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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995, 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 of Incorporation) (I.R.S. Employer
Identification Number)
333 East Main Street
Midland, Michigan 48640
(Address of principal executive offices) (Zip code)
(517) 631-3310
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X__ No _____
The number of shares of the registrant's Common Stock, $10 par value,
outstanding as of July 14, 1995 was 9,162,925 shares.
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INDEX
CHEMICAL FINANCIAL CORPORATION
PART 1. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited, except Consolidated
Statement of Financial Position as of December 31, 1994)
Consolidated Statement of Income for the three- and
six-month periods ended June 30, 1995 and June 30, 1994
3
Consolidated Statement of Financial Position as of
June 30, 1995, December 31, 1994 and June 30, 1994 4
Consolidated Statement of Cash Flows for the six-month
periods ended June 30, 1995 and June 30, 1994 5
Notes to consolidated financial statements 6-7
Item 2. Management s Discussion and Analysis of Financial Condition
and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . $ 15,582 $ 14,919 $ 31,021 $ 29,357
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . 8,887 7,751 17,519 15,660
Tax-exempt. . . . . . . . . . . . . . . . . . . . 505 510 1,024 1,067
TOTAL INTEREST ON SECURITIES 9,392 8,261 18,543 16,727
Interest on federal funds sold . . . . . . . . . . . 1,147 742 2,090 1,506
Interest on deposits with unaffiliated banks . . . . 50 5 102 5
TOTAL INTEREST INCOME 26,171 23,927 51,756 47,595
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . 10,408 8,437 20,200 17,237
Interest on short-term borrowings. . . . . . . . . . 348 266 777 488
Interest on long-term debt . . . . . . . . . . . . . 210 168 423 321
TOTAL INTEREST EXPENSE 10,966 8,871 21,400 18,046
NET INTEREST INCOME 15,205 15,056 30,356 29,549
Provision for possible loan losses . . . . . . . . . 240 269 490 533
NET INTEREST INCOME After Provision for
Possible Loan Losses. . . . . . . . . . . . . . . 14,965 14,787 29,866 29,016
OTHER INCOME
Trust department income. . . . . . . . . . . . . . . 734 695 1,344 1,265
Service charges on deposit accounts. . . . . . . . . 1,248 1,081 2,468 2,110
Other charges and fees for customer services . . . . 453 472 1,083 1,115
Revenue from data processing services. . . . . . . . 255 253 524 517
Gains on sales of loans. . . . . . . . . . . . . . . 407 25 435 93
Investment securities gains (loss) . . . . . . . . . 152 (1) 267
Other. . . . . . . . . . . . . . . . . . . . . . . . 22 162 68 239
TOTAL OTHER INCOME 3,119 2,840 5,921 5,606
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . . . . 6,306 6,321 12,630 12,290
Occupancy expense-premises . . . . . . . . . . . . . 1,077 1,058 2,181 2,174
Equipment rentals, depreciation and maintenance. . . 672 706 1,385 1,416
Other. . . . . . . . . . . . . . . . . . . . . . . . 3,399 3,168 6,456 6,585
TOTAL OPERATING EXPENSES 11,454 11,253 22,652 22,465
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 6,630 6,374 13,135 12,157
Federal income taxes . . . . . . . . . . . . . . . . 2,132 1,976 4,243 3,705
NET INCOME $ 4,498 $ 4,398 $ 8,892 $ 8,452
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . $ .49 $ .47 $ .96 $ .91
-3-
See accompanying notes to consolidated financial statements.
</TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
<TABLE>
<CAPTION>
June 30 December 31 June 30
1995 1994 1994
(Unaudited) (Audited) (Unaudited)
(In thousands of dollars)
<S> <C> <C> <C>
Cash and demand deposits due from banks. . . . . $ 73,226 $ 83,456 $ 76,416
Federal funds sold . . . . . . . . . . . . . . . 62,850 67,100 86,600
Interest bearing deposits with unaffiliated banks 2,974 2,967 2,001
Investment securities:
Held to maturity (market value $363,818
at 6/30/95, $271,107 at 12/31/94,
$45,797 at 6/30/94) 360,217 280,962 45,649
Available for sale (at market value) . . . . 333,706 382,569 583,473
Total investment securities 693,923 663,531 629,122
Loans:
Commercial and agricultural. . . . . . . . . 112,893 119,533 126,964
Real estate construction . . . . . . . . . . 12,891 19,239 13,786
Real estate mortgage . . . . . . . . . . . . 445,556 449,086 446,731
Installment. . . . . . . . . . . . . . . . . 141,723 152,318 169,798
Total loans 713,063 740,176 757,279
Less: Allowance for possible loan losses. . 15,551 15,095 14,870
Net loans 697,512 725,081 742,409
Premises and equipment . . . . . . . . . . . . . 20,236 20,942 21,516
Accrued income . . . . . . . . . . . . . . . . . 13,942 14,121 12,697
Other assets . . . . . . . . . . . . . . . . . . 12,680 16,219 15,584
TOTAL ASSETS $1,577,343 $1,593,417 $1,586,345
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing. . . . . . . . . . . . . $ 193,434 $ 196,654 $ 180,961
Interest bearing . . . . . . . . . . . . . . 1,144,742 1,170,047 1,178,166
Total deposits 1,338,176 1,366,701 1,359,127
Short-term borrowings:
Treasury tax & loan notes payable to the U.S.
