<PAGE>
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number: 0-8185
CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2022454
(State or Other Jurisdiction (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 28,1997, was 10,233,829 shares.
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<PAGE>
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, 1996)
Consolidated Statement of Income for the Three
and Nine Months Ended September 30, 1997 and
September 30, 1996 3
Consolidated Statement of Financial Position as
of September 30, 1997, December 31, 1996 and
September 30, 1996 4
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1997 and September 30,
1996 5
Notes to Consolidated Financial Statements 6-8
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
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<PAGE>
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,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . $17,864 $17,098 $51,857 $50,211
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 10,437 9,803 30,141 29,342
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . 540 515 1,622 1,654
------- ------- ------- -------
TOTAL INTEREST ON SECURITIES 10,977 10,318 31,763 30,996
Interest on federal funds sold . . . . . . . . . . . . . . . 1,290 995 3,767 3,264
Interest on deposits with unaffiliated banks . . . . . . . . 20 33 116
------- ------- ------- -------
TOTAL INTEREST INCOME 30,131 28,431 87,420 84,587
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . . 12,074 10,910 34,455 33,316
Interest on short-term borrowings. . . . . . . . . . . . . . 357 310 991 871
Interest on long-term debt . . . . . . . . . . . . . . . . . 152 162 444 546
------- ------- ------- -------
TOTAL INTEREST EXPENSE 12,583 11,382 35,890 34,733
------- ------- ------- -------
NET INTEREST INCOME 17,548 17,049 51,530 49,854
Provision for possible loan losses . . . . . . . . . . . . . 219 273 767 811
------- ------- ------- -------
NET INTEREST INCOME after provision for
possible loan losses. . . . . . . . . . . . . . . . . . . 17,329 16,776 50,763 49,043
OTHER INCOME
Trust department income. . . . . . . . . . . . . . . . . . . 740 663 2,319 2,137
Service charges on deposit accounts. . . . . . . . . . . . . 1,332 1,342 3,964 4,020
Other charges and fees for customer services . . . . . . . . 844 611 2,542 1,955
Gains on sales of loans. . . . . . . . . . . . . . . . . . . 81 36 160 98
Investment securities gains. . . . . . . . . . . . . . . . . 1 1 1 15
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 181 684 853
------- ------- ------- -------
TOTAL OTHER INCOME 3,126 2,834 9,670 9,078
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<PAGE>
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . . . . . . . . 6,845 6,735 20,652 20,355
Occupancy expense. . . . . . . . . . . . . . . . . . . . . . 1,174 1,167 3,593 3,504
Equipment expense. . . . . . . . . . . . . . . . . . . . . . 872 775 2,468 2,339
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,779 2,832 8,371 8,554
------- ------- ------- -------
TOTAL OPERATING EXPENSES 11,670 11,509 35,084 34,752
------- ------- ------- -------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 8,785 8,101 25,349 23,369
Federal income taxes . . . . . . . . . . . . . . . . . . . . 2,879 2,689 8,293 7,801
------- ------- ------- -------
NET INCOME $ 5,906 $ 5,412 $17,056 $15,568
======= ======= ======= =======
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . . . . $ .57 $ .52 $ 1.65 $ 1.50
======= ======= ======= =======
Cash dividends per common share. . . . . . . . . . . . . . . $ .23 $ .19 $ .65 $ .57
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------ -------------
(Unaudited) (Unaudited)
(In thousands)
<S> <C> <C> <C>
ASSETS
Cash and demand deposits due from banks. . . . . . . . . . . $ 77,504 $ 89,517 $ 85,693
Federal funds sold . . . . . . . . . . . . . . . . . . . . . 62,950 114,200 86,900
Interest-bearing deposits with unaffiliated banks. . . . . . 1,134 991
Investment securities:
Held to maturity (market value $262,297 at 9/30/97,
$215,494 at 12/31/96, $258,773 at 9/30/96). . . . . . . . 260,197 213,752 257,441
Available for sale (at market value). . . . . . . . . . . . 478,981 441,787 423,731
---------- ---------- ----------
Total investment securities 739,178 655,539 681,172
Loans:
Commercial and agricultural . . . . . . . . . . . . . . . . 114,211 114,154 120,104
Real estate construction. . . . . . . . . . . . . . . . . . 26,736 24,791 21,113
Real estate mortgage. . . . . . . . . . . . . . . . . . . . 533,130 510,193 507,013
Installment . . . . . . . . . . . . . . . . . . . . . . . . 165,547 158,515 161,913
---------- ---------- ----------
Total loans 839,624 807,653 810,143
Less: Allowance for possible loan losses . . . . . . . . . 17,269 16,607 16,503
---------- ---------- ----------
Net loans 822,355 791,046 793,640
Premises and equipment . . . . . . . . . . . . . . . . . . . 20,165 20,335 19,398
Accrued income . . . . . . . . . . . . . . . . . . . . . . . 15,039 14,419 14,983
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 11,633 12,584 13,119
---------- ---------- ----------
TOTAL ASSETS $1,748,824 $1,698,774 $1,695,896
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . $ 224,618 $ 226,965 $ 218,772
Interest bearing. . . . . . . . . . . . . . . . . . . . . . 1,234,557 1,202,950 1,212,400
---------- ---------- ----------
Total deposits 1,459,175 1,429,915 1,431,172
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<PAGE>
Short-term borrowings:
Treasury tax and loan notes payable to the U.S.
