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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 MARCH 31, 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 April 15, 1996, was 9,219,105 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 months
ended March 31, 1996, and March 31, 1995 3
Consolidated Statement of Financial Position as of March 31,
1996, December 31, 1995, and March 31, 1995 4
Consolidated Statement of Cash Flows for the three months
ended March 31, 1996, and March 31, 1995 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 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
(In thousands, except per
share amounts)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . $15,981 $15,439
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 9,274 8,632
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . 487 519
TOTAL INTEREST ON SECURITIES 9,761 9,151
Interest on federal funds sold . . . . . . . . . . . . . . 1,197 943
Interest on deposits with unaffiliated banks . . . . . . . 50 52
TOTAL INTEREST INCOME 26,989 25,585
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . 10,907 9,792
Interest on short-term borrowings. . . . . . . . . . . . . 328 429
Interest on long-term debt . . . . . . . . . . . . . . . . 198 213
TOTAL INTEREST EXPENSE 11,433 10,434
NET INTEREST INCOME 15,556 15,151
Provision for possible loan losses . . . . . . . . . . . . 268 250
NET INTEREST INCOME After Provision for
Possible Loan Losses. . . . . . . . . . . . . . . . . . . 15,288 14,901
OTHER INCOME
Trust department income. . . . . . . . . . . . . . . . . . 661 610
Service charges on deposit accounts. . . . . . . . . . . . 1,284 1,220
Other charges and fees for customer services . . . . . . . 650 630
Revenue from data processing services. . . . . . . . . . . 230 269
Gains on sales of residential mortgage loans . . . . . . . 33 28
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 26 45
TOTAL OTHER INCOME 2,884 2,802
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . . . . . . . 6,502 6,324
Occupancy expense-premises . . . . . . . . . . . . . . . . 1,181 1,104
Equipment rentals, depreciation and maintenance. . . . . . 752 713
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,570 3,057
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . 11,005 11,198
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 7,167 6,505
Federal income taxes . . . . . . . . . . . . . . . . . . . 2,365 2,111
NET INCOME $ 4,802 $ 4,394
-3-
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . . . $ .51 $ .47
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
(Unaudited) (Unaudited)
ASSETS (In thousands)
<S> <C> <C> <C>
Cash and demand deposits due from banks. . . . . . $ 92,009 $ 88,054 $ 69,904
Federal funds sold . . . . . . . . . . . . . . . . 81,850 80,100 69,000
Interest-bearing deposits with unaffiliated
banks . . . . . . . . . . . . . . . . . . . . . . 2,984 2,981 2,971
Investment securities:
Held to maturity (market value $317,263 at
3/31/96, $365,516 at 12/31/95, $316,001 at
3/31/95). . . . . . . . . . . . . . . . . . . . 314,451 360,864 316,218
Available for sale (at market value). . . . . . . 386,228 341,670 359,015
Total investment securities 700,679 702,534 675,233
Loans:
Commercial and agricultural . . . . . . . . . . . 116,905 116,630 117,574
Real estate construction. . . . . . . . . . . . . 17,550 16,195 15,506
Real estate mortgage. . . . . . . . . . . . . . . 462,869 454,591 447,367
Installment . . . . . . . . . . . . . . . . . . . 155,020 151,300 144,596
Total loans 752,344 738,716 725,043
Less: Allowance for possible loan losses . . . . 15,958 15,678 15,358
Net loans 736,386 723,038 709,685
Premises and equipment . . . . . . . . . . . . . . 19,406 19,821 20,702
Accrued income . . . . . . . . . . . . . . . . . . 15,957 15,060 13,087
Other assets . . . . . . . . . . . . . . . . . . . 13,267 12,292 14,500
TOTAL ASSETS $1,662,538 $1,643,880 $1,575,082
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . $ 209,682 $ 208,377 $ 176,834
Interest bearing. . . . . . . . . . . . . . . . . 1,205,124 1,188,889 1,168,060
Total deposits 1,414,806 1,397,266 1,344,894
Short-term borrowings:
Treasury tax and loan notes payable to the
U.S. Treasury . . . . . . . . . . . . . . . . . 8,005 7,084 5,307
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . . . 24,236 28,139 30,354
32,241 35,223 35,661
Interest payable and other liabilities . . . . . . 16,642 13,767 13,702
Long-term debt . . . . . . . . . . . . . . . . . . 12,000 12,080 12,099
Total liabilities 1,475,689 1,458,336 1,406,356
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares (10,000,000
at March 31, 1995)
-5-
Issued - 9,216,569 shares, 9,194,376 shares,
and 9,157,625 shares, respectively. . . . . . 92,166 91,944 91,576
Surplus . . . . . . . . . . . . . . . . . . . . . 58,013 57,918 57,917
Retained earnings . . . . . . . . . . . . . . . . 37,265 34,307 23,741
Unrealized net gain (loss) on securities
available for sale. . . . . . . . . . . . . . . (595) 1,375 (4,508)
Total shareholders' equity 186,849 185,544 168,726
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,662,538 $1,643,880 $1,575,082
