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SECURITIES AND EXCHANGE COMMISSION FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-08185 CHEMICAL FINANCIAL CORPORATION Michigan 38-2022454 333 East Main Street (989) 839-5350 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X The number of shares outstanding of the Registrant's Common Stock, $1 par value, as of October 26, 2005, was 25,079,291 shares.
INDEX Page FORWARD-LOOKING STATEMENTS 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited, except Consolidated Consolidated Statements of Income for the Three and Nine Months Ended Consolidated Statements of Financial Position as of September 30, 2005 Consolidated Statements of Cash Flows for the Nine Months Ended Notes to Consolidated Financial Statements 7-19 Item 2. Management's Discussion and Analysis of Financial Condition and Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 Item 4. Controls and Procedures 34 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 6. Exhibits 36 SIGNATURES 37
FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the Corporation itself. Words such as "anticipates," "believes," "estimates," "judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "should," "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, all statements under Part I, Item 3 concerning quantitative and qualitative disclosures about market risk are forward-looking statements. 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 statement
s. The Corporation 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, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; changes in the local and national economy; opportunities for acquisition and the effective completion of acquisitions and integration of acquired entities; the effective completion of bank consolidations and restructurings; and the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forwa
rd-looking statement.
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Three Months Ended Nine Months Ended 2005 2004 2005 2004 (In thousands, except per share amounts) INTEREST INCOME Interest and fees on loans $ 42,023 $ 38,347 $ 121,055 $ 113,306 Interest on investment securities: Taxable 6,950 8,066 22,459 25,218 Tax-exempt 539 511 1,551 1,602 Total interest on investment securities 7,489 8,577 24,010 26,820 Interest on federal funds sold 682 265 1,586 668 Interest on deposits with banks 226 129 741 292 TOTAL INTEREST INCOME 50,420 47,318 147,392 141,086 INTEREST EXPENSE Interest on deposits 11,851 7,437 31,522 22,651 Interest on other borrowings - short-term 733 158 1,526 357 Interest on Federal Home Loan Bank (FHLB) borrowings 2,690 2,570 7,553 7,694 TOTAL INTEREST EXPENSE 15,274 10,165 40,601 30,702 NET INTEREST INCOME 35,146 37,153 106,791 110,384 Provision for loan losses 1,500 701 2,960 2,108 NET INTEREST INCOME after provision for loan losses 33,646 36,452 103,831 108,276 NONINTEREST INCOME Service charges on deposit accounts 5,406 4,970 15,136 14,281 Trust and investment management services revenue 1,891 1,761 5,963 5,541 Other charges and fees for customer services 2,388 1,706 5,984 5,060 Mortgage banking revenue 322 960 1,292 2,820 Investment securities gains 3 9 1,174 1,259 Other 239 217 633 629 TOTAL NONINTEREST INCOME 10,249 9,623 30,182 29,590 OPERATING EXPENSES Salaries, wages and employee benefits 14,404 14,385 43,642 43,879 Occupancy 2,346 2,237 7,067 6,976 Equipment 2,134 2,376 6,686 6,921 Other 5,955 5,501 17,190 16,803 TOTAL OPERATING EXPENSES 24,839 24,499 74,585 74,579 INCOME BEFORE INCOME TAXES 19,056 21,576 59,428 63,287 Federal income taxes 5,451 7,280 19,104 21,006 NET INCOME $ 13,605 $ 14,296 $ 40,324 $ 42,281 NET INCOME PER SHARE (Basic) $ 0.54 $ 0.58 $ 1.60 $ 1.69 (Diluted) $ 0.54 $ 0.57 $ 1.60 $ 1.68 Cash dividends per share $ 0.265 $ 0.252 $ 0.795 $ 0.756 See accompanying notes to consolidated financial statements.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES September 30, December 31, (Unaudited) ASSETS Cash and demand deposits due from banks $ 111,115 $ 106,565 Federal funds sold 76,300 34,500 Interest bearing deposits with banks 36,337 5,869 Investment securities: Available for sale (at estimated fair value) 654,445 716,757 Held to maturity (estimated fair value - $132,367 at 9/30/05, $177,587 at Total investment securities 787,343 893,274 Loans: Commercial 504,189 468,970 Real estate construction 146,973 120,900 Real estate commercial 708,152 697,779 Real estate residential 783,834 760,834 Consumer 557,256 537,102 Total loans 2,700,404 2,585,585 Less: Allowance for loan losses 34,603 34,166 Net loans 2,665,801 2,551,419 Premises and equipment 45,123 47,577 Intangible assets 72,194 74,421 Other assets 47,948 50,500 TOTAL ASSETS $ 3,842,161 $ 3,764,125 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 521,969 $ 555,287 Interest-bearing 2,386,605 2,308,186 Total deposits 2,908,574 2,863,473 Reverse repurchase agreements 10,000 - Other borrowings - short-term 127,613 101,834 Interest payable and other liabilities 29,118 28,986 FHLB borrowings 268,959 284,996 Total liabilities 3,344,264 3,279,289 Shareholders' equity: Common stock, $1 par value: Authorized - 30,000 shares Issued and outstanding - 25,127 shares at 9/30/05, 25,169 shares at Surplus 377,469 378,694 Retained earnings 100,598 80,266 Accumulated other comprehensive (loss)/income (5,297 ) 707 Total shareholders' equity 497,897 484,836 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,842,161 $ 3,764,125 See accompanying notes to consolidated financial statements.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Nine Months Ended 2005 2004 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 40,324 $ 42,281 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,960 2,108 Gains on sales of loans (863 ) (1,159 ) Proceeds from loan sales 75,974 125,206 Loans originated for sale (79,776 ) (122,781 ) Investment securities gains (1,174 ) (1,259 ) Depreciation of fixed assets 4,564 5,025 Amortization of intangible assets 2,496 2,861 Net amortization of investment securities 3,438 7,529 Mortgage servicing rights impairment recovery - (793 ) Net decrease in accrued interest and other assets 10,599 11,107 Net increase (decrease) in interest payable and other liabilities 547 (1,522 ) Net Cash Provided by Operating Activities 59,089 68,603 CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from maturities, calls and principal reductions 169,073 160,875 Proceeds from sales 75,864 81,654 Purchases (193,711 ) (274,161 ) Securities held to maturity: Proceeds from maturities, calls and principal reductions 83,420 73,919 Purchases (40,418 ) (38,087 ) Net increase in loans (117,759 ) (135,070 ) Purchases of premises and equipment (2,110 ) (3,152 ) Net Cash Used in Investing Activities (25,641 ) (134,022 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in total deposits 45,101 8,067 Proceeds from reverse repurchase agreements 10,000 - Net increase in other borrowings - short-term 25,779 8,915 Increase in FHLB borrowings 65,000 150,000 Repayments of FHLB borrowings (81,037 ) (20,182 ) Cash dividends paid (19,992 ) (19,027 ) Proceeds from directors' stock purchase plan 231 219 Proceeds from exercise of stock options 471 2,728 Repurchases of common stock (2,183 ) - Net Cash Provided by Financing Activities 43,370 130,720 Net Increase in Cash and Cash Equivalents 76,818 65,301 Cash and cash equivalents at beginning of year 146,934 162,191 Cash and Cash Equivalents at End of Period $ 223,752 $ 227,492 Supplemental disclosure of cash flow information: Interest paid on deposits, reverse repurchase agreements, other borrowings- Federal income taxes paid 18,250 20,750 Loans transferred to other real estate and repossessed assets 5,082 6,923 See accompanying notes to consolidated financial statements.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chemical Financial Corporation (the "Corporation") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial condition and results of operations of the Corporation for the periods presented. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's Annual Re
