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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
333 E. MAIN STREET
MIDLAND, MICHIGAN 48640
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (517) 839-5350
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $10 PAR VALUE
(Title of Class)
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 _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( X )
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing.
Aggregate Market Value as of February 20, 1998: $373,122,660
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $10 par value, outstanding at February 20, 1998: 10,778,380
shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated by reference in Parts I and II
(Items 1 and 5-8).
Portions of the registrant's definitive Proxy Statement for its April 20,
1998, annual shareholders' meeting are incorporated by reference in Part
III (Items 10-13).
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PART I
ITEM 1. BUSINESS.
Chemical Financial Corporation ("Chemical" or the "Corporation") is a bank
holding company. Chemical was organized under Michigan law in August 1973,
and is headquartered in Midland, Michigan. Chemical was substantially
inactive until June 30, 1974, when it acquired its lead subsidiary bank,
Chemical Bank and Trust Company ("CB&T"), pursuant to a reorganization in
which the former shareholders of CB&T became shareholders of Chemical. As
of December 31, 1997, Chemical owned all of the outstanding stock of ten
commercial banks and a data processing company, all located in Michigan.
The main offices of Chemical's ten banking subsidiaries are located in
Midland, Bay City, Big Rapids, Cadillac, Caro, Clare, Grayling, Marshall,
Owosso and Stanton.
Chemical's business is concentrated in a single industry segment -
commercial banking. Chemical's subsidiaries offer a full range of
commercial banking and fiduciary services. These include accepting
deposits, business and personal checking accounts, savings and individual
retirement accounts, time deposit instruments, electronically accessed
banking products, residential and commercial real estate financing,
commercial lending, consumer financing, debit cards, safe deposit services,
automated teller machines, access to insurance and investment products,
money transfer services, corporate and personal trust services and other
banking services.
The principal markets for these financial services are the communities
within Michigan in which Chemical's subsidiaries are located and the areas
immediately surrounding these communities. As of December 31, 1997,
Chemical and its subsidiaries served these markets through 86 banking
offices in 55 communities, located in 24 counties, generally across the
mid-section of Michigan. In addition to the full service banking offices,
the subsidiary banks operated 84 automated teller machines, both on and off
bank premises, as of December 31, 1997.
CB&T, which has its headquarters in Midland, is Chemical's lead subsidiary
bank and accounted for 33% of total deposits and 29% of total loans of
Chemical and its subsidiaries on a consolidated basis as of December 31,
1997. Chemical's banking subsidiaries' primary loan product, historically,
has been residential real estate mortgages. As of December 31, 1997, these
loans totaled $442 million, or 52.2%, of consolidated total loans. During
1997, Chemical's subsidiaries' sold residential real estate mortgages with
fifteen year and greater original terms in the secondary mortgage market.
During 1996 and 1995, residential mortgage loans with an original term of
fifteen years were kept in the Corporation's own loan portfolio, and those
with original terms greater than fifteen years were sold in the secondary
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mortgage market. Chemical originated $38.8 million of residential mortgage
loans during 1997 which were sold in the secondary mortgage market,
compared to $12.3 million and $15.6 million in residential mortgage loans
originated and sold during 1996 and 1995, respectively.
The principal sources of revenues for Chemical are interest and fees on
loans, which accounted for 54% of total revenues in 1997 and 1996, and 53%
in 1995. Interest on investment securities is also a significant source of
revenue, accounting for 33% of total revenues in each of the years 1997,
1996 and 1995. Chemical has no foreign loans, assets or activities. No
material part of the business of Chemical or its subsidiaries is dependent
upon a single customer or very few customers, the loss of which would have
a materially adverse effect on Chemical.
The business of banking is highly competitive. In addition to competition
from other commercial banks, banks face significant competition from
nonbank financial institutions. Savings associations and credit unions
compete aggressively with commercial banks for deposits and loans, and
credit unions and finance companies are particularly significant factors in
the consumer loan market. Banks compete for deposits with a broad range of
other types of investments, the most significant of which, over the past
few years, have been mutual funds and annuities. Insurance companies and
investment firms are significant competitors for customer deposits. In
response to this increased competition for customers' bank deposits, the
Corporation expanded its sales and marketing efforts of mutual fund and
annuity investment products during 1996. The Corporation's subsidiary
banks, through "CFC Investment Centers," offer an array of mutual funds,
annuity products and market securities through alliances with Security
First Group and Corelink Financial Services. The CFC Investment Centers
offer customers a complete spectrum of investment products and service
capabilities. In addition, the Trust Department of Chemical Bank and Trust
Company offers customers a number of investment products and services. The
principal methods of competition for financial services are price (interest
rates paid on deposits, interest rates charged on borrowings and fees
charged for services) and service (convenience and quality of services
rendered to customers).
Banks and bank holding companies are extensively regulated. Chemical's
subsidiary banks are all chartered by the State of Michigan and supervised
and regulated by the Financial Institutions Bureau of the Michigan Depart-
ment of Consumer and Industry Services. Three of Chemical's banks are
members of the Federal Reserve System and are also supervised, examined and
regulated by the Federal Reserve System. The other seven state non-member
banks are also regulated by the Federal Deposit Insurance Corporation
("FDIC"). Deposits of all of Chemical's bank subsidiaries are insured by
the FDIC to the extent provided by law.
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State banks and bank holding companies are governed by both federal and
state laws which significantly limit their business activities in a number
of respects. Examples of such limitations include: (1) prior approval of
the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"), and in some cases various other governing agencies, is required
for bank holding companies to acquire control of any additional banks or
branches, (2) the business activities of bank holding companies and their
subsidiaries are limited to banking and to other activities which are
determined by the Federal Reserve Board to be closely related to banking,
and (3) transactions between bank holding company subsidiary banks are
significantly restricted by banking laws and regulations.
Chemical is a legal entity separate and distinct from its subsidiary banks
and data processing subsidiary. Chemical's primary source of revenues
results from dividends paid to it by its subsidiaries. Federal and state
banking laws and regulations limit both the extent to which Chemical's
subsidiary banks can lend or otherwise supply funds to Chemical or certain
of its affiliates and also place certain restrictions on the amount of
dividends the subsidiary banks of Chemical may pay to Chemical.
Banks are subject to a number of federal and state laws and regulations
which have a material impact on their business. These include, among
others, minimum capital requirements, state usury laws, state laws relating
to fiduciaries, the Truth In Lending Act, the Truth in Savings Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited
Funds Availability Act, the Community Reinvestment Act, electronic funds
transfer laws, redlining laws, antitrust laws, environmental laws and
privacy laws. These policies can have a significant effect on the
operating results of banks.
Under Federal law, the FDIC has the authority to impose special assessments
on insured depository institutions to repay FDIC borrowings from the United
States Treasury or other sources, and to establish semiannual assessment
rates on Bank Insurance Fund ("BIF") member banks, so as to maintain the
BIF at the designated reserve ratio defined by law. On January 1, 1994,
the FDIC implemented a system of risk-based premiums for deposit insurance,
pursuant to which the premiums paid by a depository institution are based
on the probability that the BIF will incur a loss in respect of such
institution.
FDIC expense was $.2 million in 1997, $.1 million in 1996 and $1.6 million
in 1995. In 1997, the Corporation paid the minimum rate of $.01296 per
$100 of deposits insured by the BIF and $.0644 per $100 of deposits insured
by the Savings Association Insurance Fund ("SAIF"). During 1996, the
FDIC's minimum assessment rate for BIF insured deposits was reduced to
$2000. Deposits held by well-capitalized banks and insured by the SAIF
were assessed at a rate of $.23 per $100 of insured deposits in 1996. In
addition, during 1996, SAIF insured deposits, held on March 31, 1995,
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were assessed a one-time charge of $.657 per $100 of deposits to
recapitalize the SAIF to its required reserve ratio. The Corporation's
liability for this special assessment was approximately $30,000.
The recapitalization of the SAIF was accomplished through the enactment of
The Deposit Insurance Funds Act of 1996 (the "Funds Act") on September 30,
1996. This legislation, in addition to requiring the one-time special
assessment to the FDIC to capitalize the SAIF to its required reserve
ratio, authorizes the Financing Corporation ("FICO") to impose periodic
assessments on depository institutions that are members of the BIF, in
addition to institutions that are members of the SAIF. The purpose of
these periodic assessments is to spread the cost of the interest payments
on the outstanding FICO bonds over a larger number of institutions. Until
the change in the law, only SAIF-member institutions bore the cost of
funding these interest payments. The FICO assessment on BIF insured
deposits for years 1997-1999 was established at 1.296 cents for every $100
of domestic deposits. For this same period, the SAIF insured institutions'
FICO assessment rate was established at 6.44 cents for every $100 of
domestic deposits. Beginning in the year 2000 until 2017, the FICO
assessment for both BIF and SAIF insured deposits was established at 2.43
cents for every $100 of domestic deposits.
Federal law also contains a "cross-guarantee" provision that could result
in insured depository institutions owned by Chemical being assessed for
losses incurred by the FDIC in connection with assistance provided to, or
the failure of, any other insured depository institution owned by Chemical.
Under Federal Reserve Board policy, Chemical is expected to act as a source
of financial strength to each subsidiary bank and to commit resources to
support each subsidiary bank.
Banks are subject to the provisions of the Community Reinvestment Act of
1977 ("CRA"). Under the terms of the CRA, the appropriate federal bank
regulatory agency is required, in connection with its examination of a
bank, to assess such bank's record in meeting the credit needs of the
community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied to: (1) obtain deposit insurance coverage for a
newly chartered institution, (2) establish a new branch office that will
accept deposits, (3) relocate an office, or (4) merge or consolidate with,
or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal
Reserve Board will assess the CRA compliance record of each subsidiary bank
of the applicant bank holding company, and such compliance records may be
the basis for denying the application.
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changed the geographic constraints
applicable to the banking industry. The Riegle-Neal Act allows bank
holding companies to acquire banks located in any state in the United
States without regard to geographic restrictions or reciprocity
requirements imposed by state law. Effective June 1, 1997, the Riegle-Neal
Act also allowed banks to establish interstate branch networks through
acquisitions of other banks. The establishment of DE NOVO interstate
branches or the acquisition of individual branches of a bank in another
state (rather than the acquisition of an out-of-state bank in its entirety)
is allowed by the Riegle-Neal Act only if specifically authorized by state
law.
Michigan permits both U.S. and non-U.S. banks to establish branch offices
in Michigan. The Michigan Banking Code permits, in appropriate
circumstances and with the approval of the Commissioner of the Financial
Institutions Bureau, (1) acquisition of Michigan banks by FDIC-insured
banks, savings banks or savings and loan associations located in other
states, (2) sale by a Michigan bank of branches to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a
Michigan bank could purchase branches of the purchasing entity, (3)
consolidation of Michigan banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws
permitting such consolidation, (4) establishment of branches in Michigan by
FDIC-insured banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting a Michigan bank to
establish a branch in such jurisdiction, and (5) establishment by foreign
banks of branches located in Michigan.
In March 1996, the Corporation consolidated its bank subsidiary
headquartered in Standish, Michigan (Chemical Bank Huron) with its bank
subsidiary headquartered in Bay City, Michigan (Chemical Bank Bay Area).
On May 1, 1996, the Corporation merged with State Savings Bancorp, Inc.
("SSBI") in Caro, Michigan. SSBI operated one bank, State Savings Bank of
Caro, with offices in Caro and Fairgrove, Michigan. The Corporation issued
551,250 shares (adjusted for the 5% stock dividends paid December 30, 1996
and December 30, 1997) of the Corporation's common stock in exchange for
all of the common stock of SSBI. The merger was accounted for as a
"pooling of interests." As of May 1, 1996, SSBI had assets of
approximately $65 million.
On December 31, 1996, the Corporation through CB&T 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.
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In March 1997, the Corporation's subsidiary headquartered in Owosso,
Michigan (Chemical Bank Key State) sold its branch banking building in
Okemos, Michigan. The loans and deposits of the Okemos branch were
transferred to Chemical Bank Key State's branch banking office in Lansing,
Michigan.
The nature of the business of Chemical's subsidiaries is such that they
hold title to numerous parcels of real property. These properties are
primarily owned for branch offices; however, Chemical and its subsidiaries
may hold properties for other business purposes, as well as on a temporary
basis for properties taken in or in lieu of foreclosure to satisfy loans in
default. Under current state and federal laws, present and past owners of
real property may be exposed to liability for the cost of clean up of
contamination on or originating from those properties, even if they are
wholly innocent of the actions that caused the contamination. These
liabilities can be material and can exceed the value of the contaminated
property.
At December 31, 1997, Chemical was the fifth largest bank holding company
headquartered in Michigan, measured by total assets, and together with its
subsidiaries employed a total of 1007 full-time equivalent employees.
The following table summarizes the book value of investment securities as
of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment securities available for sale:
U.S. Government and agency securities $474,706 $422,629 $328,072
States of the U.S. and municipal securities -- -- --
Mortgage-backed securities 2,351 2,850 3,262
Other securities 17,116 16,308 10,336
-------- -------- --------
Total investment securities available for sale 494,173 441,787 341,670
Investment securities held to maturity:
U.S. Government and agency securities 201,801 168,958 343,627
States of the U.S. and municipal securities 46,707 42,096 46,065
Mortgage-backed securities 501 679 2,026
Other securities 2,011 2,019 711
-------- -------- --------
Total investment securities held to maturity 251,020 213,752 392,429
-------- -------- --------
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Total investment securities $745,193 $655,539 $734,099
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</TABLE>
The information under the following captions in the registrant's Annual
Report to Shareholders for the year ended December 31, 1997, further
describes the business of Chemical and is here incorporated by reference:
CAPTION PAGES
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Table 2. Average Balances, Tax Equivalent Interest and
Effective Yields and Rates 31
Table 3. Volume and Rate Variance Analysis 33
Note C - Investment Securities 19-20
Table 8. Maturities and Yields of Investment Securities
at December 31, 1997 38
Table 4. Summary of Loans and Loan Loss Experience 33
Table 5. Comparison of Loan Maturities and Interest Sensitivity 35
Table 6. Summary of Nonperforming Loans 35
Note D - Loans 20
Table 7. Allocation of the Allowance For Possible Loan Losses 36
Management's Discussion and Analysis of Financial Position and
Results of Operations, subheadings "Net Interest Income",
"Loans", "Nonperforming Loans" and "Provision For Possible
Loan Losses" and "Liquidity and Interest Sensitivity" 30-41
Table 10. Maturity Distribution of Time Deposits of $100,000
or More 39
Financial Highlights 1
ITEM 2. PROPERTIES.
The executive offices of Chemical, the main office of CB&T and Chemical's
data processing subsidiary are located in a three story, approximately
74,000 square foot, office building in downtown Midland, which is 100%
owned by CB&T.
Chemical's subsidiary banks conduct business from a total of 86 banking
offices as of December 31, 1997. These offices are located in or in the
vicinity of the cities in which the banks have their main offices. Of the
banking offices, 83 are owned by the subsidiary banks and 3 are leased from
independent parties with remaining lease terms of one year to twelve years.
This leased property is considered insignificant.
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ITEM 3. LEGAL PROCEEDINGS.
Chemical's subsidiaries are parties, as plaintiff or defendant, to a number
of legal proceedings, none of which is considered material, and all of
which arose in the ordinary course of their operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Biographical information concerning Chemical's executive officers who are
not directors or nominated for election to the Board of Directors is
presented below. Executive officer appointments are made or reaffirmed
annually at the organizational meeting of the Board of Directors. At its
regular meetings, the Board may also make other executive officer
appointments.
Lawrence E. Burks, age 64, is Vice Chairman of CB&T. He joined CB&T as
Vice President on April 1, 1973, was promoted to Senior Vice President in
February 1975, Executive Vice President in December 1975, President and
Director in April 1986 and Vice Chairman in September 1996. Mr. Burks has
served on the Board of Directors of Chemical Bank Montcalm since June 1984
and was named Chairman of the Board of Chemical Bank Montcalm in December
1996. Mr. Burks was named Chairman of the Board of Chemical Bank Bay Area
in December 1996. Both banks are wholly owned subsidiaries of Chemical.
Mr. Burks is a member of the Management Committee of Chemical.
Bruce M. Groom, age 56, is Senior Vice President and Trust Officer of CB&T.
He joined CB&T on April 29, 1985 as Senior Vice President and was promoted
to Senior Trust Officer in May 1986. Mr. Groom has served on the Board of
Chemical Bank Central, a wholly owned subsidiary of Chemical, since
February 1989. Mr. Groom is an attorney. Mr. Groom is a member of the
Management Committee of Chemical.
Lori A. Gwizdala, age 39, is Senior Vice President, Chief Financial Officer
and Treasurer of Chemical. She joined Chemical as Controller on January 2,
1985 and was named Chief Financial Officer in May 1987, Senior Vice
President in February 1991 and Treasurer in April 1994. Ms. Gwizdala has
served as Secretary to the Board of Directors of CFC Data Corp since May
1986, a director of Chemical Bank Bay Area since January 1993 and a
director of Chemical Bank Thumb Area since July 1996, all of which are
wholly owned subsidiaries of Chemical. Ms. Gwizdala is a certified public
accountant. Ms. Gwizdala is a member of the Management Committee of
Chemical.
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William C. Lauderbach, age 55, is Senior Vice President and Investment
Officer of CB&T. He joined CB&T as a Trust Officer on July 2, 1973, was
promoted to Vice President and Trust Officer in March 1980, Investment
Officer in January 1985 and Senior Vice President in February 1991. Mr.
Lauderbach has served on the Board of Directors of Chemical Bank South, a
wholly owned subsidiary of Chemical, since 1989. Mr. Lauderbach is a
member of the Management Committee of Chemical.
David B. Ramaker, age 42, is Chief Executive Officer and President of CB&T
and Executive Vice President and Secretary of Chemical. He joined CB&T as
Vice President on November 20, 1989. Mr. Ramaker became President of
Chemical Bank Key State, a wholly owned subsidiary of Chemical in October
1993. Mr. Ramaker became President and member of the Board of Directors of
CB&T in September 1996 and Executive Vice President and Secretary to the
Board of Chemical and Chief Executive Officer of CB&T on January 1, 1997.
Mr. Ramaker has served as a director of Chemical Bank Key State since
October 1993. Mr. Ramaker was appointed to the following Boards of
Directors of wholly owned subsidiaries of Chemical in December 1996:
Chemical Bank Montcalm, Chemical Bank Central (also Chairman), Chemical
Bank North (also Chairman), and Chemical Bank West (also Chairman). Mr.
Ramaker is a member of the Management Committee of Chemical.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information under the heading "Stock Price Ranges and Cash Dividends
Per Share" on page 12 of the registrant's Annual Report to Shareholders for
the year ended December 31, 1997, is here incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Financial Highlights" on page 1 and the
sub-heading "Financial Highlights" of "Management's Discussion and
Analysis" on pages 28 through 30 of the registrant's Annual Report to
Shareholders for the year ended December 31, 1997, is here incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information under the heading "Management's Discussion and Analysis" on
pages 28 through 43 (inclusive) of the registrant's Annual Report to
Shareholders for the year ended December 31, 1997, is here incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the heading "Liquidity and Interest Sensitivity" on
pages 37 through 41 (inclusive) of the registrant's Annual Report to
Shareholders for the year ended December 31, 1997, is here incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes, and independent auditors' report on pages
13 through 27 (inclusive) of the registrant's Annual Report to Shareholders
for the year ended December 31, 1997, is here incorporated by reference.
The information under the caption "Selected Quarterly Financial Information
(Unaudited)" on page 12 of the registrant's Annual Report to Shareholders
for the year ended December 31, 1997, is here incorporated by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Nominees for Election to
Serve Until the Annual Meeting of Shareholders in 1999" on pages 2 through
4 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 18
in the registrant's definitive Proxy Statement for its April 20, 1998
annual meeting of shareholders is here incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Compensation of Executive
Officers and Directors" on pages 10 through 14 in the registrant's
definitive Proxy Statement for its April 20, 1998, annual meeting of
shareholders is here incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Voting Securities" on pages 7
and 8 in the registrant's definitive Proxy Statement for its April 20,
1998, annual meeting of shareholders is here incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships and
Related Transactions" on page 18 in the registrant's definitive Proxy
Statement for its April 20, 1998, annual meeting of shareholders is here
incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. The following financial statements
and independent auditors' report of Chemical Financial Corporation and its
subsidiaries are filed as part of this report:
Consolidated Statements of Financial Position-December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors dated January 20, 1998
The financial statements, the notes to financial statements, and the
independent auditors' report listed above are incorporated by reference in
Item 8 of this report from the corresponding portions of the registrant's
Annual Report to Shareholders for the year ended December 31, 1997.
(2) FINANCIAL STATEMENT SCHEDULES. None
(3) EXHIBITS. The following exhibits are filed as part of this
report:
NUMBER EXHIBIT
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3(a) 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(b) 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.
4 LONG-TERM DEBT. The registrant has outstanding long-term debt
which at the time of this report does not exceed 10% of the
registrant's total consolidated assets. The registrant agrees to
furnish copies of the agreements defining the rights of holders
of such long-term debt to the Securities and Exchange Commission
upon request.
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NUMBER EXHIBIT
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10(a) CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF 1997.<F*>
Previously filed as Appendix A to the registrant's Definitive
Proxy Statement with respect to its Annual Meeting of Share-
holders held on April 21, 1997. Here incorporated by reference.
10(b) AMENDED AWARD AND STOCK OPTION PLAN OF 1987.<F*> Previously filed
as Exhibit 10(a) to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, filed with the
Commission on March 24, 1994. Here incorporated by reference.
10(c) PLAN FOR DEFERRAL OF DIRECTORS' FEES.<F*> Previously filed as
Exhibit 10(c) to the registrant's Form S-4 Registration Statement
No. 33-64944 filed with the Commission on June 24, 1993. Here
incorporated by reference.
10(d) CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN.<F*>
Previously filed as Exhibit 10(c) to the registrant's Annual
Report to Shareholders and Form 10-K for the fiscal year ended
December 31, 1992, filed with the Commission on March 12, 1993.
Here incorporated by reference.
10(e) RETIREMENT AGREEMENT.<F*>
11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
13 1997 ANNUAL REPORT TO SHAREHOLDERS.
21 SUBSIDIARIES OF THE REGISTRANT.
23 CONSENT OF INDEPENDENT AUDITORS.
27(a) FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1997.
27(b) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
SEPTEMBER 30, 1997.
27(c) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
JUNE 30, 1997.
27(d) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
MARCH 31, 1997.
27(e) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED
DECEMBER 31, 1996.
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NUMBER EXHIBIT
------ -------
27(f) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
SEPTEMBER 30, 1996.
27(g) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
JUNE 30, 1996.
27(h) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
MARCH 31, 1996.
27(i) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED
DECEMBER 31, 1995.
99(a) CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN FINANCIAL
STATEMENTS, NOTES AND SCHEDULES.
99(b) CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR
SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES.
- -----------------
<F*> These agreements are management contracts or compensation plans or
arrangements required to be filed as Exhibits to this Form 10-K.
Chemical will furnish a copy of any exhibit listed above to any shareholder
of the registrant without charge upon written request to Ms. Lori A.
Gwizdala, Chief Financial Officer, Chemical Financial Corporation, 333 East
Main Street, Midland, Michigan 48640-0569.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
-16-
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) 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
March 24, 1998 S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
President and
Chief Executive Officer
March 24, 1998 S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer
-17-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 24, 1998 S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
President and
Chief Executive Officer and
Director
(Principal Executive Officer)
March 24, 1998 S/ JAMES A. CURRIE
James A. Currie
Director
March , 1998 ________________________________________
Michael L. Dow
Director
March 24, 1998 S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial and Accounting
Officer)
March 24, 1998 S/ TERENCE F. MOORE
Terence F. Moore
Director
March 24, 1998 S/ ALAN W. OTT
Chairman of the Board and Director
March 24, 1998 S/ FRANK P. POPOFF
Frank P. Popoff
Director
March 24, 1998 S/ LAWRENCE A. REED
Lawrence A. Reed
Director
March 24, 1998 S/ WILLIAM S. STAVROPOULOS
William S. Stavropoulos
Director
-18-
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
------ -------
3(a) 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(b) 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.
4 LONG-TERM DEBT. The registrant has outstanding long-term debt
which at the time of this report does not exceed 10% of the
registrant's total consolidated assets. The registrant agrees to
furnish copies of the agreements defining the rights of holders
of such long-term debt to the Securities and Exchange Commission
upon request.
10(a) CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF 1997.<F*>
Previously filed as Appendix A to the registrant's Definitive
Proxy Statement with respect to its Annual Meeting of Share-
holders held on April 21, 1997. Here incorporated by reference.
10(b) AMENDED AWARD AND STOCK OPTION PLAN OF 1987.<F*> Previously filed
as Exhibit 10(a) to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, filed with the
Commission on March 24, 1994. Here incorporated by reference.
10(c) PLAN FOR DEFERRAL OF DIRECTORS' FEES.<F*> Previously filed as
Exhibit 10(c) to the registrant's Form S-4 Registration Statement
No. 33-64944 filed with the Commission on June 24, 1993. Here
incorporated by reference.
10(d) CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN.<F*>
Previously filed as Exhibit 10(c) to the registrant's Annual
Report to Shareholders and Form 10-K for the fiscal year ended
December 31, 1992, filed with the Commission on March 12, 1993.
Here incorporated by reference.
10(e) RETIREMENT AGREEMENT.<F*>
11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
13 1997 ANNUAL REPORT TO SHAREHOLDERS.
21 SUBSIDIARIES OF THE REGISTRANT.
-19-
<PAGE>
NUMBER EXHIBIT
------ -------
23 CONSENT OF INDEPENDENT AUDITORS.
27(a) FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1997.
27(b) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
SEPTEMBER 30, 1997.
27(c) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
JUNE 30, 1997.
27(d) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
MARCH 31, 1997.
27(e) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED
DECEMBER 31, 1996.
27(f) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
SEPTEMBER 30, 1996.
27(g) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
JUNE 30, 1996.
27(h) RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
MARCH 31, 1996.
27(i) RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED
DECEMBER 31, 1995.
99(a) CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN FINANCIAL
STATEMENTS, NOTES AND SCHEDULES.
99(b) CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR
SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES.
- -----------------
<F*> These agreements are management contracts or compensation plans or
arrangements required to be filed as Exhibits to this Form 10-K.
-20-
<PAGE>
EXHIBIT 10(e)
RETIREMENT AGREEMENT
THIS AGREEMENT is made this 31st day of December, 1997, between
ALAN W. OTT ("Mr. Ott") and CHEMICAL FINANCIAL CORPORATION ("Chemical"), and
joined in by its subsidiary, CHEMICAL BANK AND TRUST COMPANY ("Chemical Bank");
WHEREAS, Chemical is a bank holding company and a Michigan
corporation; and
WHEREAS, Chemical believes that its ability to conduct its
business successfully is dependent upon retaining key management employees
until such time as they retire; and
WHEREAS, Mr. Ott has been employed in an important management and
chief executive position with Chemical for over 30 years, and the parties
desire to continue to maintain a relationship upon the terms and conditions
set forth herein; and
WHEREAS, Mr. Ott has determined to retire from the active
management of Chemical, but has agreed to provide assistance and advice
during the transition to a new chief executive;
IT IS, THEREFORE, AGREED AS FOLLOWS:
1. RETIREMENT. Effective the close of business December 31,
1996, Mr. Ott resigned and retired from his position as President and Chief
Executive Officer of Chemical Financial Corporation and Chief Executive
Officer of Chemical Bank. Mr. Ott shall continue to serve as a Director of
Chemical and Chemical Bank and Chairman of the Board of Directors of
Chemical and Chemical Bank, through January 1, 1998 to December 31, 1998,
without compensation for Directors' meetings. Mr. Ott may thereafter
continue his service to Chemical for such time and in such role as Chemical
and he deem appropriate.
