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1999 |
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[PICTURES OF COWS, FAMILY, SCENIC, TRACTORS, CLASSROOM & VEHICLE]
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CHEMICAL FINANCIAL CORPORATION |
1999 HIGHLIGHTS |
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1999 marked the 25th consecutive year of both increased operating earnings and cash dividends |
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1999 net income was $27.709 million, up 6.4% over 1998 net income of $26.046 million. |
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1999 earnings per share were $1.94, up 6.6% over 1998 earnings per share of $1.82. |
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Return on average assets was 1.47% in 1999, compared to 1.44% in 1998. |
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1999 cash dividends per share were $.80, up 9.4% over 1998 cash dividends per share of $.73. |
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The Corporation declared a 5% stock dividend in December 1999 and paid it on January 21, |
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The Corporation's financial position remained strong at |
[PICTURE OF BOARD OF DIRECTORS] |
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Total assets increased $17.8 million during 1999 to 1.89 billion as of December 31, 1999. |
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Total loans increased $110.7 million and total |
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Shareholders' equity increased $7.7 million during 1999 to $249.6 million as of December 31, 1999 and represented 13.2% of total assets. |
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The allowance for loan losses was $18.2 million, or 1.80% of total loans, compared to total nonperforming loans of $3.4 million, or .33% of total loans, as of December 31, 1999. |
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BOARD OF DIRECTORS |
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(from left to right) MICHAEL L. DOW, TERENCE F. MOORE, ALAN W. OTT, WILLIAM S. STAVROPOULOS, ALOYSIUS J. OLIVER, LAWRENCE A. REED, FRANK P. POPOFF and JAMES A. CURRIE |
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REFERENCE GUIDE |
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Financial Highlights |
1 |
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Message to Shareholders |
2 |
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Consumer Loans |
5 |
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Real Estate Loans |
7 |
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Farm Loans |
9 |
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Commercial Loans |
11 |
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Community Involvement |
13 |
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Quarterly Financial Information |
14 |
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Consolidated Financial Statements |
15 |
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Notes to Consolidated Financial Statements |
19 |
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Report of Ernst & Young LLP, Independent Auditors |
31 |
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Management's Discussion and Analysis |
32 |
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Directors and Officers of Affiliates |
48 |
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Corporate Directors and Officers |
52 |
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Corporate Information |
Inside Back Cover |
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FINANCIAL HIGHLIGHTS
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Years Ended December 31 |
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1999 |
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1998 |
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1997 |
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1996 |
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1995 |
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Operating Results (In thousands) |
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Net interest income |
$74,846 |
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$72,487 |
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$69,040 |
|
$67,090 |
|
$63,687 |
|
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Provision for loan losses |
483 |
|
964 |
|
1,002 |
|
1,128 |
|
1,065 |
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Noninterest income |
16,003 |
|
15,610 |
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13,122 |
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12,198 |
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12,359 |
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Operating expenses |
48,986 |
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48,307 |
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45,718 |
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45,124 |
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44,629 |
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Net income |
27,709 |
|
26,046 |
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23,889 |
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22,003 |
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20,489 |
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Per Share Data* |
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Net income |
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Basic |
$1.96 |
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$1.84 |
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$1.69 |
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$1.56 |
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$1.46 |
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Diluted |
1.94 |
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1.82 |
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1.67 |
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1.54 |
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1.44 |
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Cash dividends declared and paid |
.80 |
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.73 |
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.64 |
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.55 |
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.47 |
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Book value end-of-period |
17.71 |
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17.07 |
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15.87 |
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14.73 |
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14.73 |
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Market value end-of-period |
29.52 |
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31.90 |
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34.10 |
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28.66 |
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26.61 |