port on Form 10-K for the year ended December 31, 2004. Certain prior year amounts have been reclassified to place them on a basis comparable with the current period's financial statements. Such reclassifications had no impact on net income or shareholders' equity. Income Taxes The difference between the federal statutory income tax rate and the Corporation's effective federal income tax rate primarily is a function of the proportion of the Corporation's interest income exempt from federal taxation, nondeductible interest expense and other nondeductible expenses and tax credits. Earnings Per Share All earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings per share exclude any dilutive effect of stock options. Basic earnings per share for the Corporation is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per 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 outstanding employee stock options.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Earnings Per Share (continued) The following table summarizes the number of shares used in the numerator and denominator of the basic and diluted earnings per share computations: Three Months Ended Nine Months Ended 2005 2004 2005 2004 (In thousands) Numerator for both basic and diluted Denominator for basic earnings per share, weighted average shares outstanding 25,134 25,144 25,156 25,120 Potential effect of stock options 56 78 57 86 Denominator for diluted earnings per share 25,190 25,222 25,213 25,206 Equity In April of 2005, the Corporation's Board of Directors authorized management to repurchase up to 500,000 shares of the Corporation's common stock. The repurchased shares are available for later reissue in connection with potential future stock dividends, the Corporation's dividend reinvestment plan, employee benefit plans and other general purposes. This authorization replaced all prior share repurchase authorizations. During the third quarter of 2005, the Corporation repurchased 14,000 shares, at an average purchase price of $31.80 per share. During the nine months ended September 30, 2005, the Corporation repurchased a total of 72,200 shares, at an average purchase price of $30.24 per share.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Comprehensive Income The components of comprehensive income, net of related tax, for the three and nine months ended September 30, 2005 and 2004 are as follows (in thousands of dollars): Three Months Ended Nine Months Ended 2005 2004 2005 2004 Net income $ 13,605 $ 14,296 $ 40,324 $ 42,281 Net unrealized (losses) gains net of tax benefit (expense) of $1,781 and $(1,309) for the three months ended 9/30/05 and Reclassification adjustment Comprehensive income $ 10,295 $ 16,721 $ 34,320 $ 34,864 The components of accumulated other comprehensive income, net of related tax, at September 30, 2005 and December 31, 2004 are as follows (in thousands of dollars): September 30, December 31, Net unrealized (losses) gains
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Operating Segment Under the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," it is management's opinion that the Corporation operates in a single operating segment - commercial banking. The Corporation is a bank holding company that operates three commercial banks, a title insurance company and an insurance subsidiary, each as a separate subsidiary of the Corporation, as of September 30, 2005. The Corporation's commercial bank subsidiaries operate as community banks and offer a full range of commercial banking and fiduciary products and services to the residents and business customers in their geographical market areas. The products and services offered by the commercial bank subsidiaries are generally consistent throughout the Corporation. Each of the Corporation's commercial bank subsidiaries operates within the State of Michigan. The marketing of products and services throughout the Corporation's subsidiary banks is generally unifor
m, as many of the markets served by the subsidiaries overlap. The distribution of products and services is uniform throughout the Corporation's commercial bank subsidiaries and is achieved primarily through retail branch banking offices, automated teller machines and electronically accessed banking products. The commercial bank subsidiaries are state-chartered commercial banks and operate under the same banking regulations. On October 28, 2005, the Corporation issued a press release announcing a strategic restructuring that will include the consolidation of its three commercial bank charters into a single state chartered institution. The Corporation expects the legal consolidation of the bank charters to be effective on or about December 31, 2005. This press release is discussed in more detail in Note G, included herein. Other The Corporation and its subsidiary banks are subject to certain legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated income or financial position of the Corporation.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE B: NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES The following summarizes nonperforming assets at the dates indicated (in thousands of dollars): September 30, December 31, Nonperforming Assets: Nonaccrual loans $ 9,913 $ 8,397 Loans 90 days or more past due and still accruing interest 10,364 1,653 Total Nonperforming Loans 20,277 10,050 Repossessed assets acquired (1) 6,511 6,799 Total Nonperforming Assets $ 26,788 $ 16,849 (1) Includes property acquired through foreclosure and by acceptance of a deed in lieu of foreclosure, and other property held for sale. September 30, December 31, Nonperforming loans as a percent of total loans 0.75% 0.39% Allowance for loan losses as a percent of total loans 1.28% 1.32% Nonperforming assets as a percent of total assets 0.70% 0.45% Allowance for loan losses as a percent of
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE B: NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES The following summarizes the changes in the allowance for loan losses (in thousands of dollars): Nine Months Ended 2005 2004 Allowance for Loan Losses Balance as of January 1 $ 34,166 $ 33,179 Provision for loan losses 2,960 2,108 Gross loans charged off (3,008 ) (2,602 ) Gross recoveries of loans previously charged off 485 944 Net loans charged off (2,523 ) (1,658 ) Balance as of end of period $ 34,603 $ 33,629 Net loans charged against the allowance to average The Corporation considers all nonaccrual commercial and commercial real estate loans to be impaired loans. Impaired loans as of September 30, 2005 and December 31, 2004, were $5.1 million and $4.6 million, respectively. The Corporation allocated $1.2 million and $2.5 million of the allowance for loan losses to impaired loans as of September 30, 2005 and December 31, 2004, respectively. The Corporation's average investment in impaired loans was approximately $4.7 million and $4.2 million for the nine-month periods ended September 30, 2005 and 2004, respectively. NOTE C: INTANGIBLE ASSETS The Corporation has four major types of intangible assets: goodwill, mortgage servicing rights, core deposits and non-compete covenants. Goodwill, core deposits and non-compete covenants arose as the result of business combinations or other acquisitions. Mortgage servicing rights arose as a result of selling mortgage loans in the secondary market but retaining the right to service these loans and receive servicing income over the life of the loan. Amortization is recorded on the mortgage servicing rights, core deposits and non-compete covenants.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE C: INTANGIBLE ASSETS (continued) The following table shows the net carrying value of the Corporation's intangible assets (in thousands): September 30, December 31, Goodwill $ 63,293 $ 63,293 Mortgage servicing rights 2,595 3,197 Core deposits 6,068 7,507 Non-compete covenants 238 424 $ 72,194 $ 74,421 Goodwill was $63.3 million at September 30, 2005 and at December 31, 2004. The Corporation's capitalized mortgage servicing rights (MSRs) as of September 30, 2005 and December 31, 2004, were $2.6 million and $3.2 million, respectively. There was no impairment valuation allowance recorded on MSRs as of September 30, 2005 or December 31, 2004. Mortgage banking revenue is a component of noninterest income and is recorded net of the amortization expense on MSRs. The Corporation was servicing $557.8 million and $591.3 million of residential mortgage loans as of September 30, 2005 and December 31, 2004, respectively. The following table sets forth the carrying amount and accumulated amortization of intangible assets that are amortizable and arose from business combinations or were acquired otherwise (in thousands): September 30, 2005 December 31, 2004 Gross Net Gross Net Core deposits $ 19,269 $ 13,201 $ 6,068 $ 19,269 $ 11,762 $ 0 $ 7,507 Non-compete $ 19,959 $ 13,653 $ 6,306 $ 20,134 $ 12,118 $ 85 $ 7,931
