10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

[X]	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal year ended December 31, 2005
	or
[  ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from __________ to __________.

Commission File Number 000-08185

CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Michigan (State or Other Jurisdiction of Incorporation or Organization)	38-2022454 (I.R.S. Employer Identification No.)
333 E. Main Street Midland, Michigan (Address of Principal Executive Offices)	48640 (Zip Code)

Registrant's Telephone Number, Including Area Code: (989) 839-5350

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Chemical Financial Corporation
Common Stock, $1 Par Value Per Share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes    X     No ____

Indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or Section 15(d) of the Act.  Yes  ____ No   X     

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (   )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer   X      Accelerated filer ____ Non-accelerated filer ____

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 aggregate market value of the registrant's outstanding voting common stock held by non-affiliates of the registrant as of June 30, 2005, determined using the average bid and asked price of the registrant's common stock on June 30, 2005, as quoted on The Nasdaq Stock Market, was $742,882,722.

The number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 2006:

Common stock, $1 par value per share - 25,099,917 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, are incorporated by reference in Parts I and II (Items 1 and 5-9A).
Portions of the registrant's Proxy Statement (dated March 10, 2006) for its April 17, 2006 annual shareholders' meeting are incorporated by reference in Parts II and III (Items 5 and 10-14).

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 Chemical Financial Corporation itself. Words such as "anticipates," "believes," "estimates," "judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, certain statements under the subheadings "Liquidity Risk" and "Market Risk" in "Management's Discussion and Analysis" 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 fore casted in such forward-looking statements. Chemical Financial 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, the risk factors described in Item 1A ("Risk Factors") of this report; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; 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 forward-looking statement.

PART I

Item 1.  Business.

Chemical Financial Corporation ("Chemical" or the "Corporation") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and incorporated in the State of Michigan. Chemical was organized under Michigan law in August 1973, and is headquartered in Midland, Michigan. Chemical was substantially inactive until June 30, 1974, when it acquired Chemical Bank and Trust Company (CBT), pursuant to a reorganization in which the former shareholders of CBT became shareholders of Chemical.

In addition to the acquisition of CBT, the Corporation acquired nineteen community banks and thirteen branch bank offices through December 31, 2005 and had consolidated these acquisitions into three commercial bank subsidiaries. The Corporation completed a corporate organizational restructuring on December 31, 2005 which consolidated its three commercial bank charters into one commercial bank charter. Chemical Bank Shoreline, headquartered in Benton Harbor, Michigan and Chemical Bank West, headquartered in the Grand Rapids area of Michigan, were merged into the Corporation's remaining commercial bank subsidiary, CBT, headquartered in Midland, Michigan. CBT's name was changed to Chemical Bank on December 31, 2005. Chemical's sole bank subsidiary, Chemical Bank, will continue to operate through an organizational structure of community banks. The organizational restructuring included changes in the responsibilities of certain executive officers to place a greater emphasis on internal growth initiatives. These executive officer position changes became effective on January 1, 2006 and are discussed herein under the heading "Supplemental Item. Executive Officers of the Registrant."

The Corporation directly owns two non-bank subsidiaries: CFC Financial Services, Inc. and CFC Title Services, Inc. CFC Financial Services, Inc. is an insurance subsidiary that operates under the assumed name of CFC Investment Centers (a provider of mutual funds and annuity products to customers). In December 2004, the Corporation sold its property and casualty agency book of business and discontinued the use of "Chemical Financial Insurance Agency" at that time. CFC Title Services, Inc. is an issuer of title insurance to buyers and sellers of residential and commercial mortgage properties, including properties subject to loan refinancing.

At December 31, 2005, Chemical was the fourth largest bank holding company headquartered in Michigan, measured by total assets, and together with its subsidiaries, employed a total of 1,376 full-time equivalent employees.

Chemical's business is concentrated in a single industry segment - commercial banking. Chemical's bank subsidiary offers a full range of commercial banking and fiduciary products and services. These include business and personal

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checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit services, automated teller machines, access to insurance and investment products, money transfer services, corporate and personal trust services and other banking services.

The principal markets for these financial services are the communities within Michigan in which the branches of Chemical's bank subsidiary are located and the areas surrounding these communities. As of December 31, 2005, Chemical and its bank subsidiary served these markets through 132 banking offices and one loan production office across 32 counties, all in the lower peninsula of Michigan. In addition to the banking offices, the subsidiary bank operated 132 automated teller machines, both on- and off-bank premises, as of December 31, 2005.

Chemical Bank's largest loan category is residential real estate mortgages. At December 31, 2005, residential real estate loans totaled $789 million, or 29.1% of consolidated total loans. Residential real estate loans increased $27.8 million or 3.7% during 2005. The increase in residential real estate loans during 2005 was primarily attributable to growth in the adjustable interest rate loan type that includes a fixed interest rate period for three, five or seven years. Market interest rates on this type of loan decreased during 2005 making these loans more attractive to customers. The Corporation generally keeps adjustable interest rate loans in its loan portfolio, rather than selling them in the secondary mortgage market.

The Corporation's general practice is to sell residential real estate loan originations with maturities of fifteen years and longer in the secondary market. The Corporation sold $111 million of long-term fixed rate residential real estate loans during 2005. This compares with $153 million and $409 million of residential real estate loans sold during 2004 and 2003, respectively. The decrease in loans sold in 2005 was attributable to the continuing decline in residential loan refinancing volume and the growth in adjustable interest rate residential real estate loans that are kept in the loan portfolio.

The Corporation realized growth in commercial and real estate commercial loans in 2005, as the focus over the past three years has been to increase such loans. Commercial loans increased $48.9 million, or 10.4%, and real estate commercial loans increased $6.9 million, or 1.0%, during 2005. Commercial and real estate commercial loans combined comprised 45.1%, 45.1% and 41.7% of consolidated total loans as of December 31, 2005, 2004 and 2003, respectively.

The principal source of revenue for Chemical is interest and fees on loans, which accounted for 69% of total revenues in 2005, 67% of total revenues in 2004 and 65% of total revenues in 2003. Interest on securities is also a significant source of revenue, accounting for 13% of total revenues in 2005, 15% of total revenues in 2004 and 17% of total revenues in 2003. Chemical has no foreign loans, assets or activities. No material part of the business of Chemical or its subsidiaries is dependent upon a single customer or very few customers.

The business of banking is highly competitive. In addition to competition from other commercial banks, banks face significant competition from nonbank financial institutions. Savings associations and credit unions compete aggressively with commercial banks for deposits and loans, and credit unions and finance companies are particularly significant factors in the consumer loan market. Banks compete for deposits with a broad range of other types of investments, the most significant of which, over the past few years, have been mutual funds and annuities. Insurance companies and investment firms are also significant competitors for customer deposits. In response to this increased competition for customers' bank deposits, the Corporation's subsidiary bank, through CFC Investment Centers, offers a broad array of mutual funds, annuity products and market securities through an alliance with an independent, registered broker/dealer. In addition, the Trust and Investment Management Services department (Trust Department) of Chemical Bank offers customers a variety of investment products and services. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on loans and fees charged for services) and service (convenience and quality of services rendered to customers).

The nature of the business of Chemical's bank subsidiary is such that it holds title to numerous parcels of real property. These properties are primarily owned for branch offices; however, Chemical and its bank subsidiary may hold properties for other business purposes, as well as on a temporary basis for properties taken in, or in lieu of foreclosure, to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of clean up of contamination on or originating from those properties, even if they are wholly innocent

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of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property.

Supervision and Regulation

Banks and bank holding companies are extensively regulated. As of December 31, 2005, Chemical's sole bank subsidiary, Chemical Bank, was chartered by the State of Michigan and supervised, examined and regulated by the Michigan Office of Financial and Insurance Services. Chemical Bank is a member of the Federal Reserve System and supervised, examined and regulated by the Federal Reserve System. Deposits of Chemical Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. Chemical has elected to be regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board) as a financial holding company under the Bank Holding Company Act of 1956.

State banks and bank holding companies are governed by both federal and state laws that significantly limit their business activities in a number of respects. Examples of such limitations include: (1) prior approval of the Federal Reserve Board, and in some cases various other governing agencies, is required for bank holding companies to acquire control of any additional bank holding companies, banks or branches, (2) the business activities of bank holding companies and their subsidiaries are limited to banking and to other activities which are determined by the Federal Reserve Board to be closely related to banking, and (3) transactions between bank holding company subsidiary banks are significantly restricted by banking laws and regulations. Somewhat broader activities are permitted for qualifying financial holding companies, such as Chemical, and "financial subsidiaries." Chemical currently does not have any subsidiaries that have elected to qualify as "financial subsidiaries."

Chemical is a legal entity separate and distinct from its subsidiary bank and non-bank subsidiaries. Chemical's primary source of funds is dividends paid to it by its subsidiaries. Federal and state banking laws and regulations limit both the extent to which Chemical's subsidiary bank can lend or otherwise supply funds to Chemical or certain of its affiliates and also place certain restrictions on the amount of dividends the subsidiary bank of Chemical may pay to Chemical.

Banks are subject to a number of federal and state laws and regulations that have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the USA Patriot Act, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, anti-money laundering laws and privacy laws. These laws and regulations can have a significant effect on the operating results of banks.

To recharacterize itself as a financial holding company and to avail itself of the broader powers permitted for financial holding companies, a bank holding company must meet certain regulatory standards for being "well capitalized," "well-managed" and "satisfactory" in its Community Reinvestment Act compliance. The Corporation became a financial holding company in 2000.

Under Federal law, the FDIC has the authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources, and to establish semi-annual assessment rates on Bank Insurance Fund (BIF) member banks, so as to maintain the BIF at the designated reserve ratio defined by law. The semi-annual assessment rate of the FDIC is based upon a system of risk-based premiums for deposit insurance, pursuant to which the premiums paid by a depository institution are based on the probability that the BIF will incur a loss in respect of such institution.

The recapitalization of the Savings Association Insurance Fund (SAIF) was accomplished through the enactment of The Deposit Insurance Funds Act of 1996 (Funds Act). This legislation authorized the Financing Corporation (FICO) to impose periodic assessments on depository institutions that are members of the BIF, in addition to institutions that are members of the SAIF. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds over a larger number of institutions. Until the change in the law, only SAIF-member institutions bore the cost of funding these interest payments. FDIC premiums, which consisted exclusively of the FICO assessment, were $0.41 million in 2005, $0.44 million in 2004 and $0.45 million in 2003.

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Federal law also contains a "cross-guarantee" provision that could result in insured depository institutions owned by Chemical being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by Chemical. Under Federal Reserve Board policy, Chemical is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support its subsidiary bank.

Banks are subject to the provisions of the Community Reinvestment Act of 1977 (CRA). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, consistent with the safe and sound operation of the institution. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank that has applied to: (1) obtain deposit insurance coverage for a newly chartered institution, (2) establish a new branch office that will accept deposits, (3) relocate an office, or (4) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application.

Bank holding companies may acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan Office of Financial and Insurance Services (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of bran ches located in Michigan.

Mergers, Acquisitions, Consolidations and Divestitures

The following is a summary of the business combinations, consolidations and divestitures completed during the three-year period ended December 31, 2005.

The Corporation completed a corporate organizational restructuring on December 31, 2005 which consolidated its three commercial bank charters into one commercial bank charter. Chemical Bank Shoreline, headquartered in Benton Harbor, Michigan and Chemical Bank West, headquartered in the Grand Rapids area of Michigan, were merged into the Corporation's remaining commercial bank subsidiary, CBT, headquartered in Midland, Michigan. CBT's name was changed to Chemical Bank on December 31, 2005.

On October 22, 2004, CBT sold its branch bank office located in Frandor, Michigan to Republic Bank. The branch had total deposits of approximately $6 million as of the date of sale. In December 2004, the Corporation sold its property and casualty insurance book of business.

The Corporation acquired Caledonia Financial Corporation (Caledonia), a one-bank holding company headquartered in Caledonia, Michigan, on December 1, 2003. As of that date, Caledonia had total assets of $211 million, total loans of $184 million, total deposits of $171 million and shareholders' equity of $22.3 million. Shareholders of Caledonia received $39.00 cash for each share of Caledonia common stock in a taxable transaction. The total value of the transaction was approximately $56.8 million, of which $52.3 million was paid in cash and $4.5 million represented the value of stock options. The purchase price represented a premium over book value of $34.5 million. The acquisition was accounted for by the purchase method of accounting; therefore, the financial results of Caledonia's operations are included from the acquisition date, with no restatement of prior period amounts.

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On September 30, 2003, the Corporation consolidated CFC Data Corp, its wholly-owned data processing subsidiary, into the parent.

The information under the following captions in the registrant's Annual Report to Shareholders for the year ended December 31, 2005, further describes the business of Chemical and is here incorporated by reference (tables are included under the caption "Management's Discussion and Analysis"):

Caption	Pages
Five-Year Summary of Selected Financial Data	2
Table 1. Average Balances, Tax Equivalent Interest and
Effective Yields and Rates	7
Table 2. Volume and Rate Variance Analysis	8
Table 3. Summary of Loans and Loan Loss Experience	11
Table 4. Comparison of Loan Maturities and Interest Sensitivity	12
Table 5. Nonperforming Assets	13
Table 6. Allocation of the Allowance For Loan Losses	17
Table 7. Noninterest Income	17
Table 8. Operating Expenses	18
Table 9. Maturities and Yields of Investment Securities
at December 31, 2005	21
Table 10. Summary of Investment Securities	21
Table 11. Maturity Analysis of Investment Securities	22
Management's Discussion and Analysis subheadings:
"Net Interest Income," "Loans," "Nonperforming
Assets," "Provision and Allowance For Loan Losses," "Liquidity Risk"
and "Market Risk"	7-24
Table 12. Maturity Distribution of Time Deposits of $100,000 or More	22
Table 13. Financial Obligations	23
Table 14. Commitments	23
Note C - Investment Securities	41-43
Note E - Loans	44-45
Note J - Short-term Borrowings	49

Chemical's internet website is located at www.chemicalbankmi.com. Chemical provides, free of charge in the "Investor Information" section of its website, copies of all periodic reports and amendments to such reports that Chemical files with the Securities and Exchange Commission, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Chemical posts such reports to its website as soon as reasonably practicable after each report has been filed with or furnished to the Securities and Exchange Commission.

Item 1A.  Risk Factors.

The Corporation's business model is subject to many risks and uncertainties. Although the Corporation seeks ways to manage these risks and develop programs to control those that management can, the Corporation ultimately cannot predict the future. Actual results may differ materially from management's expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Corporation faces. Additional risks and uncertainties of which the Corporation is unaware, or that it currently deems immaterial, also may become important factors that affect the Corporation and its business. If any of these risks were to occur, the Corporation's business, financial condition or results of operations could be materially and adversely affected.

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Investments in Chemical common stock involve risk.

The market price of Chemical common stock may fluctuate significantly in response to a number of factors, including:

• Variations in quarterly or annual operating results

• Changes in interest rates

• New developments in the banking industry

• Regulatory actions

• Volatility of stock market prices and volumes

• Changes in market valuations of similar companies

• Changes in securities analysts' estimates of financial performance

• New litigation or contingencies or changes in existing litigation or contingencies

• Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies

• Rumors or erroneous information

Asset quality could be less favorable than expected.

A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Corporation are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when in fact it is not.

General economic conditions in the state of Michigan could be less favorable than expected.

The Corporation is affected by general economic conditions in the United States, although most directly within Michigan. A further economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.

If Chemical does not adjust to changes in the financial services industry, its financial performance may suffer.

Chemical's ability to maintain its historically stable and consistent financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for Chemical's customers and services. Financial services and products are also constantly changing. Chemicals financial performance will also depend in part upon customer demand for Chemical's products and services and Chemical' s ability to develop and offer competitive financial products and services.

Changes in interest rates could reduce Chemical's income and cash flow.

Chemical's income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond Chemical's control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory

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agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings.

Additional risks and uncertainties could have a negative effect on financial performance.

Additional factors could have a negative effect on the financial performance of Chemical and Chemical's common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses.

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

The executive offices of Chemical, the main office of Chemical Bank and CFC Financial Services, Inc. are located in a three story, approximately 74,000 square foot, office building in downtown Midland, which is 100% owned by Chemical Bank. The Trust Department of Chemical Bank is headquartered in a separate three story, approximately 35,000 square foot, office building in downtown Midland, which is 100% owned by Chemical. As of December 31, 2005, the Trust Department was utilizing approximately one-third of the available space in the building and the remainder was leased to an unaffiliated business. The lease to the unaffiliated business expired in February 2006 and was not renewed.

Chemical's subsidiary bank, Chemical Bank, conducts business from a total of 132 banking offices and one loan production office as of December 31, 2005. These offices are located in the lower peninsula of Michigan. Of the total offices, 126 are owned by the subsidiary bank and seven are leased from independent parties with remaining lease terms of two years and four months to nine years. This leased property is considered insignificant.

Item 3.  Legal Proceedings.

Chemical's bank subsidiary is a party, as plaintiff or defendant, to a number of legal proceedings, none of which is considered material, and all of which arose in the ordinary course of its operations.

Item 4.  Submission of Matters to a Vote of Security Holders.

None.

Supplemental Item. Executive Officers of the Registrant.

The following provides biographical information about Chemical's executive officers who are not directors or nominated for election to the board of directors as of January 1, 2006. Executive officer appointments are made or reaffirmed annually at the organizational meeting of the board of directors. At its regular meetings, the board of directors may also make other executive officer appointments. Certain executive officer titles, positions and responsibilities were changed effective January 1, 2006. These changes were, in part, made in conjunction with the organizational restructuring of Chemical that was effective on December 31, 2005. On December 31, 2005, the Corporation's wholly-owned bank subsidiaries, Chemical Bank Shoreline and Chemical Bank West, were merged into CBT. In addition, as of December 31, 2005, CBT's name was changed to Chemical Bank.

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Bruce M. Groom, age 64, is Executive Vice President and Senior Trust Officer of Chemical Bank. Mr. Groom joined Chemical Bank on April 29, 1985 as Senior Vice President and was promoted to Senior Trust Officer in May 1986, First Senior Vice President in January 2001 and Executive Vice President in February 2002. Mr. Groom has served as a director of Chemical Financial Services, Inc. and CFC Title Services, Inc. since February 2004. Mr. Groom is an attorney. Mr. Groom is a member of the Executive Management Committee of Chemical.

Lori A. Gwizdala, age 47, is Executive Vice President, Chief Financial Officer and Treasurer of Chemical. Ms. Gwizdala joined Chemical as Controller on January 1, 1985 and was named Chief Financial Officer in May 1987, Senior Vice President in February 1991, Treasurer in April 1994 and Executive Vice President in January 2002. Ms. Gwizdala has served as a director of CFC Financial Services, Inc. and CFC Title Services, Inc. since 1997, and as a director of Chemical Bank West from January 2002 until December 31, 2005. Ms. Gwizdala is a certified public accountant. Ms. Gwizdala is a member of the Executive Management Committee of Chemical.

Kenneth W. Johnson, age 43, was appointed Executive Vice President, Director of Bank Operations of Chemical Bank effective January 1, 2006. Mr. Johnson joined Shoreline Bank, a bank subsidiary of Shoreline Financial Corporation (Shoreline), in 1995 as Vice President and North Region Sales Manager. Mr. Johnson was promoted to First Vice President and Head of Retail Banking Operations in 2000. Shoreline merged with Chemical in January 2001. Mr. Johnson became a First Vice President of Branch Administration at Chemical in 2003. Mr. Johnson is a member of the Executive Management Committee of Chemical.

Thomas W. Kohn, age 51, was appointed Executive Vice President, Community Banking of Chemical Bank effective January 1, 2006. Mr. Kohn previously served as President, Chief Executive Officer and a director of Chemical Bank West until December 31, 2005. Mr. Kohn became President of Chemical Bank Montcalm (merged into Chemical Bank West) in 1991 and President, Chief Executive Officer and a director of Chemical Bank West in January 2002. Mr. Kohn is a member of the Executive Management Committee of Chemical.

William C. Lauderbach, age 63, is Executive Vice President and Senior Investment Officer of Chemical Bank. Mr. Lauderbach joined Chemical Bank as a Trust Officer on July 2, 1973, was promoted to Vice President and Trust Officer in March 1980, Investment Officer in January 1985, Senior Vice President in February 1991, First Senior Vice President in January 2001 and Executive Vice President in February 2002. Mr. Lauderbach is a member of the Executive Management Committee of Chemical.

James R. Milroy, age 45, was appointed Executive Vice President, Chief Risk Management Officer and Secretary of Chemical effective January 1, 2006. Mr. Milroy was Executive Vice President and Chief Operating Officer of Chemical from January 1, 2002 to December 31, 2005. Mr. Milroy joined Shoreline and Shoreline Bank in 1990 and served in various senior management positions including President from 1999 to January 2001. Mr. Milroy was President and Chief Executive Officer of Chemical Bank Shoreline from January 2001 to December 31, 2001, and a director of Chemical Bank Shoreline until December 31, 2005. Mr. Milroy became a director of CFC Financial Services, Inc. and CFC Title Services, Inc. in February 2002. Mr. Milroy is a member of the Executive Management Committee of Chemical.

John A. Reisner, age 60, was appointed Executive Vice President, Community Banking of Chemical Bank effective January 1, 2006. Mr. Reisner previously served as President, Chief Executive Officer and a director of Chemical Bank until December 31, 2005. Mr. Reisner joined the Chemical organization in 1979 and has served in various senior management positions. Mr. Reisner served as President, Chief Executive Officer and a director of Chemical Bank West for thirteen years prior to his appointment in January 2002 as President, Chief Executive Officer and a director of Chemical Bank. Mr. Reisner is a member of the Executive Management Committee of Chemical.

James E. Tomczyk, age 53, was appointed Executive Vice President and Senior Credit Officer of Chemical Bank effective January 1, 2006. Previously, Mr. Tomczyk served as President, Chief Executive Officer and a director of Chemical Bank Shoreline from January 2002 until December 31, 2005. Mr. Tomczyk joined Shoreline Bank in February 1999 as Executive Vice President of its Private Banking, Trust and Investment divisions and became Senior Executive Vice President of these divisions in October 2000. Mr. Tomczyk is a member of the Executive Management Committee of Chemical.

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PART II

Item 5.  Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The information under the heading "Market for Chemical Financial Corporation Common Stock and Related Shareholder Matters (Unaudited)" on page 59 and in Footnote L on page 50 of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, and the information under the heading "Equity Compensation Plan Information" on pages 19 and 20 in the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders, is here incorporated by reference.

Item 6.  Selected Financial Data.

The information under the caption "Five-Year Summary of Selected Financial Data" on page 2 and information under the caption "Mergers and Acquisitions" on page 5 of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, is here incorporated by reference.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The information under the heading "Management's Discussion and Analysis" on pages 3 through 26 (inclusive) of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, is here incorporated by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

The information under the subheading "Liquidity Risk" on pages 20 through 22 (inclusive) and "Market Risk" on pages 23 through 24 (inclusive) of "Management's Discussion and Analysis" in the registrant's Annual Report to Shareholders for the year ended December 31, 2005, is here incorporated by reference.

Item 8.  Financial Statements and Supplementary Data.

The financial statements, notes, and independent registered public accounting firm's report on pages 28 through 58 (inclusive) of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, are here incorporated by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.  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 December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

10

The information under the caption "Management Report" on page 27 and under the caption "Report of Independent Registered Public Accounting Firm" on page 29 of the registrant's Annual Report to Shareholders for the year ended December 31, 2005, is here incorporated by reference.

Item 9B.  Other Information.

Not applicable.

PART III

Item 10.  Directors and Executive Officers of the Registrant.

The information set forth under the heading "Chemical Financial's Board of Directors and Nominees for Election as Directors" on pages 2 through 6 (inclusive) and the subheading "Section 16(a) Beneficial Ownership Reporting Compliance" on page 25 in the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders is here incorporated by reference.

Chemical has adopted a Code of Ethics for Senior Financial Officers and Members of the Executive Management Committee, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on Chemical's website at www.chemicalbankmi.com. Chemical intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at www.chemicalbankmi.com.

Item 11.  Executive Compensation.

The information set forth under the heading "Executive Compensation" on pages 17 through 21 (inclusive) and the sub-heading "Compensation of Directors" on pages 5 and 6 in the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders is here incorporated by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forth under the heading "Equity Compensation Plan Information" on pages 19 and 20 and under the heading "Ownership of Chemical Financial Common Stock" on pages 14 and 15 in the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders is here incorporated by reference.

Item 13.  Certain Relationships and Related Transactions.

The information set forth under the subheading "Certain Relationships and Related Transactions" on page 25 in the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders is here incorporated by reference.

Item 14.  Principal Accountant Fees and Services.

The information set forth under the subheading "Independent Registered Public Accounting Firm" on page 25 and the subheading "Committees of the Board of Directors" on pages 4 and 5 of the registrant's definitive Proxy Statement for its April 17, 2006 annual meeting of shareholders is here incorporated by reference.

11

PART IV

Item 15. Exhibits and Financial Statement Schedules.

          (a)          (1)          Financial Statements. The following financial statements and independent auditors' report of Chemical Financial Corporation and its subsidiaries are filed as part of this report:

Consolidated Statements of Financial Position-December 31, 2005 and 2004
Consolidated Statements of Income for each of the three years in the period ended December 31, 2005
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2005
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period
   ended December 31, 2005
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm dated February 24, 2006.

The financial statements, the notes to financial statements, and the independent registered public accounting firm's report listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant's Annual Report to Shareholders for the year ended December 31, 2005.

                      (2)          Financial Statement Schedules. None.

                      (3)          Exhibits. The following exhibits are filed as part of this report:

Number	Exhibit
3.1	Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference.
3.2	Restated Bylaws. Previously filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, filed with the Commission on November 5, 2004. Here incorporated by reference.
4	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.
10.1	Chemical Financial Corporation Stock Incentive Plan of 1997 and Underlying Agreements.* Previously filed as Exhibit 10.1 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Here incorporated by reference.
10.2	Amended Award and Stock Option Plan of 1987.* Previously filed as Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Commission on March 22, 2002. Here incorporated by reference.
10.3	Chemical Financial Corporation Deferred Compensation Plan for Directors.*
10.4	Chemical Financial Corporation Supplemental Pension Plan.* Previously filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 12, 2004. Here incorporated by reference.
10.5	Chemical Financial Corporation Stock Option Plan for Holders of Shoreline Financial Corporation.* Previously filed as Exhibit 4.3 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference.

12

Number	Exhibit
10.6	Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors.* Previously filed as Exhibit 4.3 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 25, 2002. Here incorporated by reference.
10.7	Chemical Financial Corporation Stock Option Plan for Option Holders of Caledonia Financial Corporation.* Previously filed as Exhibits 4.3 through 4.7 to the registrant's Registration Statement on Form S-8 filed with the Commission on December 4, 2003. Here incorporated by reference.
11	Computation of Per Share Earnings.
13	2005 Annual Report to Shareholders.
21	Subsidiaries.
23.1	Consent of Independent Registered Public Accounting Firm.
24	Powers of Attorney.
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32	Certification pursuant to 18 U.S.C. §1350.
99.1	Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors Audited Financial Statements and Notes.

_____________________

*  These agreements are management contracts or compensation plans or arrangements required to be filed as Exhibits to this Form 10-K.

Chemical will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Ms. Lori A. Gwizdala, Chief Financial Officer, Chemical Financial Corporation, 333 East Main Street, Midland, Michigan 48640-0569.

