-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HaqrOIkc2k30NZ+ao8mHvYVHd9L6ofUmNsqYHp/Io17wnwnEUt78Pd05ohQsexNk J5cAR/22VrKTHbJKzaj6MQ== 0000905729-96-000071.txt : 19960514 0000905729-96-000071.hdr.sgml : 19960514 ACCESSION NUMBER: 0000905729-96-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMICAL FINANCIAL CORP CENTRAL INDEX KEY: 0000019612 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382022454 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08185 FILM NUMBER: 96561917 BUSINESS ADDRESS: STREET 1: 333 E MAIN ST CITY: MIDLAND STATE: MI ZIP: 48640 BUSINESS PHONE: 5176313310 10-Q 1 =========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ___________________________________________________________________________ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ Commission file number 0-8185 CHEMICAL FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2022454 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 333 EAST MAIN STREET MIDLAND, MICHIGAN 48640 (Address of Principal Executive Offices) (Zip Code) (517) 839-5350 (Registrant's telephone number, including area code) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ The number of shares outstanding of the registrant's Common Stock, $10 par value, as of April 15, 1996, was 9,219,105 shares. =========================================================================== INDEX CHEMICAL FINANCIAL CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements (unaudited, except Consolidated Statement of Financial Position as of December 31, 1995) Consolidated Statement of Income for the three months ended March 31, 1996, and March 31, 1995 3 Consolidated Statement of Financial Position as of March 31, 1996, December 31, 1995, and March 31, 1995 4 Consolidated Statement of Cash Flows for the three months ended March 31, 1996, and March 31, 1995 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Income (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 1995 (In thousands, except per share amounts) INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . . . $15,981 $15,439 Interest on investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 9,274 8,632 Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . 487 519 TOTAL INTEREST ON SECURITIES 9,761 9,151 Interest on federal funds sold . . . . . . . . . . . . . . 1,197 943 Interest on deposits with unaffiliated banks . . . . . . . 50 52 TOTAL INTEREST INCOME 26,989 25,585 INTEREST EXPENSE Interest on deposits . . . . . . . . . . . . . . . . . . . 10,907 9,792 Interest on short-term borrowings. . . . . . . . . . . . . 328 429 Interest on long-term debt . . . . . . . . . . . . . . . . 198 213 TOTAL INTEREST EXPENSE 11,433 10,434 NET INTEREST INCOME 15,556 15,151 Provision for possible loan losses . . . . . . . . . . . . 268 250 NET INTEREST INCOME After Provision for Possible Loan Losses. . . . . . . . . . . . . . . . . . . 15,288 14,901 OTHER INCOME Trust department income. . . . . . . . . . . . . . . . . . 661 610 Service charges on deposit accounts. . . . . . . . . . . . 1,284 1,220 Other charges and fees for customer services . . . . . . . 650 630 Revenue from data processing services. . . . . . . . . . . 230 269 Gains on sales of residential mortgage loans . . . . . . . 33 28 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 26 45 TOTAL OTHER INCOME 2,884 2,802 OPERATING EXPENSES Salaries, wages and employee benefits. . . . . . . . . . . 6,502 6,324 Occupancy expense-premises . . . . . . . . . . . . . . . . 1,181 1,104 Equipment rentals, depreciation and maintenance. . . . . . 752 713 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,570 3,057 TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . 11,005 11,198 INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 7,167 6,505 Federal income taxes . . . . . . . . . . . . . . . . . . . 2,365 2,111 NET INCOME $ 4,802 $ 4,394 -3- NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . . . $ .51 $ .47
See accompanying notes to consolidated financial statements. -4- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Financial Position
