<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- -------------------------------------------------------------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission File Number: 0-8185
CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2022454
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
333 EAST MAIN STREET
MIDLAND, MICHIGAN 48640
(Address of Principal Executive Offices) (Zip Code)
(517) 839-5350
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
The number of shares outstanding of the Registrant's Common Stock, $1 par
value, as of October 27, 1998, was 10,794,029 shares.
===============================================================================
<PAGE>
INDEX
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (unaudited, except
Consolidated Statement of Financial Position as of
December 31, 1997)
Consolidated Statement of Income for the Three and
Nine Months Ended September 30, 1998 and
September 30, 1997 3
Consolidated Statement of Financial Position as of
September 30, 1998, December 31, 1997 and
September 30, 1997 4
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
PART II. OTHER INFORMATION
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . $ 18,807 $ 17,864 $ 55,286 $ 51,857
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . 9,889 10,437 30,573 30,141
Tax-exempt. . . . . . . . . . . . . . . . . . 505 540 1,580 1,622
------------ ---------- ---------- -----------
TOTAL INTEREST ON SECURITIES . . . . . . 10,394 10,977 32,153 31,763
Interest on federal funds sold . . . . . . . . 1,520 1,290 3,566 3,767
Interest on deposits with unaffiliated banks 55 55 33
------------ ---------- ---------- -----------
TOTAL INTEREST INCOME. . . . . . . . . . 30,776 30,131 91,060 87,420
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . 11,902 12,074 35,709 34,455
Interest on short-term borrowings. . . . . . . 437 357 1,125 991
Interest on long-term debt . . . . . . . . . . 152 152 452 444
------------ ---------- ---------- -----------
TOTAL INTEREST EXPENSE . . . . . . . . . 12,491 12,583 37,286 35,890
------------ ---------- ---------- -----------
NET INTEREST INCOME. . . . . . . . . . . 18,285 17,548 53,774 51,530
Provision for possible loan losses . . . . . . 234 219 713 767
------------ ---------- ---------- -----------
NET INTEREST INCOME after provision for
possible loan losses. . . . . . . . . . . . . 18,051 17,329 53,061 50,763
OTHER INCOME
Trust department income. . . . . . . . . . . . 834 740 2,607 2,319
Service charges on deposit accounts. . . . . . 1,409 1,332 4,082 3,964
Other charges and fees for customer services 997 790 3,046 2,409
Gains on sales of loans . . . . . . . . . . . 469 81 975 160
Other . . .. . . . . . . . . . . . . . . . . . 238 183 737 818
------------ ---------- ---------- -----------
TOTAL OTHER INCOME . . . . . . . . . . . 3,947 3,126 11,447 9,670
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . 7,283 6,845 21,931 20,652
-3-
<PAGE>
Occupancy expense. . . . . . . . . . . . . . . 1,175 1,174 3,525 3,593
Equipment expense. . . . . . . . . . . . . . . 796 872 2,432 2,468
Other . . .. . . . . . . . . . . . . . . . . . 2,950 2,779 9,054 8,371
------------ ---------- ---------- -----------
TOTAL OPERATING EXPENSES . . . . . . . . 12,204 11,670 36,942 35,084
------------ ---------- ---------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . 9,794 8,785 27,566 25,349
Federal income taxes . . . . . . . . . . . . . 3,265 2,879 9,079 8,293
------------ ---------- ---------- -----------
NET INCOME . . . . . . . . . . . . . . . $ 6,529 $ 5,906 $ 18,487 $ 17,056
============ ========== ========== ===========
NET INCOME PER SHARE
Basic. . . . . . . . . . . . . . . . . . . . . $ .60 $ .55 $ 1.71 $ 1.59
============ ========== ========== ===========
Diluted . .. . . . . . . . . . . . . . . . . . $ .60 $ .54 $ 1.70 $ 1.57
============ ========== ========== ===========
CASH DIVIDENDS PER SHARE . . . . . . . . . . . $ .24 $ .22 $ .72 $ .62
============ ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
------------- ------------ -------------
(Unaudited) (Unaudited)
(In thousands)
<S> <C> <C> <C>
ASSETS
Cash and demand deposits due from banks $ 78,588 $ 95,794 $ 77,504
Federal funds sold . . . . . . . . . . . . . . 90,650 49,750 62,950
Interest bearing deposits with unaffiliated banks 5,000
Investment securities:
Available for sale (at market value) 506,656 494,173 478,981
Held to maturity (market value $222,269 at 9/30/98,
$253,459 at 12/31/97, and $262,297 at 9/30/97) 217,935 251,020 260,197
---------- ----------- ----------
Total investment securities. . . . 724,591 745,193 739,178
Loans:
Commercial . . . . . . . . . . . . . . . 136,682 110,554 114,211
Real estate construction . . . . . . . . 32,978 31,143 26,736
Real estate mortgage . . . . . . . . . . 534,682 536,938 533,130
Consumer . . . . . . . . . . . . . . . . 186,864 166,965 165,547
---------- ----------- ----------
Total loans. . . . . . . . . . . . 891,206 845,600 839,624
Less: Allowance for possible loan losses 17,969 17,359 17,269
---------- ----------- ----------
Net loans. . . . . . . . . . . . . 873,237 828,241 822,355
Premises and equipment . . . . . . . . . . . . 19,384 20,416 20,165
