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Proc-Type: 2001,MIC-CLEAR
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SECURITIES AND EXCHANGE COMMISSION FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-08185 CHEMICAL FINANCIAL CORPORATION Michigan 38-2022454 333 East Main Street (989) 839-5350 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No The number of shares outstanding of the Registrant's Common Stock, $1 par value, as of May 2, 2003, was 23,689,132 shares. INDEX Page FORWARD-LOOKING STATEMENTS 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited, except Consolidated Consolidated Statements of Income for the Three Months Ended Consolidated Statements of Financial Position as of March 31, 2003, Consolidated Statements of Cash Flows for the Three Months Ended Notes to Consolidated Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES AND CERTIFICATIONS 22-26 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the Corporation itself. Words such as "anticipates," "believes," "estimates," "judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "should," "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future even
ts or otherwise. Risk Factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economies; and the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Three Months Ended 2003 2002 (In thousands, except per share data) INTEREST INCOME Interest and fees on loans $ 36,414 $ 40,510 Interest on investment securities: Taxable 10,680 11,994 Tax-exempt 677 782 Total interest on securities 11,357 12,776 Interest on federal funds sold 336 692 Interest on deposits with unaffiliated banks 139 263 TOTAL INTEREST INCOME 48,246 54,241 INTEREST EXPENSE Interest on deposits 10,840 15,542 Interest on FHLB borrowings 2,113 2,210 Interest on other borrowings - short term 169 266 TOTAL INTEREST EXPENSE 13,122 18,018 NET INTEREST INCOME 35,124 36,223 Provision for loan losses 295 653 NET INTEREST INCOME after provision for loan losses 34,829 35,570 NONINTEREST INCOME Services charges on deposit accounts 3,891 2,635 Trust services revenue 1,727 1,681 Other charges and fees for customer services 1,915 1,782 Mortgage banking revenue 1,547 2,556 Investment securities gains (losses) 184 (45 ) Other 50 62 TOTAL NONINTEREST INCOME 9,314 8,671 OPERATING EXPENSES Salaries, wages and employee benefits 13,689 13,744 Occupancy 1,964 1,879 Equipment 2,049 2,198 Other 5,324 5,858 TOTAL OPERATING EXPENSES 23,026 23,679 INCOME BEFORE INCOME TAXES 21,117 20,562 Federal income taxes 7,103 6,852 NET INCOME $ 14,014 $ 13,710 NET INCOME PER SHARE (Basic) $ .59 $ .58 (Diluted) $ .59 $ .58 Cash dividends per share $ .25 $ .23 See accompanying notes to consolidated financial statements CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES March 31, December 31, March 31, (Unaudited) (Unaudited) ASSETS Cash and demand deposits due from banks $ 114,023 $ 148,112 $ 116,846 Federal funds sold 32,400 69,900 112,925 Interest bearing deposits with unaffiliated banks 18,674 53,135 75,200 Investment securities: Available for sale (at estimated market value) 946,711 858,744 811,792 Held to maturity (estimated market value - $283,742 at Total investment securities 1,223,078 1,127,982 1,034,980 Loans: Commercial 325,673 327,438 314,831 Real estate construction 106,384 108,589 129,254 Real estate commercial 506,243 481,084 451,947 Real estate residential 691,626 648,286 691,397 Consumer 501,767 509,789 498,610 Total loans 2,131,693 2,075,186 2,086,039 Less: Allowance for loan losses 30,693 30,672 30,890 Net loans 2,101,000 2,044,514 2,055,149 Premises and equipment 41,841 42,767 43,192 Intangible assets 40,060 40,489 42,711 Other assets 42,423 41,994 40,782 TOTAL ASSETS $ 3,613,499 $ 3,568,893 $ 3,521,785 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 448,585 $ 475,933 $ 417,469 Interest-bearing 2,455,517 2,371,339 2,406,780 Total deposits 2,904,102 2,847,272 2,824,249 FHLB borrowings 153,591 157,393 167,545 Other borrowings - short term 83,348 104,212 103,950 Interest payable and other liabilities 35,418 29,677 33,808 Total liabilities 3,176,459 3,138,554 3,129,552 Shareholders' equity: Common stock, $1 par value: Authorized - 30,000 shares Issued and outstanding - 23,690 shares, 23,684 shares, and 23,666 shares, respectively 23,690 23,684 22,539 Surplus 325,096 325,149 290,660 Retained earnings 70,812 62,721 73,079 Accumulated other comprehensive income 17,442 18,785 5,955 Total shareholders' equity 437,040 430,339 392,233 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,613,499 $ 3,568,893 $ 3,521,785 See accompanying notes to consolidated financial statements. CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Three Months