2010
Annual Report
to Shareholders
CHEMICAL FINANCIAL CORPORATION
2010 ANNUAL REPORT TO SHAREHOLDERS
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Table of Contents
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Page
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1
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2
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3
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42
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43
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45
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49
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98
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99
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100
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101
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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). Words
such as anticipates, believes,
estimates, expects,
forecasts, intends, is
likely, judgment, plans,
predicts, projects, should,
will, and variations of such words and similar
expressions are intended to identify such forward-looking
statements. Such statements are based upon current beliefs and
expectations and involve substantial risks and uncertainties
which could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. These
statements include, among others, statements related to real
estate valuation, future levels of nonperforming loans, the rate
of asset dispositions, future capital levels, future dividends,
future growth and funding sources, future liquidity levels,
future profitability levels, future deposit insurance premiums,
the effects on earnings of future changes in interest rates and
the future level of other revenue sources. All statements
referencing future time periods are forward-looking.
Managements determination of the provision and allowance
for loan losses; the carrying value of acquired loans, goodwill
and mortgage servicing rights; the fair value of investment
securities (including whether any impairment on any investment
security is temporary or
other-than-temporary
and the amount of any impairment); and managements
assumptions concerning pension and other postretirement benefit
plans involve judgments that are inherently forward-looking.
There can be no assurance that future loan losses will be
limited to the amounts estimated. 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 of this report. 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.
1
SELECTED
FINANCIAL DATA
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Years Ended December 31,
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2010(a)
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2009
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2008
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2007
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2006
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(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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171,120
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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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Provision for loan losses
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45,600
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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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Noninterest income
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42,472
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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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Operating expenses
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136,802
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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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Net income
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23,090
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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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Per Common Share Data
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Net income:
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Basic
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$
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0.88
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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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Diluted
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0.88
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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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Cash dividends paid
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0.80
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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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Book value at end of period
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20.41
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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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Market value at end of period
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22.15
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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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Common shares outstanding at end of period
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27,440
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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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Year End Balances
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Total assets
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$
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5,246,209
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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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Total loans
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3,681,662
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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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Total deposits
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4,331,765
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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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Federal Home Loan Bank advances/other borrowings
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316,833
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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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Total shareholders equity
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560,078
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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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Average Balances
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Total assets
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$
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4,913,310
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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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Total earning assets
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4,618,012
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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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Total loans
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3,438,550
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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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Total interest-bearing liabilities
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3,685,186
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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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Total deposits
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4,017,230
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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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Federal Home Loan Bank advances/other borrowings
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336,782
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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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Total shareholders equity
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530,819
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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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Financial Ratios
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Net interest margin
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3.80
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%
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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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Return on average assets
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0.47
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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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Return on average shareholders equity
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4.3
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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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Efficiency ratio
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62.8
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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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Average shareholders equity as a percentage
of average assets
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10.8
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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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Tangible shareholders equity as a percentage
of total assets
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8.6
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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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Tier 1 risk-based capital ratio
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11.7
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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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Total risk-based capital ratio
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12.9
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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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Dividend payout ratio
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91.1
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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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Credit Quality
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Allowance for loan losses
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$
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89,530
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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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Total nonperforming originated loans
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147,729
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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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Total nonperforming assets
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175,239
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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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Net loan charge-offs
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36,911
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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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Allowance for loan losses as a percentage of total originated
loans
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2.86
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%
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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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Allowance for loan losses as a percentage of nonperforming
originated loans
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61
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60
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61
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62
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127
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Nonperforming originated loans as a percentage of total
originated loans
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4.72
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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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Nonperforming assets as a percentage of total assets
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3.34
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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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Net loan charge-offs as a percentage of average total loans
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1.07
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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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(a) |
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Includes the impact of the acquisition of O.A.K. Financial
Corporation on April 30, 2010. See Note 2 to the
consolidated financial statements in Item 8 of this Report
for information on the acquisition of O.A.K. Financial
Corporation. |
2
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OF THE CORPORATION
Chemical Financial Corporation (Corporation) is a financial
holding company headquartered in Midland, Michigan with its
business concentrated in a single industry segment
commercial banking. The Corporation, through its subsidiary
bank, Chemical Bank, offers a full range of traditional banking
and fiduciary products and services. These products and 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 and investment products, corporate and personal wealth
management services and other banking services.
The principal markets for the Corporations products and
services are communities within Michigan in which the branches
of Chemical Bank are located and the areas immediately
surrounding those communities. As of December 31, 2010,
Chemical Bank served 90 communities through 142 banking offices
located in 32 counties across Michigans lower peninsula.
In addition to its banking offices, Chemical Bank operated three
loan production offices and 162 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 76% of total revenue in
2010, 74% of total revenue in 2009 and 72% of total revenue in
2008. Interest on investment securities is also a significant
source of revenue, accounting for 6% of total revenue in 2010,
8% of total revenue in 2009 and 10% of total revenue in 2008.
Revenue is influenced by overall economic factors including
market interest rates, business and consumer spending, consumer
confidence and competitive conditions in the marketplace.
BANK INDUSTRY DEVELOPMENTS
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (Dodd-Frank Act) was signed into law by President Obama on
July 21, 2010. The Dodd-Frank Act permanently increased the
Federal Deposit Insurance Corporation (FDIC) insurance coverage
to $250,000 per depositor. In addition, the Dodd-Frank Act
resulted in a comprehensive overhaul of the financial services
industry within the United States, established the new federal
Bureau of Consumer Financial Protection (BCFP), and requires the
BCFP and other federal agencies to implement many new and
significant rules and regulations. At this time, it is difficult
to predict the extent to which the Dodd-Frank Act or the
resulting rules and regulations will impact the
Corporations and Chemical Banks business. Compliance
with these new laws and regulations will likely result in
additional costs, which could be significant and could adversely
impact the Corporations results of operations, financial
condition or liquidity.
In November 2010, the FDIC, as mandated by the Dodd-Frank Act,
issued a rule that provides unlimited insurance coverage on
noninterest-bearing transaction accounts at all insured
institutions beginning December 31, 2010 and expiring
December 31, 2012. Under the rule, a noninterest-bearing
transaction account is defined as a deposit account where
interest is neither accrued nor paid, depositors are permitted
to make an unlimited number of transfers and withdrawals and the
institution does not reserve the right to advance notice of an
intended withdrawal. Money market deposit accounts and
Negotiable Orders of Withdrawal (NOW) accounts are not eligible
for the unlimited insurance coverage, regardless of the interest
rate. Further, there will not be a separate fee assessment on
noninterest-bearing transaction accounts after December 31,
2010. Prior to December 31, 2010, unlimited insurance
coverage was available on noninterest-bearing transaction
accounts under the FDICs Transaction Account Guarantee
Program (TAGP). The TAGP, which was adopted by the FDIC in
November 2008 and expired December 31, 2010, provided full
FDIC deposit insurance coverage for covered accounts, which were
defined as noninterest-bearing transaction deposit accounts, NOW
accounts paying less than 0.5% (0.25% after June 30,
2010) interest per annum and Interest on Lawyers
Trust Accounts (IOLTA) held at participating FDIC-insured
institutions through December 31, 2010. The fee assessment
for deposit insurance coverage was an annualized 10 basis
points assessed quarterly on amounts in covered accounts
exceeding $250,000. The Corporations additional FDIC fee
assessment related to the full deposit coverage for TAGP
eligible accounts was $0.6 million in 2010 and
$0.1 million in 2009.
In February 2011, the FDIC adopted a rule which changes the
assessment base and assessment rates used to compute quarterly
FDIC insurance assessments beginning April 1, 2011. Under
the rule, the assessment base for all insured institutions, as
mandated by the Dodd-Frank Act, will change to average
consolidated total assets less average tangible equity. In
addition, the initial base assessment rates for Risk Category 1
institutions will range from 5 to 9 basis points, on an
annualized basis, and from 2.5 to 9 basis points after the
effect of potential base-rate adjustments. Chemical Bank was, by
definition, a Risk Category 1 institution during 2010 and 2009.
3
Chemical Banks FDIC insurance assessments totaled
$7.4 million in 2010, $7.0 million in 2009 and
$0.9 million in 2008. Based upon the adopted rule that
takes effect April 1, 2011 and the Corporations
average assessment base (under the adopted rule) at
December 31, 2010, the Corporations FDIC premiums are
expected to be lower in 2011 than in 2010.
In February 2009, the FDIC issued 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 assessment rate methodology 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 initial base
assessment rates for Risk Category 1 institutions ranged 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. In May 2009, the FDIC issued a 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. Deposit insurance expense during 2009 totaled
$7.0 million, including the $1.8 million recognized in
the second quarter related to the special assessment. In
November 2009, the FDIC issued a 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. The
prepayment calculation was based on an institutions
assessment rate in effect on September 30, 2009 and assumed
a 5% annual growth rate in the assessment base. On
December 30, 2009, the Corporation prepaid
$19.7 million in risk-based assessments. In conjunction
with the adoption of the prepaid assessment, the FDIC adopted a
uniform 3 basis point increase in assessment rates
effective on January 1, 2011. In October 2010, the FDIC
adopted a new DIF restoration plan to ensure the fund reserve
ratio reaches 1.35% by September 30, 2020, as required by
the Dodd-Frank Act. Under the new restoration plan, the FDIC
elected to forego the uniform 3 basis point increase
scheduled to take place on January 1, 2011. As previously
discussed, in February 2011, the FDIC adopted a rule that
further changed future assessment rates beginning April 1,
2011.
At December 31, 2010, the Corporation held
$18.7 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 $0.3 million of cash dividend payments on its FHLB
stock during 2010, down from $0.5 million received during
2009. The FHLB was profitable through the first three quarters
of 2010, with net income of $70 million, despite
recognizing $68 million of
other-than-temporary
impairment losses on the credit-loss portion of its
private-label residential mortgage-backed securities portfolio.
At September 30, 2010, the FHLB was considered
well-capitalized in accordance with regulatory requirements and
its capital was 4.2% of total assets, compared to 3.7% at
December 31, 2009. Standard & Poors has
given the FHLB a rating of AAA since December 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,
2010.
On October 3, 2008, the Emergency Economic Stabilization
Act of 2008 (EESA) was signed into law in response to the
financial crisis affecting the banking system and financial
markets and going concern threats to investment banks and other
financial institutions. 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,
residential 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. With the passage
of the Dodd-Frank Act in 2010, the deposit insurance increase to
$250,000 per depositor was made permanent.
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
4
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 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 and again in April 2010 to
extend maturity dates originally adopted. Under the TLGP, the
FDIC guaranteed, 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 April 30, 2010. The fee
assessment for coverage of senior unsecured debt ranged from
50 basis points to 300 basis points per annum,
depending on the initial maturity of the debt. The Corporation
did not issue any FDIC guaranteed debt during the three years
ended December 31, 2010.
ACQUISITION OF O.A.K. FINANCIAL CORPORATION
On April 30, 2010, the Corporation acquired 100% of O.A.K.
Financial Corporation (OAK) for total consideration of
$83.7 million. The total consideration consisted of the
issuance of 3,529,772 shares of the Corporations
common stock with a total value of $83.7 million based upon
a market price per share of the Corporations common stock
of $23.70 at the acquisition date, the exchange of 26,425 stock
options for the outstanding vested stock options of OAK with a
value of the exchange equal to approximately $41,000 at the
acquisition date, and approximately $8,000 of cash in lieu of
fractional shares.
OAK, a bank holding company, owned Byron Bank, which provided
traditional banking services and products through 14 banking
offices serving communities in Ottawa, Allegan and Kent counties
in west Michigan. Byron Bank owned two operating subsidiaries,
Byron Investment Services, which offered mutual fund products,
securities, brokerage services, retirement planning services,
and investment management and advisory services, and O.A.K.
Title Insurance Agency, which offered title insurance to
buyers and sellers of residential and commercial properties. At
April 30, 2010, OAK had total assets of $820 million,
total loans of $627 million and total deposits of
$693 million. The Corporation operated Byron Bank as a
separate subsidiary from the acquisition date until
July 23, 2010, the date Byron Bank was consolidated with
and into Chemical Bank, and at which time Byron Investment
Services and O.A.K. Title Insurance Agency became
subsidiaries of Chemical Bank. O.A.K. Title Insurance
Agency was subsequently dissolved effective August 31, 2010
and Byron Investment Services is expected to be dissolved in
2011.
In connection with the acquisition of OAK, the Corporation
recorded $43.5 million of goodwill. Goodwill recorded was
primarily attributable to the synergies and economies of scale
expected from combining the operations of the Corporation and
OAK. In addition, the Corporation recorded $9.8 million of
other intangible assets in conjunction with the acquisition. The
other intangible assets represent the value attributable to core
deposits of $8.4 million, mortgage servicing rights of
$0.7 million and non-compete agreements of
$0.7 million.
The Corporation developed exit plans for involuntary employee
terminations associated with the OAK acquisition, of which the
Corporation recognized $0.6 million during 2010 for these
exit costs and employee termination benefits. In addition to
these costs, the Corporation incurred other acquisition related
transaction expenses of $3.7 million in 2010.
Acquisition-related transaction expenses associated with the OAK
acquisition totaled $4.3 million during 2010, which reduced
net income per common share by $0.12 in 2010.
Additional information regarding the acquisition of OAK can be
found in the notes to the consolidated financial statements
contained in this Report and the Corporations Current
Reports on
Form 8-K
filed with the Securities and Exchange Commission (SEC) on
May 7, 2010, May 3, 2010 and January 8, 2010.
CRITICAL ACCOUNTING POLICIES
The Corporations consolidated financial statements are
prepared in accordance with United States generally accepted
accounting principles (GAAP), SEC rules and interpretive
releases and 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,
5
when available. When third-party information is not available,
valuation adjustments are estimated by management primarily
through the use of internal discounted cash flow analyses.
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, accounting for loans acquired in business
combinations, 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 and
collateral values on impaired loans, estimated losses on
commercial, real estate commercial, real estate construction and
land development 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, real estate construction and land development loan
portfolios, (ii) allocations established for
adversely-rated commercial, real estate commercial, real estate
construction and land development loans and nonaccrual real
estate residential and 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, 2010. Notes 1 and 4 to the consolidated
financial statements further describe 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 Allowance for Loan
Losses in Managements Discussion and Analysis
of Financial Condition and Results of Operations.
The Corporation has a loan review function that is independent
of the loan origination function and that 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, real estate construction and land development
loans, particularly focusing on larger balance loans and loans
that have deteriorated below certain levels of credit risk.
Accounting
for Loans Acquired in Business Combinations
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic
310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (ASC
310-30),
provides the GAAP guidance for accounting for loans acquired in
a business combination that have experienced a deterioration of
credit quality from origination to acquisition for which it is
probable that the investor will be unable to collect all
contractually required payments receivable, including both
principal and interest.
Loans purchased with evidence of credit deterioration since
origination and for which it is probable that all contractually
required payments will not be collected are considered to be
impaired. In the assessment of credit quality deterioration, the
Corporation must make numerous assumptions, interpretations and
judgments using internal and third-party credit quality
information to determine whether it is probable that the
Corporation will be able to collect all contractually required
payments. This is a point in time assessment and inherently
subjective due to the nature of the available information and
judgment involved. Evidence of credit quality deterioration as
of the purchase date may include statistics such as past due and
nonaccrual status, recent borrower credit scores and
loan-to-value
percentages. Those loans that qualify under ASC
310-30 are
recorded at fair value at acquisition, which involves estimating
the expected cash flows to be received. Accordingly, the
associated allowance for loan losses related to these loans is
not
6
carried over at the acquisition date.
ASC 310-30
also allows investors to aggregate loans acquired into loan
pools that have common risk characteristics and thereby use a
composite interest rate and expectation of cash flows to be
collected for the loan pools. The Corporation understands, as
outlined in the American Institute of Certified Public
Accountants open letter to the Office of the Chief
Accountant of the SEC dated December 18, 2009 and pending
further standard setting, that for acquired loans that do not
meet the scope criteria of
ASC 310-30,
a company may elect to account for such acquired loans pursuant
to the provisions of either
ASC 310-20,
Nonrefundable Fees and Other Costs, or
ASC 310-30.
The Corporation elected to apply
ASC 310-30
by analogy to loans acquired in the OAK transaction that were
determined not to have deteriorated credit quality, and
therefore, did not meet the scope criteria of
ASC 310-30.
Accordingly, the Corporation will follow the accounting and
disclosure guidance of
ASC 310-30
for these loans.
The excess of cash flows of a loan, or pool of loans, expected
to be collected over the estimated fair value is referred to as
the accretable yield and is recognized into interest income over
the remaining life of the loan, or pool of loans, on a
level-yield basis. The difference between the contractually
required payments of a loan, or pool of loans, and the cash
flows expected to be collected at acquisition, considering the
impact of prepayments and estimates of future credit losses
expected to be incurred over the life of the loan, or pool of
loans, is referred to as the nonaccretable difference.
Subsequent to acquisition, the Corporation is required to
quarterly evaluate its estimates of cash flows expected to be
collected. These evaluations require the continued usage of key
assumptions and estimates, similar to the initial estimate of
fair value. Given the current economic environment, the
Corporation must apply judgment to develop its estimates of cash
flows for acquired loans given the impact of changes in property
values, default rates, loss severities and prepayment speeds.
Decreases in the estimates of expected cash flows will generally
result in a charge to the provision for loan losses and a
resulting increase to the allowance for loan losses. Increases
in the estimates of expected cash flows will generally result in
adjustments to the accretable yield which will increase amounts
recognized in interest income in subsequent periods. Disposals
of loans, which may include sales of loans to third parties,
receipt of payments in full or in part by the borrower and
foreclosure of the collateral, result in removal of the loan
from the acquired loan portfolio at its carrying amount. As a
result of the significant amount of judgment involved in
estimating future cash flows expected to be collected for
acquired loans, the adequacy of the allowance for loan losses is
particularly sensitive to changes due to decreases in expected
cash flows resulting from changes in loan credit quality.
Acquired loans that were classified as nonperforming loans prior
to being acquired are not classified as nonperforming at
acquisition because the loans are recorded in pools at fair
value based on the principal and interest the Corporation
expects to collect on such loans. Accordingly, at the
acquisition date, the Corporation expects to fully collect the
carrying value of acquired loans. Judgment is required to
classify acquired loans as performing and is dependent on having
a reasonable expectation about the timing and amount of cash
flows expected to be collected, even if the loans are
contractually past due.
Loans acquired in the acquisition of OAK (acquired
loans) were initially recorded at fair value without a
carryover of OAKs allowance for loan losses. The
calculation of fair value of the acquired loans entailed
estimating the amount and timing of cash flows attributable to
both principal and interest expected to be collected on such
loans and then discounting those cash flows at market interest
rates. The Corporation aggregated acquired loans into 14 pools
based upon common risk characteristics and estimated the cash
flows expected to be collected at acquisition using its internal
credit risk grading model, interest rate risk and prepayment
models, which incorporated its best estimate of current key
assumptions, such as property values, default rates, loss
severity and prepayment speeds. The fair value of the acquired
loans included discounts attributable to both credit quality and
market interest rates, which were recorded as a reduction of the
loans outstanding principal balance at the acquisition
date. Upon acquisition, the acquired loan portfolio had
contractually required principal and interest payments of
$683 million and $97 million, respectively, expected
principal and interest cash flows of $636 million and
$88 million, respectively, and a fair value of
$627 million. The difference between the contractually
required payments receivable and the expected cash flows
represents the nonaccretable difference, which totaled
$56 million at the acquisition date, with $47 million
attributable to expected credit losses. The difference between
the expected cash flows and the fair value represents the
accretable yield, which totaled $97 million at the
acquisition date.
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. At December 31, 2010,
257 employees, or 16% of total employees, on a full-time
equivalent basis, were earning pension benefits under the
defined benefit pension plan. 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.
7
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, 2010, 2009 and 2008, 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 a portfolio of bonds of Aa quality
to determine the discount rate. At December 31, 2010, 2009
and 2008, the discount rate was established at 5.65%, 6.15% 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,
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2010
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2009
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2008
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Equity securities
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6% 9%
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7% 9%
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7% 8%
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Debt securities
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3% 7%
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4% 6%
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4% 6%
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Other
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2% 3%
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2% 5%
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2% 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 2010, 2009 and 2008.
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 2011 for the defined benefit pension plan are
a discount rate of 5.65%, a long-term rate of return on pension
plan assets of 7% and a rate of compensation increase of 3.50%.
Pension expense in 2011 is expected to be approximately
$0.7 million, a decrease of approximately $0.1 million
from 2010. In 2011, 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 FASB 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, 2010 and 2009 is further discussed in
Note 16 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 regulations and case law.
8
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 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, 2010 and 2009, there were no federal income
tax reserves recorded for uncertain tax positions.
Goodwill
At December 31, 2010, the Corporation had
$113.4 million of goodwill, which was originated through
the acquisition of various banks and bank branches, recorded on
the consolidated statement of financial position. Goodwill is
not amortized, but rather is tested by management annually for
impairment, or more frequently if triggering events occur and
indicate potential impairment, in accordance with FASB ASC Topic
350-20,
Goodwill. 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 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. At the valuation date of
September 30, 2010, 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. At the
valuation date of September 30, 2010, the market approach
utilized a price to latest twelve months earnings ratio of 35
times and a price to tangible book value of 145%.
The fair value of Chemical Bank was determined to be slightly
above the income approach and within the range of values in the
market approach 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, 2010. 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 price per share of its common stock as reported
on The Nasdaq Stock
Market®
establishes the marketable minority value. Given the volatility
of the financial markets, particularly in the equity markets in
2010, 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
9
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,
2010. 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.
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 13 to the
Corporations consolidated financial statements for more
information on fair value measurements.
PENDING ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements and Disclosures: In
January 2010, the FASB issued Accounting Standards Update (ASU)
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (ASU
2010-06).
ASU 2010-06
requires reporting entities to make new disclosures about
recurring and nonrecurring fair value measurements, including
significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances and settlements, on a gross basis,
in the reconciliation of Level 3 fair value measurements.
ASU 2010-06
also requires disclosure of fair value measurements by
class instead of by major category as
well as any changes in valuation techniques used during the
reporting period. For disclosures of Level 1 and
Level 2 activity, fair value measurements by
class and changes in valuation techniques, ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, with disclosures for previous
comparative periods prior to adoption not required. The adoption
of this portion of ASU
2010-06 on
January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations. For the reconciliation of Level 3 fair value
measurements, ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2010. The adoption of this portion of
ASU 2010-06
on January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Goodwill Impairment Testing: In December 2010,
the FASB issued ASU
No. 2010-28,
Intangibles (Topic 350): When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU
2010-28).
ASU 2010-28
provides guidance on (i) the circumstances under which step
2 of the goodwill impairment test must be performed for
reporting units with zero or negative carrying amounts, and
(ii) the qualitative factors to be taken into account when
performing step 2 in determining whether it is more likely than
not that an impairment exists. ASU
2010-28 is
effective for public entities with fiscal years beginning after
December 15, 2010, with early adoption prohibited. Upon
initial application, all entities having reporting units with
zero or negative carrying amounts are required to assess whether
it is more likely than not that impairment exists and any
resulting goodwill impairment should be recognized as a
cumulative-effect adjustment to opening retained earnings in the
period of adoption. The adoption of ASU
2010-28 on
January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Pro Forma Disclosure Requirements for Business
Combinations: In December 2010, the FASB issued
ASU
No. 2010-29,
Business Combinations (Topic 805): Disclosure of Supplementary
Pro Forma Information for Business Combinations
(ASU 2010-29).
ASU 2010-29
clarifies that pro forma revenue and earnings for a business
combination occurring in the current year should be presented as
though the business combination occurred as of the beginning of
the year or, if comparative financial statements are presented,
as though the business combination took place as of the
beginning of the comparative year. ASU
2010-29 also
amends existing guidance to expand the supplemental pro forma
disclosures to include a description of the nature and amount of
material, nonrecurring adjustments directly attributable to the
business combination included in the pro forma revenue and
earnings. ASU
2010-29 is
effective prospectively for business combinations consummated on
or after the start of the first annual reporting period
beginning after December 15, 2010, with early adoption
permitted. The adoption of ASU
2010-29 on
January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
10
Deferral of Troubled Debt Restructuring
Disclosures: In January 2011, the FASB issued ASU
No. 2011-01,
Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update
No. 2010-20
(ASU 2011-01).
For public entities, ASU
2011-01
delays the effective date for certain disclosures about loans
modified under troubled debt restructurings included in ASU
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses (ASU
2010-20).
The new effective date for the loans modified under troubled
debt restructuring disclosures will be concurrent with the
effective date of FASBs proposed ASU, Receivables (Topic
310): Clarifications to Accounting for Troubled Debt
Restructurings by Creditors. ASU
2011-01 does
not change the effective date for other disclosures required by
public entities in ASU
2010-20. The
adoption of ASU
2011-01 once
effective is not expected to have a material impact on the
Corporations consolidated financial condition or results
of operations.
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.
NET INCOME
Net income in 2010 was $23.1 million, or $0.88 per diluted
share, compared to net income in 2009 of $10.0 million, or
$0.42 per diluted share, and net income in 2008 of
$19.8 million, or $0.83 per diluted share. Net income in
2010 represented a 131% increase from 2009 net income,
while 2009 net income represented a 50% decrease from
2008 net income. Net income per share in 2010 was 110% more
than in 2009, while net income per share in 2009 was 49% less
than in 2008. The increases in net income and net income per
share in 2010, compared to 2009, were primarily attributable to
a decrease in the provision for loan losses and the acquisition
of OAK. The decreases in net income and net income per share in
2009, compared to 2008, were primarily attributable to increases
in the provision for loan losses and operating expenses.
The Corporations return on average assets was 0.47% in
2010, 0.25% in 2009 and 0.52% in 2008. The Corporations
return on average shareholders equity was 4.3% in 2010,
2.1% in 2009 and 3.9% in 2008.
ASSETS
Total assets were $5.25 billion at December 31, 2010,
an increase of $1.00 billion, or 23%, from total assets at
December 31, 2009 of $4.25 billion. Average assets
were $4.91 billion during 2010, an increase of
$847.1 million, or 21%, from average assets during 2009 of
$4.07 billion. Average assets were $4.07 billion
during 2009, an increase of $281.6 million, or 7%, from
average assets during 2008 of $3.78 billion. The increases
in total assets and average assets during 2010 were primarily
attributable to the acquisition of OAK.
11
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, 2010:
TABLE 1.
MATURITIES AND YIELDS* OF INVESTMENT SECURITIES AT DECEMBER 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Within
|
|
|
but Within
|
|
|
but Within
|
|
|
After
|
|
|
Carrying
|
|
|
Total
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Value
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
64,067
|
|
|
|
1.22
|
%
|
|
$
|
45,942
|
|
|
|
1.18
|
%
|
|
$
|
5,583
|
|
|
|
1.83
|
%
|
|
$
|
1,929
|
|
|
|
0.91
|
%
|
|
$
|
117,521
|
|
|
|
1.23
|
%
|
|
$
|
117,521
|
|
State and political subdivisions
|
|
|
1,053
|
|
|
|
5.21
|
|
|
|
8,819
|
|
|
|
4.17
|
|
|
|
33,408
|
|
|
|
5.71
|
|
|
|
2,766
|
|
|
|
5.92
|
|
|
|
46,046
|
|
|
|
5.42
|
|
|
|
46,046
|
|
Residential mortgage-backed securities
|
|
|
50,713
|
|
|
|
2.29
|
|
|
|
56,799
|
|
|
|
2.97
|
|
|
|
9,352
|
|
|
|
4.40
|
|
|
|
20,071
|
|
|
|
4.46
|
|
|
|
136,935
|
|
|
|
3.03
|
|
|
|
136,935
|
|
Collateralized mortgage obligations***
|
|
|
81,020
|
|
|
|
0.91
|
|
|
|
112,337
|
|
|
|
0.88
|
|
|
|
22,481
|
|
|
|
1.75
|
|
|
|
18,083
|
|
|
|
1.62
|
|
|
|
233,921
|
|
|
|
1.03
|
|
|
|
233,921
|
|
Corporate bonds
|
|
|
6,994
|
|
|
|
0.88
|
|
|
|
35,753
|
|
|
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,747
|
|
|
|
2.31
|
|
|
|
42,747
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,440
|
|
|
|
5.59
|
|
|
|
1,440
|
|
|
|
5.59
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Available-for-Sale
|
|
|
203,847
|
|
|
|
1.37
|
|
|
|
259,650
|
|
|
|
1.74
|
|
|
|
70,824
|
|
|
|
3.98
|
|
|
|
44,289
|
|
|
|
3.28
|
|
|
|
578,610
|
|
|
|
2.00
|
|
|
|
578,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
18,259
|
|
|
|
4.10
|
|
|
|
65,394
|
|
|
|
4.23
|
|
|
|
50,290
|
|
|
|
4.75
|
|
|
|
20,957
|
|
|
|
6.55
|
|
|
|
154,900
|
|
|
|
4.70
|
|
|
|
155,248
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
|
|
3.88
|
|
|
|
10,500
|
|
|
|
3.88
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Held-to-Maturity
|
|
|
18,259
|
|
|
|
4.10
|
|
|
|
65,394
|
|
|
|
4.23
|
|
|
|
50,290
|
|
|
|
4.75
|
|
|
|
31,457
|
|
|
|
5.66
|
|
|
|
165,400
|
|
|
|
4.64
|
|
|
|
159,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
222,106
|
|
|
|
1.59
|
%
|
|
$
|
325,044
|
|
|
|
2.24
|
%
|
|
$
|
121,114
|
|
|
|
4.30
|
%
|
|
$
|
75,746
|
|
|
|
4.27
|
%
|
|
$
|
744,010
|
|
|
|
2.59
|
%
|
|
$
|
737,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
|
** |
|
Residential mortgage-backed securities and collateralized
mortgage obligations (CMOs) are based on scheduled principal
maturity. All other investment securities are based on final
contractual maturity. |
|
*** |
|
Yields disclosed are actual yields at December 31, 2010.
The majority of the CMOs are variable rate financial instruments. |
The following table summarizes the carrying value of investment
securities at December 31, 2010, 2009 and 2008:
TABLE 2.
SUMMARY OF INVESTMENT SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,494
|
|
Government sponsored agencies
|
|
|
117,521
|
|
|
|
191,985
|
|
|
|
172,234
|
|
State and political subdivisions
|
|
|
46,046
|
|
|
|
3,562
|
|
|
|
4,552
|
|
Residential mortgage-backed securities
|
|
|
136,935
|
|
|
|
154,205
|
|
|
|
169,214
|
|
Collateralized mortgage obligations
|
|
|
233,921
|
|
|
|
223,758
|
|
|
|
37,285
|
|
Corporate bonds
|
|
|
42,747
|
|
|
|
19,011
|
|
|
|
45,168
|
|
Preferred stock
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Available-for-Sale
|
|
|
578,610
|
|
|
|
592,521
|
|
|
|
449,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
|
|
|
|
|
|
|
|
|
1,007
|
|
State and political subdivisions
|
|
|
154,900
|
|
|
|
120,447
|
|
|
|
85,495
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
350
|
|
|
|
509
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
10,500
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
Held-to-Maturity
|
|
|
165,400
|
|
|
|
131,297
|
|
|
|
97,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
744,010
|
|
|
$
|
723,818
|
|
|
$
|
547,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The carrying value of investment securities at December 31,
2010 totaled $744.0 million, an increase of
$20.2 million, or 2.8%, from investment securities at
December 31, 2009 of $723.8 million. The increase in
investment securities was attributable to the acquisition of
OAKs investment securities portfolio, which was partially
offset by the Corporation not reinvesting all of its maturing
investment securities. At December 31, 2010, the
Corporations investment securities portfolio consisted of
$117.5 million in government sponsored agency debt
obligations comprised primarily of senior bonds that were issued
by the twelve regional Federal Home Loan Banks that make up the
Federal Home Loan Bank System (FHLBanks); $201.0 million in
state and political subdivisions debt obligations comprised
primarily of general debt obligations of issuers primarily
located in the State of Michigan; $136.9 million in
residential mortgage-backed securities comprised primarily of
fixed rate instruments backed by a U.S. government agency
(Government National Mortgage Association) or government
sponsored enterprises (Federal Home Loan Mortgage Corporation
(Freddie Mac) and Federal National Mortgage Association (Fannie
Mae)); $233.9 million of collateralized mortgage
obligations comprised primarily of variable rate instruments
with average maturities of less than three years backed by the
same U.S. government agency and government sponsored
enterprises as the residential mortgage-backed securities;
$42.8 million in corporate bonds comprised primarily of
debt obligations of large national financial organizations;
preferred stock securities of $1.4 million comprised of
preferred stock securities of two large banks; and
$10.5 million of trust preferred securities (TRUPs)
comprised primarily of a 100% interest in a TRUP of a small
non-public bank holding company in Michigan.
The acquisition of OAK increased the Corporations
investment securities portfolio by $69.6 million at the
acquisition date and slightly changed the mix of the investment
securities portfolio by increasing the amount of state and
political subdivisions investment securities by
$46.3 million, of which $46.0 million remained at
December 31, 2010 in the
available-for-sale
portfolio. In addition, the preferred stock securities of
$1.4 million at December 31, 2010 were acquired in the
OAK acquisition. The Corporation has re-invested a portion of
funds from maturing government sponsored agencies and
residential mortgage-backed securities in 2010 into state and
political subdivisions investment securities, as opportunities
in local municipal markets remained available 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 $201.0 million,
or 27.0%, of investment securities at December 31, 2010,
compared to $124.0 million, or 17.1%, of investment
securities at December 31, 2009. The Corporation also
invested maturing funds from its investment securities portfolio
into corporate bonds during 2010 due to an improvement in that
market related to credit risk. The corporate bond portfolio
totaled $42.7 million, or 5.7% of investment securities, at
December 31, 2010, compared to $19.0 million, or 2.6%
of investment securities, at December 31, 2009. The
remaining investment securities that matured in 2010 were
primarily held in interest bearing deposits at the Federal
Reserve Bank of Chicago (FRB) due to the lack of investment
options that meet the Corporations investment strategy,
which is primarily centered on investing in relatively
short-term investment securities with average maturities of two
years or less or variable rate investment securities with
limited exposure to credit risk.
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.
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), if the Corporation
intends to sell a security or it is more-likely- than-not that
the Corporation will be required to sell the security prior to
the recovery of its amortized cost, an other-than-temporary
impairment (OTTI) write down is recognized in earnings equal to
the entire difference between the securitys amortized cost
basis and its fair value. If the Corporation does not intend to
sell a security and it is not more-likely-than-not that the
Corporation would be required to sell a security before the
recovery of its amortized cost basis, then the recognition of
the impairment is bifurcated. For a security where the
impairment is bifurcated, the impairment is separated into an
amount representing credit loss, which is recognized in
earnings, and an amount related to all other factors, which is
recognized in other comprehensive income. Prior to April 1,
2009, all declines in fair value deemed to be
other-than-temporary
were reflected in earnings as realized losses. In assessing
whether OTTI exists, 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
potential for impairments in an entire industry or sub-sector
and (iv) the potential for impairments in certain
economically depressed geographical locations.
The Corporations investment securities portfolio with a
carrying value of $744.0 million at December 31, 2010,
had gross impairment of $9.4 million at that date.
Management believed that the unrealized losses on investment
securities were temporary in nature and due primarily to changes
in interest rates on the investment securities and market
illiquidity and not as a result of credit-related issues.
Accordingly, at December 31, 2010, 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 2010.
13
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, 2010, the Corporations investment
securities portfolio included government sponsored agencies
securities with gross impairment of $0.04 million, state
and political subdivisions securities with gross impairment of
$1.99 million, residential mortgage-backed securities and
collateralized mortgage obligations, combined, with gross
impairment of $0.38 million, corporate bonds with gross
impairment of $0.47 million and trust preferred securities
with gross impairment of $6.56 million. The amortized costs
and fair values of investment securities are disclosed in
Note 3 to the consolidated financial statements.
