Form 10-K

10-K 1 d274665d10k.htm FORM 10-K Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended: December 31, 2011

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		38-2022454
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

235 E. Main Street,

Midland, Michigan

48640

(Zip Code)

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (888) 309-2481

Securities Registered Pursuant to Section 12(b) of the Act:


Common Stock, $1 Par Value Per Share		The NASDAQ Stock Market
(Title of Class)		(Name of each exchange on which registered)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes üNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes üNo

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer		Accelerated filer ü		Non-accelerated filer		Smaller reporting company

(Do not check if a smaller reporting company)

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

The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates of the registrant as of June 30, 2011, determined using the closing price of the registrant’s common stock on June 30, 2011 of $18.76, as quoted on The Nasdaq Stock Market^®, was $465.4 million.

The number of shares outstanding of each of the registrant’s classes of common stock, as of January 31, 2012: Common stock, $1 par value per share — 27,468,919 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of Chemical Financial Corporation for the April 16, 2012 annual shareholders’ meeting are incorporated by reference into Part III of this Form 10-K.

CHEMICAL FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


		Page
FORWARD LOOKING STATEMENTS			1

PART I

Item 1.	Business		2

Item 1A.	Risk Factors		8

Item 1B.	Unresolved Staff Comments		16

Item 2.	Properties		16

Item 3.	Legal Proceedings		16

Item 4.	Mine Safety Disclosures		16

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17

Item 6.	Selected Financial Data		19

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		55

Item 8.	Financial Statements and Supplementary Data		57

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		109

Item 9A.	Controls and Procedures		109

Item 9B.	Other Information		112

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		112

Item 11.	Executive Compensation		112

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		112

Item 13.	Certain Relationships and Related Transactions and Director Independence		113

Item 14.	Principal Accountant Fees and Services		113

PART IV

Item 15.	Exhibits and Financial Statement Schedules		113

SIGNATURES			115

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 (Corporation). Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “judgment,” “plans,” “predicts,” “projects,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to future levels of loan charge-offs, future levels of provisions for loan losses, real estate valuation, future levels of nonperforming loans, the rate of asset dispositions, future capital levels, future dividends, future growth and funding sources, future liquidity levels, future profitability levels, future deposit insurance premiums, the effects on earnings of future changes in interest rates, the future level of other revenue sources, future economic trends, future initiatives to expand the Corporation’s market share, future economic conditions, future effects of new or changed accounting standards and future opportunities for acquisitions. All statements referencing future time periods are forward-looking. Management’s determination of the provision and allowance for loan losses; the carrying value of acquired loans, goodwill and mortgage servicing rights; the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment); and management’s assumptions and estimates concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated. All of the information concerning interest rate sensitivity is forward-looking. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on the Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

Risk factors include, but are not limited to, the risk factors described in Item 1A of this report. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

PART I

Item 1.

Business.

General Business

Chemical Financial Corporation (Corporation), headquartered in Midland, Michigan, is a financial holding company registered under the Bank Holding Company Act of 1956 and incorporated in the State of Michigan. The Corporation is the second-largest bank holding company headquartered and operating branch offices in Michigan. At December 31, 2011, the Corporation’s consolidated total assets, loans, deposits and shareholders’ equity were $5.3 billion, $3.8 billion, $4.4 billion and $572 million, respectively, and the Corporation employed approximately 1,700 full-time equivalent employees at that date. For more information about the Corporation’s financial condition and results of operations, see the consolidated financial statements and related notes included in Part II, Item 8 of this report.

The Corporation was incorporated in August 1973. On June 30, 1974, the Corporation acquired Chemical Bank and Trust Company (CBT) pursuant to a reorganization in which the former shareholders of CBT became shareholders of the Corporation. CBT’s name was changed to Chemical Bank on December 31, 2005. In addition to the acquisition of CBT, the Corporation has acquired 20 community banks and 15 other branch bank offices through December 31, 2011, including the acquisition of O.A.K. Financial Corporation (OAK) during 2010. This transaction is discussed in more detail under the subheading, “Acquisition of O.A.K. Financial Corporation,” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Corporation has consolidated these acquisitions into a single commercial subsidiary bank, Chemical Bank. Chemical Bank operates through an internal organizational structure of four regional banking units and 15 community banking units.

Chemical Bank directly owns two operating non-bank subsidiaries: CFC Financial Services, Inc. and CFC Title Services, Inc. CFC Financial Services, Inc. is an insurance subsidiary that operates under the assumed name of “Chemical Financial Advisors” and provides mutual funds, annuity products and market securities to customers. CFC Title Services, Inc. is an issuer of title insurance to buyers and sellers of residential and commercial mortgage properties, including properties subject to loan refinancing.

The Corporation’s business is concentrated in a single industry segment — commercial banking. Chemical Bank offers a full range of traditional banking and fiduciary products and services. These include business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance and investment products, corporate and personal wealth management services and other banking services.

The principal markets for the Corporation’s products and services are the communities in Michigan where Chemical Bank’s branches are located and the areas surrounding these communities. As of December 31, 2011, the Corporation and Chemical Bank served these markets through 142 banking offices located in 32 counties, all in the lower peninsula of Michigan. In addition to the banking offices, Chemical Bank operated three loan production offices and 161 automated teller machines, both on- and off-bank premises, as of December 31, 2011. The Corporation did not have banking offices or provide commercial banking services in the southeast portion of Michigan at December 31, 2011. The southeast portion of Michigan is not part of the Corporation’s current or projected markets for the delivery of its products and services.

A summary of the composition of the Corporation’s loan portfolio at December 31, 2011, 2010 and 2009 was as follows:


	December 31,
	2011					2010					2009
	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(Dollars in millions)
Composition of Loans:
Commercial	$	895.2		23	%	$	819.0		22	%	$	584.3		20	%
Real estate commercial		1,072.0		28			1,077.0		29			785.7		26
Real estate construction and land development		118.2		3			142.6		4			121.3		4
Real estate residential		861.7		23			798.0		22			739.4		25
Consumer installment and home equity		884.2		23			845.0		23			762.5		25

Total composition of loans	$	3,831.3		100	%	$	3,681.6		100	%	$	2,993.2		100	%

The Corporation’s loan portfolio totaled $3.83 billion at December 31, 2011, compared to $3.68 billion and $2.99 billion at December 31, 2010 and 2009, respectively. The Corporation’s loan portfolio increased 150 million, or 4.1%, during 2011, with the increase attributable to a $76 million, or 9.3%, increase in commercial loans, a $64 million, or 8.0%, increase in real estate residential loans and a $39 million, or 4.6%, increase in consumer installment and home equity loans. These increases were partially offset by decreases of $5 million in real estate commercial loans and $24 million, or 17%, in real estate construction and land development loans. The growth in loans during 2011 was primarily attributable to an improved economy in Michigan during the year, which resulted in more loan demand than in recent years and the Corporation increasing its loan market share in some of its lending markets. The Corporation’s loan portfolio increased $689 million, or 23%, during 2010, with the increase primarily attributable to the acquisition of OAK. The Corporation’s loan portfolio is not concentrated in any one industry.

The principal source of revenue for the Corporation is interest income and fees on loans, which accounted for 76% of total revenue in both 2011 and 2010 and 74% of total revenue in 2009. Interest income on investment securities is also a significant source of revenue, accounting for 6% of total revenue in both 2011 and 2010 and 8% of total revenue in 2009. The Corporation has no foreign loans, assets or activities. No material part of the business of the Corporation or Chemical Bank is dependent upon a single customer or very few customers.

The nature of the business of Chemical Bank is such that it holds title to numerous parcels of real property. These properties are primarily owned for branch offices. However, the Corporation and Chemical Bank may hold properties for other business purposes, as well as on a temporary basis for properties taken in, or in lieu of, foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of clean up of contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property.

The Corporation offers wealth management services, including trust services, financial and estate planning, retirement programs, investment management and custodial services and employee benefit programs through the Wealth Management department of Chemical Bank. The Wealth Management department had assets under custodial and management arrangements of $1.95 billion, $2.02 billion and $1.91 billion as of December 31, 2011, 2010 and 2009, respectively. The Wealth Management department primarily earns revenue from fees based on the market value of those assets under management, which can fluctuate significantly as the market fluctuates.

Competition

The business of banking is highly competitive. 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). In addition to competition from other commercial banks, banks face significant competition from nonbank financial institutions, including savings and loan associations, credit unions, finance companies, insurance companies and investment firms. Credit unions and finance companies are particularly significant competitors in the consumer loan market. Banks also compete for deposits with a broad range of other types of investments, including mutual funds and annuities. In response to the competition for customers’ bank deposits, Chemical Bank, through the Chemical Financial Advisors program, offers a broad array of mutual funds, annuity products, market securities and insurance products through an alliance with an independent, registered broker/dealer. In addition, the Wealth Management department of Chemical Bank offers customers a variety of investment products and services.

Supervision and Regulation

The Corporation and Chemical Bank are subject to extensive supervision and regulation under various federal and state laws. The supervisory and regulatory framework is intended primarily for the protection of depositors and the banking system as a whole, and not for the protection of shareholders and creditors.

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

A summary of significant elements of some of the laws, regulations and regulatory policies applicable to the Corporation and Chemical Bank follows below. The descriptions are qualified in their entirety by reference to the full text of the statutes,

regulations and policies that are described. These statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Corporation and Chemical Bank could have a material effect on the business of the Corporation and Chemical Bank.

Regulatory Agencies

The Corporation is a legal entity separate and distinct from Chemical Bank. The Corporation is regulated by the Federal Reserve Board (FRB) as a financial holding company and a bank holding company under the Bank Holding Company Act of 1956 (BHC Act). The BHC Act provides for general regulation of financial holding companies by the FRB and functional regulation of banking activities by banking regulators. The Corporation is also under the jurisdiction of the Securities and Exchange Commission (SEC) and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Corporation’s common stock is traded on The Nasdaq Stock Market^® (Nasdaq) under the symbol CHFC and is subject to the Nasdaq Listing Rules.

Chemical Bank is chartered by the State of Michigan and supervised, examined and regulated by the Michigan Office of Financial and Insurance Regulation (OFIR). Chemical Bank, as a member of the Federal Reserve System, is also supervised, examined and regulated by the FRB. Deposits of Chemical Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum extent provided by law.

Bank Holding Company Activities

In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies, may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.

In order for the Corporation to maintain financial holding company status, both the Corporation and Chemical Bank must be categorized as “well-capitalized” and “well-managed” under applicable regulatory guidelines. If the Corporation or Chemical Bank ceases to meet these requirements, the FRB may impose corrective capital and/or managerial requirements and place limitations on the Corporation’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the FRB may require the Corporation to divest of Chemical Bank. At December 31, 2011, both the Corporation and Chemical Bank were categorized as “well-capitalized and “well-managed”.

The BHC Act requires prior approval of the FRB for any direct or indirect acquisition of more than 5.0% of the voting shares of a commercial bank or its parent holding company by the Corporation. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the Corporation’s performance record under the Community Reinvestment Act of 1977 (CRA) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

Interstate Banking and Branching

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

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

Dividends

The Corporation’s primary source of funds is dividends paid to it by Chemical Bank. Federal and state banking laws and regulations limit both the extent to which Chemical Bank can lend or otherwise supply funds to the Corporation and also place certain restrictions on the amount of dividends Chemical Bank may pay to the Corporation.

Chemical Bank is required to obtain prior approval from the FRB for the declaration and payment of dividends to the Corporation if the total of all dividends declared in any calendar year will exceed the total of (i) Chemical Bank’s net income (as defined by regulation) for that year plus (ii) the retained net income (as defined by regulation) for the preceding two years. At December 31, 2011, Chemical Bank could declare, without FRB approval, aggregate dividends of approximately $29 million from retained net income from the preceding two years. This amount is not necessarily indicative of amounts that may be paid or available to be paid in future. Chemical Bank declared and paid dividends to the Corporation of $22.0 million and $21.3 million in 2011 and 2010, respectively.

The Corporation and Chemical Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums, which could prohibit the payment of dividends under circumstances where the payment could be deemed an unsafe and unsound banking practice. In addition, federal regulatory authorities have stated that, in the current financial and economic environment, banking organizations should generally pay dividends only out of current operating earnings. Further, the FRB has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

Source of Strength

Under FRB policy, the Corporation is expected to act as a source of financial strength to Chemical Bank and to commit resources to support Chemical Bank. In addition, if the OFIR deems Chemical Bank’s capital to be impaired, OFIR may require Chemical Bank to restore its capital by a special assessment on the Corporation as Chemical Bank’s only shareholder. If the Corporation failed to pay any assessment, the Corporation’s directors would be required, under Michigan law, to sell the shares of Chemical Bank’s stock owned by the Corporation to the highest bidder at either a public or private auction and use the proceeds of the sale to restore Chemical Bank’s capital.

Capital Requirements

The Corporation and Chemical Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Corporation or Chemical Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, Chemical Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution’s capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure.

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

Regulations establishing the specific capital tiers provide that, for a depository institution to be well capitalized, it must have a total risk-based capital ratio of at least 10% and a Tier 1 risk-based capital ratio of at least 6%, a Tier 1 leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized, it must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4% (and

in some cases 3%). Under certain circumstances, the appropriate banking agency may treat a well capitalized, adequately capitalized or undercapitalized institution as if the institution were in the next lower capital category.

The capital ratios of the Corporation and Chemical Bank exceed the regulatory guidelines for institutions to be categorized as “well-capitalized.” Additional information on the Corporation and Chemical Bank’s capital ratios may be found under Note 21 to the consolidated financial statements under Item 8 of this report.

FDIC Insurance

The FDIC formed the Deposit Insurance Fund (DIF) in accordance with the Federal Deposit Insurance Reform Act of 2005 (Reform Act). The FDIC implemented the Reform Act to create a stronger and more stable insurance system. The FDIC maintains the insurance reserves of the DIF by assessing depository institutions an insurance premium. The DIF insures deposit accounts of Chemical Bank up to a maximum amount per separately insured depositor. Under The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the maximum amount of federal deposit insurance coverage permanently increased from $100,000 to $250,000 per depositor, per institution. On November 9, 2010, the FDIC issued a final rule to implement a provision of the Dodd- Frank Act that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts. This unlimited coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.

FDIC-insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. As required by the Dodd-Frank Act, in February 2011, the FDIC finalized rules, effective for assessments occurring after April 1, 2011, which redefine an institution’s assessment base as average consolidated total assets minus average tangible equity. The new rules also establish the general assessment rate for Risk Category 1 institutions such as Chemical Bank at 5 to 9 basis points (annualized). Prior to this, an institution’s assessment base was average deposits and the assessment rate for Risk Category institutions ranged from 12 to 16 basis points (annualized). The Corporation’s FDIC DIF insurance premiums, including an FDIC special assessment in 2009 as discussed below, were $5.4 million in 2011, compared to $7.4 million in 2010 and $7.0 million in 2009.

In May 2009, the FDIC, as part of its efforts to rebuild the DIF, levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The Corporation recognized FDIC insurance expense of $1.8 million in the second quarter of 2009 related to the special assessment.

In November 2009, the FDIC required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Accordingly, on December 30, 2009, the Corporation prepaid $19.7 million in risk-based assessments. At December 31, 2011, the Corporation’s remaining prepaid FDIC insurance assessments totaled $10.7 million.

Safety and Soundness Standards

As required by FDICIA, the federal banking agencies’ prompt corrective action powers impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. These actions can include: requiring an insured depository institution to adopt a capital restoration plan guaranteed by the institution’s parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution.

The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.

Depositor Preference

The FDIC provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC on behalf of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Community Reinvestment Act (CRA)

Banks are subject to the provisions of the 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, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance”. 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 FRB 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. Chemical Bank received an “outstanding” rating in its most recent CRA evaluation.

Financial Privacy

The federal banking regulators limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering and the USA Patriot Act

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (USA Patriot Act) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Office of Foreign Assets Control Regulation

The United States Treasury Department Office of Foreign Assets Control (OFAC) has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. OFAC sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

The Dodd-Frank Act

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the new federal Bureau of Consumer Financial Protection (BCFP), and requires the BCFP and other federal agencies to implement many new and significant rules and regulations. Compliance with these new laws and regulations will likely result in additional costs, which could be significant and could adversely impact the Corporation’s results of operations, financial condition or liquidity.

Incentive Compensation

The regulatory agencies have issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk

profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The FRB reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Corporation, that are not “large, complex banking organizations.” The findings will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Mergers, Acquisitions, Consolidations and Divestitures

The Corporation’s strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings while taking into account the integration and other risks of growth. The Corporation evaluates strategic acquisition opportunities and conducts due diligence activities in connection with possible transactions. As a result, discussions, and in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur. These generally involve payment of a premium over book value and current market price, and therefore, dilution of book value and net income per share may occur with any future transaction.

On April 30, 2010, the Corporation acquired all of the outstanding stock of O.A.K. Financial Corporation (OAK) for total consideration of $83.7 million. The total consideration consisted of the issuance of 3,529,772 shares of the Corporation’s common stock with a total value of $83.7 million based upon a market price per share of $23.70 at the acquisition date, the exchange of 26,425 stock options for the outstanding vested stock options of OAK with a value of the exchange equal to approximately $41,000 at the acquisition date, and approximately $8,000 of cash in lieu of fractional shares.

There were no other business combinations, consolidations or divestitures completed by the Corporation during the three years ended December 31, 2011.