2. COMPENSATION AND BENEFITS. Chemical agrees to pay to Mr.
Ott an annual salary of Fifty Thousand Dollars ($50,000.00), commencing on
the first day of January, 1998, for a period of one year or until his
death, if earlier. Payments to Mr. Ott will be made on the last business
day of each month during the term of this Agreement.
Mr. Ott shall be provided group health benefits in accordance
with the terms of Chemical's Retiree Medical and Dental Plan. If at any
time Chemical terminates any such insurance plan for its retirees, Chemical
may also terminate such plan for Mr. Ott; if Chemical substitutes medical
and hospitalization insurance plans for its retirees or provides additional
medical or hospitalization insurance coverage for its retirees, then such
substituted and/or additional insurance coverage shall be made available to
Mr. Ott.
<PAGE>
3. COVENANT NOT TO COMPETE. Mr. Ott agrees that during the
period that payments are being made to him hereunder, he shall not enter
into employment or any form of equity ownership of any business which is
competitive with the businesses related to, affiliated with, or managed by
Chemical; provided, however, that the parties agree that this provision
will be limited to a geographic area consisting of a fifty (50) mile radius
from each existing business location of Chemical or any business related
to, affiliated with, or managed by Chemical. In the event the Board of
Directors of Chemical determines that Mr. Ott is in violation of this
covenant not to compete, it shall give written notice to him. Mr. Ott
shall have a period of ninety (90) days from the date of such notice to
cease his competitive activity, and the payments hereunder shall continue
during such period. If the competitive activity is not terminated within
the ninety (90) day period, further payments hereunder shall cease. In the
event of a dispute hereunder, the parties agree to submit their
disagreement to arbitration. Nothing in this Section 3 shall be construed
to prevent Mr. Ott from acquiring or holding, directly or indirectly,
securities of any corporation or other entity the securities of which are
listed for trading on any national or regional securities exchange or
quoted on any automated quotation system sponsored by the National
Association of Securities Dealers, Inc. as long as Mr. Ott's total
beneficial ownership in any such corporation or entity does not exceed five
percent (5%) of the total securities outstanding of such corporation or
entity.
4. NO ASSIGNMENT. This Agreement is personal to each party
to this Agreement and no party may assign or delegate any rights or
obligations hereunder without first obtaining the written consent of the
others.
5. MODIFICATION. This Agreement supersedes all prior
agreements with respect to the matters covered hereby, and no modification
of this Agreement shall be valid unless it is in writing and signed by
Chemical and by Mr. Ott.
6. CONSTRUCTION. This Agreement shall be governed and
construed in accordance with the laws of the State of Michigan.
7. HEADINGS. The paragraph headings in this Agreement are for
convenient reference only, and shall not modify or amend the express terms
hereof.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their
respective heirs, personal representatives, successors and assigns.
DATED: DECEMBER 31, 1997 /S/ ALAN W. OTT
Alan W. Ott
<PAGE>
CHEMICAL FINANCIAL CORPORATION
DATED: DECEMBER 31, 1997 By /S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
Its PRESIDENT & CHIEF EXECUTIVE
OFFICER
CHEMICAL BANK AND TRUST
COMPANY
DATED: DECEMBER 31, 1997 By /S/ DAVID B. RAMAKER
David B. Ramaker
Its PRESIDENT
<PAGE>
EXHIBIT NO. 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(Amounts in thousands,
except per share amounts)
<S> <C> <C> <C>
BASIC:
Average shares outstanding 10,741 10,710 10,657
Net income $23,889 $22,003 $20,489
======= ======= =======
Net income per common share $ 2.22 $ 2.05 $ 1.92
======= ======= =======
DILUTED:
Average shares outstanding 10,741 10,710 10,657
Net effect of the assumed exercise of
stock options-based on the treasury
stock method using average market price 128 156 163
------- ------- -------
10,869 10,866 10,820
======= ======= =======
Net income $23,889 $22,003 $20,489
======= ======= =======
Net income per common share $ 2.20 $ 2.03 $ 1.89
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 13
1997
ANNUAL REPORT
NINETEEN HUNDRED NINETY-SEVEN
[PICTURE OF MONEY]
[CHEMICAL LOGO]
CHEMICAL FINANCIAL CORPORATION
<PAGE>
[PICTURE OF GILBERT A. CURRIE]
1923 - 1998
The directors, officers and employees of Chemical
Financial Corporation and its affiliates acknowledge
and mourn the passing of our long-time colleague,
Gilbert A. Currie. Mr. Currie became a member of the
Chemical Financial official family when he joined the
board of directors of Chemical State Savings Bank in
1956. He went on to serve as chairman of that bank
from 1961 to 1986. He joined the board of Chemical
Financial Corporation when it was organized in 1973 and
retired as chairman in April 1994.
Over the years, Mr. Currie made great contributions to
the advancement of our Company while earning the
respect and friendship of all those who had the
privilege of knowing and working with him.
Our Company and the communities we serve were greatly
enriched by the life and work of Gilbert A. Currie.
<PAGE>
1997 HIGHLIGHTS
1997 marked the 23rd consecutive year of both increased operating earnings
and cash dividends:
- 1997 Earnings were $23.889 million, up 8.6% over 1996 Earnings of
$22.003 million.
- 1997 Earnings per share were $2.22, up 8.3% over 1996 Earnings
per share of $2.05.
- Return on average assets was 1.38% in 1997, compared to 1.30% in
1996.
- 1997 Cash dividends per share were $.84, up 15.5% over 1996 Cash
dividends per share of $.73.
- The Corporation paid a 5% stock dividend on December 30, 1997.
The Corporation's financial position remained strong at December 31, 1997.
Highlights as of this date follow:
- Total assets were $1.8 billion.
- Shareholders' equity was $223.9 million and represented 12.7% of
total assets.
- The allowance for possible loan losses was $17.4 million, or
2.05% of total loans, compared to total nonperforming loans of
$3.0 million, or .36% of total loans.
REFERENCE GUIDE
1997 Highlights . . . . . . . . . . . . . . . . . . .Inside Cover
A Year of Progress. . . . . . . . . . . . . . . Inside Cover Flap
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . 1
Message to Shareholders . . . . . . . . . . . . . . . . . . . . 2
Management Transition . . . . . . . . . . . . . . . . . . . . . 4
Super Community Banking . . . . . . . . . . . . . . . . . . . . 6
Quarterly Financial Information . . . . . . . . . . . . . . . .12
Consolidated Financial Statements . . . . . . . . . . . . . . .13
Notes to Consolidated Financial Statements. . . . . . . . . . .17
<PAGE>
Report of Ernst & Young LLP
Independent Auditors . . . . . . . . . . . . . . . . . . .27
Management's Discussion and Analysis. . . . . . . . . . . . . .28
Directors and Officers of Affiliates. . . . . . . . . . . . . .44
Corporate Directors and Officers . . . . . . . . . . . . . . .48
Corporate Information . . . . . . . . . . . . . . . . . . . . .49
<PAGE>
A YEAR OF PROGRESS
Chemical Financial Corporation's ten affiliate banks provide financial
services all across mid-Michigan. In recent years, new technology has
changed the way commercial banks deliver many of their services. Amendments
to banking laws and regulations have allowed banks to enter new lines of
business. We are committed to using technology to provide enhanced customer
service and to make our operations more cost efficient while striving to
keep pace with the evolving needs of our customers.
[WOMAN AT A CHEMICAL BANK ATM]
[CHEMICAL BANK ATM CARD]
Our network of 84 ChemKey Automatic Teller Machines handles more than 3
million transactions each year. It gives our customers convenient access to
their Chemical Bank accounts, produces significant cost savings and
provides a significant revenue stream from customers of other banks.
www.chemicalbankmi.com
[PICTURES OF CHEMICAL BANK LOCATIONS -- MAP OF MICHIGAN; CHEMICAL BANK
INVESTOR INFO; AND CHEMICAL FINANCIAL CORPORATION INFORMATION]
The Chemical Financial Corporation web site links us with the rapidly
growing number of Internet users. At WWW.CHEMICALBANKMI.COM web surfers can
find general information about our Company ... the locations and telephone
numbers of our affiliates and their branch offices ... our ATM locations
... descriptions of our deposit and loan products ... financial calculators
... an overview of other facets of our operations such as home banking
services, trust services, and the CFC Investment Centers ... historical
information about our stock prices, cash dividends and earnings ... and
"What's New" at Chemical Bank.
CFC Data Corp purchased a new IBM System 390 Mainframe computer in 1997.
Used with Kirchman Corporation's Dimension bank automation software, this
state-of-the-art system confirms Chemical Financial Corporation's
commitment to allocate adequate resources to become Year 2000 Compliant.
Beyond the Year 2000 issue, this system will have the technological
capability to offer our customers the new products and services that they
will need and want in the years ahead.
[PICTURE OF MAN LOOKING OVER A REPORT BY A COMPUTER]
Chemical Banks are market leaders in offering our consumer and commercial
customers access to their accounts via both personal computers and touch-
tone telephones.
[PICTURE OF A PORTION OF A KEYBOARD AND A $100 BILL]
<PAGE>
Technology is not the only thing changing in banking. Redesigned $100 and
$50 bills have been introduced as the first steps in a program to make U.S.
currency more difficult to counterfeit.
[PICTURES OF CONSTRUCTION WORKERS AT A CHEMICAL BANK]
Construction of new street-level offices adjacent to the Main Office of
Chemical Bank and Trust Company will provide larger, more attractive
quarters for our mortgage lending activities and offices for Chemical
Financial Insurance Agency that offers all types of property, casualty,
automobile and life insurance.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (in thousands)
Net interest income $ 69,040 $ 67,090 $ 63,687 $ 63,278 $ 62,645
Provision for possible
loan losses 1,002 1,128 1,065 1,099 1,104
Other income 13,122 12,198 12,359 11,330 11,876
Operating expenses 45,718 45,124 44,629 45,613 46,746
Net operating income 23,889 22,003 20,489 19,110 18,165
Net income 23,889 22,003 20,489 19,110 20,165
PER SHARE DATA<F*>
Net operating income
Basic $ 2.22 $ 2.05 $ 1.92 $ 1.80 $ 1.72
Diluted 2.20 2.03 1.89 1.77 1.69
Net income
Basic 2.22 2.05 1.92 1.80 1.91
Diluted 2.20 2.03 1.89 1.77 1.87
Cash dividends .84 .73 .62 .51 .46
Book value end-of-period 20.82 19.33 18.24 16.06 15.60
Market value end-of-period 44.75 37.62 34.92 24.19 24.79
AT YEAR END (in thousands)
Total assets $1,765,100 $1,698,774 $1,706,085 $1,658,023 $1,653,246
Deposits 1,475,841 1,429,915 1,449,801 1,421,678 1,425,415
Long-term debt 9,000 10,000 12,080 12,099 14,104
Shareholders' equity 223,925 207,269 194,902 170,680 165,037
FINANCIAL RATIOS
Return on average total assets 1.38% 1.30% 1.24% 1.15% 1.23%
Return on average
shareholders' equity 11.1 10.9 11.0 11.1 12.8
Average shareholders' equity
to average total assets 12.5 11.9 11.3 10.4 9.6
Cash dividends paid per
share to diluted net
income per share 38.2 36.0 32.8 28.8 24.6
Allowance for possible loan
losses to total loans 2.05 2.06 2.09 2.01 2.00
Tangible equity to assets 12.5 12.0 11.2 10.1 9.7
<FN>
<F*>Adjusted for the 5% stock dividend paid December 30, 1997.
</FN>
</TABLE>
<PAGE>
[LOAN COMPOSITION DECEMBER 31, 1997 PIE CHART]
[BOOK VALUE PER SHARE GRAPH]
[CASH DIVIDENDS PER SHARE (IN DOLLARS) GRAPH]
1
<PAGE>
MESSAGE TO SHAREHOLDERS
To Our Shareholders:
For the twenty-third consecutive year, Chemical Financial
Corporation's operating income increased during 1997. Net income for the
year was $23.9 million or 8.6 percent more than 1996 net income of $22
million. Basic earnings per share in 1997 were $2.22, while fully diluted
earnings per share were $2.20. In 1996, they were $2.05 and $2.03,
respectively.
On December 31, 1997, total assets were $1.765 billion, 3.9 percent
more than they were one year earlier. Total deposits increased 3.2 percent
during the same 12 months to $1.476 billion and total loans went up 4.7
percent to $845.6 million. Shareholders' equity grew by 8.0 percent to
$223.9 million.
Shareholders received cash dividends in 1997 of $.84 per share, 15.5
percent more than the cash dividends of $.73 per share paid in 1996. In
addition, a 5 percent stock dividend was distributed to shareholders on
December 30, 1997, and the board of directors announced that the quarterly
dividend rate for 1998 will be $.24 per share. The combined effect of the
stock dividend and the higher quarterly dividend in 1998 will be a 14.55
percent increase in cash dividends.
During 1997, $1 million was provided for the Allowance for Possible
Loan Losses. Net loan charge-offs in the same period were $.25 million.
Consequently, the allowance at year-end was $17.4 million, or 2.05 percent
of all loans and 570 percent of nonperforming loans.
On December 31, 1997, the closing bid price of the Company's common
stock on The NASDAQ Stock Market was $44.75 per share. This price was 215
percent of book value and more than 20 times earnings per share. These
multiples compare favorably with those of our peer companies in the Great
Lakes region.
The Corporation's improved profitability in 1997 was attributed to an
increase in net interest income, greater trust department revenue, earnings
from the sale of insurance products and mutual funds, and fees from the use
of ChemKey ATMs by noncustomers. At the same time, overhead expenses went
up by only 1.3 percent during the year.
We expect the fees generated by our network of 84 ChemKey ATMs to
increase substantially in 1998. And, we believe that our ATMs will be an
excellent source of fee income in future years.
<PAGE>
Elsewhere in this Annual Report, we have described many important
developments of the past year. One deserves special notice here the
acquisition of a new IBM Systems 390 mainframe computer by CFC Data Corp.
Paired with the Kirchman Corporation Dimension Software System, this new
computer will give us the technological capability to remain competitive in
product and service innovation throughout the foreseeable future. The
Dimension system was developed with the Year 2000 in mind and is already
being used by more than 700 banks worldwide.
[NET OPERATING INCOME PER SHARE GRAPH]
[NET INCOME PER SHARE GRAPH]
[NET INCOME GRAPH]
[TOTAL ASSETS GRAPH]
2
<PAGE>
During the past year, two large Michigan banking companies agreed to
be acquired by larger, out-of-state organizations. We do not expect either
of these transactions to have a significant effect on our affiliates. In
the event that some of the banking offices now operated by these companies
would be offered for sale, we expect to be active bidders for them.
[PICTURE OF ALOYSIUS J. OLIVER & ALAN W. OTT]
We continue to seek acquisitions. Unfortunately, our negotiations with
Shelby Financial Corporation did not produce a transaction, however, we
continue to seek opportunities to acquire community banks within our market
area. We also are in contact with the larger banking companies that operate
branches in our market area to pursue acquisitions of banking offices that
they might offer for sale. Our strong capital base provides us with the
opportunity to expand our branch network without the need to raise
additional capital.
In keeping with industry trends, fee-based income has become a more
significant component of our business, and we have expanded our traditional
banking products to provide the additional financial services demanded by
consumers of today. Our Trust Department is a leading provider of personal
trust services, and we have made a substantial investment to enhance the
recordkeeping services provided by its Retirement Planning Center. For our
401(k) customers, this will mean more fund choices, timely, efficient,
technology-driven record-keeping and one-stop customer service. We have
also entered the insurance business. CFC Title Services, Inc. provides
title insurance to customers throughout Michigan, and the Chemical
Financial Insurance Agency now offers traditional insurance products and
services to customers from its headquarters in Midland. Both subsidiaries
have been well-received, and their opportunities for growth are promising.
Many consumers today have made mutual funds their investment vehicle of
choice. Through our partnership with Security First Group, we have been
very successful in offering mutual funds and other investment products to
our customers.
We also want to take note at the 1997 Annual Meeting of the retirement
of three affiliate bank directors who retired upon reaching the mandatory
retirement age according to the company's Board of Directorship policy. Dr.
Alan E. Grunewald served as a director of Chemical Bank Montcalm for
fourteen years and as a director of Chemical Bank South for seven years.
Samuel ("Pat") Marra was a director of Chemical Bank West when we acquired
it in 1980. He moved to a seat on the board of Chemical Bank North when the
Houghton Lake office was transferred to that affiliate. James A. Kendall
was a director of Chemical Bank Michigan from 1971 to 1991. Then he became
a director of Chemical Bank and Trust Company and served on that board
until his retirement. We thank these gentlemen for their many contributions
and dedicated service.
<PAGE>
We would like to thank our corporate and bank directors, our officers,
our staff, and you, our shareholders, for the support that has contributed
a great deal to the progress our Corporation has made during the past year.
We are pleased with our performance under a new executive management team
and look to the future with confidence that we are on a course that will
lead to success in the years ahead.
Sincerely,
/s/ Alan W. Ott /s/ Aloysius J. Oliver
Alan W. Ott Aloysius J. Oliver
Chairman of the Board President and Chief Executive
Officer
3
<PAGE>
MANAGEMENT TRANSITION
During 1997, Chemical Financial Corporation underwent the most
significant management transition in its history. At the end of 1996, Alan
Ott, who had been the chief executive officer of the Company since its
organization, retired as a full-time employee. In retirement, Mr. Ott
remained chairman of the boards of the Company and Chemical Bank and Trust
Company (the Company's lead subsidiary bank) and a member of the board of
Chemical Bank Thumb Area (a wholly owned subsidiary). He left the boards of
all of the Company's other affiliates. He had been a member of those boards
since they became part of the Company and had been the principal corporate
representative on each of them.
When Mr. Ott retired, Aloysius Oliver, who had been executive vice
president since 1985, became the Company's president and chief executive
officer. David Ramaker, who was named president and a director of Chemical
Bank and Trust Company in September 1996, became chief executive officer of
that bank and executive vice president and chief lending officer of the
Company. Lori Gwizdala continued in her position as senior vice president
and chief financial officer of the Company.
To help ensure a seamless transfer of responsibilities, a new
Executive Management Committee was formed to review policy initiatives and
provide corporate oversight of the Company's affiliates. In addition to Mr.
Oliver, Mr. Ramaker and Ms. Gwizdala, the members of this committee include
the following senior officers of Chemical Bank and Trust Company: Lawrence
Burks, vice chairman; William Lauderbach, senior vice president and senior
investment officer; and Bruce Groom, senior vice president and head of the
Trust Department. Mr. Ott is the chairman of this committee and provides
its members with the benefit of his long experience as the Company's chief
executive.
In addition to serving on the Executive Management Committee, its
various members replaced Mr. Ott as the senior corporate representative on
the boards of each of the Company's affiliates.
The Executive Management Committee structure has proven to be an
effective means of assuring coordination among the Company's affiliates and
providing executive management with a timely flow of information about
developments and activities across the Company's entire mid-Michigan market
area.
[PICTURE OF EXECUTIVE COMMITTEE (forefront): Aloysius J. Oliver (left
to right): William C. Lauderbach, Bruce M. Groom, David B. Ramaker,
Lawrence E. Burks and Lori A. Gwizdala]
While the new committee is now at the center of the Company's
management process, several other committees that have existed for some
time continue to play vital roles in facilitating communication and
coordination between the Company and the affiliate banks.
<PAGE>
- The presidents of the Company's affiliates and the senior
officers of Chemical Bank and Trust Company continue to meet
quarterly with the corporate officers. These meetings are an
important forum for the affiliate presidents to provide feedback
on the effect of corporate policies in the marketplace, to make
the executive officers aware of potential developments that might
require a corporate response at some future time and to exchange
ideas among themselves.
4
<PAGE>
- The Asset and Liability Committee (ALCO) meets weekly to review
and establish rates on loans and deposits at the Company's
affiliates and to ensure that overall interest rate risk is kept
within the parameters established by the board of directors. In
addition to Mr. Oliver, Mr. Ramaker, Ms. Gwizdala and Mr.
Lauderbach, the other members of the committee are Thomas
Alexander and Roger Mikusek. Mr. Alexander is executive vice
president and cashier of Chemical Bank and Trust Company and Mr.
Mikusek is senior vice president in the mortgage department of
that affiliate.
- The principal members of the Operations Committee meet weekly to
formulate and coordinate operational procedures and policies
within the Company. Mr. Oliver; Mr. Alexander; Thomas Peterson,
general manager of the data processing subsidiary; and Brian
Beall, systems manager of the data processing subsidiary, are the
members of this committee. They meet monthly with the cashiers of
all the affiliate banks to provide information about new
procedures and policies, to obtain feedback about the effect of
new procedures and policies on affiliate bank operations and to
discuss recommendations for new products and systems which might
be desired by the affiliate banks and their customers.
- The Financial Services Committee meets monthly to oversee the
operations of CFC Title Services, Inc., the Chemical Financial
Insurance Agency and the Company's CFC Investment Centers.
- Other committees provide a forum for the corporate staff and the
affiliate banks to coordinate activities in important areas such
as Auditing, Compliance, Community Reinvestment, Human Resources
and Marketing. These committees meet on a regular schedule to
facilitate effective communication between the staff and the
affiliates and to provide a forum for the exchange of ideas among
the affiliates.
[PICTURE OF OFFICERS IN MEETING] THE PRESIDENTS OF THE COMPANY'S
AFFILIATES AND THE SENIOR OFFICERS OF CHEMICAL BANK AND TRUST COMPANY MEET
QUARTERLY WITH THE CORPORATE OFFICERS.
Chemical Financial Corporation's committees have proven to be an
effective and cost-efficient alternative to an extensive middle management
structure. Organization of the Executive Management Committee, together
with the network of "insider directors," was a logical outgrowth of that
positive experience. The Company's results during 1997 suggest that our
committees will allow the new management team to sustain the progress that
has consistently marked the Company's entire history.
5
<PAGE>
SUPER COMMUNITY BANKING
Chemical Financial Corporation's affiliates provide financial services
to 55 cities and towns in 24 counties spread all across mid-Michigan. The
communities we serve range from small villages to larger cities like
Midland and Bay City.
History has shown that there are five things that differentiate a
functioning community from a mere spot on a map. They are a post office,
grocery store, school, church and bank. As a super community banking
company, we are proud of the vital role we play in the social and economic
life of communities, large and small, all over our market area. We believe
that they are all better places to live and work because a Chemical Bank is
there.
The need for modern super community banks like Chemical Financial
Corporation grew out of the changes in the banking industry caused by
developments in technology and modern communications. Not too many years
ago, banking was a simple business. However, the advent of modern computers
and data transmission techniques, together with major changes in the laws
and regulations governing bank operations, soon made the successful
operation of smaller banks very challenging, causing many of them to be
sold or merged with larger institutions.
[PICTURE OF MAN WORKING ON A LAPTOP COMPUTER] Commercial Cash
Management Accounts. A convenient way to invest excess cash balances.
With continuing technological developments, the economies of scale that
consolidation made possible became evident even to independent banks of
<PAGE>
considerable size. As a consequence, the pace of mergers and acquisitions in
the banking industry quickened and merger partners became larger and larger.
Affiliation with a holding company became quite attractive to many community
banks because it allowed them to preserve the characteristics that had
contributed most to their success, while sharing the cost of ever more
6
<PAGE>
sophisticated technology and staff services with other institutions like
themselves. These trends led to the development of super community banks.
Chemical Financial Corporation believes that the concepts and management
philosophies which originally brought about the existence of super
community banks remain valid today.
[PICTURE OF WOMAN ON A PHONE] On-line banking services for
individuals and families via the ChemConnect home banking system.
As a general rule, super community banks have total assets of more
than $1 billion and less than $5 billion. Because of their lower overhead,
they are able to do business profitably in smaller cities and towns that do
not offer the potential volume to make them attractive to the largest
multi-state bank holding companies. They are able to link hundreds of Main
Streets to virtually all of the financial services that the largest
institutions provide in major metropolitan areas. Most important, they are
one of the key enterprises that help make these communities viable.
At Chemical Financial Corporation, we believe that we have evolved
into an organization that combines the best of the old with the best of the
new. We serve our customers through ten affiliate banks instead of a single
large institution with many branches. Each of those affiliates has an
experienced banker as its president and chief executive officer and a board
of directors made up of local civic and business leaders. They have the
authority and responsibility to make local decisions that best satisfy
local needs. They know their customers and their customers know them,
<PAGE>
allowing our banks to give a level of service that we believe consistently
exceeds their customers' reasonable expectations.
[PICTURE OF WOMAN USING A CHEMICAL ATM CARD AT A GAS PUMP] ChemCheck
debit cards. A replacement for cash or checks wherever MasterCard is
accepted.
7
<PAGE>
[PICTURE OF WOMAN IN A CAR AT A DRIVE-THROUGH ATM MACHINE] Our
ChemKey ATM Network processes 3.5 million transactions annually.
At the same time that we provide "hometown" service in our lobbies,
many of the internal functions of our ten banks are combined at our
corporate offices and at CFC Data Corp, the Company's data processing
subsidiary. As a consequence, our banks enjoy economies of scale that can
be achieved only in larger banking companies.
At Chemical Financial Corporation, the technological "heart" of our
operations is CFC Data Corp's new, state-of-the-art IBM Systems 390
mainframe computer and Kirchman Corporation's Dimension bank automation
software. We expect that implementation of this new system will maximize
our ability to serve our customers and make the information we need to
manage our business readily available. This system was designed to be Year
2000 Compliant. This should keep our critical operations from being
disrupted when the new millennium arrives. Most important, it will allow us
to maintain our leadership in product and service innovation in every city
and town where we do business.
We are proud of our record as a provider of a complete array of
financial services in all of the cities and towns, large and small, where
our Chemical Bank affiliates do business. We believe that we offer the
individuals, families and business organizations in each of them virtually
everything they could want of their bank.
<PAGE>
[PICTURE OF TWO WOMEN SPEAKING IN THE BACKGROUND, ON TOP ARE THE WORDS
"THE WALL STREET JOURNAL"] Professional trust and investment services
available in every community where there is a Chemical Bank Office.
8
<PAGE>
Some of these services are quite traditional. Others are technology-
based and very sophisticated. Offering low cost checking accounts and home
mortgages has always been a key element of our marketing strategy.
Our Commercial Cash Management Account provides a business with a
service that compares favorably with those offered by the largest banks to
their largest corporate accounts. This service allows our customers to link
their checking accounts with a repurchase agreement investment account.
This Commercial Cash Management Account allows our business customers to be
investors one day, out of the market the next and investors again on the
third day. They can maximize the income produced by their cash balances
without ever leaving their stores and offices simply by linking their
personal computers to our mainframe.
[PICTURE OF TWO WOMEN NEXT TO CAR NEEDING TO BE REPAIRED AFTER AN
ACCIDENT] Fast, fair claims services provided by the Chemical Financial
Insurance Agency.
Individuals and families also have access to their Chemical Bank
accounts using our ChemConnect Electronic Banking Service. With a touch-
tone telephone or personal computer, they can inquire about account
balances, transfer money between accounts, make loan payments and obtain
interim statements.
We have added a new dimension to our personal checking and savings
accounts by introducing "ChemCheck" MasterMoney debit cards. The new
"ChemCheck" card complements our ChemKey ATM card. It can be used wherever
MasterCard credit cards are accepted to pay merchants for goods and
<PAGE>
services by electronic transfer of funds from a customer's checking
account.
Obviously, a "checkless, cashless society" is not here yet, but it is
definitely getting closer every day, even in the smaller communities served
by a Chemical Financial Corporation affiliate bank.
We have brought ChemKey Automatic Teller Machines to many communities
that might not otherwise have this type of electronic banking available.
Through our network of 84 machines, we process approximately 3.5 million
ATM transactions each year. The volume of business that our customers do
at our machines is ample evidence of their popularity. Because customers of
9
<PAGE>
other institutions also use them, they are an excellent source of revenue
from the fees that we receive from the various ATM networks and the fees we
collect on noncustomer cash withdrawals.
