

	Six Months Ended
	June 30, 2012
(in thousands)	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Average Coupon Rate
Commercial real estate		2	$	1,839	$	1,500		6.50	%
Residential mortgage		14		2,333		2,333		2.45
Direct consumer		52		3,803		3,722		4.39
Total portfolio loans		68	$	7,975	$	7,555		4.21

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The following table provides information on how loans were modified as a TDR in 2012.

	Three Months Ended
	June 30, 2012
(in thousands)	Post-Modification Recorded Investment
Extended maturity	$	1,086
Interest rate adjustments		310
Combination of rate and maturity		1,090
Total	$	2,486

	Six Months Ended
	June 30, 2012
(in thousands)	Post-Modification Recorded Investment
Extended maturity	$	1,993
Interest rate adjustments		2,625
Combination of rate and maturity		2,173
Other (1)		764
Total	$	7,555

⁽¹⁾  Other includes convenant modification, forebearance and other concessions or combination of concessions that do not consist of interest rate adjustments and/or maturity extensions.

A TDR loan is considered to have a payment default when one or more payments is over 90 days past due. At June 30, 2012, there were two loans of approximately $0.1 million modified as a TDR within the last twelve months in payment default.

Note 5. Long-Term Debt

The components of long-term debt are presented below.

(in thousands)	June 30, 2012		December 31, 2011
Citizens (Parent only):
Subordinated debt:
5.75% subordinated notes due February 2013	$	17,175	$	17,101
Variable rate junior subordinated debenture due June 2033		25,774		25,774
7.50% junior subordinated debentures due September 2066		48,677		48,677
Subsidiaries:
FHLB advances		657,288		658,484
Other borrowed funds		104,128		104,149
Total long-term debt	$	853,042	$	854,185

Citizens restructured $225.0 million of FHLB advances during the first six months of 2012, extending the average remaining term on these advances to 9.5 years from 3.6 years and reducing the average interest rate

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to 3.08% from 4.05%. Throughout 2011, Citizens restructured $245.0 million in FHLB advances extending the average remaining term to 5.8 years from 3.3 years and reducing the average interest rate to 3.32% from 4.84%.

During the first quarter of 2010, Citizens decided to defer regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities. While Citizens accrues for this obligation it is currently in arrears with the interest payments as contractually permitted. As of June 30, 2012 and December 31, 2011, the amount of the arrearage on the payments on the subordinated debentures associated with the trust preferred securities is $12.4 million and $9.8 million, respectively.

Note 6. Income Taxes

Citizens recorded a benefit for income taxes of $276.8 million for the second quarter of 2012, compared to a benefit of $10.3 million for the second quarter of 2011. For the first six months of 2012, the income tax benefit totaled $276.8 million, compared with a benefit of $10.2 million for the same period of 2011. The increase in tax benefit for 2012 was primarily the result of eliminating the valuation allowance against the deferred tax asset. The deferred tax asset is reviewed on a quarterly basis and based on the analysis of positive and negative evidence at June 30, 2012, including the Company’s return to profitability over the past five quarters, no deferred tax asset valuation allowance was deemed necessary as of June 30, 2012. As a result, the deferred tax asset valuation allowance was reversed in the second quarter of 2012. As of June 30, 2012, the recorded balance of the deferred tax asset was $268.9 million, reported in Other Assets on the Consolidated Balance Sheets.

Note 7. Fair Values of Assets and Liabilities

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Given that there is no active market for many of Citizens’ financial instruments, Citizens has made estimates using discounted cash flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented herein are not necessarily indicative of the amounts Citizens could realize in a current market exchange.

The fair value estimates are based on existing on- and off-balance sheet financial instruments and do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. For example, Citizens has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include Citizens’ brokerage network, net deferred tax assets (and the related valuation reserves), and premises and equipment. In addition, tax ramifications related to the recognition of unrealized gains and losses such as those within the investment securities portfolio can have a significant effect on estimated fair values and have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of Citizens’ value.

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. An asset or liability’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 the use of discounted cash flow models and similar techniques.

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The carrying amount, estimated fair value, and placement in the fair value hierarchy of Citizens’ financial instruments that are not measured at fair value follow.

	June 30, 2012
	Carrying		Estimated		Fair Value Measurements
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	145,432	$	145,432	$	—	$	145,432	$	—
Money market investments		203,861		203,861		—		203,861		—
Securities held to maturity		1,296,164		1,349,429		—		1,349,429		—
FHLB and Federal Reserve stock		122,123		122,123		—		122,123		—
Net portfolio loans		5,385,628		5,212,654		—		—		5,212,654
Loans held for sale		14,518		14,518		—		11,397		3,121
Accrued interest receivable		30,932		30,932		—		30,932		—
Financial liabilities:
Deposits		7,287,709		7,312,332		—		7,312,332		—
Short-term borrowings		39,169		39,169		—		39,169		—
Long-term debt		853,042		927,850		51,948		875,902		—
Accrued interest payable		15,990		15,990		—		15,990		—

	December 31, 2011
	Carrying		Estimated		Fair Value Measurements
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	153,418	$	153,418	$	—	$	153,418	$	—
Money market investments		313,632		313,632		—		313,632		—
Securities held to maturity		1,444,054		1,487,550		—		1,487,550		—
FHLB and Federal Reserve stock		117,943		117,943		—		117,943		—
Net portfolio loans		5,356,809		5,101,446		—		—		5,101,446
Loans held for sale		10,402		10,402		—		6,140		4,262
Accrued interest receivable		31,390		31,390		—		31,390		—
Financial liabilities:
Deposits		7,394,941		7,424,427		—		7,424,427		—
Short-term borrowings		40,098		40,098		—		40,098		—
Long-term debt		854,185		927,533		45,931		881,602		—
Accrued interest payable		14,047		14,047		—		14,047		—

The carrying amount approximates fair value for cash, money market investments, and accrued interest. The methods and assumptions used to estimate the fair value of other financial instruments, regardless if the instrument is carried at fair value or not, are set forth below. There were no changes in the valuation methods used to estimate fair value during the period ended June 30, 2012.

Securities Available for Sale. Fair value measurement is based upon quoted prices for similar assets, if available, or matrix pricing models. Matrix pricing is a mathematical technique widely used in the financial industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. The securities in the available for sale portfolio are priced by independent providers. These providers utilize pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing applications apply available

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information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. In addition, Citizens uses model processes to assess interest rate impact and develop prepayment scenarios. The impact of unobservable inputs and proprietary models are not material to the determination of fair values of these securities. 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 the price at which a transaction would take place in current markets. Further, Citizens completes a comparison of the fair value estimates quarterly by validating the data received to date provided by a separate third party. In order to then evaluate reasonableness of the market data, Citizens also independently prices a sampling of securities using data from an independent source. Should Citizens find variances, the prices are then challenged and prices are adjusted accordingly. To date, there have been no significant findings or adjustments made by Citizens. 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.

Recurring Level 3 securities include auction rate securities issued by student-loan authorities and a taxable municipal Qualified Zone Academy Bond (“QZAB”). Due to the nature of the auction rate securities and the lack of a secondary market with active fair value indicators, Citizens used an income approach based on a discounted cash flow model utilizing significant unobservable inputs (Level 3) in the valuation process to estimate the transaction price between market participants for each group of securities as of the valuation date. The significant assumptions made in this modeling process included the liquidity and credit premiums, and fail rate formulas utilizing assumed interest payments. Due to the current illiquid market for QZAB bonds, Citizens relies on models containing significant unobservable market-based inputs to determine the fair value of these bonds.

Securities Held to Maturity. The fair value of securities classified as held to maturity are based upon quoted prices for similar assets, if available, or matrix pricing models. This process is essentially the same as the valuation methodologies and price verification functions used for securities available for sale.

FHLB and Federal Reserve Stock. The carrying amount of FHLB and Federal Reserve stock is used to approximate the fair value of these investments. These securities are not readily marketable, are recorded at cost (par value), and are evaluated for impairment based on the ultimate recoverability of the par value. Citizens considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. Citizens believes its investments in FHLB and Federal Reserve stock are ultimately recoverable at par.

Net Portfolio Loans. The fair value of loans and loan commitments is estimated based on discounted cash flows using exit-value rates at June 30, 2012 and December 31, 2011, weighted for varying maturity dates. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. If an entry-value rate was used to estimate fair value of loans and loan commitments, the disclosed fair value would have been higher for the periods presented.

Deposits. The estimated fair value of demand deposits (e.g., noninterest and interest bearing demand, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of Citizens’ long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments.

Short-Term Borrowings. The carrying amounts of federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings approximate their fair values because they frequently reprice to a market rate.

Long-Term Debt. The fair value is estimated using observable market prices and by discounting future cash flows using current interest rates for similar financial instruments.

Derivative Instruments. Substantially all derivative instruments held or issued by Citizens are traded in over-the-counter markets where quoted market prices are not readily available. Derivative instruments are priced by independent providers using observable market assumptions with adjustments based on widely accepted valuation techniques. For those derivatives, Citizens measures fair value with models that use primarily market observable

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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 classified as trading securities which hedge the deferred compensation liabilities for 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. Additionally, Citizens invests in a Guaranteed Income Fund which is supported by a group annuity insurance contract issued by Prudential Retirement Insurance and Annuity Company. The investment is recorded at contract value and, based on the nature of the fund, generally approximates fair value. The Guaranteed Income Fund has no maturity date and is secured only by Prudential’s general account. Therefore, the Guaranteed Income Fund is recorded as recurring 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 typically measured based on the fair value of the underlying collateral. The fair value of the underlying collateral is determined, where possible, using market prices derived from appraisals, which are considered to be Level 2. Fair value may also be measured using the present value of expected future cash flows discounted at the loan’s effective interest rate. Since certain assumptions and unobservable inputs related to loss severity are currently being used in both techniques, impaired loans are recorded as Level 3 in the fair value hierarchy. 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. Citizens measures impairment on all residential mortgage loans over 120 days past due.

Loans Held for Sale. Residential mortgage loans held for sale are comprised of loans originated for sale in the ordinary course of business and selected nonperforming residential mortgage loans. The fair value of residential mortgage loans originated for sale in the secondary market is based on purchase commitments or quoted prices for similar loans and are classified as nonrecurring Level 2. The fair value of nonperforming residential mortgage loans is based on the fair value of the underlying collateral, net of estimated costs to sell, using market prices derived from indicative pricing models which utilize projected assumptions about loss severity Citizens believes potential investors would make or appraisals and are classified as nonrecurring Level 3.

Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the lower of carrying amount or market value based on appraisals of the underlying collateral, which are also subject to management adjustments for loss severity based on current market conditions and recent sales activity. Fair value may also be measured using the present value of expected future cash flows discounted at the loan’s effective interest rate. Citizens records commercial loans held for sale as nonrecurring Level 3.

Other Real Estate. Other real estate (“ORE”) is comprised of commercial and residential real estate acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure. Commercial properties and former branch locations are carried at fair value at the time of acquisition based on the fair value of the underlying real property, net of estimated costs to sell. This is determined using market prices derived from appraisals, which are considered to be Level 2. However, certain assumptions and unobservable inputs related to loss severity are currently being used by appraisers and management, therefore, qualifying the assets as Level 3 in the fair value hierarchy. Residential real estate is recorded at the fair value of the underlying real property, net of estimated costs to sell, using market prices derived from indicative pricing models which utilize projected assumptions Citizens believes potential investors would make or appraisals and are classified as nonrecurring Level 3. 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 fair value, as well as gains and losses on disposal of these properties, are charged to noninterest expense 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 fair value, net of estimated costs to sell, based on internally developed procedures. Citizens records repossessed assets as nonrecurring Level 3.

Some of the assets and liabilities discussed above 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,

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investment securities available for sale, derivative instruments, and deferred compensation assets are recorded at fair value on a recurring basis. Other assets, such as loans held for sale, impaired loans, other real estate, and repossessed assets are recorded at fair value on a nonrecurring basis. Goodwill and core deposit intangibles are measured for impairment on a nonrecurring basis and are written down when the value of the individual asset has declined.

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

June 30, 2012
(in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Collateralized mortgage obligations	$	337,563	$	—	$	337,557	$	6
Mortgage-backed		1,028,455		—		1,028,455		—
State and municipal		113,986		—		112,539		1,447
Other		286		—		53		233
Total available for sale		1,480,290		—		1,478,604		1,686
Other assets:
Derivatives designated as hedging instruments		1,614		—		1,614		—
Derivatives not designated as hedging instruments		15,150		—		15,150		—
Deferred compensation assets		8,849		6,998		—		1,851
Total other assets		25,613		6,998		16,764		1,851
Total	$	1,505,903	$	6,998	$	1,495,368	$	3,537
Other liabilities:
Derivatives designated as hedging instruments	$	5,844	$	—	$	5,844	$	—
Derivatives not designated as hedging instruments		15,689		—		15,689		—
Total	$	21,533	$	—	$	21,533	$	—

December 31, 2011
(in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Collateralized mortgage obligations	$	365,302	$	—	$	365,294	$	8
Mortgage-backed		823,852		—		823,852		—
State and municipal		123,308		—		121,862		1,446
Other		271		—		38		233
Total available for sale		1,312,733		—		1,311,046		1,687
Other assets:
Derivatives designated as hedging instruments		3,791		—		3,791		—
Derivatives not designated as hedging instruments		17,088		—		17,088		—
Deferred compensation assets		8,477		6,791		—		1,686
Total other assets		29,356		6,791		20,879		1,686
Total	$	1,342,089	$	6,791	$	1,331,925	$	3,373
Other liabilities:
Derivatives designated as hedging instruments	$	2,317	$	—	$	2,317	$	—
Derivatives not designated as hedging instruments		17,614		—		17,614		—
Total	$	19,931	$	—	$	19,931	$	—

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There were no transfers between levels within the fair value hierarchy nor were there any purchases, sales, or issuances during the three and six month periods ended June 30, 2012. The following table presents the reconciliation of Level 3 assets held by Citizens.

			Net Realized/Unrealized Gains (Losses)
(in thousands)	Balance at Beginning of Period		Recorded in Earnings				Recorded in Other Comprehensive Income (Pretax)			Purchases		Sales			Settlements			Balance at End of Period
			Realized(1)		Unrealized
Three Months Ended June 30, 2012
Securities available for sale
Collateralized mortgage obligations	$	7	$	—	$	—	$	—		$	—	$	—		$	(1	)	$	6
State and municipal		1,446		7		—		(6	)		—		—			—			1,447
Other		233		3		—		(3	)		—		—			—			233
Deferred compensation assets		1,740		—		—		—			204		(93	)		—			1,851
Total	$	3,426	$	10	$	—	$	(9	)	$	204	$	(93	)	$	(1	)	$	3,537
Six Months Ended June 30, 2011
Securities available for sale
Collateralized mortgage obligations	$	8	$	—	$	—	$	—		$	—	$	—		$	(2	)	$	6
State and municipal		1,446		16		—		(15	)		—		—			—			1,447
Other		233		6		—		(6	)		—		—			—			233
Deferred compensation assets		1,686		—		—		—			286		(121	)		—			1,851
Total	$	3,373	$	22	$	—	$	(21	)	$	286	$	(121	)	$	(2	)	$	3,537

⁽¹⁾  Net realized gains and losses recorded in earnings include discount accretions.

The following table includes assets measured at fair value on a nonrecurring basis that have had a fair value adjustment.

June 30, 2012 (in thousands)	Initial  Carrying Value		Fair Value
			Total		Level 1		Level 2		Level 3
Impaired loans	$	54,621	$	22,618	$	—	$	—	$	22,618
Commercial loans held for sale		36		—		—		—		—
Residential mortgage loans held for sale		710		216		—		—		216
Other real estate		1,413		867		—		—		867
Repossessed assets		2,683		1,475		—		—		1,475
Total	$	59,463	$	25,176	$	—	$	—	$	25,176

The following table represents quantitative information about Level 3 fair value measurements.

