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Previous: CACI INTERNATIONAL INC /DE/, DEFA14A, 1999-11-04 |
Next: COLUMBIA ENERGY GROUP, U-1, 1999-11-04 |
(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, 1999, OR |
|
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ |
|
|
|
|
|
|
|
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 22, 1999, was 13,449,732 shares.
| PART I. | FINANCIAL INFORMATION |
|
| Item 1. Consolidated Financial Statements (unaudited, except Consolidated | ||
| Statement of Financial Position as of December 31, 1998) | ||
| Consolidated Statement of Income for the Three and Nine Months Ended | ||
| September 30, 1999 and September 30, 1998 |
3
|
|
| Consolidated Statement of Financial Position as of September 30, 1999, | ||
| December 31, 1998 and September 30, 1998 |
4
|
|
| Consolidated Statement of Cash Flows for the Nine Months Ended | ||
| September 30, 1999 and September 30, 1998 |
5
|
|
| Notes to Consolidated Financial Statements |
6-10
|
|
| Item 2. Management's Discussion and Analysis of Financial Condition and | ||
| Results of Operations |
11-21
|
|
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
22
|
|
| PART II. | OTHER INFORMATION | |
| Item 6. Exhibits and Reports on Form 8-K |
23
|
|
| SIGNATURES |
24
|
|
| ITEM 1. | FINANCIAL STATEMENTS |
|
|
|
||||||||
|
|
|
|
|
||||||
|
|
|||||||||
| INTEREST INCOME | |||||||||
| Interest and fees on loans |
|
$ 19,585
|
|
$ 18,807
|
|
$ 56,719
|
|
$ 55,286
|
|
| Interest on investment securities: | |||||||||
| Taxable |
9,769
|
9,889
|
30,457
|
30,573
|
|||||
| Tax-exempt |
452 |
505 |
1,422 |
1,580 |
|||||
| TOTAL INTEREST ON SECURITIES |
10,221
|
10,394
|
31,879
|
32,153
|
|||||
| Interest on federal funds sold |
767
|
1,520
|
2,458
|
3,566
|
|||||
| Interest on deposits with unaffiliated banks |
33 |
55 |
84 |
55 |
|||||
| TOTAL INTEREST INCOME |
30,606
|
30,776
|
91,140
|
91,060
|
|||||
| INTEREST EXPENSE | |||||||||
| Interest on deposits |
11,138
|
11,902
|
33,591
|
35,709
|
|||||
| Interest on short-term borrowings |
460
|
437
|
1,219
|
1,125
|
|||||
| Interest on long-term debt |
123 |
152 |
354 |
452 |
|||||
| TOTAL INTEREST EXPENSE |
11,721 |
12,491 |
35,164 |
37,286 |
|||||
| NET INTEREST INCOME |
18,885
|
18,285
|
55,976
|
53,774
|
|||||
| Provision for loan losses |
143 |
234 |
318 |
713 |
|||||
| NET INTEREST INCOME after provision for | |||||||||
| loan losses |
18,742
|
18,051
|
55,658
|
53,061
|
|||||
| NONINTEREST INCOME | |||||||||
| Trust department income |
929
|
834
|
2,867
|
2,607
|
|||||
| Service charges on deposit accounts |
1,470
|
1,409
|
4,209
|
4,082
|
|||||
| Other charges and fees for customer services |
1,216
|
1,109
|
3,566
|
3,386
|
|||||
| Gains on sales of loans |
133
|
469
|
526
|
975
|
|||||
| Other |
122 |
126 |
608 |
397 |
|||||
| TOTAL NONINTEREST INCOME |
3,870
|
3,947
|
11,776
|
11,447
|
|||||
| OPERATING EXPENSES | |||||||||
| Salaries, wages and employee benefits |
7,599
|
7,283
|
22,579
|
21,931
|
|||||
| Occupancy |
1,168
|
1,175
|
3,533
|
3,525
|
|||||
| Equipment |
947
|
796
|
2,777
|
2,432
|
|||||
| Other |
2,545 |
2,950 |
8,545 |
9,054 |
|||||
| TOTAL OPERATING EXPENSES |
12,259 |
12,204 |
37,434 |
36,942 |
|||||
| INCOME BEFORE INCOME TAXES |
10,353
|
9,794
|
30,000
|
27,566
|
|||||
| Federal income taxes |
3,422 |
3,265 |
9,904 |
9,079 |
|||||
| NET INCOME |
|
$ 6,931 |
|
$ 6,529 |
|
$ 20,096 |
|
$ 18,487 |
|
| NET INCOME PER SHARE | |||||||||
| Basic |
|
$ .51 |
|
$ .48 |
|
$ 1.49 |
|
$ 1.37 |
|
| Diluted |
$ .51 |
|
$ .48 |
|
$ 1.48 |
|
$ 1.36 |
||
| CASH DIVIDENDS PER SHARE |
|
$ .21 |
|
$ .19 |
|
$ .63 |
|
$ .58 |
|
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||||
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||||||
| ASSETS | ||||||
| Cash and demand deposits due from banks |
|
$ 87,412
|
|
$ 98,483
|
|
$ 78,588
|
| Federal funds sold |
96,900
|
113,150
|
90,650
|
|||
| Interest bearing deposits with unaffiliated banks |
5,000
|
5,000
|
||||
| Investment securities: | ||||||
| Available for sale (at estimated market value) |
430,249
|
488,976
|
506,656
|
|||
| Held to maturity (estimated market value- 255,340 at 9/30/99, | ||||||