The government sponsored agencies securities, included in the
available-for-sale
investment securities portfolio, had an amortized cost totaling
$117.2 million, with gross impairment of
$0.04 million, at December 31, 2010. This gross
impairment was attributable to impaired government sponsored
agencies securities with an amortized cost of
$20.2 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 recent increase in interest rates for these investments and
was temporary in nature at December 31, 2010. At
December 31, 2010, the Corporations government
sponsored agencies securities included $48.9 million of
senior bonds at fair value that were issued by the twelve
FHLBanks. There was no impairment in these FHLBanks
investment securities at December 31, 2010. FHLBanks are
government-sponsored enterprises created by Congress to ensure
access to low-cost funding for their member financial
institutions. FHLBanks overall experienced 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 residential mortgage-backed securities and home
equity loans due to the dramatic decline in interest rates that
occurred in 2008. However, the capital of FHLBanks improved
throughout 2009 and by September 30, 2009, the FHLBanks
were categorized as well-capitalized under applicable regulatory
requirements and continued to be well-capitalized in 2010.
The state and political subdivisions securities, included in the
available-for-sale
and the
held-to-maturity
investment securities portfolios, had an amortized cost totaling
$200.9 million, with gross impairment of
$1.99 million, at December 31, 2010. 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 $1.99 million at December 31,
2010 was attributable to $77.7 million of investment
securities at amortized cost, with two-thirds of these
investment securities maturing beyond 2013. The Corporation
determined that the impairment of $1.99 million at
December 31, 2010 was attributable to the recent change in
market interest rates for these investment securities and the
markets perception of the Michigan economy causing
illiquidity in the market for these investment securities. The
Corporation determined that the impairment on these investment
securities at December 31, 2010 was temporary in nature.
The residential mortgage-backed securities and collateralized
mortgage obligations, included in the
available-for-sale
investment securities portfolio, had a combined amortized cost
of $365.9 million, with gross impairment of
$0.38 million, at December 31, 2010. Virtually all of
the impaired investment securities in these two categories are
backed by a guarantee of a U.S. government agency or
government sponsored enterprise and are AAA rated. The
Corporation assessed the impairment on these investment
securities and determined that the impairment was attributable
to the low level of market interest rates and the volatility of
prepayment speeds and that the impairment on these investment
securities at December 31, 2010 was temporary in nature.
At December 31, 2010, the Corporations corporate bond
portfolio, included in the
available-for-sale
investment securities portfolio, had an amortized cost of
$43.1 million, with gross impairment of $0.47 million.
All of the corporate bonds held at December 31, 2010 were
of an investment grade, except a single issue investment
security of Lehman Brothers Holdings Inc. (Lehman) and a
corporate bond of American General Finance Corporation (AGFC).
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, 2010. AGFC was a
wholly-owned subsidiary of Fortress Investment Group, LLC, which
was rated BBB by Fitch at December 31, 2010. AGFC had
previously been owned by American General Finance Inc. (AGFI),
which was wholly-owned indirectly by American International
Group (AIG). At December 31, 2010, the AGFC corporate bond
had an amortized cost of $2.5 million with gross impairment
of $0.15 million and a maturity date of December 15,
2011. At December 31, 2010, the Corporations
assessment was that it was probable that it would collect all of
the contractual amounts due on the AGFC corporate bond. The
impairment at December 31, 2010 on the AGFC corporate bond
of $0.15 million improved from $0.46 million of
impairment at December 31, 2009. Ratings from Moodys,
Standard & Poors and Fitch were B2, BB+ and BB,
respectively, at December 31, 2010. The investment grade
ratings obtained for the balance of the corporate bond
portfolio, with a gross impairment of $0.32 million at
December 31, 2010, indicated that the obligors
capacities to meet their financial commitments was
strong. The Corporation assessed the gross
impairment of $0.47 million on the corporate bond portfolio
at December 31, 2010 and determined that the impairment was
attributable to the low level of market interest rates, and not
due to credit-related issues, and that the impairment on the
corporate bond portfolio at December 31, 2010 was temporary
in nature.
14
At December 31, 2010, the Corporation held two TRUPs in the
held-to-maturity
investment securities portfolio, with a combined amortized cost
of $10.5 million that had gross impairment of
$6.56 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 that was
purchased in the second quarter of 2008. At December 31,
2010, the Corporation determined that the fair value of this
TRUP was $3.80 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, 2010, the Corporation determined
the fair value of this TRUP was $0.14 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 3 to
the consolidated financial statements.
Management reviewed financial information of the issuers of the
TRUPs at December 31, 2010. 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 each of the three years ended
December 31, 2010. At December 31, 2010, the issuer
was categorized as well-capitalized under applicable regulatory
requirements 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,
2010, it was the Corporations opinion that this issuer
appeared to be a financially sound financial institution with
sufficient liquidity to meet its financial obligations in 2011.
This TRUP is not independently rated. Bank industry ratings as
of September 30, 2010, 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 2010 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 2010. The principal of
$10.0 million of this TRUP matures in 2038, with interest
payments due quarterly.
Based on the information provided by the issuer of the
$10.0 million TRUP, it was the Corporations opinion
that, as of December 31, 2010, there had been no material
adverse changes in the issuers financial performance since
the TRUP was issued and purchased by the Corporation and no
indication that any material adverse trends were developing that
would suggest that the issuer would be unable to make all future
principal and interest payments under the TRUP. Further, based
on the information provided by the issuer, the issuer appeared
to be a financially viable financial institution with both the
credit quality and liquidity necessary to meet its financial
obligations in 2011. At December 31, 2010, the Corporation
was not aware of any regulatory issues, memorandums of
understanding or cease and desist orders that had been issued to
the issuer or its subsidiaries. In reviewing all available
information regarding the issuer, including past performance and
its financial and liquidity position, it was the
Corporations opinion that the future cash flows of the
issuer supported the carrying value of the TRUP at its original
cost of $10.0 million at December 31, 2010. While
the total fair value of the TRUP was $6.2 million below the
Corporations amortized cost at December 31, 2010, it
was the Corporations assessment that, based on the overall
financial condition of the issuer, the impairment was temporary
in nature at December 31, 2010.
The issuer of the $0.5 million TRUP reported a net loss in
2010 that was significantly greater than a small net loss
reported in 2009. At December 31, 2010, the issuer was
categorized as well-capitalized under applicable regulatory
requirements and its subsidiary bank was rated adequate by Bauer
based on September 30, 2010 financial data. All scheduled
interest payments on this TRUP were made on a timely basis in
2010 and 2009. The principal of $0.5 million of this TRUP
matures in 2033, with interest payments due quarterly. At
December 31, 2010, the Corporation was not aware of any
regulatory issues, memorandums of understanding or cease and
desist orders that had been issued to the issuer of this TRUP or
any subsidiary. In reviewing all financial information regarding
the $0.5 million TRUP, it was the Corporations
opinion that the carrying value of this TRUP at its original
cost of $0.5 million was supported by the issuers
financial position at December 31, 2010, even though the
fair value of the TRUP was $0.3 million below the
Corporations amortized cost at December 31, 2010. It
was the Corporations assessment that the impairment was
temporary in nature at December 31, 2010.
At December 31, 2010, 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, 2010, 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.
However, there can be no assurance that OTTI losses will not be
recognized on the TRUPs or on any other investment security in
the future.
The Corporation did not realize any investment securities
impairment losses in 2010 or 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.
15
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, 2010,
the Corporations loan portfolio was $3.68 billion and
consisted of loans to commercial borrowers (commercial, real
estate commercial and real estate construction and land
development) totaling $2.04 billion, or 55.4% of total
loans, loans to borrowers for the purpose of acquiring
residential real estate totaling $798 million, or 21.7% of
total loans, and loans to consumer borrowers secured by various
types of collateral totaling $845 million, or 22.9% of
total loans, at that date. Loans at fixed interest rates
comprised approximately 72% of the Corporations total loan
portfolio at December 31, 2010, compared to 80% at
December 31, 2009.
The Corporation maintains loan policies and credit underwriting
standards as part of the process of managing credit risk. These
standards include making 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 that monitors the approval process and
ongoing asset quality of the loan portfolio.
Table 3 includes the composition of the Corporations loan
portfolio, by major loan category, as of December 31, 2010,
2009, 2008, 2007 and 2006.
TABLE 3.
SUMMARY OF LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(In thousands)
|
|
Distribution of Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
818,997
|
|
|
$
|
584,286
|
|
|
$
|
587,554
|
|
|
$
|
515,319
|
|
|
$
|
545,591
|
|
|
|
Real estate commercial
|
|
|
1,076,971
|
|
|
|
785,675
|
|
|
|
786,404
|
|
|
|
760,399
|
|
|
|
726,554
|
|
|
|
Real estate construction and land development
|
|
|
142,620
|
|
|
|
121,305
|
|
|
|
119,001
|
|
|
|
134,828
|
|
|
|
145,933
|
|
|
|
Real estate residential
|
|
|
798,046
|
|
|
|
739,380
|
|
|
|
839,555
|
|
|
|
838,545
|
|
|
|
835,263
|
|
|
|
Consumer installment and home equity
|
|
|
845,028
|
|
|
|
762,514
|
|
|
|
649,163
|
|
|
|
550,343
|
|
|
|
554,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
3,681,662
|
|
|
$
|
2,993,160
|
|
|
$
|
2,981,677
|
|
|
$
|
2,799,434
|
|
|
$
|
2,807,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 4 presents the maturity distribution of commercial, real
estate commercial and real estate construction and land
development loans. These loans totaled $2.04 billion and
represented 55% of total loans at December 31, 2010. The
percentage of these loans maturing within one year was 41% at
December 31, 2010, while the percentage of these loans
maturing beyond five years remained low at 6% at
December 31, 2010. At December 31, 2010, commercial,
real estate commercial and real estate construction and land
development loans with maturities beyond one year totaled
$1.21 billion and were comprised of 73% of fixed interest
rate loans.
TABLE 4.
COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Due In
|
|
|
|
1 Year
|
|
|
1 to 5
|
|
|
Over 5
|
|
|
|
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Loan Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
489,153
|
|
|
$
|
268,481
|
|
|
$
|
61,363
|
|
|
$
|
818,997
|
|
Real estate commercial
|
|
|
252,301
|
|
|
|
766,320
|
|
|
|
58,350
|
|
|
|
1,076,971
|
|
Real estate construction and land development
|
|
|
90,892
|
|
|
|
47,333
|
|
|
|
4,395
|
|
|
|
142,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
832,346
|
|
|
$
|
1,082,134
|
|
|
$
|
124,108
|
|
|
$
|
2,038,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total
|
|
|
41
|
%
|
|
|
53
|
%
|
|
|
6
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Interest Sensitivity:
|
|
|
|
|
|
|
|
|
Above loans maturing after one year which have:
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
$
|
878,696
|
|
|
|
73
|
%
|
Variable interest rates
|
|
|
327,546
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,206,242
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Total loans were $3.68 billion at December 31, 2010,
an increase of $689 million, or 23%, from total loans of
$2.99 billion at December 31, 2009. Total loans
increased $11.5 million, or 0.4%, during 2009, from total
loans of $2.98 billion at December 31, 2008. The
increase in total loans during 2010 was due primarily to the
loans acquired in the acquisition of OAK. In addition, during
2010, the Corporation originated $71 million of
fifteen-year fixed-rate residential mortgage loans that it held
in its portfolio, as opposed to selling them in the secondary
market as has been its general practice. At April 30, 2010,
OAKs loan portfolio was recorded by the Corporation at its
fair value of $627 million and was comprised of commercial
loans totaling $191 million, real estate commercial loans
totaling $294 million, real estate construction and land
development loans totaling $39 million, real estate
residential loans totaling $34 million and consumer
installment and home equity loans totaling $69 million. A
summary of the Corporations loan portfolio by category
follows.
Commercial loans consist 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 customer. Commercial loans are generally
secured with inventory, accounts receivable, equipment, personal
guarantees of the owner or other sources of repayment, although
the Corporation may also obtain real estate as collateral.
Commercial loans were $819.0 million at December 31,
2010, an increase of $234.7 million, or 40.2%, from
commercial loans at December 31, 2009 of
$584.3 million, with the increase due primarily to the
acquisition of OAK. Commercial loans decreased
$3.2 million, or 0.6%, during 2009 from commercial loans at
December 31, 2008 of $587.5 million. Commercial loans
represented 22.2% of the Corporations loan portfolio at
December 31, 2010, compared to 19.5% and 19.7% at
December 31, 2009 and 2008, respectively.
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
$1.08 billion at December 31, 2010, an increase of
$291.3 million, or 37.1%, from real estate commercial loans
at December 31, 2009 of $785.7 million, with the
increase due primarily to the acquisition of OAK. Loans secured
by owner occupied properties, non-owner occupied properties and
vacant land comprised 63%, 34% and 3%, respectively, of the
Corporations real estate commercial loans outstanding at
December 31, 2010. Real estate commercial loans decreased
$0.7 million, or 0.1%, during 2009 from real estate
commercial loans at December 31, 2008 of
$786.4 million. Real estate commercial loans represented
29.3% of the Corporations loan portfolio at
December 31, 2010, compared to 26.2% and 26.4% at
December 31, 2009 and 2008, respectively.
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 and land development loans are
primarily originated for land development and construction of
commercial properties. Land development loans include loans made
to developers for the purpose of infrastructure improvements to
vacant land to create finished marketable residential and
commercial lots/land. Real estate construction loans often
convert to a real estate commercial loan at the completion of
the construction period; however, most land development loans
are originated with the intention that the loans will be re-paid
through the sale of finished properties by the developers within
twelve months of the completion date. Real estate construction
and land development loans were $142.6 million at
December 31, 2010, an increase of
17
$21.3 million, or 17.6%, from real estate construction and
land development loans at December 31, 2009 of
$121.3 million, with the increase primarily due to the
acquisition of OAK. Real estate construction and land
development loans increased $2.3 million, or 1.9%, during
2009 from real estate construction and land development loans of
$119.0 million at December 31, 2008. The
Corporations land development loans totaled
$53.4 million and $46.6 million at December 31,
2010 and 2009, respectively, and consisted primarily of loans to
develop residential real estate. Real estate construction and
land development loans represented 3.9% of the
Corporations loan portfolio at December 31, 2010,
compared to 4.1% and 4.0% at December 31, 2009 and 2008,
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, the need to obtain a tenant or purchaser of
the property if it will not be owner-occupied or the need to
sell developed properties. 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. 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 lots and
units in both residential and commercial development projects
remains weak, as customer demand also remains low, resulting in
the inventory of unsold lots and housing units remaining high
across the State of Michigan. The unfavorable economic
environment 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 land development borrowers have sold
developed lots or units since early 2008 due to the unfavorable
economic environment.
The Corporations commercial loan portfolio, comprised of
commercial, real estate commercial and real estate construction
and land development loans, is well diversified across business
lines and has no concentration in any one industry. The
commercial loan portfolio totaling $2.04 billion at
December 31, 2010 included 142 loan relationships of
$2.5 million or greater. These 142 borrowing relationships
totaled $747 million and represented 37% of the commercial
loan portfolio at December 31, 2010. At December 31,
2010, 12 of these borrowing relationships had outstanding
balances of $10 million or higher, totaling
$166 million, or 8%, of the commercial loan portfolio at
that date. Further, the Corporation had four loan relationships
at December 31, 2010 with loan balances greater than
$2.5 million and less than $10 million, totaling
$32.2 million, that had unfunded credit amounts that, if
advanced, could result in a loan relationship of
$10 million or more.
Real estate residential loans consist primarily of one- to
four-family residential loans with fixed interest rates of
fifteen years or less. The Corporation generally sells fixed
interest rate real estate residential loans originated with
maturities of over fifteen years in the secondary market. 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 $798.0 million at December 31,
2010, an increase of $58.7 million, or 7.9%, from real
estate residential loans at December 31, 2009 of
$739.4 million. The increase in real estate residential
loans in 2010 was partially due to the acquisition of OAK and
partially due to the Corporation electing to hold in its
portfolio $71 million of fifteen-year term fixed interest
rate real estate residential loans during 2010 that historically
have been sold in the secondary market. Real estate residential
loans decreased $100.2 million, or 11.9%, during 2009 from
real estate residential loans of $839.6 million at
December 31, 2008. 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. While real estate
residential loans have historically involved the least amount of
credit risk in the Corporations loan portfolio, the risk
on these loans has increased as the unemployment rate has
increased and real estate property values have decreased in the
State of Michigan. Real estate residential loans also include
loans to consumers for the construction of single family
residences that are secured by these properties. Real estate
residential construction loans to consumers were
$15.3 million at December 31, 2010, compared to
$22.9 million at December 31, 2009 and
$29.2 million at December 31, 2008. Real estate
residential loans represented 21.7% of the Corporations
loan portfolio at December 31, 2010, compared to 24.7% and
28.1% at December 31, 2009 and 2008, respectively.
The Corporations consumer loans consist of relatively
small loan amounts to consumers to finance personal items;
primarily automobiles, recreational vehicles and boats. These
loans 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.
Consumer installment and home equity loans (consumer loans) were
$845.0 million at December 31, 2010, an increase of
$82.5 million, or 10.8%, from consumer loans at
December 31, 2009 of $762.5 million, with the increase
due primarily to the acquisition of OAK. Consumer loans
increased $113.4 million, or 17.5%, during 2009 from
consumer loans of $649.2 million at December 31, 2008.
The increase in consumer loans during 2009 was 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
18
reduction in the number of competing lenders. Indirect consumer
loans include automobile, recreational vehicle and boat
financing purchased from dealerships. At December 31, 2010,
approximately 45% of consumer loans were secured by the
borrowers personal residences (primarily second
mortgages), 25% by automobiles, 19% by recreational vehicles, 8%
by marine vehicles and the remaining 3% was mostly unsecured.
Consumer loans represented 22.9% of the Corporations loan
portfolio at December 31, 2010, compared to 25.5% and 21.8%
at December 31, 2009 and 2008, respectively.
Consumer loans generally have shorter terms than residential
mortgage loans, but generally involve more credit risk than real
estate residential lending because of the type and nature of the
collateral. The Corporation originates 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 has increased as the
unemployment rate has increased. The unemployment rate in the
State of Michigan was 11.7% at December 31, 2010, down from
14.6% at December 31, 2009, although higher than 10.2% at
December 31, 2008 and the national average of 9.4% at
December 31, 2010. The Corporation has experienced
significant increases in losses on consumer loans, with net loan
losses totaling 116 basis points of average consumer loans
during 2010, compared to 77 basis points of average
consumer loans in 2009 and 71 basis points of average
consumer loans in 2008. 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 since the beginning of 2008 as
property values have declined throughout the State of Michigan,
thus increasing the risk of insufficient collateral, and in many
instances no 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 originated loans for which the
accrual of interest has been discontinued, originated loans that
are past due as to principal or interest by 90 days or more
and are still accruing interest, originated loans which have
been modified due to a decline in the credit quality of the
borrower (collectively referred to as nonperforming
loans or nonperforming loans of the originated portfolio)
and assets obtained through foreclosures and repossessions,
including foreclosed and repossessed assets acquired as a result
of the OAK transaction. The Corporation transfers an originated
loan that is 90 days or more past due to nonaccrual status
(except for real estate residential loans that are transferred
at 120 days past due), 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 originated loan that is 90 days or
more past due (120 days or more past due on real estate
residential loans) and still accruing interest is probable.
Nonperforming assets do not include acquired loans that were not
performing in accordance with the loans contractual terms.
These loans were recorded at their estimated fair value, which
included estimated credit losses, at the acquisition date and
are considered performing due to the application of
ASC 310-30
as discussed in Note 1 to the consolidated financial
statements under the subheading, Loans Acquired in a Business
Combination. Accordingly, these acquired loans have been
excluded from Table 5 Nonperforming Assets.
Nonperforming assets were $175.2 million at
December 31, 2010, compared to $153.3 million at
December 31, 2009 and $113.3 million at
December 31, 2008, and represented 3.3%, 3.6% and 2.9%,
respectively, of total assets. The decrease in this ratio at
December 31, 2010 compared to December 31, 2009 was
attributable to the acquisition of OAK, which increased total
assets $820 million at the acquisition date, with no
increase in nonperforming loans, as the acquired loans were
recorded at their fair value, which included a discount
attributable, in part, to credit quality. It is
managements belief that the elevated levels of
nonperforming assets are primarily attributable to the
unfavorable economic climate within the State of Michigan, which
has resulted in cash flow difficulties being encountered by many
business and consumer loan customers. The unemployment rate in
Michigan was 11.7% at December 31, 2010, compared to 9.4%
nationwide. The Corporations nonperforming assets are not
concentrated in any one industry or any one geographical area
within Michigan, other than $10.2 million in nonperforming
land development loans. At December 31, 2010, there were
seven commercial loan relationships exceeding $2.5 million,
totaling $24.3 million, that were in nonperforming status.
Based on declines in both residential and commercial real estate
appraised values due to the weakness in the Michigan economy
over the past several years, management continues to evaluate
and, when appropriate, 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, it is managements
belief that nonperforming assets will remain at elevated levels
throughout 2011.
19
Table 5 provides a five-year history of nonperforming assets,
including the composition of nonperforming loans of the
originated portfolio, by major loan category.
TABLE 5.
NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Nonaccrual
loans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
16,668
|
|
|
$
|
19,309
|
|
|
$
|
16,324
|
|
|
$
|
10,961
|
|
|
$
|
4,203
|
|
Real estate commercial
|
|
|
60,558
|
|
|
|
49,419
|
|
|
|
27,344
|
|
|
|
19,672
|
|
|
|
9,612
|
|
Real estate construction and land development
|
|
|
8,967
|
|
|
|
15,184
|
|
|
|
15,310
|
|
|
|
12,979
|
|
|
|
2,552
|
|
Real estate residential
|
|
|
12,083
|
|
|
|
15,508
|
|
|
|
12,175
|
|
|
|
8,516
|
|
|
|
2,887
|
|
Consumer installment and home equity
|
|
|
4,686
|
|
|
|
7,169
|
|
|
|
5,313
|
|
|
|
3,468
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
102,962
|
|
|
|
106,589
|
|
|
|
76,466
|
|
|
|
55,596
|
|
|
|
20,239
|
|
Accruing loans contractually past due 90 days or more
as to interest or principal payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
530
|
|
|
|
1,371
|
|
|
|
1,652
|
|
|
|
1,958
|
|
|
|
1,693
|
|
Real estate commercial
|
|
|
1,350
|
|
|
|
3,971
|
|
|
|
9,995
|
|
|
|
4,170
|
|
|
|
2,232
|
|
Real estate construction and land development
|
|
|
1,220
|
|
|
|
1,990
|
|
|
|
759
|
|
|
|
|
|
|
|
174
|
|
Real estate residential
|
|
|
3,253
|
|
|
|
3,614
|
|
|
|
3,369
|
|
|
|
1,470
|
|
|
|
1,158
|
|
Consumer installment and home equity
|
|
|
1,055
|
|
|
|
787
|
|
|
|
1,087
|
|
|
|
166
|
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or more
as to interest or principal payments
|
|
|
7,408
|
|
|
|
11,733
|
|
|
|
16,862
|
|
|
|
7,764
|
|
|
|
6,671
|
|
Loans modified under troubled debt
restructurings(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and real estate commercial
|
|
|
15,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential
|
|
|
22,302
|
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified under troubled debt restructurings
|
|
|
37,359
|
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans of the originated portfolio
|
|
|
147,729
|
|
|
|
135,755
|
|
|
|
93,328
|
|
|
|
63,360
|
|
|
|
26,910
|
|
Other real estate and repossessed
assets(3)
|
|
|
27,510
|
|
|
|
17,540
|
|
|
|
19,923
|
|
|
|
11,132
|
|
|
|
8,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
175,239
|
|
|
$
|
153,295
|
|
|
$
|
113,251
|
|
|
$
|
74,492
|
|
|
$
|
35,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of total originated loans
|
|
|
4.72
|
%
|
|
|
4.54
|
%
|
|
|
3.13
|
%
|
|
|
2.26
|
%
|
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percent of total assets
|
|
|
3.34
|
%
|
|
|
3.61
|
%
|
|
|
2.92
|
%
|
|
|
1.98
|
%
|
|
|
0.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There was no interest income recognized on nonaccrual loans in
2010 while they were in nonaccrual status. During 2010, the
Corporation recognized $1.1 million of interest income on
these loans while they were in an accruing status. Additional
interest income of $5.9 million would have been recorded
during 2010 on nonaccrual loans had they been current in
accordance with their original terms. |
|
(2) |
|
Interest income of $1.8 million was recorded in 2010 on
loans modified under troubled debt restructurings. |
|
(3) |
|
Includes property acquired through foreclosure and by acceptance
of a deed in lieu of foreclosure and other property held for
sale, including properties acquired as a result of the OAK
transaction. |
The following schedule provides the composition of nonperforming
loans of the originated portfolio, by major loan category, as of
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
22,511
|
|
|
|
15
|
%
|
|
$
|
20,680
|
|
|
|
15
|
%
|
Real estate commercial
|
|
|
71,652
|
|
|
|
49
|
|
|
|
53,390
|
|
|
|
39
|
|
Real estate construction and land development
|
|
|
10,187
|
|
|
|
7
|
|
|
|
17,174
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
104,350
|
|
|
|
71
|
|
|
|
91,244
|
|
|
|
67
|
|
Real estate residential
|
|
|
37,638
|
|
|
|
25
|
|
|
|
36,555
|
|
|
|
27
|
|
Consumer installment and home equity
|
|
|
5,741
|
|
|
|
4
|
|
|
|
7,956
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans of originated portfolio
|
|
$
|
147,729
|
|
|
|
100
|
%
|
|
$
|
135,755
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Total nonperforming loans of the originated portfolio at
December 31, 2010 were $147.7 million, an increase of
$11.9 million, or 8.8%, compared to $135.8 million at
December 31, 2009. The Corporations nonperforming
loans to commercial borrowers (commercial, real estate
commercial and real estate construction and land development) of
the originated portfolio, including loans modified under
troubled debt restructurings, were $104.4 million at
December 31, 2010, an increase of $13.2 million, or
14%, from $91.2 million at December 31, 2009. The net
increase in nonperforming loans to commercial borrowers of the
originated portfolio during 2010 was largely due to an increase
in loans modified under troubled debt restructurings.
Nonperforming loans to commercial borrowers comprised 71% of
total nonperforming loans at December 31, 2010, compared to
67% at December 31, 2009. Likewise, as disclosed in Table
6, the majority of the Corporations net loan charge-offs
during 2010 occurred within these three commercial loan
categories, with 55% of net loan charge-offs during 2010
attributable to commercial borrowers, although down from 75% in
2009. Nonperforming real estate residential loans of the
originated portfolio, including loans modified under troubled
debt restructurings, were $37.6 million at
December 31, 2010, an increase of $1.0 million, or
3.0%, from $36.6 million at December 31, 2009.
Nonperforming consumer loans of the originated portfolio were
$5.7 million at December 31, 2010, a decrease of
$2.3 million, or 28%, from $8.0 million at
December 31, 2009.
The following schedule summarizes changes in nonaccrual loans of
the originated portfolio during 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
106,589
|
|
|
$
|
76,466
|
|
Additions during period
|
|
|
85,882
|
|
|
|
124,403
|
|
Principal balances charged off
|
|
|
(35,845
|
)
|
|
|
(36,146
|
)
|
Transfers to other real estate/repossessed assets
|
|
|
(21,534
|
)
|
|
|
(18,320
|
)
|
Return to accrual status
|
|
|
(9,576
|
)
|
|
|
(18,174
|
)
|
Payments received
|
|
|
(22,554
|
)
|
|
|
(21,640
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
102,962
|
|
|
$
|
106,589
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents data related to nonperforming
commercial, real estate commercial and real estate construction
and land development loans of the originated portfolio by dollar
amount as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Borrowers
|
|
|
Amount
|
|
|
Borrowers
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
$5,000,000 or more
|
|
|
1
|
|
|
$
|
7,227
|
|
|
|
1
|
|
|
$
|
7,532
|
|
$2,500,000 - $4,999,999
|
|
|
6
|
|
|
|
17,071
|
|
|
|
4
|
|
|
|
11,926
|
|
$1,000,000 - $2,499,999
|
|
|
18
|
|
|
|
29,246
|
|
|
|
17
|
|
|
|
28,989
|
|
$500,000 - $999,999
|
|
|
22
|
|
|
|
14,483
|
|
|
|
21
|
|
|
|
14,640
|
|
$250,000 - $499,999
|
|
|
50
|
|
|
|
18,188
|
|
|
|
40
|
|
|
|
14,042
|
|
Under $250,000
|
|
|
202
|
|
|
|
18,135
|
|
|
|
175
|
|
|
|
14,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
299
|
|
|
$
|
104,350
|
|
|
|
258
|
|
|
$
|
91,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming commercial loans of the originated portfolio were
$22.5 million at December 31, 2010, an increase of
$1.8 million, or 8.9%, from $20.7 million at
December 31, 2009. The nonperforming commercial loans of
the originated portfolio at December 31, 2010 were not
concentrated in any single industry and it is managements
belief that the increase from December 31, 2009 was
primarily reflective of the unfavorable economic conditions in
Michigan.
Nonperforming real estate commercial loans of the originated
portfolio were $71.7 million at December 31, 2010, an
increase of $18.3 million, or 34%, from $53.4 million
at December 31, 2009. At December 31, 2010, the
Corporations nonperforming real estate commercial loans of
the originated portfolio were comprised of $34.6 million of
loans secured by owner occupied real estate, $29.4 million
of loans secured by non-owner occupied real estate and
$7.7 million of loans secured by vacant land, resulting in
approximately 6% of owner occupied real estate commercial loans
of the originated portfolio, 12% of non-owner occupied real
estate commercial loans of the originated portfolio and 29% of
vacant land loans of the originated portfolio in a nonperforming
status at December 31, 2010. At December 31, 2010, the
Corporations nonperforming real estate commercial loans of
the originated portfolio were comprised of a diverse mix of
commercial lines of business and were also geographically
disbursed throughout the Corporations market areas. The
largest concentration of the $71.7 million in nonperforming
real estate commercial loans of the
21
originated portfolio at December 31, 2010 was one customer
relationship totaling $6.8 million that was secured by a
combination of vacant land and non-owner occupied commercial
real estate. This same customer relationship had another
$0.4 million included in nonperforming real estate
construction and land development loans of the originated
portfolio. At December 31, 2010, $11.4 million of the
nonperforming real estate commercial loans of the originated
portfolio were in various stages of foreclosure with 38
borrowers. Challenges remain in the Michigan economy, thus
creating a difficult business environment for many lines of
business across the state.
Nonperforming real estate construction and land development
loans of the originated portfolio were $10.2 million at
December 31, 2010, a decrease of $7.0 million, or 41%,
from $17.2 million at December 31, 2009. At
December 31, 2010, all of the nonperforming real estate
construction and land development loans were land development
loans secured primarily by residential real estate improved lots
and housing units. The $10.2 million of nonperforming loans
secured by land development projects represented 29% of total
land development loans of the originated portfolio outstanding
of $34.7 million at December 31, 2010. The economy in
Michigan has adversely impacted housing demand throughout the
state and, accordingly, a significant percentage of the
Corporations residential real estate development borrowers
have experienced cash flow difficulties associated with a
significant decline in sales of both lots and residential real
estate.
Nonperforming real estate residential loans of the originated
portfolio, including loans modified under troubled debt
restructurings, were $37.6 million at December 31,
2010, an increase of $1.0 million, or 3.0%, from
$36.6 million at December 31, 2009. At
December 31, 2010, a total of $9.7 million of
nonperforming real estate residential loans of the originated
portfolio were in various stages of foreclosure.
Nonperforming consumer loans of the originated portfolio were
$5.7 million at December 31, 2010, a decrease of
$2.3 million, or 28%, from $8.0 million at
December 31, 2009. The decrease in nonperforming consumer
loans during 2010 was primarily attributable to elevated levels
of net loan charge-offs of consumer loans of the originated
portfolio, which were $9.0 million during 2010, compared to
$5.6 million during 2009.
The unfavorable economic climate in Michigan has resulted in an
increasing number of both business and consumer customers with
cash flow difficulties and thus the inability to maintain their
loan balances in a performing status. The Corporation determined
that it was probable that certain customers who were past due on
their 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 believed by the
Corporation to potentially result in a lower level of loan
losses and loan collection costs than if the Corporation
currently proceeded through the foreclosure process with these
borrowers.
The Corporations loans modified under troubled debt
restructurings-commercial and real estate commercial generally
consist of allowing borrowers to defer scheduled principal
payments and make interest only payments for a short period of
time at the stated interest rate of the original loan agreement
or lower payments due to a modification of the loans
contractual terms. The outstanding balance of these loans was
$15.1 million at December 31, 2010. The Corporation
does not expect to incur a loss on these loans based on its
assessment of the borrowers expected cash flows, and
accordingly, no additional provision for loan losses has been
recognized related to these loans. Additionally, these loans are
individually evaluated for impairment and transferred to
nonaccrual status when it is probable that any remaining
principal and interest payments due on the loan will not be
collected in accordance with the contractual terms of the loan.
The Corporations loans modified under troubled debt
restructurings-real estate residential generally consist of
reducing a borrowers monthly payments by decreasing the
interest rate charged on the loan to 3% for a specified period
of time (generally 24 months). The outstanding loan balance
of these loans was $22.3 million at December 31, 2010,
compared to $17.4 million at December 31, 2009. All
loans reported as loans modified under troubled debt
restructurings-real estate residential will remain in
nonperforming status until a sustained payment history has been
observed. The Corporation recognized $0.6 million and
$0.8 million of additional provision for loan losses during
2010 and 2009, respectively, related to impairment on these
loans based on the present value of expected future cash flows
discounted at the loans original effective interest rate.
These loans are moved to nonaccrual status when the loan becomes
ninety days past due as to principal or interest and sooner if
conditions warrant.
Other real estate and repossessed assets is a component of
nonperforming assets that includes residential and commercial
real estate and development properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure,
and also other personal and commercial assets. Other real estate
and repossessed assets were $27.5 million at
December 31, 2010, an increase of $10.0 million, or
57%, from $17.5 million at December 31, 2009. The
increase from December 31, 2009 was partially attributable
to $2.7 million of other real estate and $0.2 million
of repossessed assets acquired in the OAK acquisition at the
acquisition date. The increase was also attributable to the
foreclosure and transfer into other real estate of one real
estate commercial loan acquired in the OAK acquisition with a
carrying value of $4.3 million.
22
The following schedule provides the composition of other real
estate and repossessed assets at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Other real estate:
|
|
|
|
|
|
|
|
|
Vacant land
|
|
$
|
9,149
|
|
|
$
|
3,427
|
|
Commercial properties
|
|
|
8,604
|
|
|
|
4,160
|
|
Residential real estate properties
|
|
|
6,189
|
|
|
|
7,384
|
|
Residential development properties
|
|
|
3,035
|
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
Total other real estate
|
|
|
26,977
|
|
|
|
17,248
|
|
Repossessed assets
|
|
|
533
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
Total other real estate and repossessed assets
|
|
$
|
27,510
|
|
|
$
|
17,540
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes other real estate and
repossessed asset activity during 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
17,540
|
|
|
$
|
19,923
|
|
Additions attributable to OAK acquisition
|
|
|
2,907
|
|
|
|
|
|
Other additions
|
|
|
26,429
|
|
|
|
18,320
|
|
Write-downs to fair value
|
|
|
(2,694
|
)
|
|
|
(4,722
|
)
|
Dispositions
|
|
|
(16,672
|
)
|
|
|
(15,981
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
27,510
|
|
|
$
|
17,540
|
|
|
|
|
|
|
|
|
|
|
The historically large inventory of real estate properties 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 $8.9 million
in real estate properties at December 31, 2010 that had
been held in excess of one year as of that date, of which
$2.9 million was vacant land, $2.1 million were
commercial properties, $2.6 million were residential real
estate properties and $1.3 million were residential
development properties. 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
nonperforming loans that were in the process of foreclosure at
December 31, 2010, it is anticipated that the level of
other real estate will remain at elevated levels throughout
2011. Other real estate properties are carried at the lower of
cost or fair value less estimated cost to sell.
