<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 0-8185
CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2022454
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
333 EAST MAIN STREET
MIDLAND, MICHIGAN 48640
(Address of Principal Executive Offices) (Zip Code)
(517) 839-5350
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, $10 par
value, as of October 15, 1996, was 9,703,014 shares.
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INDEX
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (unaudited, except
Consolidated Statement of Financial Position as of
December 31, 1995)
Consolidated Statement of Income for the three- and
nine-month periods ended September 30, 1996 and
September 30, 1995 3
Consolidated Statement of Financial Position as of
September 30, 1996, December 31, 1995 and
September 30, 1995 4
Consolidated Statement of Cash Flows for the nine-month
periods ended September 30, 1996 and September 30, 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<CAPTION> QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . $17,098 $16,060 $50,211 $47,842
Interest on investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . . 9,803 9,468 29,342 27,900
Tax-exempt . . . . . . . . . . . . . . . . . . . . . 515 591 1,654 1,806
------- ------- ------- -------
TOTAL INTEREST ON SECURITIES 10,318 10,059 30,996 29,706
Interest on federal funds sold . . . . . . . . . . . . 995 1,214 3,264 3,421
Interest on deposits with unaffiliated banks . . . . . 20 51 116 153
------- ------- ------- -------
TOTAL INTEREST INCOME 28,431 27,384 84,587 81,122
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . 10,910 10,933 33,316 31,860
Interest on short-term borrowings . . . . . . . . . . 310 412 871 1,189
Interest on long-term debt . . . . . . . . . . . . . . 162 205 546 628
------- ------- ------- -------
TOTAL INTEREST EXPENSE 11,382 11,550 34,733 33,677
------- ------- ------- -------
NET INTEREST INCOME 17,049 15,834 49,854 47,445
Provision for possible loan losses . . . . . . . . . . 273 260 811 750
------- ------- ------- -------
NET INTEREST INCOME after provision for
possible loan losses . . . . . . . . . . . . . . . . 16,776 15,574 49,043 46,695
OTHER INCOME
Trust department income. . . . . . . . . . . . . . . . 663 651 2,137 1,995
Service charges on deposit accounts . . . . . . . . . 1,342 1,317 4,020 3,844
Other charges and fees for customer services . . . . . 611 663 1,955 1,983
Revenue from data processing services . . . . . . . . 148 242 578 766
Gains on sales of loans. . . . . . . . . . . . . . . . 36 54 98 489
Investment securities gains . . . . . . . . . . . . . 1 15
Other. . . . . . . . . . . . . . . . . . . . . . . . . 33 175 275 247
------- ------- ------- -------
TOTAL OTHER INCOME 2,834 3,102 9,078 9,324
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OPERATING EXPENSES
Salaries, wages and employee benefits . . . . . . . . 6,735 6,525 20,355 19,639
Occupancy expense-premises . . . . . . . . . . . . . . 1,167 1,098 3,504 3,332
Equipment rentals, depreciation and maintenance . . . 775 707 2,339 2,149
Other. . . . . . . . . . . . . . . . . . . . . . . . . 2,832 2,757 8,554 9,545
------- ------- ------- -------
TOTAL OPERATING EXPENSES 11,509 11,087 34,752 34,665
------- ------- ------- -------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 8,101 7,589 23,369 21,354
Federal income taxes . . . . . . . . . . . . . . . . . 2,689 2,514 7,801 6,915
------- ------- ------- -------
NET INCOME $ 5,412 $ 5,075 $15,568 $14,439
======= ======= ======= =======
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . $ .55 $ .51 $ 1.58 $ 1.47
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and demand deposits due from banks. . . . . . . . . . . . . . . . . $ 85,693 $ 91,017 $ 74,698
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,900 84,900 102,900
Interest-bearing deposits with unaffiliated banks. . . . . . . . . . . . 991 2,981 2,978
Investment securities:
Held to maturity (market value $258,773 at 9/30/96,
$397,062 at 12/31/95, $400,002 at 9/30/95). . . . . . . . . . . . . . 257,441 392,429 397,029
Available for sale (at market value). . . . . . . . . . . . . . . . . . 423,731 341,670 326,491
---------- ---------- ----------
Total investment securities 681,172 734,099 723,520
Loans:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . 120,104 117,759 123,808
Real estate construction. . . . . . . . . . . . . . . . . . . . . . . . 21,113 16,195 14,622
Real estate mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . 507,013 472,454 464,148
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,913 154,170 140,647
---------- ---------- ----------
Total loans 810,143 760,578 743,225
Less: Allowance for possible loan losses . . . . . . . . . . . . . . . 16,503 15,886 15,980
---------- ---------- ----------
Net loans 793,640 744,692 727,245
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 19,398 20,448 20,494
Accrued income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,983 15,619 15,806