MARCH 31, DECEMBER 31, MARCH 31, 1996 1995 1995 (Unaudited) (Unaudited) ASSETS (In thousands) Cash and demand deposits due from banks. . . . . . $ 92,009 $ 88,054 $ 69,904 Federal funds sold . . . . . . . . . . . . . . . . 81,850 80,100 69,000 Interest-bearing deposits with unaffiliated banks . . . . . . . . . . . . . . . . . . . . . . 2,984 2,981 2,971 Investment securities: Held to maturity (market value $317,263 at 3/31/96, $365,516 at 12/31/95, $316,001 at 3/31/95). . . . . . . . . . . . . . . . . . . . 314,451 360,864 316,218 Available for sale (at market value). . . . . . . 386,228 341,670 359,015 Total investment securities 700,679 702,534 675,233 Loans: Commercial and agricultural . . . . . . . . . . . 116,905 116,630 117,574 Real estate construction. . . . . . . . . . . . . 17,550 16,195 15,506 Real estate mortgage. . . . . . . . . . . . . . . 462,869 454,591 447,367 Installment . . . . . . . . . . . . . . . . . . . 155,020 151,300 144,596 Total loans 752,344 738,716 725,043 Less: Allowance for possible loan losses . . . . 15,958 15,678 15,358 Net loans 736,386 723,038 709,685 Premises and equipment . . . . . . . . . . . . . . 19,406 19,821 20,702 Accrued income . . . . . . . . . . . . . . . . . . 15,957 15,060 13,087 Other assets . . . . . . . . . . . . . . . . . . . 13,267 12,292 14,500 TOTAL ASSETS $1,662,538 $1,643,880 $1,575,082 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . $ 209,682 $ 208,377 $ 176,834 Interest bearing. . . . . . . . . . . . . . . . . 1,205,124 1,188,889 1,168,060 Total deposits 1,414,806 1,397,266 1,344,894 Short-term borrowings: Treasury tax and loan notes payable to the U.S. Treasury . . . . . . . . . . . . . . . . . 8,005 7,084 5,307 Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . . . 24,236 28,139 30,354 32,241 35,223 35,661 Interest payable and other liabilities . . . . . . 16,642 13,767 13,702 Long-term debt . . . . . . . . . . . . . . . . . . 12,000 12,080 12,099 Total liabilities 1,475,689 1,458,336 1,406,356 Shareholders' equity: Common stock, $10 par value: Authorized - 15,000,000 shares (10,000,000 at March 31, 1995) -5- Issued - 9,216,569 shares, 9,194,376 shares, and 9,157,625 shares, respectively. . . . . . 92,166 91,944 91,576 Surplus . . . . . . . . . . . . . . . . . . . . . 58,013 57,918 57,917 Retained earnings . . . . . . . . . . . . . . . . 37,265 34,307 23,741 Unrealized net gain (loss) on securities available for sale. . . . . . . . . . . . . . . (595) 1,375 (4,508) Total shareholders' equity 186,849 185,544 168,726 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,662,538 $1,643,880 $1,575,082
See accompanying notes to consolidated financial statements. -6- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 1995 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,802 $ 4,394 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . 268 250 Provision for depreciation and amortization . . . . . . . . 787 763 Net amortization of investment securities . . . . . . . . . 861 343 Net (increase) decrease in accrued income and other assets . . . . . . . . . . . . . . . . . . . . (849) 642 Net increase in interest payable and other liabilities. . . . . . . . . . . . . . . . . . . . . . . 3,052 1,977 NET CASH PROVIDED BY OPERATING ACTIVITIES 8,921 8,369 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in interest-bearing deposits with unaffiliated banks . . . . . . . . . . . . . . . . . . . (3) (4) Proceeds from maturities of securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . 47,536 3,267 Purchases of securities held to maturity. . . . . . . . . . . . (1,100) (38,366) Proceeds from maturities of securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,063 52,818 Purchases of securities available for sale. . . . . . . . . . . (73,536) (23,948) Net (increase) decrease in loans. . . . . . . . . . . . . . . . (13,718) 15,121 Purchases of premises and equipment . . . . . . . . . . . . . . (232) (422) NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (15,990) 8,466 CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in demand deposits, NOW accounts and savings accounts. . . . . . . . . . . . . . . . . . . . . (2,700) (30,471) Net increase in certificates of deposit and other time deposits . . . . . . . . . . . . . . . . . . . . . 