| 244,430 at 12/31/98, 222,269 at 9/30/98) |
255,694 |
240,847 |
217,935 |
|||
| Total investment securities |
685,943 |
729,823
|
724,591
|
|||
| Loans: | ||||||
| Commercial and agricultural |
155,734
|
139,051
|
137,107
|
|||
| Real estate construction |
32,120
|
35,039
|
32,978
|
|||
| Real estate mortgage |
573,422
|
520,972
|
534,257
|
|||
| Consumer |
243,800 |
203,231 |
186,864 |
|||
| Total loans |
1,005,076
|
898,293
|
891,206
|
|||
| Less: Allowance for loan losses |
18,165 |
18,071 |
17,969 |
|||
| Net loans |
986,911
|
880,222
|
873,237
|
|||
| Premises and equipment |
20,534
|
20,215
|
19,384
|
|||
| Accrued income |
15,021
|
14,195
|
14,286
|
|||
| Other assets |
17,164 |
11,538 |
9,865 |
|||
| TOTAL ASSETS |
|
$ 1,909,885 |
|
$ 1,872,626 |
|
$ 1,815,601 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Deposits: | ||||||
| Noninterest-bearing |
|
$ 266,705
|
|
$ 272,388
|
|
$ 242,017
|
| Interest-bearing |
1,288,703 |
1,281,883 |
1,257,677 |
|||
| Total deposits |
1,555,408
|
1,554,271
|
1,499,694
|
|||
| Short-term borrowings: | ||||||
| Treasury tax and loan notes payable to the U.S. Treasury |
10,481
|
5,137
|
8,127
|
|||
| Securities sold under agreements to repurchase |
70,976 |
48,113 |
44,913 |
|||
| Total short-term borrowings |
81,457
|
53,250
|
53,040
|
|||
| Interest payable and other liabilities |
17,269
|
15,266
|
15,905
|
|||
| Long-term debt |
8,200 |
8,000 |
9,000 |
|||
| Total liabilities |
1,662,334
|
1,630,787
|
1,577,639
|
|||
| Shareholders' equity: | ||||||
| Common stock, 1 par value: | ||||||
| Authorized - 18,000,000 shares | ||||||
| Issued -- 13,461,200 shares, 13,496,230 shares, | ||||||
| and 10,794,935 shares, respectively |
13,461
|
13,496
|
10,795
|
|||
| Surplus |
182,103
|
184,384
|
184,399
|
|||
| Retained earnings |
52,494
|
40,892
|
38,623
|
|||
| Accumulated other comprehensive income |
(507 |
) |
3,067 |
4,145 |
||
| Total shareholders' equity |
247,551 |
241,839 |
237,962 |
|||
| TOTAL LIABILITIES AND | ||||||
| SHAREHOLDERS' EQUITY |
|
$ 1,909,885 |
|
$ 1,872,626 |
|
$ 1,815,601 |
|
|
||||||
|
|
|
|||||
|
|
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
| Net income |
|
$ 20,096
|
|
$ 18,487
|
||
| Adjustments to reconcile net income to net cash provided by | ||||||
| operating activities: | ||||||
| Provision for loan losses |
318
|
713
|
||||
| Gains on sales of loans |
(526
|
) |
(975
|
) | ||
| Provision for depreciation and amortization |
2,848
|
2,515
|
||||
| Net amortization of investment securities |
1,571
|
548
|
||||
| Net (increase) decrease in accrued income and other assets |
(2,196
|
) |
521
|
|||
| Net increase in interest payable and other liabilities |
2,021 |
1,757 |
||||
| Net Cash Provided by Operating Activities |
24,132 |
23,566 |
||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
| Cash and cash equivalents assumed in acquisition of branch offices |
24,366
|
|||||
| Net (increase) decrease in interest-bearing deposits with unaffiliated banks |
5,000
|
(5,000
|
) | |||
| Proceeds from maturities of securities available for sale |
218,340
|
143,569
|
||||
| Proceeds from sales of securities available for sale |
339
|
|||||
| Purchases of securities available for sale |
(166,366
|
) |
(153,349
|
) | ||
| Proceeds from maturities of securities held to maturity |
83,108
|
96,945
|
||||
| Purchases of securities held to maturity |
(98,610
|
) |
(62,896
|
) | ||
| Proceeds from sales of loans |
39,438
|
75,877
|
||||
| Net loan originations, excluding sales |
(146,379
|
) |
(121,425
|
) | ||
| Purchases of premises and equipment |
(2,116 |
) |
(1,050 |
) | ||
| Net Cash Used in Investing Activities |
(42,880 |
) |
(27,329 |
) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
| Net increase (decrease) in demand deposits, NOW accounts and | ||||||
| savings accounts |
(22,751
|
) |
11,211
|
|||
| Net increase (decrease) in certificates of deposit and other time deposits |
(3,324
|
) |
12,642
|
|||
| Net increase in short-term borrowings |
28,207
|
10,844
|
||||
| Proceeds from issuance of long-term debt |
200
|
|||||
| Cash dividends paid |
(8,494
|
) |
(7,768
|
) | ||
| Proceeds from stock purchase plan |