At December 31, 2010, all of the other real estate
properties had been written down to fair value through a
charge-off at the transfer of the loan to other real estate, a
write-down recorded as an operating expense to recognize a
further market value decline of the property after the initial
transfer date or a recording at fair value in conjunction with
the OAK acquisition. Accordingly, at December 31, 2010, the
carrying value of other real estate of $27.0 million, was
reflective of $35.7 million in charge-offs, write-downs or
fair value adjustments, and represented 43% of the contractual
loan balance remaining at the time the property was transferred
to other real estate.
During 2010, the Corporation sold 185 pieces of other real
estate properties for net proceeds of $14.5 million. On an
average basis, the net proceeds from these sales represented
110% of the carrying value of the property at the time of sale,
although the net proceeds represented 56% of the remaining loan
balance at the time the Corporation received title to the
properties.
As previously discussed, due to the application of
ASC 310-30,
nonperforming assets at December 31, 2010 did not include
acquired loans totaling $21.4 million that were not
performing in accordance with the loans original
contractual terms due to a market interest yield recognized on
these loans in interest income during 2010. Additionally, the
risk of credit loss at the acquisition date was recognized as
part of the fair value adjustment. These loans are included in
the Corporations impaired loan schedule in Note 4 to
the consolidated financial statements.
23
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 loans and loans modified under troubled debt
restructurings meet the definition of an impaired loan. Acquired
loans that meet the definition of an impaired loan are included
even though the amortization of the accretable yield results in
interest income recognition on these loans. In most instances,
impairment is measured based on the fair market value of the
underlying collateral. It is the Corporations general
policy to, at least annually, obtain new appraisals on impaired
commercial and real estate commercial loans that are secured by
real estate. At December 31, 2010, the Corporation had a
current appraisal on approximately 90% of impaired loans, with
50% of these appraisals being performed during the second half
of 2010. 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 totaled $161.7 million at December 31,
2010, an increase of $37.7 million, or 30%, compared to
$124.0 million at December 31, 2009. Impaired loans
increased $47.5 million, or 62%, during 2009 from
$76.5 million at December 31, 2008. The increase in
impaired loans during 2010 was due to increases in the amount of
loans modified under troubled debt restructurings and loans
acquired in the acquisition of OAK that were not performing in
accordance with the loans contractual terms. Impaired
loans at December 31, 2010 included $21.4 million of
loans acquired in the OAK acquisition that were recorded at fair
value at the acquisition date. 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 and land development loans totaling
$44.9 million at December 31, 2010 required a specific
allocation of the allowance for loan losses (valuation
allowance), compared to $38.2 million of impaired loans at
December 31, 2009 and $30.3 million of impaired loans
at December 31, 2008. The valuation allowance on these
impaired loans was $15.0 million at December 31, 2010,
compared to $10.5 million at December 31, 2009 and
$9.2 million at December 31, 2008. At
December 31, 2010 and 2009, loans modified under troubled
debt restructurings-real estate residential of
$22.3 million and $17.4 million, respectively, also
required a valuation allowance of $0.8 million and
$0.7 million, respectively. Loans modified under troubled
debt restructurings-commercial and real estate commercial of
$15.1 million at December 31, 2010 did not require a
valuation allowance as the Corporation expects to collect the
full principal and interest owed on each loan. At
December 31, 2010, there was no valuation allowance
required on impaired loans acquired in the OAK acquisition. 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, Allowance for Loan Losses,
below.
24
ALLOWANCE
FOR LOAN LOSSES
The allowance for loan losses (allowance) provides for probable
losses in the originated loan portfolio that have been
identified with specific customer relationships and for probable
losses believed to be inherent in the remainder of the
originated loan portfolio but that have not been specifically
identified. The allowance is comprised of specific allowances
(assessed for originated 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 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. Further discussion of the Corporations
methodology used to determine the allowance is included in
Notes 1 and 4 to the consolidated financial statements.
The Corporations allowance at December 31, 2010 did
not include losses inherent in the acquired loan portfolio, as
an allowance was not carried over on the date of acquisition.
The acquired loans were recorded at their estimated fair value
at the date of acquisition, with the estimated fair value
including a component for expected credit losses. A portion of
the allowance, however, may be set aside in the future, related
to the acquired loans, if an acquired loan pool experiences a
decrease in expected cash flows as compared to those expected at
the acquisition date. An allowance for loan losses related to
acquired loans was not required at December 31, 2010 due to
no material changes in expected cash flows since the date of
acquisition.
A summary of the activity in the allowance for loan losses for
the last five years is included in Table 6.
TABLE 6.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
$
|
34,098
|
|
|
$
|
34,148
|
|
Provision for loan losses
|
|
|
45,600
|
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
11,500
|
|
|
|
5,200
|
|
Loan charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(8,430
|
)
|
|
|
(12,001
|
)
|
|
|
(16,787
|
)
|
|
|
(1,622
|
)
|
|
|
(1,389
|
)
|
Real estate commercial
|
|
|
(10,811
|
)
|
|
|
(9,231
|
)
|
|
|
(6,995
|
)
|
|
|
(1,675
|
)
|
|
|
(1,564
|
)
|
Real estate construction and land development
|
|
|
(2,544
|
)
|
|
|
(6,969
|
)
|
|
|
(2,963
|
)
|
|
|
(1,272
|
)
|
|
|
(1,201
|
)
|
Real estate residential
|
|
|
(8,036
|
)
|
|
|
(3,694
|
)
|
|
|
(2,458
|
)
|
|
|
(484
|
)
|
|
|
(515
|
)
|
Consumer installment and home equity
|
|
|
(10,665
|
)
|
|
|
(6,791
|
)
|
|
|
(4,739
|
)
|
|
|
(1,935
|
)
|
|
|
(1,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan charge-offs
|
|
|
(40,486
|
)
|
|
|
(38,686
|
)
|
|
|
(33,942
|
)
|
|
|
(6,988
|
)
|
|
|
(6,645
|
)
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
921
|
|
|
|
904
|
|
|
|
1,473
|
|
|
|
249
|
|
|
|
370
|
|
Real estate commercial
|
|
|
426
|
|
|
|
495
|
|
|
|
131
|
|
|
|
21
|
|
|
|
6
|
|
Real estate construction and land development
|
|
|
20
|
|
|
|
307
|
|
|
|
29
|
|
|
|
30
|
|
|
|
|
|
Real estate residential
|
|
|
543
|
|
|
|
614
|
|
|
|
160
|
|
|
|
18
|
|
|
|
98
|
|
Consumer installment and home equity
|
|
|
1,665
|
|
|
|
1,151
|
|
|
|
583
|
|
|
|
494
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan recoveries
|
|
|
3,575
|
|
|
|
3,471
|
|
|
|
2,376
|
|
|
|
812
|
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs
|
|
|
(36,911
|
)
|
|
|
(35,215
|
)
|
|
|
(31,566
|
)
|
|
|
(6,176
|
)
|
|
|
(5,650
|
)
|
Allowance of branches acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
$
|
89,530
|
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
|
$
|
34,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs during the year as a percentage of average
loans outstanding during the year
|
|
|
1.07
|
%
|
|
|
1.18
|
%
|
|
|
1.10
|
%
|
|
|
0.22
|
%
|
|
|
0.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of total originated
loans outstanding at end of year
|
|
|
2.86
|
%
|
|
|
2.70
|
%
|
|
|
1.91
|
%
|
|
|
1.41
|
%
|
|
|
1.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of nonperforming
originated loans outstanding at end of year
|
|
|
61
|
%
|
|
|
60
|
%
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
127
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The Corporations allowance was $89.5 million at
December 31, 2010, compared to $80.8 million at
December 31, 2009 and $57.1 million at
December 31, 2008. The allowance as a percentage of
originated loans was 2.86% at December 31, 2010, compared
to 2.70% at December 31, 2009 and 1.91% at
December 31, 2008. The allowance as a percentage of
nonperforming originated loans was 61% at December 31,
2010, compared to 60% at December 31, 2009 and 61% at
December 31, 2008.
The allocation of the allowance 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.
TABLE 7.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
in Each
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
in Each
|
|
|
|
|
|
|
to Total
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
Allowance
|
|
|
Originated
|
|
|
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
|
|
$
|
22.2
|
|
|
|
22
|
%
|
|
$
|
19.1
|
|
|
|
20
|
%
|
|
$
|
12.3
|
|
|
|
20
|
%
|
|
$
|
9.7
|
|
|
|
19
|
%
|
|
$
|
8.9
|
|
|
|
19
|
%
|
Real estate commercial
|
|
|
32.6
|
|
|
|
25
|
|
|
|
23.9
|
|
|
|
26
|
|
|
|
20.3
|
|
|
|
26
|
|
|
|
12.8
|
|
|
|
27
|
|
|
|
11.4
|
|
|
|
26
|
|
Real estate construction and land development
|
|
|
4.6
|
|
|
|
3
|
|
|
|
5.7
|
|
|
|
4
|
|
|
|
3.8
|
|
|
|
4
|
|
|
|
3.0
|
|
|
|
5
|
|
|
|
1.8
|
|
|
|
5
|
|
Real estate residential
|
|
|
10.8
|
|
|
|
25
|
|
|
|
13.1
|
|
|
|
25
|
|
|
|
8.0
|
|
|
|
28
|
|
|
|
5.5
|
|
|
|
30
|
|
|
|
3.6
|
|
|
|
30
|
|
Consumer installment and home equity
|
|
|
16.6
|
|
|
|
25
|
|
|
|
17.3
|
|
|
|
25
|
|
|
|
10.9
|
|
|
|
22
|
|
|
|
6.6
|
|
|
|
19
|
|
|
|
6.8
|
|
|
|
20
|
|
Unallocated
|
|
|
2.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89.5
|
|
|
|
100
|
%
|
|
$
|
80.8
|
|
|
|
100
|
%
|
|
$
|
57.1
|
|
|
|
100
|
%
|
|
$
|
39.4
|
|
|
|
100
|
%
|
|
$
|
34.1
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes impaired loans to commercial
borrowers and the related valuation allowance at
December 31, 2010 and 2009 and partial loan charge-offs
taken on these impaired loans (confirmed losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
Confirmed
|
|
|
Cumulative
|
|
|
|
Amount
|
|
|
Allowance
|
|
|
Losses
|
|
|
Loss Percentage
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with valuation allowance and no charge-offs
|
|
$
|
33,056
|
|
|
$
|
12,015
|
|
|
$
|
|
|
|
|
36
|
%
|
Impaired loans with valuation allowance and charge-offs
|
|
|
11,795
|
|
|
|
2,951
|
|
|
|
1,551
|
|
|
|
34
|
|
Impaired loans with charge-offs and no valuation allowance
|
|
|
20,033
|
|
|
|
|
|
|
|
18,277
|
|
|
|
48
|
|
Impaired loans without valuation allowance or charge-offs
|
|
|
36,366
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans to commercial borrowers-originated portfolio
|
|
|
101,250
|
|
|
$
|
14,966
|
|
|
$
|
19,828
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired acquired loans
|
|
|
21,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans to commercial borrowers
|
|
$
|
122,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loans to commercial borrowers
|
|
$
|
83,912
|
|
|
$
|
10,507
|
|
|
$
|
17,992
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed losses represent partial loan charge-offs on impaired
loans due to the receipt of a recent third-party property
appraisal indicating the value of the collateral securing the
loan is below the loan balance and management believes the full
collection of the loan balance is not likely.
The Corporations valuation allowance for impaired
commercial, real estate commercial and real estate construction
and land development loans was $15.0 million at
December 31, 2010, an increase of $4.5 million from
$10.5 million at December 31, 2009. The increase in
the valuation allowance is reflective of continued declines in
collateral values during 2010. Additionally, at
December 31, 2010 and 2009, the Corporation had a valuation
allowance attributable to loans modified under troubled debt
restructurings-real estate residential of $0.8 million and
$0.7 million, respectively.
26
The following schedule summarizes the allowance as a percentage
of nonperforming originated loans at December 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for loan losses
|
|
$
|
89,530
|
|
|
$
|
80,841
|
|
Nonperforming originated loans
|
|
|
147,729
|
|
|
|
135,755
|
|
Allowance as a percent of nonperforming originated loans
|
|
|
61
|
%
|
|
|
60
|
%
|
Allowance as a percent of nonperforming originated loans, net of
impaired originated loans for which the full loss has been
charged-off
|
|
|
79
|
%
|
|
|
70
|
%
|
Economic conditions in the Corporations markets, all
within Michigan, were generally less favorable than those
nationwide during 2010. Economic challenges remain in Michigan
and are expected to continue in 2011. Accordingly, management
believes net loan losses, delinquencies and nonperforming loans
will remain at elevated levels during 2011.
DEPOSITS
Total deposits at December 31, 2010 were
$4.33 billion, an increase of $914 million, or 27%,
from total deposits at December 31, 2009 of
$3.42 billion. Total deposits increased $439 million,
or 15%, during 2009. The increase in total deposits in 2010 was
primarily attributable to $693 million of deposits acquired
in the OAK transaction at the acquisition date. In addition to
the increase in deposits related to the OAK acquisition, the
Corporation experienced an increase in customer deposits of
$221 million.
The Corporations average deposit balances and average
rates paid on deposits for the past three years are included in
Table 9. Average total deposits in 2010 were $4.02 billion,
an increase of $821.8 million, or 25.7%, over average
deposits in 2009. Average total deposits in 2009 were
$3.20 billion, an increase of $271.1 million, or 9.3%,
over average deposits in 2008. There was no significant change
in the mix of average deposits during 2010 or 2009. At
December 31, 2010, the Corporation had $163.3 million
in brokered deposits that were acquired in the OAK acquisition.
The Corporation intends to use its excess liquidity to pay off
brokered deposits as they mature with $85.5 million,
$36.3 million, $34.3 million and $7.2 million of
brokered deposits maturing in 2011, 2012, 2013 and 2014 and
thereafter, respectively. The Corporation did not have any
brokered deposits at December 31, 2009 or 2008.
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, the Corporations financial strength and a
general trend in customers holding more liquid assets, resulted
in the Corporation experiencing a significant increase in
deposits during 2010.
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 Chemical Financial Advisor program,
offers a wide array of mutual funds, annuity products and
marketable securities through an alliance with an independent,
registered broker/dealer. During 2010 and 2009, customers
purchased $88.8 million and $110.0 million,
respectively, of annuity products, mutual fund and other
investments through the Chemical Financial Advisor program.
27
Table 8 presents the maturity distribution of time deposits of
$100,000 or more at December 31, 2010. Time deposits of
$100,000 or more totaled $508.2 million and represented
11.7% of total deposits at December 31, 2010.
TABLE 8.
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR
MORE
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
Within 3 months
|
|
$
|
129,989
|
|
|
|
26
|
%
|
After 3 but within 6 months
|
|
|
67,330
|
|
|
|
13
|
|
After 6 but within 12 months
|
|
|
111,903
|
|
|
|
22
|
|
After 12 months
|
|
|
198,974
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
508,196
|
|
|
|
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
$242.7 million at December 31, 2010,
$240.6 million at December 31, 2009 and
$233.7 million at December 31, 2008 and were comprised
solely of securities sold under agreements to repurchase at
these dates. A summary of short-term borrowings for 2010, 2009
and 2008 is included in Note 10 to the consolidated
financial statements.
Long-term borrowings, comprised solely of FHLB advances, were
$74.1 million at December 31, 2010 and
$90.0 million at December 31, 2009. Long-term FHLB
advances are borrowings that are generally used to fund loans
and a portion of the investment securities portfolio. At
December 31, 2010, long-term FHLB advances that will mature
in 2011 totaled $31.1 million. A summary of FHLB advances
outstanding at December 31, 2010 and 2009 is included in
Note 11 to the consolidated financial statements.
28
CONTRACTUAL
OBLIGATIONS AND CREDIT RELATED COMMITMENTS
The Corporation has various financial obligations, including
contractual obligations and commitments, which may require
future cash payments. The following schedule summarizes the
Corporations noncancelable contractual obligations and
future required minimum payments at December 31, 2010.
Refer to Notes 9, 10, 11 and 19 to the consolidated
financial statements for a further discussion of these
contractual obligations.
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
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*
|
|
$
|
2,738,719
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,738,719
|
|
Certificates of deposit with a stated maturity*
|
|
|
909,078
|
|
|
|
491,721
|
|
|
|
102,610
|
|
|
|
89,637
|
|
|
|
1,593,046
|
|
Short-term borrowings*
|
|
|
242,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,703
|
|
FHLB advances long-term*
|
|
|
31,073
|
|
|
|
36,792
|
|
|
|
6,265
|
|
|
|
|
|
|
|
74,130
|
|
Commitment to fund low income housing partnerships
|
|
|
3,323
|
|
|
|
599
|
|
|
|
69
|
|
|
|
81
|
|
|
|
4,072
|
|
Commitment to fund a private equity capital investment
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
880
|
|
Operating leases and noncancelable contracts
|
|
|
7,884
|
|
|
|
9,646
|
|
|
|
540
|
|
|
|
|
|
|
|
18,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
3,933,660
|
|
|
$
|
538,758
|
|
|
$
|
109,484
|
|
|
$
|
89,718
|
|
|
$
|
4,671,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Deposits and borrowings exclude accrued interest. |
The Corporation also has credit related commitments that may
impact liquidity. The following schedule summarizes the
Corporations credit related commitments and expiration
dates by period at December 31, 2010. 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 19 to the consolidated financial statements for a
further discussion of these obligations.
Credit
Related Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
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
|
|
$
|
407,881
|
|
|
$
|
72,259
|
|
|
$
|
72,956
|
|
|
$
|
71,164
|
|
|
$
|
624,260
|
|
Loan commitments
|
|
|
159,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,040
|
|
Standby letters of credit
|
|
|
39,364
|
|
|
|
1,693
|
|
|
|
3,784
|
|
|
|
10
|
|
|
|
44,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit related commitments
|
|
$
|
606,285
|
|
|
$
|
73,952
|
|
|
$
|
76,740
|
|
|
$
|
71,174
|
|
|
$
|
828,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDENDS
The Corporations annual cash dividends paid per common
share over the past five years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Annual Cash Dividend (per common share)
|
|
$
|
0.80
|
|
|
$
|
1.18
|
|
|
$
|
1.18
|
|
|
$
|
1.14
|
|
|
$
|
1.10
|
|
The Corporation has paid regular cash dividends every quarter
since it began operating as a bank holding company in 1973. 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.
29
CAPITAL
Capital supports current operations and provides the foundation
for future growth and expansion. Total shareholders equity
was $560.1 million at December 31, 2010, an increase
of $85.8 million, or 18.1%, from total shareholders
equity of $474.3 million at December 31, 2009. The
significant increase in shareholders equity during 2010
was attributable to the issuance of approximately
3.5 million shares of common stock related to the OAK
acquisition on April 30, 2010, which increased
shareholders equity by $83.7 million. Book value per
common share at December 31, 2010 and 2009 was $20.41 and
$19.85, respectively.
Shareholders equity decreased $17.2 million in 2009,
with $18.2 million of the decrease attributable to cash
dividends paid to shareholders exceeding net income of the
Corporation.
The ratio of shareholders equity to total assets was 10.7%
at December 31, 2010, compared to 11.2% at
December 31, 2009 and 12.7% at December 31, 2008. The
Corporations tangible equity to assets ratio was 8.6%,
9.6% and 11.0% at December 31, 2010, 2009 and 2008,
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, 2010, as shown in the
following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
Risk-Based
|
|
|
Leverage
|
|
Capital Ratios
|
|
|
Ratio
|
|
Tier 1
|
|
Total
|
|
Chemical Financial Corporations capital ratios
|
|
|
8.4
|
%
|
|
|
11.6
|
%
|
|
|
12.9
|
%
|
Chemical Banks capital ratios
|
|
|
8.2
|
|
|
|
11.4
|
|
|
|
12.7
|
|
Regulatory capital ratios minimum requirements
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
8.0
|
|
As of December 31, 2010, 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 20 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.
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, 2010, there were 500,000
remaining shares available for repurchase under the
Corporations stock repurchase programs.
During 2008, 38,416 shares 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 2010 or 2009.
30
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.
Net interest income (FTE) in 2010, 2009 and 2008 was
$175.5 million, $150.3 million and
$147.6 million, respectively. 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
$4.35 million, $2.90 million and $2.37 million
for 2010, 2009 and 2008, respectively. These adjustments were
computed using a 35% federal income tax rate. The increase in
2010 was attributable to higher interest income on tax-exempt
loans and securities.
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 second quarter of
2008 and 175 basis points in the fourth quarter of 2008 to
end the year at 3.25%. During 2009 and 2010, the prime interest
rate remained at 3.25%.
Net interest income (FTE) in 2010 of $175.5 million was
$25.2 million, or 16.7%, higher than net interest income
(FTE) in 2009 of $150.3 million. The increase in net
interest income (FTE) in 2010 primarily resulted from an
increase in the average volume of interest-earning assets, which
was largely attributable to the acquisition of OAK on
April 30, 2010. The average volume of interest-earning
assets in 2010 increased $771.0 million, or 20.0%, compared
to 2009. Over the same time frame, net interest margin decreased
11 basis points from 3.91% in 2009 to 3.80% in 2010. The
average yield on interest-earning assets decreased 44 basis
points to 4.65% in 2010, from 5.09% in 2009. The declines in net
interest margin and the yield on interest-earning assets during
2010, compared to 2009, was partially attributable to the
Corporations decision to maintain a higher level of
liquidity during the twelve months ended December 31, 2010.
The Corporations average cash deposits held at the Federal
Reserve Bank of Chicago (FRB) during 2010 were
$375.4 million, compared to $195.7 million during
2009. These cash deposits earned approximately 25 basis
points throughout 2010 and 2009. The decrease in the average
yield on interest-earning assets was also partially attributable
to a reduction in the yield on taxable investment securities to
1.84% in 2010, compared to 2.89% in 2009. The decrease in yield
on taxable investment securities was primarily attributable to
the Corporation increasing 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, 2010, the Corporation held $325 million
in variable rate investment securities, compared to
$297 million at December 31, 2009. The average cost of
interest-bearing liabilities decreased 44 basis points to 1.07%
in 2010, from 1.51% in 2009. The decrease in the cost of
interest-bearing liabilities was attributable to the lag effect
of declines in market interest rates beginning in 2008 in
addition to the Corporation utilizing its excess liquidity to
pay-off maturing higher-rate FHLB advances.
Net interest income (FTE) in 2009 of $150.3 million was
$2.7 million, or 1.8%, higher than net interest income
(FTE) in 2008 of $147.6 million. 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, with the decline during 2009, compared to
2008, 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
31
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.
The Corporations balance sheet has historically been
liability sensitive, meaning that interest-bearing liabilities
have 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. However, during 2009 and 2010, the Corporation
became more asset sensitive as it increased its holdings of
variable rate investment securities and cash deposits at the FRB
to lessen the impact on net interest income and net interest
margin of rising interest rates. At December 31, 2010,
approximately 44% of the Corporations investment
securities were variable rate compared to 41% at
December 31, 2009 and 28% at December 31, 2008. In
addition, the percentage of variable rate loans in the
Corporations loan portfolio increased in 2010 due
primarily to the acquisition of OAK. At December 31, 2010
and 2009, approximately 28% and 20%, respectively, of the
Corporations loans were at variable interest rates.
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 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 2010 and 2009, the Corporation experienced
increases in deposits during 2010 and 2009 due to the
acquisition of OAK in 2010, the Corporations increased
efforts to expand its deposit relationships with existing
customers, the Corporations financial strength and a
general trend in customers holding more liquid assets in 2009
and 2010. Total deposits increased $913.6 million, or
26.7%, during the twelve months ended December 31, 2010,
and $439.3 million, or 14.7%, during the twelve months
ended December 31, 2009.
Table 9 presents for 2010, 2009 and 2008 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.
32
TABLE 9. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND
EFFECTIVE YIELDS AND RATES* (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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**
|
|
$
|
3,449,562
|
|
|
$
|
194,035
|
|
|
|
5.62
|
%
|
|
$
|
2,997,277
|
|
|
$
|
173,456
|
|
|
|
5.79
|
%
|
|
$
|
2,873,151
|
|
|
$
|
181,568
|
|
|
|
6.32
|
%
|
Taxable investment securities
|
|
|
618,847
|
|
|
|
11,363
|
|
|
|
1.84
|
|
|
|
532,844
|
|
|
|
15,385
|
|
|
|
2.89
|
|
|
|
511,109
|
|
|
|
21,793
|
|
|
|
4.26
|
|
Tax-exempt investment securities
|
|
|
139,377
|
|
|
|
7,563
|
|
|
|
5.43
|
|
|
|
93,350
|
|
|
|
5,425
|
|
|
|
5.81
|
|
|
|
69,076
|
|
|
|
4,309
|
|
|
|
6.24
|
|
Other securities
|
|
|
25,463
|
|
|
|
766
|
|
|
|
3.01
|
|
|
|
22,128
|
|
|
|
821
|
|
|
|
3.71
|
|
|
|
22,141
|
|
|
|
1,167
|
|
|
|
5.27
|
|
Federal funds sold and interest-bearing deposits with
unaffiliated banks and others
|
|
|
384,763
|
|
|
|
1,055
|
|
|
|
0.27
|
|
|
|
201,407
|
|
|
|
541
|
|
|
|
0.27
|
|
|
|
75,134
|
|
|
|
1,865
|
|
|
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
4,618,012
|
|
|
|
214,782
|
|
|
|
4.65
|
|
|
|
3,847,006
|
|
|
|
195,628
|
|
|
|
5.09
|
|
|
|
3,550,611
|
|
|
|
210,702
|
|
|
|
5.93
|
|
Less: Allowance for loan losses
|
|
|
88,757
|
|
|
|
|
|
|
|
|
|
|
|
70,028
|
|
|
|
|
|
|
|
|
|
|
|
42,185
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash due from banks
|
|
|
111,388
|
|
|
|
|
|
|
|
|
|
|
|
91,829
|
|
|
|
|
|
|
|
|
|
|
|
96,094
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
63,329
|
|
|
|
|
|
|
|
|
|
|
|
53,054
|
|
|
|
|
|
|
|
|
|
|
|
50,222
|
|
|
|
|
|
|
|
|
|
Interest receivable and other assets
|
|
|
209,338
|
|
|
|
|
|
|
|
|
|
|
|
144,368
|
|
|
|
|
|
|
|
|
|
|
|
129,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,913,310
|
|
|
|
|
|
|
|
|
|
|
$
|
4,066,229
|
|
|
|
|
|
|
|
|
|
|
$
|
3,784,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
780,889
|
|
|
$
|
1,792
|
|
|
|
0.23
|
%
|
|
$
|
559,026
|
|
|
$
|
2,538
|
|
|
|
0.45
|
%
|
|
$
|
509,256
|
|
|
$
|
5,226
|
|
|
|
1.03
|
%
|
Savings deposits
|
|
|
1,085,793
|
|
|
|
4,244
|
|
|
|
0.39
|
|
|
|
925,588
|
|
|
|
6,230
|
|
|
|
0.67
|
|
|
|
792,449
|
|
|
|
10,804
|
|
|
|
1.36
|
|
Time deposits
|
|
|
1,481,722
|
|
|
|
29,859
|
|
|
|
2.02
|
|
|
|
1,169,201
|
|
|
|
30,732
|
|
|
|
2.63
|
|
|
|
1,084,531
|
|
|
|
38,733
|
|
|
|
3.57
|
|
Securities sold under agreements to repurchase
|
|
|
249,731
|
|
|
|
650
|
|
|
|
0.26
|
|
|
|
232,185
|
|
|
|
906
|
|
|
|
0.39
|
|
|
|
196,413
|
|
|
|
2,144
|
|
|
|
1.09
|
|
FHLB advances short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,593
|
|
|
|
79
|
|
|
|
0.92
|
|
FHLB advances long-term
|
|
|
87,051
|
|
|
|
2,765
|
|
|
|
3.18
|
|
|
|
116,050
|
|
|
|
4,881
|
|
|
|
4.21
|
|
|
|
120,171
|
|
|
|
6,097
|
|
|
|
5.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
3,685,186
|
|
|
|
39,310
|
|
|
|
1.07
|
|
|
|
3,002,050
|
|
|
|
45,287
|
|
|
|
1.51
|
|
|
|
2,711,413
|
|
|
|
63,083
|
|
|
|
2.33
|
|
Noninterest-bearing deposits
|
|
|
668,826
|
|
|
|
|
|
|
|
|
|
|
|
541,596
|
|
|
|
|
|
|
|
|
|
|
|
538,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowed funds
|
|
|
4,354,012
|
|
|
|
|
|
|
|
|
|
|
|
3,543,646
|
|
|
|
|
|
|
|
|
|
|
|
3,249,538
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
28,479
|
|
|
|
|
|
|
|
|
|
|
|
39,549
|
|
|
|
|
|
|
|
|
|
|
|
25,979
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
530,819
|
|
|
|
|
|
|
|
|
|
|
|
483,034
|
|
|
|
|
|
|
|
|
|
|
|
509,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
4,913,310
|
|
|
|
|
|
|
|
|
|
|
$
|
4,066,229
|
|
|
|
|
|
|
|
|
|
|
$
|
3,784,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread (Average yield earned minus average rate
paid)
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE)
|
|
|
|
|
|
$
|
175,472
|
|
|
|
|
|
|
|
|
|
|
$
|
150,341
|
|
|
|
|
|
|
|
|
|
|
$
|
147,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Net interest income (FTE)/total average interest-earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
33
TABLE 10.
VOLUME AND RATE VARIANCE ANALYSIS* (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009
|
|
|
2009 Compared to 2008
|
|
|
|
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
|
|
$
|
25,386
|
|
|
$
|
(4,807
|
)
|
|
$
|
20,579
|
|
|
$
|
7,814
|
|
|
$
|
(15,926
|
)
|
|
$
|
(8,112
|
)
|
Taxable investment/other securities
|
|
|
2,327
|
|
|
|
(6,404
|
)
|
|
|
(4,077
|
)
|
|
|
766
|
|
|
|
(7,520
|
)
|
|
|
(6,754
|
)
|
Tax-exempt investment securities
|
|
|
2,526
|
|
|
|
(388
|
)
|
|
|
2,138
|
|
|
|
1,436
|
|
|
|
(320
|
)
|
|
|
1,116
|
|
Federal funds sold and interest-bearing deposits with
unaffiliated banks and others
|
|
|
506
|
|
|
|
8
|
|
|
|
514
|
|
|
|
1,307
|
|
|
|
(2,631
|
)
|
|
|
(1,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in interest income on interest-earning assets
|
|
|
30,745
|
|
|
|
(11,591
|
)
|
|
|
19,154
|
|
|
|
11,323
|
|
|
|
(26,397
|
)
|
|
|
(15,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Interest Expense on Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
799
|
|
|
|
(1,545
|
)
|
|
|
(746
|
)
|
|
|
615
|
|
|
|
(3,303
|
)
|
|
|
(2,688
|
)
|
Savings deposits
|
|
|
783
|
|
|
|
(2,769
|
)
|
|
|
(1,986
|
)
|
|
|
1,365
|
|
|
|
(5,939
|
)
|
|
|
(4,574
|
)
|
Time deposits
|
|
|
7,148
|
|
|
|
(8,021
|
)
|
|
|
(873
|
)
|
|
|
4,177
|
|
|
|
(12,178
|
)
|
|
|
(8,001
|
)
|
Short-term borrowings
|
|
|
64
|
|
|
|
(320
|
)
|
|
|
(256
|
)
|
|
|
255
|
|
|
|
(1,572
|
)
|
|
|
(1,317
|
)
|
FHLB advances
|
|
|
(1,067
|
)
|
|
|
(1,049
|
)
|
|
|
(2,116
|
)
|
|
|
(204
|
)
|
|
|
(1,012
|
)
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in interest expense on interest-bearing liabilities
|
|
|
7,727
|
|
|
|
(13,704
|
)
|
|
|
(5,977
|
)
|
|
|
6,208
|
|
|
|
(24,004
|
)
|
|
|
(17,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in Net Interest Income (FTE)
|
|
$
|
23,018
|
|
|
$
|
2,113
|
|
|
$
|
25,131
|
|
|
$
|
5,115
|
|
|
$
|
(2,393
|
)
|
|
$
|
2,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
PROVISION
FOR LOAN LOSSES
The provision for loan losses (provision) is an increase to the
allowance to provide for probable losses inherent in the
originated loan portfolio and for impairment of pools of
acquired loans that results from the Corporation experiencing a
decrease in cash flows of acquired loans compared to expected
cash flows estimated at the acquisition date. The level of the
provision reflects managements assessment of the adequacy
of the allowance. The Corporation did not recognize any
provision related to the acquired portfolio during 2010 as there
have been no significant changes in expected cash flows compared
to cash flows estimated at the date of acquisition.
The provision was $45.6 million in 2010, $59.0 million
in 2009 and $49.2 million in 2008. The Corporation
experienced net loan charge-offs of originated loans of
$36.9 million in 2010, $35.2 million in 2009 and
$31.6 million in 2008. 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,
$0.3 million in 2009 and $0.2 million in 2010 through
the sale of collateral securing the loan. Net loan charge-offs
of originated loans as a percentage of average loans were 1.07%
in 2010, 1.18% in 2009 and 1.10% in 2008. The level of net loan
charge-offs reflects the general deterioration in credit quality
across the loan portfolio. Net loan charge-offs of commercial,
real estate commercial and real estate construction and land
development loans totaled $20.4 million in 2010, compared
to $26.5 million in 2009 and $25.1 million in 2008 and
represented 55% of total net loan charge-offs during 2010,
compared to 75% in 2009 and 80% in 2008. The commercial loan
portfolios net loan charge-offs in 2010 were not
concentrated in any one industry or borrower. Net loan
charge-offs of residential real estate and consumer loans
totaled $16.5 million in 2010, compared to
$8.7 million in 2009 and $6.5 million in 2008.
The Corporations provision of $45.6 million in 2010
was $8.7 million higher than 2010 net loan charge-offs of
$36.9 million, although $13.4 million lower than the
provision for loan losses in 2009 of $59.0 million. The
level of the provision in 2010 was reflective of the credit
quality of the originated portfolio that included slightly
higher net loan charge-offs, modest decreases in nonaccrual
loans and loans past due 90 days or more and no significant
changes in risk grade categories of the commercial loan
portfolio. The slight increase in net loan charge-offs in 2010,
compared to 2009, was partially attributable to a continued
decline in
34
real estate values within the State of Michigan during 2010, as
evidenced by lower appraised values of real estate and lower
sales prices of real estate. It is managements belief that
the overall credit quality of the Corporations loan
portfolio during the three years ended December 31, 2010
was adversely impacted by the economic environment in the State
of Michigan, with the state unemployment rate at 11.7%, compared
to 9.4% nationwide, at December 31, 2010. The
Corporations originated loan portfolio has 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 2010 and
2009.
NONINTEREST
INCOME
Noninterest income totaled $42.5 million in 2010,
$41.1 million in 2009 and $41.2 million in 2008.
Noninterest income increased $1.4 million, or 3.3%, in 2010
compared to 2009 and was consistent in 2009 compared to 2008.
Noninterest income as a percentage of net revenue (net interest
income plus noninterest income) was 19.9% in 2010, 21.8% in 2009
and 22.1% in 2008.
The following schedule includes the major components of
noninterest income during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service charges on deposit accounts
|
|
$
|
18,562
|
|
|
$
|
19,116
|
|
|
$
|
20,048
|
|
Wealth management revenue
|
|
|
10,106
|
|
|
|
9,273
|
|
|
|
10,625
|
|
Electronic banking fees
|
|
|
5,389
|
|
|
|
4,023
|
|
|
|
3,341
|
|
Mortgage banking revenue
|
|
|
3,925
|
|
|
|
4,412
|
|
|
|
1,836
|
|
Other fees for customer services
|
|
|
2,837
|
|
|
|
2,454
|
|
|
|
2,511
|
|
Insurance commissions
|
|
|
1,373
|
|
|
|
1,259
|
|
|
|
1,042
|
|
Investment securities gains
|
|
|
|
|
|
|
95
|
|
|
|
1,722
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
Other
|
|
|
280
|
|
|
|
487
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Income
|
|
$
|
42,472
|
|
|
$
|
41,119
|
|
|
$
|
41,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts were $18.6 million in
2010, $19.1 million in 2009 and $20.0 million in 2008.