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(in thousands)	Fair Value at June 30, 2012		Valuation Technique	Unobservable Input			Range (Weighted Average)
Securities available for sale:
Collateralized mortgage obligations		6	Cost		None	(1)		None
State and municipal		1,447	Discounted Cash Flow		Liquidity Premium			1.0% - 2.5% (2.2%)
					Credit Premium			1.3% - 5.0% (4.2%)
					Fail Rate			1.2% - 2.0% (1.8%)
Other		233	Discounted Cash Flow		Liquidity Premium			2.0% - 2.5% (2.4%)
					Credit Premium			2.8% - 5.5% (4.5%)
					Fail Rate			1.2% - 1.5% (1.4%)
Deferred compensation assets		1,851	Contract Value		None	(2)		None
Impaired loans		22,618	Comparative Sales		Loss Severity Discount			0% - 100% (67%)
Residential mortgage loans held for sale		216	Comparative Sales		Loss Severity Discount			6% - 100% (70%)
Other real estate		867	Comparative Sales		Loss Severity Discount			1% - 100% (39%)
Repossessed assets		1,475	Comparative Sales		Loss Severity Discount			45% - 45% (45%)

⁽¹⁾  Carrying value approximates fair value.

⁽²⁾  Contract value approximates fair value.

The significant unobservable inputs used in the fair value measurement of Citizens’ recurring Level 3 securities are the liquidity and credit premiums and fail rate formula. A change in these inputs to a different amount would not result in a material change in fair value.

Note 8. Pension Benefit Cost

Effective December 31, 2006, Citizens’ defined benefit pension plan was “frozen,” preserving prior earned benefits but discontinuing the accrual of further benefits. Citizens recognizes the change in the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its retirement plans as an adjustment to accumulated other comprehensive income, net of tax. This adjustment represents the unrecognized actuarial losses and unrecognized prior service costs. The components of retirement benefit cost are presented below.

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	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Defined benefit pension plans
Interest cost	$	881		$	955		$	1,763		$	1,910
Expected return on plan assets		(1,055	)		(1,018	)		(2,110	)		(2,035	)
Amortization of unrecognized:
Prior service cost		7			8			15			15
Net actuarial loss		793			833			1,585			1,665
Net pension cost		626			778			1,253			1,555
Supplemental pension plans
Interest cost		29			189			210			378
Amortization of unrecognized:
Net actuarial loss		7			5			23			9
Net pension cost		36			194			233			387
Postretirement benefit plans
Interest cost		20			144			40			289
Amortization of unrecognized:
Prior service cost		(229	)		(72	)		(459	)		(145	)
Net actuarial gain		(45	)		(72	)		(90	)		(144	)
Net postretirement benefit cost		(254	)		—			(509	)		—
Defined contribution retirement and 401(k) Plans
Employer contributions		473			—			938			—
Total periodic benefit cost	$	881		$	972		$	1,915		$	1,942

Citizens maintains multiple employee benefit plans, including defined benefit pension, supplemental pension, postretirement healthcare, and defined contribution retirement 401(k). Citizens made a cash contribution of $2.7 million to the defined benefit pension plan during the first six months of 2012 and expects to make an additional contribution of $0.1 million for the remainder of the year. During the first six months of 2012, Citizens contributed $0.2 million to the supplemental pension plans and anticipates that an additional $0.3 million of contributions will be made during the remaining six months of the year. Citizens contributed $0.2 million to the postretirement benefit plan during the first six months of 2012 and anticipates making an additional $0.1 million in contributions for the remaining portion of the year. Citizens suspended the 401(k) matching funds and annual discretionary contributions during the third quarter of 2009. The Board of Directors approved the reinstatement of the 401(k) matching funds effective January 1, 2012. Contributions to the 401(k) savings plan will be matched 50% on the first 2% of salary deferred and 25% on the next 6% deferred.

The pension plan assets for which Citizens determines fair value include a short-term pooled money fund, equity, and fixed income securities, all of which fall into Level 2 in the fair value hierarchy at June 30, 2012. Citizens’ pension plan assets are invested solely in pooled separate account funds, which are managed by Prudential. The net asset values (“NAV”) are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAV’s unit price of the pooled separate accounts is not quoted on any market; however, the unit price is based on the underlying investments which are traded in an active market and are priced by independent providers. 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 annual testing on valuations received from third parties. There are no significant restrictions on Citizens’ ability to sell any of the investments in the pension plan.

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The estimated fair values of Citizens’ pension plan assets follows.

June 30, 2012
(in thousands)	Total		Level 1		Level 2		Level 3
Asset Category
Short-term pooled money fund	$	2,590	$	—	$	2,590	$	—
Equity securities
Large cap		17,881		—		17,881		—
Mid-cap		4,398		—		4,398		—
Small-cap		6,246		—		6,246		—
International equity		9,280		—		9,280		—
Fixed income securities
Intermediate term fixed		23,099		—		23,099		—
Total	$	63,494	$	—	$	63,494	$	—

Note 9. 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. At June 30, 2012, Citizens had 932,081 shares of common stock reserved for future issuance under the current plan. The compensation cost for share based awards is recognized over the requisite service period of the award. The requisite service period is presumed to be the stated vesting period or the estimated time that will be required to satisfy any performance conditions. Restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights. Restricted stock units have no voting or dividend rights but have dividend equivalent rights entitling them to additional shares at the time the units are settled for common stock. There have been no options granted since 2006 and no amortized costs associated with stock options since 2009.

The following table sets forth the total stock-based compensation expense resulting from restricted stock units and restricted stock awards included in the Consolidated Statements of Operations.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Restricted stock compensation and restricted stock unit compensation	$	968		$	879		$	1,617		$	1,366
Stock-based compensation expense before income taxes		968			879			1,617			1,366
Income tax benefit (1)		(339	)		(308	)		(566	)		(478	)
Total stock-based compensation expense after income taxes	$	629		$	571		$	1,051		$	888

New shares are issued when stock options are exercised. 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 Statements of Cash Flows.

As of June 30, 2012, $7.5 million of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted average period of 2.0 years.

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The following table summarizes restricted stock activity.

	Number of Shares			Weighted-Average Per Share Grant Date Fair Value
Restricted stock at December 31, 2011		825,969		$	9.27
Granted		295,306			16.81
Vested		(76,521	)		10.86
Forfeited		(26,127	)		11.59
Restricted stock at June 30, 2012(1)		1,018,627		$	11.28

⁽¹⁾  Includes 70,296 vested shares under restriction prohibiting sale until conditions are met, including two years from grant date and certain TARP payments are made.

The total fair value of restricted stock vested during the six months ended June 30, 2012 was $1.2 million.

Note 10. Earnings Per Common Share

Earnings per common share is computed using the two-class method. As of June 30, 2012, potential common stock that would be generated from restrictions lapsing on unvested shares as well as additional shares issued through the exercise of stock options and warrants totaled 2,925,830 shares. As a result of being anti-dilutive, these shares were excluded from the computation of dilutive earnings per share. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations follows.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2012			2011			2012			2011
Numerator:
Net income (loss)	$	303,176		$	24,157		$	328,037		$	(44,521	)
Dividend on redeemable preferred stock		(6,042	)		(5,701	)		(11,997	)		(11,328	)
Net income (loss) attributable to common shareholders		297,134			18,456			316,040			(55,849	)
Net income allocated to participating securities		6,930			272			6,869			—
Net income (loss) after allocation to participating securities	$	290,204		$	18,184		$	309,171		$	(55,849	)
Denominator:
Weighted average shares outstanding		40,415			40,006			40,336			39,869
Less: participating securities included in weighted average shares outstanding		(943	)		(589	)		(877	)		(457	)
Weighted average shares outstanding for basic and dilutive earnings per common share		39,472			39,417			39,459			39,412
Basic net income (loss) per common share	$	7.35		$	0.46		$	7.84		$	(1.42	)
Diluted net income (loss) per common share		7.35			0.46			7.84			(1.42	)

During the first quarter of 2010, Citizens suspended quarterly cash dividend payments on its fixed-rate cumulative perpetual preferred stock, Series A Preferred Stock, issued to and owned by the U.S. Department of the Treasury as part of the Treasury’s Capital Purchase Program. Citizens has both the intent and ability in the future to pay these dividends and therefore accrues for this obligation. Citizens is currently in arrears in the amount of $39.9 million and $31.5 million with the dividend payments on the Series A Preferred Stock as of June 30, 2012 and December 31, 2011, respectively. For additional information about the Series A Preferred Stock, see Note 14 to the Consolidated Financial Statements of Citizens’ 2011 Annual Report on Form 10-K.

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Note 11. Lines of Business

Citizens is managed along the following business lines: Regional Banking, Specialty Consumer, Specialty Commercial, Wealth Management, and Other. Selected line of business information for the three and six months ended June 30, 2012 and 2011 is provided below. Certain amounts have been reclassified to conform with the current year presentation. These reclassifications do not have a significant effect on any one line of business and do not change the total results of the company. There are no significant intersegmental revenues. For additional information about the business lines, see Note 15 to the Consolidated Financial Statements of Citizens’ 2011 Annual Report on Form 10-K.

(in thousands)	Regional Banking		Specialty Consumer			Specialty Commercial			Wealth Mgmt		Other			Total
Earnings Summary - Three Months Ended June 30, 2012
Net interest income (taxable equivalent)	$	51,991	$	8,385		$	16,534		$	30	$	273		$	77,213
Provision for loan losses		2,291		5,814			(2,806	)		—		—			5,299
Net interest income (loss) after provision		49,700		2,571			19,340			30		273			71,914
Noninterest income		17,560		(115	)		629			3,582		689			22,345
Noninterest expense		50,962		4,465			3,183			2,365		5,364			66,339
Income (loss) before income taxes		16,298		(2,009	)		16,786			1,247		(4,402	)		27,920
Income tax expense (benefit) (taxable equivalent)		5,704		(703	)		5,876			436		(286,569	)		(275,256	)
Net income (loss)	$	10,594	$	(1,306	)	$	10,910		$	811	$	282,167		$	303,176
Average assets (in millions)	$	3,015	$	1,568		$	1,240		$	22	$	3,584		$	9,429
Earnings Summary - Three Months Ended June 30, 2011
Net interest income (taxable equivalent)	$	53,309	$	9,103		$	11,368		$	155	$	5,555		$	79,490
Provision for loan losses		11,751		2,292			3,553			—		—			17,596
Net interest income (loss) after provision		41,558		6,811			7,815			155		5,555			61,894
Noninterest income		16,974		224			2,476			3,811		(160	)		23,325
Noninterest expense		55,247		5,128			3,183			2,316		3,570			69,444
Income (loss) before income taxes		3,285		1,907			7,108			1,650		1,825			15,775
Income tax expense (benefit) (taxable equivalent)		1,276		667			2,515			581		(13,421	)		(8,382	)
Net income (loss)	$	2,009	$	1,240		$	4,593		$	1,069	$	15,246		$	24,157
Average assets (in millions)	$	3,293	$	1,639		$	1,002		$	18	$	3,713		$	9,665

(in thousands)	Regional Banking			Specialty Consumer			Specialty Commercial			Wealth Mgmt		Other			Total
Earnings Summary - Six Months Ended June 30, 2012
Net interest income (taxable equivalent)	$	103,542		$	16,898		$	32,049		$	58	$	2,354		$	154,901
Provision for loan losses		18,331			2,621			(7,256	)		—		—			13,696
Net interest income (loss) after provision		85,211			14,277			39,305			58		2,354			141,205
Noninterest income		34,695			367			1,383			7,184		2,956			46,585
Noninterest expense		101,351			8,601			6,470			4,983		12,034			133,439
Income (loss) before income taxes		18,555			6,043			34,218			2,259		(6,724	)		54,351
Income tax expense (benefit) (taxable equivalent)		6,494			2,115			11,977			791		(295,063	)		(273,686	)
Net income (loss)	$	12,061		$	3,928		$	22,241		$	1,468	$	288,339		$	328,037
Average assets (in millions)	$	3,030		$	1,564		$	1,216		$	21	$	3,644		$	9,475
Earnings Summary - Six Months Ended June 30, 2011
Net interest income (taxable equivalent)	$	109,361		$	18,169		$	21,330		$	298	$	11,048		$	160,206
Provision for loan losses		51,419			11,266			43,635			—		—			106,320
Net interest income (loss) after provision		57,942			6,903			(22,305	)		298		11,048			53,886
Noninterest income		34,546			1,656			919			7,734		1,613			46,468
Noninterest expense		111,169			9,987			8,771			4,659		16,514			151,100
Income (loss) before income taxes		(18,681	)		(1,428	)		(30,157	)		3,373		(3,853	)		(50,746	)
Income tax expense (benefit) (taxable equivalent)		(6,538	)		(500	)		(10,555	)		1,181		10,187			(6,225	)
Net income (loss)	$	(12,143	)	$	(928	)	$	(19,602	)	$	2,192	$	(14,040	)	$	(44,521	)
Average assets (in millions)	$	3,389		$	1,642		$	1,063		$	17	$	3,670		$	9,781

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Note 12. Commitments, Contingent Liabilities and Guarantees

In accordance with GAAP, the unaudited Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. Letters of credit guarantee future payment of client financial obligations to third parties. They are normally issued for services provided or to facilitate the shipment of goods. Both arrangements have essentially the same level of credit risk as that associated with extending loans to clients and are subject to Citizens’ normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on Citizens’ assessment of the client and may include receivables, inventories, real property, and equipment.

Amounts available to clients under loan commitments and standby letters of credit follow.

(in thousands)	June 30, 2012		December 31, 2011
Loan commitments and letters of credit:
Commitments to extend credit	$	951,283	$	932,435
Asset-based lending participations		104,131		151,194
Financial standby letters of credit		113,608		125,401
Performance standby letters of credit		1,756		3,571
Deferred standby letter of credit fees		720		1,123

At June 30, 2012 and December 31, 2011, a liability of $1.9 million was recorded for possible losses on commitments to extend credit. In accordance with applicable accounting standards related to guarantees, Citizens defers fees collected in connection with the issuance of standby letters of credit. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement.

Prior to June 2008, when Citizens sold its residential mortgage originations to several secondary market participants, it made various standard representations and warranties. The specific representations and warranties made by Citizens depended on the nature of the transaction and the requirements of the buyer. In the event of a breach of the representations and warranties, Citizens may be required to either repurchase the mortgage loans (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify the investor. For the three month periods ended June 30, 2012 and 2011, Citizens repurchased $1.1 million and $0.4 million of loans, respectively, pursuant to such provisions. Citizens recorded $1.8 million for both the three month periods ended June 30, 2012 and 2011 in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans. For the six month periods ended June 30, 2012 and 2011, Citizens repurchased $2.1 million and $0.5 million of loans, respectively, pursuant to such provisions. Citizens recorded $3.6 million and $2.9 million for the six month periods ended June 30, 2012 and 2011, respectively, in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans.

Note 13. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives. Citizens is exposed to certain risks arising from both its business operations and economic conditions. Citizens manages economic risks, including interest rate, liquidity, and credit risk, primarily through the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, Citizens enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and cash payments principally related to certain variable-rate loan assets and fixed and floating rate liabilities. When entering into an interest rate swap, Citizens and a counterparty agree to exchange cash flows based on a specified notional amount multiplied by an interest rate. Typically Citizens will pay a fixed rate and receive a floating rate (or vice versa), though paying one floating rate and receiving another is possible. In all cases the underlying notional amount is not exchanged. When Citizens purchases an interest rate cap, it receives variable-rate amounts from a counterparty if a specific interest rate index rises above the strike rate on the contract in exchange for an upfront premium.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets. The table below presents the fair value of Citizens’ derivative financial instruments as well as their classification on the Consolidated Balance Sheets.

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	Other Assets				Other Liabilities
(in thousands)	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Derivatives designated as hedging instruments
Interest rate products	$	1,614	$	3,791	$	5,844	$	2,317
Derivatives not designated as hedging instruments
Interest rate products		15,150		17,088		15,689		17,614
Total derivatives	$	16,764	$	20,879	$	21,533	$	19,931

Cash Flow Hedges of Interest Rate Risk. Citizens’ objective in using cash flow hedges is to add stability to net interest income through managing its income exposure to changes in market interest rates. To accomplish this objective, Citizens uses interest rate swaps and caps as part of its interest rate risk management strategy. Citizens had twelve interest rate caps and swaps with an aggregate notional amount of $385.0 million at June 30, 2012 and December 31, 2011 that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2012 and 2011, such derivatives were used to hedge the variable cash inflows and outflows associated with existing pools of prime and LIBOR-based loan assets and liabilities. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three and six months ended June 30, 2012 and 2011.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest income as interest payments are received on Citizens’ variable-rate assets. Citizens accelerated the reclassification of unrealized gains in accumulated other comprehensive income of less than $0.1 million for the six months ended June 30, 2012 and less than $0.1 million and $0.5 million for the three and six months ended June 30, 2011, respectively, to earnings as a result of the hedged forecasted transactions becoming probable not to occur. There was no reclassification of unrealized gains accelerated for the three months ended June 30, 2012. During the next twelve months, Citizens estimates that less than $0.1 million will be reclassified as an increase to interest income and $2.3 million as an increase to interest expense.