204
|
214
|
||||
| Proceeds from exercise of stock options |
235
|
314
|
||||
| Repurchases of common stock |
(2,850 |
) | |
|||
| Net Cash Provided by (Used in) Financing Activities |
(8,573 |
) |
27,457 |
|||
| Net Increase (Decrease) in Cash and | ||||||
| Cash Equivalents |
(27,321
|
) |
23,694
|
|||
| Cash and cash equivalents at beginning of year |
211,633 |
145,544 |
||||
| Cash and Cash Equivalents at End of Period |
|
$ 184,312 |
$ 169,238 |
|||
| Supplemental disclosures of cash flow information: | ||||||
| Interest paid on deposits, short-term borrowings and long-term debt |
|
$ 35,086
|
|
$ 36,853
|
||
| Federal income taxes
paid |
|
10,785 |
|
|
10,105 |
|
See accompanying notes to consolidated financial statements.
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, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
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, 1998.
Earnings Per Share
All earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per share excludes any dilutive effect of stock options. 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:
|
|
|
||||
|
|
|
|
|
||
|
|
|
||||
| Denominator for basic earnings per share |
13,468 |
13,491 |
13,482 |
13,481 |
|
| Denominator for diluted earnings per share |
13,574 |
13,629 |
13,597 |
13,634 |
|
Comprehensive Income
As of January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 established 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.
The components of comprehensive income, net of related tax, for the
three- and nine-month periods ended September 30, 1999 and 1998 are as
follows (in thousands of dollars):
|
|
|
||||||
| 1999 | 1998 | 1999 | 1998 | ||||
| Net income |
$6,931
|
$6,529
|
$20,096
|
$18,487
|
|||
| Unrealized net gains (losses) | |||||||
| on investment securities | |||||||
| available for sale |
(609 |
) |
2,334 |
(3,574 |
) |
2,740 |
|
| Comprehensive income |
$6,322 |
$8,863 |
$16,522 |
$21,227 |
|||
The components of accumulated other comprehensive income, net of related
tax, at September 30, 1999, December 31, 1998 and September 30, 1998 are
as follows (in thousands of dollars):
|
|
|
|
|
| Unrealized net gains (losses) on investment | |||
| securities available for sale |
|
|
|
| Accumulated other comprehensive income |
|
|
|
Operating Segment
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information ("SFAS 131"). SFAS 131 established standards for
the reporting of information about operating segments and related disclosures
about products and services, geographic areas and major customers.
The Corporation is a bank holding company that operates ten commercial banks and a data processing company, each as a separate subsidiary of the Corporation. All ten of the Corporation's commercial bank subsidiaries operate community banks and offer a full range of commercial banking and fiduciary products and services to the residents and business customers of their geographical market areas. The products and services offered by the commercial bank subsidiaries are consistent throughout the Corporation, as is the pricing of these products and services. Each of the Corporation's commercial bank subsidiaries operates in a separate geographical area within the state of Michigan. The geographical area served by each of these subsidiaries is generally the twenty-five mile radius surrounding its headquarters. All marketing of products and services throughout the Corporation's ten subsidiary banks is uniform, as many of the markets served by these subsidiaries overlap. The distribution of products and services is uniform throughout the Corporation's commercial bank subsidiaries and is achieved primarily through retail branch banking offices, automated teller machines and electronically accessed banking products. All ten commercial bank subsidiaries are state chartered commercial banks, and operate under the same banking regulations. The data processing subsidiary primarily performs data processing functions for the Corporation's ten commercial banking subsidiaries. It is management's opinion that the Corporation operates in a single operating segment -- commercial banking.