13

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHEMICAL FINANCIAL CORPORATION
March 10, 2006	s/ David B. Ramaker
	David B. Ramaker President and Chief Executive Officer (Principal Executive Officer)
March 10, 2006	s/ Lori A. Gwizdala
	Lori A. Gwizdala Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

14

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 10, 2006	s/ David B. Ramaker
	David B. Ramaker President and Chief Executive Officer and Director (Principal Executive Officer)
March 10, 2006	*s/Gary E. Anderson
	Gary E. Anderson Director
March 10, 2006	*s/ J. Daniel Bernson
	J. Daniel Bernson Director
March 10, 2006	*s/ Nancy Bowman
	Nancy Bowman Director
March 10, 2006	*s/ James A. Currie
	James A. Currie Director
March 10, 2006	s/ Lori A. Gwizdala
	Lori A. Gwizdala Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March 10, 2006		*s/Thomas T. Huff
		Thomas T. Huff Director
March 10, 2006		*s/Michael T. Laethem
		Michael T. Laethem Director
March 10, 2006	*s/ Geoffery E. Merszei
	Geoffery E. Merszei Director
March 10, 2006	*s/ Terence F. Moore
	Terence F. Moore Director
March 10, 2006	*s/ Aloysius J. Oliver
	Aloysius J. Oliver Director

15

March 10, 2006	*s/ Frank P. Popoff
	Frank P. Popoff Chairman of the Board and Director
March 10, 2006	*s/Calvin D. Prins
	Calvin D. Prins Director
March 10, 2006	*s/ Dan L. Smith
	Dan L. Smith Director
March 10, 2006	*s/Larry D. Stauffer
	Larry D. Stauffer Director
March 10, 2006	*s/William S. Stavropoulos
	William S. Stavropoulos Director
March 10, 2006	*s/Franklin C. Wheatlake
	Franklin C. Wheatlake Director

*By	s/ Lori A. Gwizdala
	Lori A. Gwizdala Attorney-in-Fact

16

EXHIBIT INDEX

Number	Exhibit
3.1	Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference.
3.2	Restated Bylaws. Previously filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, filed with the Commission on November 5, 2004. Here incorporated by reference.
4	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.
10.1	Chemical Financial Corporation Stock Incentive Plan of 1997 and Underlying Agreements.* Previously filed as Exhibit 10.1 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Here incorporated by reference.
10.2	Amended Award and Stock Option Plan of 1987.* Previously filed as Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Commission on March 22, 2002. Here incorporated by reference.
10.3	Chemical Financial Corporation Deferred Compensation Plan for Directors.*
10.4	Chemical Financial Corporation Supplemental Pension Plan.* Previously filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 12, 2004. Here incorporated by reference.
10.5	Chemical Financial Corporation Stock Option Plan for Holders of Shoreline Financial Corporation.* Previously filed as Exhibit 4.3 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference.
10.6	Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors.* Previously filed as Exhibit 4.3 to the registrant's Registration Statement on Form S-8 filed with the Commission on March 25, 2002. Here incorporated by reference.
10.7	Chemical Financial Corporation Stock Option Plan for Option Holders of Caledonia Financial Corporation.* Previously filed as Exhibits 4.3 through 4.7 to the registrant's Registration Statement on Form S-8 filed with the Commission on December 4, 2003. Here incorporated by reference.
11	Computation of Per Share Earnings.
13	2005 Annual Report to Shareholders.
21	Subsidiaries.
23.1	Consent of Independent Registered Public Accounting Firm.
24	Powers of Attorney.
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.

Number	Exhibit
32	Certification pursuant to 18 U.S.C. §1350.
99.1	Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors Audited Financial Statements and Notes.

_____________________

* These agreements are management contracts or compensation plans or arrangements required to be filed as Exhibits to this Form 10-K.

EX-10.3

EXHIBIT NO. 10.3

CHEMICAL FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN FOR DIRECTORS

Adopted November 15, 1982, effective for calendar year 1983, and thereafter, most recently amended December 18, 2000.

A.	Introduction
	This plan (the Plan) is a private unfunded non-qualified deferred compensation arrangement for non-employee Directors of Chemical Financial Corporation (the Company) or of wholly-owned subsidiaries of the Company which have elected to participate in the Plan. The Plan will permit Directors, on an individual election basis, to defer all or one-half of the fees payable for services as a Director of the Company or of a wholly-owned subsidiary of the Company until after their retirement from the Board.
B.	Purpose
	The purpose of the Plan is to provide Directors with maximum opportunity and flexibility in the planning of their personal financial resources.
C.	Manner of Deferral of Compensation
	Each Director of the Company or any of its participating subsidiaries may elect on or before December 31 of each calendar year to defer payment of all or one-half of all fees payable to him for his services as a Director (including Board Committee fees) during the calendar year following such election. Any person who shall become a Director during any calendar year may elect to defer payment of all or one-half of such fees for the remainder of such calendar year by making such election prior to attending his first meeting of the Board of Directors or any committee thereof. All elections shall be irrevocable during the calendar year to which such election pertains, and all elections shall be in writing and in form acceptable to the Company.
	The compensation deferred will be credited on the books of the Company to a Director's deferred compensation account as of the date it would otherwise have been payable (the "Payment Date"). The Company shall have no obligation to fund such account.
	Deferral of compensation shall have no effect on compensation related benefits received by a Director, if any.

D.	Interest on Deferred Compensation Account
	The Director's deferred compensation account will be credited with interest at the rate paid by Chemical Bank and Trust Company on its Chem Sweep Account.
E.	Payment of Deferred Compensation
	Payment of a Director's deferred compensation may only be made after the Director's service on the Board has terminated and, except as described below, will be made in ten (10) annual installments in cash. For purposes of the Plan, a Director whose service on the Board terminates, but who immediately thereafter becomes a Community Bank Advisory Director, shall not be deemed eligible for payments from the Plan while serving as a Community Bank Advisory Director.
	At the time of each election to defer Board Compensation, a Director may irrevocably elect to have the deferred compensation account covered by the election paid in less than ten (10) annual installments, or in a single lump sum. Such installment payments shall commence, or such lump sum payment shall be made, no later than January 31 of the calendar year following the year in which such Director's service on the Board terminates, or in such subsequent year as the director shall have elected.
	The amount of the first installment shall be a fraction of the total amount of the Director's deferred compensation, together with all interest accrued thereon, as of the date that payments are to commence. The numerator of such fraction shall be one (1), and the denominator of such fraction shall be the total number of installments which the Director elected to receive.
	Each subsequent installment shall be calculated in the same manner as of the same date of each subsequent year, except that the denominator shall be reduced by the number of installments which have been previously paid.
F.	Assignability
	No right to receive payment of the Directors' deferred compensation under the Plan shall be transferable or assignable by a Director except by will or under the laws of descent and distribution, except that a Director may make a written designation of beneficiary in form acceptable to the Company, which beneficiary shall succeed to the Director's rights under the Plan in the event of the Director's death.
	In the event of a Director's death prior to receiving all deferred payments to which he is entitled, the balance of the Director's deferred compensation, together with all interest credited thereon to the date of the Director's death, shall bedetermined and paid in single payment to the Director's estate or designated beneficiary as soon as reasonably possible.

2

G.	Amendment of Plan
	This plan may be amended, suspended or terminated at any time by the Board of Directors of the Company.
	However, no amendment, suspension or termination of the Plan may, without the consent of a Director, alter or impair any of the rights previously granted under the Plan.
H.	Acceleration of Payment for Hardship
	Upon the written request of a Director to the Compensation Committee of the Company's Board of Directors, a Director may be permitted to receive all or part of his deferred compensation under the Plan, including interest credited thereon, if the Compensation Committee determines that an unforeseeable emergency exists as the result of an extraordinary and unforeseeable circumstance which would cause the Director severe financial hardship. The decision as to whether to grant such a request shall rest in the absolute discretion of the Compensation Committee. Any such distribution for hardship shall be limited to the amount needed to meet such emergency.
I.	Administration
	The Plan shall be administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee shall have authority to adopt rules for carrying out the Plan, and all interpretations of the Plan's provisions by the Compensation Committee shall be final.
J.	Unfunded Plan
	The benefits payable under the Plan are unfunded. Consequently, no assets shall be segregated for purposes of the Plan and placed beyond the reach of the Company's general creditors. The right of any participating Director to receive future installments under the provisions of the Plan shall be an unsecured claim against the general assets of the Company.
K.	Business Days
	In the event any date specified herein falls on a Saturday, Sunday or legal holiday, such date shall be deemed to refer to the next business day thereafter.
L.	Continuation of Deferred Payment Method
	In order to facilitate the administration of the Plan, participants who elect to participate in the Plan for more than one year will be assumed to have selected the same method for payment of the deferred compensation for subsequent years as was selected in the election form for the first year of participation. This paragraph, however, shall not be interpreted as an automatic election to participate in the program for subsequent years.

3

EX-11

EXHIBIT NO. 11

Computation of Per Share Earnings

	Year Ended December 31
	2005		2004		2003
	(Amounts in thousands, except per share amounts)
BASIC:
Average shares outstanding		25,138		25,130		24,878
Net income	$	52,878	$	56,682	$	55,716
Net income per common share	$	2.10	$	2.26	$	2.24
DILUTED:
Average shares outstanding		25,138		25,130		24,878
Net effect of the assumed exercise of
stock options-based on the treasury
stock method using average market price		55		88		66
		25,193		25,218		24,944
Net income	$	52,878	$	56,682	$	55,716
Net income per common share	$	2.10	$	2.25	$	2.23

EX-13

CHEMICAL

FINANCIAL CORPORATIONSM

2005

Annual Report

to Shareholders

CHEMICAL FINANCIAL CORPORATION

2005 ANNUAL REPORT TO SHAREHOLDERS

Contents	Page
Chemical Financial Corporation		1
Five-Year Summary of Selected Financial Data		2
Management’s Discussion and Analysis		3
Management Report		27
Reports of Independent Registered Public Accounting Firm		28
Consolidated Financial Statements		30
Notes to Consolidated Financial Statements		34
Market for Chemical Financial Corporation Common Stock and Related Shareholder Matters		59
Chemical Financial Corporation Directors and Executive Officers		60

CHEMICAL FINANCIAL CORPORATION

This is Chemical Financial Corporation’s 2005 Annual Report to Shareholders. Chemical Financial Corporation (“Chemical” or the “Corporation”) is a diversified financial services company providing a full range of commercial, consumer, mortgage, trust, insurance and financial planning services primarily through one state-chartered commercial bank subsidiary, Chemical Bank, as of December 31, 2005. Chemical Bank served a broad customer base through 132 banking offices and 1 loan production office across 32 counties in the lower peninsula of Michigan as of December 31, 2005.

The Corporation is headquartered in Midland, Michigan, and had total assets of $3.75 billion at December 31, 2005. In addition to its banking offices, the Corporation had 132 automated teller machine (ATM) locations, with 32 located off-bank premises. The Corporation offers trust and investment management services, including financial and estate planning, retirement programs, investment management and custodial services and employee benefit programs through the Trust and Investment Management Services department (Trust Department) of Chemical Bank. At December 31, 2005, the Trust Department had assets under custodial and management arrangements of $2.3 billion.

At year-end, the Corporation had 1,376 employees on a full-time equivalent basis and approximately 5,400 shareholders of record.

Chemical Financial Corporation’s 2005 Annual Report to Shareholders contains audited financial statements and a detailed financial review. Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material, and is not deemed to be filed with the Securities and Exchange Commission (SEC) except to the extent that it is expressly incorporated by reference in a document filed with the SEC.

The 2005 Summary Annual Report accompanies the proxy statement. This report presents information concerning the business and financial results of Chemical Financial Corporation in a format and level of detail that we believe our shareholders will find useful and informative. Shareholders who would like to receive even more detailed information than that contained in this 2005 Annual Report to Shareholders are invited to request our Annual Report on Form 10-K.

Our 2005 Annual Report on Form 10-K, as filed with the SEC, including financial statements and financial statement schedules, will be provided to any shareholder, without charge, upon written request to Chemical Financial Corporation, Attn: Lori A. Gwizdala, Chief Financial Officer, 333 E. Main Street, Midland, Michigan 48640. The Annual Report on Form 10-K will also be available via our internet website www.chemicalbankmi.com in the “Investor Information” section.

1

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

		Years Ended December 31
		2005			2004			2003			2002			2001
Operating Results (In thousands)
Net interest income			$141,851		$	147,634		$	139,772		$	145,692		$	130,068
Provision for loan losses			4,285			3,819			2,834			3,765			2,004
Noninterest income			39,220			39,329			39,094			34,534			31,873
Operating expenses			98,463			98,469			91,923			93,526			94,597
Net income			52,878			56,682			55,716			54,945			42,723
Per Share Data(1)
Net income
	Basic		$2.10		$	2.26		$	2.24		$	2.21		$	1.72
	Diluted		2.10			2.25			2.23			2.20			1.72
Cash dividends declared and paid			1.06			1.01			0.95			0.87			0.83
Book value at end of period			19.98			19.26			18.33			17.30			15.69
Market value at end of period			31.76			40.62			34.66			29.13			27.30
Shares outstanding at end of period (In thousands)(1)			25,079			25,169			24,991			24,868			24,822
At Year End (In thousands)
Assets		$	3,749,316		$	3,764,125		$	3,708,888		$	3,568,649		$	3,488,306
Loans			2,710,214			2,585,585			2,481,275			2,074,942			2,182,541
Deposits			2,819,880			2,863,473			2,967,236			2,847,272			2,789,524
Federal Home Loan Bank advances/ other borrowings			400,363			386,830			246,897			261,605			286,477
Shareholders’ equity			501,065			484,836			458,049			430,339			389,456
Average Balances (In thousands)
Assets		$	3,788,469		$	3,856,036		$	3,578,678		$	3,538,599		$	3,213,561
Interest-earning assets			3,550,695			3,608,157			3,381,083			3,325,572			3,026,296
Loans			2,641,465			2,567,956			2,222,704			2,088,395			1,996,803
Deposits			2,886,209			2,976,150			2,868,180			2,825,975			2,582,480
Federal Home Loan Bank advances/ other borrowings			377,499			370,785			237,787			270,801			233,937
Shareholders’ equity			493,419			472,226			439,178			406,762			369,829
Financial Ratios
Return on average assets			1.40	%		1.47	%		1.56	%		1.55	%		1.33	%
Return on average equity			10.7			12.0			12.7			13.5			11.6
Net interest margin			4.04			4.13			4.18			4.44			4.38
Efficiency ratio			54.2			52.6			50.9			51.3			57.6
Average shareholders’ equity to average assets			13.0			12.2			12.3			11.5			11.5
Cash dividends paid per share to diluted net income per share			50.5			44.9			42.6			39.4			48.3
Tangible equity to assets			11.7			11.1			10.5			11.0			10.1
Total risk-based capital to risk-adjusted assets			17.8			17.5			16.6			18.6			17.4
Credit Quality Statistics
Allowance for loan losses as a percent of total loans			1.26	%		1.32	%		1.34	%		1.48	%		1.42	%
Nonperforming loans as a percent of total loans			0.73			0.39			0.46			0.35			0.60
Nonperforming assets as a percent of total assets			0.71			0.45			0.47			0.32			0.40
Net loans charged-off as a percent of average loans			0.16			0.11			0.15			0.20			0.08

(1)  Adjusted for stock dividends.

2

MANAGEMENT’S DISCUSSION AND ANALYSIS

BUSINESS OF THE CORPORATION

The Corporation is a financial holding company with its business concentrated in a single industry segment — commercial banking. The Corporation, through its bank subsidiary, offers a full range of commercial banking services. These banking services include deposits, business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance products and corporate and personal trust services.

The principal markets for the Corporation’s commercial banking services are communities within Michigan in which the Corporation’s subsidiary bank branches are located and the areas immediately surrounding these communities. Historically, the Corporation operated three subsidiary banks, Chemical Bank and Trust Company, headquartered in Midland, Michigan; Chemical Bank Shoreline, headquartered in Benton Harbor, Michigan; and Chemical Bank West, headquartered in the Grand Rapids, Michigan area. Together, they served 89 communities through 132 banking offices and 1 loan production office located in 32 counties across Michigan’s lower peninsula. In addition to its banking offices, the Corporation operated 132 automated teller machines, both on- and off-bank premises. On December 31, 2005, a corporate restructuring was completed resulting in the consolidation of the three commercial bank charters into one commercial bank subsidiary, Chemical Bank, headquartered in Midland, Michigan. The Corporation’s sole bank subsidiary will continue to operate through an organizational structure of community banks.

The principal source of revenue for the Corporation is interest and fees on loans, which accounted for 69% of total revenues in 2005, 67% of total revenues in 2004 and 65% of total revenues in 2003. Interest on securities is also a significant source of revenue, accounting for 13% of total revenues in 2005, 15% of total revenues in 2004 and 17% of total revenues in 2003. Business volumes tend to be influenced by overall economic factors, including market interest rates, business and consumer spending, and consumer confidence, as well as competitive conditions in the marketplace.

FINANCIAL HIGHLIGHTS

The following discussion and analysis is intended to cover the significant factors affecting the Corporation’s consolidated statements of financial position and income included in this report. It is designed to provide shareholders with a more comprehensive review of the consolidated operating results and financial position of the Corporation than could be obtained from an examination of the financial statements alone.

CRITICAL ACCOUNTING POLICIES

The Corporation’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP). Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. As this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when a decline in the value of an asset not carried at fair value on the financial statements warrants an impairment write-down or a valuation reserve to be established. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated by management primarily through the use of internal discounted cash flow analyses.

The most significant accounting policies followed by the Corporation are presented in Note A to the consolidated financial statements. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in “Management’s Discussion and Analysis,” provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates and assumptions underlying those amounts, management has identified the determination of the allowance for loan losses, pension plan accounting, capitalization and valuation of real estate mortgage loan servicing rights, and the evaluation of goodwill impairment to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new or additional

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MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING POLICIES (CONTINUED)

information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.

Allowance for Loan Losses

The allowance for loan losses (allowance) is calculated with the objective of maintaining a reserve sufficient to absorb probable loan losses in the loan portfolio. The determination of the amount of the allowance is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected cash flows on impaired loans, estimated losses on commercial, real estate commercial and real estate construction-commercial loans and on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The principal assumption used in deriving the allowance is the estimate of a loss percentage for each type of loan. It is extremely difficult to precisely measure the amount of losses that are probable in the Corporation’s loan portfolio. The Corporation uses a rigorous process to attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no assurance that the modeling process will successfully identify all of the losses that are probable in the loan portfolio. As a result, the Corporation could record future provisions for loan losses that may be significantly different than the levels that have been recorded in the past three-year period. The loan portfolio also represents the largest asset type on the consolidated statements of financial position. Note A to the consolidated financial statements describes the methodology used to determine the allowance. In addition, a discussion of the factors driving changes in the amount of the allowance is included under the subheading “Provision and Allowance for Loan Losses” in “Management’s Discussion and Analysis.”

Pension Plan Accounting

The Corporation has a defined benefit pension plan in effect for all salaried employees. The Corporation’s pension benefit obligations and related costs are calculated using actuarial concepts and measurements. Benefits under the plan are based on years of service, age and compensation. Assumptions are made concerning future events that will determine the amount and timing of required benefit payments, funding requirements and pension expense.

The key actuarial assumptions used in the pension plan are the discount rate, the long-term rate of return on plan assets and the rate of compensation increase. These assumptions have a significant effect on the amounts reported for net periodic pension expense, as well as the respective benefit obligation amounts. The Corporation evaluates these critical assumptions annually.

At December 31, 2005 and December 31, 2004, the Corporation calculated the discount rate for the pension plan using the results from a bond matching technique to match cash flows of the pension plan against both a bond portfolio derived from the S&P bond database of AA or better bonds and the Citigroup Pension Discount Curve to determine the discount rate. As of December 31, 2005, the discount rate was decreased 15 basis points to 5.60% to reflect market interest rate conditions.

The assumed long-term rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting primarily of equities and fixed income investments. When determining the expected long-term return on plan assets, the Corporation considers long-term rates of return on the asset classes in which the Corporation expects the pension funds to be invested. The expected long-term rate of return is based on both historical and forecasted returns of the overall stock and bond markets and the actual portfolio. The following rates of return by asset class were considered in setting the long-term return on assets assumption at December 31, 2005, 2004 and 2003:

Equity securities	9% – 10%
Debt securities	5% –  7%
Other	3% –  5%

The long-term return on assets is used to compute the subsequent year’s expected return on assets, using the “market-related value” of plan assets. The difference between the expected return on plan assets and the actual return on plan assets during the year is either asset gain or loss, which may be deferred and amortized over future periods.

Other assumptions made in the pension plan involve employee demographic factors such as retirement patterns, mortality and turnover.

The key actuarial assumptions that will be used to calculate 2006 expense for the defined benefit pension plan are a discount rate of 5.60%, a long-term rate of return on assets of 8.0%, and a rate of compensation increase of 4.25%. Pension expense in 2006 is expected to be approximately $3.9 million, an increase of $0.1 million from the $3.8 million recorded in 2005. A change in the discount rate of 25 basis points was estimated to have an impact on pension expense of $0.5 million in 2006.

The actual long-term return on plan assets approximated 8% over the 13 years ended December 31, 2005.

There are uncertainties associated with the underlying key actuarial assumptions, and the potential exists for significant,

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MANAGEMENT’S DISCUSSION AND ANALYSIS

and possibly material, impacts on either the results of operations or cash flows (e.g., additional pension expense and/or additional pension plan funding, whether expected or required) from changes in the key actuarial assumptions. If the Corporation were to determine that more conservative assumptions were necessary, pension expense would increase and have a negative impact on results of operations in the period in which the increase occurred.

Real Estate Mortgage Loan Servicing Rights

At December 31, 2005, the Corporation had approximately $2.4 million of real estate mortgage loan servicing rights capitalized on the consolidated statement of financial position. The two critical assumptions involved in establishing the value of this asset are the estimated future prepayment speeds on the underlying real estate mortgage loans and the interest rate used to discount the net cash flows from the real estate mortgage loan portfolio being serviced. Other assumptions include the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost to service the real estate mortgage loans. The Corporation utilizes a third-party modeling software program to value mortgage servicing rights. The Corporation believes the assumptions utilized in the valuation are reasonable based upon market interest rates and accepted industry practices for valuing mortgage servicing rights and represent neither the most conservative nor the most aggressive assumptions.

Goodwill

At December 31, 2005, the Corporation had $63.3 million of goodwill recorded on the consolidated statement of financial position. Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), amortization of goodwill ceased, and instead goodwill must be tested annually for impairment. Goodwill increased $35.4 million during 2003 from the acquisition of Caledonia Financial Corporation. The Corporation’s goodwill impairment review is performed at least annually by management and additionally assessed by an independent third-party appraisal firm utilizing the methodology and guidelines established in SFAS 142. This methodology involves assumptions regarding the valuation of the Corporation’s bank subsidiaries that contain the acquired entities that resulted in the recording of goodwill. The Corporation believes that the assumptions utilized are reasonable and that utilizing more conservative assumptions in the valuation would not presently result in impairment in the amount of goodwill that has been recorded. However, the Corporation may incur impairment charges related to goodwill in the future due to changes in business prospects or other matters that could affect the valuation assumptions.

MERGERS AND ACQUISITIONS

The Corporation’s primary method of expansion into new banking markets has been through acquisitions of other financial institutions and bank branches. During the three years ended December 31, 2005, the Corporation completed the following acquisition:

The Corporation acquired Caledonia Financial Corporation (Caledonia), a one-bank holding company headquartered in Caledonia, Michigan, on December 1, 2003. As of that date, Caledonia had total assets of $211 million, net loans of $184 million, total deposits of $171 million and shareholders’ equity of $22.3 million. Shareholders of Caledonia received $39.00 cash for each share of Caledonia common stock in a taxable transaction. The total value of the transaction was approximately $56.8 million, of which $52.3 million was paid in cash and $4.5 million represented the value of stock options. The purchase price represented a premium over book value of $34.5 million. The acquisition was accounted for by the purchase method of accounting. Therefore, the financial results of the acquired operation were included from the acquisition date, with no restatement of prior period amounts.

On December 31, 2005, the Corporation completed an organizational restructuring whereby its two wholly-owned banking subsidiaries, Chemical Bank Shoreline and Chemical Bank West, were merged into Chemical Bank and Trust Company (CBT). As of this date, CBT’s name was changed to Chemical Bank.

On September 30, 2003, the Corporation consolidated CFC Data Corp, its wholly-owned data processing subsidiary, into the parent.

NET INCOME

Net income in 2005 was $52.9 million, or $2.10 per diluted share, compared to net income of $56.7 million, or $2.25 per diluted share, in 2004. Net income in 2005 represented a 6.7% decrease from 2004 net income, while 2004 net income represented a 1.7% increase over 2003 net income. Net income per share increased at an average annual compound rate of 6.9% during the five-year period ended December 31, 2005.

The Corporation’s return on average assets was 1.40% in 2005, 1.47% in 2004 and 1.56% in 2003. The Corporation’s return on average shareholders’ equity was 10.7% in 2005, 12.0% in 2004 and 12.7% in 2003.

DEPOSITS

The Corporation’s average deposit balances and average rates paid on deposits for the past three years are included in

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MANAGEMENT’S DISCUSSION AND ANALYSIS

DEPOSITS (CONTINUED)

Table 1. Average total deposits in 2005 were $2.89 billion, $90 million or 3.0% lower than in 2004. The decrease in average deposits in 2005, compared to 2004, was primarily attributable to a decline in savings deposits that resulted from intense competition in the marketplace for retail deposits. As of December 31, 2005, the Corporation held approximately $3.4 million in brokered deposits, down $6.6 million from brokered deposits held at December 31, 2004. Average total deposits in 2004 were $2.98 billion, $108 million or 3.8% higher than in 2003. The increase in average deposits in 2004 was attributable to the Caledonia acquisition that was completed on December 1, 2003. This acquisition added $171 million in deposits as of the acquisition date. The increase in average deposits attributable to the Caledonia acquisition was partially offset by a decline in both brokered and retail deposits during 2004. The Corporation had $10 million and $49 million of brokered deposits as of December 31, 2004 and December 31, 2003, respectively. Brokered deposits, primarily acquired in the Caledonia acquisition, declined $39 million during 2004 as the Corporation had sufficient liquidity to fund loan growth and did not need to renew this source of funding during the year.

It is the Corporation’s strategy to develop customer relationships that will drive core deposit growth and stability. The Corporation has historically gathered deposits from the local markets of its bank subsidiaries, although rising market interest rates and strong competition impeded the Corporation’s ability to internally generate deposits during the three years ended December 31, 2005.

The growth of the Corporation’s deposits is also impacted by competition from other investment products, such as brokerage accounts, mutual funds and various annuity products. These investment products are sold by a wide spectrum of organizations, such as brokerage and insurance companies, as well as by financial institutions. The Corporation also competes with credit unions in most of its markets. These institutions are challenging competitors, as credit unions are exempt from federal income taxes, allowing them to potentially offer higher deposit rates and lower loan rates to customers.

In response to the competition for other investment products, the Corporation’s subsidiary bank, through “CFC Investment Centers,” offers a wide array of mutual funds, annuity products and market securities through an alliance with an independent, registered broker/ dealer. During 2005 and 2004, customers purchased $51.8 million and $52.2 million, respectively, of annuity and mutual fund investments through “CFC Investment Centers.”

ASSETS

Average assets were $3.79 billion during 2005, a decrease of $68 million, or 1.8%, from average assets during 2004 of $3.86 billion. The decrease in average assets during 2005 was attributable to a decline in investment securities that occurred as a result of a decrease in core deposits. Average assets increased $277 million, or 7.7%, during 2004 over average assets of $3.58 billion in 2003 due to the Caledonia acquisition and a Federal Home Loan Bank of Indianapolis (FHLB) borrowing transaction. The Caledonia acquisition was completed on December 1, 2003 and added $211 million in total assets as of the acquisition date. During the first quarter of 2004, the Corporation borrowed $150 million from the FHLB and invested the proceeds in mortgage-backed securities. These increases were partially offset by a decline in investment securities that occurred as a result of a decrease in total deposits.

CASH DIVIDENDS

The Corporation’s annual cash dividends per share over the past five years, adjusted for all stock dividends, were as follows:

	2005		2004		2003		2002		2001
Annual Dividend	$	1.06	$	1.01	$	0.95	$	0.87	$	0.83

During 2005, cash dividends per share of $1.06 were up 5% over cash dividends per share in 2004 of $1.01.

