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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
333 E. MAIN STREET
MIDLAND, MICHIGAN 48640
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (517) 839-5350
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $1 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( )
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 19, 1999, was $344,232,372.
The number of shares outstanding of the registrant's Common Stock, $1 par
value, at February 19, 1999, was 13,506,385.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1998, are incorporated by reference in Parts I and II
(Items 1 and 5-8).
Portions of the registrant's definitive Proxy Statement for its April 19,
1999, annual shareholders' meeting are incorporated by reference in Part
III (Items 10-13).
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PART I
FORWARD-LOOKING STATEMENTS
This report contains 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
Chemical Financial Corporation itself. Words such as "anticipates,"
"believes," "estimates," "judgement," "expects," "forecasts," "intends,"
"is likely," "plans," "predicts," "projects," variations of such words and
similar expressions are intended to identify such forward-looking
statements. Assessments that Chemical Financial 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 Chemical Financial 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. Furthermore, Chemical Financial Corporation undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events or otherwise.
Future Factors include, 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.
ITEM 1. BUSINESS.
Chemical Financial Corporation ("Chemical" or the "Corporation") is a bank
holding company. Chemical was organized under Michigan law in August 1973,
and is headquartered in Midland, Michigan. Chemical was substantially
inactive until June 30, 1974, when it acquired its lead subsidiary bank,
Chemical Bank and Trust Company ("CB&T"), pursuant to a reorganization in
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which the former shareholders of CB&T became shareholders of Chemical. As
of December 31, 1998, Chemical owned all of the outstanding stock of ten
commercial banks and a data processing company, all located in Michigan.
The main offices of Chemical's ten banking subsidiaries are located in
Midland, Bay City, Big Rapids, Cadillac, Caro, Clare, Grayling, Marshall,
Owosso and Stanton.
Chemical's business is concentrated in a single industry segment -
commercial banking. Chemical's subsidiaries offer a full range of
commercial banking and fiduciary services. These include accepting
deposits, business and personal checking accounts, savings and individual
retirement accounts, time deposit instruments, electronically accessed
banking products, residential and commercial real estate financing,
commercial lending, consumer financing, debit cards, safe deposit services,
automated teller machines, access to insurance and investment products,
money transfer services, corporate and personal trust services and other
banking services.
The principal markets for these financial services are the communities
within Michigan in which Chemical's subsidiaries are located and the areas
immediately surrounding these communities. As of December 31, 1998,
Chemical and its subsidiaries served these markets through 86 banking
offices in 55 communities, located in 24 counties, generally across the
mid-section of Michigan. In addition to the full service banking offices,
the subsidiary banks operated 85 automated teller machines, both on and off
bank premises, as of December 31, 1998.
CB&T, which has its headquarters in Midland, is Chemical's lead subsidiary
bank and accounted for 32% of total deposits and 28% of total loans of
Chemical and its subsidiaries on a consolidated basis as of December 31,
1998. Chemical's banking subsidiaries' primary loan product, historically,
has been residential real estate mortgages. As of December 31, 1998, these
loans totaled $429 million, or 48%, of consolidated total loans. During
1998 and 1997, Chemical's subsidiaries' generally sold residential real
estate mortgages with fifteen year and greater original terms in the
secondary mortgage market. During 1996, residential mortgage loans with an
original term of fifteen years and less were kept in the Corporation's own
loan portfolio, and those with original terms greater than fifteen years
were sold in the secondary mortgage market. Chemical originated $117.6
million of residential mortgage loans during 1998 which were sold in the
secondary mortgage market, compared to $38.8 million and $12.3 million in
residential mortgage loans originated and sold during 1997 and 1996,
respectively. The significant increase in 1998 was attributable to the
decline in residential mortgage rates and the resultant increases in the
refinancing of these mortgages.
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The principal sources of revenues for Chemical are interest and fees on
loans, which accounted for 54% of total revenues in 1998, 1997 and 1996.
Interest on investment securities is also a significant source of revenue,
accounting for 31% of total revenues in 1998 and 33% in 1997 and 1996.
Chemical has no foreign loans, assets or activities. No material part of
the business of Chemical or its subsidiaries is dependent upon a single
customer or very few customers, the loss of which would have a materially
adverse effect on Chemical.
The business of banking is highly competitive. In addition to competition
from other commercial banks, banks face significant competition from
nonbank financial institutions. Savings associations and credit unions
compete aggressively with commercial banks for deposits and loans, and
credit unions and finance companies are particularly significant factors in
the consumer loan market. Banks compete for deposits with a broad range of
other types of investments, the most significant of which, over the past
few years, have been mutual funds and annuities. Insurance companies and
investment firms are also significant competitors for customer deposits.
In response to this increased competition for customers' bank deposits, the
Corporation expanded its sales and marketing efforts of mutual fund and
annuity investment products during 1996. The Corporation's subsidiary
banks, through "CFC Investment Centers," offer an array of mutual funds,
annuity products and market securities through alliances with Security
First Group and BISYS Brokerage Services. The CFC Investment Centers offer
customers a complete spectrum of investment products and service
capabilities. In addition, the Trust Department of Chemical Bank and Trust
Company offers customers a variety of investment products and services. The
principal methods of competition for financial services are price (interest
rates paid on deposits, interest rates charged on borrowings and fees
charged for services) and service (convenience and quality of services
rendered to customers).
Banks and bank holding companies are extensively regulated. Chemical's
subsidiary banks are all chartered under the laws of the State of Michigan
and supervised and regulated by the Financial Institutions Bureau of the
Michigan Department of Consumer and Industry Services. Three of Chemical's
banks are members of the Federal Reserve System and are also supervised,
examined and regulated by the Federal Reserve System. The other seven
state non-member banks are also regulated by the Federal Deposit Insurance
Corporation ("FDIC"). Chemical, as a bank holding company, is regulated by
the Federal Reserve System. Deposits of all of Chemical's bank
subsidiaries are insured by the FDIC to the extent provided by law.
State banks and bank holding companies are governed by both federal and
state laws which significantly limit their business activities in a number
of respects. Examples of such limitations include: (1) prior approval of
the Board of Governors of the Federal Reserve System ("Federal Reserve
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Board"), and in some cases various other governing agencies, is required
for bank holding companies to acquire control of any additional banks or
branches, (2) the business activities of bank holding companies and their
subsidiaries are limited to banking and to other activities which are
determined by the Federal Reserve Board to be closely related to banking,
and (3) transactions between bank holding company subsidiary banks are
significantly restricted by banking laws and regulations.
Chemical is a legal entity separate and distinct from its subsidiary banks
and data processing subsidiary. Chemical's primary source of revenues
results from dividends paid to it by its subsidiaries. Federal and state
banking laws and regulations limit the extent to which Chemical's
subsidiary banks can lend or otherwise supply funds to Chemical or certain
of its affiliates and also place certain restrictions on the amount of
dividends the subsidiary banks of Chemical may pay to Chemical.
Banks are subject to a number of federal and state laws and regulations
which have a material impact on their business. These include, among
others, minimum capital requirements, state usury laws, state laws relating
to fiduciaries, the Truth In Lending Act, the Truth in Savings Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited
Funds Availability Act, the Community Reinvestment Act, electronic funds
transfer laws, redlining laws, antitrust laws, environmental laws and
privacy laws. These laws and regulations can have a significant effect on
the operating results of banks.
Under Federal law, the FDIC has the authority to impose special assessments
on insured depository institutions to repay FDIC borrowings from the United
States Treasury or other sources, and to establish semiannual assessment
rates on Bank Insurance Fund ("BIF") member banks, so as to maintain the
BIF at the designated reserve ratio defined by law. On January 1, 1994,
the FDIC implemented a system of risk-based premiums for deposit insurance,
pursuant to which the premiums paid by a depository institution are based
on the probability that the BIF will incur a loss in respect of that
institution.
FDIC expense was $.2 million in 1998 and 1997 and $.1 million in 1996. In
1998 and 1997, the Corporation paid the minimum rate of $.01296 per $100 of
deposits insured by the BIF and $.0644 per $100 of deposits insured by the
Savings Association Insurance Fund ("SAIF"). During 1996, the FDIC's
minimum assessment rate for BIF insured deposits was reduced to $2000.
Deposits held by well-capitalized banks and insured by the SAIF were
assessed at a rate of $.23 per $100 of insured deposits in 1996. In
addition, during 1996, SAIF insured deposits, held on March 31, 1995, were
assessed a one-time charge of $.657 per $100 of deposits to recapitalize
the SAIF to its required reserve ratio. The Corporation's liability for
this special assessment was approximately $30,000.
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The recapitalization of the SAIF was accomplished through the enactment of
The Deposit Insurance Funds Act of 1996 (the "Funds Act") on September 30,
1996. This legislation, in addition to requiring the one-time special
assessment to the FDIC to capitalize the SAIF to its required reserve
ratio, authorizes the Financing Corporation ("FICO") to impose periodic
assessments on depository institutions that are members of the BIF, in
addition to institutions that are members of the SAIF. The purpose of
these periodic assessments is to spread the cost of the interest payments
on the outstanding FICO bonds over a larger number of institutions. Until
the change in the law, only SAIF-member institutions bore the cost of
funding these interest payments. The FICO assessment on BIF insured
deposits for years 1997-1999 was established at 1.296 cents for every $100
of domestic deposits. For this same period, the SAIF insured institutions'
FICO assessment rate was established at 6.44 cents for every $100 of
domestic deposits. Beginning in the year 2000 until 2017, the FICO
assessment for both BIF and SAIF insured deposits was established at 2.43
cents for every $100 of domestic deposits.
Federal law also contains a "cross-guarantee" provision that could result
in insured depository institutions owned by Chemical being assessed for
losses incurred by the FDIC in connection with assistance provided to, or
the failure of, any other insured depository institution owned by Chemical.
Under Federal Reserve Board policy, Chemical is expected to act as a source
of financial strength to each subsidiary bank and to commit resources to
support each subsidiary bank.
Banks are subject to the provisions of the Community Reinvestment Act of
1977 ("CRA"). Under the terms of the CRA, the appropriate federal bank
regulatory agency is required, in connection with its examination of a
bank, to assess such bank's record in meeting the credit needs of the
community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied to: (1) obtain deposit insurance coverage for a
newly chartered institution, (2) establish a new branch office that will
accept deposits, (3) relocate an office, or (4) merge or consolidate with,
or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal
Reserve Board will assess the CRA compliance record of each subsidiary bank
of the applicant bank holding company, and such compliance records may be
the basis for denying the application.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changed the geographic constraints
applicable to the banking industry. The Riegle-Neal Act allows bank
holding companies to acquire banks located in any state in the United
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States without regard to geographic restrictions or reciprocity
requirements imposed by state law. Effective June 1, 1997, the Riegle-Neal
Act also allowed banks to establish interstate branch networks through
acquisitions of other banks. The establishment of DE NOVO interstate
branches or the acquisition of individual branches of a bank in another
state (rather than the acquisition of an out-of-state bank in its entirety)
is allowed by the Riegle-Neal Act only if specifically authorized by state
law.
Michigan permits both U.S. and non-U.S. banks to establish branch offices
in Michigan. The Michigan Banking Code permits, in appropriate
circumstances and with the approval of the Commissioner of the Financial
Institutions Bureau, (1) acquisition of Michigan banks by FDIC-insured
banks, savings banks or savings and loan associations located in other
states, (2) sale by a Michigan bank of branches to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a
Michigan bank could purchase branches of the purchasing entity, (3)
consolidation of Michigan banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws
permitting such consolidation, (4) establishment of branches in Michigan by
FDIC-insured banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting a Michigan bank to
establish a branch in such jurisdiction, and (5) establishment by foreign
banks of branches located in Michigan.
In March 1996, the Corporation consolidated its bank subsidiary
headquartered in Standish, Michigan (Chemical Bank Huron) with its bank
subsidiary headquartered in Bay City, Michigan (Chemical Bank Bay Area).
On May 1, 1996, the Corporation merged with State Savings Bancorp, Inc.
("SSBI") in Caro, Michigan. SSBI operated one bank, State Savings Bank of
Caro, with offices in Caro and Fairgrove, Michigan. The Corporation issued
689,062 shares (adjusted for the 5% stock dividends paid December 30, 1996
and December 30, 1997 and the 5 for 4 stock split paid December 16, 1998)
of the Corporation's common stock in exchange for all of the common stock
of SSBI. The merger was accounted for as a "pooling of interests." As of
May 1, 1996, SSBI had assets of approximately $65 million.
On December 31, 1996, the Corporation through CB&T acquired Arbury &
Stephenson, Inc., an insurance agency headquartered in Midland, Michigan.
The merger was effected through an exchange of shares of the Corporation's
common stock.
In March 1997, the Corporations subsidiary headquartered in Owosso,
Michigan (Chemical Bank Key State) sold its branch banking building in
Okemos, Michigan. The loans and deposits of the Okemos branch were
transferred to Chemical Bank Key State's branch banking office in Lansing,
Michigan.
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In November 1998, the Corporation's subsidiary headquartered in Marshall,
Michigan (Chemical Bank South) purchased a branch banking office in Albion,
Michigan from Great Lakes National Bank Michigan. The branch had total
deposits of approximately $11 million as of the acquisition date. Chemical
Bank South consolidated its existing banking operations at 1408 N. Eaton
Street in Albion into the newly acquired location.
The nature of the business of Chemical's subsidiaries is such that they
hold title to numerous parcels of real property. These properties are
primarily owned for branch offices; however, Chemical and its subsidiaries
may hold properties for other business purposes, as well as on a temporary
basis for properties taken in or in lieu of foreclosure to satisfy loans in
default. Under current state and federal laws, present and past owners of
real property may be exposed to liability for the cost of clean up of
environmental contamination on or originating from those properties, even
if they are wholly innocent of the actions that caused the contamination.
These liabilities can be material and can exceed the value of the
contaminated property.
At December 31, 1998, Chemical was the fifth largest bank holding company
headquartered in Michigan, measured by total assets, and together with its
subsidiaries employed a total of 1006 full-time equivalent employees.
The following table summarizes the book value of investment securities as
of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment securities available for sale:
U.S. Government and agency securities $444,361 $474,706 $422,629
States of the U.S. and municipal securities -- -- --
Mortgage-backed securities 1,583 2,351 2,850
Other securities 43,032 17,116 16,308
-------- -------- --------
Total investment securities available for sale 488,976 494,173 441,787
Investment securities held to maturity:
U.S. Government and agency securities 190,957 201,801 168,958
States of the U.S. and municipal securities 41,593 46,707 42,096
Mortgage-backed securities 312 501 679
Other securities 7,985 2,011 2,019
-------- -------- --------
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Total investment securities held to maturity 240,847 251,020 213,752
-------- -------- --------
Total investment securities $729,823 $745,193 $655,539
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</TABLE>
The information under the following captions in the registrant's Annual
Report to Shareholders for the year ended December 31, 1998, further
describes the business of Chemical and is here incorporated by reference:
<TABLE>
<CAPTION>
CAPTION PAGES
------- -----
<S> <C>
Table 2. Average Balances, Tax Equivalent Interest and
Effective Yields and Rates 31
Table 3. Volume and Rate Variance Analysis 33
Note C- Investment Securities 18
Table 8. Maturities and Yields of Investment Securities
at December 31, 1998 38
Table 4. Summary of Loans and Loan Loss Experience 33
Table 5. Comparison of Loan Maturities and Interest Sensitivity 35
Table 6. Summary of Nonperforming Loans 35
Note D - Loans 19
Table 7. Allocation of the Allowance For Possible Loan Losses 36
Management's Discussion and Analysis, subheadings
"Net Interest Income," "Loans," "Nonperforming
Loans," "Provision For Possible Loan Losses" and "Liquidity
and Interest Sensitivity" 30-41
Table 10. Maturity Distribution of Time Deposits of $100,000 or More 39
Financial Highlights 1
</TABLE>
ITEM 2. PROPERTIES.
The executive offices of Chemical, the main office of CB&T and Chemical's
data processing subsidiary are located in a three story, approximately
74,000 square foot, office building in downtown Midland, which is 100%
owned by CB&T.
Chemical's subsidiary banks conduct business from a total of 86 banking
offices as of December 31, 1998. These offices are located in or in the
vicinity of the cities in which the banks have their main offices. Of the
banking offices, 83 are owned by the subsidiary banks and 3 are leased from
independent parties with remaining lease terms of one year to eleven years.
This leased property is considered insignificant.
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ITEM 3. LEGAL PROCEEDINGS.
Chemical's subsidiaries are parties, as plaintiff or defendant, to a number
of legal proceedings, none of which is considered material, and all of
which arose in the ordinary course of their operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Biographical information concerning Chemical's executive officers who are
not directors or nominated for election to the Board of Directors is
presented below. Executive officer appointments are made or reaffirmed
annually at the organizational meeting of the Board of Directors. At its
regular meetings, the Board may also make other executive officer
appointments.
Bruce M. Groom, age 57, is Senior Vice President and Trust Officer of CB&T.
He joined CB&T on April 29, 1985 as Senior Vice President and was promoted
to Senior Trust Officer in May 1986. Mr. Groom has served on the Board of
Chemical Bank Central, a wholly owned subsidiary of Chemical, since
February 1989. Mr. Groom is an attorney. Mr. Groom is a member of the
Management Committee of Chemical.
Lori A. Gwizdala, age 40, is Senior Vice President, Chief Financial Officer
and Treasurer of Chemical. She joined Chemical as Controller on January 1,
1985 and was named Chief Financial Officer in May 1987, Senior Vice
President in February 1991 and Treasurer in April 1994. Ms. Gwizdala has
served as Secretary to the Board of Directors of CFC Data Corp since May
1986, a director of Chemical Bank Bay Area since January 1993 and a
director of Chemical Bank Thumb Area since July 1996, all of which are
wholly owned subsidiaries of Chemical. Ms. Gwizdala is a certified public
accountant. Ms. Gwizdala is a member of the Management Committee of
Chemical.
William C. Lauderbach, age 56, is Senior Vice President and Investment
Officer of CB&T. He joined CB&T as a Trust Officer on July 2, 1973, was
promoted to Vice President and Trust Officer in March 1980, Investment
Officer in January 1985 and Senior Vice President in February 1991. Mr.
Lauderbach has served on the Board of Directors of Chemical Bank South, a
wholly owned subsidiary of Chemical, since 1989. Mr. Lauderbach is a
member of the Management Committee of Chemical.
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David B. Ramaker, age 43, is Chief Executive Officer and President of CB&T
and Executive Vice President and Secretary of Chemical. He joined CB&T as
Vice President on November 20, 1989. Mr. Ramaker became President of
Chemical Bank Key State, a wholly owned subsidiary of Chemical in October
1993. Mr. Ramaker became President and member of the Board of Directors of
CB&T in September 1996 and Executive Vice President and Secretary to the
Board of Chemical and Chief Executive Officer of CB&T on January 1, 1997.
Mr. Ramaker has served as a director of Chemical Bank Key State since
October 1993. Mr. Ramaker was appointed to the following Boards of
Directors of wholly owned subsidiaries of Chemical in December 1996:
Chemical Bank Montcalm, Chemical Bank Central (also Chairman), Chemical
Bank North (also Chairman), and Chemical Bank West (also Chairman).
During 1998, Mr. Ramaker was appointed Chairman of the Board of Directors
of Chemical Bank Montcalm and of Chemical Bank Bay Area, wholly owned
subsidiaries of Chemical. Mr. Ramaker is a member of the Management
Committee of Chemical.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information under the heading "Stock Price Ranges and Cash Dividends
Per Share" on page 10 of the registrant's Annual Report to Shareholders for
the year ended December 31, 1998, is here incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Financial Highlights" on page 1 and the
sub-heading "Financial Highlights" of "Management's Discussion and
Analysis" on pages 28 through 30 of the registrant's Annual Report to
Shareholders for the year ended December 31, 1998, is here incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information under the heading "Management's Discussion and Analysis" on
pages 28 through 43 (inclusive) of the registrant's Annual Report to
Shareholders for the year ended December 31, 1998, is here incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the heading "Liquidity and Interest Sensitivity" on
pages 37 through 41 (inclusive) of the registrant's Annual Report to
Shareholders for the year ended December 31, 1998, is here incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes, and independent auditors' report on pages
11 through 27 (inclusive) of the registrant's Annual Report to Shareholders
for the year ended December 31, 1998, is here incorporated by reference.
The information under the caption "Selected Quarterly Financial Information
(Unaudited)" on page 10 of the registrant's Annual Report to Shareholders
for the year ended December 31, 1998, is here incorporated by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Nominees for Election to
Serve Until the Annual Meeting of Shareholders in 2000" on pages 3 through
4 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17
in the registrant's definitive Proxy Statement for its April 19, 1999
annual meeting of shareholders is here incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Compensation of Executive
Officers and Directors" on pages 8 through 13 in the registrant's
definitive Proxy Statement for its April 19, 1999, annual meeting of
shareholders is here incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Voting Securities" on pages 5
through 7 in the registrant's definitive Proxy Statement for its April 19,
1999, annual meeting of shareholders is here incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships and
Related Transactions" on page 17 in the registrant's definitive Proxy
Statement for its April 19, 1999, annual meeting of shareholders is here
incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. The following financial statements
and independent auditors' report of Chemical Financial Corporation and its
subsidiaries are filed as part of this report:
Consolidated Statement of Financial Position-December 31, 1998 and 1997
Consolidated Statement of Income for each of the three years in the period
ended December 31, 1998
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 1998
Consolidated Statement of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Auditors dated January 19, 1999
The financial statements, the notes to financial statements, and the
independent auditors' report listed above are incorporated by reference in
Item 8 of this report from the corresponding portions of the registrant's
Annual Report to Shareholders for the year ended December 31, 1998.
(2) FINANCIAL STATEMENT SCHEDULES. None
(3) EXHIBITS. The following exhibits are filed as part of this
report:
NUMBER EXHIBIT
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.
4 LONG-TERM DEBT. The registrant has outstanding long-term debt
which at the time of this report does not exceed 10% of the
registrant's total consolidated assets. The registrant agrees
to furnish copies of the agreements defining the rights of
holders of such long-term debt to the Securities and Exchange
Commission upon request.
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NUMBER EXHIBIT
10.1 CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF
1997.<F*> Previously filed as Appendix A to the registrant's
Definitive Proxy Statement with respect to its Annual Meeting
of Shareholders held on April 21, 1997. Here incorporated by
reference.
10.2 AMENDED AWARD AND STOCK OPTION PLAN OF 1987.<F*> Previously
filed as Exhibit 10(a) to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, filed
with the Commission on March 24, 1994. Here incorporated by
reference.
10.3 PLAN FOR DEFERRAL OF DIRECTORS' FEES.<F*> Previously filed as
Exhibit 10(c) to the registrant's Form S-4 Registration
Statement No. 33-64944 filed with the Commission on June 24,
1993. Here incorporated by reference.
10.4 CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN.<F*>
10.5 RETIREMENT AGREEMENT.<F*>
11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
13 1998 ANNUAL REPORT TO SHAREHOLDERS.
21 SUBSIDIARIES OF THE REGISTRANT.
23 CONSENT OF INDEPENDENT AUDITORS.
27 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1998.
99.1 CHEMICAL FINANCIAL CORPORATION 401(K) PLAN FINANCIAL
STATEMENTS, NOTES AND SCHEDULES.
99.2 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR
SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES.
<F*> These agreements are management contracts or compensation plans or
arrangements required to be filed as Exhibits to this Form 10-K.
Chemical will furnish a copy of any exhibit listed above to any shareholder
of the registrant without charge upon written request to Ms. Lori A.
Gwizdala, Chief Financial Officer, Chemical Financial Corporation, 333 East
Main Street, Midland, Michigan 48640-0569.
16
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(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
17
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
March 22, 1999 S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
President and Chief Executive Officer
March 22, 1999 S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President, Chief Financial
Officer and Treasurer
18
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 22, 1999 S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
President and Chief Executive Officer
and Director (Principal Executive
Officer)
March 22, 1999 S/ JAMES A. CURRIE
James A. Currie
March 22, 1999 S/ MICHAEL L. DOW
Michael L. Dow
Director
March 22, 1999 S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
March 22, 1999 S/ TERENCE F. MOORE
Terence F. Moore
Director
March 22, 1999 S/ ALAN W. OTT
Chairman of the Board and Director
March , 1999 ___________________________________
Frank P. Popoff
Director
March 22, 1999 S/ LAWRENCE A. REED
Lawrence A. Reed
Director
19
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March 22, 1999 S/ WILLIAM S. STAVROPOULOS
William S. Stavropoulos
Director
20
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EXHIBIT INDEX
NUMBER EXHIBIT
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.
4 LONG-TERM DEBT. The registrant has outstanding long-term debt
which at the time of this report does not exceed 10% of the
registrant's total consolidated assets. The registrant agrees to
furnish copies of the agreements defining the rights of holders
of such long-term debt to the Securities and Exchange Commission
upon request.
10.1 CHEMICAL FINANCIAL CORPORATION STOCK INCENTIVE PLAN OF 1997.
Previously filed as Appendix A to the registrant's Definitive
Proxy Statement with respect to its Annual Meeting of
Shareholders held on April 21, 1997. Here incorporated by
reference.
10.2 AMENDED AWARD AND STOCK OPTION PLAN OF 1987. Previously filed
as Exhibit 10(a) to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, filed with the
Commission on March 24, 1994. Here incorporated by reference.
10.3 PLAN FOR DEFERRAL OF DIRECTORS' FEES. Previously filed as
Exhibit 10(c) to the registrant's Form S-4 Registration Statement
No. 33-64944 filed with the Commission on June 24, 1993. Here
incorporated by reference.
10.4 CHEMICAL FINANCIAL CORPORATION SUPPLEMENTAL PENSION PLAN.
10.5 RETIREMENT AGREEMENT.
11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS.
13 1998 ANNUAL REPORT TO SHAREHOLDERS.
21 SUBSIDIARIES OF THE REGISTRANT.
23 CONSENT OF INDEPENDENT AUDITORS.
27 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1998.
21
<PAGE>
NUMBER EXHIBIT
99.1 CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN FINANCIAL
STATEMENTS, NOTES AND SCHEDULES.
99.2 CHEMICAL FINANCIAL CORPORATION 1992 STOCK PURCHASE PLAN FOR
SUBSIDIARY DIRECTORS FINANCIAL STATEMENTS AND NOTES.
22
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EXHIBIT 3.2
BYLAWS
OF
CHEMICAL FINANCIAL CORPORATION
(AS AMENDED THROUGH OCTOBER 19, 1998)
ARTICLE I
OFFICES
1.01 PRINCIPAL OFFICE. The principal office of the corporation
shall be at such place within the state of Michigan as the Board of
Directors shall determine from time to time.
1.02 OTHER OFFICES. The corporation may also have offices at such
other places as the Board of Directors from time to time determines or the
business of the corporation requires.
ARTICLE II
SEAL
2.01 SEAL. The corporation shall have a seal in such form as the
Board of Directors may from time to time determine. The seal may be used
by causing it or a facsimile to be impressed, affixed, reproduced or
otherwise.
ARTICLE III
CAPITAL STOCK
3.01 ISSUANCE OF SHARES. The shares of capital stock of the
corporation shall be issued in such amounts, at such times, for such
consideration and on such terms and conditions as the Board shall deem
advisable, subject to the provisions of the Articles of Incorporation of
the corporation and the further provisions of these Bylaws, and subject
also to any requirements or restrictions imposed by the laws of the State
of Michigan.
3.02 CERTIFICATES FOR SHARES. The shares of the corporation shall be
represented by certificates signed by the Chairman of the Board, President
or a Vice President and by the Treasurer, Assistant Treasurer, Secretary or
Assistant Secretary of the corporation, and may be sealed with the seal of
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the corporation or a facsimile thereof. The signatures of the officers may
be facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar other than the corporation itself or its
employee. In case an officer who has signed or whose facsimile signature
has been placed upon a certificate ceases to be such officer before the
certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the date of issuance. A certificate
representing shares shall state upon its face that the corporation is
formed under the laws of the State of Michigan; the name of the person to
whom it is issued; the number and class of shares, and the designation of
the series, if any, which the certificate represents; the par value of each
share represented by the certificate, or a statement that the shares are
without par value; and such other provisions as may be required by the laws
of the State of Michigan.
3.03 TRANSFER OF SHARES. The shares of the capital stock of the
corporation are transferable only on the books of the corporation upon
surrender of the certificate therefor, properly endorsed for transfer, and
the presentation of such evidences of ownership and validity of the
assignment as the corporation may require.
3.04 REGISTERED SHAREHOLDERS. The corporation shall be entitled to
treat the person in whose name any share of stock is registered as the
owner thereof for purposes of dividends and other distributions in the
course of business, or in the course of recapitalization, consolidation,
merger, reorganization, sale of assets, liquidation or otherwise and for
the purpose of votes, approvals and consents by shareholders, and for the
purpose of notices to shareholders, and for all other purposes whatever,
and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not the
corporation shall have notice thereof, save as expressly required by the
laws of the State of Michigan.
3.05 LOST OR DESTROYED CERTIFICATES. Upon the presentation to the
corporation of a proper affidavit attesting the loss, destruction or
mutilation of any certificate or certificates for shares of stock of the
corporation, the Board of Directors shall direct the issuance of a new
certificate or certificates to replace the certificates so alleged to be
lost, destroyed or mutilated. The Board of Directors may require as a
condition precedent to the issuance of new certificates any or all of the
following: (a) presentation of additional evidence or proof of the loss,
destruction or mutilation claimed; (b) advertisement of loss in such manner
as the Board of Directors may direct or approve; (c) a bond or agreement of
indemnity, in such form and amount and with such sureties, or without
sureties, as the Board of Directors may direct or approve; (d) the order or
approval of a court or judge.
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ARTICLE IV
SHAREHOLDERS AND MEETINGS OF SHAREHOLDERS
4.01 PLACE OF MEETINGS. All meetings of shareholders shall be held at
the principal office of the corporation or at such other place as shall be
determined by the Board of Directors and stated in the notice of meeting.
4.02 ANNUAL MEETING. The annual meeting of the shareholders of the
corporation shall be held on the third Monday of the fourth calendar month
after the end of the corporation's fiscal year at 2 o'clock in the
afternoon. Directors shall be elected at each annual meeting and such
other business transacted as may come before the meeting.
4.03 SPECIAL MEETINGS. Special meetings of shareholders may be called
by the Board of Directors, the Chairman of the Board (if such office is
filled) or the President and shall be called by the President or Secretary
at the written request of shareholders holding a majority of the shares of
stock of the corporation outstanding and entitled to vote. The request
shall state the purpose or purposes for which the meeting is to be called.
4.04 NOTICE OF MEETINGS. Except as otherwise provided by statute,
written notice of the time, place and purposes of a meeting of shareholders
shall be given not less than 10 nor more than 60 days before the date of
the meeting to each shareholder of record entitled to vote at the meeting,
either personally or by mailing such notice to his last address as it
appears on the books of the corporation. No notice need be given of an
adjourned meeting of the shareholders provided the time and place to which
such meeting is adjourned are announced at the meeting at which the
adjournment is taken and at the adjourned meeting only such business is
transacted as might have been transacted at the original meeting. However,
if after the adjournment a new record date is fixed for the adjourned
meeting a notice of the adjourned meeting shall be given to each
shareholder of record on the new record date entitled to notice as provided
in this Bylaw.
4.05 RECORD DATES. The Board of Directors, the Chairman of the Board
(if such office is filled) or the President may fix in advance a date as
the record date for the purpose of determining shareholders entitled to
notice of and to vote at a meeting of shareholders or an adjournment
thereof, or to express consent or to dissent from a proposal without a
meeting, or for the purpose of determining shareholders entitled to receive
payment of a dividend or allotment of a right, or for the purpose of any
other action. The date fixed shall not be more than 60 nor less than 10
days before the date of the meeting, nor more than 60 days before any other
action. In such case only such shareholder as shall be shareholders of
record on the date so fixed shall be entitled to notice of and to vote at
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such meeting or adjournment therefor, or to express consent or to dissent
from such proposal, or to receive payment of such dividend or to receive
such allotment of rights, or to participate in any other action, as the
case may be, notwithstanding any transfer of any stock on the books of the
corporation, or otherwise, after any such record date. Nothing in this
Bylaw shall affect the rights of a shareholder and his transferee or
transferor as between themselves.
