-----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, QaBU3jbpznY3/zEag/0is+Q+egbFWEYq26t/GNRZmLOcVZouQNLK93q50jkpfjNV ncRGZZvy1Nns6amdrA5N+w== 0000905729-98-000076.txt : 19980326 0000905729-98-000076.hdr.sgml : 19980326 ACCESSION NUMBER: 0000905729-98-000076 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 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-K405 SEC ACT: SEC FILE NUMBER: 000-08185 FILM NUMBER: 98572898 BUSINESS ADDRESS: STREET 1: 333 E MAIN ST CITY: MIDLAND STATE: MI ZIP: 48640 BUSINESS PHONE: 5176313310 10-K405 1 =========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of (I.R.S. Employer Incorporation or Organization) Identification No.) 333 E. MAIN STREET MIDLAND, MICHIGAN 48640 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (517) 839-5350 Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $10 PAR VALUE (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ( X ) State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate Market Value as of February 20, 1998: $373,122,660 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $10 par value, outstanding at February 20, 1998: 10,778,380 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, are incorporated by reference in Parts I and II (Items 1 and 5-8). Portions of the registrant's definitive Proxy Statement for its April 20, 1998, annual shareholders' meeting are incorporated by reference in Part III (Items 10-13). =========================================================================== PART I ITEM 1. BUSINESS. Chemical Financial Corporation ("Chemical" or the "Corporation") is a bank holding company. Chemical was organized under Michigan law in August 1973, and is headquartered in Midland, Michigan. Chemical was substantially inactive until June 30, 1974, when it acquired its lead subsidiary bank, Chemical Bank and Trust Company ("CB&T"), pursuant to a reorganization in which the former shareholders of CB&T became shareholders of Chemical. As of December 31, 1997, Chemical owned all of the outstanding stock of ten commercial banks and a data processing company, all located in Michigan. The main offices of Chemical's ten banking subsidiaries are located in Midland, Bay City, Big Rapids, Cadillac, Caro, Clare, Grayling, Marshall, Owosso and Stanton. Chemical's business is concentrated in a single industry segment - commercial banking. Chemical's subsidiaries offer a full range of commercial banking and fiduciary services. These include accepting deposits, business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit services, automated teller machines, access to insurance and investment products, money transfer services, corporate and personal trust services and other banking services. The principal markets for these financial services are the communities within Michigan in which Chemical's subsidiaries are located and the areas immediately surrounding these communities. As of December 31, 1997, Chemical and its subsidiaries served these markets through 86 banking offices in 55 communities, located in 24 counties, generally across the mid-section of Michigan. In addition to the full service banking offices, the subsidiary banks operated 84 automated teller machines, both on and off bank premises, as of December 31, 1997. CB&T, which has its headquarters in Midland, is Chemical's lead subsidiary bank and accounted for 33% of total deposits and 29% of total loans of Chemical and its subsidiaries on a consolidated basis as of December 31, 1997. Chemical's banking subsidiaries' primary loan product, historically, has been residential real estate mortgages. As of December 31, 1997, these loans totaled $442 million, or 52.2%, of consolidated total loans. During 1997, Chemical's subsidiaries' sold residential real estate mortgages with fifteen year and greater original terms in the secondary mortgage market. During 1996 and 1995, residential mortgage loans with an original term of fifteen years were kept in the Corporation's own loan portfolio, and those with original terms greater than fifteen years were sold in the secondary -2- mortgage market. Chemical originated $38.8 million of residential mortgage loans during 1997 which were sold in the secondary mortgage market, compared to $12.3 million and $15.6 million in residential mortgage loans originated and sold during 1996 and 1995, respectively. The principal sources of revenues for Chemical are interest and fees on loans, which accounted for 54% of total revenues in 1997 and 1996, and 53% in 1995. Interest on investment securities is also a significant source of revenue, accounting for 33% of total revenues in each of the years 1997, 1996 and 1995. Chemical has no foreign loans, assets or activities. No material part of the business of Chemical or its subsidiaries is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on Chemical. The business of banking is highly competitive. In addition to competition from other commercial banks, banks face significant competition from nonbank financial institutions. Savings associations and credit unions compete aggressively with commercial banks for deposits and loans, and credit unions and finance companies are particularly significant factors in the consumer loan market. Banks compete for deposits with a broad range of other types of investments, the most significant of which, over the past few years, have been mutual funds and annuities. Insurance companies and investment firms are significant competitors for customer deposits. In response to this increased competition for customers' bank deposits, the Corporation expanded its sales and marketing efforts of mutual fund and annuity investment products during 1996. The Corporation's subsidiary banks, through "CFC Investment Centers," offer an array of mutual funds, annuity products and market securities through alliances with Security First Group and Corelink Financial Services. The CFC Investment Centers offer customers a complete spectrum of investment products and service capabilities. In addition, the Trust Department of Chemical Bank and Trust Company offers customers a number of investment products and services. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers). Banks and bank holding companies are extensively regulated. Chemical's subsidiary banks are all chartered by the State of Michigan and supervised and regulated by the Financial Institutions Bureau of the Michigan Depart- ment of Consumer and Industry Services. Three of Chemical's banks are members of the Federal Reserve System and are also supervised, examined and regulated by the Federal Reserve System. The other seven state non-member banks are also regulated by the Federal Deposit Insurance Corporation ("FDIC"). Deposits of all of Chemical's bank subsidiaries are insured by the FDIC to the extent provided by law. -3- State banks and bank holding companies are governed by both federal and state laws which significantly limit their business activities in a number of respects. Examples of such limitations include: (1) prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), and in some cases various other governing agencies, is required for bank holding companies to acquire control of any additional banks or branches, (2) the business activities of bank holding companies and their subsidiaries are limited to banking and to other activities which are determined by the Federal Reserve Board to be closely related to banking, and (3) transactions between bank holding company subsidiary banks are significantly restricted by banking laws and regulations. Chemical is a legal entity separate and distinct from its subsidiary banks and data processing subsidiary. Chemical's primary source of revenues results from dividends paid to it by its subsidiaries. Federal and state banking laws and regulations limit both the extent to which Chemical's subsidiary banks can lend or otherwise supply funds to Chemical or certain of its affiliates and also place certain restrictions on the amount of dividends the subsidiary banks of Chemical may pay to Chemical. Banks are subject to a number of federal and state laws and regulations which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth In Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws. These policies can have a significant effect on the operating results of banks. Under Federal law, the FDIC has the authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources, and to establish semiannual assessment rates on Bank Insurance Fund ("BIF") member banks, so as to maintain the BIF at the designated reserve ratio defined by law. On January 1, 1994, the FDIC implemented a system of risk-based premiums for deposit insurance, pursuant to which the premiums paid by a depository institution are based on the probability that the BIF will incur a loss in respect of such institution. FDIC expense was $.2 million in 1997, $.1 million in 1996 and $1.6 million in 1995. In 1997, the Corporation paid the minimum rate of $.01296 per $100 of deposits insured by the BIF and $.0644 per $100 of deposits insured by the Savings Association Insurance Fund ("SAIF"). During 1996, the FDIC's minimum assessment rate for BIF insured deposits was reduced to $2000. Deposits held by well-capitalized banks and insured by the SAIF were assessed at a rate of $.23 per $100 of insured deposits in 1996. In addition, during 1996, SAIF insured deposits, held on March 31, 1995, -4- were assessed a one-time charge of $.657 per $100 of deposits to recapitalize the SAIF to its required reserve ratio. The Corporation's liability for this special assessment was approximately $30,000. The recapitalization of the SAIF was accomplished through the enactment of The Deposit Insurance Funds Act of 1996 (the "Funds Act") on September 30, 1996. This legislation, in addition to requiring the one-time special assessment to the FDIC to capitalize the SAIF to its required reserve ratio, authorizes the Financing Corporation ("FICO") to impose periodic assessments on depository institutions that are members of the BIF, in addition to institutions that are members of the SAIF. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds over a larger number of institutions. Until the change in the law, only SAIF-member institutions bore the cost of funding these interest payments. The FICO assessment on BIF insured deposits for years 1997-1999 was established at 1.296 cents for every $100 of domestic deposits. For this same period, the SAIF insured institutions' FICO assessment rate was established at 6.44 cents for every $100 of domestic deposits. Beginning in the year 2000 until 2017, the FICO assessment for both BIF and SAIF insured deposits was established at 2.43 cents for every $100 of domestic deposits. Federal law also contains a "cross-guarantee" provision that could result in insured depository institutions owned by Chemical being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by Chemical. Under Federal Reserve Board policy, Chemical is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank. Banks are subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to: (1) obtain deposit insurance coverage for a newly chartered institution, (2) establish a new branch office that will accept deposits, (3) relocate an office, or (4) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. -5- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") substantially changed the geographic constraints applicable to the banking industry. The Riegle-Neal Act allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Effective June 1, 1997, the Riegle-Neal Act also allowed banks to establish interstate branch networks through acquisitions of other banks. The establishment of DE NOVO interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner of the Financial Institutions Bureau, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. In March 1996, the Corporation consolidated its bank subsidiary headquartered in Standish, Michigan (Chemical Bank Huron) with its bank subsidiary headquartered in Bay City, Michigan (Chemical Bank Bay Area). On May 1, 1996, the Corporation merged with State Savings Bancorp, Inc. ("SSBI") in Caro, Michigan. SSBI operated one bank, State Savings Bank of Caro, with offices in Caro and Fairgrove, Michigan. The Corporation issued 551,250 shares (adjusted for the 5% stock dividends paid December 30, 1996 and December 30, 1997) of the Corporation's common stock in exchange for all of the common stock of SSBI. The merger was accounted for as a "pooling of interests." As of May 1, 1996, SSBI had assets of approximately $65 million. On December 31, 1996, the Corporation through CB&T 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. -6- In March 1997, the Corporation's subsidiary headquartered in Owosso, Michigan (Chemical Bank Key State) sold its branch banking building in Okemos, Michigan. The loans and deposits of the Okemos branch were transferred to Chemical Bank Key State's branch banking office in Lansing, Michigan. The nature of the business of Chemical's subsidiaries is such that they hold title to numerous parcels of real property. These properties are primarily owned for branch offices; however, Chemical and its subsidiaries may hold properties for other business purposes, as well as on a temporary basis for properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of clean up of contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. At December 31, 1997, Chemical was the fifth largest bank holding company headquartered in Michigan, measured by total assets, and together with its subsidiaries employed a total of 1007 full-time equivalent employees. The following table summarizes the book value of investment securities as of December 31:
1997 1996 1995 -------- -------- -------- (In thousands) Investment securities available for sale: U.S. Government and agency securities $474,706 $422,629 $328,072 States of the U.S. and municipal securities -- -- -- Mortgage-backed securities 2,351 2,850 3,262 Other securities 17,116 16,308 10,336 -------- -------- -------- Total investment securities available for sale 494,173 441,787 341,670 Investment securities held to maturity: U.S. Government and agency securities 201,801 168,958 343,627 States of the U.S. and municipal securities 46,707 42,096 46,065 Mortgage-backed securities 501 679 2,026 Other securities 2,011 2,019 711 -------- -------- -------- Total investment securities held to maturity 251,020 213,752 392,429 -------- -------- -------- -7- Total investment securities $745,193 $655,539 $734,099 ======== ======== ========
The information under the following captions in the registrant's Annual Report to Shareholders for the year ended December 31, 1997, further describes the business of Chemical and is here incorporated by reference: CAPTION PAGES ------- ----- Table 2. Average Balances, Tax Equivalent Interest and Effective Yields and Rates 31 Table 3. Volume and Rate Variance Analysis 33 Note C - Investment Securities 19-20 Table 8. Maturities and Yields of Investment Securities at December 31, 1997 38 Table 4. Summary of Loans and Loan Loss Experience 33 Table 5. Comparison of Loan Maturities and Interest Sensitivity 35 Table 6. Summary of Nonperforming Loans 35 Note D - Loans 20 Table 7. Allocation of the Allowance For Possible Loan Losses 36 Management's Discussion and Analysis of Financial Position and Results of Operations, subheadings "Net Interest Income", "Loans", "Nonperforming Loans" and "Provision For Possible Loan Losses" and "Liquidity and Interest Sensitivity" 30-41 Table 10. Maturity Distribution of Time Deposits of $100,000 or More 39 Financial Highlights 1 ITEM 2. PROPERTIES. The executive offices of Chemical, the main office of CB&T and Chemical's data processing subsidiary are located in a three story, approximately 74,000 square foot, office building in downtown Midland, which is 100% owned by CB&T. Chemical's subsidiary banks conduct business from a total of 86 banking offices as of December 31, 1997. These offices are located in or in the vicinity of the cities in which the banks have their main offices. Of the banking offices, 83 are owned by the subsidiary banks and 3 are leased from independent parties with remaining lease terms of one year to twelve years. This leased property is considered insignificant. -8- ITEM 3. LEGAL PROCEEDINGS. Chemical's subsidiaries are parties, as plaintiff or defendant, to a number of legal proceedings, none of which is considered material, and all of which arose in the ordinary course of their operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT. Biographical information concerning Chemical's executive officers who are not directors or nominated for election to the Board of Directors is presented below. Executive officer appointments are made or reaffirmed annually at the organizational meeting of the Board of Directors. At its regular meetings, the Board may also make other executive officer appointments. Lawrence E. Burks, age 64, is Vice Chairman of CB&T. He joined CB&T as Vice President on April 1, 1973, was promoted to Senior Vice President in February 1975, Executive Vice President in December 1975, President and Director in April 1986 and Vice Chairman in September 1996. Mr. Burks has served on the Board of Directors of Chemical Bank Montcalm since June 1984 and was named Chairman of the Board of Chemical Bank Montcalm in December 1996. Mr. Burks was named Chairman of the Board of Chemical Bank Bay Area in December 1996. Both banks are wholly owned subsidiaries of Chemical. Mr. Burks is a member of the Management Committee of Chemical. Bruce M. Groom, age 56, is Senior Vice President and Trust Officer of CB&T. He joined CB&T on April 29, 1985 as Senior Vice President and was promoted to Senior Trust Officer in May 1986. Mr. Groom has served on the Board of Chemical Bank Central, a wholly owned subsidiary of Chemical, since February 1989. Mr. Groom is an attorney. Mr. Groom is a member of the Management Committee of Chemical. Lori A. Gwizdala, age 39, is Senior Vice President, Chief Financial Officer and Treasurer of Chemical. She joined Chemical as Controller on January 2, 1985 and was named Chief Financial Officer in May 1987, Senior Vice President in February 1991 and Treasurer in April 1994. Ms. Gwizdala has served as Secretary to the Board of Directors of CFC Data Corp since May 1986, a director of Chemical Bank Bay Area since January 1993 and a director of Chemical Bank Thumb Area since July 1996, all of which are wholly owned subsidiaries of Chemical. Ms. Gwizdala is a certified public accountant. Ms. Gwizdala is a member of the Management Committee of Chemical. -9- William C. Lauderbach, age 55, is Senior Vice President and Investment Officer of CB&T. He joined CB&T as a Trust Officer on July 2, 1973, was promoted to Vice President and Trust Officer in March 1980, Investment Officer in January 1985 and Senior Vice President in February 1991. Mr. Lauderbach has served on the Board of Directors of Chemical Bank South, a wholly owned subsidiary of Chemical, since 1989. Mr. Lauderbach is a member of the Management Committee of Chemical. David B. Ramaker, age 42, is Chief Executive Officer and President of CB&T and Executive Vice President and Secretary of Chemical. He joined CB&T as Vice President on November 20, 1989. Mr. Ramaker became President of Chemical Bank Key State, a wholly owned subsidiary of Chemical in October 1993. Mr. Ramaker became President and member of the Board of Directors of CB&T in September 1996 and Executive Vice President and Secretary to the Board of Chemical and Chief Executive Officer of CB&T on January 1, 1997. Mr. Ramaker has served as a director of Chemical Bank Key State since October 1993. Mr. Ramaker was appointed to the following Boards of Directors of wholly owned subsidiaries of Chemical in December 1996: Chemical Bank Montcalm, Chemical Bank Central (also Chairman), Chemical Bank North (also Chairman), and Chemical Bank West (also Chairman). Mr. Ramaker is a member of the Management Committee of Chemical. -10- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the heading "Stock Price Ranges and Cash Dividends Per Share" on page 12 of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA. The information under the caption "Financial Highlights" on page 1 and the sub-heading "Financial Highlights" of "Management's Discussion and Analysis" on pages 28 through 30 of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under the heading "Management's Discussion and Analysis" on pages 28 through 43 (inclusive) of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information under the heading "Liquidity and Interest Sensitivity" on pages 37 through 41 (inclusive) of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements, notes, and independent auditors' report on pages 13 through 27 (inclusive) of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. The information under the caption "Selected Quarterly Financial Information (Unaudited)" on page 12 of the registrant's Annual Report to Shareholders for the year ended December 31, 1997, is here incorporated by reference. -11- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -12- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Nominees for Election to Serve Until the Annual Meeting of Shareholders in 1999" on pages 2 through 4 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 18 in the registrant's definitive Proxy Statement for its April 20, 1998 annual meeting of shareholders is here incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Compensation of Executive Officers and Directors" on pages 10 through 14 in the registrant's definitive Proxy Statement for its April 20, 1998, annual meeting of shareholders is here incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Voting Securities" on pages 7 and 8 in the registrant's definitive Proxy Statement for its April 20, 1998, annual meeting of shareholders is here incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Relationships and Related Transactions" on page 18 in the registrant's definitive Proxy Statement for its April 20, 1998, annual meeting of shareholders is here incorporated by reference. -13- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) FINANCIAL STATEMENTS. The following financial statements and independent auditors' report of Chemical Financial Corporation and its subsidiaries are filed as part of this report: Consolidated Statements of Financial Position-December 31, 1997 and 1996 Consolidated Statements of Income for each of the three years in the period ended December 31, 1997 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1997 Notes to Consolidated Financial Statements Report of Independent Auditors dated January 20, 1998 The financial statements, the notes to financial statements, and the independent auditors' report listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1997. (2) FINANCIAL STATEMENT SCHEDULES. None (3) EXHIBITS. The following exhibits are filed as part of this report: NUMBER EXHIBIT ------ ------- 3(a) 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(b) 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. 4 LONG-TERM DEBT. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request. -14- NUMBER EXHIBIT ------ ------- 10(a) CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF 1997. Previously filed as Appendix A to the registrant's Definitive Proxy Statement with respect to its Annual Meeting of Share- holders held on April 21, 1997. Here incorporated by reference. 10(b) AMENDED AWARD AND STOCK OPTION PLAN OF 1987. Previously filed as Exhibit 10(a) to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed with the Commission on March 24, 1994. Here incorporated by reference. 10(c) PLAN FOR DEFERRAL OF DIRECTORS' FEES. Previously filed as Exhibit 10(c) to the registrant's Form S-4 Registration Statement No. 33-64944 filed with the Commission on June 24, 1993. Here incorporated by reference. 10(d) CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN. Previously filed as Exhibit 10(c) to the registrant's Annual Report to Shareholders and Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 12, 1993. Here incorporated by reference. 10(e) RETIREMENT AGREEMENT. 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS. 13 1997 ANNUAL REPORT TO SHAREHOLDERS. 21 SUBSIDIARIES OF THE REGISTRANT. 23 CONSENT OF INDEPENDENT AUDITORS. 27(a) FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1997. 27(b) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED SEPTEMBER 30, 1997. 27(c) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED JUNE 30, 1997. 27(d) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED MARCH 31, 1997. 27(e) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1996. -15- NUMBER EXHIBIT ------ ------- 27(f) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED SEPTEMBER 30, 1996. 27(g) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED JUNE 30, 1996. 27(h) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED MARCH 31, 1996. 27(i) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1995. 99(a) CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN FINANCIAL STATEMENTS, NOTES AND SCHEDULES. 99(b) CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES. - ----------------- These agreements are management contracts or compensation plans or arrangements required to be filed as Exhibits to this Form 10-K. Chemical will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Ms. Lori A. Gwizdala, Chief Financial Officer, Chemical Financial Corporation, 333 East Main Street, Midland, Michigan 48640-0569. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. -16- SIGNATURES Pursuant to the Requirements of Section 13 or 15(d) 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 March 24, 1998 S/ ALOYSIUS J. OLIVER Aloysius J. Oliver President and Chief Executive Officer March 24, 1998 S/ LORI A. GWIZDALA Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer -17- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 24, 1998 S/ ALOYSIUS J. OLIVER Aloysius J. Oliver President and Chief Executive Officer and Director (Principal Executive Officer) March 24, 1998 S/ JAMES A. CURRIE James A. Currie Director March , 1998 ________________________________________ Michael L. Dow Director March 24, 1998 S/ LORI A. GWIZDALA Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) March 24, 1998 S/ TERENCE F. MOORE Terence F. Moore Director March 24, 1998 S/ ALAN W. OTT Chairman of the Board and Director March 24, 1998 S/ FRANK P. POPOFF Frank P. Popoff Director March 24, 1998 S/ LAWRENCE A. REED Lawrence A. Reed Director March 24, 1998 S/ WILLIAM S. STAVROPOULOS William S. Stavropoulos Director -18- EXHIBIT INDEX NUMBER EXHIBIT ------ ------- 3(a) 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(b) 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. 4 LONG-TERM DEBT. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request. 10(a) CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF 1997. Previously filed as Appendix A to the registrant's Definitive Proxy Statement with respect to its Annual Meeting of Share- holders held on April 21, 1997. Here incorporated by reference. 10(b) AMENDED AWARD AND STOCK OPTION PLAN OF 1987. Previously filed as Exhibit 10(a) to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed with the Commission on March 24, 1994. Here incorporated by reference. 10(c) PLAN FOR DEFERRAL OF DIRECTORS' FEES. Previously filed as Exhibit 10(c) to the registrant's Form S-4 Registration Statement No. 33-64944 filed with the Commission on June 24, 1993. Here incorporated by reference. 10(d) CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN. Previously filed as Exhibit 10(c) to the registrant's Annual Report to Shareholders and Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 12, 1993. Here incorporated by reference. 10(e) RETIREMENT AGREEMENT. 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS. 13 1997 ANNUAL REPORT TO SHAREHOLDERS. 21 SUBSIDIARIES OF THE REGISTRANT. -19- NUMBER EXHIBIT ------ ------- 23 CONSENT OF INDEPENDENT AUDITORS. 27(a) FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1997. 27(b) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED SEPTEMBER 30, 1997. 27(c) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED JUNE 30, 1997. 27(d) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED MARCH 31, 1997. 27(e) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1996. 27(f) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED SEPTEMBER 30, 1996. 27(g) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED JUNE 30, 1996. 27(h) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED MARCH 31, 1996. 27(i) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1995. 99(a) CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN FINANCIAL STATEMENTS, NOTES AND SCHEDULES. 99(b) CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES. - ----------------- These agreements are management contracts or compensation plans or arrangements required to be filed as Exhibits to this Form 10-K. -20- EX-10 2 EXHIBIT 10(e) RETIREMENT AGREEMENT THIS AGREEMENT is made this 31st day of December, 1997, between ALAN W. OTT ("Mr. Ott") and CHEMICAL FINANCIAL CORPORATION ("Chemical"), and joined in by its subsidiary, CHEMICAL BANK AND TRUST COMPANY ("Chemical Bank"); WHEREAS, Chemical is a bank holding company and a Michigan corporation; and WHEREAS, Chemical believes that its ability to conduct its business successfully is dependent upon retaining key management employees until such time as they retire; and WHEREAS, Mr. Ott has been employed in an important management and chief executive position with Chemical for over 30 years, and the parties desire to continue to maintain a relationship upon the terms and conditions set forth herein; and WHEREAS, Mr. Ott has determined to retire from the active management of Chemical, but has agreed to provide assistance and advice during the transition to a new chief executive; IT IS, THEREFORE, AGREED AS FOLLOWS: 1. RETIREMENT. Effective the close of business December 31, 1996, Mr. Ott resigned and retired from his position as President and Chief Executive Officer of Chemical Financial Corporation and Chief Executive Officer of Chemical Bank. Mr. Ott shall continue to serve as a Director of Chemical and Chemical Bank and Chairman of the Board of Directors of Chemical and Chemical Bank, through January 1, 1998 to December 31, 1998, without compensation for Directors' meetings. Mr. Ott may thereafter continue his service to Chemical for such time and in such role as Chemical and he deem appropriate. 2. COMPENSATION AND BENEFITS. Chemical agrees to pay to Mr. Ott an annual salary of Fifty Thousand Dollars ($50,000.00), commencing on the first day of January, 1998, for a period of one year or until his death, if earlier. Payments to Mr. Ott will be made on the last business day of each month during the term of this Agreement. Mr. Ott shall be provided group health benefits in accordance with the terms of Chemical's Retiree Medical and Dental Plan. If at any time Chemical terminates any such insurance plan for its retirees, Chemical may also terminate such plan for Mr. Ott; if Chemical substitutes medical and hospitalization insurance plans for its retirees or provides additional medical or hospitalization insurance coverage for its retirees, then such substituted and/or additional insurance coverage shall be made available to Mr. Ott. 3. COVENANT NOT TO COMPETE. Mr. Ott agrees that during the period that payments are being made to him hereunder, he shall not enter into employment or any form of equity ownership of any business which is competitive with the businesses related to, affiliated with, or managed by Chemical; provided, however, that the parties agree that this provision will be limited to a geographic area consisting of a fifty (50) mile radius from each existing business location of Chemical or any business related to, affiliated with, or managed by Chemical. In the event the Board of Directors of Chemical determines that Mr. Ott is in violation of this covenant not to compete, it shall give written notice to him. Mr. Ott shall have a period of ninety (90) days from the date of such notice to cease his competitive activity, and the payments hereunder shall continue during such period. If the competitive activity is not terminated within the ninety (90) day period, further payments hereunder shall cease. In the event of a dispute hereunder, the parties agree to submit their disagreement to arbitration. Nothing in this Section 3 shall be construed to prevent Mr. Ott from acquiring or holding, directly or indirectly, securities of any corporation or other entity the securities of which are listed for trading on any national or regional securities exchange or quoted on any automated quotation system sponsored by the National Association of Securities Dealers, Inc. as long as Mr. Ott's total beneficial ownership in any such corporation or entity does not exceed five percent (5%) of the total securities outstanding of such corporation or entity. 4. NO ASSIGNMENT. This Agreement is personal to each party to this Agreement and no party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the others. 5. MODIFICATION. This Agreement supersedes all prior agreements with respect to the matters covered hereby, and no modification of this Agreement shall be valid unless it is in writing and signed by Chemical and by Mr. Ott. 6. CONSTRUCTION. This Agreement shall be governed and construed in accordance with the laws of the State of Michigan. 7. HEADINGS. The paragraph headings in this Agreement are for convenient reference only, and shall not modify or amend the express terms hereof. 8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and assigns. DATED: DECEMBER 31, 1997 /S/ ALAN W. OTT Alan W. Ott CHEMICAL FINANCIAL CORPORATION DATED: DECEMBER 31, 1997 By /S/ ALOYSIUS J. OLIVER Aloysius J. Oliver Its PRESIDENT & CHIEF EXECUTIVE OFFICER CHEMICAL BANK AND TRUST COMPANY DATED: DECEMBER 31, 1997 By /S/ DAVID B. RAMAKER David B. Ramaker Its PRESIDENT EX-11 3 EXHIBIT NO. 11 COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31 1997 1996 1995 ---- ---- ---- (Amounts in thousands, except per share amounts) BASIC: Average shares outstanding 10,741 10,710 10,657 Net income $23,889 $22,003 $20,489 ======= ======= ======= Net income per common share $ 2.22 $ 2.05 $ 1.92 ======= ======= ======= DILUTED: Average shares outstanding 10,741 10,710 10,657 Net effect of the assumed exercise of stock options-based on the treasury stock method using average market price 128 156 163 ------- ------- ------- 10,869 10,866 10,820 ======= ======= ======= Net income $23,889 $22,003 $20,489 ======= ======= ======= Net income per common share $ 2.20 $ 2.03 $ 1.89 ======= ======= =======