Ended 2003 2002 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,014 $ 13,710 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 295 653 Gains on sales of loans (1,314 ) (2,036 ) Proceeds from sales of loans 94,736 157,921 Loans originated for sale (85,825 ) (137,271 ) Investment securities (gains) losses (184 ) 45 Provision for depreciation and amortization 2,183 2,180 Net amortization of investment securities 2,565 1,133 Net decrease in accrued income and other assets 861 422 Net increase in interest payable and other liabilities 5,741 10,909 Net Cash Provided by Operating Activities 33,072 47,666 CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from maturities, calls and principal reductions 86,892 77,832 Proceeds from sales 8,489 215 Purchases (188,536 ) (158,312 ) Securities held to maturity: Proceeds from maturities, calls and principal reductions 48,997 19,526 Purchases (55,385 ) (52,181 ) Net (increase) decrease in loans (65,190 ) 79,388 Purchases of premises and equipment (583 ) (1,484 ) Net Cash Used in Investing Activities (165,316 ) (35,016 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand deposits, NOW accounts and savings accounts 87,061 54,138 Net decrease in certificates of deposit and other time deposits (30,231 ) (19,413 ) Net decrease in other borrowings - short term (20,864 ) (14,634 ) Principal payments on FHLB borrowings (3,802 ) (348 ) Cash dividends paid (5,923 ) (5,408 ) Proceeds from shares issued 449 215 Repurchases of common stock (496 ) (166 ) Net Cash Provided by Financing Activities 26,194 14,384 Net Increase (Decrease) in Cash and Cash Equivalents (106,050 ) 27,034 Cash and cash equivalents at beginning of period 271,147 277,937 Cash and Cash Equivalents at End of Period $ 165,097 $ 304,971 Supplemental disclosure of cash flow information: Interest paid on deposits, FHLB borrowings and other borrowings - short-term $ 12,934 $ 18,911 See accompanying notes to consolidated financial statements. CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chemical Financial Corporation (the "Corporation") have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002. On December 9, 2002, the Corporation declared a 5% stock dividend that was paid January 24, 2003 to shareholders of record on January 6, 2003. All per share amounts and shares outstanding, where appropriate, have been adjusted for this stock dividend. Certain prior year amounts have been reclassified to place them on a basis comparable with the current period's financial statements. Earnings Per Share All earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings per share excludes any dilutive effect of stock options. Basic earnings per share for the Corporation is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share for the Corporation is computed by dividing net income by the sum of the weighted average number of common shares outstanding and the dilutive effect of outstanding employee stock options. CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Earnings Per Share (continued) The following table summarizes the number of shares used in the numerator and denominator of the basic and diluted earnings per share computations: Three Months Ended 2003 2002 (In thousands) Numerator for both basic and diluted earnings per share, net income $14,014 $13,710 Denominator for basic earnings per share, average outstanding common shares 23,696 23,658 Potential dilutive shares resulting from employee stock options 44 57 Denominator for diluted earnings per share 23,740 23,715 Comprehensive Income The components of comprehensive income, net of related tax, for the three months ended March 31, 2003 and 2002 are as follows (in thousands of dollars): Three Months Ended 2003 2002 Net income $14,014 $13,710 Change in unrealized net gains on investment securities available for sale (1,343 ) (5,539 ) Comprehensive income $12,671 $ 8,171 CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Comprehensive Income (continued) The components of accumulated other comprehensive income, net of related tax, at March 31, 2003, December 31, 2002 and March 31, 2002 are as follows (in thousands of dollars): March 31, December 31, March 31, Unrealized net gains on investment securities available for sale (net of related tax Accumulated other comprehensive income $17,442 $18,785 $5,955 Operating Segment Under the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," it is management's opinion that the Corporation operates in a single operating segment - commercial banking. The Corporation is a bank holding company that operated three commercial banks, a data processing company, a title insurance company and a property and casualty insurance company, each as a separate subsidiary of the Corporation, as of March 31, 2003. The Corporation's commercial bank subsidiaries operate as community banks and offer a full range of commercial banking and fiduciary products and services to the residents and business customers in their geographical market areas. The products and services offered by the commercial bank subsidiaries are generally consistent throughout the Corporation. Each of the Corporation's commercial bank subsidiaries operates within the state of Michigan. The marketing of products and services throughout the Corporati