4.06 LIST OF SHAREHOLDERS. The Secretary of the corporation or the
agent of the corporation having charge of the stock transfer records for
shares of the corporation shall make and certify a complete list of the
shareholders entitled to vote at a shareholders' meeting or any adjournment
thereof. The list shall be arranged alphabetically within each class and
series, with the address of, and the number of shares held by, each
shareholder; be produced at the time and place of the meeting; be subject
to inspection by any shareholder during the whole time of the meeting; and
be prima facie evidence as to who are the shareholders entitled to examine
the list or vote at the meeting.
4.07 QUORUM. Unless a greater or lesser quorum is required in the
Articles of Incorporation or by the laws of the State of Michigan, the
shareholders present at a meeting in person or by proxy who, as of the
record date for such meeting, were holders of a majority of the outstanding
shares of the corporation entitled to vote at the meeting shall constitute
a quorum at the meeting. Whether or not a quorum is present, a meeting of
shareholders may be adjourned by a vote of the shares present in person or
by proxy. When the holders of a class or series of shares are entitled to
vote separately on an item of business, this Bylaw applies in determining
the presence of a quorum of such class or series for transaction of such
item of business.
4.08 PROXIES. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may
authorize other persons to act for him by proxy. A proxy shall be signed
by the shareholder or his authorized agent or representative and shall not
be valid after the expiration of three years from its date unless otherwise
provided in the proxy. A proxy is revocable at the pleasure of the
shareholder executing it except as otherwise provided by the laws of the
State of Michigan.
4.09 INSPECTORS OF ELECTION. The Board of Directors, in advance of a
shareholders' meeting, may appoint one or more inspectors to act at the
meeting or any adjournment thereof. If inspectors are not so appointed,
the person presiding at the shareholders' meeting may, and on request of a
shareholder entitled to vote thereat shall, appoint one or more inspectors.
In case a person appointed fails to appear or act, the vacancy may be
filled by appointment made by the Board of Directors in advance of the
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meeting or at the meeting by the person presiding thereat. If appointed,
the inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence
of a quorum and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine challenges and questions
arising in connection with the right to vote, count and tabulate votes,
ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all shareholders. On
request of the person presiding at the meeting or a shareholder entitled to
vote thereat, the inspectors shall make and execute a written report to the
person presiding at the meeting of any of the facts found by them and
matters determined by them. The report shall be prima facie evidence of
the facts stated and of the vote as certified by the inspectors.
4.10 VOTING. Each outstanding share is entitled to one vote on each
matter submitted to a vote, unless otherwise provided in the Articles of
Incorporation. Votes shall be cast in writing, signed by the shareholder
or his proxy. When an action, other than the election of directors, is to
be taken by a vote of the shareholders, it shall be authorized by a
majority of the votes cast by the holders of shares entitled to vote
thereon, unless a greater plurality is required by the Articles of
Incorporation or by the laws of the State of Michigan. Except as otherwise
provided by the Articles of Incorporation, directors shall be elected by a
plurality of the votes cast at any election.
4.11 SHAREHOLDER PROPOSALS. Except as otherwise provided by
statute, the corporation's Articles of Incorporation or these Bylaws:
(a) No matter may be presented for shareholder action at an
annual or special meeting of shareholders unless such matter
is: (i) specified in the notice of the meeting (or any
supplement to the notice) given by or at the direction of
the Board of Directors; (ii) otherwise presented at the
meeting by or at the direction of the Board of Directors;
(iii) properly presented for action at the meeting by a
shareholder in accordance with the notice provisions set
forth in this Section and any other applicable requirements;
or (iv) a procedural matter presented, or accepted for
presentation, by the Chairman in his sole discretion.
(b) For a matter to be properly presented by a shareholder, the
shareholder must have given timely notice of the matter in
writing to the Secretary of the corporation. To be timely,
the notice must be delivered to or mailed to and received at
the principal executive offices of the corporation not less
than 120 calendar days prior to the date corresponding to
the date of the corporation's proxy statement or notice of
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meeting released to shareholders in connection with the last
preceding annual meeting of shareholders in the case of an
annual meeting (unless the corporation did not hold an
annual meeting within the last year, or if the date of the
upcoming annual meeting changed by more than thirty days
from the date of the last preceding meeting, then the notice
must be delivered or mailed and received not more than ten
days after the earlier of the date of the notice of the
meeting or public disclosure of the date of the meeting),
and not more than ten days after the earlier of the date of
the notice of the meeting or public disclosure of the date
of the meeting in the case of a special meeting. The notice
by the shareholder must set forth: (i) a brief description
of the matter the shareholder desires to present for
shareholder action; (ii) the name and record address of the
shareholder proposing the matter for shareholder action;
(iii) the class and number of shares of capital stock of the
corporation that are beneficially owned by the shareholder;
and (iv) any material interest of the shareholder in the
matter proposed for shareholder action. For purposes of
this Section, "public disclosure" means disclosure in a
press release reported by the Dow Jones News Service,
Associated Press or other comparable national financial news
service or in a document publicly filed by the corporation
with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15 of the Securities Exchange Act of 1934,
as amended.
(c) Except to the extent that a shareholder proposal submitted
pursuant to this Section is not made available at the time
of mailing, the notice of the purposes of the meeting shall
include the name and address of and the number of shares of
the voting security held by the proponent of each
shareholder proposal.
(d) Notwithstanding the above, if the shareholder desires to
require the corporation to include the shareholder's
proposal in the corporation's proxy materials, matters and
proposals submitted for inclusion in the corporation's proxy
materials shall be governed by the solicitation rules and
regulations of the Securities Exchange Act of 1934, as
amended, including without limitation Rule 14a-8.
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ARTICLE V
DIRECTORS
5.01 NUMBER. The business and affairs of the corporation shall be
managed by a Board of not less than five (5) nor more than twenty-five (25)
directors as shall be fixed from time to time by the Board of Directors.
The directors need not be residents of Michigan or shareholders of the
corporation.
5.02 ELECTION, RESIGNATION AND REMOVAL. Directors shall be elected at
each annual meeting of the shareholders, each to hold office until the next
annual meeting of shareholders and until his successor is elected and
qualified, or until his resignation or removal. A director may resign by
written notice to the corporation. The resignation is effective upon its
receipt by the corporation or a subsequent time as set forth in the notice
of resignation. A director or the entire Board of Directors may be
removed, with or without cause, by vote of the holders of a majority of the
shares entitled to vote at an election of directors.
5.03 VACANCIES. Vacancies in the Board of Directors occurring by
reason of death, resignation, removal, increase in the number of directors
or otherwise shall be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum of the Board of Directors,
unless filled by proper action of the shareholders of the corporation.
Each person so elected shall be a director for a term of office continuing
only until the next election of directors by the shareholders.
5.04 ANNUAL MEETING. The Board of Directors shall meet each year
immediately after the annual meeting of the shareholders, or within three
(3) days of such time excluding Sundays and legal holidays if such later
time is deemed advisable, at the place where such meeting of the
shareholders has been held or such other place as the Board may determine,
for the purpose of election of officers and consideration of such business
that may properly be brought before the meeting; provided, that if less
than a majority of the directors appear for an annual meeting of the Board
of Directors the holding of such annual meeting shall not be required and
the matters which might have been taken up therein may be taken up at any
later special or annual meeting, or by consent resolution.
5.05 REGULAR AND SPECIAL MEETINGS. Regular meetings of the Board of
Directors may be held at such times and places as the majority of the
directors may from time to time determine at a prior meeting or as shall be
directed or approved by the vote or written consent of all the directors.
Special meetings of the Board may be called by the Chairman of the Board
(if such office is filled) or the President and shall be called by the
President or Secretary upon the written request of any two directors.
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5.06 NOTICES. No notice shall be required for annual or regular
meetings of the Board or for adjourned meetings, whether regular or
special. Three days' written notice shall be given for special meetings of
the Board, and such notice shall state the time, place and purpose or
purposes of the meeting.
5.07 QUORUM. A majority of the Board of Directors then in office, or
of the members of a committee thereof, constitutes a quorum for the
transaction of business. The vote of a majority of the directors present
at any meeting at which there is a quorum shall be the acts of the Board or
of the committee, except as a larger vote may be required by the laws of
the State of Michigan. A member of the Board or of a committee designated
by the Board may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a
meeting in this manner constitutes presence in person at the meeting.
5.08 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint three or more
members of the Board as an executive committee to exercise all powers and
authorities of the Board in management of the business and affairs of the
corporation, provided, however, that such committee shall not have power or
authority to:
(a) amend the Articles of Incorporation;
(b) adopt an agreement of merger or consolidation;
(c) recommend to shareholders the sale, lease or exchange of all
or substantially all of the corporation's property and
assets;
(d) recommend to shareholders a dissolution of the corporation
or revocation of a dissolution;
(e) amend these Bylaws;
(f) fill vacancies in the Board;
(g) fix the compensation of the directors for serving on the
Board or on a committee; or
(h) unless expressly authorized by the Board, declare a dividend
or authorize the issuance of stock.
The Board of Directors from time to time may, by like resolution,
appoint such other committees of one or more directors to have such
authority as shall be specified by the Board in the resolution making such
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appointments. The Board of Directors may designate one or more directors
as alternate members of any committee who may replace an absent or
disqualified member at any meeting thereof.
5.09 DISSENTS. A director who is present at a meeting of the Board of
Directors, or a committee thereof of which he is a member, at which action
on a corporate matter is taken is presumed to have concurred in that action
unless his dissent is entered in the minutes of the meeting or unless he
files his written dissent to the action with the person acting as secretary
of the meeting before the adjournment thereof or shall forward such dissent
by registered mail to the Secretary of the corporation promptly after the
adjournment of the meeting. Such right to dissent does not apply to a
director who voted in favor of such action. A director who is absent from
a meeting of the Board, or a committee thereof of which he is a member, at
which any such action is taken is presumed to have concurred in the action
unless he files his written dissent with the Secretary of the corporation
within a reasonable time after he has knowledge of the action.
5.10 COMPENSATION. The Board of Directors, by affirmative vote of a
majority of directors in office and irrespective of any personal interest
of any of them, may establish reasonable compensation of directors for
services to the corporation as directors or officers.
ARTICLE VI
NOTICES, WAIVERS OF NOTICE AND MANNER OF ACTING
6.01 NOTICES. All notices of meetings required to be given to
shareholders, directors or any committee of directors may be given by mail,
telegram, radiogram or cablegram to any shareholder, director or committee
member at his last address as it appears on the books of the corporation.
Such notice shall be deemed to be given at the time when the same shall be
mailed or otherwise dispatched.
6.02 WAIVER OF NOTICE. Notice of the time, place and purpose of any
meeting of shareholders, directors or committee of directors may be waived
by telegram, radiogram, cablegram or other writing, either before or after
the meeting, or in such other manner as may be permitted by the laws of the
State of Michigan. Attendance of a person at any meeting of shareholders,
in person or by proxy, or at any meeting of directors or of a committee of
directors, constitutes a waiver of notice of the meeting except when the
person attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
6.03 ACTION WITHOUT A MEETING. Any action required or permitted at
any meeting of shareholders or directors or committee of directors may be
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taken without a meeting, without prior notice and without a vote, if all of
the shareholders or directors or committee members entitled to vote thereon
consent thereto in writing.
ARTICLE VII
OFFICERS
7.01 NUMBER. The Board of Directors shall elect or appoint a Chairman
of the Board, a President, a Secretary, a Treasurer, and one or more Vice
Presidents, Assistant Secretaries and/or Assistant Treasurers. The
President and Chairman of the Board, if any, shall be members of the Board
of Directors. Any two of the above offices, except those of President and
Vice President, may be held by the same person, but no officer shall
execute, acknowledge or verify an instrument in more than one capacity.
7.02 TERM OF OFFICE, RESIGNATION AND REMOVAL. An officer shall hold
office for the term for which he is elected or appointed and until his
successor is elected or appointed and qualified, or until his resignation
or removal. An officer may resign by written notice to the corporation.
The resignation is effective upon its receipt by the corporation or at a
subsequent time specified in the notice of resignation. An officer may be
removed by the Board with or without cause. The removal of an officer
shall be without prejudice to his contract rights, if any. The election or
appointment of an officer does not of itself create contract rights.
7.03 VACANCIES. The Board of Directors may fill any vacancies in any
office occurring for whatever reason.
7.04 AUTHORITY. All officers, employees and agents of the corporation
shall have such authority and perform such duties in the conduct and
management of the business and affairs of the corporation as may be
designated by the Board of Directors and these Bylaws.
ARTICLE VIII
DUTIES OF OFFICERS
8.01 CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the
chief executive officer of the corporation and shall preside at all
meetings of the shareholders and of the Board of Directors at which he is
present. He shall see that all orders and resolutions of the Board are
carried into effect, and he shall have the general powers of supervision
and management usually vested in the chief executive officer of a
corporation, including the authority to vote all securities of other
corporations and business organizations which are held by the corporation.
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8.02 PRESIDENT. The President shall be the chief operating officer of
the corporation and shall have the general powers of supervision and
management over the day-to-day operations of the corporation. In the
absence or disability of the Chairman of the Board, he also shall perform
the duties and execute the powers of the Chairman of the Board as set forth
in these Bylaws.
8.03 VICE PRESIDENTS. The Vice Presidents, in order of their
seniority, shall, in the absence or disability of the President, perform
his duties and exercise his powers and shall perform such other duties as
the Board of Directors or the President may from time to time prescribe.
8.04 SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and of shareholders and shall record all votes and minutes of
all proceedings in a book to be kept for that purpose. He shall give or
cause to be given notice of all meetings of the shareholders and of the
Board of Directors. He shall keep in safe custody the seal of the
corporation, and, when authorized by the Board, affix the same to any
instrument requiring it, and when so affixed it shall be attested by his
signature, or by the signature of the Treasurer or an Assistant Secretary.
The Secretary may delegate any of his duties, powers and authorities to one
or more Assistant Secretaries, unless such delegation is disapproved by the
Board.
8.05 TREASURER. The Treasurer shall have the custody of the corporate
funds and securities; shall keep full and accurate accounts of receipts and
disbursements in books of the corporation; and shall deposit all moneys and
other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. He shall
render to the President and directors, whenever they may require it, an
account of his transactions as Treasurer and of the financial condition of
the corporation. The Treasurer may delegate any of his duties, powers and
authorities to one or more Assistant Treasurers unless such delegation be
disapproved by the Board of Directors.
8.06 ASSISTANT SECRETARIES AND TREASURERS. The Assistant Secretaries,
in the order of their seniority, shall perform the duties and exercise the
powers and authorities of the Secretary in case of his absence or
disability. The Assistant Treasurers, in the order of their seniority,
shall perform the duties and exercise the powers and authorities of the
Treasurer in case of his absence or disability. The Assistant Secretaries
and Assistant Treasurers shall also perform such duties as may be delegated
to them by the Secretary and Treasurer, respectively, and also such duties
as the Board of Directors may prescribe.
-11-
<PAGE>
ARTICLE IX
SPECIAL CORPORATE ACTS
9.01 ORDERS FOR PAYMENT OF MONEY. All checks, drafts, notes, bonds,
bills of exchange and orders for payment of money of the corporation shall
be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
9.02 CONTRACTS AND CONVEYANCES. The Board of Directors of the
corporation may in any instance designate the officer and/or agent who
shall have authority to execute any contract, conveyance, mortgage or other
instrument on behalf of the corporation, or may ratify or confirm any
execution. When the execution of any instrument has been authorized
without specification of the executing officers or agents, the Chairman of
the Board, the President or any Vice President, and the Secretary or
Assistant Secretary or Treasurer or Assistant Treasurer, may execute the
same in the name and on behalf of this corporation and may affix the
corporate seal thereto.
ARTICLE X
BOOKS AND RECORDS
10.01 MAINTENANCE OF BOOKS AND RECORDS. The proper officers and
agents of the corporation shall keep and maintain such books, records and
accounts of the corporation's business and affairs, minutes of the
proceedings of its shareholders, Board and committees, if any, and such
stock ledgers and lists of shareholders, as the Board of Directors shall
deem advisable, and as shall be required by the laws of the State of
Michigan and other states or jurisdictions empowered to impose such
requirements. Books, records and minutes may be kept within or without the
State of Michigan in a place which the Board shall determine.
10.02 RELIANCE ON BOOKS AND RECORDS. In discharging his duties, a
director or an officer of the corporation, when acting in good faith, may
rely upon the opinion of counsel for the corporation, upon the report of an
independent appraiser selected with reasonable care by the Board, or upon
financial statements of the corporation represented to him to be correct by
the President or the officer of the corporation having charge of its books
of account, or stated in a written report by an independent public or
certified public accountant or firm of such accountants fairly to reflect
the financial condition of the corporation.
-12-
<PAGE>
ARTICLE XI
INDEMNIFICATION
11.01 INDEMNIFICATION. The corporation shall provide
indemnification to persons who serve or have served as directors,
officers, employees or agents of the corporation, and to persons who
serve or have served at the request of the corporation as directors,
officers, employees, partners or agents of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, to the fullest extent permitted by the
Michigan Business Corporation Act, as the same now exists or may
hereafter be amended.
ARTICLE XII
AMENDMENTS
12.01 AMENDMENTS. The Bylaws of the corporation may be amended,
altered or repealed, in whole or in part, by the shareholders or by the
Board of Directors at any meeting duly held in accordance with these
Bylaws, provided that notice of the meeting includes notice of the proposed
amendment, alternative or repeal.
-13-
<PAGE>
EXHIBIT 10.4
CHEMICAL FINANCIAL CORPORATION
SUPPLEMENTAL RETIREMENT INCOME PLAN
Adopted May 20, 1985 and as
Amended August 15, 1988 and
December 21, 1992
1. PURPOSE OF THE PLAN
The purpose of the Chemical Financial Corporation Supplemental
Retirement Income Plan (the "Plan") is threefold: (i) to reimburse a
Corporate Officer of Chemical Financial Corporation (the "Company")
for any reduction in his benefit payments under the Chemical Financial
Corporation Employees' Pension Plan (the "Pension Plan") which may be
caused by the limitations imposed thereon by Section 415 of the
Internal Revenue Code (the "415 Limit" or Section 401(a)(17) of the
Internal Revenue Code (the "401(a)(17) Limit"); (ii) to provide
incentive and reward to such officer through additional retirement
income in recognition of this meritorious service and material
contribution to the Company's continued growth and development; and
(iii) to assist the Company in retaining and attracting high caliber
key executives upon whose efforts the future successful and profitable
operation of its business is dependent.
2. EFFECTIVE DATE
This Plan was approved and adopted by the Board of Directors of
Chemical Financial Corporation as of May 20, 1985 and amended as of
August 15, 1988 and December 21, 1992.
3. PARTICIPANTS IN THE PLAN
The Plan is administered by a committee appointed by the Board of
Directors consisting of not less than three members of the Board of
Directors (the Compensation Committee). The Plan empowers the
Compensation Committee to grant such key employees of the Company and
its Subsidiaries as shall be selected from time to time by the
Committee, participation rights in the Plan.
4. PENSION PLAN BENEFITS
For purposes of this section, "Unrestricted Pension Benefit" means the
amount which would have been payable from the Pension Plan if the 415
Limit or 401(a)(17) Limit did not apply, calculated as of the
participant's date of retirement based on the applicable optional
<PAGE>
payment method. "Restricted Benefit Amount" means the amount actually
payable from the Pension Plan calculated as of the participant's date
of retirement based on the applicable optional payment method.
Pension Plan benefits are only available to a participant who is
employed by the Company immediately prior to his normal or early
retirement from the Company under the terms of the Pension Plan.
A participant who retires pursuant to the normal or early retirement
provisions of the Pension Plan and elects benefits from the Pension
Plan shall, subject to approval by the Committee, receive a monthly
supplement from the Plan. The supplement shall be equal to the
difference between (i) the Unrestricted Pension Benefit and (ii) the
Restricted Benefit Amount, both calculated according to the form of
payment elected for his Pension Plan Benefits. In the event the
participant's death and payment election from causes a Pension Plan
payment to a beneficiary, a portion of the supplement shall be paid to
such beneficiary during the period of any related Pension Plan
payment. The portion of the supplement to be paid (if any) shall
equal the portion of the participant's Pension Plan benefit which is
continued for such beneficiary(ies).
However, upon a Change in Control (as hereafter defined), each
participant or his/her recognized survivor shall be paid the present
value of the benefit accrued under the Supplemental Plan in the
following manner:
a. If an active employee or former employee with a deferred benefit
who is eligible to retire, the participant's benefit shall be
calculated as if the participant terminated employment and then
retired and elected to receive the 100% Joint Annuitant Option
benefit as of the last day of the month immediately preceding the
Change in Control.
b. If an employee or former employee who is not eligible to retire,
the participant's benefit shall be calculated as if the
participant terminated employment and then elected to receive the
lump sum equivalent of a vested deferred benefit as of the last
day of the month immediately preceding the Change in Control.
All amounts shall be paid in a single lump sum within 90 days of the
Change in Control unless the participant consents to another form of
payment.
For purposes of the Supplemental Plan, a Change in Control shall mean
a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
<PAGE>
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not the Company is then subject to such reporting
requirement; provided that, without limitation, a Change in Control
shall be deemed to have occurred if: (i) any individual, partnership,
firm, corporation, association, trust, unincorporated organization or
other entity, or any syndicate or group deemed to be a person under
Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial
owner" (as defined in rule 13D-3 of the General Rules and Regulations
under the Exchange Act), directly or indirectly, of securities of the
Company representing 20 percent or more the of the combined voting
power of the Company's then outstanding securities entitled to vote in
the election of directors of the Company; or (ii) during any period of
two (2) consecutive years (not including any period prior to the
adoption of this amendment), individuals who at the beginning of such
period constitute the Board of Directors and any new directors whose
election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at least three-
quarters (3/4) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof.
For purposes of this lump sum payment in the event of a Change in
Control, the present value of the accrued benefit shall be calculated
using such actuarial assumptions as the Compensation Committee shall
adopt from time to time.
5. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation Committee. The
Committee shall have all such powers that may be necessary to carry
out the provisions of the Plan in the absence of any action by the
Board, including without limitation, the power to delegate
administrative matters to other persons, to construe and interpret the
Plan, to adopt and revise the rules, regulations and forms relating to
and consistent with the Plan's terms and to make any other
determinations which it deems necessary or advisable for the
implementation and administration of the Plan provided, however, that
the right and power to amend and/or terminate the Plan are reserved
exclusively to the Board. Subject to the foregoing, all decisions and
determinations by the Committee shall be final, binding and conclusive
as to all parties including, without limitation, the Company, any
participant hereunder and all other employees and persons.
6. SOURCE OF BENEFIT PAYMENTS
No fund or other assets of the Company shall be segregated and
attributable to any benefit payments to be made at a later time, as
<PAGE>
herein above provided, but rather benefit payments under the Plan
shall be made from the general assets of the company at the time any
such payment becomes due and payable. Benefit payments under the
Plan are to be taken as deductions for income tax purposes in the
Company's fiscal year that they are actually made. At such time as
any benefit payments are made, it shall be determined by the Company
whether any portion thereof is allocable to any affiliates(s) of the
Company because of their recipient having also served as a Corporate
Officer of such affiliate(s); and, if such is the case, the Company
may elect to obtain reimbursement from such affiliate(s) as
appropriate, for such allocable portion. No participant or surviving
spouse or beneficiary thereof shall have any proprietary rights of any
nature whatsoever with respect to any benefit payments, unless and
until such time a benefit payment is made to such participant or the
surviving spouse or beneficiaries thereof, and then only as to the
amount of such payment.
7. NON-ALIENATION OF PAYMENTS
Any benefits payable under the Plan shall not be subject in any manner
to alienation, sale, transfer, assignment, pledge, attachment,
garnishment or encumbrance of any kind, by will, or by inter vivos
instrument. Any attempt to alienate, sell, transfer, assign, pledge
or otherwise encumber any such payment, whether currently or
thereafter payable, shall not be recognized by the Committee or the
Company. Any benefit payment due hereunder shall not in any manner be
liable for, or subject to, the debts or liabilities of any participant
or the surviving spouse or beneficiary thereof, as the case may be.
If any such participant, surviving spouse or beneficiary shall attempt
to alienate, sell, transfer, assign, pledge or otherwise encumber any
benefit payments to be made to that person under the Plan or any part
thereof, or if by reason of such person's bankruptcy or other event
happening at any time, such payments would devolve upon anyone else or
would not be enjoyed by such person, then the Committee, in its
discretion, may terminate such person's interest in any such benefit
payment, and hold or apply it to or for the benefit of that person,
the spouse, children, or other dependents hereof, or any of them, in
such manner as the Committee may deem proper.
8. INCOMPETENCY
Every person receiving or claiming benefit payments under the Plan
shall be conclusively presumed to be mentally competent until the date
on which the Committee receives a written notice, in a form and manner
acceptable to the Committee, that such person is incompetent and that
a guardian, conservator, or other person legally vested with the care
of his estate has bee appointed. In the event a guardian or
<PAGE>
conservator of the estate of any person receiving or claiming benefit
payment under the Plan shall be appointed by a court of competent
jurisdiction, payments may be made to such guardian or conservator;
provided that proper proof of appointment and continuing qualification
is furnished in a form and manner acceptable to the Committee. Any
such payment so made shall be a complete discharge of any liability
therefor.
9. LIMITATION OF RIGHTS AGAINST THE COMPANY
Participation in this Plan, or any modifications thereof, or the
payments of any benefits hereunder, shall not be construed as giving
to any participant any right to be retained in the service of the
Company, limiting in any way the right of the Company to terminate
such participant's employment at any time, evidencing any agreement or
understanding express or implied, that the Company will employ such
participant in any particular position or at any particular rate of
compensation and/or guaranteeing such participant any right to receive
any other form or amount of renumeration from the Company.
10. CONSTRUCTION
The Plan shall be construed, administered and governed in all respects
under and by the laws of the State of Michigan. Wherever any words
are used herein in the masculine, they shall be construed as though
they were used in the feminine for all cases where they would so
apply; and wherever any words are used herein in the singular or the
plural, they shall be construed as though they were used in the plural
or the singular, as the case may be, in all cases where they would so
apply. The words "hereof", "hereunder" and other similar compounds of
the word "here" shall mean and refer to this entire document and not
to any particular paragraph.
11. LIABILITY
Neither the Company nor any shareholder, director, officer or other
employee of the Company or any member of the committee or any other
person shall be jointly or severally liable for any act or failure to
act hereunder, except for gross negligence or fraud.
12. AMENDMENT OR TERMINATION OF THE PLAN
The Company, by action of the Board, reserves the right to amend,
modify, terminate or discontinue the Plan at any time; and such action
shall be final, binding and conclusive as to all parties, including
any participant hereunder, any surviving spouse or beneficiary thereof
and all other Company employees and persons.
<PAGE>
13. SUCCESSORS AND ASSIGNS
The terms and conditions of the Plan, as amended and in effect from
time to time, shall be binding upon the successors and assigns of the
Company, including without limitation any entity into which the
Company may be merged or with which the Company may be consolidated.
<PAGE>
EXHIBIT 10.5
RETIREMENT AGREEMENT
THIS AGREEMENT is made this 16th day of November, 1998, between ALAN
W. OTT ("Mr. Ott") and CHEMICAL FINANCIAL CORPORATION ("Chemical"), and
joined in by its subsidiary, CHEMICAL BANK AND TRUST COMPANY ("Chemical
Bank");
WHEREAS, Chemical is a bank holding company and a Michigan
corporation; and
WHEREAS, Chemical believes that its ability to conduct its business
successfully is dependent upon retaining key management employees until
such time as they retire; and
WHEREAS, Mr. Ott has been employed in an important management and
chief executive position with Chemical for over 30 years, and the parties
desire to continue to maintain a relationship upon the terms and conditions
set forth herein; and
WHEREAS, Mr. Ott has determined to retire from the active management
of Chemical, but has agreed to provide assistance and advice during the
transition to a new chief executive;
IT IS, THEREFORE, AGREED AS FOLLOWS:
1. RETIREMENT. Effective the close of business December 31, 1996,
Mr. Ott resigned and retired from his position as President and Chief
Executive Officer of Chemical Financial Corporation and Chief Executive
Officer of Chemical Bank. Mr. Ott shall continue to serve as a Director of
Chemical and Chemical Bank and Chairman of the Board of Directors of
Chemical and Chemical Bank, through January 1, 1999 to December 31, 1999,
without compensation for Directors' meetings. Mr. Ott may thereafter
continue his service to Chemical for such time and in such role as Chemical
and he deem appropriate.
2. COMPENSATION AND BENEFITS. Chemical agrees to pay to Mr. Ott an
annual compensation of Fifty Thousand Dollars ($50,000.00), commencing on
the first day of January, 1999, for a period of one year or until his
death, if earlier. Payments to Mr. Ott will be made on the first business
day of each month during the term of this Agreement.
Mr. Ott shall be provided group health benefits in accordance with the
terms of Chemical's Retiree Medical and Dental Plan. If at any time
Chemical terminates any such insurance plan for its retirees, Chemical may
also terminate such plan for Mr. Ott; if Chemical substitutes medical and
<PAGE>
hospitalization insurance plans for its retirees or provides additional
medical or hospitalization insurance coverage for its retirees, then such
substituted and/or additional insurance coverage shall be made available to
Mr. Ott.
3. COVENANT NOT TO COMPETE. Mr. Ott agrees that during the period
that payments are being made to him hereunder, he shall not enter into
employment or any form of equity ownership of any business which is
competitive with the businesses related to, affiliated with, or managed by
Chemical; provided, however, that the parties agree that this provision
will be limited to a geographic area consisting of a fifty (50) miles
radius from each existing business location of Chemical or any business
related to, affiliated with, or managed by Chemical. In the event the
Board of Directors of Chemical determines that Mr. Ott is in violation of
this covenant not to compete, it shall give written notice to him. Mr. Ott
shall have a period of ninety (90) days from the date of such notice to
cease his competitive activity, and that payments hereunder shall continue
during such period. If the competitive activity is not terminated within
the ninety (90) day period, further payments hereunder shall cease. In the
event of a dispute hereunder, the parties agree to submit their
disagreement to arbitration. Nothing in this Section 3 shall be construed
to prevent Mr. Ott from acquiring or holding, directly or indirectly,
securities of any corporation or other entity the securities of which are
listed for trading on any national or regional securities exchange or
quoted on any automated quotation system sponsored by the National
Association of Securities Dealers, Inc. as long as Mr. Ott's total
beneficial ownership in any such corporation or entity does not exceed five
percent (5%) of the total securities outstanding of such corporation or
entity.
4. NO ASSIGNMENT. This Agreement is personal to each party to this
Agreement and no party may assign or delegate any rights or obligations
hereunder without first obtaining the written consent of the others.
5. MODIFICATION. This Agreement supersedes all prior agreements
with respect to the matters covered hereby, and no modification of this
Agreement shall be valid unless it is in writing and signed by Chemical and
Mr. Ott.
6. CONSTRUCTION. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan.
7. HEADINGS. The paragraph headings in this Agreement are for
convenient reference only, and shall not modify or amend the express terms
hereof.
<PAGE>
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
heirs, personal representatives, successors and assigns.