[PICTURE OF MAN SITTING ON A TRACTOR WHEEL] Farmers can look to
a Chemical Bank for land, equipment and production loans.
We make trust services available in every community where one of our
affiliates has a branch office. Our trust officers travel thousands of
miles each year to call on clients in their homes and offices, wherever
they might be located. With trust assets of more than $1.3 billion, we have
professionals on our staff who are well qualified to provide every trust
service from the administration of an estate to the management of a
corporation's pension plan. A trust department must have a critical mass of
business in order to afford the staff of experts that can be found in our
Trust Department. Because we have that volume of business, we can offer all
of our customers, from Marshall to Grayling and from Caro to Cadillac, a
range of professional trust services that only a super community banking
company like Chemical Financial Corporation could provide.
[PICTURE OF FAMILY IN A BOAT] Consumer loans at competitive rates
and terms to meet all your borrowing needs, even for the "fun" things in
life.
While we are able to bring all the advantages of modern,
technology-based banking to every community where we do business, we
still provide all of the traditional banking services as well.
Moreover, we offer the same variety of loans and deposit accounts at
<PAGE>
our smallest offices that we do at our largest. Our agricultural
specialists help farmers finance land, equipment and production. Our
consumer credit specialists lend money for a variety of purposes. Our
business lenders provide working capital loans and help their
customers acquire
10
<PAGE>
buildings and equipment. We charge competitive rates on all of our loans
and pay the same market rates on deposits everywhere we do business.
Because of our size and technological capabilities, as well as the
expertise of our senior officers, we can offer a range of loan types and
deposit products that is often beyond the ability of smaller institutions.
In recent years, we have entered new lines of business as they have
been opened to commercial banks. We now provide title insurance everywhere
we do business through CFC Title Services, Inc. The investment advisors at
CFC Investment Centers, our alliance with Security First Group and Corelink
Financial Services, offer our customers mutual funds, market securities and
annuities. The Chemical Financial Insurance Agency is gradually expanding
its insurance agency activities and will, over time, provide all of our
customers with life, property and casualty insurance underwritten by the
very best companies.
[PICTURE OF LITTLE BOY HOLDING A PIGGY BANK WITH COINS ON A TABLE]
Chemical Bank for all your financial needs -- from a first savings account
to retirement plans and trust services.
For many years, the advertising slogan of Chemical Financial
Corporation affiliates has been "THE BANK FOR EVERYBODY." Because of our
capabilities as a super community bank we do not have to put economic or
geographic qualifiers on that statement. We are, in fact, the bank for
everybody within our market areas.
<PAGE>
The people and businesses we serve can look to us for the financial
products and services to meet all of their needs. They can look to us for
traditional banking services such as checking and savings accounts,
residential mortgages, installment loans and loans for business at fair and
reasonable prices. They can look to us for loans and investments. They can
look to us for everything from a child's first savings account to any
financial service he or she will ever need.
That is why we can say that the customers of every Chemical Bank, no
matter who they are, what they do or where they live, need never be out of
the financial mainstream.
11
<PAGE>
QUARTERLY FINANCIAL INFORMATION
<TABLE>
STOCK PRICE RANGES AND CASH DIVIDENDS PER SHARE<F*>
<CAPTION>
1997 1996
CASH CASH
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $35.95 $29.52 $.200 $36.05 $33.79 $.181
Second quarter 34.29 30.00 .200 36.05 32.65 .181
Third quarter 40.60 32.38 .219 32.65 29.93 .182
Fourth quarter 45.00 37.14 .219 37.62 30.84 .182
- --------------------------------------------------------------------------------------
$.838 $.726
======================================================================================
<FN>
<F*>Adjusted for the 5% stock dividend paid December 30, 1997
</FN>
</TABLE>
Chemical Financial Corporation common stock is traded on The NASDAQ
Stock Market under the symbol CHFC. The above table sets forth the range of
bid prices for Chemical Financial Corporation common stock for the periods
indicated. These quotations reflect inter-dealer prices, without retail
markup, markdown, or commission, and may not necessarily represent actual
transactions. As of December 31, 1997, there were 10,753,011 shares of
Chemical Financial Corporation common stock issued and outstanding held by
approximately 3,800 shareholders of record.
The earnings of the Corporation's subsidiary banks are the principal
source of funds to pay cash dividends. Consequently, cash dividends are
dependent upon the earnings, capital needs, regulatory constraints, and
other factors affecting each individual bank. See Note H to the
Consolidated Financial Statements for a discussion of such limitations.
Management expects the Corporation to declare and pay comparable regular
quarterly cash dividends on its common shares in 1998.
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
<CAPTION>
1997 1996
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $28,193 $29,096 $30,131 $29,899 $27,915 $28,241 $28,431 $28,665
Interest expense 11,457 11,850 12,583 12,389 11,827 11,524 11,382 11,429
Net interest income 16,736 17,246 17,548 17,510 16,088 16,717 17,049 17,236
Provision for
possible loan losses 329 219 219 235 268 270 273 317
Investment securities
gains -- -- 1 -- -- 14 1 --
Income before income
taxes 8,235 8,329 8,785 10,093 7,433 7,835 8,101 9,667
Net income 5,526 5,624 5,906 6,833 4,993 5,163 5,412 6,435
Net income per share
Basic .51 .53 .55 .63 .47 .48 .50 .60
Diluted .51 .52 .54 .63 .46 .47 .50 .60
</TABLE>
The 1997 and 1996 net income per share amounts have been restated to
reflect the 5% stock dividend paid December 30, 1997 and to comply with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
Years Ended December 31
1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 69,873 $ 67,470 $ 64,305
Interest on investment securities:
Taxable 40,554 38,882 37,675
Tax-exempt 2,160 2,189 2,394
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST ON SECURITIES 42,714 41,071 40,069
Interest on federal funds sold 4,699 4,575 4,800
Interest on deposits with unaffiliated banks 33 136 204
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 117,319 113,252 109,378
INTEREST EXPENSE
Interest on deposits 46,320 44,284 43,306
Interest on short-term borrowings 1,363 1,163 1,552
Interest on long-term debt 596 715 833
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 48,279 46,162 45,691
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME 69,040 67,090 63,687
Provision for possible loan losses 1,002 1,128 1,065
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME after provision for
possible loan losses 68,038 65,962 62,622
OTHER INCOME
Trust department income 3,210 2,897 2,681
Service charges on deposit accounts 5,314 5,382 5,193
Other charges and fees for customer services 3,522 2,707 2,635
Gains on sales of loans 239 137 526
Investment securities gains 1 15
Other 836 1,060 1,324
- ------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 13,122 12,198 12,359
OPERATING EXPENSES
Salaries, wages and employee benefits 27,280 26,964 25,703
Occupancy expense 4,362 4,261 4,028
Equipment 3,091 2,884 2,732
Other 10,985 11,015 12,166
- ------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 45,718 45,124 44,629
- ------------------------------------------------------------------------------------------------
<PAGE>
INCOME BEFORE INCOME TAXES 35,442 33,036 30,352
Federal income taxes 11,553 11,033 9,863
- ------------------------------------------------------------------------------------------------
NET INCOME $ 23,889 $ 22,003 $ 20,489
================================================================================================
NET INCOME PER SHARE
Basic $2.22 $2.05 $1.92
Diluted 2.20 2.03 1.89
CASH DIVIDENDS PER SHARE .84 .73 .62
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<CAPTION>
December 31
1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and demand deposits due from banks $ 95,794 $ 89,517
Federal funds sold 49,750 114,200
Interest bearing deposits with unaffiliated banks -- 1,134
Investment securities:
Held to maturity (estimated market value -
$253,459 in 1997 and $215,494 in 1996) 251,020 213,752
Available for sale (at estimated market value) 494,173 441,787
- ---------------------------------------------------------------------------------------------------
Total investment securities 745,193 655,539
Loans 845,600 807,653
Less: Allowance for possible loan losses 17,359 16,607
- ---------------------------------------------------------------------------------------------------
Net loans 828,241 791,046
Premises and equipment 20,416 20,335
Accrued income 14,573 14,419
Other assets 11,133 12,584
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,765,100 $1,698,774
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 237,763 $ 226,965
Interest-bearing 1,238,078 1,202,950
- ---------------------------------------------------------------------------------------------------
Total deposits 1,475,841 1,429,915
Short-term borrowings:
Treasury tax and loan notes payable to the U.S. Treasury 11,206 9,458
Securities sold under agreements to repurchase 30,990 27,875
- ---------------------------------------------------------------------------------------------------
Total short-term borrowings 42,196 37,333
Interest payable and other liabilities 14,138 14,257
Long-term debt 9,000 10,000
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,541,175 1,491,505
<PAGE>
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
Issued and outstanding - 10,753,011 shares
in 1997 and 10,209,790 shares in 1996 107,530 102,098
Surplus 87,086 69,616
Retained earnings 27,904 35,737
Unrealized net gain (loss) on investment
securities available for sale 1,405 (182)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 223,925 207,269
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,765,100 $1,698,774
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Years Ended December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,889 $ 22,003 $ 20,489
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for possible loan losses 1,002 1,128 1,065
Origination of loans held for sale (38,821) (12,421) (16,516)
Proceeds from sales of loans 39,060 12,558 17,042
Gains on sales of loans (239) (137) (526)
Provision for depreciation and amortization 2,741 2,793 2,801
Investment securities gains (1) (15) --
Gain on sale of branch office building (256) -- --
Net amortization of investment securities 1,789 2,546 2,450
Net (increase) decrease in accrued income and other assets 491 2,259 (863)
Net increase (decrease) in interest payable and other
liabilities (113) 158 1,544
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,542 30,872 27,486
INVESTING ACTIVITIES
Cash and cash equivalents assumed in acquisition of branch
office -- -- 14,661
Net (increase) decrease in interest bearing deposits with
unaffiliated banks 1,134 1,847 (14)
Proceeds from maturities of investment securities held to
maturity 122,742 200,557 27,694
Purchases of investment securities held to maturity (160,468) (45,625) (102,448)
Proceeds from maturities of investment securities
available for sale 119,934 109,233 201,593
Proceeds from sales of investment securities available
for sale -- 522 --
Purchases of investment securities available for sale (171,209) (191,055) (148,454)
Net increase in loans (38,810) (48,143) (689)
Proceeds from sale of branch office building 900
Purchases of premises and equipment (2,902) (2,349) (1,084)
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (128,679) 24,987 (8,741)
<PAGE>
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 59,944 (24,845) (13,689)
Net increase (decrease) in certificates of
deposit and other time deposits (14,018) 4,959 25,915
Net increase (decrease) in short-term borrowings 4,863 2,110 (5,799)
Principal payments on long-term debt (1,000) (2,080) (19)
Cash dividends paid (9,003) (7,771) (6,636)
Proceeds from stock purchase plan 259 264 236
Proceeds from exercise of stock options 386 339 453
Repurchases of common stock (467) (1,035) --
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 40,964 (28,059) 461
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58,173) 27,800 19,206
Cash and cash equivalents at beginning of year 203,717 175,917 156,711
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 145,544 $ 203,717 $ 175,917
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits, short-term borrowings and
long-term debt $ 48,390 $ 46,685 $ 44,757
Federal income taxes paid 11,545 11,106 9,576
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
UNREALIZED
NET GAIN (LOSS)
ON INVESTMENT
SECURITIES
COMMON RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995 $ 65,920 $56,770 $ 56,279 $(8,289) $170,680
Stock split - 3 for 2 30,467 -- (30,467) -- --
Net income for 1995 -- -- 20,489 -- 20,489
Cash dividends paid -- -- (6,636) -- (6,636)
Shares issued upon exercise of
employee stock options (including
related tax benefit) 465 (6) -- -- 459
Shares issued from stock purchase plan 92 154 -- -- 246
Net unrealized gain on investment
securities available for sale -- -- -- 9,664 9,664
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 96,944 56,918 39,665 1,375 194,902
Stock dividend - 5% 4,859 13,301 (18,160) -- --
Net income for 1996 -- -- 22,003 -- 22,003
Cash dividends paid -- -- (7,771) -- (7,771)
Shares issued upon exercise of
employee stock options (including
related tax benefit) 436 (92) -- -- 344
Shares issued from stock purchase plan 74 165 -- -- 239
Shares issued for acquisition of
insurance agency 88 56 -- -- 144
Repurchase of 33,075 shares (303) (732) -- -- (1,035)
Net unrealized loss on investment
securities available for sale -- -- -- (1,557) (1,557)
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 102,098 69,616 35,737 (182) 207,269
Stock dividend - 5% 5,120 17,599 (22,719) -- --
Net income for 1997 -- -- 23,889 -- 23,889
Cash dividends paid -- -- (9,003) -- (9,003)
Shares issued upon exercise of
employee stock options (including
related tax benefit) 374 12 -- -- 386
Shares issued from stock purchase plan 73 191 -- -- 264
Repurchase of 14,175 shares (135) (332) -- -- (467)
<PAGE>
Net unrealized gain on investment
securities available for sale -- -- -- 1,587 1,587
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 $107,530 $87,086 $ 27,904 $ 1,405 $223,925
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Chemical Financial
Corporation and its subsidiaries conform to generally accepted accounting
principles and prevailing practices within the banking industry.
Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying footnotes. Actual
results could differ from these estimates. Significant accounting
policies of Chemical Financial Corporation (the Corporation) and its
subsidiaries are described below:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Corporation include the
accounts of the parent company and its subsidiaries, all of which are
wholly-owned. All significant income and expenses are recorded on the
accrual basis. Intercompany accounts and transactions have been
eliminated in preparing the consolidated statements.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from unaffiliated banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES HELD TO MATURITY:
Designation as an investment security held to maturity is generally
made at the time of acquisition and is based on the Corporation's intent
and ability to hold the security to maturity. Securities held to maturity
are stated at cost adjusted for the amortization of premium and accretion
of discount to maturity.
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Investment securities available for sale include those securities
which might be sold as part of the Corporation's management of interest
rate and prepayment risk, in response to changes in interest rates, or a
desire to increase liquidity.
Investment securities available for sale are stated at estimated
market value, with the aggregate unrealized gains and losses, net of
income taxes, classified as a component of shareholders' equity. Realized
gains and losses from the sale of investment securities available for
sale are determined using the specific identification method and are
classified as other income in the consolidated statements of income.
<PAGE>
Premiums and discounts on securities available-for-sale, as well as
securities held-to-maturity, are amortized over the estimated lives of
the related securities.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Loans are stated at their principal amount outstanding. Loan
performance is reviewed regularly by loan review personnel, loan officers
and senior management. Loan interest income is recognized on the accrual
basis. A loan is placed in the nonaccrual category when principal or
interest is past due 90 days or more, unless the loan is both well
secured and in the process of collection, or when in the opinion of
management, there is sufficient reason to doubt the collectability of
future principal or interest. Interest previously accrued, but not
collected, is reversed and charged against interest income at the time
the loan is placed in nonaccrual status. The subsequent recognition of
interest income on a nonaccrual loan is on the cash basis.
Payments received on nonaccrual loans are recorded as principal
reductions if principal repayment is doubtful. Loans are returned to
accrual status when principal and interest payments are brought current
and collectability is no longer in doubt. Interest income on restructured
loans is recognized according to the terms of the restructure, subject to
the above described nonaccrual policy.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), as amended by SFAS No.
118, was adopted January 1, 1995. Under SFAS No. 114 and 118, a loan is
considered to be impaired when it is probable that payment of principal
and interest will not be made in accordance with the contractual terms of
the loan agreement. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or
at the fair value of the collateral, if the loan is collateral dependent.
A portion of the allowance for possible loan losses may be allocated to
impaired loans.
Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first mortgage loans secured by
one-to-four family residences, residential construction loans, and other
consumer installment loans. Commercial loans and commercial mortgage
loans are evaluated individually for impairment.
The allowance for possible loan losses is maintained at a level
that, in management's judgment, is considered to be adequate to provide
for potential loan losses. Management's evaluation is based on a
continuing review of the loan portfolio, including consideration of
actual loan loss experience, prospective financial condition of the
<PAGE>
borrowers, balance of the loan portfolio, loan growth forecasts, and
current and prospective economic conditions.
continued on page 18
17
<PAGE>
NOTE A - CONTINUED
MORTGAGE BANKING OPERATIONS:
The origination of mortgage loans is an integral component of the
business of the Corporation. The Corporation sells the longer term fixed
interest rate residential mortgage loans that it originates, in the
secondary market. These longer term fixed interest rate residential
mortgage loans are generally held for sale thirty days or less, and book
value approximates market value. The Corporation has retained the
servicing rights on all loans that it sold in the secondary market.
Servicing income is recognized in other income when received and expenses
are recognized when incurred.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125), was adopted prospectively January 1, 1997.
SFAS 125 requires that an asset be recognized for the rights to service
mortgage loans, including those rights that are created by the
origination of mortgage loans which are sold with the servicing rights
retained by the originator. The recognition of the asset results in an
increase in the gains recognized upon the sale of the underlying loans.
The asset is amortized in proportion to, and over the life of, the
estimated net future servicing income. SFAS 125 additionally requires
periodic evaluation of the fair market value of the asset. Any impairment
is recognized as a valuation allowance. The overall impact of adopting
this standard was not material to the Corporation's consolidated
financial statements.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated
depreciation. Premises and equipment are depreciated over the useful
lives of the assets. Depreciation is computed on the straight-line
method. The estimated useful lives are generally 25 to 35 years for
buildings and 3 to 7 years for equipment.
<PAGE>
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
(In thousands)
<S> <C> <C>
Bank premises $28,649 $28,956
Equipment 11,257 10,497
- ----------------------------------------------------------------
39,906 39,453
Less: Accumulated depreciation 19,490 19,118
- ----------------------------------------------------------------
Total $20,416 $20,335
================================================================
</TABLE>
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," was adopted in 1995. The statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used.
The adoption of this standard had no significant effect on the financial
position or results of operations of the Corporation.
INTANGIBLE ASSETS:
Goodwill, representing the cost of investments in subsidiaries in
excess of the fair value of identifiable net assets at acquisition, is
being amortized over twenty years. Other acquired intangible assets, such
as those associated with acquired core deposits, are being amortized over
periods between five and twenty years.
STOCK OPTIONS:
On January 1, 1996, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), became
effective. SFAS 123 established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123
established a fair value-based method of accounting for employee stock
options, but it allows companies to continue to account for stock options
granted to employees under the intrinsic value-based method of
accounting, prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation cost is recognized as a result of options awarded to
employees under stock option plans. The Corporation adopted the
disclosure-only option under SFAS 123 as of December 31, 1996, and
elected to continue to measure compensation cost using APB 25, and
<PAGE>
accordingly, has provided the supplemental disclosures for 1995, 1996 and
1997 that are required by SFAS 123. If the recognition provisions of the
new statement had been adopted as of the beginning of 1996, the effect on
1996 and 1997 net income would have been immaterial.
INCOME TAXES:
The Corporation files a consolidated federal income tax return and
is responsible for the payment of any tax liability of the consolidated
organization. Income tax expense is based on income and expenses, as
reported in the financial statements. When income and expenses are
recognized in different periods for tax purposes, applicable deferred
taxes are provided for in the financial statements.
EARNINGS PER SHARE:
In 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), became effective. SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts have been presented, and where appropriate restated, to
conform to the SFAS 128 requirements.
18
<PAGE>
Basic earnings per share for the Corporation is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted earnings per share for the Corporation is computed by dividing
net income by the sum of the weighted average number of common shares
outstanding and the dilutive effect of outstanding employee stock
options. The following table summarizes the number of shares used in the
denominator of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Denominator
for basic earnings
per share 10,741,266 10,710,259 10,656,578
Denominator for
diluted earnings
per share 10,868,784 10,865,802 10,819,798
</TABLE>
NOTE B - ACQUISITIONS
During the three years ended December 31, 1997, the Corporation made
the following acquisitions:
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 May 1, 1996, the Corporation merged with State Savings Bancorp,
Inc. (SSBI) in Caro, Michigan. SSBI operated one bank, State Savings Bank
of Caro, with offices in Caro and Fairgrove. The Corporation issued
551,250 shares of the Corporation's common stock in exchange for all of
the common stock of SSBI. The merger was accounted for as a "pooling of
interests." As of May 1, 1996, SSBI had assets of approximately $65
million.
On September 22, 1995, the Corporation acquired a branch banking
office in Belding, Michigan from First of America Bank-Michigan, N.A.
Total deposits of approximately $16 million were assumed and merged into
an existing affiliate, Chemical Bank Montcalm. The transaction was
accounted for by the purchase method of accounting. The amount of the
purchase price assigned to core deposit intangibles was $1.1 million.
<PAGE>
NOTE C - INVESTMENT SECURITIES
The following is a summary of the amortized cost and estimated
market value of investment securities available for sale and investment
securities held to maturity at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE INVESTMENT SECURITIES
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and agency securities $473,000 $2,090 $ 384 $474,706
Mortgage-backed securities 2,310 42 1 2,351
Other debt securities 15,133 18 78 15,073
- ---------------------------------------------------------------------------------------
Total debt securities 490,443 2,150 463 492,130
Equity securities 1,574 469 -- 2,043
- ---------------------------------------------------------------------------------------
TOTAL $492,017 $2,619 $ 463 $494,173
=======================================================================================
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
U.S. Treasury
and agency securities $423,233 $1,057 $1,661 $422,629
Mortgage-backed securities 2,820 35 5 2,850
Other debt securities 14,993 36 137 14,892
- ---------------------------------------------------------------------------------------
Total debt securities 441,046 1,128 1,803 440,371
Equity securities 1,021 395 -- 1,416
- ---------------------------------------------------------------------------------------
TOTAL $442,067 $1,523 $1,803 $441,787
======================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELD TO MATURITY INVESTMENT SECURITIES
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and agency securities $201,801 $1,695 $ 1 $203,495
States of the U.S. and
political subdivisions 46,707 958 227 47,438
Mortgage-backed securities 501 9 3 507
Other debt securities 2,011 12 4 2,019
- ---------------------------------------------------------------------------------------
TOTAL $251,020 $2,674 $235 $253,459
=======================================================================================
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
U.S. Treasury
and agency securities $168,958 $ 772 $ 4 $169,726
States of the U.S. and
political subdivisions 42,096 1,032 84 43,044
Mortgage-backed securities 679 13 5 687
Other debt securities 2,019 18 -- 2,037
- ---------------------------------------------------------------------------------------
TOTAL $213,752 $1,835 $ 93 $215,494
=======================================================================================
</TABLE>
continued on page 20
19
<PAGE>
NOTE C - CONTINUED
The amortized cost of U.S. Treasury and U.S. agencies, states of the
U.S. and political subdivisions and all other securities at December 31,
1995 were $668,370,000, $46,065,000 and $15,926,000, respectively,
whereas the estimated market values of these three categories of
investments at December 31, 1995 were $675,069,000, $47,232,000 and
$16,430,000, respectively.
The amortized cost and estimated market value of debt and equity
securities at December 31, 1997, by contractual maturity for both
available for sale and held to maturity investment securities follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
ESTIMATED
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $178,806 $178,850
Due after one year through five years 306,827 308,445
Due after five years through ten years 1,500 1,491
Due after ten years 1,000 993
Mortgage-backed securities 2,310 2,351
Equity securities 1,574 2,043
- -----------------------------------------------------------------------
TOTAL $492,017 $494,173
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
ESTIMATED
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 72,224 $ 72,318
Due after one year through five years 164,049 166,099
Due after five years through ten years 12,091 12,372
Due after ten years 2,155 2,163
Mortgage-backed securities 501 507
- -----------------------------------------------------------------------
TOTAL $251,020 $253,459
=======================================================================
</TABLE>
<PAGE>
Investment securities with a book value of $177.8 million at
December 31, 1997 were pledged to collateralize public fund deposits and
for other purposes as required by law; at December 31, 1996, the
corresponding amount was $91.5 million.
NOTE D - LOANS
The following summarizes loans as of December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial and agricultural $110,554 $114,154
Real estate construction 31,143 24,791
Real estate mortgage 536,938 510,193
Installment 166,965 158,515
- --------------------------------------------------------------
Total $845,600 $807,653
==============================================================
</TABLE>
The Corporation's subsidiary banks have extended loans to directors
and officers and their associates of the Corporation and of the
Corporation's significant subsidiaries. The loans were made in the
ordinary course of business at normal terms, including interest rates and
collateralization, prevailing at the time, and did not involve more than
the normal risk of collectability. The aggregate loans outstanding to the
directors and officers of the Corporation and its significant
subsidiaries totaled $19,183,000 at December 31, 1997 and $16,831,000 at
December 31, 1996. During 1997, there were $25,739,000 of new loans and
other additions, while repayments and other reductions totaled
$23,387,000.
Changes in the Allowance for Possible Loan Losses were as follows
for the years ended December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $16,607 $15,886 $15,295
Provision charged to operations 1,002 1,128 1,065
Loan charge-offs (620) (691) (666)
Loan recoveries 370 284 192
- -------------------------------------------------------------------------------
Net loan charge-offs (250) (407) (474)
- -------------------------------------------------------------------------------
Balance at end of year $17,359 $16,607 $15,886
===============================================================================
</TABLE>
Nonaccrual and renegotiated loans aggregated $1.9 million and $1.3
million at December 31, 1997 and December 31, 1996, respectively.
Interest income totaling $116,000 was recorded on the nonaccrual and
renegotiated loans in 1997. Additional interest income of $189,000 would
have been recorded during 1997 on these loans had they been current in
accordance with their original terms.
The Corporation had $328,000 of impaired loans as of December 31,
1997. An impairment allowance was not required on any of these loans. The
impaired loan balances represented loans for which their fair value
exceeded the recorded investment in the loan, based on fair value of the
related collateral. The Corporation had no impaired loans as of December
31, 1996.
20
<PAGE>
NOTE E - FEDERAL INCOME TAXES
The provision for federal income taxes is less than that computed by
applying the federal statutory income tax rate of 35% primarily due to
tax-exempt interest on investments and loans as shown in the following
analysis for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax at statutory rate $12,405 $11,563 $10,623
Changes resulting from:
Tax-exempt income (887) (884) (920)
Other 35 354 160
- -------------------------------------------------------------------------
Total federal income tax expense $11,553 $11,033 $ 9,863
=========================================================================
</TABLE>
The provision for federal income taxes consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current $11,603 $11,291 $10,075
Deferred credit (50) (258) (212)
- ------------------------------------------------------------------
Total $11,553 $11,033 $ 9,863
==================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant temporary differences which comprise the deferred
tax assets and liabilities of the Corporation were as follows as of
December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $4,786 $4,441
Investment securities available for sale 98
Employee benefit plans 1,138 1,441
Expense accruals not yet tax deductible 1,184 1,052
Other 423 398
- -----------------------------------------------------------------------
Total deferred tax assets 7,531 7,430
Deferred tax liabilities:
Investment securities available for sale 756
Tax over book depreciation 610 615
Other 856 602
- -----------------------------------------------------------------------
Total deferred tax liabilities 2,222 1,217
- -----------------------------------------------------------------------
Net deferred tax assets $5,309 $6,213
=======================================================================
</TABLE>
Federal income tax expense applicable to gains on securities
transactions was $5,000 in 1996 and is included in federal income taxes
on the consolidated statement of income.
NOTE F - PENSION AND POSTRETIREMENT BENEFITS
The Corporation has a noncontributory defined benefit pension plan
("Plan") covering all of its salaried employees. Normal retirement
benefits are based on years of service and the employee's average annual
pay of the five highest consecutive years during the ten years preceding
retirement. The Corporation's funding strategy has been to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in
the future.
Plan assets consist primarily of listed stocks, U.S. Government
securities and common stock of the Corporation (123,234 shares at
December 31, 1997).
