-----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, Dt/jDyffA3TLV+srRZVVp5J4WRisISq/V6/Y2RlIZyt2N9L6I+sJelUsQzhsz0yq AZvrgeh+wzwdNPbopmGLPA== 0000905729-97-000162.txt : 19971114 0000905729-97-000162.hdr.sgml : 19971114 ACCESSION NUMBER: 0000905729-97-000162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NONE 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: SEC FILE NUMBER: 000-08185 FILM NUMBER: 97714880 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 SEPTEMBER 30, 1997 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 28,1997, was 10,233,829 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, 1996) Consolidated Statement of Income for the Three and Nine Months Ended September 30, 1997 and September 30, 1996 3 Consolidated Statement of Financial Position as of September 30, 1997, December 31, 1996 and September 30, 1996 4 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996 5 Notes to Consolidated Financial Statements 6-8 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)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (In thousands, except per share amounts) INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . . . . $17,864 $17,098 $51,857 $50,211 Interest on investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 10,437 9,803 30,141 29,342 Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . 540 515 1,622 1,654 ------- ------- ------- ------- TOTAL INTEREST ON SECURITIES 10,977 10,318 31,763 30,996 Interest on federal funds sold . . . . . . . . . . . . . . . 1,290 995 3,767 3,264 Interest on deposits with unaffiliated banks . . . . . . . . 20 33 116 ------- ------- ------- ------- TOTAL INTEREST INCOME 30,131 28,431 87,420 84,587 INTEREST EXPENSE Interest on deposits . . . . . . . . . . . . . . . . . . . . 12,074 10,910 34,455 33,316 Interest on short-term borrowings. . . . . . . . . . . . . . 357 310 991 871 Interest on long-term debt . . . . . . . . . . . . . . . . . 152 162 444 546 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 12,583 11,382 35,890 34,733 ------- ------- ------- ------- NET INTEREST INCOME 17,548 17,049 51,530 49,854 Provision for possible loan losses . . . . . . . . . . . . . 219 273 767 811 ------- ------- ------- ------- NET INTEREST INCOME after provision for possible loan losses. . . . . . . . . . . . . . . . . . . 17,329 16,776 50,763 49,043 OTHER INCOME Trust department income. . . . . . . . . . . . . . . . . . . 740 663 2,319 2,137 Service charges on deposit accounts. . . . . . . . . . . . . 1,332 1,342 3,964 4,020 Other charges and fees for customer services . . . . . . . . 844 611 2,542 1,955 Gains on sales of loans. . . . . . . . . . . . . . . . . . . 81 36 160 98 Investment securities gains. . . . . . . . . . . . . . . . . 1 1 1 15 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 181 684 853 ------- ------- ------- ------- TOTAL OTHER INCOME 3,126 2,834 9,670 9,078 -3- OPERATING EXPENSES Salaries, wages and employee benefits. . . . . . . . . . . . 6,845 6,735 20,652 20,355 Occupancy expense. . . . . . . . . . . . . . . . . . . . . . 1,174 1,167 3,593 3,504 Equipment expense. . . . . . . . . . . . . . . . . . . . . . 872 775 2,468 2,339 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,779 2,832 8,371 8,554 ------- ------- ------- ------- TOTAL OPERATING EXPENSES 11,670 11,509 35,084 34,752 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 8,785 8,101 25,349 23,369 Federal income taxes . . . . . . . . . . . . . . . . . . . . 2,879 2,689 8,293 7,801 ------- ------- ------- ------- NET INCOME $ 5,906 $ 5,412 $17,056 $15,568 ======= ======= ======= ======= NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . . . . $ .57 $ .52 $ 1.65 $ 1.50 ======= ======= ======= ======= Cash dividends per common share. . . . . . . . . . . . . . . $ .23 $ .19 $ .65 $ .57 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. -4- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Financial Position
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1997 1996 1996 ------------- ------------ ------------- (Unaudited) (Unaudited) (In thousands) ASSETS Cash and demand deposits due from banks. . . . . . . . . . . $ 77,504 $ 89,517 $ 85,693 Federal funds sold . . . . . . . . . . . . . . . . . . . . . 62,950 114,200 86,900 Interest-bearing deposits with unaffiliated banks. . . . . . 1,134 991 Investment securities: Held to maturity (market value $262,297 at 9/30/97, $215,494 at 12/31/96, $258,773 at 9/30/96). . . . . . . . 260,197 213,752 257,441 Available for sale (at market value). . . . . . . . . . . . 478,981 441,787 423,731 ---------- ---------- ---------- Total investment securities 739,178 655,539 681,172 Loans: Commercial and agricultural . . . . . . . . . . . . . . . . 114,211 114,154 120,104 Real estate construction. . . . . . . . . . . . . . . . . . 