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,119 12,329 13,731
---------- ---------- ----------
TOTAL ASSETS $1,695,896 $1,706,085 $1,681,372
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,772 $ 214,335 $ 200,525
Interest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212,400 1,235,466 1,216,822
---------- ---------- ----------
Total deposits 1,431,172 1,449,801 1,417,347
Short-term borrowings:
Treasury tax and loan notes payable to the U.S. Treasury. . . . . . . . 11,725 7,084 11,303
Securities sold under agreements to repurchase. . . . . . . . . . . . . 25,056 28,139 36,734
---------- ---------- ----------
36,781 35,223 48,037
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Interest payable and other liabilities . . . . . . . . . . . . . . . . . 16,099 14,079 15,727
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 12,080 12,097
---------- ---------- ----------
Total liabilities 1,494,052 1,511,183 1,493,208
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
Issued - 9,702,957 shares, 9,694,376 shares,
and 9,673,461 shares, respectively. . . . . . . . . . . . . . . . . 97,030 96,944 96,735
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,454 56,918 56,900
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,405 39,665 35,370
Unrealized net gain (loss) on securities available for sale . . . . . . (1,045) 1,375 (841)
---------- ---------- ----------
Total shareholders' equity 201,844 194,902 188,164
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,695,896 $1,706,085 $1,681,372
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,568 $ 14,439
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 811 750
Provision for depreciation and amortization 2,394 2,337
Investment securities gains (15)
Net amortization of investment securities 2,122 1,604
Net (increase) decrease in accrued income and other assets 1,417 (1,167)
Net increase in interest payable and other liabilities 2,069 3,250
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,366 21,213
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents assumed in acquisition of branch office 14,661
Net (increase) decrease in interest-bearing deposits with unaffiliated banks 1,990 (10)
Proceeds from maturities of securities held to maturity 149,604 20,772
Purchases of securities held to maturity (38,130) (100,099)
Proceeds from maturities of securities available for sale 67,275 153,390
Proceeds from sales of securities available for sale 522 994
Purchases of securities available for sale (132,173) (88,656)
Net (increase) decrease in loans (50,214) 17,124
Purchases of premises and equipment (1,158) (819)
-------- --------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (2,284) 17,357
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and
savings accounts (30,375) (43,467)
Net increase in certificates of deposit and other time deposits 11,746 23,240
Net increase in repurchase agreements and other short-term
borrowings 1,558 7,015
Principal payments on long-term debt (2,080) (2)
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Cash dividends (5,827) (4,881)
Proceeds from stock purchase plan 190 173
Proceeds from exercise of stock options 226 232
Repurchases of common stock (844)
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES (25,406) (17,690)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,324) 20,880
Cash and cash equivalents at beginning of year 175,917 156,718
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $172,593 $177,598
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and long-term debt $ 35,215 $ 33,123
Federal income taxes paid 7,790 6,374
</TABLE>
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<PAGE> 9
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE A: BASIS OF PRESENTATION The accompanying unaudited
consolidated financial statements of Chemical Financial Corporation
("Chemical" or the "Corporation") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial
statements presented reflect all adjustments (consisting solely of
normal recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of the results of operations of
the interim periods. All financial statement amounts included
herein, except cash dividends per share, have been restated to
account for the acquisition of State Savings Bancorp, Inc. on May 1,
1996 by the pooling of interests method of accounting. Operating
results for the three- and nine-month periods ended September 30,
1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1995.
PER SHARE AMOUNTS
Primary net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding. Common equivalent shares consist of net shares issuable
under stock options outstanding. Fully diluted net income per share
has not been presented on the basis that it is not material. The
weighted average number of common shares used to compute earnings per
share was 9,848,000 during the third quarter and 9,859,000 during the
first nine months of 1996, as compared to 9,823,000 during the third
quarter and 9,798,000 during the first nine months of 1995.
NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes
loans and nonperforming assets at the dates indicated (in thousands of
dollars):
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<PAGE> 10
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
LOANS:
Commercial and agricultural. . . . . . $120,104 $117,759 $123,808
Real estate construction . . . . . . . 21,113 16,195 14,622
Real estate mortgage . . . . . . . . . 507,013 472,454 464,148
Installment. . . . . . . . . . . . . . 161,913 154,170 140,647
-------- -------- --------
Total Loans. . . . . . . . . . . . . . $810,143 $760,578 $743,225
======== ======== ========
NONPERFORMING ASSETS:
Nonaccrual loans . . . . . . . . . . . $ 1,627 $ 1,658 $ 2,638
Loans 90 days or more past due and
still accruing interest. . . . . . . 915 969 836
Restructured loans . . . . . . . . . . 84 100
-------- -------- --------
Total nonperforming loans. . . . . . . 2,542 2,711 3,574
-------- -------- --------
Other real estate owned <F1> . . . . . 755 966 973
-------- -------- --------
Total nonperforming assets . . . . . $ 3,297 $ 3,677 $ 4,547
======== ======== ========
<FN>
<F1> Other real estate owned includes properties acquired through foreclosure, and by
acceptance of a deed in lieu of foreclosure, and other property held for sale. The
majority of the properties have been sold, with some financed at below market terms.
</FN>
</TABLE>
NOTE C: ALLOWANCE FOR LOAN LOSSES The following summarizes the
changes in the allowance for loan losses (in thousands of dollars):
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<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance as of January 1. . . . . . . . . . . . . . . . . . . $15,886 $15,295
Provision for loan losses. . . . . . . . . . . . . . . . . . 811 750
Gross loans charged-off. . . . . . . . . . . . . . . . . . . (388) (221)
Gross recoveries of loans previously charged-off . . . . . . 194 156
------- -------
Net loans charged-off. . . . . . . . . . . . . . . . . . . . (194) (65)
------- -------
Balance at September 30. . . . . . . . . . . . . . . . . . . $16,503 $15,980
======= =======
</TABLE>
NOTE D: ACQUISITIONS
Chemical completed its acquisition of State Savings Bancorp, Inc.,
in Caro, Michigan ("SSBI") on May 1, 1996. Chemical issued 500,000
shares of Chemical common stock in exchange for all of the outstanding
shares of SSBI. The transaction was accounted for by the pooling of
interests method of accounting as of May 1, 1996. As of May 1, 1996,
SSBI had total assets of approximately $65 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Corporation's financial
condition and results of operations during the periods included in the
consolidated financial statements included in this filing.
SUMMARY
The Corporation's net income was $5,412,000 in the third quarter of
1996, as compared to net income of $5,075,000 during the third quarter
of 1995. Earnings per share in the third quarter of 1996 were $.55,
compared to earnings per share in the third quarter of 1995 of $.51.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Return on average assets in the third quarter of 1996 was 1.28%,
compared to a return on average assets of 1.23% during the third
quarter of 1995. Return on average equity for the three months ended
September 30, 1996 and September 30, 1995, was 10.6% and 10.7%,
respectively.
The Corporation's net income was $15,568,000 for the first nine months
of 1996, compared to net income of $14,439,000 during the first nine
months of 1995. Earnings per share for the nine months ended
September 30, 1996 were $1.58, compared to earnings per share for the
first nine months of 1995 of $1.47.
Return on average assets for the first nine months of 1996 was 1.23%,
compared to a return on average assets of 1.17% for the first nine
months of 1995. Return on average equity was 10.4% for the nine-month
periods ended September 30, 1996 and September 30, 1995.
Total assets were $1.696 billion as of September 30, 1996, compared to
$1.706 billion as of December 31, 1995, and $1.681 billion as of
September 30, 1995.
Total loans increased $66.9 million, or 9.0%, from September 30, 1995,
to $810.1 million as of September 30, 1996. Total loans increased
$49.6 million, or 6.5%, from December 31, 1995 to September 30, 1996.
The increase in total loans from both September 30, 1995 and December
31, 1995 to September 30, 1996 was attributable to increases in real
estate mortgage and installment loans. The Corporation's loan to
deposit ratio as of September 30, 1996 was 56.6%, compared to 52.5% at
December 31, 1995, and 52.4% at September 30, 1995.
Shareholders' equity increased $13.7 million, or 7.3%, from September
30, 1995, to $201.8 million as of September 30, 1996, or $20.80 per
share, and represented 11.9% of total assets.