EX-13 4 EXHIBIT 13 1997 ANNUAL REPORT NINETEEN HUNDRED NINETY-SEVEN [PICTURE OF MONEY] [CHEMICAL LOGO] CHEMICAL FINANCIAL CORPORATION [PICTURE OF GILBERT A. CURRIE] 1923 - 1998 The directors, officers and employees of Chemical Financial Corporation and its affiliates acknowledge and mourn the passing of our long-time colleague, Gilbert A. Currie. Mr. Currie became a member of the Chemical Financial official family when he joined the board of directors of Chemical State Savings Bank in 1956. He went on to serve as chairman of that bank from 1961 to 1986. He joined the board of Chemical Financial Corporation when it was organized in 1973 and retired as chairman in April 1994. Over the years, Mr. Currie made great contributions to the advancement of our Company while earning the respect and friendship of all those who had the privilege of knowing and working with him. Our Company and the communities we serve were greatly enriched by the life and work of Gilbert A. Currie. 1997 HIGHLIGHTS 1997 marked the 23rd consecutive year of both increased operating earnings and cash dividends: - 1997 Earnings were $23.889 million, up 8.6% over 1996 Earnings of $22.003 million. - 1997 Earnings per share were $2.22, up 8.3% over 1996 Earnings per share of $2.05. - Return on average assets was 1.38% in 1997, compared to 1.30% in 1996. - 1997 Cash dividends per share were $.84, up 15.5% over 1996 Cash dividends per share of $.73. - The Corporation paid a 5% stock dividend on December 30, 1997. The Corporation's financial position remained strong at December 31, 1997. Highlights as of this date follow: - Total assets were $1.8 billion. - Shareholders' equity was $223.9 million and represented 12.7% of total assets. - The allowance for possible loan losses was $17.4 million, or 2.05% of total loans, compared to total nonperforming loans of $3.0 million, or .36% of total loans. REFERENCE GUIDE 1997 Highlights . . . . . . . . . . . . . . . . . . .Inside Cover A Year of Progress. . . . . . . . . . . . . . . Inside Cover Flap Financial Highlights. . . . . . . . . . . . . . . . . . . . . . 1 Message to Shareholders . . . . . . . . . . . . . . . . . . . . 2 Management Transition . . . . . . . . . . . . . . . . . . . . . 4 Super Community Banking . . . . . . . . . . . . . . . . . . . . 6 Quarterly Financial Information . . . . . . . . . . . . . . . .12 Consolidated Financial Statements . . . . . . . . . . . . . . .13 Notes to Consolidated Financial Statements. . . . . . . . . . .17 Report of Ernst & Young LLP Independent Auditors . . . . . . . . . . . . . . . . . . .27 Management's Discussion and Analysis. . . . . . . . . . . . . .28 Directors and Officers of Affiliates. . . . . . . . . . . . . .44 Corporate Directors and Officers . . . . . . . . . . . . . . .48 Corporate Information . . . . . . . . . . . . . . . . . . . . .49 A YEAR OF PROGRESS Chemical Financial Corporation's ten affiliate banks provide financial services all across mid-Michigan. In recent years, new technology has changed the way commercial banks deliver many of their services. Amendments to banking laws and regulations have allowed banks to enter new lines of business. We are committed to using technology to provide enhanced customer service and to make our operations more cost efficient while striving to keep pace with the evolving needs of our customers. [WOMAN AT A CHEMICAL BANK ATM] [CHEMICAL BANK ATM CARD] Our network of 84 ChemKey Automatic Teller Machines handles more than 3 million transactions each year. It gives our customers convenient access to their Chemical Bank accounts, produces significant cost savings and provides a significant revenue stream from customers of other banks. www.chemicalbankmi.com [PICTURES OF CHEMICAL BANK LOCATIONS -- MAP OF MICHIGAN; CHEMICAL BANK INVESTOR INFO; AND CHEMICAL FINANCIAL CORPORATION INFORMATION] The Chemical Financial Corporation web site links us with the rapidly growing number of Internet users. At WWW.CHEMICALBANKMI.COM web surfers can find general information about our Company ... the locations and telephone numbers of our affiliates and their branch offices ... our ATM locations ... descriptions of our deposit and loan products ... financial calculators ... an overview of other facets of our operations such as home banking services, trust services, and the CFC Investment Centers ... historical information about our stock prices, cash dividends and earnings ... and "What's New" at Chemical Bank. CFC Data Corp purchased a new IBM System 390 Mainframe computer in 1997. Used with Kirchman Corporation's Dimension bank automation software, this state-of-the-art system confirms Chemical Financial Corporation's commitment to allocate adequate resources to become Year 2000 Compliant. Beyond the Year 2000 issue, this system will have the technological capability to offer our customers the new products and services that they will need and want in the years ahead. [PICTURE OF MAN LOOKING OVER A REPORT BY A COMPUTER] Chemical Banks are market leaders in offering our consumer and commercial customers access to their accounts via both personal computers and touch- tone telephones. [PICTURE OF A PORTION OF A KEYBOARD AND A $100 BILL] Technology is not the only thing changing in banking. Redesigned $100 and $50 bills have been introduced as the first steps in a program to make U.S. currency more difficult to counterfeit. [PICTURES OF CONSTRUCTION WORKERS AT A CHEMICAL BANK] Construction of new street-level offices adjacent to the Main Office of Chemical Bank and Trust Company will provide larger, more attractive quarters for our mortgage lending activities and offices for Chemical Financial Insurance Agency that offers all types of property, casualty, automobile and life insurance. FINANCIAL HIGHLIGHTS
Years Ended December 31 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (in thousands) Net interest income $ 69,040 $ 67,090 $ 63,687 $ 63,278 $ 62,645 Provision for possible loan losses 1,002 1,128 1,065 1,099 1,104 Other income 13,122 12,198 12,359 11,330 11,876 Operating expenses 45,718 45,124 44,629 45,613 46,746 Net operating income 23,889 22,003 20,489 19,110 18,165 Net income 23,889 22,003 20,489 19,110 20,165 PER SHARE DATA Net operating income Basic $ 2.22 $ 2.05 $ 1.92 $ 1.80 $ 1.72 Diluted 2.20 2.03 1.89 1.77 1.69 Net income Basic 2.22 2.05 1.92 1.80 1.91 Diluted 2.20 2.03 1.89 1.77 1.87 Cash dividends .84 .73 .62 .51 .46 Book value end-of-period 20.82 19.33 18.24 16.06 15.60 Market value end-of-period 44.75 37.62 34.92 24.19 24.79 AT YEAR END (in thousands) Total assets $1,765,100 $1,698,774 $1,706,085 $1,658,023 $1,653,246 Deposits 1,475,841 1,429,915 1,449,801 1,421,678 1,425,415 Long-term debt 9,000 10,000 12,080 12,099 14,104 Shareholders' equity 223,925 207,269 194,902 170,680 165,037 FINANCIAL RATIOS Return on average total assets 1.38% 1.30% 1.24% 1.15% 1.23% Return on average shareholders' equity 11.1 10.9 11.0 11.1 12.8 Average shareholders' equity to average total assets 12.5 11.9 11.3 10.4 9.6 Cash dividends paid per share to diluted net income per share 38.2 36.0 32.8 28.8 24.6 Allowance for possible loan losses to total loans 2.05 2.06 2.09 2.01 2.00 Tangible equity to assets 12.5 12.0 11.2 10.1 9.7 Adjusted for the 5% stock dividend paid December 30, 1997.
[LOAN COMPOSITION DECEMBER 31, 1997 PIE CHART] [BOOK VALUE PER SHARE GRAPH] [CASH DIVIDENDS PER SHARE (IN DOLLARS) GRAPH] 1 MESSAGE TO SHAREHOLDERS To Our Shareholders: For the twenty-third consecutive year, Chemical Financial Corporation's operating income increased during 1997. Net income for the year was $23.9 million or 8.6 percent more than 1996 net income of $22 million. Basic earnings per share in 1997 were $2.22, while fully diluted earnings per share were $2.20. In 1996, they were $2.05 and $2.03, respectively. On December 31, 1997, total assets were $1.765 billion, 3.9 percent more than they were one year earlier. Total deposits increased 3.2 percent during the same 12 months to $1.476 billion and total loans went up 4.7 percent to $845.6 million. Shareholders' equity grew by 8.0 percent to $223.9 million. Shareholders received cash dividends in 1997 of $.84 per share, 15.5 percent more than the cash dividends of $.73 per share paid in 1996. In addition, a 5 percent stock dividend was distributed to shareholders on December 30, 1997, and the board of directors announced that the quarterly dividend rate for 1998 will be $.24 per share. The combined effect of the stock dividend and the higher quarterly dividend in 1998 will be a 14.55 percent increase in cash dividends. During 1997, $1 million was provided for the Allowance for Possible Loan Losses. Net loan charge-offs in the same period were $.25 million. Consequently, the allowance at year-end was $17.4 million, or 2.05 percent of all loans and 570 percent of nonperforming loans. On December 31, 1997, the closing bid price of the Company's common stock on The NASDAQ Stock Market was $44.75 per share. This price was 215 percent of book value and more than 20 times earnings per share. These multiples compare favorably with those of our peer companies in the Great Lakes region. The Corporation's improved profitability in 1997 was attributed to an increase in net interest income, greater trust department revenue, earnings from the sale of insurance products and mutual funds, and fees from the use of ChemKey ATMs by noncustomers. At the same time, overhead expenses went up by only 1.3 percent during the year. We expect the fees generated by our network of 84 ChemKey ATMs to increase substantially in 1998. And, we believe that our ATMs will be an excellent source of fee income in future years. Elsewhere in this Annual Report, we have described many important developments of the past year. One deserves special notice here the acquisition of a new IBM Systems 390 mainframe computer by CFC Data Corp. Paired with the Kirchman Corporation Dimension Software System, this new computer will give us the technological capability to remain competitive in product and service innovation throughout the foreseeable future. The Dimension system was developed with the Year 2000 in mind and is already being used by more than 700 banks worldwide. [NET OPERATING INCOME PER SHARE GRAPH] [NET INCOME PER SHARE GRAPH] [NET INCOME GRAPH] [TOTAL ASSETS GRAPH] 2 During the past year, two large Michigan banking companies agreed to be acquired by larger, out-of-state organizations. We do not expect either of these transactions to have a significant effect on our affiliates. In the event that some of the banking offices now operated by these companies would be offered for sale, we expect to be active bidders for them. [PICTURE OF ALOYSIUS J. OLIVER & ALAN W. OTT] We continue to seek acquisitions. Unfortunately, our negotiations with Shelby Financial Corporation did not produce a transaction, however, we continue to seek opportunities to acquire community banks within our market area. We also are in contact with the larger banking companies that operate branches in our market area to pursue acquisitions of banking offices that they might offer for sale. Our strong capital base provides us with the opportunity to expand our branch network without the need to raise additional capital. In keeping with industry trends, fee-based income has become a more significant component of our business, and we have expanded our traditional banking products to provide the additional financial services demanded by consumers of today. Our Trust Department is a leading provider of personal trust services, and we have made a substantial investment to enhance the recordkeeping services provided by its Retirement Planning Center. For our 401(k) customers, this will mean more fund choices, timely, efficient, technology-driven record-keeping and one-stop customer service. We have also entered the insurance business. CFC Title Services, Inc. provides title insurance to customers throughout Michigan, and the Chemical Financial Insurance Agency now offers traditional insurance products and services to customers from its headquarters in Midland. Both subsidiaries have been well-received, and their opportunities for growth are promising. Many consumers today have made mutual funds their investment vehicle of choice. Through our partnership with Security First Group, we have been very successful in offering mutual funds and other investment products to our customers. We also want to take note at the 1997 Annual Meeting of the retirement of three affiliate bank directors who retired upon reaching the mandatory retirement age according to the company's Board of Directorship policy. Dr. Alan E. Grunewald served as a director of Chemical Bank Montcalm for fourteen years and as a director of Chemical Bank South for seven years. Samuel ("Pat") Marra was a director of Chemical Bank West when we acquired it in 1980. He moved to a seat on the board of Chemical Bank North when the Houghton Lake office was transferred to that affiliate. James A. Kendall was a director of Chemical Bank Michigan from 1971 to 1991. Then he became a director of Chemical Bank and Trust Company and served on that board until his retirement. We thank these gentlemen for their many contributions and dedicated service. We would like to thank our corporate and bank directors, our officers, our staff, and you, our shareholders, for the support that has contributed a great deal to the progress our Corporation has made during the past year. We are pleased with our performance under a new executive management team and look to the future with confidence that we are on a course that will lead to success in the years ahead. Sincerely, /s/ Alan W. Ott /s/ Aloysius J. Oliver Alan W. Ott Aloysius J. Oliver Chairman of the Board President and Chief Executive Officer 3 MANAGEMENT TRANSITION During 1997, Chemical Financial Corporation underwent the most significant management transition in its history. At the end of 1996, Alan Ott, who had been the chief executive officer of the Company since its organization, retired as a full-time employee. In retirement, Mr. Ott remained chairman of the boards of the Company and Chemical Bank and Trust Company (the Company's lead subsidiary bank) and a member of the board of Chemical Bank Thumb Area (a wholly owned subsidiary). He left the boards of all of the Company's other affiliates. He had been a member of those boards since they became part of the Company and had been the principal corporate representative on each of them. When Mr. Ott retired, Aloysius Oliver, who had been executive vice president since 1985, became the Company's president and chief executive officer. David Ramaker, who was named president and a director of Chemical Bank and Trust Company in September 1996, became chief executive officer of that bank and executive vice president and chief lending officer of the Company. Lori Gwizdala continued in her position as senior vice president and chief financial officer of the Company. To help ensure a seamless transfer of responsibilities, a new Executive Management Committee was formed to review policy initiatives and provide corporate oversight of the Company's affiliates. In addition to Mr. Oliver, Mr. Ramaker and Ms. Gwizdala, the members of this committee include the following senior officers of Chemical Bank and Trust Company: Lawrence Burks, vice chairman; William Lauderbach, senior vice president and senior investment officer; and Bruce Groom, senior vice president and head of the Trust Department. Mr. Ott is the chairman of this committee and provides its members with the benefit of his long experience as the Company's chief executive. In addition to serving on the Executive Management Committee, its various members replaced Mr. Ott as the senior corporate representative on the boards of each of the Company's affiliates. The Executive Management Committee structure has proven to be an effective means of assuring coordination among the Company's affiliates and providing executive management with a timely flow of information about developments and activities across the Company's entire mid-Michigan market area. [PICTURE OF EXECUTIVE COMMITTEE (forefront): Aloysius J. Oliver (left to right): William C. Lauderbach, Bruce M. Groom, David B. Ramaker, Lawrence E. Burks and Lori A. Gwizdala] While the new committee is now at the center of the Company's management process, several other committees that have existed for some time continue to play vital roles in facilitating communication and coordination between the Company and the affiliate banks. - The presidents of the Company's affiliates and the senior officers of Chemical Bank and Trust Company continue to meet quarterly with the corporate officers. These meetings are an important forum for the affiliate presidents to provide feedback on the effect of corporate policies in the marketplace, to make the executive officers aware of potential developments that might require a corporate response at some future time and to exchange ideas among themselves. 4 - The Asset and Liability Committee (ALCO) meets weekly to review and establish rates on loans and deposits at the Company's affiliates and to ensure that overall interest rate risk is kept within the parameters established by the board of directors. In addition to Mr. Oliver, Mr. Ramaker, Ms. Gwizdala and Mr. Lauderbach, the other members of the committee are Thomas Alexander and Roger Mikusek. Mr. Alexander is executive vice president and cashier of Chemical Bank and Trust Company and Mr. Mikusek is senior vice president in the mortgage department of that affiliate. - The principal members of the Operations Committee meet weekly to formulate and coordinate operational procedures and policies within the Company. Mr. Oliver; Mr. Alexander; Thomas Peterson, general manager of the data processing subsidiary; and Brian Beall, systems manager of the data processing subsidiary, are the members of this committee. They meet monthly with the cashiers of all the affiliate banks to provide information about new procedures and policies, to obtain feedback about the effect of new procedures and policies on affiliate bank operations and to discuss recommendations for new products and systems which might be desired by the affiliate banks and their customers. - The Financial Services Committee meets monthly to oversee the operations of CFC Title Services, Inc., the Chemical Financial Insurance Agency and the Company's CFC Investment Centers. - Other committees provide a forum for the corporate staff and the affiliate banks to coordinate activities in important areas such as Auditing, Compliance, Community Reinvestment, Human Resources and Marketing. These committees meet on a regular schedule to facilitate effective communication between the staff and the affiliates and to provide a forum for the exchange of ideas among the affiliates. [PICTURE OF OFFICERS IN MEETING] THE PRESIDENTS OF THE COMPANY'S AFFILIATES AND THE SENIOR OFFICERS OF CHEMICAL BANK AND TRUST COMPANY MEET QUARTERLY WITH THE CORPORATE OFFICERS. Chemical Financial Corporation's committees have proven to be an effective and cost-efficient alternative to an extensive middle management structure. Organization of the Executive Management Committee, together with the network of "insider directors," was a logical outgrowth of that positive experience. The Company's results during 1997 suggest that our committees will allow the new management team to sustain the progress that has consistently marked the Company's entire history. 5 SUPER COMMUNITY BANKING Chemical Financial Corporation's affiliates provide financial services to 55 cities and towns in 24 counties spread all across mid-Michigan. The communities we serve range from small villages to larger cities like Midland and Bay City. History has shown that there are five things that differentiate a functioning community from a mere spot on a map. They are a post office, grocery store, school, church and bank. As a super community banking company, we are proud of the vital role we play in the social and economic life of communities, large and small, all over our market area. We believe that they are all better places to live and work because a Chemical Bank is there. The need for modern super community banks like Chemical Financial Corporation grew out of the changes in the banking industry caused by developments in technology and modern communications. Not too many years ago, banking was a simple business. However, the advent of modern computers and data transmission techniques, together with major changes in the laws and regulations governing bank operations, soon made the successful operation of smaller banks very challenging, causing many of them to be sold or merged with larger institutions. [PICTURE OF MAN WORKING ON A LAPTOP COMPUTER] Commercial Cash Management Accounts. A convenient way to invest excess cash balances. With continuing technological developments, the economies of scale that consolidation made possible became evident even to independent banks of considerable size. As a consequence, the pace of mergers and acquisitions in the banking industry quickened and merger partners became larger and larger. Affiliation with a holding company became quite attractive to many community banks because it allowed them to preserve the characteristics that had contributed most to their success, while sharing the cost of ever more 6 sophisticated technology and staff services with other institutions like themselves. These trends led to the development of super community banks. Chemical Financial Corporation believes that the concepts and management philosophies which originally brought about the existence of super community banks remain valid today. [PICTURE OF WOMAN ON A PHONE] On-line banking services for individuals and families via the ChemConnect home banking system. As a general rule, super community banks have total assets of more than $1 billion and less than $5 billion. Because of their lower overhead, they are able to do business profitably in smaller cities and towns that do not offer the potential volume to make them attractive to the largest multi-state bank holding companies. They are able to link hundreds of Main Streets to virtually all of the financial services that the largest institutions provide in major metropolitan areas. Most important, they are one of the key enterprises that help make these communities viable. At Chemical Financial Corporation, we believe that we have evolved into an organization that combines the best of the old with the best of the new. We serve our customers through ten affiliate banks instead of a single large institution with many branches. Each of those affiliates has an experienced banker as its president and chief executive officer and a board of directors made up of local civic and business leaders. They have the authority and responsibility to make local decisions that best satisfy local needs. They know their customers and their customers know them, allowing our banks to give a level of service that we believe consistently exceeds their customers' reasonable expectations. [PICTURE OF WOMAN USING A CHEMICAL ATM CARD AT A GAS PUMP] ChemCheck debit cards. A replacement for cash or checks wherever MasterCard is accepted. 7 [PICTURE OF WOMAN IN A CAR AT A DRIVE-THROUGH ATM MACHINE] Our ChemKey ATM Network processes 3.5 million transactions annually. At the same time that we provide "hometown" service in our lobbies, many of the internal functions of our ten banks are combined at our corporate offices and at CFC Data Corp, the Company's data processing subsidiary. As a consequence, our banks enjoy economies of scale that can be achieved only in larger banking companies. At Chemical Financial Corporation, the technological "heart" of our operations is CFC Data Corp's new, state-of-the-art IBM Systems 390 mainframe computer and Kirchman Corporation's Dimension bank automation software. We expect that implementation of this new system will maximize our ability to serve our customers and make the information we need to manage our business readily available. This system was designed to be Year 2000 Compliant. This should keep our critical operations from being disrupted when the new millennium arrives. Most important, it will allow us to maintain our leadership in product and service innovation in every city and town where we do business. We are proud of our record as a provider of a complete array of financial services in all of the cities and towns, large and small, where our Chemical Bank affiliates do business. We believe that we offer the individuals, families and business organizations in each of them virtually everything they could want of their bank. [PICTURE OF TWO WOMEN SPEAKING IN THE BACKGROUND, ON TOP ARE THE WORDS "THE WALL STREET JOURNAL"] Professional trust and investment services available in every community where there is a Chemical Bank Office. 8 Some of these services are quite traditional. Others are technology- based and very sophisticated. Offering low cost checking accounts and home mortgages has always been a key element of our marketing strategy. Our Commercial Cash Management Account provides a business with a service that compares favorably with those offered by the largest banks to their largest corporate accounts. This service allows our customers to link their checking accounts with a repurchase agreement investment account. This Commercial Cash Management Account allows our business customers to be investors one day, out of the market the next and investors again on the third day. They can maximize the income produced by their cash balances without ever leaving their stores and offices simply by linking their personal computers to our mainframe. [PICTURE OF TWO WOMEN NEXT TO CAR NEEDING TO BE REPAIRED AFTER AN ACCIDENT] Fast, fair claims services provided by the Chemical Financial Insurance Agency. Individuals and families also have access to their Chemical Bank accounts using our ChemConnect Electronic Banking Service. With a touch- tone telephone or personal computer, they can inquire about account balances, transfer money between accounts, make loan payments and obtain interim statements. We have added a new dimension to our personal checking and savings accounts by introducing "ChemCheck" MasterMoney debit cards. The new "ChemCheck" card complements our ChemKey ATM card. It can be used wherever MasterCard credit cards are accepted to pay merchants for goods and services by electronic transfer of funds from a customer's checking account. Obviously, a "checkless, cashless society" is not here yet, but it is definitely getting closer every day, even in the smaller communities served by a Chemical Financial Corporation affiliate bank. We have brought ChemKey Automatic Teller Machines to many communities that might not otherwise have this type of electronic banking available. Through our network of 84 machines, we process approximately 3.5 million ATM transactions each year. The volume of business that our customers do at our machines is ample evidence of their popularity. Because customers of 9 other institutions also use them, they are an excellent source of revenue from the fees that we receive from the various ATM networks and the fees we collect on noncustomer cash withdrawals. [PICTURE OF MAN SITTING ON A TRACTOR WHEEL] Farmers can look to a Chemical Bank for land, equipment and production loans. We make trust services available in every community where one of our affiliates has a branch office. Our trust officers travel thousands of miles each year to call on clients in their homes and offices, wherever they might be located. With trust assets of more than $1.3 billion, we have professionals on our staff who are well qualified to provide every trust service from the administration of an estate to the management of a corporation's pension plan. A trust department must have a critical mass of business in order to afford the staff of experts that can be found in our Trust Department. Because we have that volume of business, we can offer all of our customers, from Marshall to Grayling and from Caro to Cadillac, a range of professional trust services that only a super community banking company like Chemical Financial Corporation could provide. [PICTURE OF FAMILY IN A BOAT] Consumer loans at competitive rates and terms to meet all your borrowing needs, even for the "fun" things in life. While we are able to bring all the advantages of modern, technology-based banking to every community where we do business, we still provide all of the traditional banking services as well. Moreover, we offer the same variety of loans and deposit accounts at our smallest offices that we do at our largest. Our agricultural specialists help farmers finance land, equipment and production. Our consumer credit specialists lend money for a variety of purposes. Our business lenders provide working capital loans and help their customers acquire 10 buildings and equipment. We charge competitive rates on all of our loans and pay the same market rates on deposits everywhere we do business. Because of our size and technological capabilities, as well as the expertise of our senior officers, we can offer a range of loan types and deposit products that is often beyond the ability of smaller institutions. In recent years, we have entered new lines of business as they have been opened to commercial banks. We now provide title insurance everywhere we do business through CFC Title Services, Inc. The investment advisors at CFC Investment Centers, our alliance with Security First Group and Corelink Financial Services, offer our customers mutual funds, market securities and annuities. The Chemical Financial Insurance Agency is gradually expanding its insurance agency activities and will, over time, provide all of our customers with life, property and casualty insurance underwritten by the very best companies. [PICTURE OF LITTLE BOY HOLDING A PIGGY BANK WITH COINS ON A TABLE] Chemical Bank for all your financial needs -- from a first savings account to retirement plans and trust services. For many years, the advertising slogan of Chemical Financial Corporation affiliates has been "THE BANK FOR EVERYBODY." Because of our capabilities as a super community bank we do not have to put economic or geographic qualifiers on that statement. We are, in fact, the bank for everybody within our market areas. The people and businesses we serve can look to us for the financial products and services to meet all of their needs. They can look to us for traditional banking services such as checking and savings accounts, residential mortgages, installment loans and loans for business at fair and reasonable prices. They can look to us for loans and investments. They can look to us for everything from a child's first savings account to any financial service he or she will ever need. That is why we can say that the customers of every Chemical Bank, no matter who they are, what they do or where they live, need never be out of the financial mainstream. 11 QUARTERLY FINANCIAL INFORMATION STOCK PRICE RANGES AND CASH DIVIDENDS PER SHARE
1997 1996 CASH CASH HIGH LOW DIVIDEND HIGH LOW DIVIDEND - -------------------------------------------------------------------------------------- First quarter $35.95 $29.52 $.200 $36.05 $33.79 $.181 Second quarter 34.29 30.00 .200 36.05 32.65 .181 Third quarter 40.60 32.38 .219 32.65 29.93 .182 Fourth quarter 45.00 37.14 .219 37.62 30.84 .182 - -------------------------------------------------------------------------------------- $.838 $.726 ====================================================================================== Adjusted for the 5% stock dividend paid December 30, 1997
Chemical Financial Corporation common stock is traded on The NASDAQ Stock Market under the symbol CHFC. The above table sets forth the range of bid prices for Chemical Financial Corporation common stock for the periods indicated. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission, and may not necessarily represent actual transactions. As of December 31, 1997, there were 10,753,011 shares of Chemical Financial Corporation common stock issued and outstanding held by approximately 3,800 shareholders of record. The earnings of the Corporation's subsidiary banks are the principal source of funds to pay cash dividends. Consequently, cash dividends are dependent upon the earnings, capital needs, regulatory constraints, and other factors affecting each individual bank. See Note H to the Consolidated Financial Statements for a discussion of such limitations. Management expects the Corporation to declare and pay comparable regular quarterly cash dividends on its common shares in 1998. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands, except per share data)
1997 1996 FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------- Interest income $28,193 $29,096 $30,131 $29,899 $27,915 $28,241 $28,431 $28,665 Interest expense 11,457 11,850 12,583 12,389 11,827 11,524 11,382 11,429 Net interest income 16,736 17,246 17,548 17,510 16,088 16,717 17,049 17,236 Provision for possible loan losses 329 219 219 235 268 270 273 317 Investment securities gains -- -- 1 -- -- 14 1 -- Income before income taxes 8,235 8,329 8,785 10,093 7,433 7,835 8,101 9,667 Net income 5,526 5,624 5,906 6,833 4,993 5,163 5,412 6,435 Net income per share Basic .51 .53 .55 .63 .47 .48 .50 .60 Diluted .51 .52 .54 .63 .46 .47 .50 .60
The 1997 and 1996 net income per share amounts have been restated to reflect the 5% stock dividend paid December 30, 1997 and to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." 12 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------ (In thousands, except per share data) INTEREST INCOME Interest and fees on loans $ 69,873 $ 67,470 $ 64,305 Interest on investment securities: Taxable 40,554 38,882 37,675 Tax-exempt 2,160 2,189 2,394 - ------------------------------------------------------------------------------------------------ TOTAL INTEREST ON SECURITIES 42,714 41,071 40,069 Interest on federal funds sold 4,699 4,575 4,800 Interest on deposits with unaffiliated banks 33 136 204 - ------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 117,319 113,252 109,378 INTEREST EXPENSE Interest on deposits 46,320 44,284 43,306 Interest on short-term borrowings 1,363 1,163 1,552 Interest on long-term debt 596 715 833 - ------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 48,279 46,162 45,691 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME 69,040 67,090 63,687 Provision for possible loan losses 1,002 1,128 1,065 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME after provision for possible loan losses 68,038 65,962 62,622 OTHER INCOME Trust department income 3,210 2,897 2,681 Service charges on deposit accounts 5,314 5,382 5,193 Other charges and fees for customer services 3,522 2,707 2,635 Gains on sales of loans 239 137 526 Investment securities gains 1 15 Other 836 1,060 1,324 - ------------------------------------------------------------------------------------------------ TOTAL OTHER INCOME 13,122 12,198 12,359 OPERATING EXPENSES Salaries, wages and employee benefits 27,280 26,964 25,703 Occupancy expense 4,362 4,261 4,028 Equipment 3,091 2,884 2,732 Other 10,985 11,015 12,166 - ------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 45,718 45,124 44,629 - ------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 35,442 33,036 30,352 Federal income taxes 11,553 11,033 9,863 - ------------------------------------------------------------------------------------------------ NET INCOME $ 23,889 $ 22,003 $ 20,489 ================================================================================================ NET INCOME PER SHARE Basic $2.22 $2.05 $1.92 Diluted 2.20 2.03 1.89 CASH DIVIDENDS PER SHARE .84 .73 .62