DATED: December 9, 1998 /S/ ALAN W. OTT
Alan W. Ott
CHEMICAL FINANCIAL CORPORATION
DATED: December 9, 1998 /S/ ALOYSIUS J. OLIVER
Aloysius J. Oliver
Its President & Chief Executive Officer
CHEMICAL BANK AND TRUST COMPANY
DATED: December 9, 1998 /S/ DAVID B. RAMAKER
David B. Ramaker
Its President & Chief Executive Officer
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------- ------- -------
(Amounts in thousands,
except per share amounts)
<S> <C> <C> <C>
BASIC:
Average shares outstanding 13,486 13,427 13,388
Net income $26,046 $23,889 $22,003
======= ======= =======
Net income per common share $ 1.93 $ 1.78 $ 1.64
======= ======= =======
DILUTED:
Average shares outstanding 13,486 13,427 13,388
Net effect of the assumed exercise of
stock options-based on the treasury
stock method using average market price 150 159 194
------- ------- -------
13,636 13,586 13,582
======= ======= =======
Net income $26,046 $23,889 $22,003
======= ======= =======
Net income per common share $ 1.91 $ 1.76 $ 1.62
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 13
1998
SILVER ANNIVERSARY
- ---------------------------------------------------------------------------
NINETEEN NINETY-EIGHT - ANNUAL REPORT
[PICTURE OF QUARTER SPINNING]
Chemical Financial Corporation
[CHEMICAL LOGO]
<PAGE>
1998 HIGHLIGHTS
1998 marked the 24th consecutive year of both increased operating earnings
and cash dividends.
- 1998 net income was $26.046 million, up 9% over 1997 net income of
$23.889 million.
- 1998 earnings per share were $1.91, up 8.5% over 1997 earnings per
share of $1.76.
- Return on average assets was 1.44% in 1998, compared to 1.38% in 1997.
- 1998 cash dividends per share were $.77, up 14.6% over 1997 cash
dividends per share of $.67.
- The Corporation paid a 5 for 4 stock split on December 16, 1998. All
per share amounts have been adjusted to reflect the stock split.
- The Corporation converted its core operating system in 1998 to a new
system as part of its Year 2000 readiness plan.
The Corporation's financial position remained strong at December 31, 1998.
- Total assets increased $108 million, or 6.1%, during 1998 to $1.873
billion as of December 31, 1998.
- Total loans increased $52.7 million, or 6.2%, and total deposits
increased $78.4 million, or 5.3%, during 1998.
- Shareholders' equity increased $17.9 million, or 8%, during 1998 to
$241.8 million as of December 31, 1998 and represented 12.9% of total
assets.
- The allowance for possible loan losses was $18.1 million, or 2.01% of
total loans, compared to total nonperforming loans of $3.1 million, or
.35% of total loans as of December 31, 1998.
REFERENCE GUIDE
1998 Highlights. . . . . . . . . . . . . . . . . . .Inside Front Cover
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 1
Message to Shareholders. . . . . . . . . . . . . . . . . . . . . . . 2
A Quarter Century of Growth and Profitability. . . . . . . . . . . . 4
25 Years in Review . . . . . . . . . . . . . . . . . . . . . . . . . 6
<PAGE>
Quarterly Financial Information. . . . . . . . . . . . . . . . . . .10
Consolidated Financial Statements. . . . . . . . . . . . . . . . . .11
Notes to Consolidated Financial Statements . . . . . . . . . . . . .15
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . .27
Management's Discussion and Analysis . . . . . . . . . . . . . . . .28
Directors and Officers of Affiliates . . . . . . . . . . . . . . . .44
Corporate Directors and Officers . . . . . . . . . . . . . . . . .48
Corporate Information. . . . . . . . . . . . . . . . Inside Back Cover
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (in thousands)
Net interest income $72,487 $69,040 $67,090 $63,687 $63,278
Provision for possible loan losses 964 1,002 1,128 1,065 1,099
Noninterest income 15,610 13,122 12,198 12,359 11,330
Operating expenses 48,307 45,718 45,124 44,629 45,613
Net income 26,046 23,889 22,003 20,489 19,110
PER SHARE DATA<F*>
Net income
Basic $1.93 $1.78 $1.64 $1.53 $1.44
Diluted 1.91 1.76 1.62 1.51 1.42
Cash dividends .77 .67 .58 .49 .41
Book value end-of-period 17.92 16.66 15.47 14.59 12.85
Market value end-of-period 33.50 35.80 30.10 27.94 19.35
AT YEAR END (in thousands)
Total assets $1,872,626 $1,765,100 $1,698,774 $1,706,085 $1,658,023
Deposits 1,554,271 1,475,841 1,429,915 1,449,801 1,421,678
Long-term debt 8,000 9,000 10,000 12,080 12,099
Shareholders' equity 241,839 223,925 207,269 194,902 170,680
FINANCIAL RATIOS
Return on average total assets 1.44% 1.38% 1.30% 1.24% 1.15%
Return on average shareholders'
equity 11.3 11.1 10.9 11.0 11.1
Average shareholders' equity
to average total assets 12.8 12.5 11.9 11.3 10.4
Cash dividends paid per share
to diluted net income per share 40.3 38.2 36.0 32.8 28.8
Allowance for possible loan
losses to total loans 2.01 2.05 2.06 2.09 2.01
Tangible equity to assets 12.7 12.5 12.0 11.2 10.1
<FN>
<F*>Adjusted for the 5 for 4 stock split paid December 16, 1998.
</FN>
</TABLE>
<PAGE>
[LOAN COMPOSITION December 31, 1998]
<TABLE>
<CAPTION>
<S> <C>
Consumer Installment Loans 18.8%
Commercial and Municipal Loans 15.5%
Residential Mortgages 45.6%
Nonresidential Real Estate Mortgages 10.2%
Construction Loans 3.9%
Home Equity Loans 6.0%
</TABLE>
[BOOK VALUE PER SHARE (December 31) (in dollars) Graph]
<TABLE>
<CAPTION>
<S> <C>
94 12.85
95 14.59
96 15.47
97 16.66
98 17.92
</TABLE>
[CASH DIVIDENDS PER SHARE (in dollars) Graph]
<TABLE>
<CAPTION>
<S> <C>
94 .41
95 .49
96 .58
97 .67
98 .77
</TABLE>
1
<PAGE>
MESSAGE TO SHAREHOLDERS
To Our Shareholders:
In our 25th year, Chemical Financial Corporation continued an unbroken
series of increases in annual operating income since 1974 and recorded net
income of more than $25 million for the first time. Net income for 1998 was
$26.046 million, 9.0 percent more than earnings of $23.889 million reported
for 1997. Diluted earnings per share were $1.91, an 8.5 percent increase
over earnings of $1.76 per share in 1997.
At year end 1998, total assets were $1.873 billion, 6.1 percent more than
they were one year earlier. Total deposits increased by 5.3 percent during
the year to $1.554 billion and total loans went up by 6.2 percent to $898.3
million. Shareholders' equity grew 8.0 percent to stand at $241.8 million
as the year ended. This is more than twice the minimum recommended by bank
regulators for "well capitalized" organizations.
It is interesting to recall that the Company reported net income of $1.3
million for 1974 and ended that year with total assets of $153.4 million.
The past 25 years have, indeed, made a difference!
The improvement in 1998 earnings is primarily attributable to growth, a
significant increase in the gains on the sale of mortgages and our ability
to maintain net interest income in spite of declining interest rates.
Moreover, our fastest growing deposit category was demand deposits in
checking accounts. These tend to be the lowest cost deposit. We also had
three highly successful consumer loan promotions during the year. They
generated 9,333 new loans totaling $94.5 million in a fiercely competitive
environment.
[2000 AND BEYOND LOGO]
Our shareholders continued to share in our progress. Cash dividends
increased 14.6 percent in 1998 and a 5-for-4 stock split was distributed in
December. At the time of the split, the Board of Directors announced their
intention to pay a quarterly dividend of $.21 per share in 1999. This rate
would provide our shareholders with another 9.4 percent increase in
dividends paid. We are just as proud of our record of increasing dividend
payments every year for 25 years as we are of our record of improving
operating income in each of those years.
In September, we announced a stock repurchase program. Management was
authorized to purchase up to 100,000 shares of the Corporation's common
stock. The stock acquired under the program is used in connection with the
employee benefit plans and for other general corporate purposes. Because
less than one percent of the Company's 13.5 million outstanding shares are
involved, the financial impact of this repurchase program is expected to be
minimal.
<PAGE>
Without question, our most significant internal effort in 1998 was working
toward ensuring that the Company and its bank subsidiaries are ready for
the Year 2000. In February, we converted our principal data processing
activities to the new Kirchman Corporation Dimension system as part of our
Year 2000 readiness plan. Not only has the Kirchman Corporation certified
that this system is designed to be Year 2000 compliant, but its
implementation enhanced our customer accounting operations and gave us the
ability to improve customer service and expand our product offerings.
Chemical Bank and Trust Company, the Corporation's lead subsidiary bank,
has agreed to adopt Kirchman's GBQ (Getting Better Quicker) process that is
designed to improve customer service by providing front line employees full
on-line access to their customers' deposit and loan records. The process is
also designed to improve income by better identifying cross-sales
opportunities for customer contact employees and helping to control
expenses.
Although some media outlets have sensationalized the story and raised
questions about the ability of banks to deal with Year 2000 issues, we are
pleased to report that as of December 31, 1998, all of our information
systems that we have identified as critical were on target to be ready for
the
[NET INCOME PER SHARE (DILUTED) (in dollars) Graph]
<TABLE>
<CAPTION>
<S> <C>
94 1.42
95 1.51
96 1.62
97 1.76
98 1.91
</TABLE>
[NET INCOME (in thousands of dollars) Graph]
<TABLE>
<CAPTION>
<S> <C>
94 19,110
95 20,489
96 22,003
97 23,889
98 26,046
</TABLE>
<PAGE>
[TOTAL ASSETS (December 31) (in millions of dollars) Graph]
<TABLE>
<CAPTION>
<S> <C>
94 1,658
95 1,706
96 1,699
97 1,765
98 1,873
</TABLE>
2
<PAGE>
first day of business in January 2000 according to our readiness plan. For
example, we spent approximately $525,000 in 1998 replacing desktop
computers and software that were not Year 2000 compliant and the Trust
Department of Chemical Bank and Trust Company converted to new SunGard and
Corbel Quantech systems as part of our Year 2000 readiness plan.
Chemical Bank South, a banking subsidiary headquartered in Marshall,
Michigan acquired the Albion, Michigan branch of Great Lakes National Bank
Michigan in November. In connection with this acquisition, Chemical Bank
South merged its existing branch at 1408 N. Eaton Street in Albion into the
larger facility acquired. We are now in the midst of a significant
remodeling project at this new location that will enhance our image in the
community just as the acquisition increased our market share.
As we have said many times, one of our key corporate strategies is to
operate as a group of community banks, not as a large branch network of a
single bank. This strategy works well for us because we have been able to
attract community leaders in business, the professions and civic affairs to
serve as directors of our affiliates. At the Annual Shareholder Meeting in
April of 1998, five of them retired in accordance with our Directors
Retirement Policy.
At Chemical Bank and Trust Company, Stuart Bergstein retired after 22 years
of service and Mary Neely ended a 16 year tenure on that bank's board.
Donald Clarke retired after serving as a member of the Chemical Bank
Michigan board since 1987. David Elow joined the Chemical Bank Key State
board in 1983 and served as that bank's Chairman from 1986 until his
retirement. Finally, Carl Schuberg retired after 30 years as a member of
the Chemical Bank Central board. Lawrence Burks, Vice Chairman of Chemical
Bank and Trust Company, retired as a full time employee in April after 25
years of service but continues to serve as a director of that bank. We
thank these able people for their many contributions to the advancement of
our organization.
During the year, we also added ten new affiliate bank directors. The new
directors represent a variety of business interests and professions. We
look forward to their participation in the deliberations of our affiliate
boards and to their advice and counsel. All of us associated with the
Company are encouraged that such capable community leaders are willing to
join the Chemical Financial family.
At the corporate level, Terence F. Moore was appointed to the Corporation's
board in January and then elected to a full one-year term at the Annual
Meeting. Mr. Moore has been a director of Chemical Bank and Trust Company
since 1991 and of CFC Data Corp since 1995. He is President and Chief
Executive Officer of MidMichigan Health in Midland, an organization
comprising three hospitals, two nursing homes and nine other subsidiaries.
[PICTURE OF ALOYSIUS J. OLIVER & ALAN W. OTT]
<PAGE>
As we begin our 26th year, we remain optimistic about our future prospects.
When our principal competitors affiliate with interstate megabanks, our
market position is enhanced because we remain a local organization, with
decision makers who live and work in the communities we serve. We have the
ability to develop products and services tailored specifically to the local
needs of our communities and to react quickly to changes in the financial
services industry.
We express gratitude to our shareholders, directors, officers and employees
for participating in the success of Chemical Financial Corporation over the
past 25 years. We intend to continue with our strategy that has proven
successful in the past and look forward to the new millennium and continued
success in the future.
Sincerely,
/s/ Alan W. Ott
Alan W. Ott
Chairman of the Board
/s/ Aloysius J. Oliver
Aloysius J. Oliver
President and Chief Executive Officer
3
<PAGE>
A QUARTER CENTURY OF GROWTH AND PROFITABILITY
On June 30, 1974, Chemical Financial Corporation began operation with total
assets of approximately $150 million and a staff of 165 under the direction
of Robert B. Bennett, as Chairman and Alan W. Ott, as President and Chief
Executive Officer. Messrs. Bennett and Ott held these positions until their
retirement in 1986 and 1996, respectively. In 1973, the Company had been
incorporated at the urging of Mr. Ott, then President and CEO of Chemical
Bank and Trust Company. Following approvals by the shareholders and various
state and federal regulators, each share of the bank was exchanged for two
new shares of Chemical Financial Corporation common stock.
[PICTURES OF ROBERT B. BENNETT AND ALAN W. OTT]
[PICTURE OF STOCK CERTIFICATES]
[PICTURE OF EMPLOYEE GROWTH RATE FROM 1981 TO 1998]
By the end of 1981, the staff of Chemical Financial Corporation and its
affiliates had grown to 500+ full-time employees. At the end of 1998, the
Corporation had 1006 employees. Thanks to the hard work of these dedicated
banking professionals, the Chemical organization has maintained its 25-year
focus on customer satisfaction and achieved recognition as one of the
premier banking companies in Michigan.
[PICTURE OF QUARTERS ACROSS THE PAGE WITH THE YEARS 1974 THROUGH 1986 ABOVE
EACH QUARTER]
[PICTURE OF CHEMICAL BANK MASTERCARD WITH A LINE POINTING TO THE QUARTER
WITH 1977 ABOVE IT]
The first two ChemKey Automatic Teller Machines (ATMs) were installed in
1977. Today, the Corporation has a sophisticated online network of 85
machines that process almost 4 million transactions and inquiries each
year, not only for Chemical Bank customers, but also for members of other
financial institutions as well - a significant source of fee income.
Chemical Financial Corporation continues to lead the way with innovative
banking services such as ChemConnectsm online banking and ChemKey/ChemCheck
debit cards.
[PICTURE OF LITTLE TOY HOUSES WITH DOLLAR SIGNS ON THEM WITH A LINE
POINTING TO THE QUARTER WITH 1979 ABOVE IT]
Chemical Financial Corporation acquired its fifth bank in 1979, Citizens
Bank and Trust Company, in Clare, now Chemical Bank Michigan. Over the past
25 years, the acquisition of new banks (17 in all) has been a principal
source of growth for the Corporation. Today, the Corporation is one of the
leading super community banks in Michigan, with ten bank affiliates and 86
full-service banking offices in 24 counties across mid-Michigan.
<PAGE>
In 1986, Chemical Financial Corporation became the first bank holding
company in Michigan to take advantage of the state's eased restrictions on
branch banking when Chemical Bank Albion merged with Chemical Bank Marshall
to form one larger, more efficient institution - Chemical Bank South. By
taking advantage of additional changes in the Michigan Banking Code over
the years, Chemical Financial Corporation has been able to organize its
affiliates so all of its customers have a nearby community bank, each with
its own officers and board of directors.
[PICTURE OF CHEMICAL BANK SOUTH]
4
<PAGE>
For the first time, Chemical Financial Corporation reported net income of
more than $10 million - a far cry from the $1,319,000 net income reported
in 1974. Operating income has increased EVERY SINGLE YEAR since the
Corporation began.
[PICTURE OF GROWTH OF NET INCOME REPORTED UP TO $10 MILLION WITH A LINE
POINTING TO THE QUARTER WITH 1989 ABOVE IT]
At the Annual Meeting in April 1994, Gilbert A. Currie retired as Chairman
of the Board of Chemical Financial Corporation. Mr. Currie began his
association with the Chemical organization in 1956 when he was elected a
director of Chemical Bank and Trust Company. He served as Chairman of that
bank from 1961 until 1986, when he became Chairman of the Board of Chemical
Financial Corporation. "Gil" Currie personified that special combination of
progressive thinking and conservative practices that has allowed the
organization to compound its successes, year after year.
[PICTURE OF GILBERT A. CURRIE WITH A LINE POINTING TO THE QUARTER WITH 1994
ABOVE IT]
In its 25th year of doing business, Chemical Financial Corporation earned
net income of more than $26 million. This consistent improvement in
earnings is the primary reason the Corporation has been able to distribute
stock dividends and splits that have enabled one share of Chemical
Financial Corporation stock in 1974 to grow to 10.992 shares today. It has
also allowed the payment of cash dividends totaling $70.47 on those shares.
In 1974, the market value of a single share of Chemical Financial
Corporation stock was $38. As of December 31, 1998, the value of 10.992
shares of Chemical Financial Corporation stock was $368.23.
[PICTURE OF THE NUMBER 25 ON TOP OF A PILE OF QUARTERS, DIMES AND NICKELS
WITH A LINE POINTING TO THE QUARTER WITH 1998 ABOVE IT]
[PICTURE OF QUARTERS ACROSS THE PAGE WITH THE YEARS 1987 THROUGH 1998 ABOVE
EACH QUARTER]
<PAGE>
[PICTURE OF CHEMICAL BANK BAY AREA (MANUFACTURERS BANK OF BAY CITY) WITH A
LINE POINTING TO THE QUARTER WITH 1987 ABOVE IT]
With the purchase of Manufacturers Bank of Bay City in 1987, now known as
Chemical Bank Bay Area, Chemical Financial Corporation became one of the
ten largest bank holding companies in Michigan, with consolidated total
assets exceeding $1 billion.
[PICTURE OF 75TH ANNIVERSARY WITH A LINE POINTING TO THE QUARTER WITH 1992
ABOVE IT]
Chemical Financial Corporation's lead bank, Chemical Bank and Trust
Company, celebrated its 75th Anniversary in March 1992. Originally known as
Chemical State Savings Bank, it opened in 1917 as a "savings bank," which,
under the banking laws of that era, meant it could pay interest on savings
accounts and lend money for home mortgages. For much of its history, the
bank has advertised itself as the bank for everybody. This philosophy of
doing business has guided the operations of all Chemical Financial
Corporation affiliate banks for the past 25 years.
5
<PAGE>
25 YEARS IN REVIEW
When the directors of Chemical Bank and Trust Company incorporated a
holding company in 1973, they had two primary goals: steady asset growth
and consistent earnings improvement. Their goals extended to provide
customers with superior service and innovative products, give employees an
opportunity for professional development and career advancement, and
provide the shareholders with returns on their investment. Looking at the
Corporation's record, these goals have been achieved.
- ---------------------------------------------------------------------------
CHEMICAL BANK HAS TWO PRIMARY GOALS: STEADY ASSET
GROWTH AND CONSISTENT EARNINGS IMPROVEMENT.
- ---------------------------------------------------------------------------
In 1972, the Michigan legislature amended the state's Banking Code to allow
for the formation of multi-bank holding companies.
Allowing banks to affiliate under one corporate umbrella allowed affiliated
banks to be more responsive to their customers while achieving efficiencies
that enhanced profitability.
[PICTURE OF ARTICLES OF INCORPORATION OF CHEMICAL FINANCIAL CORPORATION]
Not long after the new law became effective, Alan W. Ott, who had become
President and Chief Executive Officer of Chemical Bank and Trust Company in
1972, led the project of organizing a holding company, and in 1973 the new
company was incorporated. The formation of the new company resulted in the
exchange of Chemical Bank and Trust Company stock for new shares of
Chemical Financial Corporation on June 30, 1974.
Chemical Financial Corporation began operations with one subsidiary bank,
approximately $150 million in assets and 165 employees. A key decision made
at this time was to transfer the bank's data processing subsidiary to a
separate subsidiary and rename it CFC Data Corp.
Over the next 25 years, the Corporation acquired 16 more commercial banks.
Figure 1 lists those acquisitions and the year in which each occurred.
<PAGE>
FIGURE 1
<TABLE>
<CAPTION>
BANK ACQUISITIONS
- -------------------------------------------------------
<S> <C>
Chemical Bank and Trust Company, Midland 1974
The Bank of Albion 1975
AuGres State Bank 1977
Gladwin County Bank, Beaverton 1977
National Bank of Marshall 1978
Citizens Bank and Trust Company, Clare 1979
First National Bank of Lake City 1980
Montcalm Central Bank, Stanton 1981
The Pinney State Bank, Cass City 1982
Northern National Bank, Grayling 1984
Manufacturers Bank of Bay City 1987
First National Bank & Trust, Big Rapids 1988
Huron County Bank, Harbor Beach 1989
The Peoples State Bank of Caro 1989
Cass City State Bank 1989
Key State Bank, Owosso 1993
State Savings Bank of Caro 1996
</TABLE>
Many of these transactions were mergers that triggered an accounting method
called "pooling of interests." As a consequence, the Corporation's
financial statements for previous years were restated as if the new
affiliate had always been a subsidiary of the Corporation. The total assets
originally reported by the Corporation at the end of each year, however,
more accurately reflect the growth achieved as a result of mergers and
acquisitions.
6
<PAGE>
FIGURE 2
<TABLE>
TOTAL ASSETS REPORTED AT YEAR END
1974 -1998
<CAPTION>
<S> <C> <C>
1974 $153,484,000
1977
1980
1983
1986
1989
1992
1995
1998 $1,872,626,000
</TABLE>
FIGURE 3
<TABLE>
REPORTED ANNUAL NET INCOME
1974 - 1998
<CAPTION>
<S> <C> <C>
1974 $1,319,000
1977
1980
1983
1986
1989
1992
1995
1998 $26,046,000
</TABLE>
Figure 2 shows the growth in total assets reported by Chemical Financial
Corporation over the past 25 years.
Figure 3 shows the growth in net income reported since the Corporation was
formed. The Corporation's operating income has increased every single year
since 1974.
- ---------------------------------------------------------------------------
WHILE GROWTH WAS THE MOST IMPORTANT FACTOR IN THE
CORPORATION'S RECORD OF UNINTERRUPTED INCREASES IN
EARNINGS, THE CONTINUOUS EFFORT TO IMPROVE OPERATING
EFFICIENCY HAS ALSO PLAYED A KEY ROLE IN MAKING
UNINTERRUPTED INCREASES IN EARNINGS POSSIBLE
- ---------------------------------------------------------------------------
<PAGE>
While growth was the most important factor in the Corporation's record of
uninterrupted increases in earnings, a continuous effort to improve
operating efficiency has also played a key role in making this record
possible. There have been three main components to this effort.
The first has been to consolidate all data processing. As technology has
evolved and CFC Data Corp's capabilities have expanded, CFC Data Corp has
become a vital contributor to the improved efficiency of the subsidiary
banks.
The second has been the development of a small corporate staff. Functions
such as financial accounting, auditing, loan review, investments and
marketing are the responsibility of professionals on the corporate staff.
The net result has been to give the affiliate banks better staff support
services at a lower overall cost.
The third component has been the consolidation of affiliates that were in
contiguous or overlapping markets to gain greater operating efficiencies
while continuing to provide first-rate customer service. This process began
in 1986 when Chemical Bank Albion was merged into Chemical Bank Marshall.
The combined institution was renamed Chemical Bank South.
This merger was one of the first of its kind in the state of Michigan
following enactment of a new law easing the restrictions on branch banking
in the state. Federal law and the Banking Code gradually eliminated most
restrictions on branch banking. Today, they allow one institution to have
branches anywhere in the state and, in many cases, in other states as well.
7
<PAGE>
Chemical Financial Corporation has determined that it cannot maintain its
level of customer service through a statewide network of branches. At the
same time, however, it has determined that it is possible to provide
quality service wherever it does business through a limited number of
affiliates. This approach gives all of the Corporation's customers access
to senior bank officers who live and work nearby. It also puts major
decisions, including lending approvals, in the hands of local directors who
are familiar with the people, businesses and communities most affected by
their decisions.
Since 1985, Chemical Financial Corporation has undertaken four affiliate
consolidations and reorganized two existing affiliates through mergers into
two new banks organized by the Corporation. Figure 4 shows these intra-
company consolidations.
FIGURE 4
INTRA-COMPANY CONSOLIDATIONS
- ---------------------------------------------------------------------------
1985 Chemical Bank West was organized and Chemical Bank Lake City merged
into it
1986 Chemical Bank Albion merged into Chemical Bank Marshall and was
renamed Chemical Bank South
1987 Chemical Bank Huron was organized and Chemical Bank AuGres merged
into it
1988 Chemical Bank Cass City merged into Chemical Bank Bay Area
1992 Chemical Bank Gladwin County merged into Chemical Bank Michigan
1996 Chemical Bank Huron merged into Chemical Bank Bay Area
[PICTURE OF A LITTLE BOY SITTING ON AN INFORMATION CENTER DESK TOUCHING THE
BOTTOM OF A PIGGY BANK THAT A WOMAN WHO IS SITTING AT THE DESK IS HOLDING
AND A MAN STANDING BEHIND THE LITTLE BOY]
In a related effort to improve customer service and efficiency, the
Corporation has made Chemical Bank and Trust Company the sole provider of
trust services among its affiliates. Through agency agreements with all of
the other nine affiliates, the Trust Department of Chemical Bank and Trust
Company offers a wide range of sophisticated trust services wherever a
Chemical Financial Corporation affiliate does business.
The Trust Department now has more than $1.3 billion in assets and has
become a significant source of fee income that is increasing each year,
demonstrating the success of this approach.
<PAGE>
As new laws and changes in regulations have opened new lines of business to
banks and their holding companies, Chemical Financial Corporation has
seized the opportunities that have presented themselves.
Banks, but not holding companies, may now operate insurance agencies in
Michigan. Chemical Bank and Trust Company formed a new subsidiary, CFC
Title Services, Inc. in 1996 as the first step in a successful move into
the title insurance business. At the end of that year, the Corporation
acquired Arbury & Stephenson, Inc., an independent insurance agency located
in Midland. Through this agency, now known as Chemical Financial Insurance
Agency, the Corporation is gradually expanding its efforts to market
casualty and life insurance. Ultimately, the goal is to offer insurance of
all types throughout the 24-county area served by Chemical Banks.
8
<PAGE>
Chemical Financial Corporation has also moved into the marketing of mutual
funds, market securities and annuities through a partnership with Security
First Group and BISYS Brokerage Services and now operates five CFC
Investment Centers. Security First provides customers with annuities and
BISYS provides them with mutual funds and market securities. The
Corporation's management felt that a partnership with outside experts was
the best way to move into these highly specialized areas and introduce a
new sales culture into the organization.
Banking is a people business. It always has been and always will be.
Technology has made many clerical and administrative tasks unnecessary;
however, the operation of a successful financial institution is still the
consequence of strong leadership working with capable officers and
employees. Chemical Financial Corporation's continuous growth and constant
improvement in earnings would not have been possible if it were not for the
skill, dedication and foresight of the men and women who have been members
of the Chemical Financial family during the past 25 years.
- ---------------------------------------------------------------------------
THE OPERATION OF A SUCCESSFUL FINANCIAL INSTITUTION IS
STILL THE CONSEQUENCE OF STRONG LEADERSHIP WORKING
WITH CAPABLE OFFICERS AND EMPLOYEES.
- ---------------------------------------------------------------------------
The 14 people who have served on the Chemical Financial Corporation board
of directors since 1974 have brought a rare combination of innovative
thinking and conservative practices to the board deliberations. Figure 5
lists all of the current and former members of the Chemical Financial
Corporation board of directors.
- ---------------------------------------------------------------------------
THE COMPOUND AVERAGE ANNUAL RATE OF RETURN ON
STOCK HELD FOR 25 YEARS, EXCLUDING CASH DIVIDENDS,
HAS BEEN 9.51 PERCENT
- ---------------------------------------------------------------------------
The Corporation has been fortunate to have such highly qualified directors.
It has also employed a great many good people who have made major
contributions to the advancement of Chemical Financial Corporation since
1974. Although it would be impossible to name them all here, their work and
their accomplishments are duly noted and gratefully acknowledged.
The approach of Chemical Financial Corporation's organizers was to do well
so that it would be possible to provide the Corporation's shareholders with
a return on their investment. As the record indicates, that has happened.
When the first shares of Chemical Financial Corporation were issued in
1974, they had an initial market value of $38.00 per share. Thanks to 17
stock dividends and splits since then, each of those shares had grown to
10.992 shares at the end of 1998. Based on the closing price on December
31, 1998, the market value of those 10.992 shares was $368.23.
<PAGE>
Put another way, the cost basis of one share of Chemical Financial
Corporation stock after the exchange in 1974 was $3.46 per share as of
December 31, 1998, adjusted for all subsequent stock dividends and splits.
Therefore, the compound average annual rate of return on Chemical Financial
Corporation stock held for 25 years, excluding cash dividends, has been
9.51 percent. In addition, over the 25-year period, each of the 10.992
shares has received cash dividends of $6.41, or a total cash payment on
each initial share of $70.46.
Viewed in retrospect, Chemical Financial Corporation's 25-year history is
not filled with notable events or great suspense. Rather, it is a record of
constantly compounding success made possible by careful planning and
diligent execution. It is also the story of the development of super
community banking. Today, super community banks are the backbone of the
financial services industry in smaller cities and towns across America. The
ability of the Corporation and its affiliates to adapt to changing
circumstances and foresee opportunities has allowed it to achieve increased
performance, year after year, as it also became one of the premier super
community banks in the country.
Those who were responsible for the organization of Chemical Financial
Corporation 25 years ago should be pleased with the results of their
efforts.
FIGURE 5
CURRENT AND FORMER DIRECTORS OF CHEMICAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Robert B. Bennett Michael L. Dow* Keith R. McKennon Frank P. Popoff*
Gilbert A. Currie Carl A. Gerstacker Terence F. Moore* Lawrence A. Reed*
James A. Currie* I. Frank Harlow Aloysius J. Oliver* William S. Stavropoulos*
Herbert H. Lyon Alan W. Ott* *Current director
</TABLE>
9
<PAGE>
QUARTERLY FINANCIAL INFORMATION
<TABLE>
STOCK PRICE RANGES AND CASH DIVIDENDS PER SHARE<F*>
<CAPTION>
1998 1997
HIGH LOW CASH DIVIDEND HIGH LOW CASH DIVIDEND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 36.40 $ 31.10 $.192 $ 28.76 $ 23.62 $.160
Second quarter 35.50 32.20 .192 27.43 24.00 .160
Third quarter 33.95 26.10 .192 32.48 25.90 .175
Fourth quarter 34.25 28.20 .192 36.00 29.71 .175
- ----------------------------------------------------------------------------------------------------------
$.768 $.670
==========================================================================================================
<FN>
<F*>Adjusted for the 5 for 4 stock split paid December 16, 1998.
</FN>
</TABLE>
Chemical Financial Corporation common stock is traded on The NASDAQ Stock
Market under the symbol CHFC. The above table sets forth the range of bid
prices for Chemical Financial Corporation common stock for the periods
indicated. These quotations reflect inter-dealer prices, without retail
markup, markdown, or commission, and may not necessarily represent actual
transactions. As of December 31, 1998, there were 13,496,230 shares of
Chemical Financial Corporation common stock issued and outstanding held by
approximately 4,200 shareholders of record.
The earnings of the Corporation's subsidiary banks are the principal source
of funds to pay cash dividends. Consequently, cash dividends are dependent
upon the earnings, capital needs, regulatory constraints, and other factors
affecting each individual bank. See Note H to the Consolidated Financial
Statements for a discussion of such limitations. Management expects the
Corporation to declare and pay comparable regular quarterly cash dividends
on its common shares in 1999.