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE C: INTANGIBLE ASSETS (continued) The following table sets forth the amortization expense of amortizable intangible assets (in thousands): Three months ended Nine months ended 2005 2004 2005 2004 Mortgage servicing rights amortization $ 412 $ 365 $ 871 $ 1,144 Core deposit and non-compete Total intangible assets amortization The amortization expense on core deposits and non-compete covenant intangible assets has been estimated through 2010 and thereafter in the following table, and does not take into consideration any potential future acquisitions or branch purchases (in thousands): 2005 $ 2,138 2006 1,850 2007 1,635 2008 1,292 2009 1,016 2010 and thereafter $ 7,931 NOTE D: EMPLOYEE BENEFIT PLANS Stock Options The Corporation periodically grants stock options for a fixed number of shares with an exercise price equal to the market value of the shares on the date of grant. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Corporation accounts for stock option grants under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, because the exercise prices of the Corporation's stock options equal the market prices of the underlying stock at the dates of grant, no compensation expense is recognized at the date of grant.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE D: EMPLOYEE BENEFIT PLANS (continued) If the Corporation had elected to recognize compensation cost in the three and nine months ended September 30, 2005 and 2004, based on the fair value of the options granted at the grant dates, net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts): Three Months Ended Nine Months Ended 2005 2004 2005 2004 Net income - as reported $ 13,605 $ 14,296 $ 40,324 $ 42,281 Deduct: Stock-based employee fair value based method, net of related tax effects (262 ) (131 ) (786 ) (394 ) Net income - pro forma $ 13,343 $ 14,165 $ 39,538 $ 41,877 Basic earnings per share - as reported $ 0.54 $ 0.58 $ 1.60 $ 1.69 Basic earnings per share - pro forma 0.53 0.56 1.57 1.67 Diluted earnings per share - as reported 0.54 0.57 1.60 1.68 Diluted earnings per share - pro forma 0.53 0.56 1.57 1.66 Pension and Post Retirement Benefits The components of net periodic benefit cost for the Corporation's qualified and nonqualified pension plans and nonqualified postretirement benefit plan are as follows: (in thousands) Defined Benefit Postretirement Nine Months Ended September 30, 2005 2004 2005 2004 Service cost $ 3,671 $ 3,383 $ - $ 23 Interest cost 3,233 3,101 210 237 Expected return on plan assets (4,384 ) (4,067 ) - - Amortization of prior service benefit (18 ) (27 ) (243 ) (243 ) Amortization of unrecognized net loss 355 279 46 243 Net periodic benefit cost $ 2,857 $ 2,669 $ 13 $ 260
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE D: EMPLOYEE BENEFIT PLANS (continued) For further information on the Corporation's employee benefit plans, refer to Note H to the consolidated financial statements incorporated in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004. NOTE E: FINANCIAL GUARANTEES In the normal course of business, the Corporation is a party to financial instruments containing credit risk that are not required to be reflected in the consolidated statements of financial position. For the Corporation, these financial instruments are financial and performance standby letters of credit. The Corporation has risk management policies to identify, monitor and limit exposure to credit risk. To mitigate credit risk for these financial guarantees, the Corporation generally determines the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer's creditworthiness. At September 30, 2005, the Corporation had $50.6 million of outstanding financial and performance standby letters of credit which expire in five years or less. The majority of these standby letters of credit are collateralized. The amount of a potential liability arising from these standby letters of credit is considered immaterial t
o the financial statements as a whole. NOTE F: PENDING ACCOUNTING PRONOUNCEMENTS In March 2004, the Emerging Issues Task Force (EITF), a standard setting body working under the Financial Accounting Standards Board (FASB), reached a revised consensus on EITF Issue No. 03-1 and decided not to provide additional guidance on the meaning of other-than-temporary impairment and directed the staff to issue proposed FASB Staff Position (FSP) EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1," as final. The final FSP will supersede EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," and EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." The final FSP (retitled FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments") will replace the guidance set forth in paragraphs 10-18 of EITF Issue No. 03-1 with references to existing other-than-temporary impairment
guidance, such as Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," SEC Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities," and Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." FSP FAS 115-1 will codify the guidance set forth in EITF Topic No. D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP FAS 115-1 would be effective for other-than-temporary impairment analyses conducted in periods beginning after September 15, 2005. The issuance of FSP FAS 115-1 is not expected to significantly impact the Corporation's financial condition and results of operations.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE F: PENDING ACCOUNTING PRONOUNCEMENTS (continued) On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" (SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. On April 14, 2005, the Securities and Exchange Commission (SEC) deferred the required implementation date for SFAS No. 123(R) to the beginning of the first fiscal year beginning after June 15, 2005. The Corporation expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously disclosed under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. On June 28, 2005, the FASB issued proposed FSP 123(R)-a, "Classification and Measurement of Freestanding Financial Instruments Originally Issued as Employee Compensation." This FSP defers the requirement of SFAS No. 123(R), that a freestanding financial instrument originally subject to SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. Under the provisions of the proposed FSP, a freestanding financial instrument originally issued as employee compensation shall be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified subsequent to the time the rights conveyed by the instrument are no longer dependent on the individual being an employee. The final FSP will be effective upon the adoption of S
FAS No. 123(R).
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE F: PENDING ACCOUNTING PRONOUNCEMENTS (continued) On August 31, 2005, the FASB issued FSP No. FAS 123 (R) -1, "Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No.123(R)." This FSP defers indefinitely the requirement of SFAS No. 123 that a share-based payment to an employee subject to SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument are no longer dependent on the holder being an employee. This deferral is important because many employee stock options and similar instruments include features (e.g., for tax withholding, share repurchase) that would have required liability classification and remeasurement each reporting period once the instrument no longer was subject to SFAS No. 123(R). FSP No. FAS 123(R)-1 provides that a freestanding financial instrument issued to an employee in exchange for past or future employee services that is subject to SFAS No. 123 (R), or was subject to SFAS No. 123(R) upon initial adoption of SFAS No. 123(R), shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. Further, the FSP clarifies that the deferral only applies to awards issued in exchange for employee services. Any awards exchanged for nonemployee services or a combination of employee and nonemployee services (e.g., an award granted to an employee who terminates employment and continues to vest by providing substantive consulting services) would not be subject to the deferral. As of September 30, 2005, the Corporation had not determined the method or assumptions that it will use to adopt SFAS No. 123(R) on January 1, 2006. As permitted by SFAS No. 123, the Corporation currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, does not recognize compensation cost for employee stock options at the date of grant. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on the Corporation's consolidated results of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Corporation adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note O to the annual consolidated financial statements for the year ended December 31, 2004 and Note D herein. SFAS
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE F: PENDING ACCOUNTING PRONOUNCEMENTS (continued) No. 123(R) also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Corporation cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior annual periods for such excess tax deductions were $609,000, $504,000, and $56,000 in the years ended December 31, 2004, 2003 and 2002, respectively. NOTE G: SUBSEQUENT EVENT On October 28, 2005, the Corporation issued a press release that reported a strategic restructuring designed to reposition the Company to better capitalize on growth opportunities in high potential markets. The restructuring, which resulted from an intensive examination of the Company's core retail banking franchise, encompasses three integrated initiatives: Consolidation of its three subsidiary state bank charters into a single state chartered institution Realignment of its existing branch network, closing eight overlapping and/or underperforming branches across the state Reorganization of senior management to place a greater emphasis on internal growth initiatives Management estimates that total costs for the restructuring will not exceed $1 million, and will be incurred primarily over the next nine months. Cost savings resulting from reduced compliance costs, staff reductions and branch closings had not been estimated as of the announcement date; however, the Corporation does not expect these savings to be material. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Corporation's financial condition and results of operations during the periods included in the consolidated financial statements included in this filing.