Other
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), was issued in June 1998. SFAS 133 was amended by SFAS 137, in July 1999, to delay its effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. 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. The timing of gain or loss recognition on the value of those derivatives will depend upon the use of those derivatives and whether they qualify for hedge accounting. 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, 1999, the Corporation held no derivative financial instruments.
The Corporation paid a 5 for 4 stock split on December 16, 1998. All per share amounts have been adjusted for this stock split.
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):
| Loans: |
|
|
|
|||||||||
| Commercial |
|
$ 155,734
|
|
$ 139,051
|
|
$ 137,107
|
| Real estate construction |
32,120
|
35,039
|
32,978
|
|||
| Real estate mortgage |
573,422
|
520,972
|
534,257
|
|||
| Consumer |
243,800 |
203,231 |
186,864 |
|||
| Total Loans |
|
$ 1,005,076 |
|
$ 898,293 |
|
$ 891,206 |
| Nonperforming assets: | ||||||
| Nonaccrual loans |
|
$ 1,956
|
|
$ 1,785
|
|
$ 1,616
|
| Loans 90 days or more past due and | ||||||
| still accruing interest |
439
|
1,316
|
910
|
|||
| Restructured loans |
838 |
|
21 |
|||
| Total nonperforming loans |
3,233 |
3,101 |
2,547 |
|||
| Other real estate owned (1) |
589 |
470 |
472 |
|||
| Total nonperforming assets |
|
$ 3,822 |
|
$ 3,571 |
|
$ 3,019 |
| (1) | 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. |
|
|
|||||
| 1999 |
|
||||
| Allowance for Loan Losses | |||||
| Balance as of January 1 |
|
$ 18,071
|
|
$ 17,359
|
|
| Provision for loan losses |
318
|
713
|
|||
| Gross loans charged-off |
(397
|
) |
(346
|
) | |
| Gross recoveries of loans previously charged-off |
173 |
243 |
|||
| Net loans charged-off |
(224 |
) |
(103 |
) | |
| Balance at September 30 |
|
$ 18,165 |
|
$ 17,969 |
|
NOTE D: ACQUISITIONS
On November 20, 1998, Chemical Bank South, a wholly owned banking subsidiary of the Corporation headquartered in Marshall, Michigan, acquired a branch banking office in Albion, Michigan from Great Lakes National Bank Michigan. The branch banking office had approximately $11 million of deposits as of that date. The transaction was accounted for by the purchase method of accounting. The amount of the purchase price assigned to core deposit intangibles was $1.3 million. In conjunction with the acquisition, Chemical Bank South consolidated its banking operations at 1408 N. Eaton Street in Albion with the newly acquired branch banking office.
On July 9, 1999, Chemical Bank Bay Area ("Bay Area"), a wholly owned
banking subsidiary of the Corporation headquartered in Bay City, Michigan,
acquired branch banking offices in Linwood and Standish, Michigan from
National City Bank of Michigan/Illinois. The two branch banking offices
had approximately $27 million of deposits as of that date. The transaction
was accounted for by the purchase method of accounting. The amount of the
purchase price assigned to core deposit intangibles was $2.4 million. Bay
Area continues to operate the office acquired in Linwood, Michigan, while
the banking operations of the office acquired in Standish were consolidated
with Bay Area's existing branch banking office located at 220 South Main
Street in Standish.
| 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," "judgment," "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. Assessments that the Corporation and/or its information and non-information technology systems are Year 2000 "compliant" or "ready" are statements of belief as to the outcome of future events based in part on information provided by vendors and other third parties that the Corporation has not independently verified. 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. The Corporation undertakes no obligation
to update, amend or clarify forward-looking statements, whether as a result
of new information, future events or otherwise.
The Corporation's net income was $6,931,000 in the third quarter of 1999, as compared to net income of $6,529,000 during the third quarter of 1998. Earnings per share in the third quarter of 1999 were $.51, compared to earnings per share of $.48 in the third quarter of 1998.