RESULTS OF OPERATIONS
NET INTEREST INCOME
An analysis of the components affecting operating earnings for the
periods presented in 1996 and 1995 is facilitated by segregating
amounts into categories of interest income, interest expense, other
income, provision for possible loan losses, operating expense and
income tax expense. To improve the comparability of the interest
income component, interest income, shown in the table which follows,
is expressed on a fully taxable equivalent (FTE) basis. For this
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
purpose, tax-exempt interest earned has been adjusted as if it had
been subject to a federal income tax rate of 35%. The following
summary is a reconcilement of the tax equivalent amounts used in
presenting net interest income on a fully taxable equivalent basis to
amounts shown in the Corporation's quarterly consolidated statement of
income.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------- ---------------------
9-30-96 9-30-95 9-30-96 9-30-95
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income per quarterly
consolidated statement of income. . . . $28,431 $27,384 $84,587 $81,122
Add tax equivalent adjustment. . . . . . 318 340 1,005 1,058
------- ------- ------- -------
Interest income (FTE). . . . . . . . . . 28,749 27,724 85,592 82,180
Less interest expense. . . . . . . . . . 11,382 11,550 34,733 33,677
------- ------- ------- -------
Net interest income (FTE). . . . . . . . $17,367 $16,174 $50,859 $48,503
</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.
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.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THIRD QUARTER 1996 COMPARED FIRST NINE MONTHS 1996 COMPARED
TO THIRD QUARTER 1995 TO FIRST NINE MONTHS 1995
--------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
------------------------- COMBINED ------------------------- COMBINED
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME<F*> YIELD/RATE<F*> (DECREASE) VOLUME<F*> YIELD/RATE<F*> (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. . . . . . . . . . . . . . . . . . . . . . . . . $1,399 $ (346) $1,053 $2,984 $ (589) $2,395
Taxable investment securities. . . . . . . . . . . . . (394) 729 335 (324) 1,766 1,442
Non-taxable investment securities. . . . . . . . . . . (75) (38) (113) (165) (66) (231)
Federal funds sold . . . . . . . . . . . . . . . . . . (115) (104) (219) 216 (373) (157)
Interest on deposits with unaffiliated banks . . . . . (39) 8 (31) (40) 3 (37)
------ ------ ------ ------ ------ ------
Total change in interest income on earning assets . . 776 249 1,025 2,671 741 3,412
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits . . . . . . . . . . . . . . . . . . . . . . . 133 (156) (23) 607 849 1,456
Short-term borrowed funds. . . . . . . . . . . . . . . (39) (63) (102) (168) (150) (318)
Long-term debt . . . . . . . . . . . . . . . . . . . . (34) (9) (43) (40) (42) (82)
------ ------ ------ ------ ------ ------
Total change in interest expense on interest-bearing
liabilities . . . . . . . . . . . . . . . . . . . . . 60 (228) (168) 399 657 1,056
------ ------ ------ ------ ------ ------
TOTAL INCREASE IN NET INTEREST
INCOME (FTE) . . . . . . . . . . . . . . . . . . . . . $ 716 $ 477 $1,193 $2,272 $ 84 $2,356
====== ====== ====== ====== ====== ======
<FN>
<F*> 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.
</FN>
</TABLE>
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net interest income (FTE) increased $1,193,000, or 7.4%, in the third
quarter of 1996 as compared to the third quarter of 1995. The total
increase in net interest income attributable to volume changes in
interest-bearing assets and liabilities was $716,000. The increase
attributable to changes in the average yields and rates on interest-
bearing assets and liabilities was $477,000. These increases were due
primarily to increases in average real estate mortgage and installment
loans and deposits and the repricing of investment securities maturing
in the third quarter of 1996, compared to the third quarter of 1995.
The net interest margin increased to 4.38% in the third quarter of
1996 from 4.14% in the third quarter of 1995.
Net interest income (FTE) increased $2,356,000, or 4.9%, during the
first nine months of 1996 as compared to the first nine months of
1995. The net interest margin increased to 4.29% during the first
nine months of 1996 from 4.21% during the first nine months of 1995.
OTHER INCOME
Other income decreased $268,000, or 8.6%, in the third quarter of 1996
as compared to the third quarter of 1995. This decrease was
attributable to decreases in revenue from data processing services
performed for unrelated entities and in miscellaneous "other"
nonoperating income. Other income attributable to trust department
income, service charges on deposit accounts and other charges and fees
for customer services was relatively stable in the third quarter of
1996 and 1995.