on's subsidiary banks is generally uniform, as many of the markets served by the subsidiaries overlap. The distribution of products and services is uniform throughout the Corporation's commercial bank subsidiaries and is achieved primarily through retail branch banking offices, automated teller machines and electronically accessed banking products. The commercial bank subsidiaries are state-chartered commercial banks and operate under the same banking regulations. The data processing subsidiary primarily performs data processing functions for the Corporation's commercial bank subsidiaries. CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Goodwill During 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS 142, goodwill is no longer amortized, but is subject to annual impairment tests. The Corporation tested goodwill for impairment as of December 31, 2002. Based on these test results, the Corporation determined that there was no impairment of goodwill as of December 31, 2002. Goodwill was $27.94 million both at March 31, 2003 and 2002. Other The Corporation and its subsidiary banks are subject to certain legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated income and financial position of the Corporation. NOTE B: 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, 2003 2002 2002 Loans: Commercial $ 325,673 $ 327,438 $ 314,831 Real estate construction 106,384 108,589 129,254 Real estate commercial 506,243 481,084 451,947 Real estate residential 691,626 648,286 691,397 Consumer 501,767 509,789 498,610 Total Loans $2,131,693 $2,075,186 $2,086,039 Nonperforming Assets: Nonaccrual loans $ 5,730 $ 4,859 $ 9,895 Loans 90 days or more past due and still accruing interest 5,442 2,422 3,519 Total Nonperforming Loans 11,172 7,281 13,414 Repossessed assets acquired (1) 4,590 4,298 1,159 Total Nonperforming Assets $ 15,762 $ 11,579 $ 14,573 (1) Includes property acquired through foreclosure and by acceptance of a deed in lieu of foreclosure, and other property held for sale. CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTE C: ALLOWANCE FOR LOAN LOSSES The following summarizes the changes in the allowance for loan losses (in thousands of dollars): Three Months Ended 2003 2002 Allowance for Loan Losses Balance as of January 1 $30,672 $30,994 Provision for loan losses 295 653 Gross loans charged off (448 ) (874 ) Gross recoveries of loans previously charged off 174 117 Net loans charged off (274 ) (757 ) Balance as of end of period $30,693 $30,890 The Corporation considers all nonaccrual commercial and commercial real estate loans to be impaired loans. Impaired loans as of March 31, 2003 and 2002 were $3,938,000 and $8,091,000, respectively. The allowance for impaired loans was $1,700,000 and $1,050,000 as of March 31, 2003 and 2002, respectively. NOTE D: ACQUIRED INTANGIBLE ASSETS The following table sets forth the carrying amount, accumulated amortization and amortization expense of acquired intangible assets (in thousands): March 31, 2003 December 31, 2002 March 31, 2002 Carrying Accumulated Carrying Accumulated Carrying Accumulated Core Deposit Intangibles $9,445 $8,395 $9,898 $7,942 $11,322 $6,518 Other 146 29 155 20 - - Amortization expense for the: Quarter ended March 31, 2003 $ 462 Quarter ended March 31, 2002 509 Year ended December 31, 2002 1,953 CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES Estimated amortization expense for the years ending December 31: 2003 $1,848 2004 $1,819 2005 $1,721 2006 $1,607 2007 $1,520 NOTE E: STOCK OPTIONS The Corporation periodically grants stock options for a fixed number of shares with an exercise price equal to the market value of the shares on the date of grant. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Corporation accounts for stock option grants under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, because the exercise prices of the Corporation's stock options equal the market prices of the underlying stock at the dates of grant, no compensation expense is recognized at the date of grant. If the Corporation had elected to recognize compensation cost for options granted in the three months ended March 31, 2003 and 2002, based on the fair value of the options granted at the grant dates, net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts): 2003 2002 Net income - as reported $14,014 $13,710 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (63 ) (43 ) Net income - pro forma $13,951 $13,667 Basic earnings per share - as reported $ .59 $ .58 Basic earnings per share - pro forma .59 .58 Diluted earnings per share - as reported .59 .58 Diluted earnings per share - pro forma .59 .58 NOTE F: FINANCIAL GUARANTEES In the normal course of business, the Corporation is a party to financial instruments containing credit risk that are not required to be reflected in the consolidated statement of financial position. For the Corporation, these financial instruments are financial and performance standby letters of credit. The Corporation has risk management policies to identify, monitor and limit exposure to credit risk. To mitigate credit risk for these financial guarantees, the Corporation generally determines the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer's creditworthiness. At March 31, 2003, the Corporation had $19.2 million of outstanding financial and performance standby letters of credit. In 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"), which requires additional disclosures by a guarantor about its obligations under certain guarantees that it has issued. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The instruments impacted for the Corporation are financial and performance standby letters of credit. The accounting pronouncements of FIN No. 45 became effective for the Corporation on January 1, 2003, on a prospective basis. The impact of adoption was not material to the Corporation's consolidated results of operations, financial position or cash flows. 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 that 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 $14.0 million in the first quarter of 2003, up 2.2% over net income of $13.7 million during the first quarter of 2002. Earnings per share in the first quarter of 2003 were $.59, an increase of 1.7% over earnings per share of $.58 in the first quarter of 2002. The increase in net income was principally the result of higher noninterest income and lower noninterest expense. These factors were partially offset by lower net interest income. Return on average assets in the first quarter of 2003 was 1.59%, compared to 1.57% during the first quarter of 2002. Return on average equity in the first quarter of 2003 was 13.1%, compared to 14.1% in the first quarter of 2002. Total assets were $3.61 billion as of March 31, 2003, up $45 million, or 1.2%, from total assets of $3.57 billion as of December 31, 2002, and up $92 million, or 2.6%, from total assets of $3.52 billion as of March 31, 2002. Total loans increased $57 million, or 2.7%, from December 31, 2002, and $46 million, or 2.2%, from March 31, 2002 to $2.13 billion as of March 31, 2003. The increase in total loans was primarily due to growth in residential real estate loans. During the first quarter of 2003, the Corporation held in its portfolio a portion of the fixed-rate residential real estate loan originations with maturities of fifteen years or greater. The Corporation's general practice is to sell these types of loans in the secondary market. The outstanding residential real estate loan portfolio balance declined in 2002 as customers took advantage of the lower interest rate environment. The increase in residential real estate loans during the first quarter of 2003 was undertaken to achieve the Corporation's desired mix of residential loans to total loans. Shareholders' equity increased $44.8 million, or 11.4%, from March 31, 2002 to $437 million as of March 31, 2003, or $18.45 per share, representing 12.1% of total assets. The increase was primarily attributable to retained net income and an increase in accumulated other comprehensive income. RESULTS OF OPERATIONS Net Interest Income The Corporation's net interest income in the first quarter of 2003 was $35.1 million, a $1.1 million, or 3.0% decrease from the $36.2 million recorded in the first quarter of 2002. The decrease was due to a lower net interest margin. Net interest margin decreased to 4.25% in the first quarter of 2003 from 4.48% in the first quarter of 2002. Average loans decreased $35.2 million, or 1.6%, while average interest-earning assets increased $70.0 million, or 2.1%, in the first quarter of 2003, compared to the first quarter of 2002. Provision for Loan Losses The provision for loan losses ("provision") is the amount added to the allowance for loan losses ("allowance") to absorb loan losses in the loan portfolio. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the remainder of the loan portfolio but that have not been specifically identified. The allowance is comprised of specific allowances (assessed for loans that have known credit weaknesses), general allowances based on an assigned risk rating and an unallocated allowance for imprecision in the subjective nature of the specific and general allowance methodology. Management continuously evaluates the allowance to ensure the level is adequate to absorb losses inherent in the loan portfolio. This evaluation is based on a continuous review of the loan portfolio, both individually and by category, and includes consideration of changes in the mix and volume of the loan portfolio, actual loan loss experienc
e, the financial condition of the borrowers, industry and geographical exposures within the portfolio, economic conditions and employment levels of the Corporation's local markets, and other factors affecting business sectors. A formal evaluation of the allowance is prepared quarterly to assess the risk in the loan portfolio and to determine the adequacy of the allowance. The Corporation's loan review personnel, who are independent of the loan origination function, review this evaluation. The provision for loan losses was $295,000 in the first quarter of 2003 compared to $653,000 in the first quarter of 2002. Net loan losses were $274,000 in the first quarter of 2003 compared to $757,000 in the first quarter of 2002. The decrease in the provision for loan losses in the first quarter of 2003 compared to 2002 was primarily attributable to the decrease in net loan losses. Noninterest Income Noninterest income increased $643,000, or 7.4%, in the first quarter of 2003, compared to the first quarter of 2002. The increase was primarily attributable to an increase in service charges on deposit accounts of $1.3 million, or 48%. This increase was partially offset by a decrease in mortgage banking revenue of $1.0 million, or 39.5%. Residential mortgage loan volume remained strong during the first quarter of 2003. However, mortgage banking revenue was negatively impacted by higher amortization of mortgage servicing rights and by a shift by the Corporation to holding a percentage of the long-term fixed interest rate residential loans originated in its loan portfolio versus selling all of these longer-term loans in the secondary market. Operating Expenses Total operating expenses decreased $653,000, or 2.8%, in the first quarter of 2003, compared to the first quarter of 2002. The decrease in operating expenses was due to a decrease in employee benefits expense, professional fees, Michigan single business taxes and equipment expense, compared to the first quarter of 2002. Income Tax Expense The Corporation's effective federal income tax rate was 33.6% during the quarter ended March 31, 2003, compared to 33.3% during the quarter ended March 31, 2002. The difference between the
Washington, D.C. 20549
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003, OR
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
Midland, Michigan
(Address of Principal Executive Offices)
48640
(Zip Code)
(Registrant's Telephone Number, Including Area Code)
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
Statement of Financial Position as of December 31, 2002)
March 31, 2003 and March 31, 2002
4
December 31, 2002 and March 31, 2002
5
March 31, 2003 and March 31, 2002
6
Results of Operations
14-19
Consolidated Statements of Income (Unaudited)
March 31
Consolidated Statements of Financial Position (In thousands)
2003
2002
2002
3/31/03, $277,231 at 12/31/02, $227,007 at 3/31/02)
276,367
269,238
223,188
Consolidated Statements of Cash Flows (Unaudited)
March 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
March 31
March 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
2003
2002
2002
of $9,391 at 3/31/03, $10,115 at 12/31/02,
$3,206 at 3/31/02)
$17,442
$18,785
$5,955
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
March 31
Amount
Amortization
Amount
Amortization
Amount
Amortization
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003
federal statutory income tax rate and the Corporation's effective federal income tax rate primarily 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 $44.6 million, or 1.2%, from December 31, 2002 and increased $91.7 million, or 2.6%, from March 31, 2002 to $3.61 billion as of March 31, 2003. Total deposits increased $56.8 million, or 2.0%, from December 31, 2002, and increased $79.9 million, or 2.8%, from March 31, 2002 to $2.90 billion as of March 31, 2003. The growth in total assets was attributable to deposit and retained net income growth.
