===========================================================================
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 JUNE 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 periods 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 July 15, 1996, was 9,722,676 shares.
===========================================================================
INDEX
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (unaudited, except
Consolidated Statement of Financial Position as of
December 31, 1995)
Consolidated Statement of Income for the three and
six month periods ended June 30, 1996 and June 30, 1995 3
Consolidated Statement of Financial Position as of
June 30, 1996, December 31, 1995 and June 30, 1995 4
Consolidated Statement of Cash Flows for the six month
periods ended June 30, 1996 and June 30, 1995 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1996 1995 1996 1995
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . $16,749 $15,982 $33,126 $31,807
Interest on investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . 9,916 9,328 19,539 18,432
Tax-exempt . . . . . . . . . . . . . . . . . . 552 601 1,139 1,215
TOTAL INTEREST ON SECURITIES 10,468 9,929 20,678 19,647
Interest on federal funds sold . . . . . . . . . 984 1,206 2,269 2,207
Interest on deposits with unaffiliated banks . . 46 50 96 102
TOTAL INTEREST INCOME 28,247 27,167 56,169 53,763
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . 11,105 10,778 22,406 20,927
Interest on short-term borrowings. . . . . . . . 233 348 561 777
Interest on long-term debt . . . . . . . . . . . 186 210 384 423
TOTAL INTEREST EXPENSE 11,524 11,336 23,351 22,127
NET INTEREST INCOME 16,723 15,831 32,818 31,636
Provision for possible loan losses . . . . . . . 270 240 538 490
NET INTEREST INCOME after provision for
possible loan losses . . . . . . . . . . . . . 16,453 15,591 32,280 31,146
OTHER INCOME
Trust department income. . . . . . . . . . . . . 813 734 1,474 1,344
Service charges on deposit accounts. . . . . . . 1,365 1,278 2,678 2,527
Other charges and fees for customer services . . 608 579 1,331 1,295
Revenue from data processing services. . . . . . 200 255 430 524
Gains on sales of loans. . . . . . . . . . . . . 29 407 62 435
Investment securities gains . . . . . . . . . . 14 14
Other. . . . . . . . . . . . . . . . . . . . . . 213 24 242 72
TOTAL OTHER INCOME 3,242 3,277 6,231 6,197
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . . 6,871 6,532 13,620 13,114
Occupancy expense-premises . . . . . . . . . . . 1,128 1,103 2,337 2,234
Equipment rentals, depreciation and maintenance. 786 703 1,564 1,442
Other. . . . . . . . . . . . . . . . . . . . . . 3,075 3,544 5,722 6,788
TOTAL OPERATING EXPENSES 11,860 11,882 23,243 23,578
-3-
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 7,835 6,986 15,268 13,765
Federal income taxes . . . . . . . . . . . . . . 2,672 2,215 5,112 4,401
NET INCOME $ 5,163 $ 4,771 $10,156 $ 9,364
NET INCOME PER COMMON SHARE. . . . . . . . . . . $ .52 $ .49 $ 1.03 $ .96
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
(Unaudited) (Unaudited)
ASSETS (In thousands)
<S> <C> <C> <C>
Cash and demand deposits due from banks . . . . . . . . . $ 81,092 $ 91,017 $ 75,876
Federal funds sold. . . . . . . . . . . . . . . . . . . . 73,200 84,900 63,850
Interest-bearing deposits with unaffiliated banks . . . . 988 2,981 2,974
Investment securities:
Held to maturity (market value $278,720 at 6/30/96,
$397,062 at 12/31/95, $397,953 at 6/30/95) . . . . . . 277,570 392,429 394,831
Available for sale (at market value) . . . . . . . . . . 431,206 341,670 333,706
Total investment securities 708,776 734,099 728,537
Loans:
Commercial and agricultural. . . . . . . . . . . . . . . 109,722 117,759 114,475
Real estate construction . . . . . . . . . . . . . . . . 19,687 16,195 12,891
Real estate mortgage . . . . . . . . . . . . . . . . . . 504,773 472,454 462,558
Installment. . . . . . . . . . . . . . . . . . . . . . . 160,311 154,170 144,441
Total loans 794,493 760,578 734,365
Less: Allowance for possible loan losses 16,260 15,886 15,747
Net loans 778,233 744,692 718,618
Premises and equipment. . . . . . . . . . . . . . . . . . 19,722 20,448 20,883
Accrued income. . . . . . . . . . . . . . . . . . . . . . 15,436 15,619 14,585
Other assets. . . . . . . . . . . . . . . . . . . . . . . 13,853 12,329 12,765
TOTAL ASSETS $1,691,300 $1,706,085 $1,638,088
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing. . . . . . . . . . . . . . . . . . . $ 209,318 $ 214,335 $ 198,390
Interest bearing . . . . . . . . . . . . . . . . . . . . 1,223,667 1,235,466 1,190,896
Total deposits 1,432,985 1,449,801 1,389,286
Short-term borrowings:
Treasury tax and loan notes payable to the U.S.