Availability of Financial Information

The Corporation files reports with the Securities and Exchange Commission (SEC). Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements. The public may read and copy any materials the Corporation files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, but not including exhibits to those reports, may be obtained without charge upon written request to Lori A. Gwizdala, Chief Financial Officer of the Corporation, at P.O. Box 569, Midland, Michigan 48640-0569 and are accessible at no cost on the Corporation’s website at www.chemicalbankmi.com in the “Investor Information” section, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of exhibits may be requested at the cost of 30 cents per page from the Corporation’s corporate offices. In addition, interactive copies of the Corporation’s 2011 Annual Report on Form 10-K and the 2012 Proxy Statement are available at www.edocumentview.com/chfc.

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 risks that management can, the Corporation ultimately cannot predict the future or control all of the risks to which it is subject. Actual results may differ materially from 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 adversely 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. If this were to happen, the market price of the Corporation’s common stock per share could decline significantly.

Investments in the Corporation’s common stock involve risk.

The market price of the Corporation’s common stock may fluctuate significantly in response to a number of factors, including, among other things:

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Variations in quarterly or annual results of operations

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Changes in dividends paid per share

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Deterioration in asset quality

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Changes in interest rates

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Declining real estate values

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Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by, or involving, the Corporation or its competitors

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Failure to integrate acquisitions or realize anticipated benefits from acquisitions

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Regulatory actions

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Volatility of stock market prices and volumes

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Issuance of additional shares of common stock or other debt or equity securities of the Corporation

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Changes in market valuations of similar companies

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Uncertainties and fluctuations in the financial markets

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Changes in securities analysts’ estimates of financial performance or recommendations

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New litigation or contingencies or changes in existing litigation or contingencies

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New technology used, or services offered, by competitors

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

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New developments in the financial services industry

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News reports relating to trends, concerns and other issues in the financial services industry

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Perceptions in the marketplace regarding the financial services industry, the Corporation and/or its competitors

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Rumors or erroneous information

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Geopolitical conditions such as acts or threats of terrorism or military conflicts

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Disruptions in the credit and financial markets, either nationally or globally, including the impact of a downgrade of U.S. government obligations by one of the credit agencies and the adverse effects of the ongoing sovereign debt crisis in Europe

The Corporation is subject to lending risk.

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 repayment includes a wide variety of real and personal property that may be insufficient to cover the amounts owed. Collateral values are 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.

The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to net income that represents management’s estimate of probable losses that have been incurred within the existing portfolio of loans. The level of the allowance for loan losses reflects management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, the value of real estate, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions and declines in real

estate values affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Any significant increase in the allowance for loan losses would likely result in a significant decrease in net income and may have a material adverse effect on the Corporation’s financial condition and results of operations. See the sections captioned “Allowance for Loan Losses” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4 — Loans in the notes to consolidated financial statements in Item 8. Financial Statements and Supplementary Data, located elsewhere in this report for further discussion related to the Corporation’s process for determining the appropriate level of the allowance for loan losses.

Environmental liability associated with commercial lending could result in losses.

In the course of its business, the Corporation may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in real estate commercial lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Corporation might be required to remove these substances from the affected properties at the Corporation’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Corporation may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Corporation’s business, results of operations and financial condition.

The Corporation may face increasing pressure from purchasers of its residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans.

The Corporation sells fixed rate long-term residential mortgage loans it originates in the secondary market. The Corporation believes that purchasers of residential mortgage loans, such as government sponsored entities, are increasing their efforts to seek to require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual or alleged failure to strictly conform to the purchaser’s purchase criteria. As a result, the Corporation may face increasing pressure from purchasers of its residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and it may face increasing expenses to defend against such claims. If the Corporation is required in the future to repurchase loans previously sold, reimburse purchasers for losses related to loans previously sold, or if it incurs increasing expenses to defend against such claims, the Corporation’s financial condition and results of operations would be negatively affected.

The Corporation holds general obligation municipal bonds in its investment securities portfolio. If one or more issuers of these bonds were to become insolvent and default on its obligations under the bonds, it could have a negative effect on the financial condition and results of operations of the Corporation.

Municipal bonds held by the Corporation totaled $218 million at December 31, 2011, and were issued by many different municipalities with no significant concentration in any single municipality. There can be no assurance that the financial conditions of these municipalities will not be materially and adversely affected by future economic conditions. If one or more of the issuers of these bonds were to become insolvent and default on their obligations under the bonds, it could have a negative effect on the financial condition and results of operations of the Corporation.

The Corporation depends upon the accuracy and completeness of information about customers.

In deciding whether to extend credit to customers, the Corporation relies on information provided to it by its customers, including financial statements and other financial information. The Corporation may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Corporation’s financial condition and results of operations could be negatively impacted to the extent that the Corporation extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.

General economic conditions, and in particular conditions in the State of Michigan, effect the Corporation’s business.

The Corporation is affected by general economic conditions in the United States, although most directly within Michigan. Since December 2007, recessionary conditions have existed nationwide, while the State of Michigan has experienced economic difficulties since at least 2006. Business activity across a wide range of industries and regions is greatly reduced and many businesses are in serious difficulty due to a decline in consumer and business spending. Unemployment levels nationwide and in the State of Michigan remain high.

The Corporation’s success depends primarily on the general economic conditions in the State of Michigan and the specific local markets in which the Corporation operates. The local economic conditions in these local markets have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding sources. Economic conditions experienced in the State of Michigan have been more adverse than in the United States generally, and these conditions may not significantly improve in the near future. Substantially all of the Corporation’s loans are to individuals and businesses in Michigan. Consequently, any further or prolonged decline in Michigan’s economy could have a materially adverse effect on the Corporation’s financial condition and results of operations. A significant further decline or a prolonged period of the lack of improvement in general economic conditions could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.

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

The Corporation’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing and/or new customers. In addition to other banks, competitors include savings and loan associations, credit unions, securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the State of Michigan, regulation, and changes in technology and product delivery systems. New competitors may emerge to increase the degree of competition for the Corporation’s customers and services. Financial services and products are also constantly changing. The Corporation’s financial performance will also depend in part upon customer demand for its products and services and its ability to develop and offer competitive financial products and services.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries in financial transactions, known as disintermediation, could result in the loss of fee income, the loss of customer deposits and income generated from those deposits and lending opportunities.

Changes in interest rates could reduce the Corporation’s net income and cash flow.

The Corporation’s net income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities and the interest paid on deposits and other borrowings. Market interest rates are beyond the Corporation’s control, and they fluctuate in response to general economic conditions, the policies of various governmental and regulatory agencies and competition. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits, the interest received on loans and securities and the interest paid on deposits and other borrowings. Any significant adverse effects of changes in interest rates on the Corporation’s results of operations, or any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Corporation’s financial condition and results of operations. See the sections captioned “Net Interest Income” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Market Risk” in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, located elsewhere in this report, for further discussion related to the Corporation’s management of interest rate risk.

The Corporation may be required to pay additional deposit insurance premiums to the FDIC, which could negatively impact earnings.

Insured institution failures have significantly increased losses to the FDIC deposit insurance fund. If the number of insured institution failures remains elevated, the deposit insurance fund may continue to decline despite the FDIC’s efforts to increase it. In addition, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor and the FDIC issued a rule in November 2010 that provides unlimited FDIC coverage on noninterest-bearing transaction accounts through December 31, 2012, further exposing the deposit insurance fund to losses.

Depending upon the magnitude of future losses that the FDIC insurance fund suffers, there can be no assurance that there will not be additional premium increases or assessments in order to replenish the fund. The FDIC may need to set a higher base rate schedule based on future financial institution failures and updated failure and loss projections. Potentially higher FDIC assessment rates than those currently projected or special assessments could have an adverse impact on the Corporation’s financial condition and results of operations.

The Corporation is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.

Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within

acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Corporation is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively effected.

The Corporation may issue debt and equity securities that are senior to the Corporation’s common stock as to distributions and in liquidation, which could negatively affect the value of the Corporation’s common stock.

In the future, the Corporation may increase its capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of the Corporation’s liquidation, its lenders and holders of its debt securities would receive a distribution of the Corporation’s available assets before distributions to the holders of the Corporation’s common stock. The Corporation’s decision to incur debt and issue securities in future offerings may depend on market conditions and other factors beyond its control. The Corporation cannot predict or estimate the amount, timing or nature of its future offerings and debt financings. Future offerings could reduce the value of shares of the Corporation’s common stock and dilute a shareholder’s interest in the Corporation.

Evaluation of investment securities for other-than-temporary impairment involves subjective determinations and could materially impact the Corporation’s financial condition and results of operations.

The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s net income, projected net income and financial condition or future recovery prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and/or value of the underlying asset and also assessing the probability that an adverse change in future cash flows has occurred. The determination of the amount of other-than-temporary impairments is based upon the Corporation’s quarterly evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.

Additionally, the Corporation’s management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been less than cost or amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) the Corporation’s intent and ability to retain the investment for a period of time sufficient to allow for the recovery of its value; (vii) unfavorable changes in forecasted cash flows on residential mortgage-backed and asset-backed securities; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. Impairments to the carrying value of the Corporation’s investment securities may need to be taken in the future, which could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation may be required to recognize an impairment of goodwill or to establish a valuation allowance against deferred income tax assets, which could have a material adverse effect on the Corporation’s financial condition and results of operations.

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The Corporation tests goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. Substantially all of the Corporation’s goodwill at December 31, 2011 was recorded on the books of Chemical Bank. The fair value of Chemical Bank is impacted by the performance of its business and other factors. If it is determined that the goodwill has been impaired, the Corporation must write-down the goodwill by the amount of the impairment, with a corresponding charge to net income. Such write-downs could have a material adverse effect on the Corporation’s financial position and results of operations.

Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the Corporation, including the ability to generate taxable net income. If, based on available information, it is

more-likely-than-not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2011, the Corporation did not carry a valuation allowance against its deferred tax assets. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on the Corporation’s financial position and results of operations.

If the Corporation is required to establish a valuation allowance with respect to its mortgage servicing rights asset, its financial condition and results of operations would be negatively affected.

At December 31, 2011, the Corporation’s mortgage servicing rights asset had a book value of $3.6 million and a fair value of approximately $4.8 million. Because of the current interest rate environment and the increasing rate and speed of mortgage refinancings, it is possible that the Corporation may have to establish a valuation allowance with respect to its mortgage servicing rights asset in the future. If the Corporation is required in the future to establish a valuation allowance with respect to its mortgage servicing rights asset, the Corporation’s financial condition and results of operations could be negatively affected.

The Corporation may be a defendant in a variety of litigation and other actions, which may have a material adverse affect on the Corporation’s financial condition and results of operations.

The Corporation and Chemical Bank may be involved from time to time in a variety of litigation arising out of its business. The Corporation’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Corporation to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Corporation’s insurance coverage, they could have a material adverse effect on the Corporation’s financial condition and results of operations. In addition, the Corporation may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all.

The Corporation operates in a highly competitive industry and market area.

The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Corporation operates. The Corporation also faces competition from many other types of financial institutions, including savings and loans associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Corporation competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks. Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can.

The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:

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The ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical standards and safe, sound assets

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The ability to expand the Corporation’s market position

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The scope, relevance and pricing of products and services offered to meet customer needs and demands

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The rate at which the Corporation introduces new products and services relative to its competitors

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Customer satisfaction with the Corporation’s level of service

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Industry and general economic trends

Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability and have a material adverse effect on the Corporation’s financial condition and results of operations.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact the Corporation or the businesses in which it is engaged.

The financial services industry is extensively regulated. The Corporation and Chemical Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit the Corporation’s shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Corporation or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Corporation’s regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against the Corporation or Chemical Bank could require the Corporation to devote significant time and resources to defending its business and may lead to penalties that materially affect the Corporation and its shareholders.

The soundness of other financial institutions could adversely affect the Corporation.

The Corporation’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Corporation has exposure to many different industries and counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to losses or defaults by the Corporation or by other institutions. Many of these transactions expose the Corporation to credit risk in the event of default of the Corporation’s counterparty or client. In addition, the Corporation’s credit risk may be exacerbated when the collateral that it holds cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan. The Corporation can give no assurance that any such losses would not materially and adversely affect its business, financial condition or results of operations.

Recently enacted financial reform legislation may have a significant impact on the Corporation and results of its operations.

The Corporation’s controls and procedures may fail or be circumvented.

Management regularly reviews and updates the Corporation’s internal controls and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. A significant failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations and financial condition.

Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value.

The Corporation seeks merger or acquisition partners, including FDIC assisted acquisitions, that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

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The recording of assets and liabilities of the target company at fair value may materially dilute shareholder value at the transaction date and could have a material adverse effect on the Corporation’s financial condition and results of operations

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The time and costs associated with identifying and evaluating potential acquisitions and merger targets

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Potential exposure to unknown or contingent liabilities of the target company

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The estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate

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Exposure to potential asset quality issues of the target company

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The time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion

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The diversion of the Corporation’s management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses

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The introduction of new products and services into the Corporation’s business

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Potential disruption to the Corporation’s business

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The incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the Corporation’s results of operations

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The possible loss of key employees and customers of the target company

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Difficulty in estimating the value of the target company

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Potential changes in banking or tax laws or regulations that may affect the target company

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Difficulty or unanticipated expense associated with converting the communication and information systems of the target company to those of the Corporation

The transactions may be more expensive to complete and the anticipated benefits, including cost savings and strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events, including the economic and financial conditions within the State of Michigan.

The Corporation regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, dilution of the Corporation’s tangible book value, net income per common share and ownership interest may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Corporation’s financial condition and results of operations.

If the Corporation cannot raise additional capital when needed, its ability to further expand its operations through organic growth and acquisitions could be materially impaired.

The Corporation is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Corporation may need to raise additional capital to support its continued growth. The Corporation’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside the Corporation’s control, and on its financial performance. The Corporation cannot assure that it will be able to raise additional capital in the future on terms acceptable to the Corporation. If the Corporation cannot raise additional capital when needed, its ability to further expand its operations through organic growth and acquisitions could be materially limited.

The Corporation relies on dividends from Chemical Bank for most of its revenue.

The Corporation is a separate and distinct legal entity from Chemical Bank. It receives substantially all of its revenue from dividends from Chemical Bank. These dividends are the principal source of funds to pay cash dividends on the Corporation’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that Chemical Bank may pay to the Corporation. In the event Chemical Bank is unable to pay dividends to the Corporation, the Corporation may not be able to pay cash dividends on its common stock. The earnings of Chemical Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting Chemical Bank. See the section captioned “Supervision and Regulation” in Item 1. Business and Note 21 — Regulatory Capital and Reserve Requirements in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Corporation’s business.

As part of its business, the Corporation collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Corporation has in place for its facilities and systems,

and the security measures of its third party service providers, the Corporation may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Corporation or by its vendors, could severely damage the Corporation’s reputation, expose it to the risks of litigation and liability, disrupt the Corporation’s operations and have a material adverse effect on the Corporation’s business.

The Corporation’s information systems may experience an interruption or breach in security.

The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Corporation’s information systems would not damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Corporation’s business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. Such events could affect the stability of the Corporation’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Corporation to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on the Corporation’s business, financial condition and results of operations.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

The executive offices and accounting department of the Corporation and Chemical Bank and the accounting services, marketing, risk management and Wealth Management departments of Chemical Bank are located at 235 E. Main Street in downtown Midland, Michigan, in a three-story, approximately 35,000 square foot office building, owned by the Corporation free from mortgage. The main office of Chemical Bank and certain operations’ departments are located in a three story, approximately 74,000 square foot office building in downtown Midland, Michigan at 333 E. Main Street, owned by Chemical Bank free from mortgage. During 2011, Chemical Bank also began leasing approximately 30,000 square feet of a building in Midland, Michigan for additional operations’ departments under a ten-year lease agreement.

Chemical Bank also conducted customer banking business from a total of 141 other banking offices and three loan production offices as of December 31, 2011. These offices are located in the lower peninsula of Michigan. Of these offices, 134 are owned by Chemical Bank free from mortgages and 10 are leased from independent parties. The leased property is considered insignificant.

The Corporation considers its properties to be suitable and adequate for its present needs.

Item 3.

Legal Proceedings.

As of December 31, 2011, the Corporation was not a party to any material pending legal proceeding. As of December 31, 2011, Chemical Bank was a party, as plaintiff or defendant, to a number of legal proceedings, none of which are considered material, and all of which are considered ordinary routine litigation incidental to its business.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Corporation’s common stock is traded on The Nasdaq Stock Market^® under the symbol CHFC. As of December 31, 2011, there were approximately 27.5 million shares of the Corporation’s common stock issued and outstanding, held by approximately 5,100 shareholders of record. The table below sets forth the range of high and low sales prices for transactions reported on The Nasdaq Stock Market^® for the Corporation’s common stock for the periods indicated.


	2011				2010
	High		Low		High		Low
First quarter	$	23.04	$	19.08	$	24.99	$	19.61
Second quarter		20.56		17.85		25.20		21.20
Third quarter		19.43		14.56		23.07		18.79
Fourth quarter		21.80		14.60		23.00		19.60

The earnings of Chemical Bank are the principal source of funds for the Corporation to pay cash dividends to its shareholders. Accordingly, cash dividends are dependent upon the earnings, capital needs, regulatory constraints, and other factors affecting Chemical Bank. See Note 21 to the consolidated financial statements in Item 8 of this report for a discussion of such limitations. The Corporation has paid regular cash dividends every quarter since it began operation as a bank holding company in 1973. The following table summarizes the quarterly cash dividends paid to shareholders over the past five years. Based on the financial condition of the Corporation at December 31, 2011, management expects the Corporation to pay quarterly cash dividends on its common shares in 2012. However, there can be no assurance as to future dividends because they are dependent on future earnings, capital requirements, regulatory approval and the Corporation’s financial condition. On February 20, 2012, the board of directors declared a $0.20 per share first quarter 2012 cash dividend, payable on March 16, 2012.


