e10vk
CHEMICAL
FINANCIAL
CORPORATIONSM
2009
Annual Report
to Shareholders
CHEMICAL FINANCIAL CORPORATION
2009 ANNUAL REPORT TO SHAREHOLDERS
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Table of Contents
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Page
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3
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4
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39
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40
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42
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Notes to Consolidated Financial Statements
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46
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80
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81
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83
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FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements that are based
on managements beliefs, assumptions, current expectations,
estimates and projections about the financial services industry,
the economy and Chemical Financial Corporation (Chemical)
itself. Words such as anticipates,
believes, estimates,
expects, forecasts, intends,
is likely, judgment, plans,
predicts, projects, should,
will, variations of such words and similar
expressions are intended to identify such forward-looking
statements. Managements determination of the provision and
allowance for loan losses, the carrying value of goodwill and
mortgage servicing rights and the fair value of investment
securities (including whether any impairment on any investment
security is temporary or
other-than-temporary)
and managements assumptions concerning pension and other
post retirement benefit plans involve judgments that are
inherently forward-looking. All of the information concerning
interest rate sensitivity is forward-looking. The future effect
of changes in the financial and credit markets and the national
and regional economy on the banking industry, generally, and on
Chemical, specifically, are also inherently uncertain. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions (risk
factors) that are difficult to predict with regard to
timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may
be expressed or forecasted in such forward-looking statements.
Chemical undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new
information, future events or otherwise.
Risk factors include, but are not limited to, the risk factors
described in Item 1A in Chemical Financial
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2009; the risk factors
described in Item 1A in O.A.K. Financial Corporations
(OAKs) Annual Report on
Form 10-K
for the year ended December 31, 2009; the timing and level
of asset growth; changes in market interest rates; changes in
banking laws and regulations; changes in tax laws; changes in
prices, levies and assessments; the impact of technological
advances and issues; governmental and regulatory policy changes;
opportunities for acquisitions and the effective completion of
acquisitions and integration of acquired entities; the
possibility that anticipated cost savings and revenue
enhancements from acquisitions, restructurings, reorganizations
and bank consolidations may not be realized fully or at all or
within expected time frames; the local and global effects of
current and future military actions, and current uncertainties
and fluctuations in the financial markets and stocks of
financial services providers due to concerns about credit
availability and concerns about the Michigan economy in
particular. These and other factors are representative of the
risk factors that may emerge and could cause a difference
between an ultimate actual outcome and a preceding
forward-looking statement.
This report also contains forward-looking statements regarding
Chemicals outlook or expectations with respect to the
planned acquisition of OAK, the expected costs to be incurred in
connection with the acquisition, OAKs future performance
and consequences of its integration into Chemical and the impact
of the transaction on Chemicals future performance.
Risk factors also include, but are not limited to, risks and
uncertainties related both to the proposed acquisition of OAK
and to the integration of the acquired business into Chemical
after closing, including:
Completion of the transaction is dependent on, among other
things, receipt of regulatory and OAK shareholder approvals, the
timing of which cannot be predicted with precision at this point
and which may not be received at all. The impact of the
completion of the transaction on Chemicals financial
statements will be affected by the timing of the transaction,
including in particular the ability to complete the acquisition
in the second quarter of 2010.
The transaction may be more expensive to complete and the
anticipated benefits, including anticipated cost savings and
strategic gains, may be significantly harder or take longer to
achieve than expected or may not be achieved in their entirety
as a result of unexpected factors or events.
Chemicals ability to achieve anticipated results from the
transaction is dependent on the state of the economic and
financial markets going forward, which have been under
significant stress recently. Specifically, Chemical may incur
more credit losses from OAKs loan portfolio than expected
and deposit attrition may be greater than expected.
The integration of OAKs business and operations into
Chemical, which will include conversion of OAKs operating
systems and procedures, may take longer than anticipated or be
more costly than anticipated or have unanticipated adverse
results relating to OAKs or Chemicals existing
businesses.
Additional
Information About the Chemical/OAK Transaction
Chemical has filed a registration statement with the Securities
and Exchange Commission (SEC) to register the securities that
the OAK shareholders will receive if the merger is consummated.
The registration statement contains a prospectus and proxy
statement and other relevant documents concerning the merger.
Investors are urged to read the registration statement, the
prospectus and proxy statement, and any other relevant documents
because they contain important information about Chemical, OAK,
and the merger. Investors may obtain the documents free of
charge at the SECs website, www.sec.gov.
1
The proposed transaction will be submitted to the shareholders
of OAK for their consideration and approval. In connection with
the proposed transaction, OAK has filed a proxy statement and
other relevant documents to be distributed to the shareholders
of OAK. Investors are urged to read the proxy statement
regarding the proposed transaction and any other relevant
documents filed with the SEC, as well as any amendments or
supplements to those documents, because they contain important
information. Investors may obtain a free copy of the proxy
statement, as well as other filings containing information about
Chemical and OAK, free of charge from the SECs website
(www.sec.gov), by contacting Chemical Financial Corporation, 333
East Main Street, P.O. Box 569, Midland, MI
48640-0569,
Attention: Ms. Lori A. Gwizdala, Investor Relations,
telephone
800-867-9757
or by contacting O.A.K. Financial Corporation, 2445
84th Street, SW, Byron Center, MI 49315, Attention:
Mr. James A. Luyk, Investor Relations, telephone
616-588-7419.
INVESTORS SHOULD READ THE PROXY STATEMENT AND OTHER DOCUMENTS
FILED WITH THE SEC CAREFULLY BEFORE MAKING A DECISION CONCERNING
THE TRANSACTION.
OAK and its directors, executive officers, and certain other
members of management and employees may be soliciting proxies
from OAK shareholders in favor of the transaction. Information
regarding the persons who may, under the rules of the SEC, be
considered participants in the solicitation of OAK shareholders
in connection with the proposed transaction is set forth in the
proxy statement filed with the SEC. You can find information
about OAKs executive officers and directors in its most
recent proxy statement filed with the SEC, which is available at
the SECs website (www.sec.gov). You can also obtain free
copies of these documents from Chemical or OAK, as appropriate,
using the contact information above.
2
SELECTED
FINANCIAL DATA
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Years Ended December 31,
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2009
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2008
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2007
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2006
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2005
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(Dollar amounts in thousands, except per share data)
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Earnings Summary
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Net interest income
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$
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147,444
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$
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145,253
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$
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130,089
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$
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132,236
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$
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141,851
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Provision for loan losses
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59,000
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49,200
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11,500
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5,200
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4,285
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Noninterest income
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41,119
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41,197
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43,288
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40,147
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39,220
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Operating expenses
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117,610
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109,108
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104,671
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97,874
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98,463
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Net income
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10,003
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19,842
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39,009
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46,844
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52,878
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Per Common Share Data
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Net income:
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Basic
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$
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0.42
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$
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0.83
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$
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1.60
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$
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1.88
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$
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2.10
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Diluted
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0.42
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0.83
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1.60
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1.88
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2.10
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Cash dividends paid
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1.18
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1.18
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1.14
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1.10
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1.06
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Book value at end of period
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19.85
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20.58
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21.35
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20.46
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19.98
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Market value at end of period
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23.58
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27.88
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23.79
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33.30
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31.76
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Common shares outstanding at end of period
(In thousands)
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23,891
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23,881
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23,815
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24,828
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25,079
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Year End Balances
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Total assets
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$
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4,250,712
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$
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3,874,313
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$
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3,754,313
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$
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3,789,247
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$
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3,749,316
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Total loans
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2,993,160
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2,981,677
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2,799,434
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2,807,660
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2,706,695
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Total deposits
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3,418,125
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2,978,792
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2,875,589
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2,898,085
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2,819,880
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Federal Home Loan Bank advances/other borrowings
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330,568
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368,763
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347,412
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354,041
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400,363
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Total shareholders equity
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474,311
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491,544
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508,464
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507,886
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501,065
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Average Balances
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Total assets
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$
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4,066,229
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$
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3,784,617
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$
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3,785,034
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$
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3,763,067
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$
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3,788,469
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Total earning assets
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3,847,006
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3,550,611
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3,551,867
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3,521,489
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3,550,695
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Total loans
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2,980,126
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2,873,151
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2,805,880
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2,767,114
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2,641,465
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Total interest-bearing liabilities
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3,002,050
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2,711,413
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2,718,814
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2,692,410
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2,718,267
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Total deposits
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3,195,411
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2,924,361
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2,923,004
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2,861,916
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2,886,209
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Federal Home Loan Bank advances/other borrowings
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348,235
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325,177
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327,831
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362,990
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377,499
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Total shareholders equity
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483,034
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509,100
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505,915
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510,255
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493,419
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Financial Ratios
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Net interest margin
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3.91
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%
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4.16
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%
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3.73
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%
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3.82
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%
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4.04
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%
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Return on average assets
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0.25
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0.52
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1.03
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1.24
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1.40
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Return on average shareholders equity
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2.1
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3.9
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7.7
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9.2
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10.7
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Efficiency ratio
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61.4
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57.8
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59.6
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56.1
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54.2
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Average shareholders equity as a percentage of average
assets
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11.9
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13.5
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13.4
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13.6
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13.0
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Tangible shareholders equity as a percentage of total
assets
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9.6
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11.0
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11.7
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11.6
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11.7
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Dividend payout ratio
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281.0
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142.2
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71.2
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58.5
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50.5
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Tier 1 risk-based capital ratio
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14.2
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15.1
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16.1
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16.2
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16.5
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Total risk-based capital ratio
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15.5
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16.4
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17.3
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17.5
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17.8
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Credit Quality
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Allowance for loan losses
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$
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80,841
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$
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57,056
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$
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39,422
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$
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34,098
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$
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34,148
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Total nonperforming loans
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135,755
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93,328
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63,360
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26,910
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19,697
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Total nonperforming assets
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153,295
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113,251
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74,492
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35,762
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26,498
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Net loan charge-offs
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35,215
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31,566
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6,176
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5,650
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4,303
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Allowance for loan losses as a percentage of total period-end
loans
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2.70
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%
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1.91
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%
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1.41
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%
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1.21
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%
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1.26
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%
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Allowance for loan losses as a percentage of nonperforming loans
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60
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61
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62
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127
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173
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Nonperforming loans as a percentage of total loans
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4.54
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3.13
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2.26
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0.96
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|
|
0.73
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Nonperforming assets as a percentage of total assets
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3.61
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2.92
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1.98
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0.94
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0.71
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Net loan charge-offs as a percentage of average total loans
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1.18
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1.10
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0.22
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0.20
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0.16
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3
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OF THE CORPORATION
Chemical Financial Corporation (Corporation) is a financial
holding company with its business concentrated in a single
industry segment commercial banking. The
Corporation, through its subsidiary bank, offers a full range of
commercial banking services. These banking services include
business and personal checking accounts, savings and individual
retirement accounts, time deposit instruments, electronically
accessed banking products, residential and commercial real
estate financing, commercial lending, consumer financing, debit
cards, safe deposit box services, money transfer services,
automated teller machines, access to insurance products and
corporate and personal trust and investment management services.
The principal markets for the Corporations commercial
banking services are communities within Michigan in which the
branches of the Corporations subsidiary bank are located
and the areas immediately surrounding those communities. As of
December 31, 2009, the Corporation operated through one
subsidiary bank, Chemical Bank, headquartered in Midland,
Michigan, serving 90 communities through 129 banking offices
located in 31 counties across Michigans lower peninsula.
In addition to its banking offices, the Corporation operated
three loan production offices and 140 automated teller machines,
both on- and off-bank premises. Chemical Bank operates through
an internal organizational structure of four regional banking
units. Chemical Banks regional banking units are
collections of branch banking offices organized by geographical
regions within the State of Michigan.
The principal source of revenue for the Corporation is interest
and fees on loans, which accounted for 74% of total revenue in
2009, 72% of total revenue in 2008 and 71% of total revenue in
2007. Interest on investment securities is also a significant
source of revenue, accounting for 8% of total revenue in 2009
and 10% of total revenue in both 2008 and 2007. Business volumes
are influenced by overall economic factors including market
interest rates, business and consumer spending, consumer
confidence and competitive conditions in the marketplace.
RECENT MARKET DEVELOPMENTS
At December 31, 2009, the Corporation held
$16.2 million of Federal Home Loan Bank of Indianapolis
(FHLB) stock. The Corporation carries FHLB stock at cost, or par
value, and evaluates FHLB stock for impairment based on the
ultimate recoverability of par value rather than by recognizing
temporary declines in value. As part of the impairment
assessment of FHLB stock, management considers, among other
things, (i) the significance and length of time of any
declines in net assets of the FHLB compared to its capital
stock, (ii) commitments by the FHLB to make payments
required by law or regulations and the level of such payments in
relation to its operating performance, (iii) the impact of
legislative and regulatory changes on financial institutions
and, accordingly, the customer base of the FHLB and
(iv) the liquidity position of the FHLB. The Corporation
received $0.5 million of cash dividend payments on its FHLB
stock during 2009, down from $0.8 million received during
2008. The FHLB has historically paid a quarterly dividend in the
month following the end of a quarter. During 2009, the
Corporation received four quarterly dividend payments, three of
which were delayed by one month compared to when such payments
had been historically made. The FHLB was profitable through the
first three quarters of 2009, with net income of
$96.4 million, despite recognizing $44.9 million of
other-than-temporary
impairment losses on the credit-loss portion of its
private-label mortgage-backed securities portfolio. At
September 30, 2009, the FHLB was considered
well-capitalized in accordance with regulatory requirements and
its capital was 4.1% of total assets, compared to 3.7% at
December 31, 2008. Standard & Poors gave
the FHLB a rating of AAA on December 9, 2009. Given all of
the factors available, it was the Corporations assessment
that the overall financial condition of the FHLB did not
indicate an impairment of its FHLB stock at December 31,
2009.
In December 2008, the Federal Deposit Insurance Corporation
(FDIC) finalized a rule that raised the then current deposit
assessment rates uniformly by 7 basis points for the first
quarter of 2009 assessment. The new rule resulted in annualized
assessment rates for Risk Category 1 institutions ranging from
12 to 14 basis points. Chemical Bank was by definition a
Risk Category 1 institution during all of 2009. In February
2009, the FDIC issued final rules to amend the Deposit Insurance
Fund (DIF) restoration plan, change the risk-based assessment
system and set increased assessment rates for Risk Category 1
institutions beginning in the second quarter of 2009. Effective
April 1, 2009, for Risk Category 1 institutions, the
methodology for establishing assessment rates for large
institutions, such as Chemical Bank, was established to
determine the initial base assessment rate by using a weighted
combination of weighted-average regulatory examination component
ratings, long-term debt issuer ratings (converted to numbers and
averaged) and certain financial ratios. The new initial base
assessment rates for Risk Category 1 institutions range from 12
to 16 basis points, on an annualized basis, and from 7 to
24 basis points after the effect of potential base-rate
adjustments. Chemical Banks quarterly FDIC assessments in
2009 totaled $5.2 million, compared to $0.9 million in
2008.
In May 2009, the FDIC issued a final rule which levied a special
assessment applicable to all FDIC insured depository
institutions totaling 5 basis points of each
institutions total assets less Tier 1 capital as of
June 30, 2009, not to exceed 10 basis points of
domestic
4
deposits. The special assessment was part of the FDICs
efforts to restore the DIF reserves. The Corporation recognized
$1.8 million of additional deposit insurance expense in the
second quarter of 2009 related to the special assessment. In
November 2009, the FDIC issued a final rule that required all
insured depository institutions, with limited exceptions, to
prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. In
conjunction with the adoption of the prepaid assessment, the
FDIC also adopted a uniform 3 basis point increase in
assessment rates effective on January 1, 2011. The
prepayment calculation is based on an institutions
assessment rate in effect on September 30, 2009 and assumes
a 5% annual growth rate in the assessment base. On
December 30, 2009, the Corporation prepaid
$19.7 million in risk-based assessments.
In response to the financial crises affecting the banking system
and financial markets and going concern threats to investment
banks and other financial institutions, on October 3, 2008,
the Emergency Economic Stabilization Act of 2008 (EESA) was
signed into law. The EESA created the Troubled Asset Relief
Program (TARP), under which the United States Department of the
Treasury (Treasury) was given the authority to, among other
things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets. EESA also temporarily increased the amount of deposit
insurance coverage available on customer deposit accounts from
$100,000 per depositor to $250,000 per depositor until
December 31, 2009. In May 2009, the Helping Families Save
Their Homes Act was signed into law, which extended the
temporary deposit insurance increase of $250,000 per depositor
through December 31, 2013.
In October 2008, the Treasury announced that it would purchase
equity stakes in a wide variety of banks and thrifts. Under the
program, known as the Capital Purchase Program (CPP), the
Treasury made $250 billion of the $700 billion
authorized under TARP available to U.S. financial
institutions through the purchase of preferred stock. In
conjunction with the purchase of preferred stock, the Treasury
received, from participating financial institutions, warrants to
purchase common stock with an aggregate market price equal to
15% of the preferred stock investment. Participating financial
institutions were required to agree to restrictions on future
dividends and share repurchases during the period in which the
preferred stock remained outstanding. On December 18, 2008,
the Corporation announced that it had elected not to accept the
$84 million capital investment approved by the Treasury as
part of the CPP. The board of directors and management of the
Corporation determined that the potential dilution to the
Corporations shareholders and various restrictions
outweighed any potential benefits from the Corporations
participation in the CPP.
In November 2008, the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (TLGP). The TLGP, an
initiative to counter the system-wide crisis in the
nations financial sector, was amended by the FDIC in
August 2009 to extend maturity dates originally adopted under
the November 2008 final rule. Under the TLGP, the FDIC will
(i) guarantee, through the earlier of maturity or
December 31, 2012, certain newly-issued senior unsecured
debt issued by participating institutions on or after
October 14, 2008 and through October 31, 2009 and
(ii) provide full FDIC deposit insurance coverage for
covered accounts, which are defined as noninterest-bearing
transaction deposit accounts, Negotiable Order of Withdrawal
(NOW) accounts paying less than 0.5% interest per annum and
Interest on Lawyers Trust Accounts (IOLTA) held at
participating FDIC-insured institutions through June 30,
2010. The fee assessment for coverage of senior unsecured debt
ranges from 50 basis points to 100 basis points per
annum, depending on the initial maturity of the debt. The fee
assessment for deposit insurance coverage is an annualized
10 basis points assessed quarterly on amounts in covered
accounts exceeding $250,000. The Corporation has elected to
participate in both guarantee programs. In October 2009, the
FDIC also established a limited, six-month emergency guarantee
facility upon expiration of the debt guarantee program, under
which certain eligible participating entities can issue
FDIC-guaranteed debt starting October 31, 2009 through
April 30, 2010. The fee for issuing debt under the
emergency facility will be at least 300 basis points per
annum. At December 31, 2009, the Corporation had not issued
and does not expect to issue any FDIC-guaranteed debt under the
TLGP. The Corporations additional FDIC fee assessment in
2009 related to the full deposit coverage for NOW accounts
paying less than 0.5% interest per annum and IOLTA was
$0.1 million.
CRITICAL ACCOUNTING POLICIES
The Corporations consolidated financial statements are
prepared in accordance with United States generally accepted
accounting principles (GAAP) and follow general practices within
the industry in which the Corporation operates. Application of
these principles requires management to make estimates,
assumptions and complex judgments that affect the amounts
reported in the consolidated 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 consolidated 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, assumptions and
judgments are necessary when assets and liabilities are required
to be recorded at fair value or when a decline in the value of
an asset not carried at fair value on the financial statements
warrants an impairment write-down or a valuation reserve to be
established. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The
fair values and the information used to record valuation
adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by third-party sources,
when
5
available. When third-party information is not available,
valuation adjustments are estimated by management primarily
through the use of internal discounted cash flow analysis.
The most significant accounting policies followed by the
Corporation are presented in Note 1 to the consolidated
financial statements. These policies, along with the disclosures
presented in the other notes to the consolidated financial
statements and in Managements Discussion and
Analysis of Financial Condition and Results of Operations,
provide information on how significant assets and liabilities
are valued in the consolidated financial statements and how
those values are determined. Based on the valuation techniques
used and the sensitivity of financial statement amounts to the
methods, estimates and assumptions underlying those amounts,
management has identified the determination of the allowance for
loan losses, pension plan accounting, income and other taxes,
the evaluation of goodwill impairment and fair value
measurements to be the accounting areas that require the most
subjective or complex judgments, and as such, could be most
subject to revision as new or additional information becomes
available or circumstances change, including overall changes in
the economic climate
and/or
market interest rates. Management reviews its critical
accounting policies with the Audit Committee of the board of
directors at least annually.
Allowance
for Loan Losses
The allowance for loan losses (allowance) is calculated with the
objective of maintaining a reserve sufficient to absorb inherent
loan losses in the loan portfolio. The loan portfolio represents
the largest asset type on the consolidated statements of
financial position. The determination of the amount of the
allowance is considered a critical accounting estimate because
it requires significant judgment and the use of estimates
related to the amount and timing of expected cash flows on
impaired loans, estimated losses on commercial, real estate
commercial and real estate construction-commercial loans and on
pools of homogeneous loans based on historical loss experience,
and consideration of current economic trends and conditions, all
of which may be susceptible to significant change. The principal
assumption used in deriving the allowance is the estimate of a
loss percentage for each type of loan. In determining the
allowance and the related provision for loan losses, the
Corporation considers four principal elements: (i) specific
impairment reserve allocations (valuation allowances) based upon
probable losses identified during the review of impaired
commercial, real estate commercial and real estate
construction-commercial loan portfolios, (ii) allocations
established for adversely-rated commercial, real estate
commercial and real estate construction-commercial loans and
nonaccrual real estate residential and nonaccrual consumer
loans, (iii) allocations on all other loans based
principally on the most recent three years of historical loan
loss experience and loan loss trends, and (iv) an
unallocated allowance based on the imprecision in the overall
allowance methodology. It is extremely difficult to accurately
measure the amount of losses that are inherent in the
Corporations loan portfolio. The Corporation uses a
defined methodology to quantify the necessary allowance and
related provision for loan losses, but there can be no assurance
that the methodology will successfully identify and estimate all
of the losses that are inherent in the loan portfolio. As a
result, the Corporation could record future provisions for loan
losses that may be significantly different than the levels that
have been recorded in the three-year period ended
December 31, 2009. Note 1 to the consolidated
financial statements further describes the methodology used to
determine the allowance. In addition, a discussion of the
factors driving changes in the amount of the allowance is
included under the subheading Provision and Allowance for
Loan Losses in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The Corporation has a loan review function, which is independent
of the loan origination function, which reviews
managements evaluation of the allowance at least annually.
The Corporations loan review function performs a detailed
credit quality review at least annually on commercial, real
estate commercial and real estate construction-commercial loans,
particularly focusing on larger balance loans and loans that
have deteriorated below certain levels of credit risk.
Pension
Plan Accounting
The Corporation has a defined benefit pension plan for certain
salaried employees. Effective June 30, 2006, benefits under
the defined benefit pension plan were frozen for approximately
two-thirds of the Corporations salaried employees as of
that date. Pension benefits continued unchanged for the
remaining salaried employees. The Corporations pension
benefit obligations and related costs are calculated using
actuarial concepts and measurements. Benefits under the plan are
based on years of vested service, age and amount of
compensation. Assumptions are made concerning future events that
will determine the amount and timing of required benefit
payments, funding requirements and pension expense.
The key actuarial assumptions used in the pension plan are the
discount rate and long-term rate of return on plan assets. These
assumptions have a significant effect on the amounts reported
for net periodic pension expense, as well as the respective
benefit obligation amounts. The Corporation evaluates these
critical assumptions annually.
At December 31, 2009, 2008 and 2007, the Corporation
calculated the discount rate for the pension plan using the
results from a bond matching technique, which matched cash flows
of the pension plan against both a bond portfolio derived from
the Standard & Poors bond database of AA or
better bonds and the Citigroup Pension Discount Curve, to
determine the discount rate. As of
6
December 31, 2009, 2008 and 2007, the discount rate was
established at 6.15%, 6.50% and 6.50%, respectively, to reflect
market interest rate conditions.
The assumed long-term rate of return on pension plan assets
represents an estimate of long-term returns on an investment
portfolio consisting primarily of equity and fixed income
investments. When determining the expected long-term return on
pension plan assets, the Corporation considers long-term rates
of return on the asset classes in which the Corporation expects
the pension funds to be invested. The expected long-term rate of
return is based on both historical and forecasted returns of the
overall stock and bond markets and the actual portfolio. The
following rates of return by asset class were considered in
setting the assumptions for long-term return on pension plan
assets:
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December 31,
2009
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December 31, 2008
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December 31, 2007
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Equity securities
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7% 9%
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7% 8%
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8% 9%
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Debt securities
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4% 6%
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4% 6%
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4% 6%
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Other
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2% 5%
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2% 5%
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3% 5%
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The assumed long-term return on pension plan assets is developed
through an analysis of forecasted rates of return by asset class
and forecasted asset allocations. It is used to compute the
subsequent years expected return on assets, using the
market-related value of pension plan assets. The
difference between the expected return and the actual return on
pension plan assets during the year is either an asset gain or
loss, which is deferred and amortized over future periods when
determining net periodic pension expense. The Corporations
projection of the long-term return on pension plan assets was 7%
in 2009, 2008 and 2007.
Other assumptions made in the pension plan calculations involve
employee demographic factors such as retirement patterns,
mortality, turnover and the rate of compensation increase.
The key actuarial assumptions that will be used to calculate
pension expense in 2010 for the defined benefit pension plan are
a discount rate of 6.15%, a long-term rate of return on pension
plan assets of 7% and a rate of compensation increase of 3.50%.
Pension expense in 2010 is expected to be approximately
$0.8 million, an increase of approximately
$0.1 million from 2009. In 2010, a decrease in the discount
rate of 50 basis points was estimated to increase pension
expense by $0.4 million, while an increase of 50 basis
points was estimated to decrease pension expense by the same
amount.
There are uncertainties associated with the underlying key
actuarial assumptions, and the potential exists for significant,
and possibly material, impacts on either or both the results of
operations and cash flows (e.g., additional pension expense
and/or
additional pension plan funding, whether expected or required)
from changes in the key actuarial assumptions. If the
Corporation were to determine that more conservative assumptions
are necessary, pension expense would increase and have a
negative impact on results of operations in the period in which
the increase occurs.
The Corporation accounts for its defined benefit pension and
other postretirement plans in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 715, Compensation-Retirement Benefits,
which requires companies to recognize the over- or under-funded
status of a plan as an asset or liability as measured by the
difference between the fair value of the plan assets and the
projected benefit obligation and requires any unrecognized prior
service costs and actuarial gains and losses to be recognized as
a component of accumulated other comprehensive income (loss).
The impact of pension plan accounting on the statements of
financial position at December 31, 2009 and 2008 is
included in Note 15 to the consolidated financial
statements.
Income
and Other Taxes
The Corporation is subject to the income and other tax laws of
the United States and the State of Michigan. These laws are
complex and are subject to different interpretations by the
taxpayer and the various taxing authorities. In determining the
provisions for income and other taxes, management must make
judgments and estimates about the application of these
inherently complex laws, related regulations and case law. In
the process of preparing the Corporations tax returns,
management attempts to make reasonable interpretations of
applicable tax laws. These interpretations are subject to
challenge by the taxing authorities upon audit or to
reinterpretation based on managements ongoing assessment
of facts and evolving case law.
The Corporation and its subsidiaries file a consolidated federal
income tax return. The provision for federal income taxes is
based on income and expenses, as reported in the consolidated
financial statements, rather than amounts reported on the
Corporations federal income tax return. When income and
expenses are recognized in different periods for tax purposes
than for book purposes, applicable deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to
7
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
On a quarterly basis, management assesses the reasonableness of
its effective federal tax rate based upon its current best
estimate of net income and the applicable taxes expected for the
full year. Deferred tax assets and liabilities are reassessed on
an annual basis, or more frequently, if warranted by business
events or circumstances. Reserves for uncertain tax positions
are reviewed quarterly for adequacy based upon developments in
tax law and the status of examinations or audits. As of
December 31, 2009 and 2008, there were no federal income
tax reserves recorded for uncertain tax positions.
Goodwill
At December 31, 2009, the Corporation had
$69.9 million of goodwill, that was originated through the
acquisition of various banks and bank branches, recorded on the
consolidated statement of financial position. In accordance with
FASB ASC Topic
350-20,
Goodwill, goodwill is not amortized, but rather is tested by
management annually for impairment, or more frequently if
triggering events occur and indicate potential impairment. The
Corporations goodwill impairment assessment is reviewed
annually, as of September 30, by an independent third-party
appraisal firm utilizing the methodology and guidelines
established in GAAP, including assumptions regarding the
valuation of Chemical Bank.
The value of Chemical Bank was measured utilizing the income and
market approaches as prescribed in FASB ASC Topic 820, Fair
Value Measurements and Disclosures (ASC 820). GAAP identifies
the cost approach as another acceptable method; however, the
cost approach was not deemed an effective method to value a
financial institution. The cost approach estimates value by
adjusting the reported values of assets and liabilities to their
market values. It is the Corporations opinion that
financial institutions cannot be liquidated in an efficient
manner. Estimating the fair market value of loans is a very
difficult process and subject to a wide margin of error unless
done on a loan by loan basis. Voluntary liquidations of
financial institutions are not typical. More commonly, if a
financial institution is liquidated, it is due to being taken
over by the FDIC. The value of Chemical Bank was based as a
going concern and not as a liquidation.
The income approach uses valuation techniques to convert future
amounts (cash flows or earnings) to a single, discounted amount.
The income approach includes present value techniques,
option-pricing models, such as the Black-Scholes formula and
lattice models, and the multi-period excess-earnings method. In
the valuation of Chemical Bank, the income approach utilized the
discounted cash flow method based upon a forecast of growth and
earnings. Cash flows are measured by using projected earnings,
projected dividends and dividend paying capacity over a
five-year period. In addition to estimating periodic cash flows,
an estimate of residual value is determined through the
capitalization of earnings. The income approach assumed cost
savings and earnings enhancements that a strategic acquiror
would likely implement based upon typical market participant
assumptions of market transactions. The discount rate is
critical to the discounted cash flow analysis. The discount rate
reflects the risk of uncertainty associated with the cash flows
and a rate of return that investors would require from similar
investments with similar risks. A discount rate of 14% was
utilized in the income approach.
The market approach uses observable prices and other relevant
information that are generated by market transactions involving
identical or comparable assets or liabilities. The fair value
measure is based on the value that those transactions indicate
utilizing both financial and operating characteristics of the
acquired companies. Two of the more significant financial ratios
analyzed in completed transactions included price to latest
twelve months earnings and price to tangible book value. The
market approach utilized a price to latest twelve months
earnings ratio of 22 times and a price to tangible book value of
135%.
The fair value of Chemical Bank was determined to be slightly
above the income approach and in the low to middle of the market
approach to value range. The results of the valuation analysis
concluded that the fair value of Chemical Bank was greater than
its book value, including goodwill, and thus no goodwill
impairment was evident at the valuation date of
September 30, 2009. The weighted average of the fair values
determined under the income and market approaches was a discount
compared to the market capitalization of the Corporation at the
valuation date. The Corporation is publicly traded and,
therefore, The Nasdaq Stock
Market®
establishes the marketable minority value. Given the volatility
of the financial markets, particularly in the equity markets in
2009, it is managements opinion that the marketable
minority value does not always represent the fair value of the
reporting unit as a whole and that an adjustment to the
marketable minority value for the acquirors control is
generally considered in the assessment of fair value. The
Corporation determined that no triggering events occurred that
indicated potential impairment of goodwill from the valuation
date through December 31, 2009. The Corporation believes
that the assumptions utilized were reasonable. However, the
Corporation could incur impairment charges related to goodwill
in the future due to changes in financial results or other
matters that could affect the valuation assumptions.
8
Fair
Value Measurements
The Corporation determines the fair value of its assets and
liabilities in accordance with ASC 820. ASC 820 establishes a
standard framework for measuring and disclosing fair value under
GAAP. A number of valuation techniques are used to determine the
fair value of assets and liabilities in the Corporations
financial statements. The valuation techniques include quoted
market prices for investment securities, appraisals of real
estate from independent licensed appraisers and other valuation
techniques. Fair value measurements for assets and liabilities
where limited or no observable market data exists are based
primarily upon estimates, and are often calculated based on the
economic and competitive environment, the characteristics of the
asset or liability and other factors. Therefore, the valuation
results cannot be determined with precision and may not be
realized in an actual sale or immediate settlement of the asset
or liability. Additionally, there are inherent weaknesses in any
calculation technique, and changes in the underlying assumptions
used, including discount rates and estimates of future cash
flows, could significantly affect the results of current or
future values. Significant changes in the aggregate fair value
of assets and liabilities required to be measured at fair value
or for impairment are recognized in the income statement under
the framework established by GAAP. See Note 12 to the
Corporations consolidated financial statements for more
information on fair value measurements.
PENDING ACCOUNTING PRONOUNCEMENTS
Transfers of Financial Assets: In June 2009,
the FASB issued guidance amending the accounting for transfers
of financial assets. The new guidance amends existing guidance
by eliminating the concept of a qualifying special-purpose
entity (QSPE), creating more stringent conditions for reporting
a transfer of a portion of a financial asset as a sale,
clarifying other sale-accounting criteria and changing the
initial measurement of a transferors interest in
transferred financial assets. The amended guidance is effective
as of the beginning of a companys first fiscal year that
begins after November 15, 2009 and for subsequent interim
and annual periods. The adoption of the amended guidance as of
January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Variable Interest Entities (VIEs): In June
2009, the FASB issued guidance amending the accounting for
consolidation of VIEs. This new guidance amends existing
guidance by eliminating exceptions for consolidating QSPEs,
adding new criteria for determining the primary beneficiary and
increasing the frequency of required reassessments to determine
whether a company is the primary beneficiary of a VIE. The
amended guidance also contains a new requirement that any term,
transaction or arrangement that does not have a substantive
effect on an entitys status as a VIE, a companys
power over a VIE or a companys obligation to absorb losses
or rights to receive benefits of an entity must be disregarded
when evaluating consolidation of a VIE. The amended guidance is
effective as of the beginning of a companys first fiscal
year that begins after November 15, 2009 and for subsequent
interim and annual periods. The adoption of the amended guidance
as of January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
PENDING ACQUISITION
The Corporations primary method of expansion into new
banking markets has been through acquisitions of other financial
institutions and bank branches.
On January 7, 2010, the Corporation and O.A.K. Financial
Corporation (OAK), the parent company of Byron Bank, a community
bank based in Byron Center, Michigan, entered into a definitive
agreement whereby OAK will merge with and into the Corporation.
Under the terms of the agreement, OAK shareholders will be
entitled to receive 1.306 shares of the Corporations
common stock for each share of OAK common stock outstanding, or
approximately 3.5 million shares, subject to adjustment in
certain limited circumstances. The merger is designed to be a
tax free exchange. Cash will be paid in lieu of fractional
shares. Closing of the merger, which is expected to occur in the
second quarter of 2010, is subject to certain conditions,
including approval by the shareholders of OAK and regulatory
approval.
FINANCIAL HIGHLIGHTS
The following discussion and analysis is intended to cover the
significant factors affecting the Corporations
consolidated statements of financial position and income
included in this report. It is designed to provide shareholders
with a more comprehensive review of the consolidated operating
results and financial position of the Corporation than could be
obtained from an examination of the financial statements alone.
9
NET INCOME
Net income in 2009 was $10.0 million, or $0.42 per diluted
share, net income in 2008 was $19.8 million, or $0.83 per
diluted share, and net income in 2007 was $39.0 million, or
$1.60 per diluted share. Net income in 2009 represented a 49.6%
decrease from 2008 net income, while 2008 net income
represented a 49.1% decrease from 2007 net income. Net
income per share in 2009 was 49.4% less than in 2008, while net
income per share in 2008 was 48.1% less than in 2007. The
decrease in net income in 2009 was primarily attributable to
increases in the provision for loan losses and operating
expenses. The decrease in net income in 2008 was primarily
attributable to a significant increase in the provision for loan
losses that was only partially offset by an increase in net
interest income.
The Corporations return on average assets was 0.25% in
2009, 0.52% in 2008 and 1.03% in 2007. The Corporations
return on average shareholders equity was 2.1% in 2009,
3.9% in 2008 and 7.7% in 2007.
ASSETS
Average assets were $4.07 billion during 2009, an increase
of $281.6 million, or 7.4%, from average assets during 2008
of $3.78 billion. Average assets were $3.78 billion
during 2008, a decrease of less than $1 million from
average assets during 2007 of $3.79 billion. The increase
in average assets during 2009 was primarily attributable to
increases in interest-bearing deposits with unaffiliated banks
and others, investment securities and loans that were funded by
increased deposits generated in the Corporations markets.
INVESTMENT SECURITIES
Information about the Corporations investment securities
portfolio is summarized in Tables 1 and 2. The following table
summarizes the maturities and yields of the carrying value of
investment securities by investment category and fair value by
investment category, at December 31, 2009:
TABLE 1.
MATURITIES AND YIELDS* OF INVESTMENT SECURITIES AT DECEMBER 31,
2009
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Maturity**
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After One
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After Five
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Total
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Within
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but Within
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but Within
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After
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Carrying
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Total
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One Year
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Five Years
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Ten Years
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Ten Years
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Value
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Fair
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Amount
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Yield
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|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Value
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
109,472
|
|
|
|
1.87
|
%
|
|
$
|
74,067
|
|
|
|
1.15
|
%
|
|
$
|
6,391
|
|
|
|
0.84
|
%
|
|
$
|
2,055
|
|
|
|
0.88
|
%
|
|
$
|
191,985
|
|
|
|
1.55
|
%
|
|
$
|
191,985
|
|
State and political subdivisions
|
|
|
1,198
|
|
|
|
7.38
|
|
|
|
1,450
|
|
|
|
7.65
|
|
|
|
914
|
|
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
3,562
|
|
|
|
7.13
|
|
|
|
3,562
|
|
Mortgage-backed securities
|
|
|
56,347
|
|
|
|
3.77
|
|
|
|
64,195
|
|
|
|
3.71
|
|
|
|
12,483
|
|
|
|
4.87
|
|
|
|
21,180
|
|
|
|
5.04
|
|
|
|
154,205
|
|
|
|
4.00
|
|
|
|
154,205
|
|
Collateralized mortgage obligations
|
|
|
67,325
|
|
|
|
1.05
|
|
|
|
125,290
|
|
|
|
1.04
|
|
|
|
21,315
|
|
|
|
2.16
|
|
|
|
9,828
|
|
|
|
3.59
|
|
|
|
223,758
|
|
|
|
1.26
|
|
|
|
223,758
|
|
Corporate bonds
|
|
|
2,141
|
|
|
|
4.68
|
|
|
|
16,870
|
|
|
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,011
|
|
|
|
2.05
|
|
|
|
19,011
|
|
|
|
Total Investment Securities
Available-for-Sale
|
|
|
236,483
|
|
|
|
2.14
|
|
|
|
281,872
|
|
|
|
1.75
|
|
|
|
41,103
|
|
|
|
2.86
|
|
|
|
33,063
|
|
|
|
4.35
|
|
|
|
592,521
|
|
|
|
2.13
|
|
|
|
592,521
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
10,940
|
|
|
|
4.62
|
|
|
|
49,659
|
|
|
|
4.23
|
|
|
|
32,517
|
|
|
|
6.27
|
|
|
|
27,331
|
|
|
|
4.99
|
|
|
|
120,447
|
|
|
|
4.99
|
|
|
|
121,722
|
|
Mortgage-backed securities
|
|
|
118
|
|
|
|
7.43
|
|
|
|
157
|
|
|
|
7.67
|
|
|
|
68
|
|
|
|
7.77
|
|
|
|
7
|
|
|
|
7.13
|
|
|
|
350
|
|
|
|
7.60
|
|
|
|
383
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
|
|
4.82
|
|
|
|
10,500
|
|
|
|
4.82
|
|
|
|
3,625
|
|
|
|
Total Investment Securities
Held-to-Maturity
|
|
|
11,058
|
|
|
|
4.65
|
|
|
|
49,816
|
|
|
|
4.24
|
|
|
|
32,585
|
|
|
|
6.27
|
|
|
|
37,838
|
|
|
|
4.94
|
|
|
|
131,297
|
|
|
|
4.98
|
|
|
|
125,730
|
|
|
|
Total Investment Securities
|
|
$
|
247,541
|
|
|
|
2.25
|
%
|
|
$
|
331,688
|
|
|
|
2.13
|
%
|
|
$
|
73,688
|
|
|
|
4.37
|
%
|
|
$
|
70,901
|
|
|
|
4.66
|
%
|
|
$
|
723,818
|
|
|
|
2.65
|
%
|
|
$
|
718,251
|
|
|
|
|
|
|
*
|
|
Yields are weighted by amount and
time to contractual maturity, are on a taxable equivalent basis
using a 35% federal income tax rate and are based on carrying
value.
|
**
|
|
Mortgage-backed securities and
collateralized mortgage obligations are based on scheduled
principal maturity. All other investment securities are based on
final contractual maturity.
|
10
The following table summarizes the carrying value of investment
securities at December 31, 2009, 2008 and 2007:
TABLE 2.
SUMMARY OF INVESTMENT SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
|
|
|
$
|
21,494
|
|
|
$
|
31,450
|
|
Government sponsored agencies
|
|
|
191,985
|
|
|
|
172,234
|
|
|
|
193,958
|
|
State and political subdivisions
|
|
|
3,562
|
|
|
|
4,552
|
|
|
|
6,514
|
|
Mortgage-backed securities
|
|
|
154,205
|
|
|
|
169,214
|
|
|
|
215,720
|
|
Collateralized mortgage obligations
|
|
|
223,758
|
|
|
|
37,285
|
|
|
|
575
|
|
Corporate bonds
|
|
|
19,011
|
|
|
|
45,168
|
|
|
|
54,552
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
Total Investment Securities
Available-for-Sale
|
|
|
592,521
|
|
|
|
449,947
|
|
|
|
503,271
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
|
|
|
|
|
1,007
|
|
|
|
18,718
|
|
State and political subdivisions
|
|
|
120,447
|
|
|
|
85,495
|
|
|
|
71,899
|
|
Mortgage-backed securities
|
|
|
350
|
|
|
|
509
|
|
|
|
626
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
10,500
|
|
|
|
|
|
|
|
Total Investment Securities
Held-to-Maturity
|
|
|
131,297
|
|
|
|
97,511
|
|
|
|
91,243
|
|
|
|
Total Investment Securities
|
|
$
|
723,818
|
|
|
$
|
547,458
|
|
|
$
|
594,514
|
|
|
|
The carrying value of investment securities at December 31,
2009 totaled $723.8 million, an increase of
$176.4 million, or 32.2%, from December 31, 2008. The
increase in investment securities was funded by increased
customer deposits. The increased funds were partially invested
in collateralized mortgage obligations (CMOs), that were
primarily variable rate instruments with average maturities of
less than three years. CMO investment securities totaled
$223.8 million, or 30.9%, of investment securities at
December 31, 2009, compared to $37.3 million, or 6.8%,
of investment securities at December 31, 2008.
Additionally, during 2009, the Corporation changed the mix of
its investment securities portfolio as it re-invested a portion
of funds from maturing U.S. Treasury, mortgage-backed
securities and corporate bonds into state and political
subdivisions investment securities, as opportunities in local
municipal markets increased due to a reduction in demand
nationally for local municipal securities. State and political
subdivisions investment securities, which consist primarily of
issuers located in the State of Michigan and are general
obligations of the issuers, totaled $124.0 million, or
17.1%, of investment securities at December 31, 2009,
compared to $90.0 million, or 16.4%, of investment
securities at December 31, 2008.
The Corporation records all investment securities in accordance
with FASB ASC Topic 320, Investments Debt and Equity
Securities (ASC 320), under which the Corporation is required to
assess equity and debt securities that have fair values below
their amortized cost basis to determine whether the decline
(impairment) is
other-than-temporary.
Impairment is
other-than-temporary
if the assessment concludes that it is probable that the holder
will be unable to collect all amounts due according to the
contractual terms of the debt instrument or in instances where
the debt instrument will mature or be disposed of before a full
recovery of its amortized cost. An assessment is performed
quarterly by the Corporation to determine whether unrealized
losses in its investment securities portfolio are temporary or
other-than-temporary
by carefully considering all available information. The
Corporation reviews factors such as financial statements, credit
ratings, news releases and other pertinent information of the
underlying issuer or company to make its determination.
Effective April 1, 2009, in accordance with FASB Staff
Position
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (later codified in ASC 320), the Corporation began
accounting for declines in the fair value of
held-to-maturity
and
available-for-sale
investment securities below their cost that are deemed to be
other-than-temporary
through earnings as realized losses to the extent the impairment
is related to credit losses. The amount of the impairment
related to other factors is recognized in other comprehensive
income, net of income tax. Prior to April 1, 2009, all
declines in fair value deemed to be
other-than-temporary
were reflected in earnings as realized losses. In estimating
other-than-temporary
impairment (OTTI) losses, management considers, among other
things, (i) the length of time and the extent to which the
fair value has been less than amortized cost, (ii) the
financial condition and near-term prospects of the issuer,
(iii) the intent of the Corporation to retain its
investment in the issuer for a period of time sufficient to
allow for any anticipated recovery of amortized cost and
(iv) whether it is more
likely-than-not
that the Corporation will be required to sell its investment
prior to recovery.
The Corporations investment securities portfolio with a
carrying value of $723.8 million at December 31, 2009,
had gross impairment of $8.8 million as of that date.
Management believed that the unrealized losses on investment
securities were temporary
11
in nature and due primarily to changes in interest rates,
increased credit spreads and reduced market liquidity and not as
a result of credit-related issues. Accordingly, at
December 31, 2009, the Corporation believed the impairment
in its investment securities portfolio was temporary in nature
and, therefore, no impairment loss was realized in the
Corporations consolidated statement of income for 2009.
However, due to market and economic conditions, OTTI may occur
as a result of material declines in the fair value of investment
securities in the future. A further discussion of the assessment
of potential impairment and the Corporations process that
resulted in the conclusion that the impairment was temporary in
nature follows.
At December 31, 2009, the Corporations investment
securities portfolio included government sponsored agency
securities with gross impairment of $0.16 million, state
and political subdivisions securities with gross impairment of
$0.68 million, mortgage-backed securities and
collateralized mortgage obligations, combined, with gross
impairment of $0.64 million, corporate bonds with gross
impairment of $0.46 million and trust preferred securities
with gross impairment of $6.88 million. The amortized costs
and fair values of investment securities are disclosed in
Note 2 to the consolidated financial statements.
The government sponsored agencies securities, included in the
available-for-sale
investment securities portfolio, had an amortized cost totaling
$190.9 million with gross impairment of $0.16 million
at December 31, 2009. This gross impairment was
attributable to impaired government sponsored agency securities
with an amortized cost of $47.8 million. All of the
impaired investment securities are backed by the full faith and
credit of the U.S. government. The Corporation determined
that the impairment on these investment securities was
attributable to the lack of liquidity for these investments and
was temporary in nature at December 31, 2009. At
December 31, 2009, the Corporations government
sponsored agencies securities included $129.6 million of
senior bonds that were issued by the twelve regional Federal
Home Loan Banks that make up the Federal Home Loan Bank System
(FHLBanks). There was no impairment in these FHLBanks investment
securities at December 31, 2009. FHLBanks are
government-sponsored enterprises created by Congress to ensure
access to low-cost funding for their member financial
institutions. FHLBanks overall experienced recent declines in
profitability during the fourth quarter of 2008 and first
quarter of 2009, primarily due to a number of the FHLBanks
incurring significant OTTI losses on their portfolios of
private-label mortgage-backed securities and home equity loans
due to the dramatic decline in interest rates that occurred in
2008. However, the capital of FHLBanks has improved throughout
2009 and at September 30, 2009, the FHLBanks were
considered well-capitalized in accordance with regulatory
requirements. At December 31, 2009, the Corporation also
held $16.2 million of FHLB stock, included in other
securities on the consolidated statements of financial position,
which was not impaired.