The following table sets forth the Plan's funded status and amounts
recognized in the Corporation's statement of financial position at
December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested $19,466 $16,553
nonvested 2,555 1,937
- ----------------------------------------------------------------------
Accumulated benefit obligation $22,021 $18,490
======================================================================
Projected benefit obligation $30,022 $25,648
Plan assets at fair value 44,043 34,880
- ----------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 14,021 9,232
Unrecognized amortization of
transition amount (628) (804)
Unrecognized net gains (10,253) (5,989)
- ----------------------------------------------------------------------
Prepaid pension expense $ 3,140 $ 2,439
======================================================================
</TABLE>
Net periodic pension cost consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned
during the period $1,339 $1,405 $1,136
Interest cost on projected
benefit obligation 1,897 1,754 1,666
Actual return on plan assets (8,774) (3,963) (6,340)
Deferral of net gains 6,037 1,485 3,799
- -----------------------------------------------------------------------
Pension expense $ 499 $ 681 $ 261
=======================================================================
</TABLE>
Actuarial assumptions were as follows for the years ended December
31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used in determining
projected benefit obligation 7.0% 7.5% 7.0%
Rate of increase in
compensation levels 5.0% 6.0% 6.0%
Long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
continued on page 22
21
<PAGE>
NOTE F - CONTINUED
In addition to the Corporation's defined benefit pension plan, the
Corporation provides postretirement medical and dental (to age 65)
benefits to salaried employees. Eligibility for such benefits is age 55
with at least ten years of service with the Corporation or its
subsidiaries. Retirees are required to make contributions toward the cost
of their benefits based on their years of credited service and age at
retirement. Retiree contributions are adjusted annually. The accounting
for these postretirement benefits anticipates changes in future cost-
sharing features such as retiree contributions, deductibles, copayments
and coinsurance. The Corporation reserves the right to amend, modify or
terminate these benefits at any time.
The following table presents the Corporation's postretirement
benefit obligation reconciled with amounts recognized in the statement of
financial position at December 31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $1,266 $1,080
Fully eligible active plan participants 763 619
Other active plan participants 2,245 1,523
- ---------------------------------------------------------------------
4,274 3,222
Unrecognized net gain (loss) (368) 359
- ---------------------------------------------------------------------
Accrued postretirement benefit cost $3,906 $3,581
=====================================================================
</TABLE>
The Corporation's postretirement benefit obligation is nonfunded.
Net periodic postretirement benefit cost includes the following
components for the years ended December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned
during the period $148 $139 $206
Interest cost on accumulated
benefit obligation 267 216 199
Net amortization and deferral (4) (4) (18)
- ----------------------------------------------------------------
Net periodic postretirement
benefit cost $411 $351 $387
================================================================
</TABLE>
At December 31, 1997, the weighted average annual assumed rates of
increase in the per capita cost of covered benefits (i.e., medical and
dental care cost trend rates) for 1997 were 8.42% for medical benefits
and 6.68% for dental benefits and are both assumed to decrease uniformly
to 5% in 2003 and remain at that level thereafter. The medical and dental
care cost trend rate assumptions have a significant effect on the amounts
reported. For example, increasing both the assumed medical and dental
care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1997
by 18.70%, and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for 1997 by 19.35%.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0% and 7.5% at
December 31, 1997 and December 31, 1996, respectively.
NOTE G - LONG-TERM DEBT
Long-term debt consisted of the following obligation:
<TABLE>
<CAPTION>
December 31
1997 1996
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Chemical Financial Corporation:
Term note payable to unaffiliated bank
(6.625% at December 31, 1997) $9,000 $10,000
==================================================================
</TABLE>
<PAGE>
Principal payments on the term note payable are due as follows:
$5,000,000 in June 2002 and $4,000,000 in June 2003. The Corporation, at
its option, reduced this debt by $1,000,000 during 1997. Interest on the
term note payable is computed based upon one of three alternative
interest rate methods, which is elected by the Corporation at the
beginning of each interest period for 1, 3, 6 or 12 month intervals. The
three alternative interest rate methods are based upon the prime rate of
the unaffiliated bank, the Eurodollar rate or the domestic certificate of
deposit rate of the unaffiliated bank. The loan agreement includes
various restrictions and covenants pertaining to capital, earnings and
additional indebtedness and is secured by the stock of two of the
Corporation's subsidiary banks.
22
<PAGE>
NOTE H - RESTRICTED ASSETS AND DIVIDEND LIMITATIONS OF SUBSIDIARY BANKS
Banking regulations require that banks maintain cash reserve
balances in vault cash, with the Federal Reserve Bank or with certain
other qualifying banks. The aggregate average amount of such reserve
balances maintained by the Corporation's subsidiary banks was $16.5
million for the year ended December 31, 1997.
Federal and state banking regulations place certain restrictions on
the transfer of assets in the form of dividends, loans or advances from
the bank subsidiaries to the Corporation. At December 31, 1997,
substantially all of the assets of the bank subsidiaries were restricted
from transfer to the Corporation in the form of loans or advances.
Dividends from its bank subsidiaries are the principal source of funds
for the Corporation. Under the most restrictive of these regulations, the
aggregate amount of dividends which can be paid by the Corporation's bank
subsidiaries to the parent company, without obtaining prior approval from
bank regulatory agencies, approximated $73 million at January 1, 1998. In
addition to the statutory limits, the Corporation also considers the
overall financial and capital position of each subsidiary prior to making
any cash dividend decisions.
NOTE I - CAPITAL
The Corporation and its subsidiary banks are subject to various
regulatory capital requirements administered by the federal banking
agencies. Under these capital requirements, the subsidiary banks must
meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. In addition, capital amounts and
classifications are subject to qualitative judgments by the regulators.
Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the
Corporation's financial statements.
Quantitative measures established by regulation to ensure capital
adequacy require minimum ratios of total and Tier I capital to risk-
weighted assets and of Tier I capital to average assets. These capital
guidelines assign risk weights to on- and off-balance sheet items in
arriving at total risk-weighted assets. Minimum capital levels are based
upon perceived risk of various asset categories and certain off-balance
sheet instruments.
At December 31, 1997 and December 31, 1996, the Corporation's and
each of its banking subsidiaries' capital ratios exceeded the
quantitative capital ratios required for an institution to be considered
"well-capitalized."
<PAGE>
The table below, "Capital Analysis," compares the Corporation's and
each of its significant subsidiaries' actual capital amounts and ratios
with the quantitative measures established by regulation to ensure
capital adequacy at December 31, 1997.
<TABLE>
<CAPTION>
CAPITAL ANALYSIS RISK-BASED CAPITAL
LEVERAGE TIER I TOTAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Corporation's capital $223 13% $219 31% $228 32%
Required capital - minimum 52 3 29 4 57 8
Required capital - "well capitalized" definition 87 5 43 6 72 10
Chemical Bank and Trust Company's capital 79 13 79 38 82 39
Required capital - minimum 18 3 8 4 17 8
Required capital - "well capitalized" definition 29 5 13 6 21 10
Chemical Bank Michigan's capital 28 12 27 32 28 33
Required capital - minimum 7 3 3 4 7 8
Required capital - "well capitalized" definition 12 5 5 6 9 10
Chemical Bank Bay Area's capital 23 12 23 28 24 29
Required capital - minimum 6 3 3 4 7 8
Required capital - "well capitalized" definition 10 5 5 6 8 10
Chemical Bank Thumb Area's capital 20 12 20 30 21 32
Required capital - minimum 5 3 3 4 5 8
Required capital - "well capitalized" definition 9 5 4 6 7 10
</TABLE>
23
<PAGE>
NOTE J - STOCK OPTIONS
The Chemical Financial Corporation stock option plan provides for
the granting of options, incentive stock options, stock appreciation
rights, or a combination thereof. At December 31, 1997, there were a
total of 517,913 shares available for the granting of future awards under
the Corporation's 1997 Plan. The plan provides that the option price
shall not be less than fair market value at the date of grant, options
become exercisable between one and five years from the date of grant as
determined by the Compensation Committee of the Board of Directors, all
awards expire no later than ten years and one day after the date of
grant, and options granted may be designated nonstatutory options or
incentive stock options.
Options granted may include an appreciation right that entitles the
awardee to receive a number of shares of common stock without payment to
the Corporation, calculated by dividing the difference between the option
price and the market price of the total number of shares in the option at
the expiration date of the option, by the market price of a single share.
As of December 31, 1997, there were no outstanding options with stock
appreciation rights.
The activity in the Corporation's stock option plans during 1995,
1996 and 1997 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
- -------------------------------------------------------------------
<S> <C> <C>
Outstanding - January 1, 1995 428,211 $17.00
Activity during 1995:
Granted 441 27.89
Exercised (79,167) 14.28
Cancelled (348) 26.71
- -------------------------------------------------------------------
Outstanding - December 31, 1995 349,137 17.40
Activity during 1996:
Granted 106,888 32.88
Exercised (71,428) 15.44
Cancelled (885) 26.71
- -------------------------------------------------------------------
<PAGE>
Outstanding - December 31, 1996 383,712 21.97
Activity during 1997:
Granted 7,087 38.93
Exercised (46,996) 13.87
Cancelled (2,546) 32.87
- -------------------------------------------------------------------
Outstanding - December 31, 1997 341,257 $23.35
===================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------
AVERAGE EXERCISE AVERAGE
NUMBER EXERCISE AVERAGE PRICE NUMBER EXERCISE
OUTSTANDING PRICE LIFE <FA> RANGE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
77,713 $12.25 1.56 $11.43 - $12.54 77,713 $12.25
63,255 15.35 4.29 $15.35 63,255 15.35
193,202 29.86 7.62 $24.34 - $32.88 148,647 29.55
7,087 38.93 9.82 $38.93 -- --
- -----------------------------------------------------------------------------------
341,257 $23.35 5.67 $11.43 - $38.93 289,615 $21.81
===================================================================================
<FN>
<FA> Average remaining contractual life in years.
</FN>
</TABLE>
NOTE K - COMMITMENTS AND OTHER MATTERS
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses. Historically, the majority of the commitments have
not been drawn upon and, therefore, do not necessarily represent future
cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by the Corporation upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued generally by
the Corporation to guarantee the performance of a customer to a third
<PAGE>
party. Both arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the
Corporation's normal credit policies. The Corporation at any point in
time also has approved but undisbursed loans. The majority of these
undisbursed loans will convert to a booked loan within a three month
period.
Loan commitments, standby letters of credit and undisbursed loans
were $105.7 million, $4.9 million and $35.7 million, respectively, at
December 31, 1997 and $90.1 million, $3.3 million and $33 million,
respectively, at December 31, 1996. The majority of the loan commitments
and standby letters of credit outstanding as of December 31, 1997 expire
one year from their contract date, except for $11.8 million which extend
for more than five years.
The Corporation's loan commitments, standby letters of credit and
undisbursed loans have been estimated to have no realizable fair value,
as historically the majority of the loan commitments have not been drawn
upon and generally the Corporation does not receive any fees in
connection with these agreements.
24
<PAGE>
The Corporation has a single lease commitment on certain computer
software that will require annual lease payments of approximately
$350,000 per year through 2002. There are no other material lease rental
payments or noncancelable lease commitments outstanding at December 31,
1997.
Expenses included in the category of "Other" operating expenses
which were in excess of 1% of interest and other income during the three
year period ended December 31, 1997, were as follows: Federal Deposit
Insurance Corporation (FDIC) premium expense of $1,561,000 in 1995 and
stationery and supplies expense of $1,428,000 in 1996.
NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" (SFAS 107), requires
disclosures about the estimated fair values of the Corporation's
financial instruments. The Corporation utilized quoted market prices,
where available, to compute the fair value of its financial instruments.
In cases where quoted market prices were not available, the Corporation
used present value methods to estimate the fair values of its financial
instruments. These estimates of fair value are significantly affected by
the assumptions made and, accordingly, do not necessarily indicate
amounts which could be realized in a current market exchange. It is also
the Corporation's general practice and intent to hold the majority of its
financial instruments until maturity and, therefore, the Corporation does
not expect to realize the estimated amounts disclosed.
The following methods and assumptions were used by the Corporation
in estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated statements of financial position for cash and federal funds
sold approximate those assets' fair values.
INTEREST-BEARING DEPOSITS WITH UNAFFILIATED BANKS: The carrying
amounts reported in the consolidated statements of financial position for
interest bearing deposits with unaffiliated banks approximate those
assets' fair values.
INVESTMENT SECURITIES: Fair values for investment securities are
based on quoted market prices.
LOANS RECEIVABLE: For variable rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain mortgage loans (e.g., one-
to-four family residential) are based on quoted market prices of similar
loans sold in secondary market source transactions. The fair values for
other loans (e.g., commercial real estate, rental property mortgage,
<PAGE>
commercial, agricultural and installment) are estimated using discounted
cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The
resulting amounts are adjusted to estimate the effect of declines in the
credit quality of borrowers since the loans were originated.
DEPOSIT LIABILITIES: The fair values of accounts without defined
maturities, such as interest and noninterest-bearing checking, savings
and money fund accounts are equal to the amounts payable on demand. As of
December 31, 1997 and December 31, 1996, the Corporation had total
deposits without defined maturities totaling $934,676,000 and
$874,732,000, respectively, for which SFAS 107 defined their fair values
to be equal to their carrying amounts. Fair values for fixed rate
certificates of deposit and other time deposits are based on the
discounted value of contractual cash flows, using interest rates
currently being offered for deposits of similar remaining maturities. The
fair values for variable rate certificates of deposits and other time
deposits approximate their carrying amounts.
SHORT-TERM BORROWINGS: The carrying amounts of borrowings under
repurchase agreements and other short-term borrowings approximate their
fair values.
LONG-TERM DEBT: The carrying amount of the Corporation's variable
rate long-term debt approximates fair value.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND
UNDISBURSED LOANS: The Corporation's loan commitments, standby letters of
credit and undisbursed loans have no carrying amount and have been
estimated to have no realizable fair value. Historically, the majority of
the loan commitments have not been drawn upon and, generally the
Corporation does not receive any fees in connection with any of these
commitments.
Estimates of fair value have not been made for items which are not
defined by SFAS 107 as financial instruments, including such items as the
Corporation's core deposit intangibles and the value of its trust and
data processing operations. The Corporation believes it is impractical to
estimate a representational fair value for these types of assets, even
though they add significant value to the Corporation.
The following is a summary of previously described financial
instruments reported in the consolidated statements of financial position
for which fair values differ from carrying amounts as of December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Investment securities $745,193 $747,632 $655,539 $657,281
Loans 828,241 842,582 791,046 800,050
LIABILITIES:
Time deposits 541,165 540,745 555,183 547,868
</TABLE>
25
<PAGE>
NOTE M - PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of Chemical Financial Corporation (parent
company) follow:
<TABLE>
CONDENSED STATEMENT OF FINANCIAL POSITION
<CAPTION>
December 31
1997 1996
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash on deposit at subsidiary bank $ 15,228 $ 15,960
Investments in bank subsidiaries 218,146 203,221
Investment in non-bank subsidiary 1,984 1,565
Goodwill 2,314 2,619
Other assets 3,468 1,855
- ----------------------------------------------------------------------------------
TOTAL ASSETS $241,140 $225,220
==================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 9,000 $ 10,000
Other liabilities 8,215 7,951
- ----------------------------------------------------------------------------------
Total Liabilities 17,215 17,951
Shareholders' equity 223,925 207,269
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $241,140 $225,220
==================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENT OF INCOME
<CAPTION>
Years Ended December 31
1997 1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
INCOME
Cash dividends from bank subsidiaries $11,348 $20,304 $ 7,613
Cash dividends from non-bank subsidiary 102 360 326
Interest received from subsidiary bank 677 660 621
Other income 12 163 33
- ----------------------------------------------------------------------------------------
Total Income 12,139 21,487 8,593
EXPENSES
Interest on long-term debt 596 715 826
Other operating expenses 1,818 1,500 1,493
Amortization of goodwill 305 305 305
- ----------------------------------------------------------------------------------------
Total Expenses 2,719 2,520 2,624
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 9,420 18,967 5,969
Federal income tax benefit 658 470 609
- ----------------------------------------------------------------------------------------
10,078 19,437 6,578
Equity in undistributed net income of:
Bank subsidiaries 13,392 2,465 13,718
Non-bank subsidiary 419 101 193
- ----------------------------------------------------------------------------------------
NET INCOME $23,889 $22,003 $20,489
========================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
Years Ended December 31
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $23,889 $22,003 $20,489
Equity in undistributed net income of subsidiaries (13,811) (2,566) (13,911)
Other (985) 349 1,578
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations 9,093 19,786 8,156
FINANCING ACTIVITIES
Capital contribution to bank subsidiary -- (9,000) --
Principal payments on long-term debt (1,000) (2,000) --
Repurchases of common stock (467) (1,035) --
Proceeds from subsidiary directors stock purchase plan 259 264 236
Proceeds from exercise of stock options 386 339 453
Cash dividends paid (9,003) (7,771) (6,636)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,825) (19,203) (5,947)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash (732) 583 2,209
Cash at beginning of year 15,960 15,377 13,168
- ---------------------------------------------------------------------------------------------------
Cash at end of year $15,228 $15,960 $15,377
===================================================================================================
</TABLE>
26
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
To the Board of Directors
Chemical Financial Corporation
We have audited the accompanying consolidated statement of financial
position of Chemical Financial Corporation and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Chemical Financial Corporation and subsidiaries at December 31, 1997 and
<PAGE>
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
January 20, 1998
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
The following discussion and analysis is intended to cover the
significant factors affecting Chemical Financial Corporation's
(Corporation) consolidated statements of financial position and income,
included herein. It is designed to provide shareholders with a more
comprehensive review of the operating results and financial position of
the Corporation than could be obtained from an examination of the
financial statements alone. This discussion should be read in conjunction
with the financial highlights on page 1, Tables 1-12, beginning on
page 29, and the consolidated financial statements and notes thereto
beginning on page 13. On December 30, 1997, the Corporation paid a 5%
stock dividend to shareholders of record on December 17, 1997. All per
share amounts included herein have been adjusted for this stock dividend.
MERGERS AND ACQUISITIONS
The primary method of expansion into new banking markets has been
through acquisitions of other financial institutions or bank branches.
The following is a summary of the Corporation's merger and acquisition
activity during the three year period ended December 31, 1997.
On December 31, 1996, the Corporation acquired Arbury & Stephenson,
Inc. (A&S), a property and casualty insurance agency headquartered in
Midland, Michigan. The merger was effected through an exchange of shares
of the Corporation's common stock. A&S was merged into an insurance
subsidiary of the Corporation's lead bank and offers a variety of
personal and corporate insurance products, through the "Chemical
Financial Insurance Agency."
On May 1, 1996, the Corporation acquired State Savings Bancorp, Inc.
(SSBI), headquartered in Caro, Michigan. SSBI operated one bank, State
Savings Bank of Caro, with offices in Caro and Fairgrove. The Corporation
issued 551,250 shares of the Corporation's common stock for all of the
outstanding stock of SSBI. As of May 1, 1996, SSBI had total assets of
approximately $65 million.
On September 22, 1995, the Corporation acquired a branch banking
office in Belding, Michigan, from First of America Bank-Michigan, N.A.
The branch had total deposit liabilities of approximately $16 million and
was merged into an existing affiliate.
NET INCOME
Net income in 1997 was $23.889 million, or $2.22 per share, compared
to net income of $22.003 million, or $2.05 per share, in 1996. 1997 net
income represented an 8.6% increase over 1996 net income, while 1997
earnings per share represented an 8.3% increase over 1996 earnings per
share. Net income has increased at an average annual compound rate of
<PAGE>
6.44% during the five year period ended December 31, 1997, while earnings
per share has grown at an average annual compound rate of 7.85% over that
same period.
The Corporation's return on average assets was 1.38% in 1997, 1.30%
in 1996 and 1.24% in 1995. The Corporation's return on average
shareholders' equity was 11.1% in 1997, 10.9% in 1996 and 11.0% in 1995.
DEPOSITS
Total deposits as of December 31, 1997 were $1.476 billion, up $46
million, or 3.2%, from total deposits of $1.430 billion as of December
31, 1996. The increase in total deposits during 1997 was attributable to
the transfer of Trust Department assets from a non-affiliated financial
services organization to a new money market savings account at the
Corporation's lead subsidiary bank, Chemical Bank and Trust Company. This
new account was designed to provide Trust Department customers a
comparable interest yield with the added protection of deposit insurance
coverage provided by the Federal Deposit Insurance Corporation.
The growth of the Corporation's deposits continues to be impacted by
competition for customer deposits from other investment products. Mutual
funds and various annuity products are clearly the two most significant
products in competition for customer deposits. These products are sold by
a wide spectrum of organizations, including both bank and nonbank
financial institutions and nonfinancial institutions, such as brokerage
and insurance companies. In response to this increased competition for
customers' bank deposits, the Corporation expanded its sales and
marketing efforts of mutual fund and annuity investment products during
1996. The Corporation's subsidiary banks, through "CFC Investment
Centers," offer a broad array of mutual funds, annuity products and
market securities through alliances with Security First Group and
Corelink Financial Services. CFC Investment Centers offer customers a
complete spectrum of investment products and service capabilities, backed
by strong technical innovations. During 1997, customers purchased $14.5
million of annuity and mutual fund investments through the CFC Investment
Centers. In addition, the Trust Department of Chemical Bank and Trust
Company offers customers a number of investment products and services.
Two of these products are "ChemVest Advantage," which provides customers
with professional assistance in spreading their funds among a variety of
institutional mutual funds and "ChemSelect-IRA," which allows customers
to choose their own asset allocation and risk tolerance among a variety
of mutual funds without any sales charges or transaction fees. As of
December 31, 1997, these two Trust Department investment products had
balances totaling $23 million.
28
<PAGE>
<TABLE>
TABLE 1. FIVE-YEAR INCOME STATEMENT -
TAX EQUIVALENT BASIS<F*> - AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
<CAPTION>
Years Ended December 31
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans 4.06% 4.01% 3.90% 3.75% 3.90%
Interest on investment securities 2.54 2.49 2.49 2.26 2.49
Interest on short-term investments .27 .28 .30 .21 .14
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 6.87 6.78 6.69 6.22 6.53
INTEREST EXPENSE
Interest on deposits 2.68 2.62 2.62 2.20 2.52
Interest on short-term borrowings .08 .07 .09 .07 .05
Interest on long-term debt .03 .04 .05 .04 .04
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2.79 2.73 2.76 2.31 2.61
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 4.08 4.05 3.93 3.91 3.92
Provision for possible loan losses .06 .07 .06 .07 .07
OTHER INCOME
Trust department income .19 .17 .16 .16 .14
Service charges and fees .51 .48 .47 .41 .41
Gains on sales of loans .01 .01 .03 .01 .07
Investment securities gains -- -- -- .02 .03
Other .05 .02 .08 .08 .08
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME .76 .72 .74 .68 .73
OPERATING EXPENSES
Salaries, wages and benefits 1.58 1.60 1.55 1.53 1.57
Occupancy expense .25 .25 .24 .24 .24
Equipment expense .18 .17 .17 .17 .17
Other .64 .65 .74 .80 .87
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2.65 2.67 2.70 2.74 2.85
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES 2.13 2.03 1.91 1.78 1.73
Federal income taxes .67 .65 .59 .54 .53
Tax equivalent adjustment .08 .08 .08 .09 .09
- -----------------------------------------------------------------------------------------------------------------------
<PAGE>
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLES 1.38 1.30 1.24 1.15 1.11
Cumulative effect on prior years of
change in accounting principles -- -- -- -- .12
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME 1.38% 1.30% 1.24% 1.15% 1.23%
=======================================================================================================================
AVERAGE TOTAL ASSETS - In thousands $1,726,960 $1,688,214 $1,654,640 $1,659,360 $1,638,101
=======================================================================================================================
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
</FN>
</TABLE>
ASSETS
Total assets of the Corporation were $1.765 billion as of December 31,
1997, up $66 million, or 3.9%, over total assets of $1.699 billion as of
December 31, 1996.
CASH DIVIDENDS
The Corporation paid a cash dividend of $.20 per share during the
first two quarters of 1997, and increased the cash dividend to $.22 per
share during the remaining two quarters of 1997, thereby resulting in total
1997 cash dividends of $.84 per share. Cash dividends paid per share in
1997 represented a 15.5% increase over cash dividends paid per share in
1996 of $.73.
The Corporation has paid regular cash dividends every quarter since it
was organized as a bank holding company in 1973. The Corporation's annual
cash dividends per share over the past five years, adjusted for all stock
dividends and stock splits, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Annual Dividend $.84 $.73 $.62 $.51 $.46
</TABLE>
continued on page 30
29
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
Cash dividends per share in 1996 represented a 17.6% increase over
cash dividends per share in 1995, while cash dividends per share in 1995
represented a 21.4% increase over cash dividends paid in 1994. The compound
annual growth rate of the Corporation's cash dividends per share over the
past five and ten year periods ended December 31, 1997, was 14.9% and
11.6%, respectively.
The earnings of the Corporation's subsidiaries are the principal
source of funds to pay cash dividends to shareholders. Cash dividends are
dependent upon the earnings of the Corporation's subsidiaries, as well as
capital requirements, regulatory restraints and other factors affecting
each of the Corporation's subsidiary banks.
BUSINESS OF THE CORPORATION
The Corporation is a bank holding company with its business
concentrated in a single industry segment commercial banking. The
Corporation, through its ten banking subsidiaries, offers a full range of
commercial banking services. These banking services include accepting
deposits, business and personal checking accounts, savings and individual
retirement accounts, time deposit instruments, electronically accessed
banking products, residential and commercial real estate financing,
commercial lending, consumer financing, debit cards, safe deposit box
services, money transfer services, automated teller machines, access to
insurance products and corporate and personal trust services. The
Corporation also has a data processing subsidiary. This subsidiary provides
data processing services to the Corporation's ten subsidiary banks and to
outside customers. The data processing services provided to the
Corporation's subsidiaries represented 84% of total revenue of the data
processing subsidiary in 1997, 76% in 1996 and 68% in 1995.
The principal markets for the Corporation's commercial banking
services are communities within Michigan in which the Corporation's
subsidiaries are located and the areas immediately surrounding these
communities. As of December 31, 1997, the Corporation served 55 communities
through 86 banking offices in 24 counties, located generally across the
mid-section of Michigan's lower peninsula. In addition to the banking
offices, the Corporation operated 84 automated teller machines, both on and
off bank premises, as of December 31, 1997.
The principal sources of revenues for the Corporation are interest and
fees on loans, which accounted for 54% of total revenues in both 1997 and
1996 and 53% in 1995. Interest on investment securities is also a
significant source of revenue, accounting for 33% of revenues in each of
the years 1997, 1996 and 1995. Chemical Bank and Trust Company (CB&T), the
Corporation's largest subsidiary and lead bank headquartered in Midland,
Michigan, represented 29% of total loans and 33% of total deposits, as of
December 31, 1997.
<PAGE>
CB&T broadened the insurance products offered to its customers through
further entry into the insurance industry. On December 31, 1996, CB&T
acquired a small property and casualty agency in Midland, Michigan. In
January 1997, a title insurance company formed by CB&T in late 1996 began
operations.
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in loans,
investment securities and other money market instruments, such as federal
funds sold. Interest expense is the amount of interest paid on interest-
bearing checking accounts, savings and time deposits, as well as on short
and long-term debt. Net interest income, on a fully taxable equivalent
(FTE) basis, is the difference between interest income and interest expense
and reflects adjustments made to the yields on tax-exempt assets in order
to analyze tax-exempt income and fully taxable income on a comparable
basis. The net interest margin is net interest income (FTE) as a percentage
of average earning assets. Interest spread is the difference between the
average yield on earnings assets and the average cost of interest-bearing
liabilities.
The single most important component in analyzing the results of the
Corporation's operations is net interest income. Net interest income is
influenced by a variety of factors, including changes in the volume of
earning assets, changes in the mix of earning assets and interest-bearing
liabilities, the proportion of earning assets that are funded by
noninterest-bearing liabilities (demand deposits) and equity capital,
market rates of interest and variations in interest sensitivity in the
differing types of interest-bearing assets and liabilities. Some of these
factors are controlled to a certain extent by management policies and
actions. However, conditions beyond management's control also have an
impact on changes in net interest income. These conditions include changes
in market interest rates, the strength of credit demands by customers,
competition from other financial institutions, the growth of deposit
accounts at nonbank financial competitors and the continued growth in
annuity and mutual fund investments.