Treasury 11,870 9,849 11,978
Securities sold under agreements to repurchase 26,215 31,173 31,680
38,085 41,022 43,658
Interest payable and other liabilities . . . . . 14,178 11,915 13,186
Long term debt . . . . . . . . . . . . . . . . . 12,098 12,099 14,103
Total liabilities 1,402,537 1,431,737 1,430,074
-4-
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
(10,000,000 at December 31, 1994 and
June 30, 1994)
Issued - 9,162,525 shares, 6,091,971 shares,
and 6,082,807 shares, respectively. . . . . 91,625 60,920 60,828
Surplus. . . . . . . . . . . . . . . . . . . 57,915 57,770 57,818
Retained earnings. . . . . . . . . . . . . . 26,773 51,279 44,020
Unrealized net loss on securities available
for sale (1,507) (8,289) (6,395)
Total shareholders' equity 174,806 161,680 156,271
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,577,343 $1,593,417 $1,586,345
See accompanying notes to consolidated financial statements.
</TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1995 1994
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 8,892 $ 8,452
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . 490 533
Provision for depreciation and amortization . . . . . . 1,520 1,543
Investment securities (gains) loss. . . . . . . . . . . 1 (267)
Net amortization of investment securities . . . . . . . 839 1,882
Net (increase) decrease in accrued income and other assets (42) 729
Net increase in interest payable and other liabilities. 2,351 1,165
Net Cash Provided by Operating Activities 14,051 14,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents assumed in acquisition of branch office 2,789
Net increase in interest bearing deposits with unaffiliated banks (7) (2,001)
Proceeds from maturities of securities held to maturity . . 8,301 10,894
Purchases of securities held to maturity. . . . . . . . . . (87,286) (7,430)
Proceeds from maturities of securities available for sale . 93,140 155,937
Proceeds from sales of securities available for sale. . . . 994 58,972
Purchases of securities available for sale. . . . . . . . . (35,947) (179,512)
Net (increase) decrease in loans. . . . . . . . . . . . . . 26,985 (45,673)
Purchases of premises and equipment . . . . . . . . . . . . (613) (875)
Net Cash Provided by (Used for) Investing Activities 5,567 (6,899)
-5-
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and savings accounts (39,291) (5,707)
Net increase (decrease) in certificates of deposit
and other time deposits . . . . . . . . . . . . . . . . . 10,810 (8,951)
Net increase (decrease) in repurchase agreements and other
short-term borrowings . . . . . . . . . . . . . . . . . . (2,937) 7,542
Principal payments on long-term debt. . . . . . . . . . . . (1) (1)
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . (2,931) (2,554)
Proceeds from stock purchase plan . . . . . . . . . . . . . 114 117
Proceeds from exercise of stock options . . . . . . . . . . 138 195
Net Cash Used for Financing Activities (34,098) (9,359)
Net Decrease in Cash and Cash Equivalents (14,480) (2,221)
Cash and cash equivalents at beginning of year 150,556 165,237
Cash and Cash Equivalents at End of Period $136,076 $163,016
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and long-term debt $ 21,027 $ 18,147
Federal income taxes paid . . . . . . . . . . . . . . . . . 3,350 4,020
</TABLE>
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CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1995
NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated
financial statements of Chemical Financial Corporation and subsidiaries
("Corporation") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
THE FINANCIAL STATEMENTS PRESENTED REFLECT ALL ADJUSTMENTS (CONSISTING OF
NORMAL RECURRING ACCRUALS) WHICH ARE, IN THE OPINION OF MANAGEMENT,
NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF OPERATIONS FOR THE
INTERIM PERIODS PRESENTED. Operating results for the three- and six-
month periods ended June 30, 1995 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1995. For
-6-
further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994.
NOTE B: CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1995,
the Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118. Under the new standard, the allowance for
possible loan losses in 1995, related to loans that are identified for
evaluation in accordance with SFAS No. 114, is based on discounted cash
flows using the loans initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. Prior to 1995, the
allowance for possible loan losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The adoption of SFAS No. 114 did not have a significant
impact on the Corporation's financial position or results of operations.
