-----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, PurT/luXE0Qrm+gpO0Rux8SLUsBKcC5D6Tpe1Ek6HtV2Rgwi51CbtQqG4sWpSaPg +7KuDTakdWL9nHpIsuPmag== 0000905729-96-000128.txt : 19961113 0000905729-96-000128.hdr.sgml : 19961113 ACCESSION NUMBER: 0000905729-96-000128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 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: 96659271 BUSINESS ADDRESS: STREET 1: 333 E MAIN ST CITY: MIDLAND STATE: MI ZIP: 48640 BUSINESS PHONE: 5176313310 10-Q 1 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 SEPTEMBER 30, 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's Common Stock, $10 par value, as of October 15, 1996, was 9,703,014 shares. ================================================================================ 2 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- and nine-month periods ended September 30, 1996 and September 30, 1995 3 Consolidated Statement of Financial Position as of September 30, 1996, December 31, 1995 and September 30, 1995 4 Consolidated Statement of Cash Flows for the nine-month periods ended September 30, 1996 and September 30, 1995 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 -2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- --------------------- 1996 1995 1996 1995 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . $17,098 $16,060 $50,211 $47,842 Interest on investment securities: Taxable. . . . . . . . . . . . . . . . . . . . . . . 9,803 9,468 29,342 27,900 Tax-exempt . . . . . . . . . . . . . . . . . . . . . 515 591 1,654 1,806 ------- ------- ------- ------- TOTAL INTEREST ON SECURITIES 10,318 10,059 30,996 29,706 Interest on federal funds sold . . . . . . . . . . . . 995 1,214 3,264 3,421 Interest on deposits with unaffiliated banks . . . . . 20 51 116 153 ------- ------- ------- ------- TOTAL INTEREST INCOME 28,431 27,384 84,587 81,122 INTEREST EXPENSE Interest on deposits . . . . . . . . . . . . . . . . . 10,910 10,933 33,316 31,860 Interest on short-term borrowings . . . . . . . . . . 310 412 871 1,189 Interest on long-term debt . . . . . . . . . . . . . . 162 205 546 628 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 11,382 11,550 34,733 33,677 ------- ------- ------- ------- NET INTEREST INCOME 17,049 15,834 49,854 47,445 Provision for possible loan losses . . . . . . . . . . 273 260 811 750 ------- ------- ------- ------- NET INTEREST INCOME after provision for possible loan losses . . . . . . . . . . . . . . . . 16,776 15,574 49,043 46,695 OTHER INCOME Trust department income. . . . . . . . . . . . . . . . 663 651 2,137 1,995 Service charges on deposit accounts . . . . . . . . . 1,342 1,317 4,020 3,844 Other charges and fees for customer services . . . . . 611 663 1,955 1,983 Revenue from data processing services . . . . . . . . 148 242 578 766 Gains on sales of loans. . . . . . . . . . . . . . . . 36 54 98 489 Investment securities gains . . . . . . . . . . . . . 1 15 Other. . . . . . . . . . . . . . . . . . . . . . . . . 33 175 275 247 ------- ------- ------- ------- TOTAL OTHER INCOME 2,834 3,102 9,078 9,324 -3- 4 OPERATING EXPENSES Salaries, wages and employee benefits . . . . . . . . 6,735 6,525 20,355 19,639 Occupancy expense-premises . . . . . . . . . . . . . . 1,167 1,098 3,504 3,332 Equipment rentals, depreciation and maintenance . . . 775 707 2,339 2,149 Other. . . . . . . . . . . . . . . . . . . . . . . . . 2,832 2,757 8,554 9,545 ------- ------- ------- ------- TOTAL OPERATING EXPENSES 11,509 11,087 34,752 34,665 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 8,101 7,589 23,369 21,354 Federal income taxes . . . . . . . . . . . . . . . . . 2,689 2,514 7,801 6,915 ------- ------- ------- ------- NET INCOME $ 5,412 $ 5,075 $15,568 $14,439 ======= ======= ======= ======= NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . $ .55 $ .51 $ 1.58 $ 1.47 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. -4- 5 CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1996 1995 1995 ------------- ------------ ------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) ASSETS Cash and demand deposits due from banks. . . . . . . . . . . . . . . . . $ 85,693 $ 91,017 $ 74,698 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,900 84,900 102,900 Interest-bearing deposits with unaffiliated banks. . . . . . . . . . . . 