Table 2 presents for 1997, 1996 and 1995, average daily balances of
the Corporation's major assets and liabilities, interest income and expense
on a fully taxable equivalent (FTE) basis, average interest rates earned
and paid on the Corporation's assets and liabilities, net interest income
(FTE), interest spread (FTE) and net interest margin. Net interest income
(FTE) in 1997 was $70.404 million, up $1.96 million, or 2.9%, over 1996 net
interest income (FTE) of $68.447 million. The increase in net interest
income during 1997 was primarily attributable to increases in average
loans, noninterest-bearing deposits and shareholders' equity. During 1997,
average loans increased $28 million, or 3.6%, average noninterest-bearing
deposits increased $12 million, or 5.8%, and average shareholders' equity
increased $14.5 million, or
30
<PAGE>
<TABLE>
TABLE 2. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES<F*> (Dollars in thousands)
<CAPTION>
Years Ended December 31
1997 1996 1995
TAX EFFECTIVE TAX EFFECTIVE TAX EFFECTIVE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans <F1> <F2> $ 820,451 $ 70,198 8.56% $ 792,209 $ 67,767 8.55% $ 744,207 $ 64,554 8.67%
Taxable investment securities 672,347 40,554 6.03 661,401 38,882 5.88 680,235 37,675 5.54
Non-taxable investment
securities 40,129 3,199 7.97 39,542 3,249 8.22 41,896 3,570 8.52
Federal funds sold 86,045 4,699 5.46 86,721 4,575 5.28 82,249 4,800 5.84
Interest-bearing deposits
with unaffiliated banks 415 33 7.95 1,905 136 7.14 2,974 204 6.86
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income/
Total earning assets 1,619,387 118,683 7.33 1,581,778 114,609 7.25 1,551,561 110,803 7.14
Less: Allowance for possible
loan losses (17,032) (16,296) (15,718)
Other assets:
Cash and due from banks 78,216 75,828 73,809
Premises and equipment 19,838 20,303 21,296
Accrued income and other
assets 26,551 26,601 23,692
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,726,960 $1,688,214 $1,654,640
==================================================================================================================================
LIABILITIES AND EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand deposits $ 233,004 $ 5,408 2.32% $ 234,900 $ 5,359 2.28% $ 225,331 $ 5,268 2.34%
Savings deposits 442,195 11,545 2.61 430,783 10,305 2.39 449,642 10,820 2.41
Time deposits 556,259 29,367 5.28 553,993 28,620 5.17 534,017 27,218 5.10
Short-term borrowed funds 34,271 1,363 3.98 31,455 1,163 3.70 36,698 1,552 4.23
Long-term debt 9,236 596 6.45 10,976 715 6.51 12,094 833 6.89
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense/Total
interest-bearing liabilities 1,274,965 48,279 3.79 1,262,107 46,162 3.66 1,257,782 45,691 3.63
Noninterest-bearing deposits 221,652 209,500 197,746
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed
funds 1,496,617 1,471,607 1,455,528
Accrued expenses and other
liabilities 14,386 15,182 12,114
<PAGE>
Shareholders' equity 215,957 201,425 186,998
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity $1,726,960 $1,688,214 $1,654,640
==================================================================================================================================
Interest Spread (Average yield
earned minus average rate paid) 3.54% 3.59% 3.51%
==================================================================================================================================
Net Interest Income (FTE) $ 70,404 $ 68,447 $ 65,112
==================================================================================================================================
Net Interest Margin
(Net interest income (FTE)/Total
average earning assets) 4.35% 4.33% 4.20%
==================================================================================================================================
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
<F1> Nonaccrual loans are included in average balances reported and are
used to calculate yields.
<F2> Interest includes loan fees of $1,645,000 in 1997, $1,721,000 in 1996
and $1,414,000 in 1995.
</FN>
</TABLE>
7.2%. Average interest rates earned and paid on the Corporation's assets
and liabilities did not change significantly during 1997. The average
yield on interest earning assets increased 8 basis points to 7.33% from
7.25% in 1996, while the average cost of interest-bearing liabilities
increased 13 basis points to 3.79%, from 3.66% in 1996. The 13 basis
point increase in the average cost of interest-bearing liabilities was
primarily attributable to the introduction of a new money market savings
account in 1997. This new account was designed to accommodate short-term
investable funds of our Trust Department customers. This new money market
savings account resulted in a 22 basis point increase in the average
interest cost of the Corporation's total savings accounts. The
Corporation's net interest spread decreased 5 basis points in
continued on page 32
31
<PAGE>
NET INTEREST INCOME - CONTINUED
1997 to 3.54% from 3.59% in 1996. The increases in loans, noninterest-
bearing deposits and shareholders' equity, offset with the slight reduction
in the net interest spread, resulted in a slightly higher net interest
margin in 1997. Net interest margin was 4.35% in 1997, compared to 4.33% in
1996 and 4.20% in 1995.
Net interest income (FTE) increased $3.34 million, or 5.1%, in 1996 to
$68.4 million. This increase was primarily attributable to increases in
average loans and an increase in the average yield of investment
securities. During 1996, average loans increased $48 million, or 6.4%,
while the average yield on investment securities increased 34 basis points.
The net interest spread increased 8 basis points during 1996 to 3.59%,
while the net interest margin increased 13 basis points to 4.33%. The
increases in the net interest spread and the net interest margin resulted
from an 11 basis point increase in the average yield earned on earning
assets, which was slightly offset by a 3 basis point increase in the
average cost of the Corporation's interest-bearing liabilities.
Table 3 allocates the dollar change in net interest income (FTE)
between the portion attributable to changes in the average volume of
interest-bearing assets and liabilities, including changes in the mix of
assets and liabilities, and changes in average interest rates earned and
paid.
During 1997, the increase in the volume and change in the mix of
interest-bearing assets and liabilities accounted for a $2.310 million
increase in net interest income (FTE), while changes in average interest
rates earned and paid on assets and liabilities resulted in a $.353 million
decrease in net interest income. Accordingly, the total increase in net
interest income (FTE) during 1997 was $1.957 million, or 2.9%. The increase
due to changes in the volume and mix of interest-bearing assets and
liabilities was primarily attributable to increases in average loans,
noninterest-bearing deposits and shareholders' equity.
Net interest income (FTE) increased $3.335 million, or 5.1%, in 1996.
This increase was primarily attributable to increases in the volume and
change in the mix of interest-bearing assets and liabilities, resulting
from a $48 million, or 6.4%, increase in average loans.
LOANS
The Corporation's ten banking subsidiaries are full service community
banks, therefore the acceptance and management of credit risk is an
integral part of the Corporation's business. The Corporation maintains a
conservative loan policy and strict credit underwriting standards. These
standards include the granting of loans only within the Corporation's
defined market areas. The Corporation has no foreign loans nor any loans to
finance highly leveraged transactions. The Corporation's conservative
lending philosophy is implemented through strong administrative and
<PAGE>
reporting controls at the subsidiary bank level, with additional oversight
at the holding company level. The Corporation maintains a centralized
independent loan review function at the holding company level which
monitors asset quality at each of the Corporation's subsidiary banks. In
addition, the Corporation continues to maintain an aggressive loan charge-
off policy.
The Corporation's loan portfolio is well diversified geographically,
as well as along industry lines and, therefore, is reasonably sheltered
from adverse economic impact in any one industry or geographic area. An
additional strength of the Corporation's loan portfolio is that as of
December 31, 1997 approximately 56% of the loan portfolio was comprised of
credits granted to consumers in the form of residential mortgage loans,
home equity loans and lines of credit secured by first and second
mortgages.
Total loans as of December 31, 1997 were $845.6 million, an increase
of $37.9 million, or 4.7%, over total loans of $807.7 million as of
December 31, 1996. The increase in total loans during 1997 was largely
attributable to a combined increase in real estate construction and real
estate mortgage loans of $33.1 million, or 6.2%. Commercial loans decreased
$3.6 million, or 3.2%, while installment loans increased $8.5 million, or
5.3%, during 1997.
The Corporation's geographical market area generally consists of small
cities across mid-Michigan. The lack of substantive economic growth in the
Corporation's market areas and increased competition have impacted the
Corporation's loan growth over the past few years. The Corporation
experiences competition from larger regional banks, located outside the
Corporation's market areas, in the commercial loan area, and from large
local credit unions in the installment loan area. The competition for
residential mortgage loans intensified significantly over the last few
years, as mortgage companies expanded sales efforts nationwide.
Real estate mortgage loans, including real estate construction loans,
comprise the majority of the Corporation's loan portfolio. As of December
31, 1997, 1996 and 1995, total real estate mortgage loans, including real
estate construction loans, were $568.1 million, $535.0 million and $488.7
million, respectively. Real estate mortgage loans, including real estate
construction loans, increased $33.1 million, or 6.2%, during 1997, $46.3
million, or 9.5%, during 1996 and $3.7 million, or .8%, during 1995. Real
estate mortgage loans, including real estate construction loans, as a
percentage of total loans were 67% as of December 31, 1997, compared to 66%
as of December 31, 1996 and 64% as of December 31, 1995. Approximately 81%
of the total real estate mortgage portfolio, as of December 31, 1997, was
secured by residential real estate.
continued on page 34
32
<PAGE>
<TABLE>
TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS<F*> (In Thousands)
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN COMBINED DUE TO CHANGES IN COMBINED
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME YIELD/RATE (DECREASE) VOLUME YIELD/RATE (DECREASE)
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME ON EARNING
ASSETS:
Loans $2,179 $ 252 $2,431 $4,144 $ (931) $3,213
Taxable investment securities 650 1,022 1,672 (1,063) 2,270 1,207
Non-taxable investment securities 48 (98) (50) (196) (125) (321)
Federal funds sold (36) 160 124 252 (477) (225)
Interest-bearing deposits with
unaffiliated banks (103) -- (103) (76) 8 (68)
- --------------------------------------------------------------------------------------------------------------------------------
Total change in interest income on
earning assets 2,738 1,336 4,074 3,061 745 3,806
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits 431 1,605 2,036 385 593 978
Short-term borrowed funds 109 91 200 (207) (182) (389)
Long-term debt (112) (7) (119) (74) (44) (118)
- --------------------------------------------------------------------------------------------------------------------------------
Total change in interest expense on
interest-bearing liabilities 428 1,689 2,117 104 367 471
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN
NET INTEREST INCOME (FTE) $2,310 $ (353) $1,957 $2,957 $ 378 $3,335
================================================================================================================================
<FN>
The changes in net interest income (FTE) due to both volume and rate have
been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE 4. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE (Dollars in Thousands)
<CAPTION>
Years Ended December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
DISTRIBUTION OF LOANS:
Commercial and agricultural loans $110,554 $114,154 $117,759 $121,175 $148,985
Real estate construction loans 31,143 24,791 16,195 19,255 14,141
Real estate mortgage loans 536,938 510,193 472,454 465,721 451,481
Installment loans 166,965 158,515 154,170 154,712 115,913
- -------------------------------------------------------------------------------------------------------------------
Total loans outstanding at year end $845,600 $807,653 $760,578 $760,863 $730,520
===================================================================================================================
SUMMARY OF CHANGES IN THE ALLOWANCE FOR
POSSIBLE LOAN LOSSES:
Allowance for possible loan losses at
beginning of year $ 16,607 $ 15,886 $ 15,295 $ 14,583 $ 13,989
Loans charged off:
Commercial and agricultural (114) (250) (433) (317) (607)
Real estate mortgage (26) (55) (3) (76) (33)
Installment (480) (386) (230) (237) (258)
- -------------------------------------------------------------------------------------------------------------------
Total loan charge-offs (620) (691) (666) (630) (898)
Recoveries of loans previously charged
off:
Commercial and agricultural 193 92 60 58 188
Real estate mortgage 10 24 28 40 30
Installment 167 168 104 145 170
- -------------------------------------------------------------------------------------------------------------------
Total loan recoveries 370 284 192 243 388
- -------------------------------------------------------------------------------------------------------------------
Net loan charge-offs (250) (407) (474) (387) (510)
Provision for loan losses 1,002 1,128 1,065 1,099 1,104
- -------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses at
year end $ 17,359 $ 16,607 $ 15,886 $ 15,295 $ 14,583
===================================================================================================================
Ratio of net charge-offs during the
year to average loans outstanding .03% .05% .06% .05% .07%
===================================================================================================================
Ratio of allowance for possible loan
losses at year end to total loans
outstanding at year end 2.05% 2.06% 2.09% 2.01% 2.00%
===================================================================================================================
</TABLE>
33
<PAGE>
LOANS - CONTINUED
The Corporation originated $38.8 million of residential mortgage
loans during 1997, which were sold in the secondary mortgage market.
This compares with $12.3 million of residential mortgage loans
originated during 1996 and $15.6 million of residential mortgage loans
originated during 1995, which were sold in the secondary mortgage
market. The increase in the amount of residential mortgage loans sold
during 1997 was attributable to the Corporation selling those loans
with original maturities of fifteen years and longer in the secondary
market. In 1996 and 1995, it was the Corporation's general practice to
sell only those residential real estate mortgage loans with original
maturities greater than fifteen years in the secondary mortgage
market. As of December 31, 1997, the Corporation was servicing $98
million of residential mortgage loans, which had been originated by
the Corporation in its market areas and subsequently sold in the
secondary mortgage market. Prior to 1992, the Corporation kept all
residential mortgage loans originated in its own loan portfolio.
The Corporation manages the interest rate risk on the residential
real estate mortgage loan portfolio through the promotion of balloon
mortgage products. As of December 31, 1997, balloon mortgage loans
represented approximately 47% of the residential mortgage loan
portfolio, repriceable three, five or eight years from the mortgage
origination date. The eight year balloon product was introduced during
1996.
Installment loans totaled $167.0 million as of December 31, 1997,
compared to $158.5 million as of December 31, 1996 and $154.2 million
as of December 31, 1995. Installment loans represented approximately
20% of total loans outstanding as of December 31, 1997, 1996 and 1995.
Installment loans increased $8.5 million, or 5.3%, during 1997. The
increase in 1997 was attributable to two special installment loan
promotions. In late spring, the affiliate banks offered 7.99% consumer
installment loans with maturities up to forty eight months, and in the
fall offered 7.49% consumer loans on new automobiles up to sixty
months, to qualifying borrowers. These two loan promotions generated
$48.4 million of new consumer installment loans. The 1997 installment
loan promotions were the Corporation's affiliate banks' seventh year
of offering special interest rates on consumer installment loans
during promotion periods.
Historically, the average life of the Corporation's installment
loan portfolio has been approximately three years. This short average
life and the success of the installment loan promotions in recent
years, results in significant reductions each year in installment loan
balances through loan payments and payoffs. Consequently, during each
of the last three years, the installment loan portfolio did not
increase by the amount of new loans generated during the loan
promotion periods in these years.
<PAGE>
Commercial loans decreased $3.6 million, or 3.2%, during 1997 to
$110.6 million as of December 31, 1997. Commercial loans decreased
$3.6 million, or 3.1%, during 1996 and $3.4 million, or 2.8%, during
1995. The expansion of commercial lending efforts by larger regional
banks into smaller communities has impacted the Corporation's
commercial lending growth rate. The combination of the efforts by
these larger financial institutions and the location of the majority
of the Corporation's subsidiary banks in smaller communities, where
the demand for commercial loans which meet the Corporation's credit
standards has historically not been particularly strong, contributed
to the slight decline in the Corporation's commercial loans during the
last three years. Commercial loans represented 13.1%, 14.1% and 15.5%
of total loans as of December 31, 1997, December 31, 1996 and
December 31, 1995, respectively.
Table 5 presents the maturity distribution of commercial and
agricultural loans, real estate construction and nonresidential real
estate mortgage loans. These loans represented 28% and 29% of total
loans as of December 31, 1997 and December 31, 1996, respectively. The
percentage of these loans maturing within one year was 51% at December
31, 1997, compared to 45% at December 31, 1996. The percentage of
these loans maturing beyond five years remained low at 12% as of
December 31, 1997, compared to 11% at December 31, 1996. Of those
loans with maturities beyond one year, the percentage of loans with
variable interest rates was 32% at December 31, 1997, compared to 37%
at December 31, 1996. The decline in the percentage of variable rate
loans with maturities beyond one year has continued over the past two
years, as a result of a strong customer demand to convert loans to
fixed interest rates. It is management's opinion that these loan
maturities and the mix between loans with fixed and variable interest
rates remain at acceptable levels to provide the Corporation
sufficient flexibility in maintaining a balance between interest rate-
sensitive assets and liabilities.
NONPERFORMING LOANS
Nonperforming loans include loans accounted for on a nonaccrual
basis, accruing loans contractually past due 90 days or more as to
interest or principal payments and other loans whose terms have been
renegotiated to provide for a reduction of interest or principal
because of a deterioration in the financial position of the borrower.
The Corporation maintains an aggressive loan charge-off policy.
The Corporation's practice is to immediately charge to the allowance
for possible loan losses specifically identified credit losses. This
determination is made for each loan at the time of transfer to
nonperforming status, after giving consideration to collateral value
and the borrower's ability to repay the loan principal.
34
<PAGE>
<TABLE>
TABLE 5. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in thousands)
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
DUE IN DUE IN
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 TO 5 OVER 5 1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL OR LESS YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN MATURITIES:
Commercial and agricultural $ 74,903 $ 31,361 $ 4,290 $110,554 $ 74,113 $33,545 $ 6,496 $114,154
Real estate construction 19,669 6,435 5,039 31,143 13,956 8,634 2,201 24,791
Nonresidential real estate
mortgage 25,351 49,084 20,747 95,182 18,230 61,840 18,043 98,113
- ----------------------------------------------------------------------------------------------------------------------------------
Total $119,923 $ 86,880 $30,076 $236,879 $106,299 $104,019 $26,740 $237,058
==================================================================================================================================
Percent of Total 51% 37% 12% 100% 45% 44% 11% 100%
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST SENSITIVITY:
Above loans maturing after one
year which have:
Fixed interest rates $ 79,710 68% $ 82,630 63%
Variable interest rates 37,860 32 48,129 37
- ----------------------------------------------------------------------------------------------------------------------------------
Total $117,570 100% $130,759 100%
==================================================================================================================================
</TABLE>
Nonaccrual loans were $1.78 million as of December 31, 1997,
compared to $1.34 million as of December 31, 1996, and represented
.21% and .17% of total loans, as of December 31, 1997 and December 31,
1996, respectively. Accruing loans past due 90 days or more were $1.13
million as of December 31, 1997, compared to $.5 million as of
December 31, 1996. Total nonperforming loans were $3.05 million, or
.36% of total loans, as of December 31, 1997, compared to $1.88
million, or .23% of total loans, as of December 31, 1996.
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses ("provision") is the
amount added to the allowance for possible loan losses ("allowance")
on a monthly basis to absorb potential loan losses. The allowance is
maintained at a level considered by management to be adequate to
absorb potential future loan losses. This evaluation is based on a
continuous review of the loan portfolio, both individually and by
category, and includes consideration of changes in the type and volume
of the loan portfolio, actual loan loss experience, the present and
prospective financial condition of borrowers, industry and geographic
exposures within the portfolio, current and prospective economic
conditions, and special factors affecting specific business sectors.
This evaluation process is reviewed by the Corporation's centralized
independent loan review personnel, who monitor the credit quality of
the Corporation's loan portfolio using uniform procedures and
reporting systems.
The provision was $1 million in 1997, compared to $1.13 million
in 1996 and $1.07 million in 1995. The Corporation experienced net
loan losses of $.25 million in 1997, $.41 million in 1996 and $.47
million in 1995. The Corporation's
continued on page 36
<TABLE>
TABLE 6. SUMMARY OF NONPERFORMING LOANS (In thousands)
<CAPTION>
December 31
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis<F*> $1,783 $1,341 $1,658 $2,682 $2,318
Accruing loans contractually past due 90 days or
more as to interest or principal payments:
Commercial, agricultural and real estate construction 447 7 118 95 101
Real estate mortgage 557 271 747 182 441
Installment 121 261 104 91 99
- ------------------------------------------------------------------------------------------------------------------
1,125 539 969 368 641
Renegotiated loans 139 -- 84 148 311
- ------------------------------------------------------------------------------------------------------------------
Total $3,047 $1,880 $2,711 $3,198 $3,270
==================================================================================================================
<PAGE>
<FN>
<F*>The Corporation's policy is to transfer a loan to nonaccrual status whenever:
(1) it is determined that interest should be recorded on the cash basis
instead of the accrual basis because of a deterioration in the
financial position of the borrower,
(2) it is determined that payment in full of interest or principal
cannot be expected, or
(3) the loan has been in default for a period of 90 days or more unless
it is both well secured and in the process of collection (this
category excludes 1 to 4 family residential loans and consumer
installment loans).
</FN>
</TABLE>
35
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES - CONTINUED
<TABLE>
TABLE 7. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in thousands)
<CAPTION>
DECEMBER 31
1997 1996 1995 1994 1993
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TO TO TO TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agri-
cultural loans $ 4,975 13.1% $ 5,351 14.1% $ 5,510 15.5% $ 4,959 15.9% $ 5,609 20.4%
Real estate construc-
tion loans 623 3.7 496 3.1 324 2.1 385 2.5 300 1.9
Real estate mort-
gage loans 5,638 63.5 5,612 63.2 5,052 62.1 4,990 61.3 4,629 61.8
Installment loans 3,673 19.7 3,487 19.6 3,381 20.3 3,401 20.3 2,557 15.9
Not allocated 2,450 1,661 1,619 1,560 1,488
- ---------------------------------------------------------------------------------------------------------------------------------
Total $17,359 100% $116,607 100% $15,886 100% $15,295 100% $14,583 100%
=================================================================================================================================
</TABLE>
provision exceeded actual net loan losses by $.75 million in 1997,
$.72 million in 1996 and $.59 million in 1995. The Corporation's
allowance increased to $17.36 million as of December 31, 1997 and
represented 2.05% of total loans, compared to 2.06% at December 31,
1996 and 2.09% at December 31, 1995.
The allocation of the allowance in Table 7 is based upon ranges
of estimates and is not intended to imply either limitations on the
usage of the allowance or exactness of the specific amounts. The
entire allowance is available to absorb any future loan losses without
regard to the categories in which the loan losses are classified.
OTHER INCOME
Other income is derived primarily from trust services, deposit
account fees, fees for customer services and gains on the sale of
residential mortgage loans. Other income totaled $13.12 million in
1997, compared to $12.20 million in 1996 and $12.36 million in 1995.
Other income increased $.924 million, or 7.6%, in 1997 over the prior
year.
<PAGE>
The 1997 increase was primarily attributable to increases in
Trust Department income, increased gains from the sale of residential
mortgage loans in the secondary market, increases in other charges and
fees for customer services and a gain on the sale of a branch office
building.
Income from Trust Department activities increased $.313 million,
or 10.8%, in 1997. The 1997 increase reflects higher fee income
resulting from an expanded customer base, increases in custodial
accounts and increased asset values due to favorable market
performance.
Gains on the sale of residential mortgage loans were $.239
million in 1997, compared to $.137 million in 1996. The $.1 million,
or 74%, increase was due to the Corporation selling more residential
mortgage loans in the secondary market in 1997 than in 1996. During
1997, the Corporation sold $38.8 million of residential mortgage loans
in the secondary market, compared to $12.3 million in 1996.
Income from other charges and fees for customer services was
$3.522 million in 1997, compared to $2.707 million in 1996 and $2.635
million in 1995. The increase of $.815 million, or 30%, in 1997 was
primarily attributable to increased fee income generated from the sale
of annuity and mutual fund investment products, property and casualty
insurance and title insurance.
In March 1997, Chemical Bank Key State, a wholly owned subsidiary
of the Corporation, sold its branch banking office in Okemos. A gain
of $256,000 was recognized upon the sale of this building. The loans
and deposits of the banking office in Okemos were transferred to the
subsidiary's branch banking office in Lansing.
The slight reduction in other income in 1996, compared to 1995,
was due to decreases in revenue from data processing services and
gains on sales of loans. During 1996, data processing revenue declined
$.29 million. This decrease was attributable to an anticipated loss of
outside customers. Gains on the sales of loans were $.39 million lower
in 1996 than in 1995. During 1995, the Corporation sold its credit
card loan portfolio and recognized a gain of $.32 million.
36
<PAGE>
OPERATING EXPENSES
Total operating expenses were $45.72 million in 1997, $45.12
million in 1996 and $44.63 million in 1995. Total operating expenses
as a percentage of total average assets was 2.65% in 1997, 2.67% in
1996 and 2.70% in 1995 and can be reviewed in more detail and in
relation to the other components of net income in Table 1, on page 29.
The Corporation's efficiency ratio, defined as total operating
expenses divided by the sum of net interest income and other income,
excluding net securities gains, was 56% in 1997, compared to 57% in
1996 and 59% in 1995.
The Corporation continued in its efforts to control operating
expenses during 1997, resulting in total operating expenses increasing
only 1.3% over 1996 total operating expenses.
Salaries, wages and employee benefits remain the largest
component of operating expenses. These expenses totaled $27.28 million
in 1997, $26.96 million in 1996 and $25.70 million in 1995. Salaries,
wages and employee benefits expense increased $.32 million, or 1.2%,
in 1997. The Corporation was successful in maintaining 1997 personnel
costs at approximately 1996 levels by achieving a 3.1% reduction in
employee benefits cost, while salaries and wages increased 2.3%. Full-
time equivalent employees were 1007 at December 31, 1997, compared to
1000 at December 31, 1996. Salaries, wages and employee benefits
expense increased $1.26 million, or 4.9%, in 1996. Personnel expenses
accounted for 60% of operating expenses during 1997 and 1996 and 58%
in 1995.
Occupancy and equipment expense totaled $7.45 million in 1997,
$7.15 million in 1996 and $6.76 million in 1995. Occupancy and
equipment expense increased $.3 million, or 4.3%, in 1997 and $.39
million, or 5.7%, in 1996.
Other operating expenses totaled $10.99 million in 1997, $11.02
million in 1996 and $12.17 million in 1995. The reduction in other
operating expenses in 1997, compared to 1996, was attributable to 1996
expenses including costs associated with the acquisition of State
Savings Bancorp, Inc.
Federal Deposit Insurance Corporation (FDIC) expense is included
in other operating expenses, and was $.2 million in 1997, $.1 million
in 1996 and $1.6 million in 1995. In 1997, the Corporation paid the
minimum rate of $.01296 per $100 of deposits insured by the Bank
Insurance Fund and $.0644 per $100 of deposits insured by the Savings
Association Insurance Fund (SAIF).
The significant reduction in FDIC expense in 1996 represented the
effect of the Bank Insurance Fund legislative reform process, which
resulted in substantially lower premiums in 1995 and 1996. During
<PAGE>
1996, the FDIC charged banks that met the FDIC criteria of being
well-capitalized and well-managed the minimum allowable amount of $2,000
per bank, while deposits held by well-capitalized banks and insured by
the SAIF were assessed at a rate of 23.0 cents per $100 of insured
deposits. In addition, SAIF insured deposits held on March 31, 1995,
were assessed a one-time charge of 65.7 cents per $100 of deposits in
1996 to recapitalize SAIF to its required reserve ratio. The
Corporation's liability for this special assessment was approximately
$30,000.
INCOME TAXES
The Corporation's effective federal income tax rate was 32.6% in
1997, 33.4% in 1996 and 32.5% in 1995, compared to the statutory rate
of 35% in each of these years. The small changes in the Corporation's
effective federal income tax rate reflect the changes each year in the
proportion of interest income exempt from federal taxation, tax
credits, non-deductible interest expense and other non-deductible
expenses relative to pretax income.
Tax-exempt income (FTE), net of related non-deductible interest
expense, amounted to $3.9 million in both 1997 and 1996 and $4.0
million in 1995. Tax-exempt income (FTE) as a percentage of total
interest income (FTE) was 3.5%, 3.6% and 3.9% in 1997, 1996 and 1995,
respectively.