26,736 24,791 21,113 Real estate mortgage. . . . . . . . . . . . . . . . . . . . 533,130 510,193 507,013 Installment . . . . . . . . . . . . . . . . . . . . . . . . 165,547 158,515 161,913 ---------- ---------- ---------- Total loans 839,624 807,653 810,143 Less: Allowance for possible loan losses . . . . . . . . . 17,269 16,607 16,503 ---------- ---------- ---------- Net loans 822,355 791,046 793,640 Premises and equipment . . . . . . . . . . . . . . . . . . . 20,165 20,335 19,398 Accrued income . . . . . . . . . . . . . . . . . . . . . . . 15,039 14,419 14,983 Other assets . . . . . . . . . . . . . . . . . . . . . . . . 11,633 12,584 13,119 ---------- ---------- ---------- TOTAL ASSETS $1,748,824 $1,698,774 $1,695,896 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . $ 224,618 $ 226,965 $ 218,772 Interest bearing. . . . . . . . . . . . . . . . . . . . . . 1,234,557 1,202,950 1,212,400 ---------- ---------- ---------- Total deposits 1,459,175 1,429,915 1,431,172 -5- Short-term borrowings: Treasury tax and loan notes payable to the U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . . . . 11,760 9,458 11,725 Securities sold under agreements to repurchase. . . . . . . 35,290 27,875 25,056 ---------- ---------- ---------- 47,050 37,333 36,781 Interest payable and other liabilities . . . . . . . . . . . 14,704 14,257 16,099 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 9,000 10,000 10,000 ---------- ---------- ---------- Total liabilities 1,529,929 1,491,505 1,494,052 Shareholders' equity: Common stock, $10 par value: Authorized - 15,000,000 shares Issued - 10,226,280 shares, 10,209,790 shares, and 9,702,957 shares, respectively. . . . . . . . . . . 102,263 102,098 97,030 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . 69,500 69,616 56,454 Retained earnings . . . . . . . . . . . . . . . . . . . . . 46,144 35,737 49,405 Unrealized net gain (loss) on securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . 988 (182) (1,045) ---------- ---------- ---------- Total shareholders' equity 218,895 207,269 201,844 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,748,824 $1,698,774 $1,695,896 ========== ========== ==========
See accompanying notes to consolidated financial statements. -6- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,056 $ 15,568 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 767 811 Origination of loans held for sale (21,633) (7,940) Proceeds from sales of loans 21,793 8,075 Gains on sales of loans (160) (98) Investment securities gains (1) (15) Gain on sale of branch office building (256) Provision for depreciation and amortization 2,382 2,394 Net amortization of investment securities 1,420 2,122 Net (increase) decrease in accrued income and other assets (295) 1,417 Net increase in interest payable and other liabilities 525 2,069 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,598 24,403 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits with unaffiliated banks 1,134 1,990 Proceeds from maturities of securities held to maturity 109,026 149,604 Purchases of securities held to maturity (155,848) (38,130) Proceeds from maturities of securities available for sale 101,506 67,275 Proceeds from sales of securities available for sale 522 Purchases of securities available for sale (137,942) (132,173) Net increase in loans (32,504) (50,251) Proceeds from sale of branch office building 900 Purchases of premises and equipment (2,432) (1,158) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (116,160) (2,321) --------- --------- -7- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW accounts and savings accounts 34,091 (30,375) Net increase (decrease) in certificates of deposit and other time deposits (4,831) 11,746 Net increase in repurchase agreements and other short-term borrowings 9,717 1,558 Principal payments on long-term debt (1,000) (2,080) Cash dividends (6,648) (5,827) Proceeds from stock purchase plan 187 190 Proceeds from exercise of stock options 250 226 Purchases of common stock (467) (844) --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 31,299 (25,406) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (63,263) (3,324) Cash and cash equivalents at beginning of year 203,717 175,917 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 140,454 $ 172,593 ========= ========= See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid on deposits, short-term borrowings and long-term debt $ 35,646 $ 35,215 Federal income taxes paid 8,520 7,790 - --------------------------------------------------------------------------------------------------