20,240 8,664 Net decrease in repurchase agreements and other short-term borrowings . . . . . . . . . . . . . . . . . (2,982) (5,361) Principal payments on long-term debt. . . . . . . . . . . . . . (80) Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . (1,844) (1,465) Proceeds from stock purchase plan . . . . . . . . . . . . . . . 62 56 Proceeds from exercise of stock options . . . . . . . . . . . . 78 90 -7- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 12,774 (28,487) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,705 (11,652) Cash and cash equivalents at beginning of year 168,154 150,556 CASH AND CASH EQUIVALENTS AT END OF PERIOD $173,859 $138,904
See accompanying notes to consolidated financial statements. ________________________________________________________________________________
Supplemental disclosures of cash flow information: Interest paid on deposits, short-term borrowings and long-term debt $ 11,217 $ 10,222 Federal income taxes paid - -
________________________________________________________________________________ -8- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1996 NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chemical Financial Corporation ("Corporation") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. PER SHARE AMOUNTS Primary net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares consist of net shares issuable under stock options outstanding. Fully diluted net income per share has not been presented on the basis that it is not material. The weighted average number of common shares used to compute earnings per share for the three months ended March 31, 1996 and 1995 were 9,363,992 and 9,278,911, respectively. THE FINANCIAL STATEMENTS PRESENTED REFLECT ALL ADJUSTMENTS (CONSISTING SOLELY OF NORMAL RECURRING ACCRUALS) WHICH ARE, IN THE OPINION OF MANAGEMENT, NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF OPERATIONS OF THE INTERIM PERIODS. Operating results for the three months ended March 31, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE B: CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under the new standard, the 1995 allowance for possible loan losses, related to loans that are identified for evaluation in accordance with SFAS No. 114, is based on discounted cash flows using each loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for possible loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The adoption of SFAS No. 114 did not have a significant impact on the Corporation's financial position or results of operations. -9- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1996 NOTE C: LOANS AND NONPERFORMING ASSETS The following summarizes loans and nonperforming assets at the dates indicated (in thousands of dollars):
MARCH 31, DECEMBER 31, MARCH 31, 1996 1995 1995 LOANS: Commercial and agricultural . . . . . . . . . . . $116,905 $116,630 $117,574 Real estate construction. . . . . . . . . . . . . 17,550 16,195 15,506 Real estate mortgage. . . . . . . . . . . . . . . 462,869 454,591 447,367 Installment . . . . . . . . . . . . . . . . . . . 155,020 151,300 144,596 Total Loans . . . . . . . . . . . . . . . . . . . $752,344 $738,716 $725,043 NONPERFORMING ASSETS: Nonaccrual loans. . . . . . . . . . . . . . . . . $ 1,672 $ 1,658 $ 2,380 Loans 90 days or more past due and still accruing interest . . . . . . . . . . . . 556 855 547 Restructured loans. . . . . . . . . . . . . . . . 67 84 132 Total nonperforming loans . . . . . . . . . . . . 2,295 2,597 3,059 Other real estate owned . . . . . . . . . . . 884 966 566 Total nonperforming assets. . . . . . . . . . . . $ 3,179 $ 3,563 $ 3,625 Other real estate owned includes properties acquired through foreclosure, and by acceptance of a deed in lieu of foreclosure, and other property held for sale. The majority of the properties have been sold, with some financed at below market terms.