Treasury. . . . . . . . . . . . . . . . . . . . . . . . . 11,760 9,458 11,725
Securities sold under agreements to repurchase. . . . . . . 35,290 27,875 25,056
---------- ---------- ----------
47,050 37,333 36,781
Interest payable and other liabilities . . . . . . . . . . . 14,704 14,257 16,099
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 9,000 10,000 10,000
---------- ---------- ----------
Total liabilities 1,529,929 1,491,505 1,494,052
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
Issued - 10,226,280 shares, 10,209,790 shares,
and 9,702,957 shares, respectively. . . . . . . . . . . 102,263 102,098 97,030
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . 69,500 69,616 56,454
Retained earnings . . . . . . . . . . . . . . . . . . . . . 46,144 35,737 49,405
Unrealized net gain (loss) on securities available
for sale. . . . . . . . . . . . . . . . . . . . . . . . . 988 (182) (1,045)
---------- ---------- ----------
Total shareholders' equity 218,895 207,269 201,844
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,748,824 $1,698,774 $1,695,896
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,056 $ 15,568
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 767 811
Origination of loans held for sale (21,633) (7,940)
Proceeds from sales of loans 21,793 8,075
Gains on sales of loans (160) (98)
Investment securities gains (1) (15)
Gain on sale of branch office building (256)
Provision for depreciation and amortization 2,382 2,394
Net amortization of investment securities 1,420 2,122
Net (increase) decrease in accrued income and other assets (295) 1,417
Net increase in interest payable and other liabilities 525 2,069
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,598 24,403
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with unaffiliated banks 1,134 1,990
Proceeds from maturities of securities held to maturity 109,026 149,604
Purchases of securities held to maturity (155,848) (38,130)
Proceeds from maturities of securities available for sale 101,506 67,275
Proceeds from sales of securities available for sale 522
Purchases of securities available for sale (137,942) (132,173)
Net increase in loans (32,504) (50,251)
Proceeds from sale of branch office building 900
Purchases of premises and equipment (2,432) (1,158)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (116,160) (2,321)
--------- ---------
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<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts and
savings accounts 34,091 (30,375)
Net increase (decrease) in certificates of deposit and
other time deposits (4,831) 11,746
Net increase in repurchase agreements and other short-term
borrowings 9,717 1,558
Principal payments on long-term debt (1,000) (2,080)
Cash dividends (6,648) (5,827)
Proceeds from stock purchase plan 187 190
Proceeds from exercise of stock options 250 226
Purchases of common stock (467) (844)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 31,299 (25,406)
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (63,263) (3,324)
Cash and cash equivalents at beginning of year 203,717 175,917
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 140,454 $ 172,593
========= =========
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and long-term debt $ 35,646 $ 35,215
Federal income taxes paid 8,520 7,790
- --------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
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 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. In the opinion of
management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
condition and results of operations of the Corporation for the periods
presented. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. 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, 1996.
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 the difference between
primary and fully diluted earnings per share is not material. The
weighted average number of common shares used to compute earnings per
share was 10,343,000 during the third quarter and 10,345,000 during
the first nine months of 1997, as compared to 10,341,000 during the
third quarter and 10,352,000 during the first nine months of 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," which is required to be adopted on December 31, 1997. At that
time, the Corporation will be required to change the method currently
used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. Statement No.