-8- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 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 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. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial condition and results of operations of the Corporation for the periods presented. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. 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 the difference between primary and fully diluted earnings per share is not material. The weighted average number of common shares used to compute earnings per share was 10,343,000 during the third quarter and 10,345,000 during the first nine months of 1997, as compared to 10,341,000 during the third quarter and 10,352,000 during the first nine months of 1996. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, the Corporation will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Statement No. 128 is not expected to have a material effect on primary or fully diluted earnings per share for the periods presented. -9- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes loans and nonperforming assets at the dates indicated (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1997 1996 1996 ------------ ------------ ------------- LOANS: Commercial and agricultural. . . . $114,211 $114,154 $120,104 Real estate construction . . . . . 26,736 24,791 21,113 Real estate mortgage . . . . . . . 533,130 510,193 507,013 Installment. . . . . . . . . . . . 165,547 158,515 161,913 -------- -------- -------- Total Loans. . . . . . . . . . . . $839,624 $807,653 $810,143 ======== ======== ======== NONPERFORMING ASSETS: Nonaccrual loans . . . . . . . . . $ 1,870 $ 1,341 $ 1,627 Loans 90 days or more past due and still accruing interest. . . 1,691 539 915 Restructured loans . . . . . . . . 6 -------- -------- -------- Total nonperforming loans. . . . . 3,567 1,880 2,542 Other real estate owned . . . 817 688 755 -------- -------- -------- Total nonperforming assets . . . . $ 4,384 $ 2,568 $ 3,297 ======== ======== ======== 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- CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 NOTE C: ALLOWANCE FOR POSSIBLE LOAN LOSSES The following summarizes the changes in the allowance for possible loan losses (in thousands of dollars):
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1997 1996 ------- ------- ALLOWANCES FOR POSSIBLE LOAN LOSSES Balance as of January 1. . . . . . . . . . . . . . $16,607 $15,886 Provision for loan losses. . . . . . . . . . . . . 767 811 Gross loans charged-off. . . . . . . . . . . . . . (394) (388) Gross recoveries of loans previously charged-off. . . . . . . . . . . . . . . . . . . 289 194 ------- ------- Net loans charged-off. . . . . . . . . . . . . . . (105) (194) ------- ------- Balance at September 30. . . . . . . . . . . . . . $17,269 $16,503 ======= =======
NOTE D: ACQUISITIONS Chemical completed its acquisition of State Savings Bancorp, Inc., in Caro, Michigan ("SSBI") on May 1, 1996. Chemical issued 525,000 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. On December 31, 1996, the Corporation acquired Arbury & Stephenson, Inc., an insurance agency headquartered in Midland, Michigan. The merger was effected through an exchange of shares of the Corporation's common stock. On October 31, 1997, Chemical and Shelby Financial Corporation in Shelby, Michigan ("SFC"), signed a letter of intent for the affiliation of SFC with Chemical through the merger of SFC with and into Chemical. The transaction is subject to execution of a definitive agreement, SFC shareholder and regulatory approvals, and other customary conditions and is expected to be completed during the first quarter of 1998. At September 30, 1997, SFC reported total assets of approximately $102 million. -11- 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 report. SUMMARY The Corporation's net income was $5,906,000 in the third quarter of 1997, an increase of 9.1% over net income of $5,412,000 during the third quarter of 1996. Earnings per share in the third quarter of 1997 were $.57, an increase of 9.6% over earnings per share of $.52 in the third quarter of 1996. Return on average assets in the third quarter of 1997 was 1.33%, compared to a return on average assets of 1.28% during the third quarter of 1996. Return on average equity for the three months ended September 30, 1997 and September 30, 1996, was 10.8% and 10.6%, respectively. The Corporation's net income was $17,056,000 for the first nine months of 1997, an increase of 9.6% over net income of $15,568,000 during the first nine months of 1996. Earnings per share for the nine months ended September 30, 1997 were $1.65, an increase of 10% over earnings per share of $1.50 for the first nine months of 1996. Return on average assets for the first nine months of 1997 was 1.33%, compared to a return on average assets of 1.23% for the first nine months of 1996. Return on average equity for the nine-month periods ended September 30, 1997 and September 30, 1996 was 10.7% and 10.4%, respectively. Total assets were $1.749 billion as of September 30, 1997, compared to $1.699 billion as of December 31, 1996, and $1.696 billion as of September 30, 1996. Total loans increased $29.5 million, or 3.6%, from September 30, 1996, to $839.6 million as of September 30, 1997. Total loans increased $32 million, or 4.0%, from December 31, 1996 to September 30, 1997. The increases in total loans from September 30, 1996 and December 31, 1996 to September 30, 1997 were attributable primarily to increases in real estate construction and residential mortgage loans. Shareholders' equity increased $17.1 million, or 8.4%, from September 30, 1996, to $218.9 million as of September 30, 1997, or $21.41 per share, representing 12.5% of total assets. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) RESULTS OF OPERATIONS NET INTEREST INCOME The Corporation's net interest income for the third quarter of 1997 was $17.55 million, a $.5 million, or 2.9%, increase over the $17.05 million recorded in the third quarter of 1996. The increase in net interest income was due primarily to growth in loans and an increase in the average yield of the investment securities portfolio. Average loans increased 3.2% in the third quarter of 1997 compared to the third quarter of 1996. For the third quarter of 1997, the net interest margin was 4.29%, compared to 4.38% in the third quarter of 1996. Net interest income increased $1,676,000, or 3.4%, during the first nine months of 1997 as compared to the first nine months of 1996. The net interest margin increased to 4.35% during the first nine months of 1997 from 4.29% during the first nine months of 1996. OTHER INCOME Other income increased $292,000, or 10.3%, in the third quarter of 1997 as compared to the third quarter of 1996 and $592,000, or 6.5%, in the first nine months of 1997 as compared to the first nine months of 1996. Trust Department income increased $77,000, or 11.6%, in the third quarter of 1997 compared to the third quarter of 1996 and $182,000, or 8.5%, in the first nine months of 1997 compared to the first nine months of 1996. Other charges and fees for customer services increased $233,000, or 38.1%, in the third quarter of 1997 compared to the third quarter of 1996 and $587,000, or 30.0%, in the first nine months of 1997 compared to the first nine months of 1996. The increase in other charges and fees in the third quarter and first nine months of 1997 was due to increased mutual fund sales, annuity sales and insurance commissions. The Corporation, through a subsidiary of its lead affiliate bank, expanded the array of mutual funds offered and began offering annuity investment products to customers during the second half of 1996. In addition, beginning in January 1997, the Corporation began selling title, property and casualty insurance products through subsidiaries of its lead affiliate bank. The Corporation realized gains on the sale of residential mortgage loans in the secondary market of $81,000 and $36,000 during the third -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) quarter of 1997 and 1996, respectively. Total gains realized on the sale of residential mortgage loans in the secondary market during the first nine months of 1997 and 1996 were $160,000 and $98,000, respectively. The Corporation realized a gain of $256,000 from the sale of a branch office building during the first quarter of 1997. In the second quarter of 1996, the Corporation realized a gain of $150,000 as a termination fee when the credit card portfolio, which it sold in 1995, was sold by the original purchaser to another credit card provider. These gains were recorded in the "Other" category of other income. 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 (the "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, 1997, the Corporation added $219,000 and $767,000, respectively, to the Allowance through the provision for possible loan losses, as compared to $273,000 and $811,000, respectively, during these same periods in 1996. Net loan charge-offs during the three- and nine-month periods ended September 30, 1997 were $31,000 and $105,000, respectively, compared to net charge-offs of $30,000 and $194,000, respectively, during these same periods in 1996. OPERATING EXPENSES Total operating expenses increased $161,000, or 1.4%, in the third quarter of 1997 compared to the third quarter of 1996. Salaries, wages and employee benefits increased $110,000, or 1.6%, in the third quarter of 1997 over the third quarter of 1996. The remaining categories of operating expenses, occupancy, equipment and other expenses, increased $51,000, or 1.1%, in the third quarter of 1997 compared to the third quarter of 1996. Total operating expenses increased $332,000, or 1.0%, in the first nine months of 1997 compared to the first nine months of 1996. -14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) INCOME TAX EXPENSE The Corporation's effective federal income tax rate was 32.8% and 32.7%, respectively, during the three and nine months ended September 30, 1997, compared to 33.2% and 33.4%, respectively, during these same periods in 1996. 