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Unrealized appreciation and depreciation
(the difference between fair market value and amortized cost) on securities
classified as available for sale is accounted for as an adjustment to
shareholders' equity in accordance with SFAS No. 115. Upon adoption, the
application of SFAS No. 115 resulted in a $4.14 million increase in
shareholder's equity which represented the unrealized appreciation, net of
taxes, of the Corporation's investments in debt and equity securities
classified as available-for-sale as of this date, which prior to January 1,
1994, had been carried at amortized cost.
As of June 30, 1995, the impact of SFAS No. 115 was a $1.5 million decrease
in shareholders' equity, net of taxes, as compared to an $8.3 million
decrease as of December 31, 1994 and a $6.4 million decrease as of June 30,
1994. The Corporation's investment portfolio is composed primarily of U.S.
Treasury securities with an average maturity of less than one and one-half
years. The significant increase in interest rates on short-term U.S.
Treasury securities throughout 1994 accounted for the overall net reduction
in the fair market value of the Corporation's portfolio of investment
securities available for sale during 1994. However, due to both maturities
of investment securities and the decline in interest rates on short-term
U.S. Treasury securities from December 31, 1994 to June 30, 1995, the SFAS
No. 115 shareholders' equity adjustment declined $6.8 million, or 82%, from
December 31, 1994 to June 30, 1995.
-7-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1995 (continued)
NOTE C: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the dates
indicated (in thousands of dollars):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1995 1994 1994
<S> <C> <C> <C>
Loans:
Commercial and agricultural . . . . . . . . $ 112,893 $119,533 $ 126,964
Real estate construction. . . . . . . . . . 12,891 19,239 13,786
Real estate mortgage. . . . . . . . . . . . 445,556 449,086 446,731
Installment . . . . . . . . . . . . . . . . 141,723 152,318 169,798
Total Loans . . . . . . . . . . . . . . . . $ 713,063 $740,176 $ 757,279
Nonperforming assets:
Nonaccrual loans. . . . . . . . . . . . . . $ 3,132 $ 2,682 $ 1,829
Loans 90 days or more past due and
still accruing interest. . . . . . . . . 489 296 717
Restructured loans. . . . . . . . . . . . . 116 148 259
Total nonperforming loans . . . . . . . . . 3,737 3,126 2,805
Other real estate owned <F1>. . . . . . . . 678 773 796
Total nonperforming assets. . . . . . . . . $ 4,415 $ 3,899 $ 3,601
<FN>
<F1> Other real estate includes properties acquired through foreclosure, and by acceptance of a deed
in lieu of foreclosure and other property held for sale. The majority of the properties have been
sold, with some financed at below market terms.
</FN>
</TABLE>
NOTE D: ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses (in
thousands of dollars):
<TABLE>
<CAPTION>
For the six months
ended June 30
1995 1994
<S> <C> <C> <C>
Allowances for Loan Losses
Balance as of January 1, . . . . . . . . . . . . . . $ 15,095 $ 14,383
Provision for loan losses. . . . . . . . . . . . . . 490 533
Gross loans charged-off. . . . . . . . . . . . . . . (130) (166)
Gross recoveries of loans previously charged-off . . 96 120
Net loans charged off. . . . . . . . . . . . . . . . (34) (46)
Balance at June 30,. . . . . . . . . . . . . . . . . $ 15,551 $ 14,870
</TABLE>
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Registrant's financial
condition and results of operations during the periods included in the
consolidated financial statements included in this filing.
Summary
The Corporation's net income was $4,498,000 in the second quarter of 1995,
as compared to net income of $4,398,000 during the second quarter of 1994.
Earnings per share in the second quarter of 1995 was $.49, compared to
earnings per share in the second quarter of 1994 of $.47.
Return on average assets in the second quarter of 1995 was 1.14%, compared
to a return on average assets of 1.10% during the second quarter of 1994.
Return on average equity for the three months ended June 30, 1995 and June
30, 1994 was 10.4% and 11.0%, respectively.
The Corporation's net income was $8,892,000 for the first six months of
1995, as compared to net income of $8,452,000 during the first six months
of 1994. Earnings per share for the six months ended June 30, 1994 was
$.96, as compared to earnings per share for the first six months of 1994 of
$.91.
Return on average assets for the first six months of 1995 was 1.13%,
compared to a return on average assets of 1.07% for the first six months of
1994. Return on average equity for the six month periods ended June 30,
1995 and June 30, 1994 was 10.3% and 10.6%, respectively.
Total assets were $1.577 billion as of June 30, 1995, compared to $1.593
billion as of December 31, 1994 and $1.586 billion as of June 30, 1994.