The increase in net income during the third quarter of 1999, as compared to the third quarter of 1998, was principally the result of an increase in net interest income and a decrease in the provision for loan losses. These factors were partially offset by a slight decrease in noninterest income and a slight increase in operating expenses.
Return on average assets in the third quarter of 1999 was 1.45%, as compared to 1.43% during the third quarter of 1998. Return on average equity for the third quarter of 1999 and the third quarter of 1998 was 11.1% and 11.2%, respectively.
The Corporation's net income was $20,096,000 for the first nine months of 1999, compared to net income of $18,487,000 during the first nine months of 1998. Earnings per share for the first nine months of 1999 were $1.48, compared to earnings per share of $1.36 for the first nine months of 1998.
The increase in net income during the nine months ended September 30, 1999, as compared to the nine months ended September 30, 1998, was principally the result of increases in both net interest income and noninterest income and a decrease in the provision for loan losses. These factors were slightly offset by increased operating expenses.
Return on average assets for the first nine months of 1999 was 1.43%, compared to a return on average assets of 1.38% for the first nine months of 1998. Return on average equity for the nine-month periods ended September 30, 1999 and September 30, 1998 was 11.0% and 10.8%, respectively.
Total assets were $1.91 billion as of September 30, 1999, up $37 million, or 2%, from total assets of $1.873 billion as of December 31, 1998, and up $94 million, or 5.2%, from total assets of $1.816 billion as of September 30, 1998.
Total loans increased $107 million, or 11.9%, from December 31, 1998, and $114 million, or 12.8%, from September 30, 1998 to $1.005 billion as of September 30, 1999. The Corporation experienced increases from both December 31, 1998 and September 30, 1998 to September 30, 1999 in commercial, real estate mortgage and consumer loans.
Shareholders' equity increased $9.6 million, or 4%, from September 30,
1998, to $247.6 million as of September 30, 1999, or $18.39 per share,
representing 13.0% 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 1999 was $18.89 million, a $.6 million, or 3.3%, increase over the $18.29 million recorded in the third quarter of 1998. The increase in net interest income was due primarily to increases in average loans, deposits and shareholders' equity. Average total loans increased $94.5 million, or 10.6%, in the third quarter of 1999 compared to the third quarter of 1998. Average deposits increased $56.1 million, or 3.7%, in the third quarter of 1999 compared to the third quarter of 1998, while average shareholders' equity increased $14.8 million, or 6.4%. The Corporation's net interest margin was 4.30% in the third quarter of 1999 compared to 4.33% in the third quarter of 1998.
Net interest income was $56 million for the nine months ended September 30,1999, a $2.2 million, or 4.1%, increase over the $53.77 million recorded for the corresponding period in 1998. The net interest margin was 4.32% and 4.35% during the nine months ended September 30, 1999 and 1998, respectively.
The decline in the Corporation's net interest margin during the third quarter of 1999 and the first nine months of 1999, as compared to similar periods in 1998, resulted from lower yields on loans and investment securities that were partially offset by lower costs of interest bearing liabilities.
Noninterest Income
Noninterest income decreased $77,000, or 2%, in the third quarter of 1999 compared to the third quarter of 1998 and increased $329,000, or 2.9%, in the first nine months of 1999 compared to the first nine months of 1998.
The decrease in noninterest income during the third quarter of 1999 was attributable to a $336,000 reduction in the gains realized on the sales of residential mortgage loans in the secondary market, resulting from the significant decline in the refinancing activity of residential mortgage loans. This reduction was partially offset by increases in Trust Department income, service charges on deposit accounts and other charges and fees for customer services. Trust Department income increased $95,000, or 11.4%, from increased fees resulting from an increase in the market value of trust assets and new business. Service charges on deposit accounts increased $61,000, or 4.3%, in the third quarter of 1999 compared to the third quarter of 1998. Other charges and fees for customer services increased $107,000, or 9.6%, in the third quarter of 1999 compared to the third quarter of 1998.
The increase in noninterest income during the first nine months of 1999
was primarily attributable to a $236,000 gain that was realized on the
sale of land owned by the Corporation's lead subsidiary bank, Chemical
Bank and Trust Company, and to increases in Trust Department income, service
charges on deposit accounts and other charges and fees for customer services.
During the first nine
Provision for Loan Losses
The provision for 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 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 and consistent evaluation of risks in the loan portfolios, management believes that the Allowance is adequate. During the three- and nine-month periods ended September 30, 1999, the Corporation added $143,000 and $318,000, respectively, to the Allowance through the provision for loan losses, compared to $234,000 and $713,000, respectively, during the comparable periods in 1998. Net loan charge-offs during the three- and nine-month periods ended September 30, 1999 were $112,000 and $224,000, respectively, compared to $41,000 and $103,000, respectively, during the comparable periods in 1998.