-10- NOTE D: ALLOWANCE FOR LOAN LOSSES The following summarizes the changes in the allowance for loan losses (in thousands of dollars):
FOR THE THREE MONTHS ENDED MARCH 31 1996 1995 ALLOWANCES FOR LOAN LOSSES Balance as of January 1. . . . . . . . . . . . . . . . . . . . . $15,678 $15,095 Provision for loan losses. . . . . . . . . . . . . . . . . . . . 268 250 Gross loans charged-off. . . . . . . . . . . . . . . . . . . . . (46) (26) Gross recoveries of loans previously charged-off . . . . . . . . 58 39 Net loans recovered. . . . . . . . . . . . . . . . . . . . . . . 12 13 Balance at March 31. . . . . . . . . . . . . . . . . . . . . . . $15,958 $15,358
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Corporation's financial condition and results of operations during the periods included in the consolidated financial statements included in this filing. SUMMARY The Corporation's net income was $4,802,000 in the first quarter of 1996, as compared to net income of $4,394,000 during the first quarter of 1995. Earnings per share in the first quarter of 1996 was $.51, compared to earnings per share in the first quarter of 1995 of $.47. Return on average assets in the first quarter of 1996 was 1.19%, compared to a return on average assets of 1.12% during the first quarter of 1995. Return on average equity for the three months ended March 31, 1996, and March 31, 1995, was 10.4% and 10.3%, respectively. Total assets were $1.663 billion as of March 31, 1996, compared to $1.644 billion as of December 31, 1995, and $1.575 billion as of March 31, 1995. Total loans increased $27.3 million, or 3.8%, from March 31, 1995, to $752.3 million as of March 31, 1996. Total loans increased $13.6 million, or 1.8%, from December 31, 1995, to March 31, 1996. The increase in total loans from March 31, 1995, to March 31, 1996, was attributable to increases in real estate mortgage and installment loans. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Installment loans increased $10.4 million, or 7.2%, from March 31, 1995, to $155 million as of March 31, 1996. The increase in installment loans between March 31, 1995, and March 31, 1996, was primarily attributable to the Corporation's success in its special installment loan promotion from October 1995 through January 1996. This promotion had the goal of both increasing the Corporation's level of consumer loans and of reinforcing existing, and developing new, customer relationships. During the promotion period the Corporation's subsidiary banks originated $45 million of consumer installment loans. The maximum term of the consumer loans originated in the promotion period was forty-eight months. The Corporation's loan to deposit ratio as of March 31, 1996, was 53.2%, compared to 52.9% at December 31, 1995, and 53.9% at March 31, 1995. Shareholders' equity increased $18.1 million, or 10.7%, from March 31, 1995, to $186.8 million as of March 31, 1996, or $20.27 per share and represented 11.2% of total assets. RESULTS OF OPERATIONS NET INTEREST INCOME An analysis of the components affecting operating earnings for the periods presented in 1996 and 1995 is facilitated by segregating amounts into categories of interest income, interest expense, other income, provision for possible loan losses, operating expense and income tax expense. To improve the comparability of the interest income component, interest income, shown in the table which follows, is expressed on a fully taxable equivalent (FTE) basis. For this purpose, tax-exempt interest earned has been adjusted as if it had been subject to a federal income tax rate of 35%. The following summary is a reconcilement of the tax equivalent amounts used in presenting net interest income on a fully taxable equivalent basis to amounts shown in the Corporation's quarterly consolidated statement of income.
QUARTER ENDED 3-31-96 3-31-95 (In thousands) Interest income per quarterly consolidated statement of income. . . . . . . . . . . . . . . $26,989 $25,585 Add tax equivalent adjustment. . . . . . . . . . . . . . . . . 308 325 Interest income (FTE). . . . . . . . . . . . . . . . . . . . . 27,297 25,910 Less interest expense. . . . . . . . . . . . . . . . . . . . . 11,433 10,434 Net interest income (FTE). . . . . . . . . . . . . . . . . . . $15,864 $15,476
-12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Other income is derived from trust services, service charges, data processing and other bank-related services, gains on sales of residential mortgage loans, and miscellaneous income. Operating expenses are comprised of salaries, wages and employee benefits, occupancy expense, equipment expense, federal deposit insurance premium expense and miscellaneous other operating expenses. -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NET INTEREST INCOME (FTE) The following table shows the effect that volume and rate changes had on the net interest income (FTE) over the periods indicated:
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995 INCREASE (DECREASE) DUE TO CHANGES IN COMBINED AVERAGE AVERAGE INCREASE VOLUME YIELD/RATE (DECREASE) (In thousands) Causes of increase in net interest income (FTE) due to: CHANGES IN INTEREST INCOME ON EARNING ASSETS: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $449 $ 92 $ 541 Taxable investment securities. . . . . . . . . . . . . . . . 642 642 Non-taxable investment securities. . . . . . . . . . . . . . (56) 8 (48) Federal funds sold . . . . . . . . . . . . . . . . . . . . . 343 (89) 254 Interest on deposits with unaffiliated banks . . . . . . . . (2) (2) Total change in interest income on earning assets. . . 736 651 1,387 CHANGES IN INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES: Deposits:. . . . . . . . . . . . . . . . . . . . . . . . . . 191 924 1,115 Short-term borrowed funds. . . . . . . . . . . . . . . . . . (75) (26) (101) Long-term debt . . . . . . . . . . . . . . . . . . . . . . . (2) (13) (15) Total change in interest expense on interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . 114 885 999 TOTAL INCREASE (DECREASE) IN NET INTEREST INCOME (FTE) . . . . . . . . . . . . . . . . . . . . . . . . $622 $(234) $ 388 The change in interest due to both rate and volume has been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.