Total loans declined $27.1 million, or 3.7%, from December 31, 1994 to
$713.1 million as of June 30, 1995. Total loans decreased $44.2 million,
or 5.8%, from June 30, 1994.
Shareholders' equity increased $13.1 million, or 8.1%, from December 31,
1994 and $18.5 million, or 11.9%, from June 30, 1994, to $174.8 million as
of June 30, 1995. As of June 30, 1995, shareholders' equity per share was
$19.08 and represented 11.1% of total assets. Approximately 52% and 34.5%
of the increase in shareholders' equity from December 31, 1994 and June 30,
1994, respectively, to June 30, 1995, was attributable to a reduction in
the unrealized net loss on securities classified as available for sale.
-9-
RESULTS OF OPERATIONS
Net Interest Income
An analysis of the components affecting operating earnings for the periods
presented in 1995 and 1994 is facilitated by segregating amounts into
categories of interest income, interest expense, other income, provision
for possible loan losses, operating expense and income tax expense. To
improve the comparability of the interest income component, interest
income, shown in the table which follows, is expressed on a fully taxable
equivalent (FTE) basis. For this purpose, tax-exempt interest earned has
been adjusted as if it had been subject to a federal income tax rate of
35%. The following summary is a reconcilement of the tax equivalent
amounts used in presenting net interest income on a fully taxable
equivalent basis to amounts shown in the Corporation's quarterly
consolidated statement of income.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
6-30-95 6-30-94 6-30-95 6-30-94
(In thousands)
<S> <C> <C> <C> <C>
Interest income per quarterly
consolidated statement of income $26,171 $23,927 $51,756 $47,595
Add tax equivalent adjustment 298 331 623 703
Interest income (FTE) 26,469 24,258 52,379 48,298
Less interest expense 10,966 8,871 21,400 18,046
Net interest income (FTE) $15,503 $15,387 $30,979 $30,252
</TABLE>
Other income is derived from trust services, service charges, data
processing and other bank related services, gains on sales of residential
mortgage loans in the secondary mortgage market and investment securities
gains and miscellaneous income. Operating expenses are comprised of
salaries, wages and employee benefits, occupancy expense, equipment
expense, federal deposit insurance premium expense and miscellaneous other
operating expenses.
-10-
NET INTEREST INCOME (FTE)
The following table shows the effect that volume and rate changes had on the net
interest income (FTE) over the periods indicated.
<TABLE>
<CAPTION>
Second Quarter 1995 Compared First Six Months 1995 Compared
to Second Quarter 1994 to First Six Months 1994
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)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Causes of increase in net
interest income (FTE) due to:
CHANGES IN INTEREST INCOME ON
EARNING ASSETS:
Loans. . . . . . . . . . . . . . . $(469) $1,108 $ 639 $(244) $1,858 $1,614
Taxable investment securities. . . 206 930 1,136 334 1,525 1,859
Non-taxable investment
securities. . . . . . . . . . . (13) (1) (14) (118) 45 (73)
Federal funds sold . . . . . . . . (9) 414 405 (318) 902 584
Interest on deposits with
unaffiliated banks. . . . . . . 45 45 97 97
Total change in interest
income on earning assets . . (240) 2,451 2,211 (249) 4,330 4,081
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits . . . . . . . . . . . . . (278) 2,249 1,971 (595) 3,558 2,963
Short-term borrowed funds. . . . . (36) 118 82 5 284 289
Long-term debt . . . . . . . . . . (27) 69 42 (51) 153 102
Total change in interest
expense on interest-bearing
liabilities. . . . . . . . (341) 2,436 2,095 (641) 3,995 3,354
TOTAL INCREASE IN NET INTEREST
INCOME (FTE) . . . . . . . . . . . $ 101 $ 15 $ 116 $ 392 $ 335 $ 727
</TABLE>
* The change in interest due to both rate and volume has been allocated to the
change due to volume and the change due to rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
Net interest income (FTE) increased $116,000 or .8% in the second quarter
of 1995 as compared to the second quarter of 1994. Net interest margin
increased to 4.20% in the second quarter of 1995 from 4.14% in the second
-11-
quarter of 1994. The improvement in the net interest margin during the
second quarter of 1995, as compared to the second quarter of 1994, was primarily
attributable to a 6.2% increase in the average balance of demand
deposit accounts between these two time periods.
Net interest income (FTE) increased $727,000 or 2.4% during the first six
months of 1995 as compared to the first six months of 1994. Net interest
margin increased to 4.21% during the first six months of 1995 as compared
to 4.10% during the first six months of 1994.
Other Income
Other income increased $279,000, or 9.8%, in the second quarter of 1995 and
$315,000, or 5.6%, in the first six months of 1995 as compared to these
same periods in 1994.