See notes to consolidated financial statements. 13 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31 1997 1996 - --------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS Cash and demand deposits due from banks $ 95,794 $ 89,517 Federal funds sold 49,750 114,200 Interest bearing deposits with unaffiliated banks -- 1,134 Investment securities: Held to maturity (estimated market value - $253,459 in 1997 and $215,494 in 1996) 251,020 213,752 Available for sale (at estimated market value) 494,173 441,787 - --------------------------------------------------------------------------------------------------- Total investment securities 745,193 655,539 Loans 845,600 807,653 Less: Allowance for possible loan losses 17,359 16,607 - --------------------------------------------------------------------------------------------------- Net loans 828,241 791,046 Premises and equipment 20,416 20,335 Accrued income 14,573 14,419 Other assets 11,133 12,584 - --------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,765,100 $1,698,774 =================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 237,763 $ 226,965 Interest-bearing 1,238,078 1,202,950 - --------------------------------------------------------------------------------------------------- Total deposits 1,475,841 1,429,915 Short-term borrowings: Treasury tax and loan notes payable to the U.S. Treasury 11,206 9,458 Securities sold under agreements to repurchase 30,990 27,875 - --------------------------------------------------------------------------------------------------- Total short-term borrowings 42,196 37,333 Interest payable and other liabilities 14,138 14,257 Long-term debt 9,000 10,000 - --------------------------------------------------------------------------------------------------- Total liabilities 1,541,175 1,491,505 Shareholders' equity: Common stock, $10 par value: Authorized - 15,000,000 shares Issued and outstanding - 10,753,011 shares in 1997 and 10,209,790 shares in 1996 107,530 102,098 Surplus 87,086 69,616 Retained earnings 27,904 35,737 Unrealized net gain (loss) on investment securities available for sale 1,405 (182) - --------------------------------------------------------------------------------------------------- Total shareholders' equity 223,925 207,269 - --------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,765,100 $1,698,774 ===================================================================================================
See notes to consolidated financial statements. 14 CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income $ 23,889 $ 22,003 $ 20,489 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 1,002 1,128 1,065 Origination of loans held for sale (38,821) (12,421) (16,516) Proceeds from sales of loans 39,060 12,558 17,042 Gains on sales of loans (239) (137) (526) Provision for depreciation and amortization 2,741 2,793 2,801 Investment securities gains (1) (15) -- Gain on sale of branch office building (256) -- -- Net amortization of investment securities 1,789 2,546 2,450 Net (increase) decrease in accrued income and other assets 491 2,259 (863) Net increase (decrease) in interest payable and other liabilities (113) 158 1,544 - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,542 30,872 27,486 INVESTING ACTIVITIES Cash and cash equivalents assumed in acquisition of branch office -- -- 14,661 Net (increase) decrease in interest bearing deposits with unaffiliated banks 1,134 1,847 (14) Proceeds from maturities of investment securities held to maturity 122,742 200,557 27,694 Purchases of investment securities held to maturity (160,468) (45,625) (102,448) Proceeds from maturities of investment securities available for sale 119,934 109,233 201,593 Proceeds from sales of investment securities available for sale -- 522 -- Purchases of investment securities available for sale (171,209) (191,055) (148,454) Net increase in loans (38,810) (48,143) (689) Proceeds from sale of branch office building 900 Purchases of premises and equipment (2,902) (2,349) (1,084) - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (128,679) 24,987 (8,741) FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts 59,944 (24,845) (13,689) Net increase (decrease) in certificates of deposit and other time deposits (14,018) 4,959 25,915 Net increase (decrease) in short-term borrowings 4,863 2,110 (5,799) Principal payments on long-term debt (1,000) (2,080) (19) Cash dividends paid (9,003) (7,771) (6,636) Proceeds from stock purchase plan 259 264 236 Proceeds from exercise of stock options 386 339 453 Repurchases of common stock (467) (1,035) -- - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 40,964 (28,059) 461 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58,173) 27,800 19,206 Cash and cash equivalents at beginning of year 203,717 175,917 156,711 - ------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 145,544 $ 203,717 $ 175,917 ============================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid on deposits, short-term borrowings and long-term debt $ 48,390 $ 46,685 $ 44,757 Federal income taxes paid 11,545 11,106 9,576
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995 UNREALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES COMMON RETAINED AVAILABLE STOCK SURPLUS EARNINGS FOR SALE TOTAL - --------------------------------------------------------------------------------------------------------------------- (Dollars In thousands) BALANCES AT JANUARY 1, 1995 $ 65,920 $56,770 $ 56,279 $(8,289) $170,680 Stock split - 3 for 2 30,467 -- (30,467) -- -- Net income for 1995 -- -- 20,489 -- 20,489 Cash dividends paid -- -- (6,636) -- (6,636) Shares issued upon exercise of employee stock options (including related tax benefit) 465 (6) -- -- 459 Shares issued from stock purchase plan 92 154 -- -- 246 Net unrealized gain on investment securities available for sale -- -- -- 9,664 9,664 - --------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995 96,944 56,918 39,665 1,375 194,902 Stock dividend - 5% 4,859 13,301 (18,160) -- -- Net income for 1996 -- -- 22,003 -- 22,003 Cash dividends paid -- -- (7,771) -- (7,771) Shares issued upon exercise of employee stock options (including related tax benefit) 436 (92) -- -- 344 Shares issued from stock purchase plan 74 165 -- -- 239 Shares issued for acquisition of insurance agency 88 56 -- -- 144 Repurchase of 33,075 shares (303) (732) -- -- (1,035) Net unrealized loss on investment securities available for sale -- -- -- (1,557) (1,557) - --------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1996 102,098 69,616 35,737 (182) 207,269 Stock dividend - 5% 5,120 17,599 (22,719) -- -- Net income for 1997 -- -- 23,889 -- 23,889 Cash dividends paid -- -- (9,003) -- (9,003) Shares issued upon exercise of employee stock options (including related tax benefit) 374 12 -- -- 386 Shares issued from stock purchase plan 73 191 -- -- 264 Repurchase of 14,175 shares (135) (332) -- -- (467) Net unrealized gain on investment securities available for sale -- -- -- 1,587 1,587 - --------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1997 $107,530 $87,086 $ 27,904 $ 1,405 $223,925 =====================================================================================================================
See notes to consolidated financial statements. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Chemical Financial Corporation and its subsidiaries conform to generally accepted accounting principles and prevailing practices within the banking industry. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from these estimates. Significant accounting policies of Chemical Financial Corporation (the Corporation) and its subsidiaries are described below: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the Corporation include the accounts of the parent company and its subsidiaries, all of which are wholly-owned. All significant income and expenses are recorded on the accrual basis. Intercompany accounts and transactions have been eliminated in preparing the consolidated statements. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from unaffiliated banks and federal funds sold. Generally, federal funds are sold for one-day periods. INVESTMENT SECURITIES HELD TO MATURITY: Designation as an investment security held to maturity is generally made at the time of acquisition and is based on the Corporation's intent and ability to hold the security to maturity. Securities held to maturity are stated at cost adjusted for the amortization of premium and accretion of discount to maturity. INVESTMENT SECURITIES AVAILABLE FOR SALE: Investment securities available for sale include those securities which might be sold as part of the Corporation's management of interest rate and prepayment risk, in response to changes in interest rates, or a desire to increase liquidity. Investment securities available for sale are stated at estimated market value, with the aggregate unrealized gains and losses, net of income taxes, classified as a component of shareholders' equity. Realized gains and losses from the sale of investment securities available for sale are determined using the specific identification method and are classified as other income in the consolidated statements of income. Premiums and discounts on securities available-for-sale, as well as securities held-to-maturity, are amortized over the estimated lives of the related securities. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES: Loans are stated at their principal amount outstanding. Loan performance is reviewed regularly by loan review personnel, loan officers and senior management. Loan interest income is recognized on the accrual basis. A loan is placed in the nonaccrual category when principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection, or when in the opinion of management, there is sufficient reason to doubt the collectability of future principal or interest. Interest previously accrued, but not collected, is reversed and charged against interest income at the time the loan is placed in nonaccrual status. The subsequent recognition of interest income on a nonaccrual loan is on the cash basis. Payments received on nonaccrual loans are recorded as principal reductions if principal repayment is doubtful. Loans are returned to accrual status when principal and interest payments are brought current and collectability is no longer in doubt. Interest income on restructured loans is recognized according to the terms of the restructure, subject to the above described nonaccrual policy. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as amended by SFAS No. 118, was adopted January 1, 1995. Under SFAS No. 114 and 118, a loan is considered to be impaired when it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral, if the loan is collateral dependent. A portion of the allowance for possible loan losses may be allocated to impaired loans. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and other consumer installment loans. Commercial loans and commercial mortgage loans are evaluated individually for impairment. The allowance for possible loan losses is maintained at a level that, in management's judgment, is considered to be adequate to provide for potential loan losses. Management's evaluation is based on a continuing review of the loan portfolio, including consideration of actual loan loss experience, prospective financial condition of the borrowers, balance of the loan portfolio, loan growth forecasts, and current and prospective economic conditions. continued on page 18 17 NOTE A - CONTINUED MORTGAGE BANKING OPERATIONS: The origination of mortgage loans is an integral component of the business of the Corporation. The Corporation sells the longer term fixed interest rate residential mortgage loans that it originates, in the secondary market. These longer term fixed interest rate residential mortgage loans are generally held for sale thirty days or less, and book value approximates market value. The Corporation has retained the servicing rights on all loans that it sold in the secondary market. Servicing income is recognized in other income when received and expenses are recognized when incurred. Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125), was adopted prospectively January 1, 1997. SFAS 125 requires that an asset be recognized for the rights to service mortgage loans, including those rights that are created by the origination of mortgage loans which are sold with the servicing rights retained by the originator. The recognition of the asset results in an increase in the gains recognized upon the sale of the underlying loans. The asset is amortized in proportion to, and over the life of, the estimated net future servicing income. SFAS 125 additionally requires periodic evaluation of the fair market value of the asset. Any impairment is recognized as a valuation allowance. The overall impact of adopting this standard was not material to the Corporation's consolidated financial statements. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated over the useful lives of the assets. Depreciation is computed on the straight-line method. The estimated useful lives are generally 25 to 35 years for buildings and 3 to 7 years for equipment. A summary of premises and equipment at December 31 follows:
1997 1996 - ---------------------------------------------------------------- (In thousands) Bank premises $28,649 $28,956 Equipment 11,257 10,497 - ---------------------------------------------------------------- 39,906 39,453 Less: Accumulated depreciation 19,490 19,118 - ---------------------------------------------------------------- Total $20,416 $20,335 ================================================================
Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was adopted in 1995. The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used. The adoption of this standard had no significant effect on the financial position or results of operations of the Corporation. INTANGIBLE ASSETS: Goodwill, representing the cost of investments in subsidiaries in excess of the fair value of identifiable net assets at acquisition, is being amortized over twenty years. Other acquired intangible assets, such as those associated with acquired core deposits, are being amortized over periods between five and twenty years. STOCK OPTIONS: On January 1, 1996, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), became effective. SFAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 established a fair value-based method of accounting for employee stock options, but it allows companies to continue to account for stock options granted to employees under the intrinsic value-based method of accounting, prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no compensation cost is recognized as a result of options awarded to employees under stock option plans. The Corporation adopted the disclosure-only option under SFAS 123 as of December 31, 1996, and elected to continue to measure compensation cost using APB 25, and accordingly, has provided the supplemental disclosures for 1995, 1996 and 1997 that are required by SFAS 123. If the recognition provisions of the new statement had been adopted as of the beginning of 1996, the effect on 1996 and 1997 net income would have been immaterial. INCOME TAXES: The Corporation files a consolidated federal income tax return and is responsible for the payment of any tax liability of the consolidated organization. Income tax expense is based on income and expenses, as reported in the financial statements. When income and expenses are recognized in different periods for tax purposes, applicable deferred taxes are provided for in the financial statements. EARNINGS PER SHARE: In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), became effective. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented, and where appropriate restated, to conform to the SFAS 128 requirements. 18 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. The following table summarizes the number of shares used in the denominator of the basic and diluted earnings per share computations:
1997 1996 1995 - ------------------------------------------------------------------ Denominator for basic earnings per share 10,741,266 10,710,259 10,656,578 Denominator for diluted earnings per share 10,868,784 10,865,802 10,819,798
NOTE B - ACQUISITIONS During the three years ended December 31, 1997, the Corporation made the following acquisitions: 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 May 1, 1996, the Corporation merged with State Savings Bancorp, Inc. (SSBI) in Caro, Michigan. SSBI operated one bank, State Savings Bank of Caro, with offices in Caro and Fairgrove. The Corporation issued 551,250 shares of the Corporation's common stock in exchange for all of the common stock of SSBI. The merger was accounted for as a "pooling of interests." As of May 1, 1996, SSBI had assets of approximately $65 million. On September 22, 1995, the Corporation acquired a branch banking office in Belding, Michigan from First of America Bank-Michigan, N.A. Total deposits of approximately $16 million were assumed and merged into an existing affiliate, Chemical Bank Montcalm. The transaction was accounted for by the purchase method of accounting. The amount of the purchase price assigned to core deposit intangibles was $1.1 million. NOTE C - INVESTMENT SECURITIES The following is a summary of the amortized cost and estimated market value of investment securities available for sale and investment securities held to maturity at December 31, 1997 and 1996:
AVAILABLE FOR SALE INVESTMENT SECURITIES GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE (In thousands) DECEMBER 31, 1997 - --------------------------------------------------------------------------------------- U.S. Treasury and agency securities $473,000 $2,090 $ 384 $474,706 Mortgage-backed securities 2,310 42 1 2,351 Other debt securities 15,133 18 78 15,073 - --------------------------------------------------------------------------------------- Total debt securities 490,443 2,150 463 492,130 Equity securities 1,574 469 -- 2,043 - --------------------------------------------------------------------------------------- TOTAL $492,017 $2,619 $ 463 $494,173 ======================================================================================= DECEMBER 31, 1996 - --------------------------------------------------------------------------------------- U.S. Treasury and agency securities $423,233 $1,057 $1,661 $422,629 Mortgage-backed securities 2,820 35 5 2,850 Other debt securities 14,993 36 137 14,892 - --------------------------------------------------------------------------------------- Total debt securities 441,046 1,128 1,803 440,371 Equity securities 1,021 395 -- 1,416 - --------------------------------------------------------------------------------------- TOTAL $442,067 $1,523 $1,803 $441,787 ======================================================================================
HELD TO MATURITY INVESTMENT SECURITIES GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE (In thousands) DECEMBER 31, 1997 - --------------------------------------------------------------------------------------- U.S. Treasury and agency securities $201,801 $1,695 $ 1 $203,495 States of the U.S. and political subdivisions 46,707 958 227 47,438 Mortgage-backed securities 501 9 3 507 Other debt securities 2,011 12 4 2,019 - --------------------------------------------------------------------------------------- TOTAL $251,020 $2,674 $235 $253,459 ======================================================================================= DECEMBER 31, 1996 - --------------------------------------------------------------------------------------- U.S. Treasury and agency securities $168,958 $ 772 $ 4 $169,726 States of the U.S. and political subdivisions 42,096 1,032 84 43,044 Mortgage-backed securities 679 13 5 687 Other debt securities 2,019 18 -- 2,037 - --------------------------------------------------------------------------------------- TOTAL $213,752 $1,835 $ 93 $215,494 =======================================================================================
continued on page 20 19 NOTE C - CONTINUED The amortized cost of U.S. Treasury and U.S. agencies, states of the U.S. and political subdivisions and all other securities at December 31, 1995 were $668,370,000, $46,065,000 and $15,926,000, respectively, whereas the estimated market values of these three categories of investments at December 31, 1995 were $675,069,000, $47,232,000 and $16,430,000, respectively. The amortized cost and estimated market value of debt and equity securities at December 31, 1997, by contractual maturity for both available for sale and held to maturity investment securities follows:
AVAILABLE FOR SALE ESTIMATED AMORTIZED MARKET COST VALUE - ----------------------------------------------------------------------- (In thousands) Due in one year or less $178,806 $178,850 Due after one year through five years 306,827 308,445 Due after five years through ten years 1,500 1,491 Due after ten years 1,000 993 Mortgage-backed securities 2,310 2,351 Equity securities 1,574 2,043 - ----------------------------------------------------------------------- TOTAL $492,017 $494,173 =======================================================================
HELD TO MATURITY ESTIMATED AMORTIZED MARKET COST VALUE - ----------------------------------------------------------------------- (In thousands) Due in one year or less $ 72,224 $ 72,318 Due after one year through five years 164,049 166,099 Due after five years through ten years 12,091 12,372 Due after ten years 2,155 2,163 Mortgage-backed securities 501 507 - ----------------------------------------------------------------------- TOTAL $251,020 $253,459 =======================================================================
Investment securities with a book value of $177.8 million at December 31, 1997 were pledged to collateralize public fund deposits and for other purposes as required by law; at December 31, 1996, the corresponding amount was $91.5 million. NOTE D - LOANS The following summarizes loans as of December 31:
1997 1996 - -------------------------------------------------------------- (In thousands) Commercial and agricultural $110,554 $114,154 Real estate construction 31,143 24,791 Real estate mortgage 536,938 510,193 Installment 166,965 158,515 - -------------------------------------------------------------- Total $845,600 $807,653 ==============================================================
The Corporation's subsidiary banks have extended loans to directors and officers and their associates of the Corporation and of the Corporation's significant subsidiaries. The loans were made in the ordinary course of business at normal terms, including interest rates and collateralization, prevailing at the time, and did not involve more than the normal risk of collectability. The aggregate loans outstanding to the directors and officers of the Corporation and its significant subsidiaries totaled $19,183,000 at December 31, 1997 and $16,831,000 at December 31, 1996. During 1997, there were $25,739,000 of new loans and other additions, while repayments and other reductions totaled $23,387,000. Changes in the Allowance for Possible Loan Losses were as follows for the years ended December 31:
1997 1996 1995 - ------------------------------------------------------------------------------- (In thousands) Balance at beginning of year $16,607 $15,886 $15,295 Provision charged to operations 1,002 1,128 1,065 Loan charge-offs (620) (691) (666) Loan recoveries 370 284 192 - ------------------------------------------------------------------------------- Net loan charge-offs (250) (407) (474) - ------------------------------------------------------------------------------- Balance at end of year $17,359 $16,607 $15,886 ===============================================================================
Nonaccrual and renegotiated loans aggregated $1.9 million and $1.3 million at December 31, 1997 and December 31, 1996, respectively. Interest income totaling $116,000 was recorded on the nonaccrual and renegotiated loans in 1997. Additional interest income of $189,000 would have been recorded during 1997 on these loans had they been current in accordance with their original terms. The Corporation had $328,000 of impaired loans as of December 31, 1997. An impairment allowance was not required on any of these loans. The impaired loan balances represented loans for which their fair value exceeded the recorded investment in the loan, based on fair value of the related collateral. The Corporation had no impaired loans as of December 31, 1996. 20 NOTE E - FEDERAL INCOME TAXES The provision for federal income taxes is less than that computed by applying the federal statutory income tax rate of 35% primarily due to tax-exempt interest on investments and loans as shown in the following analysis for the years ended December 31:
1997 1996 1995 - ------------------------------------------------------------------------- (In thousands) Tax at statutory rate $12,405 $11,563 $10,623 Changes resulting from: Tax-exempt income (887) (884) (920) Other 35 354 160 - ------------------------------------------------------------------------- Total federal income tax expense $11,553 $11,033 $ 9,863 =========================================================================
The provision for federal income taxes consisted of the following for the years ended December 31:
1997 1996 1995 - ------------------------------------------------------------------ (In thousands) Current $11,603 $11,291 $10,075 Deferred credit (50) (258) (212) - ------------------------------------------------------------------ Total $11,553 $11,033 $ 9,863 ==================================================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant temporary differences which comprise the deferred tax assets and liabilities of the Corporation were as follows as of December 31:
1997 1996 - ----------------------------------------------------------------------- (In thousands) Deferred tax assets: Allowance for possible loan losses $4,786 $4,441 Investment securities available for sale 98 Employee benefit plans 1,138 1,441 Expense accruals not yet tax deductible 1,184 1,052 Other 423 398 - ----------------------------------------------------------------------- Total deferred tax assets 7,531 7,430 Deferred tax liabilities: Investment securities available for sale 756 Tax over book depreciation 610 615 Other 856 602 - ----------------------------------------------------------------------- Total deferred tax liabilities 2,222 1,217 - ----------------------------------------------------------------------- Net deferred tax assets $5,309 $6,213 =======================================================================
Federal income tax expense applicable to gains on securities transactions was $5,000 in 1996 and is included in federal income taxes on the consolidated statement of income. NOTE F - PENSION AND POSTRETIREMENT BENEFITS The Corporation has a noncontributory defined benefit pension plan ("Plan") covering all of its salaried employees. Normal retirement benefits are based on years of service and the employee's average annual pay of the five highest consecutive years during the ten years preceding retirement. The Corporation's funding strategy has been to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets consist primarily of listed stocks, U.S. Government securities and common stock of the Corporation (123,234 shares at December 31, 1997). The following table sets forth the Plan's funded status and amounts recognized in the Corporation's statement of financial position at December 31:
1997 1996 - ---------------------------------------------------------------------- (In thousands) Accumulated benefit obligation: Vested $19,466 $16,553 nonvested 2,555 1,937 - ---------------------------------------------------------------------- Accumulated benefit obligation $22,021 $18,490 ====================================================================== Projected benefit obligation $30,022 $25,648 Plan assets at fair value 44,043 34,880 - ---------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 14,021 9,232 Unrecognized amortization of transition amount (628) (804) Unrecognized net gains (10,253) (5,989) - ---------------------------------------------------------------------- Prepaid pension expense $ 3,140 $ 2,439 ======================================================================
Net periodic pension cost consisted of the following for the years ended December 31:
1997 1996 1995 - ----------------------------------------------------------------------- (In thousands) Service cost - benefits earned during the period $1,339 $1,405 $1,136 Interest cost on projected benefit obligation 1,897 1,754 1,666 Actual return on plan assets (8,774) (3,963) (6,340) Deferral of net gains 6,037 1,485 3,799 - ----------------------------------------------------------------------- Pension expense $ 499 $ 681 $ 261 =======================================================================
Actuarial assumptions were as follows for the years ended December 31:
1997 1996 1995 - --------------------------------------------------------------------- Discount rate used in determining projected benefit obligation 7.0% 7.5% 7.0% Rate of increase in compensation levels 5.0% 6.0% 6.0% Long-term rate of return on assets 8.0% 8.0% 8.0%
continued on page 22 21 NOTE F - CONTINUED In addition to the Corporation's defined benefit pension plan, the Corporation provides postretirement medical and dental (to age 65) benefits to salaried employees. Eligibility for such benefits is age 55 with at least ten years of service with the Corporation or its subsidiaries. Retirees are required to make contributions toward the cost of their benefits based on their years of credited service and age at retirement. Retiree contributions are adjusted annually. The accounting for these postretirement benefits anticipates changes in future cost- sharing features such as retiree contributions, deductibles, copayments and coinsurance. The Corporation reserves the right to amend, modify or terminate these benefits at any time. The following table presents the Corporation's postretirement benefit obligation reconciled with amounts recognized in the statement of financial position at December 31:
1997 1996 - --------------------------------------------------------------------- (In thousands) Accumulated postretirement benefit obligation: Retirees $1,266 $1,080 Fully eligible active plan participants 763 619 Other active plan participants 2,245 1,523 - --------------------------------------------------------------------- 4,274 3,222 Unrecognized net gain (loss) (368) 359 - --------------------------------------------------------------------- Accrued postretirement benefit cost $3,906 $3,581 =====================================================================
The Corporation's postretirement benefit obligation is nonfunded. Net periodic postretirement benefit cost includes the following components for the years ended December 31:
1997 1996 1995 - ---------------------------------------------------------------- (In thousands) Service cost - benefits earned during the period $148 $139 $206 Interest cost on accumulated benefit obligation 267 216 199 Net amortization and deferral (4) (4) (18) - ---------------------------------------------------------------- Net periodic postretirement benefit cost $411 $351 $387 ================================================================
At December 31, 1997, the weighted average annual assumed rates of increase in the per capita cost of covered benefits (i.e., medical and dental care cost trend rates) for 1997 were 8.42% for medical benefits and 6.68% for dental benefits and are both assumed to decrease uniformly to 5% in 2003 and remain at that level thereafter. The medical and dental care cost trend rate assumptions have a significant effect on the amounts reported. For example, increasing both the assumed medical and dental care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by 18.70%, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by 19.35%. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% at December 31, 1997 and December 31, 1996, respectively. NOTE G - LONG-TERM DEBT Long-term debt consisted of the following obligation:
December 31 1997 1996 - ------------------------------------------------------------------ (In thousands) Chemical Financial Corporation: Term note payable to unaffiliated bank (6.625% at December 31, 1997) $9,000 $10,000 ==================================================================
Principal payments on the term note payable are due as follows: $5,000,000 in June 2002 and $4,000,000 in June 2003. The Corporation, at its option, reduced this debt by $1,000,000 during 1997. Interest on the term note payable is computed based upon one of three alternative interest rate methods, which is elected by the Corporation at the beginning of each interest period for 1, 3, 6 or 12 month intervals. The three alternative interest rate methods are based upon the prime rate of the unaffiliated bank, the Eurodollar rate or the domestic certificate of deposit rate of the unaffiliated bank. The loan agreement includes various restrictions and covenants pertaining to capital, earnings and additional indebtedness and is secured by the stock of two of the Corporation's subsidiary banks. 22 NOTE H - RESTRICTED ASSETS AND DIVIDEND LIMITATIONS OF SUBSIDIARY BANKS Banking regulations require that banks maintain cash reserve balances in vault cash, with the Federal Reserve Bank or with certain other qualifying banks. The aggregate average amount of such reserve balances maintained by the Corporation's subsidiary banks was $16.5 million for the year ended December 31, 1997. Federal and state banking regulations place certain restrictions on the transfer of assets in the form of dividends, loans or advances from the bank subsidiaries to the Corporation. At December 31, 1997, substantially all of the assets of the bank subsidiaries were restricted from transfer to the Corporation in the form of loans or advances. Dividends from its bank subsidiaries are the principal source of funds for the Corporation. Under the most restrictive of these regulations, the aggregate amount of dividends which can be paid by the Corporation's bank subsidiaries to the parent company, without obtaining prior approval from bank regulatory agencies, approximated $73 million at January 1, 1998. In addition to the statutory limits, the Corporation also considers the overall financial and capital position of each subsidiary prior to making any cash dividend decisions. NOTE I - CAPITAL The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Under these capital requirements, the subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. In addition, capital amounts and classifications are subject to qualitative judgments by the regulators. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Quantitative measures established by regulation to ensure capital adequacy require minimum ratios of total and Tier I capital to risk- weighted assets and of Tier I capital to average assets. These capital guidelines assign risk weights to on- and off-balance sheet items in arriving at total risk-weighted assets. Minimum capital levels are based upon perceived risk of various asset categories and certain off-balance sheet instruments. At December 31, 1997 and December 31, 1996, the Corporation's and each of its banking subsidiaries' capital ratios exceeded the quantitative capital ratios required for an institution to be considered "well-capitalized." The table below, "Capital Analysis," compares the Corporation's and each of its significant subsidiaries' actual capital amounts and ratios with the quantitative measures established by regulation to ensure capital adequacy at December 31, 1997.