991 2,981 2,978 Investment securities: Held to maturity (market value $258,773 at 9/30/96, $397,062 at 12/31/95, $400,002 at 9/30/95). . . . . . . . . . . . . . 257,441 392,429 397,029 Available for sale (at market value). . . . . . . . . . . . . . . . . . 423,731 341,670 326,491 ---------- ---------- ---------- Total investment securities 681,172 734,099 723,520 Loans: Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . 120,104 117,759 123,808 Real estate construction. . . . . . . . . . . . . . . . . . . . . . . . 21,113 16,195 14,622 Real estate mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . 507,013 472,454 464,148 Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,913 154,170 140,647 ---------- ---------- ---------- Total loans 810,143 760,578 743,225 Less: Allowance for possible loan losses . . . . . . . . . . . . . . . 16,503 15,886 15,980 ---------- ---------- ---------- Net loans 793,640 744,692 727,245 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 19,398 20,448 20,494 Accrued income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,983 15,619 15,806 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,119 12,329 13,731 ---------- ---------- ---------- TOTAL ASSETS $1,695,896 $1,706,085 $1,681,372 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,772 $ 214,335 $ 200,525 Interest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212,400 1,235,466 1,216,822 ---------- ---------- ---------- Total deposits 1,431,172 1,449,801 1,417,347 Short-term borrowings: Treasury tax and loan notes payable to the U.S. Treasury. . . . . . . . 11,725 7,084 11,303 Securities sold under agreements to repurchase. . . . . . . . . . . . . 25,056 28,139 36,734 ---------- ---------- ---------- 36,781 35,223 48,037 -5- 6 Interest payable and other liabilities . . . . . . . . . . . . . . . . . 16,099 14,079 15,727 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 12,080 12,097 ---------- ---------- ---------- Total liabilities 1,494,052 1,511,183 1,493,208 Shareholders' equity: Common stock, $10 par value: Authorized - 15,000,000 shares Issued - 9,702,957 shares, 9,694,376 shares, and 9,673,461 shares, respectively. . . . . . . . . . . . . . . . . 97,030 96,944 96,735 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,454 56,918 56,900 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,405 39,665 35,370 Unrealized net gain (loss) on securities available for sale . . . . . . (1,045) 1,375 (841) ---------- ---------- ---------- Total shareholders' equity 201,844 194,902 188,164 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,695,896 $1,706,085 $1,681,372 ========== ========== ==========
See accompanying notes to consolidated financial statements. -6- 7 CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1996 1995 ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,568 $ 14,439 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 811 750 Provision for depreciation and amortization 2,394 2,337 Investment securities gains (15) Net amortization of investment securities 2,122 1,604 Net (increase) decrease in accrued income and other assets 1,417 (1,167) Net increase in interest payable and other liabilities 2,069 3,250 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 24,366 21,213 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash and cash equivalents assumed in acquisition of branch office 14,661 Net (increase) decrease in interest-bearing deposits with unaffiliated banks 1,990 (10) Proceeds from maturities of securities held to maturity 149,604 20,772 Purchases of securities held to maturity (38,130) (100,099) Proceeds from maturities of securities available for sale 67,275 153,390 Proceeds from sales of securities available for sale 522 994 Purchases of securities available for sale (132,173) (88,656) Net (increase) decrease in loans (50,214) 17,124 Purchases of premises and equipment (1,158) (819) -------- -------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (2,284) 17,357 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in demand deposits, NOW accounts and savings accounts (30,375) (43,467) Net increase in certificates of deposit and other time deposits 11,746 23,240 Net increase in repurchase agreements and other short-term borrowings 1,558 7,015 Principal payments on long-term debt (2,080) (2) -7- 8 Cash dividends (5,827) (4,881) Proceeds from stock purchase plan 190 173 Proceeds from exercise of stock options 226 232 Repurchases of common stock (844) -------- -------- NET CASH USED FOR FINANCING ACTIVITIES (25,406) (17,690) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,324) 20,880 Cash and cash equivalents at beginning of year 175,917 156,718 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $172,593 $177,598 ======== ========