The state and political subdivisions securities, included in the
held-to-maturity
investment securities portfolio, had an amortized cost totaling
$120.4 million with gross impairment of $0.68 million
at December 31, 2009. The majority of these investment
securities are from issuers primarily located in the State of
Michigan and are general obligations of the issuer, meaning that
the Corporation has the first claim on taxes collected for the
repayment of the investment securities. The gross impairment of
$0.68 million at December 31, 2009 was attributable to
$33.6 million of investment securities, with two-thirds of
these investment securities maturing beyond 2013. The
Corporation determined that the impairment of $0.68 million
at December 31, 2009 was attributable to the change in
market interest rates due to the steepness of the interest yield
curve at December 31, 2009 and the markets perception
of the Michigan economy. The Corporation determined that the
impairment on these investment securities at December 31,
2009 was temporary in nature.
The mortgage-backed securities and collateralized mortgage
obligations, included in the
available-for-sale
investment securities portfolio, had an amortized cost of
$374.1 million, with gross impairment of $0.64 million
at December 31, 2009. Mortgage-backed securities with an
amortized cost of $27.0 million had gross impairment of
$0.29 million and collateralized mortgage obligations with
an amortized cost of $110.5 million had gross impairment of
$0.35 million. Virtually all of the impaired investment
securities in these two categories are backed by an explicit
guarantee of the U.S. government and are AAA rated. The
Corporation assessed the impairment on these investment
securities and determined that the impairment was attributable
to the general decline in market interest rates and volatile
prepayment speeds and that the impairment on these investment
securities at December 31, 2009 was temporary in nature.
At December 31, 2009, the Corporations corporate bond
portfolio, included in the
available-for-sale
investment securities portfolio, had an amortized cost of
$19.3 million, with gross impairment of $0.46 million.
All of the corporate bonds held at December 31, 2009 were
of an investment grade, except one single issue investment
security, Lehman Brothers Holdings Inc. (Lehman), and two
corporate bonds of American General Finance Corporation (AGFC),
a wholly-owned subsidiary of American General Finance Inc.
(AGFI), which is wholly-owned indirectly by American
International Group (AIG). The investment grade ratings obtained
for the balance of the corporate bond portfolio indicated that
the obligors capacities to meet their financial
commitments was strong. During the third quarter of
2008, the Corporation recognized an OTTI loss of
$0.4 million related to the write-down of the Lehman bond
to fair value as the impairment was deemed to be
other-than-temporary
and entirely credit related. The Corporations remaining
amortized cost of the Lehman bond was less than
$0.1 million at December 31, 2009. The gross
impairment of $0.46 million existing at December 31,
2009 was attributable to two corporate bonds from AGFC with a
combined amortized cost of $2.7 million at that date. The
amortized cost amounts of the two bonds were $0.2 million
and $2.5 million with maturity dates of
12
September 1, 2010 and December 15, 2011, respectively.
The Corporation performed an assessment of the probability that
it would collect all of the contractual amounts due under the
two AGFC corporate bonds at December 31, 2009. The
impairment at December 31, 2009 on the AGFC corporate bonds
of $0.46 million improved from $1.6 million of
impairment at December 31, 2008. Ratings from Moodys,
Standard & Poors and Fitch were B2, BB+ and BB,
respectively, at December 31, 2009. Management believes
that the analyses used by these rating agencies does not include
the likelihood of the parent companys (AIG) ability and
willingness to provide support to its subsidiary.
The public filing of AGFCs
Form 10-Q
with the SEC for the period ended September 30, 2009
indicated AGFC had net income of $231 million for the three
months ended September 30, 2009 compared to a net loss of
$236 million during the nine months ended
September 30, 2009. AGFCs total equity at
September 30, 2009 was $2.6 billion, or 10.5% of total
assets. AGFCs own assessment of its financial condition at
September 30, 2009 indicated that, after consideration of
many factors, although primarily due to its ability to obtain
funding from its parent company and its ability to severely
reduce originations of finance receivables, AGFC believed it
would have adequate liquidity to finance and operate its
businesses and repay its obligations for at least the next
twelve months. However, it is possible that the actual outcome
of one or more of AGFCs significant judgments or estimates
could prove to be materially incorrect and AGFC may not have
sufficient cash to meet its obligations in the future. All 2009
quarterly and semi-annual interest payments on both AGFC
corporate bonds owned by the Corporation were paid in full on
the scheduled payment date. The Corporation determined that the
impairment of the AGFC corporate bonds was attributable to a
lack of liquidity for these investments and that the impairment
was temporary in nature at December 31, 2009.
At December 31, 2009, the Corporation held two trust
preferred securities (TRUPs) in the
held-to-maturity
investment securities portfolio with a combined amortized cost
of $10.5 million that had gross impairment of
$6.9 million. One TRUP, with an amortized cost of
$10.0 million, represented a 100% interest in a TRUP of a
small non-public bank holding company in Michigan (issuer) that
was purchased in the second quarter of 2008. At
December 31, 2009, the Corporation determined the fair
value of this TRUP was $3.5 million. The second TRUP, with
an amortized cost of $0.5 million, represented a 10%
interest in the TRUP of another small non-public bank holding
company in Michigan. At December 31, 2009, the Corporation
determined the fair value of this TRUP was $0.1 million.
The fair value measurements of the two TRUP investments were
developed based upon market pricing observations of much larger
banking institutions in an illiquid market adjusted by risk
measurements. The fair values of the TRUPs were based on
calculations of discounted cash flows, and further based upon
both observable inputs and appropriate risk adjustments that
market participants would make for performance, liquidity and
issuer specifics. See the additional discussion of the
development of the fair values of the TRUPs in Note 2 to
the consolidated financial statements.
Management reviewed financial information of the issuers of the
TRUPs at December 31, 2009. Based on this review, the
Corporation concluded that the significant decline in fair
values of the TRUPs, compared to their amortized cost, was not
attributable to materially adverse conditions specifically
related to the issuers. The issuer of the $10.0 million
TRUP reported net income in 2007, 2008 and 2009. At
December 31, 2009, the issuer was categorized as
well-capitalized under applicable regulatory capital
adequacy guidelines and had a liquidity position which included
over $100 million in investment securities held as
available-for-sale.
Based on the Corporations analysis at December 31,
2009, it was the Corporations opinion that this issuer
appeared to be a financially sound institution with sufficient
liquidity to meet its financial obligations in 2010. This TRUP
is not independently rated. Industry bank ratings for
September 30, 2009, obtained from Bauer Financial at
www.bauerfinancial.com (Bauer) for subsidiaries of this issuer
were rated good and excellent. Common stock cash dividends were
paid throughout 2008 and 2009 by the issuer and the Corporation
understands that the issuers management anticipates cash
dividends to continue to be paid in the future. All scheduled
interest payments on this TRUP were made on a timely basis in
2009 and 2008. The principal of $10.0 million of this TRUP
matures in 2038, with interest payments due quarterly.
The issuer of the $0.5 million TRUP reported a net loss in
2009 that was less than the net loss reported in 2008. At
December 31, 2009, the issuer was categorized as
well-capitalized under applicable regulatory capital
adequacy guidelines and its subsidiary bank was rated adequate
by Bauer based on September 30, 2009 financial data. All
scheduled interest payments on this TRUP were made on a timely
basis in 2009 and 2008. The principal of $0.5 million of
this TRUP matures in 2033, with interest payments due quarterly.
Based on the information provided by the issuers of both TRUPs,
as of December 31, 2009, it was the Corporations
opinion that there had been no material adverse changes in the
issuers financial performance since the TRUPs were issued
and purchased by the Corporation and no indication that any
material adverse trends were developing that would suggest that
the issuers would be unable to make all future principal and
interest payments under the TRUPs. Further, based on the
information provided by the issuers, the issuers appeared to be
financially viable financial institutions with both the credit
quality and liquidity necessary to meet financial obligations in
2010. At December 31, 2009, the Corporation was not aware
of any regulatory issues, memorandums of understanding or cease
and desist orders that had been issued to the issuers or their
subsidiaries. In reviewing all available information regarding
the issuers, including past performance and their financial and
liquidity position, it was the Corporations opinion that
the future cash flows of the issuers supported the carrying
value of the TRUPs at their original cost of $10.5 million
at
13
December 31, 2009. There can be no assurance that OTTI
losses will not be recognized on the TRUPs or on any other
investment security in the future. While the total fair value of
the TRUPs was $6.9 million below the Corporations
amortized cost at December 31, 2009, it was the
Corporations assessment that, based on the overall
financial condition of the issuers, the impairment was temporary
in nature at December 31, 2009.
At December 31, 2009, the Corporation expected to fully
recover the entire amortized cost basis of each impaired
investment security in its investment securities portfolio at
that date. Furthermore, at December 31, 2009, the
Corporation did not have the intent to sell any of its impaired
investment securities and believed that it was more likely than
not that the Corporation would not have to sell any of its
impaired investment securities before a full recovery of
amortized cost.
The Corporation did not realize any investment securities
impairment losses in 2009. In 2008, the Corporation recorded a
$0.4 million loss related to the write-down of a specific
investment debt security to fair value as the impairment was
deemed to be
other-than-temporary
in nature and entirely credit related.
LOANS
Chemical Bank is a full-service commercial bank and, therefore,
the acceptance and management of credit risk is an integral part
of the Corporations business. At December 31, 2009,
the Corporations loan portfolio was $2.99 billion and
consisted of loans to commercial borrowers (commercial, real
estate commercial and real estate construction-commercial)
totaling $1.47 billion, or 49.1% of total loans, loans to
borrowers for the purpose of acquiring residential real estate
(real estate residential and real estate
construction-residential) totaling $762 million, or 25.4%
of total loans, and loans to consumer borrowers secured by
various types of collateral totaling $763 million, or 25.5%
of total loans. Loans at fixed interest rates comprised
approximately 80% of the Corporations loan portfolio at
December 31, 2009 and 2008.
The Corporation maintains loan policies and credit underwriting
standards as part of the process of managing credit risk.
Underwriting standards are designed to promote relationship
banking rather than transactional banking. These standards
include providing loans generally only within the
Corporations market areas. The Corporations lending
markets generally consist of communities across the middle to
southern and western sections of the lower peninsula of
Michigan. The Corporations lending market areas do not
include the southeastern portion of Michigan. The Corporation
has no foreign loans or any loans to finance highly leveraged
transactions. The Corporations lending philosophy is
implemented through strong administrative and reporting
controls. The Corporation maintains a centralized independent
loan review function, which monitors asset quality of the loan
portfolio.
Table 3 includes the composition of the Corporations loan
portfolio, by major loan category, as of December 31, 2009,
2008, 2007, 2006 and 2005.
TABLE 3.
SUMMARY OF LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Distribution of Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
584,286
|
|
|
$
|
587,554
|
|
|
$
|
515,319
|
|
|
$
|
545,591
|
|
|
$
|
517,852
|
|
|
|
Real estate commercial
|
|
|
785,675
|
|
|
|
786,404
|
|
|
|
760,399
|
|
|
|
726,554
|
|
|
|
704,684
|
|
|
|
Real estate construction
|
|
|
121,305
|
|
|
|
119,001
|
|
|
|
134,828
|
|
|
|
145,933
|
|
|
|
158,376
|
|
|
|
Real estate residential
|
|
|
739,380
|
|
|
|
839,555
|
|
|
|
838,545
|
|
|
|
835,263
|
|
|
|
785,160
|
|
|
|
Consumer
|
|
|
762,514
|
|
|
|
649,163
|
|
|
|
550,343
|
|
|
|
554,319
|
|
|
|
540,623
|
|
|
|
|
|
Total loans
|
|
$
|
2,993,160
|
|
|
$
|
2,981,677
|
|
|
$
|
2,799,434
|
|
|
$
|
2,807,660
|
|
|
$
|
2,706,695
|
|
|
|
|
|
Table 4 presents the maturity distribution of commercial, real
estate commercial and real estate construction loans. These
loans totaled $1.49 billion and represented 50% of total
loans at December 31, 2009 and 2008. The percentage of
these loans maturing within one year was 40% at
December 31, 2009, compared to 36% at December 31,
2008. The percentage of these loans maturing beyond five years
remained low at 6% at December 31, 2009, compared to 9% at
December 31, 2008. At December 31, 2009 and 2008,
commercial, real estate commercial and real estate construction
loans with maturities beyond one year totaled $889 million
and $962 million, respectively, and were comprised of 97%
and 91%, respectively, of fixed interest rate loans and variable
interest rate loans that were at their minimum interest rate.
The Corporation classifies variable interest rate loans that are
at their minimum interest rate as fixed interest rate loans for
purposes of interest sensitivity disclosure and regulatory
reporting. Variable interest rate loans that were at their
minimum interest rate, and therefore reported as fixed rate
loans, totaled $128 million at December 31, 2009 and
$47 million at December 31, 2008.
14
TABLE 4.
COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
Due In
|
|
|
Due In
|
|
|
|
|
|
|
1 Year
|
|
|
1 to 5
|
|
|
Over 5
|
|
|
|
|
|
1 Year
|
|
|
1 to 5
|
|
|
Over 5
|
|
|
|
|
|
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
|
|
Loan Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
330,139
|
|
|
$
|
207,585
|
|
|
$
|
46,562
|
|
|
$
|
584,286
|
|
|
$
|
303,518
|
|
|
$
|
234,795
|
|
|
$
|
49,241
|
|
|
$
|
587,554
|
|
|
|
Real estate commercial
|
|
|
219,992
|
|
|
|
528,831
|
|
|
|
36,852
|
|
|
|
785,675
|
|
|
|
169,787
|
|
|
|
566,503
|
|
|
|
50,114
|
|
|
|
786,404
|
|
|
|
Real estate construction
|
|
|
52,262
|
|
|
|
62,277
|
|
|
|
6,766
|
|
|
|
121,305
|
|
|
|
57,572
|
|
|
|
25,572
|
|
|
|
35,857
|
|
|
|
119,001
|
|
|
|
|
|
Total
|
|
$
|
602,393
|
|
|
$
|
798,693
|
|
|
$
|
90,180
|
|
|
$
|
1,491,266
|
|
|
$
|
530,877
|
|
|
$
|
826,870
|
|
|
$
|
135,212
|
|
|
$
|
1,492,959
|
|
|
|
|
|
Percent of Total
|
|
|
40
|
%
|
|
|
54
|
%
|
|
|
6
|
%
|
|
|
100
|
%
|
|
|
36
|
%
|
|
|
55
|
%
|
|
|
9
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
Interest Sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Above loans maturing after one year which have:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
$
|
861,097
|
|
|
|
97
|
%
|
|
$
|
877,685
|
|
|
|
91
|
%
|
Variable interest rates
|
|
|
27,776
|
|
|
|
3
|
|
|
|
84,397
|
|
|
|
9
|
|
|
|
Total
|
|
$
|
888,873
|
|
|
|
100
|
%
|
|
$
|
962,082
|
|
|
|
100
|
%
|
|
|
Total loans at December 31, 2009 were $2.99 billion,
an increase of $11.5 million, or 0.4%, from total loans at
December 31, 2008, compared to an increase of
$182 million, or 6.5%, during 2008. A summary of the
changes in the loan portfolio by category follows.
Commercial loans consist primarily of loans to varying types of
businesses, including municipalities, school districts and
nonprofit organizations, for the purpose of supporting working
capital and operational needs and term financing of equipment.
Repayment of such loans is generally provided through operating
cash flows of the business, although the Corporation also
generally secures commercial loans with equipment, real estate,
personal guarantees of the owner or other sources of repayment.
Commercial loans were $584.3 million at December 31,
2009, a decrease of $3.2 million, or 0.6%, from total
commercial loans at December 31, 2008 of
$587.5 million. The decrease in commercial loans in 2009
was attributable to less demand for new financing by commercial
customers that was partially offset by an increase in loans to
municipalities and school districts. Loans to municipalities and
school districts were $71.7 million at December 31,
2009, a $26.0 million, or 57%, increase from
$45.7 million at December 31, 2008. The increase in
loans in this category during 2009 was primarily due to a lower
level of competition for these types of loans in the
Corporations lending markets that created additional
lending opportunities for the Corporation. Commercial loans
increased $72.2 million, or 14.0%, during 2008 from
commercial loans at December 31, 2007 of
$515.3 million. The increase in commercial loans in 2008
arose throughout the Corporations lending markets and
across a wide range of industries. Commercial loans represented
19.5% of the Corporations loan portfolio at
December 31, 2009, compared to 19.7% and 18.4% at
December 31, 2008 and 2007, respectively.
The average size of commercial loan transactions is generally
relatively small, which decreases the risk of loss within the
commercial loan portfolio due to the lack of loan concentration.
The Corporations loan portfolio to commercial borrowers,
defined as commercial, real estate commercial and real estate
construction-commercial loans, is well diversified across
business lines and has no concentration in any one industry. The
total loan portfolio to commercial borrowers of
$1.47 billion at December 31, 2009 included 83 loan
relationships of $2.5 million or greater. These 83
borrowing relationships totaled $432.9 million and
represented 29.5% of the loan portfolio to commercial borrowers
at December 31, 2009. At December 31, 2009, five of
these borrowing relationships had outstanding balances of
$10 million or higher, totaling $67.5 million, or
4.6%, of the loan portfolio to commercial borrowers as of that
date. Further, the Corporation had nine loan relationships at
December 31, 2009 with loan balances greater than $2.5 million
and less than $10 million, totaling $47.1 million, that had
unfunded credit amounts, that if advanced, could result in a
loan relationship exceeding $10 million.
Real estate commercial loans include loans that are secured by
real estate occupied by the borrower for ongoing operations,
non-owner occupied real estate leased to one or more tenants and
vacant land that has been acquired for investment or future land
development. Real estate commercial loans were
$785.7 million at December 31, 2009, a decrease of
$0.7 million, or 0.1%, from total real estate commercial
loans at December 31, 2008 of $786.4 million. Loans
secured by owner occupied properties, non-owner occupied
properties and vacant land comprised 74.6%, 21.9% and 3.5%,
respectively, of the Corporations real estate commercial
loans outstanding at December 31, 2009. Real estate
commercial loans increased $26.0 million, or 3.4%, during
2008 from real estate commercial loans at December 31, 2007
of $760.4 million. Real estate commercial loans represented
26.2% of the Corporations loan portfolio at
December 31, 2009, compared to 26.4% and 27.2% at
December 31, 2008 and 2007, respectively.
15
Real estate commercial lending is generally considered to
involve a higher degree of risk than real estate residential
lending and typically involves larger loan balances concentrated
in a single borrower. In addition, the payment experience on
loans secured by income-producing properties and vacant land
loans are typically dependent on the success of the operation of
the related project and are typically affected by adverse
conditions in the real estate market and in the economy.
The Corporation generally attempts to mitigate the risks
associated with commercial and real estate commercial lending
by, among other things, lending primarily in its market areas,
lending across industry lines, not developing a concentration in
any one line of business and using prudent loan-to-value ratios
in the underwriting process. The weakened economy in Michigan
has resulted in higher loan delinquencies, customer bankruptcies
and real estate foreclosures. Based on current economic
conditions in Michigan, management expects real estate
foreclosures to remain higher than historical averages. It is
also managements belief that the loan portfolio is
generally well-secured, despite declining market values for all
types of real estate in the State of Michigan and nationwide.
Real estate construction loans are originated for both business
and residential properties, including land development. Land
development loans are loans made to residential and commercial
developers for infrastructure improvements to create finished
marketable lots for residential or commercial construction. Real
estate construction loans often convert to a real estate
commercial or real estate residential loan at the completion of
the construction period; however, most land development loans
are originated with the intention that the loans will be paid
through the sale of finished properties by the developers within
twelve months of the completion date. Real estate construction
loans were $121.3 million at December 31, 2009, an
increase of $2.3 million, or 1.9%, from real estate
construction loans at December 31, 2008 of
$119.0 million. Real estate construction loans decreased
$15.8 million, or 11.7%, during 2008 from real estate
construction loans of $134.8 million at December 31,
2007. Real estate construction loans to commercial borrowers
represented the majority of these loans and were
$98.4 million at December 31, 2009, an increase of
$8.6 million, or 9.6%, from December 31, 2008. The
increase in real estate construction loans to commercial
borrowers during 2009 was attributable to one project to finance
the construction and renovation of a private recreational
facility. At December 31, 2009, $9.3 million had been
advanced by the Corporation on this project and another
$9.4 million was committed for future advancements at that
date. Real estate construction loans also include loans to
consumers for the construction of single family residences that
are secured by these properties. Real estate construction loans
to consumers were $22.9 million at December 31, 2009,
a decrease of $6.3 million, or 21.6%, from
December 31, 2008. Real estate construction loans
represented 4.1% of the Corporations loan portfolio as of
December 31, 2009 compared to 4.0% and 4.8% at
December 31, 2008 and 2007, respectively.
Real estate construction lending involves a higher degree of
risk than real estate commercial lending and real estate
residential lending because of the uncertainties of
construction, including the possibility of costs exceeding the
initial estimates and the need to obtain a tenant or purchaser
of the property if it will not be owner-occupied. The
Corporation generally attempts to mitigate the risks associated
with construction lending by, among other things, lending
primarily in its market areas, using prudent underwriting
guidelines and closely monitoring the construction process. At
December 31, 2009, the Corporations real estate
construction loans to commercial borrowers included
$46.6 million of residential real estate development loans.
The Corporations risk in this area has increased since
early 2008 due to the recessionary economic environment within
the State of Michigan. The sale of units in residential real
estate development projects has slowed significantly, as
customer demand significantly decreased, resulting in the
inventory of unsold housing units increasing across the State of
Michigan. The severe recession in Michigan has resulted in the
inability of most developers to sell their finished developed
lots and units within their original expected time frames.
Accordingly, few of the Corporations residential real
estate development borrowers sold developed lots or units during
2008 and 2009 due to the poor economic environment. At
December 31, 2009, $14.4 million, or 31%, of the
Corporations residential real estate development loans
were not performing in accordance with their contractual terms.
Real estate residential loans consist primarily of one- to
four-family residential loans with fixed interest rates of
fifteen years or less. The loan-to-value ratio at the time of
origination is generally 80% or less. Loans with more than an
80% loan-to-value ratio generally require private mortgage
insurance. Real estate residential loans were
$739.4 million as of December 31, 2009, a decrease of
$100.2 million, or 11.9%, from real estate residential
loans at December 31, 2008 of $839.6 million. Real
estate residential loans increased $1.0 million, or 0.1%,
during 2008 from $838.5 million at December 31, 2007.
The decrease in real estate residential loans in 2009 was
attributable to both a significant decline in Michigans
housing market due to the overall economic environment and
customers refinancing adjustable rate and balloon mortgages to
long-term fixed interest rate loans that the Corporation sold in
the secondary market. The Corporations current general
practice is to sell fixed interest rate real estate residential
loan originations with maturities of over ten years in the
secondary market. Real estate residential loans represented
24.7% of the Corporations loan portfolio at
December 31, 2009, compared to 28.1% and 30.0% at
December 31, 2008 and 2007, respectively.
The Corporations consumer loan portfolio consists of
relatively small loan amounts that are spread across many
individual borrowers, which minimizes the risk per loan
transaction. Collateral values, particularly those of
automobiles, recreational vehicles and boats, are negatively
impacted by many factors, such as new car promotions, the
physical condition of the collateral and even more
significantly, overall economic conditions. Consumer loans also
include home equity loans, whereby consumers utilize equity in
their personal residence, generally through a second mortgage,
as collateral to secure the loan.
16
Consumer loans were $762.5 million at December 31,
2009, an increase of $113.4 million, or 17.5%, from
consumer loans at December 31, 2008 of $649.2 million.
Consumer loans increased $98.8 million, or 18.0%, during
2008 from $550.3 million at December 31, 2007. The
increases in consumer loans during 2009 and 2008 were primarily
attributable to an increase in indirect consumer loans, due to a
combination of an increased sales effort, new technology to
support indirect loan application processing and a reduction in
the number of competing lenders. In 2008, new electronic
application tools were installed that link the
Corporations loan underwriting department directly to
business dealerships. This capability stimulated an increase in
lending opportunities during 2009 and 2008. Indirect consumer
loans include automobile, recreational vehicle and boat
financing purchased from dealerships. At December 31, 2009,
approximately 41% of consumer loans were secured by the
borrowers personal residences, 28% by automobiles, 18% by
recreational vehicles, 9% by marine vehicles and the remaining
4% was mostly unsecured. Consumer loans represented 25.5% of the
Corporations loan portfolio at December 31, 2009,
compared to 21.8% and 19.6% at December 31, 2008 and 2007,
respectively.
Consumer loans generally have shorter terms than mortgage loans
but generally involve more credit risk than real estate
residential lending because of the type and nature of the
collateral. The Corporation approves consumer loans utilizing a
computer-based credit scoring analysis to supplement the
underwriting process. Consumer lending collections are dependent
on the borrowers continuing financial stability and are
more likely to be affected by adverse personal situations.
Overall, credit risk on these loans increases as the
unemployment rate increases. The unemployment rate in the State
of Michigan was 14.6% at December 31, 2009, up from 10.2%
at December 31, 2008, and significantly higher than the
national average of 10.0% at December 31, 2009. The credit
risk on home equity loans has historically been low as property
values of residential real estate have historically increased
year over year. However, credit risk has increased on home
equity loans since the beginning of 2008 as property values have
declined throughout the State of Michigan, thus increasing the
risk of insufficient collateral, as the majority of these loans
are secured by a second mortgage on the borrowers
residences.
ASSET
QUALITY
Nonperforming
Assets
Nonperforming assets consist of loans for which the accrual of
interest has been discontinued, loans that are past due as to
principal or interest by 90 days or more and are still
accruing interest, loans which have been modified due to a
decline in the credit quality of the borrower (loans modified
under troubled debt restructurings) and assets obtained through
foreclosures and repossessions. The Corporation transfers a loan
that is 90 days or more past due to nonaccrual status,
unless it believes the loan is both well-secured and in the
process of collection. Accordingly, the Corporation has
determined that the collection of accrued and unpaid interest on
any loan that is 90 days or more past due and still
accruing interest is probable.
Nonperforming assets were $153.3 million at
December 31, 2009, compared to $113.3 million at
December 31, 2008 and $74.5 million at
December 31, 2007, and represented 3.6%, 2.9% and 2.0%,
respectively, of total assets. It is managements belief
that the continued increase in nonperforming assets was largely
attributable to the severe recessionary economic climate within
Michigan, which has resulted in cash flow difficulties being
encountered by many business and consumer loan customers. The
unemployment rate in Michigan was 14.6% at December 31,
2009, compared to 10.0% nationwide. The increase in the
Corporations nonperforming assets was not concentrated in
any one industry or any one geographical area within Michigan,
other than $14.4 million in nonperforming residential real
estate development loans (included in real estate construction)
made in Chemical Banks various lending market areas
throughout the state. At December 31, 2009, there were five
commercial loan relationships exceeding $2.5 million,
totaling $19.5 million, which were in nonperforming status.
It continues to be well publicized nationwide that appraised
values of residential and commercial real estate have generally
declined. The Corporation likewise continued to experience
declines in appraised values of both residential and commercial
real estate properties in 2009 due to the continued weakness in
the economy in Michigan. Based on the declines in both
commercial and residential real estate values, management
continues to evaluate and discount appraised values and obtain
new appraisals to compute estimated fair market values of
impaired real estate secured loans and other real estate
properties. Due to the economic climate within Michigan,
management expects that nonperforming assets will continue to
remain at elevated levels into 2010.
17
The following table provides a five-year history of
nonperforming assets, including the composition of nonaccrual
loans and accruing loans contractually past due 90 days or
more as to interest or principal payments and loans modified
under troubled debt restructurings, by major loan category:
TABLE 5.
NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Nonaccrual loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
19,309
|
|
|
$
|
16,324
|
|
|
$
|
10,961
|
|
|
$
|
4,203
|
|
|
$
|
3,133
|
|
|
|
Real estate commercial
|
|
|
49,419
|
|
|
|
27,344
|
|
|
|
19,672
|
|
|
|
9,612
|
|
|
|
2,950
|
|
|
|
Real estate construction
|
|
|
15,184
|
|
|
|
15,310
|
|
|
|
12,979
|
|
|
|
2,552
|
|
|
|
3,741
|
|
|
|
Real estate residential
|
|
|
15,508
|
|
|
|
12,175
|
|
|
|
8,516
|
|
|
|
2,887
|
|
|
|
3,853
|
|
|
|
Consumer
|
|
|
7,169
|
|
|
|
5,313
|
|
|
|
3,468
|
|
|
|
985
|
|
|
|
884
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
106,589
|
|
|
|
76,466
|
|
|
|
55,596
|
|
|
|
20,239
|
|
|
|
14,561
|
|
|
|
Accruing loans contractually past due 90 days or more as to
interest or principal payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,371
|
|
|
|
1,652
|
|
|
|
1,958
|
|
|
|
1,693
|
|
|
|
825
|
|
|
|
Real estate commercial
|
|
|
3,971
|
|
|
|
9,995
|
|
|
|
4,170
|
|
|
|
2,232
|
|
|
|
2,002
|
|
|
|
Real estate construction
|
|
|
1,990
|
|
|
|
759
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
Real estate residential
|
|
|
3,614
|
|
|
|
3,369
|
|
|
|
1,470
|
|
|
|
1,158
|
|
|
|
1,717
|
|
|
|
Consumer
|
|
|
787
|
|
|
|
1,087
|
|
|
|
166
|
|
|
|
1,414
|
|
|
|
592
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or more
as to interest or principal payments
|
|
|
11,733
|
|
|
|
16,862
|
|
|
|
7,764
|
|
|
|
6,671
|
|
|
|
5,136
|
|
|
|
Loans modified under troubled debt restructurings
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
135,755
|
|
|
|
93,328
|
|
|
|
63,360
|
|
|
|
26,910
|
|
|
|
19,697
|
|
|
|
Other real estate and repossessed assets
|
|
|
17,540
|
|
|
|
19,923
|
|
|
|
11,132
|
|
|
|
8,852
|
|
|
|
6,801
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
153,295
|
|
|
$
|
113,251
|
|
|
$
|
74,492
|
|
|
$
|
35,762
|
|
|
$
|
26,498
|
|
|
|
|
|
Nonperforming loans as a percent of total loans
|
|
|
4.54
|
%
|
|
|
3.13
|
%
|
|
|
2.26
|
%
|
|
|
0.96
|
%
|
|
|
0.73
|
%
|
|
|
|
|
Nonperforming assets as a percent of total assets
|
|
|
3.61
|
%
|
|
|
2.92
|
%
|
|
|
1.98
|
%
|
|
|
0.94
|
%
|
|
|
0.71
|
%
|
|
|
|
|
|
|
|
* |
|
Interest income totaling $2.1 million was recorded in 2009 on
loans in nonaccrual status. At December 31, 2009, additional
interest income of $6.1 million would have been recorded during
2009 on these loans had they been current in accordance with
their original terms. |
The following schedule provides the composition of nonperforming
loans, by major loan category, as of December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
20,680
|
|
|
|
15
|
%
|
|
$
|
17,976
|
|
|
|
19
|
%
|
Real estate commercial
|
|
|
53,390
|
|
|
|
39
|
|
|
|
37,339
|
|
|
|
40
|
|
Real estate construction
|
|
|
17,174
|
|
|
|
13
|
|
|
|
16,069
|
|
|
|
17
|
|
|
|
Sub-total
|
|
|
91,244
|
|
|
|
67
|
|
|
|
71,384
|
|
|
|
76
|
|
Real estate residential
|
|
|
36,555
|
|
|
|
27
|
|
|
|
15,544
|
|
|
|
17
|
|
Consumer
|
|
|
7,956
|
|
|
|
6
|
|
|
|
6,400
|
|
|
|
7
|
|
|
|
Total nonperforming loans
|
|
$
|
135,755
|
|
|
|
100
|
%
|
|
$
|
93,328
|
|
|
|
100
|
%
|
|
|
Total nonperforming loans at December 31, 2009 were
$135.8 million, an increase of $42.5 million, or 46%,
compared to $93.3 million at December 31, 2008. The
increase in nonperforming loans has occurred in both commercial
borrower (commercial, real estate commercial and real estate
construction) and consumer borrower (real estate residential and
consumer) loan categories. Combined, the three commercial
borrower nonperforming loan categories totaled
$91.2 million, or 67%, of total nonperforming loans at
December 31, 2009. Likewise, as disclosed in Table 6 under
the subheading Provision and Allowance for Loan
Losses the majority of the Corporations net loan
charge-offs during 2009 occurred within these three loan
categories, with 75% of net loan charge-offs during 2009
attributable to commercial borrowers, compared to 80% in 2008.
The increase in the level of nonperforming
18
loans during 2009 was largely attributable to the recessionary
economic conditions in the State of Michigan and in the
Corporations local markets that have been existent since
2006 and continued to deteriorate through 2009, with no clear
economic indications of when significant improvement is likely
to occur.
The following schedule presents additional data related to
nonperforming commercial, real estate commercial and real estate
construction loans by dollar amount as of December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Borrowers
|
|
|
Amount
|
|
|
Borrowers
|
|
|
Amount
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
$5,000,000 or more
|
|
|
1
|
|
|
$
|
7,532
|
|
|
|
1
|
|
|
$
|
6,083
|
|
$2,500,000 - $4,999,999
|
|
|
4
|
|
|
|
11,926
|
|
|
|
3
|
|
|
|
10,259
|
|
$1,000,000 - $2,499,999
|
|
|
17
|
|
|
|
28,989
|
|
|
|
12
|
|
|
|
18,868
|
|
$500,000 - $999,999
|
|
|
21
|
|
|
|
14,640
|
|
|
|
20
|
|
|
|
14,758
|
|
$250,000 - $499,999
|
|
|
40
|
|
|
|
14,042
|
|
|
|
31
|
|
|
|
10,125
|
|
Under $250,000
|
|
|
175
|
|
|
|
14,115
|
|
|
|
133
|
|
|
|
11,291
|
|
|
|
Total
|
|
|
258
|
|
|
$
|
91,244
|
|
|
|
200
|
|
|
$
|
71,384
|
|
|
|
Nonperforming commercial loans of $20.7 million at
December 31, 2009 were up $2.7 million, or 15%, from
nonperforming commercial loans at December 31, 2008 of
$18.0 million. The nonperforming commercial loans at
December 31, 2009 were not concentrated in any single
industry and it is managements belief that the increase in
2009 was primarily reflective of the recessionary economic
conditions in Michigan.
Nonperforming real estate commercial loans of $53.4 million
at December 31, 2009 were up $16.1 million, or 43%,
from $37.3 million at December 31, 2008. At
December 31, 2009, the Corporations nonperforming
real estate commercial loan portfolio was comprised of
$29.8 million of loans secured by owner occupied real
estate, $14.7 million of loans secured by non-owner
occupied real estate and $8.9 million of loans secured by
vacant land, resulting in approximately 5% of owner occupied
real estate commercial loans, 9% of non-owner occupied real
estate commercial loans and 32% of vacant land loans in a
nonperforming status at December 31, 2009. At
December 31, 2009, the Corporations nonperforming
real estate commercial loans included a diverse mix of
commercial lines of business and were also geographically
disbursed throughout the Corporations market areas. The
largest concentration of the $53.4 million in nonperforming
real estate commercial loans at December 31, 2009 was one
customer relationship totaling $6.7 million that is secured
by a combination of vacant land and non-owner occupied
commercial real estate. This same customer relationship also has
$0.8 million in nonperforming real estate construction
loans (secured by residential real estate development). At
December 31, 2009, $7.5 million of the nonperforming
real estate commercial loans were in various stages of
foreclosure with 43 borrowers. The Michigan economy remains
weak, thus creating a difficult business environment for many
lines of business across the state.
Nonperforming real estate construction loans at
December 31, 2009 were $17.2 million, up
$1.1 million, or 6.9%, from $16.1 million at
December 31, 2008. At December 31, 2009,
$14.4 million, or 84%, of nonperforming real estate
construction loans were secured by residential development real
estate comprised primarily of improved lots and housing units.
The $14.4 million of nonperforming loans secured by
residential real estate development projects represented 31% of
total residential real estate development loans outstanding of
$46.6 million at December 31, 2009. The economy in
Michigan has adversely impacted housing demand throughout the
state and, accordingly, the Corporation has experienced an
increase in the number of its residential real estate
development borrowers with cash flow difficulties associated
with a significant decline in sales of both lots and residential
real estate.
Nonperforming real estate residential loans, including loans
modified under troubled debt restructurings, were
$36.6 million at December 31, 2009, an increase of
$21.1 million, or 135%, from total nonperforming real
estate residential loans of $15.5 million at
December 31, 2008. The significant increase in
nonperforming real estate residential loans was attributable to
a rise in delinquencies, bankruptcies and foreclosures primarily
reflective of the elevated unemployment rate in the State of
Michigan. At December 31, 2009, a total of
$5.9 million of nonperforming real estate residential loans
were in various stages of foreclosure.
During 2009, the continuing recessionary economic climate in
Michigan resulted in an increasing number of customers with cash
flow difficulties and thus the inability to maintain their
residential mortgage loan balances in a performing status. The
Corporation determined that it was probable that certain
customers who were past due on their real estate residential
loans, if provided a reduction in their monthly payment for a
limited time period, would be able to bring their loan
relationship to a performing status and was deemed by the
Corporation to potentially result in a lower level of loan
losses and loan collection costs than if the Corporation
proceeded through the foreclosure process with these borrowers.
The Corporation began modifying real estate residential loans
during the second quarter of 2009. The majority of these
modifications consisted of reducing a borrowers monthly
payments by
19
decreasing the interest rate charged on the loan to 3% for a
period of 24 months. The outstanding loan balances of the
Corporations loans modified under troubled debt
restructurings were $17.4 million at December 31,
2009. Each of these modified loans was current in accordance
with their modified terms at December 31, 2009. Each of the
Corporations modified loans will remain in nonperforming
status until six consecutive months of payments have been
received under their modified term, at which time the modified
loans will be moved to performing status. Under GAAP, these
modified loans meet the definition of a troubled debt
restructuring and as a result, the Corporation recognized
$0.8 million of additional provision for loan losses during
2009 related to impairment on these loans based on the present
value of expected future cash flows discounted at the
loans original effective interest rate.
Nonperforming consumer loans were $8.0 million at
December 31, 2009, an increase of $1.6 million, or
24%, from total nonperforming consumer loans of
$6.4 million at December 31, 2008. The increase in
nonperforming consumer loans during 2009 was also primarily
reflective of the elevated unemployment rate in the State of
Michigan.
Other real estate and repossessed assets is a component of
nonperforming assets and primarily includes real property
acquired through foreclosure or by acceptance of a deed in lieu
of foreclosure, and also personal and commercial property held
for sale. Other real estate and repossessed assets totaled
$17.5 million at December 31, 2009, a decrease of
$2.4 million, or 12%, from $19.9 million at
December 31, 2008. The decrease in other real estate and
repossessed assets during 2009 was due to fair value write-downs
as sales activity was offset by additions of other real estate
and repossessed assets during the year.
The following schedule summarizes other real estate and
repossessed asset activity during 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December, 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
19,923
|
|
|
$
|
11,132
|
|
Additions
|
|
|
18,056
|
|
|
|
21,282
|
|
Capitalized improvements
|
|
|
264
|
|
|
|
214
|
|
Write-downs to fair value
|
|
|
(4,722
|
)
|
|
|
(3,186
|
)
|
Dispositions
|
|
|
(15,981
|
)
|
|
|
(9,519
|
)
|
|
|
Balance at end of year
|
|
$
|
17,540
|
|
|
$
|
19,923
|
|
|
|
The following schedule provides the composition of other real
estate and repossessed assets as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Other real estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,250
|
|
|
$
|
6,202
|
|
Commercial development
|
|
|
1,265
|
|
|
|
1,629
|
|
Residential real estate
|
|
|
7,483
|
|
|
|
6,960
|
|
Residential development
|
|
|
4,250
|
|
|
|
4,667
|
|
|
|
Total other real estate
|
|
|
17,248
|
|
|
|
19,458
|
|
Repossessed assets
|
|
|
292
|
|
|
|
465
|
|
|
|
Total other real estate and repossessed assets
|
|
$
|
17,540
|
|
|
$
|
19,923
|
|
|
|
At December 31, 2009, total other real estate of
$17.2 million was comprised of 49 commercial properties
totaling $4.2 million, commercial development properties
obtained from four developers totaling $1.3 million, 118
residential real estate properties totaling $7.5 million
and 19 residential development projects totaling
$4.2 million. The residential development projects were
primarily concentrated in five projects totaling
$3.1 million. The residential development projects are
unfinished in varying stages of completion. The largest
residential development project is a high-rise mixed use
condominium building with eleven unsold residential units and a
carrying value of $1.0 million at December 31, 2009.
Only one unit has been sold in this project and that unit was
sold in 2005. The carrying value at December 31, 2009 on
this high-rise mixed use condominium building of
$1.0 million was net of $2.0 million in fair value
write-downs since the project has been in other real estate,
including $0.8 million during 2009. Repossessed assets of
$0.3 million at December 31, 2009, were comprised of
commercial equipment, automobiles, boats and recreational
vehicles.
The historically large inventory of other real estate properties
held for sale across the State of Michigan has resulted in an
increase in the Corporations carrying time and cost of
holding other real estate. Consequently, the Corporation had
$8.5 million in other real estate properties at
December 31, 2009 that had been held in excess of one year
as of that date. Due to the redemption period on foreclosures
being relatively long in Michigan (six months to one year) and
the Corporation having a significant number of
20
nonperforming loans that were in the process of foreclosure at
December 31, 2009, management anticipates that the level of
other real estate and repossessed assets will likely remain
elevated for some period of time. Other real estate properties
are carried at the lower of cost or fair value less estimated
cost to sell.
At December 31, 2009, all of the other real estate
properties had been written down to fair value through a
combination of a loan charge-off at the transfer of the loan to
other real estate
and/or as a
write-down, recorded as an operating expense, to recognize the
further market value decline of the property after the initial
transfer date. At December 31, 2009, the carrying value of
other real estate of $17.2 million, was reflective of
$15.5 million in charge-offs/write-downs and represented
53% of the loan balance at the time the property was transferred
to other real estate.
During 2009, 138 pieces of other real estate properties were
sold with net proceeds from sales totaling $13.5 million.
On an average basis, the net proceeds from these sales
represented 60% of the loan balance at the time the Corporation
received title to the properties.
Impaired
Loans
A loan is considered impaired when management determines it is
probable that all of the principal and interest due will not be
collected according to the original contractual terms of the
loan agreement. The Corporation has determined that all of its
nonaccrual commercial, real estate commercial, real estate
construction-commercial loans and loans modified under troubled
debt restructurings meet the definition of an impaired loan. In
most instances, the impairment is measured based on the fair
market value of the underlying collateral. Impairment may also
be measured based on the present value of expected future cash
flows discounted at the loans effective interest rate. A
portion of the allowance for loan losses may be specifically
allocated to impaired loans.
Impaired loans were $101.3 million at December 31,
2009, compared to $59.0 million at December 31, 2008
and $45.9 million at December 31, 2007. The increase
in impaired loans during 2009 was primarily attributable to the
weak economy in the State of Michigan. After analyzing the
various components of the customer relationships and evaluating
the underlying collateral of impaired loans, it was determined
that impaired commercial, real estate commercial and real estate
construction-commercial
loans totaling $38.2 million at December 31, 2009
required a valuation allowance, compared to $30.3 million
of impaired loans at December 31, 2008 and
$22.2 million of impaired loans at December 31, 2007.
The valuation allowance on these impaired loans was
$10.5 million at December 31, 2009, compared to
$9.2 million at December 31, 2008 and
$4.6 million at December 31, 2007. At December 31,
2009, loans modified under troubled debt restructurings of $17.4
million also required a valuation allowance of $0.7 million.
The process of measuring impaired loans and the allocation of
the allowance for loan losses requires judgment and estimation.
The eventual outcome may differ from the estimates used on these
loans. A discussion of the allowance for loan losses is included
under the subheading, Provision and Allowance for Loan
Losses, below.
PROVISION
AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses (provision) is an increase to the
allowance for loan losses (allowance) to provide for probable
losses inherent in the loan portfolio. The allowance provides
for probable losses that have been identified with specific
customer relationships and for probable losses believed to be
inherent in the remainder of the loan portfolio but that have
not been specifically identified. The allowance is comprised of
specific allowances (assessed for loans that have known credit
weaknesses), pooled allowances based on assigned risk ratings
and historical loan loss experience for each loan type, and an
unallocated allowance for imprecision in the subjective nature
of the specific and pooled allowance methodology. Management
evaluates the allowance on a quarterly basis in an effort to
ensure the level is adequate to absorb probable losses inherent
in the loan portfolio. This evaluation process is inherently
subjective as it requires estimates that may be susceptible to
significant change and has the potential to affect net income
materially. The Corporations methodology for measuring the
adequacy of the allowance includes several key elements, which
includes a review of the loan portfolio, both individually and
by category, and includes consideration of changes in the mix
and volume of the loan portfolio, actual loan loss experience,
review of collateral values, the financial condition of the
borrowers, industry and geographical exposures within the
portfolio, economic conditions and employment levels of the
Corporations local markets and other factors affecting
business sectors. Management believes that the allowance for
loan losses is currently maintained at an appropriate level,
considering the inherent risk in the loan portfolio. Future
significant adjustments to the allowance may be necessary due to
changes in economic conditions, delinquencies or the level of
loan losses incurred. A summary of the activity in the allowance
for loan losses for the last five years is included in Table 6.
21
TABLE 6.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
$
|
34,098
|
|
|
$
|
34,148
|
|
|
$
|
34,166
|
|
Provision for loan losses
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
11,500
|
|
|
|
5,200
|
|
|
|
4,285
|
|
Loan charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(12,001
|
)
|
|
|
(16,787
|
)
|
|
|
(1,622
|
)
|
|
|
(1,389
|
)
|
|
|
(2,126
|
)
|
Real estate commercial
|
|
|
(9,231
|
)
|
|
|
(6,995
|
)
|
|
|
(1,675
|
)
|
|
|
(1,564
|
)
|
|
|
|
|
Real estate construction
|
|
|
(6,969
|
)
|
|
|
(2,963
|
)
|
|
|
(1,272
|
)
|
|
|
(1,201
|
)
|
|
|
|
|
Real estate residential
|
|
|
(3,694
|
)
|
|
|
(2,458
|
)
|
|
|
(484
|
)
|
|
|
(515
|
)
|
|
|
(453
|
)
|
Consumer
|
|
|
(6,791
|
)
|
|
|
(4,739
|
)
|
|
|
(1,935
|
)
|
|
|
(1,976
|
)
|
|
|
(2,407
|
)
|
|
|
Total loan charge-offs
|
|
|
(38,686
|
)
|
|
|
(33,942
|
)
|
|
|
(6,988
|
)
|
|
|
(6,645
|
)
|
|
|
(4,986
|
)
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
904
|
|
|
|
1,473
|
|
|
|
249
|
|
|
|
370
|
|
|
|
110
|
|
Real estate commercial
|
|
|
495
|
|
|
|
131
|
|
|
|
21
|
|
|
|
6
|
|
|
|
11
|
|
Real estate construction
|
|
|
307
|
|
|
|
29
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Real estate residential
|
|
|
614
|
|
|
|
160
|
|
|
|
18
|
|
|
|
98
|
|
|
|
29
|
|
Consumer
|
|
|
1,151
|
|
|
|
583
|
|
|
|
494
|
|
|
|
521
|
|
|
|
533
|
|
|
|
Total loan recoveries
|
|
|
3,471
|
|
|
|
2,376
|
|
|
|
812
|
|
|
|
995
|
|
|
|
683
|
|
|
|
Net loan charge-offs
|
|
|
(35,215
|
)
|
|
|
(31,566
|
)
|
|
|
(6,176
|
)
|
|
|
(5,650
|
)
|
|
|
(4,303
|
)
|
Allowance of branches acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
$
|
34,098
|
|
|
$
|
34,148
|
|
|
|
Net loan charge-offs during the year as a percentage of average
loans outstanding during the year
|
|
|
1.18
|
%
|
|
|
1.10
|
%
|
|
|
0.22
|
%
|
|
|
0.20
|
%
|
|
|
0.16
|
%
|
|
|
Allowance for loan losses as a percentage of total loans
outstanding at end of year
|
|
|
2.70
|
%
|
|
|
1.91
|
%
|
|
|
1.41
|
%
|
|
|
1.21
|
%
|
|
|
1.26
|
%
|
|
|
Allowance for loan losses as a percentage of nonperforming loans
outstanding at end of year
|
|
|
60
|
%
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
127
|
%
|
|
|
173
|
%
|
|
|
The provision for loan losses was $59.0 million in 2009,
$49.2 million in 2008 and $11.5 million in 2007. The
Corporation experienced net loan charge-offs of
$35.2 million in 2009, $31.6 million in 2008 and
$6.2 million in 2007. Net loan charge-offs in 2008 included
$10.3 million attributable to the identification of a
fraudulent loan transaction related to a single borrower for
which the Corporation recovered $1.2 million in 2008 and
$0.3 million in 2009 through the sale of collateral
securing the loan. Net loan charge-offs as a percentage of
average loans were 1.18% in 2009, 1.10% in 2008 and 0.22% in
2007. The level of net loan charge-offs reflects the general
deterioration in credit quality across the entire loan
portfolio. Net loan charge-offs of commercial, real estate
commercial and real estate construction loans totaled
$26.5 million in 2009 and represented 75% of total net loan
charge-offs during the year, compared to 80% and 69% of total
net loan charge-offs in 2008 and 2007, respectively. The
commercial loan type net loan charge-offs in 2009 were not
concentrated in any one industry or borrower. The level of the
provision each year reflects managements assessment of the
adequacy of the allowance.