The Corporation has paid regular cash dividends every quarter since it began operating as a bank holding company in 1973. The compound annual growth rate of the Corporation’s cash dividends per share over the past five- and ten-year periods ended December 31, 2005 was 6.9% and 10.1%, respectively. The earnings of the Corporation’s subsidiaries are the principal source of funds to pay cash dividends to shareholders. Cash dividends are dependent upon the earnings of the Corporation’s subsidiaries, as well as capital requirements, regulatory restraints and other factors affecting the Corporation’s subsidiary bank.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 1. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES* (Dollars in thousands)

		Years Ended December 31
		2005							2004							2003
				Tax		Effective					Tax		Effective					Tax		Effective
		Average		Equivalent		Yield/			Average		Equivalent		Yield/			Average		Equivalent		Yield/
		Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest-earning Assets:
	Loans**	$	2,641,465	$	165,355		6.26	%	$	2,567,956	$	152,993		5.96	%	$	2,222,704	$	145,212		6.53	%
	Taxable investment/other securities		775,691		29,216		3.77			899,085		33,124		3.68			1,026,318		36,700		3.58
	Non-taxable investment securities		47,522		3,235		6.81			42,779		3,187		7.45			47,547		3,806		8.00
	Federal funds sold		69,061		2,121		3.07			83,871		1,077		1.28			68,796		749		1.09
	Interest-bearing deposits with unaffiliated banks		16,956		984		5.80			14,466		411		2.84			15,718		235		1.50
Total interest-earning assets			3,550,695		200,911		5.66			3,608,157		190,792		5.29			3,381,083		186,702		5.52
Less: Allowance for loan losses			34,189							33,663							30,893
Other Assets:
	Cash and due from banks		105,435							110,017							106,288
	Premises and equipment		46,233							48,071							43,815
	Interest receivable and other assets		120,295							123,454							78,385
Total Assets		$	3,788,469						$	3,856,036						$	3,578,678
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing Liabilities:
	Interest-bearing demand deposits	$	544,174	$	7,050		1.30	%	$	542,211	$	2,163		0.40	%	$	505,278	$	1,902		0.38	%
	Savings deposits		858,143		9,426		1.10			1,005,728		6,914		0.69			953,741		8,098		0.85
	Time deposits		938,451		28,156		3.00			884,291		21,664		2.45			919,221		26,345		2.87
	Short-term borrowings		129,535		3,021		2.33			98,349		697		0.71			86,604		539		0.62
	Federal Home Loan Bank advances — long-term		247,964		9,800		3.95			272,436		10,178		3.74			151,183		8,381		5.54
Total interest-bearing liabilities			2,718,267		57,453		2.11			2,803,015		41,616		1.48			2,616,027		45,265		1.73
Noninterest-bearing deposits			545,441							543,920							489,940
	Total deposits and borrowed funds		3,263,708							3,346,935							3,105,967
Interest payable and other liabilities			31,342							36,875							33,533
Shareholders’ equity			493,419							472,226							439,178
Total Liabilities and Shareholders’ Equity		$	3,788,469						$	3,856,036						$	3,578,678
Net Interest Spread (Average yield earned minus average rate paid)							3.55	%						3.81	%						3.79	%
Net Interest Income (FTE)				$	143,458						$	149,176						$	141,437
Net Interest Margin
	(Net interest income (FTE)/total average interest-earning assets)						4.04	%						4.13	%						4.18	%

*	Taxable equivalent basis using a federal income tax rate of 35%.
**	Nonaccrual loans are included in average balances reported and are included in the calculation of yields.

NET INTEREST INCOME

Interest income is the total amount earned on funds invested in loans, investment and other securities, other interest-bearing deposits and federal funds sold. Interest expense is the amount of interest paid on interest-bearing checking and savings accounts, time deposits, short-term borrowings and FHLB advances — long-term. Net interest income, on a fully taxable equivalent (FTE) basis, is the difference between interest income and interest expense adjusted for the tax benefit received on tax-exempt commercial loans and investment securities. Net interest margin is calculated by dividing net interest income (FTE) by average interest-earning assets. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Because noninterest-bearing sources of funds, or free funds (principally demand deposits and shareholders’ equity) also support earning assets, the net interest margin exceeds the net interest spread.

The presentation of net interest income on a FTE basis is not in accordance with GAAP but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine tax equivalent net interest income were $1.61 million, $1.54 million and $1.67 million for 2005, 2004 and 2003, respectively. 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,

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS*⁺ (In thousands)

			2005 Compared to 2004									2004 Compared to 2003
			Increase (Decrease)									Increase (Decrease)
			Due to Changes in									Due to Changes in
									Combined									Combined
			Average			Average			Increase			Average			Average			Increase
			Volume			Yield/Rate			(Decrease)			Volume			Yield/Rate			(Decrease)
CHANGES IN INTEREST INCOME ON INTEREST-EARNING ASSETS:
		Loans	$	4,610		$	7,752		$	12,362		$	21,041		$	(13,260	)	$	7,781
		Taxable investment/other securities		(4,690	)		782			(3,908	)		(4,673	)		1,097			(3,576	)
		Non-taxable investment securities		336			(288	)		48			(372	)		(247	)		(619	)
		Federal funds sold		(220	)		1,264			1,044			182			146			328
		Interest-bearing deposits with unaffiliated banks		82			491			573			(20	)		196			176
	Total change in interest income on interest-earning assets			118			10,001			10,119			16,158			(12,068	)		4,090
CHANGES IN INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES:
		Interest-bearing demand deposits		8			4,879			4,887			152			109			261
		Savings deposits		(1,136	)		3,648			2,512			419			(1,603	)		(1,184	)
		Time deposits		1,391			5,101			6,492			(981	)		(3,700	)		(4,681	)
		Short-term borrowings		283			2,041			2,324			76			82			158
		Federal Home Loan Bank advances —  long-term		(937	)		559			(378	)		5,136			(3,339	)		1,797
	Total change in interest expense on interest-bearing liabilities			(391	)		16,228			15,837			4,802			(8,451	)		(3,649	)
TOTAL INCREASE (DECREASE) IN NET INTEREST INCOME (FTE)			$	509		$	(6,227	)	$	(5,718	)	$	11,356		$	(3,617	)	$	7,739

*  This analysis is calculated on a taxable equivalent basis using a federal income tax rate of 35%.

⁺ The change in interest income and interest expense due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

NET INTEREST INCOME (CONTINUED)

including changes in the level of interest-earning assets, changes in the mix of interest-earning assets and interest-bearing liabilities, the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve), and the general strength of the economies in the 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. Management monitors the Corporation’s consolidated statement of financial position to reduce the potential adverse impact on net interest income caused by significant changes in interest rates. The Corporation’s policies in this regard are further discussed under the subheading “Market Risk.”

Table 1 presents, for 2005, 2004 and 2003, average daily balances of the Corporation’s major categories of assets and liabilities, interest income and expense on a FTE basis, average interest rates earned and paid on the assets and liabilities, net interest income (FTE), net interest spread and net interest margin.

Net interest income (FTE) in 2005, 2004 and 2003 was $143.5 million, $149.2 million and $141.4 million, respectively. Net interest income (FTE) in 2005 was $5.7 million, or 3.8% lower than 2004 net interest income (FTE) of $149.2 million, while net interest income in 2004 was $7.8 million, or 5.5% higher than 2003 net interest income.

In 2005, the Federal Open Market Committee (FOMC) raised the Discount and Federal Funds rates by 25 basis points eight times during the year, resulting in an equal increase each time in the prime rate. Accordingly, the prime rate was 5.25% on January 1, 2005 and 7.25% on December 31, 2005. While short-term interest rates increased throughout 2005, long-term interest rates rose only slightly to produce a virtually flat interest yield curve at December 31, 2005. The ten-year U.S. Treasury note, which is generally used to price both 15- and 30-year residential mortgage loans, was 4.35% at the end of 2005 compared to 4.24% at the end of 2004.

The decline in net interest income during 2005 was primarily attributable to a slight decrease in average interest-earning assets and the flattening of the interest yield curve during 2005. These factors were partially offset by a positive change in the mix of interest-earning assets with average loans up $73.5 million, or 2.8% in 2005 compared to 2004. Average interest-earning assets of $3.55 billion in 2005 were down $57.5 million, or 1.6% from 2004. The reduction in average interest-earning assets during 2005 was

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MANAGEMENT’S DISCUSSION AND ANALYSIS

primarily attributable to a reduction in investment securities. The Corporation’s investment securities portfolio declined as investment securities maturities were used to fund the increase in total loans and offset a decline in total deposits.

The decrease in net interest margin to 4.04% in 2005 compared to 4.13% in 2004 occurred as a result of the increases in the average yield on interest-earning assets not keeping pace with the increases in the average cost of interest-bearing liabilities. In 2005, the average yield on interest-earning assets increased 37 basis points to 5.66%, while the average cost of interest-bearing liabilities increased 63 basis points to 2.11%. Consequently, the increase in the interest yield on loans was not significant enough to offset the increase in the Corporation’s funding costs. While the average yield on loans increased to 6.26% in 2005 from 5.96% in 2004, the average cost of interest-bearing liabilities increased at a greater rate to 2.11% in 2005 from 1.48% in 2004, which resulted in a decline in both the net interest spread and net interest margin during 2005. Short-term market interest rates increased throughout 2005, although the yield on the Corporation’s loan portfolio increased only modestly as the majority of the loan portfolio is comprised of fixed interest rate loans. Additionally, the competition for loan volume remained strong all year in the Corporation’s local markets, which resulted in lower interest rates on new and renewed loans than otherwise could have been expected. 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. Accordingly, the increase in short-term market interest rates and strong competition resulted in a significant increase in the average cost of deposits and wholesale borrowings, and also a decrease in core deposits in 2005 as compared to 2004. Net interest spread for 2005 was 3.55%, compared to 3.81% for 2004.

Table 2 allocates the dollar change in net interest income (FTE) between the portion attributable to changes in the average volume of interest-earning assets and interest-bearing liabilities, including changes in the mix of assets and liabilities, and changes in average interest rates earned and paid.

The $5.7 million reduction in net interest income (FTE) in 2005, as compared to 2004, is analyzed in detail in Table 2. This table calculates the net impact on net interest income (FTE) in 2005 from the unfavorable effect of a lower level of interest-earning assets and the favorable effect of an increase in average loans, as a net increase in net interest income (FTE) of $0.5 million. This increase was offset by the Corporation experiencing a $6.2 million reduction in net interest income (FTE) due to the rising interest rate environment and the flattening of the interest yield curve. Interest income on loans, investment securities and other investable funds increased $10 million due to rising interest rates, although interest expense on deposits and borrowings increased $16.2 million, as market interest rates increased throughout 2005. The Corporation’s balance sheet was liability sensitive throughout 2005, with a higher percentage of interest-bearing liabilities repricing than interest-earning assets. The Corporation’s average interest-bearing demand and savings type deposits that have no defined maturity and primarily reprice at the Corporation’s discretion were $1.4 billion in 2005. The combination of short-term interest rates rising steadily throughout 2005 and the strong competition for customer deposit accounts throughout the Corporation’s market areas resulted in the average interest cost of these nonmaturing deposits increasing approximately 100% during 2005 to 1.18%.

In 2004, net interest income was positively impacted by an increase in average interest-earning assets from the Caledonia acquisition and a FHLB borrowing transaction. The effects of the increase in interest-earning assets attributable to the Caledonia transaction accounted for the majority of the increase in net interest income in 2004. In addition, the Corporation estimated that the net effect of the investment of the proceeds from a $150 million borrowing from the FHLB added approximately $1.7 million to net interest income in 2004. The Corporation borrowed $150 million from the FHLB during January 2004, at a weighted average life of 1.6 years and a weighted average interest rate of 1.85%. The proceeds of the borrowing were invested approximately equally in five- and seven-year balloon type mortgage-backed investment securities, with a projected weighted average life of 3.03 years, a projected duration of 2.75 years, and a projected weighted average yield of 3.40% at the investment date. The borrowing transaction was done to increase interest-earning assets of the Corporation, as a means to partially offset the impact of the lack of growth in core deposits and continued low interest rates on net interest income, and anticipated significantly lower mortgage banking revenue. The borrowing transaction had the net effect of increasing net interest income in 2004. The impact on net interest margin was estimated as a net decrease of approximately 12 basis points. Net interest income was also positively impacted by a change in the mix of interest-earning assets, as total loans were up $104.3 million, or 4.2% during the year. These items were partially offset by the impact of a reduction in interest-earning assets resulting from a $103.8 million, or 3.5% decrease in total deposits during 2004.

During 2004, short-term interest rates remained constant until June 30 when the FOMC increased the Discount and Federal Funds rates by 25 basis points. The FOMC

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MANAGEMENT’S DISCUSSION AND ANALYSIS

NET INTEREST INCOME (CONTINUED)

increased these rates by 25 basis points four more times during 2004, resulting in equal increases each time in the prime rate. Accordingly, the prime rate was 4.00% on January 1, 2004 and 5.25% on December 31, 2004. While short-term interest rates gradually increased during the second half of 2004, long-term interest rates remained relatively flat during the entire year. The ten-year U.S. Treasury note, which is used to price both 15- and 30-year residential mortgage loans, was 4.24% at the end of 2004 and 4.27% at the end of 2003. Consequently, the interest yield curve flattened during the second half of 2004. The combination of the historically low interest rate environment during the first six months of 2004 and increased competition for loans resulted in a 57 basis point decrease in the average yield on loans in 2004, compared to 2003. The average yield on loans was 5.96% in 2004, compared to 6.53% in 2003. The reduction in the average yield on loans and the impact of the $150 million borrowing transaction resulted in a 23 basis point reduction in the overall average yield on average interest-earning assets in 2004 to 5.29% from 5.52% in 2003. The historically low interest rate environment throughout all of 2003 and the first six months of 2004 resulted in a 25 basis point reduction in the average cost of deposits and borrowed funds in 2004, compared to the prior year. The average cost of deposits and borrowed funds was 1.48% in 2004, compared to 1.73% in 2003. The net result was a five basis point decrease in net interest margin in 2004 to 4.13% from 4.18% in 2003.

LOANS

The Corporation’s bank subsidiary is a full-service commercial bank and, therefore, the acceptance and management of credit risk is an integral part of the Corporation’s business. The Corporation maintains conservative loan policies and credit underwriting standards. These standards include the granting of loans generally only within the Corporation’s market areas. The Corporation’s lending markets generally consist of small communities across the middle to southern and western sections of the lower peninsula of Michigan. The Corporation has no foreign loans or any loans to finance highly leveraged transactions. The Corporation’s lending philosophy is implemented through strong administrative and reporting controls at the bank level, with additional oversight at the parent company level. The Corporation maintains a centralized independent loan review function, which monitors asset quality of the loan portfolio.

The Corporation’s subsidiary bank has extended loans to its directors, executive officers and their affiliates. The loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the time and did not involve more than the normal risk of repayment by the borrower or present other unfavorable features. Note E includes more information on loans to the Corporation’s directors, executive officers and their affiliates.

The Corporation experiences competition for commercial loans primarily from larger regional banks located both within and outside of the Corporation’s market areas, and from other community banks located within the Corporation’s lending markets. The Corporation’s competition for residential real estate loans primarily includes community banks, larger regional banks, savings associations, credit unions and mortgage companies. The competition for residential real estate loans has increased over the last few years as mortgage lending companies have expanded their sales and marketing efforts. The Corporation experiences competition for consumer loans mostly from captive automobile finance companies, larger regional banks, community banks and local credit unions. The Corporation’s loan portfolio is generally diversified geographically within Michigan, as well as along industry lines and, therefore, the Corporation believes that its loan portfolio is reasonably sheltered from material adverse local economic impact.

Table 3 includes the composition of the Corporation’s loan portfolio, by major loan category, as of December 31, 2005, 2004, 2003, 2002, and 2001.

Total loans at December 31, 2005 were $2.71 billion, an increase of $124.6 million, or 4.8% over total loans at December 31, 2004. The Corporation achieved significant increases in the commercial and real estate construction loan categories in 2005. The Corporation achieved modest increases in the other loan categories during 2005.

Commercial loans totaled $517.9 million at December 31, 2005, an increase of $48.9 million, or 10.4%, from total commercial loans at December 31, 2004 of $469.0 million. The increase in these loans was largely attributable to the Corporation’s emphasis to increase this portion of the loan portfolio. Commercial loans represented 19.1%, 18.1% and 16.4% of total loans outstanding at December 31, 2005, 2004 and 2003, respectively.

Real estate loans include real estate commercial loans, real estate construction loans and residential real estate loans. At December 31, 2005 and 2004, real estate loans totaled $1.65 billion and $1.58 billion, respectively. Real estate loans increased $72 million, or 4.6%, in 2005. Real estate loans as a percentage of total loans at December 31, 2005, 2004 and 2003 were 60.9%, 61.1% and 61.8%, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 3. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE

		Years Ended December 31
		2005			2004			2003			2002			2001
		(Dollars in thousands)
Distribution of Loans:
Commercial		$	517,852		$	468,970		$	405,929		$	327,438		$	332,055
Real estate commercial			704,684			697,779			628,815			481,084			432,747
Real estate construction			158,376			120,900			138,280			108,589			137,500
Real estate residential			788,679			760,834			767,199			648,042			769,272
Consumer			540,623			537,102			541,052			509,789			510,967
Total loans		$	2,710,214		$	2,585,585		$	2,481,275		$	2,074,942		$	2,182,541
Summary of Changes in the Allowance for Loan Losses:
Allowance for loan losses at beginning of year		$	34,166		$	33,179		$	30,672		$	30,994		$	26,883
Loans charged off:
	Commercial		(2,126	)		(1,270	)		(2,002	)		(2,345	)		(544	)
	Real estate commercial		—			(88	)		(40	)		—			(55	)
	Real estate construction		—			—			—			(107	)		—
	Real estate residential		(453	)		(430	)		(102	)		(164	)		(108	)
	Consumer		(2,407	)		(2,175	)		(1,927	)		(2,214	)		(1,427	)
	Total loan charge-offs		(4,986	)		(3,963	)		(4,071	)		(4,830	)		(2,134	)
Recoveries of loans previously charged-off:
	Commercial		110			464			174			329			195
	Real estate commercial		11			7			7			17			10
	Real estate residential		29			105			38			18			23
	Consumer		533			555			500			379			251
	Total loan recoveries		683			1,131			719			743			479
	Net loan charge-offs		(4,303	)		(2,832	)		(3,352	)		(4,087	)		(1,655	)
Provision for loan losses			4,285			3,819			2,834			3,765			2,004
Allowance of banks/branches acquired			—			—			3,025			—			3,762
Allowance for loan losses at year-end		$	34,148		$	34,166		$	33,179		$	30,672		$	30,994
Ratio of net charge-offs during the year to average loans outstanding			0.16	%		0.11	%		0.15	%		0.20	%		0.08	%
Ratio of allowance for loan losses at year-end to total loans outstanding at year-end			1.26	%		1.32	%		1.34	%		1.48	%		1.42	%

Real estate commercial loans increased $6.9 million, or 1.0% during 2005 to $704.7 million at December 31, 2005. The modest increase was largely due to minimal economic growth in the Corporation’s community bank market areas. At December 31, 2005, 2004 and 2003, real estate commercial loans as a percentage of total loans were 26.0%, 27.0% and 25.3%, respectively.

Commercial lending and real estate commercial 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 of 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 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 areas and using conservative loan-to-value ratios in the underwriting process.

Real estate construction loans are originated for both business and residential properties. These loans generally convert to a real estate loan at the completion of the construction period. Real estate construction loans were $158.4 million at December 31, 2005, an increase of $37.5 million, or 31.0% from December 31, 2004. At December 31, 2005, 2004 and 2003, real estate construction loans as a percentage of total loans were 5.8%, 4.7% and 5.6%, respectively.

Construction lending involves 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS

LOANS (CONTINUED)

other things, lending primarily in its market areas, using conservative underwriting guidelines, and closely monitoring the construction process.

Table 4 presents the maturity distribution of commercial, real estate commercial, and real estate construction loans. These loans represented 51% of total loans at December 31, 2005, compared to 50% of total loans at December 31, 2004. The percentage of these loans maturing within one year remained low at 30% at December 31, 2005, compared with 28% at December 31, 2004. The percentage of these loans maturing beyond five years also remained low at 9% at both December 31, 2005 and December 31, 2004. Of those loans with maturities beyond one year, the percentage of loans with variable interest rates was 23% at December 31, 2005, compared to 28% at December 31, 2004. The decrease in variable interest rate loans with maturities greater than one year was due to both a strong customer preference to secure fixed interest rate financing in a rising interest rate environment and equally strong competitive conditions.

The continued low percentage of loans maturing within one year is primarily due to the growth in the real estate commercial and real estate construction loan types. Real estate commercial loans are generally written as balloon-type mortgages at fixed interest rates for balloon time periods ranging from three to ten years. Real estate construction-commercial loans are also generally written as balloon type loans at fixed interest rates that convert to a real estate commercial loan at the end of the construction period. During 2004 and 2005, the Corporation offered a real estate construction-commercial loan product with an adjustable interest rate that has an initial fixed interest rate period of ten years. As of December 31, 2005, the Corporation held approximately $43 million in real estate commercial and real estate construction-commercial loans that had fixed interest rates through 2014 or 2015.

Residential real estate loans increased $27.8 million, or 3.7%, during 2005 to $788.7 million. At December 31, 2005, 2004 and 2003, residential real estate loans as a percentage of total loans were 29.1%, 29.4% and 30.9%, respectively. The increase in residential real estate loans during 2005 was primarily attributable to growth in the adjustable interest rate loan type that includes a fixed interest rate period for three, five or seven years. Market interest rates on this type of loan decreased during 2005 making these loans more attractive to customers. The Corporation generally keeps adjustable interest rate loans in its loan portfolio, rather than selling them in the secondary mortgage market.

The Corporation’s residential real estate loans primarily consist of one-to four-family residential loans with original terms of fifteen years and less. The loan-to-value ratio at the time of origination is generally 80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance.

TABLE 4. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in thousands)

		December 31, 2005												December 31, 2004
		Due In												Due In
			1 Year			1 to 5			Over 5						1 Year			1 to 5			Over 5
		or Less				Years			Years			Total			or Less			Years			Years			Total
Loan Maturities:
Commercial		$	252,682		$	224,191		$	40,979		$	517,852		$	229,694		$	206,245		$	33,031		$	468,970
Real estate commercial			94,465			578,713			31,506			704,684			79,912			566,486			51,381			697,779
Real estate construction			68,213			41,923			48,240			158,376			56,746			36,598			27,556			120,900
Total		$	415,360		$	844,827		$	120,725		$	1,380,912		$	366,352		$	809,329		$	111,968		$	1,287,649
Percent of Total			30	%		61	%		9	%		100	%		28	%		63	%		9	%		100	%
		December 31, 2005									December 31, 2004
						Amount			Percent						Amount			Percent
Interest Sensitivity:
Above loans maturing after one year which have:
	Fixed interest rates				$	745,496			77	%				$	664,968			72	%
	Variable interest rates					220,056			23						256,329			28
Total					$	965,552			100	%				$	921,297			100	%

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 5. NONPERFORMING ASSETS

		December 31
		2005			2004			2003			2002			2001
		(Dollars in thousands)
Nonaccrual loans*:
	Commercial	$	3,133		$	3,245		$	3,902		$	1,460		$	4,451
	Real estate commercial		3,610			1,343			1,550			887			658
	Real estate construction-commercial		3,081			—			—			—			—
	Real estate residential		3,853			3,133			694			1,739			1,335
	Consumer		884			676			545			773			453
	Total nonaccrual loans		14,561			8,397			6,691			4,859			6,897
Accruing loans contractually past due 90 days or more as to interest or principal payments:
	Commercial		825			106			777			231			1,566
	Real estate commercial		2,002			—			924			318			2,743
	Real estate residential		1,717			1,023			2,371			1,388			1,180
	Consumer		592			524			584			485			692
	Total accruing loans contractually past due 90 days or more as to interest or principal payments		5,136			1,653			4,656			2,422			6,181
Total nonperforming loans			19,697			10,050			11,347			7,281			13,078
Other real estate and repossessed assets			6,801			6,799			6,002			4,298			728
Total nonperforming assets		$	26,498		$	16,849		$	17,349		$	11,579		$	13,806
Nonperforming loans as a percent of total loans			0.73	%		0.39	%		0.46	%		0.35	%		0.60	%
Nonperforming assets as a percent of total assets			0.71	%		0.45	%		0.47	%		0.32	%		0.40	%

*  Interest income totaling $564,000 was recorded in 2005 on loans in nonaccrual status at December 31, 2005. Additional interest income of $546,000 would have been recorded during 2005 on these loans had they been current in accordance with their original terms.

The Corporation’s general practice is to sell residential real estate loan originations with maturities of fifteen years and longer in the secondary market. The Corporation sold $111 million of long-term fixed rate residential real estate loans during 2005 in the secondary market, compared to the sale of $153 million of residential real estate loans during 2004. The decrease in loans sold during 2005 was partially attributable to the increase in market interest rates on residential real estate loans and the corresponding decline in both new and refinanced loan activity, and growth in adjustable interest rate loans, which are kept in the Corporation’s loan portfolio.

At December 31, 2005, the Corporation was servicing $544 million of residential mortgage loans that had been originated by the Corporation in its market areas and subsequently sold in the secondary mortgage market. At December 31, 2004, the Corporation serviced for others approximately $596 million of residential mortgages.

Consumer loans totaled $540.6 million at December 31, 2005, an increase of $3.5 million, or 0.7% from total consumer loans at December 31, 2004 of $537.1 million. The minimal increase during 2005 was largely attributable to increased competition from captive auto finance companies on new personal vehicle loans and slower economic conditions in the Corporation’s market areas. Consumer loans represented 19.9%, 20.8% and 21.8% of total loans outstanding at December 31, 2005, 2004 and 2003, respectively.

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 a slow economy. Consumer lending collections are dependent on the borrowers’ continuing financial stability, and thus are more likely to be affected by adverse personal situations.

NONPERFORMING ASSETS

A five-year history of nonperforming assets is presented in Table 5. Nonperforming assets are comprised of loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more as to interest or principal payments, other loans whose terms have been restructured to provide for a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower, and other real estate and repossessed assets. There were no restructured loans at December 31, 2005, 2004 or 2003.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

NONPERFORMING ASSETS (CONTINUED)

Nonaccrual loans were $14.6 million at December 31, 2005, compared to $8.4 million at December 31, 2004 and $6.7 million at December 31, 2003. The increase in nonaccrual loans during 2005 was primarily attributable to the addition of two nonaccrual loans totaling $5.3 million, consisting of a $2.2 million real estate commercial loan and a $3.1 million real estate construction-commercial loan. Nonaccrual loans as a percentage of total loans were 0.54% at December 31, 2005, 0.32% at December 31, 2004 and 0.27% at December 31, 2003.

The Corporation’s nonaccrual loans increased only slightly during the second and third quarters of 2005, as compared to December 31, 2004, although nonaccrual loans increased $4.6 million, or 47%, during the fourth quarter of 2005 from $9.9 million at September 30, 2005 to $14.6 million at December 31, 2005. The increase in nonaccrual loans during the fourth quarter of 2005 was attributable to two commercial type loans totaling $5.3 million moving from the past due 90 days or more category to nonaccrual loan status. An impairment reserve of $0.6 million was recorded on one of these nonaccrual loans at December 31, 2005. Loans 90 days or more past due were $5.1 million as of December 31, 2005, compared to $10.4 million as of September 30, 2005.

Accruing loans past due 90 days or more were $5.1 million at December 31, 2005, $1.7 million at December 31, 2004 and $4.7 million at December 31, 2003. The increase from 2004 to 2005 was primarily due to the addition of three commercial loan type relationships totaling $2.0 million and an additional $0.7 million in residential real estate loans moving into the 90 days or more past due status during 2005.

Total nonperforming loans were $19.7 million, or 0.73% of total loans at December 31, 2005, compared to $10.1 million or 0.39% of total loans at December 31, 2004. The level and composition of nonperforming loans are affected by economic conditions in the Corporation’s local markets.

Other real estate and repossessed assets totaled $6.8 million at December 31, 2005, and consisted of commercial real estate of $3.8 million, residential real estate of $2.6 million and other repossessions, mostly automobiles, boats and recreational vehicles, of $0.4 million. Other real estate and repossessed assets also totaled $6.8 million at December 31, 2004, and consisted of commercial real estate of $3.9 million, residential real estate of $2.4 million and other repossessions, mainly automobiles, of $0.5 million.

The Corporation considers a loan as 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. The Corporation measures impairment on commercial, real estate commercial and real estate construction-commercial loans. 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 is allocated to impaired loans.

Impaired loans were $9.8 million as of December 31, 2005, $4.6 million as of December 31, 2004 and $5.5 million as of December 31, 2003. After analyzing the various components of the customer relationships and evaluating the underlying collateral of impaired loans, it was determined that the total of impaired loans requiring an allocation of the allowance for loan losses was $5.1 million at December 31, 2005, $0.8 million at December 31, 2004 and $1.1 million at December 31, 2003. The allowance for loan losses allocated to impaired loans was as follows: $1.3 million at December 31, 2005, $0.4 million at December 31, 2004, and $0.8 million at December 31, 2003. The process of measuring impaired loans and the allocation of the allowance for loan losses requires judgment and estimation, therefore the eventual outcome may differ from the estimates used on these loans.