See accompanying notes to consolidated financial statements. - --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Interest paid on deposits, short-term borrowings and long-term debt $ 35,215 $ 33,123 Federal income taxes paid 7,790 6,374
- -------------------------------------------------------------------------------- -8- 9 CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1996 NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chemical Financial Corporation ("Chemical" or the "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. 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. All financial statement amounts included herein, except cash dividends per share, have been restated to account for the acquisition of State Savings Bancorp, Inc. on May 1, 1996 by the pooling of interests method of accounting. Operating results for the three- and nine-month periods ended September 30, 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. 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 was 9,848,000 during the third quarter and 9,859,000 during the first nine months of 1996, as compared to 9,823,000 during the third quarter and 9,798,000 during the first nine months of 1995. NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes loans and nonperforming assets at the dates indicated (in thousands of dollars): -9- 10
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1996 1995 1995 ------------- ------------ ------------- LOANS: Commercial and agricultural. . . . . . $120,104 $117,759 $123,808 Real estate construction . . . . . . . 21,113 16,195 14,622 Real estate mortgage . . . . . . . . . 507,013 472,454 464,148 Installment. . . . . . . . . . . . . . 161,913 154,170 140,647 -------- -------- -------- Total Loans. . . . . . . . . . . . . . $810,143 $760,578 $743,225 ======== ======== ======== NONPERFORMING ASSETS: Nonaccrual loans . . . . . . . . . . . $ 1,627 $ 1,658 $ 2,638 Loans 90 days or more past due and still accruing interest. . . . . . . 915 969 836 Restructured loans . . . . . . . . . . 84 100 -------- -------- -------- Total nonperforming loans. . . . . . . 2,542 2,711 3,574 -------- -------- -------- Other real estate owned . . . . . 755 966 973 -------- -------- -------- Total nonperforming assets . . . . . $ 3,297 $ 3,677 $ 4,547 ======== ======== ======== 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.
NOTE C: ALLOWANCE FOR LOAN LOSSES The following summarizes the changes in the allowance for loan losses (in thousands of dollars): -10- 11
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1996 1995 -------- -------- ALLOWANCE FOR LOAN LOSSES Balance as of January 1. . . . . . . . . . . . . . . . . . . $15,886 $15,295 Provision for loan losses. . . . . . . . . . . . . . . . . . 811 750 Gross loans charged-off. . . . . . . . . . . . . . . . . . . (388) (221) Gross recoveries of loans previously charged-off . . . . . . 194 156 ------- ------- Net loans charged-off. . . . . . . . . . . . . . . . . . . . (194) (65) ------- ------- Balance at September 30. . . . . . . . . . . . . . . . . . . $16,503 $15,980 ======= =======
NOTE D: ACQUISITIONS Chemical completed its acquisition of State Savings Bancorp, Inc., in Caro, Michigan ("SSBI") on May 1, 1996. Chemical issued 500,000 shares of Chemical common stock in exchange for all of the outstanding shares of SSBI. The transaction was accounted for by the pooling of interests method of accounting as of May 1, 1996. As of May 1, 1996, SSBI had total assets of approximately $65 million. 