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 $50.1 million, or 2.9%, from December 31, 1996, and increased $52.9 million, or 3.1%, from September 30, 1996, to $1.749 billion as of September 30, 1997. Total deposits increased $29.3 million, or 2.0%, from December 31, 1996, and increased $28.0 million, or 2.0%, from September 30, 1996, to $1.459 billion as of September 30, 1997. The increases in both assets and deposits were primarily attributable to a transfer of Trust Department assets out of a non-affiliated financial services organization into deposits in the Corporation's lead subsidiary bank in June 1997. 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, 1997 were $839.6 million, as compared to $810.1 million as of September 30, 1996 and $807.7 million as of December 31, 1996. The increase in total loans from September 30, 1996 and December 31, 1996 to September 30, 1997, was attributable mainly to an increase in real estate construction and residential mortgage loans. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) Real estate construction and mortgage loans increased $31.7 million, or 6.0%, from September 30, 1996, and $24.9 million, or 4.7%, from December 31, 1996, to $559.9 million as of September 30, 1997. Real estate construction and mortgage loans represented 66.7%, 66.3% and 65.2% of the Corporation's loan portfolio as of September 30, 1997, December 31, 1996 and September 30, 1996, respectively. Commercial and agricultural loans decreased $5.9 million, or 4.9%, from September 30, 1996, and increased $57,000, or .05%, from December 31, 1996, to $114.2 million as of September 30, 1997. The decrease from September 30, 1996 and minimal increase from December 31, 1996 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 13.6%, 14.1% and 14.8% of the Corporation's loan portfolio as of September 30, 1997, December 31, 1996 and September 30, 1996, respectively. Installment loans increased $3.6 million, or 2.2%, from September 30, 1996, and $7.0 million, or 4.4%, from December 31, 1996, to $165.5 million as of September 30, 1997, and represented 19.7%, 19.6% and 20.0% of total loans as of September 30, 1997, December 31, 1996 and September 30, 1996, respectively. The Corporation's total loan to deposit ratio as of September 30, 1997, December 31, 1996 and September 30, 1996, was 57.5%, 56.5% and 56.6%, 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. During the three and nine months ended September 30, 1997, the Corporation experienced net loan charge-offs of $31,000 and $105,000, respectively. The Corporation had net loan charge-offs of $30,000 and $194,000, respectively, during these same periods in 1996. Nonperforming loans consist of loans which are past due for principal or interest payments by 90 days or more and still accruing interest, loans for which the accrual of interest has been discontinued and other loans which have been renegotiated to less than market terms due to a serious weakening of the borrower's financial condition. Nonperforming loans were $3.6 million as of September 30, 1997, $1.9 million as of December 31, 1996, and $2.5 million as of September 30, 1996, and represented .42%, .23% and .31% of total loans as of these dates, respectively. The -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) increase in nonperforming loans from September 30, 1996 and December 31, 1996 to September 30, 1997 was attributable to four commercial real estate loans. The Corporation had no impaired loans as of September 30, 1997. The allowance for possible loan losses at September 30, 1997 was $17,269,000 and represented 2.06% of total loans. 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 withdrawal needs. 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 September 30, 1997, the Corporation's investment securities portfolio had an average life of less than two years, with $479 million of investment securities classified as available for sale. In addition, at September 30, 1997 the Corporation held only $3.0 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 September 30, 1997, shareholders' equity was $218.9 million, compared to $207.3 million as of December 31, 1996 and $201.8 million as of September 30, 1996, resulting in an increase of $17.1 million, or 8.4%, from September 30, 1996. Shareholders' equity as a percentage of total assets was 12.5% as of September 30, 1997, 12.2% as of December 31, 1996 and 11.9% as of September 30, 1996. Total equity included an after-tax unrealized net gain of $988,000 as of September 30, 1997, and an unrealized net loss of $182,000 as of December 31, 1996 and $1.0 million as of September 30, 1996 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, 1997, and September 30, 1996, follows: -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1997 1996 -------- -------- Total shareholders' equity as of January 1, $207,269 $194,902 Net income 17,056 15,568 Dividends (6,648) (5,827) Shares issued upon exercise of employee stock options 250 226 Shares issued from director stock purchase plan 265 239 Repurchases of common stock (467) (844) Change in unrealized gains and losses on available for sale securities 1,170 (2,420) -------- -------- Total shareholders' equity as of end of period $218,895 $201,844 ======== ========