CAPITAL ANALYSIS RISK-BASED CAPITAL LEVERAGE TIER I TOTAL AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------- (Dollars in millions) Corporation's capital $223 13% $219 31% $228 32% Required capital - minimum 52 3 29 4 57 8 Required capital - "well capitalized" definition 87 5 43 6 72 10 Chemical Bank and Trust Company's capital 79 13 79 38 82 39 Required capital - minimum 18 3 8 4 17 8 Required capital - "well capitalized" definition 29 5 13 6 21 10 Chemical Bank Michigan's capital 28 12 27 32 28 33 Required capital - minimum 7 3 3 4 7 8 Required capital - "well capitalized" definition 12 5 5 6 9 10 Chemical Bank Bay Area's capital 23 12 23 28 24 29 Required capital - minimum 6 3 3 4 7 8 Required capital - "well capitalized" definition 10 5 5 6 8 10 Chemical Bank Thumb Area's capital 20 12 20 30 21 32 Required capital - minimum 5 3 3 4 5 8 Required capital - "well capitalized" definition 9 5 4 6 7 10
23 NOTE J - STOCK OPTIONS The Chemical Financial Corporation stock option plan provides for the granting of options, incentive stock options, stock appreciation rights, or a combination thereof. At December 31, 1997, there were a total of 517,913 shares available for the granting of future awards under the Corporation's 1997 Plan. The plan provides that the option price shall not be less than fair market value at the date of grant, options become exercisable between one and five years from the date of grant as determined by the Compensation Committee of the Board of Directors, all awards expire no later than ten years and one day after the date of grant, and options granted may be designated nonstatutory options or incentive stock options. Options granted may include an appreciation right that entitles the awardee to receive a number of shares of common stock without payment to the Corporation, calculated by dividing the difference between the option price and the market price of the total number of shares in the option at the expiration date of the option, by the market price of a single share. As of December 31, 1997, there were no outstanding options with stock appreciation rights. The activity in the Corporation's stock option plans during 1995, 1996 and 1997 was as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE - ------------------------------------------------------------------- Outstanding - January 1, 1995 428,211 $17.00 Activity during 1995: Granted 441 27.89 Exercised (79,167) 14.28 Cancelled (348) 26.71 - ------------------------------------------------------------------- Outstanding - December 31, 1995 349,137 17.40 Activity during 1996: Granted 106,888 32.88 Exercised (71,428) 15.44 Cancelled (885) 26.71 - ------------------------------------------------------------------- Outstanding - December 31, 1996 383,712 21.97 Activity during 1997: Granted 7,087 38.93 Exercised (46,996) 13.87 Cancelled (2,546) 32.87 - ------------------------------------------------------------------- Outstanding - December 31, 1997 341,257 $23.35 ===================================================================
The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------------- AVERAGE EXERCISE AVERAGE NUMBER EXERCISE AVERAGE PRICE NUMBER EXERCISE OUTSTANDING PRICE LIFE RANGE EXERCISABLE PRICE - ----------------------------------------------------------------------------------- 77,713 $12.25 1.56 $11.43 - $12.54 77,713 $12.25 63,255 15.35 4.29 $15.35 63,255 15.35 193,202 29.86 7.62 $24.34 - $32.88 148,647 29.55 7,087 38.93 9.82 $38.93 -- -- - ----------------------------------------------------------------------------------- 341,257 $23.35 5.67 $11.43 - $38.93 289,615 $21.81 =================================================================================== Average remaining contractual life in years.
NOTE K - COMMITMENTS AND OTHER MATTERS Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Historically, the majority of the commitments have not been drawn upon and, therefore, do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Corporation upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties. Standby letters of credit are conditional commitments issued generally by the Corporation to guarantee the performance of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies. The Corporation at any point in time also has approved but undisbursed loans. The majority of these undisbursed loans will convert to a booked loan within a three month period. Loan commitments, standby letters of credit and undisbursed loans were $105.7 million, $4.9 million and $35.7 million, respectively, at December 31, 1997 and $90.1 million, $3.3 million and $33 million, respectively, at December 31, 1996. The majority of the loan commitments and standby letters of credit outstanding as of December 31, 1997 expire one year from their contract date, except for $11.8 million which extend for more than five years. The Corporation's loan commitments, standby letters of credit and undisbursed loans have been estimated to have no realizable fair value, as historically the majority of the loan commitments have not been drawn upon and generally the Corporation does not receive any fees in connection with these agreements. 24 The Corporation has a single lease commitment on certain computer software that will require annual lease payments of approximately $350,000 per year through 2002. There are no other material lease rental payments or noncancelable lease commitments outstanding at December 31, 1997. Expenses included in the category of "Other" operating expenses which were in excess of 1% of interest and other income during the three year period ended December 31, 1997, were as follows: Federal Deposit Insurance Corporation (FDIC) premium expense of $1,561,000 in 1995 and stationery and supplies expense of $1,428,000 in 1996. NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), requires disclosures about the estimated fair values of the Corporation's financial instruments. The Corporation utilized quoted market prices, where available, to compute the fair value of its financial instruments. In cases where quoted market prices were not available, the Corporation used present value methods to estimate the fair values of its financial instruments. These estimates of fair value are significantly affected by the assumptions made and, accordingly, do not necessarily indicate amounts which could be realized in a current market exchange. It is also the Corporation's general practice and intent to hold the majority of its financial instruments until maturity and, therefore, the Corporation does not expect to realize the estimated amounts disclosed. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated statements of financial position for cash and federal funds sold approximate those assets' fair values. INTEREST-BEARING DEPOSITS WITH UNAFFILIATED BANKS: The carrying amounts reported in the consolidated statements of financial position for interest bearing deposits with unaffiliated banks approximate those assets' fair values. INVESTMENT SECURITIES: Fair values for investment securities are based on quoted market prices. LOANS RECEIVABLE: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one- to-four family residential) are based on quoted market prices of similar loans sold in secondary market source transactions. The fair values for other loans (e.g., commercial real estate, rental property mortgage, commercial, agricultural and installment) are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines in the credit quality of borrowers since the loans were originated. DEPOSIT LIABILITIES: The fair values of accounts without defined maturities, such as interest and noninterest-bearing checking, savings and money fund accounts are equal to the amounts payable on demand. As of December 31, 1997 and December 31, 1996, the Corporation had total deposits without defined maturities totaling $934,676,000 and $874,732,000, respectively, for which SFAS 107 defined their fair values to be equal to their carrying amounts. Fair values for fixed rate certificates of deposit and other time deposits are based on the discounted value of contractual cash flows, using interest rates currently being offered for deposits of similar remaining maturities. The fair values for variable rate certificates of deposits and other time deposits approximate their carrying amounts. SHORT-TERM BORROWINGS: The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair values. LONG-TERM DEBT: The carrying amount of the Corporation's variable rate long-term debt approximates fair value. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND UNDISBURSED LOANS: The Corporation's loan commitments, standby letters of credit and undisbursed loans have no carrying amount and have been estimated to have no realizable fair value. Historically, the majority of the loan commitments have not been drawn upon and, generally the Corporation does not receive any fees in connection with any of these commitments. Estimates of fair value have not been made for items which are not defined by SFAS 107 as financial instruments, including such items as the Corporation's core deposit intangibles and the value of its trust and data processing operations. The Corporation believes it is impractical to estimate a representational fair value for these types of assets, even though they add significant value to the Corporation. The following is a summary of previously described financial instruments reported in the consolidated statements of financial position for which fair values differ from carrying amounts as of December 31:
1997 1996 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------- (In thousands) ASSETS: Investment securities $745,193 $747,632 $655,539 $657,281 Loans 828,241 842,582 791,046 800,050 LIABILITIES: Time deposits 541,165 540,745 555,183 547,868
25 NOTE M - PARENT COMPANY ONLY FINANCIAL INFORMATION Condensed financial statements of Chemical Financial Corporation (parent company) follow: CONDENSED STATEMENT OF FINANCIAL POSITION
December 31 1997 1996 - ---------------------------------------------------------------------------------- (In thousands) ASSETS Cash on deposit at subsidiary bank $ 15,228 $ 15,960 Investments in bank subsidiaries 218,146 203,221 Investment in non-bank subsidiary 1,984 1,565 Goodwill 2,314 2,619 Other assets 3,468 1,855 - ---------------------------------------------------------------------------------- TOTAL ASSETS $241,140 $225,220 ================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Long-term debt $ 9,000 $ 10,000 Other liabilities 8,215 7,951 - ---------------------------------------------------------------------------------- Total Liabilities 17,215 17,951 Shareholders' equity 223,925 207,269 - ---------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $241,140 $225,220 ==================================================================================
CONDENSED STATEMENT OF INCOME
Years Ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------- (In thousands) INCOME Cash dividends from bank subsidiaries $11,348 $20,304 $ 7,613 Cash dividends from non-bank subsidiary 102 360 326 Interest received from subsidiary bank 677 660 621 Other income 12 163 33 - ---------------------------------------------------------------------------------------- Total Income 12,139 21,487 8,593 EXPENSES Interest on long-term debt 596 715 826 Other operating expenses 1,818 1,500 1,493 Amortization of goodwill 305 305 305 - ---------------------------------------------------------------------------------------- Total Expenses 2,719 2,520 2,624 - ---------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 9,420 18,967 5,969 Federal income tax benefit 658 470 609 - ---------------------------------------------------------------------------------------- 10,078 19,437 6,578 Equity in undistributed net income of: Bank subsidiaries 13,392 2,465 13,718 Non-bank subsidiary 419 101 193 - ---------------------------------------------------------------------------------------- NET INCOME $23,889 $22,003 $20,489 ========================================================================================
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income $23,889 $22,003 $20,489 Equity in undistributed net income of subsidiaries (13,811) (2,566) (13,911) Other (985) 349 1,578 - --------------------------------------------------------------------------------------------------- Net cash provided by operations 9,093 19,786 8,156 FINANCING ACTIVITIES Capital contribution to bank subsidiary -- (9,000) -- Principal payments on long-term debt (1,000) (2,000) -- Repurchases of common stock (467) (1,035) -- Proceeds from subsidiary directors stock purchase plan 259 264 236 Proceeds from exercise of stock options 386 339 453 Cash dividends paid (9,003) (7,771) (6,636) - --------------------------------------------------------------------------------------------------- Net cash used in financing activities (9,825) (19,203) (5,947) - --------------------------------------------------------------------------------------------------- Increase (decrease) in cash (732) 583 2,209 Cash at beginning of year 15,960 15,377 13,168 - --------------------------------------------------------------------------------------------------- Cash at end of year $15,228 $15,960 $15,377 ===================================================================================================
26 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS To the Board of Directors Chemical Financial Corporation We have audited the accompanying consolidated statement of financial position of Chemical Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chemical Financial Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Detroit, Michigan January 20, 1998 27 MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS The following discussion and analysis is intended to cover the significant factors affecting Chemical Financial Corporation's (Corporation) consolidated statements of financial position and income, included herein. It is designed to provide shareholders with a more comprehensive review of the operating results and financial position of the Corporation than could be obtained from an examination of the financial statements alone. This discussion should be read in conjunction with the financial highlights on page 1, Tables 1-12, beginning on page 29, and the consolidated financial statements and notes thereto beginning on page 13. On December 30, 1997, the Corporation paid a 5% stock dividend to shareholders of record on December 17, 1997. All per share amounts included herein have been adjusted for this stock dividend. MERGERS AND ACQUISITIONS The primary method of expansion into new banking markets has been through acquisitions of other financial institutions or bank branches. The following is a summary of the Corporation's merger and acquisition activity during the three year period ended December 31, 1997. On December 31, 1996, the Corporation acquired Arbury & Stephenson, Inc. (A&S), a property and casualty insurance agency headquartered in Midland, Michigan. The merger was effected through an exchange of shares of the Corporation's common stock. A&S was merged into an insurance subsidiary of the Corporation's lead bank and offers a variety of personal and corporate insurance products, through the "Chemical Financial Insurance Agency." On May 1, 1996, the Corporation acquired State Savings Bancorp, Inc. (SSBI), headquartered in Caro, Michigan. SSBI operated one bank, State Savings Bank of Caro, with offices in Caro and Fairgrove. The Corporation issued 551,250 shares of the Corporation's common stock for all of the outstanding stock of SSBI. As of May 1, 1996, SSBI had total assets of approximately $65 million. On September 22, 1995, the Corporation acquired a branch banking office in Belding, Michigan, from First of America Bank-Michigan, N.A. The branch had total deposit liabilities of approximately $16 million and was merged into an existing affiliate. NET INCOME Net income in 1997 was $23.889 million, or $2.22 per share, compared to net income of $22.003 million, or $2.05 per share, in 1996. 1997 net income represented an 8.6% increase over 1996 net income, while 1997 earnings per share represented an 8.3% increase over 1996 earnings per share. Net income has increased at an average annual compound rate of 6.44% during the five year period ended December 31, 1997, while earnings per share has grown at an average annual compound rate of 7.85% over that same period. The Corporation's return on average assets was 1.38% in 1997, 1.30% in 1996 and 1.24% in 1995. The Corporation's return on average shareholders' equity was 11.1% in 1997, 10.9% in 1996 and 11.0% in 1995. DEPOSITS Total deposits as of December 31, 1997 were $1.476 billion, up $46 million, or 3.2%, from total deposits of $1.430 billion as of December 31, 1996. The increase in total deposits during 1997 was attributable to the transfer of Trust Department assets from a non-affiliated financial services organization to a new money market savings account at the Corporation's lead subsidiary bank, Chemical Bank and Trust Company. This new account was designed to provide Trust Department customers a comparable interest yield with the added protection of deposit insurance coverage provided by the Federal Deposit Insurance Corporation. The growth of the Corporation's deposits continues to be impacted by competition for customer deposits from other investment products. Mutual funds and various annuity products are clearly the two most significant products in competition for customer deposits. These products are sold by a wide spectrum of organizations, including both bank and nonbank financial institutions and nonfinancial institutions, such as brokerage and insurance companies. In response to this increased competition for customers' bank deposits, the Corporation expanded its sales and marketing efforts of mutual fund and annuity investment products during 1996. The Corporation's subsidiary banks, through "CFC Investment Centers," offer a broad array of mutual funds, annuity products and market securities through alliances with Security First Group and Corelink Financial Services. CFC Investment Centers offer customers a complete spectrum of investment products and service capabilities, backed by strong technical innovations. During 1997, customers purchased $14.5 million of annuity and mutual fund investments through the CFC Investment Centers. In addition, the Trust Department of Chemical Bank and Trust Company offers customers a number of investment products and services. Two of these products are "ChemVest Advantage," which provides customers with professional assistance in spreading their funds among a variety of institutional mutual funds and "ChemSelect-IRA," which allows customers to choose their own asset allocation and risk tolerance among a variety of mutual funds without any sales charges or transaction fees. As of December 31, 1997, these two Trust Department investment products had balances totaling $23 million. 28 TABLE 1. FIVE-YEAR INCOME STATEMENT - TAX EQUIVALENT BASIS - AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
Years Ended December 31 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans 4.06% 4.01% 3.90% 3.75% 3.90% Interest on investment securities 2.54 2.49 2.49 2.26 2.49 Interest on short-term investments .27 .28 .30 .21 .14 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 6.87 6.78 6.69 6.22 6.53 INTEREST EXPENSE Interest on deposits 2.68 2.62 2.62 2.20 2.52 Interest on short-term borrowings .08 .07 .09 .07 .05 Interest on long-term debt .03 .04 .05 .04 .04 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 2.79 2.73 2.76 2.31 2.61 - ----------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 4.08 4.05 3.93 3.91 3.92 Provision for possible loan losses .06 .07 .06 .07 .07 OTHER INCOME Trust department income .19 .17 .16 .16 .14 Service charges and fees .51 .48 .47 .41 .41 Gains on sales of loans .01 .01 .03 .01 .07 Investment securities gains -- -- -- .02 .03 Other .05 .02 .08 .08 .08 - ----------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME .76 .72 .74 .68 .73 OPERATING EXPENSES Salaries, wages and benefits 1.58 1.60 1.55 1.53 1.57 Occupancy expense .25 .25 .24 .24 .24 Equipment expense .18 .17 .17 .17 .17 Other .64 .65 .74 .80 .87 - ----------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 2.65 2.67 2.70 2.74 2.85 - ----------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES 2.13 2.03 1.91 1.78 1.73 Federal income taxes .67 .65 .59 .54 .53 Tax equivalent adjustment .08 .08 .08 .09 .09 - ----------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES 1.38 1.30 1.24 1.15 1.11 Cumulative effect on prior years of change in accounting principles -- -- -- -- .12 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME 1.38% 1.30% 1.24% 1.15% 1.23% ======================================================================================================================= AVERAGE TOTAL ASSETS - In thousands $1,726,960 $1,688,214 $1,654,640 $1,659,360 $1,638,101 ======================================================================================================================= Taxable equivalent basis using a federal income tax rate of 35%.