Treasury . . . . . . . . . . . . . . . . . . . . . . . 11,171 7,084 11,870
Securities sold under agreements to repurchase . . . . . 23,378 28,139 26,215
34,549 35,223 38,085
Interest payable and other liabilities. . . . . . . . . . 15,187 14,079 14,540
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 10,000 12,080 12,098
Total liabilities 1,492,721 1,511,183 1,454,009
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
Issued - 9,722,574 shares, 9,694,376 shares,
and 9,662,525 shares, respectively . . . . . . . . . 97,226 96,944 96,625
-5-
Surplus. . . . . . . . . . . . . . . . . . . . . . . . . 57,005 56,918 56,915
Retained earnings. . . . . . . . . . . . . . . . . . . . 45,934 39,665 32,046
Unrealized net gain (loss) on securities available
for sale . . . . . . . . . . . . . . . . . . . . . . . (1,586) 1,375 (1,507)
Total shareholders' equity 198,579 194,902 184,079
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,691,300 $1,706,085 $1,638,088
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,156 $ 9,364
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 538 490
Provision for depreciation and amortization 1,581 1,556
Investment securities gains (14)
Net amortization of investment securities 1,595 906
Net (increase) decrease in accrued income and other assets 362 (27)
Net increase in interest payable and other liabilities 1,221 2,083
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,439 14,372
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with
unaffiliated banks 1,993 (7)
Proceeds from maturities of securities held to maturity 100,057 16,964
Purchases of securities held to maturity (7,803) (94,094)
Proceeds from maturities of securities available for sale 44,838 94,134
Proceeds from sales of securities available for sale 522
Purchases of securities available for sale (118,427) (35,947)
Net (increase) decrease in loans (34,454) 26,356
Purchases of premises and equipment (589) (600)
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (13,863) 6,806
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and
savings accounts (3,388) (42,857)
Net increase (decrease) in certificates of deposit and
other time deposits (13,428) 10,504
Net decrease in repurchase agreements and other short-term
borrowings (674) (2,937)
Principal payments on long-term debt (2,080) (1)
Cash dividends (3,887) (3,131)
Proceeds from stock purchase plan 126 114
Proceeds from exercise of stock options 130 138
NET CASH USED FOR FINANCING ACTIVITIES (23,201) (38,170)
-7-
NET DECREASE IN CASH AND
CASH EQUIVALENTS (21,625) (16,992)
Cash and cash equivalents at beginning of year 175,917 156,718
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 154,292 $139,726
</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 $ 23,914 $ 21,744
Federal income taxes paid 5,165 3,586
</TABLE>
________________________________________________________________________________
-8-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE A: BASIS OF PRESENTATION The accompanying unaudited
consolidated financial statements of Chemical Financial Corporation
("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 six month periods
ended June 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 9,866,000 during the second quarter and 9,865,000 during the
first six months of 1996, as compared to 9,792,000 during the second
quarter and 9,785,000 during the first six months of 1995.