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 $5,412,000 in the third quarter of 1996, as compared to net income of $5,075,000 during the third quarter of 1995. Earnings per share in the third quarter of 1996 were $.55, compared to earnings per share in the third quarter of 1995 of $.51. -11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Return on average assets in the third quarter of 1996 was 1.28%, compared to a return on average assets of 1.23% during the third quarter of 1995. Return on average equity for the three months ended September 30, 1996 and September 30, 1995, was 10.6% and 10.7%, respectively. The Corporation's net income was $15,568,000 for the first nine months of 1996, compared to net income of $14,439,000 during the first nine months of 1995. Earnings per share for the nine months ended September 30, 1996 were $1.58, compared to earnings per share for the first nine months of 1995 of $1.47. Return on average assets for the first nine months of 1996 was 1.23%, compared to a return on average assets of 1.17% for the first nine months of 1995. Return on average equity was 10.4% for the nine-month periods ended September 30, 1996 and September 30, 1995. Total assets were $1.696 billion as of September 30, 1996, compared to $1.706 billion as of December 31, 1995, and $1.681 billion as of September 30, 1995. Total loans increased $66.9 million, or 9.0%, from September 30, 1995, to $810.1 million as of September 30, 1996. Total loans increased $49.6 million, or 6.5%, from December 31, 1995 to September 30, 1996. The increase in total loans from both September 30, 1995 and December 31, 1995 to September 30, 1996 was attributable to increases in real estate mortgage and installment loans. The Corporation's loan to deposit ratio as of September 30, 1996 was 56.6%, compared to 52.5% at December 31, 1995, and 52.4% at September 30, 1995. Shareholders' equity increased $13.7 million, or 7.3%, from September 30, 1995, to $201.8 million as of September 30, 1996, or $20.80 per share, and represented 11.9% 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 -12- 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 NINE MONTHS ENDED --------------------- --------------------- 9-30-96 9-30-95 9-30-96 9-30-95 ------- ------- ------- ------- (IN THOUSANDS) Interest income per quarterly consolidated statement of income. . . . $28,431 $27,384 $84,587 $81,122 Add tax equivalent adjustment. . . . . . 318 340 1,005 1,058 ------- ------- ------- ------- Interest income (FTE). . . . . . . . . . 28,749 27,724 85,592 82,180 Less interest expense. . . . . . . . . . 11,382 11,550 34,733 33,677 ------- ------- ------- ------- Net interest income (FTE). . . . . . . . $17,367 $16,174 $50,859 $48,503
Other income is derived from trust services, service charges, data processing and other bank related services, gains on sales of residential mortgage loans in the secondary mortgage market and investment securities gains 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. 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. -13- 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THIRD QUARTER 1996 COMPARED FIRST NINE MONTHS 1996 COMPARED TO THIRD QUARTER 1995 TO FIRST NINE MONTHS 1995 --------------------------------- ----------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN DUE TO CHANGES IN ------------------------- COMBINED ------------------------- COMBINED AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE VOLUME YIELD/RATE (DECREASE) VOLUME YIELD/RATE (DECREASE) ---------- -------------- ---------- ---------- -------------- ---------- (IN THOUSANDS) Causes of increase in net interest income (FTE) due to: CHANGES IN INTEREST INCOME ON EARNING ASSETS: Loans. . . . . . . . . . . . . . . . . . . . . . . . . $1,399 $ (346) $1,053 $2,984 $ (589) $2,395 Taxable investment securities. . . . . . . . . . . . . (394) 729 335 (324) 1,766 1,442 Non-taxable investment securities. . . . . . . . . . . (75) (38) (113) (165) (66) (231) Federal funds sold . . . . . . . . . . . . . . . . . . (115) (104) (219) 216 (373) (157) Interest on deposits with unaffiliated banks . . . . . (39) 8 (31) (40) 3 (37) ------ ------ ------ ------ ------ ------ Total change in interest income on earning assets . . 776 249 1,025 2,671 741 3,412 CHANGES IN INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES: Deposits . . . . . . . . . . . . . . . . . . . . . . . 133 (156) (23) 607 849 1,456 Short-term borrowed funds. . . . . . . . . . . . . . . (39) (63) (102) (168) (150) (318) Long-term debt . . . . . . . . . . . . . . . . . . . . (34) (9) (43) (40) (42) (82) ------ ------ ------ ------ ------ ------ Total change in interest expense on interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . 60 (228) (168) 399 657 1,056 ------ ------ ------ ------ ------ ------ TOTAL INCREASE IN NET INTEREST INCOME (FTE) . . . . . . . . . . . . . . . . . . . . . $ 716 $ 477 $1,193 $2,272 $ 84 $2,356 ====== ====== ====== ====== ====== ====== 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- 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net interest income (FTE) increased $1,193,000, or 7.4%, in the third quarter of 1996 as compared to the third quarter of 1995. The total increase in net interest income attributable to volume changes in interest-bearing assets and liabilities was $716,000. The increase attributable to changes in the average yields and rates on interest- bearing assets and liabilities was $477,000. These increases were due primarily to increases in average real estate mortgage and installment loans and deposits and the repricing of investment securities maturing in the third quarter of 1996, compared to the third quarter of 1995. The net interest margin increased to 4.38% in the third quarter of 1996 from 4.14% in the third quarter of 1995. Net interest income (FTE) increased $2,356,000, or 4.9%, during the first nine months of 1996 as compared to the first nine months of 1995. The net interest margin increased to 4.29% during the first nine months of 1996 from 4.21% during the first nine months of 1995. OTHER INCOME Other income decreased $268,000, or 8.6%, in the third quarter of 1996 as compared to the third quarter of 1995. This decrease was attributable to decreases in revenue from data processing services performed for unrelated entities and in miscellaneous "other" nonoperating income. Other income attributable to trust department income, service charges on deposit accounts and other charges and fees for customer services was relatively stable in the third quarter of 1996 and 1995. Other income during the first nine months of 1996 was $246,000, or 2.6%, lower than the comparable period in 1995. The Corporation realized a gain of $322,000 in the second quarter of 1995 from the sale of its credit card loan portfolio. The Corporation sold its credit card loan portfolio due to the increased competition for this product from other providers offering cards at no annual fee and the proliferation of co-branded credit cards. In the second quarter of 1996 the Corporation realized a gain of $150,000 as a termination fee when the credit card portfolio was sold by the original purchaser to another credit card provider. The Corporation realized gains on the sale of residential mortgage loans in the secondary market of $36,000 and $54,000 during the third quarters of 1996 and 1995, respectively. Total gains realized on the sale of residential mortgage loans in the secondary market during the first nine months of 1996 and 1995 were $98,000 and $164,000, respectively. -15- 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PROVISION FOR POSSIBLE 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 and nine months ended September 30, 1996, the Corporation added $273,000 and $811,000, respectively, to the allowance through the provision for possible loan losses, as compared to $260,000 and $750,000, respectively, during these same periods in 1995. Net loan charge-offs during the three- and nine-month periods ended September 30, 1996 were $30,000 and $194,000, respectively, compared to net charge-offs of $27,000 and $65,000, respectively, during these same periods in 1995. OPERATING EXPENSES Total operating expenses increased $422,000, or 3.8%, in the third quarter of 1996 and $87,000, or .3%, during the first nine months of 1996, as compared to these same periods in 1995. Federal Deposit Insurance Corporation ("FDIC") premiums were reduced effective June 1, 1995 as a result of the full recapitalization of the Bank Insurance Fund to a 1.25% ratio. FDIC premiums were $1,454,000 lower during the first nine months of 1996, as compared to the first nine months of 1995. Legislation was passed on September 30, 1996 to recapitalize the Savings Association Insurance Fund. This law levied a 65.7 cent fee on every $100 of thrift deposits held on March 31, 1995. The Corporation's liability under this law was approximately $30,000. This amount was expensed in the third quarter of 1996. Excluding FDIC premiums, total operating expenses were 4.3% higher in the first nine months of 1996 compared to the same period in 1995. INCOME TAX EXPENSE The Corporation's effective federal income tax rate was 33.2% and 33.4%, respectively, during the three and nine months ended September 