	Years Ended December 31,
	2011		2010		2009		2008		2007
First quarter	$	0.200	$	0.200	$	0.295	$	0.295	$	0.285
Second quarter		0.200		0.200		0.295		0.295		0.285
Third quarter		0.200		0.200		0.295		0.295		0.285
Fourth quarter		0.200		0.200		0.295		0.295		0.285

Total	$	0.800	$	0.800	$	1.180	$	1.180	$	1.140

Shareholder Return

The following line graph compares Chemical Financial Corporation’s cumulative total shareholder return on its common stock over the last five years, assuming the reinvestment of dividends, to the Standard and Poor’s (“S&P”) 500 Stock Index and the KBW Regional Banking Index (Ticker: KRXTR). Both of these indices are based upon total return (including reinvestment of dividends) and are market-capitalization-weighted indices. The S&P 500 Stock Index is a broad equity market index published by S&P. The KBW Regional Banking Index is published by Keefe, Bruyette & Woods, Inc. (KBW), an investment banking firm that specializes in the banking industry. The KBW Regional Banking Index is composed of 50 mid-cap regional bank holding companies. The line graph assumes $100 was invested on December 31, 2006.

LOGO

The dollar values for total shareholder return plotted in the above graph are shown below:


	December 31,
	2006		2007		2008		2009		2010		2011
Chemical Financial Corporation	$	100.0	$	74.5	$	91.5	$	81.8	$	79.6	$	79.9
KBW Regional Banking Index		100.0		78.0		63.6		49.5		59.6		56.5
S&P 500 Stock Index		100.0		105.5		66.5		84.1		96.7		98.8

Equity Compensation Plans

Information about the Corporation’s equity compensation plans as of December 31, 2011 is set forth in Part III, Item 12 of this report, and is here incorporated by reference.

Item 6.

Selected Financial Data.


	Years Ended December 31,
	2011^(a)			2010^(a)			2009			2008			2007
	(In thousands, except per share data)
Earnings Summary
Net interest income	$	183,853		$	171,120		$	147,444		$	145,253		$	130,089
Provision for loan losses		26,000			45,600			59,000			49,200			11,500
Noninterest income		44,400			42,472			41,119			41,197			43,288
Operating expenses		142,003			136,802			117,610			109,108			104,671
Net income		43,050			23,090			10,003			19,842			39,009
Per Common Share Data
Net income — basic	$	1.57		$	0.88		$	0.42		$	0.83		$	1.60
Net income — diluted		1.57			0.88			0.42			0.83			1.60
Cash dividends paid		0.80			0.80			1.18			1.18			1.14
Book value at end of period		20.82			20.41			19.85			20.58			21.35
Market value at end of period		21.32			22.15			23.58			27.88			23.79
Common shares outstanding at year end		27,457			27,440			23,891			23,881			23,815
Balance Sheet Data (Year End)
Total assets	$	5,339,453		$	5,246,209		$	4,250,712		$	3,874,313		$	3,754,313
Total loans		3,831,285			3,681,662			2,993,160			2,981,677			2,799,434
Total deposits		4,366,857			4,331,765			3,418,125			2,978,792			2,875,589
Federal Home Loan Bank advances/other borrowings		346,843			316,833			330,568			368,763			347,412
Total shareholders’ equity		571,729			560,078			474,311			491,544			508,464
Balance Sheet Averages
Total assets	$	5,304,098		$	4,913,310		$	4,066,229		$	3,784,617		$	3,785,034
Total earning assets		4,971,704			4,618,012			3,847,006			3,550,611			3,551,867
Total loans		3,730,795			3,438,550			2,980,126			2,873,151			2,805,880
Total interest-bearing liabilities		3,874,811			3,685,186			3,002,050			2,711,413			2,718,814
Total deposits		4,349,873			4,017,230			3,195,411			2,924,361			2,923,004
Federal Home Loan Bank advances/other borrowings		351,433			336,782			348,235			325,177			327,831
Total shareholders’ equity		569,521			530,819			483,034			509,100			505,915
Performance Ratios
Net interest margin		3.80	%		3.80	%		3.91	%		4.16	%		3.73	%
Return on average assets		0.81			0.47			0.25			0.52			1.03
Return on average shareholders’ equity		7.6			4.3			2.1			3.9			7.7
Efficiency ratio		60.8			62.8			61.4			57.8			59.6
Dividend payout ratio		51.0			90.9			281.0			142.2			71.2
Consolidated Capital Ratios
Average shareholders’ equity as a percentage of average assets		10.7	%		10.8	%		11.9	%		13.5	%		13.4	%
Year end ratios:
Leverage ratio		9.0			8.4			10.1			11.6			11.9
Tier 1 risk-based capital ratio		12.1			11.6			14.2			15.1			16.1
Total risk-based capital ratio		13.3			12.9			15.5			16.4			17.3
Asset Quality
Year end balances:
Allowance for loan losses — originated loans	$	86,733		$	89,530		$	80,841		$	57,056		$	39,422
Allowance for loan losses — acquired loans		1,600			—			—			—			—
Total nonperforming loans		106,269			147,729			135,755			93,328			63,360
Total nonperforming assets		131,753			175,239			153,295			113,251			74,492
Year end ratios:
Allowance for loan losses as a percentage of total originated loans		2.60	%		2.86	%		2.70	%		1.91	%		1.41	%
Allowance for loan losses as a percentage of nonperforming loans		82			61			60			61			62
Nonperforming loans as a percentage of total loans		2.77			4.01			4.54			3.13			2.26
Nonperforming assets as a percentage of total assets		2.47			3.34			3.61			2.92			1.98
Net loan charge-offs	$	27,197		$	36,911		$	35,215		$	31,566		$	6,176
Net loan charge-offs as a percentage of average total loans		0.73	%		1.07	%		1.18	%		1.10	%		0.22	%

(a)	Includes the impact of the acquisition of OAK on April 30, 2010. See Note 2 to the consolidated financial statements in Item 8 of this report for information on the acquisition of OAK.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

BUSINESS OF THE CORPORATION

Chemical Financial Corporation (Corporation) is a financial holding company headquartered in Midland, Michigan with its business concentrated in a single industry segment — commercial banking. The Corporation, through its subsidiary bank, Chemical Bank, offers a full range of traditional banking and fiduciary products and services. These products and services include business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance and investment products, corporate and personal wealth management services and other banking services.

The principal markets for the Corporation’s products and services are communities in Michigan where the branches of Chemical Bank are located and the areas immediately surrounding those communities. As of December 31, 2011, Chemical Bank served these markets through 142 banking offices located in 32 counties across Michigan’s lower peninsula. In addition to its banking offices, Chemical Bank operated three loan production offices and 161 automated teller machines, both on- and off-bank premises. Chemical Bank operates through an internal organizational structure of four regional banking units. Chemical Bank’s regional banking units are collections of branch banking offices organized by geographical regions within the State of Michigan.

The principal source of revenue for the Corporation is interest and fees on loans, which accounted for 76% of total revenue in both 2011 and 2010 and 74% of total revenue in 2009. Interest on investment securities is also a significant source of revenue, accounting for 6% of total revenue in both 2011 and 2010 and 8% of total revenue in 2009. Revenue is influenced by overall economic factors including market interest rates, business and consumer spending, consumer confidence and competitive conditions in the marketplace.

ACQUISITION OF O.A.K. FINANCIAL CORPORATION

On April 30, 2010, the Corporation acquired O.A.K. Financial Corporation (OAK) for total consideration of $83.7 million. OAK, a bank holding company, owned Byron Bank, which provided traditional banking services and products through 14 banking offices serving communities in Ottawa, Allegan and Kent counties in west Michigan. At April 30, 2010, OAK had total assets of $820 million, including total loans of $627 million, and total deposits of $693 million, including brokered deposits of $193 million. The Corporation operated Byron Bank as a separate subsidiary from the acquisition date until July 23, 2010, the date Byron Bank was consolidated with and into Chemical Bank.

In connection with the acquisition of OAK, the Corporation recorded $43.5 million of goodwill. Goodwill recorded was primarily attributable to the synergies and economies of scale expected from combining the operations of the Corporation and OAK. In addition, the Corporation recorded $9.8 million of other intangible assets in conjunction with the acquisition. The other intangible assets represent the value attributable to core deposits of $8.4 million, mortgage servicing rights of $0.7 million and non-compete agreements of $0.7 million.

Acquisition-related transaction expenses associated with the OAK acquisition totaled $4.3 million during 2010, which reduced net income per common share by $0.12 in 2010. The Corporation developed exit plans for involuntary employee terminations associated with the OAK acquisition, of which the Corporation recognized $0.6 million during 2010 for these exit costs and employee termination benefits. In addition to these costs, the Corporation incurred other acquisition related transaction expenses of $3.7 million in 2010.

CRITICAL ACCOUNTING POLICIES

The Corporation’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP), Securities and Exchange Commission (SEC) rules and interpretive releases and general practices within the industry in which the Corporation operates. Application of these principles requires management to make estimates, assumptions and complex judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments. Actual results could differ significantly from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when a decline in the value of an asset not carried at fair value on the financial statements warrants an impairment write-down or a valuation reserve to be established. Carrying assets and liabilities at fair value inherently results in

more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party sources are utilized, the Corporation’s management remains responsible for complying with GAAP. To execute management’s responsibilities, the Corporation has processes in place to develop an understanding of the third-party pricing methodologies and to design and implement specific internal controls over valuation. When third-party information is not available, valuation adjustments are estimated by management primarily through the use of internal discounted cash flow analyses.

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in Item 8 of this report. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates and assumptions underlying those amounts, management has identified the determination of the allowance for loan losses, accounting for loans acquired in business combinations, pension plan accounting, income and other taxes, the evaluation of goodwill impairment and fair value measurements to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Management reviews its critical accounting policies with the Audit Committee of the board of directors at least annually.

Allowance for Loan Losses

The allowance for loan losses (allowance) is calculated with the objective of maintaining a reserve sufficient to absorb inherent loan losses in the loan portfolio. Loans represent the Corporation’s largest asset type on the consolidated statements of financial position. The determination of the amount of the allowance is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected cash flows and collateral values on impaired loans, estimated losses on loans in the commercial loan portfolio (comprised of commercial, real estate commercial, real estate construction and land development loans) and on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The principal assumption used in deriving the allowance is the estimate of a loss percentage for each type of loan. In determining the allowance and the related provision for loan losses, the Corporation considers four principal elements: (i) specific impairment reserve allocations (valuation allowances) based upon probable losses identified during the review of impaired loans in the commercial loan portfolio, (ii) allocations established for adversely-rated loans in the commercial loan portfolio and nonaccrual real estate residential, consumer installment and home equity loans, (iii) allocations on all other loans based principally on a five-year historical loan loss experience and loan loss trends, and (iv) an unallocated allowance based on the imprecision in the allowance methodology for loans collectively evaluated for impairment. It is extremely difficult to accurately measure the amount of losses that are inherent in the Corporation’s loan portfolio. The Corporation uses a defined methodology to quantify the necessary allowance and related provision for loan losses, but there can be no assurance that the methodology will successfully identify and estimate all of the losses that are inherent in the loan portfolio. As a result, the Corporation could record future provisions for loan losses that may be significantly different than the levels that have been recorded in the three-year period ended December 31, 2011. Notes 1 and 4 to the consolidated financial statements further describe the methodology used to determine the allowance. In addition, a discussion of the factors driving changes in the amount of the allowance is included under the subheading “Allowance for Loan Losses” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Corporation has a loan review function that is independent of the loan origination function. At least annually, the loan review function reviews management’s evaluation of the allowance and performs a detailed credit quality review of loans in the commercial loan portfolio, particularly focusing on larger balance loans and loans that have deteriorated below certain levels of credit risk.

Accounting for Loans Acquired in Business Combinations

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30), provides the GAAP guidance for accounting for loans acquired in a business combination that have experienced a deterioration of credit quality from origination to acquisition for which it is probable that the investor will be unable to collect all contractually required payments receivable, including both principal and interest.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be impaired. In the assessment of credit quality deterioration, the Corporation must make numerous assumptions, interpretations and judgments using internal and third-party credit quality information to determine whether or not it is probable that the Corporation will be able to collect all contractually required payments. This is a

point in time assessment and inherently subjective due to the nature of the available information and judgment involved. Evidence of credit quality deterioration as of the acquisition date may include statistics such as past due and nonaccrual status, recent borrower credit scores and loan-to-value percentages. Those loans that qualify under ASC 310-30 are recorded at fair value at acquisition, which involves estimating the expected cash flows to be received. Accordingly, the associated allowance for loan losses related to these loans is not carried over at the acquisition date. ASC 310-30 also allows investors to aggregate acquired loans into loan pools that have common risk characteristics and use a composite interest rate and expectation of cash flows to be collected for the loan pools. The Corporation understands, as outlined in the American Institute of Certified Public Accountants’ open letter to the Office of the Chief Accountant of the SEC dated December 18, 2009, and pending further standard setting, that for acquired loans that do not meet the scope criteria of ASC 310-30, a company may elect to account for such acquired loans pursuant to the provisions of either ASC Topic 310-20, Nonrefundable Fees and Other Costs, or ASC 310-30. The Corporation elected to apply ASC 310-30, by analogy, to loans acquired in the OAK acquisition that were determined not to have deteriorated credit quality, and therefore, did not meet the scope criteria of ASC 310-30. Accordingly, the Corporation follows the accounting and disclosure guidance of ASC 310-30 for these loans. Notes 1, 2 and 4 to the consolidated financial statements contain additional information related to loans acquired in the OAK acquisition.

The excess of cash flows of a loan, or pool of loans, expected to be collected over the estimated fair value is referred to as the “accretable yield” and is recognized into interest income over the estimated remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments of a loan, or pool of loans, and the cash flows expected to be collected at acquisition, considering the impact of prepayments and estimates of future credit losses expected to be incurred over the life of the loan, or pool of loans, is referred to as the “nonaccretable difference.”

The Corporation is required to quarterly evaluate its estimates of cash flows expected to be collected from acquired loans. These evaluations require the continued usage of key assumptions and estimates, similar to the initial estimate of fair value. Given the current economic environment, the Corporation must apply judgment to develop its estimates of cash flows for acquired loans given the impact of changes in property values, default rates, loss severities and prepayment speeds. Decreases in the estimates of expected cash flows will generally result in a charge to the provision for loan losses and a resulting increase to the allowance for loan losses. Increases in the estimates of expected cash flows will generally result in adjustments to the accretable yield which will increase amounts recognized in interest income in subsequent periods. Dispositions of acquired loans, which may include sales of loans to third parties, receipt of payments in full or in part by the borrower and foreclosure of the collateral, result in removal of the loan from the acquired loan portfolio at its carrying amount. As a result of the significant amount of judgment involved in estimating future cash flows expected to be collected for acquired loans, the adequacy of the allowance for loan losses could be significantly impacted by decreases in expected cash flows resulting from changes in credit quality of acquired loans.

Acquired loans that were classified as nonperforming loans prior to being acquired and acquired loans that are not performing in accordance with contractual terms subsequent to acquisition are not classified as nonperforming loans subsequent to acquisition because the loans are recorded in pools at net realizable value based on the principal and interest the Corporation expects to collect on such loans. Judgment is required to estimate the timing and amount of cash flows expected to be collected when the loans are not performing in accordance with the original contractual terms.

Pension Plan Accounting

The Corporation has a defined benefit pension plan for certain salaried employees. Effective June 30, 2006, benefits under the defined benefit pension plan were frozen for approximately two-thirds of the Corporation’s salaried employees as of that date. Pension benefits continued unchanged for the remaining salaried employees. At December 31, 2011, 238 employees, or 14% of total employees, on a full-time equivalent basis, were earning pension benefits under the defined benefit pension plan. 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 vested service, age and amount of compensation. Assumptions are made concerning future events that will determine the amount and timing of required benefit payments, funding requirements and pension expense.

The key actuarial assumptions used in the pension plan are the discount rate and long-term rate of return on plan assets. These assumptions have a significant effect on the amounts reported for net periodic pension expense, as well as the respective benefit obligation amounts. The Corporation evaluates these critical assumptions annually. At December 31, 2011, 2010 and 2009, the Corporation calculated a discount rate of 4.90%, 5.65% and 6.15%, respectively, for the pension plan using the results from a bond matching technique, which matched the future estimated annual benefit payments of the pension plan against a portfolio of bonds of Aa quality to determine the discount rate.