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $29,824 $30,460 $30,776 $30,573 $28,193 $29,096 $30,131 $29,899
Interest expense 12,348 12,447 12,491 11,860 11,457 11,850 12,583 12,389
Net interest income 17,476 18,013 18,285 18,713 16,736 17,246 17,548 17,510
Provision for possible
loan losses 219 260 234 251 329 219 219 235
Investment securities gains -- 8 -- -- -- -- 1 --
Income before income taxes 8,564 9,208 9,794 11,260 8,235 8,329 8,785 10,093
Net income 5,779 6,179 6,529 7,559 5,526 5,624 5,906 6,833
Net income per share
Basic .43 .46 .48 .56 .41 .42 .44 .51
Diluted .42 .46 .48 .55 .41 .41 .43 .51
</TABLE>
The net income per share amounts have been restated to
reflect the 5 for 4 stock split paid December 16, 1998.
10
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 74,039 $ 69,873 $ 67,470
Interest on investment securities:
Taxable 40,602 40,554 38,882
Tax-exempt 2,072 2,160 2,189
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST ON SECURITIES 42,674 42,714 41,071
Interest on federal funds sold 4,809 4,699 4,575
Interest on deposits with unaffiliated banks 111 33 136
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 121,633 117,319 113,252
INTEREST EXPENSE
Interest on deposits 47,050 46,320 44,284
Interest on short-term borrowings 1,503 1,363 1,163
Interest on long-term debt 593 596 715
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 49,146 48,279 46,162
- ----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 72,487 69,040 67,090
Provision for possible loan losses 964 1,002 1,128
- ----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME after provision for
possible loan losses 71,523 68,038 65,962
NONINTEREST INCOME
Trust department income 3,554 3,210 2,897
Service charges on deposit accounts 5,487 5,314 5,382
Other charges and fees for customer services 4,515 3,813 3,199
Gains on sales of loans 1,536 239 137
Other 518 546 583
- ----------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 15,610 13,122 12,198
OPERATING EXPENSES
Salaries, wages and employee benefits 28,895 27,280 26,964
Occupancy 4,372 4,362 4,261
Equipment 2,988 3,091 2,884
Other 12,052 10,985 11,015
- ----------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 48,307 45,718 45,124
- ----------------------------------------------------------------------------------------------------------
<PAGE>
INCOME BEFORE INCOME TAXES 38,826 35,442 33,036
Federal income taxes 12,780 11,553 11,033
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 26,046 $ 23,889 $ 22,003
==========================================================================================================
NET INCOME PER SHARE
Basic $ 1.93 $ 1.78 $ 1.64
Diluted 1.91 1.76 1.62
CASH DIVIDENDS PER SHARE .77 .67 .58
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<CAPTION>
DECEMBER 31
1998 1997
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and demand deposits due from banks $ 98,483 $ 95,794
Federal funds sold 113,150 49,750
Interest bearing deposits with unaffiliated banks 5,000 --
Investment securities:
Available for sale (at estimated market value) 488,976 494,173
Held to maturity (estimated market value -
$244,430 in 1998 and $253,459 in 1997) 240,847 251,020
- -----------------------------------------------------------------------------------------------------------
Total investment securities 729,823 745,193
Loans 898,293 845,600
Less: Allowance for possible loan losses 18,071 17,359
- -----------------------------------------------------------------------------------------------------------
Net loans 880,222 828,241
Premises and equipment 20,215 20,416
Accrued income 14,195 14,573
Other assets 11,538 11,133
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,872,626 $1,765,100
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 272,388 $ 237,763
Interest-bearing 1,281,883 1,238,078
- -----------------------------------------------------------------------------------------------------------
Total deposits 1,554,271 1,475,841
Short-term borrowings:
Treasury tax and loan notes payable to the U.S. Treasury 5,137 11,206
Securities sold under agreements to repurchase 48,113 30,990
- -----------------------------------------------------------------------------------------------------------
Total short-term borrowings 53,250 42,196
Interest payable and other liabilities 15,266 14,138
Long-term debt 8,000 9,000
- -----------------------------------------------------------------------------------------------------------
Total liabilities 1,630,787 1,541,175
<PAGE>
Shareholders' equity:
Common stock, $1 par value ($10 par value at December 31, 1997):
Authorized 18,000,000 shares (15,000,000 at December 31, 1997)
Issued and outstanding 13,496,230 shares in 1998
and 10,753,011 shares in 1997 13,496 107,530
Surplus 184,384 87,086
Retained earnings 40,892 27,904
Accumulated other comprehensive income 3,067 1,405
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 241,839 223,925
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,872,626 $1,765,100
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 26,046 $ 23,889 $ 22,003
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for possible loan losses 964 1,002 1,128
Gains on sales of loans (1,536) (239) (137)
Provision for depreciation and amortization 2,946 2,741 2,793
Gain on sale of branch office building -- (256) --
Net amortization of investment securities 405 1,789 2,546
Net decrease in accrued income and other assets 475 491 2,244
Net increase (decrease) in interest payable and other liabilities 967 (113) 158
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,267 29,303 30,735
INVESTING ACTIVITIES
Cash and cash equivalents assumed in acquisition of branch office 9,588 -- --
Net (increase) decrease in interest bearing deposits with
unaffiliated banks (5,000) 1,134 1,847
Proceeds from maturities of investment securities available for sale 255,153 119,934 109,233
Proceeds from sales of investment securities available for sale -- -- 522
Purchases of investment securities available for sale (247,675) (171,209) (191,055)
Proceeds from maturities of investment securities held to maturity 101,991 122,742 200,557
Purchases of investment securities held to maturity (91,946) (160,468) (45,625)
Proceeds from sales of loans 118,566 39,060 12,558
Net loan originations, excluding sales (170,567) (77,631) (60,564)
Proceeds from sale of branch office building -- 900 --
Purchases of premises and equipment (1,790) (2,902) (2,349)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (31,680) (128,440) 25,124
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 67,408 59,944 (24,845)
Net increase (decrease) in certificates of
deposit and other time deposits (197) (14,018) 4,959
Net increase in short-term borrowings 11,054 4,863 2,110
Principal payments on long-term debt (1,000) (1,000) (2,080)
Cash dividends paid (10,359) (9,003) (7,771)
Proceeds from stock purchase plan 295 259 264
<PAGE>
Proceeds from exercise of stock options 338 386 339
Repurchases of common stock (37) (467) (1,035)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 67,502 40,964 (28,059)
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 66,089 (58,173) 27,800
Cash and cash equivalents at beginning of year 145,544 203,717 175,917
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 211,633 $ 145,544 $ 203,717
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits, short-term borrowings and long-term debt $ 49,229 $ 48,390 $ 46,685
Federal income taxes paid 14,180 11,545 11,106
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996 $96,944 $56,918 $39,665 $1,375 $194,902
Stock dividend - 5% 4,859 13,301 (18,160) -- --
Comprehensive income:
Net income for 1996 -- -- 22,003 -- --
Net change in unrealized gains (losses) on
securities available for sale, net of taxes
of $(858) -- -- -- (1,557) --
Comprehensive income -- -- -- -- 20,446
Cash dividends paid -- -- (7,771) -- (7,771)
Shares issued upon exercise of employee
stock options (including related tax benefit) 436 (92) -- -- 344
Shares issued from stock purchase plan 74 165 -- -- 239
Shares issued for acquisition of insurance agency 88 56 -- -- 144
Repurchase of 41,343 shares (303) (732) (1,035)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 102,098 69,616 35,737 (182) 207,269
Stock dividend 5% 5,120 17,599 (22,719) -- --
Comprehensive income:
Net income for 1997 -- -- 23,889 -- --
Net change in unrealized gains (losses) on
securities available for sale, net of taxes
of $854 -- -- -- 1,587 --
Comprehensive income -- -- -- -- 25,476
Cash dividends paid -- -- (9,003) -- (9,003)
Shares issued upon exercise of employee
stock options (including related tax benefit) 374 12 -- -- 386
Shares issued from stock purchase plan 73 191 -- -- 264
Repurchase of 17,718 shares (135) (332) -- -- (467)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 107,530 87,086 27,904 1,405 223,925
Change in common stock par value to $1 per share (97,058) 97,058 -- -- --
Stock split - 5 for 4 2,699 -- (2,699) -- --
Comprehensive income:
Net income for 1998 -- -- 26,046 -- --
Net change in unrealized gains (losses) on
securities available for sale, net of taxes
of $894 -- -- -- 1,662 --
<PAGE>
Comprehensive income -- -- -- -- 27,708
Cash dividends paid -- -- (10,359) -- (10,359)
Shares issued upon exercise of employee
stock options (including related tax benefit) 252 86 -- -- 338
Shares issued from stock purchase plan 74 190 -- -- 264
Repurchase of 1,250 shares (1) (36) -- -- (37)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $13,496 $184,384 $40,892 $3,067 $241,839
===================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Chemical Financial Corporation and
its subsidiaries conform to generally accepted accounting principles and
prevailing practices within the banking industry. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying footnotes. Actual results could differ from
these estimates. Significant accounting policies of Chemical Financial
Corporation (the Corporation) and its subsidiaries are described below:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Corporation include the
accounts of the parent company and its subsidiaries, all of which are
wholly-owned. All significant income and expenses are recorded on the
accrual basis. Intercompany accounts and transactions have been eliminated
in preparing the consolidated statements.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from unaffiliated banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Investment securities available for sale include those securities which
might be sold as part of the Corporation's management of interest rate and
prepayment risk, in response to changes in interest rates, or a desire to
increase liquidity.
Investment securities available for sale are stated at estimated market
value, with the aggregate unrealized gains and losses, net of income taxes,
classified as a component of accumulated other comprehensive income.
Realized gains and losses from the sale of investment securities available
for sale are determined using the specific identification method and are
classified as noninterest income in the consolidated statement of income.
Premiums and discounts on securities available for sale, as well as on
securities held to maturity, are amortized over the estimated lives of the
related securities.
INVESTMENT SECURITIES HELD TO MATURITY:
Designation as an investment security held to maturity is made at the time
of acquisition and is based on the Corporation's intent and ability to hold
the security to maturity. Securities held to maturity are stated at cost
adjusted for the amortization of premium and accretion of discount to
maturity.
<PAGE>
LOANS:
Loans are stated at their principal amount outstanding. Loan performance is
reviewed regularly by loan review personnel, loan officers and senior
management. Loan interest income is recognized on the accrual basis. A loan
is placed in the nonaccrual category when principal or interest is past due
90 days or more, unless the loan is both well secured and in the process of
collection, or when in the opinion of management, there is sufficient
reason to doubt the collectability of future principal or interest.
Interest previously accrued, but not collected, is reversed and charged
against interest income at the time the loan is placed in nonaccrual
status. The subsequent recognition of interest income on a nonaccrual loan
is then recognized only to the extent cash is received and where future
collection of principal is probable. Loans are returned to accrual status
when principal and interest payments are brought current and collectability
is no longer in doubt. Interest income on restructured loans is recognized
according to the terms of the restructure, subject to the above described
nonaccrual policy.
Nonperforming loans are comprised of those loans accounted for on a
nonaccrual basis, accruing loans contractually past due 90 days or more as
to interest or principal payments, and other loans for which the terms have
been renegotiated to provide for a reduction of interest or principal
because of a deterioration in the financial position of the borrower.
A loan is considered to be impaired when it is probable that payment of
principal and interest will not be made in accordance with the contractual
terms of the loan agreement. Impaired loans are carried at the present
value of expected cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral, if the loan is collateral
dependent. Smaller-balance homogeneous loans are evaluated for impairment
in total. Such loans include residential first mortgage loans secured by
one-to-four family residences, residential construction loans, and other
consumer installment loans. Commercial loans and commercial mortgage loans
are evaluated individually for impairment. A portion of the allowance for
possible loan losses may be allocated to impaired loans.
ALLOWANCE FOR LOAN LOSSES:
The allowance for possible loan losses is maintained at a level that, in
management's judgment, is considered to be adequate to provide for
potential loan losses. Management's evaluation of the adequacy of the
allowance is based on a continuing review of the loan portfolio, actual
loan loss experience, risk characteristics of the loan portfolio, current
and prospective financial condition of the borrowers, balance of the loan
portfolio, loan growth, and current and prospective economic conditions.
Loans which are deemed uncollectible are charged off and deducted from
continued on next page
15
<PAGE>
NOTE A - CONTINUED
the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
MORTGAGE BANKING OPERATIONS:
The origination of mortgage loans is an integral component of the business
of the Corporation. The Corporation generally sells the longer term fixed
interest rate residential mortgage loans that it originates in the
secondary market. These longer term fixed interest rate residential
mortgage loans are generally held for sale thirty days or less, and book
value approximates market value. The Corporation has retained the servicing
rights on all loans that it sold in the secondary market. Servicing income
is recognized in noninterest income when received and expenses are
recognized when incurred.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125), was adopted prospectively January 1, 1997. SFAS
125 requires that an asset be recognized for the rights to service mortgage
loans, including those rights that are created by the origination of
mortgage loans which are sold with the servicing rights retained by the
originator. The recognition of the asset results in an increase in the
gains recognized upon the sale of the underlying loans. The Corporation
amortizes the mortgage servicing right asset in proportion to, and over the
life of, the estimated net future servicing income. SFAS 125 additionally
requires periodic evaluation of the fair market value of the asset. Any
impairment is recognized as a valuation allowance.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Premises and equipment are depreciated over the useful lives of the assets.
Depreciation is computed on the straight-line method. The estimated useful
lives are generally 25 to 35 years for buildings and 3 to 7 years for
equipment.
<PAGE>
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Bank premises $ 29,239 $ 28,649
Equipment 12,278 11,257
- ------------------------------------------------------------------------
41,517 39,906
Less: Accumulated depreciation 21,302 19,490
- ------------------------------------------------------------------------
Total $ 20,215 $ 20,416
========================================================================
</TABLE>
INTANGIBLE ASSETS:
Goodwill, representing the cost of investments in subsidiaries in excess of
the fair value of identifiable net assets at acquisition, is being
amortized over twenty years. Other acquired intangible assets, such as
those associated with acquired core deposits, are being amortized over
periods between five and fifteen years.
STOCK OPTIONS:
In 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
Under the provisions of this statement, the Corporation elected to continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) in measuring and recognizing compensation
expense for its stock option plan and to disclose the pro forma effect of
applying the fair value method required by SFAS 123. Under APB 25, no
compensation expense is recognized as a result of options awarded to
employees under stock option plans. Information on the Corporation's stock-
based compensation plans is included in Note J.
INCOME TAXES:
The Corporation files a consolidated federal income tax return and is
responsible for the payment of any tax liability of the consolidated
organization. Income tax expense is based on income and expenses, as
reported in the financial statements. When income and expenses are
recognized in different periods for tax purposes, applicable deferred taxes
are provided for in the financial statements.
EARNINGS PER SHARE:
In 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This statement
simplified the standard for computing earnings per share.
<PAGE>
Basic earnings per share for the Corporation is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. 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 common stock equivalents
outstanding during the period. The Corporation's common stock equivalents
consist of common stock issuable under the assumed exercise of stock
options granted under the Corporation's stock option plans, using the
treasury stock method. The following table summarizes the number of shares
used in the denominator of the basic and diluted earnings per share
computations:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator for
basic earnings per share 13,486,159 13,426,583 13,387,824
Denominator for
diluted earnings per share 13,636,337 13,585,980 13,582,253
</TABLE>
16
<PAGE>
COMPREHENSIVE INCOME:
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards, No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 established standards for the reporting of comprehensive income
and its components. Comprehensive income includes net income and certain
adjustments to equity required under generally accepted accounting
principles which result from transactions other than with shareholders. The
Corporation elected to display comprehensive income as a component in the
statement of shareholders' equity.
OPERATING SEGMENT:
On January 1, 1998, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), became effective. 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 as 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. These services include
personal and business checking accounts, savings and individual retirement
accounts, time deposit instruments, electronically accessed banking
products, residential and commercial real estate financing, commercial
lending, consumer financing, debit cards, safe deposit services, automated
teller machines, access to insurance and investment products, money
transfer services, corporate and personal trust services and other banking
services. 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.
<PAGE>
The Corporation's primary sources of revenues are from its investment
securities and loan products. The following table summarizes the
Corporation's revenue from its specific loan products for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest income and fee revenue
Commercial loans $ 11,689 $ 10,747 $ 11,148
Real estate mortgage loans - commercial 8,312 8,332 8,328
Real estate mortgage loans - residential 35,520 35,120 33,167
Real estate construction loans 2,757 2,165 1,679
Consumer loans 15,761 13,509 13,148
- ---------------------------------------------------------------------------------------
Total $ 74,039 $ 69,873 $ 67,470
=======================================================================================
</TABLE>
COMMON STOCK:
On December 16, 1998, the Corporation paid a 5 for 4 stock split, effected
in the form of a 25% stock dividend. All per share data and share amounts,
where applicable, included in the consolidated financial statements and in
the related notes thereto have been retroactively adjusted to reflect the
split.
RECLASSIFICATION:
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 presentation.
NOTE B - ACQUISITIONS
During the three years ended December 31, 1998, the Corporation made the
following 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.
<PAGE>
On December 31, 1996, the Corporation acquired Arbury & Stephenson, Inc.,
an insurance agency headquartered in Midland, Michigan. The merger was
effected through an exchange of shares of the Corporation's common stock.
On May 1, 1996, the Corporation merged with State Savings Bancorp, Inc.
(SSBI) in Caro, Michigan. SSBI operated one bank, State Savings Bank of
Caro, with offices in Caro and Fairgrove. The Corporation issued 689,062
shares of the Corporation's common stock in exchange for all of the common
stock of SSBI. The merger was accounted for as a "pooling of interests." As
of May 1, 1996, SSBI had assets of approximately $65 million.
17
<PAGE>
NOTE C - INVESTMENT SECURITIES
The following is a summary of the amortized cost and estimated market value
of investment securities available for sale and investment securities held
to maturity at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE INVESTMENT SECURITIES
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and agency securities $ 440,479 $ 4,073 $ 191 $ 444,361
Mortgage-backed securities 1,554 29 -- 1,583
Other debt securities 38,043 197 8 38,232
- ----------------------------------------------------------------------------------------------------------
Total debt securities 480,076 4,299 199 484,176
Equity securities 4,181 619 -- 4,800
- ----------------------------------------------------------------------------------------------------------
Total $ 484,257 $ 4,918 $ 199 $ 488,976
==========================================================================================================
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------
U.S. Treasury
and agency securities $ 473,000 $ 2,090 $ 384 $ 474,706
Mortgage-backed securities 2,310 42 1 2,351
Other debt securities 15,133 18 78 15,073
- ----------------------------------------------------------------------------------------------------------
Total debt securities 490,443 2,150 463 492,130
Equity securities 1,574 469 -- 2,043
- ----------------------------------------------------------------------------------------------------------
Total $ 492,017 $ 2,619 $ 463 $ 494,173
==========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELD TO MATURITY INVESTMENT SECURITIES
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and agency securities $ 190,957 $ 2,526 $ 30 $ 193,453
States of the U.S. and
political subdivisions 41,593 1,076 28 42,641
Mortgage-backed securities 312 4 1 315
Other debt securities 7,985 36 -- 8,021
- ----------------------------------------------------------------------------------------------------------
Total $ 240,847 $ 3,642 $ 59 $ 244,430
==========================================================================================================
DECEMBER 31, 1997
U.S. Treasury
and agency securities $ 201,801 $ 1,695 $ 1 $ 203,495
States of the U.S. and
political subdivisions 46,707 958 227 47,438
Mortgage-backed securities 501 9 3 507
Other debt securities 2,011 12 4 2,019
- ----------------------------------------------------------------------------------------------------------
Total $ 251,020 $ 2,674 $ 235 $ 253,459
==========================================================================================================
</TABLE>
The amortized cost of U.S. Treasury and U.S. agencies, states of the U.S.
and political subdivisions and all other securities at December 31, 1996
were $592,191,000, $42,096,000 and $21,532,000, respectively, whereas the
estimated market values of these three categories of investments at
December 31, 1996 were $592,355,000, $43,044,000 and $21,882,000,
respectively.
The amortized cost and estimated market value of debt and equity securities
at December 31, 1998, by contractual maturity for both available for sale
and held to maturity investment securities follows:
<PAGE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
ESTIMATED
AMORTIZED MARKET
COST VALUE
- ----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 244,323 $ 245,724
Due after one year through five years 234,199 236,869
Mortgage-backed securities 1,554 1,583
Equity securities 4,181 4,800
- ----------------------------------------------------------------------------
Total $ 484,257 $ 488,976
============================================================================
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
ESTIMATED
AMORTIZED MARKET
COST VALUE
- ----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 94,410 $ 95,128
Due after one year through five years 133,950 136,322
Due after five years through ten years 10,456 10,871
Due after ten years 1,719 1,794
Mortgage-backed securities 312 315
- ----------------------------------------------------------------------------
Total $ 240,847 $ 244,430
============================================================================
</TABLE>
Investment securities with a book value of $233.6 million at December 31,
1998 were pledged to collateralize public fund deposits and for other
purposes as required by law; at December 31, 1997, the corresponding amount
was $177.8 million.
Recognized gains on investment securities were $8,000, $1,000 and $15,000
in 1998, 1997 and 1996, respectively.
18
<PAGE>
NOTE D - LOANS
The following summarizes loans as of December 31:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial and agricultural $ 139,051 $ 120,696
Real estate construction 35,039 31,143
Real estate mortgage 520,972 536,938
Consumer 203,231 156,823
- -----------------------------------------------------------------------
Total $ 898,293 $ 845,600
=======================================================================
</TABLE>
The Corporation's subsidiary banks have extended loans to directors and
officers, and their associates, of the Corporation and of the Corporation's
significant subsidiaries. The loans were made in the ordinary course of
business at normal terms, including interest rates and collateralization,
prevailing at the time, and did not involve more than the normal risk of
collectability. The aggregate loans outstanding to the directors and
officers of the Corporation and its significant subsidiaries totaled
$18,495,000 at December 31, 1998 and $19,183,000 at December 31, 1997.
During 1998, there were $25,978,000 of new loans and other additions, while
repayments and other reductions totaled $26,666,000.
Changes in the Allowance for Possible Loan Losses were as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $17,359 $16,607 $15,886
Provision charged
to operations 964 1,002 1,128
Loan charge-offs (549) (620) (691)
Loan recoveries 297 370 284
- ----------------------------------------------------------------------------------------
Net loan charge-offs (252) (250) (407)
- ----------------------------------------------------------------------------------------
Balance at end of year $18,071 $17,359 $16,607
========================================================================================
</TABLE>
<PAGE>
Nonaccrual and renegotiated loans aggregated $1.8 million and $1.9 million
at December 31, 1998 and December 31, 1997, respectively. Interest income
totaling $79,172 was recorded on the nonaccrual loans in 1998. Additional
interest income of $144,870 would have been recorded during 1998 on these
loans had they been current in accordance with their original terms.
The Corporation had no impaired loans as of December 31, 1998 and 1996. The
Corporation had $328,000 of impaired loans as of December 31, 1997. An
impairment allowance was not required on any of these loans. The impaired
loan balances represented loans for which their fair value exceeded the
recorded investment in the loan, based on fair value of the related
collateral.
NOTE E - FEDERAL INCOME TAXES
The provision for federal income taxes is less than that computed by
applying the federal statutory income tax rate of 35% primarily due to tax-
exempt interest on investments and loans as shown in the following analysis
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax at statutory rate $13,589 $12,405 $11,563
Changes resulting from:
Tax-exempt income (878) (887) (884)
Other 69 35 354
- ----------------------------------------------------------------------------------------
Total federal income tax expense $12,780 $11,553 $11,033
========================================================================================
</TABLE>
The provision for federal income taxes consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current $14,537 $11,503 $11,291
Deferred (benefit) (1,757) 50 (258)
- ----------------------------------------------------------------------------------------
Total $12,780 $11,553 $11,033
========================================================================================
</TABLE>
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant temporary differences which comprise the deferred tax assets
and liabilities of the Corporation were as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $5,437 $4,786
Employee benefit plans 1,601 1,138
Expense accruals not yet tax deductible 1,459 1,184
Other 549 423
- ----------------------------------------------------------------------------
Total deferred tax assets 9,046 7,531
Deferred tax liabilities:
Investment securities available for sale 1,651 756
Tax over book depreciation 621 610
Other 603 856
- ----------------------------------------------------------------------------
Total deferred tax liabilities 2,875 2,222
- ----------------------------------------------------------------------------
Net deferred tax assets $6,171 $5,309
============================================================================
</TABLE>
Federal income tax expense applicable to gains on securities transactions
was $3,000 in 1998 and $5,000 in 1996, and is included in federal income
taxes on the consolidated statement of income.
19
<PAGE>
NOTE F - PENSION AND POSTRETIREMENT BENEFITS
The Corporation has a noncontributory defined benefit pension plan ("Plan")
covering all of its salaried employees. Normal retirement benefits are
based on years of service and the employee's average annual pay of the five
highest consecutive years during the ten years preceding retirement. The
Corporation's funding strategy has been to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions
are intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
Plan assets consist primarily of listed stocks, U.S. Government securities
and common stock of the Corporation (154,042 shares at December 31, 1998).
The following table sets forth the change in the benefit obligation and
plan assets of the Plan:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $30,022 $25,648
Service cost 1,563 1,339
Interest cost 2,073 1,897
Net actuarial loss 1,269 1,948
Benefits paid (1,026) (810)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $33,901 $30,022
===============================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $44,043 $34,880
Actual return on plan assets 6,202 8,774
Contributions by the Corporation -- 1,199
Benefits paid (1,026) (810)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $49,219 $44,043
===============================================================================
Overfunded status of the plan $15,318 $14,021
Unrecognized net actuarial gain (12,111) (10,099)
Unrecognized net transition asset (451) (628)
Unrecognized prior service cost (126) (154)
- -------------------------------------------------------------------------------
Prepaid benefit cost $ 2,630 $ 3,140
===============================================================================
</TABLE>
<PAGE>
Net periodic pension cost of the Plan consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 1,563 $ 1,339 $ 1,405
Interest cost 2,073 1,897 1,753
Expected return on plan assets (2,921) (2,532) (2,272)
Amortization of transition amount (177) (177) (177)
Amortization of prior service cost (28) (28) (28)
- -----------------------------------------------------------------------------------------
Pension expense $ 510 $ 499 $ 681
=========================================================================================
</TABLE>
Weighted-average assumptions as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used in determining
projected benefit obligation 6.75% 7.00% 7.50%
Expected return on assets 8% 8% 8%
Rate of compensation increase 5% 5% 6%
</TABLE>
In addition to the Corporation's defined benefit pension plan, the
Corporation provides postretirement medical and dental (to age 65) benefits
to salaried employees. Eligibility for such benefits is age 55 with at
least ten years of service with the Corporation or its subsidiaries.
Retirees are required to make contributions toward the cost of their
benefits based on their years of credited service and age at retirement.
Retiree contributions are adjusted annually. The accounting for these
postretirement benefits anticipates changes in future cost-sharing features
such as retiree contributions, deductibles, copayments and coinsurance. The
Corporation reserves the right to amend, modify or terminate these benefits
at any time.
The following table sets forth changes in the Corporation's postretirement
benefit obligation:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $4,274 $3,222
Service cost 192 148
Interest cost 287 267
Net actuarial (gain) loss (306) 723
Benefits paid, net of retiree contributions 25 (86)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $4,472 $4,274
===============================================================================
Unfunded status of the plan $4,472 $4,274
Unrecognized net actuarial loss (75) (380)
Unrecognized prior service cost 8 12
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost $4,405 $3,906
===============================================================================
</TABLE>
Net periodic postretirement benefit cost consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 192 $ 148 $ 139
Interest cost 287 267 216
Amortization of prior service cost (4) (4) (4)
- -------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 475 $ 411 $ 351
===========================================================================================
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% and 7.0% at December 31, 1998
and December 31, 1997, respectively.
<PAGE>
For measurement purposes, the annual rates of increase in the per capita
cost of covered health care benefits and dental benefits for 1999 were
assumed at 7.73% and 6.34%, respectively. These rates were assumed to
decrease gradually to 5% in 2003 and remain at that level thereafter.
20
<PAGE>
The assumed health care and dental cost trend rates have a significant
effect on the amounts reported. A one-percentage-point change in these
rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Effect on total of service
and interest cost
components in 1998 $102 $(79)
Effect on postretirement
benefit obligation as of
December 31, 1998 $839 $(738)
</TABLE>
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following obligation:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Chemical Financial Corporation:
Term note payable to unaffiliated bank
(5.76% at December 31, 1998) $8,000 $9,000
==============================================================================
</TABLE>
Principal payments on the term note payable are due as follows: $5,000,000
in June 2002 and $3,000,000 in June 2003. The Corporation, at its option,
reduced this debt by $1,000,000 during both 1998 and 1997. Interest on the
term note payable is computed based upon one of three alternative interest
rate methods, which is elected by the Corporation at the beginning of each
interest period for 1, 3, 6 or 12 month intervals. The three alternative
interest rate methods are based upon the prime rate of the unaffiliated
bank, the Eurodollar rate or the domestic certificate of deposit rate of
the unaffiliated bank. The loan agreement includes various restrictions and
covenants pertaining to capital, earnings and additional indebtedness and
is secured by the stock of two of the Corporation's subsidiary banks.
<PAGE>
NOTE H - RESTRICTED ASSETS AND DIVIDEND LIMITATIONS OF SUBSIDIARY BANKS
Banking regulations require that banks maintain cash reserve balances in
vault cash, with the Federal Reserve Bank or with certain other qualifying
banks. The aggregate average amount of such legal balances required to be
maintained by the Corporation's subsidiary banks was $18.3 million for the
year ended December 31, 1998. During 1998, the Corporation's subsidiary
banks satisfied their legal reserve requirements almost exclusively by
maintaining average vault cash balances in excess of their legal reserve
requirements.
Federal and state banking regulations place certain restrictions on the
transfer of assets in the form of dividends, loans or advances from the
bank subsidiaries to the Corporation. At December 31, 1998, substantially
all of the assets of the bank subsidiaries were restricted from transfer to
the Corporation in the form of loans or advances. Dividends from its bank
subsidiaries are the principal source of funds for the Corporation. Under
the most restrictive of these regulations, the aggregate amount of
dividends which can be paid by the Corporation's bank subsidiaries to the
parent company, without obtaining prior approval from bank regulatory
agencies, was $71 million at January 1, 1999. Dividends paid to the
Corporation by its banking subsidiaries totaled $12 million in 1998, $11.3
million in 1997 and $20.3 million in 1996. In addition to the statutory
limits, the Corporation also considers the overall financial and capital
position of each subsidiary prior to making any cash dividend decisions.
21
<PAGE>
NOTE I - CAPITAL
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Under
these capital requirements, the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. In addition, capital amounts and classifications are subject to
qualitative judgements by the regulators. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require minimum ratios of Total and Tier I capital to risk-weighted assets
and of Tier I capital to average assets ("Leverage ratio"). These capital
guidelines assign risk weights to on- and off-balance sheet items in
arriving at total risk-weighted assets. Minimum capital levels are based
upon perceived risk of various asset categories and certain off-balance
sheet instruments.
At December 31, 1998 and 1997, the Corporation's and each of its banking
subsidiaries' capital ratios exceeded the quantitative capital ratios
required for an institution to be considered "well-capitalized."
The table below, "Capital Analysis," compares the Corporation's and each of
its significant subsidiaries' actual capital amounts and ratios with the
quantitative measures established by regulation to ensure capital adequacy
at December 31, 1998.