-14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net interest income (FTE) increased $388,000, or 2.5%, in the first quarter of 1996 as compared to the first quarter of 1995. This increase was due primarily to increases in average real estate mortgage and installment loans and deposits in the first quarter of 1996, compared to the first quarter of 1995. The total increase in net interest income attributable to volume changes in interest-bearing assets and liabilities was $622,000. The increase attributable to volume changes was partially offset by a $234,000 decrease in net interest income attributable to changes in the average yields and rates on interest-bearing assets and liabilities. As interest rates rose over the three-month period ended March 31, 1996, the Corporation experienced an increase in interest expense from deposits maturing and repricing which exceeded the increased yield on investment securities which matured and were reinvested at higher interest rates. OTHER INCOME Other income increased $82,000, or 2.9%, in the first quarter of 1996 as compared to the first quarter of 1995. The Corporation's trust department income and income from service charges on deposit accounts combined were $115,000 higher in the first quarter of 1996 than in the first quarter of 1995. Trust department income increased 8.4% and service charge income on deposit accounts increased 5.2%, both due to increased services provided. The Corporation realized gains on the sale of residential mortgage loans in the secondary market of $33,000 and $28,000, during the first quarter of 1996 and 1995, respectively. PROVISION FOR LOAN LOSSES The provision for possible loan losses reflects management's judgment of changing economic conditions, as well as increases and other changes in the subsidiary banks' loan portfolios. It is management's policy to control loan quality through a carefully structured review of loan requests. In assessing the adequacy of the allowance for possible loan losses ("Allowance"), management believes that its historical experience confirms, in principle, its judgment in what is essentially a subjective decision. Based upon historical experience and a constant evaluation of present and potential risks in the loan portfolios, management believes that the Allowance is adequate. During the three months ended March 31, 1996, the Corporation added $268,000 to the Allowance through the provision for possible loan losses, compared to $250,000 during the first three months of 1995. During the first three months of 1996 the Corporation experienced net loan recoveries of $12,000 as compared to net loan recoveries during the first three months of 1995 of $13,000. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING EXPENSES Total operating expenses decreased $193,000, or 1.7%, in the first quarter of 1996, compared to the first quarter of 1995. Operating expenses were down due to the reduction in Federal Deposit Insurance Corporation ("FDIC") premiums, effective June 1, 1995. FDIC premiums were reduced as a result of the full recapitalization of the Bank Insurance Fund to a 1.25% ratio. FDIC premiums were $530,000 lower in the first quarter of 1996, compared to the first quarter of 1995. Excluding FDIC premiums, total operating expenses were 3.2% higher in the first quarter of 1996, compared to the first quarter of 1995. INCOME TAX EXPENSE The Corporation's effective federal income tax rate was 33.0% and 32.4% during the three months ended March 31, 1996, and March 31, 1995, respectively. The effective federal income tax rate is a function of the proportion of the Corporation's interest income exempt from federal taxation, nondeductible interest expense and other nondeductible expenses. BALANCE SHEET CHANGES ASSET AND DEPOSIT CHANGES Total assets increased $19 million, or 1.1%, from December 31, 1995, and increased $87 million, or 5.6%, from March 31, 1995, to $1.663 billion as of March 31, 1996. Total deposits increased $17.5 million, or 1.3%, from December 31, 1995, and increased $70 million, or 5.2%, from March 31, 1995, to $1.415 billion as of March 31, 1996. LOANS The Corporation's subsidiary banks are generally located in rural communities, where the demand for commercial loans which meet the Corporation's credit standards historically has not been high. The Corporation's philosophy is such that it will neither compromise on loan quality nor make loans outside its banking markets to increase its loan portfolio. The Corporation does