Accrued income . . . . . . . . . . . . . . . . 14,286 14,573 15,039
Other assets . . . . . . . . . . . . . . . . . 9,865 11,133 11,633
---------- ----------- ----------
TOTAL ASSETS . . . . . . . . . . . $1,815,601 $ 1,765,100 $1,748,824
========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing. . . . . . . . . . . $ 242,017 $ 237,763 $ 224,618
Interest bearing . . . . . . . . . . . . 1,257,677 1,238,078 1,234,557
---------- ----------- ----------
Total deposits . . . . . . . . . . 1,499,694 1,475,841 1,459,175
Short-term borrowings:
Treasury tax and loan notes payable to the U.S. Treasury 8,127 11,206 11,760
Securities sold under agreements to repurchase 44,913 30,990 .35,290
---------- ----------- ----------
Total short-term borrowings. . . . 53,040 42,196 47,050
-5-
<PAGE>
Interest payable and other liabilities 15,905 14,138 14,704
Long-term debt . . . . . . . . . . . . . . . . 9,000 9,000 9,000
---------- ----------- ----------
Total liabilities. . . . . . . . . 1,577,639 1,541,175 1,529,929
Shareholders' equity:
Common stock, $1 par value ($10 par value at 12/31/97
and 9/30/97):
Authorized - 18,000,000 shares (15,000,000
at 12/31/97 and 9/30/97)
Issued - 10,794,935 shares, 10,753,011 shares,
and 10,226,280 shares, respectively 10,795 107,530 102,263
Surplus. . . . . . . . . . . . . . . . . 184,399 87,086 69,500
Retained earnings. . . . . . . . . . . . 38,623 27,904 46,144
Unrealized net gain on securities available for sale 4,145 1,405 988
---------- ----------- ----------
Total shareholders' equity . . . . 237,962 223,925 218,895
---------- ----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . . . . . . . $1,815,601 $ 1,765,100 $1,748,824
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
<TABLE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,487 $ 17,056
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 713 767
Origination of loans held for sale (75,278) (21,633)
Proceeds from sales of loans 75,877 21,793
Gains on sales of loans (975) (160)
Gain on sale of branch office building (256)
Provision for depreciation and amortization 2,515 2,382
Net amortization of investment securities 548 1,420
Net (increase) decrease in accrued income and other assets 521 (296)
Net increase in interest payable and other liabilities 1,757 525
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,165 21,598
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with
unaffiliated banks (5,000) 1,134
Proceeds from maturities of securities held to maturity 96,945 109,026
Purchases of securities held to maturity (62,896) (155,848)
Proceeds from maturities of securities available for sale 143,569 101,506
Purchases of securities available for sale (153,349) (137,942)
Net increase in loans (46,147) (32,504)
Proceeds from sale of branch office building 900
Purchases of premises and equipment (1,050) (2,432)
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (27,928) (116,160)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts and
savings accounts 11,211 34,091
Net increase (decrease) in certificates of deposit and other time
deposits 12,642 (4,831)
Net increase in repurchase agreements and other short-term
borrowings 10,844 9,717
Principal payments on long-term debt (1,000)
-7-
<PAGE>
Cash dividends paid (7,768) (6,648)
Proceeds from stock purchase plan 214 187
Proceeds from exercise of stock options 314 250
Repurchases of common stock (467)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,457 31,299
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 23,694 (63,263)
Cash and cash equivalents at beginning of year 145,544 203,717
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 169,238 $ 140,454
========== ==========
- --------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and
long-term debt $ 36,853 $ 35,646
Federal income taxes paid 10,105 8,520
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE A: BASIS OF PRESENTATION The accompanying unaudited
consolidated financial statements of Chemical Financial Corporation
(the "Corporation") have been prepared in accordance with generally
accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial condition and results of operations of the
Corporation for the periods presented. Operating results for the
three and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997.
EARNINGS PER SHARE
The Corporation adopted Statement of Financial Accounting Standard No.
128, Earnings Per Share ("SFAS 128"), on December 31, 1997. All
earnings per share amounts have been presented, and where appropriate
restated, to conform to the SFAS 128 requirements. SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effect of stock options. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. 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:
-9-
<PAGE>
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Denominator for basic earnings per share 10,793 10,740 10,785 10,738
====== ====== ====== ======
Denominator for diluted earnings per share 10,903 10,861 10,907 10,862
====== ====== ====== ======
</TABLE>
COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display
of comprehensive income and its components. The adoption of SFAS 130
had no impact on the Corporation's net income or shareholders' equity.