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At Year End (In thousands) |
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Total assets |
$1,890,376 |
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$1,872,626 |
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$1,765,100 |
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$1,698,774 |
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$1,706,085 |
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Deposits |
1,561,702 |
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1,561,702 |
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1,475,841 |
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1,429,915 |
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1,449,801 |
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Long-term debt |
200 |
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8,000 |
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9,000 |
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10,000 |
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12,080 |
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Shareholders' equity |
249,581 |
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241,839 |
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223,925 |
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207,269 |
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194,902 |
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Financial Ratios |
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Return on average total assets |
1.47 |
% |
1.44 |
% |
1.38 |
% |
1.30 |
% |
1.24 |
% |
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Return on average shareholders' equity |
11.3 |
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11.3 |
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11.1 |
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10.9 |
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11.0 |
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Net interest margin |
4.32 |
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4.36 |
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4.35 |
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4.33 |
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4.20 |
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Average shareholders' equity to |
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Cash dividends paid per share to |
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Allowance for loan losses to total loans |
1.80 |
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2.01 |
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2.05 |
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2.06 |
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2.09 |
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Tangible equity to assets |
12.9 |
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12.7 |
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12.5 |
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12.0 |
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11.2 |
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*Adjusted for the 5% stock dividend paid January 21, 2000. |
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Real Estate Residential Loans |
43.4% |
|
95 |
13.89 |
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95 |
.47 |
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Real Estate Construction Loans |
3.4% |
|
96 |
14.73 |
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96 |
.55 |
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Real Estate Commercial Loans |
12.0% |
|
97 |
15.87 |
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97 |
.64 |
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Home Equity Loans |
6.0% |
|
98 |
17.07 |
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98 |
.73 |
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Consumer Loans |
19.6% |
|
99 |
17.71 |
|
99 |
.80 |
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Commercial and Agricultural Loans |
15.6% |
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Loan Composition |
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Book Value Per Share |
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Cash Dividends |
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1
MESSAGE TO SHAREHOLDERS
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To Our Shareholders: |
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2000. The Board also indicated its intent to establish a quarterly cash
dividend for the year 2000 of $.22 per common share. Coupled with the
stock dividend, this increase would raise cash payments to shareholders
by 10 percent in 2000. |
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95 |
1.44 |
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95 |
20,489 |
|
95 |
1,706 |
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|
96 |
1.54 |
|
96 |
22,003 |
|
96 |
1,699 |
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|
97 |
1.67 |
|
97 |
23,889 |
|
97 |
1,765 |
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|
98 |
1.82 |
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98 |
26,046 |
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98 |
1,873 |
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|
99 |
1.94 |
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99 |
27,709 |
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99 |
1,890 |
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Net Income Per Share (Diluted) |
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Net Income |
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Total Assets (December
31) |
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2
MESSAGE TO SHAREHOLDERS |
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When our affiliate banks opened for business on January 3, 2000, it was apparent that the coming of Year 2000 was a non-event throughout the Corporation. By January 6th, we were in a position to advise our Y2K Task Force
directors and affiliate bank Y2K officers that "January 1, 2000, came and went without incident for Chemical Financial Corporation and its subsidiaries." In recent years, we spent approximately $2 million and devoted countless hours of director, officer
and staff time to preparations for the Year 2000. In the process, we acquired a new mainframe computer, installed new software systems, replaced most desk-top computers and even installed a large diesel-powered generator at CFC Data Corp. It is safe to
say that we not only dealt with the Y2K challenge but also significantly improved our data processing capabilities at every level of the Corporation. We do not anticipate any additional issues associated with the turn of the new century. |
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One provision of the new law that could have great significance for community banking organizations is the expanded authority granted to Federal Home Loan Banks to provide liquidity and funding to community banks, as their loan portfolios expand faster than their deposit growth.