SUMMARY The Corporation's net income was $13.6 million in the third quarter of 2005, down 4.83% from net income of $14.3 million in the third quarter of 2004. Diluted earnings per share were $0.54 in the third quarter of 2005, down 5.26% from diluted earnings per share of $0.57 in the third quarter of 2004. Return on average assets in the third quarter of 2005 was 1.42%, compared to 1.48% in the third quarter of 2004. Return on average equity in the third quarter of 2005 was 10.9%, compared to 12.0% in the third quarter of 2004. Total assets were $3.84 billion as of September 30, 2005, up $78 million, or 2.07%, from total assets of $3.76 billion as of December 31, 2004. Total loans increased $114.8 million, or 4.44%, from December 31, 2004 to $2.7 billion as of September 30, 2005. The increase in total loans was due to modest increases across all loan types. Shareholders' equity increased $13.1 million, or 2.69%, from December 31, 2004 to $497.9 million as of September 30, 2005, or $19.82 per share, representing 12.96% of total assets. The increase in shareholders' equity was primarily attributable to retained net income. RESULTS OF OPERATIONS Net Interest Income Interest income is the total amount earned on funds invested in loans, investment securities, interest-bearing deposits with nonaffiliated banks and federal funds sold. Interest expense is the amount of interest paid on interest-bearing checking and savings accounts, time deposits, reverse repurchase agreements, other borrowings - short term and Federal Home Loan Bank (FHLB) borrowings. 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. The presentation of net interest income on a FTE basis is not in accordance with generally accepted accounting principles ("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 $0.41 million and $0.38 million for the third quarters of 2005 and 2004, respectively, and were $1.2 million for the first nine months of both 2005 and 2004. These adjustments were computed using a 35% tax rate. Net interest income is the most important source of the Corporation's earnings and thus is critical in evaluating the results of operations. Changes in the Corporation's net interest income are influenced by a variety of factors, including changes in the level of interest-earning assets, changes in the mix of interest-earning assets and interest-bearing liabilities, the income or yield earned on those assets, the manner by which such interest-earning assets are funded (and the related cost of funding), and variations in interest sensitivity between interest-earning assets and interest-bearing
The Corporation's net interest income (FTE) in the third quarter of 2005 was $35.556 million, a $1.98 million, or 5.27%, decrease from the $37.533 million recorded in the third quarter of 2004. Net interest income (FTE) for the nine months ended September 30, 2005 was $107.955 million, compared to $111.547 million for the nine months ended September 30, 2004, which represented a decrease of $3.59 million or 3.22%. The decrease in net interest income in both periods was primarily attributable to a slight decrease in average interest-earning assets and the impact of the continued flattening of the interest yield curve. These factors were partially offset by a positive change in the mix of interest-earning assets, with average loans up $81 million, or 3.1%, in the third quarter of 2005, as compared to the third quarter of 2004, and up $62 million, or 2.4%, in the nine months ended September 30, 2005, as compared to the same time period in 2004. Average interest-earning assets of $3.56 billion in the third quarter of 2005 were down $29.9 million or 0.83%, from the third quarter of 2004. During the nine months ended September 30, 2005, average interest-earning assets were $3.56 billion, $57.8 million or 1.60%, less than in the same time period in 2004. The reduction in average interest-earning assets during both time periods was primarily attributable to a reduction in investment securities. The Corporation's investment securities portfolio declined slightly, as investment securities maturities were used to fund the increase in total loans and offset a modest decline in total deposits. The net interest margin was 3.96% in the third quarter of 2005, compared to 4.16% in the third quarter of 2004. The net interest margin for the nine months ended September 30, 2005 was 4.06%, compared to 4.12% for the first nine months of 2004. The decreases in net interest margin during the three and nine months ended September 30, 2005, compared to these same time periods in 2004, were primarily attributable to the increases in the average yield on interest-earning assets not keeping pace with the increases in the average cost of interest-bearing liabilities. The average yield on interest-earning assets increased 38 basis points to 5.66% in the third quarter of 2005, while the average cost of interest-bearing liabilities increased 76 basis points to 2.22%. During the nine months ended September 30, 2005, the average yield on interest-earning assets increased 33 basis points to 5.58%, while the average cost of interest-bearing liabilities increased 54 basis points to 1.99%. Loan interest rates have been lower than expected in 2005 considering the interest rate environment, as the competition for loan volume remains strong in the Corporation's local markets. The Corporation's competitive position within many of its market areas limits its ability to materially increase deposits without adversely impacting the weighted average cost of core deposits. The Corporation's ability to increase net interest income during the remainder of 2005 and into 2006 will be contingent on a number of factors, including but not limited to, the shape of the interest yield curve, the state of the economic climate in the markets that the Corporation serves, the degree of competition from other financial institutions for both loan customers and deposit accounts and the Corporation's ability to attract new customers to its subsidiary banks from competitor financial institutions for both loans and deposits.
AVERAGE BALANCES, TAX EQUIVALENT INTEREST, AND Three Months Ended 2005 2004 Tax Effective Tax Effective ASSETS Interest-earning Assets: Loans $ 2,677,776 $ 42,163 6.25% $ 2,596,355 $ 38,464 5.89% Taxable investment securities 745,991 6,950 3.70 865,992 8,066 3.71 Non-taxable investment securities 48,455 809 6.68 42,134 774 7.31 Federal funds sold 78,603 682 3.44 76,510 265 1.38 Interest-bearing deposits with Total interest-earning assets 3,561,960 50,830 5.66 3,591,860 47,698 5.28 Less: Allowance for loan losses 33,907 33,830 Other Assets: Cash and due from banks 108,908 114,328 Premises and equipment 45,867 47,909 Accrued income and other assets 117,722 122,803 Total Assets $ 3,800,550 $ 3,843,070 LIABILITIES AND Interest-bearing Liabilities: Interest-bearing demand deposits $ 540,447 $ 1,976 1.45% $ 526,615 $ 511 0.39% Savings deposits 849,482 2,550 1.19 999,594 1,646 0.66 Time deposits 942,059 7,325 3.08 867,220 5,280 2.42 Reverse repurchase agreements 10,000 92 3.65 - - - Other borrowings -- short-term 117,312 733 2.48 94,475 158 0.67 Federal Home Loan Bank Total interest-bearing liabilities 2,728,259 15,274 2.22 2,773,098 10,165 1.46 Noninterest-bearing deposits 544,620 560,886 Total deposits and borrowed funds 3,272,879 3,333,984 Accrued expenses and other liabilities 31,266 35,469 Shareholders' equity 496,405 473,617 Total Liabilities and Shareholders' Net Interest Income (FTE) $ 35,556 $ 37,533 Net Interest Margin (FTE) 3.96% 4.16%