The following tables summarize the impact of cash flow hedges on the Consolidated Financial Statements.

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	Derivative Impact on OCI Gain (Loss)												Derivative Ineffectiveness Gain (Loss)
Derivatives Relationship (in thousands)	Recognized in OCI						Location Reclassified in Statement of Operations	Reclassified from Accumulated OCI into Statement of Operations					Location Recognized in Statement of Operations	Amount
	Three Months Ended June 30,							Three Months Ended June 30,						Three Months Ended June 30,
	2012			2011				2012			2011			2012		2011
Cash flow hedges:
							Interest income	$	51		$	825
Interest rate products	$	(6,629	)	$	(1	)	Interest expense		(619	)		—
							Other income		—			23	Other income	$	—	$	—
Total	$	(6,629	)	$	(1	)		$	(568	)	$	848		$	—	$	—
	Derivative Impact on OCI Gain (Loss)												Derivative Ineffectiveness Gain (Loss)
Derivatives Relationship (in thousands)	Recognized in OCI						Location Reclassified in Statement of Operations	Reclassified from Accumulated OCI into Statement of Operations					Location Recognized in Statement of Operations	Amount
	Six Months Ended June 30,							Six Months Ended June 30,						Six Months Ended June 30,
	2012			2011				2012			2011			2012		2011
Cash flow hedges:							Interest income	$	372		$	1,871
Interest rate products	$	(6,876	)	$	17		Interest expense		(1,209	)		—
							Other income		6			535	Other income	$	—	$	—
Total	$	(6,876	)	$	17			$	(831	)	$	2,406		$	—	$	—

Fair Value Hedges of Interest Rate Risk. Citizens is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in market interest rates. Citizens utilizes derivatives designated as fair value hedges to mitigate this market value risk. At June 30, 2012, Citizens had no derivatives designated as fair value hedges.

For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Citizens includes the gain or loss on the hedged items in the same line item in the Statements of Operations as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2012 Citizens did not recognize any gains in interest expense related to hedge ineffectiveness. During the three and six months ended June 30, 2011 Citizens recognized gains of $0.2 million and $0.7 million in interest expense related to hedge ineffectiveness, respectively. In addition, during the three and six months ended June 30, 2012 and June 30, 2011, Citizens recognized a net reduction to interest expense of $0.1 million, $0.3 million, $0.2 million and $0.4 million, respectively, related to the amortization adjustment of the basis in the hedged items that were in a hedging relationship with hedges that were terminated.

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The following table summarizes the impact of fair value hedges on the Consolidated Financial Statements.

	Derivative Contract (Loss) Gain						Hedged Item Gain (Loss)
Derivatives Relationship (in thousands)	Location in Statement of Operations	Three Months Ended					Location in Statement of Operations	Three Months Ended
		June 30,						June 30,
		2012		2011				2012		2011
Fair value hedges:
Interest rate products	Interest expense	$	—	$	(117	)	Interest expense	$	—	$	358
	Derivative Contract (Loss) Gain						Hedged Item Gain (Loss)
Derivatives Relationship (in thousands)	Location in Statement of Operations	Six Months Ended					Location in Statement of Operations	Six Months Ended
		June 30,						June 30,
		2012		2011				2012		2011
Fair value hedges:
Interest rate products	Interest expense	$	—	$	(1,107	)	Interest expense	$	—	$	1,818

Derivatives Not Designated as Hedges. Citizens does not use derivatives for trading or speculative purposes and does not use credit derivatives for any purpose. Derivatives not designated as hedges are used to manage Citizens’ exposure to interest rate movements and other identified risks but do not satisfy the conditions for hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly into earnings. Additionally, Citizens holds interest rate derivatives, including interest rate swaps and option products, resulting from a service Citizens provides to certain clients. Citizens executes interest rate derivatives with commercial banking clients to facilitate their respective risk management strategies. Those derivatives are simultaneously hedged by offsetting derivatives that Citizens executes with a third party, such that Citizens minimizes its net risk exposure resulting from such transactions. As of June 30, 2012 and December 31, 2011, Citizens had 144 derivative transactions with an aggregate notional amount of $488.5 million and 156 derivative transactions with an aggregate notional amount of $527.4 million, respectively, related to this program.

The following table summarizes the impact of derivatives not designated as hedges on the Consolidated Financial Statements.

		Amount of (Loss) Gain Recognized in Statement of Operations
Derivatives Relationship (in thousands)	Location of (Loss) Gain Recognized in Statement of Operations	Three Months Ended June 30,
		2012			2011
Derivatives not designated as hedges - Interest rate products	Other income	$	(74	)	$	(77	)
			Amount of (Loss) Gain
Derivatives Relationship (in thousands)	Location of (Loss) Gain Recognized in Statement of Operations	Six Months Ended June 30,
		2012			2011
Derivatives not designated as hedges - Interest rate products	Other income	$	(13	)	$	(189	)

Credit-Risk-Related Contingent Features. Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain derivative counterparties that contain a provision where if it fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and Citizens would be required to settle its obligations under the agreements.

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As of June 30, 2012, the fair value of derivatives in a net liability position with all counterparties, which includes accrued interest, but excludes any adjustment for nonperformance risk related to these agreements, was $20.0 million. As of June 30, 2012, Citizens had minimum collateral posting requirements with its derivative counterparties resulting in assigned collateral of $25.5 million. As of June 30, 2012 no circumstances could have been triggered to require Citizens to pledge additional collateral.

In addition, if Citizens’ credit rating is reduced below investment grade, then a termination event is deemed to have occurred with one of its counterparties and the counterparty has the right to terminate all affected transactions under the related agreement. Citizens has breached these provisions with respect to a Moody’s rating below investment grade at August 6, 2009 and may be required to settle its obligations under the agreement at the termination value. Citizens may be required to pay additional amounts due in excess of amounts previously posted as collateral. As of June 30, 2012, the termination value approximated $4.2 million.

Citizens does not offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against recognized fair value amounts of derivatives executed with the same counterparty under a master netting agreement. Citizens has the right to reclaim collateral assigned of $25.5 million.

Note 14. Regulatory Matters

On April 19, 2012, Citizens announced that, effective April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation have terminated their written agreement with Citizens, and its subsidiary, Citizens Bank dated July 28, 2010.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Quarterly Information (Unaudited)
	Three Months Ended
(in thousands, except per share amounts)	June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011
Summary of Operations
Net interest income	$	75,680		$	76,119		$	78,049		$	78,841		$	77,606
Provision for loan losses		5,299			8,397			15,007			17,481			17,596
Noninterest income		22,345			24,240			24,363			24,427			23,325
Noninterest expense		66,339			67,101			66,640			65,411			69,444
Income tax (benefit) provision(7)		(276,789	)		—			2,521			(12,568	)		(10,266	)
Net income		303,176			24,861			18,244			32,944			24,157
Net income attributable to common shareholders (1)		297,134			18,906			12,347			27,183			18,456
Taxable equivalent adjustment		1,532			1,571			1,670			1,827			1,884
Per Common Share Data (2)
Net income:
Basic	$	7.35		$	0.47		$	0.31		$	0.68		$	0.46
Diluted		7.35			0.47			0.31			0.68			0.46
Common book value		25.85			18.83			18.24			18.03			17.34
Tangible book value (non-GAAP)		24.97			17.88			17.24			16.96			16.22
Tangible common book value (non-GAAP)		17.84			10.75			10.16			9.92			9.22
Shares outstanding, end of period (3)		40,504,637			40,247,241			40,260,213			40,255,758			40,251,874
At Period End
Assets	$	9,670,493		$	9,577,346		$	9,462,849		$	9,600,188		$	9,495,630
Earning assets		8,588,343			8,774,119			8,680,995			8,824,183			8,755,838
Portfolio loans		5,521,748			5,528,063			5,529,535			5,672,327			5,627,637
Allowance for loan losses		136,120			153,007			172,726			190,354			206,292
Deposits		7,287,709			7,490,362			7,394,941			7,539,904			7,444,703
Long-term debt		853,042			853,599			854,185			855,670			881,112
Shareholders’ equity		1,335,855			1,044,619			1,019,537			1,009,143			979,722
Average for the Quarter
Assets	$	9,429,050		$	9,521,386		$	9,523,184		$	9,596,275		$	9,664,939
Earning assets		8,622,067			8,750,078			8,761,435			8,856,072			8,942,348
Portfolio loans		5,517,726			5,508,528			5,632,432			5,663,058			5,668,752
Allowance for loan losses		152,154			172,509			190,163			206,119			223,922
Deposits		7,317,653			7,441,693			7,452,137			7,546,615			7,605,707
Long-term debt		853,333			853,912			856,206			862,479			905,902
Shareholders’ equity		1,061,519			1,028,494			1,017,082			991,602			963,932
Financial Ratios (annualized)
Return on average assets		12.93	%		1.05	%		0.76	%		1.36	%		1.00	%
Return on average shareholders’ equity		114.87			9.72			7.12			13.18			10.05
Average shareholders’ equity / average assets		11.26			10.80			10.68			10.33			9.97
Net interest margin (FTE) (4)		3.60			3.56			3.62			3.63			3.56
Efficiency ratio (non-GAAP)		65.99			65.20			61.39			59.89			63.85
Allowance for loan losses as a percent of portfolio loans		2.47			2.77			3.12			3.36			3.67
Allowance for loan losses as a percent of nonperforming loans(5)		161.53			202.56			197.56			190.09			185.90
Allowance for loan losses as a percent of nonperforming assets(5)		144.85			168.87			168.97			139.01			147.99
Nonperforming loans as a percent of portfolio loans(5)		1.53			1.37			1.58			1.77			1.97
Nonperforming assets as a percent of total loans plus ORAA(5)(6)		1.69			1.63			1.84			2.39			2.46
Nonperforming assets as a percent of total assets(5)		0.97			0.95			1.08			1.43			1.47
Ratio of net charge-offs during period to average portfolio loans		1.62			2.05			2.30			2.34			2.51
Leverage ratio		9.77			8.71			8.45			8.21			7.83
Tier 1 capital ratio		14.70			13.70			13.51			12.81			12.43
Total capital ratio		15.96			14.97			14.84			14.14			13.77

⁽¹⁾  Net income attributable to common shareholders includes a non-cash dividend to preferred shareholders of $6.0 million in both the second and the first quarters of 2012 and $5.9 million, $5.8 million and $5.7 million in the fourth, third, and second quarters of 2011.

⁽²⁾  Earnings per share in the second quarter of 2012 includes a tax benefit of $6.85 per share related to restoring the deferred tax asset.

⁽³⁾  Includes participating shares which are restricted stock units and restricted shares.

⁽⁴⁾  Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%.

⁽⁵⁾  Nonperforming loans/assets exclude troubled debt restructurings (TDRs) that are on an accrual status and performing in accordance with their modified terms.

⁽⁶⁾  Other real estate assets acquired (ORAA) include loans held for sale.

⁽⁷⁾  Second quarter 2012 benefit is directly related to the restoration of the deferred tax asset.

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Introduction

The following presents management’s discussion and analysis of Citizens Republic Bancorp, Inc.’s financial condition and results of operations for the three and six months ended June 30, 2012. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in Citizens’ 2011 Annual Report on Form 10-K. In addition, the following discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Citizens’ 2011 Annual Report on Form 10-K, which contains important additional information that is necessary to understand Citizens and its financial condition and results of operations for the periods covered by this report. Unless the context indicates otherwise, all references in the discussion to “Citizens,” “the Company,” “the Corporation,” “we,” or “our,” refer to Citizens Republic Bancorp, Inc. and its subsidiary. References to the “Holding Company” refer solely to Citizens Republic Bancorp, Inc. References to the “Bank” refer solely to our banking subsidiary, Citizens Bank.

Forward – Looking Statements

Discussions and statements in this report that are not statements of historical fact, including without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan,” and statements regarding Citizens’ future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and uncertainties, many of which are beyond Citizens’ control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially.

Factors that could cause or contribute to such differences include, without limitation, the following:

• Citizens faces the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, could exceed the allowance for loan losses and that additional increases in the allowance will be required. Additions to the allowance for loan losses would cause Citizens’ operating results to decline and could have a negative impact on its capital and financial position.

• Citizens’ core lending and other businesses have been adversely affected by the historic weakness in the national and regional economies in which it operates, particularly Michigan. Citizens’ ability to generate earnings and maintain regulatory capital ratios at acceptable levels at the Holding Company and the Bank depends substantially on developments in those economies. Also, Citizens’ potential inability to comply with applicable laws, regulations, and regulatory policies or standards due to the effects of these conditions on its results of operations and financial condition may result in heightened regulatory scrutiny and require Citizens to take actions to protect depositors that are not in the best interests of its shareholders.

• Citizens’ business may be adversely affected by the highly regulated environment in which it operates. Changes in applicable laws, regulations, and regulatory practices at either the federal or state level may result in the imposition of additional costs or restrict Citizens’ ability to operate its business in the manner most beneficial to its shareholders.

• While Citizens attempts to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, Citizens may not be able to economically hedge its interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect Citizens’ net interest income and results of operations.

• The negative economic effects caused by terrorist attacks, including cyber attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of Citizens’ loan portfolio and could reduce its customer base, its level of deposits, and demand for its financial products such as loans.

• If Citizens is unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources (as a result of rating agency downgrades or other market factors), its cost of funds will increase, adversely affecting its ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting its results of operations.

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• Increased competition with other financial institutions or an adverse change in Citizens’ relationship with a number of major customers could reduce its net interest margin and net income by decreasing the number and size of loans originated, the interest rates charged on these loans and the fees charged for services to customers.

• Events such as significant adverse changes in the business climate, adverse action by a regulator, unanticipated changes in the competitive environment, or a decision to change Citizens’ operations or dispose of an operating unit could have a negative effect on its goodwill or other intangible assets such that it may need to record an impairment charge, which could have a material adverse impact on its results of operations.

• If the FDIC raises the assessments charged to its insured financial institutions, Citizens’ FDIC insurance premium may increase, which could have a negative effect on expenses and results of operations.

• Citizens may not realize its deferred income tax assets and loss carryforwards.

• Citizens’ stock price can be volatile.

• An investment in Citizens’ common stock is not an insured deposit.

• Citizens may be adversely affected by the soundness of other financial institutions.

• In order to maintain and strengthen its capital base or to repay outstanding obligations, Citizens may need to raise additional capital in transactions that may be highly dilutive to its common shareholders. If such capital becomes needed, Citizens’ failure to raise additional capital could have serious consequences for its business.

• The Holding Company may not have sufficient resources to make capital contributions to the Bank if required by bank regulatory agencies, or if it might otherwise wish to do so, in order to maintain the Bank’s capital ratios at acceptable levels.

• As a bank holding company that conducts substantially all of its operations through its operating subsidiary, the ability of the Holding Company to pay dividends, repurchase its shares or to repay its indebtedness depends upon the results of operations of its subsidiary and its ability to pay dividends to the Holding Company. Dividends paid by the subsidiary are subject to limits imposed by federal and state law.

• Citizens could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state, and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations.

• Citizens is a party to various lawsuits incidental to its business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

• The financial services industry is undergoing rapid technological changes. If Citizens is unable to adequately invest in and implement new technology-driven products and services, it may not be able to compete effectively, or the cost to provide products and services may increase significantly.

• The products and services offered by the banking industry and customer expectations regarding them are subject to change. Citizens attempts to respond to perceived customer needs and expectations by offering new products and services, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on its financial condition and results of operations.

• Citizens may not be able to attract and retain skilled people. If Citizens were to lose key employees, it may experience a disruption in its relationship with certain customers.

• The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, creates risks to our net income, capital levels, financial condition and liquidity and causes uncertainties in general economic conditions that may adversely impact us.

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• New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators, or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact Citizens’ results of operations and financial condition.

• Citizens’ business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in or disruption to, its business and a negative impact on its results of operations.

• Citizens’ vendors could fail to fulfill their contractual obligations, resulting in a material interruption in or disruption to, its business and a negative impact on its results of operations.

• Citizens controls and procedures may fail or be circumvented which could have a material adverse effect on its business, results of operations and financial condition.

• Citizens’ potential inability to integrate companies it may acquire in the future could have a negative effect on our expenses and results of operations.