The Corporations provision for loan losses in 2009 of
$59.0 million was $23.8 million higher than net loan
charge-offs in 2009 and $9.8 million higher than the
provision for loan losses in 2008. The level of the provision in
2009 was primarily reflective of continued credit deterioration
during the year that was driven by higher net loan charge-offs,
increases in nonperforming loans and loan delinquencies and
adverse changes in certain risk grade categories of the
commercial, real estate commercial and real estate construction
loan portfolios. The increase in net loan charge-offs was
impacted by declining real estate values within the State of
Michigan during 2009, as evidenced by both lower appraised
values of real estate and lower sales prices of real estate. It
is managements belief that the overall credit
deterioration in the Corporations loan portfolio during
2009 was largely reflective of the economic environment in the
State of Michigan, as the unemployment rate increased throughout
the year to 14.6% at December 31, 2009. The
Corporations loan portfolio had no concentration in the
automotive sector and management has identified its direct
exposure to this industry as not material, although the economic
impact of the depressed automotive sector affected the general
economy within Michigan during 2008 and 2009. It has been
publicized nationally that the residential real estate
development industry was one of the industries most affected by
the recessionary economy during 2008 and 2009 and, accordingly,
the Corporation experienced $6.4 million of net loan
charge-offs on residential real estate development loans in 2009
and $5.4 million in 2008. In addition, the
Corporations loan portfolio at December 31, 2009
included 22 residential real estate developers with outstanding
loan balances totaling $14.4 million that were experiencing
significant cash flow difficulties and resulted in these loan
relationships being classified as nonperforming at that date. At
December 31, 2009, management evaluated the underlying
collateral
22
value of the $14.4 million in impaired residential real
estate development loans and determined a valuation allowance of
$0.6 million was required on $4.0 million of these
loans, as the fair value of the underlying collateral was
assessed to be less than the carrying value of the loans.
Impaired residential real estate development loans at
December 31, 2009 of $14.4 million were largely
concentrated in loans to five developers having individual loan
balances exceeding $1 million that totaled
$8.1 million, or 57%, of total impaired residential real
estate development loans at that date.
In determining the allowance for loan losses and the related
provision for loan losses, the Corporation considers four
principal elements: (i) valuation allowances based upon
probable losses identified during the review of impaired
commercial, real estate commercial and real estate
construction-commercial loan portfolios, (ii) allocations
established for adversely-rated commercial, real estate
commercial and real estate construction-commercial loans and
nonaccrual real estate residential and nonaccrual consumer
loans, (iii) allocations on all other loans based
principally on the most recent three years of historical loan
loss experience and loan loss trends, and (iv) an
unallocated allowance based on the imprecision in the overall
allowance methodology.
The first element reflects the Corporations estimate of
probable losses based upon the systematic review of impaired
commercial, real estate commercial and real estate
construction-commercial impaired loans. These estimates are
based upon a number of objective factors, such as payment
history, financial condition of the borrower and discounted
collateral exposure. The Corporation measures the investment in
an impaired loan based on one of three methods: the loans
observable market price, the fair value of the collateral or the
present value of expected future cash flows discounted at the
loans effective interest rate. At December 31, 2009,
all of the Corporations impaired loans to commercial
borrowers were valued based on the fair value of the collateral
securing the loan. It is the Corporations general policy
to, at least annually, obtain new appraisals on impaired loans
that are primarily secured by real estate. At December 31,
2009, the Corporation had a current appraisal on approximately
90% of impaired loans, with 60% of these appraisals being
performed during the second half of 2009. When the Corporation
determines that the fair value of the collateral is less than
the carrying value of an impaired loan and a portion is deemed
not collectible, the portion of the impairment that is deemed
not collectible is charged-off and deducted from the allowance.
The remaining carrying value of the impaired loan is classified
as a nonperforming loan. When the Corporation determines that
the fair value of the collateral is less than the carrying value
of an impaired loan but believes it is probable it will recover
this impairment, the Corporation establishes a valuation
allowance for such impairment.
The second element reflects the application of the
Corporations loan grading system. This grading system is
similar to those employed by state and federal banking
regulators. Commercial, real estate commercial and real estate
construction-commercial loans that are risk rated below a
certain predetermined risk grade and nonaccrual real estate
residential and nonaccrual consumer loans are assigned a loss
allocation factor that is based upon a historical analysis of
losses incurred within the specific risk grade category and a
valuation of the type of collateral securing the loans.
The third element is determined by assigning allocations based
principally upon the three-year average of loss experience for
each type of loan. Average losses may be adjusted based on
current loan loss experience and delinquency trends. This
component considers the lagging impact of historical charge-off
ratios in periods where future loan charge-offs are expected to
increase or decrease, trends in delinquencies and nonaccrual
loans, the changing portfolio mix in terms of collateral,
average loan balance, loan growth and the degree of seasoning in
the various loan portfolios. Loan loss analyses are performed
quarterly.
The fourth element is based on factors that cannot be associated
with a specific credit or loan category and reflects an attempt
to ensure that the overall allowance appropriately reflects a
margin for the imprecision necessarily inherent in the estimates
of expected loan losses. Management maintains an unallocated
allowance to recognize the uncertainty and imprecision
underlying the process of estimating projected loan losses.
Determination of the probable losses inherent in the portfolio,
which are not necessarily captured by the allocation methodology
discussed above, involves the exercise of judgment. The
unallocated allowance associated with the imprecision in the
risk rating system is based on a historical evaluation of the
accuracy of the risk ratings associated with loans. This
unallocated portion of the allowance is judgmentally determined
and generally serves to compensate for the uncertainty in
estimating losses, particularly in times of changing economic
conditions, and also considers the possibility of improper risk
ratings. The unallocated portion of the allowance also takes
into consideration economic conditions within the State of
Michigan and nationwide, including unemployment levels,
industry-wide loan delinquency rates, and declining commercial
and residential real estate values and historically high
inventory levels of residential lots, condominiums and single
family houses held for sale.
The allocation of the allowance for loan losses in Table 7 is
based upon ranges of estimates and is not intended to imply
either limitations on the usage of the allowance or exactness of
the specific amounts. The entire allowance is available to
absorb future loan losses without regard to the categories in
which the loan losses are classified. The allocation of the
allowance is based upon a combination of factors, including
historical loss factors, credit-risk grading, past-due
experiences, and the trends in these, as well as other factors,
as discussed above.
23
TABLE 7.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
|
Allowance
|
|
|
to Total
|
|
Loan Type
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Commercial
|
|
$
|
19.1
|
|
|
|
20
|
%
|
|
$
|
12.3
|
|
|
|
20
|
%
|
|
$
|
9.7
|
|
|
|
19
|
%
|
|
$
|
8.9
|
|
|
|
19
|
%
|
|
$
|
9.0
|
|
|
|
19
|
%
|
Real estate commercial
|
|
|
23.9
|
|
|
|
26
|
|
|
|
20.3
|
|
|
|
26
|
|
|
|
12.8
|
|
|
|
27
|
|
|
|
11.4
|
|
|
|
26
|
|
|
|
11.6
|
|
|
|
26
|
|
Real estate construction
|
|
|
5.7
|
|
|
|
4
|
|
|
|
3.8
|
|
|
|
4
|
|
|
|
3.0
|
|
|
|
5
|
|
|
|
1.8
|
|
|
|
5
|
|
|
|
1.8
|
|
|
|
6
|
|
Real estate residential
|
|
|
13.1
|
|
|
|
25
|
|
|
|
8.0
|
|
|
|
28
|
|
|
|
5.5
|
|
|
|
30
|
|
|
|
3.6
|
|
|
|
30
|
|
|
|
3.6
|
|
|
|
29
|
|
Consumer
|
|
|
17.3
|
|
|
|
25
|
|
|
|
10.9
|
|
|
|
22
|
|
|
|
6.6
|
|
|
|
19
|
|
|
|
6.8
|
|
|
|
20
|
|
|
|
6.7
|
|
|
|
20
|
|
Unallocated
|
|
|
1.7
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
Total
|
|
$
|
80.8
|
|
|
|
100
|
%
|
|
$
|
57.1
|
|
|
|
100
|
%
|
|
$
|
39.4
|
|
|
|
100
|
%
|
|
$
|
34.1
|
|
|
|
100
|
%
|
|
$
|
34.1
|
|
|
|
100
|
%
|
|
|
The Corporations allowance was $80.8 million at
December 31, 2009 and represented 2.70% of total loans,
compared to $57.1 million, or 1.91% of total loans, at
December 31, 2008 and $39.4 million, or 1.41% of total
loans, at December 31, 2007. The allowance as a percentage
of nonperforming loans was 60% at December 31, 2009,
compared to 61% at December 31, 2008 and 62% at
December 31, 2007.
The Corporations valuation allowance for impaired
commercial, real estate commercial and real estate
construction-commercial loans increased $1.3 million to
$10.5 million at December 31, 2009 from
$9.2 million at December 31, 2008. The increase in the
valuation allowance is reflective of the increase in impaired
loans during 2009. Additionally, at December 31,2009, the
Corporation had a $0.7 million valuation allowance attributable
to loans modified under troubled debt restructurings. Impaired
loans were $101.3 million, including $17.4 million of
real estate residential loans modified under troubled debt
restructurings, at December 31, 2009, up
$42.3 million, or 72%, from $59.0 million at
December 31, 2008.
The following schedule summarizes impaired loans to commercial
borrowers and the related valuation allowance as of
December 31, 2009 and 2008 and partial loan charge-offs
taken on these impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
Charged
|
|
|
Cumulative
|
|
|
|
Amount
|
|
|
Allowance
|
|
|
Off
|
|
|
Loss Percentage
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with valuation allowance and no charge-offs
|
|
$
|
33,052
|
|
|
$
|
10,036
|
|
|
$
|
|
|
|
|
30
|
%
|
Impaired loans with valuation allowance and charge-offs
|
|
|
5,165
|
|
|
|
471
|
|
|
|
908
|
|
|
|
23
|
%
|
Impaired loans with charge-offs and no valuation allowance
|
|
|
20,800
|
|
|
|
|
|
|
|
17,084
|
|
|
|
45
|
%
|
Impaired loans without valuation allowance or charge-offs
|
|
|
24,895
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
Total impaired (nonaccrual) loans to commercial borrowers
|
|
$
|
83,912
|
|
|
$
|
10,507
|
|
|
$
|
17,992
|
|
|
|
28
|
%
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with valuation allowance and no charge-offs
|
|
$
|
25,774
|
|
|
$
|
8,459
|
|
|
$
|
|
|
|
|
33
|
%
|
Impaired loans with valuation allowance and charge-offs
|
|
|
4,532
|
|
|
|
720
|
|
|
|
1,125
|
|
|
|
33
|
%
|
Impaired loans with charge-offs and no valuation allowance
|
|
|
15,216
|
|
|
|
|
|
|
|
10,078
|
|
|
|
40
|
%
|
Impaired loans without valuation allowance or charge-offs
|
|
|
13,456
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
Total impaired (nonaccrual) loans to commercial borrowers
|
|
$
|
58,978
|
|
|
$
|
9,179
|
|
|
$
|
11,203
|
|
|
|
29
|
%
|
|
|
The following schedule summarizes the allowance as a percentage
of nonperforming loans at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Allowance for loan losses
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
Nonperforming loans
|
|
|
135,755
|
|
|
|
93,328
|
|
Allowance as a percent of nonperforming loans
|
|
|
60
|
%
|
|
|
61
|
%
|
Allowance as a percent of nonperforming loans, net of impaired
loans for which the full loss has been charged-off
|
|
|
70
|
%
|
|
|
73
|
%
|
|
|
24
At December 31, 2009 and 2008, impaired loans of
$33.1 million and $25.8 million, respectively, had a
valuation allowance of $10.0 million and $8.5 million,
respectively, at these dates. The valuation allowance as a
percentage of the impaired loan balances at December 31,
2009 and 2008 represented a cumulative loss percentage on these
loans at these dates of 30% and 33%, respectively.
Additionally, impaired loans of $5.2 million and
$4.5 million at December 31, 2009 and 2008,
respectively, that had been partially charged off
$0.9 million and $1.1 million, respectively, had a
valuation allowance of $0.5 million and $0.7 million,
respectively, at these dates. The combination of the partial
loan charge-off amounts and the valuation allowance as a
percentage of the impaired loan balances prior to the partial
charge-off amounts represented a cumulative loss percentage on
these loans at December 31, 2009 and 2008 of 23% and 33%,
respectively.
Further, at December 31, 2009 and 2008, the Corporation,
after individually reviewing its impaired loans to commercial
borrowers determined $45.7 million and $28.7 million,
respectively, of impaired loans were deemed to have sufficient
collateral values so as to not require a valuation allowance,
due in part to significant write-downs on a portion of these
loans. At December 31, 2009, the Corporation had
$20.8 million of impaired loans with no valuation allowance
as a result of these loans being partially charged off in the
amount of $17.1 million, primarily as a result of declining
real estate values, with $14.3 million of charge-offs
occurring in 2009 and $2.8 million of charge-offs occurring
in 2008. The partial charge-offs of $17.1 million on these
loans represented a cumulative loss percentage of 45% based on
the total outstanding loan balances of these loans prior to the
charged off amounts. At December 31, 2008, the Corporation
had $15.2 million of impaired loans with no valuation
allowance, as a result of these loans being partially charged
off $10.1 million as of that date, with $8.9 million
of charge-offs occurring in 2008 and $1.2 million occurring
in 2007. The partial charge-offs of $10.1 million on these
loans represented a cumulative loss percentage of 40% based on
the total outstanding loan balances of these loans prior to the
charged off amounts. At December 31, 2009 and 2008, the
Corporation had impaired loans totaling $24.9 million and
$13.5 million, respectively, for which the Corporation
determined the fair value of the underlying collateral securing
the loan exceeded the contractual loan balance and, therefore, a
valuation allowance was not required for these loans. These
impaired loans had no partial charge-offs.
The process of measuring the fair value of impaired loans and
the allocation of the allowance for loan losses requires
judgment and estimation; therefore, the eventual outcome may
differ from the estimates used on these loans. Continued severe
economic conditions
and/or
declining property values could result in higher loan losses,
which could result in the need for a higher allowance for loan
losses. Economic conditions in the Corporations markets,
all within Michigan, were generally less favorable than those
nationwide during 2009. Forward-looking indicators suggest these
unfavorable economic conditions will continue in 2010.
Accordingly, management believes net loan losses, delinquencies
and nonperforming loans will remain at elevated levels during
2010.
The underlying credit quality of the Corporations real
estate residential and consumer loan portfolios is dependent
primarily on each borrowers ability to continue to make
required loan payments and, in the event a borrower is unable to
continue to do so, the value of the collateral, if any, securing
the loan. The continued declines in real estate values
nationally, and particularly in Michigan, have resulted in lower
fair values of collateral securing real estate residential
loans. A borrowers ability to pay typically is dependent
primarily on employment and other sources of income, which in
turn is impacted by general economic conditions, although other
factors may also impact a borrowers ability to pay. During
2009, the unemployment rate in the State of Michigan increased
to 14.6% at December 31, 2009 from 10.2% at
December 31, 2008. Consequently, the Corporation
experienced increases in nonperforming real estate residential
and consumer loans and higher real estate residential and
consumer loan losses in 2009 than in 2008. Net loan losses on
real estate residential loans in 2009 were $3.1 million, or
39 basis points of average real estate residential loans
outstanding during 2009, compared to net loan losses in 2008 of
$2.3 million, or 28 basis points of average real
estate residential loans outstanding during 2008. Net loan
losses on consumer loans in 2009 were $5.6 million, or
77 basis points of average consumer loans outstanding
during 2009, compared to net loan losses in 2008 of
$4.2 million, or 71 basis points of average consumer
loans outstanding during 2008.
DEPOSITS
Total deposits at December 31, 2009 were
$3.42 billion, an increase of $439.3 million, or
14.7%, from total deposits at December 31, 2008 of
$2.98 billion. Total deposits increased
$103.2 million, or 3.6%, during 2008. The increase in total
deposits in 2009 was primarily attributable to growth in
consumer time deposits, municipal customer account balances and
business money market accounts.
The Corporations average deposit balances and average
rates paid on deposits for the past three years are included in
Table 9 under the subheading Net Interest Income.
Average total deposits in 2009 were $3.20 billion, an
increase of $271.1 million, or 9.3%, over average deposits
in 2008. Average total deposits in 2008 were $2.92 billion,
an increase of $1.4 million, or less than 1%, over average
deposits in 2007. There was no significant change in the mix of
average deposits during 2009 or 2008, nor did the Corporation
have any brokered deposits as of December 31, 2009, 2008 or
2007.
25
It is the Corporations strategy to develop customer
relationships that will drive core deposit growth and stability.
While competition for core deposits remained strong throughout
the Corporations markets, the Corporations increased
efforts to expand its deposit relationships with existing
customers and the Corporations financial strength resulted
in the Corporation experiencing a historically high increase in
deposits during 2009 in both amount and percentage.
The growth of the Corporations deposits can be impacted by
competition from other investment products, such as mutual funds
and various annuity products. These investment products are sold
by a wide spectrum of organizations, such as brokerage and
insurance companies, as well as by financial institutions. The
Corporation also competes with credit unions in most of its
markets. These institutions are challenging competitors, as
credit unions are exempt from federal income taxes, allowing
them to potentially offer higher deposit rates and lower loan
rates to customers.
In response to the competition for other investment products,
Chemical Bank, through its CFC Investment Center program, offers
a wide array of mutual funds, annuity products and marketable
securities through an alliance with an independent, registered
broker/dealer. During 2009 and 2008, customers purchased
$110 million and $106 million, respectively, of
annuity products, mutual fund and other investments through the
CFC Investment Center program.
Table 8 presents the maturity distribution of time deposits of
$100,000 or more at the end of each of the last three years.
Time deposits of $100,000 or more increased $73.0 million,
or 21.7%, during 2009 to $409.0 million at
December 31, 2009 and increased $38.0 million, or
12.8%, during 2008 to $336.0 million at December 31,
2008. Time deposits of $100,000 or more represented 12.0%, 11.3%
and 10.4% of total deposits at December 31, 2009, 2008 and
2007, respectively.
TABLE 8.
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR
MORE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 3 months
|
|
$
|
128,661
|
|
|
|
31
|
%
|
|
$
|
156,577
|
|
|
|
47
|
%
|
|
$
|
129,801
|
|
|
|
44
|
%
|
After 3 but within 6 months
|
|
|
80,491
|
|
|
|
20
|
|
|
|
48,511
|
|
|
|
14
|
|
|
|
50,191
|
|
|
|
17
|
|
After 6 but within 12 months
|
|
|
111,296
|
|
|
|
27
|
|
|
|
58,134
|
|
|
|
17
|
|
|
|
68,308
|
|
|
|
23
|
|
After 12 months
|
|
|
88,507
|
|
|
|
22
|
|
|
|
72,736
|
|
|
|
22
|
|
|
|
49,636
|
|
|
|
16
|
|
|
|
Total
|
|
$
|
408,955
|
|
|
|
100
|
%
|
|
$
|
335,958
|
|
|
|
100
|
%
|
|
$
|
297,936
|
|
|
|
100
|
%
|
|
|
BORROWED
FUNDS
Borrowed funds include short-term borrowings and long-term FHLB
advances. Short-term borrowings are comprised of securities sold
under agreements to repurchase with customers and short-term
FHLB advances that have original maturities of one year or less.
Securities sold under agreements to repurchase are funds
deposited by customers that were exchanged for investment
securities that are owned by Chemical Bank, as these deposits
are not covered by FDIC insurance. These funds have been a
stable source of liquidity for Chemical Bank, much like its core
deposit base. Short-term FHLB advances are generally used to
fund short-term liquidity needs. FHLB advances, both short-term
and long-term, are secured under a blanket security agreement of
real estate residential first lien loans with an aggregate book
value equal to at least 155% of the advances and FHLB stock
owned by the Corporation. Short-term borrowings are highly
interest rate sensitive. Total short-term borrowings were
$240.6 million at December 31, 2009,
$233.7 million at December 31, 2008 and
$197.4 million at December 31, 2007 and were comprised
solely of securities sold under agreements to repurchase at
these dates. A summary of short-term borrowings for 2009, 2008
and 2007 is included in Note 9 to the consolidated
financial statements.
Long-term borrowings, comprised solely of FHLB advances, were
$90 million at December 31, 2009 and $135 million
at December 31, 2008. Long-term FHLB advances are
borrowings that are generally used to fund loans and a portion
of the investment securities portfolio. At December 31,
2009, long-term FHLB advances that will mature in 2010 totaled
$40 million. A summary of FHLB advances outstanding at
December 31, 2009 and 2008 is included in Note 10 to
the consolidated financial statements.
26
CONTRACTUAL
OBLIGATIONS AND LOAN COMMITMENTS
The Corporation has various financial obligations, including
contractual obligations and commitments, which may require
future cash payments. The following contractual obligations
schedule summarizes the Corporations noncancelable
contractual obligations and future required minimum payments at
December 31, 2009. Refer to Notes 8, 9, 10 and 18 to
the consolidated financial statements for a further discussion
of these contractual obligations.
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Minimum Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Total
|
|
|
|
|
|
(In thousands)
|
|
|
Deposits with no stated maturity*
|
|
$
|
2,131,082
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,131,082
|
|
Certificates of deposit with a stated maturity*
|
|
|
962,797
|
|
|
|
243,862
|
|
|
|
37,368
|
|
|
|
43,016
|
|
|
|
1,287,043
|
|
Short-term borrowings*
|
|
|
240,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,568
|
|
FHLB advances long-term*
|
|
|
40,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
90,000
|
|
Commitment to fund a low income housing partnership
|
|
|
223
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
Commitment to fund a private equity capital investment
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
970
|
|
Operating leases and noncancelable contracts
|
|
|
7,373
|
|
|
|
7,586
|
|
|
|
984
|
|
|
|
37
|
|
|
|
15,980
|
|
|
|
Total contractual obligations
|
|
$
|
3,383,013
|
|
|
$
|
276,575
|
|
|
$
|
63,352
|
|
|
$
|
43,053
|
|
|
$
|
3,765,993
|
|
|
|
|
|
|
*
|
|
Deposits and borrowings exclude
accrued interest.
|
The Corporation also has loan commitments that may impact
liquidity. The following schedule summarizes the
Corporations loan commitments and expiration dates by
period at December 31, 2009. Since many of these
commitments historically have expired without being drawn upon,
the total amount of these commitments does not necessarily
represent future cash requirements of the Corporation. Refer to
Note 18 to the consolidated financial statements for a
further discussion of these obligations.
Loan
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Expiration Dates by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit
|
|
$
|
276,459
|
|
|
$
|
49,969
|
|
|
$
|
60,323
|
|
|
$
|
26,170
|
|
|
$
|
412,921
|
|
Undisbursed loans
|
|
|
74,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,888
|
|
Standby letters of credit
|
|
|
31,837
|
|
|
|
4,507
|
|
|
|
5,072
|
|
|
|
25
|
|
|
|
41,441
|
|
|
|
Total loan commitments
|
|
$
|
383,184
|
|
|
$
|
54,476
|
|
|
$
|
65,395
|
|
|
$
|
26,195
|
|
|
$
|
529,250
|
|
|
|
CASH
DIVIDENDS
The Corporations annual cash dividends paid per common
share over the past five years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
Annual Cash Dividend (per common share)
|
|
$
|
1.18
|
|
|
$
|
1.18
|
|
|
$
|
1.14
|
|
|
$
|
1.10
|
|
|
$
|
1.06
|
|
The Corporation has paid regular cash dividends every quarter
since it began operating as a bank holding company in 1973. The
compound annual growth rate of the Corporations cash
dividends paid per common share over the past five-and ten-year
periods ended December 31, 2009 was 3.2% and 5.5%,
respectively. The earnings of Chemical Bank have been the
principal source of funds to pay cash dividends to shareholders.
Over the long-term, cash dividends to shareholders are dependent
upon earnings, as well as capital requirements, regulatory
restraints and other factors affecting Chemical Bank. Due to the
strength of the Corporations capital position, the
Corporation has the financial ability to continue to pay cash
dividends to shareholders in excess of the current earnings
27
of Chemical Bank. The length of time the Corporation can sustain
cash dividends to shareholders in excess of the current earnings
of Chemical Bank is dependent on the magnitude of any earnings
shortfall, the capital levels of both Chemical Bank and the
Corporation and regulatory approval. As of December 31,
2009, Chemical Bank could not pay additional dividends to the
Corporation without approval from the Board of Governors of the
Federal Reserve System (Federal Reserve), as dividends paid
during 2008 exceeded net income of Chemical Bank in 2008 and
2009, combined.
CAPITAL
Capital supports current operations and provides the foundation
for future growth and expansion. Total shareholders equity
was $474.3 million at December 31, 2009, a decrease of
$17.2 million, or 3.5%, from total shareholders
equity of $491.5 million at December 31, 2008. The
decrease in shareholders equity in 2009 was attributable
to cash dividends paid to shareholders exceeding net income by
$18.2 million. Book value per common share at
December 31, 2009 and 2008 was $19.85 and $20.58,
respectively.
Shareholders equity decreased $16.9 million in 2008
with $8.3 million of the decrease attributable to cash
dividends paid to shareholders exceeding net income of the
Corporation. Shareholders equity decreased another
$11.0 million in 2008 attributable to a net increase in
accumulated other comprehensive loss, a component of
shareholders equity. The increase in accumulated other
comprehensive loss was primarily due to a decline in the fair
value of pension plan assets. See Notes 1 and 15 to the
consolidated financial statements for more information regarding
accumulated other comprehensive loss.
The ratio of shareholders equity to total assets was 11.2%
at December 31, 2009, compared to 12.7% at
December 31, 2008 and 13.5% at December 31, 2007. The
Corporations tangible equity to assets ratio was 9.6%,
11.0% and 11.7% at December 31, 2009, 2008 and 2007,
respectively.
Under the regulatory risk-based capital guidelines
in effect for both banks and bank holding companies, minimum
capital levels are based upon perceived risk in the
Corporations various asset categories. These guidelines
assign risk weights to on- and off-balance sheet items in
arriving at total risk-adjusted assets. Regulatory capital is
divided by the computed total of risk-adjusted assets to arrive
at the risk-based capital ratios.
The Corporation continues to maintain a strong capital position
which significantly exceeded the minimum levels prescribed by
the Federal Reserve at December 31, 2009, as shown in the
following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Risk-Based
|
|
|
|
Leverage
|
|
|
Capital Ratios
|
|
|
|
Ratio
|
|
|
Tier 1
|
|
|
Total
|
|
|
|
|
Chemical Financial Corporations capital ratios
|
|
|
10.1
|
%
|
|
|
14.2
|
%
|
|
|
15.5
|
%
|
Regulatory capital ratios minimum requirements
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
8.0
|
|
As of December 31, 2009, the Corporations and
Chemical Banks capital ratios exceeded the minimum
required for an institution to be categorized as
well-capitalized, as defined by applicable
regulatory requirements. See Note 19 to the consolidated
financial statements for more information regarding the
Corporations and Chemical Banks regulatory capital
ratios.
From time to time, the board of directors of the Corporation
approves common stock repurchase programs allowing management to
repurchase shares of the Corporations common stock in the
open market. The repurchased shares are available for later
reissuance in connection with potential future stock dividends,
the Corporations dividend reinvestment plan, employee
benefit plans and other general corporate purposes. Under these
programs, the timing and actual number of shares subject to
repurchase are at the discretion of management and are
contingent on a number of factors, including the projected
parent company cash flow requirements and the Corporations
share price.
During 2007, the board of directors of the Corporation
authorized management to repurchase 1,000,000 shares of the
Corporations common stock under a stock repurchase program
and accordingly, during 2007, 1,023,000 shares, including
23,000 shares from a previous authorization, were
repurchased under the Corporations repurchase programs for
an aggregate purchase price of $25.5 million. In January
2008, the board of directors of the Corporation authorized
management to repurchase up to 500,000 shares of the
Corporations common stock under a stock repurchase
program. Since the January 2008 authorization, no shares have
been repurchased. At December 31, 2009, there were 500,000
remaining shares available for repurchase under the
Corporations stock repurchase programs.
28
All repurchases during 2007 were made in compliance with
Rule 10b-18
under the Securities Exchange Act of 1934, as amended, which
provides a safe harbor for purchases in a given day if an issuer
of equity securities satisfies the manner, timing, price and
volume conditions of the rule when purchasing its own common
shares in the open market.
During 2008 and 2007, 38,416 shares and 9,017 shares,
respectively, of the Corporations common stock were
delivered or attested in satisfaction of the exercise price
and/or tax
withholding obligations by holders of employee stock options.
The Corporations stock compensation plans permit employees
to use stock to satisfy such obligations based on the market
value of the stock on the date of exercise. There was no such
activity during 2009.
NET
INTEREST INCOME
Interest income is the total amount earned on funds invested in
loans, investment and other securities, federal funds sold and
other interest-bearing deposits with unaffiliated banks and
others. Interest expense is the amount of interest paid on
interest-bearing checking and savings accounts, time deposits,
short-term borrowings and FHLB advances. Net interest income, on
a fully taxable equivalent (FTE) basis, is the difference
between interest income and interest expense adjusted for the
tax benefit received on tax-exempt commercial loans and
investment securities. Net interest margin is calculated by
dividing net interest income (FTE) by average interest-earning
assets. Net interest spread is the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Because noninterest-bearing
sources of funds, or free funds (principally demand deposits and
shareholders equity), also support earning assets, the net
interest margin exceeds the net interest spread.
The presentation of net interest income on a FTE basis is not in
accordance with GAAP but is customary in the banking industry.
This non-GAAP measure ensures comparability of net interest
income arising from both taxable and tax-exempt loans and
investment securities. The adjustments to determine tax
equivalent net interest income were $2.90 million,
$2.37 million and $2.25 million for 2009, 2008 and
2007, respectively. These adjustments were computed using a 35%
federal income tax rate.
Net interest income is the most important source of the
Corporations earnings and thus is critical in evaluating
the results of operations. Changes in the Corporations net
interest income are influenced by a variety of factors,
including changes in the level and mix of interest-earning
assets and interest-bearing liabilities, the level and direction
of interest rates, the difference between short-term and
long-term interest rates (the steepness of the yield curve) and
the general strength of the economies in the Corporations
markets. Risk management plays an important role in the
Corporations level of net interest income. The ineffective
management of credit risk, and more significantly interest rate
risk, can adversely impact the Corporations net interest
income. Management monitors the Corporations consolidated
statement of financial position to reduce the potential adverse
impact on net interest income caused by significant changes in
interest rates. The Corporations policies in this regard
are further discussed under the subheading Market
Risk.
The Federal Reserve influences the general market rates of
interest, including the deposit and loan rates offered by many
financial institutions. The prime interest rate, which is the
rate offered on loans to borrowers with strong credit, began
2008 at 7.25% and decreased 200 basis points in the first
quarter of 2008, 25 basis points in the third quarter of
2008 and 175 basis points in the fourth quarter of 2008 to
end the year at 3.25%. During 2009, the prime interest rate
remained at 3.25% for the entire period. The intended federal
funds rate has moved in a similar manner to the prime interest
rate. The federal funds rates began 2008 at 4.25% and decreased
200 basis points in the first quarter of 2008,
25 basis points in the third quarter of 2008 and 175 to
200 basis points in the fourth quarter of 2008 to end the
year at zero to 0.25%. During 2009, the intended federal funds
rates remained at zero to 0.25% for the entire period.
Net interest income (FTE) in 2009, 2008 and 2007 was
$150.3 million, $147.6 million and
$132.3 million, respectively. Net interest income (FTE) in
2009 was $2.7 million, or 1.8%, higher than net interest
income (FTE) of $147.6 million in 2008. The increase in net
interest income (FTE) in 2009 primarily resulted from an
increase in the average volume of interest-earning assets,
particularly in investments and loans, that was partially offset
by a decrease in net interest margin. The average volume of
interest-earning assets in 2009 increased $296.4 million,
or 8.3%, compared to 2008. Over the same time frame, net
interest margin decreased 25 basis points from 4.16% in
2008 to 3.91% in 2009. The decline in net interest margin of
25 basis points during 2009, compared to 2008, was
partially attributable to the Corporations decision to
maintain a higher level of liquidity coupled with a significant
increase in nonaccrual loans during 2009. The average yield on
interest-earning assets decreased 84 basis points to 5.09%
in 2009, from 5.93% in 2008. The average cost of
interest-bearing liabilities decreased 82 basis points to
1.51% in 2009, from 2.33% in 2008. The decreases in the yield on
interest-earning assets and the cost of interest-bearing
liabilities were primarily attributable to the lag effect of the
decline in market interest rates during 2008. The yield on the
loan portfolio and net interest margin were also slightly
adversely impacted in 2009 by an increase in nonaccrual loans of
$30.1 million, or 39.4%, during the year to
$106.6 million at December 31, 2009.
29
Net interest income (FTE) of $147.6 million in 2008 was
$15.3 million, or 11.5%, higher than net interest income
(FTE) of $132.3 million in 2007. The increase in net
interest income (FTE) in 2008, compared to 2007, was primarily
attributable to the positive impact of lower short-term interest
rates reducing interest expense more than interest income and to
a lesser extent attributable to the growth in loans. Net
interest margin was 4.16% in 2008, compared to 3.73% in 2007.
The increase in net interest margin during 2008, compared to
2007, was primarily attributable to the decrease in the average
cost of interest-bearing liabilities significantly exceeding the
decrease in the average yield on interest-earning assets. During
2008, the average cost of interest-bearing liabilities decreased
119 basis points to 2.33% while the average yield on
interest-earning assets decreased 49 basis points to 5.93%.
The significant decrease in the cost of interest-bearing
liabilities was attributable to the overall decrease in
short-term market interest rates in 2008. The yield on the
Corporations loan portfolio decreased only 54 basis
points in 2008, compared to 2007, due to the loan portfolio
being comprised predominately of fixed interest rate loans or
loans with interest rates fixed for at least five years. The
increase in the net interest margin was also positively impacted
by an increase in average loans of $67.3 million, or 2.4%,
during 2008. The net interest margin was slightly adversely
impacted in 2008 due to an increase in nonaccrual loans of
$20.9 million, or 37.5%, during the year to
$76.5 million at December 31, 2008.
The Corporations balance sheet has historically been
liability sensitive, meaning that interest-bearing liabilities
generally repriced more quickly than interest-earning assets.
Therefore, the Corporations net interest margin has
historically increased in sustained periods of declining
interest rates and decreased in sustained periods of increasing
interest rates. This interest rate sensitivity position resulted
in a significant increase in net interest income in 2008, as
compared to 2007. The Corporation is primarily funded by core
deposits, and this lower-cost funding base has historically had
a positive impact on the Corporations net interest income
and net interest margin in a declining interest rate
environment. However, based on the historically low level of
market interest rates and the Corporations current low
levels of interest rates on its core deposit transaction
accounts, further market interest rate reductions would likely
not result in a significant decrease in interest expense. The
Corporations loan portfolio is predominately comprised of
fixed interest rate loans. At December 31, 2009 and 2008,
approximately 80% of the Corporations loans were at fixed
rates.
The Corporations competitive position within many of its
market areas has historically limited its ability to materially
increase core deposits without adversely impacting the weighted
average cost of the deposit portfolio. While competition for
core deposits remained strong throughout the Corporations
markets during 2009, the Corporations increased efforts to
expand its deposit relationships with existing customers and the
Corporations financial strength resulted in the
Corporation experiencing an increase in deposits during 2009.
Total deposits increased $439.3 million, or 14.7%, during
the twelve months ended December 31, 2009, while during the
same time frame the Corporation experienced a decrease in the
average cost of its deposits.
During 2009, the Corporation increased its holdings of variable
rate investment securities to lessen the impact on net interest
income and the net interest margin of rising interest rates. At
December 31, 2009, the Corporation held $297 million
in variable rate investment securities at carrying value,
compared to $155 million at December 31, 2008.
Table 9 presents for 2009, 2008 and 2007 average daily balances
of the Corporations major categories of assets and
liabilities, interest income and expense on a FTE basis, average
interest rates earned and paid on the assets and liabilities,
net interest income (FTE), net interest spread and net interest
margin.
Table 10 allocates the dollar change in net interest income
(FTE) between the portion attributable to changes in the average
volume of interest-earning assets and interest-bearing
liabilities, including changes in the mix of assets and
liabilities and changes in average interest rates earned and
paid.
30
TABLE 9. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND
EFFECTIVE YIELDS AND RATES* (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Tax
|
|
|
Effective
|
|
|
|
|
|
Tax
|
|
|
Effective
|
|
|
|
|
|
Tax
|
|
|
Effective
|
|
|
|
Average
|
|
|
Equivalent
|
|
|
Yield/
|
|
|
Average
|
|
|
Equivalent
|
|
|
Yield/
|
|
|
Average
|
|
|
Equivalent
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans**
|
|
$
|
2,997,277
|
|
|
$
|
173,456
|
|
|
|
5.79
|
%
|
|
$
|
2,873,151
|
|
|
$
|
181,568
|
|
|
|
6.32
|
%
|
|
$
|
2,805,880
|
|
|
$
|
192,433
|
|
|
|
6.86
|
%
|
Taxable investment securities
|
|
|
532,844
|
|
|
|
15,385
|
|
|
|
2.89
|
|
|
|
511,109
|
|
|
|
21,793
|
|
|
|
4.26
|
|
|
|
551,806
|
|
|
|
24,927
|
|
|
|
4.52
|
|
Tax-exempt investment securities
|
|
|
93,350
|
|
|
|
5,425
|
|
|
|
5.81
|
|
|
|
69,076
|
|
|
|
4,309
|
|
|
|
6.24
|
|
|
|
62,319
|
|
|
|
4,013
|
|
|
|
6.44
|
|
Other securities
|
|
|
22,128
|
|
|
|
821
|
|
|
|
3.71
|
|
|
|
22,141
|
|
|
|
1,167
|
|
|
|
5.27
|
|
|
|
22,133
|
|
|
|
1,116
|
|
|
|
5.04
|
|
Federal funds sold and Interest-bearing deposits with
unaffiliated banks and others
|
|
|
201,407
|
|
|
|
541
|
|
|
|
0.27
|
|
|
|
75,134
|
|
|
|
1,865
|
|
|
|
2.48
|
|
|
|
109,729
|
|
|
|
5,652
|
|
|
|
5.15
|
|
|
|
Total interest-earning assets
|
|
|
3,847,006
|
|
|
|
195,628
|
|
|
|
5.09
|
|
|
|
3,550,611
|
|
|
|
210,702
|
|
|
|
5.93
|
|
|
|
3,551,867
|
|
|
|
228,141
|
|
|
|
6.42
|
|
Less: Allowance for loan losses
|
|
|
70,028
|
|
|
|
|
|
|
|
|
|
|
|
42,185
|
|
|
|
|
|
|
|
|
|
|
|
36,224
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash due from banks
|
|
|
91,829
|
|
|
|
|
|
|
|
|
|
|
|
96,094
|
|
|
|
|
|
|
|
|
|
|
|
93,715
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
53,054
|
|
|
|
|
|
|
|
|
|
|
|
50,222
|
|
|
|
|
|
|
|
|
|
|
|
48,908
|
|
|
|
|
|
|
|
|
|
Interest receivable and other assets
|
|
|
144,368
|
|
|
|
|
|
|
|
|
|
|
|
129,875
|
|
|
|
|
|
|
|
|
|
|
|
126,768
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,066,229
|
|
|
|
|
|
|
|
|
|
|
$
|
3,784,617
|
|
|
|
|
|
|
|
|
|
|
$
|
3,785,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
559,026
|
|
|
$
|
2,538
|
|
|
|
0.45
|
%
|
|
$
|
509,256
|
|
|
$
|
5,226
|
|
|
|
1.03
|
%
|
|
$
|
516,170
|
|
|
$
|
12,551
|
|
|
|
2.43
|
%
|
Savings deposits
|
|
|
925,588
|
|
|
|
6,230
|
|
|
|
0.67
|
|
|
|
792,449
|
|
|
|
10,804
|
|
|
|
1.36
|
|
|
|
744,624
|
|
|
|
17,816
|
|
|
|
2.39
|
|
Time deposits
|
|
|
1,169,201
|
|
|
|
30,732
|
|
|
|
2.63
|
|
|
|
1,084,531
|
|
|
|
38,733
|
|
|
|
3.57
|
|
|
|
1,130,189
|
|
|
|
50,867
|
|
|
|
4.50
|
|
Securities sold under agreements to repurchase
|
|
|
232,185
|
|
|
|
906
|
|
|
|
0.39
|
|
|
|
196,413
|
|
|
|
2,144
|
|
|
|
1.09
|
|
|
|
181,773
|
|
|
|
6,859
|
|
|
|
3.77
|
|
FHLB advances short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,593
|
|
|
|
79
|
|
|
|
0.92
|
|
|
|
8,822
|
|
|
|
468
|
|
|
|
5.30
|
|
FHLB advances long-term
|
|
|
116,050
|
|
|
|
4,881
|
|
|
|
4.21
|
|
|
|
120,171
|
|
|
|
6,097
|
|
|
|
5.07
|
|
|
|
137,236
|
|
|
|
7,244
|
|
|
|
5.28
|
|
|
|
Total interest-bearing liabilities
|
|
|
3,002,050
|
|
|
|
45,287
|
|
|
|
1.51
|
|
|
|
2,711,413
|
|
|
|
63,083
|
|
|
|
2.33
|
|
|
|
2,718,814
|
|
|
|
95,805
|
|
|
|
3.52
|
|
Noninterest-bearing deposits
|
|
|
541,596
|
|
|
|
|
|
|
|
|
|
|
|
538,125
|
|
|
|
|
|
|
|
|
|
|
|
532,021
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowed funds
|
|
|
3,543,646
|
|
|
|
|
|
|
|
|
|
|
|
3,249,538
|
|
|
|
|
|
|
|
|
|
|
|
3,250,835
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
39,549
|
|
|
|
|
|
|
|
|
|
|
|
25,979
|
|
|
|
|
|
|
|
|
|
|
|
28,284
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
483,034
|
|
|
|
|
|
|
|
|
|
|
|
509,100
|
|
|
|
|
|
|
|
|
|
|
|
505,915
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
4,066,229
|
|
|
|
|
|
|
|
|
|
|
$
|
3,784,617
|
|
|
|
|
|
|
|
|
|
|
$
|
3,785,034
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread (Average yield earned minus average rate
paid)
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
Net Interest Income (FTE)
|
|
|
|
|
|
$
|
150,341
|
|
|
|
|
|
|
|
|
|
|
$
|
147,619
|
|
|
|
|
|
|
|
|
|
|
$
|
132,336
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Net interest income (FTE)/total average interest-earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
|
*
|
|
Taxable equivalent basis using a
federal income tax rate of 35%.
|
|
**
|
|
Nonaccrual loans and loans
held-for-sale
are included in average balances reported and are included in
the calculation of yields. Also, tax equivalent interest
includes net loan fees.
|
31
TABLE 10.
VOLUME AND RATE VARIANCE ANALYSIS* (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Compared to 2008
|
|
|
2008 Compared to 2007
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
Due to Changes in
|
|
|
Combined
|
|
|
Due to Changes in
|
|
|
Combined
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
|
Volume**
|
|
|
Yield/Rate**
|
|
|
(Decrease)
|
|
|
Volume**
|
|
|
Yield/Rate**
|
|
|
(Decrease)
|
|
|
|
|
Changes in Interest Income on Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
7,814
|
|
|
$
|
(15,926
|
)
|
|
$
|
(8,112
|
)
|
|
$
|
4,963
|
|
|
$
|
(15,828
|
)
|
|
$
|
(10,865
|
)
|
Taxable investment/other securities
|
|
|
766
|
|
|
|
(7,520
|
)
|
|
|
(6,754
|
)
|
|
|
(1,779
|
)
|
|
|
(1,304
|
)
|
|
|
(3,083
|
)
|
Tax-exempt investment securities
|
|
|
1,436
|
|
|
|
(320
|
)
|
|
|
1,116
|
|
|
|
425
|
|
|
|
(129
|
)
|
|
|
296
|
|
Federal funds sold and Interest-bearing deposits with
unaffiliated banks and others
|
|
|
1,307
|
|
|
|
(2,631
|
)
|
|
|
(1,324
|
)
|
|
|
(1,411
|
)
|
|
|
(2,376
|
)
|
|
|
(3,787
|
)
|
|
|
Total change in interest income on interest-earning assets
|
|
|
11,323
|
|
|
|
(26,397
|
)
|
|
|
(15,074
|
)
|
|
|
2,198
|
|
|
|
(19,637
|
)
|
|
|
(17,439
|
)
|
|
|
Changes in Interest Expense on Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
615
|
|
|
|
(3,303
|
)
|
|
|
(2,688
|
)
|
|
|
(209
|
)
|
|
|
(7,116
|
)
|
|
|
(7,325
|
)
|
Savings deposits
|
|
|
1,365
|
|
|
|
(5,939
|
)
|
|
|
(4,574
|
)
|
|
|
1,920
|
|
|
|
(8,932
|
)
|
|
|
(7,012
|
)
|
Time deposits
|
|
|
4,177
|
|
|
|
(12,178
|
)
|
|
|
(8,001
|
)
|
|
|
(1,766
|
)
|
|
|
(10,368
|
)
|
|
|
(12,134
|
)
|
Short-term borrowings
|
|
|
255
|
|
|
|
(1,572
|
)
|
|
|
(1,317
|
)
|
|
|
502
|
|
|
|
(5,606
|
)
|
|
|
(5,104
|
)
|
Federal Home Loan Bank (FHLB) advances
|
|
|
(204
|
)
|
|
|
(1,012
|
)
|
|
|
(1,216
|
)
|
|
|
(873
|
)
|
|
|
(274
|
)
|
|
|
(1,147
|
)
|
|
|
Total change in interest expense on interest-bearing liabilities
|
|
|
6,208
|
|
|
|
(24,004
|
)
|
|
|
(17,796
|
)
|
|
|
(426
|
)
|
|
|
(32,296
|
)
|
|
|
(32,722
|
)
|
|
|
Total Increase (Decrease) in Net Interest Income (FTE)
|
|
$
|
5,115
|
|
|
$
|
(2,393
|
)
|
|
$
|
2,722
|
|
|
$
|
2,624
|
|
|
$
|
12,659
|
|
|
$
|
15,283
|
|
|
|
|
|
|
*
|
|
Taxable equivalent basis using a
federal income tax rate of 35%.
|
|
**
|
|
The change in interest income and
interest expense due to both volume and rate has been allocated
to the volume and rate change in proportion to the relationship
of the absolute dollar amount of the change in each.
|
NONINTEREST
INCOME
Noninterest income totaled $41.1 million in 2009,
$41.2 million in 2008 and $43.3 million in 2007.