ASSETS Total assets of the Corporation were $1.765 billion as of December 31, 1997, up $66 million, or 3.9%, over total assets of $1.699 billion as of December 31, 1996. CASH DIVIDENDS The Corporation paid a cash dividend of $.20 per share during the first two quarters of 1997, and increased the cash dividend to $.22 per share during the remaining two quarters of 1997, thereby resulting in total 1997 cash dividends of $.84 per share. Cash dividends paid per share in 1997 represented a 15.5% increase over cash dividends paid per share in 1996 of $.73. The Corporation has paid regular cash dividends every quarter since it was organized as a bank holding company in 1973. The Corporation's annual cash dividends per share over the past five years, adjusted for all stock dividends and stock splits, were as follows:
1997 1996 1995 1994 1993 - --------------------------------------------------------------- Annual Dividend $.84 $.73 $.62 $.51 $.46
continued on page 30 29 FINANCIAL HIGHLIGHTS - CONTINUED Cash dividends per share in 1996 represented a 17.6% increase over cash dividends per share in 1995, while cash dividends per share in 1995 represented a 21.4% increase over cash dividends paid in 1994. The compound annual growth rate of the Corporation's cash dividends per share over the past five and ten year periods ended December 31, 1997, was 14.9% and 11.6%, respectively. The earnings of the Corporation's subsidiaries are the principal source of funds to pay cash dividends to shareholders. Cash dividends are dependent upon the earnings of the Corporation's subsidiaries, as well as capital requirements, regulatory restraints and other factors affecting each of the Corporation's subsidiary banks. BUSINESS OF THE CORPORATION The Corporation is a bank holding company with its business concentrated in a single industry segment commercial banking. The Corporation, through its ten banking subsidiaries, offers a full range of commercial banking services. These banking services include accepting deposits, business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance products and corporate and personal trust services. The Corporation also has a data processing subsidiary. This subsidiary provides data processing services to the Corporation's ten subsidiary banks and to outside customers. The data processing services provided to the Corporation's subsidiaries represented 84% of total revenue of the data processing subsidiary in 1997, 76% in 1996 and 68% in 1995. The principal markets for the Corporation's commercial banking services are communities within Michigan in which the Corporation's subsidiaries are located and the areas immediately surrounding these communities. As of December 31, 1997, the Corporation served 55 communities through 86 banking offices in 24 counties, located generally across the mid-section of Michigan's lower peninsula. In addition to the banking offices, the Corporation operated 84 automated teller machines, both on and off bank premises, as of December 31, 1997. The principal sources of revenues for the Corporation are interest and fees on loans, which accounted for 54% of total revenues in both 1997 and 1996 and 53% in 1995. Interest on investment securities is also a significant source of revenue, accounting for 33% of revenues in each of the years 1997, 1996 and 1995. Chemical Bank and Trust Company (CB&T), the Corporation's largest subsidiary and lead bank headquartered in Midland, Michigan, represented 29% of total loans and 33% of total deposits, as of December 31, 1997. CB&T broadened the insurance products offered to its customers through further entry into the insurance industry. On December 31, 1996, CB&T acquired a small property and casualty agency in Midland, Michigan. In January 1997, a title insurance company formed by CB&T in late 1996 began operations. NET INTEREST INCOME Interest income is the total amount earned on funds invested in loans, investment securities and other money market instruments, such as federal funds sold. Interest expense is the amount of interest paid on interest- bearing checking accounts, savings and time deposits, as well as on short and long-term debt. Net interest income, on a fully taxable equivalent (FTE) basis, is the difference between interest income and interest expense and reflects adjustments made to the yields on tax-exempt assets in order to analyze tax-exempt income and fully taxable income on a comparable basis. The net interest margin is net interest income (FTE) as a percentage of average earning assets. Interest spread is the difference between the average yield on earnings assets and the average cost of interest-bearing liabilities. The single most important component in analyzing the results of the Corporation's operations is net interest income. Net interest income is influenced by a variety of factors, including changes in the volume of earning assets, changes in the mix of earning assets and interest-bearing liabilities, the proportion of earning assets that are funded by noninterest-bearing liabilities (demand deposits) and equity capital, market rates of interest and variations in interest sensitivity in the differing types of interest-bearing assets and liabilities. Some of these factors are controlled to a certain extent by management policies and actions. However, conditions beyond management's control also have an impact on changes in net interest income. These conditions include changes in market interest rates, the strength of credit demands by customers, competition from other financial institutions, the growth of deposit accounts at nonbank financial competitors and the continued growth in annuity and mutual fund investments. Table 2 presents for 1997, 1996 and 1995, average daily balances of the Corporation's major assets and liabilities, interest income and expense on a fully taxable equivalent (FTE) basis, average interest rates earned and paid on the Corporation's assets and liabilities, net interest income (FTE), interest spread (FTE) and net interest margin. Net interest income (FTE) in 1997 was $70.404 million, up $1.96 million, or 2.9%, over 1996 net interest income (FTE) of $68.447 million. The increase in net interest income during 1997 was primarily attributable to increases in average loans, noninterest-bearing deposits and shareholders' equity. During 1997, average loans increased $28 million, or 3.6%, average noninterest-bearing deposits increased $12 million, or 5.8%, and average shareholders' equity increased $14.5 million, or 30 TABLE 2. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES (Dollars in thousands)
Years Ended December 31 1997 1996 1995 TAX EFFECTIVE TAX EFFECTIVE TAX EFFECTIVE AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ---------------------------------------------------------------------------------------------------------------------------------- Earning Assets: Loans $ 820,451 $ 70,198 8.56% $ 792,209 $ 67,767 8.55% $ 744,207 $ 64,554 8.67% Taxable investment securities 672,347 40,554 6.03 661,401 38,882 5.88 680,235 37,675 5.54 Non-taxable investment securities 40,129 3,199 7.97 39,542 3,249 8.22 41,896 3,570 8.52 Federal funds sold 86,045 4,699 5.46 86,721 4,575 5.28 82,249 4,800 5.84 Interest-bearing deposits with unaffiliated banks 415 33 7.95 1,905 136 7.14 2,974 204 6.86 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income/ Total earning assets 1,619,387 118,683 7.33 1,581,778 114,609 7.25 1,551,561 110,803 7.14 Less: Allowance for possible loan losses (17,032) (16,296) (15,718) Other assets: Cash and due from banks 78,216 75,828 73,809 Premises and equipment 19,838 20,303 21,296 Accrued income and other assets 26,551 26,601 23,692 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $1,726,960 $1,688,214 $1,654,640 ================================================================================================================================== LIABILITIES AND EQUITY Interest-Bearing Liabilities: Interest-bearing demand deposits $ 233,004 $ 5,408 2.32% $ 234,900 $ 5,359 2.28% $ 225,331 $ 5,268 2.34% Savings deposits 442,195 11,545 2.61 430,783 10,305 2.39 449,642 10,820 2.41 Time deposits 556,259 29,367 5.28 553,993 28,620 5.17 534,017 27,218 5.10 Short-term borrowed funds 34,271 1,363 3.98 31,455 1,163 3.70 36,698 1,552 4.23 Long-term debt 9,236 596 6.45 10,976 715 6.51 12,094 833 6.89 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense/Total interest-bearing liabilities 1,274,965 48,279 3.79 1,262,107 46,162 3.66 1,257,782 45,691 3.63 Noninterest-bearing deposits 221,652 209,500 197,746 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits and borrowed funds 1,496,617 1,471,607 1,455,528 Accrued expenses and other liabilities 14,386 15,182 12,114 Shareholders' equity 215,957 201,425 186,998 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Equity $1,726,960 $1,688,214 $1,654,640 ================================================================================================================================== Interest Spread (Average yield earned minus average rate paid) 3.54% 3.59% 3.51% ================================================================================================================================== Net Interest Income (FTE) $ 70,404 $ 68,447 $ 65,112 ================================================================================================================================== Net Interest Margin (Net interest income (FTE)/Total average earning assets) 4.35% 4.33% 4.20% ================================================================================================================================== Taxable equivalent basis using a federal income tax rate of 35%. Nonaccrual loans are included in average balances reported and are used to calculate yields. Interest includes loan fees of $1,645,000 in 1997, $1,721,000 in 1996 and $1,414,000 in 1995.
7.2%. Average interest rates earned and paid on the Corporation's assets and liabilities did not change significantly during 1997. The average yield on interest earning assets increased 8 basis points to 7.33% from 7.25% in 1996, while the average cost of interest-bearing liabilities increased 13 basis points to 3.79%, from 3.66% in 1996. The 13 basis point increase in the average cost of interest-bearing liabilities was primarily attributable to the introduction of a new money market savings account in 1997. This new account was designed to accommodate short-term investable funds of our Trust Department customers. This new money market savings account resulted in a 22 basis point increase in the average interest cost of the Corporation's total savings accounts. The Corporation's net interest spread decreased 5 basis points in continued on page 32 31 NET INTEREST INCOME - CONTINUED 1997 to 3.54% from 3.59% in 1996. The increases in loans, noninterest- bearing deposits and shareholders' equity, offset with the slight reduction in the net interest spread, resulted in a slightly higher net interest margin in 1997. Net interest margin was 4.35% in 1997, compared to 4.33% in 1996 and 4.20% in 1995. Net interest income (FTE) increased $3.34 million, or 5.1%, in 1996 to $68.4 million. This increase was primarily attributable to increases in average loans and an increase in the average yield of investment securities. During 1996, average loans increased $48 million, or 6.4%, while the average yield on investment securities increased 34 basis points. The net interest spread increased 8 basis points during 1996 to 3.59%, while the net interest margin increased 13 basis points to 4.33%. The increases in the net interest spread and the net interest margin resulted from an 11 basis point increase in the average yield earned on earning assets, which was slightly offset by a 3 basis point increase in the average cost of the Corporation's interest-bearing liabilities. Table 3 allocates the dollar change in net interest income (FTE) between the portion attributable to changes in the average volume of interest-bearing assets and liabilities, including changes in the mix of assets and liabilities, and changes in average interest rates earned and paid. During 1997, the increase in the volume and change in the mix of interest-bearing assets and liabilities accounted for a $2.310 million increase in net interest income (FTE), while changes in average interest rates earned and paid on assets and liabilities resulted in a $.353 million decrease in net interest income. Accordingly, the total increase in net interest income (FTE) during 1997 was $1.957 million, or 2.9%. The increase due to changes in the volume and mix of interest-bearing assets and liabilities was primarily attributable to increases in average loans, noninterest-bearing deposits and shareholders' equity. Net interest income (FTE) increased $3.335 million, or 5.1%, in 1996. This increase was primarily attributable to increases in the volume and change in the mix of interest-bearing assets and liabilities, resulting from a $48 million, or 6.4%, increase in average loans. LOANS The Corporation's ten banking subsidiaries are full service community banks, therefore the acceptance and management of credit risk is an integral part of the Corporation's business. The Corporation maintains a conservative loan policy and strict credit underwriting standards. These standards include the granting of loans only within the Corporation's defined market areas. The Corporation has no foreign loans nor any loans to finance highly leveraged transactions. The Corporation's conservative lending philosophy is implemented through strong administrative and reporting controls at the subsidiary bank level, with additional oversight at the holding company level. The Corporation maintains a centralized independent loan review function at the holding company level which monitors asset quality at each of the Corporation's subsidiary banks. In addition, the Corporation continues to maintain an aggressive loan charge- off policy. The Corporation's loan portfolio is well diversified geographically, as well as along industry lines and, therefore, is reasonably sheltered from adverse economic impact in any one industry or geographic area. An additional strength of the Corporation's loan portfolio is that as of December 31, 1997 approximately 56% of the loan portfolio was comprised of credits granted to consumers in the form of residential mortgage loans, home equity loans and lines of credit secured by first and second mortgages. Total loans as of December 31, 1997 were $845.6 million, an increase of $37.9 million, or 4.7%, over total loans of $807.7 million as of December 31, 1996. The increase in total loans during 1997 was largely attributable to a combined increase in real estate construction and real estate mortgage loans of $33.1 million, or 6.2%. Commercial loans decreased $3.6 million, or 3.2%, while installment loans increased $8.5 million, or 5.3%, during 1997. The Corporation's geographical market area generally consists of small cities across mid-Michigan. The lack of substantive economic growth in the Corporation's market areas and increased competition have impacted the Corporation's loan growth over the past few years. The Corporation experiences competition from larger regional banks, located outside the Corporation's market areas, in the commercial loan area, and from large local credit unions in the installment loan area. The competition for residential mortgage loans intensified significantly over the last few years, as mortgage companies expanded sales efforts nationwide. Real estate mortgage loans, including real estate construction loans, comprise the majority of the Corporation's loan portfolio. As of December 31, 1997, 1996 and 1995, total real estate mortgage loans, including real estate construction loans, were $568.1 million, $535.0 million and $488.7 million, respectively. Real estate mortgage loans, including real estate construction loans, increased $33.1 million, or 6.2%, during 1997, $46.3 million, or 9.5%, during 1996 and $3.7 million, or .8%, during 1995. Real estate mortgage loans, including real estate construction loans, as a percentage of total loans were 67% as of December 31, 1997, compared to 66% as of December 31, 1996 and 64% as of December 31, 1995. Approximately 81% of the total real estate mortgage portfolio, as of December 31, 1997, was secured by residential real estate. continued on page 34 32 TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS (In Thousands)
1997 COMPARED TO 1996 1996 COMPARED TO 1995 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN COMBINED DUE TO CHANGES IN COMBINED AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE VOLUME YIELD/RATE (DECREASE) VOLUME YIELD/RATE (DECREASE) CHANGES IN INTEREST INCOME ON EARNING ASSETS: Loans $2,179 $ 252 $2,431 $4,144 $ (931) $3,213 Taxable investment securities 650 1,022 1,672 (1,063) 2,270 1,207 Non-taxable investment securities 48 (98) (50) (196) (125) (321) Federal funds sold (36) 160 124 252 (477) (225) Interest-bearing deposits with unaffiliated banks (103) -- (103) (76) 8 (68) - -------------------------------------------------------------------------------------------------------------------------------- Total change in interest income on earning assets 2,738 1,336 4,074 3,061 745 3,806 CHANGES IN INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES: Deposits 431 1,605 2,036 385 593 978 Short-term borrowed funds 109 91 200 (207) (182) (389) Long-term debt (112) (7) (119) (74) (44) (118) - -------------------------------------------------------------------------------------------------------------------------------- Total change in interest expense on interest-bearing liabilities 428 1,689 2,117 104 367 471 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN NET INTEREST INCOME (FTE) $2,310 $ (353) $1,957 $2,957 $ 378 $3,335 ================================================================================================================================ The changes in net interest income (FTE) due to both volume and rate have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Taxable equivalent basis using a federal income tax rate of 35%.
TABLE 4. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE (Dollars in Thousands)
Years Ended December 31 1997 1996 1995 1994 1993 DISTRIBUTION OF LOANS: Commercial and agricultural loans $110,554 $114,154 $117,759 $121,175 $148,985 Real estate construction loans 31,143 24,791 16,195 19,255 14,141 Real estate mortgage loans 536,938 510,193 472,454 465,721 451,481 Installment loans 166,965 158,515 154,170 154,712 115,913 - ------------------------------------------------------------------------------------------------------------------- Total loans outstanding at year end $845,600 $807,653 $760,578 $760,863 $730,520 =================================================================================================================== SUMMARY OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES: Allowance for possible loan losses at beginning of year $ 16,607 $ 15,886 $ 15,295 $ 14,583 $ 13,989 Loans charged off: Commercial and agricultural (114) (250) (433) (317) (607) Real estate mortgage (26) (55) (3) (76) (33) Installment (480) (386) (230) (237) (258) - ------------------------------------------------------------------------------------------------------------------- Total loan charge-offs (620) (691) (666) (630) (898) Recoveries of loans previously charged off: Commercial and agricultural 193 92 60 58 188 Real estate mortgage 10 24 28 40 30 Installment 167 168 104 145 170 - ------------------------------------------------------------------------------------------------------------------- Total loan recoveries 370 284 192 243 388 - ------------------------------------------------------------------------------------------------------------------- Net loan charge-offs (250) (407) (474) (387) (510) Provision for loan losses 1,002 1,128 1,065 1,099 1,104 - ------------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses at year end $ 17,359 $ 16,607 $ 15,886 $ 15,295 $ 14,583 =================================================================================================================== Ratio of net charge-offs during the year to average loans outstanding .03% .05% .06% .05% .07% =================================================================================================================== Ratio of allowance for possible loan losses at year end to total loans outstanding at year end 2.05% 2.06% 2.09% 2.01% 2.00% ===================================================================================================================
33 LOANS - CONTINUED The Corporation originated $38.8 million of residential mortgage loans during 1997, which were sold in the secondary mortgage market. This compares with $12.3 million of residential mortgage loans originated during 1996 and $15.6 million of residential mortgage loans originated during 1995, which were sold in the secondary mortgage market. The increase in the amount of residential mortgage loans sold during 1997 was attributable to the Corporation selling those loans with original maturities of fifteen years and longer in the secondary market. In 1996 and 1995, it was the Corporation's general practice to sell only those residential real estate mortgage loans with original maturities greater than fifteen years in the secondary mortgage market. As of December 31, 1997, the Corporation was servicing $98 million of residential mortgage loans, which had been originated by the Corporation in its market areas and subsequently sold in the secondary mortgage market. Prior to 1992, the Corporation kept all residential mortgage loans originated in its own loan portfolio. The Corporation manages the interest rate risk on the residential real estate mortgage loan portfolio through the promotion of balloon mortgage products. As of December 31, 1997, balloon mortgage loans represented approximately 47% of the residential mortgage loan portfolio, repriceable three, five or eight years from the mortgage origination date. The eight year balloon product was introduced during 1996. Installment loans totaled $167.0 million as of December 31, 1997, compared to $158.5 million as of December 31, 1996 and $154.2 million as of December 31, 1995. Installment loans represented approximately 20% of total loans outstanding as of December 31, 1997, 1996 and 1995. Installment loans increased $8.5 million, or 5.3%, during 1997. The increase in 1997 was attributable to two special installment loan promotions. In late spring, the affiliate banks offered 7.99% consumer installment loans with maturities up to forty eight months, and in the fall offered 7.49% consumer loans on new automobiles up to sixty months, to qualifying borrowers. These two loan promotions generated $48.4 million of new consumer installment loans. The 1997 installment loan promotions were the Corporation's affiliate banks' seventh year of offering special interest rates on consumer installment loans during promotion periods. Historically, the average life of the Corporation's installment loan portfolio has been approximately three years. This short average life and the success of the installment loan promotions in recent years, results in significant reductions each year in installment loan balances through loan payments and payoffs. Consequently, during each of the last three years, the installment loan portfolio did not increase by the amount of new loans generated during the loan promotion periods in these years. Commercial loans decreased $3.6 million, or 3.2%, during 1997 to $110.6 million as of December 31, 1997. Commercial loans decreased $3.6 million, or 3.1%, during 1996 and $3.4 million, or 2.8%, during 1995. The expansion of commercial lending efforts by larger regional banks into smaller communities has impacted the Corporation's commercial lending growth rate. The combination of the efforts by these larger financial institutions and the location of the majority of the Corporation's subsidiary banks in smaller communities, where the demand for commercial loans which meet the Corporation's credit standards has historically not been particularly strong, contributed to the slight decline in the Corporation's commercial loans during the last three years. Commercial loans represented 13.1%, 14.1% and 15.5% of total loans as of December 31, 1997, December 31, 1996 and December 31, 1995, respectively. Table 5 presents the maturity distribution of commercial and agricultural loans, real estate construction and nonresidential real estate mortgage loans. These loans represented 28% and 29% of total loans as of December 31, 1997 and December 31, 1996, respectively. The percentage of these loans maturing within one year was 51% at December 31, 1997, compared to 45% at December 31, 1996. The percentage of these loans maturing beyond five years remained low at 12% as of December 31, 1997, compared to 11% at December 31, 1996. Of those loans with maturities beyond one year, the percentage of loans with variable interest rates was 32% at December 31, 1997, compared to 37% at December 31, 1996. The decline in the percentage of variable rate loans with maturities beyond one year has continued over the past two years, as a result of a strong customer demand to convert loans to fixed interest rates. It is management's opinion that these loan maturities and the mix between loans with fixed and variable interest rates remain at acceptable levels to provide the Corporation sufficient flexibility in maintaining a balance between interest rate- sensitive assets and liabilities. NONPERFORMING LOANS Nonperforming loans include loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more as to interest or principal payments and other loans whose terms have been renegotiated to provide for a reduction of interest or principal because of a deterioration in the financial position of the borrower. The Corporation maintains an aggressive loan charge-off policy. The Corporation's practice is to immediately charge to the allowance for possible loan losses specifically identified credit losses. This determination is made for each loan at the time of transfer to nonperforming status, after giving consideration to collateral value and the borrower's ability to repay the loan principal. 34 TABLE 5. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in thousands)
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996 DUE IN DUE IN - ---------------------------------------------------------------------------------------------------------------------------------- 1 YEAR 1 TO 5 OVER 5 1 YEAR 1 TO 5 OVER 5 OR LESS YEARS YEARS TOTAL OR LESS YEARS YEARS TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- LOAN MATURITIES: Commercial and agricultural $ 74,903 $ 31,361 $ 4,290 $110,554 $ 74,113 $33,545 $ 6,496 $114,154 Real estate construction 19,669 6,435 5,039 31,143 13,956 8,634 2,201 24,791 Nonresidential real estate mortgage 25,351 49,084 20,747 95,182 18,230 61,840 18,043 98,113 - ---------------------------------------------------------------------------------------------------------------------------------- Total $119,923 $ 86,880 $30,076 $236,879 $106,299 $104,019 $26,740 $237,058 ================================================================================================================================== Percent of Total 51% 37% 12% 100% 45% 44% 11% 100% ==================================================================================================================================
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY: Above loans maturing after one year which have: Fixed interest rates $ 79,710 68% $ 82,630 63% Variable interest rates 37,860 32 48,129 37 - ---------------------------------------------------------------------------------------------------------------------------------- Total $117,570 100% $130,759 100% ==================================================================================================================================
Nonaccrual loans were $1.78 million as of December 31, 1997, compared to $1.34 million as of December 31, 1996, and represented .21% and .17% of total loans, as of December 31, 1997 and December 31, 1996, respectively. Accruing loans past due 90 days or more were $1.13 million as of December 31, 1997, compared to $.5 million as of December 31, 1996. Total nonperforming loans were $3.05 million, or .36% of total loans, as of December 31, 1997, compared to $1.88 million, or .23% of total loans, as of December 31, 1996. PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses ("provision") is the amount added to the allowance for possible loan losses ("allowance") on a monthly basis to absorb potential loan losses. The allowance is maintained at a level considered by management to be adequate to absorb potential future loan losses. This evaluation is based on a continuous review of the loan portfolio, both individually and by category, and includes consideration of changes in the type and volume of the loan portfolio, actual loan loss experience, the present and prospective financial condition of borrowers, industry and geographic exposures within the portfolio, current and prospective economic conditions, and special factors affecting specific business sectors. This evaluation process is reviewed by the Corporation's centralized independent loan review personnel, who monitor the credit quality of the Corporation's loan portfolio using uniform procedures and reporting systems. The provision was $1 million in 1997, compared to $1.13 million in 1996 and $1.07 million in 1995. The Corporation experienced net loan losses of $.25 million in 1997, $.41 million in 1996 and $.47 million in 1995. The Corporation's continued on page 36 TABLE 6. SUMMARY OF NONPERFORMING LOANS (In thousands)
December 31 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Loans accounted for on a nonaccrual basis $1,783 $1,341 $1,658 $2,682 $2,318 Accruing loans contractually past due 90 days or more as to interest or principal payments: Commercial, agricultural and real estate construction 447 7 118 95 101 Real estate mortgage 557 271 747 182 441 Installment 121 261 104 91 99 - ------------------------------------------------------------------------------------------------------------------ 1,125 539 969 368 641 Renegotiated loans 139 -- 84 148 311 - ------------------------------------------------------------------------------------------------------------------ Total $3,047 $1,880 $2,711 $3,198 $3,270 ================================================================================================================== The Corporation's policy is to transfer a loan to nonaccrual status whenever: (1) it is determined that interest should be recorded on the cash basis instead of the accrual basis because of a deterioration in the financial position of the borrower, (2) it is determined that payment in full of interest or principal cannot be expected, or (3) the loan has been in default for a period of 90 days or more unless it is both well secured and in the process of collection (this category excludes 1 to 4 family residential loans and consumer installment loans).