Other income during the first nine months of 1996 was $246,000, or
2.6%, lower than the comparable period in 1995. The Corporation
realized a gain of $322,000 in the second quarter of 1995 from the
sale of its credit card loan portfolio. The Corporation sold its
credit card loan portfolio due to the increased competition for this
product from other providers offering cards at no annual fee and the
proliferation of co-branded credit cards. In the second quarter of
1996 the Corporation realized a gain of $150,000 as a termination fee
when the credit card portfolio was sold by the original purchaser to
another credit card provider.
The Corporation realized gains on the sale of residential mortgage
loans in the secondary market of $36,000 and $54,000 during the third
quarters of 1996 and 1995, respectively. Total gains realized on the
sale of residential mortgage loans in the secondary market during the
first nine months of 1996 and 1995 were $98,000 and $164,000,
respectively.
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses reflects management's judgment
of changing economic conditions, as well as increases and other
changes in the subsidiary banks' loan portfolios. It is management's
policy to control loan quality through a carefully structured review
of loan requests. In assessing the adequacy of the allowance for
possible loan losses ("Allowance"), management believes that its
historical experience confirms, in principle, its judgment in what is
essentially a subjective decision. Based upon historical experience
and a constant evaluation of present and potential risks in the loan
portfolios, management believes that the Allowance is adequate.
During the three and nine months ended September 30, 1996, the
Corporation added $273,000 and $811,000, respectively, to the
allowance through the provision for possible loan losses, as compared
to $260,000 and $750,000, respectively, during these same periods in
1995. Net loan charge-offs during the three- and nine-month periods
ended September 30, 1996 were $30,000 and $194,000, respectively,
compared to net charge-offs of $27,000 and $65,000, respectively,
during these same periods in 1995.
OPERATING EXPENSES
Total operating expenses increased $422,000, or 3.8%, in the third
quarter of 1996 and $87,000, or .3%, during the first nine months of
1996, as compared to these same periods in 1995. Federal Deposit
Insurance Corporation ("FDIC") premiums were reduced effective June 1,
1995 as a result of the full recapitalization of the Bank Insurance
Fund to a 1.25% ratio. FDIC premiums were $1,454,000 lower during the
first nine months of 1996, as compared to the first nine months of 1995.
Legislation was passed on September 30, 1996 to recapitalize the
Savings Association Insurance Fund. This law levied a 65.7 cent fee
on every $100 of thrift deposits held on March 31, 1995. The
Corporation's liability under this law was approximately $30,000.
This amount was expensed in the third quarter of 1996.
Excluding FDIC premiums, total operating expenses were 4.3% higher in
the first nine months of 1996 compared to the same period in 1995.
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 33.2% and
33.4%, respectively, during the three and nine months ended September
30, 1996, compared to 33.1% and 32.4%, respectively, during these same
periods in 1995. The effective federal income tax rate is a function
-16-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of the proportion of the Corporation's interest income exempt from
federal taxation, nondeductible interest expense and other
nondeductible expenses.
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets decreased $10.2 million, or .6%, from December 31, 1995,
and increased $14.5 million, or .9%, from September 30, 1995, to
$1.696 billion as of September 30, 1996. Total deposits decreased
$18.6 million, or 1.3%, from December 31, 1995, and increased
$13.8 million, or 1.0%, from September 30, 1995, to $1.431 billion as
of September 30, 1996.
LOANS
The Corporation's subsidiary banks are generally located in rural
communities, where the demand for commercial loans which meet the
Corporation's credit standards historically has not been high. The
Corporation's philosophy is such that it will neither compromise on
loan quality nor make loans outside its banking markets to increase
its loan portfolio. The Corporation does not generally purchase
participation loans, which is a method utilized by many financial
institutions to increase the size of their loan portfolios.
Total loans as of September 30, 1996 were $810.1 million, as compared
to $743.2 million as of September 30, 1995, and $760.6 million as of
December 31, 1995. The increase in total loans from September 30,
1995 to September 30, 1996 of $66.9 million was attributable to
increases in real estate mortgage and installment loans.