Noninterest income in 2009 was consistent with 2008 and declined
$2.1 million, or 4.8%, in 2008 compared to 2007.
Noninterest income as a percentage of net revenue (net interest
income plus noninterest income) was 21.8% in 2009, 22.1% in 2008
and 25.0% in 2007.
The following schedule includes the major components of
noninterest income during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
19,116
|
|
|
$
|
20,048
|
|
|
$
|
20,549
|
|
Trust and investment services revenue
|
|
|
9,273
|
|
|
|
10,625
|
|
|
|
11,325
|
|
Other fees for customer services
|
|
|
2,454
|
|
|
|
2,511
|
|
|
|
3,031
|
|
ATM and network user fees
|
|
|
4,023
|
|
|
|
3,341
|
|
|
|
2,968
|
|
Insurance commissions
|
|
|
1,259
|
|
|
|
1,042
|
|
|
|
773
|
|
Mortgage banking revenue
|
|
|
4,412
|
|
|
|
1,836
|
|
|
|
2,117
|
|
Investment securities gains
|
|
|
95
|
|
|
|
1,722
|
|
|
|
4
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
Gains on sales of branch bank properties
|
|
|
58
|
|
|
|
295
|
|
|
|
912
|
|
Insurance settlement
|
|
|
208
|
|
|
|
|
|
|
|
1,122
|
|
Other
|
|
|
221
|
|
|
|
221
|
|
|
|
487
|
|
|
|
Total Noninterest Income
|
|
$
|
41,119
|
|
|
$
|
41,197
|
|
|
$
|
43,288
|
|
|
|
Service charges on deposit accounts were $19.1 million in
2009, $20.0 million in 2008 and $20.5 million in 2007.
The decline of $0.9 million, or 4.6%, in 2009 and the
decline of $0.5 million, or 2.4%, in 2008 were primarily
attributable to a lower level of customer activity in areas
where fees and service charges are applicable and customers
choosing alternative non-fee based accounts.
32
Trust and investment services revenue was $9.3 million in
2009, $10.6 million in 2008 and $11.3 million in 2007.
The declines of $1.4 million, or 12.7%, in 2009 and
$0.7 million, or 6.2%, in 2008 were partially due to a
reduction in the market value of assets under management, which
resulted from general declines in U.S. equity markets.
Average assets under management of $1.7 billion during 2009
declined 16.6% from $2.0 billion during 2008. Average
assets under management declined 11.9% during 2008 from
$2.3 billion during 2007. Trust and investment services
revenue also includes fees from sales of investment products
offered through the CFC Investment Center program. Fees under
this program totaled $2.3 million, $2.8 million and
$3.0 million in 2009, 2008 and 2007, respectively.
Other fees for customer services were approximately
$2.5 million in 2009 and 2008 and $3.0 million in
2007. While 2009 was unchanged from 2008, an increase in safe
deposit box revenue, resulting primarily from an increase in
2009 rental rates, was offset by a decrease in the amount
of fees earned on outstanding bank money orders. During 2009,
the Corporation began processing its bank money orders
internally. Prior to this, the Corporation outsourced processing
to a third-party vendor, which paid the Corporation fees based
on the level of outstanding bank money orders. The decline of
$0.5 million, or 17.2%, in 2008, compared with 2007, was
primarily attributable to a $0.5 million decrease in the
amount of fees earned on outstanding bank money orders.
ATM and network user fees were $4.0 million in 2009,
$3.3 million in 2008 and $3.0 million in 2007. ATM and
network user fees increased $0.7 million, or 20.4%, in 2009
due primarily to an increase in the ATM user fee for
non-customers. ATM and network user fees increased
$0.4 million, or 12.6%, in 2008 due primarily to increased
debit card activity.
Insurance commissions were $1.2 million in 2009,
$1.0 million in 2008 and $0.8 million in 2007.
Insurance commissions increased $0.2 million, or 20.8%, in
2009, compared to 2008, and $0.2 million, or 34.8%, in 2008
from 2007, due to higher closing fees and title insurance
premium income from increases in mortgage loan closing activity.
This increase in mortgage loan closing activity occurred due to
lower market interest rates on residential real estate loans
compared to the prior year.
Mortgage banking revenue (MBR) was $4.4 million in 2009,
$1.8 million in 2008 and $2.1 million in 2007. The
increase in mortgage banking revenue in 2009 was primarily due
to the increased volume of loans sold in the secondary market
compared to 2008 and an increase in the average net gain per
loan associated with the sale of these loans. The Corporation
originated $467 million of real estate residential loans
during 2009, of which $361 million, or 77%, were sold in
the secondary market, compared to the origination of
$341 million of real estate residential loans during 2008,
of which $145 million, or 43%, were sold in the secondary
market. In 2007, the Corporation originated $307 million of
real estate residential loans, of which $136 million, or
44%, were sold in the secondary market. The decline in MBR in
2008, compared to 2007, was primarily attributable to a decrease
in the average net gain per loan sold and an increase in costs
associated with selling loans in the secondary market. At
December 31, 2009, the Corporation was servicing
$755 million of real estate residential loans that had been
originated by the Corporation in its market areas and
subsequently sold in the secondary mortgage market, up from
$604 million at December 31, 2008. The increase in the
Corporations servicing portfolio in 2009 was due to the
significant increase in the volume of loans sold in the
secondary market with servicing rights retained.
In 2009, the Corporation realized a $0.1 million gain
related to the sale of the remaining balance of the
Corporations MasterCard Class B shares, which had no
cost basis. During 2008, the Corporation realized a
$1.7 million gain related to the sale of 92% of the
Corporations MasterCard Class B shares, which had no
cost basis.
In 2008, the Corporation recognized a $0.4 million
other-than-temporary
impairment loss on a single issue corporate bond in the
Corporations
available-for-sale
investment securities portfolio. The Corporation had no
other-than-temporary
impairment losses during 2009 or 2007.
Gains on sales of branch bank properties totaled $0.1 million in
2009, $0.3 million in 2008 and $0.9 million in 2007. The
Corporation sold one building in 2009 and two buildings in 2008.
In 2007, the Corporation realized $0.9 million in gains on
the sales of a branch office building and a parcel of excess
land contiguous to an existing branch office. At
December 31, 2009, the Corporation had two branch bank
properties held for sale with a total carrying value of
$0.1 million.
In 2009, the Corporation recognized $0.2 million in
nonrecurring noninterest income as the final installment of an
insurance settlement for damage incurred to a branch building in
2007 resulting from a fire in an adjacent structure. The
Corporation recognized $1.1 million in insurance settlement
income in 2007 related to the same event.
Noninterest income, excluding revenue from investment securities
net gains and losses, gains on sales of branch bank properties
and the insurance settlement, was $40.8 million in 2009,
$39.6 million in 2008 and $41.2 million in 2007.
Noninterest income, excluding these items, increased
$1.2 million, or 2.8%, in 2009 and decreased
$1.6 million, or 3.9%, in 2008. The increase in 2009,
compared to 2008, was primarily attributable to increases in ATM
and network user fees, insurance commissions and mortgage
banking revenue being partially offset by decreases in service
charges on deposit accounts and trust and investment services
revenue. The decrease in 2008, compared to 2007, was primarily
attributable to decreases in service charges on deposit
accounts, trust and investment services revenue, other fees for
customer services, mortgage banking revenue and other
miscellaneous income being partially offset by increases in ATM
and network user fees and insurance commissions.
33
OPERATING
EXPENSES
Total operating expenses were $117.6 million in 2009,
$109.1 million in 2008 and $104.7 million in 2007.
Total operating expenses as a percentage of total average assets
were 2.89% in 2009, 2.88% in 2008 and 2.77% in 2007.
The following schedule includes the major categories of
operating expenses during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Salaries and wages
|
|
$
|
49,227
|
|
|
$
|
48,713
|
|
|
$
|
48,651
|
|
|
|
Employee benefits
|
|
|
10,991
|
|
|
|
10,514
|
|
|
|
10,357
|
|
|
|
Occupancy
|
|
|
10,359
|
|
|
|
10,221
|
|
|
|
10,172
|
|
|
|
Equipment
|
|
|
9,723
|
|
|
|
9,230
|
|
|
|
8,722
|
|
|
|
Postage and courier
|
|
|
2,951
|
|
|
|
3,169
|
|
|
|
2,841
|
|
|
|
Supplies
|
|
|
1,526
|
|
|
|
1,482
|
|
|
|
1,544
|
|
|
|
Professional fees
|
|
|
4,165
|
|
|
|
3,554
|
|
|
|
4,382
|
|
|
|
Outside processing/service fees
|
|
|
3,231
|
|
|
|
3,219
|
|
|
|
3,495
|
|
|
|
Michigan business taxes
|
|
|
(620
|
)
|
|
|
(806
|
)
|
|
|
1,132
|
|
|
|
Advertising and marketing
|
|
|
2,396
|
|
|
|
2,492
|
|
|
|
1,854
|
|
|
|
Intangible asset amortization
|
|
|
718
|
|
|
|
1,543
|
|
|
|
1,786
|
|
|
|
Telephone
|
|
|
1,840
|
|
|
|
2,186
|
|
|
|
1,829
|
|
|
|
FDIC insurance premiums
|
|
|
7,013
|
|
|
|
899
|
|
|
|
427
|
|
|
|
Other real estate and repossessed asset expenses
|
|
|
6,031
|
|
|
|
4,680
|
|
|
|
2,207
|
|
|
|
Loan and collection costs
|
|
|
3,056
|
|
|
|
1,592
|
|
|
|
702
|
|
|
|
Non-loan losses
|
|
|
291
|
|
|
|
1,473
|
|
|
|
605
|
|
|
|
Other
|
|
|
4,712
|
|
|
|
4,947
|
|
|
|
3,965
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
117,610
|
|
|
$
|
109,108
|
|
|
$
|
104,671
|
|
|
|
|
|
Full-time equivalent staff (at December 31)
|
|
|
1,427
|
|
|
|
1,416
|
|
|
|
1,368
|
|
|
|
Efficiency ratio
|
|
|
61.4
|
%
|
|
|
57.8
|
%
|
|
|
59.6
|
%
|
|
|
|
|
Operating expenses were $117.6 million in 2009, an increase
of $8.5 million, or 7.8%, compared to 2008. Operating
expenses were $109.1 million in 2008, an increase of
$4.4 million, or 4.2%, compared to 2007. The increase in
2009, compared to 2008, was primarily due to increases in
personnel costs, FDIC insurance premiums, other real estate and
repossessed asset expenses and loan and collection costs
partially offset by decreases in intangible asset amortization
and non-loan losses. The increase in 2008, compared to 2007, was
primarily due to increases in other real estate and repossessed
asset expenses, loan and collection expenses and other operating
expenses that were partially offset by decreases in professional
fees and Michigan business taxes.
Salaries and wages were $49.2 million in 2009,
$48.7 million in 2008 and $48.7 million in 2007.
Salaries and wages expense in 2009 was $0.5 million higher
than 2008 due to higher costs attributable to merit salary
increases and new positions, partially offset by a decrease in
mortgage loan originator commissions. Mortgage loan originator
commissions decreased as a component of salary expense due to a
decrease in the volume of mortgage loans originated for the
banks loan portfolio in 2009, compared to 2008. Salaries
and wages expense in 2008 increased only slightly over 2007 as
higher costs attributable to merit salary increases, new
positions, higher mortgage loan originator commissions and
higher share-based compensation expense were almost entirely
offset by savings associated with a 2007 internal reorganization.
Employee benefits expense was $11.0 million in 2009,
$10.5 million in 2008 and $10.4 million in 2007.
Employee benefits expense increased $0.5 million, or 4.5%,
in 2009, compared to 2008, due to higher retirement and group
health insurance plan costs. Employee benefits expense increased
$0.2 million, or 1.5%, in 2008, compared to 2007, due to
higher group health insurance costs.
Compensation expenses, which include salaries and wages and
employee benefits, as a percentage of total operating expenses
were 51.2% in 2009, 54.3% in 2008 and 56.4% in 2007. In April
2007, the Corporation announced an internal reorganization that
centralized six operational departments and reduced back-office
and management staff. The reorganization was complete at
December 31, 2007. The Corporation recognized
$1.7 million in compensation related expense during 2007
for severance and early retirement costs in conjunction with the
internal reorganization. The $1.7 million in reorganization
expense was comprised of $1.3 million in severance costs,
$0.3 million of early retirement pension cost and
$0.1 million of payroll taxes. In December 2005, the board
of directors of the Corporation accelerated the vesting of
certain unvested
out-of-the-money
nonqualified stock options previously awarded to employees. The
acceleration of the vesting of these options reduced non-cash
compensation expense in 2009, 2008 and 2007 by
$0.1 million, $0.2 million and $0.4 million,
respectively, as all unvested awards existing as of
January 1, 2006, were required to be recognized as
compensation expense on a straight-line basis over the vesting
period.
34
Occupancy expense was $10.4 million in 2009 and
$10.2 million in both 2008 and 2007. The increase in 2009,
as compared to 2008, was due to slight increases in building
depreciation expense and property taxes on real estate used for
bank operations. While occupancy expense in 2008 was unchanged
from 2007, building repair and maintenance costs increased
$0.4 million in 2008, compared to 2007, which were offset
by a $0.3 million decline in losses on the disposal of
branches during 2008, compared to 2007. Depreciation expense on
buildings included in occupancy expense was $2.4 million,
$2.3 million and $2.4 million in 2009, 2008 and 2007,
respectively.
Equipment expense was $9.7 million in 2009,
$9.2 million in 2008 and $8.7 million in 2007.
Equipment expense increased $0.5 million, or 5.3%, in 2009,
compared to 2008, primarily due to higher depreciation expense
associated with equipment upgrades completed in 2008. Equipment
expense increased $0.5 million, or 5.8%, in 2008, compared
to 2007, due to higher depreciation expense and higher
teleprocessing line costs in association with significant
upgrades made to telephone, teleprocessing and computer network
equipment. Equipment depreciation expense included in equipment
expense was $4.0 million, $3.5 million and
$3.3 million in 2009, 2008 and 2007, respectively.
Professional fees were $4.2 million in 2009,
$3.6 million in 2008 and $4.4 million in 2007.
Professional fees were $0.6 million, or 17.2%, higher in
2009 than in 2008 due to an increase in consulting expenses
attributable to the pending acquisition of OAK totaling
$0.8 million, which were partially offset by a decrease in
external auditing fees. Professional fees were
$0.8 million, or 18.9%, lower in 2008 than in 2007 due to
lower consulting and legal fees.
Outside processing/service fees were $3.2 million in both
2009 and 2008 and $3.5 million in 2007. The nature and
amount of expense components in 2009 were consistent with the
prior year. The decrease in outside processing/service fees in
2008, compared to 2007, of $0.3 million, or 7.9%, was
primarily attributable to slightly higher costs in 2007 related
to a mainframe migration project that increased the capacity,
flexibility and functionality of the banks core processing
system, and also attributable to additional network organization
and security costs.
Michigan business taxes were $(0.6) million in 2009,
$(0.8) million in 2008 and $1.1 million in 2007. The
Michigan Single Business Tax (SBT), which expired
December 31, 2007, was replaced by the Michigan Business
Tax (MBT). The MBT includes a provision for a Financial
Institutions Tax (FIT), which applies to all banks, savings
banks, bank holding companies and all of their affiliated
companies and was effective January 1, 2008. The FIT is a
tax on a financial institutions consolidated capital less
both goodwill and certain debt obligations held by the financial
institution using a five-year average. The MBT resulted in a
reduction of the Corporations Michigan business tax
expense in 2009 and 2008, compared to SBT expense recorded in
2007. The decline in Michigan business tax expense in both 2009
and 2008, compared to 2007, was also due to the reversal of
contingent reserves recorded for the SBT which were no longer
required due to the expiration of the statutory audit period.
These reserve reversals totaled $0.8 million in 2009,
$0.9 million in 2008 and $0.4 million in 2007. In
2008, an additional $0.5 million of previously recorded SBT
expenses were reversed based on the successful results of a
state tax audit.
Other real estate and repossessed assets (ORE) expenses were
$6.0 million in 2009, $4.7 million in 2008 and
$2.2 million in 2007. ORE expenses include costs to carry
ORE such as property taxes, insurance and maintenance costs as
well as fair value write-downs after the property was
transferred to ORE and net gains/losses from the disposition of
ORE. As property values in Michigan declined in late 2008 and
2009, the Corporation recorded write-downs to the carrying value
of ORE to fair value, which were recognized as operating costs.
Write-downs and net gains/losses from dispositions of ORE were
$3.7 million in 2009, compared to $2.9 million in 2008
and $1.2 million in 2007. Property taxes on ORE were
$1.1 million in 2009, $0.6 million in 2008 and
$0.3 million in 2007. Other operating costs on ORE were
$1.2 million in both 2009 and 2008 and $0.7 million in
2007. The increase in other operating costs on ORE in 2008,
compared to 2007, was due to increased levels of ORE holdings.
Loan and collection expenses were $3.1 million in 2009,
$1.6 million in 2008 and $0.7 million in 2007. These
costs included legal fees, appraisal fees and other costs
realized in the collection of problem loans. The significant
increases in these expenses in both 2009 and 2008 were
attributable to the continued deterioration in the credit
quality of the loan portfolio and corresponding increased costs
associated with foreclosing on properties and obtaining title to
properties securing loans from customers that defaulted on
payments.
Advertising and marketing expenses were $2.4 million in
2009, $2.5 million in 2008 and $1.9 million in 2007.
Advertising and marketing expenses were similar in 2009 compared
to 2008. While the Corporation increased its expenditures for
targeted direct mail campaigns in 2009, the Corporation
similarly reduced expenditures for more traditional advertising
expenses such as newspaper, radio and television. Advertising
and marketing expenses of $2.5 million in 2008 were
$0.6 million, or 34.4%, higher than in 2007. The increase
in advertising and marketing expenses was primarily due to an
increase in market research expenses and print and television ad
campaign costs.
Intangible asset amortization was $0.7 million in 2009,
$1.5 million in 2008 and $1.8 million in 2007.
Intangible asset amortization declined $0.8 million, or
53.5%, in 2009, compared to 2008. The decrease was due to a
number of core deposit intangibles that
35
became fully amortized during the latter half of 2008 and early
2009. Intangible asset amortization in 2008, compared to 2007,
declined $0.2 million, or 13.6%.
FDIC insurance premiums were $7.0 million in 2009,
$0.9 million in 2008 and $0.4 million in 2007. The
increase in FDIC insurance premiums in 2009 was attributable to
an industry-wide FDIC special assessment as of June 30,
2009 and an increase in fee assessment rates that took effect at
the beginning of 2009. The special assessment to the Corporation
was $1.8 million. FDIC insurance premiums were also higher
due to an increase in insurable deposits resulting from deposit
growth. The increase in deposit insurance expense during 2009,
compared to 2008, was also partially related to the
Corporations utilization of available credits to offset
assessments during 2008, which were fully utilized as of
December 31, 2008, and to an additional 10 basis point
assessment paid on covered transaction accounts exceeding
$0.25 million under the TLGP. The increase in FDIC
insurance premiums in 2008, compared to 2007, was attributable
to a lower amount of FDIC insurance credits available to reduce
the FDIC premium assessments in 2008 than in 2007.
Non-loan losses were $0.3 million in 2009,
$1.5 million in 2008 and $0.6 million in 2007.
Non-loan losses in 2008 included a branch office loss of
$0.8 million.
All other categories of operating expenses were
$11.0 million in 2009, $11.8 million in 2008 and
$10.2 million in 2007. The decrease of $0.8 million,
or 6.8%, in all other categories of operating expenses in 2009,
as compared to 2008, was largely attributable to decreases in
postage and courier and telephone expenses. The increase of
$1.6 million, or 15.7%, in all other categories of
operating expenses in 2008, as compared to 2007, was
attributable to increases in postage and courier, telephone and
other expenses.
The Corporations efficiency ratio, which measures total
operating expenses divided by the sum of net interest income
(FTE) and noninterest income, was 61.4% in 2009, 57.8% in 2008
and 59.6% in 2007. The increase in 2009, compared to 2008, was
attributable to higher operating expenses. The decrease in 2008,
compared to 2007, was attributable to significantly higher net
interest income.
INCOME TAXES
The Corporations effective federal income tax rate was
16.3% in 2009, 29.5% in 2008 and 31.8% in 2007. The fluctuations
in the Corporations effective federal income tax rate
reflect changes each year in the proportion of interest income
exempt from federal taxation, nondeductible interest expense and
other nondeductible expenses relative to pretax income and tax
credits. Based on the Corporations assessment of uncertain
tax positions during 2009, 2008 and 2007, no adjustments to the
federal income tax provision were required. The significant
change in the Corporations effective federal income tax
rate for 2009, compared to 2008, was due to a decrease in the
Corporations pre-tax income and an increase in interest
income exempt from federal taxation, while nondeductible
interest expense, other nondeductible expenses and tax credits
remained similar to the previous year amounts.
Tax-exempt income (FTE), net of related nondeductible interest
expense, totaled $8.0 million in 2009, $6.5 million in
2008 and $6.3 million in 2007. Tax-exempt income (FTE) as a
percentage of total interest income (FTE) was 4.1% in 2009, 3.1%
in 2008 and 2.7% in 2007.
Income before income taxes (FTE) was $14.9 million in 2009,
$30.5 million in 2008 and $59.5 million in 2007.
LIQUIDITY RISK
Liquidity risk is the possibility of the Corporation being
unable to meet current and future financial obligations in a
timely manner and the adverse impact on net interest income if
the Corporation was unable to meet its funding requirements at a
reasonable cost.
Liquidity is managed to ensure stable, reliable and
cost-effective sources of funds are available to satisfy deposit
withdrawals and lending and investment opportunities. The
Corporations largest source of liquidity on a consolidated
basis is the deposit base that comes from consumer, business and
municipal customers within the Corporations local markets,
principal payments on loans, cash held at the Federal Reserve
Bank of Chicago (FRB), unpledged investment securities
available-for-sale
and federal funds sold. For the year ended December 31,
2009, total deposits increased $439.3 million, or 14.7%,
compared to increasing $103.2 million, or 3.6%, during the
year ended December 31, 2008. The Corporations loan
to deposit ratio decreased to 87.6% at December 31, 2009
from 100.1% at December 31, 2008. At December 31,
2009, the Corporation had $223 million of cash deposits
held at the FRB that were not invested in federal funds sold due
to the low interest rate environment. In addition, at
December 31, 2009, the Corporation had $163 million of
unpledged investment securities
available-for-sale.
The Corporation also has available unused wholesale sources of
liquidity, including FHLB advances and borrowings from the
discount window of the FRB.
Chemical Bank is a member of the FHLB and as such has access to
short-term and long-term advances from the FHLB secured
generally by real estate residential first lien loans. The
Corporation considers advances from the FHLB as its primary
wholesale source
36
of liquidity. FHLB advances decreased $45.1 million during
2009 to $90 million at December 31, 2009. At
December 31, 2009, the Corporations additional
borrowing availability from the FHLB, subject to certain
requirements, was $234 million. See the Borrowed Funds
section of this Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 10
to the consolidated financial statements for more information on
advances from the FHLB. Chemical Bank can also borrow from the
FRBs discount window to meet short-term liquidity
requirements. These borrowings are required to be secured by
investment securities
and/or
certain loan types, with each category of assets carrying
various borrowing capacity percentages. At December 31,
2009, Chemical Bank maintained an unused borrowing capacity of
$30 million with the FRBs discount window based upon
pledged collateral as of that date, although it is
managements opinion that this borrowing capacity could be
expanded, if deemed necessary, as Chemical Bank has a
significant amount of additional assets that could be used as
collateral at the FRBs discount window.
The Corporation manages its liquidity primarily through
dividends from Chemical Bank. The Corporation manages its
liquidity position to provide the cash necessary to pay
dividends to shareholders, invest in new subsidiaries, enter new
banking markets, pursue investment opportunities and satisfy
other operating requirements. The long-term ability of the
Corporation to pay cash dividends to shareholders is dependent
on the adequacy of capital and earnings of Chemical Bank.
Federal and state banking laws place certain restrictions on the
amount of dividends that a bank may pay to its parent company.
During 2009, Chemical Bank did not pay any dividends to the
Corporation. The Corporation paid cash dividends to shareholders
of $28.2 million in 2009. The Corporations cash
decreased $28.5 million during 2009 to $7.8 million at
December 31, 2009, which it held in a deposit account at
Chemical Bank as of that date. During 2008, Chemical Bank paid
dividends to the Corporation of $59 million, including a
one-time $30 million dividend in the fourth quarter for
which it was necessary to receive approval from the Federal
Reserve. The Corporation paid cash dividends to shareholders of
$28.1 million in 2008. The Corporations cash
increased $32 million during 2008 to $36.3 million at
December 31, 2008. The Corporation utilized the
$30 million dividend received from Chemical Bank in the
fourth quarter of 2008 to pay cash dividends to shareholders
during 2009. Dividends paid by Chemical Bank to the Corporation
in 2008 exceeded Chemical Banks earnings in 2008 and 2009,
combined, by $25.8 million and, at December 31, 2009,
Chemical Bank could not pay additional dividends to the
Corporation without Federal Reserve approval. The earnings of
Chemical Bank have been the principal source of funds to pay
cash dividends to the Corporations shareholders. Over the
long term, cash dividends to shareholders are dependent upon
earnings, as well as capital requirements, regulatory restraints
and other factors affecting Chemical Bank. Due to the strength
of the Corporations capital position, the Corporation has
the financial ability to continue to pay cash dividends to
shareholders in excess of the earnings of Chemical Bank. The
length of time the Corporation can sustain cash dividends to
shareholders in excess of the earnings of Chemical Bank is
dependent on the magnitude of any earnings shortfall, the
capital levels of both Chemical Bank and the Corporation and
regulatory approval.
The Corporation maintains a liquidity contingency plan that
outlines the process for addressing a liquidity crisis. The plan
provides for an evaluation of funding sources under various
market conditions. It also assigns specific roles and
responsibilities for effectively managing liquidity through a
problem period.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due primarily to changes
in interest rates. Interest rate risk is the Corporations
primary market risk and results from timing differences in the
repricing of interest rate sensitive assets and liabilities and
changes in relationships between rate indices due to changes in
interest rates. The Corporations net interest income is
largely dependent upon the effective management of interest rate
risk. The Corporations goal is to avoid a significant
decrease in net interest income, and thus an adverse impact on
the profitability of the Corporation, in periods of changing
interest rates. Sensitivity of earnings to interest rate changes
arises when yields on assets change differently from the
interest costs on liabilities. Interest rate sensitivity is
determined by the amount of interest-earning assets and
interest-bearing liabilities repricing within a specific time
period and the magnitude by which interest rates change on the
various types of interest-earning assets and interest-bearing
liabilities. The management of interest rate sensitivity
includes monitoring the maturities and repricing opportunities
of interest-earning assets and interest-bearing liabilities. The
Corporations interest rate risk is managed through
policies and risk limits approved by the boards of directors of
the Corporation and Chemical Bank and an Asset and Liability
Committee (ALCO). The ALCO, which is comprised of executive
management from various areas of the Corporation and Chemical
Bank, including finance, lending, investments and deposit
gathering, meets regularly to execute asset and liability
management strategies. The ALCO establishes guidelines and
monitors the sensitivity of earnings to changes in interest
rates. The goal of the ALCO process is to maximize net interest
income and the net present value of future cash flows within
authorized risk limits.
The primary technique utilized by the Corporation to measure its
interest rate risk is simulation analysis. Simulation analysis
forecasts the effects on the balance sheet structure and net
interest income under a variety of scenarios that incorporate
changes in interest rates, the shape of the Treasury yield
curve, interest rate relationships and the mix of assets and
liabilities and loan prepayments. These forecasts are compared
against net interest income projected in a stable interest rate
environment. While many assets and liabilities reprice either at
maturity or in accordance with their contractual terms, several
balance sheet components demonstrate characteristics
37
that require an evaluation to more accurately reflect their
repricing behavior. Key assumptions in the simulation analysis
include prepayments on loans, probable calls of investment
securities, changes in market conditions, loan volumes and loan
pricing, deposit sensitivity and customer preferences. These
assumptions are inherently uncertain as they are subject to
fluctuation and revision in a dynamic environment. As a result,
the simulation analysis cannot precisely forecast the impact of
rising and falling interest rates on net interest income. Actual
results will differ from simulated results due to many other
factors, including changes in balance sheet components, interest
rate changes, changes in market conditions and management
strategies.
The Corporations interest rate sensitivity is estimated by
first forecasting the next twelve months of net interest income
under an assumed environment of constant market interest rates.
The Corporation then compares the results of various simulation
analyses to the constant interest rate forecast. At
December 31, 2009 and 2008, the Corporation projected the
change in net interest income during the next twelve months
assuming short-term market interest rates were to uniformly and
gradually increase or decrease by up to 200 basis points in
a parallel fashion over the entire yield curve during the same
time period. These projections were based on the
Corporations assets and liabilities remaining static over
the next twelve months, while factoring in probable calls and
prepayments of certain investment securities and real estate
residential mortgage and consumer loans. The ALCO regularly
monitors the Corporations forecasted net interest income
sensitivity to ensure that it remains within established limits.
A summary of the Corporations interest rate sensitivity at
December 31, 2009 and 2008 is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Month Interest Rate Change
Projection (in basis points)
|
|
|
−200
|
|
|
|
−100
|
|
|
|
0
|
|
|
|
+100
|
|
|
|
+200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change in net interest income vs. constant rates
|
|
|
(3.0
|
)%
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
0.6
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Month Interest Rate Change Projection (in basis points)
|
|
|
−200
|
|
|
|
−100
|
|
|
|
0
|
|
|
|
+100
|
|
|
|
+200
|
|
|
|
|
|
|
|
Percent change in net interest income vs. constant rates
|
|
|
(3.9
|
)%
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
|
|
At December 31, 2009, the Corporations model
simulations projected that 100 and 200 basis point
increases in interest rates would result in positive variances
in net interest income of 0.6% and 0.0%, respectively, relative
to the base case over the next 12 month period, while a
decrease in interest rates of 100 and 200 basis points
would result in a negative variance in net interest income of
1.6% and 3.0%, respectively, relative to the base case over the
next 12 month period. At December 31, 2008, the model
simulations projected that 100 and 200 basis point
increases in interest rates would result in positive variances
in net interest income of 1.1% under both scenarios relative to
the base case over the next 12 month period, while a
decrease in interest rates of 100 and 200 basis points
would result in a negative variance in net interest income of
1.8% and 3.9%, respectively, relative to the base case over the
next 12 month period. The likelihood of a decrease in
interest rates beyond 100 basis points as of
December 31, 2009 and 2008 was considered to be unlikely
given prevailing interest rate levels.
The Corporations mix of interest-earning assets and
interest-bearing liabilities has historically resulted in its
interest rate position being liability sensitive. The
Corporation modestly adjusted its liability sensitive position
by significantly increasing the amount of variable rate
investment securities in its investment securities portfolio.
Variable rate investment securities of $297 million
comprised 41% of total investment securities at
December 31, 2009, compared to $155 million, or 28% of
total investment securities, at December 31, 2008.
38
MANAGEMENTS
ASSESSMENT AS TO THE EFFECTIVENESS
OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing
and maintaining effective internal control over financial
reporting that is designed to provide reasonable assurance
regarding reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. The system
of internal control over financial reporting as it relates to
the financial statements is evaluated for effectiveness by
management and tested for reliability through a program of
internal audits. Actions are taken to correct potential
deficiencies as they are identified. Any system of internal
control, no matter how well designed, has inherent limitations,
including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and
not be detected. Also, because of changes in conditions,
internal control effectiveness may vary over time. Accordingly,
even an effective system of internal control will provide only
reasonable assurance with respect to financial reporting and
financial statement preparation.
Management assessed the Corporations system of internal
control over financial reporting as of December 31, 2009,
as required by Section 404 of the Sarbanes-Oxley Act of
2002. Managements assessment is based on the criteria for
effective internal control over financial reporting as described
in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this
assessment, management has concluded that, as of
December 31, 2009, its system of internal control over
financial reporting was effective and meets the criteria of the
Internal Control Integrated Framework.
The Corporations independent registered public accounting
firm that audited the Corporations consolidated financial
statements included in this annual report has issued an
attestation report on the Corporations internal control
over financial reporting as of December 31, 2009.
|
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|
|
|
David B. Ramaker
|
|
Lori A. Gwizdala
|
Chairman, Chief Executive Officer
|
|
Executive Vice President, Chief Financial Officer
|
and President
|
|
and Treasurer
|
|
|
|
February 25, 2010
|
|
February 25, 2010
|
39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Chemical Financial Corporation:
We have audited Chemical Financial Corporations internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Chemical
Financial Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Assessment as to the Effectiveness of Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on Chemical Financial Corporations
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Chemical Financial Corporation maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial position of Chemical
Financial Corporation and subsidiaries as of December 31,
2009 and 2008, and the related consolidated statements of
income, changes in shareholders equity, and cash flows for
each of the years in the three-year period ended
December 31, 2009, and our report dated February 25,
2010 expressed an unqualified opinion on those consolidated
financial statements.
Detroit, Michigan
February 25, 2010
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Chemical Financial Corporation:
We have audited the accompanying consolidated statements of
financial position of Chemical Financial Corporation and
subsidiaries (the Corporation) as of December 31, 2009 and
2008, and the related consolidated statements of income, changes
in shareholders equity, and cash flows for each of the
years in the three year period ended December 31, 2009.
These consolidated financial statements are the responsibility
of the Corporations management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Chemical Financial Corporation and subsidiaries as
of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Chemical Financial Corporations internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated February 25,
2010 expressed an unqualified opinion on the effectiveness of
the Corporations internal control over financial reporting.
Detroit, Michigan
February 25, 2010
41
CONSOLIDATED
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and cash due from banks
|
|
$
|
131,383
|
|
|
$
|
168,650
|
|
Interest-bearing deposits with unaffiliated banks and others
|
|
|
229,326
|
|
|
|
4,572
|
|
|
|
Total cash and cash equivalents
|
|
|
360,709
|
|
|
|
173,222
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale
at fair value
|
|
|
592,521
|
|
|
|
449,947
|
|
Held-to-maturity
(fair value $125,730 at December 31, 2009 and
90,556 at December 31, 2008)
|
|
|
131,297
|
|
|
|
97,511
|
|
|
|
Total investment securities
|
|
|
723,818
|
|
|
|
547,458
|
|
Other securities
|
|
|
22,128
|
|
|
|
22,128
|
|
Loans held for sale
|
|
|
8,362
|
|
|
|
8,463
|
|
Loans
|
|
|
2,993,160
|
|
|
|
2,981,677
|
|
Allowance for loan losses
|
|
|
(80,841
|
)
|
|
|
(57,056
|
)
|
|
|
Net loans
|
|
|
2,912,319
|
|
|
|
2,924,621
|
|
Premises and equipment
|
|
|
53,934
|
|
|
|
53,036
|
|
Goodwill
|
|
|
69,908
|
|
|
|
69,908
|
|
Other intangible assets
|
|
|
5,408
|
|
|
|
5,241
|
|
Interest receivable and other assets
|
|
|
94,126
|
|
|
|
70,236
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,250,712
|
|
|
$
|
3,874,313
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
573,159
|
|
|
$
|
524,464
|
|
Interest-bearing
|
|
|
2,844,966
|
|
|
|
2,454,328
|
|
|
|
Total deposits
|
|
|
3,418,125
|
|
|
|
2,978,792
|
|
Interest payable and other liabilities
|
|
|
27,708
|
|
|
|
35,214
|
|
Short-term borrowings
|
|
|
240,568
|
|
|
|
233,738
|
|
Federal Home Loan Bank (FHLB) advances
|
|
|
90,000
|
|
|
|
135,025
|
|
|
|
Total liabilities
|
|
|
3,776,401
|
|
|
|
3,382,769
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value:
|
|
|
|
|
|
|
|
|
Authorized 200,000 shares, none issued
|
|
|
|
|
|
|
|
|
Common stock, $1 par value per share:
|
|
|
|
|
|
|
|
|
Authorized 30,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding 23,891,321 shares at
December 31, 2009 and 23,880,593 shares at
December 31, 2008
|
|
|
23,891
|
|
|
|
23,881
|
|
Additional paid in capital
|
|
|
347,676
|
|
|
|
346,916
|
|
Retained earnings
|
|
|
115,391
|
|
|
|
133,578
|
|
Accumulated other comprehensive loss
|
|
|
(12,647
|
)
|
|
|
(12,831
|
)
|
|
|
Total shareholders equity
|
|
|
474,311
|
|
|
|
491,544
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
4,250,712
|
|
|
$
|
3,874,313
|
|
|
|
See accompanying notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
172,388
|
|
|
$
|
180,629
|
|
|
$
|
191,480
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
15,385
|
|
|
|
21,793
|
|
|
|
24,927
|
|
Tax-exempt
|
|
|
3,596
|
|
|
|
2,882
|
|
|
|
2,719
|
|
Dividends on other securities
|
|
|
821
|
|
|
|
1,167
|
|
|
|
1,116
|
|
Interest on federal funds sold
|
|
|
|
|
|
|
1,666
|
|
|
|
5,135
|
|
Interest on deposits with unaffiliated banks and others
|
|
|
541
|
|
|
|
199
|
|
|
|
517
|
|
|
|
TOTAL INTEREST INCOME
|
|
|
192,731
|
|
|
|
208,336
|
|
|
|
225,894
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
39,500
|
|
|
|
54,763
|
|
|
|
81,234
|
|
Interest on short-term borrowings
|
|
|
906
|
|
|
|
2,223
|
|
|
|
7,327
|
|
Interest on FHLB advances
|
|
|
4,881
|
|
|
|
6,097
|
|
|
|
7,244
|
|
|
|
TOTAL INTEREST EXPENSE
|
|
|
45,287
|
|
|
|
63,083
|
|
|
|
95,805
|
|
|
|
NET INTEREST INCOME
|
|
|
147,444
|
|
|
|
145,253
|
|
|
|
130,089
|
|
Provision for loan losses
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
11,500
|
|
|
|
NET INTEREST INCOME after provision for loan losses
|
|
|
88,444
|
|
|
|
96,053
|
|
|
|
118,589
|
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
19,116
|
|
|
|
20,048
|
|
|
|
20,549
|
|
Trust and investment services revenue
|
|
|
9,273
|
|
|
|
10,625
|
|
|
|
11,325
|
|
Other charges and fees for customer services
|
|
|
7,736
|
|
|
|
6,894
|
|
|
|
6,772
|
|
Mortgage banking revenue
|
|
|
4,412
|
|
|
|
1,836
|
|
|
|
2,117
|
|
Investment securities gains
|
|
|
95
|
|
|
|
1,722
|
|
|
|
4
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
Other
|
|
|
487
|
|
|
|
516
|
|
|
|
2,521
|
|
|
|
TOTAL NONINTEREST INCOME
|
|
|
41,119
|
|
|
|
41,197
|
|
|
|
43,288
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
60,218
|
|
|
|
59,227
|
|
|
|
59,008
|
|
Occupancy
|
|
|
10,359
|
|
|
|
10,221
|
|
|
|
10,172
|
|
Equipment
|
|
|
9,723
|
|
|
|
9,230
|
|
|
|
8,722
|
|
Other
|
|
|
37,310
|
|
|
|
30,430
|
|
|
|
26,769
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
117,610
|
|
|
|
109,108
|
|
|
|
104,671
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
11,953
|
|
|
|
28,142
|
|
|
|
57,206
|
|
Federal income tax expense
|
|
|
1,950
|
|
|
|
8,300
|
|
|
|
18,197
|
|
|
|
NET INCOME
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
$
|
39,009
|
|
|
|
NET INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.83
|
|
|
$
|
1.60
|
|
Diluted
|
|
|
0.42
|
|
|
|
0.83
|
|
|
|
1.60
|
|
CASH DIVIDENDS PAID PER COMMON SHARE
|
|
|
1.18
|
|
|
|
1.18
|
|
|
|
1.14
|
|
See accompanying notes to consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
(In thousands, except per share
data)
|
|
Stock
|
|
|
Paid in Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
BALANCES AT JANUARY 1, 2007
|
|
$
|
24,828
|
|
|
$
|
368,554
|
|
|
$
|
123,454
|
|
|
$
|
(8,950
|
)
|
|
$
|
507,886
|
|
Impact of adoption of new accounting guidance (see Note 17)
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2007
|
|
|
|
|
|
|
|
|
|
|
39,009
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment securities
available-for-sale,
net of tax expense of $2,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,556
|
|
|
|
|
|
Reclassification adjustment for realized net gain on call of
investment securities included in net income, net of tax expense
of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Adjustment for pension and other postretirement benefits, net of
tax expense of $861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,162
|
|
Cash dividends declared and paid of $0.855 per share
|
|
|
|
|
|
|
|
|
|
|
(20,636
|
)
|
|
|
|
|
|
|
(20,636
|
)
|
Shares issued stock options
|
|
|
2
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Shares issued directors stock purchase plan
|
|
|
7
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
Shares issued share awards
|
|
|
1
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Repurchases of shares
|
|
|
(1,023
|
)
|
|
|
(24,488
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,511
|
)
|
Share-based compensation
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
BALANCES AT DECEMBER 31, 2007
|
|
|
23,815
|
|
|
|
344,579
|
|
|
|
141,867
|
|
|
|
(1,797
|
)
|
|
|
508,464
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2008
|
|
|
|
|
|
|
|
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment securities
available-for-sale,
net of tax expense of $606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
Reclassification adjustment for
other-than-temporary
impairment loss realized on investment security included in net
income, net of tax benefit of $156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
Adjustment for pension and other postretirement benefits, net of
tax benefit of $6,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,448
|
)
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,808
|
|
Cash dividends declared and paid of $1.18 per share
|
|
|
|
|
|
|
|
|
|
|
(28,131
|
)
|
|
|
|
|
|
|
(28,131
|
)
|
Shares issued stock options
|
|
|
58
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
1,508
|
|
Shares issued directors stock purchase plan
|
|
|
8
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Share-based compensation
|
|
|
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
664
|
|
|
|
BALANCES AT DECEMBER 31, 2008
|
|
|
23,881
|
|
|
|
346,916
|
|
|
|
133,578
|
|
|
|
(12,831
|
)
|
|
|
491,544
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2009
|
|
|
|
|
|
|
|
|
|
|
10,003
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment securities
available-for-sale,
net of tax expense of $42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
Reclassification adjustment for realized gain on call of
investment security
available-for-sale
included in net income, net of tax expense of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
Adjustment for pension and other postretirement benefits, net of
tax expense of $63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,187
|
|
Cash dividends declared and paid of $1.18 per share
|
|
|
|
|
|
|
|
|
|
|
(28,190
|
)
|
|
|
|
|
|
|
(28,190
|
)
|
Shares issued stock options
|
|
|
1
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Shares issued directors stock purchase plan
|
|
|
9
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
Share-based compensation
|
|
|
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
490
|
|
|
|
BALANCES AT DECEMBER 31, 2009
|
|
$
|
23,891
|
|
|
$
|
347,676
|
|
|
$
|
115,391
|
|
|
$
|
(12,647
|
)
|
|
$
|
474,311
|
|
|
|
See accompanying notes to consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
$
|
39,009
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
11,500
|
|
|
|
|
|
Gains on sales of loans
|
|
|
(6,431
|
)
|
|
|
(1,790
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
Proceeds from sales of loans
|
|
|
367,796
|
|
|
|
147,172
|
|
|
|
137,056
|
|
|
|
|
|
Loans originated for sale
|
|
|
(361,264
|
)
|
|
|
(145,943
|
)
|
|
|
(137,983
|
)
|
|
|
|
|
Investment securities net gains
|
|
|
(95
|
)
|
|
|
(1,722
|
)
|
|
|
(4
|
)
|
|
|
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
Net gains on sales of other real estate and repossessed assets
|
|
|
(969
|
)
|
|
|
(283
|
)
|
|
|
(181
|
)
|
|
|
|
|
Gains on sales of branch bank properties
|
|
|
(58
|
)
|
|
|
(295
|
)
|
|
|
(912
|
)
|
|
|
|
|
Gain on insurance settlement
|
|
|
(208
|
)
|
|
|
|
|
|
|
(1,122
|
)
|
|
|
|
|
Net losses on disposal of premises and equipment
|
|
|
104
|
|
|
|
53
|
|
|
|
406
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
6,429
|
|
|
|
5,878
|
|
|
|
5,688
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,569
|
|
|
|
2,613
|
|
|
|
2,781
|
|
|
|
|
|
Net amortization of premiums and discounts on investment
securities
|
|
|
815
|
|
|
|
625
|
|
|
|
516
|
|
|
|
|
|
Share-based compensation expense
|
|
|
490
|
|
|
|
664
|
|
|
|
222
|
|
|
|
|
|
Deferred income tax provision
|
|
|
(6,977
|
)
|
|
|
(6,882
|
)
|
|
|
(2,981
|
)
|
|
|
|
|
Contributions to defined benefit pension plan
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in interest receivable and other assets
|
|
|
(17,973
|
)
|
|
|
(12,284
|
)
|
|
|
4,884
|
|
|
|
|
|
Net increase in interest payable and other liabilities
|
|
|
306
|
|
|
|
12,378
|
|
|
|
907
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
46,037
|
|
|
|
69,670
|
|
|
|
58,497
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions
|
|
|
264,998
|
|
|
|
161,375
|
|
|
|
137,486
|
|
|
|
|
|
Proceeds from sales
|
|
|
78
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(408,344
|
)
|
|
|
(107,417
|
)
|
|
|
(111,702
|
)
|
|
|
|
|
Investment securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions
|
|
|
41,511
|
|
|
|
67,560
|
|
|
|
28,847
|
|
|
|
|
|
Purchases
|
|
|
(75,219
|
)
|
|
|
(73,356
|
)
|
|
|
(25,682
|
)
|
|
|
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from redemption
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
|
|
Net increase in loans
|
|
|
(64,754
|
)
|
|
|
(235,110
|
)
|
|
|
(6,825
|
)
|
|
|
|
|
Proceeds from sales of other real estate and repossessed assets
|
|
|
16,950
|
|
|
|
9,802
|
|
|
|
4,298
|
|
|
|
|
|
Proceeds from insurance settlement
|
|
|
208
|
|
|
|
|
|
|
|
1,122
|
|
|
|
|
|
Proceeds from sales of branch bank properties
|
|
|
225
|
|
|
|
554
|
|
|
|
1,825
|
|
|
|
|
|
Purchases of premises and equipment, net
|
|
|
(7,431
|
)
|
|
|
(9,262
|
)
|
|
|
(7,012
|
)
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(231,778
|
)
|
|
|
(184,123
|
)
|
|
|
22,352
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in noninterest-bearing and interest-bearing demand
deposits and savings accounts
|
|
|
222,222
|
|
|
|
111,554
|
|
|
|
38,468
|
|
|
|
|
|
Net increase (decrease) in time deposits
|
|
|
217,111
|
|
|
|
(8,351
|
)
|
|
|
(60,964
|
)
|
|
|
|
|
Net increase in securities sold under agreements to repurchase
|
|
|
6,830
|
|
|
|
36,375
|
|
|
|
18,394
|
|
|
|
|
|
Increase in short-term FHLB advances
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
Repayment of short-term FHLB advances
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
Increase in long-term FHLB advances
|
|
|
|
|
|
|
65,000
|
|
|
|
35,000
|
|
|
|
|
|
Repayment of long-term FHLB advances
|
|
|
(45,025
|
)
|
|
|
(80,024
|
)
|
|
|
(30,023
|
)
|
|
|
|
|
Cash dividends paid
|
|
|
(28,190
|
)
|
|
|
(28,131
|
)
|
|
|
(27,712
|
)
|
|
|
|
|
Proceeds from directors stock purchase plan
|
|
|
244
|
|
|
|
231
|
|
|
|
223
|
|
|
|
|
|
Tax benefits from share-based awards
|
|
|
|
|
|
|
140
|
|
|
|
12
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
36
|
|
|
|
1,368
|
|
|
|
21
|
|
|
|
|
|
Repurchases of common shares
|
|
|
|
|
|
|
|
|
|
|
(25,511
|
)
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
373,228
|
|
|
|
98,162
|
|
|
|
(82,092
|
)
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
187,487
|
|
|
|
(16,291
|
)
|
|
|
(1,243
|
)
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
173,222
|
|
|
|
189,513
|
|
|
|
190,756
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
360,709
|
|
|
$
|
173,222
|
|
|
$
|
189,513
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
46,232
|
|
|
$
|
64,629
|
|
|
$
|
96,039
|
|
|
|
|
|
Federal income taxes paid
|
|
|
9,725
|
|
|
|
16,881
|
|
|
|
20,165
|
|
|
|
|
|
Loans transferred to other real estate and repossessed assets
|
|
|
18,056
|
|
|
|
21,282
|
|
|
|
8,875
|
|
|
|
|
|
Investment securities
available-for-sale
transferred to
Investment securities
held-to-maturity
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
Closed branch bank properties transferred to other assets
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Operations:
Chemical Financial Corporation (the Corporation) operates in a
single operating segment commercial banking. The
Corporation is a financial holding company, headquartered in
Midland, Michigan, that operates through one commercial bank,
Chemical Bank. Chemical Bank operates within the State of
Michigan as a state-chartered commercial bank. Chemical Bank
operates through an internal organizational structure of four
regional banking units and offers a full range of commercial
banking and fiduciary products and services to the residents and
business customers in the banks geographical market areas.