Loans
The Corporation's philosophy is such that it will not compromise on loan quality and generally does not make loans outside its banking markets to increase its loan portfolio. In addition, the Corporation generally does not participate in syndicated loans, which is a method utilized by many financial institutions to increase the size of their loan portfolios. The Corporation's loan portfolio is generally diversified geographically, as well as along industry lines and, therefore, the Corporation believes that its loan portfolio is reasonably sheltered from material adverse local economic impact.
Total loans as of March 31, 2003 were $2.13 billion, compared to $2.08 billion as of December 31, 2002 and $2.09 billion as of March 31, 2002.
Residential real estate loans increased $43.3 million, or 6.7%, from December 31, 2002 and $.2 million, or .03%, from March 31, 2002 to $691.6 million as of March 31, 2003. Residential real estate loans represented 32.5%, 31.2% and 33.1% of the Corporation's loan portfolio as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively. The Corporation's residential real estate loans primarily consist of one- to four-family residential loans with original terms of fifteen years or less. The loan-to-value ratio at time of origination is generally 80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance.
Real estate construction loans decreased $2.2 million, or 2.0%, from December 31, 2002 and $22.9 million, or 17.7%, from March 31, 2002 to $106.4 million as of March 31, 2003. Real estate construction loans represented 5.0%, 5.2% and 6.2% of the Corporation's loan portfolio as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively. Construction lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser of the property if it will not be owner-occupied. The Corporation generally attempts to mitigate the risks associated with construction lending by, among other things, lending primarily in its market area, using conservative underwriting guidelines, and closely monitoring the construction process.
Commercial loans decreased $1.8 million, or .5%, from December 31, 2002, and increased $10.8 million, or 3.4%, from March 31, 2002 to $325.7 million as of March 31, 2003. Commercial loans represented 15.3%, 15.8% and 15.1% of the Corporation's loan portfolio as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively.
Commercial real estate loans increased $25.2 million, or 5.2%, from December 31, 2002 and $54.3 million, or 12%, from March 31, 2002 to $506.2 million as of March 31, 2003. Commercial real estate loans represented 23.7%, 23.2% and 21.7% of the Corporation's loan portfolio as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively.
Commercial lending and commercial real estate lending are generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower for rental or business properties or for the operation of a business. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Corporation generally attempts to mitigate the risks associated with commercial lending by, among other things, lending primarily in its market area and using conservative loan-to-value ratios in the underwriting process.
Consumer loans decreased $8 million, or 1.6%, from December 31, 2002, and increased $3.2 million, or .6%, from March 31, 2002 to $501.8 million as of March 31, 2003. Consumer loans represented 23.5%, 24.6% and 23.9% of total loans as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively.
Consumer loans generally have shorter terms than mortgage loans but generally involve more credit risk than one- to four-family residential lending because of the type and nature of the collateral. However, consumer lending generally involves less credit risk than commercial lending. Consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by adverse personal situations.
The Corporation's total loan to deposit ratio as of March 31, 2003, December 31, 2002 and March 31, 2002 was 73.4%, 72.9% and 73.9%, respectively.
Nonperforming loans consist of loans which are past due for principal or interest payments by 90 days or more and are still accruing interest, loans for which the accrual of interest has been discontinued, and other loans which have been restructured to less than market terms due to a serious weakening of the borrower's financial condition. Nonperforming loans were $11.2 million as of March 31, 2003, $7.3 million as of December 31, 2002 and $13.4 million as of March 31, 2002, and represented .52%, .35% and .64% of total loans, respectively. The increase in nonperforming loans since December 31, 2002 was due to an increase of $3.0 million in commercial and real estate commercial loans past due 90 days or more and still accruing interest.
A loan is considered impaired when management determines it is probable that all of the principal and interest due under the contractual terms of the loan will not be collected. In most instances, the impairment is measured based on the fair market value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. A portion of the allowance for loan losses may be allocated to impaired loans. The Corporation has taken the position that all nonaccrual commercial and commercial real estate loans are considered to be impaired loans.