35 PROVISION FOR POSSIBLE LOAN LOSSES - CONTINUED TABLE 7. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in thousands)
DECEMBER 31 1997 1996 1995 1994 1993 PERCENT PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TO TO TO TO ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - --------------------------------------------------------------------------------------------------------------------------------- Commercial and agri- cultural loans $ 4,975 13.1% $ 5,351 14.1% $ 5,510 15.5% $ 4,959 15.9% $ 5,609 20.4% Real estate construc- tion loans 623 3.7 496 3.1 324 2.1 385 2.5 300 1.9 Real estate mort- gage loans 5,638 63.5 5,612 63.2 5,052 62.1 4,990 61.3 4,629 61.8 Installment loans 3,673 19.7 3,487 19.6 3,381 20.3 3,401 20.3 2,557 15.9 Not allocated 2,450 1,661 1,619 1,560 1,488 - --------------------------------------------------------------------------------------------------------------------------------- Total $17,359 100% $116,607 100% $15,886 100% $15,295 100% $14,583 100% =================================================================================================================================
provision exceeded actual net loan losses by $.75 million in 1997, $.72 million in 1996 and $.59 million in 1995. The Corporation's allowance increased to $17.36 million as of December 31, 1997 and represented 2.05% of total loans, compared to 2.06% at December 31, 1996 and 2.09% at December 31, 1995. The allocation of the allowance in Table 7 is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or exactness of the specific amounts. The entire allowance is available to absorb any future loan losses without regard to the categories in which the loan losses are classified. OTHER INCOME Other income is derived primarily from trust services, deposit account fees, fees for customer services and gains on the sale of residential mortgage loans. Other income totaled $13.12 million in 1997, compared to $12.20 million in 1996 and $12.36 million in 1995. Other income increased $.924 million, or 7.6%, in 1997 over the prior year. The 1997 increase was primarily attributable to increases in Trust Department income, increased gains from the sale of residential mortgage loans in the secondary market, increases in other charges and fees for customer services and a gain on the sale of a branch office building. Income from Trust Department activities increased $.313 million, or 10.8%, in 1997. The 1997 increase reflects higher fee income resulting from an expanded customer base, increases in custodial accounts and increased asset values due to favorable market performance. Gains on the sale of residential mortgage loans were $.239 million in 1997, compared to $.137 million in 1996. The $.1 million, or 74%, increase was due to the Corporation selling more residential mortgage loans in the secondary market in 1997 than in 1996. During 1997, the Corporation sold $38.8 million of residential mortgage loans in the secondary market, compared to $12.3 million in 1996. Income from other charges and fees for customer services was $3.522 million in 1997, compared to $2.707 million in 1996 and $2.635 million in 1995. The increase of $.815 million, or 30%, in 1997 was primarily attributable to increased fee income generated from the sale of annuity and mutual fund investment products, property and casualty insurance and title insurance. In March 1997, Chemical Bank Key State, a wholly owned subsidiary of the Corporation, sold its branch banking office in Okemos. A gain of $256,000 was recognized upon the sale of this building. The loans and deposits of the banking office in Okemos were transferred to the subsidiary's branch banking office in Lansing. The slight reduction in other income in 1996, compared to 1995, was due to decreases in revenue from data processing services and gains on sales of loans. During 1996, data processing revenue declined $.29 million. This decrease was attributable to an anticipated loss of outside customers. Gains on the sales of loans were $.39 million lower in 1996 than in 1995. During 1995, the Corporation sold its credit card loan portfolio and recognized a gain of $.32 million. 36 OPERATING EXPENSES Total operating expenses were $45.72 million in 1997, $45.12 million in 1996 and $44.63 million in 1995. Total operating expenses as a percentage of total average assets was 2.65% in 1997, 2.67% in 1996 and 2.70% in 1995 and can be reviewed in more detail and in relation to the other components of net income in Table 1, on page 29. The Corporation's efficiency ratio, defined as total operating expenses divided by the sum of net interest income and other income, excluding net securities gains, was 56% in 1997, compared to 57% in 1996 and 59% in 1995. The Corporation continued in its efforts to control operating expenses during 1997, resulting in total operating expenses increasing only 1.3% over 1996 total operating expenses. Salaries, wages and employee benefits remain the largest component of operating expenses. These expenses totaled $27.28 million in 1997, $26.96 million in 1996 and $25.70 million in 1995. Salaries, wages and employee benefits expense increased $.32 million, or 1.2%, in 1997. The Corporation was successful in maintaining 1997 personnel costs at approximately 1996 levels by achieving a 3.1% reduction in employee benefits cost, while salaries and wages increased 2.3%. Full- time equivalent employees were 1007 at December 31, 1997, compared to 1000 at December 31, 1996. Salaries, wages and employee benefits expense increased $1.26 million, or 4.9%, in 1996. Personnel expenses accounted for 60% of operating expenses during 1997 and 1996 and 58% in 1995. Occupancy and equipment expense totaled $7.45 million in 1997, $7.15 million in 1996 and $6.76 million in 1995. Occupancy and equipment expense increased $.3 million, or 4.3%, in 1997 and $.39 million, or 5.7%, in 1996. Other operating expenses totaled $10.99 million in 1997, $11.02 million in 1996 and $12.17 million in 1995. The reduction in other operating expenses in 1997, compared to 1996, was attributable to 1996 expenses including costs associated with the acquisition of State Savings Bancorp, Inc. Federal Deposit Insurance Corporation (FDIC) expense is included in other operating expenses, and was $.2 million in 1997, $.1 million in 1996 and $1.6 million in 1995. In 1997, the Corporation paid the minimum rate of $.01296 per $100 of deposits insured by the Bank Insurance Fund and $.0644 per $100 of deposits insured by the Savings Association Insurance Fund (SAIF). The significant reduction in FDIC expense in 1996 represented the effect of the Bank Insurance Fund legislative reform process, which resulted in substantially lower premiums in 1995 and 1996. During 1996, the FDIC charged banks that met the FDIC criteria of being well-capitalized and well-managed the minimum allowable amount of $2,000 per bank, while deposits held by well-capitalized banks and insured by the SAIF were assessed at a rate of 23.0 cents per $100 of insured deposits. In addition, SAIF insured deposits held on March 31, 1995, were assessed a one-time charge of 65.7 cents per $100 of deposits in 1996 to recapitalize SAIF to its required reserve ratio. The Corporation's liability for this special assessment was approximately $30,000. INCOME TAXES The Corporation's effective federal income tax rate was 32.6% in 1997, 33.4% in 1996 and 32.5% in 1995, compared to the statutory rate of 35% in each of these years. The small changes in the Corporation's effective federal income tax rate reflect the changes each year in the proportion of interest income exempt from federal taxation, tax credits, non-deductible interest expense and other non-deductible expenses relative to pretax income. Tax-exempt income (FTE), net of related non-deductible interest expense, amounted to $3.9 million in both 1997 and 1996 and $4.0 million in 1995. Tax-exempt income (FTE) as a percentage of total interest income (FTE) was 3.5%, 3.6% and 3.9% in 1997, 1996 and 1995, respectively. Income before income taxes (FTE) was $36.81 million in 1997, $34.39 million in 1996 and $31.78 million in 1995. LIQUIDITY AND INTEREST SENSITIVITY The Corporation manages its liquidity to ensure that it has the ability to meet the cash withdrawal needs of its depositors, provide funds for borrowers and at the same time ensure that the Corporation's own cash requirements are met. The Corporation accomplishes these goals through the management of liquidity at two levels - the parent company and the banking subsidiaries. The parent company's sources of funds have been dividends from subsidiaries, borrowings from unaffiliated banks and proceeds from equity issuances. During the three-year period ended December 31, 1997, the parent company's primary source of funds was subsidiary dividends. The parent company manages its liquidity position to provide the cash necessary to pay dividends to shareholders, service debt, invest in subsidiaries, enter new banking markets, pursue investment opportunities and satisfy other operating requirements. continued on page 38 37 LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED TABLE 8. MATURITIES AND YIELDS OF INVESTMENT SECURITIES AT DECEMBER 31, 1997 (Dollars in thousands)
MATURING AFTER ONE AFTER FIVE TOTAL TOTAL WITHIN BUT WITHIN BUT WITHIN AFTER CARRYING MARKET ONE YEAR FIVE YEARS TEN YEARS TEN YEARS VALUE VALUE - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: U.S. Treasury and agencies $177,792 5.70% $294,430 6.02% $ 1,491 4.68% $ 993 6.0% $474,706 5.96% $474,706 Other securities 1,058 6.60 14,015 5.91 901 6.60 3,493 6.45% 19,467 6.28 19,467 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale 178,850 5.71 308,445 6.01 2,392 5.39 4,486 6.34 494,173 5.97 494,173 HELD TO MATURITY: U.S. Treasury and agencies 61,509 5.89 140,292 6.46 -- -- -- -- 201,801 6.32 203,495 States of the U.S. and political subdivisions 10,715 7.10 21,745 7.86 12,092 8.13 2,155 8.33 46,707 7.77 47,438 Other securities -- -- 2,328 7.15 53 8.07 131 5.56 2,512 6.49 2,526 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity 72,224 6.07 164,365 6.65 12,145 8.13 2,286 8.17 251,020 6.59 253,459 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities $251,074 5.81% $472,810 6.23% $14,537 7.68% $6,772 6.96% $745,193 6.18% $747,632 ================================================================================================================================== Taxable equivalent basis using a 35% federal income tax rate. Based on final contractual maturity.
TABLE 9. MATURITY ANALYSIS OF INVESTMENT SECURITIES (as a % of total portfolio)
December 31 1997 1996 1995 - -------------------------------------------------------------------- MATURITY: Under 1 year 33.7% 35.1% 41.9% 1-5 years 63.4 61.4 56.1 5-10 years 2.0 2.6 1.4 Over 10 years .9 .9 .6 - -------------------------------------------------------------------- Total 100% 100% 100% ====================================================================
Federal and state banking laws place certain restrictions on the amount of dividends that a bank may pay to its parent company. Such restrictions have not had, and are not expected to have, any material effect on the Corporation's ability to meet its cash obligations or impede its ability to manage its liquidity needs. At January 1, 1998, the Corporation's bank subsidiaries could upstream $73 million to the parent company, without obtaining regulatory approval. In addition to the funds available from subsidiaries, the parent company had $15.2 million in cash on hand as of December 31, 1997. The subsidiary banks manage liquidity to insure adequate funds are available to meet the cash flow needs of depositors and borrowers. The subsidiary banks' most readily available sources of liquidity are federal funds sold, investment securities classified as available for sale and investment securities classified as held to maturity maturing within one year. These sources of liquidity are supplemented by new deposits and by loan payments received from customers. As of December 31, 1997, the Corporation held $50 million in federal funds sold, $494 million in investment securities available for sale and $72 million in other investment securities maturing within one year. These short term assets represented approximately 42% of total deposits as of December 31, 1997. Historically, the Corporation's investment securities portfolio has been very short-term in nature, with the average life of the portfolio consistently being less than two years. As of December 31, 1997, 34% of the Corporation's investment securities portfolio, or $251 million in investment securities, will mature during 1998, and another $255 million in investment securities, or 34% of the investment securities portfolio, will mature during 1999. The combination of the 1998 and 1999 scheduled maturities results in 68% of the Corporation's investment securities portfolio maturing within two years of December 31, 1997. As of December 31, 1996, 64% of the investment securities portfolio was scheduled to mature within two years. The maturity analysis of the investment securities portfolio is summarized in Tables 8 and 9. 38 TABLE 10. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE (Dollars in thousands)
December 31 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - ------------------------------------------------------------------------------------ MATURITY: Within 3 months $62,482 71% $ 86,851 78% $83,386 84% Within 3 to 6 months 12,371 14 14,893 13 4,865 5 Within 6 to 12 months 6,677 8 5,894 5 7,444 7 Over 12 months 6,550 7 3,760 4 3,807 4 - ------------------------------------------------------------------------------------ Total $88,080 100% $111,398 100% $99,502 100% ====================================================================================
Table 10 presents the maturity distribution of time deposits of $100,000 or more at the end of each of the last three years. Historically, the Corporation has not utilized time deposits of $100,000 or more as a source of liquidity. Time deposits of $100,000 or more and the percentage of these deposits to total deposits decreased slightly during 1997 to $88.1 million, or 6% of total deposits, as of December 31, 1997, compared to $111.4 million, or 7.8% of total deposits, as of December 31, 1996 and $99.5 million, or 6.9% of total deposits, as of December 31, 1995. The percentage of time deposits of $100,000 or more with a maturity of less than three months was 71% at December 31, 1997, 78% at December 31, 1996 and 84% at December 31, 1995. As the Corporation does not utilize these deposits as a source of liquidity, it is able to invest the funds generated from these deposits in investments of similar maturity. The Corporation has, and expects to continue to have, more than sufficient funds to meet the liquidity requirement of these deposits. The management of net interest income must address two objectives. It must consider the liquidity needs of the Corporation and interest rate risk. Interest rate risk arises in the normal course of the Corporation's business due to differences in the repricing and maturity characteristics of rate sensitive assets and liabilities. Sensitivity of earnings to interest rate changes arises when yields on assets change differently from the interest costs on liabilities. Interest rate sensitivity is determined by the amount of interest-earning assets and interest-bearing liabilities repricing within a specific time period and the magnitude by which interest rates change on the various types of earning assets and interest- bearing liabilities. The management of interest rate sensitivity includes monitoring the maturities and repricing opportunities of interest-earning assets and interest-bearing liabilities. Interest rate sensitivity management aims at achieving reasonable stability in both net interest income and the net interest margin through periods of changing interest rates. The Corporation's goal is to avoid a significant decrease in net interest income and thus an adverse impact on the profitability of the Corporation in periods of changing interest rates. It is necessary to analyze projections of net interest income based upon the repricing characteristics of the Corporation's earning assets and interest-bearing deposits and the varying magnitude by which interest rates may change on loans, investments and interest- bearing deposit accounts. The Corporation's interest rate sensitivity is managed through policies and risk limits approved by the Boards of Directors of the Corporation and its' subsidiary banks, and an Asset and Liability Committee (ALCO). The ALCO, which is comprised of executive and senior management from various areas of the Corporation, including finance, lending, investments and deposit gathering, meets regularly to execute asset and liability management strategies. The ALCO establishes and monitors guidelines on the sensitivity of earnings to changes in interest rates. The goal of the ALCO process is to manage the balance sheet to provide the maximum level of net interest income and minimal impact on earnings from major interest rate changes, while maintaining a high quality balance sheet and acceptable levels of interest rate risk and liquidity risk. The Corporation has not used and does not intend to use interest rate swaps or other derivative financial instruments in the management of interest rate risk. The Corporation held no derivative financial instruments as of December 31, 1997. Management uses its ability to adjust interest rates on deposit accounts to achieve an approximately neutral interest sensitivity position within a one year time period. Interest rate sensitivity is managed by a number of techniques, as no single interest rate risk measurement tool satisfies both objectives. The primary techniques utilized by the Corporation are asset and liability repricing schedules, commonly referred to as static gap analysis, and simulation analysis. continued on page 40 39 LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED TABLE 11. SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES BY REPRICING OR MATURITY DATE AT DECEMBER 31, 1997 (Dollars in thousands)
1-180 181-365 OVER 1 DAYS DAYS YEAR TOTAL - ------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Loans $222,602 $ 68,812 $ 554,186 $ 845,600 Other interest-earning assets 181,897 118,927 494,119 794,943 - ------------------------------------------------------------------------------------------------------ Total interest-earning assets $404,499 $187,739 $1,048,305 $1,640,543 ====================================================================================================== INTEREST-BEARING LIABILITIES: Non-maturing deposits $130,799 $ 589,777 $ 720,576 Time deposits 295,500 $101,657 120,345 517,502 - ------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 426,299 101,657 710,122 1,238,078 Other interest-bearing liabilities 29,242 21,954 51,196 - ------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities $455,541 $101,657 $ 732,076 $1,289,274 ====================================================================================================== Gap $(51,042) $ 86,082 $ 316,229 $ 351,269 Cumulative gap $(51,042) $ 35,040 $ 351,269 Cumulative rate sensitive ratio 0.89 1.06 1.27 Cumulative gap as a percentage of total earning assets (3.1)% 2.1% 21.4%
Table 11 summarizes the Corporation's interest rate repricing static gaps for selected maturity periods as of December 31, 1997. Total interest-earning assets exceeded interest-bearing liabilities by $351.3 million as of December 31, 1997. This difference was funded through noninterest-bearing liabilities and shareholders' equity. Table 11 shows that total assets maturing or repricing within one year exceeded liabilities maturing or repricing within one year by $35 million, or 2.1% of total earning assets, as of December 31, 1997. The computation of static gap does not address the fact that the repricing of certain categories of assets and liabilities are subject to competitive and other influences that are beyond the control of the Corporation. As a result, certain assets and liabilities mature or reprice in periods other than in their contractual period. The distribution of the Corporation's deposits with no contractual maturity was based on historical analysis and management's current assumptions as to the repricing of these funds. Accordingly, as of December 31, 1997, $589.8 million of deposits with no contractual maturity ("non-maturing deposits") that are repriceable daily at the Corporation's discretion, were included in the over 1 year repricing category. These accounts are believed by management to be predominately noninterest rate sensitive. Table 11 illustrates that as of December 31, 1997, the Corporation's cumulative rate sensitive ratio (rate sensitive assets to rate sensitive liabilities) in the 1-180 day repricing category was .89, and 1.06 in the cumulative one year (1-365 days) repricing category. Although static gap sensitivity varies from time frame to time frame, management's ability to adjust interest rates on deposit accounts enables the Corporation to achieve reasonable stability in net interest income through periods of changing interest rates. The Corporation recognizes the limitations of static gap analysis as a tool in managing interest rate risk and, therefore, utilizes other methods, including simulation analysis. Simulation analysis is used to project the potential effects of various interest rate environments on the balance sheet mix and net interest income. Simulation analysis involves the analysis of net interest income, and the corresponding quantification of interest rate risk that is attributable to changes in interest rate levels and relationships, asset and liability mixes and loan prepayment characteristics. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their pricing behavior. Assumptions based on historical pricing relationships, experience and anticipated market reactions are applied to certain core deposit and loan categories to reflect changes in interest rate costs and yields relative to changes in market interest rates. Net interest income is additionally evaluated under various interest rate scenarios, including gradually adjusting interest rates up and down by 200 basis points. The measurement of interest rate risk exposure on net interest income at year-end 1997, projected over the succeeding twelve months, indicated a nearly neutral interest rate sensitivity position. 40 TABLE 12. FINANCIAL INSTRUMENTS (Dollars in thousands)
OUTSTANDING PRINCIPAL AMOUNT MATURING IN: DECEMBER 31, 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE - ----------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed interest rate loans $257,753 $163,104 $125,034 $85,920 $41,762 $ 50,971 $724,544 $726,526 Average interest rate 8.23% 8.21% 8.14% 8.08% 7.79% 7.76% 8.11% Variable interest rate loans $ 35,880 $ 17,109 $ 18,780 $38,116 $ 1,215 $ 9,956 $121,056 $121,056 Average interest rate 9.42% 9.43% 9.35% 9.39% 9.13% 8.80% 9.35% Fixed interest rate securities $251,074 $254,917 $204,937 $ 8,445 $ 3,674 $ 22,146 $745,193 $747,632 Average interest rate 5.89% 6.05% 6.25% 7.80% 7.93% 7.56% 6.13% Other interest-bearing assets $ 49,570 -- -- -- -- -- $ 49,750 $ 49,750 Average interest rate 5.49% -- -- -- -- -- 5.49% RATE SENSITIVE LIABILITIES: Noninterest-bearing deposits $ 9,511 $ 9,130 $ 8,765 $ 8,414 $ 8,078 $193,865 $237,763 $237,763 Average interest rate Interest-bearing demand and savings deposits $ 27,877 $ 26,761 $ 25,691 $24,663 $23,677 $568,244 $696,913 $696,913 Average interest rate 2.67% 2.67% 2.67% 2.67% 2.67% 2.67% 2.67% Time deposits $388,283 $106,292 $ 36,375 $10,215 -- -- $541,165 $540,745 Average interest rate 5.28% 5.59% 5.75% 5.78% -- -- 5.38% Fixed interest rate borrowings $ 12,954 -- -- -- -- -- $ 12,954 $ 12,954 Average interest rate 2.66% -- -- -- -- -- 2.66% Variable interest rate borrowings $ 29,242 -- -- -- $ 5,000 $ 4,000 $ 38,242 $ 38,242 Average interest rate 4.68% -- -- -- 6.12% 6.16% 5.02%
Table 12 provides additional information about the Corporation's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities, deposits, and borrowings with contractual maturities, the table presents principal cash flows and related weighted average interest rates by contractual maturities, as well as the Corporation's historical experience of the impact of interest rate fluctuations on the prepayment of residential mortgage loans. For interest and noninterest-bearing demand and savings deposits that have no contractual maturity, the table presents estimated principal cash flows based on the Corporation's historical experience and management's judgement, as applicable, concerning customers' most likely withdrawal behaviors, and weighted average interest rates as of December 31, 1997. The fair market value of loans was estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Weighted average variable rates on loans were based on the implied forward rates in the yield curve at December 31, 1997. Table 12 excludes loan commitments, which are considered financial instruments. A discussion of the Corporation's loan commitments is included herein in Note K to the financial statements. CAPITAL Capital provides the foundation for future growth and expansion. The major component of capital is shareholders' equity. Shareholders' equity was $223.93 million as of December 31, 1997, an increase of $16.66 million, or 8%, from total shareholders' equity as of December 31, 1996. The increase in 1997 was derived almost exclusively from earnings retention of $14.9 million. The ratio of shareholders' equity to total assets was 12.7% at December 31, 1997, compared to 12.2% at December 31, 1996 and 11.4% at December 31, 1995. The Corporation's tangible equity ratio was 12.5%, 12.0% and 11.2% as of December 31, 1997, December 31, 1996 and December 31, 1995, respectively. Under the regulatory "risk-based" capital guidelines in effect for both banks and bank holding companies, minimum capital levels are based upon perceived risk in the Corporation's various asset categories. These guidelines assign risk weights to on-and-off balance sheet items in arriving at total risk-adjusted assets. Regulatory capital is divided by the computed total of risk-adjusted assets to arrive at the risk-based capital ratios. continued on page 42 41 CAPITAL - CONTINUED The Corporation's capital ratios exceeded the minimum levels prescribed by the Federal Reserve Board, as of December 31, 1997, as shown in the following table.