Income before income taxes (FTE) was $36.81 million in 1997,
$34.39 million in 1996 and $31.78 million in 1995.
LIQUIDITY AND INTEREST SENSITIVITY
The Corporation manages its liquidity to ensure that it has the
ability to meet the cash withdrawal needs of its depositors, provide
funds for borrowers and at the same time ensure that the Corporation's
own cash requirements are met. The Corporation accomplishes these
goals through the management of liquidity at two levels - the parent
company and the banking subsidiaries.
The parent company's sources of funds have been dividends from
subsidiaries, borrowings from unaffiliated banks and proceeds from
equity issuances. During the three-year period ended December 31,
1997, the parent company's primary source of funds was subsidiary
dividends. The parent company manages its liquidity position to
provide the cash necessary to pay dividends to shareholders, service
debt, invest in subsidiaries, enter new banking markets, pursue
investment opportunities and satisfy other operating requirements.
continued on page 38
37
<PAGE>
LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED
<TABLE>
TABLE 8. MATURITIES AND YIELDS<F*> OF INVESTMENT SECURITIES AT DECEMBER 31, 1997 (Dollars in thousands)
<CAPTION>
MATURING<F**>
AFTER ONE AFTER FIVE TOTAL TOTAL
WITHIN BUT WITHIN BUT WITHIN AFTER CARRYING MARKET
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and agencies $177,792 5.70% $294,430 6.02% $ 1,491 4.68% $ 993 6.0% $474,706 5.96% $474,706
Other securities 1,058 6.60 14,015 5.91 901 6.60 3,493 6.45% 19,467 6.28 19,467
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities
Available for Sale 178,850 5.71 308,445 6.01 2,392 5.39 4,486 6.34 494,173 5.97 494,173
HELD TO MATURITY:
U.S. Treasury and agencies 61,509 5.89 140,292 6.46 -- -- -- -- 201,801 6.32 203,495
States of the U.S. and
political subdivisions 10,715 7.10 21,745 7.86 12,092 8.13 2,155 8.33 46,707 7.77 47,438
Other securities -- -- 2,328 7.15 53 8.07 131 5.56 2,512 6.49 2,526
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities
Held to Maturity 72,224 6.07 164,365 6.65 12,145 8.13 2,286 8.17 251,020 6.59 253,459
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $251,074 5.81% $472,810 6.23% $14,537 7.68% $6,772 6.96% $745,193 6.18% $747,632
==================================================================================================================================
<FN>
<F*>Taxable equivalent basis using a 35% federal income tax rate.
<F**>Based on final contractual maturity.
</FN>
</TABLE>
<TABLE>
TABLE 9. MATURITY ANALYSIS OF INVESTMENT SECURITIES (as a % of total portfolio)
<CAPTION>
December 31
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
MATURITY:
Under 1 year 33.7% 35.1% 41.9%
1-5 years 63.4 61.4 56.1
5-10 years 2.0 2.6 1.4
Over 10 years .9 .9 .6
- --------------------------------------------------------------------
Total 100% 100% 100%
====================================================================
</TABLE>
<PAGE>
Federal and state banking laws place certain restrictions on the
amount of dividends that a bank may pay to its parent company. Such
restrictions have not had, and are not expected to have, any material
effect on the Corporation's ability to meet its cash obligations or
impede its ability to manage its liquidity needs. At January 1, 1998,
the Corporation's bank subsidiaries could upstream $73 million to the
parent company, without obtaining regulatory approval. In addition to
the funds available from subsidiaries, the parent company had $15.2
million in cash on hand as of December 31, 1997.
The subsidiary banks manage liquidity to insure adequate funds
are available to meet the cash flow needs of depositors and borrowers.
The subsidiary banks' most readily available sources of liquidity are
federal funds sold, investment securities classified as available for
sale and investment securities classified as held to maturity maturing
within one year. These sources of liquidity are supplemented by new
deposits and by loan payments received from customers. As of December
31, 1997, the Corporation held $50 million in federal funds sold, $494
million in investment securities available for sale and $72 million in
other investment securities maturing within one year. These short term
assets represented approximately 42% of total deposits as of December
31, 1997.
Historically, the Corporation's investment securities portfolio
has been very short-term in nature, with the average life of the
portfolio consistently being less than two years. As of December 31,
1997, 34% of the Corporation's investment securities portfolio, or
$251 million in investment securities, will mature during 1998, and
another $255 million in investment securities, or 34% of the
investment securities portfolio, will mature during 1999. The
combination of the 1998 and 1999 scheduled maturities results in 68%
of the Corporation's investment securities portfolio maturing within
two years of December 31, 1997. As of December 31, 1996, 64% of the
investment securities portfolio was scheduled to mature within two
years. The maturity analysis of the investment securities portfolio is
summarized in Tables 8 and 9.
38
<PAGE>
<TABLE>
TABLE 10. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE (Dollars in thousands)
<CAPTION>
December 31
1997 1996 1995
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MATURITY:
Within 3 months $62,482 71% $ 86,851 78% $83,386 84%
Within 3 to 6 months 12,371 14 14,893 13 4,865 5
Within 6 to 12 months 6,677 8 5,894 5 7,444 7
Over 12 months 6,550 7 3,760 4 3,807 4
- ------------------------------------------------------------------------------------
Total $88,080 100% $111,398 100% $99,502 100%
====================================================================================
</TABLE>
Table 10 presents the maturity distribution of time deposits of
$100,000 or more at the end of each of the last three years.
Historically, the Corporation has not utilized time deposits of
$100,000 or more as a source of liquidity. Time deposits of $100,000
or more and the percentage of these deposits to total deposits
decreased slightly during 1997 to $88.1 million, or 6% of total
deposits, as of December 31, 1997, compared to $111.4 million, or 7.8%
of total deposits, as of December 31, 1996 and $99.5 million, or 6.9%
of total deposits, as of December 31, 1995. The percentage of time
deposits of $100,000 or more with a maturity of less than three months
was 71% at December 31, 1997, 78% at December 31, 1996 and 84% at
December 31, 1995. As the Corporation does not utilize these deposits
as a source of liquidity, it is able to invest the funds generated
from these deposits in investments of similar maturity. The
Corporation has, and expects to continue to have, more than sufficient
funds to meet the liquidity requirement of these deposits.
The management of net interest income must address two
objectives. It must consider the liquidity needs of the Corporation
and interest rate risk. Interest rate risk arises in the normal course
of the Corporation's business due to differences in the repricing and
maturity characteristics of rate sensitive assets and liabilities.
Sensitivity of earnings to interest rate changes arises when yields on
assets change differently from the interest costs on liabilities.
Interest rate sensitivity is determined by the amount of
interest-earning assets and interest-bearing liabilities repricing
within a specific time period and the magnitude by which interest
rates change on the various types of earning assets and interest-
bearing liabilities. The management of interest rate sensitivity
<PAGE>
includes monitoring the maturities and repricing opportunities of
interest-earning assets and interest-bearing liabilities. Interest
rate sensitivity management aims at achieving reasonable stability in
both net interest income and the net interest margin through periods
of changing interest rates. The Corporation's goal is to avoid a
significant decrease in net interest income and thus an adverse impact
on the profitability of the Corporation in periods of changing
interest rates. It is necessary to analyze projections of net interest
income based upon the repricing characteristics of the Corporation's
earning assets and interest-bearing deposits and the varying magnitude
by which interest rates may change on loans, investments and interest-
bearing deposit accounts.
The Corporation's interest rate sensitivity is managed through
policies and risk limits approved by the Boards of Directors of the
Corporation and its' subsidiary banks, and an Asset and Liability
Committee (ALCO). The ALCO, which is comprised of executive and senior
management from various areas of the Corporation, including finance,
lending, investments and deposit gathering, meets regularly to execute
asset and liability management strategies. The ALCO establishes and
monitors guidelines on the sensitivity of earnings to changes in
interest rates. The goal of the ALCO process is to manage the balance
sheet to provide the maximum level of net interest income and minimal
impact on earnings from major interest rate changes, while maintaining
a high quality balance sheet and acceptable levels of interest rate
risk and liquidity risk. The Corporation has not used and does not
intend to use interest rate swaps or other derivative financial
instruments in the management of interest rate risk. The Corporation
held no derivative financial instruments as of December 31, 1997.
Management uses its ability to adjust interest rates on deposit
accounts to achieve an approximately neutral interest sensitivity
position within a one year time period.
Interest rate sensitivity is managed by a number of techniques,
as no single interest rate risk measurement tool satisfies both
objectives. The primary techniques utilized by the Corporation are
asset and liability repricing schedules, commonly referred to as
static gap analysis, and simulation analysis.
continued on page 40
39
<PAGE>
LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED
<TABLE>
TABLE 11. SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES BY REPRICING OR MATURITY DATE AT DECEMBER 31, 1997 (Dollars in
thousands)
<CAPTION>
1-180 181-365 OVER 1
DAYS DAYS YEAR TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $222,602 $ 68,812 $ 554,186 $ 845,600
Other interest-earning assets 181,897 118,927 494,119 794,943
- ------------------------------------------------------------------------------------------------------
Total interest-earning assets $404,499 $187,739 $1,048,305 $1,640,543
======================================================================================================
INTEREST-BEARING LIABILITIES:
Non-maturing deposits $130,799 $ 589,777 $ 720,576
Time deposits 295,500 $101,657 120,345 517,502
- ------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 426,299 101,657 710,122 1,238,078
Other interest-bearing liabilities 29,242 21,954 51,196
- ------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $455,541 $101,657 $ 732,076 $1,289,274
======================================================================================================
Gap $(51,042) $ 86,082 $ 316,229 $ 351,269
Cumulative gap $(51,042) $ 35,040 $ 351,269
Cumulative rate sensitive ratio 0.89 1.06 1.27
Cumulative gap as a percentage
of total earning assets (3.1)% 2.1% 21.4%
</TABLE>
Table 11 summarizes the Corporation's interest rate repricing
static gaps for selected maturity periods as of December 31, 1997.
Total interest-earning assets exceeded interest-bearing
liabilities by $351.3 million as of December 31, 1997. This difference
was funded through noninterest-bearing liabilities and shareholders'
equity. Table 11 shows that total assets maturing or repricing within
one year exceeded liabilities maturing or repricing within one year by
$35 million, or 2.1% of total earning assets, as of December 31, 1997.
The computation of static gap does not address the fact that the
repricing of certain categories of assets and liabilities are subject
to competitive and other influences that are beyond the control of the
Corporation. As a result, certain assets and liabilities mature or
reprice in periods other than in their contractual period. The
distribution of the Corporation's deposits with no contractual
maturity was based on historical analysis and management's current
assumptions as to the repricing of these funds. Accordingly, as of
<PAGE>
December 31, 1997, $589.8 million of deposits with no contractual
maturity ("non-maturing deposits") that are repriceable daily at the
Corporation's discretion, were included in the over 1 year repricing
category. These accounts are believed by management to be
predominately noninterest rate sensitive.
Table 11 illustrates that as of December 31, 1997, the
Corporation's cumulative rate sensitive ratio (rate sensitive assets
to rate sensitive liabilities) in the 1-180 day repricing category was
.89, and 1.06 in the cumulative one year (1-365 days) repricing
category. Although static gap sensitivity varies from time frame to
time frame, management's ability to adjust interest rates on deposit
accounts enables the Corporation to achieve reasonable stability in
net interest income through periods of changing interest rates. The
Corporation recognizes the limitations of static gap analysis as a
tool in managing interest rate risk and, therefore, utilizes other
methods, including simulation analysis.
Simulation analysis is used to project the potential effects of
various interest rate environments on the balance sheet mix and net
interest income. Simulation analysis involves the analysis of net
interest income, and the corresponding quantification of interest rate
risk that is attributable to changes in interest rate levels and
relationships, asset and liability mixes and loan prepayment
characteristics. While many assets and liabilities reprice either at
maturity or in accordance with their contractual terms, several
balance sheet components demonstrate characteristics that require an
evaluation to more accurately reflect their pricing behavior.
Assumptions based on historical pricing relationships, experience and
anticipated market reactions are applied to certain core deposit and
loan categories to reflect changes in interest rate costs and yields
relative to changes in market interest rates. Net interest income is
additionally evaluated under various interest rate scenarios,
including gradually adjusting interest rates up and down by 200 basis
points. The measurement of interest rate risk exposure on net interest
income at year-end 1997, projected over the succeeding twelve months,
indicated a nearly neutral interest rate sensitivity position.
40
<PAGE>
<TABLE>
TABLE 12. FINANCIAL INSTRUMENTS (Dollars in thousands)
<CAPTION>
OUTSTANDING
PRINCIPAL AMOUNT MATURING IN: DECEMBER 31, 1997
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans $257,753 $163,104 $125,034 $85,920 $41,762 $ 50,971 $724,544 $726,526
Average interest rate 8.23% 8.21% 8.14% 8.08% 7.79% 7.76% 8.11%
Variable interest rate loans $ 35,880 $ 17,109 $ 18,780 $38,116 $ 1,215 $ 9,956 $121,056 $121,056
Average interest rate 9.42% 9.43% 9.35% 9.39% 9.13% 8.80% 9.35%
Fixed interest rate securities $251,074 $254,917 $204,937 $ 8,445 $ 3,674 $ 22,146 $745,193 $747,632
Average interest rate 5.89% 6.05% 6.25% 7.80% 7.93% 7.56% 6.13%
Other interest-bearing assets $ 49,570 -- -- -- -- -- $ 49,750 $ 49,750
Average interest rate 5.49% -- -- -- -- -- 5.49%
RATE SENSITIVE LIABILITIES:
Noninterest-bearing deposits $ 9,511 $ 9,130 $ 8,765 $ 8,414 $ 8,078 $193,865 $237,763 $237,763
Average interest rate
Interest-bearing demand and
savings deposits $ 27,877 $ 26,761 $ 25,691 $24,663 $23,677 $568,244 $696,913 $696,913
Average interest rate 2.67% 2.67% 2.67% 2.67% 2.67% 2.67% 2.67%
Time deposits $388,283 $106,292 $ 36,375 $10,215 -- -- $541,165 $540,745
Average interest rate 5.28% 5.59% 5.75% 5.78% -- -- 5.38%
Fixed interest rate borrowings $ 12,954 -- -- -- -- -- $ 12,954 $ 12,954
Average interest rate 2.66% -- -- -- -- -- 2.66%
Variable interest rate
borrowings $ 29,242 -- -- -- $ 5,000 $ 4,000 $ 38,242 $ 38,242
Average interest rate 4.68% -- -- -- 6.12% 6.16% 5.02%
</TABLE>
Table 12 provides additional information about the Corporation's
financial instruments used for purposes other than trading that are
sensitive to changes in interest rates. For loans, securities,
deposits, and borrowings with contractual maturities, the table
presents principal cash flows and related weighted average interest
rates by contractual maturities, as well as the Corporation's
historical experience of the impact of interest rate fluctuations on
the prepayment of residential mortgage loans. For interest and
noninterest-bearing demand and savings deposits that have no
contractual maturity, the table presents estimated principal cash
flows based on the Corporation's historical experience and
management's judgement, as applicable, concerning customers' most
likely withdrawal behaviors, and weighted average interest rates as of
December 31, 1997. The fair market value of loans was estimated using
discounted cash flow analysis, using interest rates currently being
<PAGE>
offered for loans with similar terms to borrowers of similar credit
quality. Weighted average variable rates on loans were based on the
implied forward rates in the yield curve at December 31, 1997.
Table 12 excludes loan commitments, which are considered
financial instruments. A discussion of the Corporation's loan
commitments is included herein in Note K to the financial statements.
CAPITAL
Capital provides the foundation for future growth and expansion.
The major component of capital is shareholders' equity.
Shareholders' equity was $223.93 million as of December 31, 1997,
an increase of $16.66 million, or 8%, from total shareholders' equity
as of December 31, 1996. The increase in 1997 was derived almost
exclusively from earnings retention of $14.9 million.
The ratio of shareholders' equity to total assets was 12.7% at
December 31, 1997, compared to 12.2% at December 31, 1996 and 11.4% at
December 31, 1995. The Corporation's tangible equity ratio was 12.5%,
12.0% and 11.2% as of December 31, 1997, December 31, 1996 and
December 31, 1995, respectively.
Under the regulatory "risk-based" capital guidelines in effect
for both banks and bank holding companies, minimum capital levels are
based upon perceived risk in the Corporation's various asset
categories. These guidelines assign risk weights to on-and-off balance
sheet items in arriving at total risk-adjusted assets. Regulatory
capital is divided by the computed total of risk-adjusted assets to
arrive at the risk-based capital ratios.
continued on page 42
41
<PAGE>
CAPITAL - CONTINUED
The Corporation's capital ratios exceeded the minimum levels
prescribed by the Federal Reserve Board, as of December 31, 1997, as
shown in the following table.
<TABLE>
<CAPTION>
RISK BASED
CAPITAL RATIOS
LEVERAGE TIER 1 TOTAL
- --------------------------------------------------------------
<S> <C> <C> <C>
Chemical Financial
Corporation's capital ratios 13% 31% 32%
Regulatory capital ratios
"well capitalized" definition 5 6 10
Regulatory capital ratios
minimum requirements 3 4 8
</TABLE>
The Corporation's tier 1 and total regulatory capital ratios are
significantly above the regulatory minimum and "well capitalized"
levels due to the Corporation holding $662 million of investment
securities and other assets, which are assigned a 0% risk rating, $223
million of investment securities and other assets, which are assigned
a 20% risk rating, and $449 million of loans secured by first liens on
residential real estate properties, which are assigned a 50% risk
rating. These three categories of assets represented 76% of the
Corporation's total assets as of December 31, 1997.
As of December 31, 1997, all of the Corporation's banking
subsidiaries exceeded the minimum capital ratios required of a
"well-capitalized" institution, as defined in the final rule under the
Federal Deposit Insurance Corporation Improvement Act of 1991.
OUTLOOK
The Corporation's philosophy is that it intends to be a "family"
of community banks, which operates under the direction of local Boards
of Directors, a holding company management team and a Corporate Board
of Directors.
The Corporation strives to remain a quality sales and service
organization and is dedicated to sustained profitability through the
preservation of the community banking concept, in an ever changing and
increasingly competitive environment.
<PAGE>
The Corporation has designed its policies regarding
asset/liability management, liquidity, lending, investment strategy
and expense control to provide for the safety and soundness of the
organization, continued earnings growth and the avoidance of wide
fluctuations in earnings from one year to the next. The Corporation
continues to successfully manage its operations, and thus offset its
lower than peer net interest margin, which results from its
conservative lending and investment policies, with lower than peer
loan losses and operating expenses. This strategy resulted in an
increase in earnings per share of 8.3% and a return on assets of 1.38%
during 1997.
The banking industry is affected by the overall level of
inflation, primarily by the impact inflation has on the overall level
and trend of interest rates and the growth of operating expenses. It
is necessary for the Corporation to position itself so that changes in
the overall level and trend of interest rates, both on a short-term
and long-term basis, do not significantly adversely impact net
interest income. It is also necessary for the Corporation to
continually monitor the growth of operating expenses and maintain an
appropriate ratio of equity to assets.
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 financial performance.
OTHER MATTERS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). The Corporation adopted SFAS 130 on
January 1, 1998. SFAS 130 established standards for the reporting of
comprehensive income and its components. Comprehensive income includes
net income and certain adjustments to equity required under generally
accepted accounting principles which result from transactions other
than with shareholders. It is the Corporation's current intention to
display comprehensive income as a component in the statement of
changes in shareholders' equity.
The Corporation is currently in the process of addressing an
issue that is facing all users of automated information systems. The
issue is that many computer systems that process transactions based on
two digits representing the year of the transaction may recognize a
date using "00" as the year 1900 rather than the Year 2000. The
inability to correctly recognize "00" as the Year 2000 could affect a
wide variety of automated information systems, such as mainframe
applications, personal computers and communication systems, in the
form of software failure, errors or miscalculations.
42
<PAGE>
The Corporation began developing its plan to prepare for the Year
2000 in 1996. This plan began with the performance of an inventory of
software applications, communicating with third party vendors and
suppliers, and obtaining certifications of compliance from third party
providers. During the early planning process, the Corporation was
notified by the vendor of its core operating system that the core
operating system used by the Corporation was not Year 2000 Compliant
and that it would not be modified to become Year 2000 Compliant. The
Corporation performed an extensive evaluation of replacement operating
systems and in July 1997 chose to convert its core operating system to
a new system offered by its existing vendor. The vendor of the core
operating system has certified to the Corporation that its system is
Year 2000 Compliant. The Corporation is scheduled to convert to the
new operating system during the first quarter of 1998. The
Corporation's conversion to the new core operating system is
anticipated to enhance customer service and operating efficiencies.
The cost of converting to the new operating system is approximately
$300,000. In conjunction with the conversion to the new operating
system, the Corporation purchased a new mainframe computer in 1997 at
a cost of approximately $1 million, which was capitalized. The
existing mainframe computer and core operating system software were
fully depreciated prior to 1997.
The Corporation will continue to assess the impact of the Year
2000 issue on the remainder of its computer-based systems and
applications throughout 1998. The Corporation's goal is to perform
tests of its systems and applications during 1998 and to have all
systems and applications compliant with the century change by
December 31, 1998.
In addition to reviewing its own computer operating systems and
applications, the Corporation has initiated formal communications with
its significant suppliers and large customers to determine the extent
to which the Corporation's interface systems are vulnerable to those
third parties' failures to resolve their own Year 2000 issues. The
Corporation is continuing to seek assurances that the systems of other
companies on which the Corporation's systems rely will be timely
converted or modified. If such modifications and conversions are not
completed timely, their inability to correctly recognize the Year 2000
could have an adverse impact on the operations of the Corporation.
The Corporation believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems and
that additional costs to be incurred are not expected to be material
to the Corporation's results of operations, liquidity or capital
resources.
<PAGE>
The costs of the project and the date on which the Corporation
projects it will complete the Year 2000 modifications were based on
management's best estimates. There can be no guarantee that these
estimates will be achieved and actual results could differ from those
anticipated. Specific factors that might cause differences include,
but are not limited to, the ability of other companies on which the
Corporation's systems rely to modify or convert their systems to be
Year 2000 Compliant, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
This discussion and analysis of financial condition and results
of operations, and other sections of this annual report, contain
forward-looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation
itself. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"projects," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements
are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to
predict with regard to timing, extent, likelihood and degree of
occurrence. Therefore, actual results and outcomes may materially
differ from what may be expressed or forecasted in such forward-
looking statements. Furthermore, the Corporation undertakes no
obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events or otherwise.
Future Factors include changes in interest rates and interest
rate relationships; demand for products and services; the degree of
competition by traditional and non-traditional competitors; changes in
banking regulations; changes in tax laws; changes in prices, levies
and assessments; the impact of technological advances; governmental
and regulatory policy changes; the outcomes of pending and future
litigation and contingencies; trends in customer behavior as well as
their ability to repay loans; and changes in the national economy.
These are representative of the Future Factors that could cause a
difference between an ultimate actual outcome and a preceding forward-
looking statement.
43
<PAGE>
DIRECTORS AND OFFICERS OF AFFILIATES
CHEMICAL BANK AND TRUST COMPANY
DIRECTORS
STUART J. BERGSTEIN
President
Community Drug Stores, Inc.
LAWRENCE E. BURKS
Vice Chairman
JAMES A. CURRIE
Educator
DALE T. DEAN
President, 4-D Builders Supply,
Inc.
MICHAEL L. DOW
Chairman, General Aviation, Inc.
DR. DAVID E. FRY
President, Northwood University
RICHARD A. HAZLETON
Chairman and Chief Executive
Officer, Dow Corning Corporation
JAMES R. JENKINS
Vice President, Secretary and
General Counsel, Dow Corning
Corporation
TERENCE F. MOORE
President, MidMichigan Health
MARY M. NEELY
Community Volunteer
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
ALAN W. OTT
Chairman
FRANK P. POPOFF
Chairman
The Dow Chemical Company
<PAGE>
DAVID B. RAMAKER
President and CEO
LAWRENCE A. REED
Retired, Dow Corning Corporation
GARY S. SMITH, M.D.
Midland Family Physicians, P.C.
WILLIAM S. STAVROPOULOS
President and Chief Executive
Officer
The Dow Chemical Company
DIRK D. WALTZ
Dirk Waltz Buick-Olds-Jeep, Inc.
LAWRENCE J. WASHINGTON, JR.
Vice President, Human Resources
Chemicals and Plastics
The Dow Chemical Company
HONORARY DIRECTOR
DIRK B. WALTZ
Retired
Dirk Waltz Buick-Olds-Jeep, Inc.
ST. LOUIS OFFICE
ADVISORY BOARD
LAWRENCE E. BURKS
Vice Chairman
DANIEL L. DOEPKER
President, Mid-West Building
Distributors, Inc.
DOUGLAS F. McKIM
Chairman
Lodewyk, Nesen & McKim, Inc.
DUANE OXENDALE
Retired
Michigan Livestock Exchange
DAVID B. RAMAKER
President and CEO
WILLIAM C. THIEMKEY, D.O.
Physician
<PAGE>
BRADLY E. VIBBER
Senior Vice President and
Manager
JAMES F. WAGAR
Vice Chairman, Playbuoy Pontoon
Manufacturing, Inc.
OFFICERS
ALAN W. OTT
Chairman
LAWRENCE E. BURKS
Vice Chairman
DAVID B. RAMAKER
President and CEO
THOMAS J. ALEXANDER
Executive Vice President and
Cashier
BRUCE M. GROOM
Senior Vice President
and Senior Trust Officer
CHARLES F. KINNEY
Senior Vice President
WILLIAM C. LAUDERBACH
Senior Vice President and
Investment Officer
W. ROGER MIKUSEK
Senior Vice President
LARRY M. NOBLE
Senior Vice President
JUDE T. PATNAUDE
Senior Vice President and
Trust Officer
GLENN W. PIETENPOL
Senior Vice President and
Trust Officer
BRADLY E. VIBBER
Senior Vice President
<PAGE>
VICE PRESIDENTS
JOANN M. BURGESS
ROBERT W. BURNS
KIMBERLEE R. BUTCHER
ALAN C. CHRISTENSEN
LAWRENCE LaGROW
JANET M. McGUIRE
ROGER D. NEMETH
DARLENE R. SLATER
VICE PRESIDENTS AND
TRUST OFFICERS
KIRK W. FISHER
DANIEL P. McKUNE
GUY D. MERRIAM
PATRICIA ZIMMERMAN
CONTROLLER
GRETCHEN L. RODAMMER
ASSISTANT VICE PRESIDENTS
CARL R. AHEARN
COREY BAILEY
RUTH BOMAN
ROBERT O. BURGESS, JR.
G. THOMAS CIMBALIK
MARY G. GREEN
SHERRY A. MIZER
SELENA NOBLE
ROBERT S. RATHBUN
MONICA A. SANGER
VICTOR L. SCHULTZ
RONALD D. SCHWEIGERT
BARBARA E. SLAGEL
PEGGY L. TUCKER
TINA A. WALLACE
ROBERT J. WALTERS
CAROL WIERMAN
SHERYL K. WILLIG
ASSISTANT VICE PRESIDENTS
AND TRUST OFFICERS
HERBERT E. HARDY
NORMA KENDALL
TRUST OFFICERS
SHELLY L. CAUFIELD
RUDOLPH R. RADOSA, JR.
MARK SOVEREEN
PICCOLA SWEEBE
<PAGE>
ASSISTANT TRUST OFFICERS
JAN E. GORDON
DEBORA RITTENBURG
AUDITOR
AUDREY J. GRIFFIN
ASSISTANT CASHIERS
BETH E. BRICK
PAMELA J. CARRIER
REGINA CURTIS
SHERON DEIBERT
STEPHEN HALLEAD
CHERYL K. MEYERS
PATRICIA A. NELLIS
MARK J. STEINKE
TAMARA J. SWINSON
MARLENE TETU
SANDRA TURK
KEITH A. WENZEL
BESSIE T. WILLIAMS
SHARON YODER
BUILDING AND MAINTENANCE OFFICER
CHESTER CANTRELL
CHEMICAL FINANCIAL
INSURANCE AGENCY
VICE PRESIDENT
TRICIA LYN SUHR
CFC TITLE SERVICES INC.