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
(In thousands)
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,802 $ 4,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . 268 250
Provision for depreciation and amortization . . . . . . . . 787 763
Net amortization of investment securities . . . . . . . . . 861 343
Net (increase) decrease in accrued income
and other assets . . . . . . . . . . . . . . . . . . . . (849) 642
Net increase in interest payable and other
liabilities. . . . . . . . . . . . . . . . . . . . . . . 3,052 1,977
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,921 8,369
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits
with unaffiliated banks . . . . . . . . . . . . . . . . . . . (3) (4)
Proceeds from maturities of securities held
to maturity . . . . . . . . . . . . . . . . . . . . . . . . . 47,536 3,267
Purchases of securities held to maturity. . . . . . . . . . . . (1,100) (38,366)
Proceeds from maturities of securities available
for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,063 52,818
Purchases of securities available for sale. . . . . . . . . . . (73,536) (23,948)
Net (increase) decrease in loans. . . . . . . . . . . . . . . . (13,718) 15,121
Purchases of premises and equipment . . . . . . . . . . . . . . (232) (422)
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (15,990) 8,466
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts
and savings accounts. . . . . . . . . . . . . . . . . . . . . (2,700) (30,471)
Net increase in certificates of deposit and
other time deposits . . . . . . . . . . . . . . . . . . . . . 20,240 8,664
Net decrease in repurchase agreements and
other short-term borrowings . . . . . . . . . . . . . . . . . (2,982) (5,361)
Principal payments on long-term debt. . . . . . . . . . . . . . (80)
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . (1,844) (1,465)
Proceeds from stock purchase plan . . . . . . . . . . . . . . . 62 56
Proceeds from exercise of stock options . . . . . . . . . . . . 78 90
-7-
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES 12,774 (28,487)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,705 (11,652)
Cash and cash equivalents at beginning of year 168,154 150,556
CASH AND CASH EQUIVALENTS AT END OF PERIOD $173,859 $138,904
</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 $ 11,217 $ 10,222
Federal income taxes paid - -
</TABLE>
________________________________________________________________________________
-8-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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.
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 for the three months ended
March 31, 1996 and 1995 were 9,363,992 and 9,278,911, respectively.
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. Operating results for the three months ended
March 31, 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.
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 1995 allowance for possible loan
losses, related to loans that are identified for evaluation in accordance
with SFAS No. 114, is based on discounted cash flows using each loan's
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.
-9-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
NOTE C: LOANS AND NONPERFORMING ASSETS The following summarizes loans
and nonperforming assets at the dates indicated (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
<S> <C> <C> <C>
LOANS:
Commercial and agricultural . . . . . . . . . . . $116,905 $116,630 $117,574
Real estate construction. . . . . . . . . . . . . 17,550 16,195 15,506
Real estate mortgage. . . . . . . . . . . . . . . 462,869 454,591 447,367
Installment . . . . . . . . . . . . . . . . . . . 155,020 151,300 144,596
Total Loans . . . . . . . . . . . . . . . . . . . $752,344 $738,716 $725,043
NONPERFORMING ASSETS:
Nonaccrual loans. . . . . . . . . . . . . . . . . $ 1,672 $ 1,658 $ 2,380
Loans 90 days or more past due and
still accruing interest . . . . . . . . . . . . 556 855 547
Restructured loans. . . . . . . . . . . . . . . . 67 84 132
Total nonperforming loans . . . . . . . . . . . . 2,295 2,597 3,059
Other real estate owned <F1>. . . . . . . . . . . 884 966 566
Total nonperforming assets. . . . . . . . . . . . $ 3,179 $ 3,563 $ 3,625
<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 D: ALLOWANCE FOR LOAN LOSSES The following summarizes the changes
in the allowance for loan losses (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
1996 1995
<S> <C> <C>
ALLOWANCES FOR LOAN LOSSES
Balance as of January 1. . . . . . . . . . . . . . . . . . . . . $15,678 $15,095
Provision for loan losses. . . . . . . . . . . . . . . . . . . . 268 250
Gross loans charged-off. . . . . . . . . . . . . . . . . . . . . (46) (26)
Gross recoveries of loans previously charged-off . . . . . . . . 58 39
Net loans recovered. . . . . . . . . . . . . . . . . . . . . . . 12 13
Balance at March 31. . . . . . . . . . . . . . . . . . . . . . . $15,958 $15,358
</TABLE>
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 $4,802,000 in the first quarter of 1996,
as compared to net income of $4,394,000 during the first quarter of 1995.