<TABLE>
<CAPTION>
CAPITAL ANALYSIS RISK-BASED CAPITAL
LEVERAGE TIER I TOTAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Corporation's capital $239 13% $235 27% $246 29%
Required capital minimum 55 3 34 4 68 8
Required capital "well capitalized" definition 92 5 51 6 85 10
Chemical Bank and Trust Company's capital 85 14 85 35 88 36
Required capital minimum 19 3 10 4 20 8
Required capital "well capitalized" definition 31 5 15 6 24 10
Chemical Bank Michigan's capital 30 12 29 28 31 30
Required capital minimum 7 3 4 4 8 8
Required capital "well capitalized" definition 12 5 6 6 10 10
<PAGE>
Chemical Bank Bay Area's capital 25 12 25 24 26 25
Required capital minimum 6 3 4 4 8 8
Required capital "well capitalized" definition 10 5 6 6 10 10
Chemical Bank Thumb Area's capital 22 12 21 28 22 29
Required capital minimum 5 3 3 4 6 8
Required capital "well capitalized" definition 9 5 5 6 8 10
</TABLE>
22
<PAGE>
NOTE J - STOCK OPTIONS
The Chemical Financial Corporation stock option plan provides for grants of
options, incentive stock options, stock appreciation rights, or a
combination thereof. At December 31, 1998, there were a total of 522,391
shares available for the granting of future awards under the Corporation's
1997 plan. The plan provides that the option price shall not be less than
the fair market value of common stock at the date of grant, options become
exercisable between one and five years from the date of grant as determined
by the Compensation Committee of the Board of Directors, all awards expire
no later than ten years and one day after the date of grant, and options
granted may be designated nonstatutory options or incentive stock options.
The Corporation does not record expense as a result of the grant or
exercise of stock options.
Options granted may include an appreciation right that entitles the grantee
to receive a number of shares of common stock without payment to the
Corporation, calculated by dividing the difference between the option price
and the market price of the total number of shares in the option at the
expiration date of the option, by the market price of a single share. As of
December 31, 1998, there were no outstanding options with stock
appreciation rights.
The activity in the Corporation's stock option plans during the three years
ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding - January 1, 1996 436,421 $13.92
Activity during 1996:
Granted 133,610 26.30
Exercised (89,285) 12.35
Cancelled (1,106) 21.37
- ----------------------------------------------------------------------------------------------
Outstanding - December 31, 1996 479,640 17.58
Activity during 1997:
Granted 8,859 31.14
Exercised (58,745) 11.10
Cancelled (3,182) 26.30
- ----------------------------------------------------------------------------------------------
<PAGE>
Outstanding - December 31, 1997 426,572 18.68
Activity during 1998:
Granted 125,000 33.25
Exercised (57,967) 12.19
Cancelled (1,738) 26.19
- ----------------------------------------------------------------------------------------------
Outstanding - December 31, 1998 491,867 $23.12
==============================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE RANGE OF AVERAGE
NUMBER EXERCISE AVERAGE EXERCISE NUMBER EXERCISE
OUTSTANDING PRICE LIFE <Fa> PRICES EXERCISABLE PRICE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
57,914 $ 9.71 0.97 $9.14 - $ 9.91 57,914 $ 9.71
68,780 12.29 2.17 12.29 68,780 12.29
231,314 23.92 6.22 19.47 - 26.30 188,454 23.54
8,859 31.14 8.82 31.14 5,578 31.14
125,000 33.25 9.82 33.25 -- --
- ------------------------------------------------------------------------------------------------
491,867 $23.12 6.00 $9.14 - $33.25 320,726 $18.76
================================================================================================
<FN>
<Fa> Weighted average remaining contractual life in years.
</FN>
</TABLE>
The Corporation does not recognize compensation cost in accounting for its
stock option plans. If the Corporation had elected to recognize
compensation cost for options granted in 1998, 1997 and 1996, based on the
fair value of the options granted at the grant date, net income and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $26,046 $23,889 $22,003
Net income - pro forma 25,923 23,551 21,958
Diluted earnings per share - as reported 1.91 1.76 1.62
Diluted earnings per share - pro forma 1.90 1.73 1.62
Basic earnings per share - as reported 1.93 1.78 1.64
Basic earnings per share - pro forma 1.92 1.75 1.64
</TABLE>
The weighted average fair values of options granted during 1998, 1997 and
1996 were $6.96, $7.41 and $5.98 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 2.2% 2.2% 2.2%
Expected stock volatility 16.9% 16.9% 13.0%
Risk-free interest rate 4.78% 5.88% 6.13%
Expected life of options - in years 6.5 6.5 6.3
</TABLE>
23
<PAGE>
NOTE K - COMMITMENTS AND OTHER MATTERS
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Historically, the majority of the commitments have not been drawn
upon and, therefore, do not necessarily represent future cash requirements.
The Corporation evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary, by the
Corporation upon extension of credit is based on management's credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income producing
commercial properties. Standby letters of credit are conditional
commitments issued generally by the Corporation to guarantee the
performance of a customer to a third party. Both arrangements have credit
risk essentially the same as that involved in extending loans to customers
and are subject to the Corporation's normal credit policies. The
Corporation at any point in time also has approved but undisbursed loans.
The majority of these undisbursed loans will convert to a booked loan
within a three month period.
Loan commitments, standby letters of credit and undisbursed loans were $114
million, $4.7 million and $58.4 million, respectively, at December 31, 1998
and $105.7 million, $4.9 million and $35.7 million, respectively, at
December 31, 1997. The majority of the loan commitments and standby letters
of credit outstanding as of December 31, 1998 expire one year from their
contract date, except for $11.3 million which extend for more than five
years.
The Corporation's loan commitments, standby letters of credit and
undisbursed loans have been estimated to have no realizable fair value, as
historically the majority of the loan commitments have not been drawn upon
and generally the Corporation does not receive fees in connection with
these agreements.
The Corporation has lease commitments on certain computer software that
will require annual lease payments of approximately $412,000 per year
through 2002. There were no other material lease rental payments or
noncancelable lease commitments outstanding at December 31, 1998.
Expenses included in the category of other operating expenses which were in
excess of 1% of interest and noninterest income during the three year
period ended December 31, 1998, were as follows: Stationery and supplies
expense of $1,520,000 in 1998, $1,504,000 in 1997 and $1,644,000 in 1996.
<PAGE>
NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires disclosures about
the estimated fair values of the Corporation's financial instruments. The
Corporation utilized quoted market prices, where available, to compute the
fair value of its financial instruments. In cases where quoted market
prices were not available, the Corporation used present value methods to
estimate the fair values of its financial instruments. These estimates of
fair value are significantly affected by the assumptions made and,
accordingly, do not necessarily indicate amounts which could be realized in
a current market exchange. It is also the Corporation's general practice
and intent to hold the majority of its financial instruments until maturity
and, therefore, the Corporation does not expect to realize the estimated
amounts disclosed.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts reported in the consolidated statement of financial
position for cash and federal funds sold approximate those assets' fair
values.
INTEREST-BEARING DEPOSITS WITH UNAFFILIATED BANKS:
The carrying amounts reported in the consolidated statement of financial
position for interest bearing deposits with unaffiliated banks approximate
those assets' fair values.
INVESTMENT SECURITIES:
Fair values for investment securities are based on quoted market prices.
LOANS RECEIVABLE:
For variable interest rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. The fair values for fixed interest rate loans are estimated using
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
resulting amounts are adjusted to estimate the effect of declines in the
credit quality of borrowers since the loans were originated.
24
<PAGE>
DEPOSIT LIABILITIES:
The fair values of accounts without defined maturities, such as interest-
and noninterest-bearing checking, savings and money fund accounts are equal
to the amounts payable on demand. As of December 31, 1998 and December 31,
1997, the Corporation had total deposits without defined maturities
totaling $1,006,971,000 and $934,676,000, respectively, for which SFAS 107
defined their fair values to be equal to their carrying amounts. Fair
values for fixed interest rate certificates of deposit and other time
deposits are based on the discounted value of contractual cash flows, using
interest rates currently being offered for deposits of similar remaining
maturities. The fair values for variable interest rate certificates of
deposit and other time deposits approximate their carrying amounts.
SHORT-TERM BORROWINGS:
The carrying amounts of borrowings under repurchase agreements and other
short-term borrowings approximate their fair values.
LONG-TERM DEBT:
The carrying amount of the Corporation's variable rate long-term debt
approximates fair value.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND UNDISBURSED
LOANS:
The Corporation's loan commitments, standby letters of credit and
undisbursed loans have no carrying amount and have been estimated to have
no realizable fair value. Historically, a majority of the loan commitments
have not been drawn upon and, generally, the Corporation does not receive
fees in connection with these commitments.
Estimates of fair value have not been made for items which are not defined
by SFAS 107 as financial instruments, including such items as the
Corporation's core deposit intangibles, mortgage servicing rights and the
value of its trust and data processing operations. The Corporation believes
it is impractical to estimate a representative fair value for these types
of assets, even though management believes they add significant value to
the Corporation.
The following is a summary of previously described financial instruments
reported in the consolidated statement of financial position for which fair
values differ from carrying amounts as of December 31:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Investment securities $729,823 $733,406 $745,193 $747,632
Loans 880,222 892,812 828,241 842,582
LIABILITIES:
Time deposits 547,300 549,792 541,165 540,745
</TABLE>
25
NOTE M - PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of Chemical Financial Corporation (parent
company) follow:
<TABLE>
CONDENSED STATEMENT OF FINANCIAL POSITION
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash on deposit at subsidiary bank $ 15,246 $ 15,228
Investment securities available for sale 3,701 1,806
Investments in bank subsidiaries 234,616 218,146
Investment in non-bank subsidiary 1,978 1,984
Goodwill 2,008 2,314
Other assets 1,391 1,662
- ----------------------------------------------------------------------------------------------------------
Total Assets $258,940 $241,140
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 8,000 $ 9,000
Other liabilities 9,101 8,215
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 17,101 17,215
Shareholders' equity 241,839 223,925
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $258,940 $241,140
==========================================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENT OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
INCOME
Cash dividends from bank subsidiaries $11,968 $11,348 $20,304
Cash dividends from non-bank subsidiary 656 102 360
Interest received from subsidiary bank 663 677 660
Other income 82 12 163
- ----------------------------------------------------------------------------------------------------------
Total Income 13,369 12,139 21,487
EXPENSES
Interest on long-term debt 593 596 715
Operating expenses 2,088 1,818 1,500
Amortization of goodwill 305 305 305
- ----------------------------------------------------------------------------------------------------------
Total Expenses 2,986 2,719 2,520
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 10,383 9,420 18,967
Federal income tax benefit 738 658 470
- ----------------------------------------------------------------------------------------------------------
11,121 10,078 19,437
Equity in undistributed net income of:
Bank subsidiaries 14,931 13,392 2,465
Non-bank subsidiary (6) 419 101
- ----------------------------------------------------------------------------------------------------------
Net Income $26,046 $23,889 $22,003
==========================================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $26,046 $23,889 $22,003
Equity in undistributed net income of subsidiaries (14,925) (13,811) (2,566)
Other 1,385 281 349
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 12,506 10,359 19,786
INVESTING ACTIVITIES
Purchases of investment securities available for sale (1,725) (1,266) --
- -----------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (1,725) (1,266) --
FINANCING ACTIVITIES
Capital contribution to bank subsidiary -- -- (9,000)
Principal payments on long-term debt (1,000) (1,000) (2,000)
Repurchases of common stock (37) (467) (1,035)
Proceeds from subsidiary directors' stock purchase plan 295 259 264
Proceeds from exercise of stock options 338 386 339
Cash dividends paid (10,359) (9,003) (7,771)
- -----------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (10,763) (9,825) (19,203)
- -----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 18 (732) 583
Cash at beginning of year 15,228 15,960 15,377
- -----------------------------------------------------------------------------------------------------------
Cash at End of Year $15,246 $15,228 $15,960
===========================================================================================================
</TABLE>
26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
Chemical Financial Corporation
We have audited the accompanying consolidated statement of financial
position of Chemical Financial Corporation and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chemical
Financial Corporation and subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each
<PAGE>
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
January 19, 1999
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
The following discussion and analysis is intended to cover the significant
factors affecting Chemical Financial Corporation's (the Corporation)
consolidated statements of financial position and income, included herein.
It is designed to provide shareholders with a more comprehensive review of
the operating results and financial position of the Corporation than could
be obtained from an examination of the financial statements alone. This
discussion should be read in conjunction with the financial highlights on
page 1, and the consolidated financial statements and notes thereto
beginning on page 11. On December 16, 1998, the Corporation paid a 5 for 4
stock split to shareholders of record on December 2, 1998. All per share
amounts, and shares outstanding where appropriate, have been adjusted for
this stock split.
MERGERS AND ACQUISITIONS
The primary method of expansion into new banking markets has been through
acquisitions of other financial institutions and bank branches. The
following is a summary of the Corporation's merger and acquisition activity
during the three-year period ended December 31, 1998.
On November 20, 1998, the Corporation acquired a branch banking office in
Albion, Michigan from Great Lakes National Bank Michigan. The branch had
total deposit liabilities of $11 million as of that date and was
consolidated with an existing affiliate.
On December 31, 1996, the Corporation acquired Arbury & Stephenson, Inc.
(A&S), a property and casualty insurance agency headquartered in Midland,
Michigan. The merger was effected through an exchange of shares of the
Corporation's common stock. A&S was merged into an insurance subsidiary of
the Corporation's lead bank and offers a variety of personal and corporate
insurance products, through the "Chemical Financial Insurance Agency."
On May 1, 1996, the Corporation acquired State Savings Bancorp, Inc.
(SSBI), headquartered in Caro, Michigan. SSBI operated one bank, State
Savings Bank of Caro, with offices in Caro and Fairgrove. The Corporation
issued 689,062 shares of the Corporation's common stock for all of the
outstanding stock of SSBI. As of May 1, 1996, SSBI had total assets of
approximately $65 million.
NET INCOME
Net income in 1998 was $26.046 million, or $1.91 per share, compared to net
income of $23.889 million, or $1.76 per share in 1997. Net income in 1998
represented a 9% increase over 1997 net income, while 1998 earnings per
share represented an 8.5% increase over 1997 earnings per share. Net
operating income has increased at an average annual compound rate of 7.5%
<PAGE>
during the five year period ended December 31, 1998, while operating
earnings per share has grown at an average annual compound rate of 7.2%
over that same period.
The Corporation's return on average assets was 1.44% in 1998, 1.38% in 1997
and 1.30% in 1996. The Corporation's return on average shareholders' equity
was 11.3% in 1998, 11.1% in 1997 and 10.9% in 1996.
DEPOSITS
Total deposits as of December 31, 1998 were $1.554 billion, up $78 million,
or 5.3%, from total deposits of $1.476 billion as of December 31, 1997. The
majority of the growth in deposits during 1998 was in the noninterest-
bearing and interest-bearing checking account products offered by the
Corporation. This growth was primarily achieved through enhanced cross-
selling efforts by bank personnel. Total deposits increased $46 million, or
3.2%, during 1997. The 1997 increase was attributable to the transfer of
Trust Department assets from a nonaffiliated financial services
organization to a new money market savings account at the Corporation's
lead subsidiary bank, Chemical Bank and Trust Company. This new account
provides Trust Department customers a market interest yield with the added
benefit of being covered by deposit insurance provided by the Federal
Deposit Insurance Corporation, as well as being secured by U. S. Treasury
securities.
The growth of the Corporation's deposits continues to be impacted by
competition for customer deposits from other investment products. Mutual
funds and various annuity products are clearly the two most significant
products in competition for customer deposits. These products are sold by a
wide spectrum of organizations, including nonbank financial institutions
and other institutions, such as brokerage and insurance companies. In
response to this increased competition for customers' bank deposits, the
Corporation expanded its sales and marketing efforts of mutual fund and
annuity investment products during 1996. The Corporation's subsidiary
banks, through "CFC Investment Centers," offer a broad array of mutual
funds, annuity products and market securities through alliances with
Security First Group and BISYS Brokerage Services. CFC Investment Centers
offer customers a complete spectrum of investment products and service
capabilities, backed by strong technical innovations. During 1998,
customers purchased $16 million of annuity and mutual fund investments
through the CFC Investment Centers. In addition, the Trust Department of
Chemical Bank and Trust Company offers customers a number of investment
products and services. Two of these products are "ChemVest Advantage,"
which provides customers with professional assistance in spreading their
funds among a variety of
28
<PAGE>
<TABLE>
TABLE 1. FIVE-YEAR INCOME STATEMENT TAX EQUIVALENT BASIS<F*> AS A PERCENTAGE OF AVERAGE TOTAL
ASSETS
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans 4.12% 4.06% 4.01% 3.90% 3.75%
Interest on investment securities 2.42 2.54 2.49 2.49 2.26
Interest on short-term investments .27 .27 .28 .30 .21
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 6.81 6.87 6.78 6.69 6.22
INTEREST EXPENSE
Interest on deposits 2.61 2.68 2.62 2.62 2.20
Interest on short-term borrowings .08 .08 .07 .09 .07
Interest on long-term debt .03 .03 .04 .05 .04
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2.72 2.79 2.73 2.76 2.31
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 4.09 4.08 4.05 3.93 3.91
Provision for possible loan losses .05 .06 .07 .06 .07
NONINTEREST INCOME
Trust department income .20 .19 .17 .16 .16
Service charges and fees .55 .53 .51 .52 .46
Gains on sales of loans .08 .01 .01 .03 .01
Other .03 .03 .03 .03 .05
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME .86 .76 .72 .74 .68
OPERATING EXPENSES
Salaries, wages and benefits 1.60 1.58 1.60 1.55 1.53
Occupancy expense .24 .25 .25 .24 .24
Equipment expense .17 .18 .17 .17 .17
Other .67 .64 .65 .74 .80
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2.68 2.65 2.67 2.70 2.74
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2.22 2.13 2.03 1.91 1.78
Federal income taxes .71 .67 .65 .59 .54
Tax equivalent adjustment .07 .08 .08 .08 .09
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME 1.44% 1.38% 1.30% 1.24% 1.15%
===========================================================================================================================
AVERAGE TOTAL ASSETS In thousands $1,804,022 $1,726,960 $1,688,214 $1,654,640 $1,659,360
===========================================================================================================================
<PAGE>
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
</FN>
</TABLE>
institutional mutual funds and "ChemSelect-IRA," which allows customers to
choose their own asset allocation and risk tolerance among a variety of
mutual funds without any sales charges or transaction fees. As of December
31, 1998, these two Trust Department investment products had balances
totaling $28 million.
ASSETS
Total assets of the Corporation were $1.873 billion as of December 31,
1998, up $108 million, or 6.1%, over total assets of $1.765 billion as of
December 31, 1997.
CASH DIVIDENDS
Cash dividends paid per share in 1998 of $.77 represented a 14.6% increase
over cash dividends paid per share in 1997 of $.67.
The Corporation has paid regular cash dividends every quarter since it was
organized as a bank holding company in 1973.
The Corporation's annual cash dividends per share over the past five years,
adjusted for all stock dividends and stock splits, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Annual Dividend $.77 $.67 $.58 $.49 $.41
</TABLE>
Cash dividends per share in 1997 represented a 15.5% increase over cash
dividends per share in 1996, while cash dividends per share in 1996
represented a 17.6% increase over cash dividends paid in 1995. The compound
annual growth rate of the Corporation's cash dividends per share over the
past five and ten year periods ended December 31, 1998, was 15.9% and
12.3%, respectively.
The earnings of the Corporation's subsidiaries are the principal source of
funds to pay cash dividends to shareholders. Cash dividends are dependent
upon the earnings of the Corporation's subsidiaries, as well as capital
requirements, regulatory restraints and other factors affecting each of the
Corporation's subsidiary banks.
continued on next page
29
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
BUSINESS OF THE CORPORATION
The Corporation is a bank holding company with its business concentrated in
a single industry segment - commercial banking. The Corporation, through its
ten banking subsidiaries, offers a full range of commercial banking
services. These banking services include accepting deposits, business and
personal checking accounts, savings and individual retirement accounts,
time deposit instruments, electronically accessed banking products,
residential and commercial real estate financing, commercial lending,
consumer financing, debit cards, safe deposit box services, money transfer
services, automated teller machines, access to insurance products and
corporate and personal trust services. The Corporation also has a data
processing subsidiary. This subsidiary provides data processing services to
the Corporation's ten subsidiary banks and to outside customers. The data
processing services provided to the Corporation's subsidiaries represented
87% of total revenue of the data processing subsidiary in 1998, 84% in 1997
and 76% in 1996.
The principal markets for the Corporation's commercial banking services are
communities within Michigan in which the Corporation's subsidiaries are
located and the areas immediately surrounding these communities. As of
December 31, 1998, the Corporation served 55 communities through 86 banking
offices in 24 counties, located generally across the mid-section of
Michigan's lower peninsula. In addition to the banking offices, the
Corporation operated 85 automated teller machines, both on and off bank
premises, as of December 31, 1998.
The principal sources of revenues for the Corporation are interest and fees
on loans, which accounted for 54% of total revenues in 1998, 1997 and 1996.
Interest on investment securities is also a significant source of revenue,
accounting for 31% of total revenues in 1998 and 33% of total revenues in
1997 and 1996. Chemical Bank and Trust Company (CB&T), the Corporation's
largest subsidiary and lead bank headquartered in Midland, Michigan,
represented 28% of total loans and 32% of total deposits as of December 31,
1998.
CB&T broadened the insurance products offered to its customers through
further entry into the insurance industry. On December 31, 1996, CB&T
acquired a small property and casualty insurance agency in Midland,
Michigan. In January 1997, a title insurance company formed by CB&T began
operations.
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in loans,
investment securities and money market instruments, such as federal funds
sold. Interest expense is the amount of interest paid on interest-bearing
<PAGE>
checking accounts, savings and time deposits, as well as on short- and
long-term debt. Net interest income, on a fully taxable equivalent (FTE)
basis, is the difference between interest income and interest expense and
reflects adjustments made to the yields on tax-exempt assets in order to
analyze tax-exempt income and fully taxable income on a comparable basis.
The net interest margin is net interest income (FTE) as a percentage of
average earning assets. Net interest spread is the difference between the
average yield on earning assets and the average cost of interest-bearing
liabilities.
The single most important component in analyzing the results of the
Corporation's operations is net interest income. Net interest income (FTE)
comprised 82.5% of net revenues in 1998, compared to 84.3% in 1997 and
84.9% in 1996.
Net interest income is influenced by a variety of factors, including
changes in the volume of earning assets, changes in the mix of earning
assets and interest-bearing liabilities, the proportion of earning assets
that are funded by noninterest-bearing liabilities (demand deposits) and
equity capital, market rates of interest and variations in interest
sensitivity in the differing types of interest-earning assets and interest-
bearing liabilities. Some of these factors are controlled to a certain
extent by management policies and actions. However, conditions beyond
management's control also have an impact on changes in net interest income.
These conditions include changes in market interest rates, the strength of
credit demands by customers, competition from other financial institutions,
the growth of deposit accounts at nonbank financial competitors and the
continued growth in annuity and mutual fund investments.
Table 2 presents for 1998, 1997 and 1996 the average daily balances of the
Corporation's major assets and liabilities, interest income and expense on
a FTE basis, average interest rates earned and paid on the Corporation's
assets and liabilities, net interest income (FTE), net interest spread
(FTE) and net interest margin. Net interest income (FTE) in 1998 was
$73.839 million, up $3.435 million, or 4.9%, over 1997 net interest income
(FTE) of $70.404 million. The increase in net interest income during 1998
was primarily attributable to increases in average loans, noninterest-
bearing deposits and shareholders' equity. During 1998, average loans
increased $59 million, or 7.2%, average noninterest-bearing deposits
increased $26 million, or 11.6%, and average shareholders' equity increased
$14 million, or 6.5%.
30
<PAGE>
<TABLE>
TABLE 2. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES* (Dollars in Thousands)
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
TAX EFFECTIVE TAX EFFECTIVE TAX EFFECTIVE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans <F**> $ 879,886 $ 74,390 8.45% $ 820,451 $ 70,198 8.56% $ 792,209 $ 67,767 8.55%
Taxable investment securities 683,567 40,602 5.94 672,347 40,554 6.03 661,401 38,882 5.88
Non-taxable investment
securities 39,389 3,073 7.80 40,129 3,199 7.97 39,542 3,249 8.22
Federal funds sold 88,883 4,809 5.41 86,045 4,699 5.46 86,721 4,575 5.28
Interest-bearing deposits
with unaffiliated banks 2,055 111 5.40 415 33 7.95 1,905 136 7.14
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income/
total earning assets 1,693,780 122,985 7.26 1,619,387 118,683 7.33 1,581,778 114,609 7.25
Less: Allowance for possible
loan losses (17,762) (17,032) (16,296)
Other assets:
Cash and due from banks 82,481 78,216 75,828
Premises and equipment 19,804 19,838 20,303
Accrued income and other
assets 25,719 26,551 26,601
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,804,022 $1,726,960 $1,688,214
==================================================================================================================================
LIABILITIES AND EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand deposits 237,799 5,191 2.18% $ 233,004 $ 5,408 2.32% $ 234,900 $ 5,359 2.28%
Savings deposits 472,212 12,876 2.73 442,195 11,545 2.61 430,783 10,305 2.39
Time deposits 549,414 28,983 5.28 556,259 29,361 5.28 553,993 28,260 5.17
Short-term borrowed funds 41,727 1,503 3.60 34,271 1,363 3.98 31,455 1,163 3.70
Long-term debt 8,994 593 6.59 9,236 596 6.45 10,976 715 6.51
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense/total
interest-bearing liabilities 1,310,146 49,146 3.75 1,274,965 48,279 3.79 1,262,107 46,162 3.66
Noninterest-bearing deposits 247,275 221,652 209,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed
funds 1,557,421 1,496,617 1,471,607
Accrued expenses and other
liabilities 16,556 14,386 15,182
<PAGE>
Shareholders' equity 230,045 215,957 201,425
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity $1,804,022 $1,726,960 $1,688,214
==================================================================================================================================
Interest Spread (Average yield
earned minus average rate paid) 3.51% 3.54% 3.59%
==================================================================================================================================
Net Interest Income (FTE) $ 73,839 $ 70,404 $ 68,447
==================================================================================================================================
Net Interest Margin
(Net interest income (FTE)/Total
average earning assets) 4.36% 4.35% 4.33%
==================================================================================================================================
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
<F**>Nonaccrual loans are included in average balances reported and are
used to calculate yields.
</FN>
</TABLE>
Average interest rates earned and paid on the Corporation's assets and
liabilities did not change significantly during 1998, resulting in modest
changes in the Corporation's net interest spread and net interest margin
during 1998.
During 1998, the average yield on interest earning assets decreased 7 basis
points to 7.26%, while the average cost of interest-bearing liabilities
decreased 4 basis points to 3.75%. These decreases resulted in a 3 basis
point decrease in the net interest spread to 3.51%, while the net interest
margin increased 1 basis point during 1998 to 4.36%. The slight decrease in
both the average yield on earning assets and the average rate paid on
interest-bearing liabilities was attributable to the overall decline in
market interest rates.
continued on next page
31
<PAGE>
NET INTEREST INCOME - CONTINUED
Net interest income (FTE) increased $1.957 million, or 2.9%, during 1997.
The increase in net interest income during 1997 was also primarily
attributable to increases in average loans, noninterest-bearing deposits
and shareholders' equity. During 1997, average loans increased $28 million,
or 3.6%, average noninterest-bearing deposits increased $12 million, or
5.8%, and average shareholders' equity increased $14.5 million, or 7.2%.
Average interest rates earned and paid on the Corporation's assets and
liabilities did not change significantly during 1997. The net interest
spread decreased 5 basis points during 1997 to 3.54%, while the net
interest margin increased 2 basis points to 4.35%.
Net interest income (FTE) increased $3.34 million, or 5.1%, in 1996. This
increase was primarily attributable to an increase in loans and an increase
in the average yield of investment securities. During 1996, average loans
increased $48 million, or 6.4%, while the average yield on investment
securities increased 34 basis points. The net interest spread increased 8
basis points during 1996 to 3.59%, while the net interest margin increased
13 basis points to 4.33%.
Table 3 allocates the dollar change in net interest income (FTE) between
the portion attributable to changes in the average volume of interest-
earning assets and interest-bearing liabilities, including changes in the
mix of assets and liabilities, and changes in average interest rates earned
and paid.
During 1998, the increase in the volume and change in the mix of interest-
earning assets and interest-bearing liabilities accounted for a $5.31
million increase in net interest income (FTE), while changes in average
interest rates earned and paid on assets and liabilities resulted in a
$1.875 million decrease in net interest income. The increase due to changes
in the volume and mix of interest-earning assets and interest-bearing
liabilities was primarily attributable to the increases in average loans,
noninterest-bearing deposits and shareholders' equity. The decrease due to
changes in interest rates was primarily attributable to the refinancing of
real estate loans during 1998 as mortgage interest rates declined.
The increase in net interest income (FTE) in 1997 of $1.957 million, or
2.9%, was mostly attributable to increases in the volume and change in the
mix of interest-earning assets and interest-bearing liabilities; primarily
due to a $28 million, or 3.6%, increase in average loans.
LOANS
The Corporation's ten banking subsidiaries are full service community
banks, therefore the acceptance and management of credit risk is an
integral part of the Corporation's business. The Corporation maintains a
conservative loan policy and strict credit underwriting standards. These
standards include the granting of loans only within the Corporation's
<PAGE>
market areas. The Corporation's lending markets generally consist of small
cities across mid-Michigan. The Corporation has no foreign loans nor any
loans to finance highly leveraged transactions. The Corporation's lending
philosophy is implemented through strong administrative and reporting
controls at the subsidiary bank level, with additional oversight at the
holding company level. The Corporation maintains a centralized independent
loan review function at the holding company level, which monitors asset
quality at each of the Corporation's subsidiary banks.
The Corporation experiences competition for commercial loans from larger
regional banks located both in and outside the Corporation's market areas,
and from other community banks located both within and in the areas
surrounding the Corporation's lending markets. The Corporation experiences
competition for consumer loans from larger regional banks, community banks,
local credit unions and finance companies. The Corporation's competition
for residential mortgage loans includes community banks, larger regional
banks, savings associations, credit unions and mortgage companies. The
competition for residential mortgage loans has increased over the last few
years as mortgage lending companies have expanded their marketing efforts.
The Corporation's loan portfolio is well diversified geographically, as
well as along industry lines, and, therefore, is reasonably sheltered from
adverse economic impact in any one industry or geographic area. An
additional strength of the Corporation's loan portfolio is that as of
December 31, 1998, approximately 54% of the loan portfolio was comprised of
credits granted to consumers in the form of residential mortgage loans,
home equity loans and lines of credit secured by first and second
mortgages.
Total loans as of December 31, 1998 were $898.3 million, an increase of
$52.7 million, or 6.2%, over total loans of $845.6 million as of December
31, 1997. The increase in total loans during 1998 was primarily
attributable to increases in commercial and consumer loans. Commercial
loans increased 15.2%, while consumer loans increased 29.6% during 1998.
Commercial loans totaled $139 million as of December 31, 1998, an increase
of $18.4 million, or 15.2%, over total commercial loans as of December 31,
1997 of $120.7 million. The growth in the commercial loan portfolio during
1998 was the result of enhanced sales and marketing efforts within the
Corporation's market areas. Commercial loans decreased $1.9 million, or
1.5%, in 1997 and $2.3 million, or 1.8%, during 1996. Commercial loans
represented approximately 16%, 14% and 15% of total loans outstanding as of
December 31, 1998, 1997 and 1996, respectively.