The decline of $0.5 million, or 2.9%, in 2010, compared to
2009, was primarily attributable to new federal banking
regulations that took effect on August 15, 2010, which
require customers to provide authorization (opt in) to Chemical
Bank to pay overdrafts on ATM and debit card transactions, that
was partially offset by increased service charges attributable
to the acquisition of OAK. The decline of $0.9 million, or
4.6%, in 2009, compared to 2008, was 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.
Wealth management revenue was $10.1 million in 2010,
$9.3 million in 2009 and $10.6 million in 2008. The
increase of $0.8 million, or 9.0%, in 2010, compared to
2009, resulted primarily from improving equity market
performance, as well as growth in new assets, both of which led
to increased assets under management. Average assets under
management in the Wealth Management department of
$2.01 billion in 2010 represented an increase of
approximately $200 million in average assets under
management, compared to 2009. Wealth management revenue also
includes fees from sales of investment products offered through
the Chemical Financial Advisors program. Fees from this program
totaled $2.3 million in both 2010 and 2009 and
$2.8 million in 2008. The declines in revenue in both 2010
and 2009, compared to 2008, resulted primarily from lower
program sales of fixed annuity products, as those investments
became less attractive to investors due to declining interest
rates for these products over the past two years.
Electronic banking fees were $5.4 million in 2010,
$4.0 million in 2009 and $3.3 million in 2008.
Electronic banking fees increased $1.4 million, or 34.0%,
in 2010, compared to 2009, due primarily to increased customer
debit card activity that was mostly attributable to the
acquisition of OAK. Electronic banking fees increased
$0.7 million, or 20.4%, in 2009, compared to 2008, due
primarily to an increase in the ATM user fee for non-customers.
Mortgage banking revenue (MBR) includes revenue from
originating, selling and servicing real estate residential loans
for the secondary market. MBR was $3.9 million in 2010,
$4.4 million in 2009 and $1.8 million in 2008. The
decrease in mortgage banking revenue in 2010, compared to 2009,
was primarily due to a decrease in the volume of loans sold in
the secondary market compared to 2009 that was only partially
offset by an increase in the average net gain per loan
associated with the sale of these loans. The Corporation
originated $453 million of real estate residential loans
during 2010, of which $276 million, or 61%, were sold in
the secondary market, compared to the origination of
$467 million of real estate residential loans during 2009,
of which $361 million, or 77%, were sold in the secondary
market. The reduction in the volume of loans sold in the
secondary market in 2010, compared to
35
2009, was primarily attributable to the Corporation originating
$71 million of fifteen year fixed-interest rate loans that
it held in its portfolio as opposed to selling them in the
secondary market as has been its general practice. In 2008, the
Corporation originated $341 million of real estate
residential loans, of which $145 million, or 43%, were sold
in the secondary market. At December 31, 2010, the
Corporation was servicing $892 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 $755 million at December 31, 2009. The
increase in the Corporations servicing portfolio in 2010
was primarily due to the acquisition of OAK and the continued
strong volume of loans sold in the secondary market with
servicing retained.
The Corporation sells loans in the secondary market on both a
servicing retained and servicing released basis. The sale of
real estate residential loans in the secondary market includes
the Corporation entering into residential mortgage loan sale
agreements with buyers in the normal course of business. The
agreements contain provisions that include various
representations and warranties regarding the origination and
characteristics of the mortgage loans that indemnify the buyer
against losses arising from inadequate underwriting. Inadequate
underwriting examples include, but are not limited to,
insufficient or lack of verification of the borrowers
income or financial status, validity of the lien securing the
loan, absence of delinquent taxes, liens against the property
securing the loan, substandard appraisals and validity of
customer information. The recourse of the buyer may result in
either indemnification of the loss incurred by the buyer or a
requirement for the Corporation to repurchase the loan which the
buyer believes does not comply with the representations included
in the loan sale agreement. If the buyer believes that a
representation has been breached, it notifies the Corporation.
Upon receipt of this notification, the Corporation has an
opportunity to provide information that may resolve the
buyers claim. The Corporation primarily sells residential
mortgage loans to Freddie Mac and Fannie Mae (GSEs) who include
the residential mortgage loans in GSE-guaranteed mortgage
securitizations. Repurchase demands and loss indemnifications
received by the Corporation are reviewed by a senior officer on
an individual loan by loan basis to validate the claim made by
the buyer. During 2010, the Corporation was required to
repurchase $0.6 million of loans sold in the secondary
market and incurred $0.2 million of expense related to the
indemnification of losses incurred by the buyers on three
residential mortgage loans. During 2008 and 2009, the
Corporation was required to repurchase $2.7 million of
loans that had been sold in the secondary market and incurred
loan losses of $0.6 million on these loans and incurred an
additional $0.2 million of expense related to the
indemnification of buyer losses. The majority of the loans
required to be repurchased in 2008 and 2009 were attributable to
borrower misrepresentations obtained at origination. The
Corporation established a $0.25 million estimated liability
at December 31, 2010 for probable losses expected to be
incurred from loans previously sold in the secondary market.
This estimate was based on trends in repurchase and
indemnification requests, actual loss experience, known and
inherent risks in the sale of loans in the secondary market and
current economic conditions. At December 31, 2010, the
Corporation had eleven unresolved repurchase demands/buyer
indemnification loss requests.
Other fees for customer services were $2.8 million in 2010
and approximately $2.5 million in both 2009 and 2008. Other
fees for customer services increased $0.3 million, or
15.6%, in 2010, compared to 2009, due primarily to increases in
letter of credit fees and annual home equity line of credit
fees. In general, these fees rose, primarily due to the
acquisition of OAK. 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 2009, the Corporation outsourced the
processing of bank money orders to a third-party vendor, which
paid the Corporation fees based on the level of outstanding bank
money orders.
Insurance commissions were $1.4 million in 2010,
$1.2 million in 2009 and $1.0 million in 2008.
Insurance commissions increased $0.2 million, or 9.1%, in
2010, compared to 2009, and $0.2 million, or 20.8%, in 2009
from 2008, due to higher closing fees and title insurance
premium income from increases in mortgage loan closing activity.
The increases in mortgage loan closing activity occurred due to
lower market interest rates on residential real estate loans.
In 2009, the Corporation realized a $0.1 million gain
related to the sale of the remaining balance of its 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 its MasterCard Class B shares, which had
no cost basis. The Corporation had no investment securities
gains in 2010.
In 2008, the Corporation recognized a $0.4 million OTTI
loss on a Lehman corporate bond in the Corporations
available-for-sale
investment securities portfolio. The Corporation had no OTTI
losses during 2010 or 2009.
Noninterest income, excluding revenue from investment securities
net gains and losses, was $42.5 million in 2010,
$41.0 million in 2009 and $39.9 million in 2008.
Noninterest income, excluding these items, increased
$1.5 million, or 3.5%, in 2010, compared to 2009, and
$1.1 million, or 2.8%, in 2009, compared to 2008. The
increase in 2010, compared to 2009, was primarily attributable
to increases in electronic banking fees and wealth management
revenue that were partially offset by decreases in service
charges on deposit accounts and mortgage banking revenue. The
increase in 2009, compared to 2008, was primarily attributable
to increases in electronic banking fees, insurance commissions
and mortgage banking revenue that were partially offset by
decreases in service charges on deposit accounts and wealth
management revenue.
36
OPERATING
EXPENSES
Total operating expenses were $136.8 million in 2010,
$117.6 million in 2009 and $109.1 million in 2008.
Total operating expenses as a percentage of total average assets
were 2.78% in 2010, 2.89% in 2009 and 2.88% in 2008.
The following schedule includes the major categories of
operating expenses during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Salaries and wages
|
|
$
|
56,750
|
|
|
$
|
49,227
|
|
|
$
|
48,713
|
|
|
|
Employee benefits
|
|
|
11,666
|
|
|
|
10,991
|
|
|
|
10,514
|
|
|
|
Equipment and software
|
|
|
13,446
|
|
|
|
9,723
|
|
|
|
9,230
|
|
|
|
Occupancy
|
|
|
11,491
|
|
|
|
10,359
|
|
|
|
10,221
|
|
|
|
FDIC insurance premiums
|
|
|
7,388
|
|
|
|
7,013
|
|
|
|
899
|
|
|
|
Professional fees
|
|
|
5,589
|
|
|
|
4,165
|
|
|
|
3,554
|
|
|
|
Loan and collection costs
|
|
|
4,537
|
|
|
|
3,056
|
|
|
|
1,592
|
|
|
|
Outside processing/service fees
|
|
|
4,534
|
|
|
|
3,231
|
|
|
|
3,219
|
|
|
|
Other real estate and repossessed asset expenses
|
|
|
3,660
|
|
|
|
6,031
|
|
|
|
4,680
|
|
|
|
Postage and courier
|
|
|
3,115
|
|
|
|
2,951
|
|
|
|
3,169
|
|
|
|
Advertising and marketing
|
|
|
3,054
|
|
|
|
2,396
|
|
|
|
2,492
|
|
|
|
Telephone
|
|
|
1,768
|
|
|
|
1,840
|
|
|
|
2,186
|
|
|
|
Supplies
|
|
|
1,740
|
|
|
|
1,526
|
|
|
|
1,482
|
|
|
|
Intangible asset amortization
|
|
|
1,705
|
|
|
|
719
|
|
|
|
1,543
|
|
|
|
Non-loan losses
|
|
|
540
|
|
|
|
291
|
|
|
|
1,473
|
|
|
|
Other
|
|
|
5,819
|
|
|
|
4,091
|
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
136,802
|
|
|
$
|
117,610
|
|
|
$
|
109,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent staff (at December 31)
|
|
|
1,608
|
|
|
|
1,427
|
|
|
|
1,416
|
|
|
|
Efficiency ratio
|
|
|
62.8
|
%
|
|
|
61.4
|
%
|
|
|
57.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses were $136.8 million in 2010, an increase
of $19.2 million, or 16.3%, compared to 2009. The increase
in 2010, compared to 2009, was primarily due to the acquisition
of OAK, which resulted in increases in personnel costs,
equipment and software expense, occupancy expense, professional
fees, outside processing/service fees, advertising and marketing
expenses, intangible asset amortization and other expenses. The
increase in operating expenses attributable to the OAK
acquisition was partially offset by a significant decrease in
other real estate and repossessed asset expenses. Operating
expenses were $117.6 million in 2009, an increase of
$8.5 million, or 7.8%, compared to 2008. The increase in
operating expenses in 2009, compared to 2008, was primarily due
to increases in personnel costs, FDIC insurance premiums, loan
and collection costs and other real estate and repossessed asset
expenses that were partially offset by decreases in intangible
asset amortization and non-loan losses.
Salaries and wages were $56.7 million in 2010,
$49.2 million in 2009 and $48.7 million in 2008.
Salaries and wages expense in 2010 was $7.5 million, or
15.3%, higher than in 2009, due primarily to additional
employees related to the acquisition of OAK and an increase in
performance based awards and incentives. 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, which were 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.
Employee benefits expense was $11.7 million in 2010,
$11.0 million in 2009 and $10.5 million in 2008.
Employee benefits expense increased $0.7 million, or 6.1%
in 2010, compared to 2009, due to higher payroll taxes
attributable to both higher salaries and wages attributable to
the acquisition of OAK and an increase in performance based
awards and incentives, as well as other benefit costs
attributable to the acquisition of OAK. 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.
Compensation expenses, which include salaries and wages and
employee benefits, as a percentage of total operating expenses
were 50.0% in 2010, 51.2% in 2009 and 54.3% in 2008.
Equipment and software expense was $13.4 million in 2010,
$9.7 million in 2009 and $9.2 million in 2008.
Equipment and software expense increased $3.7 million, or
38.3%, in 2010, compared to 2009, primarily due to the
acquisition of OAK, including information technology conversion
costs of $1.4 million. The increase in equipment and
software expense in 2010 compared to 2009, was also due to
higher equipment depreciation expense and software maintenance
expense related to information technology initiatives. Equipment
and software expense increased $0.5 million, or 5.3%, in
2009, compared to 2008, primarily due to higher
37
depreciation expense associated with equipment upgrades
completed in 2008. Equipment and software depreciation expense
included in equipment expense was $5.0 million,
$4.0 million and $3.5 million in 2010, 2009 and 2008,
respectively.
Occupancy expense was $11.5 million in 2010,
$10.4 million in 2009 and $10.2 million in 2008.
Occupancy expense increased $1.1 million, or 10.9%, in
2010, compared to 2009, primarily due to the OAK acquisition,
which increased the Corporations branch network by
thirteen branches at the acquisition date. Occupancy expense
increased $0.2 million, or 1.4%, in 2009, compared to 2008,
due to slight increases in building depreciation expense and
property taxes on real estate used for bank operations.
Depreciation expense on buildings included in occupancy expense
was $2.8 million, $2.4 million and $2.3 million
in 2010, 2009 and 2008, respectively.
FDIC insurance premiums were $7.4 million in 2010,
$7.0 million in 2009 and $0.9 million in 2008. The
$0.4 million increase in FDIC premiums in 2010, compared to
2009, was due to an increase in deposits as a result of the OAK
acquisition and growth in customer core deposits insured by the
FDIC. These increases were partially offset by the lack of a
FDIC special assessment in 2010. In 2009, the Corporations
FDIC premiums increased $6.1 million, compared to 2008, due
to an industry-wide FDIC special assessment which resulted in
the Corporation recognizing $1.8 million of additional
premium expense, an increase in FDIC assessment rates, a
10 basis point assessment paid on covered transaction
accounts exceeding $0.25 million under the TAGP during
2009, the loss of FDIC premium assessment credits which were
fully utilized as of December 31, 2008 and growth in
customer core deposits insured by the FDIC.
Professional fees were $5.6 million in 2010,
$4.2 million in 2009 and $3.6 million in 2008.
Professional fees were $1.4 million, or 34.2%, higher in
2010 than in 2009 due primarily to an increase in consulting
expenses attributable to the acquisition of OAK. 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, which were partially offset by a
decrease in external auditing fees.
Loan and collection expenses were $4.5 million in 2010,
$3.1 million in 2009 and $1.6 million in 2008. These
costs included legal fees, appraisal fees and other costs
recognized in the collection of problem loans. The significant
increases in these expenses in both 2010 and 2009 were
attributable to 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.
Outside processing and service fees were $4.5 million in
2010 and $3.2 million in both 2009 and 2008. Outside
processing and service fees increased $1.3 million, or
40.3% in 2010, compared to 2009, due primarily to additional
outside services expense incurred as a result of transferring
the processing of customer statement printing and mailing from
an in-house process to a third-party vendor. In addition,
internet banking costs increased in 2010 due to growth in the
customer user base.
Other real estate and repossessed asset (ORE) expenses were
$3.7 million in 2010, $6.0 million in 2009 and
$4.7 million in 2008. 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 is transferred
to ORE and net gains/losses from the disposition of ORE. As
property values in Michigan declined in 2008 and 2009, the
Corporation recorded significant write-downs to the carrying
value of ORE to fair value, which were recognized as operating
costs in both of those years. Write-downs and net gains/losses
from dispositions of ORE generated net expense of
$1.3 million in 2010, compared to $3.7 million in 2009
and $2.9 million in 2008. Property taxes on ORE were
$1.0 million in 2010, $1.1 million in 2009 and
$0.6 million in 2008. Other operating costs on ORE were
$1.4 million in 2010 and $1.2 million in both 2009 and
2008.
Advertising and marketing expenses were $3.1 million in
2010, $2.4 million in 2009 and $2.5 million in 2008.
Advertising and marketing expenses increased $0.7 million,
or 27.5%, in 2010, compared to 2009, due primarily to the
acquisition of OAK. The decrease in advertising and marketing
expenses in 2009, compared to 2008, was due to the Corporation
increasing its expenditures for targeted direct mail campaigns
in 2009, which was offset by a reduction in expenditures for
more traditional advertising expenses such as newspaper, radio
and television.
Intangible asset amortization was $1.7 million in 2010,
$0.7 million in 2009 and $1.5 million in 2008.
Intangible asset amortization increased $1.0 million, or
138% in 2010, compared to 2009, due to additional amortization
expense on core deposit intangible assets and non-compete
agreements as a result of the OAK acquisition. Intangible asset
amortization declined $0.8 million, or 53.5%, in 2009,
compared to 2008, due to a number of core deposit intangible
assets becoming fully amortized during the latter half of 2008
and early 2009.
Non-loan losses were $0.5 million in 2010,
$0.3 million in 2009 and $1.5 million in 2008.
Non-loan losses in 2008 included a branch office loss of
$0.8 million.
All other categories of operating expenses were
$12.4 million in 2010, $10.4 million in 2009 and
$11.0 million in 2008. The increase of $2.0 million,
or 19.5%, in all other categories of operating expenses in 2010,
compared to 2009, was primarily attributable to the
38
acquisition of OAK. The decrease of $0.6 million, or 5.2%,
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 Corporations efficiency ratio, which measures total
operating expenses divided by the sum of net interest income
(FTE) and noninterest income, was 62.8% in 2010, 61.4% in 2009
and 57.8% in 2008. The increase in 2010, compared to 2009, was
attributable to higher operating expenses due, in part, to
transaction related costs attributable to the acquisition of
OAK. The increase in 2009, compared to 2008, was attributable to
higher operating expenses.
INCOME TAXES
The Corporations effective federal income tax rate was
26.0% in 2010, 16.3% in 2009 and 29.5% in 2008. 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 2010, 2009 and 2008, no adjustments to the
federal income tax provision were required. The Corporation had
no uncertain tax positions during the three years ended
December 31, 2010. The significant increase in the
Corporations effective federal income tax rate in 2010,
compared to 2009, was due to an increase in the
Corporations pre-tax income and nondeductible acquisition
expenses attributable to the OAK transaction, that were
partially offset by an increase in tax credits and tax exempt
income, also largely due to the OAK transaction.
Tax-exempt income (FTE), net of related nondeductible interest
expense, totaled $10.9 million in 2010, $8.0 million
in 2009 and $6.5 million in 2008. Tax-exempt income (FTE)
as a percentage of total interest income (FTE) was 5.1% in 2010,
4.1% in 2009 and 3.1% in 2008.
Income before income taxes (FTE) was $35.5 million in 2010,
$14.9 million in 2009 and $30.5 million in 2008.
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 sources of liquidity on a
consolidated basis are the deposit base that comes from
consumer, business and municipal customers within the
Corporations local markets, principal payments on loans,
cash held at the FRB, unpledged investment securities
available-for-sale
and federal funds sold. During 2010, total deposits increased
$913.6 million, or 26.7%, compared to an increase of
$439.3 million, or 14.7%, during 2009. The significant
increase in deposits in 2010 was largely attributable to
$693 million of deposits acquired in the OAK transaction.
The Corporations loan-to-deposit ratio decreased to 85.0%
at December 31, 2010 from 87.6% at December 31, 2009.
At December 31, 2010 and 2009, the Corporation had
$440 million and $223 million, respectively, 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, 2010, the Corporation had $135 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 that are
generally secured by real estate residential first lien loans.
The Corporation considers advances from the FHLB as its primary
wholesale source of liquidity. FHLB advances decreased
$15.9 million during 2010 to $74.1 million at
December 31, 2010. At December 31, 2010, the
Corporations additional borrowing availability from the
FHLB, based on its FHLB capital stock and subject to certain
requirements, was $298 million. At December 31, 2010,
if the Corporation acquired an additional $2.1 million of
FHLB capital stock, its borrowing availability from the FHLB
would increase by another $118 million, resulting in
additional borrowing availability from the FHLB of
$416 million. See the Borrowed Funds section of this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Note 11 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,
2010, 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
39
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 2010, Chemical Bank paid $21.3 million in dividends
to the Corporation. The Corporation paid cash dividends to
shareholders of $21.2 million in 2010. The
Corporations cash decreased $2.3 million during 2010
to $5.5 million at December 31, 2010, which it held in
a deposit account at Chemical Bank as of that date. 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. At December 31, 2010, Chemical Bank
could pay dividends totaling $17.5 million 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.
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 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 (base case). At
December 31, 2010 and 2009, 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 and consumer loans. The ALCO regularly monitors the
Corporations forecasted net interest income sensitivity to
ensure that it remains within established limits.
40
A summary of the Corporations interest rate sensitivity at
December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve month interest rate change projection (in basis
points)
|
|
|
−200
|
|
|
|
−100
|
|
|
|
0
|
|
|
|
+100
|
|
|
|
+200
|
|
|
|
|
|
|
|
|
|
|
|
Percent change in net interest income vs. constant rates
|
|
|
(5.3
|
)%
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
1.6
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
At December 31, 2010, 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 1.6% and 2.6%, respectively, relative
to the base case over the next 12 month period, while
decreases in interest rates of 100 and 200 basis points
would result in negative variances in net interest income of
2.6% and 5.3%, respectively, relative to the base case over the
next 12 month period. At December 31, 2009, the 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
decreases in interest rates of 100 and 200 basis points
would result in negative variances in net interest income of
1.6% and 3.0%, respectively, relative to the base case over the
next 12 month period. The likelihood of a decrease in
interest rates beyond 100 basis points at December 31,
2010 and 2009 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 at December 31, 2010 of
$325 million comprised 44% of total investment securities
at that date, compared to $297 million, or 41% of total
investment securities, at December 31, 2009 and
$155 million, or 28% of total investment securities, at
December 31, 2008. In addition, the proportion of variable
rate loans in the Corporations loan portfolio increased in
2010 due primarily to the acquisition of OAK. At
December 31, 2010 and 2009, approximately 28% and 20%,
respectively, of the Corporations loans were at variable
interest rates.
41
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, 2010,
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. Based on this assessment, management has
concluded that, as of December 31, 2010, 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, 2010.
|
|
|
|
|
|
David B. Ramaker
|
|
Lori A. Gwizdala
|
Chairman, Chief Executive Officer
|
|
Executive Vice President, Chief Financial Officer
|
and President
|
|
and Treasurer
|
|
|
|
February 25, 2011
|
|
February 25, 2011
|
42
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, 2010,
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, 2010, 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,
2010 and 2009, 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, 2010, and our report dated February 25,
2011 expressed an unqualified opinion on those consolidated
financial statements.
Detroit, Michigan
February 25, 2011
43
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, 2010 and
2009, 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, 2010.
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, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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, 2010, 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,
2011 expressed an unqualified opinion on the effectiveness of
the Corporations internal control over financial reporting.
Detroit, Michigan
February 25, 2011
44
CONSOLIDATED
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and cash due from banks
|
|
$
|
91,403
|
|
|
$
|
131,383
|
|
Interest-bearing deposits with unaffiliated banks and others
|
|
|
444,762
|
|
|
|
229,326
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
536,165
|
|
|
|
360,709
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale
at fair value
|
|
|
578,610
|
|
|
|
592,521
|
|
Held-to-maturity
(fair value $159,188 at December 31, 2010 and
$125,730 at December 31, 2009)
|
|
|
165,400
|
|
|
|
131,297
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
744,010
|
|
|
|
723,818
|
|
Other securities
|
|
|
27,133
|
|
|
|
22,128
|
|
Loans held for sale
|
|
|
20,479
|
|
|
|
8,362
|
|
Loans
|
|
|
3,681,662
|
|
|
|
2,993,160
|
|
Allowance for loan losses
|
|
|
(89,530
|
)
|
|
|
(80,841
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
3,592,132
|
|
|
|
2,912,319
|
|
Premises and equipment
|
|
|
65,961
|
|
|
|
53,934
|
|
Goodwill
|
|
|
113,414
|
|
|
|
69,908
|
|
Other intangible assets
|
|
|
13,521
|
|
|
|
5,408
|
|
Interest receivable and other assets
|
|
|
133,394
|
|
|
|
94,126
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,246,209
|
|
|
$
|
4,250,712
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
753,553
|
|
|
$
|
573,159
|
|
Interest-bearing
|
|
|
3,578,212
|
|
|
|
2,844,966
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
4,331,765
|
|
|
|
3,418,125
|
|
Interest payable and other liabilities
|
|
|
37,533
|
|
|
|
27,708
|
|
Short-term borrowings
|
|
|
242,703
|
|
|
|
240,568
|
|
Federal Home Loan Bank (FHLB) advances
|
|
|
74,130
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,686,131
|
|
|
|
3,776,401
|
|
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 27,440,006 shares at
December 31, 2010 and 23,891,321 shares at
December 31, 2009
|
|
|
27,440
|
|
|
|
23,891
|
|
Additional paid in capital
|
|
|
429,511
|
|
|
|
347,676
|
|
Retained earnings
|
|
|
117,238
|
|
|
|
115,391
|
|
Accumulated other comprehensive loss
|
|
|
(14,111
|
)
|
|
|
(12,647
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
560,078
|
|
|
|
474,311
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
5,246,209
|
|
|
$
|
4,250,712
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
192,247
|
|
|
$
|
172,388
|
|
|
$
|
180,629
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
11,363
|
|
|
|
15,385
|
|
|
|
21,793
|
|
Tax-exempt
|
|
|
4,999
|
|
|
|
3,596
|
|
|
|
2,882
|
|
Dividends on other securities
|
|
|
766
|
|
|
|
821
|
|
|
|
1,167
|
|
Interest on federal funds sold
|
|
|
|
|
|
|
|
|
|
|
1,666
|
|
Interest on deposits with unaffiliated banks and others
|
|
|
1,055
|
|
|
|
541
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
210,430
|
|
|
|
192,731
|
|
|
|
208,336
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
35,895
|
|
|
|
39,500
|
|
|
|
54,763
|
|
Interest on short-term borrowings
|
|
|
650
|
|
|
|
906
|
|
|
|
2,223
|
|
Interest on FHLB advances
|
|
|
2,765
|
|
|
|
4,881
|
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
39,310
|
|
|
|
45,287
|
|
|
|
63,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
171,120
|
|
|
|
147,444
|
|
|
|
145,253
|
|
Provision for loan losses
|
|
|
45,600
|
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income after Provision for Loan Losses
|
|
|
125,520
|
|
|
|
88,444
|
|
|
|
96,053
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
18,562
|
|
|
|
19,116
|
|
|
|
20,048
|
|
Wealth management revenue
|
|
|
10,106
|
|
|
|
9,273
|
|
|
|
10,625
|
|
Other charges and fees for customer services
|
|
|
9,599
|
|
|
|
7,736
|
|
|
|
6,894
|
|
Mortgage banking revenue
|
|
|
3,925
|
|
|
|
4,412
|
|
|
|
1,836
|
|
Investment securities gains
|
|
|
|
|
|
|
95
|
|
|
|
1,722
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
Other
|
|
|
280
|
|
|
|
487
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Income
|
|
|
42,472
|
|
|
|
41,119
|
|
|
|
41,197
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
68,416
|
|
|
|
60,218
|
|
|
|
59,227
|
|
Occupancy
|
|
|
11,491
|
|
|
|
10,359
|
|
|
|
10,221
|
|
Equipment and software
|
|
|
13,446
|
|
|
|
9,723
|
|
|
|
9,230
|
|
Other
|
|
|
43,449
|
|
|
|
37,310
|
|
|
|
30,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
136,802
|
|
|
|
117,610
|
|
|
|
109,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
31,190
|
|
|
|
11,953
|
|
|
|
28,142
|
|
Federal income tax expense
|
|
|
8,100
|
|
|
|
1,950
|
|
|
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
23,090
|
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.88
|
|
|
$
|
0.42
|
|
|
$
|
0.83
|
|
Diluted
|
|
|
0.88
|
|
|
|
0.42
|
|
|
|
0.83
|
|
Cash Dividends Declared Per Common Share
|
|
|
0.80
|
|
|
|
1.18
|
|
|
|
1.18
|
|
See accompanying notes to consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
(In thousands, except per share
data)
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at January 1, 2008
|
|
$
|
23,815
|
|
|
$
|
344,579
|
|
|
$
|
141,867
|
|
|
$
|
(1,797
|
)
|
|
$
|
508,464
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2008
|
|
|
|
|
|
|
|
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in 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
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2010
|
|
|
|
|
|
|
|
|
|
|
23,090
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains on investment securities
available-for-sale,
net of tax expense of $140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259
|
|
|
|
|
|
Adjustment for pension and other postretirement benefits, net of
tax benefit of $928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,723
|
)
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,626
|
|
Cash dividends declared and paid of $0.80 per share
|
|
|
|
|
|
|
|
|
|
|
(21,243
|
)
|
|
|
|
|
|
|
(21,243
|
)
|
Shares issued stock options
|
|
|
1
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Shares and stock options issued in the acquisition of O.A.K.
Financial Corporation
|
|
|
3,530
|
|
|
|
80,167
|
|
|
|
|
|
|
|
|
|
|
|
83,697
|
|
Shares issued directors stock purchase plan
|
|
|
12
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Share-based compensation
|
|
|
6
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
$
|
27,440
|
|
|
$
|
429,511
|
|
|
$
|
117,238
|
|
|
$
|
(14,111
|
)
|
|
$
|
560,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,090
|
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
45,600
|
|
|
|
59,000
|
|
|
|
49,200
|
|
|
|
|
|
Gains on sales of loans
|
|
|
(5,986
|
)
|
|
|
(6,431
|
)
|
|
|
(1,790
|
)
|
|
|
|
|
Proceeds from sales of loans
|
|
|
281,511
|
|
|
|
367,796
|
|
|
|
147,172
|
|
|
|
|
|
Loans originated for sale
|
|
|
(286,317
|
)
|
|
|
(361,264
|
)
|
|
|
(145,943
|
)
|
|
|
|
|
Proceeds from sale of trading securities
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities net gains
|
|
|
|
|
|
|
(95
|
)
|
|
|
(1,722
|
)
|
|
|
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
Net gains on sales of other real estate and repossessed assets
|
|
|
(1,394
|
)
|
|
|
(969
|
)
|
|
|
(283
|
)
|
|
|
|
|
Net (gain) loss on disposal of premises and equipment, branch
bank properties and insurance settlement
|
|
|
865
|
|
|
|
(162
|
)
|
|
|
(242
|
)
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
7,826
|
|
|
|
6,429
|
|
|
|
5,878
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
3,609
|
|
|
|
2,569
|
|
|
|
2,613
|
|
|
|
|
|
Net amortization of premiums and discounts on investment
securities
|
|
|
2,818
|
|
|
|
815
|
|
|
|
625
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1,395
|
|
|
|
490
|
|
|
|
664
|
|
|
|
|
|
Deferred income tax provision
|
|
|
3,439
|
|
|
|
(6,977
|
)
|
|
|
(6,882
|
)
|
|
|
|
|
Contributions to defined benefit pension plan
|
|
|
(10,000
|
)
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
|
Net (increase) decrease in interest receivable and other assets
|
|
|
35
|
|
|
|
(17,973
|
)
|
|
|
(12,284
|
)
|
|
|
|
|
Net increase in interest payable and other liabilities
|
|
|
9,325
|
|
|
|
306
|
|
|
|
12,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
76,899
|
|
|
|
46,037
|
|
|
|
69,670
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions
|
|
|
333,878
|
|
|
|
264,998
|
|
|
|
161,375
|
|
|
|
|
|
Proceeds from sales
|
|
|
|
|
|
|
78
|
|
|
|
1,724
|
|
|
|
|
|
Purchases
|
|
|
(253,815
|
)
|
|
|
(408,344
|
)
|
|
|
(107,417
|
)
|
|
|
|
|
Investment securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions
|
|
|
47,150
|
|
|
|
41,511
|
|
|
|
67,560
|
|
|
|
|
|
Purchases
|
|
|
(81,346
|
)
|
|
|
(75,219
|
)
|
|
|
(73,356
|
)
|
|
|
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from redemption
|
|
|
2,802
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Purchases
|
|
|
(2,487
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
Net increase in loans
|
|
|
(124,985
|
)
|
|
|
(64,754
|
)
|
|
|
(235,110
|
)
|
|
|
|
|
Proceeds from sales of other real estate and repossessed assets
|
|
|
18,066
|
|
|
|
16,950
|
|
|
|
9,802
|
|
|
|
|
|
Proceeds from sales of branch bank properties and insurance
settlement
|
|
|
58
|
|
|
|
433
|
|
|
|
554
|
|
|
|
|
|
Purchases of premises and equipment, net
|
|
|
(7,791
|
)
|
|
|
(7,431
|
)
|
|
|
(9,262
|
)
|
|
|
|
|
Cash acquired, net of cash paid, in business combination
|
|
|
17,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(51,293
|
)
|
|
|
(231,778
|
)
|
|
|
(184,123
|
)
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in noninterest-bearing and interest-bearing demand
deposits and savings accounts
|
|
|
200,829
|
|
|
|
222,222
|
|
|
|
111,554
|
|
|
|
|
|
Net increase (decrease) in time deposits
|
|
|
19,570
|
|
|
|
217,111
|
|
|
|
(8,351
|
)
|
|
|
|
|
Net increase in securities sold under agreements to repurchase
|
|
|
2,135
|
|
|
|
6,830
|
|
|
|
36,375
|
|
|
|
|
|
Increase in short-term FHLB advances
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
Repayment of short-term FHLB advances
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
Increase in long-term FHLB advances
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
|
|
Repayment of long-term FHLB advances
|
|
|
(51,733
|
)
|
|
|
(45,025
|
)
|
|
|
(80,024
|
)
|
|
|
|
|
Cash dividends paid
|
|
|
(21,243
|
)
|
|
|
(28,190
|
)
|
|
|
(28,131
|
)
|
|
|
|
|
Tax benefits from share-based awards
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
Proceeds from directors stock purchase plan and exercise
of stock options
|
|
|
292
|
|
|
|
280
|
|
|
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
149,850
|
|
|
|
373,228
|
|
|
|
98,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
175,456
|
|
|
|
187,487
|
|
|
|
(16,291
|
)
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
360,709
|
|
|
|
173,222
|
|
|
|
189,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
536,165
|
|
|
$
|
360,709
|
|
|
$
|
173,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
40,206
|
|
|
$
|
46,232
|
|
|
$
|
64,629
|
|
|
|
|
|
Federal income taxes paid
|
|
|
9,800
|
|
|
|
9,725
|
|
|
|
16,881
|
|
|
|
|
|
Loans transferred to other real estate and repossessed assets
|
|
|
26,429
|
|
|
|
18,320
|
|
|
|
21,282
|
|
|
|
|
|
Investment securities
available-for-sale
transferred to Investment securities
held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
Closed branch bank properties transferred to other assets
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
Business combination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of tangible assets acquired (noncash)
|
|
|
749,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and identifiable intangible assets acquired
|
|
|
53,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
736,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and stock options issued
|
|
|
83,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Operations:
Chemical Financial Corporation (Chemical or 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. Byron Bank was acquired in the
acquisition of O.A.K. Financial Corporation (OAK) on
April 30, 2010 and was consolidated with and into Chemical
Bank on July 23, 2010. 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 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, SEC rules and interpretive
releases 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 has the power to
direct the activities and absorb losses or the right to receive
benefits.
The Corporation is a significant limited partner in two low
income housing tax credit partnerships. These entities meet the
definition of VIEs. The Corporation is not the primary
beneficiary of either VIE in which it holds a limited
partnership interest, and therefore the VIEs are not
consolidated in the Corporations financial statements.
Exposure to loss as a result of its involvement with VIEs at
December 31, 2010 was limited to approximately
$4.2 million recorded as the Corporations investment,
which includes unfunded obligations to these projects of
$4.1 million. The Corporations investment in these
projects is recorded in interest receivable and other assets and
the future financial obligations are recorded in interest
payable and other liabilities in the consolidated statement of
financial position at December 31, 2010.
Reclassification:
Certain amounts in the 2009 and 2008 consolidated financial
statements and notes thereto have been reclassified to conform
with the 2010 presentation. Such reclassifications had no impact
on shareholders equity or net income.
49
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, expected cash flows from acquired
loans, fair value amounts related to the acquisition of OAK on
April 30, 2010, pension expense, income taxes, goodwill and
those assets that require fair value measurement. Actual results
could differ from these estimates.