[PICTURE OF ALAN W. OTT AND ALOYSIUS J. OLIVER OUTSIDE OF CHEMICAL FINANCIAL CORPORATION]
Now, we embark upon the new century with confident optimism. We are financially strong. We have an excellent record of improving performance. We have a splendid staff all over our 24 county market area. We shall strive to do as well for our
shareholders in the years ahead as we have done for them in the past. /s/ Aloysius J. Oliver |
3
[PICTURE OF JUNE AND JIM SWANSON STANDING NEXT TO A CAR]
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4
CONSUMER LOANS |
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Consumer loans provide financing that enhances the life style of a great majority of Americans. These loans allow them to finance automobiles, home improvements, boats and recreational vehicles, pay their children's tuition and make many
of their hopes and ambitions become realities. |
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[PICTURE OF CAR KEYS] |
5
[PICTURE OF ANDREW, SHANNON, MELANY AND KEITH TAMLYN STANDING
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6
REAL ESTATE LOANS |
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Helping families achieve the American Dream of home ownership has always been an important part of what we do at Chemical Financial Corporation. That is why our ten Chemical Banks are among the leading mortgage lenders in all of the
mid-Michigan markets where we do business. They make over two thousand residential mortgage loans each year and hold almost half a billion dollars in these loans on their books. In addition, they service thousands of other loans that they made but
subsequently sold in the secondary market.
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[PICTURE OF A TAPE MEASURE AND A PENCIL] |
7
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[PICTURE OF BEN BOOMS AND BOB WOLAK STANDING NEXT TO A TRACTOR
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8
FARM LOANS |
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Chemical Financial Corporation's farm loan business is vital to the economic health of many communities where Chemical |
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We have been successful in building and maintaining a portfolio of loans to farmers for two reasons. First, they know that we have funding available to lend to farmers on an ongoing basis. We remain committed to support our agricultural
customers to assist them in increasing their productivity and in enhancing their overall farming operations. Second, we employ lending officers who specialize in agricultural loans and understand the business of farming. |
9
[PICTURE OF JIM ALLEN, WANDA LEWIS, AND VERA MARSHALL]
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10
COMMERCIAL LOANS |
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There is a good reason why banks like the Chemical Banks are often called "commercial banks." Lending to business and industry has always been a vital part of the activity at our banks. |
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We also understand that our own prospects for future growth and profitability are linked inextricably with the prosperity of the communities we serve. In a real sense, we must do everything possible to ensure that they do well so that we
can do well with them. Our commercial loan marketing program is a key ingredient for our success. |
11
[PICTURE OF DEBBY SHORT, JIM DOYLE AND FIFTH GRADERS FROM
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12
COMMUNITY INVOLVEMENT |
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Being a good corporate citizen has always been a high priority at Chemical Financial Corporation. Our civic activities are as varied as the communities we serve. We try to do what needs to be done where it needs to be done. Because we have