• Citizens’ articles of incorporation and bylaws as well as certain banking laws may have an anti-takeover effect.

These factors also include risks and uncertainties detailed from time to time in Citizens’ other filings with the Securities and Exchange Commission (“SEC”), such as the risk factors listed in “Item 1A, Risk Factors,” of Citizens’ 2011 Annual Report on Form 10-K and subsequent Forms 10-Q, which are available at the SEC’s web site www.sec.gov. Other factors not currently anticipated may also materially and adversely affect Citizens’ results of operations, cash flows, financial position, and prospects. There can be no assurance that future results will meet expectations. While Citizens believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. Citizens does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Critical Accounting Policies

Citizens’ Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which Citizens operates. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ significantly from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include those relating to the allowance for loan losses, goodwill, fair value measurements, pension and postretirement benefits, and income taxes. Citizens believes that these estimates and the related policies are important to the portrayal of Citizens’ financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. Citizens’ significant accounting policies are more fully described in Note 1 to the audited Consolidated Financial Statements contained in Citizens’ 2011 Annual Report on Form 10-K and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our 2011 Annual Report on Form 10-K. For additional information regarding updates during 2012, see Note 1 to the unaudited Consolidated Financial Statements in this report.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as net interest margin, efficiency ratio, tangible equity to tangible assets ratio, tangible common equity to tangible assets ratio, Tier 1 common equity ratio and pre-tax pre-provision profit. Citizens believes these non-GAAP financial measures provide additional information that is useful to investors in understanding the underlying performance of Citizens, its business, and performance trends and, to a lesser degree, such measures may help facilitate performance comparisons with others in the banking industry. Non-GAAP financial measures have inherent

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limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious as to their use of such measures. To mitigate these limitations, Citizens has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that Citizens’ performance is properly reflected to facilitate consistent period-to-period comparisons. Although Citizens believes the non-GAAP financial measures disclosed in this report enhance investors’ understanding of its business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.

Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)

In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. Citizens believes the presentation of net interest margin on a taxable equivalent basis using a 35% effective tax rate allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt investments. See the Selected Quarterly Information Table, the Non-GAAP Reconciliation Table, and the Average Balances/Net Interest Income/Average Rates Table later in this report for additional information.

Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios (non-GAAP financial measures)

Citizens believes the exclusion of goodwill and other intangible assets to create “tangible assets” and “tangible equity” facilitates the comparison of results for ongoing business operations. Citizens’ management internally assesses the company’s performance based, in part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity ratio have become a focus of some investors and management believes that these ratios may assist investors in analyzing Citizens’ capital position absent the effects of intangible assets and preferred stock. Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts and banking regulators may assess Citizens’ capital adequacy using tangible common equity and Tier 1 common equity, Citizens believes that it is useful to provide investors the ability to assess its capital adequacy on the same basis. Tier 1 common equity is often expressed as a percentage of net risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weight assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (net risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity as shown in the Non-GAAP Reconciliation Table below. The amounts disclosed as net risk-weighted assets are calculated consistent with banking regulatory requirements.

Pre-Tax Pre-Provision Profit (non-GAAP financial measure)

Pre-tax pre-provision profit (“PTPP”), as defined by Citizens’ management represents total revenue (total net interest income and noninterest income) excluding any securities gains/losses, fair value adjustments on loans held for sale, interest rate swaps, and bank owned life insurance, less noninterest expense excluding any goodwill impairment charges, credit writedowns, fair value adjustments and special assessments. While certain of these items are an integral part of Citizens’ banking operations, in each case, the excluded items are items that management believes are particularly impacted by economic stress or significant changes in the credit cycle and are therefore likely to make it more difficult to understand our underlying performance trends and the ability of our banking operations to generate revenue. Net interest income, noninterest income and noninterest expense are all calculated in accordance with GAAP and are presented in the consolidated statements of operations. While noninterest income and noninterest expense are adjusted for the specific items listed above in the calculation of PTPP, these adjustments represent the excluded items in their entirety for each period presented to better facilitate period-to-period comparisons.

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Viewed together with Citizens’ GAAP results, PTPP provides management, investors, and others with a useful metric to evaluate and better understand trends in Citizens’ period-to-period earnings power and ability to generate capital to cover credit losses, in each case exclusive of the effects of the current and recent economic stress and the credit cycle. As recent results for the banking industry demonstrate, loan charge-offs, related credit provision, and credit writedowns can vary significantly from period to period, making a measure that helps isolate the impact of credit costs on profitability all the more important to investors. The “Credit Quality” section of this report discusses the quality of Citizens’ loan portfolio and the impact on Citizens’ earnings as reflected in the provision for loan losses.

A portion of the compensation awarded to Citizens’ Named Executive Officers and certain other management employees for their performance in 2011 and 2012 is measured against a PTPP performance target (as defined above) as Citizens believes that PTPP is a key measurement that helps keep revenue generation as a focus for its business and a particularly valuable measure during challenging credit cycles. Based on 2011 full year results, the total potential cash compensation award linked to PTPP was $0.8 million. Additionally, during 2011, approximately 186,500 shares of restricted stock were granted which have a two-year vesting period based partially on PTPP results and partially on net income. Based on 2012 full year results, the total potential cash compensation award linked to PTPP is $1.3 million, payable in early 2013. The grants are designed so that a portion of the compensation is based on net income while the remainder does not depend on management’s performance with regard to managing loan losses, securities impairments, and other asset impairments.

Like all non-GAAP metrics, PTPP’s usefulness is inherently limited. Because Citizens’ calculation of PTPP may differ from the calculation of similar measures used by other bank holding companies, PTPP should be used to determine and evaluate period to period trends in Citizens’ performance and in comparison to Citizens’ loan charge-offs, related credit provision, and credit writedowns, rather than in comparison to non-GAAP metrics used by other companies. In addition, investors should bear in mind that income tax expense (benefit), the provision for loan losses, and the other items excluded from revenues and expenses in the PTPP calculation are recurring and integral expenses to Citizens’ banking operations, and that these expenses will still accrue under GAAP, thereby reducing GAAP earnings and, ultimately, shareholders’ equity.

The following tables display the calculation of the efficiency ratio for the past five quarters and the calculation of the remainder of these non-GAAP measures other than pre-tax pre-provision profit, the calculation of which is set forth in the “Results of Operations – Summary” section, as of the end of each of those periods. The quantitative reconciliation of adjusted net income attributable to common shareholders to GAAP net income attributable to common shareholders is provided for the three and six months ending June 30, 2012 and 2011, respectively.

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Non-GAAP Reconciliation
(in thousands)	June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011
Efficiency Ratio (non-GAAP)
Net interest income (A)	$	75,680		$	76,119		$	78,049		$	78,841		$	77,606
Taxable equivalent adjustment (B)		1,532			1,571			1,670			1,827			1,884
Investment securities gain (losses) (C)		—			—			38			3			(993	)
Noninterest income (D)		22,345			24,240			24,363			24,427			23,325
Noninterest expense (E)		66,339			67,101			66,640			65,411			69,444
(Gains) losses on ORE and ORE Expenses (F)		93			65			2,076			1,739			2,384
Intangible amortization (G)		545			578			688			732			778
Efficiency ratio: (E-F-G)/(A+B-C+D) (non-GAAP)		65.99	%		65.20	%		61.39	%		59.89	%		63.85	%
Tangible Common Equity to Tangible Assets (non-GAAP)
Total assets	$	9,670,493		$	9,577,346		$	9,462,849		$	9,600,188		$	9,495,630
Goodwill		(318,150	)		(318,150	)		(318,150	)		(318,150	)		(318,150	)
Other intangible assets		(6,305	)		(6,850	)		(7,428	)		(8,116	)		(8,848	)
Tangible assets (non-GAAP)	$	9,346,038		$	9,252,346		$	9,137,271		$	9,273,922		$	9,168,632
Total shareholders’ equity	$	1,335,855		$	1,044,619		$	1,019,537		$	1,009,143		$	979,722
Goodwill		(318,150	)		(318,150	)		(318,150	)		(318,150	)		(318,150	)
Other intangible assets		(6,305	)		(6,850	)		(7,428	)		(8,116	)		(8,848	)
Tangible equity (non-GAAP)	$	1,011,400		$	719,619		$	693,959		$	682,877		$	652,724
Tangible equity	$	1,011,400		$	719,619		$	693,959		$	682,877		$	652,724
Preferred stock		(288,723	)		(286,901	)		(285,114	)		(283,360	)		(281,642	)
Tangible common equity (non-GAAP)	$	722,677		$	432,718		$	408,845		$	399,517		$	371,082
Tier 1 Common Equity (non-GAAP)
Total shareholders’ equity	$	1,335,855		$	1,044,619		$	1,019,537		$	1,009,143		$	979,722
Qualifying capital securities		73,667			73,667			73,667			73,667			73,667
Goodwill		(318,150	)		(318,150	)		(318,150	)		(318,150	)		(318,150	)
Accumulated other comprehensive loss		10,268			1,955			5,820			1,075			923
Disallowed deferred tax asset		(235,529	)		—			—			—			—
Other intangible assets		(6,305	)		(6,850	)		(7,428	)		(8,116	)		(8,848	)
Tier 1 capital (regulatory)	$	859,806		$	795,241		$	773,446		$	757,619		$	727,314
Tier 1 capital (regulatory)	$	859,806		$	795,241		$	773,446		$	757,619		$	727,314
Qualifying capital securities		(73,667	)		(73,667	)		(73,667	)		(73,667	)		(73,667	)
Preferred stock		(288,723	)		(286,901	)		(285,114	)		(283,360	)		(281,642	)
Total Tier 1 common equity (non-GAAP)	$	497,416		$	434,673		$	414,665		$	400,592		$	372,005
Net risk-weighted assets (regulatory)	$	5,851,871		$	5,803,811		$	5,723,333		$	5,912,527		$	5,850,177
Equity to assets		13.81	%		10.91	%		10.77	%		10.51	%		10.32	%
Tier 1 common equity (non-GAAP)		8.50			7.49			7.24			6.77			6.36
Tangible equity to tangible assets (non-GAAP)		10.82			7.78			7.59			7.36			7.12
Tangible common equity to tangible assets (non-GAAP)		7.73			4.68			4.47			4.31			4.05

Non-GAAP Reconciliation
Adjusted earnings per share	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Earnings per Share
Diluted net income (loss) per share	$	7.35	$	0.46	$	7.84	$	(1.42	)
Restoration of the deferred tax asset		6.85		—		6.87		—
Diluted net income (loss) per share (non-GAAP)	$	0.50	$	0.46	$	0.97	$	(1.42	)

An itemized reconciliation between net income on a GAAP basis and net income excluding the benefit of restoring the deferred tax asset (non-GAAP) follows:

Numerator:
Net income (loss)	$	303,176		$	24,157		$	328,037		$	(44,521	)
Restoration of the deferred tax asset		(276,789	)		—			(276,789	)		—
Net income (loss) (non-GAAP)		26,387			24,157			51,248			(44,521	)
Dividend on redeemable preferred stock		(6,042	)		(5,701	)		(11,997	)		(11,328	)
Net income (loss) attributable to common shareholders (non-GAAP)		20,345			18,456			39,251			(55,849	)
Net income allocated to participating securities		475			272			853			—
Net income (loss) after allocation to participating securities (non-GAAP)	$	19,870		$	18,184		$	38,398		$	(55,849	)
Denominator:
Weighted average shares outstanding for basic and dilutive earnings per common share		39,472			39,417			39,459			39,412
Basic net income (loss) per common share (non-GAAP)	$	0.50		$	0.46		$	0.97		$	(1.42	)
Diluted net income (loss) per common share (non-GAAP)		0.50			0.46			0.97			(1.42	)

Results of Operations

Summary

Citizens reported net income of $303.2 million for the three months ended June 30, 2012, compared to $24.2 million for the second quarter of 2011. After incorporating the $6.0 million accrued but unpaid dividend to the preferred shareholder, Citizens reported net income attributable to common shareholders of $297.1 million for the three months ended June 30, 2012, compared to $18.5 million for the second quarter of 2011. Diluted net income per share was $7.35 for the second quarter of 2012, compared to $0.46 for the second quarter of 2011. For the six months ended June 30, 2012, Citizens recorded net income attributal to common shareholders of $316.0 million, compared with a net loss attributal to common shareholders of $55.8 million for the same period of 2011. Second quarter 2012 results include $276.8 million or $6.85 per share tax benefit related to the restoration of the company’s deferred tax asset.

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Key factors behind the results for the second quarter of 2012 compared with the second quarter of 2011 were:

• An income tax benefit of $276.8 million for the second quarter of 2012 related to restoring our deferred tax asset.

• A decrease in provision for loan losses from 2011, which reflects the results of our focused efforts to improve asset quality and stabilized portfolio credit metrics as well as an overall decrease in loan balances.

• A decrease in noninterest expense from 2011, as losses on other real estate (“ORE”) were significantly lower due to the completion of the problem asset resolution initiatives in early 2011. Additionally, FDIC insurance costs decreased as we moved to the small bank pricing model. These decreases were partially offset by higher salaries, incentives, and costs related to the reinstatement of employer matching in the 401(k) plan.

• A decrease in net interest income from 2011, which was primarily the result of declining loan balances due to the resolution of problem assets, partially offset by the effects of a four basis point increase in net interest margin.

The following table displays pre-tax pre-provision profit (non-GAAP) for each of the last five quarters.

Pre-tax pre-provision profit (non-GAAP)	Three Months Ended
(in thousands)	June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011
Net income	$	303,176		$	24,861		$	18,244		$	32,944		$	24,157
Income tax provision (benefit)		(276,789	)		—			2,521			(12,568	)		(10,266	)
Provision for loan losses		5,299			8,397			15,007			17,481			17,596
Net (gains) losses on loans held for sale		(6	)		(916	)		217			(1,952	)		(1,179	)
Investment securities (gains) losses		—			—			(38	)		(3	)		993
(Gains) losses on other real estate (ORE)		(173	)		(385	)		1,081			1,210			1,355
Fair-value adjustment on bank owned life insurance (1)		118			(205	)		(100	)		385			48
Fair-value adjustment on swaps (1)		74			(61	)		(46	)		268			77
Pre-tax pre-provision profit (non-GAAP)	$	31,699		$	31,691		$	36,886		$	37,765		$	32,781

⁽¹⁾  Fair-value adjustment amounts contained in line item “Other income” on Consolidated Statements of Operations

The balance sheet grew $207.6 million to $9.7 billion compared to December 31, 2011 as a result of restoring the deferred tax asset. Core deposits were up $236.0 million or 4.5% over December 31, 2011, reflecting our focus on generating and growing core deposit relationships. Time deposits at June 30, 2012 decreased $343.2 million or 15.6% from the end of last year as we continue to strategically reduce high cost single service and brokered time deposits. Loan balances were essentially unchanged as the growth in our C&I and indirect portfolios was offset by declines in our CRE, residential mortgage, and direct portfolios.

Compared to June 30, 2011, the balance sheet grew $174.9 million as a result of restoring the deferred tax asset. Core deposits were up $432.9 million or 8.7% compared to June 2011, reflecting our focus on generating and growing core deposit relationships. This growth in core deposits was utilized to reduce reliance on more expensive time deposits. Time deposits at June 30, 2012 decreased $589.9 million or 24.1% from last June as we continue to strategically reduce high cost single service and brokered time deposits. Loan balances declined as the growth in our C&I and indirect portfolios was more than offset by declines in our CRE, direct, and residential mortgage portfolios. The decline in our loan portfolio was more than offset by reductions in the allowance for loan losses and the restoration of the deferred tax asset.

Citizens maintains a strong liquidity position, with on- and off-balance sheet liquidity sources and a stable funding base comprised of approximately 75% deposits, 9% long-term debt, 14% equity, and 2% short-term liabilities. Citizens also continues to maintain a strong capital position, and its regulatory capital ratios are above “well-capitalized” standards.

Net Interest Income and Net Interest Margin

An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates is presented below.