SFAS 130 requires unrealized gains or losses on the Corporation's
investment securities available for sale to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
The components of comprehensive income, net of related tax, for the
nine-month periods ended September 30, 1998 and 1997 are as follows
(in thousands of dollars):
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1998 1997
------ ------
<S> <C> <C>
Net income $ 18,487 $ 17,056
Unrealized net gains on investment
securities available for sale 2,740 1,170
-------- --------
Comprehensive income $ 21,227 $ 18,226
======== ========
</TABLE>
The components of accumulated other comprehensive income, net of
related tax, at September 30, 1998, December 31, 1997 and September
30, 1997 are as follows (in thousands of dollars):
-10-
<PAGE>
<TABLE>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
------------ ----------- ------------
<S> <C> <C> <C>
Unrealized net gains on investment
securities available for sale $ 4,145 $ 1,405 $ 988
-------- --------- -------
Accumulated other comprehensive
income $ 4,145 $ 1,405 $ 988
======== ========= =======
</TABLE>
OTHER
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued in
June 1998. SFAS 133 is effective for all fiscal quarters beginning after
June 15, 1999. SFAS 133 standardizes the accounting for derivative
instruments embedded in other contracts by requiring the recognition of those
items as assets or liabilities in the statement of financial position and
measuring them at fair value. SFAS 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk, or (b) the earnings effect of the
hedged forecasted transaction. The adoption of SFAS 133 is currently expected
to have no effect on the financial position, liquidity or results of operations
of the Corporation. As of September 30, 1998, the Corporation held no
derivative financial instruments.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year financial statement presentation.
NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes
loans and nonperforming assets at the dates indicated (in thousands of
dollars):
<TABLE>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
------------ ----------- ------------
<S> <C> <C> <C>
LOANS:
Commercial . . . . . . . . . $ 136,682 $ 110,554 $ 114,211
Real estate construction . . 32,978 31,143 26,736
-11-
<PAGE>
Real estate mortgage . . . . 534,682 536,938 533,130
Consumer . . . . . . . . . . 186,864 166,965 165,547
------------ --------- ----------
Total Loans. . . . . . . . . $ 891,206 $ 845,600 $ 839,624
============ ========= ==========
NONPERFORMING ASSETS:
Nonaccrual loans . . . . . . $ 1,616 $ 1,783 $ 1,870
Loans 90 days or more past due
and still accruing interest. 910 1,125 1,691
Restructured loans . . . . . 21 139 6
------------ --------- ----------
Total nonperforming loans. . 2,547 3,047 3,567
------------ --------- ----------
Other real estate owned <F1> 472 798 817
------------ --------- ----------
Total nonperforming assets . $ 3,019 $ 3,845 $ 4,384
============ ========= ==========
<FN>
<F1> Other real estate owned includes properties acquired through foreclosure
and by acceptance of a deed in lieu of foreclosure, and other property held
for sale.
</FN>
</TABLE>
-12-
<PAGE>
NOTE C: ALLOWANCE FOR POSSIBLE LOAN LOSSES The following
summarizes the changes in the allowance for possible loan losses (in
thousands of dollars):
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Balance as of January 1. . . . . . . . . . . . . . . $ 17,359 $ 16,607
Provision for possible loan losses . . . . . . . . . 713 767
Gross loans charged-off. . . . . . . . . . . . . . . (346) (394)
Gross recoveries of loans previously charged-off . . 243 289
--------- ---------
Net loans charged-off . . . . . . . . . . . . . . . (103) (105)
--------- ---------
Balance at September 30. . . . . . . . . . . . . . . $ 17,969 $ 17,269
========= =========
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Corporation's financial
condition and results of operations during the periods included in the
consolidated financial statements included in this filing.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this 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. In addition, the statements
under the caption "Year 2000 Readiness Disclosure" are 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. Future Factors
include, but are not limited to, 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
and issues, including Year 2000 issues; 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. 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.
SUMMARY
The Corporation's net income was $6,529,000 in the third quarter of
1998, as compared to net income of $5,906,000 during the third quarter
of 1997. Earnings per share in the third quarter of 1998 were $.60,
compared to earnings per share of $.54 in the third quarter of 1997.
-14-
<PAGE>
The Corporation's net income was $18,487,000 for the first nine months
of 1998, compared to net income of $17,056,000 during the first nine
months of 1997. Earnings per share for the nine months ended
September 30, 1998 were $1.70, compared to earnings per share of $1.57
for the first nine months of 1997.
The increases in net income during the three and nine months ended
September 30, 1998, as compared to the same periods in the prior year,
were principally the result of increases in net interest income and
other income. These revenue increases were slightly offset by
increased operating expenses.
Return on average assets in the third quarter of 1998 was 1.43%, as
compared to 1.33% during the third quarter of 1997. Return on average
equity for the three months ended September 30, 1998 and September 30,
1997 was 11.2% and 10.8%, respectively.
Return on average assets for the nine months ended September 30, 1998
and September 30, 1997 was 1.38% and 1.33%, respectively. Return on
average equity for the nine-month periods ended September 30, 1998 and
September 30, 1997 was 10.8% and 10.7%, respectively.