Business
Combinations:
On April 30, 2010, the Corporation acquired 100% of OAK for
total consideration of $83.7 million. The total
consideration consisted of the issuance of 3,529,772 shares
of Chemical common stock with a total value of
$83.7 million based upon a market price per share of the
Corporations common stock of $23.70 at the acquisition
date, the exchange of 26,425 vested stock options for the
outstanding vested stock options of OAK with a value of the
exchange at the acquisition date of approximately $41,000, and
approximately $8,000 of cash in lieu of fractional shares. The
issuance of 3,529,772 shares of Chemical common stock was
based on an exchange rate of 1.306 times the 2,703,009
outstanding shares of OAK at the acquisition date.
Pursuant to the guidance of ASC Topic 805, Business
Combinations (ASC 805) effective for all acquisitions with
closing dates after January 1, 2009, the Corporation
recognized the assets acquired and the liabilities assumed in
the OAK acquisition at their fair values as of the acquisition
date with the related acquisition and restructuring costs
expensed in the current period. The Corporation recorded
$43.5 million of goodwill in conjunction with the
acquisition, which represented the purchase price over the fair
values of the identifiable net assets acquired. Additionally,
the Corporation recorded $9.8 million of other intangible
assets as a result of the OAK acquisition attributable to core
deposits, mortgage servicing rights and non-compete agreements
acquired.
ASC 805 affords a measurement period beyond the acquisition date
that allows the Corporation the opportunity to finalize the
acquisition accounting in the event that new information is
identified that existed as of the acquisition date but was not
known by the Corporation at that time. The Corporation
anticipated that measurement period adjustments could arise from
adjustments to the fair values of assets and liabilities
recognized at the acquisition date as additional information is
obtained, such as appraisals of collateral securing loans and
other borrower information. In the event that a measurement
period adjustment is identified, the Corporation will recognize
the adjustment as part of its acquisition accounting, which may
result in an adjustment to goodwill being recorded.
See Note 2 for further information regarding the OAK
acquisition.
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, with
original maturities of less than 90 days. Generally,
federal funds are sold for
one-day
periods. At December 31, 2010 and 2009, the Corporation did
not have any federal funds sold. 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 (FRB) in lieu of federal funds sold.
Investment
Securities:
Investment securities include investments in debt, trust
preferred and preferred stock 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).
The Corporation held no trading investment securities at
December 31, 2010 or 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.
Effective April 1, 2009, in accordance with FASB Staff
Position
FAS 115-2
and
FAS 124-2,
50
Recognition and Presentation of
Other-Than-Temporary
Impairments (later codified in ASC 320), if the Corporation
intends to sell a security or it is more-likely-than-not that
the Corporation will be required to sell the security prior to
the recovery of its amortized cost, an
other-than-temporary
impairment write down is recognized in earnings equal to the
entire difference between the securitys amortized cost
basis and its fair value. If the Corporation does not intend to
sell a security and it is not more-likely-than-not that the
Corporation would be required to sell a security before the
recovery of its amortized cost basis, then the recognition of
the impairment is bifurcated. For a security where the
impairment is bifurcated, the impairment is separated into an
amount representing the credit loss, which is recognized in
earnings, and an amount related to all other factors, which is
recognized in other comprehensive income. Prior to April 1,
2009, all declines in fair value deemed to be
other-than-temporary
were reflected in earnings as realized losses. In assessing
whether OTTI exists, 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 potential
for impairments in an entire industry or sub-sector and
(iv) the potential for impairments in certain economically
depressed geographical locations.
Other
Securities:
Other securities consisted of Federal Home Loan Bank of
Indianapolis (FHLB) stock of $18.7 million at
December 31, 2010 and $16.2 million at
December 31, 2009 and FRB stock of $8.4 million at
December 31, 2010 and $5.9 million at
December 31, 2009. 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.
Originated
Loans:
Originated loans include all of the Corporations portfolio
loans, excluding loans acquired in the OAK transaction.
Originated loans are stated at their principal amount
outstanding, net of unearned income, charge-offs and unamortized
deferred fees and costs. 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
(except for real estate residential loans that are transferred
at 120 days past due) 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 of the originated portfolio 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 (120 days or more past due on real
estate residential loans) and loans modified under troubled debt
restructurings (nonperforming originated loans).
Loans modified under troubled debt restructurings involve
granting a concession to a borrower who is facing financial
difficulty. Concessions generally include modifications to
original loan terms, including changes to a loans payment
schedule or interest rate, which generally would not otherwise
be considered. The Corporations loans modified under
troubled debt restructurings continue on accrual status.
However, if the borrowers ability to meet the revised
payment schedule is not reasonably assured or the borrower does
not make payments in accordance with the modified loan terms,
the loan is moved to nonaccrual status.
Loans
Acquired in a Business Combination:
Loans with an outstanding principal balance of $683 million
were acquired in the acquisition of OAK. The Corporation
recognized a fair value discount on the loans acquired that was,
in part attributable to deterioration in credit quality. The
fair value discount was recorded as a reduction of the
loans outstanding principal balances in the consolidated
statement of financial position (acquired loans). Loans
purchased with evidence of credit deterioration since
origination and for which it is probable that all contractually
required payments will not be collected are considered to be
impaired. In the assessment of credit quality deterioration, the
Corporation must make numerous assumptions, interpretations and
judgments using internal and third-party credit quality
information to determine whether it is probable that the
Corporation will be able to collect all contractually required
payments. This is a point in time assessment and inherently
subjective due to the nature of the available information and
judgment involved.
51
Evidence of credit quality deterioration as of the purchase date
may include credit metrics such as past due and nonaccrual
status, recent borrower credit scores and
loan-to-value
percentages. Those loans that qualify under ASC
Topic 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (ASC
310-30), are
recorded at fair value at acquisition, which involves estimating
the expected cash flows to be received. Accordingly, the
associated allowance for loan losses related to these loans is
not carried over at the acquisition date.
ASC 310-30
also allows investors to aggregate loans acquired into loan
pools that have common risk characteristics and thereby use a
composite interest rate and expectation of cash flows expected
to be collected for the loan pools. Loans with an outstanding
principal balance of $105 million at the acquisition date
were determined to be loans with deteriorated credit quality
and, therefore, met the scope criteria set forth in
ASC 310-30.
Further, the Corporation understands, as outlined in the
AICPAs open letter to the Office of the Chief Accountant
of the SEC dated December 18, 2009 and pending further
standard setting, that for acquired loans that do not meet the
scope criteria of
ASC 310-30,
a company may elect to account for such acquired loans pursuant
to the provisions of either
ASC 310-20,
Nonrefundable Fees and Other Costs, or
ASC 310-30.
The Corporation elected to apply
ASC 310-30
by analogy to loans that were determined not to have
deteriorated credit quality with an outstanding principal
balance of $578 million at the acquisition date and will
follow the accounting and disclosure guidance of
ASC 310-30
for these loans. Accordingly, the Corporation applied
ASC 310-30
to the entire loan portfolio acquired in the acquisition of OAK
with an outstanding principal balance of $683 million at
the acquisition date. None of the acquired loans are classified
as debt securities.
Acquired loans were recorded at fair value without a carryover
of OAKs allowance for loan losses. The calculation of the
fair value of the acquired loans entails estimating the amount
and timing of both principal and interest cash flows expected to
be collected on such loans and then discounting those cash flows
at market interest rates. The excess of a loans expected
cash flows at the acquisition date over its estimated fair value
is referred to as the accretable yield, which is
recognized into interest income over the remaining life of the
loan on a level-yield basis. The difference between a
loans contractually required principal and interest
payments at the acquisition date and the cash flows expected to
be collected at the acquisition date is referred to as the
nonaccretable difference, which includes an estimate
of future credit losses expected to be incurred over the life of
the loan and interest payments that are not expected to be
collected. The estimate of expected credit losses was determined
based on due diligence performed by executive and senior
officers of the Corporation, with assistance from third-party
consultants. Decreases to the expected cash flows in subsequent
periods will require the Corporation to record a provision for
loan losses. Improvements in expected cash flows in future
periods will result in reversing a portion of the nonaccretable
difference, which is then classified as part of the accretable
yield and subsequently recognized into interest income over the
remaining life of the loan.
Under the provisions of
ASC 310-30,
the Corporation aggregated acquired loans into 14 pools based
upon common risk characteristics, including types of loans,
commercial type loans with similar risk grades and whether loans
were performing or nonperforming. A pool is considered a single
unit of accounting for the purposes of applying the guidance as
described above. A loan will be removed from a pool of acquired
loans only if the loan is sold, foreclosed, paid off or written
off, and will be removed from the pool at the carrying value. If
an individual loan is removed from a pool of loans, the
difference between its relative carrying amount and the cash,
fair value of the collateral, or other assets received would not
affect the effective yield used to recognize the accretable
difference on the remaining pool. The Corporation estimated the
cash flows expected to be collected over the life of the pools
of loans at acquisition, and will estimate quarterly thereafter,
based on a set of assumptions including expectations as to
default rates, prepayment rates and loss severities. In the
event that the updated expected cash flows increase in a pool
from those originally projected at acquisition date, the
Corporation will adjust the accretable yield amount with a
resulting change in the amount recognized in interest income in
subsequent periods. In the event that the updated expected cash
flows in a pool decrease from those originally projected at the
acquisition date, the Corporation will consider that loan pool
impaired, which results in the Corporation accruing a charge to
the provision for loan losses.
Impaired
Loans:
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. In the
originated loan portfolio, all nonaccrual 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, real
estate construction and land development loans in the originated
loan portfolio may be considered impaired loans. Loans in the
acquired portfolio that meet the definition of an impaired loan
are included in impaired loans, even though the amortization of
the accretable yield results in interest income recognition on
these loans. 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
commercial, real estate commercial, real estate construction and
land development loans, as well as real estate residential loans
modified under troubled debt restructurings, are evaluated
individually to determine whether or not a valuation allowance
is required.
52
Allowance
for Loan Losses:
The allowance for loan losses (allowance) is presented as a
reserve against loans. The allowance represents
managements assessment of probable loan 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, real estate construction and land development
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 loans greater
than $0.25 million 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, real estate construction and land development
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
inherent 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 types, 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.
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 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 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
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 quarterly.
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
53
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 when
earned and includes amortization of MSRs.
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 vacant land and
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 $27.0 million and $17.2 million at
December 31, 2010 and 2009, 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, noncompete agreements and MSRs. Goodwill is not
amortized, but rather is subject to impairment tests annually,
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
primarily on an accelerated basis, as applicable. Noncompete
agreements are amortized over the term of the agreement on a
straight-line basis. MSRs are amortized in proportion to, and
over the life of, the estimated net future servicing income of
the underlying loans.
Share-based
Compensation:
The Corporation has granted stock options, stock awards and
restricted stock performance units to certain executive and
senior management employees. The Corporation accounts for
share-based compensation expense using the modified-prospective
transition method. Under that method, compensation expense is
recognized for 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
and the probability of issuance for performance based awards.
The fair value of stock options is recognized as compensation
expense on a straight-line basis over the requisite service
period. The fair value of restricted stock performance units is
recognized as compensation expense over the requisite
performance 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.
54
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, 2010 and 2009, 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, as
well as health care costs. The Corporation evaluates all
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, 2010 and 2009, the Corporation
determined the discount rate by utilizing the results from a
discount rate model which involves selecting a portfolio of
bonds to settle the projected benefit payments of the defined
benefit pension plan. The selected bond portfolio is derived
from a universe of corporate bonds rated at Aa quality. After
the bond portfolio is selected, a single rate is determined that
equates the market value of the bonds purchased to the
discounted value of the plans benefit payments which
represents 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.
The Corporation recognizes the over- or under-funded status of a
plan as an other asset or other liability in the consolidated
statements of financial position 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
55
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 of the change.
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.
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 audits or
examinations.
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 using the treasury stock
method. 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, restricted stock performance units that may be converted
to stock, 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 advisory
directors. For any period in which a loss is recorded, the
assumed exercise of stock options, restricted stock performance
units that may be converted to stock 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 calculation. The following summarizes the numerator
and denominator of the basic and diluted earnings per common
share computations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator for both basic and diluted earnings per common share,
net income
|
|
$
|
23,090
|
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share, weighted
average common shares outstanding
|
|
|
26,276
|
|
|
|
23,890
|
|
|
|
23,840
|
|
Weighted average common stock equivalents
|
|
|
29
|
|
|
|
19
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
26,305
|
|
|
|
23,909
|
|
|
|
23,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.88
|
|
|
$
|
0.42
|
|
|
$
|
0.83
|
|
Diluted earnings per common share
|
|
|
0.88
|
|
|
|
0.42
|
|
|
|
0.83
|
|
The average number of exercisable employee stock option awards
outstanding that were
out-of-the-money,
whereby the option exercise price per share exceeded the market
price per share at year-end, and therefore, were not included in
the computation of diluted earnings per common share was 597,710
for the year ended December 31, 2010, 529,571 for the year
ended December 31, 2009 and 532,765 for the year ended
December 31, 2008.
56
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 (expense), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Net unrealized gains on investment securities
available-for-sale,
net of related tax expense of $1,786 at December 31, 2010,
$1,646 at December 31, 2009 and $1,610 at December 31, 2008
|
|
$
|
3,317
|
|
|
$
|
3,058
|
|
|
$
|
2,990
|
|
Pension and other postretirement benefits adjustment, net of
related tax benefit of $9,384 at December 31, 2010, $8,456
at December 31, 2009 and $8,519 at December 31, 2008
|
|
|
(17,428
|
)
|
|
|
(15,705
|
)
|
|
|
(15,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(14,111
|
)
|
|
$
|
(12,647
|
)
|
|
$
|
(12,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending
Accounting Pronouncements:
Fair Value Measurements and Disclosures: In
January 2010, the FASB issued Accounting Standards Update (ASU)
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (ASU
2010-06).
ASU 2010-06
requires reporting entities to make new disclosures about
recurring and nonrecurring fair value measurements, including
significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances and settlements, on a gross basis,
in the reconciliation of Level 3 fair value measurements.
ASU 2010-06
also requires disclosure of fair value measurements by
class instead of by major category as
well as any changes in valuation techniques used during the
reporting period. For disclosures of Level 1 and
Level 2 activity, fair value measurements by
class and changes in valuation techniques, ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, with disclosures for previous
comparative periods prior to adoption not required. The adoption
of this portion of ASU
2010-06 on
January 1, 2010 did not have a material impact on the
Corporations consolidated financial condition or results
of operations. For the reconciliation of Level 3 fair value
measurements, ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2010. The adoption of this portion of
ASU 2010-06
on January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Goodwill Impairment Testing: In December 2010,
the FASB issued ASU
No. 2010-28,
Intangibles (Topic 350): When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU
2010-28).
ASU 2010-28
provides guidance on (1) the circumstances under which step
2 of the goodwill impairment test must be performed for
reporting units with zero or negative carrying amounts, and
(2) the qualitative factors to be taken into account when
performing step 2 in determining whether it is
more-likely-than-not that an impairment exists. ASU
2010-28 is
effective for public entities with fiscal years beginning after
December 15, 2010, with early adoption prohibited. Upon
initial application, all entities having reporting units with
zero or negative carrying amounts are required to assess whether
it is more-likely-than-not that impairment exists and any
resulting goodwill impairment should be recognized as a
cumulative-effect adjustment to opening retained earnings in the
period of adoption. The adoption of ASU
2010-28 on
January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
Pro Forma Disclosure Requirements for Business
Combinations: In December 2010, the FASB issued
ASU
No. 2010-29,
Business Combinations (Topic 805): Disclosure of Supplementary
Pro Forma Information for Business Combinations
(ASU 2010-29).
ASU 2010-29
clarifies that pro forma revenue and earnings for a business
combination occurring in the current year should be presented as
though the business combination occurred as of the beginning of
the year or, if comparative financial statements are presented,
as though the business combination took place as of the
beginning of the comparative year. ASU
2010-29 also
amends existing guidance to expand the supplemental pro forma
disclosures to include a description of the nature and amount of
material, nonrecurring adjustments directly attributable to the
business combination included in the pro forma revenue and
earnings. ASU
2010-29 is
effective prospectively for business combinations consummated on
or after the start of the first annual reporting period
beginning after December 15, 2010, with early adoption
permitted. The adoption of ASU
2010-29 on
January 1, 2011 did not have a material impact on the
Corporations consolidated financial condition or results
of operations.
57
Deferral of Troubled Debt Restructuring
Disclosures: In January 2011, the FASB issued ASU
No. 2011-01,
Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update
No. 2010-20
(ASU
2011-01).
For public entities, ASU
2011-01
delays the effective date for certain disclosures about loans
modified under troubled debt restructurings included in ASU
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses (ASU
2010-20).
The new effective date for the loans modified under troubled
debt restructuring disclosures will be concurrent with the
effective date of FASBs proposed ASU, Receivables (Topic
310): Clarifications to Accounting for Troubled Debt
Restructurings by Creditors. ASU
2011-01 does
not change the effective date for other disclosures required by
public entities in ASU
2010-20. The
adoption of ASU
2011-01 once
effective is not expected to have a material impact on the
Corporations consolidated financial condition or results
of operations.
NOTE 2 ACQUISITION
O.A.K.
Financial Corporation
On April 30, 2010, the Corporation acquired 100% of OAK for
total consideration of $83.7 million. The total
consideration consisted of the issuance of 3,529,772 shares
of Chemical common stock with a total value of
$83.7 million based upon a price per share of the
Corporations common stock of $23.70 at the acquisition
date, the exchange of 26,425 vested stock options for the
outstanding vested stock options of OAK with a value of the
exchange at the acquisition date of approximately $41,000 and
approximately $8,000 of cash in lieu of fractional shares. The
issuance of 3,529,772 shares of Chemical common stock was
based on an exchange rate of 1.306 times the 2,703,009
outstanding shares of OAK at the acquisition date. There were no
contingencies resulting from the acquisition.
OAK, a bank holding company, owned Byron Bank, which provided
traditional commercial banking services and products through 14
banking offices serving communities in Ottawa, Allegan and Kent
counties in west Michigan. Byron Bank owned two operating
subsidiaries, Byron Investment Services, which offered mutual
fund products, securities, brokerage services, retirement
planning services and investment management and advisory
services, and O.A.K. Title Insurance Agency, which offered
title insurance to buyers and sellers of residential and
commercial properties. As a result of the consolidation of Byron
Bank with and into Chemical Bank on July 23, 2010, these
two subsidiaries became subsidiaries of Chemical Bank. O.A.K.
Title Insurance Agency was legally dissolved on
August 31, 2010 and Byron Investment Services is expected
to be dissolved in 2011, as these products and services are
currently being offered through existing subsidiaries of
Chemical Bank. At the acquisition date, OAK had total assets of
$820 million, total loans of $627 million and total
deposits of $693 million.
Upon acquisition, the OAK loan portfolio had contractually
required principal and interest payments receivable of
$683 million and $97 million, respectively, expected
principal and interest cash flows of $636 million and
$88 million, respectively, and a fair value of
$627 million. The difference between the contractually
required payments receivable and the expected cash flows
represents the nonaccretable difference, which totaled
$56 million at the acquisition date, with $47 million
attributable to expected credit losses. The difference between
the expected cash flows and fair value represents the accretable
yield, which totaled $97 million at the acquisition date.
At December 31, 2010, the outstanding contractual principal
balance and the carrying amount of the acquired loan portfolio
were $597 million and $552 million, respectively, and
there was no related allowance for loan losses at that date.
Activity for the accretable yield, which includes contractually
due interest, of acquired loans since the acquisition date
follows:
|
|
|
|
|
|
|
Accretable
|
|
|
|
Yield
|
|
|
|
(In thousands)
|
|
|
Balance at acquisition date
|
|
$
|
96,859
|
|
Additions
|
|
|
|
|
Disposals
|
|
|
|
|
Accretion recognized in interest income
|
|
|
(23,996
|
)
|
Reclassification from (to) nonaccretable difference
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
72,863
|
|
|
|
|
|
|
The amounts reported for the accretable yield at the acquisition
date and accretion recognized in interest income were revised
during the fourth quarter of 2010 from amounts previously
reported due to the Corporation updating its analysis of
contractually required and expected interest cash flows. These
revisions did not have an impact on the Corporations
financial condition or results of operations.
58
In connection with the acquisition of OAK, the Corporation
recorded $43.5 million of goodwill. Goodwill recorded is
primarily attributable to the synergies and economies of scale
expected from combining the operations of Chemical and OAK. In
addition, the Corporation recorded $9.8 million of other
intangible assets in conjunction with the acquisition. The other
intangible assets represent the value attributable to core
deposits, mortgage servicing rights and non-compete agreements
acquired.
As of the acquisition date, Byron Bank became a wholly owned
subsidiary of the Corporation. Byron Bank was consolidated with
and into Chemical Bank on July 23, 2010. The
$43.5 million of goodwill recognized in the acquisition of
OAK was allocated at the acquisition date to Byron Bank and,
therefore, upon the consolidation of Byron Bank with and into
Chemical Bank, the goodwill of $43.5 million and other
intangible assets of $9.8 million became intangible assets
of Chemical Bank.
The results of the merged OAK operations are presented within
the Corporations consolidated financial statements from
the acquisition date. The disclosure of OAKs
post-acquisition revenue and net income is not practical due to
the combining of Byron Banks operations with and into
Chemical Bank on July 23, 2010. Acquisition-related
transaction expenses associated with the OAK acquisition totaled
$4.3 million during 2010 and $0.8 million during 2009.
The summary computation of the purchase price, including
adjustments to reflect OAKs assets acquired and
liabilities assumed at fair value and the allocation of the
purchase price to the net assets of OAK is presented below. The
acquisition accounting presented below may be further adjusted
during a measurement period of up to one year beyond the
acquisition date that provides the Corporation with the
opportunity to finalize the acquisition accounting in the event
that new information is identified that existed as of the
acquisition date but was not known by the Corporation at that
time.
A summary of the purchase price and the excess of the purchase
price over the fair value of adjusted net assets acquired
(goodwill) was as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Fair value of Chemical common shares issued at April 30,
2010 (3,529,772 shares at the market price of $23.70 per
share)
|
|
|
|
|
|
$
|
83,656
|
|
Fair value of OAK options converted to Chemical options
|
|
|
|
|
|
|
41
|
|
Cash paid in lieu of fractional shares
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
83,705
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
|
|
|
|
OAK shareholders equity
|
|
|
|
|
|
$
|
68,379
|
|
Adjustments to reflect fair value of net assets acquired:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
(56,296
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
15,250
|
|
Deferred tax asset, net
|
|
|
|
|
|
|
15,020
|
|
Premises and equipment
|
|
|
|
|
|
|
(1,718
|
)
|
Core deposit intangibles
|
|
|
|
|
|
|
8,404
|
|
Other intangible assets
|
|
|
|
|
|
|
1,244
|
|
Deposits
|
|
|
|
|
|
|
(4,833
|
)
|
Federal Home Loan Bank advances
|
|
|
|
|
|
|
(1,436
|
)
|
Other assets and liabilities
|
|
|
|
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of adjusted net assets acquired
|
|
|
|
|
|
|
40,199
|
|
|
|
|
|
|
|
|
|
|
Goodwill recognized as a result of the OAK transaction
|
|
|
|
|
|
$
|
43,506
|
|
|
|
|
|
|
|
|
|
|
59
The following schedule summarizes the original acquisition date
estimated fair values and the adjustments to the fair values of
assets acquired and liabilities assumed from OAK from the
acquisition date through December 31, 2010. Subsequent to
the original acquisition date valuation of assets and
liabilities, the Corporation obtained additional appraisal
information about the fair value of premises and equipment,
revised its assumptions regarding the timing and expected loss
experience related to certain acquired loans and received
updated information regarding the valuation of the core deposit
intangible asset and the measurement of various other assets and
liabilities acquired, which resulted in an increase to the
goodwill recognized in the transaction of $4.3 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
|
|
|
Revised
|
|
|
|
Allocation
|
|
|
Adjustments
|
|
|
Allocation
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,185
|
|
|
$
|
|
|
|
$
|
17,185
|
|
Investment securities
|
|
|
69,561
|
|
|
|
|
|
|
|
69,561
|
|
Other securities
|
|
|
5,320
|
|
|
|
|
|
|
|
5,320
|
|
Loans
|
|
|
630,575
|
|
|
|
(3,718
|
)
|
|
|
626,857
|
|
Premises and equipment
|
|
|
14,645
|
|
|
|
(1,718
|
)
|
|
|
12,927
|
|
Goodwill
|
|
|
39,241
|
|
|
|
4,265
|
|
|
|
43,506
|
|
Other intangible assets
|
|
|
10,314
|
|
|
|
(510
|
)
|
|
|
9,804
|
|
Deferred tax asset, net
|
|
|
18,547
|
|
|
|
2,452
|
|
|
|
20,999
|
|
Interest receivable and other assets
|
|
|
15,023
|
|
|
|
(771
|
)
|
|
|
14,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
820,411
|
|
|
$
|
|
|
|
$
|
820,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
693,241
|
|
|
$
|
|
|
|
$
|
693,241
|
|
Interest payable and other liabilities
|
|
|
7,602
|
|
|
|
|
|
|
|
7,602
|
|
Federal Home Loan Bank (FHLB) advances
|
|
|
35,863
|
|
|
|
|
|
|
|
35,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
736,706
|
|
|
|
|
|
|
|
736,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
83,705
|
|
|
$
|
|
|
|
$
|
83,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets acquired in the OAK acquisition at the
acquisition date consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Weighted
|
|
|
Amortization
|
Other Intangible
Assets:
|
|
Value
|
|
|
Avg. Life
|
|
|
Method
|
|
Core deposit intangible assets
|
|
$
|
8,435
|
|
|
|
4.7 years
|
|
|
Accelerated basis
|
Mortgage servicing rights
|
|
|
691
|
|
|
|
3.0 years
|
|
|
Accelerated basis
|
Non-compete agreements
|
|
|
678
|
|
|
|
1.4 years
|
|
|
Straight-line
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The following unaudited pro forma combined results of operations
of Chemical and OAK presents results as if the acquisition had
been completed as of the beginning of each period indicated. The
unaudited pro forma combined results of operations are presented
solely for information purposes and are not intended to
represent or be indicative of the consolidated results of
operations that Chemical would have reported had this
transaction been completed as of the dates and for the periods
presented, nor are they necessarily indicative of future
results. In particular, no adjustments have been made to
eliminate the amount of OAKs provision for loan losses
incurred prior to the acquisition date that would not have been
necessary had the acquired loans been recorded at fair value as
of the beginning of each period indicated. In accordance with
SEC
Regulation S-X,
Article 11, transaction costs directly attributable to the
acquisition have been excluded.
Unaudited
Pro Forma Combined Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
$
|
223,821
|
|
|
$
|
234,329
|
|
Interest expense
|
|
|
41,852
|
|
|
|
57,095
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
181,969
|
|
|
|
177,234
|
|
Provision for loan losses
|
|
|
48,800
|
|
|
|
69,050
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
133,169
|
|
|
|
108,184
|
|
Noninterest income
|
|
|
47,255
|
|
|
|
51,917
|
|
Operating expenses
|
|
|
141,232
|
|
|
|
144,696
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
39,192
|
|
|
|
15,405
|
|
Federal income tax expense
|
|
|
10,690
|
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,502
|
|
|
$
|
13,003
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.04
|
|
|
$
|
0.47
|
|
Diluted
|
|
|
1.04
|
|
|
|
0.47
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,436
|
|
|
|
27,420
|
|
Diluted
|
|
|
27,466
|
|
|
|
27,439
|
|
61
NOTE 3 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, 2010 and 2009:
Investment
Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
117,167
|
|
|
$
|
394
|
|
|
$
|
40
|
|
|
$
|
117,521
|
|
State and political subdivisions
|
|
|
45,951
|
|
|
|
326
|
|
|
|
231
|
|
|
|
46,046
|
|
Residential mortgage-backed securities
|
|
|
132,683
|
|
|
|
4,439
|
|
|
|
187
|
|
|
|
136,935
|
|
Collateralized mortgage obligations
|
|
|
233,202
|
|
|
|
911
|
|
|
|
192
|
|
|
|
233,921
|
|
Corporate bonds
|
|
|
43,115
|
|
|
|
99
|
|
|
|
467
|
|
|
|
42,747
|
|
Preferred stock
|
|
|
1,389
|
|
|
|
51
|
|
|
|
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
573,507
|
|
|
$
|
6,220
|
|
|
$
|
1,117
|
|
|
$
|
578,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
190,920
|
|
|
$
|
1,228
|
|
|
$
|
163
|
|
|
$
|
191,985
|
|
State and political subdivisions
|
|
|
3,506
|
|
|
|
56
|
|
|
|
|
|
|
|
3,562
|
|
Residential 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
154,900
|
|
|
$
|
2,106
|
|
|
$
|
1,758
|
|
|
$
|
155,248
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
|
|
|
|
6,560
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,400
|
|
|
$
|
2,106
|
|
|
$
|
8,318
|
|
|
$
|
159,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
120,447
|
|
|
$
|
1,954
|
|
|
$
|
679
|
|
|
$
|
121,722
|
|
Residential mortgage-backed securities
|
|
|
350
|
|
|
|
33
|
|
|
|
|
|
|
|
383
|
|
Trust preferred securities
|
|
|
10,500
|
|
|
|
|
|
|
|
6,875
|
|
|
|
3,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,297
|
|
|
$
|
1,987
|
|
|
$
|
7,554
|
|
|
$
|
125,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Corporations residential
mortgage-backed securities and collateralized mortgage
obligations are backed by a U.S. government agency
(Government National Mortgage Association) or a government
sponsored enterprise (Federal Home Loan Mortgage Association or
Federal National Mortgage Association).
At December 31, 2010, the Corporation held
$10.5 million of trust preferred investment securities that
were recorded as
held-to-maturity,
with $10.0 million of these securities representing a 100%
interest in a trust preferred investment security of a small
non-public bank holding company in Michigan that has been
assessed by the Corporation as financially strong. The remaining
$0.5 million represents a 10% interest in another trust
preferred investment security of a small non-public bank holding
company located in Michigan that incurred net losses in both
2010 and 2009, although remained well-capitalized under
regulatory guidelines at December 31, 2010.
62
At December 31, 2010, 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 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 a single
issue investment security 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, 2010, 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 38% on its $10.0 million trust preferred
investment security and 28% 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 $3.8 million and
$0.1 million, respectively, resulting in a combined
impairment of $6.6 million. At December 31, 2010, the
Corporation concluded that the $6.6 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, 2010, by maturity,
for both
available-for-sale
and
held-to-maturity
investment securities. The maturities of residential
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, 2010
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
202,421
|
|
|
$
|
203,847
|
|
Due after one year through five years
|
|
|
257,662
|
|
|
|
259,650
|
|
Due after five years through ten years
|
|
|
70,216
|
|
|
|
70,824
|
|
Due after ten years
|
|
|
41,819
|
|
|
|
42,849
|
|
Preferred stock
|
|
|
1,389
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
573,507
|
|
|
$
|
578,610
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
18,259
|
|
|
$
|
18,313
|
|
Due after one year through five years
|
|
|
65,394
|
|
|
|
66,102
|
|
Due after five years through ten years
|
|
|
50,290
|
|
|
|
50,187
|
|
Due after ten years
|
|
|
31,457
|
|
|
|
24,586
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,400
|
|
|
$
|
159,188
|
|
|
|
|
|
|
|
|
|
|
63
The following schedule summarizes information for both
available-for-sale
and
held-to-maturity
investment securities with gross unrealized losses at
December 31, 2010 and 2009, aggregated by category and
length of time that individual securities have been in a
continuous unrealized loss position. Investment securities
acquired in the OAK transaction were recorded at fair value at
the acquisition date of April 30, 2010, and are included in
the following schedule based upon the length of time that
individual securities were in a continuous unrealized loss
position since the OAK acquisition date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
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
|
|
$
|
20,117
|
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,117
|
|
|
$
|
40
|
|
State and political subdivisions
|
|
|
71,900
|
|
|
|
1,863
|
|
|
|
3,800
|
|
|
|
126
|
|
|
|
75,700
|
|
|
|
1,989
|
|
Residential mortgage-backed securities
|
|
|
26,117
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
26,117
|
|
|
|
187
|
|
Collateralized mortgage obligations
|
|
|
57,556
|
|
|
|
170
|
|
|
|
9,616
|
|
|
|
22
|
|
|
|
67,172
|
|
|
|
192
|
|
Corporate bonds
|
|
|
24,683
|
|
|
|
317
|
|
|
|
2,341
|
|
|
|
150
|
|
|
|
27,024
|
|
|
|
467
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
3,940
|
|
|
|
6,560
|
|
|
|
3,940
|
|
|
|
6,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200,373
|
|
|
$
|
2,577
|
|
|
$
|
19,697
|
|
|
$
|
6,858
|
|
|
$
|
220,070
|
|
|
$
|
9,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Residential 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Management did not believe any individual unrealized loss on any
investment security, as of December 31, 2010, represented
an OTTI. Management believed that the unrealized losses on
investment securities at December 31, 2010 were temporary
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. Unrealized losses of
$6.6 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, 2010, the Corporation
expected to recover the entire amortized cost basis of these
investment securities.
As of December 31, 2010, 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, 2010, 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 2010.
However, there is no assurance that OTTI may not occur in the
future.
Investment securities with a book value of $435.2 million
at December 31, 2010 were pledged to secure public fund
deposits, short-term borrowings and for other purposes as
required by law; at December 31, 2009, the corresponding
amount was $452.9 million.
64
NOTE 4 LOANS
The Corporation monitors and assesses the credit risk of its
loan portfolio using the classes set forth below. These classes
also represent the segments by which the Corporation monitors
the performance of its loan portfolio and estimates its
allowance for loan losses.
Commercial Loans to varying types of
businesses, including municipalities, school districts and
nonprofit organizations, for the purpose of supporting working
capital, operational needs and term financing of equipment.
Repayment of such loans is generally provided through operating
cash flows of the business. Commercial loans are predominately
secured by equipment, inventory, accounts receivable, personal
guarantees of the owner and other sources of repayment, although
the Corporation may also secure commercial loans with real
estate.
Real estate commercial Loans 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 construction Secured loans for
the construction of business properties. Real estate
construction loans often convert to a real estate commercial
loan at the completion of the construction period.
Land development Secured development loans
are made to borrowers for the purpose of infrastructure
improvements to vacant land to create finished marketable
residential and commercial lots/land. Most land development
loans are originated with the intention that the loans will be
paid through the sale of developed lots/land by the developers
within twelve months of the completion date. Land development
loans at December 31, 2010 were primarily comprised of
loans to develop residential properties.
Real estate residential Loans secured by one-
to four-family residential properties generally with fixed
interest rates of fifteen years or less. The
loan-to-value
ratio at the time of origination is generally 80% or less. Real
estate residential loans with a
loan-to-value
ratio of more than 80% generally require private mortgage
insurance.
Consumer installment Loans to consumers
primarily for the purpose of home improvements and acquiring
automobiles, recreational vehicles and boats. These loans
consist of relatively small amounts that are spread across many
individual borrowers.
Home equity Loans whereby consumers utilize
equity in their personal residence, generally through a second
mortgage, as collateral to secure the loan.
Commercial, real estate commercial, real estate construction and
land development loans are referred to as the Corporations
commercial loan portfolio, while real estate residential,
consumer installment and home equity loans are referred to as
the Corporations consumer loan portfolio.
A summary of loans at December 31, 2010 and
December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Commercial loan portfolio:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
818,997
|
|
|
$
|
584,286
|
|
Real estate commercial
|
|
|
1,076,971
|
|
|
|
785,675
|
|
Real estate construction
|
|
|
89,234
|
|
|
|
74,742
|
|
Land development
|
|
|
53,386
|
|
|
|
46,563
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,038,588
|
|
|
|
1,491,266
|
|
|
|
|
|
|
|
|
|
|
Consumer loan portfolio:
|
|
|
|
|
|
|
|
|
Real estate residential
|
|
|
798,046
|
|
|
|
739,380
|
|
Consumer installment
|
|
|
503,132
|
|
|
|
485,360
|
|
Home equity
|
|
|
341,896
|
|
|
|
277,154
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,643,074
|
|
|
|
1,501,894
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
3,681,662
|
|
|
$
|
2,993,160
|
|
|
|
|
|
|
|
|
|
|
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
$14.6 million at December 31, 2010 and
$18.4 million at December 31, 2009. During 2010 and
2009, there were $23.5 million and $28.3 million,
respectively, of new loans and other additions, while repayments
and other reductions totaled $27.3 million and
$24.8 million, respectively.