VICE PRESIDENT
CHARLOTTE A. ELMORE
CFC DATA CORP
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President and
Cashier
Chemical Bank and Trust Co.
STUART J. BERGSTEIN
President
Community Drug Stores, Inc.
<PAGE>
JAMES R. JENKINS
Vice President,
Secretary and General Counsel
Dow Corning Corporation
DOMINIC MONASTIERE
President and CEO
Chemical Bank Bay Area
TERENCE F. MOORE
President, MidMichigan Health
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
THOMAS H. PETERSEN
Executive Vice President and
General Manager
44
<PAGE>
CFC DATA CORP
- - CONTINUED
OFFICERS
ALOYSIUS J. OLIVER
President and Treasurer
THOMAS H. PETERSEN
Executive Vice President and
General Manager
W. BRIAN BEALL
Systems Manager
LORI A. GWIZDALA
Secretary
CHEMICAL BANK BAY AREA
DIRECTORS
GARY E. ANDERSON
President
Dow Corning Corporation
LAWRENCE E. BURKS
Vice Chairman
Chemical Bank and Trust Co.
JAMES E. DANEK
Executive Vice President
LORI A. GWIZDALA
Senior Vice President, Chief
Financial Officer and Treasurer
Chemical Financial Corporation
THERON P. HOLLAND
Retired
DOMINIC MONASTIERE
President and CEO
DONALD L. PIETZ
President, PICO, Inc.
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
DAVID S. RAMSAY
Lee/Ramsay Funeral Home
<PAGE>
ROBERT D. SAROW
Attorney at Law, Learman,
Peters, Sarow & McQuillan
GARY D. STEADMAN
President, Gary D. Steadman,
Inc.
THOMAS H. TABOR
President, Herman Hiss & Co.
DONALD L. WILTSE
Wiltse Chevrolet,
Oldsmobile, Buick, Inc.
AU GRES ADVISORY BOARD
HOWARD M. BARRIGER
Teacher
Standish Sterling High School
President, Barriger Builders
RONALD E. CHRISTIE
Retired
JAMES E. DANEK
Executive Vice President
KARL N. EDMONDS
AuGres Parts & Service
GERALD H. HEINRICH
Retired
THERON P. HOLLAND
Retired
OTIS L. McKINLEY, D.D.S.
DOMINIC MONASTIERE
President and CEO
DAVID S. RAMSAY
Lee/Ramsay Funeral Home
DONALD L. WILTSE
Wiltse Chevrolet,
Oldsmobile, Buick, Inc.
OFFICERS
LAWRENCE E. BURKS
Chairman
<PAGE>
DOMINIC MONASTIERE
President and CEO
JAMES E. DANEK
Executive Vice President
RODNEY R. LOOMIS
Senior Vice President
VICE PRESIDENT AND CASHIER
JANIE L. WILLIAMSON
VICE PRESIDENTS
CRAIG A. BISHOP
TARI E. DETZLER
DUANA R. Mc CULLOCH
GALE L. MIELENS
MARY JO TOPORSKI
THOMAS R. WILCOX
ASSISTANT VICE PRESIDENTS
LYNN M. HANSEN
R. JAMES MERRILL
SANDRA A. METZGER
DEBORAH K. MORGAN
SUZANNE E. NEERING
AUDITOR
DEBBIE L. DEWALD
ASSISTANT CASHIERS
CHARLOTTE L. ANSPAUGH
HOLLY J. BICKHAM
RONALD D. ERNDT
MARIA FRANEK
JUDITH A. MARCINIAK
KATHLEEN C. MARQUARDT
JEAN M. SAXON
KAREN M. SCHAFFER
WILLIAM R. TILLEN
CHEMICAL BANK SOUTH
DIRECTORS
JUDITH A. BOROWITZ
President and CEO
RONALD J. DeGRAW
Attorney, Schroeder, DeGraw,
Kendall, Mayhall, DeGraw &
Dickerson
<PAGE>
ROBERT W. FRAHM
President, Bob Frahm Chevrolet-
Buick-Pontiac Company
EUGENE D. HAMAKER
Retired/Consultant, Metalab
DENNIS J. LaFLEUR
President and CEO
Chemical Bank Michigan
WILLIAM C. LAUDERBACH
Senior Vice President and
Investment Officer
Chemical Bank and Trust Co.
PETER T. MITCHELL
President, Albion College
ARLIN E. NESS
President
Starr Commonwealth Schools
JOYCE J. SPICER
Administrative Assistant, Albion
Division, Harvard Industries, Inc.
WILLIAM K. STOFFER
Chairman and
Chief Executive Officer
Albion Machine and Tool Co.
JEOFFREY A. THORREZ
President
Concord Manufacturing Co.
JACK H. TOWNSEND
Chairman and
Chief Executive Officer
Michigan Kitchen Distributors
DR. MELVIN L. VULGAMORE
Chancellor
Albion College
OFFICERS
EUGENE D. HAMAKER
Chairman
JUDITH A. BOROWITZ
President and CEO
<PAGE>
CAROL R. HAYDEN
Vice President and Cashier
TERI E. FOGEL
Vice President
MARVIN N. ITTNER
Vice President
REBECCA L. VETTEL
Vice President
ASSISTANT VICE PRESIDENT
DIANE M. RAMIREZ
AUDITOR
ELIZABETH A. WONUS
ASSISTANT CASHIERS
MELISSA J. HOATH
BARBARA A. KEITH
DAVID A. SMITH
CHEMICAL BANK
MONTCALM
DIRECTORS
LAWRENCE E. BURKS
Vice Chairman
Chemical Bank and Trust Co.
DONALD BURNS
President
Montcalm Community College
GARY COPP
Secretary/Manager
Carson City Lumber Co.
C. NORMAN CROOKS
Farmer
THOMAS W. KOHN
President and CEO
CHARLES E. MILLER, JR.
Insurance
Miller-Gamwell Agency
<PAGE>
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
MELVIN SCHNEPP
Retired
Schnepp Funeral Homes, Inc.
OFFICERS
LAWRENCE E. BURKS
Chairman
THOMAS W. KOHN
President and CEO
GLENN L. WOOD
Senior Vice President
LLOYD D. SCOBY
Senior Vice President
DARLA BARTLETT
Cashier
VICE PRESIDENTS
DAVID BARKER
DIANE BEACH
BRUCE COLE
ROBERT HILL
JEAN SOUTHWARD
45
<PAGE>
CHEMICAL BANK
MONTCALM - CONTINUED
ASSISTANT VICE PRESIDENTS
KAY MEISTER
DONNA STRATTON
AUDITOR
KIMBERLY SIBURT
ASSISTANT CASHIERS
AMY S. ANDERSEN
CONNIE COLLAR
TAMALA HARRINGTON
DORIS RASMUSSEN
LINDA TUCKER
KAREN YAW
CHEMICAL BANK CENTRAL
DIRECTORS
JACK R. BENEDICT
President
The Benedict Manufacturing Co.
BRUCE M. GROOM
Senior Vice President and
Senior Trust Officer
Chemical Bank and Trust Co.
KARL W. LINEBAUGH
President and CEO
RONALD MOHNKE
President
Mohnke Funeral Home, Inc.
LINDA L.H. MYERS
Assistant Superintendent
Mecosta-Osceola Intermediate
School District
WILLIAM R. PRUITT
Pruitt-Livingston Funeral Home
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
CARL M. SCHUBERG
Auctioneer-Farmer
<PAGE>
FRANKLIN C. WHEATLAKE
Chairman, Wheatlake Enterprises
JOSEPH M. WOLSCHLEGER, M.D.
Internal Medicine
OFFICERS
DAVID B. RAMAKER
Chairman
KARL W. LINEBAUGH
President and CEO
PHILIP R. KEATING
Executive Vice President
MARY WITHERS
Vice President and Cashier
ASSISTANT VICE PRESIDENTS
JAMES GARRETT
DAVID J. LANGWORTHY
JEAN A. MISENAR
MARJORIE A. RICHARDS
AUDITOR
ROBERT D. GAMMONS
ASSISTANT CASHIERS
KENDA DIESON
JANET ROWLAND
KELLIE J. SHANKEL
CRA OFFICER
MARY K. SUCKOW
CHEMICAL BANK MICHIGAN
DIRECTORS
ROBERT H. BEACOM
Retired, Chemical Bank
Michigan
JOHN M. BICKNELL
Retired Retailer
DONALD D. CLARKE
Crop Farmer
VINCENT L. DEMASI
Owner, Clare Hardware
<PAGE>
RICHARD DEAN DOHERTY
A.J. Doherty Motor Inns, Inc.
WAYNE FRUCHEY
Retired, Fruchey Foods, Inc.
JOSEPH F. JOHNSTON
Retired, Johnston Elevator
CHARLES F. KINNEY
Senior Vice President
Chemical Bank and Trust Co.
DENNIS J. LAFLEUR
President and CEO
CLAY MAXWELL
Maxwell Seed Farms
RICHARD M. MOSER
Owner, Woods Household
Furniture & Appliances
BETTY M. MUSSELL
Community Volunteer
JOSEPH F. MYERS
Myers for Tires
WILLIAM C. ODYKIRK
Ody Enterprises
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
GUERDON E. SCHUMACHER
Retired
ALBERT F. WENTWORTH
Dairy Farmer
OFFICERS
ALOYSIUS J. OLIVER
Chairman
DENNIS J. LAFLEUR
President and CEO
<PAGE>
SENIOR VICE PRESIDENTS
JAMES A. ALLEN
RODERICK F. BEAMISH
RONNIE L. POWELL
MARK D. RUHLE
VICE PRESIDENT AND CASHIER
DAVID P. VERMILYE
VICE PRESIDENTS
JANET GILLARD
STEVEN J. KINGSBURY
TAMMY L. MILLER
COMPTROLLER
BRENDA J. HAVENS
ASSISTANT VICE PRESIDENTS
CHARLES AMBLE
ROBIN R. GROVE
LINDA C. HALL
DAVID T. PRAWDZIK
SUSAN D. SPEARY
LORI STOUT
STANLEY L. WARNER
AUDITOR
HILDA E. FLETCHER
ASSISTANT CASHIERS
THEOLA CLEVELAND
STEPHANIE COOPER
ELAINE DUNKLE
JUDITH A. GROVE
CHRISTINE J. LAWSON
TINA M. LEHMANN
VERA MARSHALL
SUE E. WHITE
CHEMICAL BANK NORTH
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President and
Cashier
Chemical Bank and Trust Co.
WILLIAM L. CAREY
Attorney at Law
<PAGE>
JERRY M. DeWITT
Owner, Fox Run Country Club
ROSE E. DULEY GLEASON
Retired, Crawford County Library
RICHARD D. HACKER
Owner
Hacker's Yamaha & Honda
ROBERT JANSEN
Owner
Jansen Plumbing & Heating
PAUL B. LERG
Assistant Superintendent
Crawford AuSable Schools
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
G. JOE SWAIN
President and CEO
JERRY WALKER
Vice President, Jack Millikin,
Inc.
OFFICERS
DAVID B. RAMAKER
Chairman
G. JOE SWAIN
President and CEO
MARK W. FURST
Vice President
RANDALL A. SEYMOUR
Vice President
J. ELAINE SWEENEY
Vice President and Cashier
ASSISTANT VICE PRESIDENTS
TAMARA L. KENT
SHARON NIEBRZYDOWSKI
SHELBY J. NORMAN
JANE A. RANDALL
ANDREA M. WEISS
<PAGE>
AUDITOR
CAROL D. WHITE
ASSISTANT CASHIERS
JAY T. DUKE
SANDRA L. EGBERS
SHARON A. VARISCO
46
<PAGE>
CHEMICAL BANK WEST
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President
and Cashier, Chemical Bank
and Trust Co.
RONALD L. BLACKMAN
President
Blackman Iron & Metal, Inc.
NANCY BOWMAN
C.P.A.
HAROLD CNOSSEN
Prosperous Farms
WAYNE EVERETT
Everett Office Plus
JAMES B. HINKAMP, II
Executive Vice President
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
JOHN A. REISNER
President and CEO
OFFICERS
DAVID B. RAMAKER
Chairman
JOHN A. REISNER
President and CEO
JAMES B. HINKAMP, II
Executive Vice President
KRISTINE E. BOWEN
Vice President
BARBARA HANCOCK
Assistant Vice President
and Cashier
<PAGE>
ASSISTANT VICE PRESIDENTS
ROXANNE PRINCE
SUSAN SCHWAGER
AGRICULTURE REPRESENTATIVE
THOMAS WINKEL
AUDITOR
SUSAN PARSONS
ASSISTANT CASHIERS
DELLA BEDNARICK
DARYL HESSELINK
LORIE MORIARTY
JUDY MULDER
MARY JO SHIVLIE
CHEMICAL BANK KEY STATE
DIRECTORS
DAVID ELOW
Retired Industrialist
MARGARET S. GULICK
President and Chief Executive
Officer, Memorial Healthcare
Center
JOHN F. HARRISON
President and CEO
WILLIAM P. HOWE
President
Mid-Michigan Construction
MICHAEL G. MAJZEL, JR.
Self-Employed Crop Farmer
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
HERBERT F. PENHORWOOD
Retired Industrialist
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
<PAGE>
HOWARD S. SHAND
President, William E. Walter,
Inc.
PHILIP R. WELCH
President
Michigan Lake Products, Inc.
OFFICERS
DAVID ELOW
Chairman
JOHN F. HARRISON
President and CEO
ROBERT L. HARDY
Senior Vice President
VICE PRESIDENTS
LORI L. EDINGTON
ARTHUR C. ELBRACHT
JOHN H. LARZELERE
ASSISTANT VICE PRESIDENTS
P. JOSEPH DALY
DONALD D. LEVI
ASSISTANT VICE PRESIDENT
AND CASHIER
NITA L. JONES
ASSISTANT VICE PRESIDENT
AND CONTROLLER
DONNA S. McAVOY
ASSISTANT CASHIERS
BARBARA M. BUCSI
JAMES R. FARHAT
MICHELLE M. HOLDEN
RANDY L. HORTON
JAMES D. JONES
SUSAN K. LYNDE
JANA L. MOORE
CAROL A. ROWELL
LINDA K. SOVIS
<PAGE>
CHEMICAL BANK THUMB AREA
DIRECTORS
RICHARD C. BIDDINGER
Owner, Riverside Sales and
Engineering Corp.
GARY J. CREWS
Attorney, Ransford and Crews
LORI A. GWIZDALA
Senior Vice President, Chief
Financial Officer and Treasurer,
Chemical Financial Corporation
DOUGLAS H. HERRINGSHAW
President
CARL O. HOLMES
Chairman and CEO
MARVIN J. KOCIBA
Farm Owner and Operator
MICHAEL LAETHEM
President
Laethem Equipment Company
Laethem Farm Service Company
KENNETH G. McLAREN
Retired Insurance Agency Owner
ALAN W. OTT
Chairman
Chemical Financial Corporation
GERALDINE F. PRIESKORN
Vice President
Prieskorn Variety Stores, Inc.
RICHARD B. RANSFORD
President
Ransford Funeral Home, Inc.
CASS CITY/HARBOR BEACH/
BAD AXE ADVISORY BOARD
DUANE W. CHIPPI
President
Cass City Oil & Gas Company
<PAGE>
RICHARD T. DONAHUE
Farm Owner
DOUGLAS H. HERRINGSHAW
President
CARL O. HOLMES
Chairman and CEO
WILLIAM L. KRITZMAN
President and Treasurer
Kritzman's, Inc.
MARVIN J. KOCIBA
Farm Owner and Operator
GERALDINE F. PRIESKORN
Vice President
Prieskorn Variety Stores, Inc.
PATRICIA J. ROGGENBUCK
Secretary, Helena Valley Farms
GLEN H. TOWNLEY
Owner
Harbor Beach Insurance Agency
K. MICHAEL WEAVER
Owner, Coachlight Pharmacy
ROBERT V. WISCHMEYER
Plant Manager
Agri Sales, Inc. (Cass City)
OFFICERS
CARL O. HOLMES
Chairman and CEO
DOUGLAS H. HERRINGSHAW
President
JAMES E. BOLTON
Senior Vice President
DENNIS P. GILKEY
Senior Vice President
ROBERT M. WOLAK
Senior Vice President
<PAGE>
VICE PRESIDENT AND CASHIER
CHARLES L. BROWN
VICE PRESIDENTS
FELICIA M. CARR
WILLIAM L. CHASE
BEVERLY J. PERRY
ASSISTANT VICE PRESIDENTS
LYNN C. PAVLICHEK
LINDA K. SMITH
CHERYL D. WILDER
CAROLYN M. WYMORE
AUDITOR
ROSE M. STRUNZ
ASSISTANT CASHIERS
ORVIL A. BEECHER
BETTE M. BURTON
ANNE M. FOLEY
SUSAN M. MILLER
MARSHA K. MOORE
SHERRYL M. SEELEY
JANET D. THANE
KAREN L. WOOD
EXECUTIVE SECRETARY
MONALEE McCREA
47
<PAGE>
CORPORATE DIRECTORS AND OFFICERS
[PICTURE OF JAMES A. CURRIE]
[PICTURE OF MICHAEL L. DOW]
[PICTURE OF ALOYSIUS J. OLIVER]
[PICTURE OF ALAN W. OTT]
[PICTURE OF FRANK P. POPOFF]
[PICTURE OF LAWRENCE A. REED]
[PICTURE OF WILLIAM S. STAVROPOULOS]
BOARD OF DIRECTORS
JAMES A. CURRIE
Educator
MICHAEL L. DOW
Chairman
General Aviation, Inc.
ALOYSIUS J. OLIVER
President
and Chief Executive Officer
ALAN W. OTT
Chairman
FRANK P. POPOFF
Chairman
The Dow Chemical Company
LAWRENCE A. REED
Retired
Dow Corning Corporation
WILLIAM S. STAVROPOULOS
President
and Chief Executive Officer
The Dow Chemical Company
[PICTURE OF EXECUTIVE MANAGEMENT (from left to right): LORI A. GWIZDALA,
ALOYSIUS J. OLIVER, AND DAVID B. RAMAKER]
EXECUTIVE OFFICERS
ALAN W. OTT
Chairman
ALOYSIUS J. OLIVER
President and Chief Executive
Officer
<PAGE>
DAVID B. RAMAKER
Executive Vice President
and Secretary
LORI A. GWIZDALA
Senior Vice President,
Chief Financial Officer
and Treasurer
CORPORATE OFFICES
333 East Main Street
P.O. Box 569
Midland, Michigan 48640
Telephone: (517) 839-5350
Fax Number: (517) 839-5255
OFFICERS
GLENN SWEENEY
Vice President
and Corporate Auditor
THOMAS R. GAPSKE
Vice President
THEODORE J. GROENING
Assistant Vice President and
Assistant Financial Officer
JOSEPH W. TORRENCE
Assistant Vice President and
Corporate Human Resources
Officer
SANDRA BARGERON
Assistant Vice President
and Auditor
ROBERT E. SUTTON
Corporate Loan Review
and Compliance Officer
JONATHAN P. BUSHEY
Loan Review Officer
CHERYL HASSEN SWARTHOUT
Training Officer
48
<PAGE>
CHEMICAL FINANCIAL CORPORATION
THE COMPANY
Chemical Financial Corporation is a registered bank holding
company headquartered in Midland, Michigan, that operates ten bank
affiliates with eighty-six banking offices in twenty-four counties
located generally across the midsection of Michigan's lower peninsula.
Because the Corporation is a bank holding company, its principal
operations are conducted by its subsidiaries. All of the Corporation's
subsidiary banks are state banks and offer the full range of services
normally associated with commercial banking. The Corporation's lead
bank is Chemical Bank and Trust Company, headquartered in Midland,
Michigan. Trust services are provided by the lead bank directly to
customers of the Corporation's other nine subsidiary banks through
service agreements with each bank.
The Corporation owns a bank-related company, CFC Data Corp, which
provides data processing services to both the Corporation's subsidiary
banks and non-affiliated business customers.
The Corporation also operates an insurance agency and a title
services company through subsidiaries of its lead bank.
The Parent Company serves as controlling shareholder and
maintains systems of financial, operational and administrative
controls that permit centralized evaluation of subsidiary operations.
The Parent Company also provides substantive assistance to its
subsidiaries in selected functional areas including accounting,
operations, marketing, investments, central purchasing, financial
planning, internal auditing, loan quality control, training,
compliance with regulatory requirements and personnel.
On January 1, 1997, Aloysius J. Oliver succeeded Alan W. Ott as
president and chief executive officer of the Corporation and David B.
Ramaker was appointed executive vice president of the Corporation. Mr.
Oliver, who has been with the Corporation forty years, had been
executive vice president of the Corporation. Mr. Ramaker, who
succeeded Mr. Ott as chief executive officer of Chemical Bank and
Trust Company, had been president and chief executive officer of
Chemical Bank Key State, a wholly owned subsidiary of the Corporation,
in Owosso, Michigan. Additionally, on January 1, 1997, Mr. Oliver was
appointed a director of the Corporation and Mr. Ramaker was appointed
secretary of the Corporation.
ANNUAL MEETING
The annual meeting of the shareholders will be held at the
Midland Center for the Arts, Midland, Michigan, on Monday, April 20,
1998, at 2:00 P.M.
<PAGE>
DIVIDEND REINVESTMENT
The Corporation offers a dividend reinvestment program through
Harris Trust and Savings Bank, whereby shareholders may reinvest their
Chemical Financial Corporation dividends in additional shares of the
Corporation's stock. Information concerning this optional program is
available from the Chief Financial Officer, Chemical Financial
Corporation, P.O. Box 569, Midland, Michigan 48640. Telephone (517)
839-5350.
ADDITIONAL INFORMATION
Chemical Financial Corporation common stock is traded on The
NASDAQ Stock Market. It is quoted daily in leading financial
publications under the NASDAQ National Market Issues heading of the
stock tables, NASDAQ symbol: CHFC. As of December 31, 1997, there were
six registered market makers of Chemical Financial Corporation common
stock: A.G. Edwards & Sons, Inc., Stifel Nicolaus & Co., First of
Michigan Corporation, Roney & Company, Herzog, Heine, Geduld, Inc. and
Troster Singer Corp. The approximate number of shareholders of record
at December 31, 1997 was 3,800. Analysts, investors, and others
seeking financial or general information about the Corporation are
invited to contact Aloysius J. Oliver, president and chief executive
officer, or Lori A. Gwizdala, senior vice president and chief
financial officer. Telephone (517) 839-5350.
EQUAL OPPORTUNITY EMPLOYERS
Chemical Financial Corporation and its subsidiaries are equal
opportunity employers.
REGISTRAR & TRANSFER AGENTS
Harris Trust and Savings Bank Chemical Bank and Trust Company
Attention: Shareholder Services Attention: Transfer Agent
311 West Monroe Street, 11th Floor 333 East Main Street
Chicago, Illinois 60606 Midland, Michigan 48640
49
<PAGE>
CHEMICAL FINANCIAL CORPORATION
333 East Main Street
P.O. Box 569
Midland, Michigan 48640-0569
Telephone: (517) 839-5350
Fax: (517) 839-5255
www.chemicalbankmi.com
<PAGE>
EXHIBIT NO. 21
<TABLE>
SUBSIDIARIES
<CAPTION>
STATE OF OTHER JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
- ---- -- ---------- -- -------------
<S> <C>
Banking subsidiaries:
Chemical Bank and Trust Company Michigan
Chemical Bank Michigan Michigan
Chemical Bank South Michigan
Chemical Bank Thumb Area Michigan
Chemical Bank West Michigan
Chemical Bank Montcalm Michigan
Chemical Bank North Michigan
Chemical Bank Bay Area Michigan
Chemical Bank Central Michigan
Chemical Bank Key State Michigan
Non-banking subsidiaries:
CFC Data Corp Michigan
CFC Financial Services, Inc. (subsidiary of
Chemical Bank and Trust Company) - also
operates under d/b/a Chemical Financial
Insurance Agency Michigan
CFC Title Services, Inc. (subsidiary of
Chemical Bank and Trust Company) Michigan
</TABLE>
<PAGE>
EXHIBIT 23
ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100
500 Woodward Avenue
Detroit, Michigan 48226-3426
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (1) the Registration
Statement (Form S-8, Number 33-15064, dated June 17, 1987, pertaining to
the Chemical Financial Corporation 1987 Award and Stock Option Plan, (2)
the Registration Statement (Form S-8, Number 33-40792, dated May 21, 1991)
pertaining to the Chemical Financial Corporation 401(k) Savings Plan and in
the related Prospectus, (3) the Registration Statement (Form S-8, Number
33-47356, dated April 28, 1992) pertaining to the Chemical Financial
Corporation 1992 Stock Purchase Plan for Subsidiary Directors and (4) the
Registration Statement (Form S-8, Number 333-38511, dated October 22, 1997)
pertaining to the Chemical Financial Corporation 1997 Stock Incentive Plan
of our report dated January 20, 1998 with respect to the consolidated
financial statements of Chemical Financial Corporation included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
We consent to the incorporation by reference in (1) the Registration
Statement (Form S-8, Number 33-40792, dated May 21, 1991) pertaining to the
Chemical Financial Corporation 401(k) Savings Plan and in the related
Prospectus of our report dated January 30, 1998, with respect to the
financial statements and schedules of the Chemical Financial Corporation
401(k) Savings Plan included in the Annual Report (Form 10-K) for the year
ended December 31, 1997 and (2) the Registration Statement (Form S-8,
Number 33-47356, dated April 28, 1992) pertaining to the Chemical Financial
Corporation 1992 Stock Purchase Plan for Subsidiary Directors and in the
related Prospectus of our report dated January 14, 1998, with respect to
the financial statements of the Chemical Financial Corporation 1992 Stock
Purchase Plan for Subsidiary Directors included in the Annual Report (Form
10-K) for the year ended December 31, 1997.