30, 1996, compared to 33.1% and 32.4%, respectively, during these same periods in 1995. The effective federal income tax rate is a function -16- 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 decreased $10.2 million, or .6%, from December 31, 1995, and increased $14.5 million, or .9%, from September 30, 1995, to $1.696 billion as of September 30, 1996. Total deposits decreased $18.6 million, or 1.3%, from December 31, 1995, and increased $13.8 million, or 1.0%, from September 30, 1995, to $1.431 billion as of September 30, 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. Total loans as of September 30, 1996 were $810.1 million, as compared to $743.2 million as of September 30, 1995, and $760.6 million as of December 31, 1995. The increase in total loans from September 30, 1995 to September 30, 1996 of $66.9 million was attributable to increases in real estate mortgage and installment loans. Commercial and agricultural loans decreased $3.7 million, or 3.0%, from September 30, 1995, and increased $2.3 million, or 2.0%, from December 31, 1995, to $120.1 million as of September 30, 1996. The decrease in commercial and agricultural loans from September 30, 1995 resulted from a combination of factors including increased competition for these types of loans, the lack of an increased demand for these types of loans in the Corporation's market areas and a number of payoffs of significant balance loans. Commercial and agricultural loans represented 14.8%, 15.5% and 16.7% of the Corporation's loan portfolio as of September 30, 1996, December 31, 1995, and September 30, 1995, respectively. Real estate construction and mortgage loans increased $49.4 million, or 10.3%, from September 30, 1995, and $39.5 million, or 8.1%, from -17- 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) December 31, 1995, to $528.1 million as of September 30, 1996. Real estate construction and mortgage loans represented 65.2%, 64.2% and 64.4% of the Corporation's loan portfolio as of September 30, 1996, December 31, 1995, and September 30, 1995, respectively. Installment loans increased $21.3 million, or 15.1%, from September 30, 1995, and $7.7 million, or 5.0%, from December 31, 1995, to $161.9 million as of September 30, 1996, and represented 20.0%, 20.3% and 18.9% of total loans as of September 30, 1996, December 31, 1995, and September 30, 1995, respectively. The Corporation's total loan to deposit ratio as of September 30, 1996, December 31, 1995, and September 30, 1995, was 56.6%, 52.5% and 52.4%, 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 periods ended September 30, 1996 and 1995, the Corporation experienced net loan charge-offs of $30,000 and $27,000, respectively. The Corporation reported net loan charge-offs of $194,000 and $65,000, respectively, during the nine-month periods ended September 30, 1996 and 1995. Nonperforming loans consist of loans for which the accrual of interest has been discontinued, loans which are past due for principal or interest payments by ninety days or more and still accruing interest, 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 $2.5 million as of September 30, 1996, $2.7 million as of December 31, 1995, and $3.6 million as of September 30, 1995, and represented .31%, .36% and .48% of total loans as of these dates, respectively. The allowance for possible loan losses at September 30, 1996, was $16,503,000 and represented 2.04% of total loans and 649% 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 customers' loan demands and deposit withdrawals. The banking subsidiaries' primary liquidity sources consist of investment securities, both those maturing within one year and those classified as available for sale, maturing loans and federal funds sold. As of September 30, 1996, the -18- 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Corporation's investment securities portfolio had an average life of less than two years. In addition, at September 30, 1996, the Corporation held $3.7 million in mortgage-backed securities and $5.4 million in structured notes, acquired in conjunction with subsidiary bank acquisitions. These investments represented 1.3% of the Corporation's investment securities portfolio as of September 30, 1996. The Corporation held no other derivatives or any investments in instruments considered "junk bonds" as of September 30, 1996. CAPITAL RESOURCES