AVERAGE BALANCES, TAX EQUIVALENT INTEREST, AND Nine Months Ended 2005 2004 Tax Effective Tax Effective ASSETS Interest-earning Assets: Loans $ 2,619,616 $ 121,435 6.20% $ 2,557,822 $ 113,643 5.93% Taxable investment securities 800,631 22,459 3.75 915,820 25,218 3.68 Non-taxable investment securities 44,868 2,335 6.86 43,291 2,428 7.48 Federal funds sold 74,121 1,586 2.86 83,215 668 1.07 Interest-bearing deposits with Total interest-earning assets 3,558,148 148,556 5.58 3,615,976 142,249 5.25 Less: Allowance for loan losses 34,118 33,717 Other Assets: Cash and due from banks 105,121 110,429 Premises and equipment 46,577 48,313 Accrued income and other assets 118,658 124,986 Total Assets $ 3,794,386 $ 3,865,987 LIABILITIES AND Interest-bearing Liabilities: Interest-bearing demand deposits $ 550,634 $ 4,784 1.16% $ 547,767 $ 1,400 0.34% Savings deposits 880,464 6,814 1.03 1,016,071 5,055 0.66 Time deposits 923,288 19,924 2.89 893,337 16,196 2.42 Reverse repurchase agreements 4,505 123 3.65 - - - Other borrowings -- short-term 104,229 1,526 1.96 89,548 357 0.53 Federal Home Loan Bank Total interest-bearing liabilities 2,726,842 40,601 1.99 2,826,020 30,702 1.45 Noninterest-bearing deposits 544,819 533,653 Total deposits and borrowed funds 3,271,661 3,359,673 Accrued expenses and other liabilities 31,101 37,546 Shareholders' equity 491,624 468,768 Total Liabilities and Shareholders' Net Interest Income (FTE) $ 107,955 $ 111,547 Net Interest Margin (FTE) 4.06% 4.12%
VOLUME AND RATE VARIANCE ANALYSIS Three Months Ended Nine Months Ended Combined Combined Average Average Increase Average Average Increase CHANGES IN INTEREST INCOME ON Loans $ 1,104 $ 2,595 $ 3,699 $ 2,858 $ 4,934 $ 7,792 Taxable investment securities (1,177 ) 61 (1,116 ) (3,229 ) 470 (2,759 ) Non-taxable investment securities 105 (70 ) 35 85 (178 ) (93 ) Federal funds sold 7 410 417 (81 ) 999 918 Interest-bearing deposits with Total change in interest income on Interest-bearing demand deposits 14 1,451 1,465 7 3,377 3,384 Savings deposits (279 ) 1,183 904 (743 ) 2,502 1,759 Time deposits 478 1,567 2,045 549 3,179 3,728 Reverse repurchase agreements 92 - 92 123 - 123 Other borrowings--short-term 46 437 483 67 979 1,046 Federal Home Loan Bank borrowings (157 ) 277 120 (443 ) 302 (141 ) Total change in interest expense on TOTAL INCREASE (DECREASE) IN *Taxable equivalent basis using a federal income tax rate of 35%. Provision for Loan Losses The provision for loan losses ("provision") is the amount added to the allowance for loan losses ("allowance") to absorb loan losses in the loan portfolio and maintain an adequate allowance. The allowance represents management's assessment of probable losses inherent in the Corporation's loan portfolio. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the remainder of the loan portfolio but that have not been specifically identified. The allowance is comprised of specific allowances (assessed for loans that have known credit weaknesses), pooled allowances based on assigned risk ratings and historical loan loss experience for each loan type, and an unallocated allowance for imprecision in the subjective nature of the specific and pooled allowance methodology. Management evaluates the allowance on a quarterly basis to ensure the level is adequate to absorb losses inherent in the loan portfolio. This e
valuation is based on a review of the
The provision for loan losses was $1.50 million in the third quarter of 2005, compared to $0.70 million in the third quarter of 2004, as well as $0.70 million in each of the first and second quarters of 2005. The provision for loan losses was $2.96 million and $2.11 million for the nine months ended September 30, 2005 and 2004, respectively. The increase in the provision for loan losses during the three months ended September 30, 2005, as compared to the third quarter of 2004, was primarily driven by an increase in the Corporation's nonperforming commercial and commercial real estate loans and other watch loans, and also the overall increase in total loans, during the third quarter of 2005. Nonperforming loans were $20.3 million as of September 30, 2005, an increase of $4.2 million from June 30, 2005 and up $10.2 million from December 31, 2004. The increase in nonperforming loans in 2005 was primarily attributable to an increase in loans past due 90 days or more, which have increased $8.7 million during t
he nine months ended September 30, 2005. Loans past due 90 days or more, as of September 30, 2005, include two commercial real estate loans totaling $5.0 million. Based on the collateral evaluation of these loans as of September 30, 2005, the Corporation does not expect to record an additional provision for loan losses related to these two loans. Net loan charge-offs were $0.72 million in the third quarter of 2005 and $0.62 million in the third quarter of 2004. Net loan charge-offs for the nine months ended September 30, 2005 and 2004 were $2.52 million and $1.66 million, respectively. Net loan charge-offs as a percentage of average total loans were 0.13% during the nine months ended September 30, 2005, compared to 0.09% during the same time period in 2004. Economic conditions in the Corporation's markets, all within Michigan, were generally less favorable than those nationwide during the third quarter of 2005. Forward-looking indicators suggest these economic conditions may continue for the remainder of 2005. At September 30, 2005, the allowance was $34.6 million, an increase of $0.4 million from the $34.2 million at December 31, 2004. The allowance as a percentage of total period-end loans was 1.28% at September 30, 2005, compared to 1.32% at December 31, 2004.
Noninterest Income The following schedule includes the major components of noninterest income during the three and nine months ended September 30, 2005 and 2004. (In thousands) Three Months Ended Nine Months Ended 2005 2004 2005 2004 Service charges on deposit accounts $ 5,406 $ 4,970 $ 15,136 $ 14,281 Trust and investment management services Other fees for customer services 702 545 1,718 1,551 Electronic banking fees 813 738 2,152 1,801 Investment fees 637 111 1,370 482 Insurance commissions 236 312 744 1,226 Mortgage banking revenue 322 960 1,292 2,820 Investment securities gains 3 9 1,174 1,259 Other 239 217 633 629 Total Noninterest Income $ 10,249 $ 9,623 $ 30,182 $ 29,590 Noninterest income increased $0.63 million, or 6.5%, in the third quarter of 2005, compared to the third quarter of 2004. The Corporation experienced increases in a number of noninterest income categories, including service charges on deposit accounts of $0.44 million, or 8.8%, trust and investment management services revenue of $0.13 million, or 7.4%, other fees for customer services of $0.16 million, or 28.8%, electronic banking fees of $0.08 million, or 10.2%, and investment fees of $0.53 million, or 474%. Service charges on deposits accounts were positively impacted by a fee increase on certain customer activity effective August 1, 2005. The increase in investment fees was primarily attributable to a change in the operation of this program, which is explained in more detail herein. The increases in noninterest income were largely offset by a continued reduction in mortgage banking revenue. Mortgage banking revenue of $0.32 million in the third quarter of 2005 was down $0.64 million, or 66.5%, from the
third quarter of 2004. The majority of the reduction in mortgage banking revenue between the third quarter of 2005 and the third quarter of 2004 was attributable to a $0.4 million reversal of previously recorded impairment on mortgage servicing rights during the third quarter of 2004. Noninterest income of $30.2 million during the nine months ended September 30, 2005 was $0.59 million, or 2.0%, higher than the prior year period. On a year-to-date basis in 2005, as compared to the prior year, the Corporation experienced increases in services charges on deposit accounts of $0.86 million, or 6.0%, trust and investment management services revenue of $0.42 million, or 7.6%, other fees for customer services of $0.17 million, or 10.8%, electronic banking fees of $0.35 million, or 19.5%, and investment fees of $0.89 million, or 184%. These increases were mostly offset by a $0.48 million, or 39.3%, decline in insurance commissions and a $0.09 million decrease in investment securities gains, but more significantly by a $1.53 million, or 54.2%, decrease in mortgage banking revenue. Based on current market interest rates of residential mortgage loans and slower economic conditions, we expect both the level of mortgage refinance activity and new mortgage originations to continue to be below 2004 le
vels during the remainder of 2005.