The assumed long-term rate of return on pension plan assets represents an estimate of long-term returns on an investment portfolio consisting primarily of equity and fixed income investments. When determining the expected long-term return on pension plan assets, the Corporation considers long-term rates of return on the asset classes in which the Corporation expects the

pension funds to be invested. The expected long-term rate of return is based on both historical and forecasted returns of the overall stock and bond markets and the actual portfolio. The following rates of return by asset class were considered in setting the assumptions for long-term return on pension plan assets:

December 31,

2011

2010

2009

Equity securities

6% – 10%

6% – 9%

7% – 9%

Debt securities

3% – 6%

3% – 7%

4% – 6%

Other

2% – 3%

2% – 3%

2% – 5%

The assumed long-term return on pension plan assets is developed through an analysis of forecasted rates of return by asset class and forecasted asset allocations. It is used to compute the subsequent year’s expected return on assets, using the “market-related value” of pension plan assets. The difference between the expected return and the actual return on pension plan assets during the year is either an asset gain or loss, which is deferred and amortized over future periods when determining net periodic pension expense. The Corporation’s projection of the long-term return on pension plan assets was 7% in 2011, 2010 and 2009, while the actual return on pension plan assets was (0.9)%, 8.7% and 15.6% in 2011, 2010 and 2009, respectively.

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

The key actuarial assumptions that will be used to calculate pension expense in 2012 for the defined benefit pension plan are a discount rate of 4.90%, a long-term rate of return on pension plan assets of 7% and a rate of compensation increase of 3.50%. Pension expense in 2012 is expected to be approximately $1.4 million, an increase of approximately $0.7 million from 2011. The increase in pension expense in 2012, as compared to 2011, is primarily attributable to the decrease in the discount rate. In 2012, a decrease in the discount rate of 50 basis points and 100 basis points is estimated to increase pension expense by $0.4 million and $0.8 million, respectively, while an increase of 50 basis points and 100 basis points is estimated to decrease pension expense by approximately the same amounts. The discount rate used to value the projected benefit obligation and estimated pension expense of the Corporation’s defined benefit pension plan has averaged 6.52% over the last fifteen years. However, the discount rate used to estimate the projected benefit obligation and pension expense in 2011, 2010 and 2009 was significantly below this historical average. In order to mitigate the increases in the projected benefit obligation and pension expense resulting from the lower discount rates, the Corporation made a $10 million contribution to the pension plan in 2010 and a $12 million contribution to the pension plan in January 2012 related to the 2011 plan year.

There are uncertainties associated with the underlying key actuarial assumptions, and the potential exists for significant, and possibly material, impacts on either or both the results of operations and cash flows (e.g., additional pension expense and/or additional pension plan funding, whether expected or required) from changes in the key actuarial assumptions. If the Corporation were to determine that more conservative assumptions are necessary, pension expense would increase and have a negative impact on results of operations in the period in which the increase occurs.

The Corporation accounts for its defined benefit pension and other postretirement plans in accordance with FASB ASC Topic 715, Compensation-Retirement Benefits, which requires companies to recognize the over- or under-funded status of a plan as an asset or liability as measured by the difference between the fair value of the plan assets and the projected benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income (loss). The impact of pension plan accounting on the statements of financial position at December 31, 2011 and 2010 is further discussed in Note 17 to the consolidated financial statements.

Income and Other Taxes

The Corporation is subject to the income and other tax laws of the United States, the State of Michigan and other states where nexus has been created. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provisions for income and other taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations and case law. In the process of preparing the Corporation’s tax returns, management attempts to make reasonable interpretations of applicable tax laws. These interpretations are subject to challenge by the taxing authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving regulations and 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 tax rate based upon its current best estimate of net income and the applicable taxes expected for the full year. Deferred tax assets and liabilities are reassessed on an annual basis, including the need for a valuation allowance for deferred tax assets, or more frequently if warranted by business events or circumstances. Reserves for uncertain tax positions are reviewed quarterly for adequacy based upon developments in tax law and the status of examinations or audits. As of December 31, 2011 and 2010, there were no federal income tax reserves recorded for uncertain tax positions.

Goodwill

At December 31, 2011, the Corporation had $113.4 million of goodwill, which was originated through the acquisition of various banks and bank branches, recorded on the consolidated statement of financial position. Goodwill is not amortized, but rather is tested by management annually for impairment, or more frequently if triggering events occur and indicate potential impairment, in accordance with FASB ASC Topic 350-20, Goodwill (ASC 350-20). The Corporation’s goodwill impairment assessment utilizes the methodology and guidelines established in GAAP, including assumptions regarding the valuation of Chemical Bank.

The Corporation performed its 2011 annual goodwill impairment assessment at September 30, 2011 utilizing the qualitative assessment approach as permitted by FASB Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment (ASU 2011-08), which the Corporation early adopted as of September 30, 2011. ASU 2011-08 permits an entity to make a qualitative assessment as to whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value before applying the two-step goodwill impairment test in ASC 350-20. The Corporation’s qualitative assessment considered several factors, including macroeconomic, industry and market conditions; overall financial performance; various other relevant entity-specific events; events affecting its sole reporting unit, Chemical Bank; and the market price per share of its common stock. After considering the weight of evidence in the qualitative assessment, the Corporation determined that it was not more-likely-than-not that the fair value of Chemical Bank was less than its carrying value.

During the fourth quarter of 2011, the Corporation changed the date of its annual impairment testing for goodwill from September 30 to October 31. The change in the date of the annual goodwill impairment test represents a change in the method of applying an accounting principle. Management determined that the change in accounting principle is preferable, as the later date better coincides with the Corporation’s annual budgeting and strategic planning processes. Management believes that the change in the Corporation’s annual goodwill impairment testing date did not delay, accelerate or avoid a goodwill impairment charge. A preferability letter from the Corporation’s independent registered public accounting firm regarding this change in accounting principle has been filed as an exhibit to this Annual Report on Form 10-K for the year ended December 31, 2011.

The Corporation elected to bypass the qualitative assessment approach under ASU 2011-08 and perform a Step 1 valuation of its goodwill as of October 31, 2011. It has been the Corporation’s historical practice to perform a Step 1 valuation annually, as was previously required under GAAP.

The fair value of Chemical Bank as of October 31, 2011 was measured utilizing the income and market approaches as prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820). GAAP identifies the cost approach as another acceptable method; however, the cost approach was not deemed an effective method to value a financial institution. The cost approach estimates a company’s value by adjusting the reported values of assets and liabilities to their fair values. It is the Corporation’s opinion that financial institutions cannot be liquidated in an efficient manner. Estimating the fair value of loans is a very difficult process and subject to a wide margin of error unless done on a loan by loan basis. Voluntary liquidations of financial institutions are not typical. More commonly, if a financial institution is liquidated, it is due to being taken over by the FDIC. The value of Chemical Bank was based as a going concern and not as a liquidation.

The income approach uses valuation techniques to convert future amounts (cash flows or earnings) to a single, discounted amount. The income approach includes present value techniques, option-pricing models, such as the Black-Scholes formula and lattice models, and the multi-period excess-earnings method. In the valuation of Chemical Bank, the income approach utilized the discounted cash flow method based upon a forecast of growth and earnings. Cash flows are measured by using projected earnings, projected dividends and dividend paying capacity over a five-year period. In addition to estimating periodic cash flows, an estimate of residual value is determined through the capitalization of earnings. The income approach assumed cost savings and earnings enhancements that a strategic acquiror would likely implement based upon typical participant assumptions of market transactions. The discount rate is critical to the discounted cash flow analysis. The discount rate reflects the risk of uncertainty associated with the cash flows and a rate of return that investors would require from similar investments with similar risks. At the valuation date of October 31, 2011, a discount rate of 14.5% was utilized in the income approach.

The market approach uses observable prices and other relevant information that are generated by market transactions involving identical or comparable assets or liabilities. The fair value measure is based on the value that those transactions indicate utilizing both financial and operating characteristics of the acquired companies. The most significant financial ratio analyzed in completed transactions involved the price to tangible book value. At the valuation date of October 31, 2011, the market approach utilized a price to tangible book value of 140%.

The fair value of Chemical Bank was determined to be slightly above the income approach and within the range of values in the market approach value range. The results of the valuation analysis concluded that the fair value of Chemical Bank was greater than its book value, including goodwill, and thus no goodwill impairment was evident at the valuation date of October 31, 2011. The weighted average of the fair values determined under the income and market approaches was a 14.0% premium over the market capitalization of the Corporation at the valuation date. The Corporation is publicly traded and, therefore, the price per share of its common stock as reported on The Nasdaq Stock Market^® establishes the marketable minority value. Given the volatility of the financial markets, particularly in the equity markets in 2011, it is management’s opinion that the marketable minority value does not always represent the fair value of the reporting unit as a whole and that an adjustment to the marketable minority value for the acquiror’s control is generally considered in the assessment of fair value. The market capitalization of the Corporation was $585 million on December 31, 2011, compared to $553 million on October 31, 2011. The Corporation determined that no triggering events occurred that indicated potential impairment of goodwill from the most recent valuation date through December 31, 2011. However, the Corporation could incur impairment charges related to goodwill in the future due to changes in financial results or other matters that could affect the valuation assumptions.

Fair Value Measurements

The Corporation determines the fair value of its assets and liabilities in accordance with ASC 820. ASC 820 establishes a standard framework for measuring and disclosing fair value under GAAP. A number of valuation techniques are used to determine the fair value of assets and liabilities in the Corporation’s financial statements. The valuation techniques include quoted market prices for investment securities, appraisals of real estate from independent licensed appraisers and other valuation techniques. Fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the valuation results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment are recognized in the income statement under the framework established by GAAP. See Note 14 to the Corporation’s consolidated financial statements for more information on fair value measurements.

Accounting Standards Updates

See Note 1 to the consolidated financial statements included in this report for details of accounting pronouncements adopted by the Corporation during 2011 and recently issued accounting pronouncements and their impact on the Corporation’s financial statements.

FINANCIAL HIGHLIGHTS

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

NET INCOME

Net income in 2011 was $43.1 million, or $1.57 per diluted share, compared to net income in 2010 of $23.1 million, or $0.88 per diluted share, and net income in 2009 of $10.0 million, or $0.42 per diluted share. Net income in 2011 represented an 86% increase from 2010 net income, with the increase primarily attributable to an increase in net interest income and a decrease in the provision for loan losses. Net income in 2010 represented a 131% increase over 2009 net income, with the increase primarily attributable to a decrease in the provision for loan losses and the acquisition of OAK.

The Corporation’s return on average assets was 0.81% in 2011, 0.47% in 2010 and 0.25% in 2009. The Corporation’s return on average shareholders’ equity was 7.6% in 2011, 4.3% in 2010 and 2.1% in 2009.

ASSETS

Total assets were $5.34 billion at December 31, 2011, an increase of $93 million, or 1.8%, from total assets at December 31, 2010 of $5.25 billion. The increase in total assets during 2011 was primarily attributable to growth in loans and investment securities that was funded by an increase in customer deposits.

Average assets were $5.30 billion during 2011, an increase of $391 million, or 8.0%, from average assets during 2010 of $4.91 billion, while average assets during 2010 increased $847 million, or 21%, from average assets during 2009 of $4.07 billion. The increase in average assets during 2011, as compared to 2010, was attributable to growth in loans and investment securities and the acquisition of OAK, while the increase in average assets during 2010, as compared to 2009, was primarily attributable to the acquisition of OAK.

INVESTMENT SECURITIES

Information about the Corporation’s investment securities portfolio is summarized in Tables 1 and 2. The following table summarizes the maturities and yields of the carrying value of investment securities by investment category, and fair value by investment category, at December 31, 2011:

TABLE 1. MATURITIES AND YIELDS* OF INVESTMENT SECURITIES AT DECEMBER 31, 2011

Maturity**

Within
One Year

After One
but Within
Five Years

After Five
but Within
Ten Years

After
Ten Years

Total
Carrying
Value

Total
Fair
Value

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

(Dollars in thousands)

Available-for-Sale:

Government sponsored agencies

28,407

0.75

23,831

0.92

14,031

1.10

4,410

0.64

70,679

0.87

70,679

State and political subdivisions

2,623

3.91

11,935

4.87

30,020

5.88

657

6.02

45,235

5.50

45,235

Residential mortgage-backed securities

68,165

1.98

39,773

2.22

4,450

4.84

8,392

5.73

120,780

2.42

120,780

Collateralized mortgage obligations

209,392

0.97

105,926

1.23

14,194

2.48

2,888

2.89

332,400

1.13

332,400

Corporate bonds

36,828

0.87

59,940

2.88

—

96,768

2.11

96,768

Preferred stock

—

1,414

5.60

1,414

5.60

1,414

Total investment securities available-for-sale

345,415

1.16

241,405

1.95

62,695

3.97

17,761

4.00

667,276

1.79

667,276

Held-to-Maturity:

State and political subdivisions

25,963

3.44

75,577

4.59

51,555

4.91

19,744

6.69

172,839

4.75

179,304

Trust preferred securities

—

10,500

3.85

10,500

3.85

4,465

Total investment securities held-to-maturity

25,963

3.44

75,577

4.59

51,555

4.91

30,244

5.70

183,339

4.70

183,769

Total investment securities

371,378

1.32

316,982

2.58

114,250

4.39

48,005

5.07

850,615

2.41

851,045

Yields are weighted by amount and time to contractual maturity, are on a taxable equivalent basis using a 35% federal income tax rate and are based on carrying value. Yields disclosed are actual yields at December 31, 2011. Approximately 36% of the Corporation’s investment securities at December 31, 2011 were variable-rate financial instruments.

**	Residential mortgage-backed securities, collateralized mortgage obligations (CMOs) and certain government sponsored agencies are based on scheduled principal maturity. All other investment securities are based on final contractual maturity.

The following table summarizes the carrying value of investment securities at December 31, 2011, 2010 and 2009:

TABLE 2. SUMMARY OF INVESTMENT SECURITIES


	December 31,
	2011		2010		2009
	(In thousands)
Available-for-Sale:
Government sponsored agencies	$	70,679	$	117,521	$	191,985
State and political subdivisions		45,235		46,046		3,562
Residential mortgage-backed securities		120,780		136,935		154,205
Collateralized mortgage obligations		332,400		233,921		223,758
Corporate bonds		96,768		42,747		19,011
Preferred stock		1,414		1,440		—

Total investment securities available-for-sale		667,276		578,610		592,521

Held-to-Maturity:
State and political subdivisions		172,839		154,900		120,447
Residential mortgage-backed securities		—		—		350
Trust preferred securities		10,500		10,500		10,500

Total investment securities held-to-maturity		183,339		165,400		131,297

Total investment securities	$	850,615	$	744,010	$	723,818

The carrying value of investment securities at December 31, 2011 totaled $850.6 million, an increase of $106.6 million, or 14%, from investment securities at December 31, 2010 of $744.0 million. The increase in investment securities was primarily attributable to the Corporation investing a portion of its liquidity in additional collateralized mortgage obligations (CMOs). At December 31, 2011, the Corporation’s investment securities portfolio consisted of: $70.7 million in government sponsored agency debt obligations comprised primarily of fixed-rate senior bonds that were issued by the twelve regional Federal Home Loan Banks that make up the Federal Home Loan Bank System (FHLBanks) and variable-rate instruments backed by the Federal Farm Credit Bank, Small Business Administration and Student Loan Marketing Corporation; $218.0 million in state and political subdivisions debt obligations comprised primarily of general debt obligations of issuers primarily located in the State of Michigan; $120.8 million in residential mortgage-backed securities comprised primarily of fixed-rate instruments backed by a U.S. government agency (Government National Mortgage Association) or government sponsored enterprises (the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association); $332.4 million of CMOs comprised of fixed- and variable-rate instruments backed by the same U.S. government agency and government sponsored enterprises as the residential mortgage-backed securities with average maturities of less than three years; $96.8 million in corporate bonds comprised primarily of debt obligations of large national financial organizations; preferred stock securities of $1.4 million comprised of preferred stock securities of two large banks; and $10.5 million of trust preferred securities (TRUPs) comprised primarily of a 100% interest in a TRUP of a small non-public bank holding company in Michigan.

The Corporation re-invested a portion of funds from maturing government sponsored agencies and residential mortgage-backed securities in 2011 into CMOs due to the relative short-term duration and relatively higher yield for these CMOs compared to other investment options given the current low interest rate environment. CMOs totaled $332.4 million, or 39% of investment securities, at December 31, 2011, compared to $233.9 million, or 31% of investment securities, at December 31, 2010, and $223.8 million, or 31% of investment securities, at December 31, 2009. The Corporation’s investment strategy is primarily centered on investing in relatively short-term investment securities with average maturities of two years or less or variable-rate investment securities with limited exposures to credit risk. The Corporation also invested a portion of its funds from investment securities maturing in 2011 into corporate bonds due to an improvement in that market related to credit risk. The corporate bond portfolio totaled $96.8 million, or 11% of investment securities, at December 31, 2011, compared to $42.7 million, or 6% of investment securities, at December 31, 2010 and $19.0 million, or 3% of investment securities, at December 31, 2009.

The Corporation records all investment securities in accordance with FASB ASC Topic 320, Investments-Debt and Equity Securities (ASC 320), under which the Corporation is required to assess equity and debt securities that have fair values below their amortized cost basis to determine whether the decline (impairment) is other-than-temporary. An assessment is performed quarterly by the Corporation to determine whether unrealized losses in its investment securities portfolio are temporary or other-than-temporary by considering all reasonably available information. The Corporation reviews factors such as financial statements, credit ratings, news releases and other pertinent information of the underlying issuer or company to make its determination. In assessing whether a decline is other-than-temporary, management considers, among other things (i) the length of time and the extent to

which the fair value has been less than amortized cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the potential for impairments in an entire industry or sub-sector and (iv) the potential for impairments in certain economically depressed geographical locations.