Total assets were $1.816 billion as of September 30, 1998, up $50.5
million, or 2.9%, from total assets of $1.765 billion as of December
31, 1997, and up $66.8 million, or 3.8%, from total assets of $1.749
billion as of September 30, 1997.
Total loans increased $51.6 million, or 6.1%, from September 30, 1997,
and $45.6 million, or 5.4%, from December 31, 1997 to $891.2 million
as of September 30, 1998. The increase in total loans from both
September 30, 1997 and December 31, 1997 to September 30, 1998 was
primarily attributable to increases in commercial and consumer loans.
Shareholders' equity increased $19.1 million, or 8.7%, from September
30, 1997, to $238.0 million as of September 30, 1998, or $22.04 per
share, representing 13.1% of total assets. The increase was primarily
attributable to retained net income.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's net interest income for the third quarter of 1998
was $18.28 million, a $.73 million, or 4.2%, increase over the $17.55
million recorded in the third quarter of 1997. The increase in net
interest income was due primarily to increases in average earning
assets and average loans. Average earning assets increased $53.44
million, or 3.2%, in the third quarter of 1998, compared to the third
-15-
<PAGE>
quarter of 1997, with the increase in noninterest bearing deposits
accounting for 45% of the total increase in average earning assets.
Average noninterest bearing deposits increased $24.4 million, or
10.7%, in the third quarter of 1998, compared to the third quarter of
1997. Average loans increased $65.2 million, or 7.9%, in the third
quarter of 1998, compared to the third quarter of 1997. The
Corporation's net interest margin was 4.33% in the third quarter of
1998, compared to 4.29% in the third quarter of September 1997.
Net interest income was $53.77 million for the nine months ended
September 30, 1998, a $2.24 million, or 4.4%, increase over the $51.53
million recorded for the same period in 1997. The Corporation's net
interest margin was 4.35% during both the nine months ended
September 30, 1998 and September 30, 1997.
OTHER INCOME
Other income increased $821,000, or 26.3%, in the third quarter of
1998, compared to the third quarter of 1997, and $1,777,000, or 18.4%,
in the first nine months of 1998, compared to the first nine months of
1997. The Corporation realized gains on the sales of residential
mortgage loans in the secondary market of $469,000 and $975,000 during
the three- and nine-month periods ended September 30, 1998,
respectively, compared to $81,000 and $160,000 during these same time
periods in 1997, respectively. The continued reduction in residential
mortgage loan rates since the latter part of 1997 resulted in the
Corporation experiencing an increase in long-term residential mortgage
loan volume from both new home purchases and mortgage loan refinancing
in the third quarter and first nine months of 1998. The Corporation
sold fixed rate residential mortgage loans with terms of fifteen years
or greater in the secondary market totaling $24 million and $75
million during the three- and nine-month periods ended September 30,
1998, respectively, compared to $10 million and $22 million during the
three- and nine-month periods ended September 30, 1997, respectively.
The Corporation's trust department income increased $94,000, or 12.7%,
in the third quarter and $288,000, or 12.4%, in the first nine months
of 1998, compared to comparable periods in 1997, due to a combination
of increased fees and new business. Service charges on deposit
accounts increased $77,000, or 5.8%, in the third quarter of 1998 and
$118,000, or 3.0%, in the first nine months of 1998, compared to
comparable periods in 1997. Other charges and fees for customer
services increased $207,000, or 26.2%, in the third quarter of 1998,
compared to the third quarter of 1997, and $637,000, or 26.4%, during
the first nine months of 1998, compared to the first nine months of
1997. The majority of the increases in other charges and fees during
1998 was attributable to increased ATM fees.
-16-
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses reflects management's judgment
of changing economic conditions, as well as increases and other
changes in the subsidiary banks' loan portfolios. It is management's
policy to control loan quality through a carefully structured review
of loan requests. In assessing the adequacy of the allowance for
possible loan losses (the "Allowance"), management believes that its
historical experience confirms, in principle, its judgment in what is
essentially a subjective decision. Based upon historical experience
and a constant evaluation of present and potential risks in the loan
portfolios, management believes that the Allowance is adequate.
During the three and nine months ended September 30, 1998, the
Corporation added $234,000 and $713,000, respectively, to the
Allowance through the provision for possible loan losses, compared to
$219,000 and $767,000, respectively, during the comparable periods in
1997. Net loan charge-offs during the three- and nine-month periods
ended September 30, 1998 were $41,000 and $103,000, respectively,
compared to net loan charge-offs of $31,000 and $105,000,
respectively, during the comparable periods in 1997.
OPERATING EXPENSES
Total operating expenses increased $534,000, or 4.6%, in the third
quarter of 1998, compared to the third quarter of 1997, and
$1,858,000, or 5.3%, in the first nine months of 1998, compared to the
first nine months of 1997.