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Average Balances/Net Interest Income/Average Rates
	Three Months Ended June 30,
	2012								2011
(in thousands)	Average Balance			Interest  (1)		Average Rate  (2)			Average Balance			Interest (1)		Average Rate (2)
Earning Assets
Money market investments	$	184,670		$	114		0.25	%	$	403,380		$	249		0.25	%
Investment securities: (3)
Taxable		2,577,646			16,013		2.48			2,443,792			20,546		3.36
Tax-exempt		209,421			2,199		6.46			254,797			2,713		6.55
FHLB and Federal Reserve stock		119,413			1,151		3.87			137,433			1,044		3.04
Portfolio loans: (4)
Commercial and industrial		1,665,640			22,211		5.45			1,348,499			17,683		5.38
Commercial real estate		1,465,135			18,344		5.04			1,766,070			22,196		5.04
Residential mortgage		601,439			6,557		4.36			719,336			8,636		4.80
Direct consumer		890,957			13,036		5.88			990,764			14,958		6.06
Indirect consumer		894,555			13,690		6.15			844,083			14,057		6.68
Total portfolio loans		5,517,726			73,838		5.40			5,668,752			77,530		5.51
Loans held for sale (4)		13,191			112		3.40			34,194			147		1.72
Total earning assets (3)		8,622,067			93,427		4.42			8,942,348			102,229		4.67
Nonearning Assets
Cash and due from banks		141,122								138,728
Premises and equipment		94,836								101,352
Investment security fair value adjustment		53,672								53,822
Other nonearning assets		669,507								652,611
Allowance for loan losses		(152,154	)							(223,922	)
Total assets	$	9,429,050							$	9,664,939
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand deposits	$	988,884			349		0.14		$	947,220			545		0.23
Savings deposits		2,677,524			1,537		0.23			2,621,616			2,424		0.37
Time deposits		1,916,294			7,481		1.57			2,562,463			12,073		1.89
Short-term borrowings		37,148			13		0.13			41,340			19		0.18
Long-term debt		853,333			8,367		3.94			905,902			9,562		4.23
Total interest-bearing liabilities		6,473,183			17,747		1.10			7,078,541			24,623		1.40
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing deposits		1,734,951								1,474,408
Other liabilities		159,397								148,058
Shareholders’ equity		1,061,519								963,932
Total liabilities and shareholders’ equity	$	9,429,050							$	9,664,939
Interest Spread (5)				$	75,680		3.32	%				$	77,606		3.27	%
Contribution of noninterest bearing sources of funds							0.28								0.29
Net Interest Margin (5)(6)							3.60	%							3.56	%

⁽¹⁾  Interest income is 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 $1.5 million and $1.9 million, for the three months ended June 30, 2012 and 2011, 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.

⁽⁴⁾  Nonaccrual loans are included in average balances for each applicable loan category.

⁽⁵⁾  The interest spread and net interest margin are presented on a tax-equivalent basis.

⁽⁶⁾  Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity supporting earning assets.

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Average Balances/Net Interest Income/Average Rates	Six Months Ended June 30,
	2012								2011
(in thousands)	Average Balance			Interest (1)		Average Rate  (2)			Average Balance			Interest (1)		Average Rate (2)
Earning Assets
Money market investments	$	267,161		$	329		0.25	%	$	410,031		$	502		0.25	%
Investment securities: (3)
Taxable		2,563,018			33,322		2.60			2,378,990			40,156		3.38
Tax-exempt		212,382			4,453		6.45			266,672			5,799		6.69
FHLB and Federal Reserve stock		118,678			2,291		3.87			140,635			2,169		3.10
Portfolio loans: (4)
Commercial and industrial		1,619,785			43,833		5.53			1,385,331			33,356		4.98
Commercial real estate		1,493,292			37,423		5.04			1,904,944			48,904		5.18
Residential mortgage		614,580			13,324		4.34			730,515			17,454		4.78
Direct consumer		905,494			26,518		5.89			1,007,777			30,421		6.09
Indirect consumer		879,976			27,503		6.29			830,455			27,738		6.74
Total portfolio loans		5,513,127			148,601		5.44			5,859,022			157,873		5.46
Loans held for sale (4)		11,707			228		3.90			30,547			515		3.38
Total earning assets (3)		8,686,073			189,224		4.45			9,085,897			207,014		4.67
Nonearning Assets
Cash and due from banks		142,065								141,328
Premises and equipment		95,911								102,868
Investment security fair value adjustment		51,752								43,085
Other nonearning assets		661,749								667,486
Allowance for loan losses		(162,332	)							(259,380	)
Total assets	$	9,475,218							$	9,781,284
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand deposits	$	981,274			757		0.16		$	949,482			1,093		0.23
Savings deposits		2,693,023			3,408		0.25			2,625,435			5,018		0.39
Time deposits		2,022,605			16,299		1.62			2,657,357			25,306		1.92
Short-term borrowings		37,916			31		0.16			41,264			37		0.18
Long-term debt		853,622			16,931		3.98			938,309			19,340		4.15
Total interest-bearing liabilities		6,588,440			37,426		1.14			7,211,847			50,794		1.42
Noninterest-Bearing Liabilities and Shareholders’ Equity
Noninterest-bearing deposits		1,682,772								1,435,216
Other liabilities		159,000								151,216
Shareholders’ equity		1,045,006								983,005
Total liabilities and shareholders’ equity	$	9,475,218							$	9,781,284
Interest Spread(5)				$	151,798		3.30	%				$	156,220		3.25	%
Contribution of noninterest bearing sources of funds							0.28								0.29
Net Interest Margin (5)(6)							3.58	%							3.54	%

⁽¹⁾ Interest income is 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 $3.1 million and $4.0 million, for the six months ended 2012 and 2011, 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.

⁽⁴⁾ Nonaccrual loans are included in average balances for each applicable loan category.

⁽⁵⁾ The interest spread and net interest margin are presented on a tax-equivalent basis.

⁽⁶⁾ Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders’ equity supporting earning assets.

The increases in net interest margin in the three and six months ended June 30, 2012 over the comparable periods of 2011 were a result of efforts to reduce funding costs by improving deposit mix, carefully managing deposit rates, reducing reliance on brokered time deposits, and reducing costs on long term debt by extending maturities. The benefits from these initiatives were partially offset by lower investment securities and loan portfolio yields due to the continued low interest rate environment and competitive pressures.

The decreases in net interest income in the three and six months ended June 30, 2012 from the comparable periods of 2011 were the result of lower average earning assets, partially offset by the effects of the higher net interest margin.

The table below shows changes in interest income, interest expense and net interest income due to rate and volume variances for major categories of earning assets and interest-bearing liabilities.

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Analysis of Changes in Interest Income and Interest Expense

	Three Months Ended June 30,									Six Months Ended June 30,
2012 compared with 2011 (in thousands)	Net Change(1)			Increase (Decrease) Due to Change in						Net Change(1)			Increase (Decrease) Due to Change in
				Rate (2)			Volume(2)						Rate (2)			Volume(2)
Interest Income on Earning Assets:
Money market investments	$	(135	)	$	—		$	(135	)	$	(173	)	$	—		$	(173	)
Investment securities:
Taxable		(4,533	)		(5,607	)		1,074			(6,834	)		(9,761	)		2,927
Tax-exempt		(514	)		(37	)		(477	)		(1,346	)		(201	)		(1,145	)
FHLB and Federal Reserve stock		107			256			(149	)		122			493			(371	)
Loans:
Commercial and industrial		4,528			304			4,224			10,477			4,312			6,165
Commercial real estate		(3,852	)		(84	)		(3,768	)		(11,481	)		(1,372	)		(10,109	)
Residential mortgage loans		(2,079	)		(747	)		(1,332	)		(4,130	)		(1,522	)		(2,608	)
Direct consumer		(1,922	)		(451	)		(1,471	)		(3,903	)		(1,008	)		(2,895	)
Indirect consumer		(367	)		(1,179	)		812			(235	)		(1,911	)		1,676
Total portfolio loans		(3,692	)		(2,157	)		(1,535	)		(9,272	)		(1,501	)		(7,771	)
Loans held for sale		(35	)		89			(124	)		(287	)		70			(357	)
Total		(8,802	)		(7,456	)		(1,346	)		(17,790	)		(10,900	)		(6,890	)
Interest Expense on Interest-Bearing Liabilities:
Deposits:
Interest-bearing demand deposits		(196	)		(219	)		23			(336	)		(372	)		36
Savings deposits		(887	)		(938	)		51			(1,610	)		(1,738	)		128
Time Deposits		(4,592	)		(1,858	)		(2,734	)		(9,007	)		(3,604	)		(5,403	)
Short-term borrowings		(6	)		(4	)		(2	)		(6	)		(3	)		(3	)
Long-term debt		(1,195	)		(658	)		(537	)		(2,409	)		(780	)		(1,629	)
Total		(6,876	)		(3,677	)		(3,199	)		(13,368	)		(6,497	)		(6,871	)
Net Interest Income	$	(1,926	)	$	(3,779	)	$	1,853		$	(4,422	)	$	(4,403	)	$	(19	)

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

⁽²⁾  The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each.

The decrease in net interest income in the three months ended June 30, 2012 from the comparable period of 2011 reflects rate variances that were unfavorable in the aggregate and volume variances that were favorable in the aggregate. The rate variances were the result of the low interest rate environment, with unfavorable rate variances on assets partially offset by favorable rate variances on liabilities. Volume variances were favorable in the aggregate, as reductions in time deposits and long-term debt balances and an increase in investment securities balances were partially offset by a reduction in total portfolio loan balances.

The decrease in net interest income in the six months ended June 30, 2012 from the comparable period of 2011 reflects rate variances that were unfavorable in the aggregate and volume variances that were slightly unfavorable in the aggregate. The rate variances were the result of the low interest rate environment, with unfavorable rate variances on assets partially offset by favorable rate variances on liabilities. Volume variances were slightly unfavorable in the aggregate, as a reduction in total portfolio loan balances were almost entirely offset by reductions in time deposits and long-term debt balances and an increase in investment securities balances.

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Noninterest Income

The components of noninterest income are presented below.

Noninterest Income

	Three Months Ended											Six Months Ended
	June 30,					Change in 2012						June 30,					Change in 2012
(in thousands)	2012		2011			Amount			Percent			2012		2011			Amount			Percent
Service charges on deposit accounts	$	9,355	$	9,753		$	(398	)		(4.1	)%	$	18,340	$	19,182		$	(842	)		(4.4	)%
Trust fees		3,582		3,811			(229	)		(6.0	)		7,184		7,734			(550	)		(7.1	)
Mortgage and other loan income		1,952		1,883			69			3.7			3,810		4,825			(1,015	)		(21.0	)
Brokerage and investment fees		1,331		1,533			(202	)		(13.2	)		2,654		2,641			13			0.5
Card-based and other nondeposit fees		4,444		4,394			50			1.1			8,709		8,387			322			3.8
Net gains on loans held for sale		6		1,179			(1,173	)		(99.5	)		923		73			850			N/M
Investment securities gains (losses)		—		(993	)		993			100.0			—		(1,376	)		1,376			100.0
Other income		1,675		1,765			(90	)		(5.1	)		4,965		5,002			(37	)		(0.7	)
Total noninterest income	$	22,345	$	23,325		$	(980	)		(4.2	)	$	46,585	$	46,468		$	117			0.3

* N/M - Not meaningful

The decrease in noninterest income in the second quarter of 2012 from the second quarter of 2011 reflects lower net gains on loans held for sale and, to a lesser extent, decreases in service charges on deposit accounts, and trust fees, partially offset by the absence of investment securities losses. The lower net gains on loans held for sale were primarily the result of reduced loan sale activity in the second quarter of 2012. The reduction in service charges on deposit accounts was directly related to the impact of regulatory changes resulting from the Dodd-Frank Act and guidance issued by the FDIC related to overdraft payment programs. The decrease in trust fees was the result of a reduced level of trust assets under administration.

Noninterest income for the six months ended June 30, 2012 was essentially unchanged from the comparable period of 2011 as increases in gains on loans held for sale and the absence of investment securities losses were offset by decreases in mortgage and other loan income, service charges on deposit accounts, and trust fees. The higher net gain on loans held for sale was primarily the result of fewer writedowns to reflect fair value declines of the underlying collateral. In addition, Citizens recorded no sales on investment securities in 2012 as compared to net losses on sales of investment securities in 2011. The reduced mortgage and other loan income was primarily due to lower commitment fees. The reduction in service charges on deposit accounts was directly related to the impact of regulatory changes resulting from the Dodd-Frank Act and guidance issued by the FDIC related to overdraft payment programs. The decrease in trust fees was the result of a reduced level of trust assets under administration.

Noninterest Expense

The components of noninterest expense are presented below.

Noninterest Expense

	Three Months Ended June 30,					Change in 2012						Six Months Ended June 30,					Change in 2012
(in thousands)	2012			2011		Amount			Percent			2012			2011		Amount			Percent
Salaries and employee benefits	$	32,801		$	31,265	$	1,536			4.9	%	$	66,099		$	62,283	$	3,816			6.1	%
Occupancy		6,140			6,047		93			1.5			12,837			13,609		(772	)		(5.7	)
Professional services		2,465			2,407		58			2.4			4,488			4,626		(138	)		(3.0	)
Equipment		2,904			2,841		63			2.2			6,206			5,893		313			5.3
Data processing services		3,721			4,247		(526	)		(12.4	)		7,769			8,599		(830	)		(9.7	)
Advertising and public relations		1,708			1,802		(94	)		(5.2	)		3,043			2,371		672			28.3
Postage and delivery		1,119			1,120		(1	)		(0.0	)		2,218			2,236		(18	)		(0.8	)
Other loan expenses		3,266			3,314		(48	)		(1.4	)		6,452			8,569		(2,117	)		(24.7	)
(Gains) losses on other real estate (ORE)		(173	)		1,355		(1,528	)		(112.8	)		(559	)		10,477		(11,036	)		(105.3	)
ORE expenses		266			1,029		(763	)		(74.1	)		716			2,797		(2,081	)		(74.4	)
Intangible asset amortization		545			778		(233	)		(30.0	)		1,123			1,606		(483	)		(30.1	)
Other expenses		11,577			13,239		(1,662	)		(12.6	)		23,047			28,034		(4,987	)		(17.8	)
Total noninterest expense	$	66,339		$	69,444	$	(3,105	)		(4.5	)	$	133,439		$	151,100	$	(17,661	)		(11.7	)

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The decrease in noninterest expense for the three and six months ended June 30, 2012 compared to the comparable periods of 2011 was primarily the result of gains on other real estate (ORE) compared to significant losses in 2011, lower other expense, and lower other loan expense and ORE expenses, partially offset by an increase in salaries and employee benefits. The losses on ORE and higher ORE expenses in 2011 were incurred as a result of the problem asset resolution initiatives that were substantially completed during the first quarter of 2011. The net decrease in other expenses was directly related to lower FDIC premiums. Lower other loan expense was primarily the result of lower origination volume and lower foreclosure-related expenses. The increase in salaries and employee benefits was directly related to the reinstatement of employer contributions to the 401(k) plan and higher salary and incentive costs.

Income Taxes and Deferred Tax Asset

Citizens recorded a benefit for income taxes of $276.8 million for the second quarter of 2012, compared to a benefit of $10.3 million for the second quarter of 2011. For the first six months of 2012, the income tax benefit totaled $276.8 million, compared with a benefit of $10.2 million for the same period of 2011. The increase in tax benefit for 2012 was primarily the result of eliminating the valuation allowance against our deferred tax asset. As of June 30, 2012, the recorded balance of the net deferred tax asset was $268.9 million, reported in Other Assets on the Consolidated Balance Sheets.

Based on an evaluation of the then available positive and negative evidence, Citizens determined it was appropriate to establish a full valuation allowance on our deferred tax asset as of December 31, 2008. The deferred tax asset is reviewed on a quarterly basis and based on the analysis of positive and negative evidence at June 30, 2012, the positive evidence outweighed the negative evidence and therefore Citizens determined that a deferred tax asset valuation allowance was no longer necessary. The significant positive evidence in our analysis includes: five consecutive quarters of profitability, termination of the written agreement with our primary regulators, improved capital levels, solid, credit metrics, strong deposit mix, reduced regulatory risk, and a stabilizing economy. As a result of this analysis, the deferred tax asset valuation allowance was reversed in the second quarter of 2012.

Line of Business Results

Citizens monitors financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Business line results are divided into five major business segments: Regional Banking, Specialty Consumer, Specialty Commercial, Wealth Management and Other. For additional information about each line of business, see Note 15 to the Consolidated Financial Statements of the Citizens’ 2011 Annual Report on Form 10-K and Note 11 to the unaudited Consolidated Financial Statements in this report.