RISK BASED CAPITAL RATIOS LEVERAGE TIER 1 TOTAL - -------------------------------------------------------------- Chemical Financial Corporation's capital ratios 13% 31% 32% Regulatory capital ratios "well capitalized" definition 5 6 10 Regulatory capital ratios minimum requirements 3 4 8
The Corporation's tier 1 and total regulatory capital ratios are significantly above the regulatory minimum and "well capitalized" levels due to the Corporation holding $662 million of investment securities and other assets, which are assigned a 0% risk rating, $223 million of investment securities and other assets, which are assigned a 20% risk rating, and $449 million of loans secured by first liens on residential real estate properties, which are assigned a 50% risk rating. These three categories of assets represented 76% of the Corporation's total assets as of December 31, 1997. As of December 31, 1997, all of the Corporation's banking subsidiaries exceeded the minimum capital ratios required of a "well-capitalized" institution, as defined in the final rule under the Federal Deposit Insurance Corporation Improvement Act of 1991. OUTLOOK The Corporation's philosophy is that it intends to be a "family" of community banks, which operates under the direction of local Boards of Directors, a holding company management team and a Corporate Board of Directors. The Corporation strives to remain a quality sales and service organization and is dedicated to sustained profitability through the preservation of the community banking concept, in an ever changing and increasingly competitive environment. The Corporation has designed its policies regarding asset/liability management, liquidity, lending, investment strategy and expense control to provide for the safety and soundness of the organization, continued earnings growth and the avoidance of wide fluctuations in earnings from one year to the next. The Corporation continues to successfully manage its operations, and thus offset its lower than peer net interest margin, which results from its conservative lending and investment policies, with lower than peer loan losses and operating expenses. This strategy resulted in an increase in earnings per share of 8.3% and a return on assets of 1.38% during 1997. The banking industry is affected by the overall level of inflation, primarily by the impact inflation has on the overall level and trend of interest rates and the growth of operating expenses. It is necessary for the Corporation to position itself so that changes in the overall level and trend of interest rates, both on a short-term and long-term basis, do not significantly adversely impact net interest income. It is also necessary for the Corporation to continually monitor the growth of operating expenses and maintain an appropriate ratio of equity to assets. 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 financial performance. OTHER MATTERS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The Corporation adopted SFAS 130 on January 1, 1998. SFAS 130 established standards for the reporting of comprehensive income and its components. Comprehensive income includes net income and certain adjustments to equity required under generally accepted accounting principles which result from transactions other than with shareholders. It is the Corporation's current intention to display comprehensive income as a component in the statement of changes in shareholders' equity. The Corporation is currently in the process of addressing an issue that is facing all users of automated information systems. The issue is that many computer systems that process transactions based on two digits representing the year of the transaction may recognize a date using "00" as the year 1900 rather than the Year 2000. The inability to correctly recognize "00" as the Year 2000 could affect a wide variety of automated information systems, such as mainframe applications, personal computers and communication systems, in the form of software failure, errors or miscalculations. 42 The Corporation began developing its plan to prepare for the Year 2000 in 1996. This plan began with the performance of an inventory of software applications, communicating with third party vendors and suppliers, and obtaining certifications of compliance from third party providers. During the early planning process, the Corporation was notified by the vendor of its core operating system that the core operating system used by the Corporation was not Year 2000 Compliant and that it would not be modified to become Year 2000 Compliant. The Corporation performed an extensive evaluation of replacement operating systems and in July 1997 chose to convert its core operating system to a new system offered by its existing vendor. The vendor of the core operating system has certified to the Corporation that its system is Year 2000 Compliant. The Corporation is scheduled to convert to the new operating system during the first quarter of 1998. The Corporation's conversion to the new core operating system is anticipated to enhance customer service and operating efficiencies. The cost of converting to the new operating system is approximately $300,000. In conjunction with the conversion to the new operating system, the Corporation purchased a new mainframe computer in 1997 at a cost of approximately $1 million, which was capitalized. The existing mainframe computer and core operating system software were fully depreciated prior to 1997. The Corporation will continue to assess the impact of the Year 2000 issue on the remainder of its computer-based systems and applications throughout 1998. The Corporation's goal is to perform tests of its systems and applications during 1998 and to have all systems and applications compliant with the century change by December 31, 1998. In addition to reviewing its own computer operating systems and applications, the Corporation has initiated formal communications with its significant suppliers and large customers to determine the extent to which the Corporation's interface systems are vulnerable to those third parties' failures to resolve their own Year 2000 issues. The Corporation is continuing to seek assurances that the systems of other companies on which the Corporation's systems rely will be timely converted or modified. If such modifications and conversions are not completed timely, their inability to correctly recognize the Year 2000 could have an adverse impact on the operations of the Corporation. The Corporation believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems and that additional costs to be incurred are not expected to be material to the Corporation's results of operations, liquidity or capital resources. The costs of the project and the date on which the Corporation projects it will complete the Year 2000 modifications were based on management's best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of other companies on which the Corporation's systems rely to modify or convert their systems to be Year 2000 Compliant, the ability to locate and correct all relevant computer codes, and similar uncertainties. This discussion and analysis of financial condition and results of operations, and other sections of this annual report, contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," 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 ("Future 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. Furthermore, the Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include 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; 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; and changes in the national economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward- looking statement. 43 DIRECTORS AND OFFICERS OF AFFILIATES CHEMICAL BANK AND TRUST COMPANY DIRECTORS STUART J. BERGSTEIN President Community Drug Stores, Inc. LAWRENCE E. BURKS Vice Chairman JAMES A. CURRIE Educator DALE T. DEAN President, 4-D Builders Supply, Inc. MICHAEL L. DOW Chairman, General Aviation, Inc. DR. DAVID E. FRY President, Northwood University RICHARD A. HAZLETON Chairman and Chief Executive Officer, Dow Corning Corporation JAMES R. JENKINS Vice President, Secretary and General Counsel, Dow Corning Corporation TERENCE F. MOORE President, MidMichigan Health MARY M. NEELY Community Volunteer ALOYSIUS J. OLIVER President and CEO Chemical Financial Corporation ALAN W. OTT Chairman FRANK P. POPOFF Chairman The Dow Chemical Company DAVID B. RAMAKER President and CEO LAWRENCE A. REED Retired, Dow Corning Corporation GARY S. SMITH, M.D. Midland Family Physicians, P.C. WILLIAM S. STAVROPOULOS President and Chief Executive Officer The Dow Chemical Company DIRK D. WALTZ Dirk Waltz Buick-Olds-Jeep, Inc. LAWRENCE J. WASHINGTON, JR. Vice President, Human Resources Chemicals and Plastics The Dow Chemical Company HONORARY DIRECTOR DIRK B. WALTZ Retired Dirk Waltz Buick-Olds-Jeep, Inc. ST. LOUIS OFFICE ADVISORY BOARD LAWRENCE E. BURKS Vice Chairman DANIEL L. DOEPKER President, Mid-West Building Distributors, Inc. DOUGLAS F. McKIM Chairman Lodewyk, Nesen & McKim, Inc. DUANE OXENDALE Retired Michigan Livestock Exchange DAVID B. RAMAKER President and CEO WILLIAM C. THIEMKEY, D.O. Physician BRADLY E. VIBBER Senior Vice President and Manager JAMES F. WAGAR Vice Chairman, Playbuoy Pontoon Manufacturing, Inc. OFFICERS ALAN W. OTT Chairman LAWRENCE E. BURKS Vice Chairman DAVID B. RAMAKER President and CEO THOMAS J. ALEXANDER Executive Vice President and Cashier BRUCE M. GROOM Senior Vice President and Senior Trust Officer CHARLES F. KINNEY Senior Vice President WILLIAM C. LAUDERBACH Senior Vice President and Investment Officer W. ROGER MIKUSEK Senior Vice President LARRY M. NOBLE Senior Vice President JUDE T. PATNAUDE Senior Vice President and Trust Officer GLENN W. PIETENPOL Senior Vice President and Trust Officer BRADLY E. VIBBER Senior Vice President VICE PRESIDENTS JOANN M. BURGESS ROBERT W. BURNS KIMBERLEE R. BUTCHER ALAN C. CHRISTENSEN LAWRENCE LaGROW JANET M. McGUIRE ROGER D. NEMETH DARLENE R. SLATER VICE PRESIDENTS AND TRUST OFFICERS KIRK W. FISHER DANIEL P. McKUNE GUY D. MERRIAM PATRICIA ZIMMERMAN CONTROLLER GRETCHEN L. RODAMMER ASSISTANT VICE PRESIDENTS CARL R. AHEARN COREY BAILEY RUTH BOMAN ROBERT O. BURGESS, JR. G. THOMAS CIMBALIK MARY G. GREEN SHERRY A. MIZER SELENA NOBLE ROBERT S. RATHBUN MONICA A. SANGER VICTOR L. SCHULTZ RONALD D. SCHWEIGERT BARBARA E. SLAGEL PEGGY L. TUCKER TINA A. WALLACE ROBERT J. WALTERS CAROL WIERMAN SHERYL K. WILLIG ASSISTANT VICE PRESIDENTS AND TRUST OFFICERS HERBERT E. HARDY NORMA KENDALL TRUST OFFICERS SHELLY L. CAUFIELD RUDOLPH R. RADOSA, JR. MARK SOVEREEN PICCOLA SWEEBE ASSISTANT TRUST OFFICERS JAN E. GORDON DEBORA RITTENBURG AUDITOR AUDREY J. GRIFFIN ASSISTANT CASHIERS BETH E. BRICK PAMELA J. CARRIER REGINA CURTIS SHERON DEIBERT STEPHEN HALLEAD CHERYL K. MEYERS PATRICIA A. NELLIS MARK J. STEINKE TAMARA J. SWINSON MARLENE TETU SANDRA TURK KEITH A. WENZEL BESSIE T. WILLIAMS SHARON YODER BUILDING AND MAINTENANCE OFFICER CHESTER CANTRELL CHEMICAL FINANCIAL INSURANCE AGENCY VICE PRESIDENT TRICIA LYN SUHR CFC TITLE SERVICES INC. VICE PRESIDENT CHARLOTTE A. ELMORE CFC DATA CORP DIRECTORS THOMAS J. ALEXANDER Executive Vice President and Cashier Chemical Bank and Trust Co. STUART J. BERGSTEIN President Community Drug Stores, Inc. JAMES R. JENKINS Vice President, Secretary and General Counsel Dow Corning Corporation DOMINIC MONASTIERE President and CEO Chemical Bank Bay Area TERENCE F. MOORE President, MidMichigan Health ALOYSIUS J. OLIVER President and CEO Chemical Financial Corporation THOMAS H. PETERSEN Executive Vice President and General Manager 44 CFC DATA CORP - - CONTINUED OFFICERS ALOYSIUS J. OLIVER President and Treasurer THOMAS H. PETERSEN Executive Vice President and General Manager W. BRIAN BEALL Systems Manager LORI A. GWIZDALA Secretary CHEMICAL BANK BAY AREA DIRECTORS GARY E. ANDERSON President Dow Corning Corporation LAWRENCE E. BURKS Vice Chairman Chemical Bank and Trust Co. JAMES E. DANEK Executive Vice President LORI A. GWIZDALA Senior Vice President, Chief Financial Officer and Treasurer Chemical Financial Corporation THERON P. HOLLAND Retired DOMINIC MONASTIERE President and CEO DONALD L. PIETZ President, PICO, Inc. DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. DAVID S. RAMSAY Lee/Ramsay Funeral Home ROBERT D. SAROW Attorney at Law, Learman, Peters, Sarow & McQuillan GARY D. STEADMAN President, Gary D. Steadman, Inc. THOMAS H. TABOR President, Herman Hiss & Co. DONALD L. WILTSE Wiltse Chevrolet, Oldsmobile, Buick, Inc. AU GRES ADVISORY BOARD HOWARD M. BARRIGER Teacher Standish Sterling High School President, Barriger Builders RONALD E. CHRISTIE Retired JAMES E. DANEK Executive Vice President KARL N. EDMONDS AuGres Parts & Service GERALD H. HEINRICH Retired THERON P. HOLLAND Retired OTIS L. McKINLEY, D.D.S. DOMINIC MONASTIERE President and CEO DAVID S. RAMSAY Lee/Ramsay Funeral Home DONALD L. WILTSE Wiltse Chevrolet, Oldsmobile, Buick, Inc. OFFICERS LAWRENCE E. BURKS Chairman DOMINIC MONASTIERE President and CEO JAMES E. DANEK Executive Vice President RODNEY R. LOOMIS Senior Vice President VICE PRESIDENT AND CASHIER JANIE L. WILLIAMSON VICE PRESIDENTS CRAIG A. BISHOP TARI E. DETZLER DUANA R. Mc CULLOCH GALE L. MIELENS MARY JO TOPORSKI THOMAS R. WILCOX ASSISTANT VICE PRESIDENTS LYNN M. HANSEN R. JAMES MERRILL SANDRA A. METZGER DEBORAH K. MORGAN SUZANNE E. NEERING AUDITOR DEBBIE L. DEWALD ASSISTANT CASHIERS CHARLOTTE L. ANSPAUGH HOLLY J. BICKHAM RONALD D. ERNDT MARIA FRANEK JUDITH A. MARCINIAK KATHLEEN C. MARQUARDT JEAN M. SAXON KAREN M. SCHAFFER WILLIAM R. TILLEN CHEMICAL BANK SOUTH DIRECTORS JUDITH A. BOROWITZ President and CEO RONALD J. DeGRAW Attorney, Schroeder, DeGraw, Kendall, Mayhall, DeGraw & Dickerson ROBERT W. FRAHM President, Bob Frahm Chevrolet- Buick-Pontiac Company EUGENE D. HAMAKER Retired/Consultant, Metalab DENNIS J. LaFLEUR President and CEO Chemical Bank Michigan WILLIAM C. LAUDERBACH Senior Vice President and Investment Officer Chemical Bank and Trust Co. PETER T. MITCHELL President, Albion College ARLIN E. NESS President Starr Commonwealth Schools JOYCE J. SPICER Administrative Assistant, Albion Division, Harvard Industries, Inc. WILLIAM K. STOFFER Chairman and Chief Executive Officer Albion Machine and Tool Co. JEOFFREY A. THORREZ President Concord Manufacturing Co. JACK H. TOWNSEND Chairman and Chief Executive Officer Michigan Kitchen Distributors DR. MELVIN L. VULGAMORE Chancellor Albion College OFFICERS EUGENE D. HAMAKER Chairman JUDITH A. BOROWITZ President and CEO CAROL R. HAYDEN Vice President and Cashier TERI E. FOGEL Vice President MARVIN N. ITTNER Vice President REBECCA L. VETTEL Vice President ASSISTANT VICE PRESIDENT DIANE M. RAMIREZ AUDITOR ELIZABETH A. WONUS ASSISTANT CASHIERS MELISSA J. HOATH BARBARA A. KEITH DAVID A. SMITH CHEMICAL BANK MONTCALM DIRECTORS LAWRENCE E. BURKS Vice Chairman Chemical Bank and Trust Co. DONALD BURNS President Montcalm Community College GARY COPP Secretary/Manager Carson City Lumber Co. C. NORMAN CROOKS Farmer THOMAS W. KOHN President and CEO CHARLES E. MILLER, JR. Insurance Miller-Gamwell Agency DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. MELVIN SCHNEPP Retired Schnepp Funeral Homes, Inc. OFFICERS LAWRENCE E. BURKS Chairman THOMAS W. KOHN President and CEO GLENN L. WOOD Senior Vice President LLOYD D. SCOBY Senior Vice President DARLA BARTLETT Cashier VICE PRESIDENTS DAVID BARKER DIANE BEACH BRUCE COLE ROBERT HILL JEAN SOUTHWARD 45 CHEMICAL BANK MONTCALM - CONTINUED ASSISTANT VICE PRESIDENTS KAY MEISTER DONNA STRATTON AUDITOR KIMBERLY SIBURT ASSISTANT CASHIERS AMY S. ANDERSEN CONNIE COLLAR TAMALA HARRINGTON DORIS RASMUSSEN LINDA TUCKER KAREN YAW CHEMICAL BANK CENTRAL DIRECTORS JACK R. BENEDICT President The Benedict Manufacturing Co. BRUCE M. GROOM Senior Vice President and Senior Trust Officer Chemical Bank and Trust Co. KARL W. LINEBAUGH President and CEO RONALD MOHNKE President Mohnke Funeral Home, Inc. LINDA L.H. MYERS Assistant Superintendent Mecosta-Osceola Intermediate School District WILLIAM R. PRUITT Pruitt-Livingston Funeral Home DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. CARL M. SCHUBERG Auctioneer-Farmer FRANKLIN C. WHEATLAKE Chairman, Wheatlake Enterprises JOSEPH M. WOLSCHLEGER, M.D. Internal Medicine OFFICERS DAVID B. RAMAKER Chairman KARL W. LINEBAUGH President and CEO PHILIP R. KEATING Executive Vice President MARY WITHERS Vice President and Cashier ASSISTANT VICE PRESIDENTS JAMES GARRETT DAVID J. LANGWORTHY JEAN A. MISENAR MARJORIE A. RICHARDS AUDITOR ROBERT D. GAMMONS ASSISTANT CASHIERS KENDA DIESON JANET ROWLAND KELLIE J. SHANKEL CRA OFFICER MARY K. SUCKOW CHEMICAL BANK MICHIGAN DIRECTORS ROBERT H. BEACOM Retired, Chemical Bank Michigan JOHN M. BICKNELL Retired Retailer DONALD D. CLARKE Crop Farmer VINCENT L. DEMASI Owner, Clare Hardware RICHARD DEAN DOHERTY A.J. Doherty Motor Inns, Inc. WAYNE FRUCHEY Retired, Fruchey Foods, Inc. JOSEPH F. JOHNSTON Retired, Johnston Elevator CHARLES F. KINNEY Senior Vice President Chemical Bank and Trust Co. DENNIS J. LAFLEUR President and CEO CLAY MAXWELL Maxwell Seed Farms RICHARD M. MOSER Owner, Woods Household Furniture & Appliances BETTY M. MUSSELL Community Volunteer JOSEPH F. MYERS Myers for Tires WILLIAM C. ODYKIRK Ody Enterprises ALOYSIUS J. OLIVER President and CEO Chemical Financial Corporation GUERDON E. SCHUMACHER Retired ALBERT F. WENTWORTH Dairy Farmer OFFICERS ALOYSIUS J. OLIVER Chairman DENNIS J. LAFLEUR President and CEO SENIOR VICE PRESIDENTS JAMES A. ALLEN RODERICK F. BEAMISH RONNIE L. POWELL MARK D. RUHLE VICE PRESIDENT AND CASHIER DAVID P. VERMILYE VICE PRESIDENTS JANET GILLARD STEVEN J. KINGSBURY TAMMY L. MILLER COMPTROLLER BRENDA J. HAVENS ASSISTANT VICE PRESIDENTS CHARLES AMBLE ROBIN R. GROVE LINDA C. HALL DAVID T. PRAWDZIK SUSAN D. SPEARY LORI STOUT STANLEY L. WARNER AUDITOR HILDA E. FLETCHER ASSISTANT CASHIERS THEOLA CLEVELAND STEPHANIE COOPER ELAINE DUNKLE JUDITH A. GROVE CHRISTINE J. LAWSON TINA M. LEHMANN VERA MARSHALL SUE E. WHITE CHEMICAL BANK NORTH DIRECTORS THOMAS J. ALEXANDER Executive Vice President and Cashier Chemical Bank and Trust Co. WILLIAM L. CAREY Attorney at Law JERRY M. DeWITT Owner, Fox Run Country Club ROSE E. DULEY GLEASON Retired, Crawford County Library RICHARD D. HACKER Owner Hacker's Yamaha & Honda ROBERT JANSEN Owner Jansen Plumbing & Heating PAUL B. LERG Assistant Superintendent Crawford AuSable Schools DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. G. JOE SWAIN President and CEO JERRY WALKER Vice President, Jack Millikin, Inc. OFFICERS DAVID B. RAMAKER Chairman G. JOE SWAIN President and CEO MARK W. FURST Vice President RANDALL A. SEYMOUR Vice President J. ELAINE SWEENEY Vice President and Cashier ASSISTANT VICE PRESIDENTS TAMARA L. KENT SHARON NIEBRZYDOWSKI SHELBY J. NORMAN JANE A. RANDALL ANDREA M. WEISS AUDITOR CAROL D. WHITE ASSISTANT CASHIERS JAY T. DUKE SANDRA L. EGBERS SHARON A. VARISCO 46 CHEMICAL BANK WEST DIRECTORS THOMAS J. ALEXANDER Executive Vice President and Cashier, Chemical Bank and Trust Co. RONALD L. BLACKMAN President Blackman Iron & Metal, Inc. NANCY BOWMAN C.P.A. HAROLD CNOSSEN Prosperous Farms WAYNE EVERETT Everett Office Plus JAMES B. HINKAMP, II Executive Vice President DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. JOHN A. REISNER President and CEO OFFICERS DAVID B. RAMAKER Chairman JOHN A. REISNER President and CEO JAMES B. HINKAMP, II Executive Vice President KRISTINE E. BOWEN Vice President BARBARA HANCOCK Assistant Vice President and Cashier ASSISTANT VICE PRESIDENTS ROXANNE PRINCE SUSAN SCHWAGER AGRICULTURE REPRESENTATIVE THOMAS WINKEL AUDITOR SUSAN PARSONS ASSISTANT CASHIERS DELLA BEDNARICK DARYL HESSELINK LORIE MORIARTY JUDY MULDER MARY JO SHIVLIE CHEMICAL BANK KEY STATE DIRECTORS DAVID ELOW Retired Industrialist MARGARET S. GULICK President and Chief Executive Officer, Memorial Healthcare Center JOHN F. HARRISON President and CEO WILLIAM P. HOWE President Mid-Michigan Construction MICHAEL G. MAJZEL, JR. Self-Employed Crop Farmer ALOYSIUS J. OLIVER President and CEO Chemical Financial Corporation HERBERT F. PENHORWOOD Retired Industrialist DAVID B. RAMAKER President and CEO Chemical Bank and Trust Co. HOWARD S. SHAND President, William E. Walter, Inc. PHILIP R. WELCH President Michigan Lake Products, Inc. OFFICERS DAVID ELOW Chairman JOHN F. HARRISON President and CEO ROBERT L. HARDY Senior Vice President VICE PRESIDENTS LORI L. EDINGTON ARTHUR C. ELBRACHT JOHN H. LARZELERE ASSISTANT VICE PRESIDENTS P. JOSEPH DALY DONALD D. LEVI ASSISTANT VICE PRESIDENT AND CASHIER NITA L. JONES ASSISTANT VICE PRESIDENT AND CONTROLLER DONNA S. McAVOY ASSISTANT CASHIERS BARBARA M. BUCSI JAMES R. FARHAT MICHELLE M. HOLDEN RANDY L. HORTON JAMES D. JONES SUSAN K. LYNDE JANA L. MOORE CAROL A. ROWELL LINDA K. SOVIS CHEMICAL BANK THUMB AREA DIRECTORS RICHARD C. BIDDINGER Owner, Riverside Sales and Engineering Corp. GARY J. CREWS Attorney, Ransford and Crews LORI A. GWIZDALA Senior Vice President, Chief Financial Officer and Treasurer, Chemical Financial Corporation DOUGLAS H. HERRINGSHAW President CARL O. HOLMES Chairman and CEO MARVIN J. KOCIBA Farm Owner and Operator MICHAEL LAETHEM President Laethem Equipment Company Laethem Farm Service Company KENNETH G. McLAREN Retired Insurance Agency Owner ALAN W. OTT Chairman Chemical Financial Corporation GERALDINE F. PRIESKORN Vice President Prieskorn Variety Stores, Inc. RICHARD B. RANSFORD President Ransford Funeral Home, Inc. CASS CITY/HARBOR BEACH/ BAD AXE ADVISORY BOARD DUANE W. CHIPPI President Cass City Oil & Gas Company RICHARD T. DONAHUE Farm Owner DOUGLAS H. HERRINGSHAW President CARL O. HOLMES Chairman and CEO WILLIAM L. KRITZMAN President and Treasurer Kritzman's, Inc. MARVIN J. KOCIBA Farm Owner and Operator GERALDINE F. PRIESKORN Vice President Prieskorn Variety Stores, Inc. PATRICIA J. ROGGENBUCK Secretary, Helena Valley Farms GLEN H. TOWNLEY Owner Harbor Beach Insurance Agency K. MICHAEL WEAVER Owner, Coachlight Pharmacy ROBERT V. WISCHMEYER Plant Manager Agri Sales, Inc. (Cass City) OFFICERS CARL O. HOLMES Chairman and CEO DOUGLAS H. HERRINGSHAW President JAMES E. BOLTON Senior Vice President DENNIS P. GILKEY Senior Vice President ROBERT M. WOLAK Senior Vice President VICE PRESIDENT AND CASHIER CHARLES L. BROWN VICE PRESIDENTS FELICIA M. CARR WILLIAM L. CHASE BEVERLY J. PERRY ASSISTANT VICE PRESIDENTS LYNN C. PAVLICHEK LINDA K. SMITH CHERYL D. WILDER CAROLYN M. WYMORE AUDITOR ROSE M. STRUNZ ASSISTANT CASHIERS ORVIL A. BEECHER BETTE M. BURTON ANNE M. FOLEY SUSAN M. MILLER MARSHA K. MOORE SHERRYL M. SEELEY JANET D. THANE KAREN L. WOOD EXECUTIVE SECRETARY MONALEE McCREA 47 CORPORATE DIRECTORS AND OFFICERS [PICTURE OF JAMES A. CURRIE] [PICTURE OF MICHAEL L. DOW] [PICTURE OF ALOYSIUS J. OLIVER] [PICTURE OF ALAN W. OTT] [PICTURE OF FRANK P. POPOFF] [PICTURE OF LAWRENCE A. REED] [PICTURE OF WILLIAM S. STAVROPOULOS] BOARD OF DIRECTORS JAMES A. CURRIE Educator MICHAEL L. DOW Chairman General Aviation, Inc. ALOYSIUS J. OLIVER President and Chief Executive Officer ALAN W. OTT Chairman FRANK P. POPOFF Chairman The Dow Chemical Company LAWRENCE A. REED Retired Dow Corning Corporation WILLIAM S. STAVROPOULOS President and Chief Executive Officer The Dow Chemical Company [PICTURE OF EXECUTIVE MANAGEMENT (from left to right): LORI A. GWIZDALA, ALOYSIUS J. OLIVER, AND DAVID B. RAMAKER] EXECUTIVE OFFICERS ALAN W. OTT Chairman ALOYSIUS J. OLIVER President and Chief Executive Officer DAVID B. RAMAKER Executive Vice President and Secretary LORI A. GWIZDALA Senior Vice President, Chief Financial Officer and Treasurer CORPORATE OFFICES 333 East Main Street P.O. Box 569 Midland, Michigan 48640 Telephone: (517) 839-5350 Fax Number: (517) 839-5255 OFFICERS GLENN SWEENEY Vice President and Corporate Auditor THOMAS R. GAPSKE Vice President THEODORE J. GROENING Assistant Vice President and Assistant Financial Officer JOSEPH W. TORRENCE Assistant Vice President and Corporate Human Resources Officer SANDRA BARGERON Assistant Vice President and Auditor ROBERT E. SUTTON Corporate Loan Review and Compliance Officer JONATHAN P. BUSHEY Loan Review Officer CHERYL HASSEN SWARTHOUT Training Officer 48 CHEMICAL FINANCIAL CORPORATION THE COMPANY Chemical Financial Corporation is a registered bank holding company headquartered in Midland, Michigan, that operates ten bank affiliates with eighty-six banking offices in twenty-four counties located generally across the midsection of Michigan's lower peninsula. Because the Corporation is a bank holding company, its principal operations are conducted by its subsidiaries. All of the Corporation's subsidiary banks are state banks and offer the full range of services normally associated with commercial banking. The Corporation's lead bank is Chemical Bank and Trust Company, headquartered in Midland, Michigan. Trust services are provided by the lead bank directly to customers of the Corporation's other nine subsidiary banks through service agreements with each bank. The Corporation owns a bank-related company, CFC Data Corp, which provides data processing services to both the Corporation's subsidiary banks and non-affiliated business customers. The Corporation also operates an insurance agency and a title services company through subsidiaries of its lead bank. The Parent Company serves as controlling shareholder and maintains systems of financial, operational and administrative controls that permit centralized evaluation of subsidiary operations. The Parent Company also provides substantive assistance to its subsidiaries in selected functional areas including accounting, operations, marketing, investments, central purchasing, financial planning, internal auditing, loan quality control, training, compliance with regulatory requirements and personnel. On January 1, 1997, Aloysius J. Oliver succeeded Alan W. Ott as president and chief executive officer of the Corporation and David B. Ramaker was appointed executive vice president of the Corporation. Mr. Oliver, who has been with the Corporation forty years, had been executive vice president of the Corporation. Mr. Ramaker, who succeeded Mr. Ott as chief executive officer of Chemical Bank and Trust Company, had been president and chief executive officer of Chemical Bank Key State, a wholly owned subsidiary of the Corporation, in Owosso, Michigan. Additionally, on January 1, 1997, Mr. Oliver was appointed a director of the Corporation and Mr. Ramaker was appointed secretary of the Corporation. ANNUAL MEETING The annual meeting of the shareholders will be held at the Midland Center for the Arts, Midland, Michigan, on Monday, April 20, 1998, at 2:00 P.M. DIVIDEND REINVESTMENT The Corporation offers a dividend reinvestment program through Harris Trust and Savings Bank, whereby shareholders may reinvest their Chemical Financial Corporation dividends in additional shares of the Corporation's stock. Information concerning this optional program is available from the Chief Financial Officer, Chemical Financial Corporation, P.O. Box 569, Midland, Michigan 48640. Telephone (517) 839-5350. ADDITIONAL INFORMATION Chemical Financial Corporation common stock is traded on The NASDAQ Stock Market. It is quoted daily in leading financial publications under the NASDAQ National Market Issues heading of the stock tables, NASDAQ symbol: CHFC. As of December 31, 1997, there were six registered market makers of Chemical Financial Corporation common stock: A.G. Edwards & Sons, Inc., Stifel Nicolaus & Co., First of Michigan Corporation, Roney & Company, Herzog, Heine, Geduld, Inc. and Troster Singer Corp. The approximate number of shareholders of record at December 31, 1997 was 3,800. Analysts, investors, and others seeking financial or general information about the Corporation are invited to contact Aloysius J. Oliver, president and chief executive officer, or Lori A. Gwizdala, senior vice president and chief financial officer. Telephone (517) 839-5350. EQUAL OPPORTUNITY EMPLOYERS Chemical Financial Corporation and its subsidiaries are equal opportunity employers. REGISTRAR & TRANSFER AGENTS Harris Trust and Savings Bank Chemical Bank and Trust Company Attention: Shareholder Services Attention: Transfer Agent 311 West Monroe Street, 11th Floor 333 East Main Street Chicago, Illinois 60606 Midland, Michigan 48640 49 CHEMICAL FINANCIAL CORPORATION 333 East Main Street P.O. Box 569 Midland, Michigan 48640-0569 Telephone: (517) 839-5350 Fax: (517) 839-5255 www.chemicalbankmi.com EX-21 5 EXHIBIT NO. 21 SUBSIDIARIES