32
<PAGE>
<TABLE>
TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS<F*> (In Thousands)
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN COMBINED DUE TO CHANGES IN COMBINED
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME YIELD/RATE (DECREASE) VOLUME YIELD/RATE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME ON EARNING
ASSETS:
Loans $5,565 $(1,373) $4,192 $2,179 $ 252 $2,431
Taxable investment securities 671 (623) 48 650 1,022 1,672
Non-taxable investment securities (58) (68) (126) 48 (98) (50)
Federal funds sold 154 (44) 110 (36) 160 124
Interest-bearing deposits with
unaffiliated banks 92 (14) 78 (103) -- (103)
- --------------------------------------------------------------------------------------------------------------------------------
Total change in interest income on
earning assets 6,424 (2,122) 4,302 2,738 1,336 4,074
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits 303 (520) (217) (43) 92 49
Savings deposits 909 422 1,331 279 961 1,240
Time deposits (359) (25) (384) 117 630 747
Short-term borrowed funds 277 (137) 140 109 91 200
Long-term debt (16) 13 (3) (112) (7) (119)
- --------------------------------------------------------------------------------------------------------------------------------
Total change in interest expense on
interest-bearing liabilities 1,114 (247) 867 350 1,767 2,117
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN
NET INTEREST INCOME (FTE) $5,310 $(1,875) $3,435 $2,388 $ (431) $1,957
================================================================================================================================
<FN>
The changes in net interest income (FTE) due to both volume and rate have
been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE 4. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE (Dollars in Thousands)
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distribution of Loans:
Commercial and agricultural loans $ 139,051 $ 120,696 $ 122,584 $ 124,861 $ 128,923
Real estate construction loans 35,039 31,143 24,791 16,195 19,255
Real estate mortgage loans 520,972 536,938 510,193 472,454 465,721
Consumer loans 203,231 156,823 150,085 147,068 146,964
- -------------------------------------------------------------------------------------------------------------------
Total loans outstanding at year end $ 898,293 $ 845,600 $ 807,653 $ 760,578 $ 760,863
===================================================================================================================
Summary of Changes in the Allowance for
Possible Loan Losses:
Allowance for possible loan losses at
beginning of year $ 17,359 $ 16,607 $ 15,886 $ 15,295 $ 14,583
Loans charged off:
Commercial and agricultural (111) (114) (250) (433) (317)
Real estate construction -- -- -- -- --
Real estate mortgage -- (26) (55) (3) (76)
Consumer (438) (480) (386) (230) (237)
- -------------------------------------------------------------------------------------------------------------------
Total loan charge-offs (549) (620) (691) (666) (630)
Recoveries of loans previously charged off:
Commercial and agricultural 118 193 92 60 58
Real estate construction -- -- -- -- --
Real estate mortgage 29 10 24 28 40
Consumer 150 167 168 104 145
- -------------------------------------------------------------------------------------------------------------------
Total loan recoveries 297 370 284 192 243
- -------------------------------------------------------------------------------------------------------------------
Net loan charge-offs (252) (250) (407) (474) (387)
Provision for loan losses 965 1,002 1,128 1,065 1,099
- -------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses at year end $ 18,071 $ 17,359 $ 16,607 $ 15,886 $ 15,295
===================================================================================================================
Ratio of net charge-offs during the year
to average loans outstanding .03% .03% .05% .06% .05%
===================================================================================================================
Ratio of allowance for possible loan losses at
year end to total loans outstanding at year
end 2.01% 2.05% 2.06% 2.09% 2.01%
===================================================================================================================
</TABLE>
continued on next page
33
<PAGE>
LOANS - CONTINUED
Real estate mortgage loans, including real estate construction loans,
comprise the majority of the Corporation's loan portfolio. As of December
31, 1998, 1997 and 1996, total real estate mortgage loans, including real
estate construction loans, were $556 million, $568.1 million and $535
million, respectively. Real estate mortgage loans, including real estate
construction loans, decreased $12.1 million, or 2.1%, during 1998, due
primarily to refinancing of customers with balloon mortgage loans to longer
term fixed interest rate mortgages. These longer term mortgages were sold
in the secondary mortgage lending market. The volume of mortgage loans
refinanced during 1998 was higher than historical prepayment percentages
due to the decline in interest rates on longer term residential mortgage
loans.
Real estate mortgage loans, including real estate construction loans,
increased $33.1 million, or 6.2%, during 1997, and $46.3 million, or 9.5%,
during 1996. Real estate mortgage loans, including real estate construction
loans, as a percentage of total loans, were 62% as of December 31, 1998,
compared to 67% as of December 31, 1997 and 66% as of December 31, 1996.
Approximately 82% of the total real estate mortgage loan portfolio was
secured by residential real estate as of December 31, 1998 and 1997.
The Corporation manages the interest rate risk on the residential real
estate mortgage loan portfolio through the promotion of balloon mortgage
products. As of December 31, 1998, balloon and other variable rate
residential mortgage loans represented approximately 50% of the total
residential mortgage loan portfolio, repriceable three, five or eight years
from the mortgage origination date. The eight-year balloon product was
introduced during 1996.
The Corporation originated $118 million of long-term fixed interest rate
residential mortgage loans during 1998, which were sold in the secondary
mortgage market. This compares with $39 million of residential mortgage
loans originated during 1997 and $12 million of residential mortgage loans
originated during 1996, which were sold in the secondary mortgage market.
During both 1998 and 1997, it was the Corporation's practice to generally
sell residential mortgage loans with original maturities of fifteen years
and longer in the secondary market. In 1996, it was the Corporation's
general practice to sell only those residential real estate mortgage loans
with original maturities greater than fifteen years in the secondary
market. The significant increase in the volume of long-term fixed interest
rate residential loans being originated in 1998 can be attributed to the
health of the economy and the decrease in mortgage interest rates. During
1998, interest rates on longer term residential mortgages decreased
approximately 100 basis points from 1997 levels. The decline in mortgage
interest rates resulted in an increased volume in the long-term fixed
interest rate mortgage loan products by customers seeking new residential
mortgage loans and qualifying customers refinancing balloon mortgages. As
of December 31, 1998, the Corporation was servicing $181 million of
<PAGE>
residential mortgage loans that had been originated by the Corporation in
its market areas and subsequently sold in the secondary mortgage market.
Consumer loans totaled $203.2 million as of December 31, 1998, compared to
$156.8 million as of December 31, 1997 and $150.1 million as of December
31, 1996. Consumer loans represented approximately 23% of total loans
outstanding as of December 31, 1998, and 19% as of December 31, 1997 and
1996. Consumer loans increased $46.4 million, or 29.6%, during 1998. The
increase in 1998 was attributable to three consumer loan promotions. These
promotions were limited time offers of consumer loans at special interest
rates to qualifying borrowers. These three loan promotions generated
approximately $94 million of new consumer loans during 1998. The 1998
consumer loan promotions were the Corporation's affiliate banks' eighth
year of offering special interest rates on consumer loans during promotion
periods.
Historically, the average life of the Corporation's consumer loan portfolio
has been approximately three years. This short average life and the success
of the consumer loan promotions have resulted in significant reductions
each year in consumer loan balances through loan payments and payoffs.
Consequently, during each of the last three years, the consumer loan
portfolio did not increase by the amount of new loans generated during the
loan promotion periods in these years.
Table 5 presents the maturity distribution of commercial and agricultural
loans, real estate construction and nonresidential real estate mortgage
loans. These loans represented approximately 29% of total loans as of
December 31, 1998 and 1997. The percentage of these loans maturing within
one year was 55% at December 31, 1998, compared to 49% at December 31,
1997. The percentage of these loans maturing beyond five years remained low
at 9% as of December 31, 1998, compared to 12% at December 31, 1997. Of
those loans with maturities beyond one year, the percentage of loans with
variable interest rates was 20% at December 31, 1998, compared to 30% at
December 31, 1997. The decline in the percentage of variable rate loans
with maturities beyond one year has continued as a result of a strong
customer demand to convert variable interest rate loans to fixed interest
rates as interest rates have decreased. It is management's opinion that
these loan maturities and the mix between loans with fixed and variable
interest rates remain at acceptable levels to provide the Corporation
sufficient flexibility in maintaining a balance between interest rate-
sensitive assets and liabilities.
34
<PAGE>
<TABLE>
TABLE 5. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in thousands)
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
DUE IN DUE IN
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 TO 5 OVER 5 1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL OR LESS YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Maturities:
Commercial and agricultural $ 81,076 $ 46,837 $11,138 $139,051 $ 75,885 $40,005 $ 4,806 $120,696
Real estate construction 24,367 6,470 4,202 35,039 19,669 6,435 5,039 31,143
Nonresidential real estate
mortgage 39,513 43,693 8,469 91,675 25,351 49,084 20,747 95,182
- ----------------------------------------------------------------------------------------------------------------------------------
Total $144,956 $ 97,000 $23,809 $265,765 $120,905 $ 95,524 $30,592 $247,021
==================================================================================================================================
Percent of Total 55% 36% 9% 100% 49% 39% 12% 100%
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Sensitivity:
Above loans maturing after one
year which have:
Fixed interest rates $ 96,761 80% $ 88,256 70%
Variable interest rates 24,048 20 37,860 30
- ----------------------------------------------------------------------------------------------------------------------------------
Total $120,809 100% $126,116 100%
==================================================================================================================================
</TABLE>
NONPERFORMING LOANS
Nonperforming loans include loans accounted for on a nonaccrual basis,
accruing loans contractually past due 90 days or more as to interest or
principal payments and other loans whose terms have been renegotiated to
provide for a reduction of interest or principal because of a deterioration
in the financial position of the borrower.
The Corporation's practice is to immediately charge to the allowance for
possible loan losses specifically identified credit losses. This
determination is made for each loan at the time of transfer to
nonperforming status, after giving consideration to collateral value and
the borrower's ability to repay the loan principal.
<PAGE>
Nonaccrual loans were $1.79 million as of December 31, 1998, compared to
$1.78 million as of December 31, 1997 and $1.34 million as of December 31,
1996. Nonaccrual loans as a percentage of total loans were .20%, .21% and
.17%, as of December 31, 1998, 1997 and 1996, respectively. Accruing loans
past due 90 days or more were $1.32 million as of December 31, 1998,
compared to $1.13 million as of December 31, 1997 and $.54 million as of
December 31, 1996.
Total nonperforming loans were $3.1 million, or .35% of total loans, as of
December 31, 1998; compared to $3.05 million, or .36% of total loans, as of
December 31, 1997 and $1.9 million, or .23% of total loans, as of
December 31, 1996.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses ("provision") is the amount added to
the allowance for possible loan losses ("allowance") on a monthly basis to
absorb potential loan losses. The allowance is maintained at a level
considered by management to be adequate to absorb loan losses inherent in
the loan portfolio. This evaluation is based on a continuous review of the
loan portfolio, both individually and by category, and includes
consideration of changes in the
<TABLE>
TABLE 6. SUMMARY OF NONPERFORMING LOANS (In thousands)
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis<F*> $ 1,785 $ 1,783 $ 1,341 $ 1,658 $ 2,682
Accruing loans contractually past due 90 days or
more as to interest or principal payments:
Commercial, agricultural 39 447 7 118 95
Real estate construction -- -- -- -- --
Real estate mortgage 1,145 557 271 747 182
Consumer 132 121 261 104 91
- ------------------------------------------------------------------------------------------------------------------------
1,316 1,125 539 969 368
Renegotiated loans -- 139 -- 84 148
- ------------------------------------------------------------------------------------------------------------------------
Total $ 3,101 $ 3,047 $ 1,880 $ 2,711 $ 3,198
========================================================================================================================
<FN>
<F*>Interest income totaling $79,172 was recorded on the nonaccrual loans
in 1998.
</FN>
</TABLE>
<PAGE>
Additional interest income of $144,870 would have been recorded during 1998
on these loans had they been current in accordance with their original
terms.
continued on next page
35
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES - CONTINUED
<TABLE>
TABLE 7. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in thousands)
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TO TO TO TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agri-
cultural loans $ 5,562 15.5% $ 4,975 14.3% $ 5,351 15.1% $ 5,510 16.5% $ 4,959 16.9%
Real estate construc-
tion loans 701 3.9 623 3.7 496 3.1 324 2.1 385 2.5
Real estate mort-
gage loans 5,470 58.0 5,638 63.5 5,612 63.2 5,052 62.1 4,990 61.3
Consumer loans 4,065 22.6 3,673 18.5 3,487 18.6 3,381 19.3 3,401 19.3
Not allocated 2,273 2,450 1,661 1,619 1,560
- ---------------------------------------------------------------------------------------------------------------------------------
Total $18,071 100% $17,359 100% $16,607 100% $15,886 100% $15,295 100%
=================================================================================================================================
</TABLE>
type and volume of the loan portfolio, actual loan loss experience, the
present and prospective financial condition of borrowers, industry and
geographic exposures within the portfolio, current and prospective economic
conditions, and special factors affecting specific business sectors. This
evaluation process is reviewed by the Corporation's centralized independent
loan review personnel, who monitor the credit quality of the Corporation's
loan portfolio using uniform procedures and reporting systems.
The provision was approximately $1 million in both 1998 and 1997, and $1.13
million in 1996. The Corporation experienced net loan losses of
approximately $.25 million in both 1998 and 1997, and $.41 million in 1996.
The Corporation's provision exceeded actual net loan losses by $.71 million
in 1998, $.75 million in 1997 and $.72 million in 1996. The Corporation's
allowance increased to $18.07 million as of December 31, 1998 and
represented 2.01% of total loans, compared to 2.05% at December 31, 1997
and 2.06% at December 31, 1996.
The allocation of the allowance in Table 7 is based upon ranges of
estimates and is not intended to imply either limitations on the usage of
the allowance or exactness of the specific amounts. The entire allowance is
available to absorb any future loan charge-offs without regard to the
categories in which the loan losses are classified.
<PAGE>
NONINTEREST INCOME
Noninterest income is derived primarily from trust services, deposit
account fees, fees for other customer services and gains on the sale of
residential mortgage loans. Noninterest income totaled $15.61 million in
1998, compared to $13.12 million in 1997 and $12.20 million in 1996.
Noninterest income increased $2.49 million, or 19%, in 1998 and $.924
million, or 7.6%, in 1997, over the prior year.
The 1998 increase was primarily attributable to increases in Trust
Department income, increases in other charges and fees for customer
services, and increased gains from the sale of residential mortgage loans
in the secondary market.
Income from Trust Department activities increased $.344 million, or 10.7%,
in 1998, and $.313 million, or 10.8%, in 1997, over the prior year. The
1998 and 1997 increases reflect higher fee income resulting from an
expanded customer base, increases in custodial accounts and increased asset
values due to favorable market performance.
Noninterest income from other charges and fees for customer services was
$4.515 million in 1998, compared to $3.813 million in 1997 and $3.199
million in 1996. The increases of $.702 million, or 18%, in 1998, and
$.614 million, or 19%, in 1997, were primarily attributable to increases in
ATM fee revenues from nondeposit customers of the Corporation's affiliate
banks, and increased fee income generated from the sale of annuity and
mutual fund investment products, property and casualty insurance and title
insurance.
Gains on the sale of residential mortgage loans were $1.54 million in 1998,
compared to $.24 million in 1997 and $.14 million in 1996. The $1.3 million
increase in 1998 was due to the Corporation selling significantly more
residential mortgage loans in the secondary market in 1998 than in 1997.
During 1998, the Corporation sold $118 million of residential mortgage
loans in the secondary market, compared to $39 million in 1997 and $12
million in 1996. The significant increase in the volume of residential
mortgage loans being sold during 1998 was attributable to both the health
of the economy, which created more residential mortgage loan activity, and
also the reduction of residential mortgage loan interest rates. The
reduction in interest rates increased both the refinancing of long-term
fixed interest rate mortgage loans and the election of long-term fixed
interest rate mortgage loan products over the balloon mortgage loan
products on new residential mortgage loans. It was the Corporation's
general practice during 1998 and 1997 to sell residential mortgage loans
36
<PAGE>
with terms of fifteen years or greater in the secondary mortgage market.
Gains on the sale of residential mortgage loans were significantly lower in
1996, as the Corporation elected to keep those loans with amortizations of
fifteen years or less that it originated in its own loan portfolio. Those
loans with amortizations greater than fifteen years were sold in the
secondary mortgage market.
OPERATING EXPENSES
Total operating expenses were $48.31 million in 1998, $45.72 million in
1997 and $45.12 million in 1996. Total operating expenses as a percentage
of total average assets was 2.68% in 1998, 2.65% in 1997 and 2.67% in 1996.
The Corporation's efficiency ratio, defined as total operating expenses
divided by the sum of net interest income and noninterest income was 55% in
1998, compared to 56% in 1997 and 57% in 1996.
Total operating expenses increased $2.59 million, or 5.7%, in 1998,
compared to increases of $.6 million, or 1.3%, in 1997 and $.5 million, or
1.1%, in 1996 over the prior year. The lower increase in operating expenses
in 1997 was primarily due to other operating expenses in 1996 including
nonrecurring costs associated with the acquisition of State Savings
Bancorp, Inc. The lower increase in operating expenses in 1996 was due to
the significant reduction in Federal Deposit Insurance Corporation (FDIC)
expense between 1995 and 1996. FDIC expense was $.1 million in 1996,
compared to $1.6 million in 1995.
Salaries, wages and employee benefits remain the largest component of
operating expenses. These expenses totaled $28.90 million in 1998, $27.28
million in 1997 and $26.96 million in 1996. Salaries, wages and employee
benefits expense increased $1.6 million, or 5.9%, in 1998. Full-time
equivalent employees were 1006 at December 31, 1998, compared to 1003 at
December 31, 1997 and 1000 at December 31, 1996. Salaries, wages and
employee benefits expense increased $.32 million, or 1.2%, in 1997. The
Corporation was able to maintain 1997 personnel costs at approximately 1996
levels by achieving a 3.1% reduction in employee benefits cost, while
salaries and wages increased 2.3%. Personnel expenses accounted for 60% of
operating expenses during 1998, 1997 and 1996.
Occupancy and equipment expense totaled $7.36 million in 1998, $7.45
million in 1997 and $7.15 million in 1996. Occupancy and equipment expense
decreased 1.2% in 1998 and increased 4.3% in 1997.
Other operating expenses totaled $12.05 million in 1998, $10.99 million in
1997 and $11.02 million in 1996. The increase in 1998 of $1.06 million, or
9.7%, was partially attributable to expenses incurred in the conversion of
the Corporation's core data processing system in 1998 to a new system,
which has been certified by its vendor to be Year 2000 compliant.
<PAGE>
INCOME TAXES
The Corporation's effective federal income tax rate was 32.9% in 1998,
32.6% in 1997 and 33.4% in 1996, compared to the statutory rate of 35% in
each of these years. The small changes in the Corporation's effective
federal income tax rate reflect the changes each year in the proportion of
interest income exempt from federal taxation, tax credits, nondeductible
interest expense and other nondeductible expenses relative to pretax
income.
Tax-exempt income (FTE), net of related nondeductible interest expense,
totaled $3.9 million in 1998, 1997 and 1996. Tax-exempt income (FTE) as a
percentage of total interest income (FTE) was 3.4%, 3.5% and 3.6% in 1998,
1997 and 1996, respectively.
Income before income taxes (FTE) was $40.18 million in 1998, $36.81 million
in 1997 and $34.39 million in 1996.
LIQUIDITY AND INTEREST SENSITIVITY
The Corporation manages its liquidity to ensure that it has the ability to
meet the cash withdrawal needs of its depositors, provide funds for
borrowers and at the same time ensure that the Corporation's own cash
requirements are met. The Corporation accomplishes these goals through the
management of liquidity at two levels - the parent company and the banking
subsidiaries.
The parent company's sources of funds have been dividends from
subsidiaries, borrowings from unaffiliated banks and proceeds from equity
issuances. During the three-year period ended December 31, 1998, the parent
company's primary source of funds was subsidiary dividends. The parent
company manages its liquidity position to provide the cash necessary to pay
dividends to shareholders, service debt, invest in subsidiaries, enter new
banking markets, pursue investment opportunities and satisfy other
operating requirements.
Federal and state banking laws place certain restrictions on the amount of
dividends that a bank may pay to its parent company. Such restrictions have
not had, and are not expected to have, any material effect on the
Corporation's ability to meet its cash obligations or impede its ability to
manage its liquidity needs. At January 1, 1999, the Corporation's bank
subsidiaries could dividend $71 million to the parent company and remain
"well capitalized" under the regulatory "risk-based" capital guidelines;
without obtaining regulatory approval. In addition to the funds available
from subsidiaries, the parent company had $15.2 million in cash on hand as
of December 31, 1998.
<PAGE>
The subsidiary banks manage liquidity to insure adequate funds are
available to meet the cash flow needs of depositors and borrowers. The
subsidiary banks' most readily available sources of liquidity are federal
funds sold, investment securities classified as available for sale and
investment securities classified as held to maturity maturing
continued on next page
37
<PAGE>
LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED
<TABLE>
TABLE 8. MATURITIES AND YIELDS<F*> OF INVESTMENT SECURITIES AT DECEMBER 31, 1998 (Dollars in Thousands)
<CAPTION>
MATURING<F**>
AFTER ONE AFTER FIVE TOTAL TOTAL
WITHIN BUT WITHIN BUT WITHIN AFTER CARRYING MARKET
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and agencies $229,886 5.83% $214,474 5.56% -- -- -- -- $444,360 5.62% $444,360
Other securities 15,838 5.88 22,395 5.68 $ 583 6.53% $5,800 5.96% 44,616 5.85 44,616
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities
Available for Sale 245,724 5.83 236,869 5.57 583 6.53 5,800 5.96 488,976 5.71 488,976
HELD TO MATURITY:
U.S. Treasury and agencies 79,654 6.10 111,303 5.92 -- -- -- -- 190,957 5.96 193,453
States of the U.S. and
political subdivisions 9,754 6.88 19,664 7.73 10,456 7.99 1,719 8.27 41,593 7.62 42,641
Other securities 5,002 6.04 3,165 6.09 45 8.00 85 5.56 8,297 6.01 8,336
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities
Held to Maturity 94,410 6.18 134,132 6.19 10,501 7.99 1,804 8.14 240,847 6.28 244,430
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $340,134 5.93% $371,001 5.79% $11,084 7.91% $7,604 6.52% $729,823 5.90% $733,406
==================================================================================================================================
<FN>
<F*>Yields are weighted by amount and time to contractual maturity and are on a taxable equivalent basis using a 35%
federal income tax rate.
<F**>Based on final contractual maturity.
</FN>
</TABLE>
within one year. These sources of liquidity are supplemented by new
deposits and by loan payments received from customers. As of December 31,
1998, the Corporation held $113 million in federal funds sold, $489 million
in investment securities available for sale and $94 million in other
investment securities maturing within one year. These short-term assets
represented approximately 45% of total deposits as of December 31, 1998.
Historically, the Corporation's investment securities portfolio has been
very short-term in nature, with the average life of the portfolio
consistently being less than two years. As of December 31, 1998, 46.6% of
the Corporation's investment securities portfolio, or $340 million in
<PAGE>
investment securities, will mature during 1999, and another $303 million in
investment securities, or 41.6% of the investment securities portfolio,
will mature during 2000. The combination of the 1999 and 2000 scheduled
maturities results in 88% of the Corporation's investment securities
portfolio maturing within two years of December 31, 1998. As of December
31, 1997, 68% of the investment securities portfolio was scheduled to
mature within two years. The maturity analysis of the investment securities
portfolio is summarized in Tables 8 and 9.
<TABLE>
TABLE 9. MATURITY ANALYSIS OF INVESTMENT SECURITIES (as a % of total portfolio)
<CAPTION>
DECEMBER 31
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturity:
Under 1 year 46.6% 33.7% 35.1%
1-5 years 50.8 63.4 61.4
5-10 years 1.5 2.0 2.6
Over 10 years 1.1 .9 .9
- --------------------------------------------------------------------------------------
Total 100% 100% 100%
======================================================================================
</TABLE>
Table 10 presents the maturity distribution of time deposits of $100,000 or
more at the end of each of the last three years. Historically, the
Corporation has not utilized time deposits of $100,000 or more as a source
of liquidity. Time deposits of $100,000 or more and the percentage of these
deposits to total deposits increased slightly during 1998 to $96.3 million,
or 6.2% of total deposits, as of December 31, 1998, compared to $85.1
million, or 5.8% of total deposits, as of December 31, 1997 and $108.4
million, or 7.6% of total deposits, as of December 31, 1996. The percentage
of time deposits of $100,000 or more with a maturity of less than three
months was 70% at December 31, 1998 and 1997, and 77% at December 31, 1996.
As the Corporation does not utilize these deposits as a source of
liquidity, it is able to invest the funds generated from these deposits in
investments of similar maturity.
The management of net interest income must address two objectives. It must
consider the liquidity needs of the Corporation and interest rate risk.
Interest rate risk arises in the normal course of the Corporation's
business due to differences in the repricing and maturity characteristics
of rate sensitive assets and liabilities. Sensitivity of earnings to
interest rate changes arises when yields on assets change differently from
the interest costs on liabilities.
<PAGE>
Interest rate sensitivity is determined by the amount of interest-earning
assets and interest-bearing liabilities repricing within a specific time
period and the magnitude by which interest rates change on the various
types of earning assets and interest-bearing liabilities. The management of
interest rate sensitivity includes monitoring the maturities and repricing
opportunities of interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity management aims at achieving reasonable stability
in both
38
<PAGE>
<TABLE>
TABLE 10. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE (Dollars in thousands)
<CAPTION>
DECEMBER 31
1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
Within 3 months $66,976 70% $59,482 70% $ 83,851 77%
Within 3 to 6 months 18,468 19 12,371 15 14,893 14
Within 6 to 12 months 6,497 7 6,677 8 5,894 5
Over 12 months 4,329 4 6,550 7 3,760 4
- -----------------------------------------------------------------------------------------------------------
Total $96,270 100% $85,080 100% $108,398 100%
===========================================================================================================
</TABLE>
net interest income and the net interest margin through periods of changing
interest rates. The Corporation's goal is to avoid a significant decrease
in net interest income and thus an adverse impact on the profitability of
the Corporation in periods of changing interest rates. It is necessary to
analyze projections of net interest income based upon the repricing
characteristics of the Corporation's earning assets and interest-bearing
deposits and the varying magnitude by which interest rates may change on
loans, investments and interest-bearing deposit accounts.
The Corporation's interest rate sensitivity is managed through policies and
risk limits approved by the Boards of Directors of the Corporation and its
subsidiary banks, and an Asset and Liability Committee (ALCO). The ALCO,
which is comprised of executive and senior management from various areas of
the Corporation, including finance, lending, investments and deposit
gathering, meets regularly to execute asset and liability management
strategies. The ALCO establishes and monitors guidelines on the sensitivity
of earnings to changes in interest rates. The goal of the ALCO process is
to manage the balance sheet to provide the maximum level of net interest
income and minimal impact on earnings from major interest rate changes,
while maintaining a high quality balance sheet and acceptable levels of
interest rate and liquidity risk. The Corporation has not used and does not
intend to use interest rate swaps or other derivative financial instruments
in the management of interest rate risk. The Corporation held no derivative
financial instruments as of December 31, 1998. Management has the ability
to adjust interest rates on non-maturing deposit accounts to achieve an
approximately neutral interest sensitivity position within a one-year time
period.
<PAGE>
Interest rate sensitivity is managed by a number of techniques, as no
single interest rate risk measurement tool satisfies both objectives. The
primary techniques utilized by the Corporation are asset and liability
repricing schedules, commonly referred to as static gap analysis, and
simulation analysis.
Table 11 includes the Corporation's interest-earning assets and interest-
bearing liabilities as of December 31, 1998, categorizing each into the
earliest time period of their repricing or maturity, and summarizes the
Corporation's interest rate repricing static gaps for selected
repricing/maturity periods.
<TABLE>
TABLE 11. SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES BY REPRICING OR MATURITY DATE AT DECEMBER 31, 1998
(Dollars in thousands)
<CAPTION>
1-180 181-365 OVER 1
DAYS DAYS YEAR TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $229,273 $107,878 $561,142 $ 898,293
Other interest-earning assets 276,784 181,500 389,689 847,973
- ----------------------------------------------------------------------------------------------------------
Total interest-earning assets $506,057 $289,378 $950,831 $1,746,266
==========================================================================================================
INTEREST-BEARING LIABILITIES:
Non-maturing deposits $123,844 -- $610,739 $ 734,583
Time deposits 297,170 $114,615 135,515 547,300
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 421,014 114,615 746,254 1,281,883
Other interest-bearing liabilities 53,250 8,000 -- 61,250
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $474,264 $122,615 $746,254 $1,343,133
==========================================================================================================
Gap $31,793 $166,763 $204,577 $ 403,133
Cumulative gap $31,793 $198,556 $403,133
Cumulative rate sensitive ratio 1.07 1.33 1.30
Cumulative gap as a percentage
of total earning assets 1.8% 11.4% 23.1%
</TABLE>
continued on next page
39
<PAGE>
LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED
Total interest-earning assets exceeded interest-bearing liabilities by $403
million as of December 31, 1998. This difference was funded through
noninterest-bearing deposits and shareholders' equity. Table 11 shows that
total assets maturing or repricing within one year exceeded liabilities
maturing or repricing within one year by $198.6 million, or 11.4% of total
earning assets, as of December 31, 1998.
The computation of static gap does not address the fact that the repricing
of certain categories of assets and liabilities is subject to competitive
and other influences that are beyond the control of the Corporation. As a
result, certain assets and liabilities mature or reprice in periods other
than in their contractual period. The distribution of the Corporation's
deposits with no contractual maturity was based on historical analysis and
management's current assumptions as to the repricing of these funds.
Accordingly, as of December 31, 1998, $610.7 million of deposits with no
contractual maturity ("non-maturing deposits") that are repriceable daily
at the Corporation's discretion, were included in the over-1-year repricing
category. These accounts are believed by management to be predominately
noninterest-rate sensitive.
Table 11 illustrates that as of December 31, 1998, the Corporation's
cumulative rate sensitive ratio (rate sensitive assets to rate sensitive
liabilities) in the 1-180 day repricing category was 1.07, and 1.33 in the
cumulative one-year (1-365 days) repricing category. Static gap sensitivity
varies from time frame to time frame; however, asset and liability
management and the ability to adjust interest rates on non-maturing deposit
accounts enables the Corporation to achieve reasonable stability in net
interest income through periods of changing interest rates. The Corporation
recognizes the limitations of static gap analysis as a tool in managing
interest rate risk and, therefore, utilizes other methods, including
simulation analysis.
Simulation analysis is used to project the potential effects of various
interest rate environments on the balance sheet mix and net interest
income. Simulation analysis involves the analysis of net interest income,
and the corresponding quantification of interest rate risk that is
attributable to changes in interest rate levels and relationships, asset
and liability mixes and loan prepayment characteristics. While many assets
and liabilities reprice either at maturity or in accordance with their
contractual terms, several balance sheet components demonstrate
characteristics that require an evaluation to more accurately reflect their
pricing behavior. Assumptions based on historical pricing relationships,
experience and anticipated market reactions are applied to certain core
deposit and loan categories to reflect changes in interest rate costs and
yields relative to changes in market interest rates. A process is
maintained where management evaluates "base" net interest income under what
it believes to be the most likely interest rate environment. This "base"
net interest income is then evaluated against numerous interest rate
<PAGE>
scenarios, including increasing and decreasing market interest rates by 100
basis points evenly over the next year. This measurement of interest rate
risk exposure on net interest income at year-end 1998, projected over the
succeeding twelve months, indicates a nearly neutral interest rate
sensitivity position during 1999.