The Corporation's trust department income and income from service charges
on deposit accounts, combined, were $206,000 higher in the second quarter
of 1995 than in the second quarter of 1994. Trust department income
increased 5.6% due to an increase in services provided, while service
charge income on deposit accounts increased 15.4% due to increased service
fees on business checking accounts. In addition, the Corporation realized
a gain of $322,000 in the second quarter of 1995 from the sale of its
credit card loan portfolio. The Corporation sold its credit card loan
portfolio due to the increased competition for this product from other
providers offering cards at no annual fee and the proliferation of co-
branded credit cards. These increases were somewhat offset by the $152,000
of investment securities gains realized during the second quarter of 1994
as compared to no investment securities gains being realized during the
second quarter of 1995. Gains realized on the sale of residential mortgage
loans in the secondary market were $57,000 higher in the second quarter of
1995 as compared to this same period in 1994.
During the second quarter of 1994 the Corporation sold approximately $20
million of available for sale investment securities that were scheduled to
mature later that year. The Corporation realized gains on the sale of
these investment securities of $152,000. These securities were sold to
take advantage of an opportunity which existed in the bond market to
enhance the Corporation's total return on these funds. The Corporation
sold no investment securities during the second quarter of 1995.
The Corporation realized gains on the sale of residential mortgage loans in
the secondary market of $82,000 and $25,000 during the second quarters of
1995 and 1994, respectively. The increase in these gains was attributable
to the declining real estate mortgage interest rate environment which
existed in the second quarter of 1995. The Corporation sold primarily all
of the residential real estate mortgage loans originated since December 31,
1994, with maturities of fifteen years or more, in the secondary mortgage
market. Total gains realized on the sale of residential mortgage loans in
-12-
the secondary market during the first six months of 1995 and 1994 were
$110,000 and $93,000, respectively.
Provision for Loan Losses
The provision for possible loan losses reflects management's judgement of
changing economic conditions, as well as increases and other changes in the
subsidiary banks' loan portfolios. It is management's policy to control
loan quality through a carefully structured review of loan requests. In
assessing the adequacy of the allowance for possible loan losses
("allowance"), management believes that its historical experience confirms,
in principle, its judgment in what is essentially a subjective decision.
Based upon historical experience and a constant evaluation of present and
potential risks in the loan portfolios, management believes that the
allowance is adequate. During the three- and six-months ended June 30,
1995, the Corporation added $240,000 and $490,000, respectively, to the
allowance through the provision for possible loan losses, as compared to
$269,000 and $533,000, respectively, during these same periods in 1994.
Net loan charge-offs during the three- and six-month periods ended June 30,
1995 were $47,000 and $34,000, respectively, compared to net charge-offs of
$29,000 and $46,000, respectively, during these same periods in 1994.
Operating Expenses
Total operating expenses were up $201,000, or 1.8%, during the second
quarter of 1995 and $187,000, or .8%, during the first six months of 1995,
as compared to these same periods in 1994.
The Corporation's operating philosophy includes an objective of controlling
operating expenses, and accordingly, it has been successful in its efforts
thereto.
The Federal Deposit Insurance Corporation recently announced a reduction in
the rates it charges banks for deposit insurance. This reduction in rates
is expected to favorably affect the Corporation s results of operations
during the second half of 1995.
Income Tax Expense
The Corporation's effective federal income tax rate was 32.2% and 32.3%,
respectively, during the three and six months ended June 30, 1995, compared
to 31.0% and 30.5%, respectively, during these same periods in 1994. The
effective federal income tax rate is a function of the Corporation's
interest income exempt from federal taxation, non-deductible interest
expense and other non-deductible expenses.
-13-
BALANCE SHEET CHANGES
Asset and Deposit Changes
Total assets decreased $16 million, or 1.0%, from December 31, 1994, and
decreased $9 million, or .6%, from June 30, 1994, to $1.577 billion as of
June 30, 1995. Total deposits decreased $28.5 million, or 2.1%, from
December 31, 1994 and decreased $20.9 million, or 1.5%, from June 30, 1994,
to $1.338 billion as of June 30, 1995.
Loans
The Corporation's subsidiary banks are generally located in rural
communities, where the demand for commercial loans which meet the
Corporation's credit standards historically has not been high. The
Corporation's philosophy is such that it will neither compromise on loan
quality nor make loans outside its banking markets to increase its loan
portfolio. The Corporation does not generally purchase participation
loans, which is a method utilized by many financial institutions to
increase the size of their loan portfolios. The Corporation has been
successful in remaining a safe and sound financial institution with this
philosophy.
Total loans as of June 30, 1995 were $713.1 million, as compared to $757.3
million as of June 30, 1994 and $740.2 million as of December 31, 1994.