The Corporation’s investment securities portfolio, at December 31, 2011, had gross impairment of $8.4 million. Management believed that the unrealized losses on investment securities at December 31, 2011 were temporary in nature and due primarily to changes in interest rates on the investment securities and market illiquidity, and not as a result of credit-related issues. At December 31, 2011, the Corporation believed the impairment in its investment securities portfolio was temporary in nature and, therefore, no impairment loss was realized in the Corporation’s consolidated statement of income for 2011. However, other-than-temporary impairment (OTTI) may occur in the future as a result of material declines in the fair value of investment securities resulting from market, credit, economic or other conditions. A further discussion of the assessment of potential impairment and the Corporation’s process that resulted in the conclusion that the impairment was temporary in nature follows.

At December 31, 2011, the Corporation’s investment securities portfolio’s gross impairment of $8.4 million consisted of government sponsored agencies (GSA) securities, residential mortgage-backed securities (MBSs) and CMOs, combined, with gross impairment of $1.3 million, state and political subdivisions securities with gross impairment of $0.3 million, corporate bonds with gross impairment of $0.8 million and trust preferred securities with gross impairment of $6.0 million. The amortized costs and fair values of investment securities are disclosed in Note 3 to the consolidated financial statements.

GSA securities, residential MBSs and CMOs, included in the available-for-sale investment securities portfolio, with a combined amortized cost of $520.3 million had gross impairment of $1.3 million at December 31, 2011. Virtually all of the impaired investment securities in these three categories are backed by the full faith and credit of the U.S. government or a guarantee of a U.S. government agency or government sponsored enterprise. It was the Corporation’s assessment that the impairment on these investment securities was attributable to the low level of market interest rates. The Corporation concluded that the impairment of its GSA securities, residential MBSs and CMOs was temporary in nature at December 31, 2011.

State and political subdivisions securities, included in the available-for-sale and the held-to-maturity investment securities portfolios, with an amortized cost of $215.7 million had gross impairment of $0.3 million at December 31, 2011. The majority of these investment securities are from issuers located in the State of Michigan and are general obligations of the issuer, meaning that repayment of these obligations is funded by general tax collections of the issuer. The gross impairment was attributable to impaired state and political subdivisions securities with an amortized cost of $32 million that generally mature beyond 2012. It was the Corporation’s assessment that the impairment on these investment securities was attributable to higher market interest rates and illiquidity in the market for these investment securities caused by the market’s perception of the Michigan economy. The Corporation concluded that the impairment of its state and political subdivisions securities was temporary in nature at December 31, 2011.

Corporate bonds, included in the available-for-sale investment securities portfolio, with an amortized cost of $97.6 million had gross impairment of $0.8 million at December 31, 2011. All of the corporate bonds held at December 31, 2011 were of an investment grade. The investment grade ratings of all of the corporate bonds indicated that the obligors’ capacities to meet their financial commitments were “strong.” It was the Corporation’s assessment that the impairment on the corporate bonds was attributable to the current level of market interest rates and the recent negative market perception of the financial industry and not due to credit-related issues. The Corporation concluded that the impairment of its corporate bonds was temporary in nature at December 31, 2011.

At December 31, 2011, the Corporation held two trust preferred securities (TRUPs) in the held-to-maturity investment securities portfolio with a combined amortized cost of $10.5 million that had gross impairment of $6.0 million. One TRUP, with an amortized cost of $10.0 million, represents a 100% interest in a TRUP of a non-public bank holding company in Michigan that was purchased in the second quarter of 2008. At December 31, 2011, the Corporation determined that the fair value of this TRUP was $4.3 million. The second TRUP, with an amortized cost of $0.5 million, represents a 10% interest in the TRUP of another non-public bank holding company in Michigan. At December 31, 2011, the Corporation determined the fair value of this TRUP was $0.2 million. The fair value measurements of the two TRUP investments were developed based upon market pricing observations of much larger banking institutions in an illiquid market adjusted by risk measurements. The fair values of the TRUPs were based on calculations of discounted cash flows, and further based upon both observable inputs and appropriate risk adjustments that market participants would make for performance, liquidity and issuer specifics. See the additional discussion of the development of the fair values of the TRUPs in Note 3 to the consolidated financial statements.

The issuer of the $10.0 million TRUP reported net income in each of the three years ended December 31, 2011 and was categorized as well-capitalized under applicable regulatory requirements during that time. Based on an analysis of financial information provided by the issuer, it was the Corporation’s opinion that, as of December 31, 2011, this issuer appeared to be a financially sound financial institution with sufficient liquidity to meet its financial obligations in 2012. There have been no

material adverse changes in the issuer’s financial performance since the TRUP was issued and purchased by the Corporation and no indication that any material adverse trends were developing that would suggest that the issuer would be unable to make all future principal and interest payments under the TRUP. Common stock cash dividends were paid quarterly throughout 2011, 2010 and 2009 by the issuer and the Corporation understands that the issuer’s management anticipates cash dividends to continue to be paid in the future. All scheduled interest payments on this TRUP have been made on a timely basis. The principal of $10.0 million of this TRUP matures in 2038, with interest payments due quarterly. At December 31, 2011, the Corporation was not aware of any regulatory issues, memorandums of understanding or cease and desist orders that had been issued to the issuer or its subsidiaries. In reviewing all reasonably available information regarding the issuer, including past performance and its financial and liquidity position, it was the Corporation’s opinion that the future cash flows of the issuer supported the carrying value of the TRUP at its original cost of $10.0 million at December 31, 2011. While the total fair value of the TRUP was $5.7 million below the Corporation’s amortized cost at December 31, 2011, it was the Corporation’s assessment that, based on the overall financial condition of the issuer, the impairment was temporary in nature at December 31, 2011.

The issuer of the $0.5 million TRUP reported a small amount of net income in 2011, compared to net losses reported in both 2010 and 2009. At December 31, 2011, the issuer was categorized as well-capitalized under applicable regulatory requirements. All scheduled interest payments on this TRUP have been made on a timely basis. The principal of $0.5 million of this TRUP matures in 2033, with interest payments due quarterly. At December 31, 2011, the Corporation was not aware of any regulatory issues, memorandums of understanding or cease and desist orders that had been issued to the issuer of this TRUP or any subsidiary. In reviewing all reasonably available financial information regarding the $0.5 million TRUP, it was the Corporation’s opinion that the carrying value of this TRUP at its original cost of $0.5 million was supported by the issuer’s financial position at December 31, 2011. While the fair value of the TRUP was $0.3 million below the Corporation’s amortized cost at December 31, 2011, it was the Corporation’s assessment that the impairment was temporary in nature at December 31, 2011.

At December 31, 2011, the Corporation expected to fully recover the entire amortized cost basis of each impaired investment security in its investment securities portfolio at that date. Furthermore, at December 31, 2011, the Corporation did not have the intent to sell any of its impaired investment securities and believed that it was more-likely-than-not that the Corporation would not have to sell any of its impaired investment securities before a full recovery of amortized cost. However, there can be no assurance that OTTI losses will not be recognized on the TRUPs or on any other investment security in the future.

LOANS

The Corporation’s loan portfolio is comprised of commercial, real estate commercial, real estate construction and land development loans, referred to as the Corporation’s commercial loan portfolio, and real estate residential, consumer installment and home equity loans, referred to as the Corporation’s consumer loan portfolio. At December 31, 2011, the Corporation’s loan portfolio was $3.83 billion and consisted of loans in the commercial loan portfolio totaling $2.09 billion, or 54% of total loans, and loans in the consumer loan portfolio totaling $1.74 billion, or 46% of total loans. Loans at fixed interest rates comprised approximately 71% of the Corporation’s total loan portfolio at December 31, 2011, compared to 72% at December 31, 2010 and 80% at December 31, 2009.

Chemical Bank is a full-service commercial bank and the acceptance and management of credit risk is an integral part of the Corporation’s business. The Corporation maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally only within the Corporation’s market areas. The Corporation’s lending markets generally consist of communities across the middle to southern and western sections of the lower peninsula of Michigan. The Corporation’s lending market areas do not include the southeastern portion of Michigan. The Corporation has no foreign loans or any loans to finance highly leveraged transactions. The Corporation’s lending philosophy is implemented through strong administrative and reporting controls. The Corporation maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio.

Total loans were $3.83 billion at December 31, 2011, an increase of $150 million, or 4.1%, from total loans of $3.68 billion at December 31, 2010. Total loans increased $689 million, or 23%, during 2010, from total loans of $2.99 billion at December 31, 2009. The increase in total loans during 2011 was largely due to the Corporation capitalizing on opportunities to increase market share in both its commercial and consumer loan portfolios.

Table 3 includes the composition of the Corporation’s loan portfolio, by major loan category, as of December 31, 2011, 2010, 2009, 2008 and 2007.

TABLE 3. SUMMARY OF LOANS


	December 31,
	2011		2010		2009		2008		2007
	(In thousands)
Commercial loan portfolio:
Commercial	$	895,150	$	818,997	$	584,286	$	587,554	$	515,319
Real estate commercial		1,071,999		1,076,971		785,675		786,404		760,399
Real estate construction and land development		118,176		142,620		121,305		119,001		134,828

Subtotal		2,085,325		2,038,588		1,491,266		1,492,959		1,410,546

Consumer loan portfolio:
Real estate residential		861,716		798,046		739,380		839,555		838,545
Consumer installment and home equity		884,244		845,028		762,514		649,163		550,343

Subtotal		1,745,960		1,643,074		1,501,894		1,488,718		1,388,888

Total loans	$	3,831,285	$	3,681,662	$	2,993,160	$	2,981,677	$	2,799,434

A discussion of the Corporation’s loan portfolio by category follows.

Commercial Loan Portfolio

The Corporation’s commercial loan portfolio is comprised of commercial loans, real estate commercial loans, real estate construction loans and land development loans. The Corporation’s commercial loan portfolio is well diversified across business lines and has no concentration in any one industry. The commercial loan portfolio of $2.09 billion at December 31, 2011 included 152 loan relationships of $2.5 million or greater. These 152 loan relationships totaled $794 million and represented 38% of the commercial loan portfolio at December 31, 2011 and included eleven loan relationships that had outstanding balances of $10 million or higher, totaling $148 million, or 7.1% of the commercial loan portfolio, at that date. The Corporation had 12 loan relationships at December 31, 2011 with loan balances greater than $2.5 million and less than $10 million, totaling $83 million, that had unfunded credit amounts that, if advanced, could result in a loan relationship of $10 million or more.

Table 4 presents the maturity distribution of the Corporation’s $2.09 billion commercial loan portfolio at December 31, 2011. The percentage of these loans maturing within one year was 34% at December 31, 2011, while the percentage of these loans maturing beyond five years remained low at 9% at December 31, 2011. At December 31, 2011, loans in the commercial loan portfolio with maturities beyond one year totaled $1.38 billion, with 65% of these loans at fixed interest rates.

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

December 31, 2011

Due In

1 Year
or Less

1 to 5
Years

Over 5
Years

Total

Loan maturities:

Commercial

471,622

336,397

87,131

895,150

Real estate commercial

181,861

813,564

76,574

1,071,999

Real estate construction and land development

51,035

49,615

17,526

118,176

Total

704,518

1,199,576

181,231

2,085,325

Percent of total

100

Interest sensitivity of above loans:

Fixed interest rates

225,099

767,872

123,402

1,116,373

Variable interest rates

479,419

431,704

57,829

968,952

Total

704,518

1,199,576

181,231

2,085,325

Commercial loans consist of loans and lines of credit to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital and operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the customer. Commercial loans are generally secured with inventory, accounts receivable, equipment, personal guarantees of the owner or other sources of repayment, although the Corporation may also obtain real estate as collateral.

Commercial loans were $895.2 million at December 31, 2011, an increase of $76.2 million, or 9.3%, from commercial loans of $819.0 million at December 31, 2010, with the increase in 2011 due primarily to an increase in market share for loans to business customers. Commercial loans increased $234.7 million, or 40%, during 2010 from commercial loans of $584.3 million at December 31, 2009, with the increase due primarily to the acquisition of OAK. Commercial loans represented 23.3% of the Corporation’s loan portfolio at December 31, 2011, compared to 22.2% and 19.5% at December 31, 2010 and 2009, respectively.

Real estate commercial loans include loans that are secured by real estate occupied by the borrower for ongoing operations, non-owner occupied real estate leased to one or more tenants and vacant land that has been acquired for investment or future land development. Real estate commercial loans were $1.07 billion at December 31, 2011, a decrease of $5.0 million, or 0.5%, from real estate commercial loans of $1.08 billion at December 31, 2010. Loans secured by owner occupied properties, non-owner occupied properties and vacant land comprised 61%, 36% and 3%, respectively, of the Corporation’s real estate commercial loans outstanding at December 31, 2011. Real estate commercial loans increased $291.3 million, or 37%, during 2010 from real estate commercial loans of $785.7 million at December 31, 2009, with the increase due primarily to the acquisition of OAK. Real estate commercial loans represented 28.0% of the Corporation’s loan portfolio at December 31, 2011, compared to 29.3% and 26.2% at December 31, 2010 and 2009, respectively.

Real estate commercial lending is generally considered to involve a higher degree of risk than real estate residential, consumer installment and home equity lending as it typically involves larger loan balances concentrated in a single borrower. In addition, the payment experience on loans secured by income-producing properties and vacant land loans 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 and real estate commercial lending by, among other things, lending primarily in its market areas, lending across industry lines, not developing a concentration in any one line of business and using prudent loan-to-value ratios in the underwriting process. Michigan’s economy showed signs of improvement during 2011, resulting in lower loan delinquencies compared to the previous three years. However, the market values of real estate in the State of Michigan continued to decline in 2011 in many areas, resulting in commercial and residential real estate foreclosures continuing to remain higher than historical averages, in particular for those loans where the primary source of repayment is through the sale of the underlying collateral. Accordingly, management expects real estate foreclosures to remain elevated despite improvements in Michigan’s economy. It is management’s belief that the loan portfolio is generally well-secured, despite declining market values for all types of real estate in the State of Michigan and nationwide over the past three years.

Real estate construction and land development loans are primarily originated for the construction of commercial properties and land development. Land development loans include loans made to developers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period; however, most land development loans are originated with the intention that the loans will be re-paid through the sale of finished properties by the developers within twelve months of the completion date. Real estate construction and land development loans were $118.2 million at December 31, 2011, a decrease of $24.4 million, or 17%, from real estate construction and land development loans of $142.6 million at December 31, 2010, with the decrease due primarily to one project to finance the construction of a private recreational facility paying off during 2011. Real estate construction and land development loans increased $21.3 million, or 18%, during 2010 from real estate construction and land development loans of $121.3 million at December 31, 2009, due primarily to the acquisition of OAK in 2010. The Corporation’s land development loans totaled $47.3 million, $53.4 million and $46.6 million at December 31, 2011, 2010 and 2009, respectively, and consisted primarily of loans to develop residential real estate. Real estate construction and land development loans represented 3.1% of the Corporation’s loan portfolio at December 31, 2011, compared to 3.9% and 4.1% at December 31, 2010 and 2009, respectively.

Real estate construction lending involves a higher degree of risk than real estate commercial lending and real estate residential lending because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates, the need to obtain a tenant or purchaser of the property if it will not be owner-occupied or the need to sell developed properties. The Corporation generally attempts to mitigate the risks associated with construction lending by, among other things, lending primarily in its market areas, using prudent underwriting guidelines and closely monitoring the construction process. The Corporation’s risk in this area has increased since early 2008 due to the weak economic environment within the State of Michigan. While the economy in Michigan improved during 2011, the sale of lots and units in both residential and commercial development projects remained weak, as customer demand remained low, resulting in the inventory of unsold lots and housing units remaining high across the State of Michigan and resulting in the inability of most developers to sell their finished developed lots and units within their original expected timeframes. Accordingly, the Corporation’s land development borrowers have sold a small percentage of their developed lots or units since early 2008 due to the unfavorable economic environment. At December 31, 2011,

$11.1 million, or 23%, of the Corporation’s $47.3 million of land development loans were impaired, whereby the Corporation determined it was probable that the full amount of principal and interest would not be collected on these loans in accordance with their original contractual terms.

Consumer Loan Portfolio

The Corporation’s consumer loan portfolio is comprised of real estate residential loans, consumer installment loans and home equity loans and lines of credit.

Real estate residential loans consist primarily of one- to four-family residential loans with fixed interest rates of fifteen years or less. The loan-to-value ratio at the time of origination is generally 80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance. During 2011 and 2010, the Corporation originated real estate residential loans of $474 million and $453 million, respectively, of which it retained in its loan portfolio $255 million in 2011 and $178 million in 2010. The majority of the real estate residential loan originations in 2011 and 2010 were refinances of existing loans. The demand for longer term fixed interest rate real estate residential loans was high in 2011 and 2010 due to the historical low level of long-term interest rates. The Corporation has historically sold fixed interest rate real estate residential loans originated with maturities of fifteen years and over in the secondary market. However, due to a general low level of loan demand across its market areas, the Corporation retained fixed-interest rate real estate residential loans with terms of fifteen years in its loan portfolio totaling $99 million and $71 million in 2011 and 2010, respectively.