65
Loans held for sale, comprised of fixed-rate real estate
residential loans, were $20.5 million at December 31,
2010 and $8.4 million at December 31, 2009. The
Corporation sold real estate residential loans totaling
$275 million in 2010 and $361 million in 2009. The
only loans purchased by the Corporation during 2010 were those
acquired in the OAK acquisition, as discussed in Note 2.
There were no loans purchased in 2009.
Credit
Quality Monitoring
The Corporation maintains loan policies and credit underwriting
standards as part of the process of managing credit risk. These
standards include making 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.
The Corporation has a loan approval process involving
underwriting and individual and group loan approval authorities
to consider credit quality and loss exposure at loan
origination. The loans in the Corporations commercial loan
portfolio are risk rated at origination based on the grading
system set forth below. The approval authority of relationship
managers is established based on experience levels, with credit
decisions greater than $1.0 million requiring group loan
authority approval, except for four executive and senior
officers who have varying limits exceeding $1.0 million and
up to $2.5 million. With respect to the group loan
authorities, the Corporation has a loan committee, consisting of
certain executive and senior officers, that meets weekly to
consider loans in the amount of $1.0 million to
$2.5 million. A directors loan committee, consisting
of ten members of the board of directors, including the chief
executive officer, and the senior credit officer, meets
bi-weekly to consider loans in the amount of $2.5 million
to $10 million. Loans over $10 million require the
approval of the board of directors.
The majority of the Corporations consumer loan portfolio
is comprised of secured loans that are relatively small and are
evaluated at origination on a centralized basis against
standardized underwriting criteria. The ongoing measurement of
credit quality of the consumer loan portfolio is largely done on
an exception basis. If payments are made on schedule, as agreed,
then no further monitoring is performed. However, if delinquency
occurs, the delinquent loans are turned over to the
Corporations collection department for resolution, which
generally occurs fairly rapidly and often through repossession
and foreclosure. Credit quality for the entire consumer loan
portfolio is measured by the periodic delinquency rate,
nonaccrual amounts and actual losses incurred.
Loans in the commercial loan portfolio tend to be larger and
more complex than those in the consumer loan portfolio, and
therefore, are subject to more intensive monitoring. All loans
in the commercial loan portfolio have an assigned relationship
manager, and most borrowers provide periodic financial and
operating information that allows the relationship managers to
stay abreast of credit quality during the life of the loans. The
risk ratings of loans in the commercial loan portfolio are
reassessed at least annually, with loans below an acceptable
risk rating reassessed more frequently and reviewed by various
loan committees within the Corporation at least quarterly.
The Corporation maintains a centralized independent loan review
function that monitors the approval process and on-going asset
quality of the loan portfolio, including the accuracy of loan
grades. The Corporation also maintains an independent appraisal
review function that participates in the review of all
appraisals obtained by the Corporation.
66
Credit
Quality Indicators
The Corporation uses a nine grade risk rating system to monitor
the ongoing credit quality of its commercial loan portfolio.
These loan grades rank the credit quality of a borrower by
measuring liquidity, debt capacity, coverage and payment
behavior as shown in the borrowers financial statements.
The loan grades also measure the quality of the borrowers
management and the repayment support offered by any guarantors.
A summary of the Corporations loan grades (or,
characteristics of the loans within each grade) follows:
Risk Grades 1-5 (Acceptable Credit Quality)
All loans in risk grades 1 5 are considered to be
acceptable credit risks by the Corporation and are grouped for
purposes of allowance for loan loss considerations and financial
reporting. The five grades essentially represent a ranking of
loans that are all viewed to be of acceptable credit quality,
taking into consideration the various factors mentioned above,
but with varying degrees of financial strength, debt coverage,
management and factors that could impact credit quality.
Business credits within risk grades 1 5 range from
Risk Grade 1: Prime Quality (factors include: excellent business
credit; excellent debt capacity and coverage; outstanding
management; strong guarantors; superior liquidity and net worth;
favorable
loan-to-value
ratios; debt secured by cash or equivalents, or backed by the
full faith and credit of the U.S. Government) to Risk Grade
5: Acceptable Quality With Care (factors include: acceptable
business credit, but with added risk due to specific industry or
internal situations).
Risk Grade 6 (Watch) A business credit that
is not acceptable within the Corporations loan origination
criteria; cash flow may not be adequate or is continually
inconsistent to service current debt; financial condition has
deteriorated as company trends/management have become
inconsistent; the company is slow in furnishing quality
financial information; working capital needs of the company are
reliant on short-term borrowings; personal guarantees are weak
and/or with
little or no liquidity; the net worth of the company has
deteriorated after recent or continued losses; the loan requires
constant monitoring and attention from the Corporation; payment
delinquencies becoming more serious; if left uncorrected, these
potential weaknesses may, at some future date, result in
deterioration of repayment prospects.
Risk Grade 7 (Substandard
Accrual) A business credit that is inadequately
protected by the current financial net worth and paying capacity
of the obligor or of the collateral pledged, if any; management
has deteriorated or has become non-existent; quality financial
information is unattainable; a high level of maintenance is
required by the Corporation; cash flow can no longer support
debt requirements; loan payments are continually
and/or
severely delinquent; negative net worth; personal guaranty has
become insignificant; a credit that has a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. The
Corporation still expects a full recovery of all contractual
principal and interest payments; however, a possibility exists
that the Corporation will sustain some loss if deficiencies are
not corrected.
Risk Grade 8 (Substandard
Nonaccrual) A business credit accounted for on a
nonaccrual basis that has all the weaknesses inherent in a loan
classified as risk grade 7 with the added characteristic that
the weaknesses are so pronounced that, on the basis of current
financial information, conditions, and values, collection in
full is highly questionable; a partial loss is possible and
interest is no longer being accrued. This loan meets the
definition of an impaired loan. The risk of loss requires
analysis to determine whether a valuation allowance needs to be
established.
Risk Grade 9 (Substandard
Doubtful) A business credit that has all the
weaknesses inherent in a loan classified as risk grade 8 and
interest is no longer being accrued, but additional deficiencies
make it highly probable that liquidation will not satisfy the
majority of the obligation; the primary source of repayment is
nonexistent and there is doubt as to the value of the secondary
source of repayment; the possibility of loss is likely, but
current pending factors could strengthen the credit. This loan
meets the definition of an impaired loan. A loan charge-off is
recorded when management deems an amount uncollectible; however,
the Corporation will establish a valuation allowance for
probable losses, if required.
The Corporation considers all loans graded 1-5 as acceptable
credit risks and structures and manages such relationships
accordingly. Periodic financial and operating data combined with
regular loan officer interactions are deemed adequate to monitor
borrower performance. Loans with risk grades of 6 and 7 are
considered watch credits and the frequency of loan
officer contact and receipt of financial data is increased to
stay abreast of borrower performance. Loans with risk grades of
8 and 9 are considered problematic and require special care.
Further, loans with risk grades of 6-9 are managed and monitored
regularly through a number of processes, procedures and
committees, including oversight by a loan administration
committee comprised of executive and senior management of the
Corporation, which includes highly structured reporting of
financial and operating data, intensive loan officer
intervention and strategies to exit, as well as potential
management by the Corporations special assets group.
67
The following schedule presents the recorded investment of loans
in the commercial loan portfolio by risk rating categories at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Portfolio Credit Exposure
|
|
|
|
Credit Risk Profile by Creditworthiness Category
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Land
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Construction
|
|
|
Development
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Originated Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5
|
|
$
|
619,150
|
|
|
$
|
656,471
|
|
|
$
|
67,907
|
|
|
$
|
15,797
|
|
|
$
|
1,359,325
|
|
Risk Grade 6
|
|
|
22,173
|
|
|
|
39,653
|
|
|
|
737
|
|
|
|
8,935
|
|
|
|
71,498
|
|
Risk Grade 7
|
|
|
16,480
|
|
|
|
35,471
|
|
|
|
551
|
|
|
|
983
|
|
|
|
53,485
|
|
Risk Grade 8
|
|
|
16,061
|
|
|
|
57,287
|
|
|
|
|
|
|
|
6,537
|
|
|
|
79,885
|
|
Risk Grade 9
|
|
|
607
|
|
|
|
3,271
|
|
|
|
|
|
|
|
2,430
|
|
|
|
6,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
674,471
|
|
|
$
|
792,153
|
|
|
$
|
69,195
|
|
|
$
|
34,682
|
|
|
$
|
1,570,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5
|
|
$
|
119,943
|
|
|
$
|
249,495
|
|
|
$
|
19,796
|
|
|
$
|
12,667
|
|
|
$
|
401,901
|
|
Risk Grade 6
|
|
|
10,236
|
|
|
|
18,202
|
|
|
|
|
|
|
|
|
|
|
|
28,438
|
|
Risk Grade 7
|
|
|
6,050
|
|
|
|
14,896
|
|
|
|
|
|
|
|
457
|
|
|
|
21,403
|
|
Risk Grade 8
|
|
|
8,282
|
|
|
|
2,225
|
|
|
|
243
|
|
|
|
5,580
|
|
|
|
16,330
|
|
Risk Grade 9
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,526
|
|
|
$
|
284,818
|
|
|
$
|
20,039
|
|
|
$
|
18,704
|
|
|
$
|
468,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates the credit quality of loans in the
consumer loan portfolio, based primarily on the aging status of
the loan and payment activity. Accordingly, nonaccrual loans,
loans past due as to principal or interest 90 days or more
and loans modified under troubled debt restructurings of the
originated portfolio and acquired loans past due in accordance
with the loans original contractual terms are considered
in a nonperforming status for purposes of credit quality
evaluation. The following schedule presents the recorded
investment of loans in the consumer loan portfolio based on the
credit risk profile of loans in a performing status and loans in
a nonperforming status at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan Portfolio Credit Exposure
|
|
|
|
Credit Risk Profile Based on
|
|
|
|
Aging Status and Payment Activity
|
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
|
|
|
Total
|
|
|
|
Residential
|
|
|
Installment
|
|
|
Home Equity
|
|
|
Consumer
|
|
|
|
(In thousands)
|
|
|
Originated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
733,461
|
|
|
$
|
495,203
|
|
|
$
|
286,854
|
|
|
$
|
1,515,518
|
|
Nonperforming
|
|
|
37,638
|
|
|
|
1,846
|
|
|
|
3,895
|
|
|
|
43,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
771,099
|
|
|
$
|
497,049
|
|
|
$
|
290,749
|
|
|
$
|
1,558,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
25,406
|
|
|
$
|
6,083
|
|
|
$
|
50,873
|
|
|
$
|
82,362
|
|
Nonperforming
|
|
|
1,541
|
|
|
|
|
|
|
|
274
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,947
|
|
|
$
|
6,083
|
|
|
$
|
51,147
|
|
|
$
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Nonperforming
Loans
Nonperforming loans include nonaccrual loans, accruing loans
past due 90 days or more as to interest or principal
payments and loans modified under troubled debt restructurings
of the originated portfolio. Due to the application of
ASC 310-30,
nonperforming loans at December 31, 2010 do not include
$21.4 million of acquired loans that were not performing in
accordance with the loans contractual terms as a market
yield adjustment was recognized on these loans in interest
income. Accordingly, the Corporation recognized
$0.7 million of interest income on these acquired loans
during 2010. The risk of credit loss on acquired loans was
recognized as part of the fair value adjustment at the
acquisition date.
A summary of nonperforming loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
16,668
|
|
|
$
|
19,309
|
|
|
$
|
16,324
|
|
Real estate commercial
|
|
|
60,558
|
|
|
|
49,419
|
|
|
|
27,344
|
|
Real estate construction and land development
|
|
|
8,967
|
|
|
|
15,184
|
|
|
|
15,310
|
|
Real estate residential
|
|
|
12,083
|
|
|
|
15,508
|
|
|
|
12,175
|
|
Consumer installment and home equity
|
|
|
4,686
|
|
|
|
7,169
|
|
|
|
5,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
102,962
|
|
|
|
106,589
|
|
|
|
76,466
|
|
Accruing loans contractually past due 90 days or more
as to interest or principal payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
530
|
|
|
|
1,371
|
|
|
|
1,652
|
|
Real estate commercial
|
|
|
1,350
|
|
|
|
3,971
|
|
|
|
9,995
|
|
Real estate construction and land development
|
|
|
1,220
|
|
|
|
1,990
|
|
|
|
759
|
|
Real estate residential
|
|
|
3,253
|
|
|
|
3,614
|
|
|
|
3,369
|
|
Consumer installment and home equity
|
|
|
1,055
|
|
|
|
787
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or more
as to interest or principal payments
|
|
|
7,408
|
|
|
|
11,733
|
|
|
|
16,862
|
|
Loans modified under troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and real estate commercial
|
|
|
15,057
|
|
|
|
|
|
|
|
|
|
Real estate residential
|
|
|
22,302
|
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified under troubled debt restructurings
|
|
|
37,359
|
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
147,729
|
|
|
$
|
135,755
|
|
|
$
|
93,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no interest income recognized on nonaccrual loans
during 2010, 2009 and 2008 while the loans were in nonaccrual
status. During 2010, the Corporation recognized
$1.1 million of interest income on these loans while they
were in an accruing status. Additional interest income that
would have been recorded on these loans had they been current in
accordance with their original terms was $5.9 million in
2010, $6.1 million in 2009 and $3.7 million in 2008.
During 2010, the Corporation recognized interest income of
$0.9 million on loans modified under troubled debt
restructurings-commercial and commercial real estate and
$0.9 million on loans modified under troubled debt
restructurings-residential.
The Corporations loans modified under troubled debt
restructurings-commercial and real estate commercial generally
consist of allowing commercial borrowers to defer scheduled
principal payments and make interest only payments for a
specified period of time at the stated interest rate of the
original loan agreement or lower payments due to a modification
of the loans contractual term. The Corporation does not
expect to incur a loss on these loans based on its assessment of
the borrowers expected cash flows, and accordingly, no
additional provision for loan losses has been recognized related
to these loans. Additionally, these loans are individually
evaluated for impairment and transferred to nonaccrual status
when it is probable that any remaining principal and interest
payments due on the loan will not be collected in accordance
with the contractual terms of the loan.
The Corporations loans modified under troubled debt
restructurings-real estate residential generally consist of
reducing a borrowers monthly payments by decreasing the
interest rate charged on the loan for a specified period of time
(generally 24 months). The Corporation recognized
$0.6 million and $0.8 million of additional provision
for loan losses during 2010 and 2009, respectively, related to
impairment on these loans based on the present value of expected
future cash flows discounted at the loans original
effective interest rate. These loans are moved to nonaccrual
status when the loan becomes 90 days past due as to
principal or interest and sooner if conditions warrant.
At December 31, 2010, there were $1.7 million of
commercial loans and $3.3 million of real estate
residential loans included in loans modified under troubled debt
restructurings that were past due 31 to 89 days and none
past due 90 days or more.
69
Impaired
Loans
Impaired loans include nonaccrual loans and loans modified under
troubled debt restructurings of the originated portfolio, which
totaled $140.3 million at December 31, 2010. Impaired
loans also include acquired loans that were not performing in
accordance with their contractual terms, which totaled
$21.4 million at December 31, 2010.
The following schedule presents impaired loans by portfolio
segment/class at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
|
|
|
|
Unpaid
|
|
|
Related
|
|
|
Annual
|
|
|
Recognized
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Valuation
|
|
|
Recorded
|
|
|
While on
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Impaired Status
|
|
|
|
(In thousands)
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,289
|
|
|
$
|
8,675
|
|
|
$
|
2,947
|
|
|
$
|
12,035
|
|
|
$
|
|
|
Real estate commercial
|
|
|
34,681
|
|
|
|
35,744
|
|
|
|
11,356
|
|
|
|
30,764
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development
|
|
|
1,881
|
|
|
|
1,984
|
|
|
|
663
|
|
|
|
2,939
|
|
|
|
|
|
Real estate residential
|
|
|
22,302
|
|
|
|
22,302
|
|
|
|
806
|
|
|
|
18,890
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67,153
|
|
|
|
68,705
|
|
|
|
15,772
|
|
|
|
64,628
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no related valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
28,597
|
|
|
|
39,927
|
|
|
|
|
|
|
|
18,030
|
|
|
|
1,114
|
|
Real estate commercial
|
|
|
38,689
|
|
|
|
51,722
|
|
|
|
|
|
|
|
36,629
|
|
|
|
371
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development
|
|
|
10,498
|
|
|
|
15,039
|
|
|
|
|
|
|
|
9,888
|
|
|
|
84
|
|
Real estate residential
|
|
|
12,083
|
|
|
|
12,083
|
|
|
|
|
|
|
|
11,989
|
|
|
|
|
|
Consumer installment
|
|
|
1,751
|
|
|
|
1,751
|
|
|
|
|
|
|
|
1,691
|
|
|
|
|
|
Home equity
|
|
|
2,935
|
|
|
|
2,935
|
|
|
|
|
|
|
|
2,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
94,553
|
|
|
|
123,457
|
|
|
|
|
|
|
|
81,061
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
36,886
|
|
|
|
48,602
|
|
|
|
2,947
|
|
|
|
30,065
|
|
|
|
1,114
|
|
Real estate commercial
|
|
|
73,370
|
|
|
|
87,466
|
|
|
|
11,356
|
|
|
|
67,393
|
|
|
|
371
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development
|
|
|
12,379
|
|
|
|
17,023
|
|
|
|
663
|
|
|
|
12,827
|
|
|
|
84
|
|
Real estate residential
|
|
|
34,385
|
|
|
|
34,385
|
|
|
|
806
|
|
|
|
30,879
|
|
|
|
878
|
|
Consumer installment
|
|
|
1,751
|
|
|
|
1,751
|
|
|
|
|
|
|
|
1,691
|
|
|
|
|
|
Home equity
|
|
|
2,935
|
|
|
|
2,935
|
|
|
|
|
|
|
|
2,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
161,706
|
|
|
$
|
192,162
|
|
|
$
|
15,772
|
|
|
$
|
145,689
|
|
|
$
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between a loans recorded investment and the
unpaid principal balance represents either (a) for impaired
loans of the originated portfolio, a partial charge-off
resulting from a confirmed loss due to the value of the
collateral securing the loan being below the loan balance and
managements assessment that the full collection of the
loan balance is not likely or (b) for acquired loans that
meet the definition of an impaired loan, fair value adjustments
recognized at the acquisition date attributable to expected
credit losses and the discounting of expected cash flows at
market interest rates. The difference between the recorded
investment and the unpaid principal balance of
$30.5 million at December 31, 2010 includes confirmed
losses (partial charge-offs) of $19.8 million and fair
value discount adjustments of $10.7 million. At
December 31, 2010, there was no valuation allowance
required for acquired loans, as no material changes in expected
cash flows had occurred since the acquisition date.
70
The following schedule presents a summary of impaired loans
between those with and without a valuation allowance at
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, real estate commercial, real estate construction and
land development
|
|
$
|
44,851
|
|
|
$
|
38,217
|
|
|
$
|
30,306
|
|
Real estate residential
|
|
|
22,302
|
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
67,153
|
|
|
|
55,650
|
|
|
|
30,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, real estate commercial, real estate construction and
land development
|
|
|
77,784
|
|
|
|
45,695
|
|
|
|
28,672
|
|
Real estate residential
|
|
|
12,083
|
|
|
|
15,508
|
|
|
|
12,175
|
|
Consumer installment and home equity
|
|
|
4,686
|
|
|
|
7,169
|
|
|
|
5,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
94,553
|
|
|
|
68,372
|
|
|
|
46,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
161,706
|
|
|
$
|
124,022
|
|
|
$
|
76,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of impaired loans during the year
|
|
$
|
145,689
|
|
|
$
|
110,895
|
|
|
$
|
67,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the valuation allowance on impaired loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Valuation allowance on impaired commercial portfolio loans
|
|
$
|
14,966
|
|
|
$
|
10,507
|
|
|
$
|
9,179
|
|
Valuation allowance on impaired real estate residential loans
|
|
|
806
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,772
|
|
|
$
|
11,188
|
|
|
$
|
9,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents the aging status of the recorded
investment in loans by portfolio segment/class at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-59
|
|
|
60-89
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
or More
|
|
|
Loans
|
|
|
Past Due
|
|
|
Current
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
|
Originated Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,788
|
|
|
$
|
3,645
|
|
|
$
|
530
|
|
|
$
|
16,668
|
|
|
$
|
27,631
|
|
|
$
|
646,840
|
|
|
$
|
674,471
|
|
Real estate commercial
|
|
|
9,960
|
|
|
|
4,139
|
|
|
|
1,350
|
|
|
|
60,558
|
|
|
|
76,007
|
|
|
|
716,146
|
|
|
|
792,153
|
|
Real estate construction
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689
|
|
|
|
68,506
|
|
|
|
69,195
|
|
Land development
|
|
|
|
|
|
|
119
|
|
|
|
1,220
|
|
|
|
8,967
|
|
|
|
10,306
|
|
|
|
24,376
|
|
|
|
34,682
|
|
Real estate residential
|
|
|
1,126
|
|
|
|
6,610
|
|
|
|
3,253
|
|
|
|
12,083
|
|
|
|
23,072
|
|
|
|
748,027
|
|
|
|
771,099
|
|
Consumer installment
|
|
|
6,179
|
|
|
|
1,741
|
|
|
|
95
|
|
|
|
1,751
|
|
|
|
9,766
|
|
|
|
487,283
|
|
|
|
497,049
|
|
Home equity
|
|
|
3,046
|
|
|
|
825
|
|
|
|
960
|
|
|
|
2,935
|
|
|
|
7,766
|
|
|
|
282,983
|
|
|
|
290,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,788
|
|
|
$
|
17,079
|
|
|
$
|
7,408
|
|
|
$
|
102,962
|
|
|
$
|
155,237
|
|
|
$
|
2,974,161
|
|
|
$
|
3,129,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
131
|
|
|
$
|
64
|
|
|
$
|
10,445
|
|
|
$
|
|
|
|
$
|
10,640
|
|
|
$
|
133,886
|
|
|
$
|
144,526
|
|
Real estate commercial
|
|
|
993
|
|
|
|
|
|
|
|
3,302
|
|
|
|
|
|
|
|
4,295
|
|
|
|
280,523
|
|
|
|
284,818
|
|
Real estate construction
|
|
|
736
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
979
|
|
|
|
19,060
|
|
|
|
20,039
|
|
Land development
|
|
|
2,697
|
|
|
|
|
|
|
|
5,580
|
|
|
|
|
|
|
|
8,277
|
|
|
|
10,427
|
|
|
|
18,704
|
|
Real estate residential
|
|
|
685
|
|
|
|
|
|
|
|
1,541
|
|
|
|
|
|
|
|
2,226
|
|
|
|
24,721
|
|
|
|
26,947
|
|
Consumer installment
|
|
|
19
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
6,021
|
|
|
|
6,083
|
|
Home equity
|
|
|
85
|
|
|
|
34
|
|
|
|
274
|
|
|
|
|
|
|
|
393
|
|
|
|
50,754
|
|
|
|
51,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,346
|
|
|
$
|
141
|
|
|
$
|
21,385
|
|
|
$
|
|
|
|
$
|
26,872
|
|
|
$
|
525,392
|
|
|
$
|
552,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Allowance
for Loan Losses
The allowance for loan losses (allowance) provides for probable
losses in the originated loan portfolio that have been
identified with specific customer relationships and for probable
losses believed to be inherent in the remainder of the
originated loan portfolio but that have not been specifically
identified. The allowance is comprised of specific allowances
(assessed for originated 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.
The Corporations allowance at December 31, 2010 did
not include losses inherent in the acquired loan portfolio, as
an allowance was not carried over on the date of acquisition.
The acquired loans were recorded at their estimated fair value
at the date of acquisition, with the estimated fair value
including a component for estimated credit losses. A portion of
the allowance, however, may be set aside in the future, related
to the acquired loans, if an acquired loan pool experiences a
decrease in expected cash flows as compared to those projected
at the acquisition date. An allowance related to acquired loans
was not required at December 31, 2010 due to no material
changes in expected cash flows since the date of acquisition.
Changes in the allowance were as follows for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year:
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
$
|
39,422
|
|
Provision for loan losses
|
|
|
45,600
|
|
|
|
59,000
|
|
|
|
49,200
|
|
Loan charge-offs
|
|
|
(40,486
|
)
|
|
|
(38,686
|
)
|
|
|
(33,942
|
)
|
Loan recoveries
|
|
|
3,575
|
|
|
|
3,471
|
|
|
|
2,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs
|
|
|
(36,911
|
)
|
|
|
(35,215
|
)
|
|
|
(31,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
89,530
|
|
|
$
|
80,841
|
|
|
$
|
57,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In determining the allowance 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, real estate construction and land development loans,
(ii) allocations established for adversely-rated
commercial, real estate commercial, real estate construction and
land development loans and nonaccrual real estate residential,
consumer installment and home equity loans,
(iii) allocations, by loan classes, 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, real estate construction and
land development loans in the originated portfolio. 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, 2010 loans in the commercial loan portfolio
that were in nonaccrual status were valued based on the fair
value of the collateral securing the loan, while the impaired
loans in the commercial loan portfolio that were modified under
troubled debt restructurings and in an accrual status were
valued based on the present value of expected future cash flows
discounted at the loans effective interest rate. It is the
Corporations general policy to, at least annually, obtain
new appraisals on impaired loans that are primarily secured by
real estate. When the Corporation determines that the fair value
of the collateral is less than the carrying value of an impaired
loan on nonaccrual status and a portion is deemed not
collectible, the portion of the impairment that is deemed not
collectible is charged off (confirmed loss) 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 grade risk rating system. This risk
rating system is similar to those employed by state and federal
banking regulators. Loans in the commercial loan portfolio that
are risk rated below a certain predetermined risk grade and
nonaccrual real estate residential and nonaccrual consumer
installment and home equity loans are assigned a loss allocation
factor that is based upon a historical analysis of actual loan
losses incurred and a valuation of the type of collateral
securing the loans.
72
The third element is determined by assigning allocations based
principally upon the three-year average of loss experience for
each class 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 class and reflects an attempt to
ensure that the overall allowance appropriately reflects a
margin for the imprecision necessarily inherent in the estimates
of loan losses. Management maintains an unallocated allowance to
recognize the uncertainty and imprecision underlying the process
of estimating inherent loan losses in the loan portfolio.
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 inherent 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.
Acquired loans are aggregated into pools based upon common risk
characteristics. On a quarterly basis, the expected future cash
flow of each pool is estimated based on various factors
including changes in property values of collateral dependent
loans, default rates, loss severities and prepayment speeds.
Decreases in estimates of expected cash flows within a pool
generally result in a charge to the provision for loan losses
and a corresponding increase in the allowance allocated to
acquired loans for the particular pool. Increases in estimates
of expected cash flows within a pool generally result in first a
reduction in the allowance allocated to acquired loans for the
particular pool, and then as an adjustment to the accretable
yield for the pool, which will increase amounts recognized in
interest income in subsequent periods.
The following schedule presents, by loan portfolio
segment/class, the changes in the allowance for the year ended
December 31, 2010 and details regarding the balance in the
allowance and the recorded investment in loans at
December 31, 2010 by impairment evaluation method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Portfolio
|
|
|
Consumer Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Land
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Construction
|
|
|
Development
|
|
|
Residential
|
|
|
Installment
|
|
|
Equity
|
|
|
Subtotal
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Changes in allowance for loan losses in 2010:
|
Beginning balance
|
|
$
|
19,078
|
|
|
$
|
23,964
|
|
|
$
|
1,388
|
|
|
$
|
3,809
|
|
|
$
|
13,627
|
|
|
$
|
11,554
|
|
|
$
|
5,726
|
|
|
$
|
79,146
|
|
|
$
|
1,695
|
|
|
$
|
80,841
|
|
Provision for loan losses
|
|
|
10,663
|
|
|
|
19,061
|
|
|
|
905
|
|
|
|
988
|
|
|
|
4,616
|
|
|
|
3,872
|
|
|
|
4,441
|
|
|
|
44,546
|
|
|
|
1,054
|
|
|
|
45,600
|
|
Charge-offs
|
|
|
(8,430
|
)
|
|
|
(10,811
|
)
|
|
|
(755
|
)
|
|
|
(1,784
|
)
|
|
|
(8,041
|
)
|
|
|
(6,289
|
)
|
|
|
(4,376
|
)
|
|
|
(40,486
|
)
|
|
|
|
|
|
|
(40,486
|
)
|
Recoveries
|
|
|
921
|
|
|
|
426
|
|
|
|
|
|
|
|
20
|
|
|
|
543
|
|
|
|
1,604
|
|
|
|
61
|
|
|
|
3,575
|
|
|
|
|
|
|
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,232
|
|
|
$
|
32,640
|
|
|
$
|
1,538
|
|
|
$
|
3,033
|
|
|
$
|
10,745
|
|
|
$
|
10,741
|
|
|
$
|
5,852
|
|
|
$
|
86,781
|
|
|
$
|
2,749
|
|
|
$
|
89,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses balance at December 31, 2010
attributable to:
|
Loans individually evaluated for impairment
|
|
$
|
2,947
|
|
|
$
|
11,356
|
|
|
$
|
|
|
|
$
|
663
|
|
|
$
|
806
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,772
|
|
|
$
|
|
|
|
$
|
15,772
|
|
Loans collectively evaluated for impairment
|
|
|
19,285
|
|
|
|
21,284
|
|
|
|
1,538
|
|
|
|
2,370
|
|
|
|
9,939
|
|
|
|
10,741
|
|
|
|
5,852
|
|
|
|
71,009
|
|
|
|
2,749
|
|
|
|
73,758
|
|
Loans acquired with deteriorated credit
quality(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,232
|
|
|
$
|
32,640
|
|
|
$
|
1,538
|
|
|
$
|
3,033
|
|
|
$
|
10,745
|
|
|
$
|
10,741
|
|
|
$
|
5,852
|
|
|
$
|
86,781
|
|
|
$
|
2,749
|
|
|
$
|
89,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment (loan balance) at December 31,
2010:
|
Loans individually evaluated for impairment
|
|
$
|
21,982
|
|
|
$
|
70,301
|
|
|
$
|
|
|
|
$
|
8,967
|
|
|
$
|
22,302
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
123,552
|
|
|
$
|
|
|
|
$
|
123,552
|
|
Loans collectively evaluated for impairment
|
|
|
652,489
|
|
|
|
721,852
|
|
|
|
69,195
|
|
|
|
25,715
|
|
|
|
748,797
|
|
|
|
497,049
|
|
|
|
290,749
|
|
|
|
3,005,846
|
|
|
|
|
|
|
|
3,005,846
|
|
Loans acquired with deteriorated credit
quality(1)
|
|
|
144,526
|
|
|
|
284,818
|
|
|
|
20,039
|
|
|
|
18,704
|
|
|
|
26,947
|
|
|
|
6,083
|
|
|
|
51,147
|
|
|
|
552,264
|
|
|
|
|
|
|
|
552,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
818,997
|
|
|
$
|
1,076,971
|
|
|
$
|
89,234
|
|
|
$
|
53,386
|
|
|
$
|
798,046
|
|
|
$
|
503,132
|
|
|
$
|
341,896
|
|
|
$
|
3,681,662
|
|
|
$
|
|
|
|
$
|
3,681,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Loans acquired with deteriorated
credit quality and loans that the Corporation elected to apply
ASC 310-30
by analogy were originally recorded at fair value at the
acquisition date and the risk of credit loss was recognized at
that date based on estimates of expected cash flows. There have
been no material changes in expected cash flows since the
acquisition date.
|
73
NOTE 5 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
17,344
|
|
|
$
|
11,787
|
|
Buildings
|
|
|
78,286
|
|
|
|
69,864
|
|
Equipment
|
|
|
51,123
|
|
|
|
47,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,753
|
|
|
|
129,541
|
|
Accumulated depreciation
|
|
|
(80,792
|
)
|
|
|
(75,607
|
)
|
|
|
|
|
|
|
|
|
|
Total Premises and Equipment
|
|
$
|
65,961
|
|
|
$
|
53,934
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 GOODWILL
Goodwill was $113.4 million at December 31, 2010 and
$69.9 million at December 31, 2009. During 2010, the
Corporation acquired OAK, which resulted in the recognition of
$43.5 million of goodwill. Goodwill recognized in the OAK
transaction was primarily attributable to the synergies and
economies of scale expected from combining the operations of the
Corporation and OAK. No amount of goodwill recorded in
conjunction with the OAK acquisition is deductible for tax
purposes. The Corporations goodwill impairment review is
performed annually as of September 30 of each year 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 Corporation
determined that no triggering events occurred that indicated
impairment from the most recent valuation date through
December 31, 2010. 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, 2010 or 2009.
NOTE 7 OTHER ACQUIRED INTANGIBLE ASSETS
The following sets forth the carrying amounts, accumulated
amortization and amortization expense of other acquired
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Original
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Original
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Core deposit intangible assets
|
|
$
|
26,468
|
|
|
$
|
17,062
|
|
|
$
|
9,406
|
|
|
$
|
18,033
|
|
|
$
|
15,702
|
|
|
$
|
2,331
|
|
Non-compete agreements
|
|
|
678
|
|
|
|
345
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,146
|
|
|
$
|
17,407
|
|
|
$
|
9,739
|
|
|
$
|
18,033
|
|
|
$
|
15,702
|
|
|
$
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with the OAK acquisition in 2010, the Corporation
recorded $8.4 million in core deposit intangible assets and
$0.7 million in non-compete agreements during 2010. There
were no additions of other acquired intangible assets during
2009.
Amortization expense on other acquired intangible assets for the
years ended December 31 follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,705
|
|
2009
|
|
|
719
|
|
2008
|
|
|
1,543
|
|
Estimated amortization expense on other acquired intangible
assets for the years ending December 31 follows (in thousands):
|
|
|
|
|
|
2011
|
|
$
|
1,860
|
|
2012
|
|
|
1,469
|
|
2013
|
|
|
1,309
|
|
2014
|
|
|
1,146
|
|
2015
|
|
|
1,066
|
|
2016 and thereafter
|
|
|
2,889
|
|
|
|
|
|
|
Total
|
|
$
|
9,739
|
|
|
|
|
|
|
74
NOTE 8 MORTGAGE SERVICING RIGHTS
For the three years ended December 31, 2010, activity for
capitalized MSRs was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning of year
|
|
$
|
3,077
|
|
|
$
|
2,191
|
|
|
$
|
2,283
|
|
Acquired
|
|
|
691
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
1,918
|
|
|
|
2,736
|
|
|
|
978
|
|
Amortization
|
|
|
(1,904
|
)
|
|
|
(1,850
|
)
|
|
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
3,782
|
|
|
$
|
3,077
|
|
|
$
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans serviced for others that have servicing rights capitalized
|
|
$
|
891,937
|
|
|
$
|
755,122
|
|
|
$
|
604,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of MSRs at end of year
|
|
$
|
5,674
|
|
|
$
|
4,776
|
|
|
$
|
2,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, the
weighted average coupon rate of the portfolio was 5.25% and the
discount rate was 8.4%.
During 2010 and 2009, the Corporation did not establish an MSR
valuation allowance, as the estimated fair value of MSRs
exceeded the recorded book value.
NOTE 9 DEPOSITS
A summary of deposits follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Noninterest-bearing demand
|
|
$
|
753,553
|
|
|
$
|
573,159
|
|
Interest-bearing demand
|
|
|
855,327
|
|
|
|
623,510
|
|
Savings
|
|
|
1,129,839
|
|
|
|
934,413
|
|
Time deposits over $100,000
|
|
|
508,196
|
|
|
|
408,955
|
|
Other time deposits
|
|
|
1,084,850
|
|
|
|
878,088
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,331,765
|
|
|
$
|
3,418,125
|
|
|
|
|
|
|
|
|
|
|
Excluded from total deposits are demand deposit account
overdrafts (overdrafts) which have been classified as loans. At
December 31, 2010 and 2009, overdrafts totaled
$2.7 million and $3.1 million, respectively. Time
deposits with remaining maturities of less than one year were
$909.1 million at December 31, 2010. Time deposits
with remaining maturities of one year or more were
$683.9 million at December 31, 2010. The maturities of
these time deposits are as follows: $311.3 million in 2012,
$180.4 million in 2013, $80.2 million in 2014,
$22.4 million in 2015 and $89.6 million thereafter.