Operating Expenses
The Corporation continued its cost control measures. Total operating expenses increased $55,000, or .5%, in the third quarter of 1999 compared to the third quarter of 1998 and $492,000, or 1.3%, in the first nine months of 1999 compared to the first nine months of 1998. Salaries, wages and employee benefits increased $316,000, or 4.3%, in the third quarter of 1999 compared to the third quarter of 1998 and $648,000, or 3%, in the first nine months of 1999 compared to the first nine months of 1998. Occupancy and equipment expense, combined, increased $144,000, or 7.3%, in the third quarter of 1999 and $353,000, or 5.9%, in the first nine months of 1999 compared to the corresponding periods in 1998. Other operating expenses decreased $405,000, or 13.7%, during the third quarter of 1999 and $509,000, or 5.6%, during the first nine months of 1999 compared to the corresponding periods in 1998.
Income Tax Expense
The Corporation's effective federal income tax rate was 33.1% and 33%,
respectively, during the three and nine months ended September 30, 1999,
compared to 33.3% and 32.9%, respectively, during the three and nine months
ended September 30, 1998. The Corporation is subject to the federal statutory
income tax rate of 35%. The difference between the federal statutory income
tax rate and the Corporation's effective federal income tax rate is a function
of the proportion of the
BALANCE SHEET CHANGES
Asset and Deposit Changes
Total assets increased $37 million, or 2%, from December 31, 1998 and increased $94 million, or 5.2%, from September 30, 1998 to $1.91 billion as of September 30, 1999. Total deposits increased $1 million, or .1%, from December 31, 1998 and increased $55 million, or 3.7%, from September 30, 1998 to $1.555 billion as of September 30, 1999.
Loans
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 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, 1999 were $1.005 billion, compared to $891 million as of September 30, 1998 and $898 million as of December 31, 1998.
Commercial loans increased $18.6 million, or 13.6%, from September 30, 1998, and $16.7 million, or 12%, from December 31, 1998 to $155.7 million as of September 30, 1999. The growth in commercial loans was achieved through an increased sales effort by the Corporation to increase commercial loans. Commercial loans represented 15.5%, 15.5% and 15.4% of the Corporation's loan portfolio as of September 30, 1999, December 31, 1998 and September 30, 1998, respectively.
Real estate construction and mortgage loans increased $38.3 million, or 6.8%, from September 30, 1998, and increased $49.5 million, or 8.9%, from December 31, 1998 to $605.5 million as of September 30, 1999. Real estate construction and mortgage loans represented 60.2%, 61.9% and 63.6% of the Corporation's loan portfolio as of September 30, 1999, December 31, 1998 and September 30, 1998, respectively.
Consumer loans increased $56.9 million, or 30.5%, from September 30,
1998, and $40.6 million, or 20%, from December 31, 1998 to $243.8 million
as of September 30, 1999. The increases were the result of several consumer
loan promotions, which offered special interest rates on certain types
of consumer loans during the nine- and twelve-month periods ended September
30, 1999. These various consumer loan promotions offered loans with annual
percentage rates ranging from 6.90% to 7.19% and maximum terms of 60 months.
Consumer loans represented 24.3%, 22.6% and 21% of total loans as of September
30, 1999, December 31, 1998 and September 30, 1998, respectively.
The Corporation's total loan to deposit ratio as of September 30, 1999, December 31, 1998 and September 30, 1998 was 64.6%, 57.8% and 59.4%, 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-month periods ended September 30, 1999, the Corporation added $143,000 and $318,000, respectively, to the Allowance through the provision for loan losses, compared to $234,000 and $713,000, respectively, during the comparable periods in 1998. Net loan charge-offs during the three- and nine-month periods ended September 30, 1999 were $112,000 and $224,000, respectively, compared to $41,000 and $103,000, respectively, during the comparable periods in 1998.
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 restructured to less than market terms due to a serious weakening of the borrower's financial condition. As of September 30, 1999, the Corporation had one loan totaling $838,000 that constitutes a restructured loan. Nonperforming loans were $3.2 million as of September 30, 1999, $3.1 million as of December 31, 1998 and $2.5 million as of September 30, 1998, and represented .32%, .35% and .29% of total loans as of those dates, respectively.
A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. In most instances, the impairment is measured based on the fair market value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. A portion of the allowance for loan losses may be allocated to impaired loans.