<TABLE>
TABLE 12. FINANCIAL INSTRUMENTS (Dollars in thousands)
<CAPTION>
OUTSTANDING OUTSTANDING
PRINCIPAL AMOUNT MATURING IN: DECEMBER 31, 1998 DECEMBER 31, 1997
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE TOTAL FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE
ASSETS:
Fixed interest
rate loans $246,058 $155,845 $121,612 $88,762 $29,502 $160,628 $802,407 $814,997 $724,544 $726,526
Average inter-
est rate 7.82% 7.94% 7.92% 7.89% 7.71% 7.67% 7.83% 8.11%
Variable interest
rate loans $ 58,573 $ 16,050 $ 4,715 $ 2,786 $ 1,567 $ 12,195 $ 95,886 $ 95,886 $121,056 $121,056
Average inter-
est rate 8.91% 8.66% 8.81% 8.63% 8.69% 8.62% 8.81% 9.35%
Fixed interest
rate securities $340,134 $303,259 $ 57,331 $ 4,743 $ 5,671 $ 18,685 $729,823 $733,406 $745,193 $747,632
Average inter-
est rate 5.85% 5.96% 5.23% 7.53% 6.90% 7.11% 5.89% 6.13%
Other interest-
earning assets $118,150 -- -- -- -- -- $118,150 $118,150 $ 49,750 $ 49,750
Average inter-
est rate 4.76% -- -- -- -- -- 4.76% 5.49%
RATE SENSITIVE
LIABILITIES:
Noninterest-bear-
ing deposits $ 10,896 $ 10,460 $ 10,041 $ 9,640 $ 9,254 $222,097 $272,388 $272,388 $237,763 $237,763
Interest-bear-
ing demand and
savings deposits $ 29,383 $ 28,208 $ 27,080 $25,996 $24,957 $598,959 $734,583 $734,583 $696,913 $696,913
Average inter-
est rate 2.36% 2.36% 2.36% 2.36% 2.36% 2.36% 2.36% 2.67%
Time deposits $411,785 $ 77,166 $ 45,453 $ 8,105 $ 955 $ 3,836 $547,300 $549,792 $541,165 $540,745
Average inter-
est rate 4.99% 5.38% 5.33% 5.72% 5.44% 5.43% 5.09% 5.38%
<PAGE>
Fixed interest
rate borrowings $ 1,761 -- -- -- -- -- $ 1,761 $ 1,761 $ 12,954 $ 12,954
Average inter-
est rate 4.80% -- -- -- -- -- 4.80% 2.66%
Variable interest
rate borrowings $ 51,489 -- -- $ 5,000 $ 3,000 -- $ 59,489 $ 59,489 $ 38,242 $ 38,242
Average inter-
est rate 3.30% -- -- 5.76% 5.76% -- 3.63% 5.02%
</TABLE>
40
<PAGE>
Table 12 provides additional information about the Corporation's financial
instruments used for purposes other than trading that are sensitive to
changes in interest rates. For loans, securities, deposits, and borrowings
with contractual maturities, the table presents principal cash flows and
related weighted average interest rates by contractual maturities. For
interest- and noninterest-bearing demand and savings deposits that have no
contractual maturity, the table presents estimated principal cash flows
based on the Corporation's historical experience and management's
judgement, as applicable, concerning customers' most likely withdrawal
behaviors, and weighted average interest rates as of December 31, 1998. The
fair market value of loans was estimated using discounted cash flow
analysis, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Weighted average
variable rates on loans were based on the implied forward rates in the
yield curve at December 31, 1998. The fair market value of time deposits
was estimated using discounted cash flow analysis, using interest rates
currently being paid on time deposits with similar terms.
Table 12 excludes loan commitments. A discussion of the Corporation's loan
commitments is included in this Annual Report in Note K to the financial
statements.
CAPITAL
Capital provides the foundation for future growth and expansion. The major
component of capital is shareholders' equity.
Shareholders' equity was $241.84 million as of December 31, 1998, an
increase of $17.91 million, or 8%, from total shareholders' equity as of
December 31, 1997. The increase in 1998 was derived almost exclusively from
earnings retention of $15.69 million.
The ratio of shareholders' equity to total assets was 12.9% at December 31,
1998, compared to 12.7% at December 31, 1997 and 12.2% at December 31,
1996. The Corporation's tangible equity ratio was 12.7%, 12.5% and 12.0% as
of December 31, 1998, 1997 and 1996, respectively.
Under the regulatory "risk-based" capital guidelines in effect for both
banks and bank holding companies, minimum capital levels are based upon
perceived risk in the Corporation's various asset categories. These
guidelines assign risk weights to on-and-off balance sheet items in
arriving at total risk-adjusted assets. Regulatory capital is divided by
the computed total of risk-adjusted assets to arrive at the risk-based
capital ratios.
The Corporation's capital ratios exceeded the minimum levels prescribed by
the Federal Reserve Board, as of December 31, 1998, as shown in the
following table.
<PAGE>
<TABLE>
<CAPTION>
RISK BASED
LEVERAGE CAPITAL RATIOS
RATIO TIER 1 TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chemical Financial
Corporation's capital ratios 13% 27% 29%
Regulatory capital ratios
"well capitalized" definition 5 6 10
Regulatory capital ratios
minimum requirements 3 4 8
</TABLE>
The Corporation's Tier 1 and Total regulatory capital ratios are
significantly above the regulatory minimum and "well capitalized" levels
due to the Corporation holding $460 million of investment securities and
other assets, which are assigned a 0% risk rating, $446 million of
investment securities and other assets, which are assigned a 20% risk
rating, and $453 million of loans secured by first liens on residential
real estate properties and other assets, which are assigned a 50% risk
rating. These three categories of assets represented 72% of the
Corporation's total assets as of December 31, 1998.
As of December 31, 1998, all of the Corporation's banking subsidiaries
exceeded the minimum capital ratios required of a "well-capitalized"
institution, as defined in the final rule under the Federal Deposit
Insurance Corporation Improvement Act of 1991.
OUTLOOK
The Corporation's philosophy is that it intends to be a "family" of
community banks, which operates under the direction of local Boards of
Directors, a holding company management team and a Corporate Board of
Directors.
The Corporation strives to remain a quality sales and service organization
and is dedicated to sustained profitability through the preservation of the
community banking concept, in an ever-changing and increasingly competitive
environment.
The Corporation believes it has designed its policies regarding
asset/liability management, liquidity, lending, investment strategy and
expense control to provide for the safety and soundness of the
organization, continued earnings growth and the avoidance of wide
fluctuations in earnings from one year to the next. The Corporation has
managed its operations successfully, and offsets its lower than peer net
<PAGE>
interest margin, which results from its conservative lending and investment
policies, with lower than peer loan losses and operating expenses. This
strategy resulted in an increase in earnings per share of 8.5% and a return
on assets of 1.44% during 1998.
There are currently no known trends, events or uncertainties that
management believes may be reasonably expected to have a material effect on
the Corporation's financial performance.
41
<PAGE>
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 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 information technology industry's best software
development practices for addressing the Year 2000 issue and the Kirchman
Corporation has the core capabilities needed to address the Year 2000
issue. 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
existing 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 1998. As of December 31, 1998,
it is the Corporation's opinion that it is complete with the assessment
phase of its Year 2000 Plan. Management believes that, as of December 31,
1998 (i) the conversion to the new core operating system software has been
completed, but that some additional testing is necessary; (ii) the core
operating system represents approximately 85% of the Corporation's mission
critical systems; (iii) all mission critical systems and software have been
<PAGE>
renovated; and (iv) the Corporation was substantially complete with the
testing of its internal mission critical systems and hardware, and was
significantly underway with the testing of its other mission critical
systems and other software programs. The Corporation's Year 2000 Plan has
set March 31, 1999 as the date for all testing to be complete for both
internal and external mission critical systems. Based on the testing
procedures performed through December 31, 1998, the Corporation was on
target to meet its March 31, 1999 completion date.
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 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.
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 operating 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 will
focus on the Year 2000 compliance of the systems of other third party
providers of service to the Trust Department and the progress of those
companies and entities in which the fiduciary customers of the Trust
Department are invested toward Year 2000 compliance. In accordance with the
Corporation's Year 2000 Plan, the Trust Department is developing
contingency plans to address Year 2000 issues which may arise after
December 31, 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 communication 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 communication from a majority of its 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
<PAGE>
expected compliance date by mid-1999. The testing of both mission critical
and non-critical third party software systems has begun. The Corporation is
on schedule to have all testing of third party software systems
42
<PAGE>
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 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 be monitored periodically,
based on the level of risk that the Year 2000 has been estimated to pose to
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 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. The Corporation's business
resumption plans will include the education of customers about the Year
2000 and explain what the Corporation has done and its plan to be ready for
the Year 2000, in order to minimize unwarranted public concerns, and will
include the consideration of the additional cash demands of its customers
posed by Year 2000 concerns. 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 the modifications to existing software,
the 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.
<PAGE>
The costs of the project and the date on which the Corporation projects it
will complete the Year 2000 modifications, as well as 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 other
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.
OTHER MATTERS
This discussion and analysis of financial condition and results of
operations, and other sections of this Annual Report, contain forward-
looking statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the financial
services industry, the economy, and about the Corporation itself. Words
such as "anticipates," "believes," "estimates," "judgement," "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. Furthermore, the Corporation undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events or otherwise.
Future Factors include, 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,
<PAGE>
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.
43
<PAGE>
DIRECTORS AND OFFICERS OF AFFILIATES
CHEMICAL BANK AND
TRUST COMPANY
DIRECTORS
LAWRENCE E. BURKS
Retired
Chemical Bank and Trust Co.
JAMES A. CURRIE
Investor
DALE T. DEAN
President
4-D Builders Supply, Inc.
MICHAEL L. DOW
Chairman
General Aviation, Inc.
DR. DAVID E. FRY
President
Northwood University
RICHARD A. HAZLETON
Chairman and
Chief Executive Officer
Dow Corning Corporation
JAMES R. JENKINS
Vice President, Secretary and
General Counsel
Dow Corning Corporation
TERENCE F. MOORE
President and
Chief Executive Officer
MidMichigan Health
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
ALAN W. OTT
Chairman
Chemical Financial Corporation
<PAGE>
FRANK P. POPOFF
Chairman
The Dow Chemical Company
DAVID B. RAMAKER
President and CEO
LAWRENCE A. REED
Retired
Dow Corning Corporation
GARY S. SMITH, M.D.
Midland Family Physicians, P.C.
WILLIAM S. STAVROPOULOS
President and
Chief Executive Officer
The Dow Chemical Company
DIRK D. WALTZ
Dirk Waltz Buick-Olds-Jeep, Inc.
LAWRENCE J.
WASHINGTON, JR.
Vice President
Human Resources
Chemicals and Plastics
The Dow Chemical Company
HONORARY DIRECTOR
DIRK B. WALTZ
Retired
Dirk Waltz Buick-Olds-Jeep, Inc.
ST. LOUIS OFFICE
ADVISORY BOARD
DANIEL L. DOEPKER
President
Mid-West Building
Distributors, Inc.
DOUGLAS F. McKIM
Chairman
Lodewyk, Nesen & McKim, Inc.
LARRY M. NOBLE
Senior Vice President
<PAGE>
DUANE OXENDALE
Retired
Michigan Livestock Exchange
DAVID B. RAMAKER
President and CEO
WILLIAM C. THIEMKEY, D.O.
Physician
BRADLY E. VIBBER
Senior Vice President and
Co-Manager
JAMES F. WAGAR
Vice Chairman
Playbuoy Pontoon
Manufacturing, Inc.
TINA A. WALLACE
Vice President and
Co-Manager
OFFICERS
ALAN W. OTT
Chairman
DAVID B. RAMAKER
President and CEO
THOMAS J. ALEXANDER
Executive Vice President and
Cashier
BRUCE M. GROOM
Senior Vice President
and Senior Trust Officer
CHARLES F. KINNEY
Senior Vice President
WILLIAM C. LAUDERBACH
Senior Vice President and
Investment Officer
W. ROGER MIKUSEK
Senior Vice President
<PAGE>
LARRY M. NOBLE
Senior Vice President
JUDE T. PATNAUDE
Senior Vice President and
Trust Officer
GLENN W. PIETENPOL
Senior Vice President and
Trust Officer
MARK D. RUHLE
Senior Vice President
BRADLY E. VIBBER
Senior Vice President
VICE PRESIDENTS
JOANN M. BURGESS
ROBERT W. BURNS
KIMBERLEE R. BUTCHER
ALAN C. CHRISTENSEN
TARI E. DETZLER
LAWRENCE LaGROW
JANET M. McGUIRE
ROGER D. NEMETH
DARLENE R. SLATER
TINA A. WALLACE
VICE PRESIDENTS AND
TRUST OFFICERS
KIRK W. FISHER
DANIEL P. McKUNE
GUY D. MERRIAM
PATRICIA ZIMMERMAN
ASSISTANT VICE PRESIDENT
AND CONTROLLER
JON D. CATLIN
<PAGE>
ASSISTANT VICE
PRESIDENTS
CARL R. AHEARN
RUTH BOMAN
ROBERT O. BURGESS, JR.
G. THOMAS CIMBALIK
MARY G. GREEN
STEPHEN M. HALLEAD
SHERRY A. MIZER
SELENA NOBLE
ROBERT S. RATHBUN
MONICA A. SANGER
VICTOR L. SCHULTZ
RONALD D. SCHWEIGERT
BARBARA E. SLAGEL
PEGGY L. TUCKER
ROBERT J. WALTERS
CAROL WIERMAN
SHERYL K. WILLIG
ASSISTANT VICE PRESIDENTS
AND TRUST OFFICERS
HERBERT E. HARDY
NORMA KENDALL
TRUST OFFICERS
SHELLY L. CAUFIELD
RUDOLPH R. RADOSA, JR.
MARK SOVEREEN
PICCOLA SWEEBE
ASSISTANT TRUST OFFICERS
JAN E. GORDON
DEBORA RITTENBURG
AUDITOR
AUDREY J. GRIFFIN
ASSISTANT CASHIERS
BETH E. BRICK
PAMELA J. CARRIER
REGINA CURTIS
SHERON DEIBERT
CHERYL K. MEYERS
PATRICIA A. NELLIS
<PAGE>
MARK J. STEINKE
TAMARA J. SWINSON
SANDRA TURK
KATHY M. WENZEL
KEITH A. WENZEL
BESSIE T. WILLIAMS
SHARON YODER
BUILDING AND MAINTENANCE
OFFICER
CHESTER CANTRELL
CHEMICAL FINANCIAL
INSURANCE AGENCY
VICE PRESIDENT
TRICIA LYN SUHR
CFC TITLE SERVICES INC.
VICE PRESIDENT
CHARLOTTE A. ELMORE
CFC DATA CORP
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President
and Cashier
Chemical Bank and Trust Co.
JAMES R. JENKINS
Vice President, Secretary and
General Counsel
Dow Corning Corporation
DOMINIC MONASTIERE
President and CEO
Chemical Bank Bay Area
TERENCE F. MOORE
President and
Chief Executive Officer
MidMichigan Health
<PAGE>
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
THOMAS H. PETERSEN
Executive Vice President and
General Manager
OFFICERS
ALOYSIUS J. OLIVER
President and Treasurer
THOMAS H. PETERSEN
Executive Vice President and
General Manager
W. BRIAN BEALL
Vice President and
Assistant General Manager
DAVID D. COBB
Vice President
Systems Technology
LORI A. GWIZDALA
Secretary
44
<PAGE>
CHEMICAL BANK BAY AREA
DIRECTORS
GARY E. ANDERSON
President
Dow Corning Corporation
JAMES E. DANEK
Executive Vice President
LORI A. GWIZDALA
Senior Vice President,
Chief Financial Officer and
Treasurer
Chemical Financial Corporation
THERON P. HOLLAND
Retired
DOMINIC MONASTIERE
President and CEO
DONALD L. PIETZ
President
PICO, Inc.
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
DAVID S. RAMSAY
Lee/Ramsay Funeral Home
ROBERT D. SAROW
Attorney at Law
Learman, Peters,
Sarow & McQuillan
GARY D. STEADMAN
President
Gary D. Steadman, Inc.
THOMAS H. TABOR
President
Herman Hiss & Co.
<PAGE>
DONALD L. WILTSE
Wiltse Chevrolet,
Oldsmobile, Buick, Inc.
HURON ADVISORY
BOARD
HOWARD M. BARRIGER
Teacher
Standish Sterling High School
President
Barriger Builders
RONALD E. CHRISTIE
Retired
JAMES E. DANEK
Executive Vice President
KARL N. EDMONDS
AuGres Parts & Service
GERALD H. HEINRICH
Retired
THERON P. HOLLAND
Retired
OTIS L. McKINLEY, D.D.S.
Dentist
DOMINIC MONASTIERE
President and CEO
DAVID S. RAMSAY
Lee/Ramsay Funeral Home
DONALD L. WILTSE
Wiltse Chevrolet,
Oldsmobile, Buick, Inc.
OFFICERS
DAVID B. RAMAKER
Chairman
DOMINIC MONASTIERE
President and CEO
<PAGE>
JAMES E. DANEK
Executive Vice President
RODNEY R. LOOMIS
Senior Vice President
VICE PRESIDENT AND
CASHIER
JANIE L. WILLIAMSON
VICE PRESIDENTS
CRAIG A. BISHOP
DUANA R. McCULLOCH
GALE L. MIELENS
MARY JO TOPORSKI
THOMAS R. WILCOX
ASSISTANT VICE PRESIDENTS
RONALD D. ERNDT
LYNN M. HANSEN
SANDRA A. METZGER
DEBORAH K. MORGAN
SUZANNE E. NEERING
AUDITOR
DEBBIE L. DEWALD
ASSISTANT CASHIERS
CHARLOTTE L. ANSPAUGH
HOLLY J. BICKHAM
MARIA FRANEK
JUDITH A. MARCINIAK
KATHLEEN C. MARQUARDT
BRENDA A. MICHO
JEAN M. SAXON
KAREN M. SCHAFFER
HARRIET L. STOPYAK
WILLIAM R. TILLEN
CHEMICAL BANK SOUTH
DIRECTORS
JUDITH A. BOROWITZ
President and CEO
<PAGE>
RONALD J. DeGRAW
Attorney
Schroeder, DeGraw, Kendall,
Mayhall, DeGraw & Dickerson
ROBERT W. FRAHM
President
Bob Frahm Chevrolet-Buick-
Pontiac Company
EUGENE D. HAMAKER
Retired/Consultant
Metalab
WILLIAM C. LAUDERBACH
Senior Vice President and
Investment Officer
Chemical Bank and Trust Co.
PETER T. MITCHELL
President
Albion College
ARLIN E. NESS
President
Starr Commonwealth Schools
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
JOYCE J. SPICER
Administrative Assistant
Albion Division
Harvard Industries, Inc.
WILLIAM K. STOFFER
Chairman and
Chief Executive Officer
Albion Machine and Tool Co.
JEOFFREY A. THORREZ
President
Concord Manufacturing Co.
<PAGE>
JACK H. TOWNSEND
Chairman and
Chief Executive Officer
Michigan Kitchen Distributors
OFFICERS
EUGENE D. HAMAKER
Chairman
JUDITH A. BOROWITZ
President and CEO
CAROL R. HAYDEN
Vice President and Cashier
TERI E. FOGEL
Vice President
MARVIN N. ITTNER
Vice President
REBECCA L. VETTEL
Vice President
ASSISTANT VICE PRESIDENT
DIANE M. RAMIREZ
AUDITOR
ELIZABETH A. WONUS
ASSISTANT CASHIERS
MELISSA J. HOATH
BARBARA A. KEITH
DAVID A. SMITH
CHEMICAL BANK MONTCALM
DIRECTORS
JOHN BOOKWALTER
Bookwalter Motor Sales, Inc.
DONALD BURNS
President
Montcalm Community College
<PAGE>
GARY COPP
Secretary/Manager
Carson City Lumber Co.
C. NORMAN CROOKS
Farmer
SUSAN D. DRAPER
Office Manager
Lakeview Dental
Associates, P.C.
THOMAS W. KOHN
President and CEO
LARRY M. NOBLE
Senior Vice President
Chemical Bank and Trust Co.
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
MELVIN SCHNEPP
Retired
Schnepp Funeral Homes, Inc.
OFFICERS
DAVID B. RAMAKER
Chairman
THOMAS W. KOHN
President and CEO
GLENN L. WOOD
Senior Vice President
LLOYD D. SCOBY
Senior Vice President
DARLA BARTLETT
Cashier
<PAGE>
VICE PRESIDENTS
DAVID BARKER
DIANE BEACH
BRUCE COLE
ROBERT HILL
JEAN SOUTHWARD
ASSISTANT VICE PRESIDENTS
KAY MEISTER
DONNA STRATTON
AUDITOR
KIMBERLY SIBURT
ASSISTANT CASHIERS
AMY S. ANDERSEN
CONNIE COLLAR
LINDA WOLVERTON
KAREN YAW
45
<PAGE>
CHEMICAL BANK CENTRAL
DIRECTORS
JACK R. BENEDICT
President
The Benedict Manufacturing Co.
JOHN CURRIE
Currie's Amoco
BRUCE M. GROOM
Senior Vice President and
Senior Trust Officer
Chemical Bank and Trust Co.
KARL W. LINEBAUGH
President and CEO
RONALD MOHNKE
President
Mohnke Funeral Home, Inc.
LINDA L.H. MYERS
Assistant Superintendent
Mecosta-Osceola
Intermediate School District
DAVID L. PORTEOUS
Attorney at Law
Porteous & White P.C.
WILLIAM R. PRUITT
Pruitt-Livingston Funeral Home
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
FRANKLIN C. WHEATLAKE
Chairman
Wheatlake Enterprises
JOSEPH M. WOLSCHLEGER,
M.D.
Internal Medicine
<PAGE>
OFFICERS
DAVID B. RAMAKER
Chairman
KARL W. LINEBAUGH
President and CEO
PHILIP R. KEATING
Executive Vice President
MARY WITHERS
Vice President and Cashier
ASSISTANT VICE PRESIDENTS
JAMES GARRETT
DAVID J. LANGWORTHY
JEAN A. MISENAR
MARJORIE A. RICHARDS
AUDITOR
ROBERT D. GAMMONS
ASSISTANT CASHIERS
KENDA DIESON
JANET ROWLAND
MARY K. SUCKOW
KRISTA TESSEINE
CHEMICAL BANK MICHIGAN
DIRECTORS
ROBERT H. BEACOM
Retired
Chemical Bank Michigan
JOHN M. BICKNELL
Retired Retailer
DAVID D. CLARKE
Crop Farmer
VINCENT L. DEMASI
Owner
Clare Hardware
RICHARD DEAN DOHERTY
A.J. Doherty Motor Inns, Inc.
<PAGE>
WAYNE FRUCHEY
Retired
Fruchey Foods, Inc.
JOSEPH F. JOHNSTON
Retired
Johnston Elevator
CHARLES F. KINNEY
Senior Vice President
Chemical Bank and Trust Co.
DENNIS J. LAFLEUR
President and CEO
MARK D. MANN
President
Mann Construction, Inc.
CLAY MAXWELL
Maxwell Seed Farms
RICHARD M. MOSER
Owner
Woods Household
Furniture & Appliances
BETTY M. MUSSELL
Community Volunteer
JOSEPH F. MYERS
Myers for Tires
WILLIAM C. ODYKIRK
Ody Enterprises
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
GUERDON E. SCHUMACHER
Retired
ALBERT F. WENTWORTH
Dairy Farmer
<PAGE>
OFFICERS
ALOYSIUS J. OLIVER
Chairman
DENNIS J. LAFLEUR
President and CEO
SENIOR VICE PRESIDENTS
JAMES A. ALLEN
RODERICK F. BEAMISH
RONNIE L. POWELL
JAMES P. RAFFENAUD
VICE PRESIDENT AND
CASHIER
STEVEN J. KINGSBURY
VICE PRESIDENTS
JANET GILLARD
TAMMY L. MILLER
COMPTROLLER
BRENDA J. HAVENS
ASSISTANT VICE
PRESIDENTS
CHARLES AMBLE
ROBIN R. GROVE
LINDA C. HALL
DAVID T. PRAWDZIK
SUSAN D. SPEARY
LORI STOUT
STANLEY L. WARNER
AUDITOR
HILDA E. FLETCHER
ASSISTANT CASHIERS
THEOLA CLEVELAND
STEPHANIE COOPER
ELAINE DUNKLE
JUDITH A. GROVE
CHRISTINE J. LAWSON
TINA M. LEHMANN
VERA MARSHALL
SUE E. WHITE
<PAGE>
CHEMICAL BANK NORTH
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President
and Cashier
Chemical Bank and Trust Co.
WILLIAM L. CAREY
Attorney at Law
JERRY M. DeWITT
Developer
ROSE E. DULEY GLEASON
Retired
Crawford County Library
RICHARD D. HACKER
Owner
Hacker's Yamaha & Honda
ROBERT JANSEN
Owner
Jansen Plumbing & Heating
PAUL B. LERG
Assistant Superintendent
Crawford AuSable Schools
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
G. JOE SWAIN
President and CEO
JERRY WALKER
Retired
Jack Millikin, Inc.
OFFICERS
DAVID B. RAMAKER
Chairman
G. JOE SWAIN
President and CEO
<PAGE>
MARK W. FURST
Vice President
RANDALL A. SEYMOUR
Vice President
J. ELAINE SWEENEY
Vice President and Cashier
ASSISTANT VICE PRESIDENTS
TAMARA L. KENT
SHARON NIEBRZYDOWSKI
SHELBY J. NORMAN
JANE A. RANDALL
ANDREA M. WEISS
AUDITOR
CAROL D. WHITE
ASSISTANT CASHIERS
JAY T. DUKE
SANDRA L. EGBERS
SHARON A. VARISCO
46
<PAGE>
CHEMICAL BANK WEST
DIRECTORS
THOMAS J. ALEXANDER
Executive Vice President
and Cashier
Chemical Bank and Trust Co.
RONALD L. BLACKMAN
President
Blackman Iron & Metal, Inc.
NANCY BOWMAN
Certified Public Accountant
HAROLD CNOSSEN
Prosperous Farms
WAYNE EVERETT
Everett Corporation
JOHN GERNAAT
Gernaat Family Farms
JAMES B. HINKAMP, II
Executive Vice President
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
JOHN A. REISNER
President and CEO
GERARD WINKLE
Van Drie Home Furnishings
OFFICERS
DAVID B. RAMAKER
Chairman
JOHN A. REISNER
President and CEO
JAMES B. HINKAMP, II
Executive Vice President
<PAGE>
KRISTINE E. BOWEN
Senior Vice President
BARBARA HANCOCK
Vice President and Cashier
ASSISTANT VICE
PRESIDENTS
ROXANNE PRINCE
SUSAN SCHWAGER
AUDITOR
NORMA DuVALL
ASSISTANT CASHIERS
DELLA BEDNARICK
DARYL HESSELINK
LORIE MORIARTY
JUDY MULDER
MARY JO SHIVLIE
CHEMICAL BANK KEY STATE
DIRECTORS
WADE V. ALDERMAN
President
Alderman's Inc.
GARY J. GREGORICKA
President
Viron International
MARGARET S. GULICK
President and CEO
Memorial Healthcare Center
JOHN F. HARRISON
President and CEO
WILLIAM P. HOWE
Retired Commercial Contractor
MICHAEL G. MAJZEL, JR.
Retired Crop Farmer
<PAGE>
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
HERBERT F. PENHORWOOD
Retired Industrialist
DAVID B. RAMAKER
President and CEO
Chemical Bank and Trust Co.
HOWARD S. SHAND
Retired Commercial
Mechanical Contractor
DAVID R. WAKELAND
President
Wakeland Oil Company
OFFICERS
ALOYSIUS J. OLIVER
Chairman of the Board
JOHN F. HARRISON
President and CEO
ROBERT L. HARDY
Senior Vice President
VICE PRESIDENTS
JOHN M. CREIGHTON
LORI L. EDINGTON
JOHN H. LARZELERE
VICE PRESIDENT AND
CASHIER
NITA L. JONES
VICE PRESIDENT AND
CONTROLLER
DONNA S. McAVOY
ASSISTANT VICE PRESIDENTS
P. JOSEPH DALY
MICHELLE M. HOLDEN
RANDY L. HORTON
DONALD D. LEVI
<PAGE>
AUDITOR
SANDRA A. DuBARNS
ASSISTANT CASHIERS
BARBARA M. BUCSI
JAMES D. JONES
SUSAN K. LYNDE
JANA L. MOORE
CAROL A. ROWELL
LINDA K. SOVIS
CHEMICAL BANK
THUMB AREA
DIRECTORS
RICHARD C. BIDDINGER
Owner
Riverside Sales and
Engineering Corp.
GARY J. CREWS
Attorney
Ransford and Crews
LORI A. GWIZDALA
Senior Vice President, Chief
Financial Officer and Treasurer
Chemical Financial Corporation
DOUGLAS H. HERRINGSHAW
President and CEO
CARL O. HOLMES
Chairman
MARVIN J. KOCIBA
Farm Owner and Operator
MICHAEL T. LAETHEM
President
Laethem Equipment Company
KENNETH G. McLAREN
Retired Insurance Agency
Owner
<PAGE>
ALOYSIUS J. OLIVER
President and CEO
Chemical Financial Corporation
GERALDINE F. PRIESKORN
Vice President
Prieskorn Variety Stores, Inc.
RICHARD B. RANSFORD
President
Ransford Funeral Home, Inc.
CASS CITY/HARBOR
BEACH/BAD AXE
ADVISORY BOARD
DUANE W. CHIPPI
President
Cass City Oil & Gas Company
RICHARD T. DONAHUE
Farm Owner
DOUGLAS H. HERRINGSHAW
President and CEO
MARVIN J. KOCIBA
Farm Owner and Operator
WILLIAM L. KRITZMAN
President and Treasurer
Kritzman's, Inc.
GERALDINE F. PRIESKORN
Vice President
Prieskorn Variety Stores, Inc.
PATRICIA J. ROGGENBUCK
Secretary
Helena Valley Farms
GLEN H. TOWNLEY
Owner
Harbor Beach Insurance
Agency
<PAGE>
K. MICHAEL WEAVER
Owner
Coachlight Pharmacy
ROBERT V. WISCHMEYER
Plant Manager
Agri Sales, Inc. (Cass City)
OFFICERS
CARL O. HOLMES
Chairman
DOUGLAS H. HERRINGSHAW
President and CEO
JAMES E. BOLTON
Senior Vice President
DENNIS P. GILKEY
Senior Vice President
ROBERT M. WOLAK
Senior Vice President
VICE PRESIDENTS
MICHAEL F. BOICE
FELICIA M. CARR
WILLIAM L. CHASE
BEVERLY J. PERRY
ASSISTANT VICE PRESIDENT
AND CASHIER
ORVIL A. BEECHER
ASSISTANT VICE PRESIDENTS
LYNN C. PAVLICHEK
LINDA K. SMITH
CHERYL D. WILDER
CAROLYN M. WYMORE
AUDITOR
ROSE M. STRUNZ
<PAGE>
ASSISTANT CASHIERS
BETTE M. BURTON
SUSAN M. MILLER
MARSHA K. MOORE
SHERRYL M. SEELEY
JANET D. THANE
KAREN L. WOOD
EXECUTIVE SECRETARY
MONALEE McCREA
47
<PAGE>
CORPORATE DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
(from left to right):
JAMES A. CURRIE
Investor
MICHAEL L. DOW
Chairman
General Aviation, Inc.
TERENCE F. MOORE
President and
Chief Executive Officer
MidMichigan Health
ALOYSIUS J. OLIVER
President and Chief Executive Officer
of the Corporation
ALAN W. OTT
Chairman
Retired, Former President and
Chief Executive Officer of the Corporation
FRANK P. POPOFF
Chairman
The Dow Chemical Company
LAWRENCE A. REED
Retired, Former President and
Chief Executive Officer
Dow Corning Corporation
WILLIAM S. STAVROPOULOS
President and Chief Executive Officer
The Dow Chemical Company
[PICTURE OF JAMES A. CURRIE]
[PICTURE OF MICHAEL L. DOW]
[PICTURE OF TERENCE F. MOORE]
[PICTURE OF ALOYSIUS J. OLIVER]
[PICTURE OF ALAN W. OTT]
[PICTURE OF FRANK P. POPOFF]
[PICTURE OF LAWRENCE A. REED]
[PICTURE OF WILLIAM S. STAVROPOULOS]
<PAGE>
[PICTURE OF EXECUTIVE MANAGEMENT (from left to right): LORI A. GWIZDALA,
ALOYSIUS J. OLIVER, and DAVID B. RAMAKER]
EXECUTIVE OFFICERS
ALAN W. OTT
Chairman
ALOYSIUS J. OLIVER
President and
Chief Executive Officer
DAVID B. RAMAKER
Executive Vice President
and Secretary
LORI A. GWIZDALA
Senior Vice President,
Chief Financial Officer
and Treasurer
OFFICERS
GLENN SWEENEY
Vice President and
Corporate Auditor
DAVID P. VERMILYE
Vice President
THEODORE J. GROENING
Assistant Vice President and
Assistant Financial Officer
JOSEPH W. TORRENCE
Assistant Vice President and
Corporate Human
Resources Officer
SANDRA BARGERON
Assistant Vice President and
Auditor
ROBERT E. SUTTON
Corporate Loan Review and
Compliance Officer
<PAGE>
JONATHAN P. BUSHEY
Loan Review Officer
CHERYL HASSEN SWARTHOUT
Training Officer
48
<PAGE>
CORPORATE INFORMATION
THE COMPANY
Chemical Financial Corporation is a registered bank holding company
headquartered in Midland, Michigan, that operates ten bank affiliates with
eighty-six banking offices in twenty-four counties located generally across
the midsection of Michigan's lower peninsula. Because the Corporation is a
bank holding company, its principal operations are conducted by its
subsidiaries. All of the Corporation's subsidiary banks are state banks and
offer the full range of services normally associated with commercial
banking. The Corporation's lead bank is Chemical Bank and Trust Company,
headquartered in Midland, Michigan. Trust services are provided by the lead
bank directly to customers of the Corporation's other nine subsidiary banks
through service agreements with each bank.