Real estate residential loans were $861.7 million at December 31, 2011, an increase of $63.7 million, or 8.0%, from real estate residential loans of $798.0 million at December 31, 2010, with the increase primarily due to the Corporation retaining fixed interest rate real estate residential loans, as previously discussed. Real estate residential loans increased $58.7 million, or 7.9%, during 2010 from real estate residential loans of $739.4 million at December 31, 2009, with the increase partially due to the acquisition of OAK and partially due to the Corporation retaining fixed interest rate real estate residential loans, as previously discussed. At December 31, 2011, $268 million, or 31%, of total real estate residential loans were at fixed interest rates with maturities beyond 2016. Real estate residential loans have historically involved the least amount of credit risk in the Corporation’s loan portfolio, although the risk on these loans has increased with the increase in the unemployment rate and decrease in real estate property values in the State of Michigan. Real estate residential loans also include loans to consumers for the construction of single family residences that are secured by these properties. Real estate residential construction loans to consumers were $21.6 million at December 31, 2011, compared to $15.3 million at December 31, 2010 and $22.9 million at December 31, 2009. Real estate residential loans represented 22.5% of the Corporation’s loan portfolio at December 31, 2011, compared to 21.7% and 24.7% at December 31, 2010 and 2009, respectively.

The Corporation’s consumer installment and home equity loans and lines of credit (collectively referred to as consumer loans) consist of relatively small loan amounts to consumers to finance personal items, primarily automobiles, recreational vehicles, boats and home improvements. Consumer loans are spread across many individual borrowers, which minimizes the risk per loan transaction. Consumer installment loans include indirect loans for automobiles, recreational vehicles and marine vehicles purchased from dealerships. Home equity loans and lines of credit are comprised of loans to consumers who utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan or line of credit. Collateral values on properties securing consumer loans are negatively impacted by many factors, including the physical condition of the collateral and property values, although losses on consumer loans are often more significantly impacted by the unemployment rate and other economic conditions.

Consumer loans were $884.2 million at December 31, 2011, an increase of $39.2 million, or 4.6%, from consumer loans of $845.0 million at December 31, 2010, with the increase due primarily to the Corporation’s consumer loan promotion program, which historically occurs during the spring, but in 2011 was extended into the fall to generate more lending opportunities. Consumer loans increased $82.5 million, or 11%, during 2010 from consumer loans of $762.5 million at December 31, 2009, with the increase due primarily to the acquisition of OAK. At December 31, 2011, approximately 45% of consumer loans were secured by the borrowers’ personal residences (primarily second mortgages), 23% by automobiles, 20% by recreational vehicles, 8% by marine vehicles and the remaining 4% was mostly unsecured. Consumer loans represented 23.1% of the Corporation’s loan portfolio at December 31, 2011, compared to 22.9% and 25.5% at December 31, 2010 and 2009, respectively.

Consumer loans generally have shorter terms than real estate residential loans, but generally involve more credit risk than real estate residential lending because of the type and nature of the collateral. The Corporation originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. Consumer lending collections are dependent on the borrowers’ continuing financial stability and are more likely to be affected by adverse personal situations. The unemployment rate in the State of Michigan was 9.3% at December 31, 2011, down from 11.1% at December 31, 2010, and 14.6% at December 31, 2009, although still higher than the national average of 8.5% at December 31, 2011. With an improvement in the

unemployment rate, the Corporation experienced decreases in losses on consumer loans during 2011, as compared to 2010 and 2009. Net loan losses on consumer loans totaled 60 basis points of average consumer loans during 2011, compared to 116 basis points and 77 basis points of average consumer loans in 2010 and 2009, respectively. The credit risk on home equity loans and lines of credit has historically been low as property values of residential real estate had historically increased year over year. However, this credit risk has increased since the beginning of 2008 as property values have declined throughout the State of Michigan, thus increasing the risk of insufficient collateral on some home equity loans and lines of credit, and in some instances no collateral on home equity loans and lines of credit, as the majority of these loans are secured by a second mortgage on the borrowers’ residences. While Michigan’s economy has shown signs of improvement, an increase in property values in Michigan has yet to follow. The majority of the Corporation’s home equity lines of credit are comprised of loans with payments of interest only until their maturity. Home equity lines of credit have original maturities up to ten years. Home equity lines of credit comprised 21% and 22% of the Corporation’s consumer loans at December 31, 2011 and 2010, respectively.

ASSET QUALITY

Nonperforming Assets

Nonperforming assets include nonperforming loans, which consist of originated loans for which the accrual of interest has been discontinued (nonaccrual loans), originated loans that are past due as to principal or interest by 90 days or more and still accruing interest and originated loans that have been modified under troubled debt restructurings (TDRs) where a concession has been granted to the borrower due to a decline in credit quality of the loan and the borrower has not satisfied the Corporation’s payment policy (as described below) to be considered performing. Nonperforming assets also include assets obtained through foreclosures and repossessions, including foreclosed and repossessed assets acquired as a result of the OAK acquisition. The Corporation transfers an originated loan that is 90 days or more past due to nonaccrual status (except for real estate residential loans that are transferred at 120 days past due), unless it believes the loan is both well-secured and in the process of collection. TDRs continue to be reported as nonperforming loans until a six-month payment history of principal and interest payments is sustained in accordance with the terms of the loan modification, at which time the loan is no longer considered a nonperforming asset and the Corporation moves the loan to a performing TDR status.

Nonperforming assets were $131.8 million at December 31, 2011, compared to $175.2 million at December 31, 2010 and $153.3 million at December 31, 2009, and represented 2.5%, 3.3% and 3.6%, respectively, of total assets. The decrease in nonperforming assets in 2011 of $43.4 million, or approximately 25%, is a sign of improvement in the credit quality of the Corporation’s loan portfolio. The decrease in nonperforming assets during 2011 was also a sign of the improving economic climate in Michigan. However, the Corporation’s levels of nonperforming assets remained elevated, compared to historical levels, due to an unfavorable economic climate that has existed for more than four years in the State of Michigan, which resulted in cash flow difficulties being encountered by many business and consumer loan customers. The Corporation’s nonperforming assets are not concentrated in any one industry or any one geographical area within Michigan, other than $6.3 million in nonperforming land development loans. At December 31, 2011, there were three commercial loan relationships exceeding $2.5 million, totaling $12.1 million, that were in nonperforming status. Based on declines in both residential and commercial real estate appraised values due to the weakness in the Michigan economy over the past several years, management continues to evaluate and, when appropriate, obtain new appraisals or discount appraised values to compute estimated net realizable values of nonperforming real estate secured loans and other real estate properties. While the economic climate within Michigan has shown signs of improvement, it is management’s belief that nonperforming assets will remain at elevated levels.

Table 5 provides a five-year history of nonperforming assets, including the composition of nonperforming loans by major loan category.

TABLE 5. NONPERFORMING ASSETS


	December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Nonaccrual loans⁽¹⁾:
Commercial	$	10,726		$	16,668		$	19,309		$	16,324		$	10,961
Real estate commercial		44,438			60,558			49,419			27,344			19,672
Real estate construction and land development		6,190			8,967			15,184			15,310			12,979
Real estate residential		12,573			12,083			15,508			12,175			8,516
Consumer installment and home equity		4,467			4,686			7,169			5,313			3,468

Total nonaccrual loans		78,394			102,962			106,589			76,466			55,596

Accruing loans contractually past due 90 days or more as to interest or principal payments:
Commercial		1,381			530			1,371			1,652			1,958
Real estate commercial		374			1,350			3,971			9,995			4,170
Real estate construction and land development		287			1,220			1,990			759			—
Real estate residential		752			3,253			3,614			3,369			1,470
Consumer installment and home equity		1,023			1,055			787			1,087			166

Total accruing loans contractually past due 90 days or more as to interest or principal payments		3,817			7,408			11,733			16,862			7,764

Nonperforming TDRs⁽²⁾:
Commercial loan portfolio		14,675			15,057			—			—			—
Consumer loan portfolio		9,383			22,302			17,433			—			—

Total nonperforming TDRs		24,058			37,359			17,433			—			—

Total nonperforming loans		106,269			147,729			135,755			93,328			63,360
Other real estate and repossessed assets⁽³⁾		25,484			27,510			17,540			19,923			11,132

Total nonperforming assets	$	131,753		$	175,239		$	153,295		$	113,251		$	74,492

Nonperforming loans as a percent of total loans		2.77	%		4.01	%		4.54	%		3.13	%		2.26	%

Nonperforming assets as a percent of total assets		2.47	%		3.34	%		3.61	%		2.92	%		1.98	%

(1)

There was no interest income recognized on nonaccrual loans in 2011 while they were in nonaccrual status. During 2011, the Corporation recognized $1.0 million of interest income on these loans while they were in an accruing status. Additional interest income of $6.0 million would have been recorded during 2011 on nonaccrual loans had they been current in accordance with their original terms.

(2)	Interest income of $2.3 million was recorded in 2011 on TDRs.

(3)	Includes property acquired through foreclosure and by acceptance of a deed in lieu of foreclosure and other property held for sale, including properties acquired as a result of the OAK transaction.

The following schedule summarizes changes in nonaccrual loans during 2011 and 2010:


	Years Ended December 31,
	2011			2010
	(In thousands)
Balance at beginning of period	$	102,962		$	106,589
Additions during period		65,451			85,882
Principal balances charged off		(26,751	)		(35,845	)
Transfers to other real estate/repossessed assets		(15,728	)		(21,534	)
Return to accrual status		(23,463	)		(9,576	)
Payments received		(24,077	)		(22,554	)

Balance at end of period	$	78,394		$	102,962

Nonperforming Loans

The following schedule provides the composition of nonperforming loans, by major loan category, as of December 31, 2011 and 2010.


	December 31,
	2011					2010
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Commercial loan portfolio:
Commercial	$	15,684		15	%	$	22,511		15	%
Real estate commercial		55,791		53			71,652		49
Real estate construction and land development		6,596		6			10,187		7

Subtotal — commercial loan portfolio		78,071		74			104,350		71

Consumer loan portfolio:
Real estate residential		22,708		21			37,638		25
Consumer installment and home equity		5,490		5			5,741		4

Subtotal — consumer loan portfolio		28,198		26			43,379		29

Total nonperforming loans	$	106,269		100	%	$	147,729		100	%

Total nonperforming loans were $106.3 million at December 31, 2011, a decrease of $41.4 million, or 28%, compared to $147.7 million at December 31, 2010. The Corporation’s nonperforming loans in the commercial loan portfolio were $78.1 million at December 31, 2011, a decrease of $26.3 million, or 25%, from $104.4 million at December 31, 2010. Nonperforming loans in the commercial loan portfolio comprised 74% of total nonperforming loans at December 31, 2011, compared to 71% at December 31, 2010. Likewise, as disclosed in Table 6, Analysis of Allowance for Loan Losses, the majority of the Corporation’s net loan charge-offs during 2011 and 2010 occurred within the commercial loan portfolio, with 66% and 55% of net loan charge-offs during 2011 and 2010, respectively, attributable to loans in the commercial loan portfolio. The Corporation’s nonperforming loans in the consumer loan portfolio were $28.2 million at December 31, 2011, a decrease of $15.2 million, or 35%, from $43.4 million at December 31, 2010.

Nonperforming Loans – Commercial Loan Portfolio

The following schedule presents data related to nonperforming loans in the commercial loan portfolio by dollar amount at December 31, 2011 and 2010.


	December 31,
	2011				2010
	Number of Borrowers		Amount		Number of Borrowers		Amount
	(Dollars in thousands)
$5,000,000 or more		1	$	6,906		1	$	7,227
$2,500,000 - $4,999,999		2		5,192		6		17,071
$1,000,000 - $2,499,999		14		23,516		18		29,246
$500,000 - $999,999		19		13,565		22		14,483
$250,000 - $499,999		39		13,738		50		18,188
Under $250,000		177		15,154		202		18,135

Total		252	$	78,071		299	$	104,350

Nonperforming commercial loans were $15.7 million at December 31, 2011, a decrease of $6.8 million, or 30%, from $22.5 million at December 31, 2010. The nonperforming commercial loans at December 31, 2011 were not concentrated in any single industry.

Nonperforming real estate commercial loans were $55.8 million at December 31, 2011, a decrease of $15.9 million, or 22%, from $71.7 million at December 31, 2010. Nonperforming real estate commercial loans secured by owner occupied real estate, non-owner occupied real estate and vacant land totaled $26.9 million, $21.6 million and $7.3 million, respectively, at

December 31, 2011, and comprised 5%, 8% and 34%, respectively, of total owner occupied real estate, non-owner occupied real estate and vacant land loans included in the Corporation’s originated real estate commercial loans at December 31, 2011. At December 31, 2011, the Corporation’s nonperforming real estate commercial loans were comprised of a diverse mix of commercial lines of business and were also geographically disbursed throughout the Corporation’s market areas. The largest concentration of the $55.8 million in nonperforming real estate commercial loans at December 31, 2011 was one customer relationship totaling $6.6 million that was secured by a combination of vacant land and non-owner occupied commercial real estate. This same customer relationship had another $0.3 million included in nonperforming real estate construction and land development loans and $0.4 million included in nonperforming real estate residential loans. At December 31, 2011, $9.2 million of the nonperforming real estate commercial loans were in various stages of foreclosure with 50 borrowers. Challenges remain in the Michigan economy despite some signs of improvement, thus creating a difficult business environment for many lines of business across the state.

Nonperforming real estate construction and land development loans were $6.6 million at December 31, 2011, a decrease of $3.6 million, or 35%, from $10.2 million at December 31, 2010. At December 31, 2011, $6.3 million, or 95%, of the nonperforming real estate construction and land development loans were land development loans secured primarily by residential real estate improved lots and housing units. The $6.3 million of nonperforming loans secured by land development projects represented 21% of total land development loans in the originated loan portfolio outstanding of $30.3 million at December 31, 2011. The economy in Michigan has adversely impacted housing demand throughout the state since 2008 and, accordingly, a significant percentage of the Corporation’s residential real estate development borrowers have experienced cash flow difficulties associated with a significant decline in sales of both lots and residential real estate.

Nonperforming Loans – Consumer Loan Portfolio

Nonperforming real estate residential loans were $22.7 million at December 31, 2011, a decrease of $14.9 million, or 40%, from $37.6 million at December 31, 2010. The decrease in nonperforming real estate residential loans during 2011 was attributable to the Corporation classifying $15.6 million of real estate residential TDRs as performing TDRs during 2011 due to the borrowers’ sustained repayment history. At December 31, 2011, a total of $8.0 million of nonperforming real estate residential loans were in various stages of foreclosure.

Nonperforming consumer installment and home equity loans were $5.5 million at December 31, 2011, a decrease of $0.2 million, or 4.4%, from $5.7 million at December 31, 2010.

Troubled Debt Restructurings (TDRs)

The unfavorable economic climate in Michigan has resulted in a large number of both business and consumer customers with cash flow difficulties and thus the inability to maintain their loan balances in a performing status. The Corporation determined that it was probable that certain customers who were past due on their loans, if provided a modification of their loan by reducing their monthly payment for a limited time period, would be able to bring their loan relationship to a performing status. The Corporation believed these modifications would potentially result in a lower level of loan losses and loan collection costs than if the Corporation currently proceeded through the foreclosure process with these borrowers. These modifications involve granting a concession to a borrower who is experiencing financial difficulty and, therefore, meet the criteria to be considered TDRs.

The Corporation’s loans reported as TDRs continue to accrue interest at the loan’s effective interest rate as the Corporation expects to collect the remaining principal balance of the loan. The Corporation recognizes interest income on TDRs at the loan’s original contractual rate at the time of modification. TDRs are reported as a nonperforming loan (nonperforming TDR) until a six-month payment history of principal and interest payments, in accordance with the loan modification, is sustained, at which time the Corporation moves the loans to a performing status (performing TDR). The Corporation’s loans reported as TDRs do not include modified loans that are already reported in a nonaccrual status. The Corporation’s nonaccrual loans at December 31, 2011 and 2010 included $41.8 million and $59.4 million, respectively, of these modified loans.

The following summarizes the Corporation’s TDRs at December 31, 2011:

Performing
Status

Nonperforming Status

Total

Current

Past Due
31-90 Days

Sub-
Total

(In thousands)

Commercial loan portfolio

4,765

13,770

905

14,675

19,440

Consumer loan portfolio

15,629

7,275

2,108

9,383

25,012

Total TDRs

20,394

21,045

3,013

24,058

44,452

The Corporation’s TDRs in the commercial loan portfolio generally consist of allowing borrowers to temporarily defer scheduled principal payments and make interest only payments for a short period of time (generally six months to one year) at the stated interest rate of the original loan agreement or lower payments due to a modification of the loan’s contractual terms. The

Corporation does not expect to incur a loss on these loans based on its assessment of the borrowers’ expected cash flows, and accordingly, no additional provision for loan losses has been recognized related to these loans. These TDRs are individually evaluated for impairment and transferred to nonaccrual status if conditions change and it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the modified contractual terms of the loan. Once the borrowers under these TDRs have made at least six consecutive months of principal and interest payments under a formal modification agreement that follows the temporary deferral period, the loans are classified by the Corporation as performing TDRs. The outstanding balance of nonperforming TDRs in the commercial loan portfolio was $14.7 million at December 31, 2011, compared to $15.1 million at December 31, 2010. At December 31, 2011, the Corporation had $4.8 million of performing TDRs in the commercial loan portfolio due to the borrowers’ sustained repayment histories.