Investment fees were up $0.53 million in the third quarter of 2005 and $0.89 million for the nine months ended September 30, 2005, compared to the same periods in 2004. These increases were primarily attributable to a change in the operation of the Corporation's "CFC Investment Center" program that became effective January 1, 2005. Prior to January 1, 2005, the sales of mutual fund and annuity investment products and life insurance products were accomplished through a third party vendor relationship. The Corporation virtually had no operating expenses associated with this program through December 31, 2004, as the individuals responsible for the sale of these products were employees of the third party vendor. Effective January 1, 2005, the Corporation brought the program in-house and the employees of the third party vendor associated with the CFC Investment Center program became employees of the Corporation. The Corporation continued to utilize the same third party vendor to facilitate the operation of the
CFC Investment Center program in 2005 as in 2004. Accordingly, the percentage of investment fees earned increased as of January 1, 2005, although the operating expenses of the program also increased as of this date. On a comparable basis, net revenues (fees earned less operating costs) of the CFC Investment Center program were approximately $0.3 million and $0.1 million during the three months ended September 30, 2005 and 2004, respectively, and approximately $0.5 million during the nine month periods ended both September 30, 2005 and 2004. Accordingly, excluding investment fees earned from the CFC Investment Center program, total noninterest income for the three months ended September 30, 2005 was approximately $0.1 million or 1.0%, higher than in the three months ended September 30, 2004 and was approximately $0.3 million, or 1.0%, less during the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Operating Expenses The following schedule includes the major components of operating expenses for the three and nine months ended September 30, 2005 and 2004. (In thousands) Three Months Ended Nine Months Ended 2005 2004 2005 2004 Salaries and wages $ 11,381 $ 11,122 $ 33,931 $ 34,052 Employee benefits 3,023 3,263 9,711 9,827 Occupancy 2,346 2,237 7,067 6,976 Equipment 2,134 2,376 6,686 6,921 Postage and courier 632 761 1,932 2,383 Stationery and supplies 288 260 832 775 Professional fees 1,249 870 3,339 2,696 Michigan single business tax 531 443 1,560 1,361 Advertising and marketing 434 344 1,228 1,188 Intangible asset amortization 490 565 1,624 1,717 Telephone 379 436 1,258 1,263 Other 1,952 1,822 5,417 5,420 Total Operating Expenses $ 24,839 $ 24,499 $ 74,585 $ 74,579
Total operating expenses increased $0.34 million, or 1.4 %, in the third quarter of 2005, compared to the third quarter of 2004, and remained approximately the same during the nine months ended September 30, 2005, compared to the same period in the prior year. The increase in operating expenses between the third quarter of 2005 and 2004 was primarily attributable to increases in salaries and wages, external audit fees, consulting fees, and use taxes on computer software license agreements. The Corporation had 1,398 employees on a full-time equivalent basis as of September 30, 2005, compared to 1,387 employees as of September 30, 2004. Salaries and wages were up $0.26 million, or 2.3%, during the three months ended September 30, 2005, and down $0.12 million, or 0.4%, during the nine months ended September 30, 2005, compared to the same time periods in 2004. The increase in salaries and wages during the third quarter of 2005 was net of a decrease in incentive compensation expense. Incentive compensation expense was $0.46 million lower in the third quarter of 2005 than in the third quarter of 2004. Incentive compensation expense was $0.03 million during the third quarter of 2005, compared to $0.69 million in each of the first two quarters of 2005, and $0.49 million during the third quarter of 2004. Total employee benefits expense during the nine months ended September 30, 2005 was $9.71 million, a decrease of $0.12 million, or 1.2%, compared to the same period in the prior year. The majority of the decrease in benefits costs in 2005, as compared to 2004, was attributable to a reduction in postretirement benefit plan expense. Postretirement benefit plan expense of $0.01 million during the nine months ended September 30, 2005 was $0.25 million lower than during the same period in 2004, primarily resulting from a reduction in the amortization of unrecognized losses that occurred due to the extension of the amortization period. The amortization period was lengthened as virtually all participants were vested as of December 31, 2004, and therefore the amortization period of the unrecognized loss in the postretirement benefit plan is the average remaining lives of the participants. Professional fees of $1.25 million in the third quarter of 2005, were up $0.38 million, or 44%, over the third quarter of 2004. On a year-to-date basis in 2005, as compared to the prior year, professional fees increased $0.64 million, or 23.9%. These increases were primarily attributable to an increase in external audit fees, and also to increased consulting fees related to the analysis of the branch delivery system. Equipment costs decreased $0.24 million, or 3.4%, and postage and courier fees decreased $0.45 million, or 18.9%, between the nine months ended September 30, 2005 and 2004. Income Tax Expense The Corporation's effective federal income tax rate was 28.6% in the third quarter of 2005, compared to 33.7% in the third quarter of 2004. The Corporation's federal income tax provision in the third quarter of 2005 was reduced by $0.94 million as a result of federal income tax reserves expiring on September 30, 2005. The Corporation's effective federal income tax rate was 32.1% for the nine months ended September 30, 2005, compared to 33.2% for the nine months ended September 30, 2004. Additionally, a portion of the difference between the year-to-date effective rate in 2005, as compared to 2004, was attributable to the Corporation using a capital loss carryover of $0.19 million in the first quarter of 2004 to offset the gain of investment securities sold by the parent company. The difference between the federal statutory income tax rate and the Corporation's
BALANCE SHEET CHANGES Loans The Corporation's philosophy is such that it will not compromise on loan quality and generally does not make loans outside its banking markets to grow its loan portfolio. In addition, the Corporation generally does not participate in syndicated loans, which is a method utilized by many financial institutions to increase the size of their loan portfolios. The Corporation's loan portfolio is generally diversified geographically within the State of Michigan, as well as along industry lines and, therefore, the Corporation believes that its loan portfolio is reasonably sheltered from material adverse local economic trends. Total loans as of September 30, 2005 were $2.70 billion, up $114.8 million or 4.44%, compared to $2.59 billion as of December 31, 2004. Loans increased modestly across all categories during the third quarter of 2005. Residential real estate loans increased $23.0 million, or 3.0%, from December 31, 2004 to $783.8 million as of September 30, 2005. Residential real estate loans represented 29.0% of the Corporation's loan portfolio as of September 30, 2005 and 29.4% as of December 31, 2004. The Corporation's residential real estate loans primarily consist of one- to four-family residential loans with original terms of fifteen years or less. The loan-to-value ratio at time of origination is generally 80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance or are sold in the secondary market. During 2004 and the first nine months of 2005, fixed rate mortgages with terms of fifteen or more years were generally sold in the secondary market. Real estate construction loans increased $26.1 million, or 21.6%, from December 31, 2004 to $147.0 million as of September 30, 2005. Real estate construction loans represented 5.4% and 4.7% of the Corporation's loan portfolio as of September 30, 2005 and December 31, 2004, respectively. Construction lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser of the property if it will not be owner-occupied. The Corporation generally attempts to mitigate the risks associated with construction lending by, among other things, lending primarily in its market area, using conservative underwriting guidelines, and closely monitoring the construction process. Commercial loans increased $35.2 million, or 7.5%, from December 31, 2004 to $504.2 million as of September 30, 2005. The increase in commercial loans was due to a continued emphasis on this type of lending. Commercial loans represented 18.7% and 18.1% of the Corporation's loan portfolio as of September 30, 2005 and December 31, 2004, respectively. Commercial real estate loans increased $10.4 million, or 1.5%, from December 31, 2004 to $708.2 million as of September 30, 2005. The growth in commercial real estate loans occurred in the second quarter of the year, with the economic climate in the Corporation's local markets showing some signs of improvement during this time period. This momentum did not continue into the third