Salaries, wages and employee benefits increased $438,000, or 6.4%, in
the third quarter of 1998 over the third quarter of 1997 and
$1,279,000, or 6.2%, in the first nine months of 1998 over the first
nine months of 1997. Occupancy expense and equipment expense,
combined, decreased $75,000, or 3.7%, and $104,000, or 1.7%, during
the third quarter and first nine months of 1998, compared to the third
quarter and first nine months of 1997, respectively. Other operating
expenses increased $171,000, or 6.2%, in the third quarter of 1998,
compared to the third quarter of 1997, and $683,000, or 8.2%, during
the first nine months of 1998, compared to the first nine months of
1997. Other operating expenses have increased in 1998, at a slightly
higher percentage than the Corporation's other categories of operating
expenses, due to increased expenses incurred in conjunction with the
Corporation's computer software conversion, which occurred during the
first quarter of 1998, and higher advertising expenses incurred in
conjunction with consumer loan promotions.
-17-
<PAGE>
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 33.3% and
32.9%, respectively, during the three and nine months ended September
30, 1998, compared to 32.8% and 32.7%, respectively, during these same
periods in 1997. The effective federal income tax rate is a function
of the proportion of the Corporation's interest income exempt from
federal taxation, nondeductible interest expense and other
nondeductible expenses.
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets increased $50.5 million, or 2.9%, from December 31, 1997
and increased $66.8 million, or 3.8%, from September 30, 1997 to
$1.816 billion as of September 30, 1998. Total deposits increased
$23.9 million, or 1.6%, from December 31, 1997 and increased
$40.5 million, or 2.8%, from September 30, 1997 to $1.5 billion as of
September 30, 1998.
LOANS
The Corporation's subsidiary banks are generally located in rural
communities, where the demand for commercial loans which meet the
Corporation's credit standards historically has not been high. The
Corporation's philosophy is such that it will neither compromise on
loan quality nor make loans outside its banking markets to increase
its loan portfolio. The Corporation does not generally purchase
participation loans, which is a method utilized by many financial
institutions to increase the size of their loan portfolios.
Total loans as of September 30, 1998 were $891.2 million, compared to
$839.6 million as of September 30, 1997 and $845.6 million as of
December 31, 1997. The increase in total loans from September 30,
1997 and December 31, 1997 to September 30, 1998 of $51.6 million, or
6.1%, and $45.6 million, or 5.4%, respectively, was primarily
attributable to increases in commercial and consumer loans.
Commercial loans increased $22.5 million, or 19.7%, from September 30,
1997, and $26.1 million, or 23.6%, from December 31, 1997 to $136.7
million as of September 30, 1998. The growth in commercial loans was
achieved through an increased sales effort by the Corporation to
increase commercial loans as a percentage of total loans. Commercial
loans represented 15.3%, 13.1% and 13.6% of the Corporation's loan
portfolio as of September 30, 1998, December 31, 1997 and September
30, 1997, respectively.
-18-
<PAGE>
Real estate construction and mortgage loans increased $7.8 million, or
1.4%, from September 30, 1997, and decreased $.4 million, or .1%, from
December 31, 1997 to $567.7 million as of September 30, 1998. The
decrease in these loans from December 31, 1997 and only slight
increase from September 30, 1997 resulted from an increase in the
proportion of residential mortgage loans originated being sold in the
secondary market. As residential mortgage loan interest rates have
continued to decline since the latter part of 1997, the Corporation
continues to experience the refinancing of real estate mortgages and
consumers converting balloon mortgage loans to long-term fixed rate
loans at the lower interest rates. The Corporation keeps balloon
mortgage loans in its own portfolio and generally sells the long-term
fixed rate residential mortgage loans it originates in the secondary
market. The Corporation sold $75 million of fixed rate residential
mortgage loans, with terms of fifteen years or greater, in the
secondary mortgage market in the first nine months of 1998, compared
to $22 million of similar type loans sold during the first nine months
of 1997. Real estate construction and mortgage loans represented
63.7%, 67.2% and 66.7% of the Corporation's loan portfolio as of
September 30, 1998, December 31, 1997 and September 30, 1997,
respectively.
Consumer loans increased $21.3 million, or 12.9%, from September 30,
1997, and $19.9 million, or 11.9%, from December 31, 1997 to $186.9
million as of September 30, 1998. The increases from December 31,
1997 and September 30, 1997 were the result of several consumer loan
promotions, which offered lower interest rates on certain types of
consumer loans during the twelve month period ended September 30,
1998. These various consumer loan promotions offered loans with
annual percentage rates ranging from 7.40% to 7.99% and maximum terms
varying from 48 to 60 months. The Corporation has utilized similar
special promotions to increase consumer loans during the past eight
years. Consumer loans represented 21.0%, 19.7% and 19.7% of total
loans as of September 30, 1998, December 31, 1997 and September 30,
1997, respectively.
The Corporation's total loan to deposit ratio as of September 30,
1998, December 31, 1997 and September 30, 1997 was 59.4%, 57.3% and
57.5%, respectively.