Net income for Regional Banking increased for the three months ended June 30, 2012 compared to the same period of the prior year. For the six months ended June 30, 2012, Regional Banking recorded net income compared to a net loss for the same period of the prior year. The variances were primarily due to lower provision for loan losses and lower noninterest expense, as a result of the substantial completion of Citizens’ accelerated problem asset resolution initiatives in early 2011. The variances were partially offset by higher income tax expense.

Specialty Consumer recorded a net loss for the three months ended June 30, 2012, compared to net income for the same period of the prior year. The variance was a result of higher provision for loan losses, and lower noninterest income, partially offset by lower noninterest expense and lower income taxes. The lower noninterest income was directly related to writedowns on residential held for sale loans in the second quarter of 2012. The lower noninterest expense was the result of lower ORE expenses. Specialty Consumer recorded net income for the six months ended June 30, 2012, as compared to a net loss for the same period in 2011. The variance was a result of lower provision for loan losses, which reflect the results of our focused efforts to improve asset quality and stabilize portfolio credit metrics as well as an overall decrease in loan balances, partially offset by higher income taxes.

Net income for Specialty Commercial increased for the three months ended June 30, 2012, compared to the same period of the prior year. The improvement was a result of higher net interest income and lower provision for loan losses, partially offset by lower noninterest income and higher taxes in 2012. The higher net interest income is directly related to the increase in C&I lending. The lower provision expense was directly related to the accelerated problem asset resolution initiatives in 2011. Specialty Commercial recorded net income for the six months ended June 30, 2012 compared to a net loss in the same period of the prior year. The improvement was a result of higher net interest income, lower provision for loan losses, and lower noninterest expense, partially offset by higher taxes in 2012. The higher net interest income is directly related to the increase in C&I lending. The lower provision expense was directly related to the previously mentioned accelerated problem asset resolution initiatives. The decrease in noninterest expense reflected the improved asset quality of the portfolio.

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Net income for Wealth Management for the three and six months ended June 30, 2012 decreased over the prior year primarily due to a decrease in noninterest income relating to trust fees and an increase in noninterest expense relating to an increase in salaries and employee benefits expense.

Net income for the Other line of business increased for the three months ended June 30, 2012 as compared to the prior year. The Other line of business recorded net income for the six months ended June 30, 2012 compared to a net loss in the same period of the prior year. The increases were directly related to the elimination of the valuation allowance on the deferred tax asset. These increases were partially offset by decreases in net interest income, primarily the result of the internal profitability methodology utilized at Citizens that insulates the other lines of business from interest rate risk and assigns the risk to the asset/liability management function, which is a component of this segment. Noninterest expense increased for the three months ended June 30, 2012 as compared to the prior year, primarily related to increases in occupancy expenses. For the six months ended June 30, 2012, noninterest expense decreased as a result of decreases in ORE expenses.

Financial Condition

Total assets at June 30, 2012 were $9.7 billion, an increase of $207.6 million or 2.2% over December 31, 2011 and $174.9 million or 1.8% over June 30, 2011 as a result of restoring the deferred tax asset.

Money Market Investments

Money market investments at June 30, 2012 totaled $203.9 million, a decrease of $109.8 million or 35.0% from December 31, 2011 primarily related to the use of funds to pay off maturing high cost funding. Compared to June 30, 2011, money market funds increased $27.0 million or 15.3% as less funds were used to purchase investment securities.

Investment Securities

Investment securities at June 30, 2012 totaled $2.8 billion, essentially unchanged from December 31, 2011 and a decrease of $74.9 million or 2.6% from June 30, 2011. The decrease reflects fewer funds used to purchase investment securities.

Portfolio Loans

The following definitions are provided to clarify the types of loans included in each of the commercial real estate segments identified in the table below. Land hold loans are secured by undeveloped land which has been acquired for future development. Land development loans are secured by land being developed in terms of infrastructure improvements to create finished marketable lots for commercial or residential construction. Construction loans are secured by commercial, retail, and residential real estate in the construction phase with the intent to be sold or become an income producing property. Income producing loans are secured by non-owner occupied real estate leased to one or more tenants. Owner occupied loans are secured by real estate occupied primarily by the owner.

Loan Portfolios (in thousands)	June 30, 2012		March 31, 2012		December 31, 2011		September 30, 2011		June 30, 2011
Land hold	$	5,119	$	5,387	$	6,542	$	6,818	$	7,426
Land development		7,006		7,226		13,104		22,232		22,507
Construction		4,591		6,410		5,847		5,410		8,111
Income producing		803,546		877,461		913,755		975,262		1,019,551
Owner-occupied		597,147		590,575		605,113		634,179		664,647
Total commercial real estate		1,417,409		1,487,059		1,544,361		1,643,901		1,722,242
Commercial and industrial		1,711,411		1,657,140		1,543,529		1,531,492		1,349,803
Total commercial		3,128,820		3,144,199		3,087,890		3,175,393		3,072,045
Residential mortgage		588,144		611,166		637,245		654,561		708,164
Direct consumer		881,070		903,238		933,314		954,831		978,319
Indirect consumer		923,714		869,460		871,086		887,542		869,109
Total consumer		2,392,928		2,383,864		2,441,645		2,496,934		2,555,592
Total portfolio loans	$	5,521,748	$	5,528,063	$	5,529,535	$	5,672,327	$	5,627,637

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Total portfolio loans were essentially unchanged from December 31, 2011 as the growth in our C&I and indirect portfolios was offset by declines in our CRE, direct and residential mortgage portfolios.

Underwriting

Citizens’ Commercial Credit Policy and Underwriting Guidelines and Citizens’ Consumer Loan Credit Policy and Underwriting Guidelines (together, the “Underwriting Guidelines”) are written in a manner that is consistent with prudent banking practices and regulatory guidance applicable to each loan product. Citizens’ Underwriting Guidelines outline loan requirements and structuring parameters to determine the borrower’s financial capacity to repay under the terms of the loan and evaluate the collateral pledged to secure the loan and are designed to provide an adequate margin of safety for full collection of both principal and interest, within contractual terms. The Underwriting Guidelines provide the framework to determine that the borrower has the financial capacity to fully repay the loan, structurally mitigate credit risks, and monitor the loan’s credit performance over the term of the loan. Additionally, the Underwriting Guidelines are updated periodically in response to market and economic conditions and are reviewed by the Risk Management Committee of the Board as well as Citizens’ full Board of Directors.

The commercial Underwriting Guidelines outline product- and collateral-specific acceptable loan terms and conditions, including maximum loan to value ratios for real estate collateral, advance rates for non-real estate collateral, and debt service coverage. Acceptable credit management practices require that the borrower’s financial capacity to repay the loan be analyzed based on the most recent financial information as specified by the loan’s documented structure. It is Citizens’ general practice to obtain personal guarantees and underwrite the guarantor’s capacity to support the loan no less frequently than annually and more frequently if changes occur in the borrower’s capacity to repay or in the general economic conditions that might affect the borrower. Citizens’ Underwriting Guidelines for non-owner occupied commercial real estate loans delineate maximum terms, amortizations and loan to value ratios as well as minimum equity investments and debt service coverage ratios based on property type. Generally, at origination, maximum loan terms are five years, maximum amortizations are 25 years, minimum equity requirements range from 10% to 25%, debt service coverage ratios range from 1.2 to 1.5 times and loan to value ratios range from 65% to 80%. Currently, new commercial land hold and land development loans are not being originated by Citizens. Citizens’ Real Estate Appraisal and Environmental Policy specifies the Bank’s requirements for obtaining appraisals from licensed or certified appraisers to assess the value of the underlying collateral. New variable rate commercial loans are underwritten at fully indexed rates. Additionally, variable rate commercial loan underwriting includes stress tests of the borrower’s debt service capabilities with higher than existing interest rates and fluctuations in the underlying cash flows available for repayment.

The consumer Underwriting Guidelines outline product- and collateral-specific loan terms and conditions, including maximum debt ratios and advance rates based on the borrower’s credit score. Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios, and loan-to-collateral value ratios. They are predominately originated in accordance with underwriting standards set forth by the government-sponsored entities (“GSEs”) Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”), which serve as the primary purchasers of loans sold in the secondary market by mortgage lenders. These underwriting standards generally require that the loans be collateralized by one-to-four family residential real estate. Automated underwriting engines deployed by a GSE are used to determine creditworthiness of the vast majority of borrowers. Maximum allowable loan-to-value (“LTV”)/combined loan-to-value (“CLTV”) on these loan products generally do not exceed 95% at origination. Citizens has not offered “no-doc/low doc” and “stated income/stated asset” loans since January 1, 2007 and does not have any of these loans in its residential mortgage portfolio. Sub-prime, initial teaser rate and negative amortization loans were originated on an exception basis prior to 2007 and have not been offered since January 1, 2007. At June 30, 2012, December 31, 2011 and June 30, 2011, the outstanding balance of these loans and the associated interest income was immaterial.

In June 2008, Citizens entered into a master sales agreement to sell its residential mortgage originations to its third-party servicer at a fixed rate with no recourse. Under this agreement, Citizens sells more than 90% of new mortgage origination, resulting in minimal new loans being retained in the residential mortgage portfolio. During 2011 and 2012, the amount of new mortgage loans underwritten to non-GSE standards, all of which are retained in the residential mortgage loan portfolio, was immaterial. Prior to June 2008, when Citizens sold its residential mortgage originations to several secondary market participants, it made various standard representations and warranties. The specific representations and warranties made by Citizens depended on the nature of the transaction and the requirements of the buyer. In the event of a breach of the representations and warranties, Citizens may be required to either repurchase the mortgage loans (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify the investor for losses resulting from the breach. During the first six months of 2012 and 2011, Citizens repurchased $2.1 million and $0.5 million of loans, respectively, pursuant to such provisions. Citizens estimates its

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exposure to losses from its obligation to repurchase previously sold loans based on the individual circumstances applicable to each loan submitted for potential repurchase by an investor, and as a result, Citizens maintains a liability included in Other Liabilities on the balance sheet for estimated losses on loans expected to be repurchased or on which indemnification is expected to be provided. Citizens recorded $3.6 million and $2.9 million in the first six months of 2012 and 2011, respectively in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans.

Direct consumer loans include home equity loans, and direct installment loans to individuals used to purchase boats, recreational vehicles, automobiles and other personal items. Underwriting guidelines for these loans are heavily influenced by statutory requirements, which include, but are not limited to maximum loan-to-value ratios, credit scoring results, ability to service overall debt, and documentation requirements. Individual borrowers may be required to provide additional collateral or a satisfactory endorsement or guaranty from another person, depending on the creditworthiness of the borrower. Home equity loans consist of fully-indexed variable rate revolving lines of credit and fixed rate loans to consumers that are secured by residential real estate. Home equity loans are generally in a junior lien position and are originated through Citizens’ branches with cumulative loan-to-value ratios generally at or less than 80% of appraised collateral value. As of June 30, 2012, Citizens’ home equity portfolio totaled $714.8 million, and had an average loan size of $36,195 with an average refreshed FICO score of 740. As of June 30, 2012, other direct installment loans totaled $166.3 million and had an average loan size of $19,514 with an average refreshed FICO score of 726.

Indirect consumer loans are originated through our centralized underwriting group that has established relationships with certain dealers which meet Citizens’ underwriting guidelines and adhere to prudent business practices. The dealers are evaluated on their creditworthiness and business practices with performance monitored on an annual basis. The dealers refer customers to the centralized underwriting group, which utilizes a credit scoring model to supplement the underwriting process, and then complete the loans utilizing Citizens’ loan documents. As of June 30, 2012, indirect consumer loans had an average loan size of $23,747 with an average refreshed FICO score of 740.

Citizens maintains an independent loan review department that reviews the quality, trends, collectability, and collateral margins within the loan portfolio. The loan review department validates the credit risk profile on a regular basis by sampling loans using criteria such as loan size, delinquency status, loan officer coverage and other factors. This process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and to the Risk Committee of the Board of Directors.

Credit Quality

The quality of Citizens’ loan portfolio is impacted by numerous factors, including the economic environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an effort to identify and mitigate any potential credit quality issues and losses in a proactive manner. Citizens performs quarterly reviews of the non-watchlist commercial credit portfolio focusing on industry segments and asset classes that have or may be expected to experience stress due to economic conditions. This process seeks to validate each such credit’s risk rating, underwriting structure and exposure management under current and stressed economic scenarios while strengthening these relationships and improving communication with these clients.

The following tables represent three qualitative aspects of the loan portfolio that illustrate the overall level of quality and risk inherent in the loan portfolio.

• Delinquency Rates by Loan Portfolio – Loans where the contractual payment is 30 to 89 days past due and interest is still accruing. While these loans are actively worked to bring them current, past due loan trends may be a leading indicator of potential future nonperforming loans and charge-offs.

• Nonperforming Assets – Loans that are in nonaccrual status, loans past due 90 days or more on which interest is still accruing, nonperforming loans that are held for sale, and other repossessed assets acquired.

• Net Charge-Offs – The portion of loans that have been charged-off during each quarter, net of recoveries.

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Delinquency Rates By Loan Portfolio

	June 30, 2012					March 31, 2012					December 31, 2011					September 30, 2011					June 30, 2011
30 to 89 days past due (in thousands)	$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio
Land hold	$	—		—	%	$	—		—	%	$	21		0.32	%	$	—		—	%	$	571		7.69	%
Land development		—		—			130		1.81			—		—			216		0.97			—		—
Construction		—		—			—		—			—		—			—		—			1,722		21.23
Income producing		1,519		0.19			1,447		0.16			2,508		0.27			3,325		0.34			1,597		0.16
Owner-occupied		936		0.16			5,177		0.88			2,345		0.39			5,817		0.92			6,524		0.98
Total commercial real estate		2,455		0.17			6,754		0.45			4,874		0.32			9,358		0.57			10,414		0.60
Commercial and industrial		1,565		0.09			2,887		0.17			2,454		0.16			2,594		0.17			3,637		0.27
Total commercial		4,020		0.13			9,641		0.31			7,328		0.24			11,952		0.38			14,051		0.46
Residential mortgage		7,731		1.31			7,568		1.24			9,544		1.50			9,079		1.39			11,564		1.63
Direct consumer		12,396		1.41			14,002		1.55			17,810		1.91			18,629		1.95			20,393		2.08
Indirect consumer		8,504		0.92			8,780		1.01			13,067		1.50			9,898		1.12			10,681		1.23
Total consumer		28,631		1.20			30,350		1.27			40,421		1.66			37,606		1.51			42,638		1.67
Total delinquent loans	$	32,651		0.59		$	39,991		0.72		$	47,749		0.86		$	49,558		0.87		$	56,689		1.01

The decreases in total delinquencies as of June 30, 2012 compared to December 31, 2011 and June 30, 2011 were driven by the continued emphasis on proactively managing and resolving delinquent commercial and consumer loans and reflect the improving risk profile of the loan portfolio.

Loans are generally placed on nonaccrual status when there is substantial doubt regarding collection of principal or interest, in full, based on Citizens’ credit policies and practices or when principal or interest is past due in excess of 90 days. When a loan is placed on nonaccrual status, interest that is accrued but not collected is reversed and charged against income. Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days and still accruing interest, nonperforming loans held for sale, and other repossessed assets acquired. Although these assets have more than a normal risk of loss, they may not necessarily result in future losses. Nonperforming assets during the last five quarters are presented in the table below.