Commercial lending and commercial real estate lending are generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower for rental or business properties or for the operation of a business. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is 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 lending by, among other things, lending primarily in its market area and using conservative loan-to-value ratios in the underwriting process. Consumer loans increased $20.2 million, or 3.8%, from December 31, 2004 to $557.3 million as of September 30, 2005. Consumer loans increased $15.0 million in the first half of 2005, while increasing $5.2 million, or 0.9%, in the third quarter of 2005. The more significant increase during the first half of the year was due largely to a successful consumer loan promotion campaign in the second quarter of 2005 that was enhanced by certain automobile manufacturer discounts offered nationwide. Consumer loans represented 20.6% of the Corporation's loan portfolio as of September 30, 2005 and 20.8% as of December 31, 2004. Consumer loans generally have shorter terms than mortgage loans but generally involve more credit risk than one- to four-family residential lending because of the type and nature of the collateral. Collateral values, particularly those of automobiles, are negatively impacted by many factors, such as new car promotions, vehicle condition and economic conditions. Consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be negatively affected by adverse personal situations. Nonperforming loans consist of loans which are past due as to principal or interest by 90 days or more and are still accruing interest, loans for which the accrual of interest has been discontinued, and other loans which have been restructured to less than market terms due to a serious weakening of the borrower's financial condition. Nonperforming loans were $20.3 million as of September 30, 2005 and $10.1 million as of December 31, 2004, and represented 0.75% and 0.39% of total loans, respectively. The increase in nonperforming loans was due primarily to an increase in loans past due 90 days or more, and also to a slight increase in nonaccrual loans. A loan is considered impaired when management determines it is probable that all of the principal and interest due under the contractual terms of the loan will not be collected. In most instances, the impairment is measured based on the fair market value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. A portion of the allowance for loan losses may be allocated to impaired loans. The Corporation has taken the position that all nonaccrual commercial and commercial real estate loans are considered impaired loans. Impaired loans totaled $5.1 million as of September 30, 2005 and $4.6 million as of December 31, 2004. After analyzing the various components of the customer relationships and evaluating the underlying collateral of impaired loans, the allowance for loan losses allocated to these impaired loans was $1.2 million at September 30, 2005 and, after reclassification adjustments, $2.5 million
The allowance for loan losses was $34.6 million at September 30, 2005 and represented 1.28% of total loans, compared to $34.2 million, or 1.32% of total loans at December 31, 2004. Total Assets Total assets were $3.84 billion as of September 30, 2005, an increase of $78 million, or 2.07 %, from total assets of $3.76 billion as of December 31, 2004. The majority of the increase in total assets in 2005 was attributable to an increase in federal funds sold, which increased approximately $42 million since December 31, 2004. The increase in federal funds sold was attributable to an increase in deposits of municipalities, which are seasonal in nature. These types of deposits are not considered core deposits and therefore are generally invested for short periods of time, to match the expected duration of the municipal deposits. LIQUIDITY The maintenance of an adequate level of liquidity is necessary to ensure that sufficient funds are available to meet customers' loan demands and deposit withdrawals and to capitalize on opportunities for business expansion. The banking subsidiaries' primary liquidity sources consist of investment securities, those designated as held to maturity maturing within one year and those classified as available for sale, loan payments, FHLB borrowings, reverse repurchase agreements, other short-term borrowings and federal funds sold. The Corporation's total loan to deposit ratio as of September 30, 2005 and December 31, 2004 was 92.8% and 90.3%, respectively. FHLB borrowings totaled $269 million as of September 30, 2005, compared to $285 million as of December 31, 2004. The FHLB borrowings are collateralized by a blanket lien on qualified one- to four-family residential mortgage loans. The carrying value of these mortgage loans was $711 million, which represented a total borrowing capacity based on existing collateral of $491 million as of September 30, 2005. Therefore, the Corporation's additional borrowing availability through the FHLB at September 30, 2005 under the blanket lien agreement was $222 million. The FHLB's willingness to lend up to the total borrowing capacity is contingent upon, but not limited to, the acceptability of the Corporation's three subsidiary banks' financial condition at the time of each credit request, as well as the Corporation's three subsidiary banks' compliance with all applicable collateral requirements, regulations, laws, and FHLB policies. The Corporation has the option to pledge additional qualified loans and investment secu
rities to potentially create additional borrowing availability with the FHLB. Reverse repurchase agreements are a means of raising funds in the capital markets by providing specific securities as collateral. On May 31, 2005, the Corporation entered into a $10,000,000 reverse repurchase agreement with another financial institution by selling $11,000,000 in U.S. treasury notes under an agreement to repurchase these notes.
The following table shows required principal payments on FHLB borrowings and reverse repurchase agreements (in thousands): October 1, 2005 - December 31, 2005 $ 32,195 2006 133,692 2007 15,023 2008 55,024 2009 25 Thereafter 43,000 Total $ 278,959 The Corporation has various commitments that may impact liquidity. The following table summarizes the Corporation's commitments and expected expiration dates by period at September 30, 2005. Since the majority 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. (In thousands) September 30, 2005 More Unused commitments to extend credit $ 177,525 $ 63,035 $ 73,037 $ 59,491 $ 373,088 Undisbursed loans 123,915 - - - 123,915 Standby letters of credit 20,453 28,356 1,768 - 50,577 Total commitments $ 321,893 $ 91,391 $ 74,805 $ 59,491 $ 547,580 CAPITAL RESOURCES As of September 30, 2005, shareholders' equity was $497.9 million, compared to $484.8 million as of December 31, 2004, resulting in an increase of $13.1 million, or 2.7%. Shareholders' equity as a percentage of total assets was 13.0 % as of September 30, 2005 and 12.9% as of December 31, 2004.
A statement of changes in shareholders' equity covering the nine-month periods ended September 30, 2005 and September 30, 2004 follows (in thousands): Nine Months Ended 2005 2004 Total shareholders' equity as of January 1 $484,836 $458,049 Comprehensive income: Net income 40,324 42,281 Change in unrealized net gains on securities available for sale, net of tax (6,004 ) (7,417 ) Total comprehensive income 34,320 34,864 Cash dividends paid (19,992 ) (19,027 ) Shares repurchased (2,183 ) - Shares issued from stock option plans 916 4,942 Total shareholders' equity as of end of period $497,897 $478,828 The following table represents the Corporation's regulatory capital ratios as of September 30, 2005: Tier 1 Total Chemical Financial Corporation - actual ratio 11.60 % 16.25 % 17.50 % Regulatory minimum ratio 3.00 4.00 8.00 Ratio considered "well capitalized" by The Corporation's Tier 1 and Total capital ratios under the risk-based capital measure at September 30, 2005 exceed the regulatory agencies ratios to be considered "well capitalized" partially due to the Corporation holding $99 million in investment securities and other assets which are assigned a 0% risk rating; $889 million in assets, primarily investment securities, which are assigned a 20% risk rating; and $939 million in residential real estate mortgages and other assets which are assigned a 50% risk rating. These three risk ratings (0%, 20% and 50%) represented 47% of the Corporation's total risk-based assets (including off-balance sheet items) as of September 30, 2005. The following table shows stock repurchase activity by the Corporation during the periods indicated: Three Months Ended 2005 2004 Number of shares repurchased 16,495 4,076 Average price of shares repurchased $32.10 $34.12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information concerning quantitative and qualitative disclosures about market risk contained in the discussion regarding interest rate risk and sensitivity under the captions "Liquidity Risk" and "Market Risk" on pages 18 through 23 of the Corporation's Annual Report to Shareholders for the year ended December 31, 2004 is herein incorporated by reference. Such Annual Report was previously filed as Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004. The Corporation does not believe that there has been a material change in the nature or categories of the Corporation's primary market risk exposure, or the particular markets that present the primary risk of loss to the Corporation. As of the date of this report, the Corporation does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Corporation manages its primary market risk exposure, as described in the sections of its Annual Report to Shareholders incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this report, the Corporation does not expect to make material changes in those methods in the near term. The Corporation may change those methods in the future to adapt to changes in circumstances or to implement new techniques. The Corporation's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships are primarily determined by market factors that are beyond the Corporation's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" in this report for a discussion of the limitations on the Corporation's responsibility for such statements. In this discussion, "near term" means a period of one year following the date of the most recent consolidated statement of financial position contained in this report. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on and as of the time of that evaluation, the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of the end of the period covered by this report. There was no change in the Corporation's internal control over financial reporting that occurred during the three months ended September 30, 2005 that has materially affected, or that is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table provides the purchases of equity securities by the Corporation during the periods indicated: Issuer Purchases of Equity Securities Total Number of Maximum July 1-31, 2005 Common Stock Employee Transactions 1,363 $34.68 N/A N/A August 1-31, 2005 Common Stock Employee Transactions - - N/A N/A September 1-30, 2005 Common Stock Employee Transactions 1,132 32.68 N/A N/A Total 16,495 $32.10 14,000 427,800