128 is not expected to have a material effect on primary or fully
diluted earnings per share for the periods presented.
-9-
<PAGE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes
loans and nonperforming assets at the dates indicated (in thousands of
dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
LOANS:
Commercial and agricultural. . . . $114,211 $114,154 $120,104
Real estate construction . . . . . 26,736 24,791 21,113
Real estate mortgage . . . . . . . 533,130 510,193 507,013
Installment. . . . . . . . . . . . 165,547 158,515 161,913
-------- -------- --------
Total Loans. . . . . . . . . . . . $839,624 $807,653 $810,143
======== ======== ========
NONPERFORMING ASSETS:
Nonaccrual loans . . . . . . . . . $ 1,870 $ 1,341 $ 1,627
Loans 90 days or more past due
and still accruing interest. . . 1,691 539 915
Restructured loans . . . . . . . . 6
-------- -------- --------
Total nonperforming loans. . . . . 3,567 1,880 2,542
Other real estate owned <F1> . . . 817 688 755
-------- -------- --------
Total nonperforming assets . . . . $ 4,384 $ 2,568 $ 3,297
======== ======== ========
<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>
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<PAGE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE C: ALLOWANCE FOR POSSIBLE LOAN LOSSES The following
summarizes the changes in the allowance for possible loan losses (in
thousands of dollars):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
ALLOWANCES FOR POSSIBLE LOAN LOSSES
Balance as of January 1. . . . . . . . . . . . . . $16,607 $15,886
Provision for loan losses. . . . . . . . . . . . . 767 811
Gross loans charged-off. . . . . . . . . . . . . . (394) (388)
Gross recoveries of loans previously
charged-off. . . . . . . . . . . . . . . . . . . 289 194
------- -------
Net loans charged-off. . . . . . . . . . . . . . . (105) (194)
------- -------
Balance at September 30. . . . . . . . . . . . . . $17,269 $16,503
======= =======
</TABLE>
NOTE D: ACQUISITIONS
Chemical completed its acquisition of State Savings Bancorp, Inc., in
Caro, Michigan ("SSBI") on May 1, 1996. Chemical issued 525,000
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.
On December 31, 1996, the Corporation acquired Arbury & Stephenson, Inc., an
insurance agency headquartered in Midland, Michigan. The merger was
effected through an exchange of shares of the Corporation's common stock.
On October 31, 1997, Chemical and Shelby Financial Corporation in Shelby,
Michigan ("SFC"), signed a letter of intent for the affiliation of SFC with
Chemical through the merger of SFC with and into Chemical. The transaction
is subject to execution of a definitive agreement, SFC shareholder and
regulatory approvals, and other customary conditions and is expected to be
completed during the first quarter of 1998. At September 30, 1997, SFC
reported total assets of approximately $102 million.
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<PAGE>
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 report.
SUMMARY
The Corporation's net income was $5,906,000 in the third quarter of
1997, an increase of 9.1% over net income of $5,412,000 during the
third quarter of 1996. Earnings per share in the third quarter of
1997 were $.57, an increase of 9.6% over earnings per share of $.52 in the
third quarter of 1996.
Return on average assets in the third quarter of 1997 was 1.33%,
compared to a return on average assets of 1.28% during the third
quarter of 1996. Return on average equity for the three months ended
September 30, 1997 and September 30, 1996, was 10.8% and 10.6%,
respectively.
The Corporation's net income was $17,056,000 for the first nine months
of 1997, an increase of 9.6% over net income of $15,568,000 during the
first nine months of 1996. Earnings per share for the nine months
ended September 30, 1997 were $1.65, an increase of 10% over earnings
per share of $1.50 for the first nine months of 1996.
Return on average assets for the first nine months of 1997 was 1.33%,
compared to a return on average assets of 1.23% for the first nine
months of 1996. Return on average equity for the nine-month periods
ended September 30, 1997 and September 30, 1996 was 10.7% and 10.4%,
respectively.
Total assets were $1.749 billion as of September 30, 1997, compared
to $1.699 billion as of December 31, 1996, and $1.696 billion as of
September 30, 1996.