ten bank affiliates, we rely upon each of them to identify situations where help is needed in the local community and then develop its own programs that are responsive to those needs. |
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[PICTURE OF MIKE KNOWLES AND CHUCK KINNEY] |
13
QUARTERLY FINANCIAL INFORMATION
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STOCK PRICE RANGES AND CASH DIVIDENDS PER SHARE* |
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1999 |
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1998 |
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High |
Low |
Cash Dividend |
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High |
Low |
Cash Dividend |
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First quarter |
$33.21 |
$28.33 |
$.20 |
|
$34.67 |
$29.62 |
$.183 |
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Second quarter |
33.15 |
27.26 |
.20 |
|
33.81 |
30.67 |
.183 |
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Third quarter |
32.62 |
29.05 |
.20 |
|
32.33 |
24.86 |
.183 |
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Fourth quarter |
31.43 |
27.86 |
.20 |
|
32.62 |
26.86 |
.183 |
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Total |
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$.80 |
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|
$.732 |
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*Adjusted for the 5% stock dividend paid January 21, 2000. |
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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, 1999, there were 14,094,885 shares (adjusted for the 5% stock dividend paid January 21, 2000) of Chemical Financial Corporation common stock issued and outstanding, held by approximately 6,200 shareholders. This number includes an estimate for individual participants in the security positions of certain shareholders of record. |
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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 2000. |
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SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
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(In thousands, except per share data) |
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1999 |
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1998 |
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First |
Second |
Third |
Fourth |
|
First |
Second |
Third |
Fourth |
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Interest income |
$30,097 |
$30,437 |
$30,606 |
$30,777 |
|
$29,824 |
$30,460 |
$30,776 |
$30,573 |
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Interest expense |
11,772 |
11,671 |
11,721 |
11,907 |
|
12,348 |
12,447 |
12,491 |
11,860 |
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Net interest income |
18,325 |
18,766 |
18,885 |
18,870 |
|
17,476 |
18,013 |
18,285 |
18,713 |
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Provision for loan losses |
175 |
- |
143 |
165 |
|
219 |
260 |
234 |
251 |
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Investment securities |
|
|
|
|
|
|
|
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Income before income |
|
|
|
|
|
|
|
|
|
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Net income |
6,471 |
6,694 |
6,931 |
7,613 |
|
5,779 |
6,179 |
6,529 |
7,559 |
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Net income per share* |
|
|
|
|
|
|
|
|
|
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Basic |
.46 |
.47 |
.49 |
.54 |
|
.41 |
.44 |
.46 |
.53 |
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Diluted |
.45 |
.47 |
.49 |
.53 |
|
.40 |
.44 |
.46 |
.52 |
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*Adjusted for the 5% stock dividend paid January 21, 2000. |
14
CONSOLIDATED FINANCIAL STATEMENTS
|
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CONSOLIDATED STATEMENT OF INCOME |
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|
Years Ended December 31 |