The following table represents the Corporation's regulatory capital ratios as of September 30, 1997:
TIER 1 TOTAL RISK-BASED RISK-BASED LEVERAGE CAPITAL CAPITAL -------- ---------- ---------- Chemical Financial Corporation - actual ratio 12.2% 30.3% 31.6% 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, 1997 are high due to the Corporation holding $680 million in investment securities and other assets which -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) are assigned a 0% risk rating, $200 million in assets which are assigned a 20% risk rating and $450 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, 1997. OTHER The Corporation paid a 5% stock dividend on December 30, 1996. All per share amounts have been adjusted for this stock dividend. As described in Note D to the unaudited consolidated financial statements, on October 31, 1997, Chemical and Shelby Financial Corporation ("SFC") entered into a letter of intent under which SFC would be merged with and into Chemical. The transaction is subject to execution of a definitive agreement and other conditions. 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. -19- 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 ------ -------- 3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. Here incorporated by reference. 3.2 BYLAWS. Previously filed as Exhibit 4(b) to the Registrant's S-8 Registration Statement No. 33-47356 filed with the Commission on April 28, 1992. Here incorporated by reference. 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. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHEMICAL FINANCIAL CORPORATION Date: November 12, 1997 By /S/ALOYSIUS J. OLIVER Aloysius J. Oliver President and Chief Executive Officer (Principal Executive Officer) Date: November 12, 1997 By /S/LORI A. GWIZDALA Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) -21- EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT - ------ -------- 3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. Here incorporated by reference. 3.2 BYLAWS. Previously filed as Exhibit 4(b) to the Registrant's S-8 Registration Statement No. 33-47356 filed with the Commission on April 28, 1992. Here incorporated by reference. 11 Statement Re Computation of Per Share Earnings 27 Financial Data Schedule EX-11 2 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS CHEMICAL FINANCIAL CORPORATION (Unaudited)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (In thousands, except per share amounts) PRIMARY: Average shares outstanding . . . . . . . . . . . . . 10,228 10,202 10,227 10,202 Net effect of the assumed exercise of stock options - based on the treasury stock method using average market price . . . . . . . . . . . . . . . . . . . . . . . 115 139 118 150 ------- ------- ------- ------- 10,343 10,341 10,345 10,352 ======= ======= ======= ======= Net income . . . . . . . . . . . . . . . . . . . . . $ 5,906 $ 5,412 $17,056 $15,568 ======= ======= ======= ======= Net income per common share. . . . . . . . . . . . . $ 0.57 $ 0.52 $ 1.65 $ 1.50 ======= ======= ======= ======= FULLY DILUTED: Average shares outstanding . . . . . . . . . . . . . 10,228 10,202 10,227 10,202 Net effect of the assumed exercise of stock options - based on the treasury stock method using end of period market price. . . . . . . . . . . . . . . 147 138 145 149 ------- ------- ------- ------- 10,375 10,340 10,372 10,351 ======= ======= ======= ======= Net income . . . . . . . . . . . . . . . . . . . . . $ 5,906 $ 5,412 $17,056 $15,568 ======= ======= ======= ======= Net income per common share. . . . . . . . . . . . . $ 0.56 $ 0.52 $ 1.64 $ 1.50 ======= ======= ======= =======
EX-27 3 ART. 9 FDS FOR 3RD 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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 77,504 0 62,950 0 478,981 260,197 262,297 839,624 17,269 1,748,824 1,459,175 47,050 14,704 9,000 102,263 0 0 116,632 1,748,824 51,857 31,763 3,800 87,420 34,455 35,890 51,530 767 1 35,084 25,349 25,349 0 0 17,056 1.65 1.64 4.35 1,870 1,691 6 3,567 16,607 394 289 17,269 17,269 0 0
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