Washington, D.C. 20549
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
Midland, Michigan
(Address of Principal Executive Offices)
48640
(Zip Code)
(Registrant's Telephone Number, Including Area Code)
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
Statement of Financial Position as of December 31, 2004)
4
September 30, 2005 and September 30, 2004
4
and December 31, 2004
5
September 30, 2005 and September 30, 2004
6
Results of Operations
19-33
Consolidated Statements of Income (Unaudited)
September 30
September 30
Consolidated Statements of Financial Position (In thousands, except par value)
2005
2004
12/31/04)
132,898
176,517
12/31/04
25,127
25,169
Consolidated Statements of Cash Flows (Unaudited)
September 30
short-term and FHLB borrowings
$
39,846
$
30,684
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
September 30
September 30
earnings per share, net income
$13,605
$14,296
$40,324
$42,281
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
September 30
September 30
on securities available for sale,
9/30/04, respectively, and $2,822 and $3,553 for
the nine months ended 9/30/05 and 9/30/04,
respectively
(3,308
)
2,431
(5,241
)
(6,599
)
for realized net gains included in net income,
net of tax expense of $1 and $3 for the three
months ended 9/30/05 and 9/30/04, respectively,
and $411 and $441 for the nine months ended
9/30/05 and 9/30/04, respectively
(2
)
(6
)
(763
)
(818
)
2005
2004
on investment securities available for sale (net of
related tax benefit (expense) of $2,852 at 9/30/05
and ($381) at 12/31/04
$
(5,297
)
$
707
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
2005
2004
2005
2004
nonperforming loans
171%
340%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(continued)
September 30
loans (annualized)
0.13%
0.09%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
2005
2004
Carrying
Amount
Accumulated
Amortization
Carrying
Value
Carrying
Amount
Accumulated
Amortization
Other
Reduction
Carrying
Value
covenants
690
452
238
865
356
85
424
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
September 30
September 30
covenant amortization
491
565
1,625
1,717
expense
$ 903
$ 930
$ 2,496
$ 2,861
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
September 30
September 30
compensation expense determined under
Pension Plans
Benefit Plan
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
liabilities. Certain macro-economic factors also influence net interest income, such as 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 Corporation's markets. Risk management plays an important role in the Corporation's level of net interest income. The ineffective management of credit risk, and more significantly interest rate risk, can adversely impact the Corporation's net interest income.
TAX EQUIVALENT YIELDS AND RATES
(In thousands)
September 30
Average
Balance
Equivalent
Interest
Yield/
Rate
Average
Balance
Equivalent
Interest
Yield/
Rate
unaffiliated banks
11,135
226
8.05
10,869
129
4.72
SHAREHOLDERS' EQUITY
borrowings
268,959
2,690
3.97
285,194
2,570
3.58
Equity
$ 3,800,550
$ 3,843,070
TAX EQUIVALENT YIELDS AND RATES
(In thousands)
September 30
Average
Balance
Equivalent
Interest
Yield/
Rate
Average
Balance
Equivalent
Interest
Yield/
Rate
unaffiliated banks
18,912
741
5.24
15,828
292
2.46
SHAREHOLDERS' EQUITY
borrowings
263,722
7,553
3.83
279,297
7,694
3.68
Equity
$ 3,794,386
$ 3,865,987
(In thousands)
September 30
2005 compared to 2004
September 30
2005 compared to 2004
Increase (Decrease)
Due to Changes in
Increase (Decrease)
Due to Changes in
Volume
Yield/Rate
(Decrease)
Volume
Yield/Rate
(Decrease)
INTEREST-EARNING ASSETS:
unaffiliated banks
3
94
97
66
383
449
interest-earning assets
42
3,090
3,132
(301
)
6,608
6,307
CHANGES IN INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES:
interest-bearing liabilities
194
4,915
5,109
(440
)
10,339
9,899
NET INTEREST INCOME (FTE)
$ (152
)
$ (1,825
)
$ (1,977
)
$ (139
)
$ (3,731
)
$ (3,592
)
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, the financial condition of the borrowers, industry and geographical exposures within the portfolio, economic conditions and employment levels of the Corporation's local markets, and other factors affecting business sectors. Management believes that the allowance for loan losses is maintained at an adequate level, considering the inherent risk in the loan portfolio.
September 30
September 30
revenue
1,891
1,761
5,963
5,541
September 30
September 30
effective federal income tax rate is primarily a function of the proportion of the Corporation's interest income exempt from federal taxation, nondeductible interest expense, other nondeductible expenses and tax credits.
quarter as the economic climate in Michigan has weakened relative to the overall economy nationwide. Commercial real estate loans represented 26.2% of the Corporation's loan portfolio as of September 30, 2005 and 27.0% as of December 31, 2004.
at December 31, 2004. 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.
Expected Expiration Dates by Period
Less than
1 year
1-3
years
3-5
years
than
5 years
Total
September 30
Leverage
Risk-Based
Capital
Risk-Based
Capital
regulatory agencies
5.00
6.00
10.00
September 30
Period
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
Repurchase Program
- -
- -
- -
441,800
Repurchase Program
14,000
31.80
14,000
427,800
Repurchase Program
- -
- -
- -
427,800
On April 22, 2005, the Corporation publicly announced that its Board of Directors had authorized management to purchase up to 500,000 shares of the Corporation's common stock. The repurchased shares are available for later reissue in connection with potential future stock dividends, the Corporation's dividend reinvestment plan, employee benefit plans and other general corporate purposes. This authorization replaced all prior share repurchase authorizations.
Employee transactions include shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options during the applicable period. The Corporation's 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.
ITEM 6. |
EXHIBITS |
Exhibits. The following exhibits are filed as part of this report on Form 10-Q:
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Exhibit |
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3.1 |
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Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the Corporation's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference. |
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3.2 |
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Restated Bylaws. Previously filed as Exhibit 3.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Here incorporated by reference. |
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31.1 |
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Certification. Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification. Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification pursuant to 18 U.S.C. § 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CHEMICAL FINANCIAL CORPORATION |
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Date: November 4, 2005 |
By: /s/ David B. Ramaker |
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David B. Ramaker |
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Date: November 4, 2005 |
By: /s/ Lori A. Gwizdala |
|
Lori A. Gwizdala |
EXHIBIT INDEX
Exhibit |
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3.1 |
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Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the Corporation's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference. |
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3.2 |
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Restated Bylaws. Previously filed as Exhibit 3.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Here incorporated by reference. |
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31.1 |
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Certification. Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification. Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification pursuant to 18 U.S.C. § 1350. |
Exhibit 31.1
CERTIFICATIONS
I, David B. Ramaker, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Chemical Financial Corporation; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
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c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 4, 2005
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/s/ David B. Ramaker |
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David B. Ramaker |
Exhibit 31.2
CERTIFICATIONS
I, Lori A. Gwizdala, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Chemical Financial Corporation; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
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c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 4, 2005
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/s/ Lori A. Gwizdala |
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Lori A. Gwizdala |
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his or her capacity as an officer of Chemical Financial Corporation (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2005 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.
Dated: November 4, 2005 |
/s/ David B. Ramaker |
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David B. Ramaker |
Dated: November 4, 2005 |
/s/ Lori A. Gwizdala |
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Lori A. Gwizdala |
A signed original of this written statement required by Section 906 has been provided to Chemical Financial Corporation and will be retained by Chemical Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request. |