not generally purchase participation loans, which is a method utilized by many financial institutions to increase the size of their loan portfolios. -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Total loans as of March 31, 1996, were $752.3 million, as compared to $725 million as of March 31, 1995, and $738.7 million as of December 31, 1995. The increase in total loans from March 31, 1995, to March 31, 1996, of $27.3 million was primarily attributable to the Corporation's 1995 consumer loan promotion, which was ongoing from October 1, 1995, through January 31, 1996. During this promotion period the Corporation originated $45 million of consumer installment loans at interest rates of 7.83%. The maximum loan amount and term of these consumer installment loans were $20,000 and forty-eight months, respectively. Installment loans increased $10.4 million, or 7.2%, from March 31, 1995, and $3.7 million, or 2.5%, from December 31, 1995, to $155 million as of March 31, 1996, and represented 20.6%, 20.5% and 19.9% of total loans as of March 31, 1996, December 31, 1995, and March 31, 1995, respectively. Real estate construction and mortgage loans increased $17.5 million, or 3.8%, from March 31, 1995, and $9.6 million, or 2%, from December 31, 1995, to $480.4 million as of March 31, 1996. Real estate construction and mortgage loans represented 63.9%, 63.7% and 63.8% of the Corporation's loan portfolio as of March 31, 1996, December 31, 1995, and March 31, 1995, respectively. Commercial and agricultural loans decreased $669,000, or .6%, from March 31, 1995, and increased $275,000, or .2%, from December 31, 1995, to $116.9 million as of March 31, 1996. The decrease from March 31, 1995, resulted from increased competition for these types of loans and the lack of an increased demand for these types of loans in the Corporation's market areas. Commercial and agricultural loans represented 15.5%, 15.8% and 16.2% of the Corporation's loan portfolio as of March 31, 1996, December 31, 1995, and March 31, 1995, respectively. The Corporation's total loan to deposit ratio as of March 31, 1996, December 31, 1995, and March 31, 1995, was 53.2%, 52.9% and 53.9%, respectively. The Corporation traditionally has had a conservative loan underwriting policy. This is evidenced by its historically low loan losses and low ratio of nonperforming loans to total loans. For the three-month period ended March 31, 1996, the Corporation experienced net loan recoveries of $12,000. The Corporation reported net loan recoveries of $13,000 during the three-month period ended March 31, 1995. -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Nonperforming loans consist of loans which are past due for principal or interest payments by ninety days or more and still accruing interest, loans for which the accrual of interest has been discontinued and loans which have been renegotiated to less than market terms due to a serious weakening of the borrower's financial condition. Nonperforming loans were $2.3 million as of March 31, 1996, $2.6 million as of December 31, 1995, and $3.1 million as of March 31, 1995, and represented .30%, .35% and .42% of total loans as of these dates, respectively. The allowance for possible loan losses at March 31, 1996, was $15,958,000 and represented 2.12% of total loans and 695% of nonperforming loans as of that date. LIQUIDITY The maintenance of an adequate level of liquidity is necessary to ensure that sufficient funds are available to meet customer's loan demands and deposit withdrawals. The banking subsidiaries' primary liquidity sources consist of investment securities, those maturing within one year and those classified as available for sale, maturing loans and federal funds sold. As of March 31, 1996, the Corporation's investment securities portfolio had an average life of less than two years. In addition, at March 31, 1996, the Corporation held only $3.5 million in mortgage-backed securities, which represented less than one percent of the investment securities portfolio, and had no other derivatives or any investments in instruments considered "junk bonds." CAPITAL RESOURCES As of March 31, 1996, shareholders' equity was $186.8 million, compared to $185.5 million as of December 31, 1995, and $168.7 million as of March 31, 1995, resulting in an increase of $18.1 million, or 10.7% from March 31, 1995. Shareholders' equity as a percentage of total assets as of March 31, 1996, was 11.2%, compared to 11.3% as of December 31, 1995, and 10.7% as of March 31, 1995. Total equity as of March 31, 1996, and March 31, 1995, included an after-tax unrealized net loss of $595,000 and $4.5 million, respectively, and an unrealized net gain of $1.375 million as of December 31, 1995, on available for sale investment securities, in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) A statement of changes in shareholders' equity covering the three-month periods ended March 31, 1996, and March 31, 1995, follows:
FOR THE THREE MONTHS ENDED MARCH 31, 1996 1995 Total shareholders' equity as of January 1, $185,544 $161,680 Net income 4,802 4,394 Dividends (1,844) (1,465) Shares issued upon exercise of employee stock options 78 90 Shares issued from director stock purchase plan 239 246 Change in unrealized gains and losses on available for sale securities (1,970) 3,781 Total shareholders' equity as of end of period $186,849 $168,726
The following table represents the Corporation's regulatory capital ratios as of March 31, 1996:
TIER 1 TOTAL RISK-BASED RISK-BASED LEVERAGE CAPITAL CAPITAL Chemical Financial Corporation - actual ratio 11.3% 27.6% 28.9% Regulatory Minimum Ratio 3.0 4.0 8.0 Ratio considered "well capitalized" by regulatory agencies 5.0 6.0 10.0
The Corporation's Tier 1 and Total capital ratios under the risk-based capital measure at March 31, 1996, are high due to the Corporation holding $663 million in investment securities and other assets which are assigned a 0% risk rating, $197 million in assets which are assigned a 20% risk rating and $390 million in residential real estate mortgages and other assets which are assigned a 50% risk rating. These three risk ratings (i.e., 0%, 20% and 50%) represent 74% of the Corporation's total risk-based assets (including off-balance sheet items) as of March 31, 1996. -19- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OTHER On April 1, 1996, the shareholders of State Savings Bancorp, Inc. approved an agreement to merge with the Corporation. All regulatory approvals have been received and the transaction was consummated on May 1, 1996. The Corporation declared a 3-for-2 stock split in December 1994 which was paid on January 20, 1995. All per share amounts have been adjusted for this split. There are currently no known trends, events or uncertainties that management believes may be reasonably expected to have a material effect on the Corporation's liquidity, capital resources or financial performance. -20- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following documents are filed as exhibits to this report on Form 10-Q: EXHIBIT NUMBER DOCUMENT 11 Statement Re Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter covered by this Form 10-Q. -21- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHEMICAL FINANCIAL CORPORATION Date: May 13, 1996 By /S/ ALAN W. OTT Alan W. Ott, Chairman, Chief Executive Officer and President Date: May 13, 1996 By /S/ LORI A. GWIZDALA Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer -22- EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT 11 Statement Re Computation of Per Share Earnings 27 Financial Data Schedule -23- EX-11 2 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS CHEMICAL FINANCIAL CORPORATION (Unaudited)
QUARTER ENDED MARCH 31, 1996 1995 PRIMARY: Average shares outstanding . . . . . . . . . . . . . . . . . . . . 9,213 9,153 Net effect of the assumed exercise of stock options- based on the treasury stock method using average market price. . . . . . . . . . . . . . . . . . . . . . . . . . . 151 126 9,364 9,279 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,802 $4,394 Net income per common share. . . . . . . . . . . . . . . . . . . . $ 0.51 $ 0.47 FULLY DILUTED: Average shares outstanding . . . . . . . . . . . . . . . . . . . . 9,213 9,153 Net effect of the assumed exercise of stock options- based on the treasury stock method using end of period market price . . . . . . . . . . . . . . . . . . . . . . . 155 129 9,368 9,282 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,802 $4,394 Net income per common share. . . . . . . . . . . . . . . . . . . . $ 0.51 $ 0.47
EX-27 3 ART. 9 FDS FOR 1ST QUARTER 10-Q
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 92,009 2,984 81,850 0 386,228 314,451 317,263 752,344 15,958 1,662,535 1,414,806 32,241 16,642 12,000 92,166 0 0 94,683 1,662,538 15,981 9,761 1,247 26,989 10,907 11,433 15,556 268 0 11,005 7,167 7,167 0 0 4,802 0.51 0.51 4.18 1,672 556 67 2,295 15,678 46 58 15,958 15,958 0 0
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