Real estate mortgage and real estate construction loans, combined, declined
$9.9 million, or 2.1%, from December 31, 1994 to $458.4 million as of June
30, 1995. This decline was partially attributable to the Corporation
selling primarily all residential mortgage loans originated since December
31, 1994, with terms of fifteen years or greater, in the secondary mortgage
lending market. Real estate construction and mortgage loans represented
approximately 64.3% and 60.8% of the Corporation's loan portfolio as of
June 30, 1995 and December 31, 1994, respectively.
Installment loans decreased $10.6 million, or 7%, from December 31, 1994 to
$141.7 million as of June 30, 1995. The decrease in installment loans
between December 31, 1994 and June 30, 1995 was due to repayment of
installment loans made during the Corporation's Money Bonanza installment
loan promotions over the past five years. During each of the past five
years the Corporation's affiliate banks offered installment loans at below
market interest rates during special promotion periods. These loans had
maximum maturities, at origination, of between forty-eight and sixty
months. Due to the short average amortization periods of these loans,
repayments are currently exceeding new loans originated. Installment loans
represented approximately 19.9% and 20.6% of total loans as of June 30,
1995 and December 31, 1994, respectively.
Commercial and agricultural loans declined $6.6 million, or 5.6%, from
December 31, 1994 to $112.9 million as of June 30, 1995. This decline was
-14-
attributable to the sale of the Corporation's $3.2 million credit card loan
portfolio, the sale of student loans in the secondary student loan market
and continued increased competition for commercial loans from other
financial institutions located both within and outside the Corporation's
lending markets. Commercial and agricultural loans represented 15.8% and
16.1% of the Corporation's loan portfolio as of June 30, 1995 and December
31, 1994, respectively.
The Corporation's total loan to deposit ratios as of June 30, 1995,
December 31, 1994 and June 30, 1994 were 53.3%, 54.2% and 55.7%,
respectively.
The Corporation traditionally has had a conservative loan underwriting
policy. This is evidenced by its historically low loan losses and low
ratio of nonperforming loans to total loans. For the three- and six-month
periods ended June 30, 1995, the Corporation experienced net charge-offs of
$47,000 and $34,000, respectively, compared to net charge-offs of $29,000
and $46,000, respectively, during these same periods in 1994.
Nonperforming loans consist of loans which are past due for principal or
interest payments by ninety days or more and still accruing interest, loans
for which the accrual of interest has been discontinued and loans which
have been renegotiated to less than market terms due to a serious weakening
of the borrower's financial condition. Nonperforming loans were $3.7
million as of June 30, 1995, compared to $2.8 million as of June 30, 1994,
and represented .52% and .37% of total loans as of these dates,
respectively.
The allowance for possible loan losses at June 30, 1995 was $15,551,000 and
represented 2.18% of total loans and 416% of nonperforming loans as of that
date.
Liquidity
The maintenance of an adequate level of liquidity is necessary to ensure
that sufficient funds are available to meet customers' loan demands and
deposit withdrawals. The banking subsidiaries' primary liquidity sources
consist of investment securities, those maturing within one year and those
classified as available for sale, maturing loans and federal funds sold.
As of June 30, 1995 the Corporation's investment securities portfolio had
an average life of approximately one and one-half years. In addition, at
June 30, 1995 the Corporation held only $4.5 million in mortgage backed
securities, which represented less than one percent of the investment
securities portfolio, and had no other derivatives or any investments in
instruments considered "junk bonds."
Capital Resources
As of June 30, 1995, shareholders' equity was $174.8 million compared to
$156.3 million as of June 30, 1994, an increase of $18.5 million, or 11.9%.
-15-
Shareholders' equity as a percentage of total assets as of June 30, 1995
was 11.1% compared to 9.9% as of June 30, 1994. Total equity as of June
30, 1995 and June 30, 1994 included an after-tax unrealized net loss of
$1.5 million and $6.4 million, respectively, on available for sale
investment securities in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (see Note B to the consolidated financial statements).
A statement of changes in shareholders' equity covering the six-month
periods ended June 30, 1995 and June 30, 1994 follows.
<TABLE>
<CAPTION>
For the six months
ended June 30
1995 1994
(In thousands)
<S> <C> <C>
Total shareholders' equity as of January 1, $ 161,680 $156,379
Net income 8,892 8,452
Dividends (2,931) (2,554)
Shares issued upon exercise of employee
stock options 137 195
Shares issued from stock purchase plan 246 194
Adjustment to beginning balance for change in
accounting method of available for sale
investment securities (See Note B to the
consolidated financial statements) 4,138
Change in unrealized gains and losses on available
for sale securities (See Note B to the
consolidated financial statements) 6,782 (10,533)
Total shareholders' equity as of end of period $ 174,806 $156,271
</TABLE>
The following table represents the Corporation's regulatory capital ratios
as of June 30, 1995.