Impaired loans totaled $3.9 million as of March 31, 2003, $2.3 million as of December 31, 2002 and $8.1 million as of March 31, 2002. After analyzing the various components of the customer
relationships and evaluating the underlying collateral of impaired loans, the allowance for loan losses allocated to impaired loans was as follows: $1.7 million as of March 31, 2003, $.8 million as of December 31, 2002 and $1.1 million as of March 31, 2002. The process of measuring impaired loans and the allocation of the allowance for loan losses requires judgment and estimation, therefore the eventual outcome may differ from the estimates used on these loans.
The allowance for loan losses at March 31, 2003 was $30.7 million and represented 1.44% of total loans, compared to $30.7 million, or 1.48% of total loans at December 31, 2002 and $30.9 million, or 1.48% of total loans at March 31, 2002.
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 and to capitalize on opportunities for business expansion. The banking subsidiaries' primary liquidity sources consist of investment securities, those maturing within one year and those classified as available for sale, loan payments and federal funds sold.
The Corporation has other commitments that may impact liquidity. The following table summarizes the Corporation's commitments and expected expiration dates by period at March 31, 2003. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent future cash requirements of the Corporation.
Commitments (in thousands)
|
Expected Expiration Dates by Period |
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More |
Unused commitments to extend credit |
$298,328 |
|
$221,633 |
|
$26,644 |
|
$30,762 |
|
$19,289 |
Undisbursed loans |
160,214 |
|
160,214 |
|
- |
|
- |
|
- |
Standby letters of credit and financial guarantees |
19,163 |
|
8,480 |
|
3,975 |
|
5,488 |
|
1,220 |
Total commitments |
$477,705 |
|
$390,327 |
|
$30,619 |
|
$36,250 |
|
$20,509 |
Capital Resources
As of March 31, 2003, shareholders' equity was $437.0 million, compared to $430.3 million as of December 31, 2002 and $392.2 million as of March 31, 2002, resulting in an increase of $6.7 million, or 1.6%, from December 31, 2002 and $44.8 million, or 11.4%, from March 31, 2002. Shareholders' equity as a percentage of total assets was 12.1% as of March 31, 2003 and December 31, 2002 and 11.1% as of March 31, 2002.
A statement of changes in shareholders' equity covering the three-month periods ended March 31, 2003 and March 31, 2002 follows (in thousands):
|
Three Months Ended |
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||
|
2003 |
|
2002 |
|
Total shareholders' equity as of January 1 |
$430,339 |
|
$389,456 |
|
Comprehensive income: |
|
|
|
|
Net income |
14,014 |
|
13,710 |
|
Change in unrealized net gains on securities |
|
|
|
|
available for sale, net of tax |
(1,343 |
) |
(5,539 |
) |
Total comprehensive income |
12,671 |
|
8,171 |
|
Cash dividends paid |
(5,925 |
) |
(5,408 |
) |
Shares issued from stock option and other plans |
451 |
|
180 |
|
Repurchase of shares |
(496 |
) |
(166 |
) |
Total shareholders' equity as of end of period |
$437,040 |
|
$392,233 |
|
The following table represents the Corporation's regulatory capital ratios as of March 31, 2003:
|
|
|
Tier 1 |
|
Total |
|
|
|
|
|
|
|
|
Chemical Financial Corporation-actual ratio |
10.8 |
% |
17.4 |
% |
18.7 |
% |
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|
|
|
|
|
|
Regulatory minimum ratio |
3.0 |
|
4.0 |
|
8.0 |
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|
|
|
|
|
|
|
Ratio considered "well capitalized" by |
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|
The Corporation's Tier 1 and Total capital ratios under the risk-based capital measure at March 31, 2003 exceed the regulatory agencies ratios to be considered "well capitalized" partially due to the Corporation holding $326 million in investment securities and other assets which are assigned a 0% risk rating; $930 million in assets, primarily investment securities, which are assigned a 20% risk rating; and $803 million in residential real estate mortgages and other assets which are assigned a 50% risk rating. These three risk ratings (0%, 20% and 50%) represented 55.4% of the Corporation's total risk-based assets (including off-balance sheet items) as of March 31, 2003.