PROVISION AND ALLOWANCE

FOR LOAN LOSSES

The provision for loan losses (provision) is the amount added to the allowance for loan losses (allowance) to absorb inherent loan losses (charge-offs) in the loan portfolio. A summary of the activity in the allowance for years 2005 back through 2001 is included in Table 3. Management regularly evaluates the allowance to ensure the level is adequate to absorb losses inherent in the loan portfolio. This evaluation is based on a continuous review of the loan portfolio, both individually and by category, and includes consideration of changes in the mix and volume of the loan portfolio, actual loan loss experience, 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 special factors affecting business sectors. A formal evaluation of the allowance is prepared quarterly to assess the risk in the loan portfolio and to determine the adequacy of the allowance. The Corporation’s loan review personnel, who are independent of the loan origination function, review this evaluation. The Corporation’s loan review personnel perform a detailed credit quality review quarterly on large commercial, real estate commercial and real estate construction-commercial

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MANAGEMENT’S DISCUSSION AND ANALYSIS

loans, particularly focusing on loans that have deteriorated below certain levels of credit risk.

The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the remainder of the loan portfolio but that have not been specifically identified. The allowance for loan losses is comprised of specific allowances (assessed for loans that have known credit weaknesses), allowances based on assigned risk ratings, allowances on the remainder of the loan portfolio based primarily on historical loan loss experience, and an unallocated allowance for the imprecision in the subjective nature of the specific and overall allowance methodology. Factors contributing to the determination of specific allocations include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. The Corporation establishes the allowance allocations by the application of projected loss percentages to adversely-graded commercial, real estate commercial and real estate construction-commercial loans by grade categories. Allowances are allocated to all other loans by loan category, based on a defined methodology, that focuses on loan loss experience and trends. Allocations to loan categories are developed based on historical loss and past due trends, management’s judgment concerning those trends and other relevant factors, including delinquency, default, and loss rates, as well as general economic conditions. Some loans will not be repaid in full. Therefore, an allowance for loan losses is maintained at a level which represents management’s best estimate of inherent losses within the loan portfolio.

In determining the allowance and the related provision for loan losses, the Corporation considers four principal elements: (i) specific allocations based upon probable losses identified during the review of adversely-graded commercial, real estate commercial and real estate construction-commercial loan portfolios (primarily focusing on impaired loans), (ii) allocations established for adversely-rated commercial, real estate commercial and real estate construction-commercial loans, (iii) allocations on all other loans based principally on historical loan loss experience, and (iv) an unallocated allowance based on the imprecision in the overall allowance methodology.

The first element reflects the Corporation’s estimate of probable losses based upon the systematic review of specific commercial, real estate commercial and real estate construction-commercial adversely-graded loans. This review is primarily focused on impaired loans. These estimates are based upon a number of objective factors, such as payment history, financial condition of the borrower, and discounted collateral exposure. The Corporation measures the investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral, or the present value of expected future cash flows discounted at the loan’s effective interest rate.

The second element reflects the application of the Corporation’s loan grading system. This grading system is similar to those employed by state and federal banking regulators. Commercial, real estate commercial and real estate construction-commercial loans that are risk rated below a certain predetermined risk grade are assigned a loss allocation factor that is based upon a historical analysis of losses incurred within the specific risk grade category. The lower the grade assigned to a loan or category, the greater the allocation percentage that is generally applied.

The third element is determined by assigning allocations based principally upon the three-year average of loss experience for each type of loan. Average losses may be adjusted based on current loan loss and delinquency trends and for the projected impact of loans acquired in branch and bank acquisitions. Loss analyses are conducted at least annually.

The fourth element is based on factors that cannot be associated with a specific credit or loan category and reflects an attempt to ensure that the overall allowance for loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. Management maintains an unallocated allowance to recognize the uncertainty and imprecision underlying the process of estimating projected loan losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocation methodology discussed above, involve the exercise of judgment. The unallocated allowance associated with the imprecision in the risk rating system is based on a historical evaluation of the accuracy of the risk ratings associated with loans. This unallocated portion of the allowance is judgmentally determined and generally serves to compensate for the uncertainty in estimating losses, particularly in times of changing economic conditions, and also considers the possibility of improper risk ratings. The unallocated allowance considers the lagging impact of historical charge-off ratios in periods where future loan charge-offs are expected to increase, trends in delinquencies and nonaccrual loans, the changing portfolio mix in terms of collateral, average loan balance, loan growth, the degree of seasoning in the various loan portfolios, and loans recently acquired through acquisitions.

The underlying credit quality of the Corporation’s residential real estate and consumer loan portfolios is

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MANAGEMENT’S DISCUSSION AND ANALYSIS

PROVISION AND ALLOWANCE

FOR LOAN LOSSES (CONTINUED)

dependent primarily on each borrower’s ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral, if any, securing the loan. A borrower’s ability to pay typically is dependent primarily on employment and other sources of income, which in turn is impacted by general economic conditions, although other factors may also impact a borrower’s ability to pay.

The provision for loan losses was $4.29 million in 2005, $3.82 million in 2004 and $2.83 million in 2003. The Corporation experienced net loan charge-offs of $4.30 million in 2005, $2.83 million in 2004 and $3.35 million in 2003. The Corporation’s allowance was $34.1 million at December 31, 2005 and represented 1.26% of total loans, compared to 1.32% at December 31, 2004 and 1.34% at December 31, 2003. During 2003, the Corporation acquired an allowance of $3.03 million in the Caledonia acquisition.

The Corporation’s provision for loan losses was approximately $0.5 million higher in 2005 than in 2004. This increase was partially attributable to the increased size of the loan portfolio, as the amount of risk of the loan portfolio increased with the increase in total loans. Additionally, the Corporation’s net loan charge-offs approximately doubled in the fourth quarter of 2005, compared to the prior three quarters of 2005, and nonaccrual loans increased from both September 30, 2005 and December 31, 2004 levels. The Corporation’s net loan charge-offs were $2.5 million during the first nine months of 2005 (an average of $0.84 million per quarter), compared to $1.8 million in the fourth quarter of 2005. The Corporation’s nonaccrual loans increased slightly during the second and third quarters of 2005, as compared to December 31, 2004, although these loans increased $4.6 million, or 47%, during the fourth quarter of 2005 from $9.9 million at September 30, 2005 to $14.6 million at December 31, 2005. The increase in nonaccrual loans during the fourth quarter of 2005 was attributable to two commercial type loans totalling $5.3 million moving from the past due 90 days and greater category to nonaccrual loan status. An impairment reserve of $0.6 million existed on one of these loans at December 31, 2005. Loans 90 days or more past due were $5.1 million as of December 31, 2005, compared to $10.4 million as of September 30, 2005 and $1.7 million as of December 31, 2004.

While the Corporation uses relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

The allocation of the allowance in Table 6 is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or exactness of the specific amounts. The entire allowance is available to absorb future loan losses without regard to the categories in which the loan losses are classified. The allocation of the allowance is based on a combination of factors, including historical loss factors, credit-risk grading, past-due experiences, and the trends in these, as well as other factors, as discussed above.

The changes in the allocation of the allowance for loan losses during 2005 were based on the results of the process previously described. The increase in the allowance allocation in real estate construction loans during 2005 was primarily attributable to a $37.5 million, or 31.0% increase in this type of loan.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 6. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31
	2005					2004					2003					2002					2001
	(Dollars in thousands)
			Percent					Percent					Percent					Percent					Percent
			of Loans					of Loans					of Loans					of Loans					of Loans
			in Each					in Each					in Each					in Each					in Each
			Category					Category					Category					Category					Category
	Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total
Loan Type	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
Commercial	$	9,011		19.1	%	$	8,752		18.1	%	$	8,814		16.4	%	$	9,065		15.8	%	$	9,562		15.2	%
Real estate commercial		11,613		26.0			11,914		27.0			9,997		25.3			6,167		23.2			5,817		19.9
Real estate construction		1,816		5.8			1,382		4.7			1,874		5.6			1,097		5.2			1,031		6.3
Real estate residential		3,576		29.1			4,023		29.4			4,006		30.9			3,563		31.2			4,026		35.2
Consumer		6,744		20.0			6,659		20.8			7,799		21.8			7,930		24.6			6,827		23.4
Unallocated		1,388					1,436					689					2,850					3,731
Total	$	34,148		100	%	$	34,166		100	%	$	33,179		100	%	$	30,672		100	%	$	30,994		100	%

NONINTEREST INCOME

Noninterest income totaled $39.2 million in 2005, $39.3 million in 2004 and $39.1 million in 2003. Noninterest income declined $0.1 million, or 0.3%, in 2005 and increased $0.2 million, or 0.6%, in 2004 compared to the prior year. Noninterest income as a percentage of net revenue (net interest income plus noninterest income) was 21.7% in 2005, compared to 21.0% in 2004 and 21.9% in 2003.

The following schedule includes the major components of noninterest income during the past three years.

TABLE 7. NONINTEREST INCOME

	Years Ended December 31
	2005		2004		2003
	(In thousands)
Service charges on deposit accounts	$	20,371	$	19,301	$	16,935
Trust and investment services revenue		7,909		7,396		6,794
Other fees for customer services		2,363		2,121		2,319
ATM and network user fees		2,726		2,541		1,911
Investment fees		1,877		598		605
Insurance commissions		917		1,335		1,770
Mortgage banking revenue		1,663		3,328		6,954
Investment securities net gains		541		1,367		1,296
Other		853		1,342		510
Total Noninterest Income	$	39,220	$	39,329	$	39,094

Investment fees of $1.88 million in 2005 were up $1.28 million, or 214%, compared to investment fees of $0.60 million in 2004. This increase was primarily attributable to a change in the operation of the Corporation’s “CFC Investment Center” program on 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, an independent, registered broker/ dealer. The Corporation incurred minimal operating expenses with this program through December 31, 2004, as the individuals responsible for the sales of mutual fund and annuity investment 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 investment fees earned increased as of January 1, 2005, although operating expenses of the program also increased as of this date. Operating expenses of $1.2 million were incurred in 2005 in conjunction with the generation of investment fees and are included in operating expenses in the consolidated statement of income. On a comparable basis, net revenues (investment fees earned less related operating expenses) included in the consolidated statements of income of the “CFC Investment Center” program were approximately $0.69 million and $0.60 million during 2005 and 2004, respectively.

Noninterest income, excluding investment fees, was $37.3 million in 2005, $1.4 million or 3.6% less than in 2004. This decrease was primarily attributable to lower mortgage banking revenue and investment securities net gains that were partially offset by increases in service charges on deposit accounts and trust and investment services (trust services) revenue. In addition, 2004 noninterest income included $0.6 million in gains from the sale of deposits of a branch office in Lansing, Michigan and the sale of the insurance agency book of business, which are included in the “other” category in Table 7.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

NONINTEREST INCOME (CONTINUED)

The Corporation recognized net gains on investment securities of $0.54 million during 2005, net gains of $1.37 million in 2004 and net gains of $1.30 million in 2003. Investment securities gains realized in 2005 were partially offset by investment securities losses realized during the fourth quarter of 2005. Historically, the Corporation has not sold investment securities at a loss. During the fourth quarter of 2005, the Corporation sold $36 million of U.S. government agency investment securities to take advantage of the relative favorable yield spread between the mortgage-backed securities market and the U.S. government agency market and adjust the investment securities portfolio allocation. In addition, this transaction reduced the reinvestment risk associated with the level of investment securities maturing in 2006 and 2007. The investment securities sold had an average yield of 2.48% and the Corporation realized a $0.63 million investment securities loss. The proceeds from the sale were reinvested in mortgage-backed securities with an average life of 4.4 years and an average yield of 5.3%.

Service charges on deposit accounts were $20.4 million in 2005, $19.3 million in 2004, and $16.9 million in 2003. The increases of $1.1 million, or 5.5% in 2005 and $2.4 million, or 14.0% in 2004 were primarily attributable to an increase in fees assessed in 2005 and a higher level of customer activity in areas where fees and service charges are applicable in 2004.

Trust services revenue was $7.9 million in 2005, $7.4 million in 2004 and $6.8 million in 2003. Trust services revenue increased $0.5 million, or 6.9% in 2005. Trust services revenue increased $0.6 million, or 8.9%, in 2004. The increases in both 2005 and 2004 were due primarily to increases in discretionary assets coupled with investment returns in the equity markets.

Mortgage banking revenue (MBR) was $1.66 million in 2005, $3.33 million in 2004 and $6.95 million in 2003. Residential real estate loan activity, both refinancing and new loan originations, declined for the second year in a row as a result of higher market interest rates and slower economic conditions. The Corporation generally sells the majority of its long-term fixed interest rate residential real estate loan originations in the secondary market as a part of its interest rate risk management strategy. During 2005, the Corporation sold $111 million of residential real estate loans in the secondary market, compared to $153 million in 2004. During 2005, generally all fifteen-year term mortgages were sold in the secondary market. The reduction in residential real estate loans sold in the secondary market was partially attributable to the Corporation’s success in marketing balloon and adjustable interest rate type loans during 2005, which are kept in the Corporation’s loan portfolio. Consequently, MBR of $1.66 million in 2005 was $1.67 million or 50% less than MBR earned in 2004.

Noninterest income from all other sources, which includes other fees for customer services, ATM and network user fees, insurance commissions and other, totaled $6.86 million in 2005, $7.34 million in 2004 and $6.51 million in 2003. Noninterest income from all other sources in 2005 declined $0.48 million, as compared to the prior year. The decrease in 2005 was primarily attributable to a decrease in insurance commissions. The decrease in insurance commissions was primarily attributable to lower title insurance commissions which occurred as a direct result of lower residential real estate loan activity. The increase in 2004 compared to 2003 was largely due to one-time realized gains of $0.6 million in 2004 as a result of the sale of a branch office in Lansing, Michigan and the sale of the insurance agency book of business.

OPERATING EXPENSES

Total operating expenses were $98.5 million in 2005 and 2004, and $91.9 million in 2003.

The following schedule includes the major categories of operating expenses during the past three years.

TABLE 8. OPERATING EXPENSES

	Years Ended December 31
	2005			2004			2003
	(Dollars in thousands)
Salaries and wages	$	44,304		$	44,763		$	43,944
Employee benefits		12,462			12,734			10,502
Occupancy		9,421			9,165			7,921
Equipment		8,867			8,955			8,045
Postage and courier		2,559			3,123			2,948
Supplies		1,145			1,082			1,293
Professional fees		3,736			2,841			2,587
Outside processing/service fees		1,347			1,000			785
Michigan single business tax		2,012			1,645			1,841
Advertising and marketing		1,720			1,659			1,358
Intangible asset amortization		2,152			2,273			1,883
Telephone		1,696			1,797			1,807
Other		7,042			7,432			7,009
Total Operating Expenses	$	98,463		$	98,469		$	91,923
Full-time equivalent staff (at December 31)		1,376			1,366			1,447
Efficiency ratio		54.2	%		52.6	%		50.9	%

Operating expenses were $98.5 million in 2005, virtually unchanged from operating expenses in 2004. Operating expenses in 2005 remained stable as increases in occupancy, supplies, professional fees, outside processing/service fees,

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Michigan single business tax, and advertising and marketing costs were offset by decreases in salaries and wages, employee benefits, equipment, postage and courier, intangible asset amortization, telephone and other expenses. The 2004 increase in operating expenses was primarily attributable to the Caledonia acquisition. The acquisition was completed on December 1, 2003, and therefore, operating expenses in 2003 included only one month of operating expenses of Caledonia, compared to a full year in 2004. The Corporation estimated that approximately $4 million, or 62% of the increase in operating expenses in 2004, was attributable to operating expenses of Caledonia. Excluding the estimated expenses of Caledonia, operating expenses were up approximately $2.5 million, or 2.8% in 2004 over 2003.

Total operating expenses as a percentage of total average assets were 2.60% in 2005, compared to 2.55% in 2004 and 2.57% in 2003.

Salaries, wages and employee benefits remain the largest component of operating expenses. These expenses totaled $56.8 million in 2005, $57.5 million in 2004 and $54.4 million in 2003. Salaries and wages declined by $0.5 million, or 1.0% in 2005 even though the Corporation’s number of employees, on a full-time equivalent basis, increased by 10 employees or 0.7% during 2005. Incentive compensation expense, included in this component of operating expenses, was $1.3 million lower in 2005 than in 2004. Conversely, compensation costs of the Corporation’s “CFC Investment Center” program recorded in salaries and wages totaled $0.9 million in 2005, compared to no similar costs in 2004. Prior to January 1, 2005, the “CFC Investment Center” program was outsourced through a third-party vendor, an independent, registered broker/dealer, which provided the Corporation with investment fees, without any corresponding operating costs. The Corporation incurred $1.2 million in total operating costs in 2005 related to the “CFC Investment Center” program and the change in this program accounts for the increase in the Corporation’s employees during 2005. Personnel expenses as a percentage of total operating expenses were 57.7% in 2005, 58.4% in 2004 and 59.2% in 2003.

In anticipation of the adoption of the modified prospective method of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)), the board of directors of the Corporation in December 2005 accelerated the vesting of certain unvested “out-of-the-money” nonqualified stock options previously awarded to employees, including executive officers, under the Corporation’s stock incentive compensation plan. As a result of this action, stock options that otherwise would have vested in years 2006-2009 became fully vested on December 31, 2005. Options to purchase 167,527 shares of the Corporation’s common stock or 90% of outstanding unvested options were accelerated. The weighted average exercise price of the options subject to acceleration was $39.23. The purpose of the acceleration was to enable the Corporation to avoid recognizing compensation expense associated with these options in future periods in its consolidated statements of income upon adoption of SFAS 123(R) in January 2006. The Corporation also believes that, because the options that were accelerated had exercise prices in excess of the then-current market value of the Corporation’s common stock, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention. The acceleration of the vesting of these options reduces non-cash compensation expense in years 2006, 2007, 2008 and 2009, in the amounts of $0.61 million, $0.37 million, $0.22 million and $0.09 million, respectively, following the adoption of SFAS 123(R). In addition, the board of directors granted options to purchase 177,450 shares in December 2005 that became immediately vested. Based on an estimated value calculation using the Black-Scholes methodology, these options had a grant date fair value of $1.66 million. As the 177,450 options granted in December 2005 were vested as of December 31, 2005, the Corporation will not recognize future non-cash compensation expense in conjunction with these options. The Corporation will recognize total non-cash compensation expense in 2006 and 2007, combined, on 17,640 of remaining unvested options outstanding at December 31 2005 in accordance with the compensation provisions of SFAS 123(R), of less than $0.1 million.

Occupancy expense increased $0.3 million, or 2.8% in 2005, due to slight increases in several expense categories. Occupancy expense increased $1.2 million, or 15.7%, in 2004. The increase in occupancy expense in 2004 was largely attributable to the Caledonia acquisition and a full year of operating expenses on an office building purchased in 2003.

Equipment expense declined $0.1 million or 1.0% in 2005, due to lower depreciation and software expenses. Depreciation expense on equipment was $3.8 million, $4.0 million and $3.5 million in 2005, 2004 and 2003, respectively.

Other categories of operating expenses include a wide array of expenses, including postage and courier, supplies, professional fees, outside processing/service fees, Michigan single business tax, advertising and marketing expenses, intangible asset amortization, telephone costs, and

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OPERATING EXPENSES (CONTINUED)

miscellaneous other expenses. In total, these other operating expenses were $23.4 million in 2005, $22.9 million in 2004 and $21.5 million in 2003. Professional fees were $0.9 million higher in 2005 than 2004 mainly as a result of increases in internal and external audit fees and consulting fees related to the analysis of the branch delivery system. These increases were partially offset by lower postage and courier expense of $0.6 million. The postage expense reduction of $0.6 million in 2005, as compared to 2004, was mainly attributable to the Corporation offering customers check safe-keeping services on certain checking accounts whereby cancelled checks are no longer returned with customers’ monthly statements. A portion of the decrease in postage expense was also attributable to the Corporation’s ability to process image-type customer transaction account statements.

The Corporation’s 2005 efficiency ratio, which measures total operating expenses divided by the sum of net interest income (fully taxable equivalent) and noninterest income was 54.2%, compared to 52.6% in 2004 and 50.9% in 2003. The slight increase in 2005 was attributable to lower net interest income, as both operating expenses and noninterest income were relatively unchanged in 2005 compared to 2004.

INCOME TAXES

The Corporation’s effective federal income tax rate was 32.5% in 2005, 33.1% in 2004 and 33.8% in 2003. In 2005 and 2004, the Corporation’s provision for federal income taxes was reduced as a result of the reassessment of required tax accruals and accounted for approximately one-half of the decrease in the effective federal income tax rate between 2005 and 2004, and also between 2004 and 2003. The fluctuations in the Corporation’s effective federal income tax rate also reflect changes each year in the proportion of interest income exempt from federal taxation, nondeductible interest expense and other nondeductible expenses relative to pretax income and tax credits.

Tax-exempt income (FTE), net of related nondeductible interest expense, totaled $4.9 million for 2005, $4.6 million for 2004 and $4.8 million for 2003. Tax-exempt income (FTE) as a percentage of total interest income (FTE) was 2.4% in 2005, 2.4% in 2004 and 2.6% in 2003.

Income before income taxes (FTE) was $79.9 million in 2005, $86.2 million in 2004 and $85.8 million in 2003.

LIQUIDITY RISK

The Corporation manages its liquidity to ensure that it has the ability to meet the cash withdrawal needs of its depositors, provide funds for borrowers and at the same time ensure that the Corporation’s own cash requirements are met. The Corporation accomplishes these goals through the management of liquidity at two levels — the parent company and its bank subsidiary.

During the three-year period ended December 31, 2005, the parent company’s primary source of funds was subsidiary dividends. The parent company manages its liquidity position to provide the cash necessary to pay dividends to shareholders, invest in new subsidiaries, enter new banking markets, pursue investment opportunities and satisfy other operating requirements.

Federal and state banking laws place certain restrictions on the amount of dividends that a bank may pay to its parent company. Such restrictions have not had, and are not expected to have, any material effect on the Corporation’s ability to meet its cash obligations or impede its ability to manage its liquidity needs. As of December 31, 2005, the Corporation’s sole bank subsidiary, Chemical Bank, could pay dividends totaling $45.8 million to the parent company without obtaining prior regulatory approval. In addition to these funds, the parent company had $17.9 million in cash and cash equivalents at December 31, 2005.

Chemical Bank manages liquidity to ensure adequate funds are available to meet the cash flow needs of depositors and borrowers. Chemical Bank’s most readily available sources of liquidity are federal funds sold, interest-bearing deposits with unaffiliated banks, investment securities classified as available for sale and investment securities classified as held to maturity maturing within one year. These sources of liquidity are supplemented by new deposits and by loan payments received from customers.

The Corporation’s investment securities portfolio historically has been short-term in nature. The average life of the investment securities portfolio, which expresses the average number of years that each principal dollar will be outstanding, was 3.5 years as of December 31, 2005, compared to 2.8 years as of December 31, 2004. At December 31, 2005, $172.2 million, or 23.8% of the Corporation’s investment securities portfolio will mature during 2006, and another $177.1 million or 24.5% of the investment securities portfolio will mature during 2007. The combination of the 2006 and 2007 scheduled maturities results in 48.3% of the Corporation’s investment securities portfolio maturing within two years, as of December 31, 2005. Information about the Corporation’s investment securities portfolio is summarized in Tables 9, 10 and 11.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 9. MATURITIES AND YIELDS* OF INVESTMENT SECURITIES AT DECEMBER 31, 2005

		Maturity**
							After One					After Five										Total					Total
		Within					but Within					but Within					After					Carrying					Market
		One Year					Five Years					Ten Years					Ten Years					Value					Value
		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
		(Dollars in thousands)
Available for Sale:
U.S. Treasury and agencies		$	51,815		3.26	%	$	210,029		3.71	%	$	1,991		5.56	%	$	—		—	%	$	263,835		3.74	%	$	263,835
States and political subdivisions			689		5.47			2,500		5.00			5,280		5.44			901		3.95			9,370		5.13			9,370
Mortgage-backed securities			63,831		4.29			159,922		4.19			33,627		4.76			40,431		5.17			297,811		4.80			297,811
Collateralized mortgage obligations			326		5.88			463		6.44			204		6.37			86		6.15			1,079		6.31			1,079
Corporate bonds			11,187		2.84			10,357		3.81			—		—			—		—			21,544		3.58			21,544
Equity securities			—		—			—		—			—		—			852		7.44			852		7.44			852
Total Investment Securities
	Available for Sale		127,848		3.74			383,271		3.96			41,102		4.90			42,270		5.16			594,491		4.55			594,491
Held to Maturity:
U.S. Treasury and agencies			39,398		3.20			39,929		3.39			—		—			—		—			79,327		3.37			78,139
States and political subdivisions			4,814		6.53			15,157		6.34			15,482		6.30			11,985		6.45			47,438		6.38			47,808
Mortgage-backed securities			139		8.14			318		8.12			240		7.44			344		6.55			1,041		6.92			1,097
Total Investment Securities
	Held to Maturity		44,351		3.75			55,404		4.42			15,722		6.31			12,329		6.45			127,806		5.72			127,044
Total Investment Securities		$	172,199		3.75	%	$	438,675		4.01	%	$	56,824		5.31	%	$	54,599		5.38	%	$	722,297		4.75	%	$	721,535

*	Yields are weighted by amount and time to contractual maturity, are on a taxable equivalent basis using a 35% federal income tax rate and are based on amortized cost.
**	Based on final contractual maturity, except mortgage-backed securities and collateralized mortgage obligations are based on scheduled principal maturities and projected principal prepayments based on historical experience. Equity securities have no stated maturity.

TABLE 10. SUMMARY OF INVESTMENT SECURITIES

	December 31
	2005		2004		2003
	(In thousands)
Available for Sale:
U.S. Treasury and agencies	$	263,835	$	349,019	$	474,279
States and political subdivisions		9,370		13,533		19,022
Mortgage-backed securities		297,811		282,437		126,766
Collateralized mortgage obligations		1,079		1,459		1,995
Corporate bonds		21,544		48,746		82,865
Equity securities		852		1,577		4,734
Total Available for Sale		594,491		696,771		709,661
Held to Maturity:
U.S. Treasury and agencies		79,327		141,622		153,585
States and political subdivisions		47,438		31,221		34,233
Mortgage-backed securities		1,041		1,419		2,619
Other debt securities		—		2,255		2,926
Total Held to Maturity		127,806		176,517		193,363
Total Investment Securities	$	722,297	$	873,288	$	903,024

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 11. MATURITY ANALYSIS OF INVESTMENT SECURITIES (as a % of total portfolio)

	December 31
	2005			2004			2003
Maturity:
Under 1 year		23.8	%		28.6	%		30.1	%
1-5 years		60.7			46.8			63.0
5-10 years		7.9			14.8			4.0
Over 10 years		7.6			9.8			2.9
Total		100	%		100	%		100	%

TABLE 12. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE

						December 31
	2005					2004					2003
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Maturity:
Within 3 months	$	141,242		46	%	$	99,896		46	%	$	59,292		35	%
After 3 but within 6 months		65,326		21			26,010		12			22,233		13
After 6 but within 12 months		52,388		17			33,656		15			31,070		18
After 12 months		50,741		16			58,670		27			57,112		34
Total	$	309,697		100	%	$	218,232		100	%	$	169,707		100	%

LIQUIDITY RISK (CONTINUED)

Table 12 presents the maturity distribution of time deposits of $100,000 or more at the end of each of the last three years. Time deposits of $100,000 or more and the percentage of these deposits to total deposits have increased during the past two years. These deposits increased $91.5 million during 2005 to $309.7 million at December 31, 2005 and increased $48.5 million during 2004 to $218.2 million at December 31, 2004, due primarily to increases in short-term interest rates during 2004, and throughout 2005. During 2003, the modest interest rate spread between money market accounts and short-term time deposits prompted many large balance customers to maintain their funds in accounts with no defined maturities. Time deposits of $100,000 or more represented 11.0%, 7.6% and 5.7% of total deposits at December 31, 2005, 2004 and 2003, respectively.

BORROWED FUNDS

Borrowed funds include short-term borrowings and FHLB advances – long-term. Short-term borrowings are comprised of securities sold under agreements to repurchase, reverse repurchase agreements and short-term FHLB advances that have original maturities of one year or less. Securities sold under agreements to repurchase are amounts advanced by customers that are secured by investment securities owned by the Corporation’s subsidiary bank, as they are not covered by FDIC insurance. Reverse repurchase agreements are a means of raising funds in the capital markets by providing specific securities as collateral. During 2005, the Corporation entered into a $10 million reverse repurchase agreement with another financial institution by selling $11 million in U.S. treasury notes under an agreement to repurchase these notes. Short-term FHLB advances are borrowings from the FHLB. Short-term borrowings are highly interest rate sensitive. Total short-term borrowings were $203.6 million at December 31, 2005, compared to $101.8 million at December 31, 2004 and $91.5 million at December 31, 2003. Additional disclosures are included in Note J to the consolidated financial statements.