STATE OF OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - ---- -- ---------- -- ------------- Banking subsidiaries: Chemical Bank and Trust Company Michigan Chemical Bank Michigan Michigan Chemical Bank South Michigan Chemical Bank Thumb Area Michigan Chemical Bank West Michigan Chemical Bank Montcalm Michigan Chemical Bank North Michigan Chemical Bank Bay Area Michigan Chemical Bank Central Michigan Chemical Bank Key State Michigan Non-banking subsidiaries: CFC Data Corp Michigan CFC Financial Services, Inc. (subsidiary of Chemical Bank and Trust Company) - also operates under d/b/a Chemical Financial Insurance Agency Michigan CFC Title Services, Inc. (subsidiary of Chemical Bank and Trust Company) Michigan
EX-23 6 EXHIBIT 23 ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100 500 Woodward Avenue Detroit, Michigan 48226-3426 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statement (Form S-8, Number 33-15064, dated June 17, 1987, pertaining to the Chemical Financial Corporation 1987 Award and Stock Option Plan, (2) the Registration Statement (Form S-8, Number 33-40792, dated May 21, 1991) pertaining to the Chemical Financial Corporation 401(k) Savings Plan and in the related Prospectus, (3) the Registration Statement (Form S-8, Number 33-47356, dated April 28, 1992) pertaining to the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors and (4) the Registration Statement (Form S-8, Number 333-38511, dated October 22, 1997) pertaining to the Chemical Financial Corporation 1997 Stock Incentive Plan of our report dated January 20, 1998 with respect to the consolidated financial statements of Chemical Financial Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1997. We consent to the incorporation by reference in (1) the Registration Statement (Form S-8, Number 33-40792, dated May 21, 1991) pertaining to the Chemical Financial Corporation 401(k) Savings Plan and in the related Prospectus of our report dated January 30, 1998, with respect to the financial statements and schedules of the Chemical Financial Corporation 401(k) Savings Plan included in the Annual Report (Form 10-K) for the year ended December 31, 1997 and (2) the Registration Statement (Form S-8, Number 33-47356, dated April 28, 1992) pertaining to the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors and in the related Prospectus of our report dated January 14, 1998, with respect to the financial statements of the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors included in the Annual Report (Form 10-K) for the year ended December 31, 1997. s/ Ernst & Young LLP March 20, 1998 Ernst & Young LLP is a member of Ernst & Young International, Ltd. EX-27 7 ART. 9 FDS FOR 1997 FORM 10-K
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 95,794 0 49,750 0 494,173 251,020 253,459 845,600 17,359 1,765,100 1,475,841 42,196 14,138 9,000 107,530 0 0 116,395 1,765,100 69,873 42,714 4,732 117,319 46,320 48,279 69,040 1,002 1 45,718 35,442 35,442 0 0 23,889 2.22 2.20 4.35 1,783 1,125 139 0 16,607 620 370 17,359 14,909 0 2,450
EX-27 8 ART. 9 FDS FOR 1997 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 1.59 1.57 4.35 1,870 1,691 6 3,567 16,607 394 289 17,269 17,269 0 0
EX-27 9 ART. 9 FDS FOR 1997 2ND 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 JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 107,287 0 84,850 0 454,236 274,230 275,557 814,391 17,081 1,764,856 1,488,212 38,221 15,558 9,000 102,271 0 0 111,594 1,764,856 33,993 20,786 2,510 57,289 22,381 23,307 33,982 548 0 23,414 16,564 16,564 0 0 11,150 1.04 1.03 4.39 1,689 956 0 2,645 16,607 272 198 17,081 17,081 0 0
EX-27 10 ARTICLE 9 FDS FOR 1997 1ST QUARTER 10-Q
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 90,356 998 106,700 0 471,735 203,923 204,102 799,661 16,865 1,705,212 1,437,049 33,484 17,200 9,000 102,284 0 0 106,195 1,705,212 16,734 10,187 1,272 28,193 10,977 11,457 16,736 329 0 11,464 8,235 8,235 0 0 5,526 0.51 0.51 4.39 1,585 337 0 1,922 16,607 172 101 16,865 16,865 0 0
EX-27 11 ART. 9 FDS FOR 1996 FORM 10-K
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 89,517 1,134 114,200 0 441,787 213,752 215,494 807,653 16,607 1,698,774 1,429,915 37,333 14,257 10,000 102,098 0 0 105,171 1,698,774 64,470 41,071 4,711 113,252 44,284 46,162 67,090 1,128 15 45,124 33,036 33,036 0 0 22,003 2.05 2.03 4.33 1,341 539 0 0 15,886 691 284 16,607 14,946 0 1,661
EX-27 12 ART. 9 FDS FOR 1996 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 1.45 1.43 4.29 1,627 915 0 2,542 15,886 388 194 16,503 16,503 0 0
EX-27 13 ART. 9 FDS FOR 1996 2ND 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 JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 81,092 988 73,200 0 431,206 277,570 278,720 794,493 16,260 1,691,300 1,432,985 34,549 15,187 10,000 97,226 0 0 101,353 1,691,300 33,126 20,678 2,365 56,169 22,406 23,351 32,818 538 14 23,243 15,268 15,268 0 0 10,156 .95 .93 4.25 1,340 955 0 2,295 15,886 286 122 16,260 16,260 0 0
EX-27 14 ART. 9 FDS FOR 1996 1ST QUARTER 10-Q
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 92,009 2,984 81,850 0 386,228 314,451 317,263 752,344 15,958 1,662,535 1,414,806 32,241 16,642 12,000 92,166 0 0 94,683 1,662,538 15,981 9,761 1,247 26,989 10,907 11,433 15,556 268 0 11,005 7,167 7,167 0 0 4,802 0.47 0.46 4.18 1,672 556 67 2,295 15,678 46 58 15,958 15,958 0 0
EX-27 15 ART. 9 FDS FOR YEAR ENDED 1995 FORM 10-K
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 88,054 2,981 80,100 0 341,670 360,864 365,516 738,716 15,678 1,643,880 1,397,266 35,223 13,767 12,080 91,944 0 0 93,600 1,643,880 62,732 38,018 4,816 105,566 41,824 44,209 61,357 1,053 0 42,606 29,391 29,391 0 0 19,731 1.92 1.89 4.19 1,658 855 84 0 15,095 645 170 15,678 14,111 0 1,567
EX-99 16 EXHIBIT 99(a) Financial Statements and Schedules Chemical Financial Corporation 401(k) Savings Plan Years ended December 31, 1997 and December 31, 1996 with Report of Independent Auditors ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100 500 Woodward Avenue Detroit, Michigan 48226-3426 Report of Independent Auditors Administrative Committee Chemical Financial Corporation 401(k) Savings Plan We have audited the accompanying statements of assets available for plan benefits of the Chemical Financial Corporation 401(k) Savings Plan as of December 31, 1997 and 1996 and the related statements of changes in assets available for plan benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets available for plan benefits of the Plan at December 31, 1997 and 1996, and the changes in its assets available for plan benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules of assets held for investment and reportable transactions as of and for the year ended December 31, 1997 are presented for purposes of complying with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, and are not a required part of the financial statements. The fund information in the statement of assets available for plan benefits and the statement of changes in assets available for plan benefits is presented for purposes of additional analysis rather than to present the assets available for benefits and changes in assets available for benefits of each fund. The supplemental schedules and fund information have been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, are fairly stated in all material respects in relation to the financial statements taken as a whole. S/ ERNST & YOUNG LLP Detroit, Michigan January 30, 1998 Ernst & Young LLP is a member of Ernst & Young International, Ltd. Statement of Assets Available for Benefits, with Fund Information Chemical Financial Corporation 401(k) Savings Plan December 31, 1997
FUND INFORMATION -------------------------------------------------------------------------- CHEMICAL CASH STOCK FINANCIAL AND INTERMEDIATE AND CORPORATION MONEY PARTICIPANT BOND INDEX BOND STOCK MARKET LOAN FUND FUND FUND FUND FUND FUND TOTAL ----------- ----- ------ ----------- ------ ------------ ----------- ASSETS: Investments at fair value: Chemical Financial Corporation Common Stock $1,906,118 $ 1,906,118 Federated Investors Mutual Funds: Short-Intermediate Government Trust $ 136,904 136,904 Max-Cap Fund $ 1,253,475 1,253,475 Treasury Obligations Fund 62 56 $ 101 274 $ 218,049 $ 3,882 222,424 Fidelity Investments-Puritan Fund 547,145 547,145 Participant loans 39,646 39,646 ---------- ----------- -------- ---------- --------- ------- ----------- 136,966 1,253,531 547,246 1,906,392 218,049 43,528 4,105,712 Employee contributions receivable 1,190 11,089 6,877 9,570 1,417 30,143 Cash and accrued income 622 26 16 40 1,012 16 1,732 ---------- ----------- -------- ---------- --------- ------- ----------- Assets Available for Plan Benefits $ 138,778 $ 1,264,646 $554,139 $1,916,002 $ 220,478 $43,544 $ 4,137,587 ========== =========== ======== ========== ========= ======= ===========
See accompanying notes. 3 Statement of Assets Available for Benefits, with Fund Information Chemical Financial Corporation 401(k) Savings Plan December 31, 1996
FUND INFORMATION ------------------------------------------------------------------------- CHEMICAL CASH STOCK FINANCIAL AND INTERMEDIATE AND CORPORATION MONEY PARTICIPANT BOND INDEX BOND STOCK MARKET LOAN FUND FUND FUND FUND FUND FUND TOTAL ------------ ----- ------ ----------- ------ ------------ ----------- ASSETS: Investments at fair value: Chemical Financial Corporation Common Stock $1,400,236 $1,400,236 Federated Investors Mutual Funds: Short-Intermediate Government Trust $ 123,197 123,197 Max-Cap Fund $ 703,917 703,917 Treasury Obligations Fund 153 136 $ 137 678 $ 240,835 $ 2,253 244,192 Fidelity Investments-Puritan Fund 294,387 294,387 Participant loans 22,401 22,401 ---------- --------- -------- ---------- --------- ------- ---------- 123,350 704,053 294,524 1,400,914 240,835 24,654 2,788,330 Employee contributions receivable 1,049 5,005 2,810 9,871 1,808 20,543 Cash and accrued income 562 15 5 67 1,071 9 1,729 ---------- --------- -------- ---------- --------- ------- ---------- Assets Available for Plan Benefits $ 124,961 $ 709,073 $297,339 $1,410,852 $ 243,714 $24,663 $2,810,602 ========== ========= ======== ========== ========= ======= ==========
See accompanying notes. 4 Statement of Changes in Assets Available for Plan Benefits, with Fund Information Chemical Financial Corporation 401(k) Savings Plan Year Ended December 31, 1997
FUND INFORMATION -------------------------------------------------------------------------- CHEMICAL CASH STOCK FINANCIAL AND INTERMEDIATE AND CORPORATION MONEY PARTICIPANT BOND INDEX BOND STOCK MARKET LOAN FUND FUND FUND FUND FUND FUND TOTAL ------------ ----- ------ ----------- ------ ------------ ----------- Additions: Interest and dividend income $ 6,836 $ 53,219 $ 41,209 $ 36,399 $ 10,985 $ 3,510 $ 152,158 Employee contributions 33,744 224,685 162,564 266,581 37,230 724,804 -------- ---------- -------- ---------- -------- ------- ---------- 40,580 277,904 203,773 302,980 48,215 3,510 876,962 Deductions: Participants' accounts distributed upon withdrawal (7,809) (15,066) (17,148) (81,987) (12,196) (467) (134,673) Net transfers between funds (19,600) 87,077 23,017 (47,077) (59,255) 15,838 0 Net realized and unrealized appreciation in fair value of investments 646 205,658 47,158 331,234 584,696 -------- ---------- -------- ---------- -------- ------- ---------- Net increase (decrease) 13,817 555,573 256,800 505,150 (23,236) 18,881 1,326,985 Assets available for plan benefits at beginning of year 124,961 709,073 297,339 1,410,852 243,714 24,663 2,810,602 -------- ---------- -------- ---------- -------- ------- ---------- Assets available for plan benefits at end of year $138,778 $1,264,646 $554,139 $1,916,002 $220,478 $43,544 $4,137,587 ======== ========== ======== ========== ======== ======= ==========
See accompanying notes. 5 Statement of Changes in Assets Available for Plan Benefits, with Fund Information Chemical Financial Corporation 401(k) Savings Plan Year Ended December 31, 1996
FUND INFORMATION -------------------------------------------------------------------------- CHEMICAL CASH STOCK FINANCIAL AND INTERMEDIATE AND CORPORATION MONEY PARTICIPANT BOND INDEX BOND STOCK MARKET LOAN FUND FUND FUND FUND FUND FUND TOTAL ------------ ----- ------ ----------- ------ ------------ ----------- Additions: Interest and dividend income $ 6,807 $ 22,751 $ 35,579 $ 25,293 $ 9,677 $ 1,822 $ 101,929 Employee contributions 28,389 111,616 82,127 224,957 40,591 487,680 -------- --------- --------- ---------- -------- ------- ---------- 35,196 134,367 117,706 250,250 50,268 1,822 589,609 Deductions: Participants' accounts distributed upon withdrawal (6,783) (6,198) (1,453) (38,185) (3,745) (56,364) Net transfers between funds (32,721) 14,862 (47,096) 107 56,384 8,464 0 Net realized and unrealized appreciation (depreciation) in fair value of investments (999) 97,080 2,372 99,088 197,541 -------- --------- --------- ---------- -------- ------- ---------- Net increase (decrease) (5,307) 240,111 71,529 311,260 102,907 10,286 730,786 Assets available for plan benefits at beginning of year 130,268 468,962 225,810 1,099,592 140,807 14,377 2,079,816 -------- --------- --------- ---------- -------- ------- ---------- Assets available for plan benefits at end of year $124,961 $ 709,073 $ 297,339 $1,410,852 $243,714 $24,663 $2,810,602 ======== ========= ========= ========== ======== ======= ==========
See accompanying notes. 6 NOTES TO FINANCIAL STATEMENTS CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN DECEMBER 31, 1997 NOTE A - - DESCRIPTION OF THE PLAN The Chemical Financial Corporation 401(k) Savings Plan (the Plan) is a voluntary, defined-contribution plan covering all eligible employees of Chemical Financial Corporation (the Corporation) and subsidiaries. The Plan provides for the deferral of salaries, wages and bonuses in accordance with Section 401(k) of the Internal Revenue Code. Employees of the Corporation or any of its subsidiaries are eligible for participation upon attaining age 21 and completing one year of service. At December 31, 1997 there were 446 participants in the Plan. Participants are eligible to contribute up to 15% (10% in 1996 and prior years) of their annual compensation, up to a maximum of $9,500 in 1997 and in 1996. The employer made no contributions to the Plan during 1997 or 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets at the date of the financial statements and the reported amounts of changes in assets during the year. Actual results could differ from those estimates. Participants may direct their contributions into an intermediate bond fund, a stock index fund, a stock and bond fund, a money market fund, a Chemical Financial Corporation common stock fund or a combination of these funds, and may elect to change the percentage directed to each fund quarterly. All participant contributions are fully vested. Participant loans are permitted under the Plan. These loans are subject to a strict set of rules established by laws and regulations. As of December 31, 1997 the Plan had eleven participant loans outstanding at interest rates ranging from 7.0%-11.75%. Information about the plan agreement and the vesting and benefit provisions is contained in the Summary Plan Description contained in the Chemical Financial Corporation Employee Handbook and is available along with information regarding investment alternatives from the Plan Administrator and Personnel Departments. The Corporation, acting through its Board of Directors, has the right to amend or terminate the Plan at any time. 7 Notes to Financial Statements (Continued) NOTE B - - SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared under the accrual basis of accounting in accordance with generally accepted accounting principles. Investments are stated at aggregate fair value. Securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the Plan year. Investments traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the last reported bid price. Expenses incurred in connection with the operation of the Plan are borne by the Corporation. 8 Notes to Financial Statements (Continued) NOTE C - - INVESTMENTS During the years ended December 31, 1997 and December 31, 1996 the Plan's net appreciation (depreciation) in the fair value of investments (including investments bought, sold, as well as held during the year) is summarized as follows:
1997 1996 ----------- ---------- Chemical Financial Corporation Common Stock Fund $ 331,234 $ 99,088 Intermediate Bond Fund 646 (999) Index Fund 205,658 97,080 Stock and Bond Fund 47,158 2,372 ----------- ---------- $ 584,696 $ 197,541 =========== ==========
The fair value of individual investments that represent 5% or more of the Plan's net assets are as follows: DECEMBER 31 1997 1996 ----------- ---------- Chemical Financial Corporation Common Stock $ 1,906,118 $ 1,400,236 Federated Investors Mutual Funds: Max-Cap Fund 1,253,475 703,917 Treasury Obligations Fund 222,424 244,192 Fidelity Investments-Puritan Fund 547,145 294,387
9 Notes to Financial Statements (Continued) NOTE D - TRANSACTIONS WITH PARTIES-IN-INTEREST THE FOLLOWING IS A SUMMARY OF TRANSACTIONS (AT COST) WITH PARTIES-IN-INTEREST:
CHEMICAL FINANCIAL CORPORATION COMMON STOCK ------------ Balance at January 1, 1996 $ 758,139 Purchases in 1996 312,505 Sales in 1996 (42,724) Distributions in 1996 (33,743) ------------ Balance at December 31, 1996 $ 994,177 Purchases in 1997 403,695 Sales in 1997 (113,741) Distributions in 1997 (49,978) ------------ Balance at December 31, 1997 $ 1,234,153 ============
NOTE E - - INCOME TAX STATUS The Plan has received a favorable determination letter from the Internal Revenue Service dated August 23, 1994, stating that the Plan is qualified under section 401(a) of the Internal Revenue Code of 1986 (the "Code") and that the trust, therefore, is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code and ERISA to maintain its tax exempt status. The Plan Sponsor is not aware of any course of action or series of events that have occurred that might adversely affect the Plan's qualified status. NOTE F - - PLAN MERGER In May 1996, the Corporation acquired State Savings Bancorp, Inc. During 1997, the participants of the Retirement Plan for the State Savings Bank of Caro were given the option to rollover their account balances into the Plan and, accordingly, approximately $145,000 of such rollover contributions have been included as employee contributions in the accompanying financial statements for the year ended December 31, 1997. 10 Employee ID# 38-2022454 Plan # 002 Item 27a -- Schedule of Assets Held for Investment Purposes Chemical Financial Corporation 401(k) Savings Plan December 31, 1997 and for the Year Then Ended
DESCRIPTION OF INVESTMENT INCLUDING IDENTITY OF ISSUE, BORROWER, LESSOR OR MATURITY DATE, RATE OF INTEREST, SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST FAIR VALUE - -------------------------------------- ----------------------------------- ------------ ---------- Chemical Financial Corporation Common Stock - 42,594 shares Common Stock $ 1,234,153 $ 1,906,118 Federated Investors Mutual Funds: Short-Intermediate Government Trust Intermediate Bond Fund- 13,163 shares 137,126 136,904 Max-Cap Fund Index Fund - 61,961 units 918,335 1,253,475 Treasury Obligations Fund Money Market Fund - 222,424 shares 222,424 222,424 Fidelity Investments-Puritan Fund Stock and Bond Fund - 28,232 shares 483,568 547,145 ------------- ------------- Total Mutual Funds 1,761,453 2,159,948 ------------- ------------- Participant Loans Eleven loans at interest rates ranging from 7.0%-11.75% and maturing 10/1/98-3/15/02 39,646 39,646 ------------- ------------- TOTAL INVESTMENTS $ 3,035,252 $ 4,105,712 ============= ============= Indicates party-in-interest to the Plan There were no investment assets reportable as acquired and disposed of during the year.
11 Employee ID# 38-2022454 Plan # 002 Item 27d -- Schedule of Reportable Transactions Chemical Financial Corporation 401(k) Savings Plan
Year Ended December 31, 1997 CURRENT DESCRIPTION OF ASSET EXPENSE VALUE ON (INTEREST RATE AND MATURITY IN PURCHASE SELLING LEASE INCURRED WITH COST TRANSACTION NET GAIN IDENTITY OF PARTY INVOLVED CASE OF A LOAN) PRICE PRICE RENTAL TRANSACTION OF ASSET DATE (LOSS) - -------------------------- ------------------------------ -------- ------- ------ ------------ -------- ----------- -------- Category iii) A series of transactions involving securities of the same issue which, when aggregated, involve an amount in excess of 5% of the current value of plan assets: Chemical Financial Corporation Common Stock: 66 purchases $ 403,695 $ 403,695 44 sales 113,741 155,029 $41,288 Federated Investors Index Fund: 27 purchases 362,100 362,100 9 sales 14,244 18,200 $ 3,956 Money Market Fund: 230 purchases 1,296,622 1,296,622 165 sales 1,318,390 1,318,390 - - - Fidelity Investments Stock and Bond Fund: 27 purchases 225,450 225,450 9 sales 17,399 19,850 2,451
There were no category i), ii) or iv) reportable transactions. 12 EX-99 17 EXHIBIT 99(b) Audited Financial Statements Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors December 31, 1997 ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100 500 Woodward Avenue Detroit, Michigan 48226-3426 REPORT OF INDEPENDENT AUDITORS Plan Administrator Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors We have audited the accompanying statements of financial condition of the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors as of December 31, 1997 and 1996 and the related statements of income and changes in plan equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Plan's administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Plan Administrator, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors at December 31, 1997 and 1996, and the results of its operations and changes in its plan equity for each of the three years in the period December 31, 1997 in conformity with generally accepted accounting principles. S/ ERNST & YOUNG LLP Detroit, Michigan January 14, 1998 Ernst & Young LLP is a member of Ernst & Young International, Ltd. 1 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 1996 -------- --------- ASSETS Cash $1,139 $1,913 Common stock receivable of Chemical Financial Corporation, at market value - (7,358 shares at a cost of $263,868 at December 31, 1997 and 7,740 shares at a cost of $265,449 at December 31, 1996) 329,270 291,194 -------- -------- Total assets $330,409 $293,107 ======== ======== LIABILITIES AND PLAN EQUITY Plan equity (46 participants at December 31, 1997 and 50 participants at December 31, 1996) $330,409 $293,107 ======== ========
See accompanying notes. 2 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
Years Ended December 31 1997 1996 1995 ---------- ----------- ----------- ADDITIONS Participant contributions $ 258,775 $ 263,650 $ 235,800 Dividend equivalents 3,501 2,965 2,944 Other income 1,055 848 ---------- ----------- ----------- 263,331 267,463 238,744 DEDUCTIONS Plan distributions 291,431 294,346 243,867 ---------- ----------- ----------- (28,100) (26,883) (5,123) Net realized and unrealized appreciation in fair value of investments 65,402 25,745 54,131 ---------- ----------- ----------- Net increase (decrease) 37,302 (1,138) 49,008 Plan equity at beginning of year 293,107 294,245 245,237 ---------- ----------- ----------- Plan equity at end of year $ 330,409 $ 293,107 $ 294,245 ========== =========== ===========
See accompanying notes. 3 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - DESCRIPTION OF THE PLAN The Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors (the Plan) was implemented by Chemical Financial Corporation (the Corporation) on April 30, 1992. The Plan is designed to provide non-employee directors and advisory directors of the Corporation's subsidiaries, who are neither directors or employees of the Corporation, with a convenient method of acquiring Corporation stock. Subsidiary directors and advisory directors, who elect to participate in the Plan, may elect to contribute to the Plan fifty percent or one hundred percent of their director board fees and/or fifty percent or one hundred percent of their director committee fees, earned as directors or advisory directors of the Corporation's subsidiaries. Participant contributions to the Plan are made by the Corporation's subsidiaries on behalf of each electing participant. Amounts remitted to the Plan are credited to a separate cash account for each participant. As of the last day of each month, each participant's cash account is debited for the purchase of whole shares of the Corporation's stock and credited to a separate participant stock account. The stock purchased under the Plan during the calendar year is issued by the Corporation directly to the participants in the following calendar year, in the month of January. The Plan provides for dividend equivalents to be credited to each participant's cash account, as of the dividend record date of the Corporation's common stock. Dividend equivalents are calculated by multiplying the Corporation's dividend rate by the number of shares of common stock in each participant's stock account, as of the Corporation's dividend record date. The Plan also provides for an appropriate credit to each participant's stock account for stock dividends, stock splits or other distributions of the Corporation's common stock by the Corporation. Fractional shares calculated as a result of the above adjustments are converted to cash based on the market price of the Corporation's common stock, and are credited to each participant's cash account. Plan participants may terminate their participation in the Plan, at any time, by written notice of withdrawal to the Corporation. Participants will cease to be eligible to participate in the Plan 4 when they cease to serve as directors or advisory directors of subsidiaries of the Corporation. Upon withdrawal from the Plan, each participant will receive the shares of common stock of the Corporation in their participant stock account and the cash in their participant cash account. The Corporation expects to maintain the Plan indefinitely, however it reserves the right to terminate or amend the Plan at any time, provided, however, that no termination or amendment shall affect or diminish any participant's right to the benefit of contributions made by him/her prior to the date of such amendment or termination. 5 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - DESCRIPTION OF THE PLAN (continued) The Plan provides that all expenses of the Plan and its administration shall be paid by the Corporation. The Plan is not qualified under Sections 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended. The Plan does not provide for income taxes because any income is taxable to the participants. Participants in the Plan must treat as taxable income the contributions made to the Plan by the Corporation's subsidiaries on their behalf. Dividend equivalents and any other cash credited to the participants' cash accounts are taxable to the participants for Federal and state income tax purposes in the year such dividend equivalent or cash is credited to the participant cash account. Upon disposition of the common stock of Chemical Financial Corporation purchased under the Plan, participants must treat any gain or loss as long-term or short-term capital gain or loss depending upon when such disposition occurs. NOTE 2 - SUMMARY OF ACCOUNTING POLICIES VALUATION OF COMMON STOCK RECEIVABLE Common stock receivable of Chemical Financial Corporation is recorded at the fair market value of the number of shares receivable at the end of the period. Market value is based on the closing bid price of the Corporation's stock at year end ($44.75 per share at December 31, 1997 and $37.62 per share at December 31, 1996). The number of shares receivable and closing bid prices were adjusted for the 5% stock dividend paid on Chemical Financial Corporation common stock on December 30, 1997. INCOME Dividend equivalents and fractional share interests are accrued on the Corporation's dividend or other record date. CONTRIBUTIONS Contributions are accounted for on the accrual basis. 6 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR SUBSIDIARY DIRECTORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 3 - CONTRIBUTIONS Contributions for participants by the participating companies were as follows:
YEARS ENDED DECEMBER 31 PARTICIPATING COMPANY 1997 1996 1995 ----------- ----------- ----------- Chemical Bank and Trust Co. $ 70,700 $ 73,025 $ 66,600 Chemical Bank Bay Area 33,100 37,525 54,000 Chemical Bank Central 26,400 22,050 20,500 Chemical Bank Thumb Area 26,650 21,200 600 Chemical Bank Michigan 29,750 31,750 22,650 Chemical Bank Montcalm 15,000 19,500 17,100 Chemical Bank North 3,150 4,650 4,200 Chemical Bank South 19,125 19,425 16,600 Chemical Bank West 8,900 8,625 8,800 Chemical Bank Key State 20,000 20,400 12,950 CFC Data Corp 6,000 5,500 11,800 ----------- ----------- ----------- Total Contributions $ 258,775 $ 263,650 $ 235,800 =========== =========== ===========
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