The products and services offered by the regional banking units,
through branch banking offices, are generally consistent
throughout the Corporation, as is the pricing of those products
and services. The marketing of products and services throughout
the Corporations regional banking units is generally
uniform, as many of the markets served by the regional banking
units overlap. The distribution of products and services is
uniform throughout the Corporations regional banking units
and is achieved primarily through retail branch banking offices,
automated teller machines and electronically accessed banking
products.
The Corporations primary sources of revenue are from its
loan products and investment securities.
Accounting
Standards Codification:
The Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) became effective on
July 1, 2009. At that date, the ASC became FASBs
officially recognized source of authoritative
U.S. generally accepted accounting principles (GAAP)
applicable to all public and non-public non-governmental
entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force
(EITF) and related literature. Rules and interpretive releases
of the Securities and Exchange Commission (SEC) under the
authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the
ASC affects the way companies refer to GAAP in financial
statements and accounting policies.
Basis of
Presentation and Principles of Consolidation:
The accounting and reporting policies of the Corporation and its
subsidiaries conform to GAAP and prevailing practices within the
banking industry. The consolidated financial statements of the
Corporation include the accounts of the Corporation and its
wholly owned subsidiaries. All significant income and expenses
are recorded on the accrual basis. Intercompany accounts and
transactions have been eliminated in preparing the consolidated
financial statements.
The Corporation consolidates variable interest entities (VIEs)
in which it is the primary beneficiary. In general, a VIE is an
entity that either (1) has an insufficient amount of equity
to carry out its principal activities without additional
subordinated financial support, (2) has a group of equity
owners that are unable to make significant decisions about its
activities or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive
return as generated by its operations. If any of these
characteristics are present, the entity is subject to a variable
interests consolidation model, and consolidation is based on
variable interests, not on ownership of the entitys
outstanding voting stock. Variable interests are defined as
contractual, ownership, or other monetary interests in an entity
that change with fluctuations in the entitys net asset
value. The primary beneficiary consolidates the VIE; the primary
beneficiary is defined as the enterprise that absorbs a majority
of expected losses or receives a majority of residual returns
(if the losses or returns occur), or both.
The Corporation is a significant limited partner in one low
income housing tax credit partnership. This entity meets the
definition of a VIE. The Corporation is not the primary
beneficiary of the VIE in which it holds an interest, and
therefore the equity investment in the VIE is not consolidated
in the financial statements. Exposure to loss as a result of its
involvement with this entity at December 31, 2009 was
limited to approximately $0.7 million recorded as the
Corporations investment, which includes unfunded
obligations to this project of $0.4 million. The
Corporations investment in the project is recorded in
interest receivable and other assets and the future financial
obligation to this project is recorded in interest payable and
other liabilities in the consolidated statement of financial
position at December 31, 2009.
46
Use of
Estimates:
Management makes estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying footnotes. Estimates that are particularly
susceptible to significant change include the determination of
the allowance for loan losses, pension expense, income taxes,
goodwill and those assets that require fair value measurement.
Actual results could differ from these estimates. Significant
accounting policies of the Corporation and its subsidiaries are
described below:
Cash and
Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, interest-bearing deposits with
unaffiliated banks and others and federal funds sold. Generally,
federal funds are sold for
one-day
periods. Amounts reported under interest-bearing deposits with
unaffiliated banks and others include interest-bearing savings
and time deposits held at other financial institutions and
overnight funds held at the Federal Reserve Bank in lieu of
federal funds sold.
Investment
Securities:
Investment securities include investments in debt and trust
preferred securities. Investment securities are accounted for in
accordance with FASB ASC Topic 320, Investments-Debt and Equity
Securities (ASC 320), which requires investments to be
classified within one of three categories (trading,
held-to-maturity
or
available-for-sale),
based on the type of security and managements intent with
regard to selling the security. The Corporation held no trading
investment securities during the three-year period ended
December 31, 2009.
Designation as an investment security
held-to-maturity
is based on the Corporations intent and ability to hold
the security to maturity. Investment securities
held-to-maturity
are stated at cost, adjusted for purchase price premiums and
discounts. Investment securities that are not
held-to-maturity
are accounted for as securities
available-for-sale,
and are stated at estimated fair value, with the aggregate
unrealized gains and losses, not deemed
other-than-temporary,
classified as a component of accumulated other comprehensive
income (loss), net of income taxes. Realized gains and losses on
the sale of investment securities and
other-than-temporary
impairment (OTTI) charges are determined using the specific
identification method and are included within noninterest income
in the consolidated statements of income. Premiums and discounts
on investment securities are amortized over the estimated lives
of the related investment securities based on the effective
interest yield method and are included in interest income in the
consolidated statements of income.
The Corporation assesses equity and debt securities that have
fair values below amortized cost basis to determine whether
declines (impairment) are
other-than-temporary.
Impairment is
other-than-temporary
if the assessment concludes that it is probable that the holder
will be unable to collect all amounts due according to the
contractual terms of the debt instrument or in instances where
the debt instrument will mature or be disposed of before a full
recovery of its amortized cost.
Effective April 1, 2009, in accordance with FASB Staff
Position
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (later codified in ASC 320), the Corporation began
accounting for declines in the fair value of
held-to-maturity
and
available-for-sale
investment securities below their cost that are deemed to be
other-than-temporary
through earnings as realized losses to the extent the impairment
is related to credit losses. The amount of the impairment
related to other factors is recognized in other comprehensive
income (loss), net of income taxes. Prior to April 1, 2009,
all declines in fair value deemed to be
other-than-temporary
were reflected in earnings as realized losses. In estimating
OTTI losses, management considers, among other things,
(i) the length of time and the extent to which the fair
value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, (iii) the intent of
the Corporation to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery
of amortized cost and (iv) whether it is more
likely-than-not
that the Corporation will be required to sell its investment
prior to recovery.
Other
Securities:
Other securities consisted of Federal Home Loan Bank of
Indianapolis (FHLB) stock of $16.2 million at
December 31, 2009 and 2008, and Federal Reserve Bank (FRB)
stock of $5.9 million at December 31, 2009 and 2008.
Other securities are recorded at cost or par, which is deemed to
be the net realizable value of these assets. The Corporation is
required to own FHLB stock and FRB stock in accordance with its
membership in these organizations. The FHLB requires its members
to provide a five-year advance notice of any request to redeem
FHLB stock.
47
Loans:
Loans are stated at their principal amount outstanding. Interest
income on loans is reported based on the level-yield method and
includes amortization of deferred loan fees and costs over the
loan term. Net loan commitment fees for commitment periods
greater than one year are deferred and amortized into fee income
on a straight-line basis over the commitment period.
Loan interest income is recognized on the accrual basis. The
past due status of a loan is based on the loans
contractual terms. A loan is placed in the nonaccrual category
when principal or interest is past due 90 days or more,
unless the loan is both well-secured and in the process of
collection, or earlier when, in the opinion of management, there
is sufficient reason to doubt the collectibility of principal or
interest. Interest previously accrued, but not collected, is
reversed and charged against interest income at the time the
loan is placed in nonaccrual status. The subsequent recognition
of interest income on a nonaccrual loan is then recognized only
to the extent cash is received and where future collection of
principal is probable. Loans are returned to accrual status when
principal and interest payments are brought current, payments
have been received consistently for a period of time and
collectibility is no longer in doubt.
Nonperforming loans are comprised of those loans accounted for
on a nonaccrual basis, accruing loans contractually past due
90 days or more as to interest or principal payments and
loans modified under troubled debt restructurings.
All nonaccrual commercial, real estate commercial and real
estate construction-commercial loans and loans modified under
troubled debt restructurings have been determined by the
Corporation to meet the definition of an impaired loan. In
addition, other commercial, real estate commercial and real
estate construction-commercial loans may be considered an
impaired loan. A loan is defined to be impaired when it is
probable that payment of principal and interest will not be made
in accordance with the contractual terms of the loan agreement.
Impaired loans are carried at the present value of expected cash
flows discounted at the loans effective interest rate or
at the estimated fair value of the collateral, if the loan is
collateral dependent. A portion of the allowance for loan losses
may be allocated to impaired loans. All impaired loans are
evaluated individually to determine whether or not a valuation
allowance is required.
Allowance
for Loan Losses:
The allowance for loan losses (allowance) is presented as a
reserve against loans. The allowance represents
managements assessment of probable losses inherent in the
Corporations loan portfolio.
Managements evaluation of the adequacy of the allowance is
based on a continuing review of the loan portfolio, actual loan
loss experience, the underlying value of the collateral, risk
characteristics of the loan portfolio, the level and composition
of nonperforming loans, the financial condition of the
borrowers, the balance of the loan portfolio, loan growth,
economic conditions, employment levels in the Corporations
local markets, and special factors affecting specific business
sectors. The Corporation maintains formal policies and
procedures to monitor and control credit risk.
The allowance provides for probable losses that have been
identified with specific customer relationships and for probable
losses believed to be inherent in the loan portfolio, but that
have not been specifically identified. The Corporation utilizes
its own loss experience to estimate inherent losses on loans.
Internal risk ratings are assigned to each commercial, real
estate commercial and real estate construction-commercial loan
at the time of approval and are subject to subsequent periodic
reviews by senior management. The Corporation performs a
detailed credit quality review quarterly on all large loans that
have deteriorated below certain levels of credit risk, and may
allocate a specific portion of the allowance to such loans based
upon this review. A portion of the allowance is allocated to the
remaining loans by applying projected loss ratios, based on
numerous factors. Projected loss ratios incorporate factors such
as recent charge-off experience, trends with respect to
adversely risk-rated commercial, real estate commercial and real
estate construction-commercial loans, trends with respect to
past due and nonaccrual loans, changes in economic conditions
and trends, changes in the value of underlying collateral and
other credit risk factors. This evaluation involves a high
degree of uncertainty.
Management maintains an unallocated allowance to recognize the
uncertainty and imprecision underlying the process of estimating
projected loan losses. Determination of the probable losses
inherent in the portfolio, which are not necessarily captured by
the allocation methodology discussed above, involves the
exercise of judgment. The unallocated allowance associated with
the imprecision in the risk rating system is based generally on
a historical evaluation of the accuracy of the risk ratings
associated with loans.
Although the Corporation allocates portions of the allowance to
specific loans and loan portfolios, the entire allowance is
available for any loan losses that occur. Loans that are deemed
not collectible are charged off and deducted from the allowance.
The provision for loan losses and recoveries on loans previously
charged off are added to the allowance. Collection efforts may
continue and recoveries may occur after a loan is charged off
against the allowance.
Various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan
losses. Such agencies may require additions to the allowance
based on their judgment reflecting information available to them
at the time of their examinations.
48
Mortgage
Banking Operations:
The origination of real estate residential (mortgage) loans is
an integral component of the business of the Corporation. The
Corporation generally sells its originations of long-term fixed
interest rate residential mortgage loans in the secondary
market. Gains and losses on the sales of these loans are
determined using the specific identification method. The
Corporation sells mortgage loans in the secondary market on
either a servicing retained or released basis.
Mortgage loans held for sale are carried at the lower of
aggregate cost or market. The value of mortgage loans held for
sale and other residential mortgage loan commitments to
customers are hedged by utilizing best efforts forward
commitments to sell loans to investors in the secondary market.
Such forward commitments are generally entered into at the time
when applications are taken to protect the value of the mortgage
loans from increases in market interest rates during the period
held. Mortgage loan commitments to customers totaled
$18.2 million at December 31, 2009 and
$66.2 million at December 31, 2008. Mortgage loans
originated for sale are generally sold within 45 days after
closing.
The Corporation recognizes revenue associated with the expected
future cash flows of servicing loans at the time a forward loan
sales commitment is made, as required under Securities and
Exchange Commission Staff Accounting Bulletin No. 109
Written Loan Commitments Recorded at Fair Value Through
Earnings.
The Corporation accounts for mortgage servicing rights (MSRs) by
separately recognizing servicing assets. An asset is recognized
for the rights to service mortgage loans that are created by the
origination of mortgage loans that are sold with the servicing
retained by the Corporation. The recognition of the asset
results in an increase in the gains recognized upon the sale of
the mortgage loans sold. The Corporation amortizes MSRs in
proportion to and over the period of net servicing income and
assesses MSRs for impairment based on fair value at each
reporting date. Prepayments of mortgage loans result in
increased amortization of MSRs, as the remaining book value of
the MSRs is expensed at the time of prepayment. Any impairment
of MSRs is recognized as a valuation allowance, resulting in a
reduction of mortgage banking revenue. The valuation allowance
is recovered when impairment that is believed to be temporary no
longer exists.
Other-than-temporary
impairments are recognized if the recoverability of the carrying
value is determined to be remote. When this occurs, the
unrecoverable portion of the valuation allowance is recorded as
a direct write-down to the carrying value of MSRs. This direct
write-down permanently reduces the carrying value of the MSRs,
precluding recognition of subsequent recoveries. For purposes of
measuring fair value, the Corporation utilizes a third-party
modeling software program. Servicing income is recognized in
noninterest income when earned and expenses are recognized when
incurred.
Premises
and Equipment:
Land is recorded at cost. Premises and equipment are stated at
cost less accumulated depreciation. Premises and equipment are
depreciated over the estimated useful lives of the assets. The
estimated useful lives are generally 25 to 39 years for
buildings and three to ten years for all other depreciable
assets. Depreciation is computed on the straight-line method.
Maintenance and repairs are charged to expense as incurred.
Other
Real Estate:
Other real estate (ORE) is comprised of commercial and
residential real estate properties, including development
properties, obtained in partial or total satisfaction of loan
obligations. ORE is recorded at the lower of cost or the
estimated fair value less anticipated selling costs based upon
the propertys appraised value at the date of transfer to
ORE and managements estimate of the fair value of the
collateral, with any difference between the fair value of the
property and the carrying value of the loan charged to the
allowance for loan losses. Subsequent changes in fair value of
ORE are recognized as adjustments to the carrying amount, not to
exceed the initial carrying value of the assets at the time of
transfer. Changes in the fair value of ORE subsequent to
transfer to ORE are recorded in other operating expenses on the
consolidated statements of income. Gains or losses not
previously recognized resulting from the sale of ORE are also
recognized in other operating expenses on the date of sale. ORE
totaling $17.2 million and $19.5 million at
December 31, 2009 and 2008, respectively, is included in
the consolidated statements of financial position in interest
receivable and other assets.
Intangible
Assets:
Intangible assets consist of goodwill, core deposit intangible
assets and MSRs. Goodwill is not amortized, but rather is
subject to annual impairment tests or more frequently if
triggering events occur and indicate potential impairment. Core
deposit intangible assets are amortized over periods ranging
from 10 to 15 years on a straight-line or accelerated
basis, as applicable. MSRs are amortized in proportion to, and
over the life of, the estimated net future servicing income of
the underlying loans.
49
Share-based
Compensation:
The Corporation accounts for share-based compensation using the
modified-prospective transition method. Under that method,
compensation cost is recognized for all of the
Corporations share-based awards granted after
December 31, 2005, based on the estimated grant date fair
value as computed using the Black-Scholes option pricing model.
The resulting fair value of share-based awards is recognized as
compensation expense on a straight-line basis over the requisite
service period.
Cash flows realized from the tax benefits of exercised stock
option awards that result from actual tax deductions that are in
excess of the recorded tax benefits related to the compensation
expense recognized for those options (excess tax benefits) are
classified as financing activities on the consolidated
statements of cash flows.
Short-term
Borrowings:
Short-term borrowings include securities sold under agreements
to repurchase with customers and short-term FHLB advances. These
borrowings have original scheduled maturities of one year or
less. The Corporation sells certain securities under agreements
to repurchase with customers. The agreements are collateralized
financing transactions and the obligations to repurchase
securities sold are reflected as a liability in the accompanying
consolidated statements of financial position. The dollar amount
of the securities underlying the agreements remain in the asset
accounts. See the description of FHLB advances below.
Federal
Home Loan Bank Advances, Short-term and Long-term:
Federal Home Loan Bank advances are borrowings from the FHLB to
fund short-term liquidity needs as well as a portion of the loan
and investment securities portfolios. These advances are secured
under a blanket security agreement by first lien real estate
residential loans with an aggregate book value equal to at least
155% of the FHLB advances and the FHLB stock owned by the
Corporation. FHLB advances with an original maturity of one year
or less are classified as short-term and FHLB advances with an
original maturity of more than one year are classified as
long-term.
Fair
Value Measurements:
Fair value for assets and liabilities measured at fair value on
a recurring or nonrecurring basis refers to the price that would
be received to sell an asset or paid to transfer a liability (an
exit price) in an orderly transaction between market
participants in the market in which the reporting entity
transacts such sales or transfers based on the assumptions
market participants would use when pricing an asset or
liability. Assumptions are developed based on prioritizing
information within a fair value hierarchy that gives the highest
priority to quoted prices in active markets and the lowest
priority to unobservable data, such as the reporting
entitys own data.
The Corporation may choose to measure eligible items at fair
value at specified election dates. Unrealized gains and losses
on items for which the fair value measurement option has been
elected are reported in earnings at each subsequent reporting
date. The fair value option (i) may be applied instrument
by instrument, with certain exceptions, allowing the Corporation
to record identical financial assets and liabilities at fair
value or by another measurement basis permitted under GAAP,
(ii) is irrevocable (unless a new election date occurs) and
(iii) is applied only to entire instruments and not to
portions of instruments. At December 31, 2009 and 2008, the
Corporation had not elected the fair value option for any
financial assets or liabilities.
Pension
and Postretirement Benefit Plan Actuarial Assumptions:
The Corporations defined benefit pension, supplemental
pension and postretirement benefit obligations and related costs
are calculated using actuarial concepts and measurements. Two
critical assumptions, the discount rate and the expected
long-term rate of return on plan assets, are important elements
of expense
and/or
benefit obligation measurements. Other assumptions involve
employee demographic factors such as retirement patterns,
mortality, turnover and the rate of compensation increase. The
Corporation evaluates the critical and other assumptions
annually.
The discount rate enables the Corporation to state expected
future benefit payments as a present value on the measurement
date. As of December 31, 2009 and 2008, the Corporation
utilized the results from a bond matching technique to match
cash flows of the defined benefit pension plan against both a
bond portfolio derived from the S&P bond database of AA or
better bonds and the Citigroup Pension Discount Curve to
determine the discount rate. A lower discount rate increases the
present value of benefit obligations and increases pension,
supplemental pension and postretirement benefit expenses.
To determine the expected long-term rate of return on defined
benefit pension plan assets, the Corporation considers the
current and expected asset allocation of the defined benefit
pension plan, as well as historical and expected returns on each
asset class. A lower expected rate of return on defined benefit
pension plan assets will increase pension expense.
50
The Corporation recognizes the over- or under-funded status of a
plan as an asset or liability as measured by the difference
between the fair value of the plan assets and the projected
benefit obligation and any unrecognized prior service costs and
actuarial gains and losses are recognized as a component of
accumulated other comprehensive income (loss). The Corporation
also measures defined benefit plan assets and obligations as of
the date of the Corporations fiscal year-end. For
measurement purposes, the Corporation utilizes a measurement
date of December 31.
Advertising
Costs:
Advertising costs are expensed as incurred.
Income
and Other Taxes:
The Corporation is subject to the income and other tax laws of
the United States and the State of Michigan. These laws are
complex and are subject to different interpretations by the
taxpayer and the various taxing authorities. In determining the
provision for income and other taxes, management must make
judgments and estimates about the application of these
inherently complex laws, related regulations and case law. In
the process of preparing the Corporations tax returns,
management attempts to make reasonable interpretations of the
tax laws. These interpretations are subject to challenge by the
tax authorities upon audit or to reinterpretation based on
managements ongoing assessment of facts and evolving case
law.
The Corporation and its subsidiaries file a consolidated federal
income tax return. The provision for federal income taxes is
based on income and expenses, as reported in the consolidated
financial statements, rather than amounts reported on the
Corporations federal income tax return. The difference
between the federal statutory income tax rate and the
Corporations effective federal income tax rate is
primarily a function of the proportion of the Corporations
interest income exempt from federal taxation, nondeductible
interest expense and other nondeductible expenses relative to
pretax income and tax credits. When income and expenses are
recognized in different periods for tax purposes than for book
purposes, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to the temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized as income or expense in the
period that includes the enactment date.
On a quarterly basis, management assesses the reasonableness of
its effective federal tax rate based upon its current best
estimate of taxable income and the applicable taxes expected for
the full year. Deferred tax assets and liabilities are
reassessed on an annual basis, or sooner, if business events or
circumstances warrant. Management also assesses the need for a
valuation allowance for deferred tax assets on a quarterly basis
using information about the Corporations current and
historical financial position and results of operations.
Management expects to realize the full benefits of the deferred
tax assets recorded at December 31, 2009.
Income tax positions are evaluated to determine whether it is
more-likely-than-not that a tax position will be sustained upon
examination based on the technical merits of the tax position.
If a tax position is more-likely-than-not to be sustained, a tax
benefit is recognized for the amount that is greater than 50%
likely to be realized. Reserves for contingent tax liabilities
attributable to unrecognized tax benefits associated with
uncertain tax positions, are reviewed quarterly for adequacy
based upon developments in tax law and the status of audit
examinations. The Corporation had no reserve for contingent
income tax liabilities recorded at December 31, 2009.
Earnings
Per Common Share:
Basic earnings per common share for the Corporation is computed
by dividing net income by the weighted average number of common
shares outstanding during the period. Basic earnings per common
share excludes any dilutive effect of common stock equivalents.
Diluted earnings per common share for the Corporation is
computed by dividing net income by the sum of the weighted
average number of common shares outstanding and the dilutive
effect of common stock equivalents outstanding during the
period. Average shares of common stock for diluted net income
per common share include shares to be issued upon exercise of
stock options granted under the Corporations stock option
plans, stock to be issued under the deferred stock compensation
plan for non-employee directors and stock to be issued under the
stock purchase plan for non-employee advisors. For any period in
which a loss is recorded, the assumed exercise of stock options
and stock to be issued under the deferred stock compensation
plan and the stock purchase plan would have an anti-dilutive
impact on the loss per common share and thus are excluded in the
diluted earnings per common share
51
calculation. The following summarizes the numerator and
denominator of the basic and diluted earnings per common share
computations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator for both basic and diluted earnings per common share,
net income
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
$
|
39,009
|
|
|
|
Denominator for basic earnings per common share, weighted
average common shares outstanding
|
|
|
23,890
|
|
|
|
23,840
|
|
|
|
24,360
|
|
Weighted average common stock equivalents
|
|
|
19
|
|
|
|
13
|
|
|
|
11
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
23,909
|
|
|
|
23,853
|
|
|
|
24,371
|
|
|
|
Basic earnings per common share
|
|
$
|
0.42
|
|
|
$
|
0.83
|
|
|
$
|
1.60
|
|
Diluted earnings per common share
|
|
|
0.42
|
|
|
|
0.83
|
|
|
|
1.60
|
|
The average number of exercisable employee stock option awards
outstanding that were anti-dilutive, whereby the option exercise
price per share exceeded the market price per share, and
therefore not included in the computation of earnings per common
share was 529,571 for the year ended December 31, 2009,
532,765 for the year ended December 31, 2008 and 534,256
for the year ended December 31, 2007.
Comprehensive
Income and Accumulated Other Comprehensive Loss:
Comprehensive income of the Corporation includes net income and
adjustments to equity for changes in unrealized gains and losses
on investment securities
available-for-sale
and the difference between the fair value of pension and other
postretirement plan assets and their respective projected
benefit obligations, net of income taxes. The Corporation
displays comprehensive income as a component in the consolidated
statements of changes in shareholders equity.
The components of accumulated other comprehensive loss, net of
related tax benefits, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Net unrealized gains on investment securities
available-for-sale,
net of related tax (expense) of $(1,646) at December 31,
2009, $(1,610) at December 31, 2008 and $(848) at
December 31, 2007
|
|
$
|
3,058
|
|
|
$
|
2,990
|
|
|
$
|
1,576
|
|
Pension and other postretirement benefits adjustment, net of
related tax benefit of $8,456 at December 31, 2009, $8,519
at December 31, 2008 and $1,816 at December 31, 2007
|
|
|
(15,705
|
)
|
|
|
(15,821
|
)
|
|
|
(3,373
|
)
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(12,647
|
)
|
|
$
|
(12,831
|
)
|
|
$
|
(1,797
|
)
|
|
|
Subsequent
Events:
Events occurring subsequent to the date of the most recent
balance sheet have been evaluated for potential recognition or
disclosure in the consolidated financial statements through
February 25, 2010, the date of the filing of the
consolidated financial statements with the SEC.
Pending
Accounting Pronouncements:
Transfers of Financial Assets: In June 2009,
the FASB issued guidance amending the accounting for transfers
of financial assets. The new guidance amends existing guidance
by eliminating the concept of a qualifying special-purpose
entity (QSPE), creating more stringent conditions for reporting
a transfer of a portion of a financial asset as a sale,
clarifying other sale-accounting criteria and changing the
initial measurement of a transferors interest in
transferred financial assets. The amended guidance is effective
as of the beginning of a companys first fiscal year that
begins after November 15, 2009 and for subsequent interim
and annual periods. The adoption of the amended guidance as of
January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Variable Interest Entities (VIEs): In June
2009, the FASB issued guidance amending the accounting for
consolidation of VIEs. This new guidance amends existing
guidance by eliminating exceptions for consolidating QSPEs,
adding new criteria for determining the primary beneficiary and
increasing the frequency of required reassessments to determine
whether a company is the primary beneficiary of a VIE. The
amended guidance also contains a new requirement that any term,
transaction or arrangement that does not have a substantive
effect on an entitys status as a VIE, a companys
power over a VIE or a companys obligation to absorb losses
or rights to receive benefits of an entity must be disregarded
when evaluating consolidation of a VIE. The amended guidance is
effective as of the beginning of a companys first fiscal
year that begins after November 15, 2009 and for subsequent
interim and
52
annual periods. The adoption of the amended guidance as of
January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
NOTE 2 INVESTMENT SECURITIES
The following is a summary of the amortized cost and fair value
of investment securities
available-for-sale
and investment securities
held-to-maturity
at December 31, 2009 and 2008:
Investment
Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
190,920
|
|
|
$
|
1,228
|
|
|
$
|
163
|
|
|
$
|
191,985
|
|
State and political subdivisions
|
|
|
3,506
|
|
|
|
56
|
|
|
|
|
|
|
|
3,562
|
|
Mortgage-backed securities
|
|
|
150,325
|
|
|
|
4,174
|
|
|
|
294
|
|
|
|
154,205
|
|
Collateralized mortgage obligations
|
|
|
223,806
|
|
|
|
298
|
|
|
|
346
|
|
|
|
223,758
|
|
Corporate bonds
|
|
|
19,260
|
|
|
|
209
|
|
|
|
458
|
|
|
|
19,011
|
|
|
|
Total
|
|
$
|
587,817
|
|
|
$
|
5,965
|
|
|
$
|
1,261
|
|
|
$
|
592,521
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
21,066
|
|
|
$
|
428
|
|
|
$
|
|
|
|
$
|
21,494
|
|
Government sponsored agencies
|
|
|
167,618
|
|
|
|
4,616
|
|
|
|
|
|
|
|
172,234
|
|
State and political subdivisions
|
|
|
4,458
|
|
|
|
94
|
|
|
|
|
|
|
|
4,552
|
|
Mortgage-backed securities
|
|
|
167,133
|
|
|
|
2,401
|
|
|
|
320
|
|
|
|
169,214
|
|
Collateralized mortgage obligations
|
|
|
37,527
|
|
|
|
30
|
|
|
|
272
|
|
|
|
37,285
|
|
Corporate bonds
|
|
|
47,545
|
|
|
|
23
|
|
|
|
2,400
|
|
|
|
45,168
|
|
|
|
Total securities
|
|
$
|
445,347
|
|
|
$
|
7,592
|
|
|
$
|
2,992
|
|
|
$
|
449,947
|
|
|
|
Investment
Securities
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
120,447
|
|
|
$
|
1,954
|
|
|
$
|
679
|
|
|
$
|
121,722
|
|
Mortgage-backed securities
|
|
|
350
|
|
|
|
33
|
|
|
|
|
|
|
|
383
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
|
|
|
|
6,875
|
|
|
|
3,625
|
|
|
|
Total
|
|
$
|
131,297
|
|
|
$
|
1,987
|
|
|
$
|
7,554
|
|
|
$
|
125,730
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
1,007
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
1,017
|
|
State and political subdivisions
|
|
|
85,495
|
|
|
|
845
|
|
|
|
1,170
|
|
|
|
85,170
|
|
Mortgage-backed securities
|
|
|
509
|
|
|
|
27
|
|
|
|
|
|
|
|
536
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
|
|
|
|
6,667
|
|
|
|
3,833
|
|
|
|
Total
|
|
$
|
97,511
|
|
|
$
|
882
|
|
|
$
|
7,837
|
|
|
$
|
90,556
|
|
|
|
At December 31, 2009, the Corporation held
$10.5 million of trust preferred investment securities that
were recorded as
held-to-maturity,
with $10.0 million representing a 100% interest in a trust
preferred investment security of a small non-public bank holding
company in Michigan that was purchased in the second quarter of
2008 and $0.5 million representing a 10% interest in
another small non-bank holding company located in Michigan. The
Corporation purchased each of these investment securities in
negotiated transactions with the issuers, and therefore, there
is not an active trading market for these investment securities.
At December 31, 2009, it was the Corporations opinion
that the market for trust preferred investment securities was
not active, and thus, in accordance with GAAP, when there is a
significant decrease in the volume and activity for an asset or
liability in relation to normal market activity, adjustments to
transaction or quoted prices may be necessary or a change in
valuation technique or multiple valuation techniques may be
appropriate. The fair values of the trust preferred investment
securities were based upon a calculation of discounted cash
flows. The cash flows were discounted based upon both observable
inputs and appropriate risk adjustments that market participants
would make for nonperformance, illiquidity and issuer specifics.
An independent third party provided the
53
Corporation with observable inputs based on the existing market
and insight into appropriate rate of return adjustments that
market participants would require for the additional risk
associated with investment securities of this nature. Using a
model that incorporated the average current yield of publicly
traded performing trust preferred securities of large financial
institutions with no known material financial difficulties at
December 31, 2009, and adjusted for both illiquidity and
the specific characteristics of the issuer, such as size,
leverage position and location, the Corporation calculated an
implied yield of 35% on its $10.0 million trust preferred
investment security and 25% for its $0.5 million trust
preferred investment security. Based upon these implied yields,
the fair values of the trust preferred investment securities
were calculated by the Corporation at $3.5 million and
$0.1 million, respectively, resulting in a combined
impairment of $6.9 million. At December 31, 2009, the
Corporation concluded that the $6.9 million of combined
impairment on the trust preferred investment securities was
temporary in nature.
The following is a summary of the amortized cost and fair value
of investment securities at December 31, 2009, by maturity,
for both
available-for-sale
and
held-to-maturity
investment securities. The maturities of mortgage-backed
securities and collateralized mortgage obligations are based on
scheduled principal payments. The maturities of all other debt
securities are based on final contractual maturity.
Investment
Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
234,598
|
|
|
$
|
236,483
|
|
Due after one year through five years
|
|
|
280,399
|
|
|
|
281,872
|
|
Due after five years through ten years
|
|
|
40,599
|
|
|
|
41,103
|
|
Due after ten years
|
|
|
32,221
|
|
|
|
33,063
|
|
|
|
Total
|
|
$
|
587,817
|
|
|
$
|
592,521
|
|
|
|
Investment
Securities
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
11,058
|
|
|
$
|
11,146
|
|
Due after one year through five years
|
|
|
49,816
|
|
|
|
50,727
|
|
Due after five years through ten years
|
|
|
32,585
|
|
|
|
32,883
|
|
Due after ten years
|
|
|
37,838
|
|
|
|
30,974
|
|
|
|
Total
|
|
$
|
131,297
|
|
|
$
|
125,730
|
|
|
|
The following table summarizes information about investment
securities with gross unrealized losses at December 31,
2009 and 2008, excluding those for which OTTI charges have been
recognized, aggregated by category and length of time that
individual securities have been in a continuous unrealized loss
position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
Government sponsored agencies
|
|
$
|
47,633
|
|
|
$
|
163
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47,633
|
|
|
$
|
163
|
|
State and political subdivisions
|
|
|
30,959
|
|
|
|
530
|
|
|
|
1,955
|
|
|
|
149
|
|
|
|
32,914
|
|
|
|
679
|
|
Mortgage-backed securities
|
|
|
26,709
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
26,709
|
|
|
|
294
|
|
Collateralized mortgage obligations
|
|
|
100,832
|
|
|
|
311
|
|
|
|
9,364
|
|
|
|
35
|
|
|
|
110,196
|
|
|
|
346
|
|
Corporate bonds
|
|
|
218
|
|
|
|
6
|
|
|
|
2,031
|
|
|
|
452
|
|
|
|
2,249
|
|
|
|
458
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
3,625
|
|
|
|
6,875
|
|
|
|
3,625
|
|
|
|
6,875
|
|
|
|
Total
|
|
$
|
206,351
|
|
|
$
|
1,304
|
|
|
$
|
16,975
|
|
|
$
|
7,511
|
|
|
$
|
223,326
|
|
|
$
|
8,815
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
State and political subdivisions
|
|
$
|
32,766
|
|
|
$
|
1,161
|
|
|
$
|
131
|
|
|
$
|
9
|
|
|
$
|
32,897
|
|
|
$
|
1,170
|
|
Mortgage-backed securities
|
|
|
49,325
|
|
|
|
320
|
|
|
|
469
|
|
|
|
|
|
|
|
49,794
|
|
|
|
320
|
|
Collateralized mortgage obligations
|
|
|
29,205
|
|
|
|
272
|
|
|
|
47
|
|
|
|
|
|
|
|
29,252
|
|
|
|
272
|
|
Corporate bonds
|
|
|
17,584
|
|
|
|
259
|
|
|
|
22,630
|
|
|
|
2,141
|
|
|
|
40,214
|
|
|
|
2,400
|
|
Trust preferred securities
|
|
|
3,833
|
|
|
|
6,667
|
|
|
|
|
|
|
|
|
|
|
|
3,833
|
|
|
|
6,667
|
|
|
|
Total
|
|
$
|
132,713
|
|
|
$
|
8,679
|
|
|
$
|
23,277
|
|
|
$
|
2,150
|
|
|
$
|
155,990
|
|
|
$
|
10,829
|
|
|
|
Gross realized gains on investment securities transactions
during 2009 were $0.1 million, compared to
$1.7 million during 2008. The Corporation realized a
$1.7 million gain in 2008 on the sale of 92% of its
MasterCard Class B shares that had no cost basis and
realized a $0.1 million gain in 2009 on the sale of the
remaining 8% of its MasterCard Class B shares. In addition,
the Corporation recognized $0.4 million of loss related to
the write-down of unrealized losses that were deemed to be
other-than-temporary
in 2008.
An assessment is performed quarterly by the Corporation to
determine whether unrealized losses in its investment securities
portfolio are temporary or
other-than-temporary.
The Corporation reviews factors such as financial statements,
credit ratings, news releases and other pertinent information of
the underlying issuer or company to make its determination.
Management did not believe any individual unrealized loss on any
investment security, as of December 31, 2009, represented
an OTTI. Management believed that the unrealized losses on
investment securities at December 31, 2009 were due
primarily to changes in interest rates, increased credit spreads
and reduced market liquidity and not as a result of
credit-related issues. Unrealized losses of $0.5 million in
the corporate bond portfolio were attributable to one issuer
experiencing declining credit quality. Unrealized losses of
$6.9 million in the trust preferred securities portfolio,
related to trust preferred securities of two well-capitalized
bank holding companies in Michigan were attributable to
illiquidity in certain financial markets. The Corporation
performed an analysis of the creditworthiness of these issuers
and concluded that, at December 31, 2009, the Corporation
expected to recover the entire amortized cost basis of these
investment securities.
As of December 31, 2009, the Corporation did not have the
intent to sell any of its impaired investment securities and
believed that it was more likely than not that the Corporation
will not have to sell any such investment securities before a
full recovery of amortized cost. Accordingly, as of
December 31, 2009, the Corporation believed the impairments
in its investment securities portfolio were temporary in nature.
Additionally, no impairment loss was realized in the
Corporations consolidated statement of income for 2009.
However, there is no assurance that OTTI may not occur in the
future.
Investment securities with a book value of $452.9 million
at December 31, 2009 were pledged to secure public fund
deposits, short-term borrowings and for other purposes as
required by law; at December 31, 2008, the corresponding
amount was $418.0 million.
NOTE 3 LOANS
A summary of loans follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Commercial
|
|
$
|
584,286
|
|
|
$
|
587,554
|
|
Real estate commercial
|
|
|
785,675
|
|
|
|
786,404
|
|
Real estate construction
|
|
|
121,305
|
|
|
|
119,001
|
|
Real estate residential
|
|
|
739,380
|
|
|
|
839,555
|
|
Consumer
|
|
|
762,514
|
|
|
|
649,163
|
|
|
|
Total loans
|
|
$
|
2,993,160
|
|
|
$
|
2,981,677
|
|
|
|
Chemical Bank has extended loans to its directors, executive
officers and their affiliates. These loans were made in the
ordinary course of business upon normal terms, including
collateralization and interest rates prevailing at the time and
did not involve more than the normal risk of repayment by the
borrower. The aggregate loans outstanding to the directors,
executive officers and their affiliates totaled approximately
$18.4 million at December 31, 2009 and
$14.9 million at December 31, 2008. During 2009, there
were
55
approximately $28.3 million of new loans and other
additions, while repayments and other reductions totaled
approximately $24.8 million.
Loans held for sale, comprised of real estate residential loans,
were $8.4 million at December 31, 2009,
$8.5 million at December 31, 2008 and
$7.9 million at December 31, 2007.
Changes in the allowance for loan losses were as follows for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Balance at beginning of year:
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
$
|
34,098
|
|
Provision for loan losses
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
11,500
|
|
Loan charge-offs
|
|
|
(38,686
|
)
|
|
|
(33,942
|
)
|
|
|
(6,988
|
)
|
Loan recoveries
|
|
|
3,471
|
|
|
|
2,376
|
|
|
|
812
|
|
|
|
Net loan charge-offs
|
|
|
(35,215
|
)
|
|
|
(31,566
|
)
|
|
|
(6,176
|
)
|
|
|
Balance at end of year
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
|
A summary of nonperforming loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
19,309
|
|
|
$
|
16,324
|
|
|
$
|
10,961
|
|
Real estate commercial
|
|
|
49,419
|
|
|
|
27,344
|
|
|
|
19,672
|
|
Real estate construction
|
|
|
15,184
|
|
|
|
15,310
|
|
|
|
12,979
|
|
Real estate residential
|
|
|
15,508
|
|
|
|
12,175
|
|
|
|
8,516
|
|
Consumer
|
|
|
7,169
|
|
|
|
5,313
|
|
|
|
3,468
|
|
|
|
Total nonaccrual loans
|
|
|
106,589
|
|
|
|
76,466
|
|
|
|
55,596
|
|
Accruing loans contractually past due 90 days or more as to
interest or principal payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,371
|
|
|
|
1,652
|
|
|
|
1,958
|
|
Real estate commercial
|
|
|
3,971
|
|
|
|
9,995
|
|
|
|
4,170
|
|
Real estate construction
|
|
|
1,990
|
|
|
|
759
|
|
|
|
|
|
Real estate residential
|
|
|
3,614
|
|
|
|
3,369
|
|
|
|
1,470
|
|
Consumer
|
|
|
787
|
|
|
|
1,087
|
|
|
|
166
|
|
|
|
Total accruing loans contractually past due 90 days or more
as to interest or principal payments
|
|
|
11,733
|
|
|
|
16,862
|
|
|
|
7,764
|
|
Loans modified under troubled debt restructurings
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
135,755
|
|
|
$
|
93,328
|
|
|
$
|
63,360
|
|
|
|
Interest income totaling $2.1 million in 2009 and 2008 and
$1.8 million in 2007 was recorded on nonaccrual loans.
Additional interest income that would have been recorded on
these loans had they been current in accordance with their
original terms was $6.1 million in 2009, $3.7 million
in 2008 and $3.0 million in 2007.
A summary of impaired loans and the related valuation allowance
at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
|
Valuation Allowance
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Impaired commercial, real estate commercial and real estate
construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With valuation allowance
|
|
$
|
38,217
|
|
|
$
|
30,306
|
|
|
$
|
22,224
|
|
|
$
|
10,507
|
|
|
$
|
9,179
|
|
|
$
|
4,616
|
|
With no valuation allowance
|
|
|
45,695
|
|
|
|
28,672
|
|
|
|
23,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial, real estate commercial and real
estate construction loans
|
|
|
83,912
|
|
|
|
58,978
|
|
|
|
45,855
|
|
|
|
10,507
|
|
|
|
9,179
|
|
|
|
4,616
|
|
Loans modified under troubled debt restructurings
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
101,345
|
|
|
$
|
58,978
|
|
|
$
|
45,855
|
|
|
$
|
11,188
|
|
|
$
|
9,179
|
|
|
$
|
4,616
|
|
|
|
Average balance of impaired loans during the year
|
|
$
|
88,218
|
|
|
$
|
50,239
|
|
|
$
|
31,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
NOTE 4 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
11,787
|
|
|
$
|
11,798
|
|
Buildings
|
|
|
69,864
|
|
|
|
67,018
|
|
Equipment
|
|
|
47,890
|
|
|
|
45,834
|
|
|
|
|
|
|
129,541
|
|
|
|
124,650
|
|
Accumulated depreciation
|
|
|
(75,607
|
)
|
|
|
(71,614
|
)
|
|
|
Total Premises and Equipment
|
|
$
|
53,934
|
|
|
$
|
53,036
|
|
|
|
NOTE 5 GOODWILL
Goodwill was $69.9 million at December 31, 2009 and
2008. The Corporations goodwill impairment review is
performed annually by management, or more frequently if
triggering events occur and indicate potential impairment, and
is additionally reviewed by an independent third-party appraisal
firm. The income and market approach methodologies prescribed in
FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC
820), were utilized to estimate the value of the
Corporations goodwill. The income approach quantifies the
present value of future economic benefits by capitalizing or
discounting the cash flows of a business. This approach
considers projected dividends, earnings, dividend paying
capacity and future residual value. The market approach
estimates the fair value of the entity by comparing it to
similar companies that have recently been acquired or companies
that are publicly traded on an organized exchange. The market
approach includes a comparison of the financial condition of the
entity against the financial characteristics and pricing
information of comparable companies. Based on the results of
these valuations, the Corporations goodwill was not
impaired at December 31, 2009 or 2008.
NOTE 6 OTHER ACQUIRED INTANGIBLE ASSETS
The following sets forth the carrying amounts, accumulated
amortization and amortization expense of other acquired
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Original
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Original
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
(In thousands)
|
|
|
Core deposit intangibles
|
|
$
|
18,033
|
|
|
$
|
15,702
|
|
|
$
|
2,331
|
|
|
$
|
18,033
|
|
|
$
|
14,983
|
|
|
$
|
3,050
|
|
|
|
There were no additions of other acquired intangible assets
during 2009 and 2008.
Amortization expense for the years ended December 31 follows (in
thousands):
|
|
|
|
|
2009
|
|
$
|
719
|
|
2008
|
|
|
1,543
|
|
2007
|
|
|
2,781
|
|
Estimated amortization expense for the years ending December 31
follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
470
|
|
2011
|
|
|
406
|
|
2012
|
|
|
406
|
|
2013
|
|
|
344
|
|
2014
|
|
|
269
|
|
2015 and thereafter
|
|
|
436
|
|
|
|
Total
|
|
$
|
2,331
|
|
|
|
57
NOTE 7 MORTGAGE SERVICING RIGHTS
For the three years ended December 31, 2009, activity for
capitalized mortgage servicing rights was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Mortgage Servicing Rights (MSRs):
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
2,191
|
|
|
$
|
2,283
|
|
|
$
|
2,398
|
|
Additions
|
|
|
2,736
|
|
|
|
978
|
|
|
|
880
|
|
Amortization
|
|
|
(1,850
|
)
|
|
|
(1,070
|
)
|
|
|
(995
|
)
|
|
|
End of year
|
|
$
|
3,077
|
|
|
$
|
2,191
|
|
|
$
|
2,283
|
|
|
|
Loans serviced for others that have servicing rights capitalized
|
|
$
|
755,122
|
|
|
$
|
604,478
|
|
|
$
|
569,806
|
|
|
|
Fair value of MSRs at end of year
|
|
$
|
4,776
|
|
|
$
|
2,287
|
|
|
$
|
3,845
|
|
|
|
The fair value of MSRs was estimated by calculating the present
value of estimated future net servicing cash flows, taking into
consideration expected prepayment rates, discount rates,
servicing costs and other economic factors that are based on
current market conditions. The prepayment rates and the discount
rate are the most significant factors affecting valuation of the
MSRs. Increases in mortgage loan prepayments reduce estimated
future net servicing cash flows because the life of the
underlying loan is reduced. Expected loan prepayment rates are
validated by a third-party model. At December 31, 2009, the
weighted average coupon rate of the portfolio was 5.52% and the
discount rate was 8.5%.
During 2009 or 2008, the Corporation did not establish an MSR
valuation allowance, as the estimated fair value of MSRs
exceeded the recorded book value.
NOTE 8 DEPOSITS
A summary of deposits follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Noninterest-bearing demand
|
|
$
|
573,159
|
|
|
$
|
524,464
|
|
Interest-bearing demand
|
|
|
623,510
|
|
|
|
509,211
|
|
Savings
|
|
|
934,413
|
|
|
|
875,185
|
|
Time deposits over $100,000
|
|
|
408,955
|
|
|
|
335,958
|
|
Other time deposits
|
|
|
878,088
|
|
|
|
733,974
|
|
|
|
Total Deposits
|
|
$
|
3,418,125
|
|
|
$
|
2,978,792
|
|
|
|
Excluded from total deposits are demand deposit account
overdrafts (overdrafts), which have been classified as loans. At
December 31, 2009 and 2008, overdrafts totaled
$3.1 million and $3.2 million, respectively. Time
deposits with remaining maturities of less than one year were
$962.8 million at December 31, 2009. Time deposits
with remaining maturities of one year or more were
$324.2 million at December 31, 2009. The maturities of
these time deposits are as follows: $155.8 million in 2011,
$88.0 million in 2012, $26.6 million in 2013,
$10.8 million in 2014 and $43.0 million thereafter.