During the first quarter of 2003, the Company repurchased 18,000 shares at an average price of $27.53 per share under the 2001 Stock Repurchase Program. The 2001 Stock Repurchase Program allows for the repurchase of up to 441,000 shares, of which 395,779 shares were available for future repurchase at March 31, 2003.
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information concerning quantitative and qualitative disclosures about market risk contained in the discussion regarding interest rate risk and sensitivity under the caption "Liquidity Risk" and "Interest Rate Risk" on pages 16 through 20 of the Corporation's Annual Report to Shareholders for the year ended December 31, 2002 is here incorporated by reference. Such Annual Report was previously filed as Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002.
The Corporation does not believe that there has been a material change in the nature or categories of the Corporation's primary market risk exposures, or the particular markets that present the primary risk of loss to the Corporation. As of the date of this report, the Corporation does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Corporation manages its primary market risk exposures, as described in the sections of its Annual Report to Shareholders incorporated by reference in response to this item, have not changed materially during the current year. As of the date of this report, the Corporation does not expect to make material changes in those methods in the near term. The Corporation may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
The Corporation's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships are primarily determined by market factors that are beyond the Corporation's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" in this report for a discussion of the limitations on the Corporation's responsibility for such statements. In this discussion, "near term" means a period of one year following the date of the most recent consolidated statement of financial position contained in this report.
ITEM 4. |
CONTROLS AND PROCEDURES |
Within 90 days prior to the date of filing this report, an evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of the time of such evaluation. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the time of such evaluation.
PART II. OTHER INFORMATION
ITEM 6. |
EXHIBITS AND REPORTS ON FORM 8-K |
(a) |
Exhibits. The following exhibits are filed as part of this report on Form 10-Q: |
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Exhibit |
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3.1 |
|
Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the Corporation's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference. |
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3.2 |
|
Bylaws. Previously filed as Exhibit 3.2 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001. Here incorporated by reference. |
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99.1 |
|
Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished, not filed, in accordance with SEC Release No. 34-47551. |
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|
(b) |
Reports on Form 8-K. During the three-month period ended March 31, 2003, there were no reports filed on Form 8-K. |
SIGNATURES AND CERTIFICATIONS
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: May 12, 2003 |
By/s/ David B. Ramaker |
|
David B. Ramaker |
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|
Date: May 12, 2003 |
By/s/ Lori A. Gwizdala |
|
Lori A. Gwizdala |
CERTIFICATIONS:
I, David B. Ramaker, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Chemical Financial Corporation; |
|
|
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
|
a) |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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|
b) |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and |
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|
c) |
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
|
a) |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
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|
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
6. |
The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 12, 2003
/s/ David B. Ramaker |
|
David B. Ramaker |
|
I, Lori A. Gwizdala, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Chemical Financial Corporation; |
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|
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
|
a) |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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|
b) |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and |
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|
|
|
c) |
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
|
a) |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
|
|
|
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
6. |
The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 12, 2003
/s/ Lori A. Gwizdala |
|
Lori A. Gwizdala |
|
EXHIBIT INDEX
Exhibit |
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|
|
|
|
3.1 |
|
Restated Articles of Incorporation. Previously filed as Exhibit 4.1 to the Corporation's Registration Statement on Form S-8 filed with the Commission on March 2, 2001. Here incorporated by reference. |
|
|
|
3.2 |
|
Bylaws. Previously filed as Exhibit 3.2 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001. Here incorporated by reference. |
|
|
|
99.1 |
|
Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished, not filed, in accordance with SEC Release No. 34-47551. |
Exhibit 99.1
CERTIFICATION
Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his or her capacity as an officer of Chemical Financial Corporation (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.
Dated: May 12, 2003 |
/s/ David B. Ramaker |
|
David B. Ramaker |
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Dated: May 12, 2003 |
/s/ Lori A. Gwizdala |
|
Lori A. Gwizdala |