The Corporation traditionally has had a conservative loan underwriting
policy. This is evidenced by its historically low loan losses and low
ratio of nonperforming loans to total loans. During the three and
nine months ended September 30, 1998, the Corporation experienced net
loan charge-offs of $41,000 and $103,000, respectively. The
Corporation had net loan charge-offs of $31,000 and $105,000,
respectively, during the comparable periods in 1997.
-19-
<PAGE>
Nonperforming loans consist of loans which are past due for principal
or interest payments by 90 days or more and are still accruing
interest, loans for which the accrual of interest has been
discontinued, and other loans which have been renegotiated to less
than market terms due to a serious weakening of the borrower's
financial condition. Nonperforming loans were $2.5 million as of
September 30, 1998, $3.0 million as of December 31, 1997 and $3.6
million as of September 30, 1997, and represented .29%, .36% and .42%
of total loans as of those dates, respectively.
The allowance for possible loan losses at September 30, 1998 was
$17,969,000 and represented 2.02% of total loans, compared to
$17,359,000, or 2.05% of total loans at December 31, 1997 and
$17,269,000, or 2.06% of total loans at September 30, 1997.
LIQUIDITY
The maintenance of an adequate level of liquidity is necessary to
ensure that sufficient funds are available to meet customers' loan
demands and deposit withdrawals. The banking subsidiaries' primary
liquidity sources consist of investment securities, those maturing
within one year and those classified as available for sale, maturing
loans and federal funds sold. As of September 30, 1998, the
Corporation's investment securities portfolio had an average life of
less than two years. In addition, at September 30, 1998, the
Corporation held only $2.2 million in mortgage-backed securities,
which represented less than one percent of the investment securities
portfolio, and had no other derivatives.
CAPITAL RESOURCES
As of September 30, 1998, shareholders' equity was $238 million,
compared to $223.9 million as of December 31, 1997 and $218.9 million
as of September 30, 1997, resulting in an increase of $14.1 million,
or 6.3%, from December 31, 1997 and $19.1 million, or 8.7%, from
September 30, 1997. Shareholders' equity as a percentage of total
assets was 13.1% as of September 30, 1998, 12.7% at December 31, 1997
and 12.5% as of September 30, 1997. Total equity included an after-
tax unrealized net gain of $4.1 million as of September 30, 1998,
$1.4 million as of December 31, 1997 and $1 million as of September
30, 1997, on investment securities available for sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
A statement of changes in shareholders' equity covering the nine-month
periods ended September 30, 1998 and September 30, 1997 follows (in
thousands of dollars):
-20-
<PAGE>
</TABLE>
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Total shareholders' equity as of January 1 $ 223,925 $ 207,269
Net income 18,487 17,056
Dividends (7,768) (6,648)
Shares issued upon exercise of employee stock options 314 250
Shares issued from director stock purchase plan 264 265
Repurchases of common stock (467)
Change in unrealized net gains and losses on securities
available for sale 2,740 1,170
------------ ------------
Total shareholders' equity as of end of period $ 237,962 $ 218,895
============ ============
</TABLE>
The following table represents the Corporation's regulatory capital
ratios as of September 30, 1998:
<TABLE>
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
-------- ---------- ----------
<S> <C> <C> <C>
Chemical Financial Corporation - actual ratio 12.7% 28.2% 29.5%
Regulatory Minimum Ratio 3.0 4.0 8.0
Ratio considered "well capitalized" by
regulatory agencies 5.0 6.0 10.0
</TABLE>
The Corporation's Tier 1 and Total capital ratios under the risk-based
capital measure at September 30, 1998 are high due to the Corporation
holding $521 million in investment securities and other assets which
are assigned a 0% risk rating, $336 million in assets which are
assigned a 20% risk rating and $466 million in residential real estate
mortgages and other assets which are assigned a 50% risk rating.
These three risk ratings (0%, 20% and 50%) represent 71% of the
Corporation's total risk-based assets (including off-balance sheet
items) as of September 30, 1998.
OTHER
The Corporation paid a 5% stock dividend on December 30, 1997. All per
share amounts have been adjusted for this stock dividend.
-21-
<PAGE>
Except as discussed below relating to the Year 2000 issue, there are
currently no known trends, events or uncertainties that management
believes may be reasonably expected to have a material effect on the
Corporation's liquidity, capital resources or financial performance.
YEAR 2000 READINESS DISCLOSURE
During the third quarter of 1996, the Corporation formed a Year 2000
project team and began developing its plan to prepare for the Year
2000. The project began with a process to identify information
technology and non-information technology systems that required
modification for the Year 2000. A Year 2000 Plan was developed with
goals and target dates. This plan includes communicating with third
party vendors and suppliers, and obtaining certifications of
compliance from third party software and service 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
("Dimension") offered by its existing vendor. The vendor of the new
core operating system has certified to the Corporation that its
Dimension system is Year 2000 compliant. The Corporation converted to
the new operating system during the first quarter of 1998. The cost
of converting to the new operating system was approximately $300,000.