-9-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE B: 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,
LOANS: 1996 1995 1995
<S> <C> <C> <C>
Commercial and agricultural. . . . . . . . $109,722 $117,759 $114,475
Real estate construction . . . . . . . . . 19,687 16,195 12,891
Real estate mortgage . . . . . . . . . . . 504,773 472,454 462,558
Installment. . . . . . . . . . . . . . . . 160,311 154,170 144,441
Total Loans. . . . . . . . . . . . . . . . $794,493 $760,578 $734,365
NONPERFORMING ASSETS:
Nonaccrual loans . . . . . . . . . . . . . $ 1,340 $ 1,658 $ 3,132
Loans 90 days or more past due and
still accruing interest. . . . . . . . . 955 969 532
Restructured loans . . . . . . . . . . . . 84 116
Total nonperforming loans. . . . . . . . . 2,295 2,711 3,780
Other real estate owned <F1> . . . . . . . 1,027 966 678
Total nonperforming assets . . . . . . . . $ 3,322 $ 3,677 $ 4,458
<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>
-10-
NOTE C: 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,
1996 1995
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance as of January 1. . . . . . . . . . . . . $15,886 $15,295
Provision for loan losses. . . . . . . . . . . . 538 490
Gross loans charged-off. . . . . . . . . . . . . (286) (144)
Gross recoveries of loans previously
charged-off. . . . . . . . . . . . . . . . . . 122 106
Net loans charged-off. . . . . . . . . . . . . . (164) (38)
Balance at June 30 . . . . . . . . . . . . . . . $16,260 $15,747
</TABLE>
NOTE D: ACQUISITIONS
Chemical Financial Corporation ("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 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 $5,163,000 in the second quarter of
1996, as compared to net income of $4,771,000 during the second
quarter of 1995. Earnings per share in the second quarter of 1996 was
$.52, compared to earnings per share in the second quarter of 1995 of
$.49.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Return on average assets in the second quarter of 1996 was 1.23%,
compared to a return on average assets of 1.17% during the second
quarter of 1995. Return on average equity for the three months ended
June 30, 1996, and June 30, 1995, was 10.3% and 10.4%, respectively.
The Corporation's net income was $10,156,000 for the first six months
of 1996, compared to net income of $9,364,000 during the first six
months of 1995. Earnings per share for the six months ended June 30,
1996 was $1.03, compared to earnings per share for the first six
months of 1995 of $.96.
Return on average assets for the first six months of 1996 was 1.21%,
compared to a return on average assets of 1.15% for the first six
months of 1995. Return on average equity was 10.3% for the six month
periods ended June 30, 1996 and June 30, 1995.
Total assets were $1.691 billion as of June 30, 1996, compared to
$1.706 billion as of December 31, 1995, and $1.638 billion as of June
30, 1995.
Total loans increased $60.1 million, or 8.2%, from June 30, 1995, to
$794.5 million as of June 30, 1996. Total loans increased $33.9
million, or 4.5%, from December 31, 1995 to June 30, 1996. The
increase in total loans from both June 30, 1995 and December 31, 1995
to June 30, 1996 was attributable to increases in real estate mortgage
and installment loans.
Installment loans increased $15.9 million, or 11.0%, from June 30,
1995, to $160.3 million as of June 30, 1996. The increase in
installment loans between June 30, 1995 and June 30, 1996, was
primarily attributable to the success of the Corporation's special
installment loan promotion from October 1995 through January 1996.
This promotion had the goal of both increasing the Corporation's level
of consumer loans and reinforcing existing, and developing new,
customer relationships. During the promotion period the Corporation's
subsidiary banks originated $45 million of consumer installment loans.
The maximum term of the consumer loans originated in the promotion
period was forty-eight months. The Corporation's loan to deposit
ratio as of June 30, 1996 was 55.4%, compared to 52.5% at December 31,
1995, and 52.9% at June 30, 1995.