A rollforward of the Corporation’s TDRs in the commercial loan portfolio for the year ended December 31, 2011 follows:

Performing

Nonperforming

Total

(In thousands)

Balance at January 1, 2011

—

15,057

Additions for modifications

—

10,975

Transfers to performing TDR status

4,953

(4,953

)

—

Principal payments and pay-offs

(188

)

(905

)

(1,093

)

Transfers to nonaccrual status

—

(5,499

)

(5,499

)

Balance at December 31, 2011

4,765

14,675

19,440

The Corporation’s TDRs in the consumer loan portfolio generally consist of reducing a borrower’s monthly payments by decreasing the interest rate charged on the loan to 3%-5% for a specified period of time (generally 24 months). These loans are moved to nonaccrual status if the loan becomes 90 days past due as to principal or interest, or sooner if conditions warrant. Once the borrowers under these TDRs have made at least six consecutive months of principal and interest payments, they are classified as performing TDRs. The outstanding balance of nonperforming TDRs in the consumer loan portfolio was $9.4 million at December 31, 2011, compared to $22.3 million at December 31, 2010. At December 31, 2011, the Corporation had $15.6 million of performing TDRs in the consumer loan portfolio due to the borrowers’ sustained repayment histories. The Corporation recognized $0.4 million of additional provision for loan losses during 2011 related to impairment on its TDRs (as a result of the temporary reduction in the borrowers’ interest rates) at the time the loans were modified based on the present value of expected future cash flows discounted at the loan’s original effective interest rate.

The Corporation’s cumulative redefault rate as of December 31, 2011 on its TDRs, which represents the percentage of TDRs that transferred to nonaccrual status since the Corporation began such modifications in 2009, was 15% for TDRs in the commercial loan portfolio and 14% for TDRs in the consumer loan portfolio.

Other Real Estate and Repossessed Assets

Other real estate and repossessed assets are components of nonperforming assets that include other real estate (ORE), comprised of residential and commercial real estate and land development properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure, and repossessed assets, comprised of other personal and commercial assets. ORE totaled $24.9 million at December 31, 2011, a decrease of $2.1 million, or 7.7%, from $27.0 million at December 31, 2010. Repossessed assets totaled $0.6 million at December 31, 2011, compared to $0.5 million at December 31, 2010.

The following schedule provides the composition of ORE at December 31, 2011 and 2010:


	December 31,
	2011		2010
	(In thousands)
Composition of ORE:
Vacant land	$	7,565	$	9,149
Commercial properties		9,565		8,604
Residential real estate properties		6,171		6,189
Residential land development properties		1,587		3,035

Total ORE	$	24,888	$	26,977

The following schedule summarizes ORE activity during 2011 and 2010:


	Years Ended December 31,
	2011			2010
	(In thousands)
Balance at beginning of year	$	26,977		$	17,247
Additions attributable to OAK acquisition		—			2,698
Other additions		16,870			23,302
Write-downs to fair value		(4,677	)		(2,685	)
Dispositions from sales		(13,644	)		(13,161	)
Other reductions		(638	)		(424	)

Balance at end of year	$	24,888		$	26,977

The historically large inventory of real estate properties for sale across the State of Michigan has resulted in an increase in the Corporation’s carrying time and cost of holding ORE. Consequently, the Corporation had $14.2 million in ORE properties at December 31, 2011 that had been held in excess of one year, of which $7.0 million were parcels of vacant land, $3.9 million were commercial properties, $1.9 million were residential real estate properties and $1.4 million were residential land development properties. Further, at December 31, 2011, the Corporation had $1.9 million in ORE properties that had been held in excess of three years. Since the redemption period on foreclosures is relatively long in Michigan (six months to one year) and the Corporation had $17.2 million of nonperforming loans that were in the process of foreclosure at December 31, 2011, it is anticipated that the level of the Corporation’s ORE will remain at elevated levels. The Corporation’s ORE is carried at the lower of cost or fair value less estimated cost to sell.

All of the Corporation’s ORE properties have been written down to fair value through a charge-off against the allowance for loan losses at the time the loan was transferred to ORE or through a subsequent write-down, recorded as an operating expense, to recognize a further market value decline of the property after the initial transfer date. In addition, ORE properties acquired in the acquisition of OAK were recorded at fair value at the date of acquisition. Accordingly, at December 31, 2011, the carrying value of ORE of $24.9 million was reflective of $39.8 million in charge-offs, write-downs or fair value adjustments, and represented 38% of the contractual loan balance remaining at the time the property was transferred to ORE.

During 2011, the Corporation sold 234 ORE properties for net proceeds of $15.9 million. On an average basis, the net proceeds from these sales represented 117% of the carrying value of the property at the time of sale, although the net proceeds represented 45% of the remaining loan balance at the time the Corporation received title to the properties.

Nonperforming assets at December 31, 2011 did not include acquired loans totaling $17.4 million that were not performing in accordance with the loan’s original contractual terms due to a market interest yield being recognized on these loans into interest income. The risk of credit loss on these loans was recognized as part of the fair value adjustment recorded at the acquisition date in accordance with the application of ASC 310-30. Acquired loans not performing in accordance with the loan’s original contractual terms are included in the Corporation’s impaired loan schedule in Note 4 to the consolidated financial statements.

Impaired Loans

A loan is considered impaired when management determines it is probable that all of the principal and interest due will not be collected according to the original contractual terms of the loan agreement. In most instances, impairment is measured based on the fair market value of the underlying collateral, as such impaired loans were deemed to be collateral dependent. Impairment is 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 specifically allocated to impaired loans. The process of measuring impaired loans and the allocation of the allowance for loan losses requires judgment and estimation. The eventual outcome may differ from amounts estimated.

Impaired loans totaled $140.2 million at December 31, 2011, a decrease of $21.5 million, or 13%, compared to impaired loans of $161.7 million at December 31, 2010. A summary of impaired loans at December 31, 2011 and 2010 follows:


	December 31,
	2011		2010
	(In thousands)
Originated impaired loans:
Commercial loan portfolio:
Nonaccrual loans	$	61,354	$	86,193
Nonperforming TDRs		14,675		15,057
Performing TDRs		4,765		—

Subtotal		80,794		101,250

Consumer loan portfolio:
Nonaccrual loans		17,040		16,769
Nonperforming TDRs		9,383		22,302
Performing TDRs		15,629		—

Subtotal		42,052		39,071

Total originated impaired loans		122,846		140,321
Acquired loans not performing in accordance with original contractual terms		17,375		21,385

Total impaired loans	$	140,221	$	161,706

After analyzing the various components of the customer relationships and evaluating the underlying collateral of impaired loans, it was determined that impaired loans of the commercial loan portfolio totaling $27.3 million at December 31, 2011 required a specific allocation of the allowance for loan losses (valuation allowance), compared to $44.9 million of impaired loans requiring a valuation allowance at December 31, 2010. The Corporation’s nonperforming and performing TDRs in the commercial loan portfolio at December 31, 2011 and 2010 did not require a valuation allowance as the Corporation expects to collect the full principal and interest owed on each of the loans.

The following schedule summarizes impaired loans to commercial borrowers and the related valuation allowance at December 31, 2011 and 2010 and partial loan charge-offs (confirmed losses) taken on these impaired loans:


	Amount		Valuation Allowance		Confirmed Losses		Cumulative Inherent Loss Percentage
	(In thousands)
December 31, 2011
Impaired loans-originated commercial loan portfolio:
With valuation allowance and no charge-offs	$	12,658	$	3,717	$	—		29	%
With valuation allowance and charge-offs		14,656		4,865		2,640		43
With charge-offs and no valuation allowance		25,407		—		19,015		43
Without valuation allowance or charge-offs		28,073		—		—		—

Total		80,794	$	8,582	$	21,655		30	%

Impaired acquired loans		17,375

Total impaired loans to commercial borrowers	$	98,169

December 31, 2010
Impaired loans-originated commercial loan portfolio:
With valuation allowance and no charge-offs	$	33,055	$	12,015	$	—		36	%
With valuation allowance and charge-offs		11,795		2,951		1,551		34
With charge-offs and no valuation allowance		20,033		—		18,277		48
Without valuation allowance or charge-offs		36,367		—		—		—

Total		101,250	$	14,966	$	19,828		29	%

Impaired acquired loans		21,385

Total impaired loans to commercial borrowers	$	122,635

The Corporation’s valuation allowance for impaired loans of the commercial loan portfolio was $8.6 million at December 31, 2011, a decrease of $6.4 million from $15.0 million at December 31, 2010. The decrease in the valuation allowance is primarily reflective of loan charge-offs of impaired loans during 2011. Confirmed losses represent partial loan charge-offs on impaired loans due primarily to the receipt of a recent third-party property appraisal indicating the value of the collateral securing the loan is below the loan balance and management believes full collection of the loan balance is not likely.

The Corporation generally does not recognize a valuation allowance for impaired loans in the consumer loan portfolio as these loans are comprised of smaller-balance homogeneous loans that are collectively evaluated for impairment. However, the Corporation had a valuation allowance attributable to TDRs in the consumer loan portfolio of $0.7 million at December 31, 2011, compared to $0.8 million at December 31, 2010, related to the reduction in the present value of expected future cash flows for these loans discounted at their original effective interest rate.

Impaired loans included acquired loans totaling $17.4 million and $21.4 million at December 31, 2011 and 2010, respectively, that were not performing in accordance with the original contractual terms of the loans. These individual loans did not require a valuation allowance at December 31, 2011 and 2010 as these loans were initially recorded at fair value, which included an estimate for credit losses, and are subsequently evaluated for further credit deterioration in loan pools. At December 31, 2011, $1.6 million of the allowance for loan losses was allocated to acquired loans due primarily to one of the pools experiencing a decline in expected cash flows during 2011. There were no material changes in expected cash flows for the remaining acquired loan pools.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses (allowance) provides for probable losses in the originated loan portfolio that have been identified with specific customer relationships and for probable losses believed to be inherent in the remainder of the originated loan portfolio but that have not been specifically identified. The allowance is comprised of specific valuation allowances (assessed for originated loans that have known credit weaknesses), pooled allowances based on assigned risk ratings and historical loan loss experience for each loan type, and an unallocated allowance for imprecision in the subjective nature of the specific and pooled allowance methodology. Management evaluates the allowance on a quarterly basis in an effort to ensure the level is adequate to absorb probable losses inherent in the loan portfolio. This evaluation process is inherently subjective as it requires estimates that may be susceptible to significant change and has the potential to affect net income materially. The Corporation’s methodology for measuring the adequacy of the allowance includes several key elements, which includes a review of the loan portfolio, both individually and by category, and includes consideration of changes in the mix and volume of the loan portfolio, actual loan loss experience, review of collateral values, the financial condition of the borrowers, industry and geographical exposures within the portfolio, economic conditions and employment levels of the Corporation’s local markets and other factors affecting business sectors. Management believes that the allowance is currently maintained at an appropriate level, considering the inherent risk in the loan portfolio. Future significant adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or the level of loan losses incurred.

The allowance of the acquired loan portfolio was not carried over on the date of acquisition. The acquired loans were recorded at their estimated fair value at the date of acquisition, with the estimated fair value including a component for expected credit losses. Acquired loans are subsequently evaluated for further credit deterioration in loan pools, which consist of loans with similar credit risk characteristics. If an acquired loan pool experiences a decrease in expected cash flows as compared to those expected at the acquisition date, a portion of the allowance is allocated to acquired loans. At December 31, 2011, $1.6 million of the allowance was allocated to acquired loans due primarily to one of the acquired loan pools experiencing a decline in expected cash flows during 2011. There were no material changes in expected cash flows for the remaining acquired loan pools.

Economic conditions in the Corporation’s markets, all within Michigan, were generally less favorable than those nationwide during 2011. The economy in Michigan showed signs of improvement in 2011, although economic challenges remain and are expected to continue in 2012. Accordingly, management believes net loan losses, delinquencies and nonperforming loans will remain at elevated levels.

A summary of the activity in the allowance for loan losses for the five years ended December 31, 2011 is included in Table 6.

TABLE 6. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES


	Years Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Balance at beginning of year	$	89,530		$	80,841		$	57,056		$	39,422		$	34,098
Provision for loan losses		26,000			45,600			59,000			49,200			11,500
Loan charge-offs:
Commercial		(6,950	)		(8,430	)		(12,001	)		(16,787	)		(1,622	)
Real estate commercial		(13,132	)		(10,811	)		(9,231	)		(6,995	)		(1,675	)
Real estate construction and land development		(489	)		(2,539	)		(6,969	)		(2,963	)		(1,272	)
Real estate residential		(4,971	)		(8,041	)		(3,694	)		(2,458	)		(484	)
Consumer installment and home equity		(6,566	)		(10,665	)		(6,791	)		(4,739	)		(1,935	)

Total loan charge-offs		(32,108	)		(40,486	)		(38,686	)		(33,942	)		(6,988	)

Recoveries of loans previously charged off:
Commercial		1,676			921			904			1,473			249
Real estate commercial		856			426			495			131			21
Real estate construction and land development		45			20			307			29			30
Real estate residential		849			543			614			160			18
Consumer installment and home equity		1,485			1,665			1,151			583			494

Total loan recoveries		4,911			3,575			3,471			2,376			812

Net loan charge-offs		(27,197	)		(36,911	)		(35,215	)		(31,566	)		(6,176	)

Allowance for loan losses at end of year	$	88,333		$	89,530		$	80,841		$	57,056		$	39,422


Allowance for loan losses-originated	$	86,733		$	89,530
Allowance for loan losses-acquired		1,600			—

Allowance for loan losses-total	$	88,333		$	89,530

Net loan charge-offs during the year as a percentage of average loans outstanding during the year		0.73	%		1.07	%		1.18	%		1.10	%		0.22	%

Allowance for loan losses-originated as a percentage of:
Total originated loans		2.60	%		2.86	%		2.70	%		1.91	%		1.41	%

Nonperforming loans		82	%		61	%		60	%		61	%		62	%

The following schedule summarizes the allowance for originated loans as a percentage of nonperforming loans at December 31, 2011, 2010 and 2009:


	December 31,
	2011			2010			2009
	(Dollars in thousands)
Allowance for loan losses (allowance)-originated loans	$	86,733		$	89,530		$	80,841
Nonperforming loans		106,269			147,729			135,755
Allowance-originated loans as a percent of nonperforming loans		82	%		61	%		60	%
Allowance-originated loans as a percent of nonperforming loans, net of impaired originated loans for which the expected loss has been charged-off		107	%		70	%		70	%

The allocation of the allowance for loan losses in Table 7 is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or exactness of the specific amounts. The entire allowance is available to absorb future loan losses without regard to the categories in which the loan losses are classified. The allocation of the allowance is based upon a combination of factors, including historical loss factors, credit-risk grading, past-due experiences, and other factors, as discussed above.

TABLE 7. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES


	December 31,
	2011					2010					2009					2008					2007
Loan Type	Allowance Amount		Percent of Originated Loans in Each Category to Total Loans			Allowance Amount		Percent of Originated Loans in Each Category to Total Loans			Allowance Amount		Percent of Loans in Each Category to Total Loans			Allowance Amount		Percent of Loans in Each Category to Total Loans			Allowance Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in millions)
Originated loans:
Commercial	$	20.7		23	%	$	22.2		22	%	$	19.1		20	%	$	12.3		20	%	$	9.7		19	%
Real estate commercial		30.0		24			32.6		25			23.9		26			20.3		26			12.8		27
Real estate construction and land development		3.7		3			4.6		3			5.7		4			3.8		4			3.0		5
Real estate residential		13.0		25			10.8		25			13.1		25			8.0		28			5.5		30
Consumer installment and home equity		15.8		25			16.6		25			17.3		25			10.9		22			6.6		19
Unallocated		3.5		—			2.7		—			1.7		—			1.8		—			1.8		—

Subtotal — originated loans		86.7		100	%		89.5		100	%	$	80.8		100	%	$	57.1		100	%	$	39.4		100	%

Acquired loans		1.6					—

Total	$	88.3				$	89.5

DEPOSITS

Total deposits at December 31, 2011 were $4.37 billion, an increase of $35 million, or 0.8%, from total deposits at December 31, 2010 of $4.33 billion. Customer deposits increased $104 million during 2011, although this growth was partially offset by the Corporation paying off $69 million of maturing brokered deposits that were acquired in the OAK acquisition. At December 31, 2011, the Corporation had $95 million in remaining brokered deposits that were acquired in the OAK acquisition. The Corporation intends to use its liquidity to pay off brokered deposits as they mature, with $52 million maturing in 2012, $35 million maturing in 2013 and the remainder thereafter. Total deposits increased $914 million, or 27%, during 2010, with the increase attributable to the OAK acquisition and an increase in other customer deposits of $285 million.

The Corporation’s average deposit balances and average rates paid on deposits for the past three years are included in Table 9 located in the “Net Interest Income” section of this report. Average total deposits in 2011 were $4.35 billion, an increase of $333 million, or 8.3%, over average deposits in 2010. Average total deposits in 2010 were $4.02 billion, an increase of $822 million, or 26%, over average deposits in 2009. The increases in average deposits in both 2011 and 2010 were primarily attributable to the OAK acquisition, which occurred on April 30, 2010. There was no significant change in the mix of average deposits during 2011 or 2010, except in the category of noninterest-bearing deposits which, as a percentage of average total deposits, increased to 19.0% in 2011 from 16.6% in 2010.

It is the Corporation’s strategy to develop customer relationships that will drive core deposit growth and stability. The Corporation’s competitive position within many of its market areas has historically limited its ability to materially increase core deposits without adversely impacting the weighted average cost of the deposit portfolio. While competition for core deposits remained strong throughout the Corporation’s markets during 2011 and 2010, the Corporation’s increased efforts to expand its deposit relationships with existing customers, the Corporation’s financial strength and a general trend in customers holding more liquid assets, resulted in the Corporation experiencing increases in customer deposits during the past two years. Total deposits increased $104 million and $285 million, excluding brokered and other deposits acquired in the OAK acquisition, during 2011 and 2010, respectively, while during the same time frame, the Corporation experienced a decrease in the average cost of its deposits.