In conjunction with the conversion to the new core operating system,
the Corporation purchased a new mainframe computer in 1997 at a cost
of approximately $1 million, which was capitalized. The previous
mainframe computer and core operating system software were fully
depreciated prior to 1997.
The Corporation continued to assess the impact of the Year 2000 issue
on the remainder of its computer-based systems and applications and
non-information technology systems throughout the first nine months of
1998. As of September 30, 1998, it is the Corporation's opinion that
it is substantially complete with the assessment phase of its Year
2000 Plan. As of September 30, 1998, the Corporation had begun
testing of its internal mission critical systems, including the new
Dimension core operating system and other software programs.
Management believes that, as of September 30, 1998 (i) the conversion
to the new core operating system software has been completed, but that
additional testing is necessary; (ii) the core operating system
represents approximately 85% of the Corporation's "mission critical"
systems; and (iii) all "mission critical" systems and software are on
schedule to be renovated by December 31, 1998.
-22-
<PAGE>
The Corporation spent a total of $112,000 to replace computer hardware
and software that was not Year 2000 compliant in the third quarter of
1998, which was capitalized. The Corporation expects to spend
approximately $425,000 during the fourth quarter of 1998, primarily to
replace desk-top computers and related equipment, that are not
currently Year 2000 compliant. These costs will be capitalized. The
Corporation currently anticipates that remaining Year 2000 costs for
hardware and software purchases, associated reprogramming, and
remedial actions for both information technology and non-information
technology will not exceed $250,000 in 1999.
The impact of the Year 2000 issues on the Corporation will depend not
only on corrective actions that the Corporation takes, but also on the
way in which Year 2000 issues are addressed by governmental agencies,
businesses and other third parties that provide services or data to,
or receive services or data from, the Corporation, or whose financial
condition or operational capability is important to the Corporation.
To reduce this exposure, 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 has received communications from the
majority of its third party vendors and suppliers either confirming
that the third parties' software systems are Year 2000 compliant or
providing the Corporation with a time line of an expected compliance
date by mid 1999. The testing of mission critical third party
software systems has begun. The Corporation is on schedule to have
all testing of third party software systems completed by June 30,
1999. 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 results of
operations and financial condition of the Corporation.
The Corporation's credit risk associated with borrowers may increase
to the extent borrowers fail to adequately address Year 2000 issues.
As a result, all of the Corporation's subsidiary banks have identified
their material borrowers and have assessed these borrowers' Year 2000
preparedness. The material borrowers' Year 2000 readiness will be
monitored periodically, based on the level of risk that the Year 2000
has been estimated to potentially impact the business of each
borrower.
The Corporation is preparing general contingency plans to address
unforeseen Year 2000 issues, including plans in the event that mission
critical systems experience difficulties or other significant third
parties fail to adequately address year 2000 issues. Such plans
-23-
<PAGE>
principally involve the operation of systems in an off-line "limited
computerized" environment. This would be accomplished by the manual
and desktop computer update of financial records until problems or
difficulties are remedied. The Corporation has determined that it
must rely primarily on its software vendors to remedy any unforeseen
situations of its mission critical systems in a timely manner.
Internal remediation plans are being developed in the remaining
information and non information technology areas. The Corporation is
also enhancing its existing business resumption plans to reflect Year
2000 issues. It is developing plans, designed to coordinate the
efforts of its personnel and resources, in addressing any Year 2000
difficulties that become evident after December 31, 1999. There can
be no assurance that any plans will fully mitigate any such
difficulties. Furthermore, there may be certain mission critical
third parties, such as utilities or telecommunication companies, where
alternative arrangements or other sources are limited or unavailable.
The Corporation believes that with modifications to existing software,
new hardware and software purchases, and the conversion of the
Corporation's core operating system, the Year 2000 issue will not pose
significant operational problems for its computer systems and that the
additional costs to be incurred are not expected to be material to the
Corporation's results of operations, liquidity or capital resources.
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,
without limitation, 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.
-24-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures
about market risk contained under the caption "Liquidity and Interest
Sensitivity" on pages 37 through 41 (inclusive) of the Corporation's
Annual Report to Shareholders for the year ended December 31, 1997 is
here incorporated by reference. Such Annual Report was previously
filed as Exhibit 13 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997.
The Corporation does not believe that there has been a material change
in the nature or categories of the Corporation' primary market risk
exposures, or the particular markets that present the primary risk of
loss to the Corporation. As of the date of this report, the
Corporation does not know of or expect there to be any material change
in the general nature of its primary market risk exposure in the near
term. The methods by which the Corporation manages its primary market
risk exposures, as described in the sections of its Annual Report to
Shareholders incorporated by reference in response to this item, have
not changed materially during the current year. As of the date of
this report, the Corporation does not expect to make material changes
in those methods in the near term. The Corporation may change those
methods in the future to adapt to changes in circumstances or to
implement new techniques.
The Corporation's market risk exposure is mainly comprised of its
vulnerability to interest rate risk. Prevailing interest rates and
interest rate relationships are primarily determined by market factors
which are beyond the Corporation's control. All information provided
in response to this item consists of forward-looking statements.