<TABLE>
<CAPTION>
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
<S> <C> <C> <C>
Chemical Financial Corporation - actual ratio 11.0% 27.3% 28.8%
Regulatory Minimum Ratio 3.0 4.0 8.0
Ratio considered "well capitalized" by 5.0 6.0 10.0
regulatory agencies
</TABLE>
-16-
The Corporation's Tier 1 and Total capital ratios under the risk-based
capital measure at June 30, 1995 are high due to the Corporation holding
$654 million in investment securities and other assets which are assigned a
0% risk rating, $172 million in assets which are assigned a 20% risk rating
and $370 million in residential real estate mortgages and other assets
which are assigned a 50% risk rating. These three risk ratings (i.e., 0%,
20% and 50%) represented 74% of the Corporation's total risk-based assets
(including off-balance sheet items) as of June 30, 1995.
Other
The Corporation declared a 3-for-2 stock split in December, 1994 which was
paid on January 20, 1995. All per share amounts have been adjusted to
reflect this split.
Other than as discussed above, there are currently no known trends, events
or uncertainties that management believes may be reasonably expected to
have a material effect on the Corporation's liquidity, capital resources or
financial performance.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On April 17, 1995, the Corporation's shareholders approved an amendment to
the Corporation s Restated Articles of Incorporation increasing the number
of authorized shares of Common Stock, $10 par value, from 10 million to 15
million shares.
All of the additional shares resulting from the increase in the
Corporation s authorized Common Stock are of the same class, with the same
dividend, voting and liquidation rights, as the shares of Common Stock
previously outstanding.
The newly authorized shares are unreserved and available for issuance. No
further shareholder authorization is required prior to the issuance of such
shares by the Corporation. Shareholders have no preemptive rights to
acquire shares issued by the Corporation under its Restated Articles of
Incorporation, and shareholders did not acquire any such rights with
respect to such additional shares under the amendment to the Corporation s
Restated Articles of Incorporation. Under some circumstances, the issuance
of additional shares of Common Stock could dilute the voting rights, equity
and earnings per share of existing shareholders.
-17-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation's annual meeting of shareholders was held on April 17,
1995. At that meeting, in addition to the election of directors and
procedural matters, the shareholders considered and voted upon a proposal
to amend the Corporation's Restated Articles of Incorporation to increase
the number of authorized Shares of Common Stock from 10 million to 15
million shares. The directors were elected and the proposal was approved
by the following votes:
<TABLE>
<CAPTION>
Election of Directors Votes Cast
All nominees for director were elected: For Withheld
<S> <C> <C>
James A. Currie 7,969,830 74,027
Michael L. Dow 7,982,535 61,322
Alan W. Ott 7,982,751 61,106
Frank P. Popoff 7,982,840 61,017
Lawrence A. Reed 7,969,215 74,642
William S. Stavropoulos 7,961,709 82,148
</TABLE>
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Proposal to amend the Corporation's
Restated Articles of Incorporation to
increase the number of authorized
shares of Common Stock from
10 million to 15 million shares: 7,849,817 125,772 68,268 none
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 3 - Restated Articles of Incorporation
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter covered by
this Form 10-Q.
-18-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: August 10, 1995 By /s/ Alan W. Ott
Alan W. Ott, Chairman,
Chief Executive Officer and
President
Date: August 10, 1995 By /s/ Lori A. Gwizdala
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer
-19-
EXHIBIT INDEX
Exhibit Documents
3. Restated Articles of Incorporation
11. Statement Regarding Computation of Earnings Per Share
27. Financial Data Schedule
-20-
EXHIBIT 3
RESTATED ARTICLES OF INCORPORATION
OF
CHEMICAL FINANCIAL CORPORATION
(As Amended Through April 17, 1995)
1. These Restated Articles of Incorporation are executed pursuant to the
provisions of Sections 641-657, Act 284, Public Acts of 1972.
2. The present name of the Corporation is Chemical Financial
Corporation; and the Corporation has had no other former name.
3. The date of filing the original Articles of Incorporation was August
27, 1973.
4. The following Restated Articles of Incorporation supersede the
original Articles of Incorporation as amended, and shall be the Articles of
Incorporation of the Corporation:
Article I
The name of the Corporation is CHEMICAL FINANCIAL CORPORATION.
Article II
The purpose or purposes for which the Corporation is organized is to
engage in any activity within the purposes for which corporations may be
organized under the Business Corporation Act of Michigan.
Article III
The total authorized capital stock is 15,000,000 common shares, par
value $10.00 per share.
Article IV
The address and mailing address of the current registered office are
333 East Main Street, Midland, Michigan 48640. The name of the current
registered agent is Alan W. Ott.