Shareholders' equity increased $14.5 million, or 7.9%, from June 30,
1995, to $198.6 million as of June 30, 1996, or $20.42 per share and
represented 11.7% of total assets.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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
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
6-30-96 6-30-95 6-30-96 6-30-95
(In thousands)
<S> <C> <C> <C> <C>
Interest income per quarterly
consolidated statement of income. . . . . . $28,247 $27,167 $56,169 $53,763
Add tax equivalent adjustment. . . . . . . . 328 345 687 718
Interest income (FTE). . . . . . . . . . . . 28,575 27,512 56,856 54,481
Less interest expense. . . . . . . . . . . . 11,524 11,336 23,351 22,127
Net interest income (FTE). . . . . . . . . . $17,051 $16,176 $33,505 $32,354
</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.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 1996 COMPARED FIRST SIX MONTHS 1996 COMPARED
TO SECOND QUARTER 1995 TO FIRST SIX MONTHS 1995
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN COMBINED DUE TO CHANGES IN 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. . . . . . . . . . . . . . . . . . . . . . . $1,126 $(352) $ 774 $1,572 $ (242) $1,330
Taxable investment securities. . . . . . . . . . . 126 462 588 64 1,043 1,107
Non-taxable investment securities. . . . . . . . . (48) (25) (73) (90) (28) (118)
Federal funds sold . . . . . . . . . . . . . . . . (56) (166) (222) 329 (267) 62
Interest on deposits with unaffiliated
banks . . . . . . . . . . . . . . . . . . . . . . (5) 1 (4) (5) (1) (6)
Total change in interest income on
earning assets. . . . . . . . . . . . . . . . . 1,143 (80) 1,063 1,870 505 2,375
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits . . . . . . . . . . . . . . . . . . . . . 282 45 327 470 1,009 1,479
Short-term borrowed funds. . . . . . . . . . . . . (144) 29 (115) (128) (88) (216)
Long-term debt . . . . . . . . . . . . . . . . . . (3) (21) (24) (5) (34) (39)
Total change in interest expense on
interest-bearing liabilities. . . . . . . . . . . 135 53 188 337 887 1,224
TOTAL INCREASE IN NET INTEREST
INCOME (FTE) . . . . . . . . . . . . . . . . . . . $1,008 $(133) $ 875 $1,533 $ (382) $1,151
<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>
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net interest income (FTE) increased $875,000, or 5.4%, in the second
quarter of 1996 as compared to the second quarter of 1995. This
increase was due primarily to increases in average real estate
mortgage and installment loans and deposits in the second quarter of
1996, compared to the second quarter of 1995. The total increase in
net interest income attributable to volume changes in interest-bearing
assets and liabilities was $1,008,000. The increase attributable to
volume changes was partially offset by a $133,000 decrease in net
interest income attributable to changes in the average yields and
rates on interest-bearing assets and liabilities. The net interest
margin increased to 4.32% in the second quarter of 1996 from 4.22% in
the second quarter of 1995.
Net interest income (FTE) increased $1,151,000, or 3.6%, during the
first six months of 1996 as compared to the first six months of 1995.
The net interest margin increased to 4.25% during the first six months
of 1996 from 4.23% during the first six months of 1995.
OTHER INCOME
Other income decreased $35,000 or 1.1%, in the second quarter of 1996
and increased $34,000 or .5%, in the first six months of 1996, as
compared to these same periods in 1995.
The Corporation's trust department income and income from service
charges on deposit accounts, combined, were $166,000 higher in the
second quarter of 1996 than in the second quarter of 1995. Trust
department income increased 10.8% and service charge income on deposit
accounts increased 6.8%, both due to increased services provided.
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 $29,000 and $82,000 during the second
quarters of 1996 and 1995, respectively. Total gains realized on the
sale of residential mortgage loans in the secondary market during the
first six months of 1996 and 1995 were $62,000 and $110,000,
respectively.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
PROVISION FOR 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 six months ended June 30, 1996 the Corporation
added $270,000 and $538,000, respectively, to the allowance through
the provision for possible loan losses, as compared to $240,000 and
$490,000, respectively, during these same periods in 1995. Net loan
charge-offs during the three- and six-month periods ended June 30,
1996 were $165,000 and $164,000, respectively, compared to net charge-
offs of $48,000 and $38,000, respectively, during these same periods
in 1995.
OPERATING EXPENSES
Total operating expenses decreased $22,000, or .2%, in the second
quarter of 1996 and $335,000, or 1.4%, during the first six months of
1996, as compared to these same periods in 1995. Operating expenses
were down due to the reduction in Federal Deposit Insurance
Corporation ("FDIC") premiums, effective June 1, 1995. FDIC premiums
were reduced as a result of the full recapitalization of the Bank
Insurance Fund to a 1.25% ratio. FDIC premiums were $712,000 lower in
the second quarter of 1996 and $1,273,000 lower during the first six
months of 1996, as compared to these same periods in 1995.