Earnings per share in the first quarter of 1996 was $.51, compared to
earnings per share in the first quarter of 1995 of $.47.
Return on average assets in the first quarter of 1996 was 1.19%, compared
to a return on average assets of 1.12% during the first quarter of 1995.
Return on average equity for the three months ended March 31, 1996, and
March 31, 1995, was 10.4% and 10.3%, respectively.
Total assets were $1.663 billion as of March 31, 1996, compared to $1.644
billion as of December 31, 1995, and $1.575 billion as of March 31, 1995.
Total loans increased $27.3 million, or 3.8%, from March 31, 1995, to
$752.3 million as of March 31, 1996. Total loans increased $13.6 million,
or 1.8%, from December 31, 1995, to March 31, 1996. The increase in total
loans from March 31, 1995, to March 31, 1996, was attributable to increases
in real estate mortgage and installment loans.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Installment loans increased $10.4 million, or 7.2%, from March 31, 1995, to
$155 million as of March 31, 1996. The increase in installment loans
between March 31, 1995, and March 31, 1996, was primarily attributable to
the Corporation's success in its 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 of 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 March 31, 1996, was 53.2%,
compared to 52.9% at December 31, 1995, and 53.9% at March 31, 1995.
Shareholders' equity increased $18.1 million, or 10.7%, from March 31,
1995, to $186.8 million as of March 31, 1996, or $20.27 per share and
represented 11.2% 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 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
3-31-96 3-31-95
(In thousands)
<S> <C> <C>
Interest income per quarterly
consolidated statement of income. . . . . . . . . . . . . . . $26,989 $25,585
Add tax equivalent adjustment. . . . . . . . . . . . . . . . . 308 325
Interest income (FTE). . . . . . . . . . . . . . . . . . . . . 27,297 25,910
Less interest expense. . . . . . . . . . . . . . . . . . . . . 11,433 10,434
Net interest income (FTE). . . . . . . . . . . . . . . . . . . $15,864 $15,476
</TABLE>
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Other income is derived from trust services, service charges, data
processing and other bank-related services, gains on sales of residential
mortgage loans, 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> FIRST QUARTER 1996 COMPARED
TO FIRST QUARTER 1995
INCREASE (DECREASE)
DUE TO CHANGES IN COMBINED
AVERAGE AVERAGE INCREASE
VOLUME<F*> YIELD/RATE<F*> (DECREASE)
(In thousands)
<S> <C> <C> <C>
Causes of increase in net
interest income (FTE) due to:
CHANGES IN INTEREST INCOME ON
EARNING ASSETS:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $449 $ 92 $ 541
Taxable investment securities. . . . . . . . . . . . . . . . 642 642
Non-taxable investment securities. . . . . . . . . . . . . . (56) 8 (48)
Federal funds sold . . . . . . . . . . . . . . . . . . . . . 343 (89) 254
Interest on deposits with unaffiliated banks . . . . . . . . (2) (2)
Total change in interest income on earning assets. . . 736 651 1,387
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits:. . . . . . . . . . . . . . . . . . . . . . . . . . 191 924 1,115
Short-term borrowed funds. . . . . . . . . . . . . . . . . . (75) (26) (101)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . (2) (13) (15)
Total change in interest expense on interest-bearing
liabilities. . . . . . . . . . . . . . . . . . . . . . 114 885 999
TOTAL INCREASE (DECREASE) IN NET INTEREST
INCOME (FTE) . . . . . . . . . . . . . . . . . . . . . . . . $622 $(234) $ 388
<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 $388,000, or 2.5%, in the first quarter
of 1996 as compared to the first quarter of 1995. This increase was due
primarily to increases in average real estate mortgage and installment
loans and deposits in the first quarter of 1996, compared to the first
quarter of 1995. The total increase in net interest income attributable to
volume changes in interest-bearing assets and liabilities was $622,000.