75
NOTE 10
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
242,703
|
|
|
|
0.22
|
%
|
|
$
|
249,725
|
|
|
|
0.26
|
%
|
|
$
|
259,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
233,738
|
|
|
|
0.48
|
%
|
|
$
|
204,748
|
|
|
|
1.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11 FEDERAL HOME LOAN BANK ADVANCES
FHLB advances outstanding at December 31, 2010 and 2009 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Ending
|
|
|
Interest Rate
|
|
|
Ending
|
|
|
Interest Rate
|
|
|
|
Balance
|
|
|
At Year-End
|
|
|
Balance
|
|
|
At Year-End
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed-rate advances
|
|
$
|
74,130
|
|
|
|
3.07
|
%
|
|
$
|
50,000
|
|
|
|
2.75
|
%
|
Convertible fixed-rate advances
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
5.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FHLB advances
|
|
$
|
74,130
|
|
|
|
3.07
|
%
|
|
$
|
90,000
|
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, the carrying value of
these loans was $743.6 million. FHLB advances totaled
$74.1 million at December 31, 2010 and were comprised
solely of long-term advances. On April 30, 2010, the
Corporation acquired $35.9 million of FHLB advances in
conjunction with the OAK acquisition, of which
$24.1 million were outstanding at December 31, 2010.
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 $298.4 million at December 31, 2010.
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 2010, 2009 or 2008. The FHLB has the option to
convert convertible fixed-rate advances to a variable interest
rate each quarter. The Corporation has the option to prepay,
without penalty, convertible fixed-rate advances when the FHLB
exercises its option to convert to variable-rate advances. The
FHLB did not exercise this option during 2010 or 2009.
The scheduled principal reductions on FHLB advances outstanding
at December 31, 2010, including amortization of the
unamortized fair value premium of $1.0 million attributable
to the acquisition of OAK, were as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
31,073
|
|
2012
|
|
|
8,767
|
|
2013
|
|
|
28,025
|
|
2014
|
|
|
5,734
|
|
2015
|
|
|
531
|
|
|
|
|
|
|
Total
|
|
$
|
74,130
|
|
|
|
|
|
|
76
NOTE 12 EQUITY
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,
2010.
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, 2010, there were 500,000
remaining shares available for repurchase under the
Corporations stock repurchase programs.
During 2008, 38,416 shares 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.
Preferred
Stock
On April 20, 2009, the shareholders of the Corporation
authorized the board of directors of the Corporation to issue up
to 200,000 shares of preferred stock in connection with
either an acquisition by the Corporation of an entity that has
shares of preferred stock issued and outstanding pursuant to any
program established by the United States government or
participation by the Corporation in any program established by
the United States government. As of December 31, 2010, no
shares of preferred stock were issued and outstanding.
NOTE 13 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.
|
77
|
|
|
|
|
|
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,
Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, Federal Farm Credit Bank and the Small
Business Administration, securities issued by certain state and
political subdivisions, residential mortgage-backed securities,
collateralized mortgage obligations, corporate bonds and
preferred stock. Valuations are obtained from a third-party
pricing service for these investment securities.
|
|
|
|
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, MSRs, 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 date of the statement of
financial position 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, residential mortgage-backed
securities, collateralized mortgage obligations, corporate bonds
and preferred stock.
78
Disclosure
of Recurring Basis Fair Value Measurements
For assets measured at fair value on a recurring basis,
quantitative disclosures about the fair value measurements for
each major category of assets were 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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
$
|
|
|
|
$
|
117,521
|
|
|
$
|
|
|
|
$
|
117,521
|
|
State and political subdivisions
|
|
|
|
|
|
|
46,046
|
|
|
|
|
|
|
|
46,046
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
136,935
|
|
|
|
|
|
|
|
136,935
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
233,921
|
|
|
|
|
|
|
|
233,921
|
|
Corporate bonds
|
|
|
|
|
|
|
42,747
|
|
|
|
|
|
|
|
42,747
|
|
Preferred stock
|
|
|
|
|
|
|
1,440
|
|
|
|
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
|
|
|
$
|
578,610
|
|
|
$
|
|
|
|
$
|
578,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale
|
|
$
|
|
|
|
$
|
592,521
|
|
|
$
|
|
|
|
$
|
592,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no liabilities recorded at fair value on a recurring
basis at December 31, 2010 and 2009.
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,
2010 and 2009, substantially all of the impaired loans were
evaluated based on the fair value of the collateral. Impaired
loans, where a valuation allowance is established or a portion
of the loan is charged off 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, 2010 and
2009. 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,
2010 and 2009, 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 primarily on an accelerated basis over
periods ranging from ten 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
79
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, as 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, 2010 and 2009, there was no
impairment identified for core deposit intangible assets 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 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 there is no available appraised value, the Corporation
records the ORE and RA as a Level 3 valuation.
Disclosure
of Nonrecurring Basis Fair Value Measurements
For assets measured at fair value on a nonrecurring basis,
quantitative disclosures about fair value measurements for each
major category of assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,195
|
|
|
$
|
15,195
|
|
Real estate commercial
|
|
|
|
|
|
|
|
|
|
|
45,229
|
|
|
|
45,229
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
4,459
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired originated loans
|
|
|
|
|
|
|
|
|
|
|
64,883
|
|
|
|
64,883
|
|
Other real estate/repossessed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacant land
|
|
|
|
|
|
|
|
|
|
|
9,149
|
|
|
|
9,149
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
8,604
|
|
|
|
8,604
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
6,189
|
|
|
|
6,189
|
|
Residential development
|
|
|
|
|
|
|
|
|
|
|
3,035
|
|
|
|
3,035
|
|
Repossessed assets
|
|
|
|
|
|
|
|
|
|
|
533
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate/repossessed assets
|
|
|
|
|
|
|
|
|
|
|
27,510
|
|
|
|
27,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92,393
|
|
|
$
|
92,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,016
|
|
|
$
|
59,016
|
|
Other real estate/repossessed assets
|
|
|
|
|
|
|
|
|
|
|
17,540
|
|
|
|
17,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76,556
|
|
|
$
|
76,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no liabilities recorded at fair value on a
nonrecurring basis at December 31, 2010 and 2009.
80
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 for
financial instruments not required to be measured on a recurring
or nonrecurring basis, as prescribed by ASC 820, 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, 2010 and 2009,
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 securitiesheld-to-maturity
include certain securities issued by state and political
subdivisions and residential 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 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 commitments to extend credit,
standby letters of credit and loan commitments have no carrying
amount and have been estimated to have no realizable fair value.
Historically, a majority of the unused commitments to extend
credit have not been drawn upon and, generally, the Corporation
does not receive fees in connection with these commitments other
than standby letters of credit fees, which are not significant.
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 Wealth Management
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.
81
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, 2010
|
|
December 31, 2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
536,165
|
|
|
$
|
536,165
|
|
|
$
|
360,709
|
|
|
$
|
360,709
|
|
Investment and other securities
|
|
|
771,143
|
|
|
|
764,931
|
|
|
|
745,946
|
|
|
|
740,379
|
|
Loans
held-for-sale
|
|
|
20,479
|
|
|
|
20,479
|
|
|
|
8,362
|
|
|
|
8,362
|
|
Net loans
|
|
|
3,592,132
|
|
|
|
3,601,805
|
|
|
|
2,912,319
|
|
|
|
2,909,875
|
|
Interest receivable
|
|
|
15,761
|
|
|
|
15,761
|
|
|
|
14,644
|
|
|
|
14,644
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without defined maturities
|
|
$
|
2,738,719
|
|
|
$
|
2,738,719
|
|
|
$
|
2,131,082
|
|
|
$
|
2,131,082
|
|
Time deposits
|
|
|
1,593,046
|
|
|
|
1,614,854
|
|
|
|
1,287,043
|
|
|
|
1,302,558
|
|
Interest payable
|
|
|
2,887
|
|
|
|
2,887
|
|
|
|
2,103
|
|
|
|
2,103
|
|
Short-term borrowings
|
|
|
242,703
|
|
|
|
242,703
|
|
|
|
240,568
|
|
|
|
240,568
|
|
FHLB advances
|
|
|
74,130
|
|
|
|
75,166
|
|
|
|
90,000
|
|
|
|
91,910
|
|
NOTE 14 NONINTEREST INCOME
The following schedule includes the major components of
noninterest income during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service charges on deposit accounts
|
|
$
|
18,562
|
|
|
$
|
19,116
|
|
|
$
|
20,048
|
|
Wealth management revenue
|
|
|
10,106
|
|
|
|
9,273
|
|
|
|
10,625
|
|
Electronic banking fees
|
|
|
5,389
|
|
|
|
4,023
|
|
|
|
3,341
|
|
Mortgage banking revenue
|
|
|
3,925
|
|
|
|
4,412
|
|
|
|
1,836
|
|
Other fees for customer services
|
|
|
2,837
|
|
|
|
2,454
|
|
|
|
2,511
|
|
Insurance commissions
|
|
|
1,373
|
|
|
|
1,259
|
|
|
|
1,042
|
|
Investment securities gains
|
|
|
|
|
|
|
95
|
|
|
|
1,722
|
|
Other-than-temporary
impairment loss on investment security
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
Other
|
|
|
280
|
|
|
|
487
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Income
|
|
$
|
42,472
|
|
|
$
|
41,119
|
|
|
$
|
41,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 OPERATING EXPENSES
The following schedule includes the major categories of
operating expenses during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Salaries and wages
|
|
$
|
56,750
|
|
|
$
|
49,227
|
|
|
$
|
48,713
|
|
Employee benefits
|
|
|
11,666
|
|
|
|
10,991
|
|
|
|
10,514
|
|
Equipment and software
|
|
|
13,446
|
|
|
|
9,723
|
|
|
|
9,230
|
|
Occupancy
|
|
|
11,491
|
|
|
|
10,359
|
|
|
|
10,221
|
|
FDIC insurance premiums
|
|
|
7,388
|
|
|
|
7,013
|
|
|
|
899
|
|
Professional fees
|
|
|
5,589
|
|
|
|
4,165
|
|
|
|
3,554
|
|
Loan and collection costs
|
|
|
4,537
|
|
|
|
3,056
|
|
|
|
1,592
|
|
Outside processing/service fees
|
|
|
4,534
|
|
|
|
3,231
|
|
|
|
3,219
|
|
Other real estate and repossessed asset expenses
|
|
|
3,660
|
|
|
|
6,031
|
|
|
|
4,680
|
|
Postage and courier
|
|
|
3,115
|
|
|
|
2,951
|
|
|
|
3,169
|
|
Advertising and marketing
|
|
|
3,054
|
|
|
|
2,396
|
|
|
|
2,492
|
|
Telephone
|
|
|
1,768
|
|
|
|
1,840
|
|
|
|
2,186
|
|
Supplies
|
|
|
1,740
|
|
|
|
1,526
|
|
|
|
1,482
|
|
Intangible asset amortization
|
|
|
1,705
|
|
|
|
719
|
|
|
|
1,543
|
|
Non-loan losses
|
|
|
540
|
|
|
|
291
|
|
|
|
1,473
|
|
Other
|
|
|
5,819
|
|
|
|
4,091
|
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
136,802
|
|
|
$
|
117,610
|
|
|
$
|
109,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
NOTE 16 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, 2010, the Corporation had
257 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 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 Wealth
Management 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, target ranges have been set for the three
primary asset classes: an equity securities range from 60% to
70%, a debt securities range from 30% to 40%; and a cash 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
|
|
2010
|
|
|
2009
|
|
|
Equity securities
|
|
|
68
|
%
|
|
|
64
|
%
|
Debt securities
|
|
|
30
|
|
|
|
32
|
|
Other
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
83
The following schedules set forth the fair value of Pension Plan
assets and the level of the valuation inputs used to value the
assets at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
Asset Category
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,752
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,752
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large- and mid-cap
stock(a)
|
|
|
35,157
|
|
|
|
|
|
|
|
|
|
|
|
35,157
|
|
U.S. small-cap mutual funds
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
2,610
|
|
International large-cap mutual funds
|
|
|
11,353
|
|
|
|
|
|
|
|
|
|
|
|
11,353
|
|
Emerging markets mutual funds
|
|
|
6,176
|
|
|
|
|
|
|
|
|
|
|
|
6,176
|
|
Chemical Financial Corporation common stock
|
|
|
3,685
|
|
|
|
|
|
|
|
|
|
|
|
3,685
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government sponsored
agency bonds and notes
|
|
|
5,983
|
|
|
|
3,143
|
|
|
|
|
|
|
|
9,126
|
|
Corporate
bonds(b)
|
|
|
|
|
|
|
16,634
|
|
|
|
|
|
|
|
16,634
|
|
Other
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,964
|
|
|
$
|
19,777
|
|
|
$
|
|
|
|
$
|
86,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
Asset Category
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
4,851
|
|
|
|
6,022
|
|
|
|
|
|
|
|
10,873
|
|
Corporate
bonds(b)
|
|
|
|
|
|
|
12,462
|
|
|
|
|
|
|
|
12,462
|
|
Other
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,217
|
|
|
$
|
18,484
|
|
|
$
|
|
|
|
$
|
73,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2010 and 2009, equity securities
included 166,363 shares and 139,043 shares,
respectively, of the Corporations common stock. During
2010 and 2009, cash dividends of $0.13 million and
$0.16 million, respectively, 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 $3.7 million at December 31, 2010 and
$3.3 million at December 31, 2009, which represented
4.2% and 4.4% of Pension Plan assets at December 31, 2010
and 2009, respectively.
84
The following schedule sets forth the changes in the projected
benefit obligation and plan assets of the Corporations
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
79,682
|
|
|
$
|
74,346
|
|
Service cost
|
|
|
1,228
|
|
|
|
1,354
|
|
Interest cost
|
|
|
4,785
|
|
|
|
4,720
|
|
Net actuarial loss
|
|
|
4,294
|
|
|
|
2,915
|
|
Benefits paid
|
|
|
(3,285
|
)
|
|
|
(3,653
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
86,704
|
|
|
|
79,682
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
73,701
|
|
|
|
60,523
|
|
Actual return on plan assets
|
|
|
6,325
|
|
|
|
9,331
|
|
Employer contributions
|
|
|
10,000
|
|
|
|
7,500
|
|
Benefits paid
|
|
|
(3,285
|
)
|
|
|
(3,653
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
86,741
|
|
|
|
73,701
|
|
|
|
|
|
|
|
|
|
|
Funded (unfunded) projected benefit obligation at December 31
|
|
$
|
37
|
|
|
$
|
(5,981
|
)
|
|
|
|
|
|
|
|
|
|
The Corporations accumulated benefit obligation as of
December 31, 2010 and 2009 for the Pension Plan was
$80.9 million and $73.5 million, respectively.
The Corporation contributed $10.0 million and
$7.5 million to the Pension Plan in 2010 and 2009,
respectively. There is no minimum required Pension Plan
contribution in 2011, as prescribed by the Internal Revenue
Code. As of December 31, 2010, the Corporation had not
determined whether it would make a contribution to the Pension
Plan in 2011.
Weighted-average rate assumptions of the Pension Plan follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate used in determining benefit obligation
December 31
|
|
|
5.65
|
%
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining pension expense
|
|
|
6.15
|
|
|
|
6.50
|
|
|
|
6.50
|
|
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
|
|
|
|
3.50
|
|
|
|
4.25
|
|
Rate of compensation increase used in determining pension expense
|
|
|
3.50
|
|
|
|
4.25
|
|
|
|
4.25
|
|
Net periodic pension cost of the Pension Plan consisted of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
1,228
|
|
|
$
|
1,354
|
|
|
$
|
1,589
|
|
Interest cost
|
|
|
4,785
|
|
|
|
4,720
|
|
|
|
4,607
|
|
Expected return on plan assets
|
|
|
(5,724
|
)
|
|
|
(5,417
|
)
|
|
|
(5,639
|
)
|
Amortization of prior service credit
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Amortization of net actuarial loss
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan expense
|
|
$
|
778
|
|
|
$
|
653
|
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents estimated future Pension Plan
benefit payments (in thousands):
|
|
|
|
|
2011
|
|
$
|
4,258
|
|
2012
|
|
|
4,567
|
|
2013
|
|
|
4,454
|
|
2014
|
|
|
4,714
|
|
2015
|
|
|
5,095
|
|
2016 - 2020
|
|
|
29,422
|
|
|
|
|
|
|
Total
|
|
$
|
52,510
|
|
|
|
|
|
|
85
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:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
856
|
|
|
$
|
773
|
|
Service cost
|
|
|
27
|
|
|
|
23
|
|
Interest cost
|
|
|
51
|
|
|
|
49
|
|
Net actuarial loss
|
|
|
33
|
|
|
|
52
|
|
Benefits paid
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
926
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
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 projected benefit obligation at December 31
|
|
$
|
(926
|
)
|
|
$
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
The Supplemental Plans accumulated benefit obligation as
of December 31, 2010 and 2009 was $0.79 million and
$0.71 million, respectively.
Weighted-average rate assumptions of the Supplemental Plan
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Discount rate used in determining benefit
obligations December 31
|
|
|
5.65
|
%
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining expense
|
|
|
6.15
|
|
|
|
6.50
|
|
|
|
6.50
|
|
Rate of compensation increase in determining benefit
obligation December 31
|
|
|
3.50
|
|
|
|
3.50
|
|
|
|
4.25
|
|
Rate of compensation increase used in determining expense
|
|
|
3.50
|
|
|
|
4.25
|
|
|
|
4.25
|
|
Net periodic cost of the Supplemental Plan consisted of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
27
|
|
|
$
|
23
|
|
|
$
|
15
|
|
Interest cost
|
|
|
51
|
|
|
|
49
|
|
|
|
39
|
|
Amortization of unrecognized net actuarial (gain) loss
|
|
|
2
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Plan expense
|
|
$
|
80
|
|
|
$
|
72
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents estimated future Supplemental
Plan benefit payments (in thousands):
|
|
|
|
|
2011
|
|
$
|
42
|
|
2012
|
|
|
42
|
|
2013
|
|
|
42
|
|
2014
|
|
|
42
|
|
2015
|
|
|
42
|
|
2016 - 2020
|
|
|
489
|
|
|
|
|
|
|
Total
|
|
$
|
699
|
|
|
|
|
|
|
86
Postretirement
Plan:
The Corporation has a postretirement benefit plan
(Postretirement Plan) that provides medical benefits, and dental
benefits through age 65, to a limited number of active and
retired employees. As of December 31, 2010, the
Postretirement Plan included 5 active employees in the
grandfathered group that were eligible to receive a premium
supplement and 107 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 five 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.
The following sets forth changes in the Corporations
Postretirement Plan benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Projected postretirement benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
4,740
|
|
|
$
|
4,184
|
|
Interest cost
|
|
|
217
|
|
|
|
282
|
|
Net actuarial (gain) loss
|
|
|
(909
|
)
|
|
|
463
|
|
Benefits paid, net of retiree contributions
|
|
|
(291
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
3,757
|
|
|
|
4,740
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
|
Employer contributions, net of retiree contributions
|
|
|
291
|
|
|
|
189
|
|
Benefits paid, net of retiree contributions
|
|
|
(291
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded projected benefit obligation at December 31
|
|
$
|
(3,757
|
)
|
|
$
|
(4,740
|
)
|
|
|
|
|
|
|
|
|
|
The Postretirement Plans accumulated benefit obligation as
of December 31, 2010 and 2009 was $3.8 million and
$4.7 million, respectively.
Net periodic postretirement benefit income of the Postretirement
Plan consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Interest cost
|
|
$
|
217
|
|
|
$
|
282
|
|
|
$
|
260
|
|
Amortization of prior service credit
|
|
|
(324
|
)
|
|
|
(324
|
)
|
|
|
(324
|
)
|
Amortization of unrecognized net actuarial loss
|
|
|
|
|
|
|
24
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Plan income
|
|
$
|
(107
|
)
|
|
$
|
(18
|
)
|
|
$
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following presents estimated future retiree plan benefit
payments under the Postretirement Plan (in thousands):
|
|
|
|
|
2011
|
|
$
|
331
|
|
2012
|
|
|
336
|
|
2013
|
|
|
335
|
|
2014
|
|
|
332
|
|
2015
|
|
|
324
|
|
2016 - 2020
|
|
|
1,485
|
|
|
|
|
|
|
Total
|
|
$
|
3,143
|
|
|
|
|
|
|
Weighted-average rate assumptions of the Postretirement Plan
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate used in determining the accumulated postretirement
benefit obligation December 31
|
|
|
5.65
|
%
|
|
|
6.15
|
%
|
|
|
6.50
|
%
|
Discount rate used in determining periodic postretirement
benefit cost
|
|
|
6.15
|
|
|
|
6.50
|
|
|
|
6.50
|
|
Year 1 increase in cost of postretirement benefits
|
|
|
9.00
|
|
|
|
9.00
|
|
|
|
9.00
|
|
87
For measurement purposes, the annual rates of increase in the
per capita cost of covered health care benefits and dental
benefits for 2011 were each assumed at 9%. These rates were
assumed to decrease gradually to 5% in 2015 and remain at that
level thereafter.
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 2010
|
|
$
|
17
|
|
|
$
|
(15
|
)
|
Effect on postretirement benefit obligation as of
December 31, 2010
|
|
|
304
|
|
|
|
(270
|
)
|
The measurement date used to determine the Pension Plan,
Supplemental Plan and Postretirement Plan amounts disclosed
herein was December 31 of each year.
Accumulated
Other Comprehensive Loss:
The following sets forth the changes in accumulated other
comprehensive income (loss), net of tax, related to the
Corporations Pension Plan, Supplemental Plan and
Postretirement Plan during 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at beginning of
year
|
|
$
|
(15,686
|
)
|
|
$
|
(65
|
)
|
|
$
|
46
|
|
|
$
|
(15,705
|
)
|
Comprehensive income (loss) adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credits
|
|
|
(1
|
)
|
|
|
|
|
|
|
(211
|
)
|
|
|
(212
|
)
|
Net actuarial gain (loss)
|
|
|
(2,082
|
)
|
|
|
(20
|
)
|
|
|
591
|
|
|
|
(1,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) adjustment
|
|
|
(2,083
|
)
|
|
|
(20
|
)
|
|
|
380
|
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at end of year
|
|
$
|
(17,769
|
)
|
|
$
|
(85
|
)
|
|
$
|
426
|
|
|
$
|
(17,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated income (loss) that will be amortized from
accumulated other comprehensive income (loss) into net periodic
cost, net of tax, in 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Prior service credits
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
211
|
|
|
$
|
212
|
|
Net loss
|
|
|
(697
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(696
|
)
|
|
$
|
(4
|
)
|
|
$
|
211
|
|
|
$
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.77 million in 2010,
$0.72 million in 2009 and $0.66 million in 2008.
Employer contributions to the 401(k) Savings Plan for the 4%
benefit for employees who are not grandfathered under the
Pension Plan totaled $1.47 million in 2010,
$1.40 million in 2009 and $1.25 million in 2008. The
combined amount of the employer match and 4% contribution to the
401(k) Savings Plan totaled $2.24 million in 2010,
$2.12 million in 2009 and $1.91 million in 2008.
88
NOTE 17 SHARE-BASED COMPENSATION
Share-Based
Compensation:
The Corporation maintains a share-based compensation plan, under
which it periodically grants share-based awards for a fixed
number of shares to certain officers of the Corporation. The
fair value of share-based awards is recognized as compensation
expense over the requisite service or performance period.
The Corporation granted options to purchase 60,365 shares of
common stock during 2010, 70,190 shares of common stock during
2009 and 63,593 shares of common stock during 2008, to
certain officers of the Corporation. The stock options granted
have an exercise price equal to the market price per share of
the Corporations common stock on the date of grant, vest
ratably over a three- or five-year period and expire ten years
from the date of the grant. Compensation expense related to
stock option grants is recognized over the requisite service
period.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected dividend yield
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
4.20%
|
|
Risk-free interest rate
|
|
|
3.37
|
%
|
|
|
2.58
|
%
|
|
|
3.28%-3.43%
|
|
Expected stock price volatility
|
|
|
41.1
|
%
|
|
|
42.0
|
%
|
|
|
36.4%
|
|
Expected life of options in years
|
|
|
6.33
|
|
|
|
6.33
|
|
|
|
6.38
|
|
Weighted average per share fair value
|
|
$
|
7.65
|
|
|
$
|
6.46
|
|
|
|
$6.23
|
|
The Corporation estimates potential forfeitures of stock option
grants and adjusts compensation expense, accordingly. The
estimate of forfeitures is adjusted over the requisite service
period to the extent that actual forfeitures differ, or are
expected to differ, from such estimates. Changes in estimated
forfeitures are recognized in the period of change and also
impact the amount of share-based compensation expense to be
recognized in future periods.
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 common 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 (or any other valuation) model is incapable of
accurately predicting the Corporations common 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 common stock over the market price per share
of the Corporations common stock at the date of grant.
In conjunction with the acquisition of OAK, each unexercised
vested stock option of OAK outstanding at the acquisition date
was converted into a vested option to purchase 1.306 shares
of the Corporations common stock. The exercise price per
share of the Corporations common stock for each of these
options was equal to the exercise price per share of the OAK
unexercised stock option divided by 1.306. Accordingly, the
Corporation issued 26,425 stock options at a weighted average
exercise price of $26.83 per share. The duration and other terms
and conditions of these options are the same as the unexercised
OAK stock options.
The Corporation issued restricted stock performance units of
40,629 during 2010, 41,248 during 2009 and 30,701 during 2008.
The restricted stock units were valued at the market price per
share of the Corporations common stock on the date of
grant, discounted for estimated future dividends expected to be
paid on the common stock during the restricted period. The
restricted stock units issued in 2010 and 2009 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. Restricted stock performance units issued in 2010 vest
at December 31, 2012 if any of the predetermined targeted
earnings per share levels are achieved in 2012. On
March 25, 2010, the Corporations board of directors
approved a modification to the predetermined targeted earnings
per share levels of the 41,248 restricted stock performance
units that were granted in 2009. The Corporation considered this
to be a Type III (improbable to probable) modification. The
incremental cost of the modification was measured at
$0.5 million, which will be recognized over the remaining
performance period using the straight-line method. The
incremental cost recognized in 2010 for this modification was
$0.2 million. Restricted stock performance units modified
in 2010 vest at December 31, 2011 if any of the modified
predetermined targeted earnings per share levels are achieved in
2011. If the minimum targeted earnings per share level is not
met in 2011 or 2012, none of
89
the restricted stock performance units granted in 2009 or 2010
will vest. Restricted stock performance units issued in 2008 did
not vest at December 31, 2010 as none of the predetermined
targeted earnings per share levels were achieved in 2010.
Upon vesting, restricted stock performance units are 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 2011 or 2012, 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 5,979 shares were issued in 2010. The
awards had a value of $22.71 per share based on the closing
market price of the Corporations common stock on the date
the awards were issued and was recognized as compensation
expense in 2010. There were no stock awards issued in 2009 and
2008.
Compensation expense related to all share-based awards was
$1.4 million, $0.5 million and $0.7 million in
2010, 2009 and 2008, respectively.
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 (collectively referred to as share-based awards). Subject
to certain anti-dilution and other adjustments,
1,000,000 shares of the Corporations common stock
were originally available for share-based awards under the 2006
Plan. At December 31, 2010, there were 545,174 shares
available for future issuance of share-based awards 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 share-based awards under the 2006
Plan while the employee is a member of the Compensation and
Pension Committee. The 2006 Plan provides for share-based
accelerated vesting if there is a change in control of the
Corporation as defined in the 2006 Plan. Stock options can be
granted with an exercise price equal to no less than the market
price per share of the Corporations common stock on the
date of grant, vest from one to five years from the date of
grant and generally have a term of ten years from the date of
grant. Dividends are not paid on unexercised stock options or
restricted stock performance units.
The Corporations Stock Incentive Plan of 1997 (1997 Plan),
which was shareholder-approved, permitted awards of stock
options to be granted through December 31, 2006. Terms of
the 1997 Plan are essentially the same as the 2006 Plan.
A summary of stock option activity as of and during the three
years ended December 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Outstanding January 1, 2008
|
|
|
793,781
|
|
|
$
|
31.26
|
|
Activity during 2008:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63,593
|
|
|
|
24.46
|
|
Exercised
|
|
|
(95,764
|
)
|
|
|
27.28
|
|
Forfeited/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
|
|
Forfeited/expired
|
|
|
(49,806
|
)
|
|
|
33.61
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
720,375
|
|
|
|
30.02
|
|
Activity during 2010:
|
|
|
|
|
|
|
|
|
Issued in OAK transaction
|
|
|
26,425
|
|
|
|
26.83
|
|
Granted
|
|
|
60,365
|
|
|
|
24.56
|
|
Exercised
|
|
|
(1,736
|
)
|
|
|
23.63
|
|
Forfeited/expired
|
|
|
(47,764
|
)
|
|
|
31.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
757,665
|
|
|
$
|
29.42
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
630,995
|
|
|
$
|
30.65
|
|
|
|
|
|
|
|
|
|
|
90
A summary of nonvested stock options activity as of and during
the three years ended December 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Options
|
|
|
Per Option
|
|
|
Nonvested outstanding January 1, 2008
|
|
|
182,223
|
|
|
$
|
7.27
|
|
Activity during 2008:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63,593
|
|
|
|
6.23
|
|
Vested
|
|
|
(66,979
|
)
|
|
|
7.27
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested outstanding December 31, 2008
|
|
|
178,837
|
|
|
|
6.90
|
|
Activity during 2009:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
70,190
|
|
|
|
6.46
|
|
Vested
|
|
|
(76,400
|
)
|
|
|
6.99
|
|
Forfeited
|
|
|
(3,554
|
)
|
|
|
6.85
|
|
|
|
|
|
|
|
|
|
|
Nonvested outstanding December 31, 2009
|
|
|
(169,073
|
)
|
|
|
6.68
|
|
Activity during 2010:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
60,365
|
|
|
|
7.65
|
|
Vested
|
|
|
(99,540
|
)
|
|
|
6.87
|
|
Forfeited
|
|
|
(3,228
|
)
|
|
|
7.07
|
|
|
|
|
|
|
|
|
|
|
Nonvested outstanding December 31, 2010
|
|
|
126,670
|
|
|
$
|
6.99
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, unrecognized compensation expense for
nonvested stock options outstanding totaled $0.6 million
and the weighted-average period over which this amount will be
recognized is 1.8 years. Compensation expense of
$0.4 million and $0.2 million will be recognized for
stock options that will vest in 2011 and 2012, respectively.
The following summarizes information about stock options
outstanding at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Range of
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Number
|
|
Price
|
|
Average
|
|
Prices
|
|
Number
|
|
Price
|
|
Average
|
Outstanding
|
|
Per Share
|
|
Term*
|
|
Per Share
|
|
Exercisable
|
|
Per Share
|
|
Term*
|
|
|
70,404
|
|
|
$
|
21.09
|
|
|
|
8.31
|
|
|
$
|
20.78 - 21.10
|
|
|
|
23,953
|
|
|
$
|
21.09
|
|
|
|
8.29
|
|
|
308,236
|
|
|
|
24.63
|
|
|
|
6.91
|
|
|
|
23.63 - 24.86
|
|
|
|
228,017
|
|
|
|
24.65
|
|
|
|
6.29
|
|
|
48,960
|
|
|
|
27.52
|
|
|
|
1.79
|
|
|
|
25.60 - 28.77
|
|
|
|
48,960
|
|
|
|
27.52
|
|
|
|
1.79
|
|
|
135,500
|
|
|
|
32.28
|
|
|
|
4.97
|
|
|
|
32.28
|
|
|
|
135,500
|
|
|
|
32.28
|
|
|
|
4.97
|
|
|
56,490
|
|
|
|
35.67
|
|
|
|
2.95
|
|
|
|
35.67
|
|
|
|
56,490
|
|
|
|
35.67
|
|
|
|
2.95
|
|
|
138,075
|
|
|
|
39.69
|
|
|
|
3.95
|
|
|
|
39.69
|
|
|
|
138,075
|
|
|
|
39.69
|
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
757,665
|
|
|
$
|
29.42
|
|
|
|
5.53
|
|
|
$
|
20.78 - 39.69
|
|
|
|
630,995
|
|
|
$
|
30.65
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Weighted average remaining contractual term in years.
|
The intrinsic value of all
in-the-money
stock options and exercisable
in-the-money
stock options was $0.07 million and $0.03 million,
respectively, at December 31, 2010. The aggregate intrinsic
values of outstanding and exercisable options at
December 31, 2010 were calculated based on the closing
market price of the Corporations common stock on
December 31, 2010 of $22.15 per share less the exercise
price. 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 was $0.43 million.
At December 31, 2010, there were no outstanding stock
options with stock appreciation rights.
91
A summary of the activity for restricted stock performance units
as of and during the three years ended December 31, 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant Date
|
|
|
Number of
|
|
Fair Value
|
|
|
Units
|
|
Per Unit
|
|
Outstanding January 1, 2008
|
|
|
|
|
|
$
|
|
|
Activity during 2008:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
30,701
|
|
|
|
21.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
30,701
|
|
|
|
21.21
|
|
Activity during 2009:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
41,248
|
|
|
|
18.04
|
|
Forfeited/expired
|
|
|
(373
|
)
|
|
|
21.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
71,576
|
|
|
|
19.38
|
|
Activity during 2010:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,629
|
|
|
|
22.47
|
|
Cancelled (2009 grant)
|
|
|
(41,248
|
)
|
|
|
18.04
|
|
Modified (2009 grant)
|
|
|
41,248
|
|
|
|
23.43
|
|
Forfeited/expired
|
|
|
(31,353
|
)
|
|
|
21.17
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
80,852
|
|
|
$
|
22.99
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, total unrecognized compensation
cost related to restricted stock performance unit awards totaled
$0.8 million. This cost is recognized based on the expected
achievement of the targeted earnings per common share level for
the restricted stock performance units over approximately three
years.
NOTE 18 FEDERAL INCOME TAXES
The provision for federal income taxes was 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 2010, 2009
and 2008. 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 were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Tax at statutory rate
|
|
$
|
10,916
|
|
|
$
|
4,184
|
|
|
$
|
9,850
|
|
Changes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income
|
|
|
(2,169
|
)
|
|
|
(1,751
|
)
|
|
|
(1,409
|
)
|
Income tax credits
|
|
|
(1,232
|
)
|
|
|
(569
|
)
|
|
|
(584
|
)
|
Other, net
|
|
|
585
|
|
|
|
86
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for federal income taxes
|
|
$
|
8,100
|
|
|
$
|
1,950
|
|
|
$
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective federal income tax rate for the years ended
December 31, 2010, 2009 and 2008 was 26.0%, 16.3% and
29.5%, respectively.
The provision for federal income taxes consisted of the
following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Current
|
|
$
|
4,661
|
|
|
$
|
8,927
|
|
|
$
|
15,182
|
|
Deferred
|
|
|
3,439
|
|
|
|
(6,977
|
)
|
|
|
(6,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,100
|
|
|
$
|
1,950
|
|
|
$
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
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,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
31,335
|
|
|
$
|
28,294
|
|
Acquired loans fair value adjustment
|
|
|
15,864
|
|
|
|
|
|
Nonaccrual loan interest
|
|
|
3,826
|
|
|
|
2,690
|
|
Other real estate
|
|
|
3,125
|
|
|
|
1,794
|
|
Accrued expenses
|
|
|
1,807
|
|
|
|
978
|
|
Employee benefit plans
|
|
|
1,725
|
|
|
|
4,067
|
|
Other acquisition-related fair value adjustments
|
|
|
1,068
|
|
|
|
|
|
Core deposit intangible assets
|
|
|
|
|
|
|
1,045
|
|
Other
|
|
|
3,801
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
62,551
|
|
|
|
41,463
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,434
|
|
|
|
3,068
|
|
Investment securities
available-for-sale
|
|
|
1,786
|
|
|
|
1,646
|
|
Core deposit intangible assets
|
|
|
1,730
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
1,324
|
|
|
|
1,077
|
|
Loan fees
|
|
|
1,268
|
|
|
|
404
|
|
Premises and equipment
|
|
|
308
|
|
|
|
1,284
|
|
Other
|
|
|
1,557
|
|
|
|
1,622
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
11,407
|
|
|
|
9,101
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
51,144
|
|
|
$
|
32,362
|
|
|
|
|
|
|
|
|
|
|
Management expects to realize the full benefits of the deferred
tax assets recorded at December 31, 2010. The Corporation
had no reserve for contingent income tax liabilities recorded at
December 31, 2010 and 2009. 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, 2010, 2009,
2008 and 2007. 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, 2006.