Article V
All of the powers of this Corporation, insofar as the same may be
lawfully vested by these Articles of Incorporation, are hereby vested in
and conferred upon the Board of Directors of this Corporation. In
furtherance and not in limitation thereof, the Board of Directors is
expressly authorized:
(a) To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which
it was created.
(b) To designate one or more committees, each committee to consist
of one or more of the directors of the Corporation. The Board
may designate one or more directors as alternate members of the
any committee, who may replace any absent or disqualified
member at any meeting of the committee.
Article VI
Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
Article VII
Any action required or permitted under the Michigan Business
Corporation Act to be taken at an annual or special meeting of shareholders
may be taken without a meeting, without prior notice and without a vote, if
consent in writing setting forth the action so taken is signed by the
holders of outstanding stock having not less than the minimum number of
votes necessary to authorize or take the action at a meeting at which all
shares entitled to vote were present and voted.
Article VIII
(a) A director of this Corporation shall not be liable to the
Corporation or its shareholders for monetary damages for a
breach of the director's fiduciary duty, except for liability;
(i) for a breach of the director's duty of loyalty to the
Corporation or its shareholders; (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) a violation of Section 551(1)
of the Michigan Business Corporation Act; or (iv) for a
transaction from which the director derived an improper
personal benefit. No Amendment to or repeal of this Article
VIII (a) shall apply to, or have any effect on, the liability
or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
(b) The Corporation shall provide indemnification to persons who
serve or have served as directors, officers, employees or
agents of the Corporation, and to persons who serve or have
served at the request of the Corporation as directors,
officers, employees, partners or agents of another foreign or
domestic corporation, partnership, joint venture, trust, or
other enterprise, whether for profit or not, to the fullest
extent permitted by the Michigan Business Corporation Act, as
the same now exists or may hereafter be amended.
-2-
These Restated Articles of Incorporation were duly adopted by the
sole shareholder of the Corporation on the 18th day of December in
accordance with the provisions of Section 642, Act 284, Public Acts of
1972. The necessary number of shares as required by statute was voted in
favor of the Restated Articles of Incorporation.
Dated this 21st day of December.
CHEMICAL FINANCIAL CORPORATION
By /s/ Alan W. Ott
Alan W. Ott
-3
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
CHEMICAL FINANCIAL CORPORATION
(Unaudited)
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding . . . . . . . . . . . . . 9,160 9,123 9,157 9,116
Net effect of the assumed exercise of stock options-
based on the treasury stock method using average
market price . . . . . . . . . . . . . . . . . . 131 145 128 154
9,291 9,268 9,285 9,270
Net income . . . . . . . . . . . . . . . . . . . . . $ 4,498 $4,398 $8,892 $ 8,452
Net income per common share. . . . . . . . . . . . . $ 0.49 $ 0.47 $ 0.96 $ 0.91
FULLY DILUTED:
Average shares outstanding . . . . . . . . . . . . . 9,160 9,123 9,157 9,116
Net effect of the assumed exercise of stock options-
based on the treasury stock method using end of
period market price. . . . . . . . . . . . . . . 132 144 130 153
9,292 9,267 9,287 9,269
Net income . . . . . . . . . . . . . . . . . . . . . $ 4,498 $4,398 $8,892 $ 8,452
Net income per common share. . . . . . . . . . . . . $ 0.49 $ 0.47 $ 0.96 $ 0.91
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> 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, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 73,226
<INT-BEARING-DEPOSITS> 2,974
<FED-FUNDS-SOLD> 62,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 333,706
<INVESTMENTS-CARRYING> 360,217
<INVESTMENTS-MARKET> 363,818
<LOANS> 713,063
<ALLOWANCE> 15,551
<TOTAL-ASSETS> 1,577,343
<DEPOSITS> 1,338,176
<SHORT-TERM> 38,085
<LIABILITIES-OTHER> 14,178
<LONG-TERM> 12,098
<COMMON> 91,625
0
0
<OTHER-SE> 83,181
<TOTAL-LIABILITIES-AND-EQUITY> 1,577,343
<INTEREST-LOAN> 31,021
<INTEREST-INVEST> 18,543
<INTEREST-OTHER> 2,192
<INTEREST-TOTAL> 51,756
<INTEREST-DEPOSIT> 20,200
<INTEREST-EXPENSE> 21,400
<INTEREST-INCOME-NET> 30,356
<LOAN-LOSSES> 490
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 22,652
<INCOME-PRETAX> 13,135
<INCOME-PRE-EXTRAORDINARY> 13,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,892
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 4.21
<LOANS-NON> 3,132
<LOANS-PAST> 489
<LOANS-TROUBLED> 116
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,095
<CHARGE-OFFS> 130
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 15,551
<ALLOWANCE-DOMESTIC> 13,996
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,555
</TABLE>