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Nonperforming Assets

	June 30, 2012						March 31, 2012						December 31, 2011						September 30, 2011						June 30, 2011
(in thousands)	$			% of Portfolio			$			% of Portfolio			$			% of Portfolio			$			% of Portfolio			$			% of Portfolio
Land hold	$	326			6.37	%	$	—			—	%	$	—			—	%	$	167			2.45	%	$	167			2.25	%
Land development		3			0.05			207			2.87			213			1.62			12			0.05			379			1.68
Construction		—			—			150			2.34			150			2.57			257			4.76			559			6.89
Income producing		19,408			2.42			18,566			2.12			21,171			2.32			23,227			2.38			20,180			1.98
Owner-occupied		18,187			3.05			20,716			3.51			23,798			3.93			27,540			4.34			21,169			3.18
Total commercial real estate		37,924			2.68			39,639			2.67			45,332			2.94			51,203			3.11			42,454			2.47
Commercial and industrial		21,676			1.27			14,629			0.88			16,946			1.10			18,536			1.21			20,995			1.56
Total nonaccruing commercial		59,600			1.90			54,268			1.73			62,278			2.02			69,739			2.20			63,449			2.07
Residential mortgage		13,474			2.29			11,137			1.82			11,312			1.78			13,074			2.00			30,693			4.33
Direct consumer		9,263			1.05			8,895			0.98			12,115			1.30			14,704			1.54			13,944			1.43
Indirect consumer		1,875			0.20			1,074			0.12			953			0.11			1,256			0.14			1,281			0.15
Total nonaccruing consumer		24,612			1.03			21,106			0.89			24,380			1.00			29,034			1.16			45,918			1.80
Total nonaccruing loans		84,212			1.53			75,374			1.37			86,658			1.57			98,773			1.74			109,367			1.94
Loans 90+ days still accruing		59			—			164			—			770			0.01			1,368			0.02			1,604			0.03
Total nonperforming portfolio loans		84,271			1.53			75,538			1.37			87,428			1.58			100,141			1.77			110,971			1.97
Nonperforming held for sale		887						3,264						2,372						20,134						11,395
Other repossessed assets acquired		8,817						11,803						12,422						16,665						17,032
Total nonperforming assets	$	93,975					$	90,605					$	102,222					$	136,940					$	139,398
Restructured loans still accruing	$	18,187					$	17,911					$	32,347					$	12,206					$	12,682
Commercial inflows	$	23,828					$	14,027					$	13,269					$	23,901					$	24,370
Commercial outflows		(18,496	)					(22,037	)					(20,730	)					(17,611	)					(38,321	)
Net change	$	5,332					$	(8,010	)				$	(7,461	)				$	6,290					$	(13,951	)

The decreases from December 31, 2011 and June 30, 2011 were related to proactively managing and resolving delinquent commercial and consumer loans and reflects the improving risk profile of the loan portfolio.

Some of the nonperforming loans included in the nonperforming asset table above are considered to be impaired. A loan is considered impaired when Citizens determines that it is probable that all of the contractual principal and interest due under the loan may not be collected. Citizens recognizes that, in the current economic environment, elevated levels of unemployment and depressed real estate values have resulted in many customers facing difficult financial situations. Distressed homeowners are identified and offered assistance. In order to avoid foreclosure, residential mortgage loans may be restructured for certain qualified borrowers who have the ability to make payments under the new terms of the loan. Citizens’ residential mortgage foreclosure abatement program includes several different options to modify contractual payments. Modified consumer and residential mortgage loans are considered troubled debt restructures (“TDRs”) when the debt restructure, for economic or legal reasons related to the borrower’s financial difficulties, results in a concession to the debtor that otherwise would not be considered by the bank. Citizens classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of the restructure, or the loan has performed according to the new contractual terms for at least six months. To qualify for accruing status at the time of the restructure, the original loan must have been less than 90 days past due at the time of the restructure and the modification must not have resulted in an impairment. At June 30, 2012, the recorded investment balance of TDRs approximated $28.3 million, of which $18.2 million were on accrual status and $10.1 million were on nonaccrual status. Of this total, $23.1 million were consumer and residential TDRs that carried a total specific reserve of $3.8 million. Of these TDRs, 48.8% involved only a reduction in interest rate, 31.0% involved both reduced interest rate and term extensions and 20.2% involved only term extensions. See Note 4 to the unaudited Consolidated Financial Statements in this report for information on impaired loans.

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Net Charge-Offs													Three Months Ended
	June 30, 2012						March 31, 2012						December 31, 2011						September 30, 2011						June 30, 2011
(in thousands)	$			% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*
Land hold	$	(58	)		(4.58	)%	$	—			—	%	$	(33	)		(2.00	)%	$	—			—	%	$	4,719			N/M	%
Land development		100			5.76			(83	)		(4.64	)		3,079			93.21			43			0.76			38			0.68
Construction		14			1.24			(101	)		(6.33	)		(4	)		(0.24	)		(5	)		(0.34	)		(1	)		(0.04	)
Income producing		3,100			1.55			4,151			1.90			11,924			5.18			3,156			1.28			8,228			3.24
Owner-occupied		2,384			1.61			2,537			1.73			5,791			3.80			2,129			1.33			3,149			1.90
Total commercial real estate		5,540			1.57			6,504			1.76			20,757			5.33			5,323			1.28			16,133			3.76
Commercial and industrial		5,249			1.23			3,029			0.74			1,032			0.27			1,225			0.32			7,176			2.13
Total commercial		10,789			1.39			9,533			1.22			21,789			2.80			6,548			0.82			23,309			3.04
Residential mortgage		3,506			2.40			5,076			3.34			1,170			0.73			18,364			11.13			4,431			2.51
Direct consumer		5,666			2.59			10,935			4.87			6,930			2.95			5,710			2.37			5,605			2.30
Indirect consumer		2,225			0.97			2,572			1.19			2,746			1.25			2,797			1.25			2,076			0.96
Total consumer		11,397			1.92			18,583			3.14			10,846			1.76			26,871			4.27			12,112			1.90
Total net charge-offs	$	22,186			1.62		$	28,116			2.05		$	32,635			2.30		$	33,419			2.34		$	35,421			2.51

* Represents an annualized rate.

N/M - Not Meaningful

The decreases in net charge-offs compared to December 31, 2011 and June 30, 2011 reflect the continued stability and steady improvement in portfolio and economic trends.

Nonperforming commercial and industrial and commercial real estate loans are generally charged off to the extent principal due exceeds the net realizable value of the collateral, with the charge-off occurring when the loss is reasonably quantifiable, but not later than when the loan becomes 180 days past due. Nonperforming residential mortgage loans are generally charged off to the extent principal exceeds the current appraised value less estimated costs to sell when the loan is five payments past due. Nonperforming direct and indirect consumer loans (open and closed end) are generally charged off to the extent principal exceeds the current appraised value less estimated costs to sell before the loan becomes 120 days past due.

A summary of loan loss experience is provided below.

Analysis of Allowance for Loan Losses
	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Allowance for loan losses - beginning of period	$	153,007		$	224,117		$	172,726		$	296,031
Provision for loan losses		5,299			17,596			13,696			106,320
Charge-offs		28,328			38,060			60,966			202,914
Recoveries		6,142			2,639			10,664			6,855
Net charge-offs		22,186			35,421			50,302			196,059
Allowance for loan losses - end of period	$	136,120		$	206,292		$	136,120		$	206,292
Portfolio loans outstanding at period end (1)	$	5,521,748		$	5,627,637		$	5,521,748		$	5,627,637
Average portfolio loans outstanding during period (1)		5,517,726			5,668,752			5,513,127			5,859,022
Allowance for loan losses as a percentage of portfolio loans		2.47	%		3.67	%		2.47	%		3.67	%
Ratio of net charge-offs during period to average portfolio loans (annualized)		1.62			2.51			1.83			6.75

⁽¹⁾ Balances exclude loans held for sale.

The allowance for loan losses represents management’s estimate of an amount appropriate to provide for probable credit losses incurred in the loan portfolio as of the balance sheet date. To assess the appropriateness of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of the loan portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical losses on each portfolio category and other qualitative and quantitative factors which could affect probable loan losses. The evaluation process is inherently subjective, as it requires estimates that may be susceptible to significant change and have the potential to affect net income materially. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a formula-based risk allocated allowance for the remainder of the portfolio and a general valuation estimate. Management also considers overall portfolio indicators, including trends in historical charge-offs, a review of industry, geographic and portfolio performance, and other qualitative factors.

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The following table summarizes the allocation of the allowance for loan losses for specific allocated, risk allocated, and general valuation allowances by loan type and the proportion of total nonperforming portfolio loans represented by each loan type.

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Allocation of the Allowance for Loan Losses⁽¹⁾

	June 30, 2012					December 31, 2011					June 30, 2011
(in thousands)	ALLL			Related NPL (2)		ALLL			Related NPL (2)		ALLL			Related NPL (2)
Specific allocated allowance:
Commercial and industrial	$	245		$	14,492	$	42		$	8,908	$	169		$	13,382
Commercial real estate		2,273			30,705		4,110			34,071		3,706			33,573
Residential mortgage		3,332			4,371		2,837			6,610		2,388			14,121
Direct consumer		443			1,132		70			1,147		184			1,289
Indirect consumer		—			—		—			478		—			474
Total specific allocated allowance		6,293			50,700		7,059			51,214		6,447			62,839
Risk allocated allowance:
Commercial and industrial		18,074			7,242		25,032			8,804		30,382			9,211
Commercial real estate		45,581			7,219		58,589			11,261		76,921			8,881
Total commercial		63,655			14,461		83,621			20,065		107,303			18,092
Residential mortgage		23,979			9,103		33,623			4,702		41,537			16,572
Direct consumer		30,811			8,132		32,950			10,972		32,504			12,661
Indirect consumer		9,382			1,875		12,973			475		15,501			807
Total risk allocated allowance		127,827			33,571		163,167			36,214		196,845			48,132
Total		134,120			84,271		170,226			87,428		203,292			110,971
General valuation allowances		2,000			—		2,500			—		3,000			—
Total	$	186,120		$	84,271	$	172,726		$	87,428	$	206,292		$	110,971
ALLL as a percentage of NPL
Specific allocated allowance:
Commercial and industrial		1.69	%				0.48	%				1.26	%
Commercial real estate		7.40					12.06					11.04
Residential mortgage		76.22					42.93					16.91
Direct consumer		39.12					6.08					14.28
Total specific allocated allowance		12.41					13.78					10.26
Risk allocated allowance:
Commercial and industrial		249.62					284.31					329.86
Commercial real estate		631.41					520.33					N/M
Total commercial		440.23					416.76					593.10
Residential mortgage		263.41					N/M					250.65
Direct consumer		378.91					300.31					256.72
Indirect consumer		500.36					N/M					N/M
Total risk allocated allowance		380.78					450.55					408.97
Total		161.53					197.56					185.90
ALLL as a percentage of portfolio loans (3)
Risk allocated allowance: (4)
Commercial and industrial		1.07					1.63					2.27
Commercial real estate		3.29					3.88					4.56
Total commercial		2.06					2.75					3.55
Residential mortgage		4.11					5.33					5.98
Direct consumer		3.50					3.53					3.33
Indirect consumer		1.02					1.49					1.78
Total risk allocated allowance		2.34					2.98					3.54
Total allowance		2.47					3.12					3.67

N/M - Not Meaningful

⁽¹⁾  The allocation of the allowance for loan losses in the above table is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. Citizens does not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified.

⁽²⁾  Related nonperforming loans (“NPL”) amounts in risk allocated allowances include loans 90+ days past due and still accruing but classified as nonperforming. NPLs exclude troubled debt restructurings (TDRs) that are on an accrual status and performing in accordance with their modified terms.

⁽³⁾  The portfolio balance of the loans with a specific allocated allowance is equal to the related NPL for said loans.

⁽⁴⁾  Portfolio loans only include loan balances evaluated for risk allocated allowance.

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Total Allowance for Loan Losses. The decreases in the total allowance and the allowance as a percentage of nonperforming loans from December 31, 2011 and June 30, 2011 were primarily the result of an overall decrease in loan balances, an improvement in risk mix of the commercial portfolio, and the stability in both portfolio and economic trends.

Based on current conditions and expectations, Citizens believes that the allowance for loan losses is appropriate to address the estimated loan losses inherent in the existing loan portfolio at June 30, 2012. After determining what Citizens believes is an appropriate allowance for loan losses based on the risk in the portfolio, the provision for loan losses is calculated as a result of the net effect of the quarterly change in the allowance for loan losses and the quarterly net charge-offs. The provision for loan losses was $5.3 million in the second quarter of 2012, compared with $17.6 million in the second quarter of 2011. The decrease in the provision was primarily due to the previously mentioned improvements in credit quality and decline in loan balances, which resulted in a decline in the required allowance for loan losses.

Specific Allocated Allowance. The specific allocated allowance is based on probable losses on specific commercial and industrial or commercial real estate loans as well as impairment on TDR loans. The allowance allocated to nonperforming commercial loans is typically based on the underlying collateral’s appraised value, updated at least annually, less management’s estimates of cost to sell. Appraisals are obtained more frequently if changes in the property or market conditions warrant. Deterioration in individual asset values, underlying commercial loans, evidenced by refreshed appraisals, is reflected in the specific allocated allowance for commercial nonperforming loans.

The fair value of nonperforming residential mortgage loans is based on the underlying collateral’s value obtained through appraisals, updated at least semi-annually, less management’s estimates of cost to sell. The allowance allocated to restructured nonperforming loans is typically based on the present value of the expected future cash flows discounted at the loan’s effective interest rate.

The specific allocated allowance decreased from December 31, 2011 and June 30, 2011, primarily as a result of the improved mix of evaluated balances where the estimated fair value of the collateral provides sufficient coverage for the remaining outstanding balance. As a percentage of non performing loans, the specific allocated allowance decreased from December 31, 2011 as a result of a decrease in the allowance related to nonperforming commercial real estate loans. The increase from June 30, 2011 in the specific allowance as a percentage of nonperforming loans was a result of an increase in the allowance related to accuring residential mortgage TDRs.

Risk Allocated Allowance. The risk allocated allowance is comprised of several loan pool valuation allowances based on Citizens’ quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks such as changes in asset quality; the experience, ability and effectiveness of Citizens’ lending management; the composition and concentrations of credit, changes in loss severity based on loan type, as well as other factors based upon the best judgment of management. The decrease from December 31, 2011 and June 30, 2011 reflects the continuing stability in both portfolio and economic trends. The majority of the decline from June 30, 2011 relates to the improvement in credit quality of the remaining portfolio at June 30, 2012, as evidenced by the 71.4% decline in commercial loans past due 30-89 days and the 23.0% decline in nonaccruing loans.

General Valuation Allowance. The general valuation allowance is used to calibrate for the current economic cycle Citizens is experiencing along with the impact of potential strategies or initiatives that may exhibit results that differ from historical trend experience. Recognizing the inherent imprecision of any loan loss allocation model, the incorporation of these impacts is intended to account for other incurred but not yet recognized losses that are not fully addressed in our other allowance categories.

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Loans Held for Sale

Loans held for sale at June 30, 2012 were $14.5 million, an increase of $4.1 million or 39.6% from December 31, 2011 and a decrease of $5.0 million or 25.6% from June 30, 2011. The increase from December 31, 2011 reflects an increase in the balance of mortgages originated for resale. The decrease from June 30, 2011 reflects declines due to customer paydowns, workout activities, sales, writedowns to reflect further fair value declines of the underlying collateral, and transfers to ORE.

Deposits

Total deposits at June 30, 2012 were $7.3 billion, a decrease of $107.2 million or 1.5% from December 31, 2011 and a decrease of $157.0 million or 2.1% from June 30, 2011. Core deposits, which exclude all time deposits, totaled $5.4 billion at June 30, 2012, an increase of $236.0 million or 4.5% from December 31, 2011 and an increase of $432.9 million or 8.7% over June 30, 2011. The increases in core deposits were the result of a continued focus on core deposit gathering. Time deposits totaled $1.9 billion at June 30, 2012, a decrease of $343.2 million or 15.6% from December 31, 2011 and a decrease of $589.9 million or 24.1% from June 30, 2011. The decreases were primarily the result of strategic reductions in single service high cost retail time deposits and brokered time deposits.

Citizens primarily gathers deposits from the local markets it serves but has utilized brokered deposits from time to time when cost effective. Excluding brokered deposits, Citizens had $531.2 million in time deposits of $100,000 or more at June 30, 2012, compared with $614.6 million at December 31, 2011 and $683.8 million at June 30, 2011. Time deposits greater than $100,000 decreased primarily as a result of the strategic focus on growing relationship balances, which resulted in a reduction in single service high cost retail time deposits. At June 30, 2012, Citizens had $141.5 million in brokered deposits, compared with $248.7 million at December 31, 2011 and $261.4 million at June 30, 2011. Brokered deposit balances decreased as excess liquidity was used to pay off maturing balances. Citizens continues to promote relationship-driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies.

Borrowed Funds

Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings consisting primarily of treasury, tax and loan (“TT&L”) borrowings. Short-term borrowed funds at June 30, 2012 totaled $39.2 million, a decrease of $0.9 million or 2.3% from December 31, 2011 and a decrease of $4.8 million or 10.8% from June 30, 2011. The decreases reflect a reduction in short-term repurchase agreement balances.

Long-term debt consists of advances from the Federal Home Loan Bank (“FHLB”) to the Bank, debt issued by the Holding Company, and other borrowed funds. Long-term debt at June 30, 2012 totaled $853.0 million, essentially unchanged from December 31, 2011 and a decrease of $28.1 million or 3.2% from June 30, 2011. The decreases were primarily the result of using excess liquidity to pay down wholesale funding at its contractual maturity.