The Corporation measures impairment on all large balance nonaccrual commercial and commercial real estate loans. In most instances, impairment is measured based on the fair value of the underlying collateral. The Corporation had one impaired loan, with a balance of $441,000, at September 30, 1999. No valuation allowance was deemed required on this loan as of that date. The Corporation had no impaired loans at September 30, 1998. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, and residential real estate loans.
The allowance for loan losses at September 30, 1999 was $18,165,000 and represented 1.81% of total loans, compared to $18,071,000, or 2.01% of total loans, at December 31, 1998 and $17,969,000, or 2.02% of total loans, at September 30, 1998.
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 and to capitalize on opportunities for business expansion.
The banking subsidiaries' primary liquidity sources consist of investment
Capital Resources
As of September 30, 1999, shareholders' equity was $247.6 million, compared to $241.8 million as of December 31, 1998 and $238 million as of September 30, 1998, resulting in an increase of $5.7 million, or 2.4%, from December 31, 1998 and $9.6 million, or 4%, from September 30, 1998. Shareholders' equity as a percentage of total assets was 13% as of September 30, 1999, 12.9% as of December 31, 1998 and 13.1% as of September 30, 1998. Total equity included an after-tax unrealized net loss of $.5 million as of September 30, 1999, compared to a net gain of $3.1 million as of December 31, 1998 and $4.1 million as of September 30, 1998, 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." The reduction in the after-tax unrealized net gain on investment securities available for sale from both September 30, 1998 and December 31, 1998 to September 30, 1999 was the result of the increase in market interest rates over this time period.
A statement of changes in shareholders' equity covering the nine-month
periods ended September 30, 1999 and September 30, 1998 follows (in thousands
of dollars):
|
|
||||
1999 |
1998 |
|||
| Total shareholders' equity as of January 1 |
|
$ 241,839
|
|
$ 223,925
|
| Comprehensive income: | ||||
| Net income |
20,096
|
18,487
|
||
| Change in unrealized net gains (losses) on securities | ||||
| available for sale |
(3,574 |
) |
2,740 |
|
| Total comprehensive income |
16,522
|
21,227
|
||
| Dividends |
(8,494
|
) |
(7,768)
|
|
| Shares issued upon exercise of employee stock options |
235
|
314
|
||
| Shares issued from director stock purchase plan |
299
|
264
|
||
| Repurchases of common stock |
(2,850 |
) | |
|
| Total shareholders' equity as of end of period |
|
$ 247,551 |
|
$ 237,962 |
The following table represents the Corporation's regulatory capital
ratios as of September 30, 1999:
|
|
|
|
|
| Chemical Financial Corporation - actual ratio |
|
|
|
| Regulatory minimum ratio |
|
|
|
| Ratio considered "well capitalized" by | |||
| regulatory agencies |
|
|
|
The Corporation's Tier 1 and Total capital ratios under the risk-based capital measure at September 30, 1999 are high due to the Corporation holding $395 million in investment securities and other assets which are assigned a 0% risk rating, $460 million in assets, primarily investment securities, which are assigned a 20% risk rating and $482 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 68% of the Corporation's total risk-based assets (including off-balance sheet items) as of September 30, 1999.
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 banking application system that the core banking
application 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 banking application systems
and, in July 1997, chose to convert its core banking application system
to a new system ("Dimension") offered by its existing vendor. The vendor
of the new core banking application system has certified to the Corporation
that its Dimension system is Year 2000 compliant and guarantees that Dimension
software has been designed to accurately store and calculate all dates
for the current and future millennia. The Dimension software was created
as Year 2000 compliant, as opposed to being modified to be Year 2000 compliant.
The Dimension software has received a Year 2000 certification by the Information
Technology Association of America ("ITAA"). ITAA is the software industry
trade group's century date change certification program. The program examines
processes and methods used by companies to perform their Year 2000 software
calculations and conversions. The certification by ITAA indicates that
it is the opinion of ITAA that the processes and methods used by the Kirchman
Corporation, which developed the Dimension software, meet the
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 1998. As of March 31, 1999, it was management's opinion that it had completed the assessment phase of its Year 2000 Plan. During the second quarter of 1999, it was management's opinion that the Corporation completed its testing of all internal and external mission critical systems and formalized its Year 2000 Contingency Plan. The Year 2000 Contingency Plan addresses both remediation efforts and business resumption parameters. Management believes that, as of June 30, 1999 (i) the conversion to the new banking application system software had been completed and all testing related to Year 2000 compliance on the new core banking application system software had also been completed; (ii) the core application system represents approximately 85% of the Corporation's mission critical systems; (iii) all mission critical systems and software had been renovated; (iv) the Corporation was complete with the testing of its internal mission critical systems and hardware, other mission critical systems and other software programs and third party software systems; and (v) the Corporation had completed its Year 2000 Contingency Plan.