Commercial and agricultural loans decreased $3.7 million, or 3.0%,
from September 30, 1995, and increased $2.3 million, or 2.0%, from
December 31, 1995, to $120.1 million as of September 30, 1996. The
decrease in commercial and agricultural loans from September 30, 1995
resulted from a combination of factors including increased competition
for these types of loans, the lack of an increased demand for these
types of loans in the Corporation's market areas and a number of
payoffs of significant balance loans. Commercial and agricultural
loans represented 14.8%, 15.5% and 16.7% of the Corporation's loan
portfolio as of September 30, 1996, December 31, 1995, and September
30, 1995, respectively.
Real estate construction and mortgage loans increased $49.4 million,
or 10.3%, from September 30, 1995, and $39.5 million, or 8.1%, from
-17-
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
December 31, 1995, to $528.1 million as of September 30, 1996. Real
estate construction and mortgage loans represented 65.2%, 64.2% and
64.4% of the Corporation's loan portfolio as of September 30, 1996,
December 31, 1995, and September 30, 1995, respectively.
Installment loans increased $21.3 million, or 15.1%, from September
30, 1995, and $7.7 million, or 5.0%, from December 31, 1995, to $161.9
million as of September 30, 1996, and represented 20.0%, 20.3% and
18.9% of total loans as of September 30, 1996, December 31, 1995, and
September 30, 1995, respectively.
The Corporation's total loan to deposit ratio as of September 30,
1996, December 31, 1995, and September 30, 1995, was 56.6%, 52.5% and
52.4%, respectively.
The Corporation traditionally has had a conservative loan underwriting
policy. This is evidenced by its historically low loan losses and low
ratio of nonperforming loans to total loans. For the three-month
periods ended September 30, 1996 and 1995, the Corporation experienced
net loan charge-offs of $30,000 and $27,000, respectively. The
Corporation reported net loan charge-offs of $194,000 and $65,000,
respectively, during the nine-month periods ended September 30, 1996
and 1995.
Nonperforming loans consist of loans for which the accrual of interest
has been discontinued, loans which are past due for principal or
interest payments by ninety days or more and still accruing interest,
and loans which have been renegotiated to less than market terms due
to a serious weakening of the borrower's financial condition.
Nonperforming loans were $2.5 million as of September 30, 1996, $2.7
million as of December 31, 1995, and $3.6 million as of September 30,
1995, and represented .31%, .36% and .48% of total loans as of these
dates, respectively.
The allowance for possible loan losses at September 30, 1996, was
$16,503,000 and represented 2.04% of total loans and 649% of
nonperforming loans as of that date.
LIQUIDITY
The maintenance of an adequate level of liquidity is necessary to
ensure that sufficient funds are available to meet customers' loan
demands and deposit withdrawals. The banking subsidiaries' primary
liquidity sources consist of investment securities, both those
maturing within one year and those classified as available for sale,
maturing loans and federal funds sold. As of September 30, 1996, the
-18-
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Corporation's investment securities portfolio had an average life of
less than two years. In addition, at September 30, 1996, the
Corporation held $3.7 million in mortgage-backed securities and $5.4
million in structured notes, acquired in conjunction with subsidiary
bank acquisitions. These investments represented 1.3% of the
Corporation's investment securities portfolio as of September 30,
1996. The Corporation held no other derivatives or any investments in
instruments considered "junk bonds" as of September 30, 1996.
CAPITAL RESOURCES
As of September 30, 1996, shareholders' equity was $201.8 million,
compared to $194.9 million as of December 31, 1995, and $188.2
million as of September 30, 1995, resulting in an increase of $13.7
million, or 7.3%, from September 30, 1995. Shareholders' equity as a
percentage of total assets as of September 30, 1996, was 11.9%, compared
to 11.4% as of December 31, 1995, and 11.2% as of September 30, 1995.