Reference is made to the section captioned "Forward-Looking
Statements" in Item 2 of this report for a discussion of the
limitations on the Corporation's responsibility for such statements.
In this discussion, "near term" means a period of one year following
the date of the most recent statement of financial position contained
in this report.
-25-
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
All information with respect to Year 2000 issues provided by the
Corporation in this Quarterly Report and in other reports and
materials previously filed with the Securities and Exchange
Commission, as set forth on Exhibit 99.1 to this Quarterly Report, are
"Year 2000 Readiness Disclosures" under the Year 2000 Information and
Readiness Disclosure Act.
The Bylaws of the Corporation provide that no matter submitted by a
shareholder may be presented for shareholder action at an annual or
special meeting of shareholders unless written notice of the matter is
delivered to the Corporation before a designated deadline prior to the
applicable meeting of shareholders. The deadline for submitting
shareholder proposals for consideration at the next annual meeting of
shareholders was November 6, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to this
report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 RESTATED ARTICLES OF INCORPORATION. Previously
filed as Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998. Here incorporated by reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's Form S-8 Registration Statement No. 33-
47356 filed with the Commission on April 28, 1992.
Here incorporated by reference.
27 FINANCIAL DATA SCHEDULE.
99.1 PRIOR YEAR 2000 READINESS DISCLOSURES.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the quarter covered by this Report on Form 10-Q.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: November 11, 1998 By /S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 11, 1998 By /S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
-27-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed
as Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998. Here
incorporated by reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's S-8 Registration Statement No. 33-47356
filed with the Commission on April 28, 1992. Here
incorporated by reference.
27 FINANCIAL DATA SCHEDULE.
99.1 PRIOR YEAR 2000 READINESS DISCLOSURES.
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 78,588
<INT-BEARING-DEPOSITS> 5,000
<FED-FUNDS-SOLD> 90,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 506,656
<INVESTMENTS-CARRYING> 217,935
<INVESTMENTS-MARKET> 222,269
<LOANS> 891,206
<ALLOWANCE> 17,969
<TOTAL-ASSETS> 1,815,601
<DEPOSITS> 1,499,694
<SHORT-TERM> 53,040
<LIABILITIES-OTHER> 15,905
<LONG-TERM> 9,000
<COMMON> 10,795
0
0
<OTHER-SE> 227,167
<TOTAL-LIABILITIES-AND-EQUITY> 1,815,601
<INTEREST-LOAN> 55,286
<INTEREST-INVEST> 32,153
<INTEREST-OTHER> 3,621
<INTEREST-TOTAL> 91,060
<INTEREST-DEPOSIT> 35,709
<INTEREST-EXPENSE> 37,286
<INTEREST-INCOME-NET> 53,774
<LOAN-LOSSES> 713
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 36,942
<INCOME-PRETAX> 27,566
<INCOME-PRE-EXTRAORDINARY> 27,566
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,487
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.35
<LOANS-NON> 1,616
<LOANS-PAST> 910
<LOANS-TROUBLED> 21
<LOANS-PROBLEM> 2,547
<ALLOWANCE-OPEN> 17,359
<CHARGE-OFFS> 346
<RECOVERIES> 243
<ALLOWANCE-CLOSE> 17,969
<ALLOWANCE-DOMESTIC> 17,969
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Exhibit 99.1
PRIOR YEAR 2000 READINESS DISCLOSURES
Each of the following statements previously made by the Corporation is
being designated as a "Year 2000 Readiness Disclosure" under the Year 2000
Information and Readiness Disclosure Act. These prior Year 2000 Readiness
Disclosures were based in part upon and repeated information provided by
the Corporation's customers, suppliers and other third parties without
independent verification by the Corporation. These prior Year 2000
Readiness Disclosures are superseded by the Year 2000 Readiness Disclosure
in the Quarterly Report on Form 10-Q for the period ended September 30,
1998.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998
YEAR 2000 COMPLIANCE
The Corporation has completed an analysis of its hardware and software
systems to determine whether those systems will properly recognize and
account for the year 2000. As described in greater detail in the
Corporation's 1997 Annual Report to Shareholders, the Corporation has now
completed the conversion of its core operating system to a new system that
has been certified by the vendor to be year 2000 compliant. The
Corporation also purchased a new mainframe computer in 1997, which was
capitalized. Management currently anticipates that the remaining costs of
analysis, conversion, hardware and software purchases, associated
reprogramming and other remedial actions will not exceed $750,000 for the
remaining eighteen-month period ending December 31, 1999, and that a
majority of these costs will relate to hardware purchases and will be
capitalized. Management believes that, as of June 30, 1998 (i) the
conversion of the core operating system software had been completed, but
that additional testing will be required; (ii) the core operating system
represents approximately 85% of the Corporation's "mission critical"
systems; and (iii) all "mission critical" systems and software are
scheduled to be renovated by December 31, 1998.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
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.
<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.
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
-2-
<PAGE>
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.
-3-