s/ Ernst & Young LLP
March 20, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL
CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 95,794
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 49,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 494,173
<INVESTMENTS-CARRYING> 251,020
<INVESTMENTS-MARKET> 253,459
<LOANS> 845,600
<ALLOWANCE> 17,359
<TOTAL-ASSETS> 1,765,100
<DEPOSITS> 1,475,841
<SHORT-TERM> 42,196
<LIABILITIES-OTHER> 14,138
<LONG-TERM> 9,000
<COMMON> 107,530
0
0
<OTHER-SE> 116,395
<TOTAL-LIABILITIES-AND-EQUITY> 1,765,100
<INTEREST-LOAN> 69,873
<INTEREST-INVEST> 42,714
<INTEREST-OTHER> 4,732
<INTEREST-TOTAL> 117,319
<INTEREST-DEPOSIT> 46,320
<INTEREST-EXPENSE> 48,279
<INTEREST-INCOME-NET> 69,040
<LOAN-LOSSES> 1,002
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 45,718
<INCOME-PRETAX> 35,442
<INCOME-PRE-EXTRAORDINARY> 35,442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,889
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 4.35
<LOANS-NON> 1,783
<LOANS-PAST> 1,125
<LOANS-TROUBLED> 139
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,607
<CHARGE-OFFS> 620
<RECOVERIES> 370
<ALLOWANCE-CLOSE> 17,359
<ALLOWANCE-DOMESTIC> 14,909
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,450
</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> 1.59
<EPS-DILUTED> 1.57
<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>
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 107,287
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 84,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 454,236
<INVESTMENTS-CARRYING> 274,230
<INVESTMENTS-MARKET> 275,557
<LOANS> 814,391
<ALLOWANCE> 17,081
<TOTAL-ASSETS> 1,764,856
<DEPOSITS> 1,488,212
<SHORT-TERM> 38,221
<LIABILITIES-OTHER> 15,558
<LONG-TERM> 9,000
<COMMON> 102,271
0
0
<OTHER-SE> 111,594
<TOTAL-LIABILITIES-AND-EQUITY> 1,764,856
<INTEREST-LOAN> 33,993
<INTEREST-INVEST> 20,786
<INTEREST-OTHER> 2,510
<INTEREST-TOTAL> 57,289
<INTEREST-DEPOSIT> 22,381
<INTEREST-EXPENSE> 23,307
<INTEREST-INCOME-NET> 33,982
<LOAN-LOSSES> 548
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 23,414
<INCOME-PRETAX> 16,564
<INCOME-PRE-EXTRAORDINARY> 16,564
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,150
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.39
<LOANS-NON> 1,689
<LOANS-PAST> 956
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,645
<ALLOWANCE-OPEN> 16,607
<CHARGE-OFFS> 272
<RECOVERIES> 198
<ALLOWANCE-CLOSE> 17,081
<ALLOWANCE-DOMESTIC> 17,081
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 90,356
<INT-BEARING-DEPOSITS> 998
<FED-FUNDS-SOLD> 106,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 471,735
<INVESTMENTS-CARRYING> 203,923
<INVESTMENTS-MARKET> 204,102
<LOANS> 799,661
<ALLOWANCE> 16,865
<TOTAL-ASSETS> 1,705,212
<DEPOSITS> 1,437,049
<SHORT-TERM> 33,484
<LIABILITIES-OTHER> 17,200
<LONG-TERM> 9,000
<COMMON> 102,284
0
0
<OTHER-SE> 106,195
<TOTAL-LIABILITIES-AND-EQUITY> 1,705,212
<INTEREST-LOAN> 16,734
<INTEREST-INVEST> 10,187
<INTEREST-OTHER> 1,272
<INTEREST-TOTAL> 28,193
<INTEREST-DEPOSIT> 10,977
<INTEREST-EXPENSE> 11,457
<INTEREST-INCOME-NET> 16,736
<LOAN-LOSSES> 329
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,464
<INCOME-PRETAX> 8,235
<INCOME-PRE-EXTRAORDINARY> 8,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,526
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 4.39
<LOANS-NON> 1,585
<LOANS-PAST> 337
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,922
<ALLOWANCE-OPEN> 16,607
<CHARGE-OFFS> 172
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 16,865
<ALLOWANCE-DOMESTIC> 16,865
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL
CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 89,517
<INT-BEARING-DEPOSITS> 1,134
<FED-FUNDS-SOLD> 114,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 441,787
<INVESTMENTS-CARRYING> 213,752
<INVESTMENTS-MARKET> 215,494
<LOANS> 807,653
<ALLOWANCE> 16,607
<TOTAL-ASSETS> 1,698,774
<DEPOSITS> 1,429,915
<SHORT-TERM> 37,333
<LIABILITIES-OTHER> 14,257
<LONG-TERM> 10,000
<COMMON> 102,098
0
0
<OTHER-SE> 105,171
<TOTAL-LIABILITIES-AND-EQUITY> 1,698,774
<INTEREST-LOAN> 64,470
<INTEREST-INVEST> 41,071
<INTEREST-OTHER> 4,711
<INTEREST-TOTAL> 113,252
<INTEREST-DEPOSIT> 44,284
<INTEREST-EXPENSE> 46,162
<INTEREST-INCOME-NET> 67,090
<LOAN-LOSSES> 1,128
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 45,124
<INCOME-PRETAX> 33,036
<INCOME-PRE-EXTRAORDINARY> 33,036
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,003
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.03
<YIELD-ACTUAL> 4.33
<LOANS-NON> 1,341
<LOANS-PAST> 539
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,886
<CHARGE-OFFS> 691
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 16,607
<ALLOWANCE-DOMESTIC> 14,946
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,661
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF CHEMICAL
FINANCIAL CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 85,693
<INT-BEARING-DEPOSITS> 991
<FED-FUNDS-SOLD> 86,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 423,731
<INVESTMENTS-CARRYING> 257,441
<INVESTMENTS-MARKET> 258,773
<LOANS> 810,143
<ALLOWANCE> 16,503
<TOTAL-ASSETS> 1,695,896
<DEPOSITS> 1,431,172
<SHORT-TERM> 36,781
<LIABILITIES-OTHER> 16,099
<LONG-TERM> 10,000
<COMMON> 97,030
0
0
<OTHER-SE> 104,814
<TOTAL-LIABILITIES-AND-EQUITY> 1,695,896
<INTEREST-LOAN> 50,211
<INTEREST-INVEST> 30,996
<INTEREST-OTHER> 3,380
<INTEREST-TOTAL> 84,587
<INTEREST-DEPOSIT> 33,316
<INTEREST-EXPENSE> 34,733
<INTEREST-INCOME-NET> 49,854
<LOAN-LOSSES> 811
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 34,752
<INCOME-PRETAX> 23,369
<INCOME-PRE-EXTRAORDINARY> 23,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,568
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 4.29
<LOANS-NON> 1,627
<LOANS-PAST> 915
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,542
<ALLOWANCE-OPEN> 15,886
<CHARGE-OFFS> 388
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 16,503
<ALLOWANCE-DOMESTIC> 16,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<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> .95
<EPS-DILUTED> .93
<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>
<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> 0.47
<EPS-DILUTED> 0.46
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL
CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 88,054
<INT-BEARING-DEPOSITS> 2,981
<FED-FUNDS-SOLD> 80,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 341,670
<INVESTMENTS-CARRYING> 360,864
<INVESTMENTS-MARKET> 365,516
<LOANS> 738,716
<ALLOWANCE> 15,678
<TOTAL-ASSETS> 1,643,880
<DEPOSITS> 1,397,266
<SHORT-TERM> 35,223
<LIABILITIES-OTHER> 13,767
<LONG-TERM> 12,080
<COMMON> 91,944
0
0
<OTHER-SE> 93,600
<TOTAL-LIABILITIES-AND-EQUITY> 1,643,880
<INTEREST-LOAN> 62,732
<INTEREST-INVEST> 38,018
<INTEREST-OTHER> 4,816
<INTEREST-TOTAL> 105,566
<INTEREST-DEPOSIT> 41,824
<INTEREST-EXPENSE> 44,209
<INTEREST-INCOME-NET> 61,357
<LOAN-LOSSES> 1,053
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 42,606
<INCOME-PRETAX> 29,391
<INCOME-PRE-EXTRAORDINARY> 29,391
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,731
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 4.19
<LOANS-NON> 1,658
<LOANS-PAST> 855
<LOANS-TROUBLED> 84
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,095
<CHARGE-OFFS> 645
<RECOVERIES> 170
<ALLOWANCE-CLOSE> 15,678
<ALLOWANCE-DOMESTIC> 14,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,567
</TABLE>
<PAGE>
EXHIBIT 99(a)
Financial Statements and Schedules
Chemical Financial Corporation
401(k) Savings Plan
Years ended December 31, 1997 and
December 31, 1996 with
Report of Independent Auditors
<PAGE>
ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100
500 Woodward Avenue
Detroit, Michigan 48226-3426
Report of Independent Auditors
Administrative Committee
Chemical Financial Corporation 401(k) Savings Plan
We have audited the accompanying statements of assets available for
plan benefits of the Chemical Financial Corporation 401(k) Savings Plan as
of December 31, 1997 and 1996 and the related statements of changes in
assets available for plan benefits for the years then ended. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the assets available for plan benefits of
the Plan at December 31, 1997 and 1996, and the changes in its assets
available for plan benefits for the years then ended in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
financial statements taken as a whole. The accompanying supplemental
schedules of assets held for investment and reportable transactions as of
and for the year ended December 31, 1997 are presented for purposes of
complying with the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act
of 1974, and are not a required part of the financial statements. The fund
information in the statement of assets available for plan benefits and the
statement of changes in assets available for plan benefits is presented for
purposes of additional analysis rather than to present the assets available
for benefits and changes in assets available for benefits of each fund.
The supplemental schedules and fund information have been subjected to the
auditing procedures applied in our audits of the financial statements and,
<PAGE>
in our opinion, are fairly stated in all material respects in relation to
the financial statements taken as a whole.
S/ ERNST & YOUNG LLP
Detroit, Michigan
January 30, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
<TABLE>
Statement of Assets Available for Benefits, with Fund Information
Chemical Financial Corporation 401(k) Savings Plan
December 31, 1997
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL CASH
STOCK FINANCIAL AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
----------- ----- ------ ----------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments at fair value:
Chemical Financial Corporation
Common Stock $1,906,118 $ 1,906,118
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust $ 136,904 136,904
Max-Cap Fund $ 1,253,475 1,253,475
Treasury Obligations Fund 62 56 $ 101 274 $ 218,049 $ 3,882 222,424
Fidelity Investments-Puritan Fund 547,145 547,145
Participant loans 39,646 39,646
---------- ----------- -------- ---------- --------- ------- -----------
136,966 1,253,531 547,246 1,906,392 218,049 43,528 4,105,712
Employee contributions receivable 1,190 11,089 6,877 9,570 1,417 30,143
Cash and accrued income 622 26 16 40 1,012 16 1,732
---------- ----------- -------- ---------- --------- ------- -----------
Assets Available for Plan
Benefits $ 138,778 $ 1,264,646 $554,139 $1,916,002 $ 220,478 $43,544 $ 4,137,587
========== =========== ======== ========== ========= ======= ===========
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
Statement of Assets Available for Benefits, with Fund Information
Chemical Financial Corporation 401(k) Savings Plan
December 31, 1996
<CAPTION>
FUND INFORMATION
-------------------------------------------------------------------------
CHEMICAL CASH
STOCK FINANCIAL AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
------------ ----- ------ ----------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments at fair value:
Chemical Financial Corporation
Common Stock $1,400,236 $1,400,236
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust $ 123,197 123,197
Max-Cap Fund $ 703,917 703,917
Treasury Obligations Fund 153 136 $ 137 678 $ 240,835 $ 2,253 244,192
Fidelity Investments-Puritan Fund 294,387 294,387
Participant loans 22,401 22,401
---------- --------- -------- ---------- --------- ------- ----------
123,350 704,053 294,524 1,400,914 240,835 24,654 2,788,330
Employee contributions receivable 1,049 5,005 2,810 9,871 1,808 20,543
Cash and accrued income 562 15 5 67 1,071 9 1,729
---------- --------- -------- ---------- --------- ------- ----------
Assets Available for Plan
Benefits $ 124,961 $ 709,073 $297,339 $1,410,852 $ 243,714 $24,663 $2,810,602
========== ========= ======== ========== ========= ======= ==========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
Statement of Changes in Assets Available for Plan Benefits, with Fund Information
Chemical Financial Corporation 401(k) Savings Plan
Year Ended December 31, 1997
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL CASH
STOCK FINANCIAL AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
------------ ----- ------ ----------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Interest and dividend income $ 6,836 $ 53,219 $ 41,209 $ 36,399 $ 10,985 $ 3,510 $ 152,158
Employee contributions 33,744 224,685 162,564 266,581 37,230 724,804
-------- ---------- -------- ---------- -------- ------- ----------
40,580 277,904 203,773 302,980 48,215 3,510 876,962
Deductions:
Participants' accounts distributed
upon withdrawal (7,809) (15,066) (17,148) (81,987) (12,196) (467) (134,673)
Net transfers between funds (19,600) 87,077 23,017 (47,077) (59,255) 15,838 0
Net realized and unrealized appreciation
in fair value of investments 646 205,658 47,158 331,234 584,696
-------- ---------- -------- ---------- -------- ------- ----------
Net increase (decrease) 13,817 555,573 256,800 505,150 (23,236) 18,881 1,326,985
Assets available for plan benefits
at beginning of year 124,961 709,073 297,339 1,410,852 243,714 24,663 2,810,602
-------- ---------- -------- ---------- -------- ------- ----------
Assets available for plan benefits
at end of year $138,778 $1,264,646 $554,139 $1,916,002 $220,478 $43,544 $4,137,587
======== ========== ======== ========== ======== ======= ==========
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
Statement of Changes in Assets Available for Plan Benefits, with Fund Information
Chemical Financial Corporation 401(k) Savings Plan
Year Ended December 31, 1996
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL CASH
STOCK FINANCIAL AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
------------ ----- ------ ----------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Interest and dividend income $ 6,807 $ 22,751 $ 35,579 $ 25,293 $ 9,677 $ 1,822 $ 101,929
Employee contributions 28,389 111,616 82,127 224,957 40,591 487,680
-------- --------- --------- ---------- -------- ------- ----------
35,196 134,367 117,706 250,250 50,268 1,822 589,609
Deductions:
Participants' accounts distributed upon
withdrawal (6,783) (6,198) (1,453) (38,185) (3,745) (56,364)
Net transfers between funds (32,721) 14,862 (47,096) 107 56,384 8,464 0
Net realized and unrealized appreciation
(depreciation) in fair value of
investments (999) 97,080 2,372 99,088 197,541
-------- --------- --------- ---------- -------- ------- ----------
Net increase (decrease) (5,307) 240,111 71,529 311,260 102,907 10,286 730,786
Assets available for plan benefits at
beginning of year 130,268 468,962 225,810 1,099,592 140,807 14,377 2,079,816
-------- --------- --------- ---------- -------- ------- ----------
Assets available for plan benefits at
end of year $124,961 $ 709,073 $ 297,339 $1,410,852 $243,714 $24,663 $2,810,602
======== ========= ========= ========== ======== ======= ==========
</TABLE>
See accompanying notes.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN
DECEMBER 31, 1997
NOTE A - - DESCRIPTION OF THE PLAN
The Chemical Financial Corporation 401(k) Savings Plan (the
Plan) is a voluntary, defined-contribution plan covering all
eligible employees of Chemical Financial Corporation (the
Corporation) and subsidiaries.
The Plan provides for the deferral of salaries, wages and
bonuses in accordance with Section 401(k) of the Internal Revenue
Code. Employees of the Corporation or any of its subsidiaries
are eligible for participation upon attaining age 21 and completing
one year of service. At December 31, 1997 there were 446 participants
in the Plan. Participants are eligible to contribute up to 15% (10%
in 1996 and prior years) of their annual compensation, up to a maximum
of $9,500 in 1997 and in 1996. The employer made no contributions to
the Plan during 1997 or 1996.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets at the date of the financial statements and the
reported amounts of changes in assets during the year. Actual
results could differ from those estimates.
Participants may direct their contributions into an
intermediate bond fund, a stock index fund, a stock and bond
fund, a money market fund, a Chemical Financial Corporation
common stock fund or a combination of these funds, and may elect
to change the percentage directed to each fund quarterly. All
participant contributions are fully vested. Participant loans
are permitted under the Plan. These loans are subject to a
strict set of rules established by laws and regulations. As of
December 31, 1997 the Plan had eleven participant loans
outstanding at interest rates ranging from 7.0%-11.75%.
Information about the plan agreement and the vesting and
benefit provisions is contained in the Summary Plan Description
contained in the Chemical Financial Corporation Employee Handbook
and is available along with information regarding investment
alternatives from the Plan Administrator and Personnel
Departments.
The Corporation, acting through its Board of Directors, has
the right to amend or terminate the Plan at any time.
7
<PAGE>
Notes to Financial Statements (Continued)
NOTE B - - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under the
accrual basis of accounting in accordance with generally accepted
accounting principles.
Investments are stated at aggregate fair value. Securities
traded on a national securities exchange are valued at the last
reported sales price on the last business day of the Plan year.
Investments traded in the over-the-counter market and listed
securities for which no sale was reported on that date are valued
at the last reported bid price.
Expenses incurred in connection with the operation of the
Plan are borne by the Corporation.
8
<PAGE>
Notes to Financial Statements (Continued)
NOTE C - - INVESTMENTS
During the years ended December 31, 1997 and December 31,
1996 the Plan's net appreciation (depreciation) in the fair value
of investments (including investments bought, sold, as well as
held during the year) is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Chemical Financial Corporation Common Stock Fund $ 331,234 $ 99,088
Intermediate Bond Fund 646 (999)
Index Fund 205,658 97,080
Stock and Bond Fund 47,158 2,372
----------- ----------
$ 584,696 $ 197,541
=========== ==========
</TABLE>
The fair value of individual investments that represent 5% or
more of the Plan's net assets are as follows:
<TABLE>
DECEMBER 31
1997 1996
----------- ----------
<S> <C> <C>
Chemical Financial Corporation Common Stock $ 1,906,118 $ 1,400,236
Federated Investors Mutual Funds:
Max-Cap Fund 1,253,475 703,917
Treasury Obligations Fund 222,424 244,192
Fidelity Investments-Puritan Fund 547,145 294,387
</TABLE>
9
<PAGE>
Notes to Financial Statements (Continued)
NOTE D - TRANSACTIONS WITH PARTIES-IN-INTEREST
THE FOLLOWING IS A SUMMARY OF TRANSACTIONS (AT COST) WITH PARTIES-IN-INTEREST:
<TABLE>
<CAPTION>
CHEMICAL
FINANCIAL
CORPORATION
COMMON STOCK
------------
<S> <C>
Balance at January 1, 1996 $ 758,139
Purchases in 1996 312,505
Sales in 1996 (42,724)
Distributions in 1996 (33,743)
------------
Balance at December 31, 1996 $ 994,177
Purchases in 1997 403,695
Sales in 1997 (113,741)
Distributions in 1997 (49,978)
------------
Balance at December 31, 1997 $ 1,234,153
============
</TABLE>
NOTE E - - INCOME TAX STATUS
The Plan has received a favorable determination letter from the
Internal Revenue Service dated August 23, 1994, stating that the Plan is
qualified under section 401(a) of the Internal Revenue Code of 1986 (the
"Code") and that the trust, therefore, is exempt from taxation. Once
qualified, the Plan is required to operate in conformity with the Code and
ERISA to maintain its tax exempt status. The Plan Sponsor is not aware of
any course of action or series of events that have occurred that might
adversely affect the Plan's qualified status.
NOTE F - - PLAN MERGER
In May 1996, the Corporation acquired State Savings Bancorp,
Inc. During 1997, the participants of the Retirement Plan for
the State Savings Bank of Caro were given the option to rollover
their account balances into the Plan and, accordingly,
approximately $145,000 of such rollover contributions have been
included as employee contributions in the accompanying financial
statements for the year ended December 31, 1997.
10
<PAGE>
Employee ID# 38-2022454
Plan # 002
<TABLE>
Item 27a -- Schedule of Assets Held for Investment Purposes
Chemical Financial Corporation 401(k) Savings Plan
December 31, 1997 and for the Year Then Ended
<CAPTION>
DESCRIPTION OF INVESTMENT INCLUDING
IDENTITY OF ISSUE, BORROWER, LESSOR OR MATURITY DATE, RATE OF INTEREST,
SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST FAIR VALUE
- -------------------------------------- ----------------------------------- ------------ ----------
<S> <C> <C> <C>
<F*>Chemical Financial Corporation Common Stock - 42,594 shares
Common Stock $ 1,234,153 $ 1,906,118
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust Intermediate Bond Fund- 13,163 shares 137,126 136,904
Max-Cap Fund Index Fund - 61,961 units 918,335 1,253,475
Treasury Obligations Fund Money Market Fund - 222,424 shares
222,424 222,424
Fidelity Investments-Puritan Fund Stock and Bond Fund - 28,232 shares 483,568 547,145
------------- -------------
Total Mutual Funds 1,761,453 2,159,948
------------- -------------
Participant Loans Eleven loans at interest rates ranging
from 7.0%-11.75% and maturing
10/1/98-3/15/02 39,646 39,646
------------- -------------
TOTAL INVESTMENTS $ 3,035,252 $ 4,105,712
============= =============
<FN>
<F*>Indicates party-in-interest to the Plan
There were no investment assets reportable as acquired and disposed of during the year.
</FN>
</TABLE>
11
<PAGE>
Employee ID# 38-2022454
Plan # 002
<TABLE>
Item 27d -- Schedule of Reportable Transactions
Chemical Financial Corporation
401(k) Savings Plan
<CAPTION>
Year Ended December 31, 1997
CURRENT
DESCRIPTION OF ASSET EXPENSE VALUE ON
(INTEREST RATE AND MATURITY IN PURCHASE SELLING LEASE INCURRED WITH COST TRANSACTION NET GAIN
IDENTITY OF PARTY INVOLVED CASE OF A LOAN) PRICE PRICE RENTAL TRANSACTION OF ASSET DATE (LOSS)
- -------------------------- ------------------------------ -------- ------- ------ ------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Category iii) A series of
transactions involving
securities of the same issue
which, when aggregated,
involve an amount in excess of
5% of the current value of
plan assets:
Chemical Financial Corporation Common Stock:
66 purchases $ 403,695 $ 403,695
44 sales 113,741 155,029 $41,288
Federated Investors Index Fund:
27 purchases 362,100 362,100
9 sales 14,244 18,200 $ 3,956
Money Market Fund:
230 purchases 1,296,622 1,296,622
165 sales 1,318,390 1,318,390 - - -
Fidelity Investments Stock and Bond Fund:
27 purchases 225,450 225,450
9 sales 17,399 19,850 2,451
</TABLE>
There were no category i), ii) or iv) reportable transactions.
12
<PAGE>
EXHIBIT 99(b)
Audited Financial Statements
Chemical Financial Corporation
1992 Stock Purchase Plan
for Subsidiary Directors
December 31, 1997
<PAGE>
ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100
500 Woodward Avenue
Detroit, Michigan 48226-3426
REPORT OF INDEPENDENT AUDITORS
Plan Administrator
Chemical Financial Corporation
1992 Stock Purchase Plan for
Subsidiary Directors
We have audited the accompanying statements of financial
condition of the Chemical Financial Corporation 1992 Stock
Purchase Plan for Subsidiary Directors as of December 31, 1997
and 1996 and the related statements of income and changes in plan
equity for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Plan's administrator. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Plan
Administrator, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Chemical Financial Corporation 1992 Stock Purchase Plan
for Subsidiary Directors at December 31, 1997 and 1996, and the
results of its operations and changes in its plan equity for each
of the three years in the period December 31, 1997 in conformity
with generally accepted accounting principles.
S/ ERNST & YOUNG LLP
Detroit, Michigan
January 14, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
1
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- ---------
<S> <C> <C>
ASSETS
Cash $1,139 $1,913
Common stock receivable of Chemical
Financial Corporation, at market value - (7,358
shares at a cost of $263,868 at December 31, 1997
and 7,740 shares at a cost of $265,449 at
December 31, 1996) 329,270 291,194
-------- --------
Total assets $330,409 $293,107
======== ========
LIABILITIES AND PLAN EQUITY
Plan equity (46 participants at December 31,
1997 and 50 participants at December 31, 1996) $330,409 $293,107
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
ADDITIONS
Participant contributions $ 258,775 $ 263,650 $ 235,800
Dividend equivalents 3,501 2,965 2,944
Other income 1,055 848
---------- ----------- -----------
263,331 267,463 238,744
DEDUCTIONS
Plan distributions 291,431 294,346 243,867
---------- ----------- -----------
(28,100) (26,883) (5,123)
Net realized and unrealized appreciation
in fair value of investments 65,402 25,745 54,131
---------- ----------- -----------
Net increase (decrease) 37,302 (1,138) 49,008
Plan equity at beginning of year 293,107 294,245 245,237
---------- ----------- -----------
Plan equity at end of year $ 330,409 $ 293,107 $ 294,245
========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - DESCRIPTION OF THE PLAN
The Chemical Financial Corporation 1992 Stock Purchase Plan
for Subsidiary Directors (the Plan) was implemented by Chemical
Financial Corporation (the Corporation) on April 30, 1992. The
Plan is designed to provide non-employee directors and advisory
directors of the Corporation's subsidiaries, who are neither
directors or employees of the Corporation, with a convenient
method of acquiring Corporation stock.
Subsidiary directors and advisory directors, who elect to
participate in the Plan, may elect to contribute to the Plan
fifty percent or one hundred percent of their director board fees
and/or fifty percent or one hundred percent of their director
committee fees, earned as directors or advisory directors of the
Corporation's subsidiaries. Participant contributions to the
Plan are made by the Corporation's subsidiaries on behalf of each
electing participant. Amounts remitted to the Plan are credited
to a separate cash account for each participant. As of the last
day of each month, each participant's cash account is debited for
the purchase of whole shares of the Corporation's stock and
credited to a separate participant stock account. The stock
purchased under the Plan during the calendar year is issued by
the Corporation directly to the participants in the following
calendar year, in the month of January. The Plan provides for
dividend equivalents to be credited to each participant's cash
account, as of the dividend record date of the Corporation's
common stock. Dividend equivalents are calculated by multiplying
the Corporation's dividend rate by the number of shares of common
stock in each participant's stock account, as of the
Corporation's dividend record date. The Plan also provides for
an appropriate credit to each participant's stock account for
stock dividends, stock splits or other distributions of the
Corporation's common stock by the Corporation. Fractional shares
calculated as a result of the above adjustments are converted to
cash based on the market price of the Corporation's common stock,
and are credited to each participant's cash account. Plan
participants may terminate their participation in the Plan, at
any time, by written notice of withdrawal to the Corporation.
Participants will cease to be eligible to participate in the Plan
4
<PAGE>
when they cease to serve as directors or advisory directors of
subsidiaries of the Corporation. Upon withdrawal from the Plan,
each participant will receive the shares of common stock of the
Corporation in their participant stock account and the cash in
their participant cash account.
The Corporation expects to maintain the Plan indefinitely,
however it reserves the right to terminate or amend the Plan at any
time, provided, however, that no termination or amendment shall affect
or diminish any participant's right to the benefit of contributions
made by him/her prior to the date of such amendment or termination.
5
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - DESCRIPTION OF THE PLAN (continued)
The Plan provides that all expenses of the Plan and its
administration shall be paid by the Corporation.
The Plan is not qualified under Sections 401(a) or 501(a) of the
Internal Revenue Code of 1986, as amended. The Plan does not provide
for income taxes because any income is taxable to the participants.
Participants in the Plan must treat as taxable income the
contributions made to the Plan by the Corporation's subsidiaries on
their behalf. Dividend equivalents and any other cash credited to the
participants' cash accounts are taxable to the participants for
Federal and state income tax purposes in the year such dividend
equivalent or cash is credited to the participant cash account. Upon
disposition of the common stock of Chemical Financial Corporation
purchased under the Plan, participants must treat any gain or loss as
long-term or short-term capital gain or loss depending upon when such
disposition occurs.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
VALUATION OF COMMON STOCK RECEIVABLE
Common stock receivable of Chemical Financial Corporation is
recorded at the fair market value of the number of shares receivable
at the end of the period. Market value is based on the closing bid
price of the Corporation's stock at year end ($44.75 per share at
December 31, 1997 and $37.62 per share at December 31, 1996). The
number of shares receivable and closing bid prices were adjusted for
the 5% stock dividend paid on Chemical Financial Corporation common
stock on December 30, 1997.
INCOME
Dividend equivalents and fractional share interests are accrued
on the Corporation's dividend or other record date.
CONTRIBUTIONS
Contributions are accounted for on the accrual basis.
6
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - CONTRIBUTIONS
Contributions for participants by the participating companies
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
PARTICIPATING COMPANY 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Chemical Bank and Trust Co. $ 70,700 $ 73,025 $ 66,600
Chemical Bank Bay Area 33,100 37,525 54,000
Chemical Bank Central 26,400 22,050 20,500
Chemical Bank Thumb Area 26,650 21,200 600
Chemical Bank Michigan 29,750 31,750 22,650
Chemical Bank Montcalm 15,000 19,500 17,100
Chemical Bank North 3,150 4,650 4,200
Chemical Bank South 19,125 19,425 16,600
Chemical Bank West 8,900 8,625 8,800
Chemical Bank Key State 20,000 20,400 12,950
CFC Data Corp 6,000 5,500 11,800
----------- ----------- -----------
Total Contributions $ 258,775 $ 263,650 $ 235,800
=========== =========== ===========
</TABLE>
7