Capital Resources

Shareholders’ equity at June 30, 2012 totaled $1.3 billion, an increase of $316.3 million or 31.0% from December 31, 2011 and an increase of $356.1 million or 36.4% from June 30, 2011, in each case primarily as a result of the elimination of the valuation allowance on the deferred tax asset. Book value per common share at June 30, 2012, December 31, 2011, and June 30, 2011 was $25.85, $18.24, and $17.34, respectively.

Citizens continues to maintain a strong capital position, and its regulatory capital ratios are above “well-capitalized” standards. Citizens’ capital ratios are presented below.

Capital Ratios	Regulatory Minimum for “Well- Capitalized”			June 30, 2012			December 31, 2011			June 30, 2011
Leverage ratio		5.00	%		9.77	%		8.45	%		7.83	%
Tier 1 capital ratio		6.00			14.70			13.51			12.43
Total capital ratio		10.00			15.96			14.84			13.77
Tier 1 common equity (non-GAAP)					8.50			7.24			6.36
Tangible equity to tangible assets (non-GAAP)					10.82			7.59			7.12
Tangible common equity to tangible assets (non-GAAP)					7.73			4.47			4.05

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations and off-balance sheet arrangements are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our 2011 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.

Liquidity and Liquidity Risk Management

Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. Liquidity management involves projecting funding requirements and maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and liability levels due to changes in business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, and wholesale market funding.

Citizens manages liquidity at two levels. The first level is at the Holding Company which owns the Bank. The second level is at the Bank. The management of liquidity at both levels is essential because the Holding Company and the Bank have different funding needs and sources, and are subject to certain regulatory guidelines and requirements. The Asset Liability Committee is responsible for establishing a liquidity policy, approving operating and contingency procedures, and monitoring liquidity on an ongoing basis. In order to maintain adequate liquidity through a wide range of potential operating environments and market conditions, Citizens conducts liquidity management and business activities in a manner designed to preserve and enhance funding stability, flexibility, and diversity of funding sources. Key components of this operating strategy include a strong focus on customer-based funding, maximizing secured borrowing capacity, maintaining relationships with wholesale market funding providers, and maintaining the ability to liquidate certain assets if conditions warrant.

Credit ratings by the nationally recognized statistical rating agencies are an important component of Citizens’ liquidity profile. Credit ratings could impact Citizens’ ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and Citizens’ ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets, but also the cost of these funds. Citizens’ credit ratings were downgraded throughout 2009 and 2010. In January of 2012, Fitch Ratings raised Citizens’ long-term issuer rating from CCC to B with a positive outlook. In February of 2012, Moody’s affirmed Citizens’ ratings and raised the long-term issuer rating outlook to stable. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently of any other rating. The current credit ratings for the Holding Company and the Bank, the dates on which the ratings were last issued and the outlook watch status of the ratings are displayed in the following table. An explanation of these ratings may be obtained from the respective rating agency.

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Credit Ratings
	Moody’s		Fitch Ratings
Citizens Republic Bancorp (Holding Company)
Long-term Issuer		B2 (OS)		B (OP)
		2/8/2012		1/31/2012
Short-term/Commercial Paper		NP		B
		2/8/2012		1/31/2012
Trust Preferred		Caa2 (ON)		C
		1/28/2010		1/31/2012
Citizens Bank
Certificate of Deposit		Ba3 (OS)		B+
		2/8/2012		1/31/2012

Ratings Watch Action Legend: (WP) Watch Positive, (WN) Watch Negative, (WU) Watch Uncertain, (WR) Watch Removed, (OP) Outlook Positive, (ON) Outlook Negative, (OS) Outlook Stable, (OD) Outlook Developing

The primary sources of liquidity for the Holding Company are dividends from and returns on investment in its subsidiary and existing cash resources. Banking regulations limit the amount of dividends a financial institution may declare to a parent company in any calendar year. The Bank is subject to dividend limits under the laws of the state in which it is chartered and to the banking regulations previously discussed. Federal and national chartered financial institutions are generally allowed to make dividends or other capital distributions in an amount not exceeding the current calendar year’s net income, plus the retained net income of the preceding two years (which was negative during 2010 and 2011). Distributions in excess of this limit require prior regulatory approval. Since 2009, neither the Holding Company nor the Bank has paid any dividends. The ability to borrow funds on both a short-term and long-term basis and to sell equity securities provides an additional source of liquidity for the Holding Company. The Holding Company’s current cash available for use totaled $54.0 million as of June 30, 2012. Citizens monitors the relationship between cash obligations and available cash resources, and believes that the Holding Company has sufficient liquidity to meet its currently anticipated short and long-term needs.

The primary source of liquidity for the Bank is customer deposits raised through the branch offices. Additional sources are wholesale borrowing, unencumbered or unpledged investment securities, access to secured borrowing at the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Indianapolis and contributions of capital from the Holding Company.

Citizens maintains a strong liquidity position, with substantial on- and off-balance sheet liquidity sources and a very stable funding base comprised of approximately 75% deposits, 9% long-term debt, 14% equity, and 2% short-term liabilities. Securities available for sale and money market investments can be sold for cash to provide additional liquidity, if necessary.

Since the first quarter of 2010, Citizens has deferred regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities and to suspend quarterly cash dividend payments on its fixed-rate cumulative perpetual preferred stock, Series A Preferred Stock, issued to and owned by the U.S. Department of the Treasury as part of the Treasury’s Capital Purchase Program, in each case, as permitted by the underlying documentation. Deferral of these payments, which is permitted pursuant to the underlying documentation, preserves a total of $19.5 million of cash annually, although such amounts continue to accrue. Citizens evaluates the deferral of these payments periodically and, in consultation with and subject to prior approval by its regulators, will reinstate these payments when appropriate. As of June 30, 2012, the amount of the arrearage (including interest on missed dividends) on the dividend payments of the Series A Preferred Stock is $39.9 million and the amount accrued (including interest on missed interest payments) on the subordinated debentures associated with the trust preferred securities is $12.4 million. The Holding Company is unable to pay common stock dividends or engage in common stock repurchases until the Series A Preferred Stock dividend payments and payments deferred under our trust preferred securities are no longer in arrears.

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On April 19, 2012, Citizens announced that, effective April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation have terminated their written agreement with Citizens, and its subsidiary, Citizens Bank dated July 28, 2010.

Citizens’ long-term debt to equity ratio improved to 63.9% as of June 30, 2012 compared with 83.8% as of December 31, 2011, and 89.9% as of June 30, 2011. Changes in deposit obligations and short-term and long-term debt during the second quarter of 2012 are further discussed in the sections titled “Deposits” and “Borrowed Funds.” Citizens believes that it has sufficient liquidity to meet presently known short and long-term cash-flow requirements arising from ongoing business transactions.

Interest Rate Risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. The risk of loss can be assessed by examining the potential for adverse changes in fair values, cash flows, and future earnings resulting from changes in market interest rates. Interest rate risk on Citizens’ balance sheet consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity or repricing timing of asset and liability portfolios. Option risk arises from embedded options present in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow certain of Citizens’ customers and counterparties of the investment and wholesale funding portfolios the opportunity to benefit when market interest rates change, which typically results in higher costs or lower revenues for Citizens. Basis risk results when assets and liabilities reprice at the same time but based on different market rates or indices, which can change by different amounts, resulting in a narrowing of profit spread.

The asset/liability management process seeks to insulate net interest income from large fluctuations attributable to changes in market interest rates and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. Accordingly, Citizens’ interest rate sensitivity is monitored on an ongoing basis by its Asset Liability Committee, which oversees interest rate risk management and establishes risk measures, limits, and policy guidelines. A combination of complementary techniques is used to measure interest rate risk exposure, the distribution of risk, the level of risk over time, and the exposure to changes in certain interest rate relationships. These measures include static repricing gap analysis, simulation of earnings, and estimates of economic value of equity.

Static repricing gap analysis provides a measurement of reprice risk on Citizens’ balance sheet as of a point in time. This measurement is accomplished through stratification of Citizens’ rate sensitive assets and liabilities into repricing periods. The sums of assets and liabilities maturing or repricing in each of these periods are compared for mismatches within each time segment. Core deposits lacking contractual maturities or repricing frequencies are placed into repricing and maturity periods based upon historical experience. Repricing periods for assets include the effects of expected prepayments on cash flows.

Rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing within one year by $1.1 billion or 11.1% of total assets as of June 30, 2012 compared with $843.0 million or 8.9% of total assets at December 31, 2011. These results incorporate the impact of off-balance sheet derivatives and reflect interest rates consistent with June 30, 2012 levels. Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded options can change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis.

Citizens utilizes a net interest income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model measures the impact to net interest income relative to a base case scenario of hypothetical changes in interest rates over the next 12 months. These simulations incorporate assumptions including prepayment speeds on various loan and investment assets, cash flows and maturities of financial instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and Citizens’ financial capital plans. These assumptions are inherently uncertain and subject to fluctuation and revision in a dynamic environment and as a result the model cannot perfectly forecast net interest income nor exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of balance sheet component and interest rate changes, and differences in client behavior, market conditions and management strategies, among other factors.

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Net interest income simulations were performed as of June 30, 2012 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming expected changes in balance sheet composition over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net interest income would be expected to increase by 1.6% and 2.8%, respectively, from what it would be if rates were to remain at June 30, 2012 levels. Net interest income simulation for 100 and 200 basis point parallel declines in market rates were not performed at June 30, 2012, as the results would not have been meaningful given the current levels of short-term market interest rates. These measurements represent similar exposure to rising interest rates as at December 31, 2011. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.

From time to time, derivative contracts are used to help manage or hedge exposure to interest rate risk and market value risk. Citizens enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Citizens’ derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and expected cash payments principally related to certain variable-rate loan assets and fixed-rate borrowings. Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain of its derivative counterparties that contain a provision where if it fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and Citizens would be required to settle its obligations under the agreements. Citizens has agreements with certain of its derivative counterparties containing provisions that require its debt to maintain an investment grade credit rating from each of the major credit rating agencies. Although Citizens was not in compliance at June 30, 2012, the value required to be paid under these agreements at that date if the counterparties had exercised their rights to terminate was not material. Further discussion of derivative instruments is included in Note 13 to the unaudited Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of Citizens’ 2011 Annual Report on Form 10-K, except as set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk” of this Form 10-Q.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by Citizens in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, Citizens performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Control over Financial Reporting

No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the first quarter of 2012, putative class action litigation was filed against the Bank and the Corporation, in the United States District Court for the Eastern District of Michigan and in Genesee County Circuit Court in the State of Michigan, relating to the Bank’s practices in posting debit card transactions to customers’ deposit accounts. The class of plaintiffs, which purports to constitute substantially all of the Bank’s customers during the class period, alleges that the Bank improperly reordered debit card transactions from the highest amount to lowest amount before processing these transactions in order to generate unwarranted overdraft fees. Plaintiffs contend that the Bank should have processed such transactions in the chronological order they were authorized or from lowest to highest, and seek restitution for the fees they claim were wrongly charged as well as a declaratory judgment and attorney fees. The state court action was stayed, and the same lead plaintiff then filed suit in federal court. During the second quarter of 2012, the two federal cases were consolidated into one case pending in the United States District Court for the Eastern District of Michigan under the caption Jane Simpson, et al.v. Citizens Bank, U.S. District Court Case No. 2:12-cv-10267, while the state court action was dismissed. Citizens has filed a motion to dismiss the consolidated federal action, which motion is currently pending. This litigation is still in its early stages and there can be no assurance that the outcome will not be adverse to Citizens. However, based on the information currently known, Citizens does not believe the resolution of this litigation will have a material adverse effect on its results of operations, cash flows or financial condition.

Item 1A. Risk Factors

For information regarding risk factors affecting Citizens, see “Risk Factors” in Item 1A of Part I of Citizens’ 2011 Annual Report on Form 10-K, as updated by Item 1A of part II of Citizens’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. These risk factors are not the only risks Citizens faces. Additional risks and uncertainties not currently known or that Citizens currently deems to be immaterial also may materially adversely impact Citizens’ business, financial condition, and results of operations.

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As previously disclosed, Citizens eliminated the valuation allowance against the deferred tax asset during the second quarter of 2012. As a result, the risk factor in Item 1A of Citizens’ Form 10-K for the year ended December 31, 2011 entitled “We may not realize our deferred income tax assets and loss carryforwards” was amended and restated as set forth below.

We may not realize our deferred income tax assets and loss carryforwards.

The realization of our deferred income tax assets is dependent on generating future taxable income, executing tax planning strategies, and reversing existing taxable temporary differences. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a change of ownership occurs with respect to a company with deferred income tax assets, that company’s use of the pre-change of ownership carryforward as well as the ability to use certain unrealized built-in losses would be substantially limited. A change of ownership occurred under Section 382 as a result of the exchange offers of common stock for long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock immediately before the ownership change. Our ability to utilize deductions related to credit losses during the twelve-month period following such an ownership change would also be limited under Section 382, together with net operating loss carryforwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change.

Because the exchange offers triggered an ownership change, our ability to use the net operating loss carryforwards and certain built-in losses existing at the time of the deemed change in ownership to offset future income will be substantially limited. Therefore, we may suffer higher than anticipated tax expense, and consequently lower net income and cash flow, in future years. Moreover, any future change in ownership would further limit our ability to use our net operating loss carryforwards and certain built-in losses existing at the time of the future change in ownership.

Other than the foregoing and as set forth in Citizens’ Quarterly Report on Form 10-Q for the period ended March 31, 2012, there have been no material changes to the risk factors set forth in Item 1A of Citizens’ Form 10-K for the fiscal year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under The Plans or Programs (2)
April 2012		—	$	—		—		124,115
May 2012		18,649		17.08		—		124,115
June 2012		—		—		—		124,115
Total		18,649	$	17.08		—		124,115

⁽¹⁾  Shares repurchased in connection with taxes due from employees as a result of the vesting of certain restricted share awards in accordance with the related grant agreements. These repurchases were not part of the repurchase program approved in October 2003.

⁽²⁾  In October 2003, the Board of Directors approved the repurchase of 300,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. The repurchase of shares is generally prohibited, with certain exceptions, by the CPP Letter Agreement while Treasury continues to hold the related Series A Preferred Stock, by the terms of Citizens’ outstanding trust preferred securities, and is also subject to limitations that may be imposed by applicable securities laws and regulations and the rules of NASDAQ. The timing of the purchases and the number of shares to be bought at any one time also depend on market conditions and Citizens’ capital requirements. There can be no assurance that Citizens will repurchase the remaining shares authorized to be repurchased.

Item 3. Defaults Upon Senior Securities

As previously disclosed, Citizens decided to defer regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities and to suspend quarterly cash dividend payments on its Series A Preferred Stock. Therefore, Citizens is currently in arrears with the dividend payments on the Series A Preferred Stock and interest payments on the junior subordinated debentures as permitted by the related documentation. As of June 30, 2012, the amount of the arrearage (including interest on the dividend payments) on the dividend payments of the Series A Preferred Stock is $39.9 million and the amount of the arrearage (including interest on the interest payments) on the payments on the subordinated debt associated with the trust preferred securities is $12.4 million.

Item 6. Exhibits

The exhibits listed on the “Exhibit Index” of this report are filed herewith and are incorporated herein by reference.

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SIGNATURES

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

CITIZENS REPUBLIC BANCORP, INC.
Date:	August 6, 2012	By	/s/ Lisa T. McNeely
			Lisa T. McNeely
			Chief Financial Officer
			(principal financial officer and duly authorized officer)

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10-Q EXHIBIT INDEX

The following exhibits are filed as part of this report, or were previously filed and are incorporated herein by reference to the filing indicated. Exhibits not required for this report have been omitted. Citizens’ Commission file number is 001-33063.

Exhibit No.	Description
10.68	Form of Long Term Incentive Restricted Stock Agreement with Cathleen H. Nash (April 2012)
10.69	Form of Long Term Incentive Restricted Stock Unit Agreement with Lisa T. McNeely, Mark W. Widawski, Judith L. Klawinski, and Thomas W. Gallagher (April 2012)
10.70	Form of Stock Salary Agreement with Cathleen H. Nash, Lisa T. McNeely, Mark W. Widawski, and Judith L. Klawinski (April 2012)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1	Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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