Excluding FDIC premiums, total operating expenses were 6.2% higher in
the second quarter of 1996 and 4.2% higher in the first six months of
1996 compared to these same periods in 1995.
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 34.1% and
33.5%, respectively, during the three and six months ended June 30,
1996, compared to 31.7% and 32.0%, respectively, during these same
periods in 1995. The effective federal income tax rate is a function
of the proportion of the Corporation's interest income exempt from
federal taxation, nondeductible interest expense and other
nondeductible expenses.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets decreased $14.8 million, or .9%, from December 31, 1995,
and increased $53.2 million, or 3.2%, from June 30, 1995, to $1.691
billion as of June 30, 1996. Total deposits decreased $16.8 million,
or 1.2%, from December 31, 1995, and increased $43.7 million, or 3.1%,
from June 30, 1995, to $1.433 billion as of June 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 June 30, 1996 were $794.5 million, as compared to
$734.4 million as of June 30, 1995, and $760.6 million as of December
31, 1995. The increase in total loans from June 30, 1995 to June 30,
1996 of $60.1 million was primarily attributable to the Corporation's
1995 consumer loan promotion, which was ongoing from October 1, 1995
through January 31, 1996. During this promotion period the
Corporation originated $45 million of consumer installment loans at
interest rates of 7.83%. The maximum loan amount and term of these
consumer installment loans were $20,000 and forty-eight months,
respectively. Installment loans increased $15.9 million, or 11.0%,
from June 30, 1995, and $6.1 million, or 4.0%, from December 31, 1995,
to $160.3 million as of June 30, 1996, and represented 20.2%, 20.3%
and 19.7% of total loans as of June 30, 1996, December 31, 1995, and
June 30, 1995, respectively.
Real estate construction and mortgage loans increased $49.0 million,
or 10.3%, from June 30, 1995, and $35.8 million, or 7.3%, from
December 31, 1995, to $524.5 million as of June 30, 1996. Real estate
construction and mortgage loans represented 66.0%, 64.2% and 64.7% of
the Corporation's loan portfolio as of June 30, 1996, December 31,
1995, and June 30, 1995, respectively.
Commercial and agricultural loans decreased $4.8 million, or 4.2%,
from June 30, 1995, and $8.0 million, or 6.8%, from December 31, 1995,
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
to $109.7 million as of June 30, 1996. The decrease in commercial and
agricultural loans resulted from increased competition for these types
of loans and the lack of an increased demand for these types of loans
in the Corporation's market areas. Commercial and agricultural loans
represented 13.8%, 15.5% and 15.6% of the Corporation's loan portfolio
as of June 30, 1996, December 31, 1995, and June 30, 1995,
respectively.
The Corporation's total loan to deposit ratio as of June 30, 1996,
December 31, 1995, and June 30, 1995, was 55.4%, 52.5% and 52.9%,
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 June 30, 1996 and 1995, the Corporation experienced net
loan charge-offs of $165,000 and $48,000, respectively. The
Corporation reported net loan charge-offs of $164,000 and $38,000,
respectively, during the six-month periods ended June 30, 1996 and
1995.
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 $2.3 million as of June 30, 1996,
$2.7 million as of December 31, 1995, and $3.8 million as of June 30,
1995, and represented .29%, .36% and .51% of total loans as of these
dates, respectively.
The allowance for possible loan losses at June 30, 1996, was
$16,260,000 and represented 2.05% of total loans and 708% 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 customer's 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, 1996, the Corporation's
investment securities portfolio had an average life of less than two
years. In addition, at June 30, 1996, the Corporation held only $3.8
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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, 1996, shareholders' equity was $198.6 million, compared
to $194.9 million as of December 31, 1995, and $184.1 million as of
June 30, 1995, resulting in an increase of $14.5 million, or 7.9%,
from June 30, 1995. Shareholders' equity as a percentage of total
assets as of June 30, 1996, was 11.7%, compared to 11.4% as of
December 31, 1995, and 11.2% as of June 30, 1995. Total equity as of
June 30, 1996, and June 30, 1995, included an after-tax unrealized net
loss of $1.6 million and $1.5 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 six-month
periods ended June 30, 1996, and June 30, 1995, follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1996 1995
<S> <C> <C>
Total shareholders' equity as of January 1, $194,902 $170,680
Net income 10,156 9,364
Dividends (3,887) (3,131)
Shares issued upon exercise of employee
stock options 130 138
Shares issued from director stock purchase plan 239 246
Change in unrealized gains and losses on
available for sale securities (2,961) 6,782
Total shareholders' equity as of end of period $198,579 $184,079
</TABLE>
The following table represents the Corporation's regulatory capital
ratios as of June 30, 1996:
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
<S> <C> <C> <C>
Chemical Financial Corporation - actual ratio 11.6% 28.7% 30.0%
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 June 30, 1996, are high due to the Corporation
holding $647 million in investment securities and other assets which
are assigned a 0% risk rating, $209 million in assets which are
assigned a 20% risk rating and $425 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 June 30, 1996.