58
NOTE 9 SHORT-TERM BORROWINGS
A summary of short-term borrowings follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
Weighted Average
|
|
Average Amount
|
|
Weighted Average
|
|
Outstanding
|
|
|
Ending
|
|
Interest Rate At
|
|
Outstanding
|
|
Interest Rate
|
|
At Any
|
|
|
Balance
|
|
Year-End
|
|
During Year
|
|
During Year
|
|
Month-End
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
240,568
|
|
|
|
0.27
|
%
|
|
$
|
232,185
|
|
|
|
0.39
|
%
|
|
$
|
240,568
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
233,738
|
|
|
|
0.48
|
%
|
|
$
|
196,155
|
|
|
|
1.09
|
%
|
|
$
|
233,738
|
|
FHLB advances short-term
|
|
|
|
|
|
|
|
|
|
|
8,593
|
|
|
|
0.93
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
233,738
|
|
|
|
0.48
|
%
|
|
$
|
204,748
|
|
|
|
1.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
197,363
|
|
|
|
3.08
|
%
|
|
$
|
181,766
|
|
|
|
3.77
|
%
|
|
$
|
203,322
|
|
FHLB advances short-term
|
|
|
|
|
|
|
|
|
|
|
8,822
|
|
|
|
5.31
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
197,363
|
|
|
|
3.08
|
%
|
|
$
|
190,588
|
|
|
|
3.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 FEDERAL HOME LOAN BANK ADVANCES
FHLB advances outstanding as of December 31, 2009 and 2008
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
Ending
|
|
Interest Rate
|
|
Ending
|
|
Interest Rate
|
|
|
Balance
|
|
At Year-End
|
|
Balance
|
|
At Year-End
|
|
|
|
(Dollars in thousands)
|
|
FHLB advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate advances
|
|
$
|
50,000
|
|
|
|
2.75
|
%
|
|
$
|
95,025
|
|
|
|
3.53
|
%
|
Convertible fixed-rate advances
|
|
|
40,000
|
|
|
|
5.88
|
|
|
|
40,000
|
|
|
|
5.88
|
|
|
|
Total FHLB advances
|
|
$
|
90,000
|
|
|
|
4.14
|
%
|
|
$
|
135,025
|
|
|
|
4.22
|
%
|
|
|
The FHLB advances, short-term and long-term, are collateralized
by a blanket lien on qualified one- to four-family residential
mortgage loans. At December 31, 2009, the carrying value of
these loans was $700 million. FHLB advances totaled
$90 million at December 31, 2009, and were comprised
solely of long-term advances. The Corporations additional
borrowing availability through the FHLB, subject to the
FHLBs credit requirements and policies and based on the
amount of FHLB stock owned by the Corporation, was
$234 million at December 31, 2009.
Prepayments of fixed-rate advances are subject to prepayment
penalties under the provisions and conditions of the credit
policy of the FHLB. The Corporation did not incur any prepayment
penalties in 2009, 2008 or 2007. The FHLB has the option to
convert the convertible fixed-rate advances to a variable
interest rate each quarter. The Corporation has the option to
prepay, without penalty, the convertible fixed-rate advances
when the FHLB exercises its option to convert to variable-rate
advances. The FHLB did not exercise this option during 2009 or
2008.
The scheduled principal reductions on FHLB advances outstanding
at December 31, 2009 were as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
40,000
|
|
2011
|
|
|
25,000
|
|
2012
|
|
|
|
|
2013
|
|
|
25,000
|
|
|
|
Total
|
|
$
|
90,000
|
|
|
|
59
NOTE 11 COMMON STOCK REPURCHASE PROGRAMS
From time to time, the board of directors approves common stock
repurchase programs allowing management to repurchase shares of
the Corporations common stock in the open market. The
repurchased shares are available for later reissuance in
connection with potential future stock dividends, the
Corporations dividend reinvestment plan, employee benefit
plans and other general corporate purposes. Under these
programs, the timing and actual number of shares subject to
repurchase are at the discretion of management and are
contingent on a number of factors, including the projected
parent company cash flow requirements and the Corporations
market price per share. The following discussion summarizes the
activity of the Corporations common stock repurchase
programs during the three-year period ended December 31,
2009.
During 2007, the board of directors authorized management to
repurchase 1,000,000 shares of the Corporations
common stock under a stock repurchase program and accordingly,
during 2007, 1,023,000 shares, including 23,000 from a
previous authorization, were repurchased under the
Corporations repurchase programs for an aggregate purchase
price of $25.5 million. In January 2008, the board of
directors of the Corporation authorized management to repurchase
up to 500,000 shares of the Corporations common stock
under a stock repurchase program. Since the January 2008
authorization, no shares have been repurchased. At
December 31, 2009, there were 500,000 remaining shares
available for repurchase under the Corporations stock
repurchase programs.
During 2008 and 2007, 38,416 shares and 9,017 shares,
respectively, of the Corporations common stock were
delivered or attested in satisfaction of the exercise price
and/or tax
withholding obligations by holders of employee stock options.
NOTE 12 FAIR VALUE MEASUREMENTS
Fair value, as defined by GAAP, is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. A fair value
measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability. The price
in the principal (or most advantageous) market used to measure
the fair value of the asset or liability is not adjusted for
transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the
measurement date to allow for market activities that are usual
and customary for transactions involving such assets and
liabilities; it is not a forced transaction. Market participants
are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able
to transact and (iv) willing to transact.
The Corporation utilizes fair value measurements to record fair
value adjustments to certain assets and to determine fair value
disclosures. Investment securities
available-for-sale
are recorded at fair value on a recurring basis. Additionally,
the Corporation may be required to record other assets at fair
value on a nonrecurring basis, such as impaired loans, goodwill,
other intangible assets, other real estate and repossessed
assets. These nonrecurring fair value adjustments typically
involve the application of lower of cost or market accounting or
write-downs of individual assets.
The Corporation determines the fair value of its financial
instruments based on a three-level hierarchy established by
GAAP. The classification and disclosure of assets and
liabilities within the hierarchy is based on whether the inputs
to the valuation methodology used for measurement are observable
or unobservable. Observable inputs reflect market-derived or
market-based information obtained from independent sources,
while unobservable inputs reflect managements estimates
about market data. The three levels of inputs that may be used
to measure fair value within the GAAP hierarchy are as follows:
|
|
|
Level 1
|
|
Valuation is based upon quoted prices for identical instruments
traded in active markets. Level 1 valuations for the Corporation
include U.S. Treasury securities that are traded by dealers or
brokers in active over-the-counter markets. Valuations are
obtained from a third party pricing service for these investment
securities.
|
|
|
|
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 2 valuations for the Corporation
include government sponsored agency securities, including
securities issued by the Federal Home Loan Bank (FHLB), Federal
Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA), Federal Farm Credit Bank (FFCB) and
the Small Business Administration (SBA), securities issued by
certain state and political subdivisions, mortgage-backed
securities, collateralized mortgage obligations and corporate
bonds. Valuations are obtained from a third-party pricing
service for these investment securities.
|
60
|
|
|
|
|
|
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 of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models, yield curves and similar
techniques. The determination of fair value requires management
judgment or estimation and generally is corroborated by external
data, which includes third-party pricing services. Level 3
valuations for the Corporation include securities issued by
certain state and political subdivisions, trust preferred
securities, impaired loans, goodwill, core deposit intangible
assets, mortgage servicing rights, other real estate and
repossessed assets.
|
A description of the valuation methodologies used for
instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy, is set forth below. These valuation methodologies
were applied to all of the Corporations financial assets
and financial liabilities carried at fair value and all
financial instruments disclosed at fair value. In general, fair
value is based upon quoted market prices, where available. If
quoted market prices are not available, fair value is based upon
third-party pricing services when available. Fair value may also
be based on internally developed models that primarily use, as
inputs, observable market-based parameters. Valuation
adjustments may be required to record financial instruments at
fair value. Any such valuation adjustments are applied
consistently over time. The Corporations valuation
methodologies may produce a fair value calculation that may not
be indicative of net realizable value or reflective of future
fair values.
While management believes the Corporations valuation
methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions
to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the
reporting date. Furthermore, the reported fair value amounts may
change significantly after the balance sheet date from the
amounts presented herein.
Assets
and Liabilities Recorded at Fair Value on a Recurring
Basis
Investment securities
available-for-sale
are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are generally measured
using independent pricing models or other model-based valuation
techniques that include market inputs, such as benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, reference data and
industry and economic events. Level 1 securities include
U.S. Treasury securities that are traded by dealers or
brokers in active
over-the-counter
markets. Level 2 securities include securities issued by
government sponsored agencies, securities issued by certain
state and political subdivisions, mortgage-backed securities,
collateralized mortgage obligations and corporate bonds.
Disclosure
of Recurring Basis Fair Value Measurements
For assets and liabilities measured at fair value on a recurring
basis, quantitative disclosures about the fair value
measurements for each major category of assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Recurring Basis
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
In Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale
|
|
$
|
|
|
|
$
|
592,521
|
|
|
$
|
|
|
|
$
|
592,521
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale
|
|
$
|
21,494
|
|
|
$
|
428,453
|
|
|
$
|
|
|
|
$
|
449,947
|
|
|
|
There were no liabilities recorded at fair value on a recurring
basis at December 31, 2009 and 2008.
61
Assets
and Liabilities Recorded at Fair Value on a Nonrecurring
Basis
The Corporation does not record loans at fair value on a
recurring basis. However, from time to time, a loan is
considered impaired and an allocation of the allowance for loan
losses (valuation allowance) may be established or a portion of
the loan is charged-off. Loans for which it is probable that
payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired. The fair value of impaired loans is estimated using
one of several methods, including the loans observable
market price, the fair value of the collateral or the present
value of the expected future cash flows discounted at the
loans effective interest rate. Those impaired loans not
requiring a valuation allowance represent loans for which the
fair value of the expected repayments or collateral exceed the
remaining carrying amount of such loans. At December 31,
2009 and 2008, substantially all of the impaired loans were
evaluated based on the fair value of the collateral. Impaired
loans, where a valuation allowance is established based on the
fair value of collateral, are subject to nonrecurring fair value
measurement and require classification in the fair value
hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the
Corporation records the impaired loan as a Level 2
valuation. When management determines the fair value of the
collateral is further impaired below the appraised value or
there is no observable market price or available appraised
value, the Corporation records the impaired loan as a
Level 3 valuation.
Goodwill is subject to impairment testing on an annual basis.
The market and income approach methods were used in the
completion of impairment testing at September 30, 2009 and
2008. These valuation methods require a significant degree of
judgment. In the event these methods indicate that fair value is
less than the carrying value, the asset is recorded at fair
value as determined by either of the valuation models. Goodwill
that is impaired and subject to nonrecurring fair value
measurements is a Level 3 valuation. At December 31,
2009 and 2008, no goodwill was impaired, and therefore, goodwill
was not recorded at fair value on a nonrecurring basis.
Other intangible assets consist of core deposit intangible
assets and MSRs. These items are both recorded at fair value
when initially recorded. Subsequently, core deposit intangible
assets are amortized on a straight-line or accelerated basis
over periods ranging from three to fifteen years and are subject
to impairment testing whenever events or changes in
circumstances indicate that the carrying amount exceeds the fair
value of the asset. If core deposit intangible asset impairment
is identified, the Corporation classifies impaired core deposit
intangible assets subject to nonrecurring fair value
measurements as Level 3 valuations. The fair value of MSRs
is initially estimated using a model that calculates the net
present value of estimated future cash flows using various
assumptions, including prepayment speeds, the discount rate and
servicing costs. If the valuation model reflects a value less
than the carrying value, MSRs are adjusted to fair value,
determined by the model, through a valuation allowance. The
Corporation classifies MSRs subject to nonrecurring fair value
measurements as Level 3 valuations. At December 31,
2009 and 2008, there was no impairment identified for core
deposit intangibles or MSRs, and therefore, no other intangible
assets were recorded at fair value on a nonrecurring basis.
The carrying amounts for ORE and repossessed assets (RA) are
reported in the consolidated statements of financial position
under Interest receivable and other assets. ORE and
RA include real estate and other types of assets repossessed by
the Corporation. ORE and RA are recorded at the lower of cost or
fair value upon the transfer of a loan to ORE or RA, and
subsequently, ORE and RA continue to be measured and carried at
the lower of cost or fair value. Fair value is based upon
independent market prices, appraised values of the collateral or
managements estimation of the value of the collateral.
When the fair value of the collateral is based on an observable
market price or a current appraised value, the Corporation
records ORE and RA subject to nonrecurring fair value
measurements as Level 2 valuations. When management
determines the fair value of the collateral is further impaired
below the appraised value or there is no observable market price
or there is no available appraised value, the Corporation
records the ORE and RA subject to nonrecurring fair value
measurements as nonrecurring Level 3 valuations.
62
Disclosure
of Nonrecurring Basis Fair Value Measurements
The Corporation is required to measure certain assets and
liabilities at fair value on a nonrecurring basis in accordance
with GAAP. These include assets that are measured at the lower
of cost or market that were recognized at fair value below cost.
The following table presents each major category of assets that
were recorded at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Nonrecurring Basis
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
In Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,016
|
|
|
$
|
59,016
|
|
Other real estate / repossessed assets
|
|
|
|
|
|
|
|
|
|
|
17,540
|
|
|
|
17,540
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76,556
|
|
|
$
|
76,556
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
45,522
|
|
|
$
|
45,522
|
|
Other real estate / repossessed assets
|
|
|
|
|
|
|
|
|
|
|
19,265
|
|
|
|
19,265
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,787
|
|
|
$
|
64,787
|
|
|
|
There were no liabilities recorded at fair value on a
nonrecurring basis at December 31, 2009 and 2008.
Disclosures
About Fair Value of Financial Instruments
GAAP requires disclosures about the estimated fair value of the
Corporations financial instruments, including those
financial assets and liabilities that are not measured and
reported at fair value on a recurring or nonrecurring basis,
with the exception that the method of estimating fair value, as
prescribed by ASC 820, for financial instruments not
required to be measured on a recurring or nonrecurring basis
does not incorporate the exit-price concept of fair value. The
Corporation utilized the fair value hierarchy in computing the
fair values of its financial instruments. In cases where quoted
market prices were not available, the Corporation employed
present value methods using unobservable inputs requiring
managements judgment to estimate the fair values of its
financial instruments, which are considered Level 3
valuations. These Level 3 valuations are affected by the
assumptions made and, accordingly, do not necessarily indicate
amounts that could be realized in a current market exchange. It
is also the Corporations general practice and intent to
hold the majority of its financial instruments until maturity
and, therefore, the Corporation does not expect to realize the
estimated amounts disclosed.
The methodologies for estimating the fair value of financial
assets and financial liabilities on a recurring or nonrecurring
basis are discussed above. At December 31, 2009 and 2008,
the estimated fair values of cash and cash equivalents, interest
receivable and interest payable approximated their carrying
values at those dates. The methodologies for other financial
assets and financial liabilities follow.
Fair value measurement for investment securities
held-to-maturity
is based upon quoted prices, if available. If quoted prices are
not available, fair values are measured using independent
pricing models or other model-based valuation techniques that
include market inputs such as benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers, reference data and industry
and economic events. Fair value measurements using Level 2
valuations of investment securities-held-to-maturity include
securities issued by government sponsored agencies, certain
securities issued by state and political subdivisions and
mortgage-backed securities. Level 3 valuations include
certain securities issued by state and political subdivisions
and trust preferred securities.
Fair value measurements of other securities, which consisted of
FHLB and FRB stock, are based on their redeemable value, which
is cost. The market for these stocks is restricted to the issuer
of the stock and subject to impairment evaluation.
The carrying amounts reported in the consolidated statements of
financial position for loans
held-for-sale
are at the lower of cost or market value. The fair values of
loans
held-for-sale
are based on the market price for similar loans in the secondary
market. The fair value measurements for loans
held-for-sale
are Level 2 valuations.
The fair value of variable interest rate loans that reprice
regularly with changes in market interest rates are based on
carrying values. The fair values for fixed interest rate loans
are estimated using discounted cash flow analyses, using the
Corporations interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
The resulting fair value amounts are
63
adjusted to estimate the effect of declines in the credit
quality of borrowers after the loans were originated. The fair
value measurements for loans are Level 3 valuations.
The fair values of deposit accounts without defined maturities,
such as interest- and noninterest-bearing checking, savings and
money market accounts, are equal to the amounts payable on
demand. Fair value measurements for fixed-interest rate time
deposits with defined maturities are based on the discounted
value of contractual cash flows, using the Corporations
interest rates currently being offered for deposits of similar
maturities and are Level 3 valuations. The fair values for
variable-interest rate time deposits with defined maturities
approximate their carrying amounts.
Short-term borrowings consist of repurchase agreements. Fair
value measurements for repurchase agreements are based on the
present value of future estimated cash flows using current
interest rates offered to the Corporation for debt with similar
terms and are Level 2 valuations.
Fair value measurements for FHLB advances are estimated based on
the present value of future estimated cash flows using current
interest rates offered to the Corporation for debt with similar
terms and are Level 2 valuations.
The Corporations unused loan commitments, standby letters
of credit and undisbursed loans have no carrying amount and have
been estimated to have no realizable fair value. Historically, a
majority of the unused loan commitments have not been drawn upon
and, generally, the Corporation does not receive fees in
connection with these commitments.
Fair value measurements have not been made for items that are
not defined by GAAP as financial instruments, including such
items as the value of the Corporations trust and
investment management services department and the value of the
Corporations core deposit base. The Corporation believes
it is impractical to estimate a representative fair value for
these types of assets, even though management believes they add
significant value to the Corporation.
A summary of carrying amounts and estimated fair values of the
Corporations financial instruments included in the
consolidated statements of financial position are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
360,709
|
|
|
$
|
360,709
|
|
|
$
|
173,222
|
|
|
$
|
173,222
|
|
Investment and other securities
|
|
|
745,946
|
|
|
|
740,379
|
|
|
|
569,586
|
|
|
|
562,631
|
|
Loans held for sale
|
|
|
8,362
|
|
|
|
8,362
|
|
|
|
8,463
|
|
|
|
8,463
|
|
Net loans
|
|
|
2,912,319
|
|
|
|
2,909,875
|
|
|
|
2,924,621
|
|
|
|
2,920,285
|
|
Interest receivable
|
|
|
14,644
|
|
|
|
14,644
|
|
|
|
15,680
|
|
|
|
15,680
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without defined maturities
|
|
$
|
2,131,082
|
|
|
$
|
2,131,082
|
|
|
$
|
1,908,860
|
|
|
$
|
1,908,860
|
|
Time deposits
|
|
|
1,287,043
|
|
|
|
1,302,558
|
|
|
|
1,069,932
|
|
|
|
1,079,498
|
|
Interest payable
|
|
|
2,103
|
|
|
|
2,103
|
|
|
|
3,048
|
|
|
|
3,048
|
|
Short-term borrowings
|
|
|
240,568
|
|
|
|
240,568
|
|
|
|
233,738
|
|
|
|
233,743
|
|
FHLB advances
|
|
|
90,000
|
|
|
|
91,910
|
|
|
|
135,025
|
|
|
|
138,729
|
|
64
NOTE 13
NONINTEREST INCOME
The following schedule includes the major components of
noninterest income during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Service charges on deposit accounts
|
|
$
|
19,116
|
|
|
$
|
20,048
|
|
|
$
|
20,549
|
|
Trust and investment services revenue
|
|
|
9,273
|
|
|
|
10,625
|
|
|
|
11,325
|
|
Other fees for customer services
|
|
|
2,454
|
|
|
|
2,511
|
|
|
|
3,031
|
|
ATM and network user fees
|
|
|
4,023
|
|
|
|
3,341
|
|
|
|
2,968
|
|
Insurance commissions
|
|
|
1,259
|
|
|
|
1,042
|
|
|
|
773
|
|
Mortgage banking revenue
|
|
|
4,412
|
|
|
|
1,836
|
|
|
|
2,117
|
|
Investment securities gains
|
|
|
95
|
|
|
|
1,722
|
|
|
|
4
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
Gains on sales of branch bank properties
|
|
|
58
|
|
|
|
295
|
|
|
|
912
|
|
Insurance settlement
|
|
|
208
|
|
|
|
|
|
|
|
1,122
|
|
Other
|
|
|
221
|
|
|
|
221
|
|
|
|
487
|
|
|
|
Total Noninterest Income
|
|
$
|
41,119
|
|
|
$
|
41,197
|
|
|
$
|
43,288
|
|
|
|
NOTE 14 OPERATING EXPENSES
The following schedule includes the major categories of
operating expenses during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Salaries and wages
|
|
$
|
49,227
|
|
|
$
|
48,713
|
|
|
$
|
48,651
|
|
Employee benefits
|
|
|
10,991
|
|
|
|
10,514
|
|
|
|
10,357
|
|
Occupancy
|
|
|
10,359
|
|
|
|
10,221
|
|
|
|
10,172
|
|
Equipment
|
|
|
9,723
|
|
|
|
9,230
|
|
|
|
8,722
|
|
Postage and courier
|
|
|
2,951
|
|
|
|
3,169
|
|
|
|
2,841
|
|
Supplies
|
|
|
1,526
|
|
|
|
1,482
|
|
|
|
1,544
|
|
Professional fees
|
|
|
4,165
|
|
|
|
3,554
|
|
|
|
4,382
|
|
Outside processing/service fees
|
|
|
3,231
|
|
|
|
3,219
|
|
|
|
3,495
|
|
Michigan business taxes
|
|
|
(620
|
)
|
|
|
(806
|
)
|
|
|
1,132
|
|
Advertising and marketing
|
|
|
2,396
|
|
|
|
2,492
|
|
|
|
1,854
|
|
Intangible asset amortization
|
|
|
718
|
|
|
|
1,543
|
|
|
|
1,786
|
|
Telephone
|
|
|
1,840
|
|
|
|
2,186
|
|
|
|
1,829
|
|
FDIC insurance premiums
|
|
|
7,013
|
|
|
|
899
|
|
|
|
427
|
|
Other real estate and repossessed asset expenses
|
|
|
6,031
|
|
|
|
4,680
|
|
|
|
2,207
|
|
Loan and collection costs
|
|
|
3,056
|
|
|
|
1,592
|
|
|
|
702
|
|
Non-loan losses
|
|
|
291
|
|
|
|
1,473
|
|
|
|
605
|
|
Other
|
|
|
4,712
|
|
|
|
4,947
|
|
|
|
3,965
|
|
|
|
Total Operating Expenses
|
|
$
|
117,610
|
|
|
$
|
109,108
|
|
|
$
|
104,671
|
|
|
|
NOTE 15 PENSION AND OTHER POSTRETIREMENT
BENEFITS
Pension
Plan:
The Corporation has a noncontributory defined benefit pension
plan (Pension Plan) covering certain salaried employees.
Effective June 30, 2006, benefits under the Pension Plan
were frozen for approximately two-thirds of the
Corporations salaried employees as of that date. Pension
benefits continued unchanged for the remaining salaried
employees. Normal retirement benefits under the Pension Plan are
based on years of vested service, up to a maximum of thirty
years, and the employees average annual pay for the five
highest consecutive years during the ten years preceding
retirement, except for employees whose benefits were frozen.
Benefits, for employees with less than 15 years of service
or whose age plus years of service were less than 65 at
June 30, 2006, will be based on years of vested service at
June 30, 2006 and generally the average of the
employees salary for the five years ended June 30,
2006. At December 31, 2009, the Corporation had
274 employees who were continuing to earn benefits under
the Pension Plan. Pension Plan contributions are intended to
provide not only for benefits attributed to
service-to-date,
but also for those benefits expected to be earned in the
65
future for employees whose benefits were not frozen at
June 30, 2006. Employees hired after June 30, 2006 and
employees affected by the partial freeze of the Pension Plan
began receiving four percent of their eligible pay as a
contribution to their 401(k) Savings Plan accounts on
July 1, 2006.
The assets of the Pension Plan are invested by the trust and
investment management services department of Chemical Bank. The
investment policy and allocation of the assets of the pension
trust were approved by the Compensation and Pension Committee of
the board of directors of the Corporation.
The Pension Plans primary investment objective is
long-term growth coupled with income. In consideration of the
Pension Plans fiduciary responsibilities, emphasis is
placed on quality investments with sufficient liquidity to meet
benefit payments and plan expenses, as well as providing the
flexibility to manage the investments to accommodate current
economic and financial market conditions. To meet the Pension
Plans long-term objective within the constraints of
prudent management, ranges have been set for the three primary
asset classes: equity securities range from 60% to 70%, debt
securities range from 30% to 40%; and cash equivalents and other
range from 0% to 10%. Equity securities are primarily comprised
of both individual securities (blue chip stocks) and
equity-based mutual funds, invested in either domestic or
international markets. The stocks are diversified among the
major economic sectors of the market and are selected based on
balance sheet strength, expected earnings growth, the management
team and position within their industries, among other
characteristics. Debt securities are comprised of
U.S. dollar denominated bonds issued by the
U.S. Treasury, U.S. government agencies and investment
grade bonds issued by corporations. The notes and bonds
purchased are rated A or better by the major bond rating
companies from diverse industries.
The Pension Plans asset allocation by asset category was
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Asset Category
|
|
2009
|
|
2008
|
|
|
Equity securities
|
|
|
64
|
%
|
|
|
61
|
%
|
Debt securities
|
|
|
32
|
|
|
|
37
|
|
Other
|
|
|
4
|
|
|
|
2
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
The following schedule sets forth the fair values of Pension
Plan assets and the level of the valuation inputs used to value
the assets at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Asset Category
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
2,767
|
|
|
$
|
2,767
|
|
|
|
|
|
|
$
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large- and mid-cap
stock(a)
|
|
|
28,225
|
|
|
|
28,225
|
|
|
|
|
|
|
|
|
|
U.S. small-cap mutual funds
|
|
|
2,202
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
International large-cap mutual funds
|
|
|
9,917
|
|
|
|
9,917
|
|
|
|
|
|
|
|
|
|
Emerging markets mutual funds
|
|
|
3,705
|
|
|
|
3,705
|
|
|
|
|
|
|
|
|
|
Chemical Financial Corporation common stock
|
|
|
3,279
|
|
|
|
3,279
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government sponsored agency bonds and notes
|
|
|
10,873
|
|
|
|
4,851
|
|
|
$
|
6,022
|
|
|
|
|
|
Corporate
bonds(b)
|
|
|
12,462
|
|
|
|
|
|
|
|
12,462
|
|
|
|
|
|
Other
|
|
|
271
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,701
|
|
|
$
|
55,217
|
|
|
$
|
18,484
|
|
|
$
|
|
|
|
|
|
|
|
(a)
|
|
This category is comprised of
common stock traded on U.S. Exchanges whose market
capitalization exceed $3 billion.
|
(b)
|
|
This category is comprised of
investment grade bonds of U.S. issuers from diverse industries.
|
As of December 31, 2009 and 2008, equity securities
included 139,043 shares and 127,043 shares,
respectively, of the Corporations common stock. During
2009 and 2008, $0.16 million and $0.20 million,
respectively, in cash dividends were paid on the
Corporations common stock held by the Pension Plan. The
fair value of the Corporations common stock held in the
Pension Plan was $3.3 million at December 31, 2009 and
$3.5 million at December 31, 2008, and represented
4.4% and 5.9% of Pension Plan assets at December 31, 2009
and 2008, respectively.
66
The following schedule sets forth the changes in the projected
benefit obligation and plan assets of the Corporations
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
74,346
|
|
|
$
|
72,512
|
|
Service cost
|
|
|
1,354
|
|
|
|
1,589
|
|
Interest cost
|
|
|
4,720
|
|
|
|
4,607
|
|
Net actuarial loss (gain)
|
|
|
2,915
|
|
|
|
(1,212
|
)
|
Benefits paid
|
|
|
(3,653
|
)
|
|
|
(3,150
|
)
|
|
|
Benefit obligation at end of year
|
|
|
79,682
|
|
|
|
74,346
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Beginning fair value
|
|
|
60,523
|
|
|
|
78,045
|
|
Actual return on plan assets
|
|
|
9,331
|
|
|
|
(14,372
|
)
|
Employer contributions
|
|
|
7,500
|
|
|
|
|
|
Benefits paid
|
|
|
(3,653
|
)
|
|
|
(3,150
|
)
|
|
|
Fair value of plan assets at end of year
|
|
|
73,701
|
|
|
|
60,523
|
|
|
|
Unfunded status of the plan
|
|
|
5,981
|
|
|
|
13,823
|
|
Unrecognized net actuarial loss
|
|
|
(24,145
|
)
|
|
|
(25,144
|
)
|
Unrecognized prior service credit
|
|
|
12
|
|
|
|
16
|
|
|
|
Prepaid benefit cost before adjustment to accumulated other
comprehensive loss
|
|
|
(18,152
|
)
|
|
|
(11,305
|
)
|
Additional liability required under GAAP
|
|
|
24,133
|
|
|
|
25,128
|
|
|
|
Liability for Pension Plan Benefits
|
|
$
|
5,981
|
|
|
$
|
13,823
|
|
|
|
The Corporations accumulated benefit obligation as of
December 31, 2009 and 2008 for the Pension Plan was
$73.5 million and $67.4 million, respectively.
The Corporation contributed $7.5 million to the Pension
Plan in 2009 and made no contributions to the Pension Plan in
2008. There is no minimum required Pension Plan contribution in
2010, as prescribed by the Internal Revenue Code. At
December 31, 2009, the Corporation had not determined
whether it would make a contribution to the Pension Plan in 2010.
Weighted-average rate assumptions of the Pension Plan follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Discount rate used in determining benefit obligation
December 31
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining pension expense
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.00
|
|
Expected long-term return on Pension Plan assets
|
|
|
7.00
|
|
|
|
7.00
|
|
|
|
7.00
|
|
Rate of compensation increase used in determining benefit
obligation December 31
|
|
|
3.50
|
|
|
|
4.25
|
|
|
|
4.25
|
|
Rate of compensation increase used in determining pension expense
|
|
|
4.25
|
|
|
|
4.25
|
|
|
|
4.25
|
|
67
Net periodic pension cost of the Pension Plan consisted of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
1,354
|
|
|
$
|
1,589
|
|
|
$
|
1,863
|
|
Interest cost
|
|
|
4,720
|
|
|
|
4,607
|
|
|
|
4,448
|
|
Expected return on plan assets
|
|
|
(5,417
|
)
|
|
|
(5,639
|
)
|
|
|
(5,621
|
)
|
Amortization of prior service credit
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Early retirement benefits
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
Pension Plan expense
|
|
$
|
653
|
|
|
$
|
552
|
|
|
$
|
991
|
|
|
|
The following schedule presents estimated future Pension Plan
benefit payments (in thousands):
|
|
|
|
|
2010
|
|
$
|
3,763
|
|
2011
|
|
|
4,229
|
|
2012
|
|
|
4,596
|
|
2013
|
|
|
4,507
|
|
2014
|
|
|
4,755
|
|
2015 - 2019
|
|
|
28,706
|
|
|
|
Total
|
|
$
|
50,556
|
|
|
|
Supplemental
Plan:
The Corporation also maintains a supplemental defined benefit
pension plan, the Chemical Financial Corporation Supplemental
Pension Plan (Supplemental Plan). The Internal Revenue Code
limits both the amount of eligible compensation for benefit
calculation purposes and the amount of annual benefits that may
be paid from a tax-qualified retirement plan. As permitted by
the Employee Retirement Income Security Act of 1974, the
Corporation established the Supplemental Plan that provides
payments to certain executive officers of the Corporation, as
determined by the Compensation and Pension Committee, the
benefits to which they would have been entitled, calculated
under the provisions of the Pension Plan, as if the limits
imposed by the Internal Revenue Code did not apply.
The following schedule sets forth the changes in the benefit
obligation and plan assets of the Supplemental Plan:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
773
|
|
|
$
|
620
|
|
Service cost
|
|
|
23
|
|
|
|
15
|
|
Interest cost
|
|
|
49
|
|
|
|
39
|
|
Net actuarial loss
|
|
|
52
|
|
|
|
140
|
|
Benefits paid
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
Benefit obligation at end of year
|
|
|
856
|
|
|
|
773
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
41
|
|
|
|
41
|
|
Benefits paid
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
Unfunded status of the plan
|
|
|
856
|
|
|
|
773
|
|
Unrecognized net actuarial loss
|
|
|
(96
|
)
|
|
|
(44
|
)
|
|
|
Accrued benefit cost before adjustment to accumulated other
comprehensive loss
|
|
|
760
|
|
|
|
729
|
|
Additional liability required under GAAP
|
|
|
96
|
|
|
|
44
|
|
|
|
Liability for Supplemental Plan benefits
|
|
$
|
856
|
|
|
$
|
773
|
|
|
|
The Supplemental Plans accumulated benefit obligation as
of December 31, 2009 and 2008 was $0.71 million and
$0.61 million, respectively.
68
Weighted-average rate assumptions of the Supplemental Plan
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Discount rate used in determining benefit
obligations December 31
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining expense
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.00
|
|
Rate of compensation increase in determining benefit
obligation December 31
|
|
|
3.50
|
|
|
|
4.25
|
|
|
|
4.25
|
|
Rate of compensation increase used in determining expense
|
|
|
4.25
|
|
|
|
4.25
|
|
|
|
4.25
|
|
Net periodic pension cost of the Supplemental Plan consisted of
the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
23
|
|
|
$
|
15
|
|
|
$
|
16
|
|
Interest cost
|
|
|
49
|
|
|
|
39
|
|
|
|
37
|
|
Amortization of unrecognized net actuarial gain
|
|
|
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
Supplemental Plan expense
|
|
$
|
72
|
|
|
$
|
50
|
|
|
$
|
51
|
|
|
|
The following schedule presents estimated future Supplemental
Plan benefit payments (in thousands):
|
|
|
|
|
2010
|
|
$
|
41
|
|
2011
|
|
|
42
|
|
2012
|
|
|
43
|
|
2013
|
|
|
43
|
|
2014
|
|
|
44
|
|
2015 - 2019
|
|
|
447
|
|
|
|
Total
|
|
$
|
660
|
|
|
|
Postretirement
Plan:
The Corporation has a postretirement benefit plan that provides
medical benefits, and dental benefits through age 65, to a
small portion of its active employees, to employees who retired
through December 31, 2001 and others who were provided
eligibility via acquisitions. Through December 31, 2001,
eligibility for such benefits was age 55 with at least ten
years of service with the Corporation. Effective January 1,
2002, the Corporation adopted a revised retiree medical program
(Postretirement Plan), which substantially reduced the future
obligation of the Corporation for retiree medical and dental
costs. Retirees and certain employees that met age and service
requirements as of December 31, 2001 were grandfathered
under the Postretirement Plan. As of January 1, 2009, the
Postretirement Plan included nine active employees in the
grandfathered group that were eligible to receive a premium
supplement and 82 retirees receiving a premium supplement. The
majority of the retirees are required to make contributions
toward the cost of their benefits based on their years of
credited service and age at retirement. All nine active
employees are currently eligible to receive benefits and will be
required to make contributions toward the cost of their benefits
upon retirement. Retiree contributions are generally adjusted
annually. The accounting for these postretirement benefits
anticipates changes in future cost-sharing features such as
retiree contributions, deductibles, copayments and coinsurance.
The Corporation reserves the right to amend, modify or terminate
these benefits at any time. Employees who retire at age 55
or older and have at least ten years of service with the
Corporation are provided access to the Corporations group
health insurance coverage for the employee and a spouse, with no
employer subsidy, and are not considered participants in the
Postretirement Plan.
69
The following sets forth changes in the Corporations
Postretirement Plan benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Projected postretirement benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
4,184
|
|
|
$
|
4,289
|
|
Interest cost
|
|
|
282
|
|
|
|
260
|
|
Net actuarial loss (gain)
|
|
|
463
|
|
|
|
(117
|
)
|
Benefits paid, net of retiree contributions
|
|
|
(189
|
)
|
|
|
(248
|
)
|
|
|
Benefit obligation at end of year
|
|
|
4,740
|
|
|
|
4,184
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
|
Employer contributions, net of retiree contributions
|
|
|
189
|
|
|
|
248
|
|
Benefits paid, net of retiree contributions
|
|
|
(189
|
)
|
|
|
(248
|
)
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
Unfunded status of the plan
|
|
|
4,740
|
|
|
|
4,184
|
|
Unrecognized net actuarial loss
|
|
|
(878
|
)
|
|
|
(439
|
)
|
Unrecognized prior service credit
|
|
|
948
|
|
|
|
1,273
|
|
|
|
Accrued postretirement benefit cost before adjustment to
accumulated other comprehensive loss
|
|
|
4,810
|
|
|
|
5,018
|
|
Adjustment to liability required under GAAP
|
|
|
(70
|
)
|
|
|
(834
|
)
|
|
|
Liability for Postretirement Plan benefits
|
|
$
|
4,740
|
|
|
$
|
4,184
|
|
|
|
The Postretirement Plans accumulated benefit obligation as
of December 31, 2009 and 2008 was $4.7 million and
$4.2 million, respectively.
Net periodic postretirement benefit income of the Postretirement
Plan consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Interest cost
|
|
$
|
282
|
|
|
$
|
260
|
|
|
$
|
261
|
|
Amortization of prior service credit
|
|
|
(324
|
)
|
|
|
(324
|
)
|
|
|
(324
|
)
|
Amortization of unrecognized net actuarial loss
|
|
|
24
|
|
|
|
7
|
|
|
|
28
|
|
|
|
Postretirement Plan income
|
|
$
|
(18
|
)
|
|
$
|
(57
|
)
|
|
$
|
(35
|
)
|
|
|
The following presents estimated future retiree plan benefit
payments under the Postretirement Plan (in thousands):
|
|
|
|
|
2010
|
|
$
|
384
|
|
2011
|
|
|
398
|
|
2012
|
|
|
405
|
|
2013
|
|
|
407
|
|
2014
|
|
|
403
|
|
2015 - 2019
|
|
|
1,877
|
|
|
|
Total
|
|
$
|
3,874
|
|
|
|
Weighted-average rate assumptions of the Postretirement Plan
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Discount rate used in determining the accumulated postretirement
benefit obligation December 31
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining periodic postretirement
benefit cost
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.00
|
|
Year 1 increase in cost of postretirement benefits
|
|
|
9.00
|
|
|
|
9.00
|
|
|
|
9.00
|
|
For measurement purposes, the annual rates of increase in the
per capita cost of covered health care benefits and dental
benefits for 2010 were each assumed at 9%. These rates were
assumed to decrease gradually to 5% in 2014 and remain at that
level thereafter.
70
The assumed health care and dental cost trend rates could have a
significant effect on the amounts reported. A one
percentage-point change in these rates would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
One
|
|
One
|
|
|
Percentage-
|
|
Percentage-
|
|
|
Point
|
|
Point
|
|
|
Increase
|
|
Decrease
|
|
|
|
(In thousands)
|
|
Effect on total of service and interest cost components in 2009
|
|
$
|
24
|
|
|
$
|
(21
|
)
|
Effect on postretirement benefit obligation as of
December 31, 2009
|
|
|
380
|
|
|
|
(336
|
)
|
The measurement date used to determine the Pension Plan,
Supplemental Plan and Postretirement Plan benefit amounts
disclosed herein was December 31 of each year.
Accumulated
Other Comprehensive Loss:
The following sets forth the changes in accumulated other
comprehensive (loss) income, net of tax, related to the
Corporations pension, supplemental and postretirement
benefit plans during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
|
|
|
|
(In thousands)
|
|
|
Accumulated other comprehensive (loss) income at beginning of
year
|
|
$
|
(16,333
|
)
|
|
$
|
(30
|
)
|
|
$
|
542
|
|
|
$
|
(15,821
|
)
|
Comprehensive income (loss) adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credits
|
|
|
(2
|
)
|
|
|
|
|
|
|
(211
|
)
|
|
|
(213
|
)
|
Net actuarial gain (loss)
|
|
|
649
|
|
|
|
(35
|
)
|
|
|
(285
|
)
|
|
|
329
|
|
|
|
Comprehensive income (loss) adjustment
|
|
|
647
|
|
|
|
(35
|
)
|
|
|
(496
|
)
|
|
|
116
|
|
|
|
Accumulated other comprehensive (loss) income at end of year
|
|
$
|
(15,686
|
)
|
|
$
|
(65
|
)
|
|
$
|
46
|
|
|
$
|
(15,705
|
)
|
|
|
The estimated (costs) and income that will be amortized from
accumulated other comprehensive loss into net periodic cost, net
of tax, in 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Supplemental
|
|
Postretirement
|
|
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Total
|
|
|
|
(In thousands)
|
|
Prior service credits
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
211
|
|
|
$
|
212
|
|
Net loss
|
|
|
(319
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)
|
|
|
(340
|
)
|
|
|
Total
|
|
$
|
(318
|
)
|
|
$
|
(1
|
)
|
|
$
|
191
|
|
|
$
|
(128
|
)
|
|
|
401(k)
Savings Plan:
The Corporations 401(k) Savings Plan provides an employer
match, in addition to a 4% contribution, for employees who are
not grandfathered under the Pension Plan discussed above. The
401(k) Savings Plan is available to all regular employees and
provides employees with tax deferred salary deductions and
alternative investment options. The Corporation matches 50% of
the participants elective deferrals on the first 4% of the
participants base compensation. The 401(k) Savings Plan
provides employees with the option to invest in the
Corporations common stock. The Corporations match
under the 401(k) Savings Plan was $0.72 million in 2009,
$0.66 million in 2008 and $0.67 million in 2007.
Employer contributions to the 401(k) Savings Plan for the 4%
benefit for employees who are not grandfathered under the
Pension Plan, totaled $1.40 million in 2009,
$1.25 million in 2008 and $1.21 million in 2007. The
combined amount of the employer match and 4% contribution to the
401(k) Savings Plan totaled $2.12 million in 2009,
$1.91 million in 2008 and $1.88 million in 2007.
71
NOTE 16
SHARE-BASED COMPENSATION
Share-Based
Compensation:
The Corporation maintains share-based employee compensation
plans, under which it periodically has granted stock options for
a fixed number of shares with an exercise price equal to the
market value of the shares on the date of grant, restricted
stock performance units and stock awards for a fixed number of
shares. The fair value of share-based awards is recognized as
compensation expense over the requisite service or performance
period.
During 2009 and 2008, the Corporation granted options to
purchase 70,190 and 63,593 shares of stock, respectively,
and 41,248 and 30,701 restricted stock performance units,
respectively, to certain officers of the Company. During 2007,
the Corporation granted options to purchase 182,223 shares
of stock to certain officers of the Company. The stock options
granted in 2009, 2008 and 2007 have an exercise price equal to
the market value of the common stock on the date of grant, vest
ratably over a three- or five-year period and expire
10 years from the date of the grant. Compensation expense
related to stock option grants is recognized over the requisite
service period.
Restricted stock performance units issued in 2009 (2009 RSUs)
vest at December 31, 2011 if any of the predetermined
targeted earnings per share levels are achieved in 2011. The
2009 RSUs vest from 0.5x to 1.5x the number of units originally
granted depending on which, if any, of the predetermined
targeted earnings per share levels are met in 2011. Restricted
stock performance units issued in 2008 (2008 RSUs) vest at
December 31, 2010 if any of the predetermined targeted
earnings per share levels are achieved in 2010. The 2008 RSUs
vest from 0.5x to 2x the number of units originally granted
depending on which, if any, of the predetermined targeted
earnings per share levels are met in 2010. Upon vesting, the
restricted stock performance units will be converted to shares
of the Corporations stock on a
one-to-one
basis. However, if the minimum earnings per share performance
level is not achieved in 2010 or 2011, no shares will be issued
for that respective years restricted stock performance
units. Compensation expense related to restricted stock
performance units is recognized over the requisite performance
period.
Stock awards totaling 1,363 shares were issued in 2007. The
awards had a value of $32.88 per share based on the closing
price of the Corporations stock on the date the awards
were approved.
Compensation expense related to all share-based awards was
$0.5 million, $0.7 million and $0.2 million in
2009, 2008 and 2007, respectively.
In December 2005, the Corporation accelerated the vesting of
out-of-the-money
stock options to purchase 167,527 shares of the
Corporations common stock. As a result of this decision,
the Corporation reduced compensation expense related to
share-based awards in 2009, 2008 and 2007 by approximately
$0.1 million, $0.2 million and $0.4 million,
respectively.
The fair values of stock options granted during 2009 were $6.46
per share. The fair values of stock options granted during 2008
were $6.25 per share for 54,593 options, $6.29 per share for
5,000 options, $6.26 per share for 2,500 options and $5.30 per
share for 1,500 options. The fair values of stock options
granted during 2007 were $7.28 per share for 174,305 options,
$7.01 per share for 5,000 options, $7.35 per share for 2,418
options and $6.93 per share for 500 options. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following
assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Expected dividend yield
|
|
|
3.50
|
%
|
|
|
4.20%
|
|
|
|
3.50%
|
|
Risk-free interest rate
|
|
|
2.58
|
%
|
|
|
3.28%-3.43%
|
|
|
|
4.25%-5.04%
|
|
Expected stock price volatility
|
|
|
42.00
|
%
|
|
|
36.40%
|
|
|
|
34.40%
|
|
Expected life of options in years
|
|
|
6.33
|
|
|
|
6.38
|
|
|
|
6.87
|
|
The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant and the expected life
of the options granted. Expected stock volatility was based on
historical volatility of the Corporations stock over a
seven-year period. The expected life of options represents the
period of time that options granted are expected to be
outstanding and is based primarily upon historical experience,
considering both option exercise behavior and employee
terminations.
Because of the unpredictability of the assumptions required, the
Black-Scholes model, or any other valuation model, is incapable
of accurately predicting the Corporations stock price or
of placing an accurate present value on options to purchase its
stock. In addition, the Black-Scholes model was designed to
approximate value for types of options that are very different
from those issued by the Corporation. In spite of any
theoretical value that may be placed on a stock option grant, no
value is possible under options issued by the Corporation
without an increase in the market price per share of the
Corporations stock over the market price per share of the
Corporations stock at the date of grant.
72
Stock
Incentive Plans:
The Corporations Stock Incentive Plan of 2006 (2006 Plan),
which was shareholder-approved, permits awards of stock options,
restricted stock, restricted stock units, stock awards, other
stock-based and stock-related awards and stock appreciation
rights (incentive awards). Subject to certain anti-dilution and
other adjustments, 1,000,000 shares of the
Corporations common stock were originally available for
incentive awards under the 2006 Plan. At December 31, 2009,
there were 614,609 shares available for future issuance
under the 2006 Plan.
Key employees of the Corporation and its subsidiaries, as the
Compensation and Pension Committee of the board of directors of
the Corporation may select from time to time, are eligible to
receive awards under the 2006 Plan. No employee of the
Corporation may receive any awards under the 2006 Plan while the
employee is a member of the Compensation and Pension Committee.
The 2006 Plan provides for accelerated vesting if there is a
change in control of the Corporation as defined in the 2006
Plan. Option awards can be granted with an exercise price equal
to no less than the market price of the Corporations stock
at the date of grant and can vest from one to five years from
the date of grant. Dividends are not paid on unexercised options
or restricted stock units.
The Corporations Stock Incentive Plan of 1997 (1997 Plan),
which was shareholder-approved, permitted awards of options to
purchase shares of common stock to its employees through
December 31, 2006.