The increase attributable to volume changes was partially offset by a
$234,000 decrease in net interest income attributable to changes in the
average yields and rates on interest-bearing assets and liabilities. As
interest rates rose over the three-month period ended March 31, 1996, the
Corporation experienced an increase in interest expense from deposits
maturing and repricing which exceeded the increased yield on investment
securities which matured and were reinvested at higher interest rates.
OTHER INCOME
Other income increased $82,000, or 2.9%, in the first quarter of 1996 as
compared to the first quarter of 1995. The Corporation's trust department
income and income from service charges on deposit accounts combined were
$115,000 higher in the first quarter of 1996 than in the first quarter of
1995. Trust department income increased 8.4% and service charge income on
deposit accounts increased 5.2%, both due to increased services provided.
The Corporation realized gains on the sale of residential mortgage loans in
the secondary market of $33,000 and $28,000, during the first quarter of
1996 and 1995, respectively.
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 months ended March 31, 1996, the
Corporation added $268,000 to the Allowance through the provision for
possible loan losses, compared to $250,000 during the first three months of
1995. During the first three months of 1996 the Corporation experienced
net loan recoveries of $12,000 as compared to net loan recoveries during
the first three months of 1995 of $13,000.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Total operating expenses decreased $193,000, or 1.7%, in the first quarter
of 1996, compared to the first quarter of 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 $530,000 lower in the first quarter of 1996, compared to
the first quarter of 1995.
Excluding FDIC premiums, total operating expenses were 3.2% higher in the
first quarter of 1996, compared to the first quarter of 1995.
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 33.0% and 32.4%
during the three months ended March 31, 1996, and March 31, 1995,
respectively. 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.
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets increased $19 million, or 1.1%, from December 31, 1995, and
increased $87 million, or 5.6%, from March 31, 1995, to $1.663 billion as
of March 31, 1996. Total deposits increased $17.5 million, or 1.3%, from
December 31, 1995, and increased $70 million, or 5.2%, from March 31, 1995,
to $1.415 billion as of March 31, 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.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Total loans as of March 31, 1996, were $752.3 million, as compared to $725
million as of March 31, 1995, and $738.7 million as of December 31, 1995.
The increase in total loans from March 31, 1995, to March 31, 1996, of
$27.3 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 $10.4 million, or
7.2%, from March 31, 1995, and $3.7 million, or 2.5%, from December 31,
1995, to $155 million as of March 31, 1996, and represented 20.6%, 20.5%
and 19.9% of total loans as of March 31, 1996, December 31, 1995, and March
31, 1995, respectively.
Real estate construction and mortgage loans increased $17.5 million, or
3.8%, from March 31, 1995, and $9.6 million, or 2%, from December 31, 1995,
to $480.4 million as of March 31, 1996. Real estate construction and
mortgage loans represented 63.9%, 63.7% and 63.8% of the Corporation's loan
portfolio as of March 31, 1996, December 31, 1995, and March 31, 1995,
respectively.
Commercial and agricultural loans decreased $669,000, or .6%, from March
31, 1995, and increased $275,000, or .2%, from December 31, 1995, to $116.9
million as of March 31, 1996. The decrease from March 31, 1995, 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 15.5%, 15.8% and 16.2% of the
Corporation's loan portfolio as of March 31, 1996, December 31, 1995, and
March 31, 1995, respectively.
The Corporation's total loan to deposit ratio as of March 31, 1996,
December 31, 1995, and March 31, 1995, was 53.2%, 52.9% and 53.9%,
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 period
ended March 31, 1996, the Corporation experienced net loan recoveries of
$12,000. The Corporation reported net loan recoveries of $13,000 during
the three-month period ended March 31, 1995.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 March 31, 1996, $2.6 million as of December 31, 1995, and
$3.1 million as of March 31, 1995, and represented .30%, .35% and .42% of
total loans as of these dates, respectively.