Total equity as of September 30, 1996, and September 30, 1995, included
an after-tax unrealized net loss of $1.045 million and $.841 million,
respectively, and an unrealized net gain of $1.375 million as of
December 31, 1995, on available for sale investment securities, in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
A statement of changes in shareholders' equity covering the nine-month
periods ended September 30, 1996, and September 30, 1995, follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Total shareholders' equity as of January 1, $194,902 $170,680
Net income 15,568 14,439
Dividends (5,827) (4,881)
Shares issued upon exercise of employee stock options 226 232
Shares issued from director stock purchase plan 239 246
Repurchases of common stock (844)
Change in unrealized gains and losses on available for
sale securities (2,420) 7,448
-------- --------
Total shareholders' equity as of end of period $201,844 $188,164
======== ========
</TABLE>
-19-
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table represents the Corporation's regulatory capital
ratios as of September 30, 1996:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
-------- ---------- ----------
<S> <C> <C> <C>
Chemical Financial Corporation - actual ratio 11.9% 28.8% 30.1%
Regulatory Minimum Ratio 3.0 4.0 8.0
Ratio considered "well capitalized" by
regulatory agencies 5.0 6.0 10.0
</TABLE>
The Corporation's Tier 1 and Total capital ratios under the risk-based
capital measure at September 30, 1996, are high due to the Corporation
holding $621 million in investment securities and other assets which
are assigned a 0% risk rating, $233 million in assets which are
assigned a 20% risk rating and $432 million in residential real estate
mortgages and other assets which are assigned a 50% risk rating.
These three risk ratings (i.e., 0%, 20% and 50%) represent 74% of the
Corporation's total risk-based assets (including off-balance sheet
items) as of September 30, 1996.
-20-
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to this
report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
------- --------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. The following report on Form 8-K was filed during
the quarter:
<TABLE>
<CAPTION>
DATE OF REPORT ITEM REPORTED FINANCIAL STATEMENTS FILED
-------------- ------------- --------------------------
<S> <C> <C> <C>
July 15, 1996 5 (Other Consolidated Statement of
Events) Income for One Month
Ended June 30, 1996.
</TABLE>
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: November 12, 1996 By /S/ ALAN W. OTT
Alan W. Ott, Chairman,
Chief Executive Officer and
President
Date: November 12, 1996 By /S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer
-22-
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------- --------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
-23-
<PAGE> 1
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
CHEMICAL FINANCIAL CORPORATION
(Unaudited)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding . . . . . . . . . . . . 9,716 9,666 9,716 9,660
Net effect of the assumed exercise of
stock options - based on the treasury
stock method using average market
price . . . . . . . . . . . . . . . . . . . . . . 132 157 143 138
------ ------ ------- -------
9,848 9,823 9,859 9,798
====== ====== ======= =======
Net income . . . . . . . . . . . . . . . . . . . . $5,412 $5,075 $15,568 $14,439
====== ====== ======= =======
Net income per common share. . . . . . . . . . . . $ 0.55 $ 0.51 $ 1.58 $ 1.47
====== ====== ======= =======
FULLY DILUTED:
Average shares outstanding . . . . . . . . . . . . 9,716 9,666 9,716 9,660
Net effect of the assumed exercise of
stock options - based on the treasury
stock method using end of period
market price. . . . . . . . . . . . . . . . . . . 131 176 142 174
------ ------ ------- -------
9,847 9,842 9,858 9,834
====== ====== ======= =======
Net income . . . . . . . . . . . . . . . . . . . . $5,412 $5,075 $15,568 $14,439
====== ====== ======= =======
Net income per common share. . . . . . . . . . . . $ 0.55 $ 0.51 $ 1.58 $ 1.47
====== ====== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 85,693
<INT-BEARING-DEPOSITS> 991
<FED-FUNDS-SOLD> 86,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 423,731
<INVESTMENTS-CARRYING> 257,441
<INVESTMENTS-MARKET> 258,773
<LOANS> 810,143
<ALLOWANCE> 16,503
<TOTAL-ASSETS> 1,695,896
<DEPOSITS> 1,431,172
<SHORT-TERM> 36,781
<LIABILITIES-OTHER> 16,099
<LONG-TERM> 10,000
<COMMON> 97,030
0
0
<OTHER-SE> 104,814
<TOTAL-LIABILITIES-AND-EQUITY> 1,695,896
<INTEREST-LOAN> 50,211
<INTEREST-INVEST> 30,996
<INTEREST-OTHER> 3,380
<INTEREST-TOTAL> 84,587
<INTEREST-DEPOSIT> 33,316
<INTEREST-EXPENSE> 34,733
<INTEREST-INCOME-NET> 49,854
<LOAN-LOSSES> 811
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 34,752
<INCOME-PRETAX> 23,369
<INCOME-PRE-EXTRAORDINARY> 23,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,568
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 4.29
<LOANS-NON> 1,627
<LOANS-PAST> 915
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,542
<ALLOWANCE-OPEN> 15,886
<CHARGE-OFFS> 388
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 16,503
<ALLOWANCE-DOMESTIC> 16,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