FHLB advances are borrowings from the FHLB used to fund loans and a portion of the investment securities portfolio. FHLB advances, both short-term and long-term combined, are secured under a blanket security agreement by residential real estate, first lien loans with an aggregate book value equal to at least 145% of the advances. FHLB advances – long-term are borrowings from the FHLB with original maturities greater than one year and were $196.8 million at December 31, 2005, compared to $285.0 million at December 31, 2004. A summary of FHLB advances – long-term outstanding at December 31, 2005 and 2004 is included in Note K to the consolidated financial statements.

During January 2004, the Corporation borrowed $150 million from the FHLB in fixed interest rate advances with maturities ranging from November 2004 through May 2006. The weighted average life of the $150 million borrowing was 1.6 years and the weighted average interest cost was 1.85%. The Corporation invested the proceeds from the $150 million FHLB borrowing transaction equally in five-and seven-year balloon type mortgage-backed securities that had a projected average yield of 3.40%, a projected weighted average life of 3.03 years, and a projected duration of 2.75 years, at the date of the transaction.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

TABLE 13. FINANCIAL OBLIGATIONS

	December 31, 2005
	Minimum Payments Due by Period
	Less than						More than
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(In thousands)
Deposits with no stated maturity	$	1,834,200	$	—	$	—	$	—	$	1,834,200
Time deposits		654,268		305,845		24,274		1,293		985,680
Short-term borrowings		203,598		—		—		—		203,598
Federal Home Loan Bank advances — long-term		83,693		70,047		40,025		3,000		196,765
Low income housing project		266		520		453		127		1,366
Operating leases and non-cancelable contracts		3,252		3,741		629		290		7,912
Total financial obligations	$	2,779,277	$	380,153	$	65,381	$	4,710	$	3,229,521

TABLE 14. COMMITMENTS

	December 31, 2005
	Expected Expiration Dates by Period
	Less than						More than
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(In thousands)
Unused commitments to extend credit	$	184,073	$	67,907	$	63,770	$	52,667	$	368,417
Undisbursed loans		169,222		—		—		—		169,222
Standby letters of credit		21,224		29,037		4,106		—		54,367
Total commitments	$	374,519	$	96,944	$	67,876	$	52,667	$	592,006

FINANCIAL OBLIGATIONS

The Corporation has various financial obligations, including contractual obligations, that may require future cash payments. Table 13 summarizes the Corporation’s obligations and estimated future payments at December 31, 2005. These payments do not include interest. Refer to Notes A, G, J, K and P to the consolidated financial statements for a further discussion of these obligations.

The Corporation also has other commitments that may impact liquidity. Table 14 summarizes the Corporation’s commitments and expected expiration dates by period at December 31, 2005. Undisbursed loans represent approved loan commitments that the Corporation expects to result in a loan origination and corresponding cash requirement within three months of December 31, 2005. Historically, the majority of the remaining commitments have expired without being drawn upon. Accordingly, the total amount of these commitments does not necessarily represent future cash requirements of the Corporation.

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due primarily to changes in interest rates. Interest rate risk is the Corporation’s primary market risk and results from timing differences in the repricing of assets and liabilities and changes in relationships between rate indices. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Corporation’s net interest income is largely dependent upon the effective management of interest rate risk. Interest rate risk arises in the normal course of the Corporation’s business due to differences in the repricing and maturity characteristics of interest rate sensitive assets and liabilities. Sensitivity of earnings to interest rate changes arises when yields on assets change differently from the interest costs on liabilities. Interest rate sensitivity is determined by the amount of interest-earning assets and interest-bearing liabilities repricing within a specific time period and the magnitude by which interest rates change on the various types of interest-earning assets and interest-bearing liabilities. The management of interest rate sensitivity includes monitoring the maturities and repricing opportunities of interest-earning assets and interest-bearing liabilities. Interest rate sensitivity management aims at achieving reasonable stability in both net interest income and the net interest margin through periods of changing interest rates. The Corporation’s goal is to avoid a significant decrease in net interest income and thus an adverse impact on the profitability of the Corporation in periods of changing interest rates. It is necessary to analyze projections of net interest income based upon the repricing characteristics of the Corporation’s interest-earning assets and interest-bearing

continued on next page

23

MANAGEMENT’S DISCUSSION AND ANALYSIS

MARKET RISK (CONTINUED)

liabilities and the varying magnitude by which interest rates may change on loans, investment securities, interest-bearing deposit accounts and borrowings. The Corporation’s interest rate sensitivity is managed through policies and risk limits approved by the boards of directors of the Corporation and its subsidiary bank, and an Asset and Liability Committee (ALCO). The ALCO, which is comprised of executive management from various areas of the Corporation, including finance, lending, investments and deposit gathering, meets regularly to execute asset and liability management strategies. The ALCO establishes guidelines and monitors the sensitivity of earnings to changes in interest rates. The goal of the ALCO process is to maximize net interest income and the net present value of future cash flows within authorized risk limits.

The Corporation has not used interest rate swaps or other derivative financial instruments in the management of interest rate risk, other than best efforts forward commitments utilized to offset the interest rate risk of interest rate lock commitments provided to customers on unfunded residential mortgage loans intended to be sold in the secondary market. In the normal course of the mortgage loan selling process, the Corporation enters into a best efforts forward loan delivery commitment with an investor. The Corporation’s exposure to market risk on these best efforts forward loan delivery commitments is not significant.

The primary technique utilized by the Corporation to measure its interest rate risk is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, changes in the shape of the Treasury yield curve, changes in interest rate relationships, changes in asset and liability mix and loan prepayments.

These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many factors such as changes in balance sheet components, interest rate changes, changes in market conditions and management strategies.

Management performed various simulation analyses throughout 2005. The Corporation’s interest rate sensitivity is estimated by first forecasting the next twelve months of net interest income under an assumed environment of constant market interest rates. The Corporation then compares various simulation analysis results to the constant interest rate forecast. As of December 31, 2005 and 2004, the Corporation projected the change in net interest income during the next twelve months assuming short-term market interest rates were to uniformly and gradually increase or decrease by up to 200 basis points over the same time period. These projections were based on the Corporation’s assets and liabilities remaining static over the next twelve months, while factoring in probable calls of investment securities, and prepayments of mortgage-backed securities, residential mortgage loans and certain consumer loans. Mortgage-backed securities and mortgage loan prepayment assumptions were developed from industry averages of prepayment speeds, adjusted for the historical prepayment performance of the Corporation’s own loans. The Corporation’s forecasted net interest income sensitivity is monitored by the ALCO within established limits as defined in the interest rate risk policy. The Corporation’s policy limits the adverse change of a 200 basis point increase or decrease in short-term interest rates over the succeeding twelve months to no more than five percent of management’s most likely net interest income forecast. Throughout 2005, the forecasted interest rate risk exposure was within the Corporation’s established policy limits.

Summary information about the interest rate risk measures, as described above, at December 31, 2005 and December 31, 2004 is presented below:

Year-End 2005 Twelve Month Projection

Interest Rate Change Projection (in basis points)	-200	-100	0	+100	+200
Percent change in net interest income vs. constant rates	0.5%	0.5%	—	(0.5)%	(1.1)%

Year-End 2004 Twelve Month Projection

Interest Rate Change Projection (in basis points)	-200	-100	0	+100	+200
Percent change in net interest income vs. constant rates	(2.6)%	(0.8)%	—	0.6%	0.9%

At the end of 2005, the Corporation’s interest rate risk position was liability sensitive, meaning net income is expected to increase as rates fall and decrease as rates rise, other factors being unchanged.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS

CAPITAL

Capital provides the foundation for future growth and expansion. Total shareholders’ equity was $501 million at December 31, 2005, an increase of $16.2 million, or 3.3% from total shareholders’ equity at December 31, 2004. The increase in 2005 was derived primarily from earnings retention of $26.2 million. This amount was partially offset by a decrease in the market value of securities available for sale, net of taxes, of $7.3 million, and a reduction in shareholders’ equity attributable to the repurchase of 126,900 shares of the Corporation’s common stock totaling $3.8 million.

The ratio of shareholders’ equity to total assets was 13.4% at December 31, 2005, compared to 12.9% at December 31, 2004 and 12.4% at December 31, 2003. The Corporation’s tangible equity to assets ratio was 11.7%, 11.1% and 10.5% at December 31, 2005, 2004 and 2003, respectively.

Under the regulatory “risk-based” capital guidelines in effect for both banks and bank holding companies, minimum capital levels are based upon perceived risk in the Corporation’s various asset categories. These guidelines assign risk weights to on- and off-balance sheet items in arriving at total risk-adjusted assets. Regulatory capital is divided by the computed total of risk-adjusted assets to arrive at the risk-based capital ratios.

The Corporation’s capital ratios exceeded the minimum levels prescribed by the Federal Reserve Board at December 31, 2005, as shown in the following table.

	December 31, 2005
				Risk-Based
				Capital Ratios
	Leverage
	Ratio			Tier 1			Total
Chemical Financial Corporation’s capital ratios		11.8	%		16.5	%		17.8%
Regulatory capital ratios-“well capitalized” definition		5.0			6.0			10.0
Regulatory capital ratios- minimum requirements		3.0			4.0			8.0

The Corporation’s tier 1 and total regulatory capital ratios are significantly above the regulatory minimum and “well capitalized” levels due to the Corporation holding $95 million of investment securities and other assets that are assigned a 0% risk rating, $789 million of investment securities and other assets that are assigned a 20% risk rating, and $953 million of loans secured by first liens on residential real estate properties and other assets that are assigned a 50% risk rating. These three categories of assets represented 49% of the Corporation’s total assets at December 31, 2005.

As of December 31, 2005, the Corporation’s bank subsidiary exceeded the minimum capital ratios required of a “well-capitalized” institution, as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991.

From time to time, the board of directors approves common stock repurchase programs allowing management to repurchase shares of the Corporation’s common stock in the open market. In April 2005, the Corporation announced a new repurchase authorization program that allows up to 500,000 shares of the Corporation’s common stock to be repurchased. This authorization rescinded all previous authorizations approved by the board of directors. Under the April 2005 program, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, including the projected parent company cash flow requirements and the Corporation’s share price. During 2005, 126,900 shares were repurchased under the repurchase program for an aggregate purchase price of $3.8 million. All such repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. As of December 31, 2005, 373,100 shares of common stock remain available for repurchase under the April 2005 authorization.

OUTLOOK

The Corporation’s philosophy is that it intends to be a “family” of community banks which operate under the direction of a corporate board of directors, subsidiary bank board of directors, a holding company and community bank management team, and a number of community bank advisory boards of directors. The Corporation remains committed to the communities it serves.

The Corporation strives to remain a quality sales and service organization and is dedicated to sustained profitability through the preservation of the community banking concept in an ever-changing and increasingly competitive environment.

The Corporation believes it has designed its policies regarding asset/liability management, liquidity, lending, investment strategy and expense control to provide for the safety and soundness of the organization, and future earnings growth.

25

MANAGEMENT’S DISCUSSION AND ANALYSIS

OTHER MATTERS

Forward Looking Statements

This discussion and analysis of financial condition and results of operations, and other sections of this Annual Report, contain forward-looking statements. Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “should,” “will,” variations of such words and similar expressions are intended to identify forward-looking statements. These statements reflect management’s current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Factors that could cause a difference include, among others: changes in the national and local economies or market conditions; changes in interest rates and banking laws and regulations; the impact of competition from traditional or new sources; and the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings and bank consolidations may not be fully realized at all or within the expected time frames. These and other factors that may emerge could cause decisions and actual results to differ materially from current expectations. Chemical undertakes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.

Important Notice Regarding Delivery of Shareholder Documents

As permitted by SEC rules, only one copy of Chemical’s Proxy Statement and the 2005 Annual Report to Shareholders is being delivered to multiple shareholders sharing the same address unless Chemical has received contrary instructions from one or more of the shareholders who share the same address. Chemical will deliver on a one-time basis, promptly upon written or verbal request from a shareholder at a shared address, a separate copy of Chemical’s Proxy Statement and the 2005 Annual Report to Shareholders. Requests should be made to Chemical Financial Corporation, Attn: Lori A. Gwizdala, Chief Financial Officer, 333 E. Main Street, Midland, Michigan 48640, telephone (989) 839-5350. Shareholders sharing an address who are currently receiving multiple copies of the Proxy Statement and Annual Report to Shareholders may instruct Chemical to deliver a single copy of such documents on an ongoing basis. Such instructions must be in writing, must be signed by each shareholder who is currently receiving a separate copy of the documents, must be addressed to Chemical Financial Corporation, Attn: Lori A. Gwizdala, Chief Financial Officer, 333 E. Main Street, Midland, Michigan 48640, telephone (989) 839-5350, and will continue in effect unless and until Chemical receives contrary instructions as provided below. Any shareholder sharing an address may request to receive and instruct Chemical to send separate copies of the Proxy Statement and Annual Report to Shareholders on an ongoing basis by written or verbal request to Chemical Financial Corporation, Attn: Lori A. Gwizdala, Chief Financial Officer, 333 E. Main Street, Midland, Michigan 48640, telephone (989) 839-5350. Chemical will begin sending separate copies of such documents within 30 days of receipt of such instructions.

26

MANAGEMENT REPORT

Management of the Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements and related information included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

In meeting its responsibility for the reliability of the consolidated financial statements, management develops and maintains effective internal controls, including those over financial reporting, as defined in the Securities and Exchange Act of 1934, as amended. The Corporation’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements.

Management assessed the Corporation’s internal control over financial reporting as it relates to its consolidated financial statements presented in conformity with U.S. generally accepted accounting principles as of December 31, 2005. The assessment was based on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that internal control over financial reporting is effective as it relates to the Corporation’s consolidated financial statements presented in conformity with U.S. generally accepted accounting principles as of December 31, 2005.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The consolidated financial statements as of December 31, 2005 have been audited by Ernst & Young LLP, an independent registered public accounting firm. The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require the independent public accountants to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements and whether effective internal control over financial reporting is maintained in all material respects. In addition, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, as stated in their report which is included herein.

David B. Ramaker	Lori A. Gwizdala
President and Chief	Executive Vice President,
Executive Officer	and Chief Financial Officer

February 24, 2006

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Chemical Financial Corporation

We have audited the accompanying consolidated statements of financial position of Chemical Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chemical Financial Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Chemical Financial Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 24, 2006

28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Chemical Financial Corporation

We have audited management’s assessment, included in the accompanying Management Report, that Chemical Financial Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Chemical Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Chemical Financial Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Chemical Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial position of Chemical Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Chemical Financial Corporation and our report dated February 24, 2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 24, 2006

29

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

			December 31
			2005			2004
			(In thousands, except share data)
ASSETS
Cash due from banks			$	145,575		$	106,565
Federal funds sold				6,600			34,500
Interest-bearing deposits with unaffiliated banks				5,321			5,869
Investment securities:
	Available for sale (at estimated market value)			594,491			696,771
	Held to maturity (estimated market value — $127,044 at December 31, 2005 and $177,587 at December 31, 2004)			127,806			176,517
		Total investment securities		722,297			873,288
Other securities				21,051			19,986
Loans				2,710,214			2,585,585
Allowance for loan losses				(34,148	)		(34,166	)
		Net loans		2,676,066			2,551,419
Premises and equipment				45,058			47,577
Intangible assets				71,496			74,421
Interest receivable and other assets				55,852			50,500
		TOTAL ASSETS	$	3,749,316		$	3,764,125
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Noninterest-bearing		$	542,014		$	555,287
	Interest-bearing			2,277,866			2,308,186
		Total deposits		2,819,880			2,863,473
Interest payable and other liabilities				28,008			28,986
Short-term borrowings				203,598			101,834
Federal Home Loan Bank advances — long-term				196,765			284,996
		Total liabilities		3,248,251			3,279,289
Shareholders’ equity:
	Common stock, $1 par value
		Authorized — 30,000,000 shares
		Issued and outstanding — 25,079,403 shares at December 31, 2005 and 25,168,548, shares at December 31, 2004		25,079			25,169
	Surplus			376,046			378,694
	Retained earnings			106,507			80,266
	Accumulated other comprehensive (loss) income			(6,567	)		707
		Total shareholders’ equity		501,065			484,836
		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,749,316		$	3,764,125

See notes to consolidated financial statements.

30

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME

		Years Ended December 31
		2005		2004		2003
		(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans		$	164,830	$	152,534	$	144,835
Interest on investment/other securities:
	Taxable		29,216		33,124		36,700
	Tax-exempt		2,153		2,104		2,518
	Total interest on securities		31,369		35,228		39,218
Interest on federal funds sold			2,121		1,077		749
Interest on deposits with unaffiliated banks			984		411		235
	TOTAL INTEREST INCOME		199,304		189,250		185,037
INTEREST EXPENSE
Interest on deposits			44,632		30,741		36,345
Interest on short-term borrowings			3,021		697		539
Interest on Federal Home Loan Bank advances — long-term			9,800		10,178		8,381
	TOTAL INTEREST EXPENSE		57,453		41,616		45,265
	NET INTEREST INCOME		141,851		147,634		139,772
Provision for loan losses			4,285		3,819		2,834
	NET INTEREST INCOME after provision for loan losses		137,566		143,815		136,938
NONINTEREST INCOME
Service charges on deposit accounts			20,371		19,301		16,935
Trust and investment services revenue			7,909		7,396		6,794
Other charges and fees for customer services			7,883		6,595		6,605
Mortgage banking revenue			1,663		3,328		6,954
Net gains on sales of investment securities			541		1,367		1,296
Other			853		1,342		510
	TOTAL NONINTEREST INCOME		39,220		39,329		39,094
OPERATING EXPENSES
Salaries, wages and employee benefits			56,766		57,497		54,446
Occupancy			9,421		9,165		7,921
Equipment			8,867		8,955		8,045
Other			23,409		22,852		21,511
	TOTAL OPERATING EXPENSES		98,463		98,469		91,923
	INCOME BEFORE INCOME TAXES		78,323		84,675		84,109
Provision for federal income taxes			25,445		27,993		28,393
	NET INCOME	$	52,878	$	56,682	$	55,716
NET INCOME PER SHARE
	Basic	$	2.10	$	2.26	$	2.24
	Diluted		2.10		2.25		2.23
CASH DIVIDENDS PER SHARE			1.06		1.01		0.95

See notes to consolidated financial statements.

31

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

		Years Ended December 31, 2005, 2004 and 2003
											Accumulated
											Other
		Common						Retained			Comprehensive
(In thousands, except per share data)		Stock			Surplus			Earnings			Income (Loss)			Total
BALANCES AT JANUARY 1, 2003		$	23,684		$	325,149		$	62,721		$	18,785		$	430,339
Comprehensive income:
	Net income for 2003								55,716
	Net unrealized losses on securities available for sale, net of tax benefit of $3,884											(7,215	)
	Reclassification adjustment for realized net gains included in net income, net of tax expense of $454											(842	)
Comprehensive income															47,659
Cash dividends paid of $0.95 per share									(23,691	)					(23,691	)
Shares issued — stock options			162			4,909									5,071
Shares issued — directors’ stock purchase plan			7			175									182
Repurchase of shares			(52	)		(1,459	)								(1,511	)
BALANCES AT DECEMBER 31, 2003			23,801			328,774			94,746			10,728			458,049
Stock dividend — 5%; declared December 2004, paid January 2005			1,199			44,584			(45,783	)
Comprehensive income:
	Net income for 2004								56,682
	Net unrealized losses on securities available for sale, net of tax benefit of $4,918											(9,132	)
	Reclassification adjustment for realized net gains included in net income, net of tax expense of $478											(889	)
Comprehensive income															46,661
Cash dividends paid of $1.01 per share									(25,379	)					(25,379	)
Shares issued — stock options			162			5,124									5,286
Shares issued — directors’ stock purchase plan			7			212									219
BALANCES AT DECEMBER 31, 2004			25,169			378,694			80,266			707			484,836
Comprehensive income:
	Net income for 2005								52,878
	Net unrealized losses on securities available for sale, net of tax benefit of $3,728											(6,922	)
	Reclassification adjustment for realized net gains included in net income, net of tax expense of $189											(352	)
Comprehensive income															45,604
Cash dividends paid of $1.06 per share									(26,637	)					(26,637	)
Shares issued — stock options			31			847									878
Shares issued — directors’ stock purchase plan			6			225									231
Repurchase of shares			(127	)		(3,720	)								(3,847	)
BALANCES AT DECEMBER 31, 2005		$	25,079		$	376,046		$	106,507		$	(6,567	)	$	501,065

See notes to consolidated financial statements.

32

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Years Ended December 31
			2005			2004			2003
			(In thousands)
OPERATING ACTIVITIES
Net income			$	52,878		$	56,682		$	55,716
Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses		4,285			3,819			2,834
		Gains on sales of loans		(1,048	)		(2,125	)		(6,426	)
		Proceeds from sales of loans		110,430			158,453			413,212
		Loans originated for sale		(110,856	)		(153,458	)		(380,325	)
		Net gains on sales of investment securities		(541	)		(1,367	)		(1,296	)
		Net loss on sales of other real estate and repossessed assets		396			363			112
		Gain on sale of branch office and insurance book of business		—			(553	)		—
		Depreciation of fixed assets		6,041			6,215			5,461
		Amortization of intangible assets		3,273			3,810			3,779
		Net amortization of investment securities		4,161			9,449			12,225
		Mortgage servicing rights impairment recovery		—			(793	)		—
		Deferred income tax provision		67			1,115			3,292
		Net (increase) decrease in interest receivable and other assets		(1,392	)		4,674			(9,833	)
		Net increase (decrease) in interest payable and other liabilities		(497	)		(5,044	)		2,561
	NET CASH PROVIDED BY OPERATING ACTIVITIES			67,197			81,240			101,312
INVESTING ACTIVITIES
Bank acquisitions, net of cash assumed				—			—			(46,583	)
Net cash outflow from sale of branch office				—			(5,738	)		—
Securities available for sale:
	Proceeds from maturities, calls and principal reductions			208,602			247,081			284,859
	Proceeds from sales			114,341			101,574			122,673
	Purchases			(234,940	)		(358,146	)		(282,518	)
Securities held to maturity:
	Proceeds from maturities, calls and principal reductions			90,524			94,133			181,113
	Purchases			(42,616	)		(79,022	)		(108,834	)
Other securities:
	Proceeds from sales			—			393			—
	Purchases			(1,065	)		(1,541	)		—
Net increase in loans				(134,716	)		(117,998	)		(250,934	)
Proceeds from sales of other real estate and repossessed assets				6,406			6,498			3,302
Purchases of premises and equipment, net				(3,522	)		(4,189	)		(9,881	)
	NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			3,014			(116,955	)		(106,803	)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing and interest-bearing demand deposits and savings accounts				(166,522	)		(48,614	)		98,241
Net increase (decrease) in time deposits				122,929			(49,085	)		(149,449	)
Net increase (decrease) in securities sold under agreements to repurchase				23,764			10,403			(23,288	)
Net increase in reverse repurchase agreements				10,000			—			—
Increase in Federal Home Loan Bank (FHLB) advances — short-term				108,000			10,000			—
Repayment of FHLB advances — short-term				(40,000	)		(10,000	)		—
Increase in FHLB advances — long-term				35,000			150,000			—
Repayment of FHLB advances — long-term				(123,231	)		(20,377	)		(9,020	)
Cash dividends paid				(26,637	)		(25,379	)		(23,691	)
Proceeds from directors’ stock purchase plan				231			219			182
Proceeds from exercise of stock options				664			3,291			5,071
Repurchases of common stock				(3,847	)		—			(1,511	)
	NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(59,649	)		20,458			(103,465	)
	NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			10,562			(15,257	)		(108,956	)
	Cash and cash equivalents at beginning of year			146,934			162,191			271,147
CASH AND CASH EQUIVALENTS AT END OF YEAR			$	157,496		$	146,934		$	162,191
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid			$	56,114		$	41,566		$	46,128
Federal income taxes paid				24,660			27,540			23,870
Loans transferred to other real estate and repossessed assets				7,258			7,986			4,620

See notes to consolidated financial statements.

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

The accounting and reporting policies of Chemical Financial Corporation (Corporation) and its subsidiaries conform to United States generally accepted accounting principles and prevailing practices within the banking industry. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from these estimates. Significant accounting policies of the Corporation and its subsidiaries are described below:

Basis of Presentation and Principles of Consolidation:

The consolidated financial statements of the Corporation include the accounts of the parent company and its subsidiaries, all of which are wholly-owned. Subsidiaries include Chemical Bank, CFC Financial Services, Inc. and CFC Title Services, Inc. On December 31, 2005, Chemical Bank Shoreline and Chemical Bank West, wholly-owned subsidiaries of the Corporation, were merged into Chemical Bank and Trust Company (CBT). As of this date, CBT was renamed Chemical Bank and became the sole bank subsidiary of the Corporation. All significant income and expenses are recorded on the accrual basis. Intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements.

The Corporation consolidates variable interest entities (VIE’s) in which it is the primary beneficiary. In general, a VIE is an entity that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. If any of these characteristics is present, the entity is subject to a variable interests consolidation model, and consolidation is based on variable interests, not on ownership of the entity’s outstanding voting stock. Variable interests are defined as contractual, ownership, or other money interests in an entity that change with fluctuations in the entity’s net asset value. The primary beneficiary consolidates the VIE; the primary beneficiary is defined as the enterprise that absorbs a majority of expected losses or receives a majority of residual returns (if the losses or returns occur), or both.

The Corporation is a significant limited partner in one low income housing tax credit partnership that was acquired in 2001 as part of the merger with Shoreline Financial Corporation. This entity meets the Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities,” definition of a VIE. The Corporation is not the primary beneficiary of the VIE it holds an interest in, and therefore the equity investment in the VIE is not consolidated in the financial statements. Exposure to loss as a result of its involvement with this entity at December 31, 2005 was limited to approximately $1.74 million of the book basis of the Corporation’s investment, which includes unfunded obligations to this project of $1.37 million. The Corporation’s investment in the project was recorded in other assets and the future financial obligation to this project was recorded in other liabilities at December 31, 2005.

Reclassifications:

Certain amounts in the 2004 and 2003 consolidated financial statements and notes thereto have been reclassified to conform with the 2005 presentation. Such reclassifications had no impact on shareholders’ equity or net income.

Cash and Cash Equivalents:

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from unaffiliated banks and federal funds sold. Generally, federal funds are sold for one-day periods.

Investment Securities:

Investment securities include investments in debt securities and certain equity securities with readily determinable fair values. Investment securities are accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). SFAS 115 requires investments to be classified within one of three categories, trading, held to maturity, or available for sale, based on the type of security and management’s intent with regard to selling the security. The Corporation held no trading investment securities during the three-year period ended December 31, 2005.

Designation as an investment security held to maturity is made at the time of acquisition and is based on the Corporation’s intent and ability to hold the security to maturity. Investment securities held to maturity are stated at cost, adjusted for the amortization of premium and accretion of discount to maturity.

Investment securities that are not held to maturity are accounted for as securities available for sale, and are stated at estimated fair value, with the aggregate unrealized gains and losses, not deemed other-than-temporary, classified as a component of accumulated other comprehensive income, net of income taxes. Realized gains and losses on the sale of investment securities available for sale and other-than-

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

temporary impairment changes, are determined using the specific identification method and are included within noninterest income in the consolidated statements of income. Premiums and discounts on investment securities available for sale are amortized over the estimated lives of the related investment securities.

Other Securities:

Other securities consisted of Federal Home Loan Bank of Indianapolis (FHLB) stock of $19.8 million and $18.7 million at December 31, 2005 and 2004, respectively, and Federal Reserve Bank (FRB) stock of $1.3 million at December 31, 2005 and 2004, respectively. Other securities are recorded at cost, or par, which is deemed to be the net realizable value of these assets. The Corporation is required to own FHLB stock and FRB stock in accordance with its membership in these organizations. As of December 31, 2005, the Corporation held $6.5 million in FHLB stock in excess of its membership requirement. The FHLB requires its members to provide a five-year advance notice of any request to redeem FHLB stock. All transactions in the capital stock of the FHLB are executed at par.