Total loans increased $29.5 million, or 3.6%, from September 30, 1996,
to $839.6 million as of September 30, 1997. Total loans increased $32
million, or 4.0%, from December 31, 1996 to September 30, 1997. The
increases in total loans from September 30, 1996 and December 31, 1996
to September 30, 1997 were attributable primarily to increases in
real estate construction and residential mortgage loans.
Shareholders' equity increased $17.1 million, or 8.4%, from September
30, 1996, to $218.9 million as of September 30, 1997, or $21.41 per
share, representing 12.5% of total assets.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's net interest income for the third quarter of 1997
was $17.55 million, a $.5 million, or 2.9%, increase over the $17.05
million recorded in the third quarter of 1996. The increase in net
interest income was due primarily to growth in loans and an increase
in the average yield of the investment securities portfolio. Average
loans increased 3.2% in the third quarter of 1997 compared to the
third quarter of 1996. For the third quarter of 1997, the net
interest margin was 4.29%, compared to 4.38% in the third quarter of
1996.
Net interest income increased $1,676,000, or 3.4%, during the first
nine months of 1997 as compared to the first nine months of 1996. The
net interest margin increased to 4.35% during the first nine months of
1997 from 4.29% during the first nine months of 1996.
OTHER INCOME
Other income increased $292,000, or 10.3%, in the third quarter of
1997 as compared to the third quarter of 1996 and $592,000, or 6.5%,
in the first nine months of 1997 as compared to the first nine months
of 1996. Trust Department income increased $77,000, or 11.6%, in the
third quarter of 1997 compared to the third quarter of 1996 and
$182,000, or 8.5%, in the first nine months of 1997 compared to the
first nine months of 1996. Other charges and fees for customer
services increased $233,000, or 38.1%, in the third quarter of 1997
compared to the third quarter of 1996 and $587,000, or 30.0%, in the
first nine months of 1997 compared to the first nine months of 1996.
The increase in other charges and fees in the third quarter and first
nine months of 1997 was due to increased mutual fund sales, annuity
sales and insurance commissions. The Corporation, through a
subsidiary of its lead affiliate bank, expanded the array of mutual
funds offered and began offering annuity investment products to
customers during the second half of 1996. In addition, beginning in
January 1997, the Corporation began selling title, property and
casualty insurance products through subsidiaries of its lead affiliate
bank.
The Corporation realized gains on the sale of residential mortgage
loans in the secondary market of $81,000 and $36,000 during the third
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
quarter of 1997 and 1996, respectively. Total gains realized on the
sale of residential mortgage loans in the secondary market during the
first nine months of 1997 and 1996 were $160,000 and $98,000,
respectively. The Corporation realized a gain of $256,000 from the
sale of a branch office building during the first quarter of 1997. In
the second quarter of 1996, the Corporation realized a gain of
$150,000 as a termination fee when the credit card portfolio, which it
sold in 1995, was sold by the original purchaser to another credit
card provider. These gains were recorded in the "Other" category of
other income.
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 (the "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, 1997, the
Corporation added $219,000 and $767,000, respectively, to the
Allowance through the provision for possible loan losses, as compared
to $273,000 and $811,000, respectively, during these same periods in
1996. Net loan charge-offs during the three- and nine-month periods
ended September 30, 1997 were $31,000 and $105,000, respectively,
compared to net charge-offs of $30,000 and $194,000, respectively,
during these same periods in 1996.
OPERATING EXPENSES
Total operating expenses increased $161,000, or 1.4%, in the third
quarter of 1997 compared to the third quarter of 1996. Salaries,
wages and employee benefits increased $110,000, or 1.6%, in the third
quarter of 1997 over the third quarter of 1996. The remaining
categories of operating expenses, occupancy, equipment and other
expenses, increased $51,000, or 1.1%, in the third quarter of 1997
compared to the third quarter of 1996. Total operating expenses
increased $332,000, or 1.0%, in the first nine months of 1997
compared to the first nine months of 1996.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 32.8% and
32.7%, respectively, during the three and nine months ended September
30, 1997, compared to 33.2% and 33.4%, respectively, during these same
periods in 1996. 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 $50.1 million, or 2.9%, from December 31, 1996,
and increased $52.9 million, or 3.1%, from September 30, 1996, to
$1.749 billion as of September 30, 1997. Total deposits increased
$29.3 million, or 2.0%, from December 31, 1996, and increased
$28.0 million, or 2.0%, from September 30, 1996, to $1.459 billion as
of September 30, 1997. The increases in both assets and deposits were
primarily attributable to a transfer of Trust Department assets out of
a non-affiliated financial services organization into deposits in the
Corporation's lead subsidiary bank in June 1997.