NOTE 19 COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Corporation enters into
various transactions with its customers, which are not included
in its consolidated statements of financial condition. These
transactions include unused commitments to extend credit,
standby letters of credit and approved but undisbursed loans
(loan commitments). Unused 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.
Unused commitments to extend credit generally have fixed
expiration dates or other termination clauses. Historically, the
majority of the unused commitments to extend credit 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, including
underwriting standards and ongoing review and monitoring.
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. Loan commitments are not included in loans on the
consolidated statements of financial position. The majority of
loan commitments will be funded and convert to a portfolio loan
within a three-month period.
At December 31, 2010, total unused commitments to extend
credit, standby letters of credit and loan commitments were
$624 million, $45 million and $159 million,
respectively. At December 31, 2009, total unused
commitments to extend credit, standby letters of credit and loan
commitments were $413 million, $41 million and
$75 million, respectively. A significant portion of the
unused commitments to extend credit and standby letters of
credit outstanding as of December 31, 2010 expire one year
from their contract date; however, $71 million of unused
commitments to extend credit extend for more than five years.
93
The Corporations unused commitments to extend credit and
standby letters of credit have been estimated to have an
immaterial realizable fair value, as historically the majority
of these commitments have not been drawn upon and generally
Chemical Bank does not receive fees in connection with these
agreements. At December 31, 2010, the Corporation had a
reserve of $0.1 million related to potential losses from
standby letters of credit.
Loan commitments at December 31, 2010, totaling
$159 million, included $50 million of residential
mortgage loans that were expected to be sold in the secondary
market. The Corporation has locked the interest rate to the
customer (mortgage loan commitment) on the $50 million of
loans that are expected to be sold in the secondary market and
entered into best efforts forward contracts with the secondary
market on these mortgage loan commitments at December 31,
2010. Best efforts forward contracts offset the interest rate
risk of market interest rates changing between the date the
interest rate is locked with the customer and the date the loan
is sold in the secondary market. At December 31, 2009, the
Corporation had mortgage loan commitments of $18 million
included in loan commitments, with best efforts forward
contracts on these loans at that date.
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 2015, including renewal option periods for those
building leases that the Corporation expects to renew. Minimum
payments due in each of the next five years are as follows (in
thousands):
|
|
|
|
|
2011
|
|
$
|
7,884
|
|
2012
|
|
|
6,605
|
|
2013
|
|
|
3,041
|
|
2014
|
|
|
315
|
|
2015
|
|
|
225
|
|
|
|
|
|
|
Total
|
|
$
|
18,070
|
|
|
|
|
|
|
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 $9.2 million in
2010, $7.3 million in 2009 and $6.9 million in 2008.
The Corporation and Chemical Bank 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 20 REGULATORY CAPITAL AND RESERVE
REQUIREMENTS
Banking regulations require that banks maintain cash reserve
balances in vault cash with the FRB, or with certain other
qualifying banks. The aggregate average amount of the regulatory
balances required to be maintained by Chemical Bank was
$23.3 million during 2010 and $15.4 million during
2009. During 2010, Chemical Bank satisfied its regulatory
reserve requirements by maintaining vault cash balances in
excess of regulatory reserve requirements. Chemical Bank was not
required to maintain compensating balances with correspondent
banks during 2010 or 2009.
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, 2010, 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. During
2010, 2009 and 2008, Chemical Bank paid dividends to the
Corporation totaling $21.3 million, $0 and
$59 million, respectively. 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, 2010, Chemical Bank could pay dividends
totaling $17.5 million to the Corporation without
regulatory approval. At December 31, 2010, 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.
94
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, 2010 and 2009, 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required to be
|
|
|
|
|
|
|
Minimum
|
|
|
Well Capitalized
|
|
|
|
|
|
|
Required for
|
|
|
Under Prompt
|
|
|
|
|
|
|
Capital Adequacy
|
|
|
Corrective Action
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Regulations
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
$473,471
|
|
|
|
12.9
|
%
|
|
|
$293,856
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
465,709
|
|
|
|
12.7
|
|
|
|
293,573
|
|
|
|
8.0
|
|
|
|
$366,966
|
|
|
|
10.0
|
%
|
Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
427,014
|
|
|
|
11.6
|
|
|
|
146,928
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
419,296
|
|
|
|
11.4
|
|
|
|
146,786
|
|
|
|
4.0
|
|
|
|
220,179
|
|
|
|
6.0
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
427,014
|
|
|
|
8.4
|
|
|
|
204,426
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chemical Bank
|
|
|
419,296
|
|
|
|
8.2
|
|
|
|
204,291
|
|
|
|
4.0
|
|
|
|
255,363
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
NOTE 21 PARENT COMPANY ONLY FINANCIAL
STATEMENTS
Condensed financial statements of Chemical Financial Corporation
(parent company) only follow:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Condensed Statements of
Financial Position
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash at subsidiary bank
|
|
$
|
5,490
|
|
|
$
|
7,784
|
|
Investment in subsidiary bank
|
|
|
547,399
|
|
|
|
460,406
|
|
Premises and equipment
|
|
|
4,716
|
|
|
|
5,039
|
|
Goodwill
|
|
|
1,092
|
|
|
|
1,092
|
|
Other assets
|
|
|
2,656
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
561,353
|
|
|
$
|
475,837
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1,275
|
|
|
$
|
1,526
|
|
Shareholders equity
|
|
|
560,078
|
|
|
|
474,311
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
561,353
|
|
|
$
|
475,837
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Condensed Statements of
Income
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from subsidiary bank
|
|
$
|
21,300
|
|
|
$
|
|
|
|
$
|
59,000
|
|
Interest income from subsidiary bank
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
21,300
|
|
|
|
|
|
|
|
59,060
|
|
Operating expenses
|
|
|
5,116
|
|
|
|
2,903
|
|
|
|
2,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and equity in undistributed
(distributions in excess of) net income of subsidiary bank
|
|
|
16,184
|
|
|
|
(2,903
|
)
|
|
|
56,736
|
|
Federal income tax benefit
|
|
|
1,335
|
|
|
|
1,015
|
|
|
|
792
|
|
Equity in undistributed (distributions in excess of) net income
of subsidiary bank
|
|
|
5,571
|
|
|
|
11,891
|
|
|
|
(37,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,090
|
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Condensed Statements of Cash
Flows
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,090
|
|
|
$
|
10,003
|
|
|
$
|
19,842
|
|
Share-based compensation expense
|
|
|
1,395
|
|
|
|
490
|
|
|
|
664
|
|
Depreciation of premises and equipment
|
|
|
497
|
|
|
|
497
|
|
|
|
481
|
|
Distributions in excess of (equity in undistributed) net income
of subsidiary bank
|
|
|
(5,571
|
)
|
|
|
(11,891
|
)
|
|
|
37,686
|
|
Net increase in other assets
|
|
|
(1,140
|
)
|
|
|
(405
|
)
|
|
|
(441
|
)
|
Net increase (decrease) in other liabilities
|
|
|
(290
|
)
|
|
|
785
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
17,981
|
|
|
|
(521
|
)
|
|
|
58,420
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash assumed in business combination
|
|
|
850
|
|
|
|
|
|
|
|
|
|
Cash assumed in transfer of net assets to subsidiary bank
|
|
|
|
|
|
|
|
|
|
|
450
|
|
Purchases of premises and equipment, net
|
|
|
(174
|
)
|
|
|
(48
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
676
|
|
|
|
(48
|
)
|
|
|
(50
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(21,243
|
)
|
|
|
(28,190
|
)
|
|
|
(28,131
|
)
|
Proceeds from directors stock purchase plan
|
|
|
250
|
|
|
|
244
|
|
|
|
231
|
|
Proceeds from employees exercises of stock options
|
|
|
42
|
|
|
|
36
|
|
|
|
1,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(20,951
|
)
|
|
|
(27,910
|
)
|
|
|
(26,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,294
|
)
|
|
|
(28,479
|
)
|
|
|
31,978
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,784
|
|
|
|
36,263
|
|
|
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,490
|
|
|
$
|
7,784
|
|
|
$
|
36,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010(1)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
$
|
46,122
|
|
|
$
|
52,962
|
|
|
$
|
55,998
|
|
|
$
|
55,348
|
|
Interest expense
|
|
|
9,734
|
|
|
|
10,071
|
|
|
|
10,105
|
|
|
|
9,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
36,388
|
|
|
|
42,891
|
|
|
|
45,893
|
|
|
|
45,948
|
|
Provision for loan losses
|
|
|
14,000
|
|
|
|
12,700
|
|
|
|
8,600
|
|
|
|
10,300
|
|
Noninterest income
|
|
|
9,440
|
|
|
|
11,000
|
|
|
|
11,119
|
|
|
|
10,913
|
|
Operating expenses
|
|
|
29,189
|
|
|
|
34,650
|
|
|
|
36,216
|
|
|
|
36,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,639
|
|
|
|
6,541
|
|
|
|
12,196
|
|
|
|
9,814
|
|
Federal income tax expense
|
|
|
350
|
|
|
|
2,150
|
|
|
|
3,325
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,289
|
|
|
$
|
4,391
|
|
|
$
|
8,871
|
|
|
$
|
7,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
Diluted
|
|
|
0.10
|
|
|
|
0.17
|
|
|
|
0.32
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
(1) |
|
On April 30, 2010, the Corporation acquired 100% of OAK for
total consideration of $83.7 million. The total
consideration consisted of the issuance of approximately
3.5 million shares of the Corporations common stock
with a total value of $83.7 million at the acquisition
date, the exchange of 26,425 stock options for the outstanding
vested stock options of OAK with a value of the exchange equal
to approximately $41,000 at the acquisition date, and
approximately $8,000 of cash in lieu of fractional shares. At
the acquisition date, OAK had $820 million in total assets,
$627 million of loans and $693 million of total
deposits. |
97
MARKET FOR
CHEMICAL FINANCIAL
CORPORATION COMMON STOCK AND RELATED
SHAREHOLDER MATTERS (UNAUDITED)
Chemical Financial Corporation common stock is traded on The
Nasdaq Stock
Market®
under the symbol CHFC. As of December 31, 2010, there were
approximately 27.4 million shares of Chemical Financial
Corporation common stock issued and outstanding, held by
approximately 5,300 shareholders of record. The table below
sets forth the range of high and low sales prices for
transactions reported on The Nasdaq Stock
Market®
for Chemical Financial Corporation common stock for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
24.99
|
|
|
$
|
19.61
|
|
|
$
|
28.59
|
|
|
$
|
15.23
|
|
Second quarter
|
|
|
25.20
|
|
|
|
21.20
|
|
|
|
23.91
|
|
|
|
17.84
|
|
Third quarter
|
|
|
23.07
|
|
|
|
18.79
|
|
|
|
22.93
|
|
|
|
18.31
|
|
Fourth quarter
|
|
|
23.00
|
|
|
|
19.60
|
|
|
|
24.35
|
|
|
|
20.79
|
|
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 20 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, 2010,
management expects the Corporation to pay quarterly cash
dividends on its common shares in 2011. 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 21,
2011, the board of directors declared a $0.20 per share first
quarter 2011 cash dividend, payable on March 18, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
First quarter
|
|
$
|
0.200
|
|
|
$
|
0.295
|
|
|
$
|
0.295
|
|
|
$
|
0.285
|
|
|
$
|
0.275
|
|
Second quarter
|
|
|
0.200
|
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
Third quarter
|
|
|
0.200
|
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
Fourth quarter
|
|
|
0.200
|
|
|
|
0.295
|
|
|
|
0.295
|
|
|
|
0.285
|
|
|
|
0.275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.800
|
|
|
$
|
1.180
|
|
|
$
|
1.180
|
|
|
$
|
1.140
|
|
|
$
|
1.100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
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
(S&P) 500 Stock Index and the KBW Regional
Banking Index (Ticker: KRX). 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 Regional Banking Index is published by Keefe,
Bruyette & Woods, Inc. (KBW), an investment banking
firm that specializes in the banking industry. The KBW Regional
Banking Index is composed of 50 mid-cap regional bank holding
companies. Historically, the Corporation compared its return to
the KBW 50 Index. KBW discontinued the calculation of the KBW 50
Index at the end of 2009. The line graph assumes $100 was
invested on December 31, 2005.
The dollar values for total shareholder return plotted in the
above graph are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Chemical Financial Corporation
|
|
$
|
100.0
|
|
|
$
|
108.6
|
|
|
$
|
80.9
|
|
|
$
|
99.3
|
|
|
$
|
88.8
|
|
|
$
|
86.5
|
|
KBW Regional Banking Index
|
|
|
100.0
|
|
|
|
108.6
|
|
|
|
84.7
|
|
|
|
69.0
|
|
|
|
53.7
|
|
|
|
64.7
|
|
S&P 500 Stock Index
|
|
|
100.0
|
|
|
|
115.8
|
|
|
|
122.2
|
|
|
|
77.0
|
|
|
|
97.3
|
|
|
|
112.0
|
|
99
CHEMICAL
FINANCIAL CORPORATION DIRECTORS AND EXECUTIVE OFFICERS
At
December 31, 2010
|
|
|
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
|
|
|
James R. Fitterling Executive Vice President of The
Dow Chemical Company (a diversified science and technology
company that manufactures chemical, plastic and agricultural
products), President of Plastics and Hydrocarbons within Dow
|
|
|
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)
|
|
|
James B. Meyer Retired Chairman, Chief Executive
Officer and President, Spartan Stores, Inc. (a food services
wholesaler and retailer)
|
|
|
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
|
|
|
Grace O. Shearer Retired Chief Executive Officer of
West Michigan Heart, P.C. (a cardiology service provider in
West Michigan)
|
|
|
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, Retired Chairman, Chief Executive Officer and
President, Chemical Financial Corporation and Chairman, Chief
Executive Officer and President, Chemical Bank
|
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
|
100
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,
2010
|
|
|
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
|
(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)
101
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, 2010, determined using the closing price of the
registrants common stock on June 30, 2010, as quoted
on The Nasdaq Stock
Market®,
was $541.9 million.
The number of shares outstanding of each of the
registrants classes of common stock, as of
January 31, 2011:
Common stock, $1 par value per share
27,451,367 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. Portions of the
registrants Proxy Statement for the April 18, 2011
annual shareholders meeting are incorporated by reference
into Part III of this report.
Only those sections of this 2010 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, 2010. No other information
contained in this 2010 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
102
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 20 community banks and 15 other branch bank offices
through December 31, 2010 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. During 2010, the
Corporation acquired O.A.K. Financial Corporation (OAK). This
transaction is discussed in more detail under the subheading,
Mergers, Acquisitions, Consolidations and
Divestitures, Note 2 to the consolidated financial
statements and the subheading, Acquisition of O.A.K.
Financial Corporation, included in Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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 Chemical Financial
Advisors 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, 2010, Chemical was the second largest
commercial bank holding company headquartered in Michigan,
measured by total assets, and together with Chemical Bank,
employed a total of 1,608 full-time equivalent employees.
Chemicals business is concentrated in a single industry
segment commercial banking. Chemical Bank offers a
full range of traditional 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 wealth
management 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, 2010, Chemical and Chemical Bank served
these markets through 142 banking offices located in 32
counties, all in the lower peninsula of Michigan. In addition to
the banking offices, Chemical Bank operated three loan
production offices and 162 automated teller machines, both on-
and off-bank premises, as of December 31, 2010. The
Corporation did not have banking offices or provide commercial
banking services in the southeast portion of Michigan at
December 31, 2010. The southeast portion of Michigan is not
part of the Corporations current or projected markets for
the delivery of its financial services.
A summary of the composition of the Corporations loan
portfolio at December 31, 2010, 2009 and 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Composition of Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
22.2
|
%
|
|
|
19.5
|
%
|
|
|
19.7
|
%
|
Real estate commercial
|
|
|
29.3
|
|
|
|
26.2
|
|
|
|
26.4
|
|
Real estate construction and land development
|
|
|
3.9
|
|
|
|
4.1
|
|
|
|
4.0
|
|
Real estate residential
|
|
|
21.7
|
|
|
|
24.7
|
|
|
|
28.1
|
|
Consumer installment and home equity
|
|
|
22.9
|
|
|
|
25.5
|
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total composition of loans
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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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, 2010, real estate
commercial loans totaled $1.1 billion, or 29.3% of total
loans, compared to $786 million, or 26.2% of total loans,
at December 31, 2009 and $786 million, or 26.4% of
total loans, at December 31, 2008. The increase in real
estate commercial loans during 2010 was primarily attributable
to the acquisition of OAK.
103
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
2010, the Corporation sold $276 million of real estate
residential loan originations in the secondary market, compared
to the sale of $361 million and $145 million of these
loan originations during 2009 and 2008, respectively. The
decrease in loans sold in 2010, compared to 2009, was primarily
attributable to the Corporation holding $71 million of
fixed rate real estate residential loans with fifteen year terms
in its own portfolio rather than selling them in the secondary
market as has been its general practice. The increase in loans
sold in 2009, compared to 2008, was attributable to the
significant reduction in market interest rates 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.
The principal source of revenue for Chemical is interest income
and fees on loans, which accounted for 76% of total revenue in
2010, 74% of total revenue in 2009 and 72% of total revenue in
2008. Interest income on investment securities is also a
significant source of revenue, accounting for 6% of total
revenue in 2010, 8% of total revenue in 2009 and 10% of total
revenue in 2008. 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 wealth management services, including
trust services, financial and estate planning, retirement
programs, investment management and custodial services and
employee benefit programs through the Wealth Management
(formerly known as Trust and Investment Management Services)
department of Chemical Bank. The Wealth Management department
had assets under custodial and management arrangements of
$2.11 billion, $1.91 billion and $1.67 billion as
of December 31, 2010, 2009 and 2008, respectively. The
Wealth Management department primarily earns revenue from fees
based on the market value of those assets under management,
which can fluctuate significantly 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. 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). 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
the competition for customers bank deposits, Chemical
Bank, through the Chemical Financial Advisors 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 Wealth Management department of
Chemical Bank offers customers a variety of investment products
and services.
Supervision
and Regulation
Banks and bank holding companies are extensively regulated. As
of December 31, 2010, 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.
104
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 20 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 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
ratio of Chemical Bank exceeds 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 20 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 improves incentives for
effective risk management and may reduce the extent to which
safer banks subsidize riskier ones. The FDIC modified insurance
premium assessments subsequent to the Reform Act, as discussed
below.
105
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 Corporations DIF insurance
premium in 2008 was $2.0 million, which was offset by the
remaining $1.4 million of assessment credits.
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 rule
resulted in annualized assessment rates for Risk Category 1
institutions ranging from 12 to 14 basis points in 2009. In
February 2009, the FDIC issued 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 initial base assessment rates for Risk
Category 1 institutions ranged 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 for the last three
quarters of 2009 and all of 2010. Chemical Bank was by
definition a Risk Category 1 institution during all of 2009 and
2010. The Corporations DIF insurance premiums in 2009 and
2010 were $4.9 million and $7.1 million, respectively.
In May 2009, the FDIC issued a 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 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. The prepayment calculation was based on an
institutions assessment rate in effect on
September 30, 2009 and assumed a 5% annual growth rate in
the assessment base. On December 30, 2009, the Corporation
prepaid $19.7 million in risk-based assessments. 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; however, in
November 2010 the FDIC issued a proposed rule that would further
change assessment rates beginning April 1, 2011, as
discussed below.
In November 2010, the FDIC issued a proposed rule, which was
adopted in February 2011, that changes the assessment base and
assessment rates used to compute quarterly FDIC insurance
assessments beginning April 1, 2011. Under the rule, the
assessment base for all insured institutions, as mandated by The
Dodd-Frank Wall Street Reform and Consumer Act of 2010
(Dodd-Frank Act), will change to average consolidated total
assets less average tangible equity. In addition, the initial
base assessment rates for Risk Category 1 institutions will
range from 5 to 9 basis points, on an annualized basis, and
from 2.5 to 9 basis points after the effect of potential
base-rate adjustments. Based upon the adopted rule and the
Corporations average assessment base (under the adopted
rule) at December 31, 2010, the Corporations FDIC
premiums are expected to be lower in 2011 than in 2010.
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. On July 21, 2010, legislation was passed to
permanently increase the FDIC deposit insurance coverage to
$250,000 per depositor. In addition to EESA, in November 2008,
the FDIC adopted a 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 rule. Under the TLGP, the FDIC
(i) guarantees, 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) provides 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 (and later extended to December 31, 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 could issue
FDIC-guaranteed debt starting October 31, 2009 through
April 30, 2010. The fee for issuing debt under the
emergency facility was at least 300 basis points per annum.
The Corporation did issue any FDIC-guaranteed debt under the
TLGP. In November 2010, the FDIC issued a rule which provides
unlimited insurance coverage on noninterest-bearing transaction
accounts beginning December 31, 2010 and expiring
December 31, 2012.
106
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 $0.4 million in
2010 and $0.3 million in both 2009 and 2008. The
Corporation expects these assessments to continue in 2011 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.
The Dodd-Frank Act was signed into law by President Obama on
July 21, 2010. The Dodd-Frank Act represents a
comprehensive overhaul of the financial services industry within
the United States, establishes the new federal Bureau of
Consumer Financial Protection (BCFP), and will require the BCFP
and other federal agencies to implement many new and significant
rules and regulations. At this time, it is difficult to predict
the extent to which the Dodd-Frank Act or the resulting rules
and regulations will impact the Corporations and Chemical
Banks business. Compliance with these new laws and
regulations will likely result in additional costs, which could
be significant and could adversely impact the Corporations
results of operations, financial condition or liquidity.
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 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 (FRB) to pay interest on
reserves starting October 1, 2011, although the EESA
accelerated the effective date to October 1, 2008. As a
result of the FRB paying interest on reserves, the Corporation
maintained its excess funds at the FRB throughout most of 2009
and all of 2010.
The information under the heading Bank Industry
Developments above is here incorporated by reference.
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
107
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 or
divestitures completed by the Corporation during 2008 or 2009.
On April 30, 2010, the Corporation acquired 100% of O.A.K.
Financial Corporation (OAK) for total consideration of
$83.7 million. The total consideration consisted of the
issuance of 3,529,772 shares of the Corporations
common stock with a total value of $83.7 million based upon
a market price per share of $23.70 at the acquisition date, the
exchange of 26,425 stock options for the outstanding vested
stock options of OAK with a value of the exchange equal to
approximately $41,000 at the acquisition date, and approximately
$8,000 of cash in lieu of fractional shares.
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 2010
Annual Report on
Form 10-K
and the 2011 Proxy Statement are available at
www.edocumentview.com/chfc.
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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108
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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 deteriorate.
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 are 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.
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 Allowance for Loan
Losses in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and
Note 4 Loans in the notes to consolidated
financial statements in Item 8. Financial Statements and
Supplementary Data 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.
109
The
Corporation may face increasing pressure from purchasers of its
residential mortgage loans to repurchase those loans or
reimburse purchasers for losses related to those
loans.
The Corporation generally sells the fixed rate long-term
residential mortgage loans it originates in the secondary
market. In response to the financial crisis, the Corporation
believes that purchasers of residential mortgage loans, such as
government sponsored entities, are increasing their efforts to
seek to require sellers of residential mortgage loans to either
repurchase loans previously sold or reimburse purchasers for
losses related to loans previously sold when losses are incurred
on a loan previously sold due to actual or alleged failure to
strictly conform to the purchasers purchase criteria. As a
result, the Corporation may face increasing pressure from
purchasers of its residential mortgage loans to repurchase those
loans or reimburse purchasers for losses related to those loans
and it may face increasing expenses to defend against such
claims. If the Corporation is required in the future to
repurchase loans previously sold, reimburse purchasers for
losses related to loans previously sold, or if it incurs
increasing expenses to defend against such claims, the
Corporations financial condition and results of operations
would be negatively affected.
The
Corporation holds general obligation, municipal bonds in its
investment securities portfolio. If one or more issuers of these
bonds were to become insolvent and default on its obligations
under the bonds, it could have a negative effect on the
financial condition and results of operations of the
Corporation.
Some experts have raised concerns about the financial
difficulties of municipalities and the potential for many
municipalities to become insolvent. Municipal bonds held by the
Corporation totaled $201 million at December 31, 2010,
and were issued by many different municipalities with no
significant concentration in any single municipality. The
Corporation has conducted an examination of the credit quality
of the municipalities whose bonds are held in the investment
securities portfolio. The Corporation believes the overall
credit quality of the municipalities to be good and expects the
municipal bonds to continue to perform in accordance with their
terms. However, there can be no assurance that the financial
conditions of these municipalities will not be materially and
adversely affected by future economic conditions. If one or more
of the issuers of these bonds were to become insolvent and
default on their obligations under the bonds, it could have a
negative effect on the financial condition and results of
operations of the Corporation.
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, and in particular conditions in the State
of Michigan, effect the Corporations
business.
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
110
economic conditions and, in turn, have a material adverse effect
on the Corporations financial condition and results of
operations.
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 net 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 rates 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.
Insured institution failures in 2009 and 2010 and expectations
of continued historically high volumes of insured institution
failures in 2011, 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 Dodd-Frank Act permanently increased FDIC
insurance coverage to $250,000 per depositor and the FDIC issued
a rule in November 2010 that provides unlimited FDIC coverage on
noninterest-bearing transaction accounts through
December 31, 2012.
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
111
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. If the Corporation is
unable to maintain adequate liquidity, then its business,
financial condition and results of operations would be
negatively effected.
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 net income, projected net income
and 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/or value
of the underlying asset and also 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
residential 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, 2010 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
112
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, 2010, 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.
If the
Corporation is required to take a valuation allowance with
respect to its mortgage servicing rights, its financial
condition and results of operations would be negatively
affected.
At December 31, 2010, the Corporations mortgage
servicing rights had a book value of $3.8 million and a
fair value of approximately $5.7 million. Because of the
current interest rate environment and the increasing rate and
speed of mortgage refinancings, it is possible that the
Corporation may have to establish a valuation allowance with
respect to its mortgage servicing rights in the future. If the
Corporation is required in the future to take a valuation
allowance with respect to its mortgage servicing rights, the
Corporations financial condition and results of operations
would be negatively affected.
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, such
as credit unions that are not subject to federal income tax.
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:
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The ability to develop, maintain and build long-term customer
relationships based on top quality service, high ethical
standards and safe, sound assets
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The ability to expand the Corporations market position
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The scope, relevance and pricing of products and services
offered to meet customer needs and demands
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The rate at which the Corporation introduces new products and
services relative to its competitors
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Customer satisfaction with the Corporations level of
service
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Industry and general economic trends
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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.
113
Legislative
or regulatory changes or actions, or significant litigation,
could adversely impact the Corporation or the businesses in
which it is engaged.
The financial services industry is extensively regulated. The
Corporation and Chemical Bank are subject to extensive state and
federal regulation, supervision and legislation that govern
almost all aspects of their operations. Laws and regulations may
change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance
funds, and not to benefit the Corporations shareholders.
The impact of any changes to laws and regulations or other
actions by regulatory agencies may negatively impact the
Corporation or its ability to increase the value of its
business. Regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operation of an
institution, the classification of assets by the institution and
the adequacy of an institutions allowance for loan losses.
Future regulatory changes or accounting pronouncements may
increase the Corporations regulatory capital requirements
or adversely affect its regulatory capital levels. Additionally,
actions by regulatory agencies or significant litigation against
the Corporation or Chemical Bank could require the Corporation
to devote significant time and resources to defending its
business and may lead to penalties that materially affect the
Corporation and its shareholders.
The
soundness of other financial institutions could adversely affect
the Corporation.
The Corporations ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading,
clearing, counterparty or other relationships. The Corporation
has exposure to many different industries and counterparties,
and it routinely executes transactions with counterparties in
the financial industry. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions,
or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or
defaults by the Corporation or by other institutions. Many of
these transactions expose the Corporation to credit risk in the
event of default of the Corporations counterparty or
client. In addition, the Corporations credit risk may be
exacerbated when the collateral that it holds cannot be realized
upon or is liquidated at prices insufficient to recover the full
amount of the loan. The Corporation can give no assurance that
any such losses would not materially and adversely affect its
business, financial condition or results of operations.
A
substantial decline in the value of the Corporations
Federal Home Loan Bank of Indianapolis stock may adversely
affect its financial condition.
The Corporation owns stock of the Federal Home Loan Bank of
Indianapolis (the FHLB), in order to qualify for
membership in the Federal Home Loan Bank system, which enables
it to borrow funds under the Federal Home Loan Bank advance
program. The carrying value of the Corporations FHLB
common stock was approximately $18.7 million as of
December 31, 2010.
Published reports indicate that certain member banks of the
Federal Home Loan Bank system may be subject to asset quality
risks that could result in materially lower regulatory capital
levels. In December 2008, certain member banks of the Federal
Home Loan Bank system (including the FHLB) suspended dividend
payments and the repurchase of capital stock until further
notice. In an extreme situation, it is possible that the
capitalization of a Federal Home Loan Bank, including the FHLB,
could be substantially diminished or reduced to zero.
Consequently, given that there is no market for the
Corporations FHLB stock, the Corporation believes that
there is a risk that the investment could be deemed
other-than-temporarily
impaired at some time in the future. If this occurs, it may
adversely affect the Corporations results of operations
and financial condition. If the FHLB were to cease operations,
or if the Corporation were required to write-off the investment
in the FHLB, its business, financial condition, liquidity,
capital and results of operations may be materially adversely
affected.
Recently
enacted financial reform legislation may have a significant
impact on the Corporation and results of its
operations.
The Dodd-Frank Act was signed into law by President Obama on
July 21, 2010. The Dodd-Frank Act represents a
comprehensive overhaul of the financial services industry within
the United States, establishes the new federal Bureau of
Consumer Financial Protection (BCFP), and will require the BCFP
and other federal agencies to implement many new and significant
rules and regulations. At this time, it is difficult to predict
the extent to which the Dodd-Frank Act or the resulting rules
and regulations will impact the Corporations and Chemical
Banks business. Compliance with these new laws and
regulations will likely result in additional costs, which could
be significant and could adversely impact the Corporations
results of operations, financial condition or liquidity.
114
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.
The
anticipated benefits or results of the Corporations
acquisition of O.A.K. Financial Corporation may not be
achieved.
On April 30, 2010, the Corporation completed its
acquisition of O.A.K. Financial Corporation (OAK).
On July 23, 2010, the Corporation completed the
consolidation of Byron Bank, OAKs subsidiary, with and
into Chemical Bank. Risks related to the OAK acquisition include:
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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.
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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.
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The complete integration of OAKs business and operations
into Chemical may take longer than anticipated or be more costly
than anticipated or have unanticipated adverse results.
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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
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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
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The introduction of new products and services into the
Corporations business
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Potential disruption to the Corporations business
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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
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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.
115
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
relies on dividends from its subsidiary bank for most of its
revenue.
Chemical 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. In the event Chemical Bank is unable
to pay dividends to Chemical, 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 could 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
approval. See the section captioned Supervision and
Regulation in Item 1. Business and
Note 20 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 financial liability, any of which could have a
material adverse effect on the Corporations financial
condition and results of operations.
116
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 Wealth Management 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.
Chemical Bank also conducted business from a total of 141 other
banking offices and three loan production offices as of
December 31, 2010. These offices are located in the lower
peninsula of Michigan. Of the total offices, 136 are owned by
Chemical Bank and ten are leased from independent parties with
remaining lease terms of less than one year to four 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, 2010, Chemical was not a party to any
material pending legal proceeding. As of December 31, 2010,
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.
PART II
|
|
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). See Item 12
for information with respect to the Corporations equity
compensation plans. All of this information is here incorporated
by reference.
|
|
Item 6.
|
Selected
Financial Data.
|
The information required by this item is included under the
heading Selected Financial Data and is here
incorporated by reference.
117
|
|
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 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 and Market
Risk of Managements Discussion and Analysis of
Financial Condition and Results of Operations and is here
incorporated by reference.
|
|
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 and is here incorporated by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
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 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 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
and under the heading Report of Independent Registered
Public Accounting Firm 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, 2010 that has
materially affected, or is reasonably likely to materially
affect, the Corporations internal control over financial
reporting.
|
|
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 2011 Annual Meeting of Shareholders and is
here incorporated by reference.
Information regarding the identification of executive officers
is set forth under the heading Executive Officers in
the registrants definitive Proxy Statement for its 2011
Annual Meeting of Shareholders and is here incorporated by
reference.
Information required by this item is set forth under the
subheadings Board Committees and Audit
Committee in the registrants definitive Proxy
Statement for its 2011 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
118
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.
|
|
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 2011
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 2011
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
742,165
|
|
|
$
|
29.47
|
|
|
|
918,894
|
|
Equity compensation plans not approved by security holders
|
|
|
15,500
|
|
|
|
26.95
|
|
|
|
113,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
757,665
|
|
|
$
|
29.42
|
|
|
|
1,031,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, 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 Chemical
Financial Corporation Plan for Participants in the O.A.K.
Financial Corporation 1999 Directors Stock Option Plan (OAK
Directors Plan) and the Chemical Financial Corporation Plan for
Participants in the O.A.K. Financial Corporation 1999 Stock
Compensation Plan (OAK Employees 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 175,000 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.
Options granted under the OAK Directors Plan are incentive stock
options and were awarded at the fair value of O.A.K. Financial
Corporation common stock on the date of grant. Payment for
exercise of an option at the time of exercise may be made in the
form of shares of the Corporations common stock having a
market value equal to the exercise price of the option at the
time of exercise, or in cash. There are no further stock options
available for grant under the OAK Directors Plan. As of
December 31, 2010, there were options outstanding under the
OAK Directors Plan for 3,479 shares of common stock with a
weighted average exercise price of $25.60 per share.
Options granted under the OAK Employees Plan are incentive stock
options and were awarded at the fair value of O.A.K. Financial
Corporation common stock on the date of grant. Payment for
exercise of an option at the time of exercise may be made in the
form of shares of the Corporations common stock having a
market value equal to the exercise price of the option at the
time of exercise, or in cash. There are no further stock options
available for grant under the OAK Employees Plan. As of
119
December 31, 2010, there were options outstanding under the
OAK Employees Plan for 12,022 shares of common stock with a
weighted average exercise price of $26.88 per share.
|
|
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 2011
Annual Meeting of Shareholders and is here incorporated by
reference.
|
|
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 Board Committees in
the registrants definitive Proxy Statement for its 2011
Annual Meeting of Shareholders and is here incorporated by
reference.
PART IV
|
|
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:
|
|
|
|
|
|
|
|
Pages
|
|
Reports of Independent Registered Public Accounting Firm dated
February 25, 2011
|
|
|
43
|
|
Consolidated Statements of Financial Position-December 31,
2010 and 2009
|
|
|
45
|
|
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2010
|
|
|
46
|
|
Consolidated Statements of Changes in Shareholders Equity
for each of the three years in the period ended
December 31, 2010
|
|
|
47
|
|
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2010
|
|
|
48
|
|
Notes to Consolidated Financial Statements
|
|
|
49
|
|
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.
|
|
|
|
(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.
|
|
|
(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.
|
120
|
|
|
Number
|
|
Exhibit
|
|
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 PLC
|
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 2010
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.
121
SIGNATURES
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, 2011.
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, 2011 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
James R. Fitterling
Thomas T. Huff
Michael T. Laethem
James B. Meyer
Terence F. Moore
Aloysius J. Oliver
Grace O. Shearer
Larry D. Stauffer
William S. Stavropoulos
Franklin C. Wheatlake
By Lori A. Gwizdala
Attorney-in-fact
122