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|
1999 |
|
1998 |
|
1997 |
|
(In thousands, except per share data) |
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INTEREST INCOME |
|||||
Interest and fees on loans |
$76,825 |
|
$74,039 |
|
$69,873 |
Interest on investment securities: |
|||||
Taxable |
39,764 |
|
40,602 |
|
40,554 |
Tax-exempt |
1,862 |
|
2,072 |
|
2,160 |
Total interest on securities |
41,626 |
|
42,674 |
|
42,714 |
Interest on federal funds sold |
3,382 |
|
4,809 |
|
4,699 |
Interest on deposits with unaffiliated banks |
84 |
|
111 |
|
33 |
TOTAL INTEREST INCOME |
121,917 |
|
121,633 |
|
117,319 |
INTEREST EXPENSE |
|||||
Interest on deposits |
44,912 |
|
47,050 |
|
46,320 |
Interest on short-term borrowings |
1,731 |
|
1,503 |
|
1,363 |
Interest on long-term debt |
428 |
|
593 |
|
596 |
TOTAL INTEREST EXPENSE |
47,071 |
|
49,146 |
|
48,279 |
NET INTEREST INCOME |
74,846 |
|
72,487 |
|
69,040 |
Provision for loan losses |
483 |
|
964 |
|
1,002 |
NET INTEREST INCOME after provision for loan losses |
74,363 |
|
71,523 |
|
68,038 |
NONINTEREST INCOME |
|||||
Trust services revenue |
3,878 |
|
3,554 |
|
3,210 |
Service charges on deposit accounts |
5,885 |
|
5,487 |
|
5,314 |
Other charges and fees for customer services |
4,764 |
|
4,515 |
|
3,813 |
Gains on sales of loans |
738 |
|
1,536 |
|
239 |
Other |
738 |
|
518 |
|
546 |
TOTAL NONINTEREST INCOME |
16,003 |
|
15,610 |
|
13,122 |
OPERATING EXPENSES |
|||||
Salaries, wages and employee benefits |
29,730 |
|
28,895 |
|
27,280 |
Occupancy |
4,437 |
|
4,372 |
|
4,362 |
Equipment |
3,411 |
|
2,988 |
|
3,091 |
Other |
11,408 |
|
12,052 |
|
10,985 |
TOTAL OPERATING EXPENSES |
48,986 |
|
48,307 |
|
45,718 |
INCOME BEFORE INCOME TAXES |
41,380 |
|
38,826 |
|
35,442 |
Federal income taxes |
13,671 |
|
12,780 |
|
11,553 |
NET INCOME |
$27,709 |
|
$26,046 |
|
$23,889 |
NET INCOME PER SHARE |
|||||
Basic |
$1.96 |
|
$1.84 |
|
$1.69 |
Diluted |
1.94 |
|
1.82 |
|
1.67 |
|
|||||
CASH DIVIDENDS PER SHARE |
.80 |
|
.73 |
|
.64 |
|
|||||
See notes to consolidated financial statements. |
15
CONSOLIDATED FINANCIAL STATEMENTS |
|||
|
|||
CONSOLIDATED STATEMENT OF FINANCIAL POSITION |
|||
|
December 31 |
||
|
1999 |
|
1998 |
|
(Dollars in thousands) |
||
ASSETS |
|
|
|
Cash and demand deposits due from banks |
$ 98,827 |
|
$ 98,483 |
Federal funds sold |
73,960 |
|
113,150 |
Interest-bearing deposits with unaffiliated banks |
11 |
|
5,000 |
Investment securities: |
|
|
|
Available for sale (at estimated market value) |
428,040 |
|
488,976 |
Held to maturity (estimated market value - $241,775 in 1999 and |
|
|
|
$244,430 in 1998) |
243,413 |
|
240,847 |
Total investment securities |
671,453 |
|
729,823 |
|
|
|
|
Loans |
1,009,017 |
|
898,293 |
Less: Allowance for loan losses |
18,190 |
|
18,071 |
Net loans |
990,827 |
|
880,222 |
|
|
|
|
Premises and equipment |
21,570 |
|
20,215 |
Accrued income |
14,935 |
|
14,195 |
Other assets |
18,793 |
|
11,538 |
TOTAL ASSETS |
$1,890,376 |
|
$1,872,626 |
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
Deposits: |
|
|
|
Noninterest-bearing |
$ 258,061 |
|
$272,388 |
Interest-bearing |
1,303,641 |
|
1,281,883 |
Total deposits |
1,561,702 |
|
1,554,271 |
Short-term borrowings: |
|
|
|
Treasury tax and loan notes payable to the U.S. Treasury |
11,832 |
|
5,137 |
Securities sold under agreements to repurchase |
50,061 |
|
48,113 |
Total short-term borrowings |
61,893 |
|
53,250 |
|
|
|
|
Interest payable and other liabilities |
17,000 |
|
15,266 |
Long-term debt |
200 |
|
8,000 |
Total liabilities |
1,640,795 |
|
1,630,787 |
Shareholders' equity: |
|
|
|
Common stock, $1 par value |
|
|
|
Authorized - 18,000,000 shares |
|
|
|
Issued and outstanding - 13,423,700 shares in 1999 |
|
|
|
and 13,496,230 shares in 1998 |
13,424 |
|
13,496 |
Surplus |
180,864 |
|
184,384 |
Retained earnings |
57,286 |
|
40,892 |
Accumulated other comprehensive income (loss) |