Loans:

Loans are stated at their principal amount outstanding. Loan origination and commitment points are deferred. The amount deferred is reported as part of loans and is recognized as interest income over the term of the loan as a yield adjustment.

Loan performance is reviewed regularly by loan review personnel, loan officers and senior management. Loan interest income is recognized on the accrual basis. The past-due status of a loan is based on the loan’s contractual terms. A loan is placed in the nonaccrual category when principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection, or earlier when, in the opinion of management, there is sufficient reason to doubt the collectibility of future principal or interest. Interest previously accrued, but not collected, is reversed and charged against interest income at the time the loan is placed in nonaccrual status. The subsequent recognition of interest income on a nonaccrual loan is then recognized only to the extent cash is received and where future collection of principal is probable. Loans are returned to accrual status when principal and interest payments are brought current and collectibility is no longer in doubt. Interest income on restructured loans is recognized according to the terms of the restructure, subject to the above described nonaccrual policy.

Nonperforming loans are comprised of those loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more as to interest or principal payments, and other loans for which the terms have been restructured to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower.

All nonaccrual commercial, real estate commercial and real estate construction-commercial loans are considered impaired loans by the Corporation. A loan is defined to be impaired when it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral, if the loan is collateral dependent. A portion of the allowance for loan losses may be allocated to impaired loans. All nonaccrual commercial loans, real estate commercial loans and real estate construction-commercial loans are evaluated individually to determine whether or not an impairment allowance is required.

Mortgage loans held for sale are carried at the lower of aggregate cost or market. The market value of loans held for sale is based on forward commitments to sell the loans in the secondary market. The value of mortgage loans held for sale and other residential mortgage loan commitments are hedged by utilizing best efforts forward commitments to sell loans to investors in the secondary market. Such forward commitments are generally entered into at the time when applications are taken to protect the value of the mortgage loans from increases in interest rates during the period held. Mortgage loans originated are generally sold within a period of 30 to 45 days after closing; therefore, the related fees and costs are not amortized during that period. Mortgage loans held for sale were $3.5 million and other residential mortgage loan commitments were $5.2 million, at December 31, 2005.

Allowance for Loan Losses:

The allowance for loan losses (allowance) represents management’s assessment of probable losses inherent in the Corporation’s loan portfolio. The Corporation maintains formal policies and procedures to monitor and control credit risk. Management’s evaluation of the adequacy of the allowance is based on a continuing review of the loan portfolio, actual loan loss experience, risk characteristics of the loan portfolio, the level and composition of nonperforming loans, the financial condition of the borrowers, balance of the loan portfolio, loan growth, economic conditions, employment levels of the

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35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES (CONTINUED)

Corporation’s local markets, and special factors affecting specific business sectors.

The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified. Internal risk ratings are assigned to each commercial, real estate commercial and real estate construction-commercial loan at the time of approval and are subject to subsequent periodic reviews by senior management. The Corporation performs a detailed credit quality review quarterly on all large loans that have deteriorated below certain levels of credit risk, and may allocate a specific portion of the allowance to such loans based upon this review. A portion of the allowance is allocated to the remaining loans by applying projected loss ratios, based on numerous factors. Projected loss ratios incorporate factors such as recent charge-off experience, trends with respect to adversely risk rated commercial, real estate commercial and real estate construction-commercial loans, trends with respect to past due and nonaccrual amounts and current economic conditions and trends, and are supported by underlying analysis. This evaluation involves a high degree of uncertainty.

Management maintains an unallocated allowance to recognize the uncertainty and imprecision underlying the process of estimating probable loan losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocation methodology discussed above, involve the exercise of judgment. The unallocated allowance associated with the imprecision in the risk rating system is based on a historical evaluation of the accuracy of the risk ratings associated with loans.

While the Corporation uses relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

Although the Corporation periodically allocates portions of the allowance to specific loans and loan portfolios, the entire allowance is available for any loan losses that occur. Collection efforts may continue and recoveries may occur after a loan is charged-off against the allowance.

Loans which are deemed uncollectible are charged-off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged-off are added to the allowance. The allowance for loan losses is presented as a reserve against loans.

The Corporation’s policy is to maintain an allowance to cover probable credit losses inherent in lending-related commitments, including commitments to extend credit, letters of credit and guarantees. This allowance is included in “interest payable and other liabilities” on the consolidated statements of financial position, with the corresponding charge reflected in “other” operating expenses on the consolidated statements of income.

Mortgage Banking Operations:

The origination of mortgage loans is an integral component of the business of the Corporation. The Corporation generally sells its originations of long-term fixed interest rate residential mortgage loans in the secondary market. Gains and losses on the sales of loans are determined using the specific identification method. Long-term fixed interest rate residential mortgage loans originated for sale are generally held for 30 days or less. The Corporation sells mortgage loans in the secondary market on either a servicing retained or released basis. Loans held for sale are carried at the lower of cost or market on an aggregate basis.

The Corporation accounts for mortgage servicing rights in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS 140). SFAS 140 requires that an asset be recognized for the rights to service mortgage loans, including those rights that are created by the origination of mortgage loans that are sold with the servicing rights retained by the originator. The recognition of the asset results in an increase in the gains recognized upon the sale of the mortgage loans sold. The Corporation amortizes mortgage servicing rights in proportion to, and over the life of, the estimated net future servicing income and performs a periodic evaluation of the fair market value of the mortgage servicing rights. Prepayments of mortgage loans result in increased amortization of mortgage servicing rights as the remaining book value of the mortgage servicing right is expensed at the time of prepayment. Any impairment of mortgage servicing rights is recognized as a valuation allowance, resulting in a reduction of mortgage banking revenue. The valuation allowance is recovered when impairment no longer exists. For purposes of measuring impairment, the Corporation utilizes a third-party modeling software program, which stratifies capitalized mortgage servicing rights by interest rate, term and loan type. Servicing income is recognized in noninterest income when received and expenses are recognized when incurred.

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premises and Equipment:

Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated over the estimated useful lives of the assets. Depreciation is computed on the straight-line method. The estimated useful lives are generally 25 to 39 years for buildings and three to ten years for equipment.

Other Real Estate:

Other real estate (ORE) is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. ORE obtained in satisfaction of a loan is recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loan losses. Subsequent changes in value are recorded as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Changes in the value subsequent to transfer are recorded in operating expenses on the consolidated statements of income. Gains or losses not previously recognized resulting from the sale of ORE are recognized in operating expense on the date of sale. Other real estate totaling $6.4 million and $6.3 million at December 31, 2005 and 2004, respectively, is included in other assets in the consolidated statements of financial position.

Intangible Assets:

Intangible assets consist of goodwill, core deposit and other intangibles, and mortgage servicing rights. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill is no longer amortized, but is subject to annual impairment tests in accordance with SFAS 142. Other intangible assets continue to be amortized over their useful lives. Core deposit and other intangible assets are amortized over periods ranging from three to 15 years on a straight-line or accelerated basis, as applicable.

Unconsolidated Investments:

Investments that are not consolidated are accounted for using either the equity method or the cost method. The equity method is used for investments in a corporate joint venture and investments where the Corporation has the ability to exercise significant influence over the investee’s operations and financial policies, which is generally presumed to exist if the Corporation owns more than 20% of the voting interest of the investee. Equity method investments are included in “interest receivable and other assets” on the consolidated statements of financial position, with income and losses recorded on the consolidated statements of income. Unconsolidated equity investments that do not meet the criteria to be accounted for under the equity method are accounted for under the cost method. Cost method investments in publicly traded companies are included in “investment securities available for sale” on the consolidated statements of financial position. Cost method investments in non-publicly traded companies are included in “other securities” and “interest receivable and other assets” on the consolidated statements of financial position, with income distributions recorded in “interest on investment/other securities” and write-downs recorded in “other” operating expenses on the consolidated statements of income.

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 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 employee 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. The Corporation has elected to provide pro forma disclosures for net income and earnings per share as if it had adopted the fair value accounting method for stock-based compensation. The stock-based compensation plans are described more fully in Note O.

Short-term Borrowings:

Short-term borrowings include securities sold under agreements to repurchase, reverse repurchase agreements and short-term FHLB advances. These borrowings have original scheduled maturities of one year or less. Securities sold under agreements to repurchase represent amounts advanced by customers that are secured by investment securities owned by the Corporation’s subsidiary bank, as they are not covered by Federal Deposit Insurance Corporation (FDIC) insurance. Reverse repurchase agreements are a means of raising funds in the capital markets by providing specific securities as collateral. See the description of FHLB advances below.

37

continued on next page

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES (CONTINUED)

Federal Home Loan Bank Advances, Short-term and Long-term:

FHLB advances are borrowings from the FHLB to fund loans and a portion of the investment securities portfolio. These advances are secured under a blanket security agreement by first residential mortgage loans with an aggregate book value equal to at least 145% of the advances.

Pension and Postretirement Benefit Plan Actuarial Assumptions:

The Corporation’s pension benefit and postretirement benefit obligations and related costs are calculated using actuarial concepts and measurements within the framework of Statement of Financial Accounting Standards No. 87, “Employer’s Accounting for Pensions” (SFAS 87) and Statement of Financial Accounting Standards No. 106, “Employer’s Accounting for Postretirement Benefits Other than Pensions” (SFAS 106), respectively. Three critical assumptions, the discount rate, the expected return on plan assets and the rate of compensation increase are important elements of expense and/or liability measurement. Other assumptions involve employee demographic factors such as retirement patterns, mortality and turnover. The Corporation evaluates the critical and other assumptions annually.

The discount rate enables the Corporation to state expected future benefit payments as a present value on the measurement date. As of December 31, 2005 and 2004, the Corporation utilized the results from a bond matching technique to match cash flows of the defined benefit pension plan against both a bond portfolio derived from the S&P bond database of AA or better bonds and the Citigroup Pension Discount Curve to determine the discount rate. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement benefit expense. The Corporation decreased the discount rate used to determine benefit obligations to 5.60% at December 31, 2005 from 5.75% at December 31, 2004 to reflect market interest rate conditions.

To determine the expected long-term rate of return on the plan assets, the Corporation considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets will increase pension expense. The long-term expected return on plan assets was 8.00% in 2005, 2004 and 2003. See Note I to the consolidated financial statements.

The rate of compensation increase is the Corporation’s expected average annual percentage increase in employees’ future salaries.

Income and Other Taxes:

The Corporation is subject to the income and other tax laws of the United States and the state of Michigan. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provision for income taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations, and case law. In the process of preparing the Corporation’s tax returns, management attempts to make reasonable interpretations of the tax laws. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving case law.

The Corporation and its subsidiaries file a consolidated federal income tax return. The provision for federal income taxes is based on income and expenses, as reported in the consolidated financial statements, rather than amounts reported on the Corporation’s federal income tax return. When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

On a quarterly basis, management assesses the reasonableness of its effective federal and state tax rates based upon its current best estimate of net income and the applicable taxes expected for the full year. Deferred tax assets and liabilities are reassessed on an annual basis, or sooner, if business events or circumstances warrant. Reserves for contingent tax liabilities are reviewed quarterly for adequacy based upon developments in tax law and the status of examinations of audits.

Earnings Per Share:

Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (SFAS 128). All earnings per share amounts for all periods presented conform to the requirements of SFAS 128, including the effects of stock dividends. Basic earnings per share for the Corporation is computed by dividing net income by the weighted average number of common shares outstanding

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

during the period. 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 common stock equivalents outstanding during the period.

The Corporation’s common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation’s stock option plans, using the treasury stock method. The following table summarizes the numerator and denominator of the basic and diluted earnings per share computations for the years ended December 31:

	2005		2004		2003
	(In thousands)
Numerator for both basic and diluted earnings per share, net income	$	52,878	$	56,682	$	55,716
Denominator for basic earnings per share, weighted average shares outstanding		25,138		25,130		24,878
Average common stock equivalents		55		88		66
Denominator for diluted earnings per share		25,193		25,218		24,944

Comprehensive Income:

Comprehensive income of the Corporation includes net income and an adjustment to equity for unrealized gains and losses on investment securities available for sale, net of income taxes, as required under Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130). The Corporation displays comprehensive income as a component in the consolidated statements of changes in shareholders’ equity.

Operating Segment:

It is management’s opinion that the Corporation operates in a single operating segment — commercial banking. The Corporation is a financial holding company that historically operated three commercial banks and operates a title insurance company and an insurance subsidiary, each as a separate direct subsidiary of the Corporation. On December 31, 2005, a corporate restructuring was completed resulting in the consolidation of the Corporation’s three commercial bank charters into one commercial bank subsidiary, Chemical Bank. The Corporation’s three commercial bank subsidiaries operated as community banks and offered a full range of commercial banking and fiduciary products and services to the residents and business customers in their geographical market areas. The Corporation’s sole banking subsidiary, Chemical Bank, will continue to operate through an organizational structure of community banks. The products and services offered by Chemical Bank, through branch banking offices, are generally consistent throughout the Corporation, as generally is the pricing of these products and services. Chemical Bank branch banking offices operate exclusively within the state of Michigan. The marketing of products and services by Chemical Bank’s branch offices is generally uniform. The distribution of products and services is uniform throughout the Corporation and is achieved primarily through retail branch banking offices, automated teller machines and electronically accessed banking products.

The Corporation’s primary sources of revenue are from its loan products and investment securities.

The following table summarizes the Corporation’s revenue from its specific loan products for the years ended December 31:

		2005		2004		2003
		(In thousands)
Interest income and fee revenue:
	Commercial	$	32,175	$	26,418	$	21,088
	Real estate commercial		46,869		42,066		35,173
	Real estate construction		8,911		7,249		6,649
	Real estate residential		43,498		44,166		47,289
	Consumer		33,377		32,635		34,636
Total		$	164,830	$	152,534	$	144,835

Common Stock:

All per share data and share amounts included in the consolidated financial statements and in the related notes thereto have been retroactively adjusted to reflect stock dividends paid on January 28, 2005 and January 24, 2003.

Recent Accounting Pronouncements:

Share-Based Payments: On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (SFAS 123(R)), which is a revision of SFAS 123. SFAS 123(R) supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of income based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS 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 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards

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39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES (CONTINUED)

	granted to employees prior to the effective date of SFAS 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 recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

SFAS 123(R) must be adopted by January 1, 2006. The Corporation will adopt the modified prospective method of SFAS 123(R) on January 1, 2006.

In addition, the FASB issued FASB Staff Position (FSP) 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” on November 10, 2005. FSP 123(R)-3 provides an elective short-cut approach to the calculation of the allocation of additional paid-in-capital to the beginning pool of tax benefits when a company transitions to SFAS 123(R). FSP 123(R)-3 provides for an entity to take up to one year from its initial adoption of SFAS 123(R) to adopt it. At December 31, 2005, the Corporation had not made a decision whether it would adopt FSP 123(R)-3.

As permitted by SFAS 123, the Corporation currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 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 future impact of adoption of SFAS 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 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note O to the consolidated financial statements. The amount of stock-based compensation expense to be incurred in future periods will be reduced by the Corporation’s acceleration of certain unvested and “out-of-the-money” stock options in 2005 as disclosed in Note O to the consolidated financial statements. SFAS 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 periods for such excess tax deductions were $0.2 million, $0.6 million and $0.5 million in 2005, 2004 and 2003, respectively.

Meaning of Other-Than-Temporary Impairment: On November 3, 2005, the FASB issued FSP 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP is effective for reporting periods beginning after December 15, 2005, and addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance in FSP 115-1 amends FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP 115-1 also replaces the impairment evaluation guidance (paragraphs 10-18) of Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other than Temporary Impairment and Its Application to Certain Investments” (EITF 03-1) and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The disclosure requirements of EITF 03-1 remain in effect and are applicable for 2005 year-end reporting for the Corporation.

FSP 115-1 clarifies 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 an impaired security has not been made. The adoption of FSP 115-1 is not expected to have a material effect on the Corporation’s financial position, results of operations, or liquidity.

Accounting Changes and Error Corrections: In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” (SFAS 154), which changes the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principles and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective application to prior period financial statements of changes effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard is not

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expected to have a material effect on the Corporation’s financial position, results of operations, or liquidity.

NOTE B — MERGERS AND ACQUISITIONS

During the three years ended December 31, 2005, the Corporation completed the following mergers and acquisitions:

On December 31, 2005, the Corporation completed an organizational restructuring whereby its two wholly-owned bank subsidiaries, Chemical Bank Shoreline and Chemical Bank West, were merged into Chemical Bank and Trust Company (CBT). As of this date, CBT’s name was changed to Chemical Bank. In October 2005, the Corporation’s public announcement of this restructuring estimated that it would incur approximately $1 million in costs to complete the reorganization. The Corporation incurred $0.2 million of these costs in the fourth quarter of 2005 and expects to incur the remaining $0.8 million of restructuring costs during the first six months of 2006. The organizational restructuring costs incurred in 2005 are included in operating expenses in the consolidated statement of income.

The Corporation acquired Caledonia Financial Corporation (Caledonia), a one-bank holding company headquartered in Caledonia, Michigan, on December 1, 2003. As of that date, Caledonia had total assets of $211 million, net loans of $184 million, total deposits of $171 million and shareholders’ equity of $22.3 million. Shareholders of Caledonia received $39.00 cash for each share of Caledonia common stock in a taxable transaction. The total value of the transaction was approximately $56.8 million, of which $52.3 million was paid in cash and $4.5 million represented the value of stock options. The purchase price represented a premium over book value of $34.5 million. The acquisition was accounted for by the purchase method; therefore, the financial results of Caledonia were included from the acquisition date, with no restatement of prior period amounts.

On September 30, 2003, the Corporation consolidated CFC Data Corp, its wholly-owned data processing subsidiary, into the parent.

NOTE C — INVESTMENT SECURITIES

The following is a summary of the amortized cost and estimated market value of investment securities available for sale and investment securities held to maturity at December 31, 2005 and 2004 (in thousands):

Investment Securities Available for Sale:

				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Market
December 31, 2005		Cost		Gains		Losses		Value
U.S. Treasury and agency securities		$	268,355	$	8	$	4,528	$	263,835
States and political subdivisions			9,097		274		1		9,370
Mortgage-backed securities			303,379		378		5,946		297,811
Collateralized mortgage obligations			1,060		21		2		1,079
Corporate bonds			21,851		1		308		21,544
	Total debt securities		603,742		682		10,785		593,639
Equity securities			852		—		—		852
Total		$	604,594	$	682	$	10,785	$	594,491

December 31, 2004
U.S. Treasury and agency securities		$	348,746	$	1,945	$	1,672	$	349,019
States and political subdivisions			12,983		553		3		13,533
Mortgage-backed securities			282,908		1,541		2,012		282,437
Collateralized mortgage obligations			1,432		28		1		1,459
Corporate bonds			48,678		230		162		48,746
	Total debt securities		694,747		4,297		3,850		695,194
Equity securities			935		642		—		1,577
Total		$	695,682	$	4,939	$	3,850	$	696,771

Investment Securities Held to Maturity:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
December 31, 2005	Cost		Gains		Losses		Value
U.S. Treasury and agency securities	$	79,327	$	11	$	1,199	$	78,139
States and political subdivisions		47,438		486		116		47,808
Mortgage-backed securities		1,041		56		—		1,097
Total	$	127,806	$	553	$	1,315	$	127,044

December 31, 2004
U.S. Treasury and agency securities	$	141,622	$	553	$	534	$	141,641
States and political subdivisions		31,221		961		18		32,164
Mortgage-backed securities		1,419		108		—		1,527
Other debt securities		2,255		—		—		2,255
Total	$	176,517	$	1,622	$	552	$	177,587

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C — INVESTMENT SECURITIES (CONTINUED)

The amortized cost and estimated market value of debt and equity securities at December 31, 2005, by contractual maturity for both available for sale and held to maturity investment securities follows:

Investment Securities Available for Sale:

	December 31, 2005
			Estimated
	Amortized		Market
	Cost		Value
	(In thousands)
Due in one year or less	$	64,109	$	63,691
Due after one year through five years		227,203		222,886
Due after five years through ten years		7,095		7,271
Due after ten years		896		901
Mortgage-backed securities		303,379		297,811
Collateralized mortgage obligations		1,060		1,079
Equity securities		852		852
Total	$	604,594	$	594,491

Investment Securities Held to Maturity:

	December 31, 2005
			Estimated
	Amortized		Market
	Cost		Value
	(In thousands)
Due in one year or less	$	44,212	$	44,066
Due after one year through five years		55,086		54,193
Due after five years through ten years		15,482		15,659
Due after ten years		11,985		12,029
Mortgage-backed securities		1,041		1,097
Total	$	127,806	$	127,044

Investment securities with a book value of $361.4 million at December 31, 2005 were pledged to collateralize public fund deposits and for other purposes as required by law; at December 31, 2004, the corresponding amount was $362.6 million.

The Corporation recognized net gains on investment securities of $0.54 million during 2005, net gains of $1.37 million in 2004 and net gains of $1.30 million in 2003. Gross gains on securities transactions were $1.18 million, $1.39 million and $1.34 million during the years ended December 31, 2005, 2004 and 2003, respectively. Gross losses on securities transactions during the years ended December 31, 2005, 2004 and 2003 were $0.64 million, $0.02 million and $0.04 million, respectively. Investment securities gains realized in 2005 were partially offset by investment securities losses realized during the fourth quarter of 2005. Historically, the Corporation has not sold investment securities at a loss. During the fourth quarter of 2005, the Corporation sold $36 million of U.S. government agency investment securities to take advantage of the relative favorable yield spread between the mortgage-backed securities market and the U.S. government agency market and adjust the investment securities portfolio allocation. In addition, this transaction reduced the reinvestment risk associated with the level of investment securities maturing in 2006 and 2007. The investment securities sold had an average yield of 2.48% and the Corporation realized a $0.63 million investment securities loss. The proceeds from the sale were reinvested in mortgage-backed securities with an average life of 4.4 years and an average yield of 5.3%.

An analysis is performed quarterly by the Corporation to determine whether unrealized losses in its investment securities portfolio are temporary or other-than-temporary. The Corporation reviews factors such as financial statements, credit ratings, news releases and other pertinent information of the underlying issuer or company to make its determination. Management does not believe any individual unrealized loss as of December 31, 2005 represents an other-than-temporary impairment. Management believes that the unrealized losses on investment securities are temporary in nature and due primarily to changes in interest rates and not as a result of credit related issues. The Corporation has both the intent and ability to hold the investment securities with unrealized losses to maturity or until such time as the unrealized losses recover.

The Corporation did not have a trading portfolio during the three years ended December 31, 2005.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the age of gross unrealized losses and estimated market value by investment category.

	December 31, 2005
	Less Than 12 Months				12 Months or More				Total
	Estimated		Estimated		Estimated		Estimated		Estimated		Estimated
	Gross		Gross		Gross		Gross		Gross		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
U.S. Treasury and agency securities	$	131,577	$	1,379	$	182,344	$	4,347	$	313,921	$	5,726
States and political subdivisions		7,058		74		1,904		44		8,962		118
Mortgage-backed securities		101,585		1,286		148,378		4,660		249,963		5,946
Collateralized mortgage obligations		4		—		320		2		324		2
Corporate bonds		5,387		49		16,006		259		21,393		308
Total	$	245,611	$	2,788	$	348,952	$	9,312	$	594,563	$	12,100

	December 31, 2004
	Less Than 12 Months				12 Months or More				Total
	Estimated		Estimated		Estimated		Estimated		Estimated		Estimated
	Gross		Gross		Gross		Gross		Gross		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
U.S. Treasury and agency securities	$	207,352	$	1,731	$	32,032	$	475	$	239,384	$	2,206
States and political subdivisions		3,062		21		—		—		3,062		21
Mortgage-backed securities		190,999		1,987		6,357		25		197,356		2,012
Collateralized mortgage obligations		182		1		265		—		447		1
Corporate bonds		17,505		147		1,132		15		18,637		162
Total	$	419,100	$	3,887	$	39,786	$	515	$	458,886	$	4,402

NOTE D — SECONDARY MARKET

MORTGAGE ACTIVITY

For the three years ended December 31, 2005, activity for capitalized mortgage servicing rights was as follows:

	2005			2004			2003
	(In thousands)
Mortgage Servicing Rights:
Beginning of year	$	3,197		$	3,264		$	2,495
Additions		347			677			1,960
Addition from bank acquisition		—			—			705
Amortization		(1,121	)		(1,537	)		(1,896	)
Impairment recovery		—			793			—
End of year	$	2,423		$	3,197		$	3,264
Loans serviced for others that have capitalized servicing rights	$	544,112		$	596,390		$	633,029

The Corporation assumed $114 million of loans serviced for others in the Caledonia acquisition during 2003.

The activity in the valuation allowance for capitalized mortgage servicing rights during the three years ended December 31, 2005 follows:

	2005		2004			2003
	(In thousands)
Valuation allowance, beginning of year	$	—	$	793		$	793
Impairment provision		—		—			—
Impairment recovery		—		(793	)		—
Valuation allowance, end of year	$	—	$	—		$	793

The fair value of capitalized mortgage servicing rights (MSRs) was estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration the expected prepayment rates, discount rates, servicing costs and other economic factors which are based on current market conditions. The prepayment speed and the discount rate are the most significant factors affecting the MSR valuation. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. Expected loan prepayment rates are validated by a third-party model. At December 31, 2005, the weighted average constant prepayment rate used was 15% and the discount rate was 8%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D — SECONDARY MARKET

MORTGAGE ACTIVITY (CONTINUED)

During 2005 and 2004, the Corporation did not record an impairment provision as there was no decline in the estimated fair value of MSRs compared to the recorded book value. During 2004, the Corporation recovered the impairment valuation allowance of $0.79 million, as the estimated fair value of the MSRs at December 31, 2004 exceeded the book value (original cost less accumulated amortization) of MSRs.

NOTE E — LOANS

The following summarizes loans as of December 31:

	2005		2004
	(In thousands)
Commercial	$	517,852	$	468,970
Real estate commercial		704,684		697,779
Real estate construction		158,376		120,900
Real estate residential		788,679		760,834
Consumer		540,623		537,102
Total loans	$	2,710,214	$	2,585,585

The Corporation’s subsidiary bank has extended loans to its directors, executive officers and their affiliates. The aggregate loans outstanding to the directors, executive officers and their affiliates totaled approximately $54.3 million at December 31, 2005 and $42.6 million at December 31, 2004. During 2005, there were approximately $35.6 million of new loans and other additions, while repayments and other reductions totaled approximately $23.9 million.

Loans held for sale were $3.5 million at December 31, 2005, $2.1 million at December 31, 2004 and $4.9 million at December 31, 2003.

Changes in the allowance for loan losses were as follows for the years ended December 31:

		2005			2004			2003
		(In thousands)
Balance at beginning of year		$	34,166		$	33,179		$	30,672
Loan charge-offs			(4,986	)		(3,963	)		(4,071	)
Loan recoveries			683			1,131			719
	Net loan charge-offs		(4,303	)		(2,832	)		(3,352	)
Provision for loan losses			4,285			3,819			2,834
Allowance of bank acquired			—			—			3,025
Balance at end of year		$	34,148		$	34,166		$	33,179

A summary of nonperforming loans at December 31 follows:

		2005		2004		2003
		(In thousands)
Nonaccrual loans:
	Commercial	$	3,133	$	3,245	$	3,902
	Real estate commercial		3,610		1,343		1,550
	Real estate construction-commercial		3,081		—		—
	Real estate residential		3,853		3,133		694
	Consumer		884		676		545
	Total nonaccrual loans		14,561		8,397		6,691
Accruing loans contractually past due 90 days or more as to interest or principal payments:
	Commercial		825		106		777
	Real estate commercial		2,002		—		924
	Real estate residential		1,717		1,023		2,371
	Consumer		592		524		584
Total accruing loans contractually past due 90 days or more as to interest or principal payments			5,136		1,653		4,656
Total nonperforming loans		$	19,697	$	10,050	$	11,347

Interest income totaling $564,000 was recorded on nonaccrual loans in 2005, compared to $340,000 in 2004 and $218,000 in 2003.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of impaired loans and the related valuation allowance follows:

		Impaired Loans						Valuation Allowance
		2005		2004		2003		2005		2004		2003
		(In thousands)
Balances — December 31:
	Impaired loans with valuation allowance	$	5,067	$	804	$	1,107	$	1,284	$	379	$	798
	Impaired loans with no valuation allowance		4,757		3,762		4,344		—		—		—
Total impaired loans		$	9,824	$	4,566	$	5,451	$	1,284	$	379	$	798
Average balance of impaired loans during the year		$	5,120	$	4,237	$	3,819

NOTE F — PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31 follows:

	2005			2004
	(In thousands)
Bank premises	$	69,557		$	67,916
Equipment		35,594			35,958
		105,151			103,874
Accumulated depreciation		(60,093	)		(56,297	)
Total	$	45,058		$	47,577

Included in bank premises is a building that the Corporation’s bank subsidiary leases under a fifteen-year capital lease agreement that expires December 31, 2014. The gross amount of this lease was $1.4 million at December 31, 2005 and December 31, 2004. The accumulated amortization was $0.28 million and $0.22 million at December 31, 2005 and 2004, respectively. The following schedule shows the future minimum lease payments together with the present value of this building as of December 31, 2005 (in thousands):

2006	$	150
2007		155
2008		159
2009		164
Thereafter		899
Total minimum lease payments		1,527
Amount representing interest		(412	)
Present value of minimum lease payments	$	1,115

NOTE G — DEPOSITS

A summary of deposits follows:

	December 31
	2005		2004
	(In thousands)
Noninterest-bearing demand	$	542,014	$	555,287
Interest-bearing demand		528,660		517,409
Savings		763,526		928,026
Time deposits over $100,000		309,697		218,232
Other time deposits		675,983		644,519
Total	$	2,819,880	$	2,863,473

Excluded from total deposits are demand deposit account overdrafts, which have been reclassified as loans. At December 31, 2005 and 2004, these overdrafts totaled $3.8 million and $2.8 million, respectively. Time deposits with remaining maturities less than one year were $654.3 million at December 31, 2005. Time deposits with remaining maturities of one year or more were $331.4 million at December 31, 2005. The maturities of these time deposits are as follows: $241.7 million in 2007, $64.2 million in 2008, $14.7 million in 2009, $9.5 million in 2010 and $1.3 million thereafter.