A summary of stock option activity during the three years ended
December 31, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic Value
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
(In
|
|
|
|
Options
|
|
|
Per Share
|
|
|
(In years)
|
|
|
thousands)
|
|
|
|
|
Outstanding January 1, 2007
|
|
|
641,494
|
|
|
$
|
33.15
|
|
|
|
|
|
|
|
|
|
Activity during 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
182,223
|
|
|
|
24.76
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,920
|
)
|
|
|
26.33
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(19,016
|
)
|
|
|
26.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
793,781
|
|
|
|
31.26
|
|
|
|
|
|
|
|
|
|
Activity during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63,593
|
|
|
|
24.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(95,764
|
)
|
|
|
27.28
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(60,064
|
)
|
|
|
31.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
701,546
|
|
|
|
31.15
|
|
|
|
|
|
|
|
|
|
Activity during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
70,190
|
|
|
|
21.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,555
|
)
|
|
|
23.14
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(49,806
|
)
|
|
|
33.61
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
720,375
|
|
|
$
|
30.02
|
|
|
|
6.21
|
|
|
$
|
178
|
|
Exercisable at December 31, 2009
|
|
|
547,774
|
|
|
$
|
32.17
|
|
|
|
5.51
|
|
|
$
|
1
|
|
|
|
At December 31, 2009, there were no outstanding stock
options with stock appreciation rights.
The aggregate intrinsic values of outstanding and exercisable
options at December 31, 2009 were calculated based on the
closing price of the Corporations stock on
December 31, 2009 of $23.58 per share less the exercise
price of these options. Outstanding and exercisable options with
intrinsic values less than zero, or
out-of-the-money
options, were not included in the aggregate intrinsic value
reported.
The total intrinsic value of stock options exercised during 2008
and 2007 was $0.43 million and $0.04 million,
respectively.
At December 31, 2009, unrecognized compensation expense for
nonvested stock options outstanding totaled $0.7 million
and the weighted-average period over which this amount will be
recognized is 1.6 years. Compensation expense of
$0.5 million and $0.2 million will be recognized for
stock options that vest in 2010 and 2011, respectively.
73
The following summarizes information about stock options
outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Range of
|
|
|
|
Average
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
Number
|
|
Price
|
|
Average
|
|
Prices
|
|
Number
|
|
Price
|
Outstanding
|
|
Per Share
|
|
Term*
|
|
Per Share
|
|
Exercisable
|
|
Per Share
|
|
|
|
71,690
|
|
|
$
|
21.09
|
|
|
|
9.31
|
|
|
$
|
20.78 - 21.10
|
|
|
|
500
|
|
|
$
|
20.78
|
|
|
17,703
|
|
|
|
23.63
|
|
|
|
1.80
|
|
|
|
23.63
|
|
|
|
17,703
|
|
|
|
23.63
|
|
|
238,192
|
|
|
|
24.71
|
|
|
|
7.71
|
|
|
|
24.07 - 24.86
|
|
|
|
136,781
|
|
|
|
24.73
|
|
|
40,075
|
|
|
|
27.78
|
|
|
|
2.94
|
|
|
|
27.78
|
|
|
|
40,075
|
|
|
|
27.78
|
|
|
139,250
|
|
|
|
32.28
|
|
|
|
5.97
|
|
|
|
32.28
|
|
|
|
139,250
|
|
|
|
32.28
|
|
|
66,990
|
|
|
|
35.67
|
|
|
|
3.95
|
|
|
|
35.67
|
|
|
|
66,990
|
|
|
|
35.67
|
|
|
146,475
|
|
|
|
39.69
|
|
|
|
4.95
|
|
|
|
39.69
|
|
|
|
146,475
|
|
|
|
39.69
|
|
|
|
|
720,375
|
|
|
$
|
30.02
|
|
|
|
6.21
|
|
|
$
|
20.78 - 39.69
|
|
|
|
547,774
|
|
|
$
|
32.17
|
|
|
|
|
|
*
|
Weighted average remaining
contractual term in years
|
NOTE 17
FEDERAL INCOME TAXES
The provision for federal income taxes is less than that
computed by applying the federal statutory income tax rate of
35%, primarily due to tax-exempt interest income on investment
securities and loans and income tax credits during 2009, 2008
and 2007. The differences between the provision for federal
income taxes, computed at the federal statutory income tax rate,
and the amounts recorded in the consolidated financial
statements are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
|
Tax at statutory rate
|
|
$
|
4,184
|
|
|
$
|
9,850
|
|
|
$
|
20,022
|
|
Changes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income
|
|
|
(1,751
|
)
|
|
|
(1,409
|
)
|
|
|
(1,377
|
)
|
Income tax credits
|
|
|
(754
|
)
|
|
|
(777
|
)
|
|
|
(777
|
)
|
Other, net
|
|
|
271
|
|
|
|
636
|
|
|
|
329
|
|
|
|
Provision for federal income taxes
|
|
$
|
1,950
|
|
|
$
|
8,300
|
|
|
$
|
18,197
|
|
|
|
The effective federal income tax rate for the years ended
December 31, 2009, 2008 and 2007 was 16.3%, 29.5% and
31.8%, respectively.
The provision for federal income taxes consisted of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
|
Current
|
|
$
|
8,927
|
|
|
$
|
15,182
|
|
|
$
|
21,178
|
|
Deferred
|
|
|
(6,977
|
)
|
|
|
(6,882
|
)
|
|
|
(2,981
|
)
|
|
|
Total
|
|
$
|
1,950
|
|
|
$
|
8,300
|
|
|
$
|
18,197
|
|
|
|
74
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant temporary differences
that comprise the deferred tax assets and liabilities of the
Corporation were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
28,294
|
|
|
$
|
19,916
|
|
Accrued expenses
|
|
|
978
|
|
|
|
1,265
|
|
Employee benefit plans
|
|
|
4,067
|
|
|
|
6,590
|
|
Nonaccrual loan interest
|
|
|
2,690
|
|
|
|
1,763
|
|
Core deposit intangible assets
|
|
|
1,045
|
|
|
|
1,104
|
|
Other real estate
|
|
|
1,794
|
|
|
|
624
|
|
Other
|
|
|
2,595
|
|
|
|
2,186
|
|
|
|
Total deferred tax assets
|
|
|
41,463
|
|
|
|
33,448
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
1,284
|
|
|
|
1,078
|
|
Mortgage servicing rights
|
|
|
1,077
|
|
|
|
767
|
|
Goodwill
|
|
|
3,068
|
|
|
|
2,702
|
|
Investment securities
available-for-sale
|
|
|
1,646
|
|
|
|
1,610
|
|
Prepaid expenses
|
|
|
842
|
|
|
|
501
|
|
Other
|
|
|
1,184
|
|
|
|
1,306
|
|
|
|
Total deferred tax liabilities
|
|
|
9,101
|
|
|
|
7,964
|
|
|
|
Net deferred tax assets
|
|
$
|
32,362
|
|
|
$
|
25,484
|
|
|
|
Federal income tax expense applicable to net gains on investment
securities transactions was $0.5 million in 2008 and is
included in the provision for federal income taxes on the
consolidated statements of income.
The tax periods open to examination by the Internal Revenue
Service include the years ended December 31, 2009, 2008,
2007 and 2006. The same years are open to examination for the
Michigan Business Tax/Michigan Single Business Tax with the
addition of the fiscal year ended December 31, 2005.
The Corporation adopted the provisions of FASB ASC Topic 740,
Income Taxes (ASC 740), as applicable to income tax reserves,
effective January 1, 2007. Upon adoption, the Corporation
recognized an increase in retained earnings of
$0.04 million, a reduction in goodwill of
$0.22 million and a reduction in income taxes payable
(included in interest payable and other liabilities on the
consolidated statement of financial position) of
$0.26 million. After adoption of ASC 740, the Corporation
had no remaining income tax reserves and had none at
December 31, 2009 and 2008.
NOTE 18 COMMITMENTS AND CONTINGENCIES
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the loan contract. Commitments generally have
fixed expiration dates or other termination clauses.
Historically, the majority of the commitments of Chemical Bank
have not been drawn upon and, therefore, may not represent
future cash requirements. Standby letters of credit are
conditional commitments issued by Chemical Bank to generally
guarantee the performance of a customer to a third party. Both
arrangements have credit risk essentially the same as that
involved in making loans to customers and are subject to the
Corporations normal credit policies. Collateral obtained
upon exercise of commitments is determined using
managements credit evaluation of the borrowers and may
include real estate, business assets, deposits and other items.
Chemical Bank at any point in time also has approved but
undisbursed loans. Undisbursed loans are not included in loans
on the consolidated statements of financial position. The
majority of these undisbursed loans will be funded and convert
to a portfolio loan within a three-month period.
At December 31, 2009, total unused loan commitments,
standby letters of credit and undisbursed loans were
$413 million, $41 million and $75 million,
respectively. At December 31, 2008, total unused loan
commitments, standby letters of credit and undisbursed loans
were $405 million, $38 million and $152 million,
respectively. A significant portion of the unused loan
commitments and standby letters of credit outstanding as of
December 31, 2009 expire one year from their contract date;
however, $26 million of unused loan commitments extend for
more than five years.
75
The Corporations unused loan commitments and standby
letters of credit have been estimated to have an immaterial
realizable fair value, as historically the majority of the
unused loan commitments have not been drawn upon and generally
Chemical Bank does not receive fees in connection with these
agreements.
The Corporation has operating leases and other non-cancelable
contractual obligations on buildings, equipment, computer
software and other expenses that will require annual payments
through 2016, including renewal option periods for those
building leases that the Corporation expects to renew. Minimum
payments due in each of the next five years and thereafter are
as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
7,373
|
|
2011
|
|
|
4,655
|
|
2012
|
|
|
2,931
|
|
2013
|
|
|
879
|
|
2014
|
|
|
105
|
|
2015 and thereafter
|
|
|
37
|
|
|
|
Total
|
|
$
|
15,980
|
|
|
|
Minimum payments include estimates, where applicable, of
estimated usage and annual Consumer Price Index increases of
approximately 3%.
Total expense recorded under operating leases and other
non-cancelable contractual obligations was $7.3 million in
2009, $6.9 million in 2008 and $4.3 million in 2007.
The Corporation and its bank subsidiary are subject to certain
legal actions arising in the ordinary course of business. In the
opinion of management, after consulting with legal counsel, the
ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated net income or
financial position of the Corporation.
NOTE 19 REGULATORY CAPITAL AND RESERVE
REQUIREMENTS
Banking regulations require that banks maintain cash reserve
balances in vault cash, with the Federal Reserve Bank, or with
certain other qualifying banks. The aggregate average amount of
such legal balances required to be maintained by Chemical Bank
was $15.4 million during 2009 and $25.5 million during
2008. During 2009, Chemical Bank satisfied its legal reserve
requirements by maintaining vault cash balances in excess of
legal reserve requirements. Chemical Bank was not required to
maintain compensating balances with correspondent banks during
2009 or 2008.
Federal and state banking regulations place certain restrictions
on the transfer of assets in the form of dividends, loans or
advances from Chemical Bank to the Corporation. At
December 31, 2009, substantially all of the assets of
Chemical Bank were restricted from transfer to the Corporation
in the form of loans or advances. Dividends from Chemical Bank
are the principal source of funds for the Corporation. Chemical
Bank did not pay dividends to the Corporation in 2009. Dividends
paid to the Corporation by Chemical Bank totaled
$59 million in 2008 and $49 million in 2007. Dividends
paid to the Corporation in 2008 by Chemical Bank of
$59 million included $30 million that required and
received approval from the Board of Governors of the Federal
Reserve System. At December 31, 2009, Chemical Bank could
not pay dividends to the Corporation without regulatory approval
as dividends paid in 2008 exceeded Chemical Banks net
income in 2008 and 2009, combined. At December 31, 2009,
Chemical Bank was well-capitalized as defined by
federal banking regulations. In addition to the statutory
limits, the Corporation considers the overall financial and
capital position of Chemical Bank prior to making any cash
dividend decisions.
The Corporation and Chemical Bank are subject to various
regulatory capital requirements administered by federal banking
agencies. Under these capital requirements, Chemical Bank must
meet specific capital guidelines that involve quantitative
measures of assets and certain off-balance sheet items as
calculated under regulatory accounting practices. In addition,
capital amounts and classifications are subject to qualitative
judgments by regulators. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporations consolidated financial statements.
Quantitative measures established by regulation to ensure
capital adequacy require minimum ratios of Tier 1 capital
to average assets (Leverage Ratio) and Tier 1 and Total
capital to risk-weighted assets. These capital guidelines assign
risk weights to on- and off- balance sheet items in arriving at
total risk-weighted assets. Minimum capital levels are based
upon the perceived risk of various asset categories and certain
off-balance sheet instruments.
At December 31, 2009 and 2008, the Corporations and
Chemical Banks capital ratios exceeded the quantitative
capital ratios required for an institution to be considered
well-capitalized. Significant factors that may
affect capital adequacy include, but are not limited to, a
disproportionate growth in assets versus capital and a change in
mix or credit quality of assets.
76
The summary below compares the Corporations and Chemical
Banks actual capital amounts and ratios with the
quantitative measures established by regulation to ensure
capital adequacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Required for Capital Adequacy Purposes
|
|
|
Required to be Well Capitalized Under Prompt Corrective
Action Regulations
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
$455,093
|
|
|
|
15.5
|
%
|
|
|
$235,261
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
442,198
|
|
|
|
15.1
|
|
|
|
234,730
|
|
|
|
8.0
|
|
|
|
$293,412
|
|
|
|
10.0
|
%
|
Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
417,787
|
|
|
|
14.2
|
|
|
|
117,630
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
404,974
|
|
|
|
13.8
|
|
|
|
117,365
|
|
|
|
4.0
|
|
|
|
176,047
|
|
|
|
6.0
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
417,787
|
|
|
|
10.1
|
|
|
|
165,576
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
404,974
|
|
|
|
9.8
|
|
|
|
165,304
|
|
|
|
4.0
|
|
|
|
206,630
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
$470,054
|
|
|
|
16.4
|
%
|
|
|
$229,712
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
427,850
|
|
|
|
14.9
|
|
|
|
229,178
|
|
|
|
8.0
|
|
|
|
$286,472
|
|
|
|
10.0
|
%
|
Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
433,900
|
|
|
|
15.1
|
|
|
|
114,856
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
391,779
|
|
|
|
13.7
|
|
|
|
114,589
|
|
|
|
4.0
|
|
|
|
171,883
|
|
|
|
6.0
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
433,900
|
|
|
|
11.6
|
|
|
|
149,603
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
391,779
|
|
|
|
10.5
|
|
|
|
149,279
|
|
|
|
4.0
|
|
|
|
186,598
|
|
|
|
5.0
|
|
|
|
NOTE 20 PARENT COMPANY ONLY FINANCIAL
STATEMENTS
Condensed financial statements of Chemical Financial Corporation
(parent company) only follow:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Condensed Statements of
Financial Position
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash at subsidiary bank
|
|
$
|
7,784
|
|
|
$
|
36,263
|
|
Investment in subsidiary bank
|
|
|
460,406
|
|
|
|
448,331
|
|
Premises and equipment
|
|
|
5,039
|
|
|
|
5,488
|
|
Goodwill
|
|
|
1,092
|
|
|
|
1,092
|
|
Other assets
|
|
|
1,516
|
|
|
|
1,111
|
|
|
|
Total assets
|
|
$
|
475,837
|
|
|
$
|
492,285
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1,526
|
|
|
$
|
741
|
|
Shareholders equity
|
|
|
474,311
|
|
|
|
491,544
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
475,837
|
|
|
$
|
492,285
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Condensed Statements of
Income
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from subsidiary bank
|
|
$
|
|
|
|
$
|
59,000
|
|
|
$
|
49,000
|
|
Interest income from subsidiary bank
|
|
|
|
|
|
|
60
|
|
|
|
393
|
|
Other interest income
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
Total income
|
|
|
|
|
|
|
59,060
|
|
|
|
49,458
|
|
Operating expenses
|
|
|
2,903
|
|
|
|
2,324
|
|
|
|
2,019
|
|
|
|
Income (loss) before income taxes and equity in undistributed
(distributions in excess of) net income of subsidiary bank
|
|
|
(2,903
|
)
|
|
|
56,736
|
|
|
|
47,439
|
|
Federal income tax benefit
|
|
|
1,015
|
|
|
|
792
|
|
|
|
545
|
|
Equity in undistributed (distributions in excess of) net income
of subsidiary bank
|
|
|
11,891
|
|
|
|
(37,686
|
)
|
|
|
(8,975
|
)
|
|
|
Net income
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
$
|
39,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Condensed Statements of Cash
Flows
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
$
|
39,009
|
|
Share-based compensation expense
|
|
|
490
|
|
|
|
664
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
497
|
|
|
|
481
|
|
|
|
439
|
|
Distributions in excess of (equity in undistributed) net income
of subsidiary bank
|
|
|
(11,891
|
)
|
|
|
37,686
|
|
|
|
8,975
|
|
Net increase in other assets
|
|
|
(405
|
)
|
|
|
(441
|
)
|
|
|
(39
|
)
|
Net increase (decrease) in other liabilities
|
|
|
785
|
|
|
|
188
|
|
|
|
(245
|
)
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(521
|
)
|
|
|
58,420
|
|
|
|
48,139
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash assumed (paid) in transfer of net assets (liabilities) to
subsidiary bank
|
|
|
|
|
|
|
450
|
|
|
|
(643
|
)
|
Purchases of premises and equipment, net
|
|
|
(48
|
)
|
|
|
(500
|
)
|
|
|
(198
|
)
|
Proceeds from call of investment security
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
Net cash used in investing activities
|
|
|
(48
|
)
|
|
|
(50
|
)
|
|
|
(491
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(28,190
|
)
|
|
|
(28,131
|
)
|
|
|
(27,712
|
)
|
Proceeds from directors stock purchase plan
|
|
|
244
|
|
|
|
231
|
|
|
|
223
|
|
Proceeds from employees exercises of stock options
|
|
|
36
|
|
|
|
1,508
|
|
|
|
21
|
|
Repurchases of shares
|
|
|
|
|
|
|
|
|
|
|
(25,511
|
)
|
|
|
Net cash used in financing activities
|
|
|
(27,910
|
)
|
|
|
(26,392
|
)
|
|
|
(52,979
|
)
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(28,479
|
)
|
|
|
31,978
|
|
|
|
(5,331
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
36,263
|
|
|
|
4,285
|
|
|
|
9,616
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,784
|
|
|
$
|
36,263
|
|
|
$
|
4,285
|
|
|
|
78
NOTE 21 SUBSEQUENT EVENT
On January 7, 2010, the Corporation and O.A.K. Financial
Corporation (OAK), the parent company of Byron Bank, a community
bank based in Byron Center, Michigan, entered into a definitive
agreement whereby OAK will merge with and into the Corporation.
Under the terms of the agreement, OAK shareholders will be
entitled to receive 1.306 shares of the Corporations
common stock for each share of OAK common stock outstanding, or
approximately 3.5 million shares, subject to adjustment in
certain limited circumstances. The merger is designed to be a
tax free exchange. Cash will be paid in lieu of fractional
shares. Closing of the merger, which is expected to occur in the
second quarter of 2010, is subject to certain conditions,
including approval by the shareholders of OAK and regulatory
approval.
NOTE 22 SUMMARY OF QUARTERLY STATEMENTS OF
INCOME (UNAUDITED)
The following quarterly information is unaudited. However, in
the opinion of management, the information reflects all
adjustments that are necessary for the fair presentation of the
results of operations for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
$
|
48,322
|
|
|
$
|
48,283
|
|
|
$
|
48,066
|
|
|
$
|
48,060
|
|
Interest expense
|
|
|
11,732
|
|
|
|
11,305
|
|
|
|
11,403
|
|
|
|
10,847
|
|
|
|
Net interest income
|
|
|
36,590
|
|
|
|
36,978
|
|
|
|
36,663
|
|
|
|
37,213
|
|
Provision for loan losses
|
|
|
14,000
|
|
|
|
15,200
|
|
|
|
14,200
|
|
|
|
15,600
|
|
Noninterest income
|
|
|
9,857
|
|
|
|
10,958
|
|
|
|
10,092
|
|
|
|
10,212
|
|
Operating expenses
|
|
|
29,205
|
|
|
|
30,016
|
|
|
|
29,582
|
|
|
|
28,807
|
|
|
|
Income before income taxes
|
|
|
3,242
|
|
|
|
2,720
|
|
|
|
2,973
|
|
|
|
3,018
|
|
Federal income tax expense
|
|
|
524
|
|
|
|
426
|
|
|
|
500
|
|
|
|
500
|
|
|
|
Net income
|
|
$
|
2,718
|
|
|
$
|
2,294
|
|
|
$
|
2,473
|
|
|
$
|
2,518
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
Diluted
|
|
|
0.11
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
$
|
53,437
|
|
|
$
|
51,508
|
|
|
$
|
51,688
|
|
|
$
|
51,703
|
|
Interest expense
|
|
|
19,051
|
|
|
|
15,872
|
|
|
|
14,968
|
|
|
|
13,192
|
|
|
|
Net interest income
|
|
|
34,386
|
|
|
|
35,636
|
|
|
|
36,720
|
|
|
|
38,511
|
|
Provision for loan losses
|
|
|
2,700
|
|
|
|
6,500
|
|
|
|
22,000
|
|
|
|
18,000
|
|
Noninterest income
|
|
|
9,580
|
|
|
|
11,959
|
|
|
|
10,054
|
|
|
|
9,604
|
|
Operating expenses
|
|
|
26,844
|
|
|
|
26,885
|
|
|
|
26,750
|
|
|
|
28,629
|
|
|
|
Income (loss) before income taxes
|
|
|
14,422
|
|
|
|
14,210
|
|
|
|
(1,976
|
)
|
|
|
1,486
|
|
Federal income tax expense (benefit)
|
|
|
4,751
|
|
|
|
4,600
|
|
|
|
(951
|
)
|
|
|
(100
|
)
|
|
|
Net income (loss)
|
|
$
|
9,671
|
|
|
$
|
9,610
|
|
|
$
|
(1,025
|
)
|
|
$
|
1,586
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
|
$
|
0.40
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.06
|
|
Diluted
|
|
|
0.41
|
|
|
|
0.40
|
|
|
|
(0.04
|
)
|
|
|
0.06
|
|
79
MARKET FOR
CHEMICAL FINANCIAL
CORPORATION COMMON STOCK AND RELATED
SHAREHOLDER MATTERS (UNAUDITED)
MARKET AND DIVIDEND INFORMATION
Chemical Financial Corporation common stock is traded on The
Nasdaq Stock
Market®
under the symbol CHFC. As of December 31, 2009, there were
approximately 23.9 million shares of Chemical Financial
Corporation common stock issued and outstanding, held by
approximately 4,900 shareholders of record. The table below
sets forth the range of high and low sales prices for Chemical
Financial Corporation common stock for the periods indicated.
These quotations reflect inter-dealer prices, without retail
markup, markdown, or commission, and may not necessarily
represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
28.59
|
|
|
$
|
15.23
|
|
|
$
|
28.33
|
|
|
$
|
19.62
|
|
Second quarter
|
|
|
23.91
|
|
|
|
17.84
|
|
|
|
25.64
|
|
|
|
19.71
|
|
Third quarter
|
|
|
22.93
|
|
|
|
18.31
|
|
|
|
42.98
|
|
|
|
14.62
|
|
Fourth quarter
|
|
|
24.35
|
|
|
|
20.79
|
|
|
|
33.00
|
|
|
|
19.14
|
|
The earnings of Chemical Bank are the principal source of funds
for the Corporation to pay cash dividends to its shareholders.
Accordingly, cash dividends are dependent upon the earnings,
capital needs, regulatory constraints, and other factors
affecting Chemical Bank. See Note 19 to the consolidated
financial statements for a discussion of such limitations. The
Corporation has paid regular cash dividends every quarter since
it began operation as a bank holding company in 1973. The
following table summarizes the quarterly cash dividends paid to
shareholders over the past five years. Based on the financial
condition of the Corporation at December 31, 2009,
management expects the Corporation to pay quarterly cash
dividends on its common shares in 2010; however, there can be no
assurance as to future dividends because they are dependent on
future earnings, capital requirements, regulatory approval and
the Corporations financial condition. On February 22,
2010 the board of directors declared a $0.20 per share first
quarter 2010 cash dividend, payable on March 19, 2010.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
First quarter
|
|
$
|
0.295
|
|
|
$
|
0.295
|
|
|
$
|
0.285
|
|
|
$
|
0.275
|
|
|
$
|
0.265
|
|
Second quarter
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
|
|
0.265
|
|
Third quarter
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
|
|
0.265
|
|
Fourth quarter
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
|
|
0.265
|
|
|
|
Total
|
|
$
|
1.180
|
|
|
$
|
1.180
|
|
|
$
|
1.140
|
|
|
$
|
1.100
|
|
|
$
|
1.060
|
|
|
|
80
SHAREHOLDER
RETURN
The following line graph compares Chemical Financial
Corporations cumulative total shareholder return on its
common stock over the last five years, assuming the reinvestment
of dividends, to the Standard and Poors (referred to as
S&P) 500 Stock Index and the KBW 50 Index. Both
of these indices are also based upon total return (including
reinvestment of dividends) and are
market-capitalization-weighted indices. The S&P 500 Stock
Index is a broad equity market index published by S&P. The
KBW 50 Index is published by Keefe, Bruyette & Woods,
Inc., an investment banking firm that specializes in the banking
industry. The KBW 50 Index is composed of 50 money center and
regional bank holding companies. The line graph assumes $100 was
invested on December 31, 2004.
The dollar values for total shareholder return plotted in the
above graph are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P
|
|
|
|
|
Chemical
|
|
|
|
|
|
500
|
|
|
|
|
Financial
|
|
|
KBW 50
|
|
|
Stock
|
|
December 31
|
|
|
Corporation
|
|
|
Index
|
|
|
Index
|
|
|
|
|
|
2004
|
|
|
$
|
100.0
|
|
|
$
|
100.0
|
|
|
$
|
100.0
|
|
|
2005
|
|
|
|
80.7
|
|
|
|
101.3
|
|
|
|
104.9
|
|
|
2006
|
|
|
|
87.7
|
|
|
|
120.8
|
|
|
|
121.5
|
|
|
2007
|
|
|
|
65.3
|
|
|
|
93.0
|
|
|
|
128.2
|
|
|
2008
|
|
|
|
80.2
|
|
|
|
50.7
|
|
|
|
80.7
|
|
|
2009
|
|
|
|
71.7
|
|
|
|
51.3
|
|
|
|
102.1
|
|
81
CHEMICAL
FINANCIAL CORPORATION DIRECTORS AND EXECUTIVE OFFICERS
At
December 31, 2009
|
|
|
Board of Directors
|
|
Gary E. Anderson Lead Independent Director, Chemical
Financial Corporation, Retired Chairman, Dow Corning Corporation
(a diversified company specializing in the development,
manufacture and marketing of silicones and related silicon-based
products)
|
|
|
J. Daniel Bernson Vice Chairman, The Hanson Group
(a holding company with interests in diversified businesses in
Southwest Michigan)
|
|
|
Nancy Bowman Certified Public Accountant, Co-owner,
Bowman & Rogers, PC (an accounting and tax services company)
|
|
|
James A. Currie Investor
|
|
|
Thomas T. Huff Attorney at Law, Thomas T.
Huff, P.C., Owner of Peregrine Realty LLC (a real estate
development company) and Peregrine Restaurant Group LLC (owner
of London Grill restaurants)
|
|
|
Michael T. Laethem President, Farm Depot, Ltd (a
company that purchases, sells and leases farm equipment)
|
|
|
Geoffery E. Merszei Executive Vice President of The
Dow Chemical Company (a diversified science and technology
company that manufactures chemical, plastic and agricultural
products), President of Dow Europe, Middle East and Africa and
Chairman of Dow Europe
|
|
|
Terence F. Moore President Emeritus, MidMichigan
Health (a health care organization)
|
|
|
Aloysius J. Oliver Retired Chairman, Chief
Executive Officer and President, Chemical Financial Corporation
|
|
|
David B. Ramaker Chairman, Chief Executive Officer
and President, Chemical Financial Corporation, and Chairman,
Chief Executive Officer and President, Chemical Bank
|
|
|
Larry D. Stauffer Consultant, Auto Wares Inc. (an
automotive parts distribution company)
|
|
|
William S. Stavropoulos Chairman Emeritus, The Dow
Chemical Company (a diversified science and technology company
that manufactures chemical, plastic and agricultural products)
|
|
|
Franklin C. Wheatlake Chairman, Utility Supply and
Construction Company (a company that provides supply chain,
material distribution, logistics support and construction
services to the electric and gas utility industry)
|
|
|
|
Director Emeritus
|
|
Alan W. Ott, Chemical Financial Corporation
|
|
|
|
Executive Officers
|
|
David B. Ramaker Chairman, Chief Executive Officer
and President, Chemical Financial Corporation, and Chairman,
Chief Executive Officer and President, Chemical Bank
|
|
|
Lori A. Gwizdala Executive Vice President, Chief
Financial Officer and Treasurer, Chemical Financial Corporation
|
|
|
Thomas W. Kohn Executive Vice President of
Community Banking and Secretary, Chemical Financial Corporation
|
|
|
Kenneth W. Johnson Executive Vice President and
Director of Bank Operations, Chemical Bank
|
|
|
John E. Kessler Executive Vice President and Senior
Trust Officer, Chemical Bank
|
|
|
Dominic Monastiere Executive Vice President and
Chief Risk Management Officer, Chemical Bank
|
|
|
James E. Tomczyk Executive Vice President and Senior
Credit Officer, Chemical Bank
|
82
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
|
|
|
þ
|
|
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
|
|
|
For the fiscal year ended December 31,
2009
|
|
|
or
|
o
|
|
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
|
|
|
For the transition period from
to
.
|
Commission File Number:
000-08185
CHEMICAL FINANCIAL
CORPORATION
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Michigan
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
38-2022454
(I.R.S. Employer Identification No.)
|
|
|
|
235 E. Main Street
Midland, Michigan
(Address of Principal Executive Offices)
|
|
48640
(Zip Code)
|
Registrants telephone number, including area code:
(989) 839-5350
Securities Registered Pursuant to Section 12(b) of the Act:
|
|
|
Common Stock, $1 Par Value Per Share
|
|
The Nasdaq Stock Market LLC
|
(Title of Class)
|
|
(Name of each exchange on which registered)
|
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes No ü
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes No ü
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 ü 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 No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. ü
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 ü Non-accelerated
filer Smaller
reporting company
(Do
not check if a smaller reporting company)
83
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes No ü
The aggregate market value of the registrants outstanding
voting common stock held by non-affiliates of the registrant as
of June 30, 2009, determined using the average bid and
asked price of the registrants common stock on
June 30, 2009, as quoted on The Nasdaq Stock
Market®,
was $431,530,071.
The number of shares outstanding of each of the
registrants classes of common stock, as of
January 31, 2010:
Common stock, $1 par value per share
23,902,519 shares
DOCUMENTS
INCORPORATED BY REFERENCE
This report incorporates into a single document the requirements
of the Securities and Exchange Commission (SEC) with respect to
annual reports on
Form 10-K
and annual reports to shareholders. The registrants Proxy
Statement for the April 19, 2010 annual shareholders
meeting is incorporated by reference into Part III of this
report.
Only those sections of this 2009 Annual Report to Shareholders
that are specified in the following Cross Reference Index
constitute part of the registrants
Form 10-K
for the year ended December 31, 2009. No other information
contained in this 2009 Annual Report to Shareholders shall be
deemed to constitute any part of the registrants
Form 10-K,
nor shall any such information be incorporated into the
Form 10-K,
and such information shall not be deemed filed as
part of the registrants
Form 10-K.
Form 10-K
Cross Reference Index
84
PART I
General
Business
Chemical Financial Corporation (Chemical or the
Corporation) is a financial holding company
registered under the Bank Holding Company Act of 1956, as
amended, and incorporated in the State of Michigan. Chemical was
organized under Michigan law in August 1973 and is headquartered
in Midland, Michigan. Chemical was substantially inactive until
June 30, 1974, when it acquired Chemical Bank and
Trust Company (CBT) pursuant to a reorganization in which
the former shareholders of CBT became shareholders of Chemical.
CBTs name was changed to Chemical Bank on
December 31, 2005.
In addition to the acquisition of CBT, the Corporation has
acquired 19 community banks and 15 branch bank offices through
December 31, 2009 and has consolidated these acquisitions
into one commercial subsidiary bank, Chemical Bank. Chemical
Bank operates through an internal organizational structure of
four regional banking units.
Chemical Bank directly owns two operating non-bank subsidiaries:
CFC Financial Services, Inc. and CFC Title Services, Inc.
CFC Financial Services, Inc. is an insurance subsidiary that
operates under the assumed name of CFC Investment
Center and provides mutual funds, annuity products and
market securities to customers. CFC Title Services, Inc. is
an issuer of title insurance to buyers and sellers of
residential and commercial mortgage properties, including
properties subject to loan refinancing.
At December 31, 2009, Chemical was the third largest bank
holding company headquartered in Michigan, measured by total
assets, and together with Chemical Bank, employed a total of
1,427 full-time equivalent employees.
Chemicals business is concentrated in a single industry
segment commercial banking. Chemical Bank offers a
full range of commercial banking and fiduciary products and
services. These include business and personal checking accounts,
savings and individual retirement accounts, time deposit
instruments, electronically accessed banking products,
residential and commercial real estate financing, commercial
lending, consumer financing, debit cards, safe deposit services,
automated teller machines, access to insurance and investment
products, money transfer services, corporate and personal trust
services and other banking services.
The principal markets for these financial services are the
communities within Michigan in which the branches of Chemical
Bank are located and the areas surrounding these communities. As
of December 31, 2009, Chemical and Chemical Bank served
these markets through 129 banking offices located in 31
counties, all in the lower peninsula of Michigan. In addition to
the banking offices, Chemical Bank operated three loan
production offices and 140 automated teller machines, both on-
and off-bank premises, as of December 31, 2009.
A summary of the composition of the Corporations loan
portfolio at December 31, 2009, 2008 and 2007 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Composition of Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
19.5
|
%
|
|
|
19.7
|
%
|
|
|
18.4
|
%
|
Real estate commercial
|
|
|
26.2
|
|
|
|
26.4
|
|
|
|
27.2
|
|
Real estate construction
|
|
|
4.1
|
|
|
|
4.0
|
|
|
|
4.8
|
|
Real estate residential
|
|
|
24.7
|
|
|
|
28.1
|
|
|
|
30.0
|
|
Consumer
|
|
|
25.5
|
|
|
|
21.8
|
|
|
|
19.6
|
|
|
|
Total composition of loans
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
While Chemical Banks loan portfolio is not concentrated in
any one loan category, its largest loan category is real estate
commercial loans. At December 31, 2009, real estate
commercial loans totaled $785.7 million, or 26.2% of total
loans, compared to $786.4 million, or 26.4% of total loans
at December 31, 2008 and $760.4 million, or 27.2% of
total loans at December 31, 2007.
The Corporations general practice is to sell real estate
residential loan originations with interest rates fixed for time
periods greater than ten years in the secondary market. During
2009, the Corporation sold $361 million of real estate
residential loan originations in the secondary market, compared
to the sale of $145 million and $136 million of these
loan originations during 2008 and 2007, respectively. The
increase in loans sold in 2009 was attributable to the low
interest rate environment that resulted in customers refinancing
balloon and adjustable rate mortgages to long-term fixed
interest rate loans, which the Corporation generally sells in
the secondary market.
85
The principal source of revenue for Chemical is interest income
and fees on loans, which accounted for 74% of total revenue in
2009, 72% of total revenue in 2008 and 71% of total revenue in
2007. Interest income on investment securities is also a
significant source of revenue, accounting for 8% of total
revenue in 2009 and 10% of total revenue in both 2008 and 2007.
Chemical has no foreign loans, assets or activities. No material
part of the business of Chemical or its subsidiaries is
dependent upon a single customer or very few customers.
The nature of the business of Chemical Bank is such that it
holds title to numerous parcels of real property. These
properties are primarily owned for branch offices; however,
Chemical and Chemical Bank may hold properties for other
business purposes, as well as on a temporary basis for
properties taken in, or in lieu of, foreclosure to satisfy loans
in default. Under current state and federal laws, present and
past owners of real property may be exposed to liability for the
cost of clean up of contamination on or originating from those
properties, even if they are wholly innocent of the actions that
caused the contamination. These liabilities can be material and
can exceed the value of the contaminated property.
The Corporation offers trust and investment management services,
including financial and estate planning, retirement programs,
investment management and custodial services and employee
benefit programs through the Trust and Investment Management
Services department (Trust Department) of Chemical Bank.
The Trust Department had assets under custodial and
management arrangements of $1.91 billion,
$1.67 billion and $2.19 billion as of
December 31, 2009, 2008 and 2007, respectively. The
Trust Department earns revenue from fees based on the
market value of those assets under management arrangements which
can fluctuate as the market fluctuates.
Competition
The business of banking is highly competitive. In addition to
competition from other commercial banks, banks face significant
competition from nonbank financial institutions. Savings
associations and credit unions compete aggressively with
commercial banks for deposits and loans, and credit unions and
finance companies are particularly significant factors in the
consumer loan market. Banks compete for deposits with a broad
range of other types of investments, the most significant of
which, over the past few years, have been mutual funds and
annuities. Insurance companies and investment firms are also
significant competitors for customer deposits. In response to
this increased competition for customers bank deposits,
Chemical Bank, through the CFC Investment Center program, offers
a broad array of mutual funds, annuity products and market
securities through an alliance with an independent, registered
broker/dealer. In addition, the Trust and Investment Management
Services department of Chemical Bank offers customers a variety
of investment products and services. The principal methods of
competition for financial services are price (interest rates
paid on deposits, interest rates charged on loans and fees
charged for services) and service (convenience and quality of
services rendered to customers).
Supervision
and Regulation
Banks and bank holding companies are extensively regulated. As
of December 31, 2009, Chemical Bank was chartered by the
State of Michigan and supervised, examined and regulated by the
Michigan Office of Financial and Insurance Regulation (OFIR).
Chemical Bank is a member of the Federal Reserve System and,
therefore, also is supervised, examined and regulated by the
Board of Governors of the Federal Reserve System (Federal
Reserve Board). Deposits of Chemical Bank are insured by the
Federal Deposit Insurance Corporation (FDIC) to the maximum
extent provided by law. Chemical has elected to be regulated by
the Federal Reserve Board as a financial holding company under
the Bank Holding Company Act of 1956.
State banks and bank holding companies are governed by both
federal and state laws that significantly limit their business
activities in a number of respects. Examples of such limitations
include: (1) prior approval of the Federal Reserve Board,
and in some cases various other governing agencies, is required
for bank holding companies to acquire control of any additional
bank holding companies, banks or branches, (2) the business
activities of bank holding companies and their subsidiaries are
limited to banking and to other activities that are determined
by the Federal Reserve Board to be closely related to banking,
and (3) transactions between bank holding company
subsidiary banks are significantly restricted by banking laws
and regulations. Somewhat broader activities are permitted for
qualifying financial holding companies, such as Chemical.
Chemical is a legal entity separate and distinct from Chemical
Bank. Chemicals primary source of funds is dividends paid
to it by Chemical Bank. Federal and state banking laws and
regulations limit both the extent to which Chemical Bank can
lend or otherwise supply funds to Chemical and also place
certain restrictions on the amount of dividends Chemical Bank
may pay to Chemical. Additional information on restrictions
regarding dividends of Chemical and Chemical Bank may be found
under Note 19 to the consolidated financial statements and
is here incorporated by reference.
To recharacterize itself as a financial holding company and to
avail itself of the broader powers permitted for financial
holding companies, a bank holding company must meet certain
regulatory standards for being well-capitalized,
well-managed and
86
satisfactory in its Community Reinvestment Act
compliance. The Corporation became a financial holding company
in 2000.
Under Federal Reserve Board policy, Chemical is expected to act
as a source of financial strength to Chemical Bank and to commit
resources to support Chemical Bank. In addition, if the OFIR
deems Chemical Banks capital to be impaired, OFIR may
require Chemical Bank to restore its capital by a special
assessment on Chemical as Chemical Banks only shareholder.
If Chemical failed to pay any assessment, Chemicals
directors would be required, under Michigan law, to sell the
shares of Chemical Banks stock owned by Chemical to the
highest bidder at either a public or private auction and use the
proceeds of the sale to restore Chemical Banks capital.
The Federal Reserve Board and the FDIC have established
guidelines for risk-based capital by bank holding companies and
banks. These guidelines establish a risk-adjusted ratio relating
capital to risk-weighted assets and off-balance-sheet exposures.
These capital guidelines primarily define the components of
capital, categorize assets into different risk classes, and
include certain off-balance-sheet items in the calculation of
capital requirements.
The FDIC Improvement Act of 1991 established a system of prompt
corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, federal banking
regulators have established five capital categories,
well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized,
in which all institutions are placed. The federal banking
agencies have also specified by regulation the relevant capital
levels for each of the categories.
Federal banking regulators are required to take specified
mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends
upon the capital category in which the institution is placed.
Subject to a narrow exception, the banking regulator must
generally appoint a receiver or conservator for an institution
that is critically undercapitalized. An institution in any of
the undercapitalized categories is required to submit an
acceptable capital restoration plan to its appropriate federal
banking agency. An undercapitalized institution is also
generally prohibited from paying any dividends, increasing its
average total assets, making acquisitions, establishing any
branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval.
Failure to meet capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies, including
issuance of a capital directive, the termination of deposit
insurance by the FDIC, a prohibition on accepting brokered
deposits, and other restrictions on its business. In addition,
such a bank would generally not receive regulatory approval of
any application that requires the consideration of capital
adequacy, such as a branch or merger application, unless the
bank could demonstrate a reasonable plan to meet the capital
requirement within a reasonable period of time. The capital
ratios of Chemical and Chemical Bank exceed the regulatory
guidelines for institutions to be categorized as
well-capitalized. Additional information on Chemical
and Chemical Banks capital ratios may be found under
Note 19 to the consolidated financial statements and is
here incorporated by reference.
The FDIC formed the Deposit Insurance Fund (DIF) in accordance
with the Federal Deposit Insurance Reform Act of 2005 (Reform
Act). The FDIC maintains the insurance reserves of the DIF by
assessing depository institutions an insurance premium. The FDIC
implemented the Reform Act to create a stronger and more stable
insurance system. The Reform Act enables the FDIC to tie each
depository institutions DIF insurance premiums both to the
balance of insured deposits, as well as to the degree of risk
the institution poses to the DIF. In addition, the FDIC has
flexibility to manage the DIFs reserve ratio within a
range, which in turn may help prevent sharp swings in assessment
rates that were possible prior to the Reform Act. Under the
Reform Acts risk-based assessment system, the FDIC will
evaluate each depository institutions risk based on three
primary sources of information: supervisory ratings for all
insured institutions, certain financial ratios for most
institutions, and long-term debt issuer ratings for large
institutions that have them. Neither the Corporation nor
Chemical Bank has a long-term debt issuer rating. The ability to
differentiate on the basis of risk will improve incentives for
effective risk management and will reduce the extent to which
safer banks subsidize riskier ones.
As part of the Reform Act, Congress provided credits to
institutions that paid high premiums in the past to bolster the
FDICs insurance reserves to offset a portion of DIF
insurance reserve assessments. The Corporations assessment
credits received from the FDIC were $3.2 million effective
January 1, 2007. The Corporation utilized the assessment
credits to offset its entire DIF insurance premium in 2007 of
approximately $1.8 million. The Corporations DIF
insurance premium in 2008 was $2.0 million, which was
offset by the remaining $1.4 million of assessment credits.
The Corporations DIF insurance premium in 2009 was
$4.9 million.
In December 2008, the FDIC finalized a rule that raised the then
current deposit assessment rates uniformly by 7 basis
points for the first quarter of 2009 assessment. The new rule
resulted in annualized assessment rates for Risk Category 1
institutions ranging from 12 to 14 basis points. Chemical
Bank was by definition a Risk Category 1 institution during all
of 2009. In
87
February 2009, the FDIC issued final rules to amend the DIF
restoration plan, change the risk-based assessment system and
set increased assessment rates for Risk Category 1 institutions
beginning in the second quarter of 2009. Effective April 1,
2009, for Risk Category 1 institutions, the methodology for
establishing assessment rates for large institutions, such as
Chemical Bank, was established to determine the initial base
assessment rate by using a weighted combination of
weighted-average CAMELS component ratings, long-term debt issuer
ratings (converted to numbers and averaged) and certain
financial ratios. The new initial base assessment rates for Risk
Category 1 institutions range from 12 to 16 basis points,
on an annualized basis, and from 7 to 24 basis points after
the effect of potential base-rate adjustments. Under the new
assessment rate system, the Corporations DIF insurance
premium is expected to be approximately $5.3 million in
2010.
In May 2009, the FDIC issued a final rule which levied a special
assessment applicable to all FDIC insured depository
institutions totaling 5 basis points of each
institutions total assets less Tier 1 capital as of
June 30, 2009, not to exceed 10 basis points of
domestic deposits. The special assessment was part of the
FDICs efforts to restore the DIF reserves. The Corporation
recognized $1.8 million of additional deposit insurance
expense in the second quarter of 2009 related to the special
assessment. In November 2009, the FDIC issued a final rule that
required all insured depository institutions, with limited
exceptions, to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010,
2011 and 2012. In conjunction with the adoption of the prepaid
assessment, the FDIC also adopted a uniform 3 basis point
increase in assessment rates effective on January 1, 2011.
The prepayment calculation is based on an institutions
assessment rate in effect on September 30, 2009 and assumes
a 5% annual growth rate in the assessment base. On
December 30, 2009, the Corporation prepaid
$19.7 million in risk-based assessments.
In October 2008, the Emergency Economic Stabilization Act (EESA)
was signed into law. Under the EESA, the basic limit on FDIC
deposit insurance coverage was temporarily increased from
$100,000 to $250,000 per depositor through December 31,
2009. In May 2009, the Helping Families Save Their Homes Act was
signed into law, which extended the temporary deposit insurance
increase of $250,000 per depositor through December 31,
2013. In addition to EESA, in November 2008, the FDIC adopted a
final rule relating to the Temporary Liquidity Guarantee Program
(TLGP). The TLGP was amended by the FDIC in August 2009 to
extend maturity dates originally adopted under the November 2008
final rule. Under the TLGP, the FDIC will (i) guarantee,
through the earlier of maturity or December 31, 2012,
certain newly-issued senior unsecured debt issued by
participating institutions on or after October 14, 2008 and
through October 31, 2009 and (ii) provide full FDIC
deposit insurance coverage for covered accounts, which are
defined as noninterest bearing transaction deposit accounts,
Negotiable Order of Withdrawal (NOW) accounts paying less than
0.5% interest per annum and Interest on Lawyers
Trust Accounts (IOLTA) held at participating FDIC-insured
institutions through June 30, 2010. The fee assessment for
coverage of senior unsecured debt ranges from 50 basis
points to 100 basis points per annum, depending on the
initial maturity of the debt. The fee assessment for deposit
insurance coverage is an annualized 10 basis points
assessed quarterly on amounts in covered accounts exceeding
$250,000. The Corporation elected to participate in both
guarantee programs. In October 2009, the FDIC also established a
limited, six-month emergency guarantee facility upon expiration
of the debt guarantee program, under which certain eligible
participating entities can issue FDIC-guaranteed debt starting
October 31, 2009 through April 30, 2010. The fee for
issuing debt under the emergency facility will be at least
300 basis points per annum. At December 31, 2009, the
Corporation had not issued and does not expect to issue any
FDIC-guaranteed debt under the TLGP.
The Deposit Insurance Funds Act of 1996 authorized the Financing
Corporation (FICO) to impose periodic assessments on all
depository institutions. The purpose of these periodic
assessments is to spread the cost of the interest payments on
the outstanding FICO bonds issued to recapitalize the Savings
Association Insurance Fund over a larger number of institutions.
The Corporations FICO assessment was $0.32 million in
2009, $0.33 million in 2008 and $0.33 million in 2007.