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, 1997 were $839.6 million, as compared
to $810.1 million as of September 30, 1996 and $807.7 million as of
December 31, 1996. The increase in total loans from September 30,
1996 and December 31, 1996 to September 30, 1997, was attributable
mainly to an increase in real estate construction and residential
mortgage loans.
-15-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
Real estate construction and mortgage loans increased $31.7 million,
or 6.0%, from September 30, 1996, and $24.9 million, or 4.7%, from
December 31, 1996, to $559.9 million as of September 30, 1997. Real
estate construction and mortgage loans represented 66.7%, 66.3% and
65.2% of the Corporation's loan portfolio as of September 30, 1997,
December 31, 1996 and September 30, 1996, respectively.
Commercial and agricultural loans decreased $5.9 million, or 4.9%,
from September 30, 1996, and increased $57,000, or .05%, from December
31, 1996, to $114.2 million as of September 30, 1997. The decrease
from September 30, 1996 and minimal increase from December 31, 1996
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 13.6%, 14.1% and 14.8% of the Corporation's loan portfolio
as of September 30, 1997, December 31, 1996 and September 30, 1996,
respectively.
Installment loans increased $3.6 million, or 2.2%, from September 30,
1996, and $7.0 million, or 4.4%, from December 31, 1996, to $165.5
million as of September 30, 1997, and represented 19.7%, 19.6% and
20.0% of total loans as of September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
The Corporation's total loan to deposit ratio as of September 30,
1997, December 31, 1996 and September 30, 1996, was 57.5%, 56.5% and
56.6%, 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. During the three and
nine months ended September 30, 1997, the Corporation experienced net
loan charge-offs of $31,000 and $105,000, respectively. The
Corporation had net loan charge-offs of $30,000 and $194,000,
respectively, during these same periods in 1996.
Nonperforming loans consist of loans which are past due for principal
or interest payments by 90 days or more and still accruing interest,
loans for which the accrual of interest has been discontinued and other
loans which have been renegotiated to less than market terms due to a
serious weakening of the borrower's financial condition. Nonperforming
loans were $3.6 million as of September 30, 1997, $1.9 million as of
December 31, 1996, and $2.5 million as of September 30, 1996, and represented
.42%, .23% and .31% of total loans as of these dates, respectively. The
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
increase in nonperforming loans from September 30, 1996 and December 31,
1996 to September 30, 1997 was attributable to four commercial real estate
loans. The Corporation had no impaired loans as of September 30, 1997.
The allowance for possible loan losses at September 30, 1997 was
$17,269,000 and represented 2.06% of total loans.
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 withdrawal needs. 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 September 30, 1997, the
Corporation's investment securities portfolio had an average life of
less than two years, with $479 million of investment securities
classified as available for sale. In addition, at September 30, 1997
the Corporation held only $3.0 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 September 30, 1997, shareholders' equity was $218.9 million,
compared to $207.3 million as of December 31, 1996 and $201.8
million as of September 30, 1996, resulting in an increase of $17.1
million, or 8.4%, from September 30, 1996. Shareholders' equity as a
percentage of total assets was 12.5% as of September 30, 1997, 12.2%
as of December 31, 1996 and 11.9% as of September 30, 1996. Total
equity included an after-tax unrealized net gain of $988,000 as of
September 30, 1997, and an unrealized net loss of $182,000 as of
December 31, 1996 and $1.0 million as of September 30, 1996 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, 1997, and September 30, 1996, follows:
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Total shareholders' equity as of January 1, $207,269 $194,902
Net income 17,056 15,568
Dividends (6,648) (5,827)
Shares issued upon exercise of employee
stock options 250 226
Shares issued from director stock purchase
plan 265 239
Repurchases of common stock (467) (844)
Change in unrealized gains and losses on
available for sale securities 1,170 (2,420)
-------- --------
Total shareholders' equity as of end of
period $218,895 $201,844
======== ========
</TABLE>
The following table represents the Corporation's regulatory capital
ratios as of September 30, 1997:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
-------- ---------- ----------
<S> <C> <C> <C>
Chemical Financial Corporation - actual ratio 12.2% 30.3% 31.6%
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, 1997 are high due to the Corporation
holding $680 million in investment securities and other assets which
-18-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (CONTINUED)
are assigned a 0% risk rating, $200 million in assets which are
assigned a 20% risk rating and $450 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, 1997.