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

In response to the competition for other investment products, Chemical Bank, through its Chemical Financial Advisors program, offers a wide array of mutual funds, annuity products and marketable securities through an alliance with an independent, registered broker/dealer. During 2011 and 2010, customers purchased $104 million and $89 million, respectively, of annuity products, mutual fund and other investments through the Chemical Financial Advisors program.

At December 31, 2011, the Corporation’s time deposits, which consist of certificates of deposit, totaled $1.51 billion. Of the Corporation’s total time deposits of $1.51 billion at December 31, 2011, $939 million have stated maturities in 2012, although the Corporation expects the majority of these to be renewed by customers. The following schedule summarizes the quarterly maturities in 2012 of the Corporation’s time deposits:


	Amount		Weighted Average Interest Rate
	(Dollars in thousands)
Maturity schedule:
January 1 — March 31, 2012	$	393,121		0.88	%
April 1 — June 30, 2012		197,298		1.31
July 1 — September 30, 2012		176,691		1.42
October 1 — December 31, 2012		171,645		1.35

Total 2012 maturities	$	938,755		1.16	%

Table 8 presents the maturity distribution of time deposits of $100,000 or more at December 31, 2011. Time deposits of $100,000 or more totaled $531 million and represented 12% of total deposits at December 31, 2011.

TABLE 8. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE


	December 31, 2011
	Amount		Percent
	(Dollars in thousands)
Maturity:
Within 3 months	$	162,195		30	%
After 3 but within 6 months		63,002		12
After 6 but within 12 months		120,083		23
After 12 months		185,763		35

Total	$	531,043		100	%

BORROWED FUNDS

Borrowed funds include short-term borrowings and FHLB advances. Short-term borrowings were $303.8 million, $242.7 million and $240.6 million at December 31, 2011, 2010 and 2009, respectively, and were comprised solely of securities sold under agreements to repurchase. Short-term borrowings, which are highly interest rate sensitive, increased $61.1 million, or 25%, during 2011 primarily due to additional funds deposited by the Corporation’s business customers. Securities sold under agreements to repurchase represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by Chemical Bank, as these deposits are not covered by FDIC insurance. These funds have been a stable source of liquidity for Chemical Bank, much like its core deposit base. As part of the Corporation’s focus on relationship banking, it generally accepts these deposits from customers that have an established banking relationship with Chemical Bank. A summary of short-term borrowings for 2011, 2010 and 2009 is included in Note 10 to the consolidated financial statements.

FHLB advances are borrowings from the Federal Home Loan Bank of Indianapolis that are secured under a blanket security agreement of real estate residential first lien loans with an aggregate book value equal to at least 155% of the advances and FHLB capital stock owned by Chemical Bank. FHLB advances outstanding totaled $43.1 million at December 31, 2011 and $74.1 million at December 31, 2010. FHLB advances are borrowings that are generally used to fund loans and a portion of the investment securities portfolio. The Corporation acquired $36 million of FHLB advances in conjunction with the OAK acquisition, of which $18 million were outstanding at December 31, 2011. At December 31, 2011, FHLB advances that will mature in 2012 totaled $8.8 million. A summary of FHLB advances outstanding at December 31, 2011 and 2010 is included in Note 11 to the consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS

The Corporation has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes the Corporation’s noncancelable contractual obligations and future required minimum payments at December 31, 2011. Refer to Notes 9, 10, 11 and 20 to the consolidated financial statements for a further discussion of these contractual obligations.

Contractual Obligations

December 31, 2011

Minimum Payments Due by Period

Less than
1 year

1-3 years

3-5 years

More than
5 years

Total

(In thousands)

Deposits with no stated maturity*

2,851,883

—

2,851,883

Time deposits with a stated maturity*

938,755

407,489

167,263

1,467

1,514,974

Short-term borrowings*

303,786

—

303,786

FHLB advances*

8,767

33,759

531

—

43,057

Commitment to fund a low income housing partnership

1,566

868

2,559

Commitment to fund a private equity capital investment

800

—

800

Operating leases and noncancelable contracts

9,350

7,325

2,806

1,361

20,842

Total contractual obligations

4,114,907

449,441

170,650

2,903

4,737,901

*	Deposits and borrowings exclude accrued interest.

Credit-Related Commitments

The Corporation also has credit-related commitments that may impact liquidity. The following schedule summarizes the Corporation’s credit-related commitments and expiration dates by period at December 31, 2011. Because many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent future cash requirements of the Corporation. Refer to Note 20 to the consolidated financial statements for a further discussion of these obligations.

December 31, 2011

Expiration Dates by Period

Less than
1 year

1-3 years

3-5 years

More than
5 years

Total

(In thousands)

Unused commitments to extend credit

454,136

96,456

63,540

63,011

677,143

Loan commitments

144,782

—

144,782

Standby letters of credit

28,108

13,469

3,840

225

45,642

Total credit-related commitments

627,026

109,925

67,380

63,236

867,567

CASH DIVIDENDS

The Corporation’s annual cash dividends paid per common share over the past five years were as follows:


	2011		2010		2009		2008		2007
Annual Cash Dividend (per common share)	$	0.80	$	0.80	$	1.18	$	1.18	$	1.14

The Corporation has paid regular cash dividends every quarter since it began operating as a bank holding company in 1973. The earnings of Chemical Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, capital requirements, legal and regulatory restraints and other factors affecting Chemical Bank. Refer to Note 21 to the consolidated financial statements for a further discussion of factors affecting cash dividends.

CAPITAL

Capital supports current operations and provides the foundation for future growth and expansion. Total shareholders’ equity was $571.7 million at December 31, 2011, an increase of $11.6 million, or 2.1%, from total shareholders’ equity of $560.1 million at December 31, 2010. The increase in shareholders’ equity during 2011 was attributable to the Corporation’s net income exceeding cash dividends paid to shareholders by $21.1 million, which was partially offset by an $11.2 million increase in accumulated other comprehensive losses. The $11.2 million increase in accumulated other comprehensive losses was primarily attributable to an increase in the projected benefit obligation of the Corporation’s defined benefit pension plan resulting from a decline in the discount rate used to value the projected benefit obligation. Book value per common share at December 31, 2011 and 2010 was $20.82 and $20.41, respectively.

Shareholders’ equity increased $85.8 million in 2010, with the increase primarily attributable to the issuance of approximately 3.5 million shares of common stock related to the OAK acquisition on April 30, 2010, which increased shareholders’ equity by $83.7 million.

The ratio of shareholders’ equity to total assets was 10.7% at both December 31, 2011 and 2010, compared to 11.2% at December 31, 2009. The Corporation’s tangible equity, which is defined as total shareholders’ equity less goodwill and other acquired intangible assets, totaled $454.2 million, $440.4 million and $405.1 million at December 31, 2011, 2010 and 2009, respectively. The Corporation’s tangible equity to assets ratio was 8.7%, 8.6% and 9.7% at December 31, 2011, 2010 and 2009, 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 and Chemical Bank’s various asset categories. These guidelines assign risk weights to on- and off-balance sheet items in arriving at total risk-weighted assets. Regulatory capital is divided by the computed total of risk-weighted assets to arrive at the risk-based capital ratios. Risk-weighted assets totaled $3.88 billion at December 31, 2011 for both the Corporation and Chemical Bank.

The Corporation and Chemical Bank continue to maintain a strong capital position, which significantly exceeded the minimum levels prescribed by the Federal Reserve at December 31, 2011, as shown in the following schedule:

December 31, 2011

Leverage
Ratio

Risk-Based
Capital Ratios

Tier 1

Total

Actual Capital Ratios:

Chemical Financial Corporation

9.0

12.1

13.3

Chemical Bank

8.9

11.9

13.2

Minimum required for capital adequacy purposes

4.0

8.0

Minimum required for “well-capitalized” capital adequacy purposes

5.0

6.0

10.0

As of December 31, 2011, Chemical Bank’s capital ratios exceeded the minimum required to be categorized as well-capitalized, as defined by applicable regulatory requirements. See Note 21 to the consolidated financial statements for more information regarding the Corporation’s and Chemical Bank’s regulatory capital ratios.

From time to time, the board of directors of the Corporation approves common stock repurchase programs allowing the repurchase of shares of the Corporation’s common stock in the open market. The repurchased shares are available for later reissuance in connection with potential future stock dividends, the Corporation’s dividend reinvestment plan, employee benefit plans and other general corporate purposes. Under these programs, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, including the projected parent company cash flow requirements and the Corporation’s share price.

In January 2008, the board of directors of the Corporation authorized the repurchase of up to 500,000 shares of the Corporation’s common stock under a stock repurchase program. In November 2011, the board of directors of the Corporation reaffirmed the stock buy-back authorization with the qualification that the shares may only be repurchased if the share price is below the tangible book value per share of the Corporation’s common stock at the time of the repurchase. Since the January 2008 authorization, no shares have been repurchased. At December 31, 2011, there were 500,000 remaining shares available for repurchase under the Corporation’s stock repurchase programs.

On April 18, 2011, the shareholders of the Corporation approved an amendment to the restated articles of incorporation to increase the number of authorized shares of common stock from 30,000,000 to 45,000,000.

NET INTEREST INCOME

Net interest income is the difference between interest income on earning assets, such as loans, investment and non-marketable equity securities and other interest-bearing deposits with unaffiliated banks and others, and interest expense on liabilities, such as deposits and borrowings. Net interest income is the Corporation’s largest source of net revenue (net interest income plus noninterest income), representing 81% of net revenue during 2011, compared to 80% in 2010 and 78% in 2009. Net interest income, on a fully taxable equivalent (FTE) basis, is the difference between interest income and interest expense adjusted for the tax benefit received on tax-exempt commercial loans and investment securities. Net interest margin is calculated by dividing net interest income (FTE) by average interest-earning assets. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Because noninterest-bearing sources of funds, or free funds (principally demand deposits and shareholders’ equity), also support earning assets, the net interest margin exceeds the net interest spread.

Net interest income (FTE) in 2011, 2010 and 2009 was $189.0 million, $175.5 million and $150.3 million, respectively. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine tax equivalent net interest income were $5.13 million, $4.35 million and $2.90 million for 2011, 2010 and 2009, respectively. These adjustments were computed using a 35% federal income tax rate.

Changes in the Corporation’s net interest income are influenced by a variety of factors, including changes in the level and mix of interest-earning assets and interest-bearing liabilities, current and prior years’ interest rate changes, 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 in the section captioned “Market Risk” in Item 7A of this report.

The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 3.25% at the end of 2008 and remained at this historically low rate through December 31, 2011. The prime interest rate has historically been 300 basis points higher than the federal funds rate. The Federal Reserve’s Open Market Committee (FOMC) has indicated that it will potentially keep the federal funds rate between zero and 0.25% through the end of 2014, and therefore, the prime interest rate is expected to remain at or near its current historical low level of 3.25% during 2012. The majority of the Corporation’s variable interest rate loans in the commercial loan portfolio are tied to the prime rate.

The Corporation’s balance sheet has historically been liability sensitive, meaning that its deposits generally reprice more quickly than its loans and investments. The nature of the Corporation’s lending activities has been to originate primarily fixed interest rate loans or loans with interest rates fixed for a period of time (generally five years). Therefore, the Corporation’s net interest margin is generally likely to increase in periods of declining interest rates and decrease in periods of rising interest rates. During 2009, in an effort to make the Corporation’s net interest income potentially less adversely impacted by rising interest rates, the Corporation began investing in more variable interest rate investment securities. Variable rate investment securities comprised 28% of total investment securities at December 31, 2008, which was indicative of the Corporation’s then historical level of variable rate investment securities. Variable rate investment securities at December 31, 2011 were $308 million, or 36% of total investment securities, compared to $325 million, or 44% of total investment securities, at December 31, 2010 and $297 million, or 41% of total investment securities, at December 31, 2009. The decrease in the percentage composition of variable rate investment securities at December 31, 2011, as compared to December 31, 2010 and 2009, was primarily due to the Corporation re-investing maturing investment securities into fixed rate CMOs during 2011 due to the relative short-term duration and higher yield for these CMOs compared to other investment options. At December 31, 2011, 29% of the Corporation’s loans were at variable interest rates, compared to 28% and 20% at December 31, 2010 and 2009, respectively. At December 31, 2011, approximately two-thirds of the Corporation’s variable interest rate loans were at an interest rate floor and are expected to remain at their floor until they mature or market interest rates rise more than 75 basis points. The Corporation’s net interest income has been favorably impacted by the high percentage of variable interest rate loans that have not declined below their interest rate floor, in addition to the significant percentage of the Corporation’s loan portfolio that are fixed interest rate loans.

The Corporation is primarily funded by core deposits, which is a lower-cost funding base than wholesale funding and historically has had a positive impact on the Corporation’s net interest income and net interest margin. Based on the current historically low level of market interest rates and the Corporation’s current low levels of interest rates on its core deposit transaction accounts, further market interest rate reductions would not result in a significant decrease in interest expense.

Net interest income (FTE) of $189.0 million in 2011 was $13.5 million, or 7.7%, higher than net interest income (FTE) of $175.5 million in 2010. The increase in net interest income (FTE) in 2011, compared to 2010, was primarily attributable to the acquisition of OAK in 2010, combined with a decrease in the cost of interest-bearing liabilities attributable to declines in market interest rates and the repricing of matured certificates of deposit. The positive impact on net interest income in 2011, compared to 2010, was also attributable to an increase in average loans in 2011, excluding the impact of loans acquired in the acquisition of OAK, that was partially offset by a decline in the average yield of the loan portfolio. The net interest margin was 3.80% in both 2011 and 2010. The average yield on interest-earning assets decreased 22 basis points to 4.43% in 2011 from 4.65% in 2010. The average cost of interest-bearing liabilities decreased 26 basis points to 0.81% in 2011 from 1.07% in 2010. The decreases in the yield on interest-earning assets and the cost of interest-bearing liabilities were primarily attributable to the repricing of loans and deposits at lower interest rates as they matured and were renewed in the continued low interest rate environment.

Net interest income (FTE) of $175.5 million in 2010 was $25.2 million, or 16.7%, higher than net interest income (FTE) of $150.3 million in 2009. The increase in net interest income (FTE) in 2010, compared to 2009, was primarily attributable to the acquisition of OAK in 2010. The net interest margin was 3.80% in 2010, compared to 3.91% in 2009. The average yield on interest-earning assets decreased 44 basis points to 4.65% in 2010 from 5.09% in 2009, with the decrease primarily attributable to the Corporation maintaining its liquidity at the Federal Reserve Bank of Chicago (FRB) earning 25 basis points, rather than investing in investment securities. The decrease in the average yield on interest-earning assets during 2010 was also partially attributable to a reduction in the yield on taxable investment securities during the year. The average cost of interest-bearing liabilities decreased 44 basis points to 1.07% in 2010 from 1.51% in 2009, with the decrease primarily attributable to the lag effect of declines in the average cost of certificates of deposit as they mature, in addition to the Corporation paying off maturing higher-rate FHLB advances during 2010.

Table 9 presents, for 2011, 2010 and 2009, the 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.

TABLE 9. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES* (Dollars in thousands)


	Years Ended December 31,
	2011							2010							2009
	Average Balance		Tax Equivalent Interest		Effective Yield/ Rate			Average Balance		Tax Equivalent Interest		Effective Yield/ Rate			Average Balance		Tax Equivalent Interest		Effective Yield/ Rate
ASSETS
Interest-Earning Assets:
Loans**	$	3,741,850	$	199,982		5.34	%	$	3,449,562	$	194,035		5.62	%	$	2,997,277	$	173,456		5.79	%
Taxable investment securities		607,921		9,423		1.55			618,847		11,363		1.84			532,844		15,385		2.89
Tax-exempt investment securities		171,971		8,907		5.18			139,377		7,563		5.43			93,350		5,425		5.81
Other assets		26,252		965		3.68			25,463		766		3.01			22,128		821		3.71
Interest-bearing deposits with unaffiliated banks and others		423,710		1,097		0.26			384,763		1,055		0.27			201,407		541		0.27

Total interest-earning assets		4,971,704		220,374		4.43	%		4,618,012		214,782		4.65	%		3,847,006		195,628		5.09	%
Less: Allowance for loan losses		91,720							88,757							70,028
Other Assets:
Cash and cash due from banks		113,919							111,388							91,829
Premises and equipment		65,344							63,329							53,054
Interest receivable and other assets		244,851							209,338							144,368

Total Assets	$	5,304,098						$	4,913,310						$	4,066,229


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	820,996	$	1,366		0.17	%	$	780,889	$	1,792		0.23	%	$	559,026	$	2,538		0.45	%
Savings deposits		1,141,977		2,342		0.21			1,085,793		4,244		0.39			925,588		6,230		0.67
Time deposits		1,560,405		25,585		1.64			1,481,722		29,859		2.02			1,169,201		30,732		2.63
Short-term borrowings		287,176		524		0.18			249,731		650		0.26			232,185		906		0.39
FHLB advances		64,257		1,572		2.45			87,051		2,765		3.18			116,050		4,881		4.21

Total interest-bearing liabilities		3,874,811		31,389		0.81			3,685,186		39,310		1.07			3,002,050		45,287		1.51
Noninterest-bearing deposits		826,495							668,826							541,596