-20-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation's annual meeting of shareholders was held April 15,
1996. At that meeting, the only matter to be voted on by the
shareholders was the election of directors. The directors were
elected 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 7,989,650 36,509
Michael L. Dow 7,979,796 46,363
Alan W. Ott 7,981,247 44,912
Frank P. Popoff 7,989,850 36,309
Lawrence A. Reed 7,982,266 43,893
William S. Stavropoulos 7,963,482 62,677
</TABLE>
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. No reports on Form 8-K were filed during
the quarter covered by this Form 10-Q.
-21-
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 5, 1996 By /S/ ALAN W. OTT
Alan W. Ott, Chairman,
Chief Executive Officer and
President
Date: August 5, 1996 By /S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer
-22-
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
-23-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
CHEMICAL FINANCIAL CORPORATION
(Unaudited)
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1996 1995 1996 1995
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding . . . . . . . . . . . . . . 9,720 9,661 9,716 9,657
Net effect of the assumed exercise of
stock options- based on the treasury
stock method using average market
price . . . . . . . . . . . . . . . . . . . . . . . . 146 131 149 128
9,866 9,792 9,865 9,785
Net income . . . . . . . . . . . . . . . . . . . . . . $5,163 $4,771 $10,156 $9,364
Net income per common share. . . . . . . . . . . . . . $ 0.52 $ 0.49 $ 1.03 $ 0.96
FULLY DILUTED:
Average shares outstanding . . . . . . . . . . . . . . 9,720 9,661 9,716 9,657
Net effect of the assumed exercise of
stock options- based on the treasury
stock method using end of period
market price. . . . . . . . . . . . . . . . . . . . . 143 131 148 130
9,863 9,792 9,864 9,787
Net income . . . . . . . . . . . . . . . . . . . . . . $5,163 $4,771 $10,156 $9,364
Net income per common share. . . . . . . . . . . . . . $ 0.52 $ 0.49 $ 1.03 $ 0.96
</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, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 81,092
<INT-BEARING-DEPOSITS> 988
<FED-FUNDS-SOLD> 73,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 431,206
<INVESTMENTS-CARRYING> 277,570
<INVESTMENTS-MARKET> 278,720
<LOANS> 794,493
<ALLOWANCE> 16,260
<TOTAL-ASSETS> 1,691,300
<DEPOSITS> 1,432,985
<SHORT-TERM> 34,549
<LIABILITIES-OTHER> 15,187
<LONG-TERM> 10,000
<COMMON> 97,226
0
0
<OTHER-SE> 101,353
<TOTAL-LIABILITIES-AND-EQUITY> 1,691,300
<INTEREST-LOAN> 33,126
<INTEREST-INVEST> 20,678
<INTEREST-OTHER> 2,365
<INTEREST-TOTAL> 56,169
<INTEREST-DEPOSIT> 22,406
<INTEREST-EXPENSE> 23,351
<INTEREST-INCOME-NET> 32,818
<LOAN-LOSSES> 538
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 23,243
<INCOME-PRETAX> 15,268
<INCOME-PRE-EXTRAORDINARY> 15,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,156
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.25
<LOANS-NON> 1,340
<LOANS-PAST> 955
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,295
<ALLOWANCE-OPEN> 15,886
<CHARGE-OFFS> 286
<RECOVERIES> 122
<ALLOWANCE-CLOSE> 16,260
<ALLOWANCE-DOMESTIC> 16,260
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