NOTE H — FEDERAL INCOME TAXES

The provision for federal income taxes is less than that computed by applying the federal statutory income tax rate of 35%, primarily due to tax-exempt interest on investment securities and loans during the years 2005, 2004 and 2003, and also due to the reversal of federal income tax reserves upon the reassessment of required tax accruals in the years 2005 and 2004. For the years ended December 31, 2005 and 2004, net federal income tax benefits of $0.94 million and $0.34 million, respectively, were recorded based on the regular reassessment of required tax accruals. No such tax benefits were recorded in 2003. The differences between the provision for federal income taxes, computed at the federal

continued on next page

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H — FEDERAL INCOME TAXES (CONTINUED)

statutory income tax rate, and the amount recorded in the consolidated statements of income are shown in the following analysis for the years ended December 31:

		2005			2004			2003
		(In thousands)
Tax at statutory rate		$	27,413		$	29,636		$	29,438
Changes resulting from:
	Tax-exempt interest income		(923	)		(876	)		(954	)
	Other, net		(1,045	)		(767	)		(91	)
Provision for federal income taxes		$	25,445		$	27,993		$	28,393

The provision for federal income taxes consisted of the following for the years ended December 31:

	2005		2004		2003
	(In thousands)
Current	$	25,378	$	26,878	$	25,101
Deferred		67		1,115		3,292
Total	$	25,445	$	27,993	$	28,393

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant temporary differences that comprise the deferred tax assets and liabilities of the Corporation were as follows as of December 31:

			2005		2004
			(In thousands)
Deferred tax assets:
	Allowance for loan losses		$	11,761	$	11,579
	Accrued expenses			2,132		2,204
	Investment securities marked to market			178		389
	Investment securities available for sale			3,536		—
	Other			2,301		1,670
		Total deferred tax assets		19,908		15,842
Deferred tax liabilities:
	Investment securities available for sale			—		381
	Premises and equipment			545		1,237
	Employee benefit plans			2,217		1,034
	Mortgage servicing rights			848		1,119
	Goodwill			1,530		1,278
	Other			1,132		925
		Total deferred tax liabilities		6,272		5,974
Net deferred tax assets			$	13,636	$	9,868

Federal income tax expense applicable to net gains on investment securities transactions was $0.19 million in 2005, $0.26 million in 2004 and $0.47 million in 2003, and is included in the provision for federal income taxes on the consolidated statements of income.

NOTE I — PENSION AND

POSTRETIREMENT BENEFITS

The Corporation has a noncontributory defined benefit pension plan (“Plan”) covering the majority of its employees. Normal retirement benefits of the Plan are based on years of service and the employee’s average annual pay for the five highest consecutive years during the ten years preceding retirement under the Plan. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future.

The assets of the Plan are invested by the Trust and Investment Management Services department of the Corporation’s bank subsidiary, Chemical Bank. The investment policy and allocation of the assets of the Pension Trust were approved by the Pension Committee of the board of directors of the Corporation.

The assets of the Plan are invested in a diversified portfolio of U.S. government treasury notes, U.S. government agency notes and high quality corporate bonds and equity securities, primarily blue chip stocks. The notes and the bonds purchased are rated A or better by the major bond rating companies and mature within five years from the date of purchase. The stocks are diversified among the major economic sectors of the market and are selected based on balance sheet strength, expected earnings growth, the management team, and position within their industries, among other characteristics.

The Plan’s asset allocations by asset category at December 31 were as follows:

Asset Category	2005			2004
Equity securities		60	%		67	%
Debt securities		31			29
Other		9			4
Total		100	%		100	%

As of December 31, 2005, based upon current market conditions, the Corporation’s strategy was to maintain equity securities between 60% and 70% of total Plan assets, and the “Other” category was expected to be maintained at less than 10% of total Plan assets. As of December 31, 2005 and December 31, 2004, equity securities included 211,395 shares of the Corporation’s common stock. During 2005, $0.22 million in cash dividends were paid on the Corporation’s common stock held by the Plan. The market value of the Corporation’s common stock held in the Plan was $6.7 million at December 31, 2005 and $8.6 million at December 31, 2004, and represented 8.8% and 11.9%, respectively, of total Plan assets as of these dates.

The measurement date used to determine both pension and other postretirement benefit amounts disclosed herein was December 31 of each year.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the changes in the benefit obligation and assets of the Corporation’s defined benefit pension plan:

		2005			2004
		(In thousands)
Projected benefit obligation:
	Benefit obligation at beginning of year	$	76,041		$	69,906
	Service cost		4,895			4,510
	Interest cost		4,310			4,135
	Net actuarial (gain) loss		2,900			(313	)
	Benefits paid		(2,585	)		(2,197	)
	Benefit obligation at end of year	$	85,561		$	76,041
Fair value of Plan assets:
	Beginning fair value	$	71,937		$	64,434
	Actual return on Plan assets		698			5,066
	Employer contributions		6,105			4,634
	Benefits paid		(2,585	)		(2,197	)
	Fair value of Plan assets at end of year	$	76,155		$	71,937
Funded status of the Plan		$	(9,406	)	$	(4,104	)
Unrecognized net actuarial loss			23,651			16,078
Unrecognized prior service benefit			(147	)		(172	)
Prepaid benefit cost		$	14,098		$	11,802

The Corporation’s accumulated benefit obligation as of December 31, 2005 and 2004 was $66.9 million and $58.9 million, respectively.

During 2005, the Corporation contributed $6.1 million to the Plan. The Corporation has historically contributed the maximum amount deductible under Internal Revenue Service regulations to the Plan. The 2006 maximum deductible Plan contribution was estimated at $9.2 million. As of December 31, 2005, the Corporation had not determined the Plan contribution that would be made in 2006.

Weighted average rate assumptions as of December 31 follow:

	2005		2004		2003
Discount rate used in determining benefit obligations		5.60%		5.75%		6.00%
Discount rate used in determining pension expense		5.75%		6.00%		6.50%
Expected long-term return on Plan assets		8.00%		8.00%		8.00%
Rate of compensation increase		5.00%		5.00%		5.00%

Net periodic pension cost of the defined benefit pension plan consisted of the following for the years ended December 31:

	2005			2004			2003
	(In thousands)
Service cost	$	4,895		$	4,510		$	3,643
Interest cost		4,310			4,135			3,841
Expected return on Plan assets		(5,845	)		(5,422	)		(4,973	)
Amortization of transition amount		—			—			(11	)
Amortization of prior service benefit		(24	)		(36	)		(46	)
Amortization of unrecognized net loss		473			372			—
Pension expense	$	3,809		$	3,559		$	2,454

The following table presents estimated future defined benefit pension plan benefit payments (in thousands):

2006	$	2,598
2007		2,745
2008		3,091
2009		3,378
2010		3,645
2011 - 2015		24,969
Total	$	40,426

Other Employee Benefit Plans:

The Corporation maintains a 401(k) Savings Plan with an employer match. The Corporation matches 50% of the participants’ elective deferrals on the first 4% of the participants’ compensation. The 401(k) Savings Plan is available to all regular employees and provides employees with tax deferred salary deductions and alternative investment options. The 401(k) Savings Plan provides employees with the option to invest in the Corporation’s common stock. The employer match under the 401(k) Savings Plan was $0.53 million in 2005 and $0.52 million in both 2004 and 2003.

The Corporation has a postretirement benefit plan that provides medical benefits, and dental benefits through age 65, to a small portion of its active employees, to employees who retired through December 31, 2001, and others who are provided eligibility via acquisitions. Through December 31, 2001, eligibility for such benefits was age 55 with at least ten years of service with the Corporation. Effective January 1, 2002, the Corporation adopted a revised retiree medical program (“Retiree Plan”), which substantially reduced the future obligation of the Corporation for retiree medical and dental costs. Retirees and certain employees that met age and service requirements as of December 31, 2001 were grandfathered under the Retiree Plan. As of December 31, 2005, the Retiree Plan included 44 employees that are in the grandfathered group, and 119 retirees. The majority of the retirees are required to make contributions

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47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I — PENSION AND

POSTRETIREMENT BENEFITS (CONTINUED)

toward the cost of their benefits based on their years of credited service and age at retirement. Retiree contributions are generally adjusted annually. The accounting for these postretirement benefits anticipates changes in future cost-sharing features such as retiree contributions, deductibles, copayments and coinsurance. The Corporation reserves the right to amend, modify or terminate these benefits at any time. Employees who retire at age 55 or older and have at least ten years of service with the Corporation are provided access to the Corporation’s group health insurance coverage for themselves and their spouses, with no employer subsidy, and are not considered participants in the Retiree Plan.

The following table sets forth changes in the Corporation’s postretirement benefit obligation:

		2005			2004
		(In thousands)
Accumulated postretirement benefit obligation:
	Benefit obligation at beginning of year	$	5,328		$	5,722
	Service cost		—			30
	Interest cost		281			316
	Net actuarial (gain) loss		112			(457	)
	Benefits paid, net of retiree contributions		(294	)		(283	)
Benefit obligation at end of year		$	5,427		$	5,328
Unfunded status of the plan		$	5,427		$	5,328
Unrecognized net actuarial loss			(1,710	)		(1,659	)
Unrecognized prior service credit			2,246			2,571
Accrued postretirement benefit cost		$	5,963		$	6,240

Net periodic postretirement benefit cost consisted of the following for the years ended December 31:

	2005			2004			2003
	(In thousands)
Service cost	$	—		$	30		$	22
Interest cost		281			316			261
Amortization of prior service credit		(324	)		(324	)		(324	)
Amortization of unrecognized net loss		61			324			167
Postretirement benefit expense	$	18		$	346		$	126

The following table presents estimated future Retiree Plan benefit payments (in thousands):

2006	$	322
2007		346
2008		366
2009		383
2010		394
2011 - 2015		2,003
Total	$	3,814

Weighted average rate assumptions as of December 31 follow:

	2005			2004			2003
Discount rate used in determining the accumulated postretirement benefit obligation		5.60	%		5.75	%		6.00	%
Discount rate used in determining periodic postretirement benefit cost		5.75	%		6.00	%		6.50	%
Year 1 increase in cost of postretirement benefits		10.50	%		10.00	%		8.33	%

For measurement purposes, the annual rates of increase in the per capita cost of covered health care benefits and dental benefits for 2006 were each assumed at 10.5%. These rates were assumed to decrease gradually to 6.5% in 2010 and remain at that level thereafter.

The assumed health care and dental cost trend rates could have a significant effect on the amounts reported. A one percentage-point change in these rates would have had the following effects:

	1-Percentage-		1-Percentage-
	Point Increase		Point Decrease
	(In thousands)
Effect on total of service and interest cost components in 2005	$	26	$	(23	)
Effect on postretirement benefit obligation as of December 31, 2005	$	452	$	(394	)

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J — SHORT-TERM BORROWINGS

				Weighted			Average		Weighted			Maximum
				Average			Amount		Average			Outstanding
		Ending		Interest Rate			Outstanding		Interest Rate			at any
		Balance		At Year-End			During Year		During Year			Month-End
		(Dollars in thousands)
December 31, 2005:
Securities sold under agreements to repurchase		$	125,598		2.76	%	$	107,634		2.01	%	$	127,613
Reverse repurchase agreements			10,000		3.64			5,890		3.66			10,000
Short-term Federal Home Loan Bank (FHLB) advances			68,000		4.41			16,011		4.02			68,000
	Total short-term borrowings	$	203,598		3.35	%	$	129,535		2.33	%	$	205,613
December 31, 2004:
Securities sold under agreements to repurchase		$	101,834		1.10	%	$	90,016		0.65	%	$	101,834
Short-term FHLB advances			—		—			8,333		1.38			10,000
	Total short-term borrowings	$	101,834		1.10	%	$	98,349		0.71	%	$	111,834
December 31, 2003:
Securities sold under agreements to repurchase		$	91,524		0.42	%	$	86,604		0.62	%	$	93,447
	Total short-term borrowings	$	91,524		0.42	%	$	86,604		0.62	%	$	93,447

The carrying value of investment securities, which are reported on the consolidated statements of financial position as “Investment securities: Available for sale,” securing securities sold under agreements to repurchase and reverse repurchase agreements as of December 31, 2005, 2004 and 2003 were $152.1 million, $119.6 million and $104.8 million, respectively.

NOTE K — FEDERAL HOME LOAN BANK ADVANCES — LONG-TERM

Long-term FHLB advances outstanding as of December 31, 2005 and 2004 are presented below. Classifications are based on original maturities.

			December 31, 2005				December 31, 2004
					Weighted Average				Weighted Average
			Ending		Interest Rate At		Ending		Interest Rate At
			Balance		Year-End		Balance		Year-End
			(Dollars in thousands)
FHLB advances — long-term:
	Bullet fixed-rate advances		$	93,765		3.45%	$	171,996		2.39%
	Convertible fixed-rate advances			103,000		5.44		113,000		5.56
		Total FHLB advances — long-term	$	196,765		4.49%	$	284,996		3.65%

The FHLB advances, short-term and long-term, are collateralized by a blanket lien on qualified one- to four-family residential mortgage loans. At December 31, 2005, the carrying value of these loans was $723 million, which represents a total FHLB borrowing capacity based on collateral of $498 million. FHLB advances totaled $265 million at December 31, 2005, comprised of $68 million in short-term advances and $197 million in long-term advances. Therefore, the Corporation’s additional borrowing availability through the FHLB at December 31, 2005 under the blanket lien agreement was $233 million.

For the convertible fixed-rate advances, the FHLB has the option to convert the advance to a variable rate beginning one, two or five years after the origination date depending on the advance, and quarterly thereafter. The Corporation has the option to prepay, without penalty, an FHLB convertible fixed-rate advance when the FHLB exercises its option to convert it to a variable-rate advance. During 2005,

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49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K — FEDERAL HOME LOAN BANK ADVANCES — LONG-TERM (CONTINUED)

the FHLB did not exercise this option on any advance. Prepayments of both fixed-rate and convertible fixed-rate advances are subject to prepayment penalties under the provisions and conditions of the credit policy of the FHLB. The Corporation did not incur any prepayment penalties for 2005, 2004 or 2003.

The scheduled principal reductions on FHLB advances — long-term outstanding at December 31, 2005 were as follows (in thousands):

2006	$	83,693
2007		15,023
2008		55,024
2009		25
2010		40,000
Thereafter		3,000
Total	$	196,765

NOTE L — SHAREHOLDERS’ EQUITY

Total shareholders’ equity was $501 million at December 31, 2005, an increase of $16.2 million, or 3.3% from total shareholders’ equity at December 31, 2004. The increase in 2005 was derived primarily from earnings retention of $26.2 million. This amount was partially offset by a decrease in the market value of securities available for sale, net of taxes, of $7.3 million, and a reduction in shareholders’ equity attributable to the repurchase of 126,900 shares of the Corporation’s common stock totaling $3.8 million.

The ratio of shareholders’ equity to total assets was 13.4% at December 31, 2005, compared to 12.9% at December 31, 2004. The Corporation’s tangible equity (shareholders’ equity less intangible assets) was $430 million at December 31, 2005 and $410 million at December 31, 2004. The Corporation’s tangible equity to assets ratio was 11.7% and 11.1% at December 31, 2005 and 2004, respectively.

On April 22, 2005, the Corporation announced that the 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 corporate purposes. This authorization replaced all prior share repurchase authorizations. Shares repurchased under this authorization totaled 126,900 in 2005.

All shares purchased in 2005 as part of the Corporation’s publicly announced repurchase plan were transacted in the open market and were within the scope of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, which provides a safe harbor for purchases in a given day if an issuer of equity securities satisfies the manner, timing, price and volume conditions of the rule when purchasing its own common shares in the open market. In addition, during 2005, 19,274 shares of the Corporation’s common stock were delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options. The following table summarizes the Corporation’s total monthly share repurchase activity for the year ended December 31, 2005:

					Total Number of Shares		Maximum Number of
	Total Number		Average Price		Purchased as Part of		Shares that May Yet
	of Shares		Paid Per		Publicly Announced		Be Purchased Under
Month Ending	Purchased(1)		Share		Plans or Programs		the Plans or Programs
January 31, 2005		6,743	$	38.45		—		—
February 28, 2005		318		34.50		—		—
March 31, 2005		—		—		—		—
April 30, 2005		48,800		29.75		48,800		451,200
May 31, 2005		10,838		30.38		9,400		441,800
June 30, 2005		—		—		—		441,800
July 31, 2005		1,363		34.68		—		441,800
August 31, 2005		14,000		31.80		14,000		427,800
September 30, 2005		1,132		32.68		—		427,800
October 31, 2005		54,876		30.42		54,700		373,100
November 30, 2005		624		33.03		—		373,100
December 31, 2005		7,480		32.53		—		373,100
Total		146,174	$	30.88		126,900

(1)  Includes shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options in 2005. The Corporation’s stock compensation plan permits employees to use stock to satisfy such obligations based on the market value of the stock on the date of exercise.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M — GOODWILL

Goodwill was $63.3 million at December 31, 2005 and 2004. The Corporation’s goodwill impairment review is performed annually by management and is additionally reviewed by an independent third-party appraisal firm. The income and market value approach methodologies were utilized by the appraisal firm to estimate the value of the Corporation’s goodwill. The income approach quantifies the present value of future economic benefits by capitalizing or discounting the cash flows of a business. This approach considers projected dividends, earnings, dividend paying capacity and future residual value. The market value approach estimates the value of the entity by comparing it to similar companies that have recently been acquired or companies that are publicly traded on an organized exchange. The estimate of market value includes a comparison of the financial condition of the entity against the financial characteristics and pricing information of comparable companies. Based on the results of these valuations, the Corporation’s goodwill was not impaired at December 31, 2005 and 2004.

NOTE N — ACQUIRED INTANGIBLE ASSETS

The following tables set forth the carrying amount, accumulated amortization and amortization expense of acquired intangible assets (in thousands):

	December 31, 2005
	Original		Accumulated		Carrying
	Amount		Amortization		Amount
Core deposit intangibles	$	19,269	$	13,666	$	5,603
Other		690		514		176

	December 31, 2004
	Original		Accumulated		Carrying
	Amount		Amortization		Amount
Core deposit intangibles	$	19,269	$	11,762	$	7,507
Other		690		266		424

There were no additions of acquired intangible assets during 2005 and 2004.

Amortization expense for the years ended December 31, follows:

2005	$	2,152
2004		2,273
2003		1,883

Estimated amortization expense for the years ending December 31 follows:

2006	$	1,858
2007		1,615
2008		1,292
2009		442
2010 and thereafter		572
Total	$	5,779

NOTE O — STOCK OPTIONS

The Corporation’s stock option plans provide for grants of stock options, incentive stock options, stock appreciation rights, or a combination thereof. At December 31, 2005, there were a total of 3,325 shares available for future awards under the Corporation’s 1997 plan. The plan provides that the option price shall not be less than the fair market value of common stock at the date of grant, options become exercisable as specified in the option agreement governing the option as determined by the Compensation Committee of the board of directors and all awards expire no later than ten years and one day after the date of grant. The Corporation has not recorded expense as a result of the grant or exercise of stock options.

Options granted may include a stock appreciation right that entitles the grantee to receive cash or a number of shares of common stock without payment to the Corporation. A stock appreciation right is calculated by the difference between the option price and the market price of the total number of shares in the option at the time of exercise of the stock appreciation right. As of December 31, 2005, there were no outstanding options with stock appreciation rights.

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51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O — STOCK OPTIONS (CONTINUED)

The activity in the Corporation’s stock option plans during the three years ended December 31, 2005, was as follows:

				Weighted
				Average
	Number of			Exercise
	Shares			Price
Outstanding — January 1, 2003		525,816		$	23.78
Activity during 2003:
Granted		87,465			35.67
Issued in bank acquisition		244,131			15.88
Exercised		(211,236	)		17.98
Cancelled		(7,656	)		25.24
Outstanding — December 31, 2003		638,520			24.26
Activity during 2004:
Granted		188,738			39.69
Exercised		(195,695	)		18.57
Cancelled		(5,548	)		22.15
Outstanding — December 31, 2004		626,015			30.73
Activity during 2005:
Granted		177,450			32.28
Exercised		(50,562	)		22.53
Cancelled		(7,475	)		33.33
Outstanding – December 31, 2005		745,428		$	31.63

The following table summarizes information about stock options outstanding at December 31, 2005:

		Options Outstanding						Options Exercisable
		Weighted								Weighted
		Average				Range of				Average
Number		Exercise		Average		Exercise		Number		Exercise
Outstanding		Price		Life(a)		Prices		Exercisable		Price
	17,214	$	14.75		3.06	$	13.54 – $17.01		17,214	$	14.75
	98,905		22.64		2.77		21.64 –  25.62		94,275		22.59
	181,432		27.38		4.43		26.17 –  27.78		168,422		27.35
	447,877		35.99		9.16		32.28 –  39.69		447,877		35.99
	745,428	$	31.63		7.02	$	13.54 – $39.69		727,788	$	31.75

(a)  Weighted average remaining contractual life in years

In anticipation of the adoption of the modified prospective method of SFAS 123(R), the board of directors of the Corporation in December 2005 accelerated the vesting of certain unvested, “out-of-the-money” nonqualified stock options previously awarded to employees, including executive officers, under the Corporation’s stock incentive compensation plans. As a result of this action, stock options that otherwise would have vested in years 2006-2009 became fully vested on December 31, 2005. Options to purchase 167,527 shares of the Corporation’s common stock or 90% of outstanding unvested options were accelerated. The weighted average exercise price of the options subject to acceleration was $39.23. The purpose of the acceleration was to enable the Corporation to avoid recognizing compensation expense associated with these options in future periods in its consolidated statements of income upon adoption of SFAS 123(R) in January 2006. The Corporation also believes that, because the options that were accelerated had exercise prices in excess of the then-current market value of the Corporation’s common stock, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention. The acceleration of the vesting of these options reduces non-cash compensation expense in years 2006, 2007, 2008 and 2009, in the amounts of $0.61 million, $0.37 million, $0.22 million and $0.09 million, respectively, following the adoption of SFAS 123(R). In addition, the board of directors granted options to purchase 177,450 shares in December 2005 that became immediately vested. Based on an estimated value calculation using the Black-Scholes methodology, these options had a grant date fair value of $1.66 million. As the 177,450 options granted in December 2005 were fully vested as of December 31, 2005, the Corporation will not recognize future non-cash compensation expense in conjunction with these options. The Corporation will recognize total non-cash compensation expense in 2006 and 2007, combined, on 17,640 of remaining unvested options outstanding at December 31 2005, in accordance with the compensation provisions of SFAS 123(R), of less than $0.1 million.

The Corporation does not recognize compensation cost in accounting for awards of options under its stock option plans. If the Corporation had elected to recognize compensation cost for options granted in 2005, 2004 and 2003, based on the fair value of the options granted at the grant date, net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

	2005			2004			2003
Net income — as reported	$	52,878		$	56,682		$	55,716
Pro forma stock-based employee compensation cost, net of tax		(2,592	)		(552	)		(281	)
Net income — pro forma	$	50,286		$	56,130		$	55,435
Basic earnings per share — as reported	$	2.10		$	2.26		$	2.24
Basic earnings per share — pro forma		2.00			2.24			2.23
Diluted earnings per share — as reported		2.10			2.25			2.23
Diluted earnings per share — pro forma		2.00			2.23			2.22

The weighted average fair values of options granted during 2005, 2004 and 2003 were $9.34, $11.53 and $10.79 per share, respectively. The fair value of each option grant is

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	2005			2004			2003
Expected dividend yield		3.20	%		2.50	%		3.00	%
Expected stock volatility		33.00	%		32.60	%		33.70	%
Risk-free interest rate		4.45	%		3.14	%		4.00	%
Expected life of options — in years		7.00			7.00			7.80

Because of the unpredictability of the assumptions required, the Black-Scholes model, or any other valuation model, is incapable of accurately predicting the Corporation’s stock price or of placing an accurate present value on options to purchase its stock. In addition, the Black-Scholes model was designed to approximate value for types of options that are very different from those issued by the Corporation. In spite of any theoretical value which may be placed on a stock option grant, no value is possible under options issued by the Corporation without an increase in the market value of the Corporation’s stock.

NOTE P — COMMITMENTS AND

OTHER MATTERS

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan contract. Commitments generally have fixed expiration dates or other termination clauses. Historically, the majority of the commitments of the Corporation’s bank subsidiary have not been drawn upon and, therefore, may not represent future cash requirements. Standby letters of credit are conditional commitments issued generally by the Corporation’s bank subsidiary to guarantee the performance of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in making loans to customers and are subject to the Corporation’s normal credit policies. Collateral obtained upon exercise of commitments is determined using management’s credit evaluation of the borrowers and may include real estate, business assets, deposits and other items. The Corporation’s bank subsidiary at any point in time also has approved but undisbursed loans. The majority of these undisbursed loans will convert to booked loans within a three-month period.

At December 31, 2005, total unused loan commitments, standby letters of credit and undisbursed loans were $368 million, $54 million and $169 million, respectively. At December 31, 2004, total unused loan commitments, standby letters of credit and undisbursed loans were $281 million, $26 million and $68 million, respectively. A significant portion of the unused loan commitments and standby letters of credit outstanding as of December 31, 2005 expire one year from their contract date; however, $53 million of unused loan commitments extend for more than five years.

The Corporation’s unused loan commitments and standby letters of credit have been estimated to have no realizable fair value, as historically the majority of the unused loan commitments have not been drawn upon and generally the Corporation’s subsidiaries do not receive fees in connection with these agreements.

The Corporation has operating leases and other non-cancelable contractual obligations on buildings, equipment, computer software and other expenses that will require annual payments through 2015, including renewal option periods for those building leases the Corporation expects to renew. Minimum payments due in each of the next five years and thereafter are as follows (in thousands):

2006	$	3,253
2007		2,671
2008		1,070
2009		451
2010		177
Thereafter		290
Total	$	7,912

Minimum payments include estimates, where applicable, of estimated usage and annual Consumer Price Index increases of approximately 3%.

Total expense recorded under operating leases and other non-cancelable contractual obligations was $3.6 million in 2005, $1.8 million in 2004, and $1.4 million in 2003.

The Corporation and its subsidiaries are subject to certain legal actions arising in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated net income or financial position of the Corporation.

NOTE Q — REGULATORY CAPITAL AND

RESERVE REQUIREMENTS

Banking regulations require that banks maintain cash reserve balances in vault cash, with the Federal Reserve Bank, or with certain other qualifying banks. The aggregate average amount of such legal balances required to be maintained by the Corporation’s subsidiary bank was $27.2 million during

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53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE Q — REGULATORY CAPITAL AND

RESERVE REQUIREMENTS (CONTINUED)

2005 and $24.8 million during 2004. During 2005, the Corporation’s subsidiary bank satisfied its legal reserve requirements almost entirely by maintaining vault cash balances in excess of legal reserve requirements. The Corporation’s subsidiary bank did not maintain significant compensating balances with correspondent banks during 2005 or 2004.