As of September 30, 1996, shareholders' equity was $201.8 million, compared to $194.9 million as of December 31, 1995, and $188.2 million as of September 30, 1995, resulting in an increase of $13.7 million, or 7.3%, from September 30, 1995. Shareholders' equity as a percentage of total assets as of September 30, 1996, was 11.9%, compared to 11.4% as of December 31, 1995, and 11.2% as of September 30, 1995. Total equity as of September 30, 1996, and September 30, 1995, included an after-tax unrealized net loss of $1.045 million and $.841 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." A statement of changes in shareholders' equity covering the nine-month periods ended September 30, 1996, and September 30, 1995, follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1995 --------- --------- Total shareholders' equity as of January 1, $194,902 $170,680 Net income 15,568 14,439 Dividends (5,827) (4,881) Shares issued upon exercise of employee stock options 226 232 Shares issued from director stock purchase plan 239 246 Repurchases of common stock (844) Change in unrealized gains and losses on available for sale securities (2,420) 7,448 -------- -------- Total shareholders' equity as of end of period $201,844 $188,164 ======== ========
-19- 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table represents the Corporation's regulatory capital ratios as of September 30, 1996:
TIER 1 TOTAL RISK-BASED RISK-BASED LEVERAGE CAPITAL CAPITAL -------- ---------- ---------- Chemical Financial Corporation - actual ratio 11.9% 28.8% 30.1% 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 September 30, 1996, are high due to the Corporation holding $621 million in investment securities and other assets which are assigned a 0% risk rating, $233 million in assets which are assigned a 20% risk rating and $432 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 September 30, 1996. -20- 21 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. The following report on Form 8-K was filed during the quarter:
DATE OF REPORT ITEM REPORTED FINANCIAL STATEMENTS FILED -------------- ------------- -------------------------- July 15, 1996 5 (Other Consolidated Statement of Events) Income for One Month Ended June 30, 1996.
-21- 22 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: November 12, 1996 By /S/ ALAN W. OTT Alan W. Ott, Chairman, Chief Executive Officer and President Date: November 12, 1996 By /S/ LORI A. GWIZDALA Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer -22- 23 EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT - ------- -------- 11 Statement Re Computation of Per Share Earnings 27 Financial Data Schedule -23- EX-11 2 1 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS CHEMICAL FINANCIAL CORPORATION (Unaudited)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY: Average shares outstanding . . . . . . . . . . . . 9,716 9,666 9,716 9,660 Net effect of the assumed exercise of stock options - based on the treasury stock method using average market price . . . . . . . . . . . . . . . . . . . . . . 132 157 143 138 ------ ------ ------- ------- 9,848 9,823 9,859 9,798 ====== ====== ======= ======= Net income . . . . . . . . . . . . . . . . . . . . $5,412 $5,075 $15,568 $14,439 ====== ====== ======= ======= Net income per common share. . . . . . . . . . . . $ 0.55 $ 0.51 $ 1.58 $ 1.47 ====== ====== ======= ======= FULLY DILUTED: Average shares outstanding . . . . . . . . . . . . 9,716 9,666 9,716 9,660 Net effect of the assumed exercise of stock options - based on the treasury stock method using end of period market price. . . . . . . . . . . . . . . . . . . 131 176 142 174 ------ ------ ------- ------- 9,847 9,842 9,858 9,834 ====== ====== ======= ======= Net income . . . . . . . . . . . . . . . . . . . . $5,412 $5,075 $15,568 $14,439 ====== ====== ======= ======= Net income per common share. . . . . . . . . . . . $ 0.55 $ 0.51 $ 1.58 $ 1.47 ====== ====== ======= =======
EX-27 3 ART. 9 FDS FOR 3RD QUARTER 10-Q
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 85,693 991 86,900 0 423,731 257,441 258,773 810,143 16,503 1,695,896 1,431,172 36,781 16,099 10,000 97,030 0 0 104,814 1,695,896 50,211 30,996 3,380 84,587 33,316 34,733 49,854 811 15 34,752 23,369 23,369 0 0 15,568 1.58 1.58 4.29 1,627 915 0 2,542 15,886 388 194 16,503 16,503 0 0
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