The Corporation expects these assessments to continue in 2010
and beyond.
Banks are subject to a number of federal and state laws and
regulations that have a material impact on their business. These
include, among others, minimum capital requirements, state usury
laws, state laws relating to fiduciaries, the Truth in Lending
Act, the Truth in Savings Act, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Expedited Funds Availability
Act, the Community Reinvestment Act, the Real Estate Settlement
Procedures Act, the USA Patriot Act, the Bank Secrecy Act,
Office of Foreign Assets Controls regulations, electronic funds
transfer laws, redlining laws, predatory lending laws, antitrust
laws, environmental laws, anti-money laundering laws and privacy
laws. These laws and regulations can have a significant effect
on the operating results of banks.
Banks are subject to the provisions of the Community
Reinvestment Act of 1977 (CRA). Under the terms of the CRA, the
appropriate federal bank regulatory agency is required, in
connection with its examination of a bank, to assess such
banks record in meeting the credit needs of the community
served by that bank, consistent with the safe and sound
operation of the institution. The regulatory agencys
assessment of the banks record is made available to the
public. Further, such assessment is required of any bank that
has applied to: (1) obtain deposit insurance coverage for a
newly chartered institution, (2) establish a new branch
office that will accept deposits, (3) relocate an office,
or (4) merge or consolidate with, or acquire the assets or
assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for
approval
88
to acquire a bank or another bank holding company, the Federal
Reserve Board will assess the CRA compliance record of each
subsidiary bank of the applicant bank holding company, and such
compliance records may be the basis for denying the application.
Bank holding companies may acquire banks located in any state in
the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law. Banks may
establish interstate branch networks through acquisitions of
other banks. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state
bank in its entirety) is allowed only if specifically authorized
by state law.
Michigan permits both U.S. and
non-U.S. banks
to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval
of the OFIR (1) acquisition of Michigan banks by
FDIC-insured banks, savings banks or savings and loan
associations located in other states, (2) sale by a
Michigan bank of branches to an FDIC-insured bank, savings bank
or savings and loan association located in a state in which a
Michigan bank could purchase branches of the purchasing entity,
(3) consolidation of Michigan banks and FDIC-insured banks,
savings banks or savings and loan associations located in other
states having laws permitting such consolidation,
(4) establishment of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting a
Michigan bank to establish a branch in such jurisdiction, and
(5) establishment by foreign banks of branches located in
Michigan. A Michigan bank holding company may acquire a
non-Michigan bank and a non-Michigan bank holding company may
acquire a Michigan bank.
On September 30, 2006, Congress passed the Financial
Services Regulatory Relief Act of 2006 (Relief Act). The Relief
Act authorizes the Federal Reserve Bank to pay interest on
reserves starting October 1, 2011. The EESA accelerated the
effective date to October 1, 2008.
Mergers,
Acquisitions, Consolidations and Divestitures
The Corporations strategy for growth includes
strengthening its presence in core markets, expanding into
contiguous markets and broadening its product offerings while
taking into account the integration and other risks of growth.
The Corporation evaluates strategic acquisition opportunities
and conducts due diligence activities in connection with
possible transactions. As a result, discussions, and in some
cases, negotiations may take place and future acquisitions
involving cash, debt or equity securities may occur. These
generally involve payment of a premium over book value and
current market price, and therefore, some dilution of book value
and net income per share may occur with any future transaction.
There were no business combinations, consolidations and
divestitures completed by the Corporation during the three-year
period ended December 31, 2009.
On January 7, 2010, the Corporation and O.A.K. Financial
Corporation (OAK), the parent company of Byron Bank, a community
bank based in Byron Center, Michigan, entered into a definitive
agreement whereby OAK will merge with and into the Corporation.
Under the terms of the agreement, OAK shareholders will be
entitled to receive 1.306 shares of the Corporations
common stock for each share of OAK common stock outstanding, or
approximately 3.5 million shares, subject to adjustment in
certain limited circumstances. The merger is designed to be a
tax free exchange. Cash will be paid in lieu of fractional
shares. Closing of the merger, which is expected to occur in the
second quarter of 2010, is subject to certain conditions,
including approval by the shareholders of OAK and regulatory
approval.
Availability of Financial Information
The Corporation files reports with the Securities and Exchange
Commission (SEC). Those reports include the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and proxy statements, as well as any amendments to those
reports. The public may read and copy any materials the
Corporation files with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding
issuers that file electronically with the SEC at
www.sec.gov. The Corporations annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and proxy statements, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 may be obtained without
charge upon written request to Lori A. Gwizdala, Chief Financial
Officer of the Corporation, at P.O. Box 569, Midland,
Michigan
48640-0569
and are accessible at no cost on the Corporations website
at www.chemicalbankmi.com in the Investor
Information section, as soon as reasonably practicable
after they are electronically filed with or furnished to the
SEC. Copies of exhibits may also be requested at the cost of
30 cents per page from the Corporations corporate offices.
In addition, interactive copies of the Corporations 2009
Annual Report on
Form 10-K
and the 2010 Proxy Statement are available at
www.edocumentview.com/chfc.
89
The Corporations business model is subject to many risks
and uncertainties. Although the Corporation seeks ways to manage
these risks and develop programs to control those risks that
management can, the Corporation ultimately cannot predict the
future or control all of the risks to which it is subject.
Actual results may differ materially from managements
expectations. Some of these significant risks and uncertainties
are discussed below. The risks and uncertainties described below
are not the only ones that the Corporation faces. Additional
risks and uncertainties of which the Corporation is unaware, or
that it currently deems immaterial, also may become important
factors that adversely affect the Corporation and its business.
If any of these risks were to occur, the Corporations
business, financial condition or results of operations could be
materially and adversely affected. If this were to happen, the
market price of the Corporations common stock per share
could decline significantly.
Investments
in Chemical common stock involve risk.
The market price of Chemical common stock may fluctuate
significantly in response to a number of factors, including,
among other things:
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Variations in quarterly or annual results of operations
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Changes in dividends paid per share
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Deterioration in asset quality
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Changes in interest rates
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Declining real estate values
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New developments in the banking industry
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Significant acquisitions or business combinations, strategic
partnerships, joint ventures or capital commitments by, or
involving, the Corporation or its competitors
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Failure to integrate acquisitions or realize anticipated
benefits from acquisitions
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Regulatory actions
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Volatility of stock market prices and volumes
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Issuance of additional shares of common stock or other debt or
equity securities of the Corporation
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Changes in market valuations of similar companies
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Current uncertainties and fluctuations in the financial markets
and stocks of financial services providers due to concerns about
credit availability and concerns about the Michigan economy in
particular
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Changes in securities analysts estimates of financial
performance or recommendations
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New litigation or contingencies or changes in existing
litigation or contingencies
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New technology used, or services offered, by competitors
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Changes in accounting policies or procedures as may be required
by the Financial Accounting Standards Board or other regulatory
agencies
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News reports relating to trends, concerns and other issues in
the financial services industry
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Perceptions in the marketplace regarding the Corporation
and/or its
competitors
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Rumors or erroneous information
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Geopolitical conditions such as acts or threats of terrorism or
military conflicts
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Asset
quality could be less favorable than expected.
A significant source of risk for the Corporation arises from the
possibility that losses will be sustained because borrowers,
guarantors and related parties may fail to perform in accordance
with the terms of their loan agreements. Most loans originated
by the Corporation are secured, but some loans are unsecured
depending on the nature of the loan. With respect to secured
loans, the collateral securing the repayment of these loans
includes a wide variety of real and personal property that may
be insufficient to cover the obligations owed under such loans.
Collateral values may be adversely affected by changes in
prevailing economic, environmental and other conditions,
including continued declines in the value of real estate,
changes in interest rates, changes in monetary and fiscal
policies of the federal government, terrorist activity,
environmental contamination and other external events.
90
The Corporation maintains an allowance for loan losses, which is
a reserve established through a provision for loan losses
charged to net income that represents managements estimate
of probable losses that have been incurred within the existing
portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for probable loan losses and
risks inherent in the loan portfolio. The level of the allowance
for loan losses reflects managements continuing evaluation
of specific credit risks, loan loss experience, current loan
portfolio quality, the value of real estate, present economic,
political and regulatory conditions and unidentified losses
inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for loan losses inherently
involves a high degree of subjectivity and requires the
Corporation to make significant estimates of current credit
risks and future trends, all of which may undergo material
changes. Continuing deterioration in economic conditions and
declines in real estate values affecting borrowers, new
information regarding existing loans, identification of
additional problem loans and other factors, both within and
outside of the Corporations control, may require an
increase in the allowance for loan losses. In addition, bank
regulatory agencies periodically review the Corporations
allowance for loan losses and may require an increase in the
provision for loan losses or the recognition of further loan
charge-offs, based on judgments different than those of
management. Any significant increase in the allowance for loan
losses would likely result in a significant decrease in net
income and may have a material adverse effect on the
Corporations financial condition and results of
operations. See the section captioned Provision and
Allowance for Loan Losses in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations located elsewhere in this report for
further discussion related to the Corporations process for
determining the appropriate level of the allowance for loan
losses.
Environmental
liability associated with commercial lending could result in
losses.
In the course of its business, the Corporation may acquire,
through foreclosure, properties securing loans it has originated
or purchased that are in default. Particularly in real estate
commercial lending, there is a risk that hazardous substances
could be discovered on these properties. In this event, the
Corporation might be required to remove these substances from
the affected properties at the Corporations sole cost and
expense. The cost of this removal could substantially exceed the
value of affected properties. The Corporation may not have
adequate remedies against the prior owner or other responsible
parties and could find it difficult or impossible to sell the
affected properties. These events could have an adverse effect
on the Corporations business, results of operations and
financial condition.
The
Corporation depends upon the accuracy and completeness of
information about customers.
In deciding whether to extend credit to customers, the
Corporation may rely on information provided to it by its
customers, including financial statements and other financial
information. The Corporation may also rely on representations of
customers as to the accuracy and completeness of that
information and, with respect to financial statements, on
reports of independent auditors. The Corporations
financial condition and results of operations could be
negatively impacted to the extent that the Corporation extends
credit in reliance on financial statements that do not comply
with generally accepted accounting principles or that are
misleading or other information provided by customers that is
false or misleading.
General
economic conditions in the State of Michigan could be less
favorable than expected.
The Corporation is affected by general economic conditions in
the United States, although most directly within Michigan. Since
December 2007, the United States has been in a recession, while
the State of Michigan has experienced economic difficulties
since at least 2006. Business activity across a wide range of
industries and regions is greatly reduced and many businesses
are in serious difficulty due to the lack of consumer spending
and the lack of liquidity in the credit markets. Unemployment
has increased significantly. A further economic downturn or
continued weak business environment within Michigan could
further negatively impact household and corporate incomes. This
impact may lead to decreased demand for both loan and deposit
products and increase the number of customers who fail to pay
interest or principal on their loans.
The Corporations success depends primarily on the general
economic conditions of the State of Michigan and the specific
local markets in which the Corporation operates. The local
economic conditions in these local markets have a significant
impact on the demand for the Corporations products and
services as well as the ability of the Corporations
customers to repay loans, the value of the collateral securing
loans and the stability of the Corporations deposit
funding sources. Economic conditions experienced in the State of
Michigan have been more adverse than in the United States
generally, and these conditions are not expected to
significantly improve in the near future. Substantially all of
the Corporations loans are to individuals and businesses
in Michigan. Consequently, any further or prolonged decline in
Michigans economy could have a materially adverse effect
on the Corporations financial condition and results of
operations. A significant further decline or a prolonged period
of the lack of improvement in general economic conditions,
whether caused by recession, inflation, unemployment, changes in
securities markets, acts of terrorism, other international or
domestic occurrences or other factors could impact these local
economic conditions and, in turn, have a material adverse effect
on the Corporations financial condition and results of
operations.
91
If
Chemical does not adjust to changes in the financial services
industry, its financial performance may suffer.
Chemicals ability to maintain its financial performance
and return on investment to shareholders will depend in part on
its ability to maintain and grow its core deposit customer base
and expand its financial services to its existing
and/or new
customers. In addition to other banks, competitors include
savings associations, credit unions, securities dealers,
brokers, mortgage bankers, investment advisors and finance and
insurance companies. The increasingly competitive environment
is, in part, a result of changes in the economic environment
within the State of Michigan, regulation, changes in technology
and product delivery systems and the accelerating pace of
consolidation among financial service providers. New competitors
may emerge to increase the degree of competition for
Chemicals customers and services. Financial services and
products are also constantly changing. Chemicals financial
performance will also depend in part upon customer demand for
Chemicals products and services and Chemicals
ability to develop and offer competitive financial products and
services.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology and other changes are allowing customers to complete
financial transactions without the involvement of banks. For
example, consumers can now pay bills and transfer funds directly
without banks. The process of eliminating banks as
intermediaries in financial transactions, known as
disintermediation, could result in the loss of fee income, as
well as the loss of customer deposits and income generated from
those deposits.
Changes
in interest rates could reduce Chemicals income and cash
flow.
Chemicals net income and cash flow depends, to a great
extent, on the difference between the interest earned on loans
and securities and the interest paid on deposits and other
borrowings. Market interest rates are beyond Chemicals
control, and they fluctuate in response to general economic
conditions, the policies of various governmental and regulatory
agencies, including, in particular, the Federal Reserve Board,
and competition. Changes in monetary policy, including changes
in interest rates and interest rate relationships, will
influence the origination of loans, the purchase of investments,
the generation of deposits and the interest rate received on
loans and securities and interest paid on deposits and other
borrowings. Although management believes it has implemented
effective asset and liability management strategies, any
significant adverse effects of changes in interest rates on the
Corporations results of operations, or any substantial,
unexpected, prolonged change in market interest rates could have
a material adverse effect on the Corporations financial
condition and results of operations. See the sections captioned
Net Interest Income and Market Risk in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations located elsewhere
in this report for further discussion related to the
Corporations management of interest rate risk.
The
Corporation may be required to pay additional insurance premiums
to the FDIC, which could negatively impact
earnings.
Recent insured institution failures, as well as deterioration in
banking and economic conditions, have significantly increased
FDIC loss provisions, resulting in a decline in the designated
reserve ratio to historical lows. Insured institution failures
could remain elevated; thus, the reserve ratio may continue to
decline despite the FDICs efforts to increase the reserve
ratio. In addition, the Helping Families Save Their Homes Act
temporarily increased the limit on FDIC coverage to $250,000
through December 31, 2013.
Depending upon the magnitude of future losses that the FDIC
insurance fund suffers, there can be no assurance that there
will not be additional premium increases or assessments in order
to replenish the fund. The FDIC may need to set a higher base
rate schedule based on future financial institution failures and
updated failure and loss projections. Potentially higher FDIC
assessment rates than those currently projected or additional
special assessments could have an adverse impact on the
Corporations results of operations.
The
Corporation is subject to liquidity risk in its operations,
which could adversely affect its ability to fund various
obligations.
Liquidity risk is the possibility of being unable to meet
obligations as they come due or capitalize on growth
opportunities as they arise because of an inability to liquidate
assets or obtain adequate funding on a timely basis, at a
reasonable cost and within acceptable risk tolerances. Liquidity
is required to fund various obligations, including credit
obligations to borrowers, loan originations, withdrawals by
depositors, repayment of debt, dividends to shareholders,
operating expenses and capital expenditures. Liquidity is
derived primarily from retail deposit growth and earnings
retention, principal and interest payments on loans and
investment securities, net cash provided from operations and
access to other funding.
92
The
Corporation may issue debt and equity securities that are senior
to Corporation common stock as to distributions and in
liquidation, which could negatively affect the value of
Corporation common stock.
In the future, the Corporation may increase its capital
resources by entering into debt or debt-like financing or
issuing debt or equity securities, which could include issuances
of senior notes, subordinated notes, preferred stock or common
stock. In the event of the Corporations liquidation, its
lenders and holders of its debt securities would receive a
distribution of the Corporations available assets before
distributions to the holders of Corporation common stock. The
Corporations decision to incur debt and issue securities
in future offerings will depend on market conditions and other
factors beyond its control. The Corporation cannot predict or
estimate the amount, timing or nature of its future offerings
and debt financings. Future offerings could reduce the value of
shares of Corporation common stock and dilute a
shareholders interest in the Corporation.
Evaluation
of investment securities for other-than-temporary impairment
involves subjective determinations and could materially impact
the Corporations results of operations and financial
condition.
The evaluation of impairments is a quantitative and qualitative
process, which is subject to risks and uncertainties and is
intended to determine whether declines in the fair value of
investments should be recognized in current period earnings. The
risks and uncertainties include changes in general economic
conditions, the issuers financial condition or future
recovery prospects, the effects of changes in interest rates or
credit spreads and the expected recovery period. Estimating
future cash flows involves incorporating information received
from third-party sources and making internal assumptions and
judgments regarding the future performance of the underlying
collateral and assessing the probability that an adverse change
in future cash flows has occurred. The determination of the
amount of other-than-temporary impairments is based upon the
Corporations quarterly evaluation and assessment of known
and inherent risks associated with the respective asset class.
Such evaluations and assessments are revised as conditions
change and new information becomes available.
Additionally, the Corporations management considers a wide
range of factors about the security issuer and uses its best
judgment in evaluating the cause of the decline in the estimated
fair value of the security and in assessing the prospects for
recovery. Inherent in managements evaluation of the
security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations in
the impairment evaluation process include, but are not limited
to: (i) the length of time and the extent to which the
market value has been less than cost or amortized cost;
(ii) the potential for impairments of securities when the
issuer is experiencing significant financial difficulties;
(iii) the potential for impairments in an entire industry
sector or sub-sector; (iv) the potential for impairments in
certain economically depressed geographic locations;
(v) the potential for impairments of securities where the
issuer, series of issuers or industry has suffered a
catastrophic type of loss or has exhausted natural resources;
(vi) the Corporations intent and ability to retain
the investment for a period of time sufficient to allow for the
recovery of its value; (vii) unfavorable changes in forecasted
cash flows on mortgage-backed and asset-backed securities; and
(viii) other subjective factors, including concentrations
and information obtained from regulators and rating agencies.
Impairments to the carrying value of our investment securities
may need to be taken in the future, which could have a material
adverse effect on our results of operations and financial
condition.
The
Corporation may be required to recognize an impairment of
goodwill or to establish a valuation allowance against deferred
income tax assets, which could have a material adverse effect on
the Corporations results of operations and financial
condition.
Goodwill represents the excess of the amounts paid to acquire
subsidiaries over the fair value of their net assets at the date
of acquisition. The Corporation tests goodwill at least annually
for impairment. Impairment testing is performed based upon
estimates of the fair value of the reporting unit to
which the goodwill relates. Substantially all of the
Corporations goodwill at December 31, 2009 was
recorded on the books of Chemical Bank. The fair value of
Chemical Bank is impacted by the performance of its business and
other factors. If it is determined that the goodwill has been
impaired, the Corporation must write-down the goodwill by the
amount of the impairment, with a corresponding charge to net
income. Such write-downs could have a material adverse effect on
the Corporations results of operations and financial
position.
Deferred income tax represents the tax effect of the differences
between the book and tax basis of assets and liabilities.
Deferred tax assets are assessed periodically by management to
determine if they are realizable. Factors in managements
determination include the performance of the Corporation,
including the ability to generate taxable net income. If, based
on available information, it is more likely than not that the
deferred income tax asset will not be realized, then a valuation
allowance must be established with a corresponding charge to net
income. As of December 31, 2009, the Corporation did not
carry a valuation allowance against its deferred tax assets.
Future facts and circumstances may require a valuation
allowance. Charges to establish a valuation allowance could have
a material adverse effect on the Corporations results of
operations and financial position.
93
The
Corporation may be a defendant in a variety of litigation and
other actions, which may have a material adverse effect on the
Corporations financial condition and results of
operations.
Chemical and its subsidiaries may be involved from time to time
in a variety of litigation arising out of its business. The
Corporations insurance may not cover all claims that may
be asserted against it, and any claims asserted against it,
regardless of merit or eventual outcome, may harm its reputation
or cause Chemical to incur unexpected expenses, which could be
material in amount. Should the ultimate expenses, judgments or
settlements in any litigation exceed the Corporations
insurance coverage, they could have a material adverse effect on
the Corporations financial condition and results of
operations. In addition, the Corporation may not be able to
obtain appropriate types or levels of insurance in the future,
nor may it be able to obtain adequate replacement policies with
acceptable terms, if at all.
The
Corporation operates in a highly competitive industry and market
area.
The Corporation faces substantial competition in all areas of
its operations from a variety of different competitors, many of
which are larger and may have more financial resources. Such
competitors primarily include national and regional banks within
the various markets where the Corporation operates. The
Corporation also faces competition from many other types of
financial institutions, including, without limitation, savings
and loans, credit unions, finance companies, brokerage firms,
insurance companies and other financial intermediaries. The
financial services industry could become even more competitive
as a result of legislative, regulatory and technological changes
and continued consolidation. Banks, securities firms and
insurance companies can merge under the umbrella of a financial
holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, insurance
(both agency and underwriting) and merchant banking. The
Corporation competes with these institutions both in attracting
deposits and in making new loans. Also, technology has lowered
barriers to entry into the market and made it possible for
non-banks to offer products and services traditionally provided
by banks. Many of the Corporations competitors have fewer
regulatory constraints and may have lower cost structures.
Additionally, due to their size, many competitors may be able to
achieve economies of scale and, as a result, may offer a broader
range of products and services as well as better pricing for
those products and services than the Corporation can.
The Corporations ability to compete successfully depends
on a number of factors, including, among other things:
|
|
|
The ability to develop, maintain and build long-term customer
relationships based on top quality service, high ethical
standards and safe, sound assets
|
|
|
The ability to expand the Corporations market position
|
|
|
The scope, relevance and pricing of products and services
offered to meet customer needs and demands
|
|
|
The rate at which the Corporation introduces new products and
services relative to its competitors
|
|
|
Customer satisfaction with the Corporations level of
service
|
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|
Industry and general economic trends
|
Failure to perform in any of these areas could significantly
weaken the Corporations competitive position, which could
adversely affect the Corporations growth and
profitability, which in turn, could have a material adverse
effect on the Corporations financial condition and results
of operations.
The
Corporations controls and procedures may fail or be
circumvented.
Management regularly reviews and updates the Corporations
internal controls and corporate governance policies and
procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the
objectives of the system are met. A significant failure or
circumvention of the Corporations controls and procedures
or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the
Corporations business, results of operations and financial
condition.
Potential
acquisitions may disrupt the Corporations business and
dilute shareholder value.
The Corporation seeks merger or acquisition partners, including
FDIC assisted acquisitions, that are culturally similar and have
experienced management and possess either significant market
presence or have potential for improved profitability through
financial management, economies of scale or expanded services.
Acquiring other banks, businesses, or branches involves various
risks commonly associated with acquisitions, including, among
other things:
|
|
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The recording of assets and liabilities of the target company at
fair value may materially dilute shareholder value at the
transaction date and could have a material adverse effect on the
Corporations results of operations and financial condition
|
94
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|
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The time and costs associated with identifying and evaluating
potential acquisitions and merger targets
|
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|
Potential exposure to unknown or contingent liabilities of the
target company
|
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|
The estimates and judgments used to evaluate credit, operations,
management and market risks with respect to the target
institution may not be accurate
|
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Exposure to potential asset quality issues of the target company
|
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|
The time and costs of evaluating new markets, hiring experienced
local management and opening new offices, and the time lags
between these activities and the generation of sufficient assets
and deposits to support the costs of the expansion
|
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|
The diversion of the Corporations managements
attention to the negotiation of a transaction, and the
integration of the operations and personnel of the combining
businesses
|
|
|
The introduction of new products and services into the
Corporations business
|
|
|
Potential disruption to the Corporations business
|
|
|
The incurrence and possible impairment of goodwill associated
with an acquisition and possible adverse short-term effects on
the Corporations results of operations
|
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|
The possible loss of key employees and customers of the target
company
|
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Difficulty in estimating the value of the target company
|
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|
Potential changes in banking or tax laws or regulations that may
affect the target company
|
The transactions may be more expensive to complete and the
anticipated benefits, including cost savings and strategic
gains, may be significantly harder or take longer to achieve
than expected or may not be achieved in their entirety as a
result of unexpected factors or events, including the economic
and financial conditions within the State of Michigan. Also, the
Corporation may issue equity securities in connection with
future acquisitions, which could cause ownership and economic
dilution to its current shareholders.
The Corporation regularly evaluates merger and acquisition
opportunities and conducts due diligence activities related to
possible transactions with other financial institutions and
financial services companies. As a result, merger or acquisition
discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity
securities may occur at any time. Acquisitions typically involve
the payment of a premium over book and market values, and,
therefore, dilution of the Corporations tangible book
value and net income per common share may occur in connection
with any future transaction. Furthermore, failure to realize the
expected revenue increases, cost savings, increases in
geographic or product presence,
and/or other
projected benefits from an acquisition could have a material
adverse effect on the Corporations financial condition and
results of operations.
If the
Corporation cannot raise additional capital when needed, its
ability to further expand its operations through organic growth
and acquisitions could be materially impaired.
The Corporation is required by federal and state regulatory
authorities to maintain specified levels of capital to support
its operations. The Corporation may need to raise additional
capital to support its continued growth. The Corporations
ability to raise additional capital will depend on conditions in
the capital markets at that time, which are outside the
Corporations control, and on its financial performance.
The Corporation cannot assure that it will be able to raise
additional capital in the future on terms acceptable to the
Corporation. If the Corporation cannot raise additional capital
when needed, its ability to further expand its operations
through organic growth and acquisitions could be materially
limited.
Chemical
Financial Corporation relies on dividends from its subsidiary
bank for most of its revenue.
Chemical Financial Corporation is a separate and distinct legal
entity from its subsidiary bank, Chemical Bank. It receives
substantially all of its revenue from dividends from Chemical
Bank. These dividends are the principal source of funds to pay
cash dividends on the Corporations common stock. Various
federal
and/or state
laws and regulations limit the amount of dividends that Chemical
Bank may pay to Chemical Financial Corporation. In the event
Chemical Bank is unable to pay dividends to Chemical Financial
Corporation, the Corporation may not be able to pay cash
dividends on the Corporations common stock. The earnings
of Chemical Bank have been the principal source of funds to pay
cash dividends to shareholders. Over the long-term, cash
dividends to shareholders are dependent upon earnings, as well
as capital requirements, regulatory restraints and other factors
affecting Chemical Bank. Due to the strength of the
Corporations capital position, the Corporation has the
financial ability to pay cash dividends to shareholders in
excess of the earnings of Chemical Bank. The length of time the
Corporation can sustain cash dividends to shareholders in excess
of the current earnings of Chemical Bank is dependent on the
magnitude of the earnings shortfall, the capital levels of both
Chemical Bank and the Corporation and obtaining regulatory
95
approval. As of December 31, 2009, Chemical Bank could not
pay additional dividends to the Corporation without approval
from the Federal Reserve, as dividends paid during 2008 exceeded
net income of Chemical Bank in 2008 and 2009, combined. See the
section captioned Supervision and Regulation in
Item 1. Business and Note 19 Regulatory
Capital and Reserve Requirements in the notes to consolidated
financial statements included in Item 8. Financial
Statements and Supplementary Data, which are located elsewhere
in this report.
Unauthorized
disclosure of sensitive or confidential client or customer
information, whether through a breach of computer systems or
otherwise, could severely harm Chemicals
business.
As part of the Corporations business, the Corporation
collects, processes and retains sensitive and confidential
client and customer information on behalf of Chemical and other
third parties. Despite the security measures the Corporation has
in place for its facilities and systems, and the security
measures of its third party service providers, the Corporation
may be vulnerable to security breaches, acts of vandalism,
computer viruses, misplaced or lost data, programming
and/or human
errors or other similar events. Any security breach involving
the misappropriation, loss or other unauthorized disclosure of
confidential customer information, whether by Chemical or by its
vendors, could severely damage the Corporations
reputation, expose it to the risks of litigation and liability,
disrupt the Corporations operations and have a material
adverse effect on the Corporations business.
The
Corporations information systems may experience an
interruption or breach in security.
The Corporation relies heavily on communications and information
systems to conduct its business. Any failure, interruption or
breach in security of these systems could result in failures or
disruptions in the Corporations customer relationship
management, general ledger, deposit, loan and other systems.
While the Corporation has policies and procedures designed to
prevent or limit the effect of the failure, interruption or
security breach of its information systems, there can be no
assurance that any such failures, interruptions or security
breaches of the Corporations information systems would not
damage the Corporations reputation, result in a loss of
customer business, subject the Corporation to additional
regulatory scrutiny, or expose the Corporation to civil
litigation and possible financial liability, any of which could
have a material adverse effect on the Corporations
financial condition and results of operations.
Severe
weather, natural disasters, acts of war or terrorism and other
external events could significantly impact the
Corporations business.
Severe weather, natural disasters, acts of war or terrorism and
other adverse external events could have a significant impact on
the Corporations ability to conduct business. Such events
could affect the stability of the Corporations deposit
base, impair the ability of borrowers to repay outstanding
loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue
and/or cause
the Corporation to incur additional expenses. Although
management has established disaster recovery policies and
procedures, the occurrence of any such event in the future could
have a material adverse effect on the Corporations
business, which, in turn, could have a material adverse effect
on the Corporations financial condition and results of
operations.
Additional
risks and uncertainties could have a negative effect on
financial performance.
Additional factors could have a negative effect on the financial
performance of Chemical and Chemicals common stock. Some
of these factors are financial market conditions, changes in
financial accounting and reporting standards, new litigation or
changes in existing litigation, regulatory actions and losses.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
The executive offices of Chemical, the accounting department of
Chemical and Chemical Bank and the accounting services,
marketing, risk management and Trust and Investment Management
Services departments of Chemical Bank are located at
235 E. Main Street in downtown Midland, Michigan, in a
three-story, approximately 35,000 square foot office
building, owned by the Corporation. The main office of Chemical
Bank and the majority of its remaining operations
departments are located in a three story, approximately
74,000 square foot office building in downtown Midland,
Michigan at 333 E. Main Street, owned by Chemical Bank.
96
Chemical Bank also conducted business from a total of 128 other
banking offices and three loan production offices as of
December 31, 2009. These offices are located in the lower
peninsula of Michigan. Of the total offices, 121 are owned by
Chemical Bank and ten are leased from independent parties with
remaining lease terms of less than one year to five years and
eight months. This leased property is considered insignificant.
The Corporations and Chemical Banks owned properties
are owned free from mortgages.
|
|
Item 3.
|
Legal
Proceedings.
|
As of December 31, 2009, Chemical was not a party to any
material pending legal proceeding. As of December 31, 2009,
Chemical Bank was a party, as plaintiff or defendant, to a
number of legal proceedings, none of which are considered
material, and all of which are considered ordinary routine
litigation incidental to its business.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
Supplemental Item. Executive Officers of the Registrant.
The following provides biographical information about
Chemicals and Chemical Banks executive officers as
of December 31, 2009. Executive officer appointments are
made or reaffirmed annually at the organizational meeting of the
Corporations board of directors. At its regular meetings,
the Corporations board of directors may also make other
executive officer appointments. Executive officers serve at the
pleasure of the Corporations board of directors.
David B. Ramaker, age 54, became Chief Executive Officer
and President of Chemical in January 2002 and Chairman of the
board of directors of Chemical in April 2006. Mr. Ramaker
has been a director of Chemical since October 2001.
Mr. Ramaker is also Chairman, Chief Executive Officer and
President of Chemical Bank. Mr. Ramaker joined Chemical
Bank as Vice President on November 29, 1989.
Mr. Ramaker became President of Chemical Bank Key State
(consolidated into Chemical Bank) in October 1993.
Mr. Ramaker became President and a member of the board of
directors of Chemical Bank in September 1996 and Executive Vice
President and Secretary to the board of Chemical and Chief
Executive Officer of Chemical Bank on January 1, 1997. He
served as Chief Executive Officer and President of Chemical Bank
and Executive Vice President and Secretary of Chemical until
December 31, 2001. Mr. Ramaker became Chairman of
Chemical Bank in January 2002. Mr. Ramaker was reappointed
as Chief Executive Officer and President of Chemical Bank
effective January 1, 2006. Mr. Ramaker serves as
President of CFC Financial Services, Inc. and CFC
Title Services, Inc., wholly-owned subsidiaries of Chemical
Bank. During the last five years, Mr. Ramaker has served as
a director of all of the Corporations subsidiaries.
Mr. Ramaker is also a member of the Executive Management
Committee of Chemical.
Lori A. Gwizdala, age 51, is Executive Vice President,
Chief Financial Officer and Treasurer of Chemical.
Ms. Gwizdala joined Chemical as Controller on
January 1, 1985 and was named Chief Financial Officer in
May 1987, Senior Vice President in February 1991, Treasurer in
April 1994 and Executive Vice President in January 2002.
Ms. Gwizdala served as a director of CFC Financial
Services, Inc. and CFC Title Services, Inc. from 1997 until
December 31, 2005, and as a director of Chemical Bank West
(consolidated into Chemical Bank) from January 2002 until
December 31, 2005. Ms. Gwizdala is a certified public
accountant. Ms. Gwizdala is a member of the Executive
Management Committee of Chemical.
Thomas W. Kohn, age 55, was appointed Executive Vice
President of Community Banking and Secretary of Chemical in
April 2007. Mr. Kohn was Executive Vice President,
Community Banking of Chemical Bank from January 1, 2006
until April 2007. Mr. Kohn served as President, Chief
Executive Officer and a director of Chemical Bank West
(consolidated into Chemical Bank) from January 2002 until
December 31, 2005. Mr. Kohn became affiliated with the
Company on December 31, 1981 through a bank acquisition and
served the Company in various capacities until 1986.
Mr. Kohn rejoined the Company in 1991 as President of
Chemical Bank Montcalm (consolidated into Chemical Bank West)
and served in that position until January 2002. Mr. Kohn is
a member of the Executive Management Committee of Chemical.
John E. Kessler, age 41, is Executive Vice President and
Senior Trust Officer of Chemical Bank. Mr. Kessler
joined Chemical Bank in 2004 as Senior Vice President to manage
Chemicals southwestern Michigan trust office and served in
that position until 2007. In 2007, Mr. Kessler became
Executive Vice President and Senior Trust Officer.
Mr. Kessler is responsible for Chemical Banks Trust
and Investment Management Services Department. Mr. Kessler
is a member of the Executive Management Committee of Chemical.
Kenneth W. Johnson, age 47, is Executive Vice President and
Director of Bank Operations of Chemical Bank. Mr. Johnson
joined Shoreline Bank, a bank subsidiary of Shoreline Financial
Corporation (Shoreline), in 1995 as Vice President and North
Region Sales Manager. Mr. Johnson became First Vice
President and Head of Retail Banking and Operations in 2000.
97
Shoreline merged with Chemical in January 2001. Mr. Johnson
became a First Vice President of Branch Administration at
Chemical Bank in 2003 and Executive Vice President and Director
of Bank Operations in January 2006. Mr. Johnson is a member
of the Executive Management Committee of Chemical.
Dominic Monastiere, age 62, was appointed Executive Vice
President and Chief Risk Management Officer of Chemical Bank
effective April 26, 2007. Mr. Monastiere joined
Chemical Bank in June 1987 and served as President and a
director of Chemical Bank Bay Area (consolidated into Chemical
Bank) from August 1, 1987 until December 31, 2000.
Mr. Monastiere was a Community Bank President from
January 1, 2001 to April 25, 2007. Mr. Monastiere
is a member of the Executive Management Committee of Chemical.
James E. Tomczyk, age 57, was appointed Executive Vice
President and Senior Credit Officer of Chemical Bank effective
January 1, 2006. Mr. Tomczyk served as President,
Chief Executive Officer and a director of Chemical Bank
Shoreline (consolidated into Chemical Bank) from January 2002
until December 31, 2005. Mr. Tomczyk joined Shoreline
Bank in February 1999 as Executive Vice President of its Private
Banking, Trust and Investment divisions and became Senior
Executive Vice President of these divisions in October 2000.
Mr. Tomczyk is a member of the Executive Management
Committee of Chemical.
PART II
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Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
|
Information required by this item is included under the heading
Market for Chemical Financial Corporation Common Stock and
Related Shareholder Matters (Unaudited) on page 80.
See Item 12 for information with respect to the
Corporations equity compensation plans. All of this
information is here incorporated by reference.
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Item 6.
|
Selected
Financial Data.
|
The information required by this item is included under the
heading Selected Financial Data on page 3 and
is here incorporated by reference.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The information required by this item is included under the
heading Managements Discussion and Analysis of
Financial Condition and Results of Operations on pages 4
through 38 and is here incorporated by reference.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The information required by this item is included under the
subheadings Liquidity Risk on pages 36 and 37 and
Market Risk on pages 37 and 38 of
Managements Discussion and Analysis of Financial
Condition and Results of Operations and is here
incorporated by reference.
|
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Item 8.
|
Financial
Statements and Supplementary Data.
|
The information required by this item is included under the
headings Report of Independent Registered Public
Accounting Firm, Consolidated Financial
Statements and Notes to Consolidated Financial
Statements on pages 41 through 79 and is here incorporated
by reference.
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
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|
Item 9A.
|
Controls
and Procedures.
|
Chemicals management is responsible for establishing and
maintaining effective disclosure controls and procedures, as
defined under
Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange
Act). An evaluation was performed under the supervision and with
the participation of the Corporations management,
including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Corporations disclosure controls and procedures as of the
end of the period covered by this report. Based on and as of the
time of that evaluation, the Corporations
98
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Corporations
disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Corporation in the
reports it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods
specified in the Commissions rules and forms.
Information required by this item is also included under the
heading Managements Assessment as to the
Effectiveness of Internal Control over Financial Reporting
on page 39 and under the heading Report of
Independent Registered Public Accounting Firm on
page 40 and is here incorporated by reference. There was no
change in the Corporations internal control over financial
reporting that occurred during the three months ended
December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, the Corporations
internal control over financial reporting.
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|
Item 9B.
|
Other
Information.
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this item is set forth under the
heading Chemical Financials Board of Directors and
Nominees for Election as Directors and the subheading
Section 16(a) Beneficial Ownership Reporting
Compliance in the registrants definitive Proxy
Statement for its 2010 Annual Meeting of Shareholders and is
here incorporated by reference.
Information regarding the identification of executive officers
is included herein in the Supplemental Item on page 97 and
is here incorporated by reference.
Information required by this item is set forth under the
subheadings Committees of the Board of Directors and
Audit Committee in the registrants definitive
Proxy Statement for its 2010 Annual Meeting of Shareholders and
is here incorporated by reference.
Chemical has adopted a Code of Ethics for Senior Financial
Officers and Members of the Executive Management Committee,
which applies to the Chief Executive Officer and the Chief
Financial Officer, as well as all other senior financial and
accounting officers. The Code of Ethics is posted on
Chemicals website at www.chemicalbankmi.com.
Chemical intends to satisfy the disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver of, a provision of the Code
of Ethics by posting such information on its website at
www.chemicalbankmi.com.
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|
Item 11.
|
Executive
Compensation.
|
Information required by this item is set forth under the
headings Compensation Discussion and Analysis,
Executive Compensation, Compensation Committee
Interlocks and Insider Participation, Compensation
Committee Report and Director Compensation in
the registrants definitive Proxy Statement for its 2010
Annual Meeting of Shareholders and is here incorporated by
reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is set forth under the
heading Ownership of Chemical Financial Common Stock
in the registrants definitive Proxy Statement for its 2010
Annual Meeting of Shareholders and is here incorporated by
reference.
The following table presents information about the
registrants equity compensation plans as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Remaining Available for
|
|
|
Number of Securities to be
|
|
Weighted-Average
|
|
Future Issuance under
|
|
|
Issued upon Exercise of
|
|
Exercise Price of
|
|
Equity Compensation
|
|
|
Outstanding Options,
|
|
Outstanding Options,
|
|
Plans (excluding Securities
|
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
Reflected in Column (a))
|
Plan category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
720,375
|
|
|
$
|
30.02
|
|
|
|
1,000,272
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
13,052
|
|
|
|
Total
|
|
|
720,375
|
|
|
$
|
30.02
|
|
|
|
1,013,324
|
|
|
|
99
At December 31, 2009, equity compensation plans not
approved by shareholders consisted of the Chemical Financial
Corporation 2001 Stock Purchase Plan for Subsidiary and
Community Bank Directors (Stock Purchase Plan). The Stock
Purchase Plan became effective on March 25, 2002 and was
designed to provide
non-employee
community advisory directors of Chemical Bank, who are neither
directors nor employees of the Corporation, the option of
receiving their fees in shares of the Corporations common
stock. The Stock Purchase Plan provides for a maximum of 75,000
shares of the Corporations common stock, subject to
adjustment for certain changes in the capital structure of the
Corporation as defined in the Stock Purchase Plan, to be
available under the Stock Purchase Plan. Subsidiary directors
and community advisory directors, who elect to participate in
the Stock Purchase Plan, may elect to contribute to the Stock
Purchase Plan fifty percent or one hundred percent of their
director fees and/or fifty percent or one hundred percent of
their director committee fees, earned as directors or community
advisory directors of Chemical Bank. Contributions to the Stock
Purchase Plan are made by Chemical Bank on behalf of each
electing participant. Stock Purchase Plan participants may
terminate their participation in the Stock Purchase Plan, at any
time, by written notice of withdrawal to the Corporation.
Participants will cease to be eligible to participate in the
Stock Purchase Plan when they cease to serve as directors or
community advisory directors of Chemical Bank. Shares are
distributed to participants annually.
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Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence.
|
The information required by this item is set forth under the
heading Election of Directors and the subheading
Certain Relationships and Related Transactions in
the registrants definitive Proxy Statement for its 2010
Annual Meeting of Shareholders and is here incorporated by
reference.
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Item 14.
|
Principal
Accountant Fees and Services.
|
The information required by this item is set forth under the
subheading Independent Registered Public Accounting
Firm and the subheading Committees of the Board of
Directors in the registrants definitive Proxy
Statement for its 2010 Annual Meeting of Shareholders and is
here incorporated by reference.
PART IV
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Item 15.
|
Exhibits
and Financial Statement Schedules.
|
|
|
(a) (1) |
Financial Statements. The following financial
statements and reports of the independent registered public
accounting firm of Chemical and Chemical Bank are filed as part
of this report:
|
The financial statements, the notes to financial statements, and
the independent registered public accounting firms reports
listed above are here incorporated by reference from Item 8
of this report.
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(2)
|
Financial Statement Schedules. The schedules
for the Corporation are omitted because of the absence of
conditions under which they are required, or because the
information is set forth in the consolidated financial
statements or the notes thereto.
|
100
(3) Exhibits. The following lists
the Exhibits to the Annual Report on
Form 10-K:
|
|
|
Number
|
|
Exhibit
|
|
2.1
|
|
Agreement and Plan of Merger, dated January 7, 2010.
Previously filed as Exhibit 2.1 to the registrants
Current Report on
Form 8-K
dated January 7, 2010, filed with the SEC on
January 8, 2010. Here incorporated by reference.
|
3.1
|
|
Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to the registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009 filed with the SEC on
August 5, 2009. Here incorporated by reference.
|
3.2
|
|
Bylaws. Previously filed as Exhibit 3.2 to the
registrants Current Report on
Form 8-K
dated January 20, 2009, filed with the SEC on
January 23, 2009. Here incorporated by reference.
|
4.1
|
|
Restated Articles of Incorporation. Exhibit 3.1 is here
incorporated by reference.
|
4.2
|
|
Bylaws. Exhibit 3.2 is here incorporated by reference.
|
4.3
|
|
Long-Term Debt. The registrant has outstanding long-term debt
which at the time of this report does not exceed 10% of the
registrants total consolidated assets. The registrant
agrees to furnish copies of the agreements defining the rights
of holders of such long-term debt to the SEC upon request.
|
10.1
|
|
Chemical Financial Corporation Stock Incentive Plan of 2006.*
Previously filed as an exhibit to the registrants
Form 8-K,
filed with the SEC on April 21, 2006. Here incorporated by
reference.
|
10.2
|
|
Chemical Financial Corporation Stock Incentive Plan of 1997.*
Previously filed as Exhibit 10.1 to the registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed with the
SEC on March 15, 2005. Here incorporated by reference.
|
10.3
|
|
Chemical Financial Corporation Deferred Compensation Plan for
Directors.* Previously filed as Exhibit 10.3 to the
registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005, filed with the
SEC on March 13, 2006. Here incorporated by reference.
|
10.4
|
|
Chemical Financial Corporation Deferred Compensation Plan.*
Previously filed as Exhibit 10.4 to the registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed with the
SEC on March 1, 2007. Here incorporated by reference.
|
10.5
|
|
Chemical Financial Corporation Supplemental Retirement Income
Plan.* Previously filed as Exhibit 10.5 to the registrants
Registration Statement on
Form S-4,
filed with the SEC on February 19, 2010. Here incorporated
by reference.
|
10.6
|
|
Chemical Financial Corporation 2001 Stock Purchase Plan for
Subsidiary and Community Bank Directors.* Previously filed as
Exhibit 4.3 to the registrants Registration Statement
on
Form S-8,
filed with the SEC on March 25, 2002. Here incorporated by
reference.
|
10.7
|
|
Chemical Financial Corporation Directors Deferred Stock
Plan.* Previously filed as Appendix A to the
registrants definitive proxy statement for the 2008 Annual
Meeting of Shareholders, filed with the SEC on March 5,
2008. Here incorporated by reference.
|
21
|
|
Subsidiaries.
|
23.1
|
|
Consent of KPMG LLP.
|
23.2
|
|
Consent of Andrews Hooper & Pavlik P.L.C.
|
24
|
|
Powers of Attorney.
|
31.1
|
|
Certification of Chief Executive Officer.
|
31.2
|
|
Certification of Chief Financial Officer.
|
32
|
|
Certification pursuant to 18 U.S.C. §1350.
|
99.1
|
|
Chemical Financial Corporation 2001 Stock Purchase Plan for
Subsidiary and Community Bank Directors Audited Financial
Statements and Notes.
|
99.2
|
|
Chemical Financial Corporation Directors Deferred Stock
Plan Audited Financial Statements and Notes.
|
* These agreements are management contracts or compensation
plans or arrangements required to be filed as Exhibits to this
Form 10-K.
The index of exhibits and any exhibits filed as part of the 2009
Form 10-K
are accessible at no cost on the Corporations web site at
www.chemicalbankmi.com in the Investor
Information section, at www.edocumentview.com/chfc
and through the United States Securities and Exchange
Commissions web site at www.sec.gov. Chemical will
furnish a copy of any exhibit listed above to any shareholder of
the registrant at a cost of 30 cents per page upon written
request to Ms. Lori A. Gwizdala, Chief Financial Officer,
Chemical Financial Corporation, 333 East Main Street, Midland,
Michigan
48640-0569.
101
Pursuant to the requirements of Section 13 or 15(d) 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, on February 25, 2010.
CHEMICAL
FINANCIAL CORPORATION
David B. Ramaker
Chairman of the Board, CEO, President and Director
Principal Executive Officer
Lori A. Gwizdala
Executive Vice President, CFO and Treasurer
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on February 25, 2010 by
the following persons on behalf of the registrant and in the
capacities indicated.
OFFICERS:
David B. Ramaker
Chairman of the Board, CEO, President and Director
Principal Executive Officer
Lori A. Gwizdala
Executive Vice President, CFO and Treasurer
Principal Financial and Accounting Officer
The following Directors of Chemical Financial Corporation
executed a power of attorney appointing David B. Ramaker and
Lori A. Gwizdala their attorneys-in-fact, empowering them to
sign this report on their behalf.
Gary E. Anderson
J. Daniel Bernson
Nancy Bowman
James A. Currie
Thomas T. Huff
Michael T. Laethem
Geoffery E. Merszei
Terence F. Moore
Aloysius J. Oliver
Larry D. Stauffer
William S. Stavropoulos
Franklin C. Wheatlake
By Lori A. Gwizdala
Attorney-in-fact
102