The Corporation replaced computer hardware, primarily desktop computers, and software that were not Year 2000 compliant in 1998 at a total cost of $525,000, which was capitalized. The Corporation's Year 2000 expenditures during the first nine months of 1999 were approximately $175,000. As of September 30, 1999 it was management's opinion that remaining Year 2000 costs in 1999 for hardware and software purchases, associated reprogramming, and remedial actions for both information technology and non-information technology would not exceed $75,000.
As part of the Corporation's Year 2000 Plan, the Trust Department of
the Corporation's lead subsidiary bank replaced its computer hardware during
1998. In addition, both of its core application systems were upgraded during
1998 to be Year 2000 compliant. The Trust Department uses the SunGard Series
7 system for the processing of trust accounting transactions and the Corbel
Quantech system for employee benefit recordkeeping transactions. During
the fourth quarter of 1998, extensive testing of the two systems used by
the Trust Department for Year 2000 compliance was performed and it is management's
opinion that all necessary testing had been satisfactorily completed as
of December 31, 1998. During 1999, the Trust Department continues to focus
on the Year 2000 compliance of the systems of other third party providers
of services to the Trust Department. In addition, the Trust Department
is continuing to communicate with those companies and entities in which
the assets of the fiduciary customers of the Trust Department are invested,
to determine the
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 formally communicated 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 all of its major third party vendors and suppliers confirming either that the third parties' software systems are Year 2000 compliant or providing the Corporation with a time line of an expected compliance date prior to December 31, 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 operations 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 readiness. The material borrowers' Year 2000 readiness will continue to be monitored periodically throughout 1999, based on the level of risk that the Year 2000 has been estimated to pose to the business of each borrower, to assess their Year 2000 compliance and evaluate any further risk to the Corporation.
During the second quarter of 1999, the Corporation completed its Year
2000 Contingency Plan ("Plan") 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, including interruption of service of electrical power and communication
lines. This plan provides for the processing of all 1999 transactions and
the printing of all critical December 31, 1999 deposit and loan application
systems' reports on hard copy or on microfiche, by midnight December 31,
1999. The Corporation believes that its most reasonably likely worst case
Year 2000 scenario is the loss or interruption of electrical power. The
Corporation addressed this concern by purchasing a 135 KW generator that
has the capacity to run the Corporation's main frame computer and data
processing facility. In the event the main office of the Corporation's
lead subsidiary bank, Chemical Bank and Trust Company ("CB&T") sustains
a loss of electrical power, CB&T will utilize office space at the Corporation's
data processing facility, which is located adjacent to CB&T, to perform
critical operational functions. In addition, the Corporation purchased
eighteen portable generators that will be used by the Corporation's subsidiary
banks in the event of the loss of electrical power. These portable generators
will be used to operate certain selected retail branch banking offices
and to service customers. In the event hardware or software problems are
encountered, the Corporation's
The Corporation believes that with the modifications to existing software, new hardware and software purchases, the conversion of the Corporation's core banking application system, the completion of its Year 2000 testing procedures and the development of a Year 2000 Contingency Plan, the Year 2000 issue will not pose significant operational problems for its computer systems and that the additional costs to be incurred will not be material to the Corporation's results of operations, liquidity or capital resources.
The estimated potential effects on the Corporation's operations of Year 2000 issues were based on management's best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ materially 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, the interruption of electronic or telephonic communications, the failure of basic utilities, and similar uncertainties.
This Year 2000 readiness disclosure is in part based upon and repeats
information provided to the Corporation by outside sources, including its
customers, vendors and outside consultants and other business partners.
Although the Corporation believes this outside information is accurate,
the Corporation is not the original source of this outside information
and has not independently verified the information.
| 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, 1998 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, 1998.
The Corporation does not believe that there has been a material change in the nature or categories of the Corporation's 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.
| 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: |
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Document | |
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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. | |
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Bylaws. Previously filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. Here incorporated by reference. | |
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Financial Data Schedule. |
| (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. |
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 4, 1999 | By /s/ Aloysius J. Oliver Aloysius J. Oliver Chief Executive Officer and President (Principal Executive Officer) |
| Date: November 4, 1999 | By /s/ Lori A. Gwizdala Lori A. Gwizdala Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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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. | |
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Bylaws. Previously filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. Here incorporated by reference. | |
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Financial Data Schedule. |
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