Federal and state banking regulations place certain restrictions on the transfer of assets in the form of dividends, loans or advances from the bank subsidiary to the Corporation. At December 31, 2005, substantially all of the assets of the bank subsidiary were restricted from transfer to the Corporation in the form of loans or advances. Dividends from its bank subsidiary are the principal source of funds for the Corporation. Under the most restrictive of these regulations, the aggregate amount of dividends that can be paid by Chemical Bank to the parent company, without obtaining prior approval from bank regulatory agencies, was $45.8 million as of December 31, 2005. Dividends paid to the Corporation by its bank subsidiaries totaled $27.0 million in 2005, $37.6 million in 2004 and $56.1 million in 2003. Prior to making any cash dividend decisions, the Corporation will consider the statutory limits and overall financial and capital position of its bank subsidiary.

The Corporation and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under these capital requirements, the subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets and certain off-balance sheet items as calculated under regulatory accounting practices. In addition, capital amounts and classifications are subject to qualitative judgments by the regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require minimum ratios of tier 1 capital to average assets (leverage ratio), and of tier 1 and total capital to risk-weighted assets. These capital guidelines assign risk weights to on- and off-balance sheet items in arriving at total risk-weighted assets. Minimum capital levels are based upon perceived risk of various asset categories and certain off-balance sheet instruments.

At December 31, 2005 and 2004, the Corporation’s and each of its bank subsidiaries’ capital ratios exceeded the quantitative capital ratios required for an institution to be considered “well-capitalized.” Significant factors that may affect capital adequacy include, but are not limited to, a disproportionate growth in assets versus capital and a change in mix or credit quality of assets. The table below compares the Corporation’s and each of its bank subsidiaries’ actual capital amounts and ratios with the quantitative measures established by regulation to ensure capital adequacy at December 31, 2005, prior to the consolidation of Chemical Bank Shoreline and Chemical Bank West into Chemical Bank and Trust Company at this date.

	December 31, 2005
						Risk-Based Capital
	Leverage					Tier 1					Total
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in millions)
Corporation’s capital	$	438		12	%	$	438		17	%	$	471		18	%
Required capital — minimum		111		3			106		4			212		8
Required capital — “well capitalized” definition		185		5			159		6			265		10
Chemical Bank and Trust Company’s capital		201		12			201		19			213		21
Required capital — minimum		50		3			42		4			83		8
Required capital — “well capitalized” definition		83		5			62		6			104		10
Chemical Bank Shoreline’s capital		127		10			127		13			139		15
Required capital — minimum		36		3			38		4			76		8
Required capital — “well capitalized” definition		61		5			57		6			94		10
Chemical Bank West’s capital		89		10			89		13			97		15
Required capital — minimum		26		3			27		4			53		8
Required capital — “well capitalized” definition		43		5			40		6			67		10

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R — DISCLOSURES ABOUT FAIR VALUE

OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments” (SFAS 107), requires disclosures about the estimated fair values of the Corporation’s financial instruments. The Corporation utilized quoted market prices, where available, to compute the fair values of its financial instruments. In cases where quoted market prices were not available, the Corporation used present value methods to estimate the fair values of its financial instruments. These estimates of fair value are significantly affected by the assumptions made and, accordingly, do not necessarily indicate amounts that could be realized in a current market exchange. It is also the Corporation’s general practice and intent to hold the majority of its financial instruments until maturity and, therefore, the Corporation does not expect to realize the estimated amounts disclosed.

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and demand deposits due from banks:

The carrying amounts reported in the consolidated statements of financial position for cash and demand deposits due from banks approximate their fair values.

Interest-bearing deposits with unaffiliated banks and federal funds sold:

The carrying amounts reported in the consolidated statements of financial position for interest-bearing deposits with unaffiliated banks and federal funds sold approximate their fair values.

Investment securities:

Fair values for investment securities are based on quoted market prices.

Other securities:

The carrying amounts reported in the consolidated statements of financial position for other securities approximate their fair values.

Loans:

For variable interest rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair values for fixed interest rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines in the credit quality of borrowers since the loans were originated.

Deposit liabilities:

The fair values of deposit accounts without defined maturities, such as interest- and noninterest-bearing checking, savings and money market accounts, are equal to the amounts payable on demand. Fair values for interest-bearing deposits with defined maturities are based on the discounted value of contractual cash flows, using interest rates currently being offered for deposits of similar maturities. The fair values for variable interest rate certificates of deposit approximate their carrying amounts.

Short-term borrowings:

Short-term borrowings consist of securities sold under agreements to repurchase (repurchase agreements), reverse repurchase agreements and short-term FHLB advances. Fair value is estimated for repurchase agreements, reverse repurchase agreements and short-term FHLB advances based on the present value of future estimated cash flows using current rates offered to the Corporation for debt with similar terms.

Federal Home Loan Bank (FHLB) advances — long-term:

Fair value is estimated based on the present value of future estimated cash flows using current rates offered to the Corporation for debt with similar terms.

Commitments to extend credit, standby letters of credit and undisbursed loans:

The Corporation’s unused loan commitments, standby letters of credit and undisbursed loans have no carrying amount and have been estimated to have no realizable fair value. Historically, a majority of the unused loan commitments and standby letters of credit have not been drawn upon and, generally, the Corporation does not receive fees in connection with these commitments.

Estimates of fair values have not been made for items that are not defined by SFAS 107 as financial instruments, including such items as the Corporation’s core deposits and the value of its trust and investment management services department. The Corporation believes it is impractical to estimate a representative fair value for these types of assets, even though management believes they add significant value to the Corporation.

continued on next page

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R — DISCLOSURES ABOUT FAIR VALUE

OF FINANCIAL INSTRUMENTS (CONTINUED)

The following is a summary of carrying amounts and estimated fair values of financial instrument components of the consolidated statements of financial position at December 31:

		2005				2004
		Carrying				Carrying		Fair
		Amount		Fair Value		Amount		Value
		(In thousands)
Assets:
	Cash and demand deposits due from banks	$	145,575	$	145,575	$	106,565	$	106,565
	Interest-bearing deposits and federal funds sold		11,921		11,921		40,369		40,369
	Investment/other securities		743,348		742,586		893,274		894,344
	Net loans		2,676,066		2,615,096		2,551,419		2,541,810
Liabilities:
	Deposits without defined maturities		1,834,200		1,834,200		2,000,722		2,000,722
	Time deposits		985,680		982,782		862,751		868,506
	Short-term borrowings		203,598		203,595		101,834		101,834
	Federal Home Loan Bank advances — long-term		196,765		198,353		284,996		279,360

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S — PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed financial statements of Chemical Financial Corporation (parent company) follow:

	December 31
Condensed Statements of Financial Position	2005		2004
	(In thousands)
Assets:
Cash and cash equivalents at subsidiary bank	$	17,853	$	20,825
Investment securities available for sale		5,421		6,063
Investment in bank subsidiaries		477,523		457,619
Investment in non-bank subsidiaries		548		768
Premises and equipment		5,975		6,414
Goodwill		1,092		1,092
Other assets		3,824		3,093
Total assets	$	512,236	$	495,874
Liabilities and Shareholders’ Equity:
Other liabilities	$	11,171	$	11,038
Total liabilities		11,171		11,038
Shareholders’ equity		501,065		484,836
Total liabilities and shareholders’ equity	$	512,236	$	495,874

		Years Ended December 31
Condensed Statements of Income		2005			2004		2003
		(In thousands)
Income:
Cash dividends from bank subsidiaries		$	27,000		$	37,620	$	56,076
Cash dividends from non-bank subsidiaries			475			—		550
Interest income from bank subsidiary			506			198		366
Other interest income and dividends			213			218		132
Rental revenue			536			536		245
Net gains on sales of investment securities			848			656		71
Other			155			213		26
Total income			29,733			39,441		57,466
Expenses:
Operating expenses			4,486			3,938		2,590
Total expenses			4,486			3,938		2,590
Income before income taxes and equity in undistributed net income of subsidiaries			25,247			35,503		54,876
Federal income tax benefit			1,134			1,047		601
Equity in undistributed net income of:
	Bank subsidiaries		26,717			19,903		158
	Non-bank subsidiaries		(220	)		229		81
Net income		$	52,878		$	56,682	$	55,716

	Years Ended December 31
Condensed Statements of Cash Flows	2005			2004			2003
	(In thousands)
Operating Activities:
Net income	$	52,878		$	56,682		$	55,716
Net gains on sales of investment securities		(848	)		(656	)		(71	)
Depreciation of fixed assets		937			949			467
Net amortization of investment securities		42			33			—
Equity in undistributed net income of subsidiaries		(26,497	)		(20,132	)		(239	)
Net (increase) decrease in other assets		(483	)		2,588			(2,171	)
Net increase (decrease) in other liabilities		346			(1,927	)		(2,694	)
Net cash provided by operating activities		26,375			37,537			51,008
Investing Activities:
Capital infusion into subsidiary bank		—			(11,600	)		—
Cash assumed in merger of data processing subsidiary into parent		—			—			3,185
Net cash used in acquisition		—			—			(52,295	)
Purchases of premises and equipment, net		(498	)		(470	)		(5,725	)
Purchases of investment securities available for sale		(1,041	)		(4,059	)		(1,552	)
Proceeds from sales and maturities of investment securities available for sale		1,781			3,624			836
Net cash provided by (used in) investing activities		242			(12,505	)		(55,551	)
Financing Activities:
Cash dividends paid		(26,637	)		(25,379	)		(23,691	)
Proceeds from directors’ stock purchase plan		231			219			182
Proceeds from exercise of stock options		664			3,291			5,071
Repurchases of common stock		(3,847	)		—			(1,511	)
Net cash used in financing activities		(29,589	)		(21,869	)		(19,949	)
Increase (decrease) in cash and cash equivalents		(2,972	)		3,163			(24,492	)
Cash and cash equivalents at beginning of year		20,825			17,662			42,154
Cash and cash equivalents at end of year	$	17,853		$	20,825		$	17,662

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE T — SUMMARY OF QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

The following quarterly information is unaudited. However, in the opinion of management, the information reflects all adjustments which are necessary for the fair presentation of the results of operations for the periods presented.

(In thousands, except per share data)		2005
		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
Interest income		$	47,960	$	49,012	$	50,420	$	51,912
Interest expense			12,013		13,314		15,274		16,852
Net interest income			35,947		35,698		35,146		35,060
Provision for loan losses			730		730		1,500		1,325
Net gains (losses) on sales of investment securities			1,089		82		3		(633	)
Noninterest income
	(excluding net gains (losses) on sales of investment securities)		9,091		9,671		10,246		9,671
Operating expenses			24,983		24,763		24,839		23,878
Income before income taxes			20,414		19,958		19,056		18,895
Provision for federal income taxes			6,910		6,743		5,451		6,341
Net income		$	13,504	$	13,215	$	13,605	$	12,554
Net income per share:
	Basic	$	0.54	$	0.53	$	0.54	$	0.50
	Diluted		0.53		0.53		0.54		0.50

		2004
		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
Interest income		$	47,185	$	46,583	$	47,318	$	48,164
Interest expense			10,363		10,174		10,165		10,914
Net interest income			36,822		36,409		37,153		37,250
Provision for loan losses			746		661		701		1,711
Investment securities net gains			983		267		9		108
Noninterest income
	(excluding net gains on sales of investment securities )		8,979		9,738		9,614		9,631
Operating expenses			25,160		24,920		24,499		23,890
Income before income taxes			20,878		20,833		21,576		21,388
Provision for federal income taxes			6,759		6,967		7,280		6,987
Net income		$	14,119	$	13,866	$	14,296	$	14,401
Net income per share:
	Basic	$	0.56	$	0.55	$	0.58	$	0.57
	Diluted		0.56		0.55		0.57		0.57

58

MARKET FOR CHEMICAL FINANCIAL

CORPORATION COMMON STOCK AND RELATED

SHAREHOLDER MATTERS (UNAUDITED)

Chemical Financial Corporation common stock is traded on The Nasdaq Stock Market^® under the symbol CHFC. As of December 31, 2005, there were approximately 25.1 million shares of Chemical Financial Corporation common stock issued and outstanding, held by approximately 5,400 shareholders of record. The table below sets forth the range of high and low trade prices per share for Chemical Financial Corporation common stock for the periods indicated. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission, and may not necessarily represent actual transactions.

	2005				2004
	High		Low		High		Low
First quarter	$	42.50	$	31.01	$	37.45	$	33.73
Second quarter		33.75		28.55		37.20		33.32
Third quarter		35.95		30.71		37.70		33.03
Fourth quarter		34.00		29.51		43.33		36.06

The earnings of the Corporation’s subsidiary bank are the principal source of funds to pay cash dividends. Consequently, cash dividends are dependent upon the earnings, capital needs, regulatory constraints, and other factors affecting Chemical Bank. See Note Q to the consolidated financial statements for a discussion of such limitations. The Corporation has paid regular cash dividends every quarter since it began operation as a bank holding company in 1973. The following table summarizes the quarterly cash dividends paid per share to shareholders over the past five years, adjusted for stock dividends paid during this time period. Management expects the Corporation to declare and pay comparable regular quarterly cash dividends on its common shares in 2006.

	Years Ended December 31
	2005		2004		2003		2002		2001
First quarter	$	0.265	$	0.252	$	0.238	$	0.217	$	0.207
Second quarter		0.265		0.252		0.238		0.217		0.207
Third quarter		0.265		0.252		0.238		0.217		0.207
Fourth quarter		0.265		0.252		0.238		0.217		0.207
Total	$	1.060	$	1.008	$	0.952	$	0.868	$	0.828

59

CHEMICAL FINANCIAL CORPORATION DIRECTORS AND EXECUTIVE OFFICERS

      At December 31, 2005

Board of Directors	Gary E. Anderson — Retired Chairman of Dow Corning Corporation
		(a diversified company specializing in the development, manufacture and marketing of silicones and related silicon-based products)
	J. Daniel Bernson — President and Chief Executive Officer, The Hanson Group
		(a holding company with interests in diversified businesses in Southwest Michigan)
	Nancy Bowman — Certified Public Accountant, Co-owner, Bowman & Rogers, PC
		(an accounting and tax services company)
	James A. Currie — Investor
	Thomas T. Huff — Attorney at Law, Thomas T. Huff, P.C.
	Terence F. Moore — President and Chief Executive Officer, MidMichigan Health
		(a health care organization)
	Aloysius J. Oliver — Retired Chairman, President and Chief Executive Officer,
		Chemical Financial Corporation
	Frank P. Popoff — Chairman of Chemical Financial Corporation, Retired Chairman,
		President and Chief Executive Officer, The Dow Chemical Company
		(a diversified science and technology company that manufactures chemical, plastic and agricultural products)
	David B. Ramaker — President and Chief Executive Officer, Chemical Financial Corporation
	Dan L. Smith — Retired Chairman and Chief Executive Officer, Shoreline Financial Corporation (a bank holding company)
	William S. Stavropoulos — Chairman, The Dow Chemical Company
		(a diversified science and technology company that manufactures chemical, plastic and agricultural products)
Executive Officers	David B. Ramaker — President and Chief Executive Officer
	Bruce M. Groom — Executive Vice President and Senior Trust Officer,
		Chemical Bank
	Lori A. Gwizdala — Executive Vice President, Chief Financial Officer and Treasurer
	Thomas W. Kohn — Executive Vice President, Community Banking,
		Chemical Bank
	William C. Lauderbach — Executive Vice President and Senior Investment Officer,
		Chemical Bank
	James R. Milroy — Executive Vice President, Chief Operating Officer and Secretary
	John A. Reisner — Executive Vice President, Community Banking,
		Chemical Bank
	James E. Tomczyk — Executive Vice President and Senior Credit Officer,
		Chemical Bank

60

EX-21

EXHIBIT NO. 21

Subsidiaries
(As of the close of business on December 31, 2005)

Name of Subsidiary	State or Other Jurisdiction of Incorporation
Bank subsidiaries:
Chemical Bank and Trust Company	Michigan
Chemical Bank Shoreline	Michigan
Chemical Bank West	Michigan
Non-bank subsidiaries:
CFC Financial Services, Inc.
-  also operates under d/b/a CFC Investment Centers	Michigan
CFC Title Services, Inc.	Michigan
Shoreline Insurance Services, Inc.	Michigan
Chemical Loan Management Corporation	Michigan
Chemical West Loan Management Corporation	Michigan
Chemical Shoreline Loan Management Corporation	Michigan
Chemical Loan Services, LLC	Michigan
Chemical West Loan Services, LLC	Michigan
Chemical Shoreline Loan Services, LLC	Michigan
JV Midland No. 1, LLC (50% owned)         -  also operates under d/b/a Bailey Financial Services	Michigan

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the 2005 Annual Report (Form 10-K) of Chemical Financial Corporation of our reports dated February 24, 2006, with respect to the consolidated financial statements of Chemical Financial Corporation, Chemical Financial Corporation's management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Chemical Financial Corporation, included in the 2005 Annual Report to Shareholders of Chemical Financial Corporation.

We also consent to the incorporation by reference in the following Registration Statements:

Registration Statement No. 33-15064 on Form S-8 dated June 17, 1987
	1987 Award and Stock Option Plan - Amendment 1991;
Registration Statement No. 33-40792 on Form S-8 dated May 21, 1991
	401(k) Plan;
Registration Statement No. 333-38511 on Form S-8 dated October 22, 1997
	Stock Incentive Plan of 1997;
Registration Statement No. 333-56482 on Form S-8 dated March 2, 2001
	Stock Option Plan for Option Holders of Shoreline Financial Corporation;
Registration Statement No. 333-84862 on Form S-8 dated March 25, 2002
	2001 Stock Purchase Plan for Subsidiary and Community Bank Directors;
Registration Statement No. 333-109184 on Form S-3 dated September 26, 2003
	Dividend Reinvestment Plan - Chemical Invest Direct;
Registration Statement No. 333-110922 on Form S-8 dated December 4, 2003
	Stock Option Plan for Option Holders of Caledonia Financial Corporation;
Registration Statement No. 333-125031 on Form S-8 dated May 18, 2005
	Chemical Financial Corporation 401(k) Savings Plan,

of our reports dated February 24, 2006, with respect to the consolidated financial statements of Chemical Financial Corporation, Chemical Financial Corporation's management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Chemical Financial Corporation, incorporated by reference in the 2005 Annual Report (Form 10-K).

We also consent to the incorporation by reference in the Registration Statement No. 333-84862 on Form S-8 dated March 25, 2002 of our report dated March 6, 2006 with respect to the financial statements of the Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors included in an Exhibit to the Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ Ernst & Young LLP

Detroit, Michigan
March 10, 2006

EX-24

EXHIBIT NO. 24

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 30, 2005	/s/ Gary E. Anderson
	(signature)
	Gary E. Anderson

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 30, 2005	/s/ J. Daniel Bernson
	(signature)
	J. Daniel Bernson

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 29, 2005	/s/ Nancy Bowman
	(signature)
	Nancy Bowman

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 15, 2005	/s/ James A. Currie
	(signature)
	James A. Currie

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 13, 2005	/s/ Thomas T. Huff
	(signature)
	Thomas T. Huff

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 19, 2005	/s/ Michael T. Laethem
	(signature)
	Michael T. Laethem

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 30, 2005	/s/ Geoffery E. Merszei
	(signature)
	Geoffery E. Merszei

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 15, 2005	/s/ Terence F. Moore
	(signature)
	Terence F. Moore

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 31, 2005	/s/ Aloysius J. Oliver
	(signature)
	Aloysius J. Oliver

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 19, 2005	/s/ Frank P. Popoff
	(signature)
	Frank P. Popoff

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 27, 2005	/s/ Calvin D. Prins
	(signature)
	Calvin D. Prins

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 27, 2005	/s/ Dan L. Smith
	(signature)
	Dan L. Smith

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 19, 2005	/s/ Larry D. Stauffer
	(signature)
	Larry D. Stauffer

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 10, 2005	/s/ William S. Stavropoulos
	(signature)
	William S. Stavropoulos

LIMITED POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer, or both, of Chemical Financial Corporation, does hereby appoint Frank P. Popoff, David B. Ramaker and Lori A. Gwizdala, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of Chemical Financial Corporation on Form 10-K for its fiscal year ended December 31, 2005, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated:  December 23, 2005	/s/ Franklin C. Wheatlake
	(signature)
	Franklin C. Wheatlake

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, David B. Ramaker, certify that:

1.	I have reviewed this annual report on Form 10-K for the year ended December 31, 2005 of Chemical Financial Corporation;
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;
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;
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;
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;
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
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):

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
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:  March 10, 2006

s/ David B. Ramaker

David B. Ramaker
President and Chief Executive Officer
Chemical Financial Corporation

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Lori A. Gwizdala, certify that:

1.	I have reviewed this annual report on Form 10-K for the year ended December 31, 2005 of Chemical Financial Corporation;
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;
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;
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;
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;
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
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):

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
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:  March 10, 2006

s/ Lori A. Gwizdala

Lori A. Gwizdala
Executive Vice President, Chief Financial
Officer and Treasurer
Chemical Financial Corporation

EX-32

EXHIBIT 32

CERTIFICATION

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his capacity as an officer of Chemical Financial Corporation (the "Company") that the Annual Report of the Company on Form 10-K for the accounting period ended December 31, 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:  March 10, 2006	s/ David B. Ramaker
	David B. Ramaker President and Chief Executive Officer

Dated:  March 10, 2006	s/ Lori A. Gwizdala
	Lori A. Gwizdala Executive Vice President, Chief Financial Officer and Treasurer

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.

EX-99.1

EXHIBIT No. 99.1














Financial Statements
With Report of Independent Registered Public Accounting Firm



Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


December 31, 2005

Report of Independent Registered Public Accounting Firm

Plan Administrator
Chemical Financial Corporation
2001 Stock Purchase Plan for Subsidiary and Community Bank Directors

We have audited the accompanying statements of financial condition of the Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors as of December 31, 2005 and December 31, 2004, and the related statements of income and changes in plan equity for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Plan's Administrator. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Plan's internal control over financial reporting. Our audits included considerations of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Plan's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Plan Administrator, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial condition of the Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors at December 31, 2005 and December 31, 2004, and the results of its operations and changes in its plan equity for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

s/ Ernst & Young LLP

Detroit, Michigan
March 6, 2006

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Statements of Financial Condition

		December 31 2005	December 31 2004
Assets
Cash	$	867	$	884
Common stock receivable of Chemical
Financial Corporation, at market value - (7,861 shares    at a cost of $254,942 at December 31, 2005 and 6,579    shares at a cost of $231,308 at December 31, 2004)		249,665		267,239
Total Assets	$	250,532	$	268,123
Plan Equity
Plan equity (50 participants at December 31, 2005 and 51 participants at December 31, 2004)	$	250,532	$	268,123

See accompanying notes.

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Statements of Income and Changes in Plan Equity

Additions	Year Ended December 31 2005			Year Ended December 31 2004			Year Ended December 31 2003
Participant contributions	$	249,525		$	227,925		$	214,900
Dividend equivalents and
fractional share interests		5,400			3,564			4,560
		254,925			231,489			219,460
Deductions
Plan distributions		267,381			255,431			202,601
		(12,456	)		(23,942	)		16,859
Net unrealized appreciation (depreciation)
in fair value of common stock receivable		(5,135	)		36,012			35,794
Net increase (decrease)		(17,591	)		12,070			52,653
Plan equity at beginning of period		268,123			256,053			203,400
Plan equity at end of period	$	250,532		$	268,123		$	256,053

See accompanying notes.

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Notes to Financial Statements
December 31, 2005

Note 1 - Description of the Plan

The Chemical Financial Corporation 2001 Stock Purchase Plan for Subsidiary and Community Bank Directors (Plan) was made effective by Chemical Financial Corporation (Corporation) on March 25, 2002. The Plan is designed to provide non-employee directors of the Corporation's subsidiaries and community banks, who are neither directors nor employees of the Corporation, with a convenient method of acquiring Corporation stock. The Plan provides for a maximum of 75,000 shares of the Corporation's common stock, $1.00 par value (Common Stock), subject to adjustments for certain changes in the capital structure of the Corporation as defined in the Plan (including stock dividends and stock splits), to be available under the Plan.

Subsidiary directors and community bank directors, who elect to participate in the Plan, may elect to contribute to the Plan fifty percent or one hundred percent of their director retainer fees and/or fifty percent or one hundred percent of their board of director fees and/or fifty percent or one hundred percent of their director committee fees, earned as directors or community bank directors of the Corporation's subsidiaries. Participant contributions to the Plan are made by the Corporation's subsidiaries on behalf of each electing participant. As of the last day of each month, each participant's cash account is debited for the purchase of whole shares of the Corporation's stock that is credited to a separate participant stock account. The stock purchased under the Plan during the calendar year is issued by the Corporation directly to the participants in the following calendar year. The Plan provides for dividend equivalents to be credited to each participant's cash account as of the dividend record date of the Corporation's common stock. Dividend equivalents are calculated by multiplying the Corporation's dividend rate by the number of shares of common stock in each participant's stock account as of the Corporation's dividend record date. The Plan also provides for an appropriate credit to each participant's stock account for stock dividends, stock splits or other distributions of the Corporation's common stock by the Corporation. Fractional shares calculated as a result of the above adjustments are converted to cash based on the market price of the Corporation's common stock and are credited to each participant's cash account. Plan participants may terminate their participation in the Plan, at any time, by written notice of withdrawal to the Corporation. Participants will cease to be eligible to participate in the Plan when they cease to serve as directors or community bank directors of subsidiaries of the Corporation. Upon withdrawal from the Plan, each participant will receive the shares of com mon stock of the Corporation in their participant stock account and the cash in their participant cash account.

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Notes to Financial Statements (continued)
December 31, 2005

Note 1 - Description of the Plan (continued)

The Plan had 56,697 shares and 63,276 shares as of December 31, 2005 and 2004, respectively, of the Corporation's common stock available for future issuance, adjusted for the the 5% stock dividend paid on January 28, 2005.

The Corporation reserves the right to terminate or amend the Plan at any time, provided, however, that no termination or amendment shall affect or diminish any participant's right to the benefit of contributions made by him/her prior to the date of such amendment or termination.

The Plan provides that all expenses of the Plan and its administration shall be paid by the Corporation.

The Plan is not qualified under Sections 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended. The Plan does not provide for income taxes because any income is taxable to the participants. Participants in the Plan must treat as taxable income the contributions made to the Plan by the Corporation's subsidiaries on their behalf. Dividend equivalents and any other cash credited to the participants' cash accounts are taxable to the participants for Federal and state income tax purposes in the year such dividend equivalent or cash is credited to the participant cash account. Upon disposition of the common stock of the Corporation purchased under the Plan, participants must treat any gain or loss as long-term or short-term capital gain or loss depending upon when such disposition occurs.

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Notes to Financial Statements (continued)
December 31, 2005

Note 2 - Summary of Accounting Policies

Valuation of Common Stock Receivable

Common stock receivable of the Corporation is recorded at the market value per share of the Corporation's common stock multiplied by the number of shares receivable at the valuation date. Market value is based on the closing price of the Corporation's common stock at year end ($31.76 per share at December 31, 2005 and $40.62 per share at December 31, 2004). The number of shares receivable and the closing price as of December 31, 2005 and December 31, 2004 were adjusted for the 5% stock dividend on the Corporation's common stock paid on January 28, 2005.

Income

Dividend equivalents and fractional share interests are accrued on the Corporation's dividend or other record date.

Contributions

Contributions are accounted for on the accrual basis.

Chemical Financial Corporation
2001 Stock Purchase Plan
for Subsidiary and Community Bank Directors


Notes to Financial Statements (continued)
December 31, 2005

Note 3 - Contributions

Contributions for participants by the participating companies were as follows:

Participating Company	Year Ended December 31, 2005		Year Ended December 31 2004		Year Ended December 31 2003
Chemical Bank and Trust Co.	$	87,650	$	94,575	$	95,850
Chemical Bank Shoreline		90,700		62,850		52,000
Chemical Bank West		67,175		65,700		61,450
CFC Data Corp		-		-		800
CFC Financial Services, Inc.		2,000		2,400		2,400
CFC Title Services, Inc.		2,000		2,400		2,400
Total Participant Contributions	$	249,525	$	227,925	$	214,900