(1,993 |
) |
3,067 |
Total shareholders' equity |
249,581 |
|
241,839 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$1,890,376 |
|
$1,872,626 |
|
|||
See notes to consolidated financial statements. |
16
CONSOLIDATED FINANCIAL STATEMENTS |
||||||
|
||||||
CONSOLIDATED STATEMENT OF CASH FLOWS |
||||||
|
Years Ended December 31 |
|||||
|
1999 |
|
1998 |
|
1997 |
|
|
(In thousands) |
|||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
$27,709 |
|
$26,046 |
|
$23,889 |
|
Adjustments to reconcile net income |
|
|
|
|
|
|
to net cash provided by operating activities: |
|
|
|
|
|
|
Provision for loan losses |
483 |
|
964 |
|
1,002 |
|
Gains on sales of loans |
(738 |
) |
(1,536 |
) |
(239 |
) |
Provision for depreciation and amortization |
3,363 |
|
2,946 |
|
2,741 |
|
Gains on sale of branch office building/land |
(236 |
) |
- |
|
(256 |
) |
Net amortization of investment securities |
2,152 |
|
405 |
|
1,789 |
|
Net (increase) decrease in accrued income and other assets |
(2,793 |
) |
475 |
|
490 |
|
Net increase (decrease) in interest payable and other liabilities |
1,678 |
|
967 |
|
(113 |
) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
31,618 |
|
30,267 |
|
29,303 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
Cash and cash equivalents assumed in acquisition of branch offices |
24,366 |
|
9,588 |
|
- |
|
Net (increase) decrease in interest-bearing deposits with |
|
|
|
|
|
|
unaffiliated banks |
4,989 |
|
(5,000 |
) |
1,134 |
|
Proceeds from maturities of investment securities available for sale |
306,441 |
|
255,153 |
|
119,934 |
|
Proceeds from sales of investment securities available for sale |
456 |
|
- |
|
- |
|
Purchases of investment securities available for sale |
(255,112 |
) |
(247,675 |
) |
(171,209 |
) |
Proceeds from maturities of investment securities held to maturity |
100,646 |
|
101,991 |
|
122,742 |
|
Purchases of investment securities held to maturity |
(103,998 |
) |
(91,946 |
) |
(160,468 |
) |
Proceeds from sales of loans |
46,675 |
|
118,566 |
|
39,060 |
|
Net loan originations, excluding sales |
(157,903 |
) |
(170,567 |
) |
(77,631 |
) |
Proceeds from sale of branch office building/land |
276 |
|
- |
|
900 |
|
Purchases of premises and equipment |
(3,434 |
) |
(1,790 |
) |
(2,902 |
) |
NET CASH USED IN INVESTING ACTIVITIES |
(36,598 |
) |
(31,680 |
) |
(128,440 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
Net increase (decrease) in demand deposits, |
|
|
|
|
|
|
NOW accounts and savings accounts |
(20,911 |
) |
67,408 |
|
59,944 |
|
Net increase (decrease) in certificates of |
|
|
|
|
|
|
deposit and other time deposits |
1,130 |
|
(197 |
) |
(14,018 |
) |
Net increase in short-term borrowings |
8,643 |
|
11,054 |
|
4,863 |
|
Proceeds from long-term borrowing |
200 |
|
- |
|
- |
|
Principal payments on long-term debt |
(8,000 |
) |
(1,000 |
) |
(1,000 |
) |
Cash dividends paid |
(11,315 |
) |
(10,359 |
) |
(9,003 |
) |
Proceeds from stock purchase plan |
278 |
|
295 |
|
259 |
|
Proceeds from exercise of stock options |
264 |
|
338 |
|
386 |
|
Repurchases of common stock |
(4,155 |
) |
(37 |
) |
(467 |
) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(33,866 |
) |
67,502 |
|
40,964 |
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(38,846 |
) |
66,089 |
|
(58,173 |
) |
Cash and cash equivalents at beginning of year |
211,633 |
|
145,544 |
|
203,717 |
|
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$172,787 |
|
$211,633 |
|
$145,544 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
Interest paid on deposits, short-term borrowings and long-term debt |
$47,152 |
|
$49,229 |
|
$48,390 |
|
Federal income taxes paid |
14,570 |
|
14,180 |
|
11,545 |
|
|
||||||
See notes to consolidated financial statements. |
17
CONSOLIDATED FINANCIAL STATEMENTS
|
||||||||||
|
||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY |
||||||||||
|
Years Ended December 31, 1999, 1998 and 1997 |
|||||||||