The allowance for possible loan losses at March 31, 1996, was $15,958,000
and represented 2.12% of total loans and 695% 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 March 31, 1996, the Corporation's investment securities portfolio had
an average life of less than two years. In addition, at March 31, 1996,
the Corporation held only $3.5 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 March 31, 1996, shareholders' equity was $186.8 million, compared to
$185.5 million as of December 31, 1995, and $168.7 million as of March 31,
1995, resulting in an increase of $18.1 million, or 10.7% from March 31,
1995. Shareholders' equity as a percentage of total assets as of March 31,
1996, was 11.2%, compared to 11.3% as of December 31, 1995, and 10.7% as of
March 31, 1995. Total equity as of March 31, 1996, and March 31, 1995,
included an after-tax unrealized net loss of $595,000 and $4.5 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."
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
A statement of changes in shareholders' equity covering the three-month
periods ended March 31, 1996, and March 31, 1995, follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1996 1995
<S> <C> <C>
Total shareholders' equity as of January 1, $185,544 $161,680
Net income 4,802 4,394
Dividends (1,844) (1,465)
Shares issued upon exercise of employee
stock options 78 90
Shares issued from director stock purchase
plan 239 246
Change in unrealized gains and losses on
available for sale securities (1,970) 3,781
Total shareholders' equity as of end
of period $186,849 $168,726
</TABLE>
The following table represents the Corporation's regulatory capital ratios
as of March 31, 1996:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
<S> <C> <C> <C>
Chemical Financial Corporation -
actual ratio 11.3% 27.6% 28.9%
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 March 31, 1996, are high due to the Corporation holding
$663 million in investment securities and other assets which are assigned a
0% risk rating, $197 million in assets which are assigned a 20% risk rating
and $390 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 March 31, 1996.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
OTHER
On April 1, 1996, the shareholders of State Savings Bancorp, Inc. approved
an agreement to merge with the Corporation. All regulatory approvals have
been received and the transaction was consummated on May 1, 1996.
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 for this
split.
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.
-20-
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. 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: May 13, 1996 By /S/ ALAN W. OTT
Alan W. Ott, Chairman,
Chief Executive Officer and
President
Date: May 13, 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
COMPUTATION OF PER SHARE EARNINGS
CHEMICAL FINANCIAL CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
1996 1995
<S> <C> <C>
PRIMARY:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . 9,213 9,153
Net effect of the assumed exercise of stock options-
based on the treasury stock method using average
market price. . . . . . . . . . . . . . . . . . . . . . . . . . . 151 126
9,364 9,279
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,802 $4,394
Net income per common share. . . . . . . . . . . . . . . . . . . . $ 0.51 $ 0.47
FULLY DILUTED:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . 9,213 9,153
Net effect of the assumed exercise of stock options-
based on the treasury stock method using end of
period market price . . . . . . . . . . . . . . . . . . . . . . . 155 129
9,368 9,282
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,802 $4,394
Net income per common share. . . . . . . . . . . . . . . . . . . . $ 0.51 $ 0.47
</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 MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 92,009
<INT-BEARING-DEPOSITS> 2,984
<FED-FUNDS-SOLD> 81,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 386,228
<INVESTMENTS-CARRYING> 314,451
<INVESTMENTS-MARKET> 317,263
<LOANS> 752,344
<ALLOWANCE> 15,958
<TOTAL-ASSETS> 1,662,535
<DEPOSITS> 1,414,806
<SHORT-TERM> 32,241
<LIABILITIES-OTHER> 16,642
<LONG-TERM> 12,000
<COMMON> 92,166
0
0
<OTHER-SE> 94,683
<TOTAL-LIABILITIES-AND-EQUITY> 1,662,538
<INTEREST-LOAN> 15,981
<INTEREST-INVEST> 9,761
<INTEREST-OTHER> 1,247
<INTEREST-TOTAL> 26,989
<INTEREST-DEPOSIT> 10,907
<INTEREST-EXPENSE> 11,433
<INTEREST-INCOME-NET> 15,556
<LOAN-LOSSES> 268
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,005
<INCOME-PRETAX> 7,167
<INCOME-PRE-EXTRAORDINARY> 7,167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,802
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 4.18
<LOANS-NON> 1,672
<LOANS-PAST> 556
<LOANS-TROUBLED> 67
<LOANS-PROBLEM> 2,295
<ALLOWANCE-OPEN> 15,678
<CHARGE-OFFS> 46
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 15,958
<ALLOWANCE-DOMESTIC> 15,958
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