The Corporation owns a bank-related company, CFC Data Corp, which provides
data processing services primarily to the Corporation's subsidiary banks.
The Corporation operates an insurance agency and a title services company
through subsidiaries of its lead bank.
The Corporation serves as controlling shareholder and maintains systems of
financial, operational and administrative controls that permit centralized
evaluation of subsidiary operations. The Corporation also provides
substantive assistance to its subsidiaries in selected functional areas
including accounting, operations, marketing, investments, central
purchasing, financial planning, internal auditing, loan quality control,
training, compliance with regulatory requirements and personnel.
STOCK INFORMATION
Chemical Financial Corporation common stock is traded on The NASDAQ Stock
Market. It is quoted daily in leading financial publications under the
NASDAQ National Market Issues heading of the stock tables, NASDAQ symbol:
CHFC. As of December 31, 1998, there were five registered market makers of
Chemical Financial Corporation common stock: A.G. Edwards & Sons, Inc.,
Stifel Nicolaus & Co., Roney Capital Markets, Herzog, Heine, Geduld, Inc.
and Keefe, Bruyette & Woods, Inc. The approximate number of shareholders of
record at December 31, 1998 was 4,200. Analysts, investors, shareholders,
and others seeking financial or general information about the Corporation
are invited to contact Aloysius J. Oliver, President and Chief Executive
Officer, or Lori A. Gwizdala, Senior Vice President and Chief Financial
Officer. Telephone (517) 839-5350.
<PAGE>
SHAREHOLDER ASSISTANCE
Inquiries related to shareholder records, change of name, address or
ownership of stock, and lost or stolen certificates can be directed to
either of the following transfer agents and registrars:
Harris Trust and Savings Bank
Attention: Shareholder Services
311 West Monroe Street, 11th Floor
Chicago, Illinois 60606
Telephone: 1-800-942-5909
Chemical Bank and Trust Company
Attention: Co-Transfer Agent
333 East Main Street
Midland, Michigan 48640
Telephone: 1-517-839-5236
DIVIDEND REINVESTMENT
The Corporation offers a dividend reinvestment program through Harris Trust
and Savings Bank, whereby shareholders may reinvest their Chemical
Financial Corporation dividends in additional shares of the Corporation's
stock. Participating shareholders also may invest up to $3,000 in
additional funds each quarter for the purchase of additional shares.
Information concerning this optional program is available from either of
the transfer agents shown above or the Corporate Office of Chemical
Financial Corporation, P.O. Box 569, Midland, Michigan 48640. Telephone
(517) 839-5350.
DIVIDEND DIRECT DEPOSIT
Shareholders of the Corporation may have their dividends deposited into
their savings or checking account at any bank that is a member of the
National Automated Clearing House (ACH) system. Information describing this
service and an authorization form can be requested from either of the
transfer agents shown above or the Corporate Office of Chemical Financial
Corporation, P.O. Box 569, Midland, Michigan 48640. Telephone (517) 839-
5350.
ANNUAL MEETING
The annual meeting of the shareholders will be held at the Midland Center
for the Arts, 1801 W. St. Andrews Drive, Midland, Michigan, on Monday,
April 19, 1999, at 2:00 P.M.
<PAGE>
CORPORATE INFORMATION
Chemical Financial Corporation
333 East Main Street
P.O. Box 569
Midland, Michigan 48640
Telephone: (517) 839-5350
Fax Number: (517) 839-5255
Internet: www.chemicalbankmi.com
EQUAL OPPORTUNITY EMPLOYERS
Chemical Financial Corporation and its subsidiaries are equal opportunity
employers.
FORM 10-K
A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED WITHOUT CHARGE UPON
WRITTEN REQUEST TO LORI A. GWIZDALA, CHIEF FINANCIAL OFFICER OF THE
CORPORATION, AT P.O. BOX 569, MIDLAND, MICHIGAN 48640.
<PAGE>
CHEMICAL FINANCIAL CORPORATION
333 East Main Street
P.O. Box 569
Midland, Michigan 48640-0569
Telephone: (517) 839-5350
Fax: (517) 839-5255
WWW.CHEMICALBANKMI.COM
[2000 AND BEYOND LOGO]
EXHIBIT 21
<TABLE>
SUBSIDIARIES
<CAPTION>
STATE OR OTHER JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
- --------------------------------- ---------------------------
<S> <C>
Banking subsidiaries:
Chemical Bank and Trust Company Michigan
Chemical Bank Michigan Michigan
Chemical Bank South Michigan
Chemical Bank Thumb Area Michigan
Chemical Bank West Michigan
Chemical Bank Montcalm Michigan
Chemical Bank North Michigan
Chemical Bank Bay Area Michigan
Chemical Bank Central Michigan
Chemical Bank Key State Michigan
Non-banking subsidiaries:
CFC Data Corp Michigan
CFC Financial Services, Inc. (subsidiary of
Chemical Bank and Trust Company) - also operates
under d/b/a Chemical Financial Insurance Agency Michigan
CFC Title Services, Inc. (subsidiary of Chemical
Bank and Trust Company) Michigan
</TABLE>
<PAGE>
EXHIBIT 23
ERNST & YOUNG LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (1) the Registration
Statement (Form S-8, Number 33-15064, dated June 17, 1987, pertaining to
the Chemical Financial Corporation 1987 Award and Stock Option Plan, (2)
the Registration Statement (Form S-8, Number 33-40792, dated May 21, 1991)
pertaining to the Chemical Financial Corporation 401(k) Savings Plan and in
the related Prospectus, (3) the Registration Statement (Form S-8, Number
33-47356, dated April 28, 1992) pertaining to the Chemical Financial
Corporation 1992 Stock Purchase Plan for Subsidiary Directors (4) the
Registration Statement (Form S-8, Number 333-38511, dated October 22, 1997)
pertaining to the Chemical Financial Corporation 1997 Stock Incentive Plan
and (5) the Registration Statement (Form S-8, Number 333-70225), dated
January 6, 1999, pertaining to Chemical Financial Corporation 1998 Stock
Purchase Plan of our report dated January 19, 1999 with respect to the
consolidated financial statements of Chemical Financial Corporation
included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
We consent to the incorporation by reference of (1) the Registration
Statement (Form S-8, Number 33-40792, dated May 21, 1991) pertaining to the
Chemical Financial Corporation 401(k) Savings Plan and in the related
Prospectus of our report dated February 12, 1999, with respect to the
financial statements and schedules of the Chemical Financial Corporation
401(k) Savings Plan included in the Annual Report (Form 10-K) for the year
ended December 31, 1998 and (2) the Registration Statement (Form S-8,
Number 33-47356, dated April 28, 1992) pertaining to the Chemical Financial
Corporation 1992 Stock Purchase Plan for Subsidiary Directors and in the
related Prospectus of our report dated February 5, 1999, with respect to
the financial statements of the Chemical Financial Corporation 1992 Stock
Purchase Plan for Subsidiary Directors included in the Annual Report (Form
10-K) for the year ended December 31, 1998.
March 22, 1999 /s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CHEMICAL FINANCIAL
CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 98,483
<INT-BEARING-DEPOSITS> 5,000
<FED-FUNDS-SOLD> 113,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 488,976
<INVESTMENTS-CARRYING> 240,847
<INVESTMENTS-MARKET> 244,430
<LOANS> 898,293
<ALLOWANCE> 18,071
<TOTAL-ASSETS> 1,872,626
<DEPOSITS> 1,554,271
<SHORT-TERM> 53,250
<LIABILITIES-OTHER> 15,266
<LONG-TERM> 8,000
<COMMON> 13,496
0
0
<OTHER-SE> 228,343
<TOTAL-LIABILITIES-AND-EQUITY> 1,872,626
<INTEREST-LOAN> 74,039
<INTEREST-INVEST> 42,674
<INTEREST-OTHER> 4,920
<INTEREST-TOTAL> 121,633
<INTEREST-DEPOSIT> 47,050
<INTEREST-EXPENSE> 49,146
<INTEREST-INCOME-NET> 72,487
<LOAN-LOSSES> 964
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 48,307
<INCOME-PRETAX> 38,826
<INCOME-PRE-EXTRAORDINARY> 38,826
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,046
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.91
<YIELD-ACTUAL> 4.36
<LOANS-NON> 1,785
<LOANS-PAST> 1,316
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,359
<CHARGE-OFFS> 549
<RECOVERIES> 297
<ALLOWANCE-CLOSE> 18,071
<ALLOWANCE-DOMESTIC> 15,798
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,273
</TABLE>
<PAGE>
EXHIBIT 99.1
Financial Statements and Schedules
Chemical Financial Corporation
401(k) Savings Plan
Years ended December 31, 1998 and
December 31, 1997 with
Report of Independent Auditors
<PAGE>
ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100
500 Woodward Avenue
Detroit, Michigan 48226-3426
REPORT OF INDEPENDENT AUDITORS
Administrative Committee
Chemical Financial Corporation 401(k) Savings Plan
We have audited the accompanying statements of assets
available for plan benefits of the Chemical Financial Corporation
401(k) Savings Plan as of December 31, 1998 and 1997 and the
related statements of changes in assets available for plan
benefits for the years then ended. These financial statements
are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the assets available
for plan benefits of the Plan at December 31, 1998 and 1997, and
the changes in its assets available for plan benefits for the
years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion
on the financial statements taken as a whole. The accompanying
supplemental schedules of assets held for investment purposes and
reportable transactions as of and for the year ended December 31,
1998 are presented for purposes of complying with the Department
of Labor's Rules and Regulations for Reporting and Disclosure
under the Employee Retirement Income Security Act of 1974, and
are not a required part of the financial statements. The fund
information in the statements of assets available for plan
2
<PAGE>
benefits and the statements of changes in assets available for
plan benefits is presented for purposes of additional analysis
rather than to present the assets available for plan benefits and
changes in assets available for plan benefits of each fund. The
supplemental schedules and fund information have been subjected
to the auditing procedures applied in our audits of the financial
statements and, in our opinion, are fairly stated in all material
respects in relation to the financial statements taken as a
whole.
S/ ERNST & YOUNG LLP
February 12, 1999
3
<PAGE>
<TABLE>
STATEMENT OF ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
CHEMICAL FINANCIAL CORPORATION 401(k) SAVINGS PLAN
DECEMBER 31, 1998
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL
STOCK FINANCIAL CASH AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
------------- ------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments at fair value:
Chemical Financial Corporation
Common Stock $2,040,820 $2,040,820
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust $171,343 171,343
Max-Cap Fund $1,923,651 1,923,651
Treasury Obligations Fund 1,866 $239,862 241,728
Fidelity Investments-Puritan Fund $707,512 707,512
Participant loans $38,169 38,169
-------- ---------- -------- ---------- -------- ------- ----------
171,343 1,923,651 707,512 2,042,686 239,862 38,169 5,123,223
Employee contributions receivable 1,479 13,382 5,097 9,281 1,534 30,773
Cash and accrued income 618 35 964 486 2,103
-------- ---------- -------- ---------- -------- ------- ----------
4
<PAGE>
Assets Available for Plan
Benefits $173,440 $1,937,033 $712,609 $2,052,002 $242,360 $38,655 $5,156,099
======== ========== ======== ========== ======== ======= ==========
</TABLE>
See accompanying notes
5
<PAGE>
<TABLE>
STATEMENT OF ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
CHEMICAL FINANCIAL CORPORATION 401(k) SAVINGS PLAN
DECEMBER 31, 1997
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL
STOCK FINANCIAL CASH AND
INTERMEDIATE AND CORPORATION MONEY PARTICIPANT
BOND INDEX BOND STOCK MARKET LOAN
FUND FUND FUND FUND FUND FUND TOTAL
------------- ------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments at fair value:
Chemical Financial Corporation
Common Stock $1,906,118 $1,906,118
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust $136,904 136,904
Max-Cap Fund $1,253,475 1,253,475
Treasury Obligations Fund 62 56 $ 101 274 $218,049 $3,882 222,424
Fidelity Investments-Puritan Fund 547,145 547,145
Participant loans 39,646 39,646
-------- ---------- -------- ---------- -------- ------- ----------
136,966 1,253,531 547,246 1,906,392 218,049 43,528 4,105,712
Employee contributions receivable 1,190 11,089 6,877 9,570 1,417 30,143
Cash and accrued income 622 26 16 40 1,012 16 1,732
-------- ---------- -------- ---------- -------- ------- ----------
6
<PAGE>
Assets Available for Plan
Benefits $138,778 $1,264,646 $554,139 $1,916,002 $220,478 $43,544 $4,137,587
======== ========== ======== ========== ======== ======= ==========
</TABLE>
See accompanying notes
7
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
CHEMICAL FINANCIAL CORPORATION 401(k) SAVINGS PLAN
DECEMBER 31, 1998
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL CASH AND
STOCK FINANCIAL MONEY
INTERMEDIATE INDEX AND BOND CORPORATION MARKET PARTICIPANT
BOND FUND FUND FUND STOCK FUND FUND LOAN FUND TOTAL
------------- ------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Interest and dividend income $7,472 $38,287 $72,496 $44,156 $10,722 $4,576 $177,709
Employee contributions 29,760 318,881 134,072 232,139 29,822 744,674
-------- ---------- -------- ---------- -------- ------- ----------
37,232 357,168 206,568 276,295 40,544 4,576 922,383
Deductions:
Participants' accounts distributed
upon withdrawal (1,115) (24,405) (38,275) (41,646) (70,704) (1,356) (177,501)
Net transfers between funds (3,236) (27,593) (33,158) 20,054 52,042 (8,109) 0
Net realized and unrealized
appreciation (depreciation)
in fair value of investments 1,781 367,217 23,335 (118,703) 273,630
-------- ---------- -------- ---------- -------- ------- ----------
Net increase (decrease) 34,662 672,387 158,470 136,000 21,882 (4,889) 1,018,512
Assets available for plan
benefits at beginning of year 138,778 1,264,646 554,139 1,916,002 220,478 43,544 4,137,587
-------- ---------- -------- ---------- -------- ------- ----------
8
<PAGE>
Assets available for plan
benefits at end of year $173,440 $1,937,033 $712,609 $2,052,002 $242,360 $38,655 $5,156,099
======== ========== ======== ========== ======== ======= ==========
</TABLE>
See accompanying notes.
9
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
CHEMICAL FINANCIAL CORPORATION 401(k) SAVINGS PLAN
DECEMBER 31, 1997
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
CHEMICAL CASH AND
STOCK FINANCIAL MONEY
INTERMEDIATE INDEX AND BOND CORPORATION MARKET PARTICIPANT
BOND FUND FUND FUND STOCK FUND FUND LOAN FUND TOTAL
------------- ------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Interest and dividend income $6,836 $53,219 $41,209 $36,399 $10,985 $3,510 $152,158
Employee contributions 33,744 224,685 162,564 266,581 37,230 724,804
-------- ---------- -------- ---------- -------- ------- ----------
40,580 277,904 203,773 302,980 48,215 3,510 876,962
Deductions:
Participants' accounts distributed
upon withdrawal (7,809) (15,066) (17,148) (81,987) (12,196) (467) (134,673)
Net transfers between funds (19,600) 87,077 23,017 (47,077) (59,255) 15,838 0
Net realized and unrealized
appreciation (depreciation)
in fair value of investments 646 205,658 47,158 331,234 584,696
-------- ---------- -------- ---------- -------- ------- ----------
Net increase (decrease) 13,817 555,573 256,800 505,150 (23,236) 18,881 1,326,985
Assets available for plan
benefits at beginning of year 124,961 709,073 297,339 1,410,852 243,714 24,663 2,810,602
-------- ---------- -------- ---------- -------- ------- ----------
10
<PAGE>
Assets available for plan
benefits at end of year $138,778 $1,264,646 $554,139 $1,916,002 $220,478 $43,544 $4,137,587
======== ========== ======== ========== ======== ======= ==========
</TABLE>
See accompanying notes.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN
DECEMBER 31, 1998
NOTE A - - DESCRIPTION OF THE PLAN
The Chemical Financial Corporation 401(k) Savings Plan
(the Plan) is a voluntary, defined-contribution plan covering all
eligible employees of Chemical Financial Corporation (the
Corporation) and subsidiaries.
The Plan provides for the deferral of salaries, wages and
bonuses in accordance with Section 401(k) of the Internal Revenue
Code. Employees of the Corporation or any of its subsidiaries
are eligible for participation upon attaining age 21 and
completing one year of service. At December 31, 1998 there were
486 participants in the Plan. Participants are eligible to
contribute up to 15% of their annual compensation, up to a
maximum of $10,000 in 1998 and $9,500 in 1997. The employer made
no contributions to the Plan during 1998 or 1997.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets at the date of the financial statements and the
reported amounts of changes in assets during the year. Actual
results could differ from those estimates.
Participants may direct their contributions into an
intermediate bond fund, a stock index fund, a stock and bond
fund, a money market fund, a Chemical Financial Corporation
common stock fund or a combination of these funds, and may elect
to change the percentage directed to each fund daily. All
participant contributions are fully vested. Participant loans
are permitted under the Plan. These loans are subject to a
strict set of rules established by laws and regulations. As of
December 31, 1998 the Plan had ten participant loans outstanding
at interest rates ranging from 7.0%-11.45%.
Information about the plan agreement and the vesting and
benefit provisions is contained in the Summary Plan Description
contained in the Chemical Financial Corporation Employee Handbook
and is available along with information regarding investment
alternatives from the Plan Administrator and Personnel
Departments.
12
<PAGE>
The Corporation, acting through its Board of Directors,
has the right to amend or terminate the Plan at any time.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B - - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under the
accrual basis of accounting in accordance with generally accepted
accounting principles.
Investments are stated at aggregate fair value.
Securities traded on a national securities exchange are valued at
the last reported sales price on the last business day of the
Plan year. Investments traded in the over-the-counter market and
listed securities for which no sale was reported on that date are
valued at the last reported bid price.
Expenses incurred in connection with the operation of the
Plan are borne by the Corporation.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C - - INVESTMENTS
During the years ended December 31, 1998 and December 31,
1997 the Plan's net appreciation (depreciation) in the fair value
of investments (including investments bought, sold, as well as
held during the year) is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Intermediate Bond Fund $ 1,781 $ 646
Index Fund 367,217 205,658
Stock and Bond Fund 23,335 47,158
Chemical Financial Corporation Common Stock Fund (118,703) 331,234
-------- --------
$273,630 $584,696
======== ========
</TABLE>
The fair value of individual investments that represent 5% or
more of the Plan's net assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Federated Investors Mutual Funds:
Treasury Obligations Fund $ 241,728 $ 22,424
Max-Cap Fund 1,923,651 1,253,475
Fidelity Investments-Puritan Fund 707,512 547,145
Chemical Financial Corporation Common Stock 2,040,820 1,906,118
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D - - TRANSACTIONS WITH PARTIES-IN-INTEREST
THE FOLLOWING IS A SUMMARY OF TRANSACTIONS (AT COST) WITH
PARTIES-IN-INTEREST:
<TABLE>
<CAPTION>
CHEMICAL
FINANCIAL
CORPORATION
COMMON STOCK
------------
<S> <C> <C>
Balance at January 1, 1997 $994,177
Purchases in 1997 403,695
Sales in 1997 (113,741)
Distributions in 1997 (49,978)
----------
Balance at December 31, 1997 $1,234,153
Purchases in 1998 379,041
Sales in 1998 (62,840)
Distributions in 1998 (25,846)
----------
Balance at December 31, 1998 $1,524,508
==========
</TABLE>
NOTE E - - INCOME TAX STATUS
The Plan has received a determination letter from the
Internal Revenue Service dated August 23, 1994, stating that the
Plan is qualified under section 401(a) of the Internal Revenue
Code (the "Code") and, therefore, the related trust is exempt from
taxation. Once qualified, the Plan is required to operate in
conformity with the Code to maintain its qualification. The Plan
15
<PAGE>
Administrator believes the plan is being operated in compliance
with the applicable requirements of the Code and, therefore,
believes that the Plan is qualified and the related trust is tax
exempt.
NOTE F - - PLAN MERGER
In May 1996, the Corporation acquired State Savings Bancorp,
Inc. During 1997, the participants of the Retirement Plan for
the State Savings Bank of Caro were given the option to rollover
their account balances into the Plan and, accordingly,
approximately $145,000 of such rollover contributions are
included as employee contributions in the accompanying financial
statements for the year ended December 31, 1997.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G - - YEAR 2000 READINESS DISCLOSURE (UNAUDITED)
The Corporation has modified its internal information
technology to be ready for the year 2000 and it is the
Corporation's opinion that the conversion of its critical data
processing systems and the testing of those systems was complete
as of December 31, 1998. The Corporation does not expect the
Year 2000 project to have a significant effect on plan
operations.
16
<PAGE>
EMPLOYEE ID# 38-2022454
PLAN # 002
<TABLE>
ITEM 27A -- SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
CHEMICAL FINANCIAL CORPORATION 401(K) SAVINGS PLAN
DECEMBER 31, 1998
<CAPTION>
DESCRIPTION OF INVESTMENT INCLUDING COST PROCEEDS
IDENTITY OF ISSUE, BORROWER, LESSOR OR MATURITY DATE, RATE OF INTEREST, OF OF
SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST FAIR VALUE ACQUISITIONS DISPOSITIONS
- -------------------------------------- ----------------------------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
<F*>Chemical Financial Corporation Common Stock - 60,920 shares
Common Stock $1,524,508 $2,040,820
Federated Investors Mutual Funds:
Short-Intermediate
Government Trust Intermediate Bond Fund- 16,272 shares 169,824 171,343
Max-Cap Fund Index Fund - 75,734 units 1,265,310 1,923,651
Treasury Obligations Fund Money Market Fund - 241,728 shares 241,728 241,728
Fidelity Investments-Puritan Fund Stock and Bond Fund - 35,252 shares 627,869 707,512
---------- ----------
Total Mutual Funds 2,304,731 3,044,234
---------- ----------
Participant Loans Ten loans at interest rates ranging
from 7.0%-11.45% and maturing
1/31/00-2/28/03 38,169 38,169 $ $
---------- ---------- ========= =========
TOTAL INVESTMENTS $3,867,408 $5,123,223
========== ==========
<FN>
<F*>Indicates party-in-interest to the Plan
There were no investment assets reportable as acquired and disposed of during the year.
</FN>
</TABLE>
17
<PAGE>
EMPLOYEE ID# 38-2022454
PLAN # 002
<TABLE>
ITEM 27D -- SCHEDULE OF REPORTABLE TRANSACTIONS
CHEMICAL FINANCIAL CORPORATION
401(K) SAVINGS PLAN
YEAR ENDED DECEMBER 31, 1998
<CAPTION>
DESCRIPTION OF ASSET EXPENSE VALUE ON
(INTEREST RATE AND MATURITY PURCHASE SELLING LEASE INCURRED WITH COST TRANSACTION NET GAIN
IDENTITY OF PARTY INVOLVED IN CASE OF A LOAN) PRICE PRICE RENTAL TRANSACTION OF ASSET DATE (LOSS)
- -------------------------- ------------------------------ -------- ------- ------ ------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Category iii) A series of
transactions involving
securities of the same issue
which, when aggregated,
involve an amount in excess of
5% of the current value of
plan assets:
Chemical Financial Corporation Common Stock:
71 purchases $379,041 $379,041
50 sales 88,686 87,128 ($1,558)
Federated Investors Index Fund:
60 purchases 450,235 450,235
21 sales 103,260 147,275 $44,015
Money Market Fund:
184 purchases 712,920 712,920
116 sales 693,616 693,616 - - -
18
<PAGE>
Fidelity Investments Stock and Bond Fund:
55 purchases 225,731 225,731
12 sales 81,430 88,699 $7,269
</TABLE>
There were no category i), ii) or iv) reportable transactions.
19
<PAGE>
EXHIBIT 99.2
Audited Financial Statements
Chemical Financial Corporation
1992 Stock Purchase Plan
for Subsidiary Directors
December 31, 1998
<PAGE>
ERNST & YOUNG LLP - Suite 1700 - Phone: 313 596 7100
500 Woodward Avenue
Detroit, Michigan 48226-3426
REPORT OF INDEPENDENT AUDITORS
Plan Administrator
Chemical Financial Corporation
1992 Stock Purchase Plan for
Subsidiary Directors
We have audited the accompanying statements of financial condition of
the Chemical Financial Corporation 1992 Stock Purchase Plan for Subsidiary
Directors as of December 31, 1998 and 1997 and the related statements of
income and changes in plan equity for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility
of the Plan's administrator. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by the Plan Administrator, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Chemical
Financial Corporation 1992 Stock Purchase Plan for Subsidiary Directors at
December 31, 1998 and 1997, and the results of its operations and changes
in its plan equity for each of the three years in the period December 31,
1998 in conformity with generally accepted accounting principles.
S/ ERNST & YOUNG LLP
February 5, 1999
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
<TABLE>
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash $ 963 $ 1,139
Common stock receivable of Chemical
Financial Corporation, at market value - (9,076
shares at a cost of $300,078 at December 31, 1998
and 9,197 shares at a cost of $263,868 at
December 31, 1997) 304,046 329,270
-------- --------
Total assets $305,009 $330,409
======== ========
LIABILITIES AND PLAN EQUITY
Plan equity (51 participants at December 31,
1998 and 46 participants at December 31, 1997) $305,009 $330,409
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
<TABLE>
STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
ADDITIONS
Participant contributions $294,650 $258,775 $263,650
Dividend equivalents 3,669 3,501 2,965
Other income 704 1,055 848
-------- -------- --------
299,023 263,331 267,463
DEDUCTIONS
Plan distributions 329,354 291,431 294,346
-------- -------- --------
(30,331) (28,100) (26,883)
Net realized appreciation
in fair value of investments 4,931 65,402 25,745
-------- -------- --------
Net increase (decrease) (25,400) 37,302 (1,138)
Plan equity at beginning of year 330,409 293,107 294,245
-------- -------- --------
Plan equity at end of year $305,009 $330,409 $293,107
======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Chemical Financial Corporation 1992 Stock Purchase Plan for
Subsidiary Directors (the Plan) was implemented by Chemical Financial
Corporation (the Corporation) on April 30, 1992. The Plan is designed
to provide non-employee directors and advisory directors of the
Corporation's subsidiaries, who are neither directors or employees of
the Corporation, with a convenient method of acquiring Corporation
stock.
NOTE 1 - DESCRIPTION OF THE PLAN
Subsidiary directors and advisory directors, who elect to
participate in the Plan, may elect to contribute to the Plan fifty
percent or one hundred percent of their director board fees and/or
fifty percent or one hundred percent of their director committee fees,
earned as directors or advisory directors of the Corporation's
subsidiaries. Participant contributions to the Plan are made by the
Corporation's subsidiaries on behalf of each electing participant.
Amounts remitted to the Plan are credited to a separate cash account
for each participant. As of the last day of each month, each
participant's cash account is debited for the purchase of whole shares
of the Corporation's stock and credited to a separate participant
stock account. The stock purchased under the Plan during the calendar
year is issued by the Corporation directly to the participants in the
following calendar year, in the month of January. The Plan provides
for dividend equivalents to be credited to each participant's cash
account, as of the dividend record date of the Corporation's common
stock. Dividend equivalents are calculated by multiplying the
Corporation's dividend rate by the number of shares of common stock in
each participant's stock account, as of the Corporation's dividend
record date. The Plan also provides for an appropriate credit to each
participant's stock account for stock dividends, stock splits or other
distributions of the Corporation's common stock by the Corporation.
Fractional shares calculated as a result of the above adjustments are
converted to cash based on the market price of the Corporation's
common stock, and are credited to each participant's cash account.
Plan participants may terminate their participation in the Plan, at
any time, by written notice of withdrawal to the Corporation.
Participants will cease to be eligible to participate in the Plan when
4
<PAGE>
they cease to serve as directors or advisory directors of subsidiaries
of the Corporation. Upon withdrawal from the Plan, each participant
will receive the shares of common stock of the Corporation in their
participant stock account and the cash in their participant cash
account.
NOTE 1 - DESCRIPTION OF THE PLAN (CONTINUED)
As of December 31, 1998, the Plan had 6,186 remaining shares of
the Corporation that it was authorized to issue. The 1998 Stock
Purchase Plan for Subsidiary Directors ("new plan") was approved by
the Board of Directors of the Corporation on December 14, 1998, with
the same terms and provisions of the Plan. A common stock receivable
for 2,890 shares of the Corporation, with a market value of $96,815,
cost basis of $95,245, and cash of $963 were transferred to the new
plan on January 1, 1999.
The Corporation reserves the right to terminate or amend the Plan
at any time, provided, however, that no termination or amendment shall
affect or diminish any participant's right to the benefit of
contributions made by him/her prior to the date of such amendment or
termination.
The Plan provides that all expenses of the Plan and its
administration shall be paid by the Corporation.
The Plan is not qualified under Sections 401(a) or 501(a) of the
Internal Revenue Code of 1986, as amended. The Plan does not provide
for income taxes because any income is taxable to the participants.
Participants in the Plan must treat as taxable income the
contributions made to the Plan by the Corporation's subsidiaries on
their behalf. Dividend equivalents and any other cash credited to the
participants' cash accounts are taxable to the participants for
Federal and state income tax purposes in the year such dividend
equivalent or cash is credited to the participant cash account. Upon
disposition of the common stock of Chemical Financial Corporation
purchased under the Plan, participants must treat any gain or loss as
long-term or short-term capital gain or loss depending upon when such
disposition occurs.
5
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
VALUATION OF COMMON STOCK RECEIVABLE
Common stock receivable of Chemical Financial Corporation is
recorded at the fair market value of the number of shares receivable
at the end of the period. Market value is based on the closing bid
price of the Corporation's stock at year end ($33.50 per share at
December 31, 1998 and $35.80 per share at December 31, 1997). The
number of shares receivable and closing bid prices were adjusted for
the 5 for 4 stock split paid on Chemical Financial Corporation common
stock on December 16, 1998.
INCOME
Dividend equivalents and fractional share interests are accrued
on the Corporation's dividend or other record date.
CONTRIBUTIONS
Contributions are accounted for on the accrual basis.
6
<PAGE>
CHEMICAL FINANCIAL CORPORATION
1992 STOCK PURCHASE PLAN
FOR SUBSIDIARY DIRECTORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - CONTRIBUTIONS
Contributions for participants by the participating companies
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
PARTICIPATING COMPANY 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Chemical Bank and Trust Co. $ 55,000 $ 70,700 $ 73,025
Chemical Bank Bay Area 34,800 33,100 37,525
Chemical Bank Central 37,150 26,400 22,050
Chemical Bank Thumb Area 34,100 26,650 21,200
Chemical Bank Michigan 32,700 29,750 31,750
Chemical Bank Montcalm 16,200 15,000 19,500
Chemical Bank North 13,575 3,150 4,650
Chemical Bank South 23,425 19,125 19,425
Chemical Bank West 11,700 8,900 8,625
Chemical Bank Key State 33,000 20,000 20,400
CFC Data Corp 3,000 6,000 5,500
-------- -------- --------
Total Contributions $294,650 $258,775 $263,650
======== ======== ========
</TABLE>
7