OTHER
The Corporation paid a 5% stock dividend on December 30, 1996. All
per share amounts have been adjusted for this stock dividend.
As described in Note D to the unaudited consolidated financial statements,
on October 31, 1997, Chemical and Shelby Financial Corporation ("SFC")
entered into a letter of intent under which SFC would be merged with and
into Chemical. The transaction is subject to execution of a definitive
agreement and other conditions.
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.
-19-
<PAGE>
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
------ --------
3.1 RESTATED ARTICLES OF INCORPORATION. Previously
filed as Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995. Here incorporated by reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's S-8 Registration Statement No.
33-47356 filed with the Commission on April 28,
1992. Here incorporated by reference.
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.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: November 12, 1997 By /S/ALOYSIUS J. OLIVER
Aloysius J. Oliver
President and Chief Executive
Officer (Principal Executive
Officer)
Date: November 12, 1997 By /S/LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------ --------
3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed
as Exhibit 3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995. Here
incorporated by reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's S-8 Registration Statement No. 33-47356
filed with the Commission on April 28, 1992. Here
incorporated by reference.
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
CHEMICAL FINANCIAL CORPORATION
(Unaudited)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding . . . . . . . . . . . . . 10,228 10,202 10,227 10,202
Net effect of the assumed exercise of
stock options - based on the treasury
stock method using average market
price . . . . . . . . . . . . . . . . . . . . . . . 115 139 118 150
------- ------- ------- -------
10,343 10,341 10,345 10,352
======= ======= ======= =======
Net income . . . . . . . . . . . . . . . . . . . . . $ 5,906 $ 5,412 $17,056 $15,568
======= ======= ======= =======
Net income per common share. . . . . . . . . . . . . $ 0.57 $ 0.52 $ 1.65 $ 1.50
======= ======= ======= =======
FULLY DILUTED:
Average shares outstanding . . . . . . . . . . . . . 10,228 10,202 10,227 10,202
Net effect of the assumed exercise of
stock options - based on the
treasury stock method using end
of period market price. . . . . . . . . . . . . . . 147 138 145 149
------- ------- ------- -------
10,375 10,340 10,372 10,351
======= ======= ======= =======
Net income . . . . . . . . . . . . . . . . . . . . . $ 5,906 $ 5,412 $17,056 $15,568
======= ======= ======= =======
Net income per common share. . . . . . . . . . . . . $ 0.56 $ 0.52 $ 1.64 $ 1.50
======= ======= ======= =======
</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 SEPTEMBER 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 77,504
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 62,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 478,981
<INVESTMENTS-CARRYING> 260,197
<INVESTMENTS-MARKET> 262,297
<LOANS> 839,624
<ALLOWANCE> 17,269
<TOTAL-ASSETS> 1,748,824
<DEPOSITS> 1,459,175
<SHORT-TERM> 47,050
<LIABILITIES-OTHER> 14,704
<LONG-TERM> 9,000
<COMMON> 102,263
0
0
<OTHER-SE> 116,632
<TOTAL-LIABILITIES-AND-EQUITY> 1,748,824
<INTEREST-LOAN> 51,857
<INTEREST-INVEST> 31,763
<INTEREST-OTHER> 3,800
<INTEREST-TOTAL> 87,420
<INTEREST-DEPOSIT> 34,455
<INTEREST-EXPENSE> 35,890
<INTEREST-INCOME-NET> 51,530
<LOAN-LOSSES> 767
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 35,084
<INCOME-PRETAX> 25,349
<INCOME-PRE-EXTRAORDINARY> 25,349
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,056
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 4.35
<LOANS-NON> 1,870
<LOANS-PAST> 1,691
<LOANS-TROUBLED> 6
<LOANS-PROBLEM> 3,567
<ALLOWANCE-OPEN> 16,607
<CHARGE-OFFS> 394
<RECOVERIES> 289
<ALLOWANCE-CLOSE> 17,269
<ALLOWANCE-DOMESTIC> 17,269
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