|
||||||||||
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
(Dollars in thousands) |
|||||||||
BALANCES AT JANUARY 1, 1997 |
$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 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
Stock split - 5 for 4 |
2,699 |
|
- |
|
(2,699 |
) |
- |
|
- |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income for 1998 |
- |
|
- |
|
26,046 |
|
- |
|
- |
|
Net change in unrealized gains (losses)
on |
|
|
|
|
|
|
|
|
|
|
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 |
|
Comprehensive income: |
- |
|
- |
|
- |
|
- |
|
- |
|
Net income for 1999 |
- |
|
- |
|
27,709 |
|
- |
|
- |
|
Net change in unrealized gains (losses)
on |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
- |
|
- |
|
- |
|
- |
|
22,649 |
|
Cash dividends paid |
- |
|
- |
|
(11,315 |
) |
- |
|
(11,315 |
) |
Shares issued upon exercise of employee |
|
|
|
|
|
|
|
|
|
|
stock options (including related tax benefit) |
50 |
|
214 |
|
- |
|
- |
|
264 |
|
Shares issued from stock purchase plan |
9 |
|
290 |
|
- |
|
- |
|
299 |
|
Repurchase of 130,950 shares |
(131 |
) |
(4,024 |
) |
- |
|
- |
|
(4,155 |
) |
BALANCES AT DECEMBER 31, 1999 |
$13,424 |
|
$180,864 |
|
$57,286 |
|
$(1,993 |
) |
$249,581 |
|
|
||||||||||
See notes to consolidated financial statements. |
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||
|
|
|
NOTE A - SUMMARY OF SIGNIFICANT |
|
|
The accounting and reporting policies of Chemical Financial Corporation (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 the Corporation and its subsidiaries are described below: |
|
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. |
|
|
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|||||||
|
|
|
|||||
NOTE A - CONTINUED |
|
|
|||||
The Corporation accounts for mortgage servicing rights in accordance with Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). 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 mortgage loans sold. The Corporation amortizes the mortgage servicing right asset in proportion to, and over the life of, the estimated net future servicing income and performs a
periodic evaluation of the fair market value of the mortgage servicing right asset. Any impairment of the mortgage servicing right asset is recognized as a valuation allowance. |
|
Income Taxes: |
|||||
|
1999 |
1998 |
|
|
1999 |
1998 |
1997 |
|
(In thousands) |
|
Denominator for |
|
|
|
|
Bank premises |
$30,351 |
$29,239 |
|
basic earnings per share |
14,148,924 |
14,160,467 |
14,097,912 |
Equipment |
10,997 |
12,278 |
|
|
|
|
|
41,348 |
41,517 |
|
Denominator for |
|
|
|
|
Less: Accumulated depreciation |
19,778 |
21,302 |
|
diluted earnings per share |
14,261,124 |
14,318,154 |
14,265,279 |
Total |
$21,570 |
$20,215 |
|
|
|
|
|
|
|
|
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|||||
|
|
|
|||
|
|
NOTE B - ACQUISITIONS |
|||
generally 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 bank subsidiaries. |
|
During the three years ended December 31, 1999, the Corporation made the following acquisitions: |
|||
|
1999 |
1998 |
1997 |
|
|
|
|
|
|
|
|
Interest income and fee revenue |
|
|
|
|
|
Commercial and agricultural |
$11,804 |
$11,689 |
$10,747 |
|
|
Real estate construction |
2,685 |
2,757 |
2,165 |
|
|
Real estate commercial |
9,339 |
8,312 |
8,332 |
|
|
Real estate residential |
34,742 |
35,520 |
35,120 |
|
|
Consumer |
18,255 |
15,761 |
13,509 |
|
|
Total |
$76,825 |
$74,039 |
$69,873 |
|
|
|
|
|
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||||||
|
||||||||||
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, 1999 and 1998 (in thousands): |
||||||||||
|
|
|
Gross |
|
Gross |
|
Estimated |
|||
U.S Treasury |
|
|
|
|
||||||
Mortgage-backed securities |
1,192 |
10 |
14 |
1,188 |
||||||
Other debt securities |
27,230 |
|
1 |
|
188 |
|
27,043 |
|||
Total debt securities |
426,724 |
155 |
3,996 |
422,883 |
||||||
Equity securities |
4,382 |
|
775 |
|
- |
|
5,157 |
|||
Total |
$431,106 |
|
$930 |
|
$3,996 |
|
$428,040 |
|||
December 31, 1998 |
||||||||||
U.S Treasury |
|
|
|
|
||||||
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 |
|||
|
||||||||||
|
|
|
Gross |
|
Gross |
|
Estimated |
|||
U.S. Treasury |
|
|
|
|
||||||
States of the U.S. and |
|
|
|
|
||||||
Mortgage-backed securities |
190 |
1 |
2 |
189 |
||||||
Other debt securities |
5,003 |
|
- |
|
32 |
|
4,971 |
|||
Total |
$243,413 |
|
$506 |
|
$2,144 |
|
$241,775 |
|||
December 31, 1998 |
||||||||||
U.S. Treasury |
|
|
|
|
||||||
States of the U.S. and |
|
|
|
|
||||||
Mortgage-backed securities |
312 |
4 |
1 |
315 |
||||||
Other debt securities |
7,985 |
|
36 |
|
- |
|
8,021 |
|||
Total |
$240,847 |
|
$3,642 |
|
$59 |
|
$244,430 |
|||
The amortized cost of U.S. Treasury and agency, states of the U.S. and political subdivisions and all other securities at December 31, 1997 were $674,801,000, $46,707,000 and $21,529,000, respectively, whereas the estimated market values
of these three categories of investments at December 31, 1997 were $678,201,000, $47,438,000 and $21,993,0000, respectively. |
||||||||||
|
|
|
Estimated |
|||||||
(In thousands) |
||||||||||
Due in one year or less |
$197,827 |
$197,456 |
||||||||
Due after one year through five years |
227,705 |
224,239 |
||||||||
Mortgage-backed securities |
1,192 |
1,188 |
||||||||
Equity securities |
4,382 |
|
5,157 |
|||||||
Total |
$431,106 |
|
$428,040 |
|||||||
Investment Securities Held to Maturity: |
||||||||||
|
|
|
Estimated |
|||||||
(In thousands) |
||||||||||
Due in one or less |
$128,351 |
$128,208 |
||||||||
Due after one year through five years |
104,699 |
103,317 |
||||||||
Due after five years through ten years |
8,593 |
8,538 |
||||||||
Due after ten years |
1,580 |
1,523 |
||||||||
Mortgage-backed securities |
190 |
|
189 |
|||||||
Total |
$243,413 |
|
$241,775 |
|||||||
|
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||||||||||||
|
||||||||||||||||
NOTE D - LOANS |
||||||||||||||||
The following summarizes loans as of December 31: |
||||||||||||||||
|
1999 |
|
1998 |
|||||||||||||
(In thousands) |
||||||||||||||||
Commercial and agricultural |
$157,721 |
$137,020 |
||||||||||||||
Real estate construction |
34,510 |
33,615 |
||||||||||||||
Real estate commercial |
120,990 |
95,130 |
||||||||||||||
Real estate residential |
457,018 |
429,297 |
||||||||||||||
Consumer |
238,778 |
|
203,231 |
|||||||||||||
Total loans |
$1,009,017 |
|
$898,293 |
|||||||||||||
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 $16,608,000 at December 31, 1999 and $18,495,000 at December 31, 1998. During 1999, there were $23,659,000 of new loans and other additions, while repayments and other reductions totaled $25,546,000. Changes in the allowance for loan losses were as follows for the years ended December 31: |
||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||||
(In thousands) |
||||||||||||||||
Balance at beginning of year |
$18,071 |
$17,359 |
$16,607 |
|||||||||||||
Provision for loan losses |
483 |
964 |
1,002 |
|||||||||||||
Loan charge-offs |
(609 |
) |
(549 |
) |
(620 |
) |
||||||||||
Loan recoveries |
245 |
|
297 |
|
370 |
|
||||||||||
Net loan charge-offs |
(364 |
) |
(252 |
) |
(250 |
) |
||||||||||
Balance at end of year |
$18,190 |
|
$18,071 |
|
$17,359 |
|
||||||||||
Nonaccrual and renegotiated loans aggregated $2.8 million and $1.8 million at December 31, 1999 and December 31, 1998, respectively. Interest income totaling $164,000 was recorded on the nonaccrual and renegotiated loans in 1999. Additional interest income of $102,000 would have been recorded during 1999 on these loans had they been current in accordance with their original terms. Impaired loans totaled $445,000 as of December 31, 1999 and $328,000 as of December 31, 1997. The Corporation had no impaired loans as of December 31, 1998. An impairment allowance was not required on any of the impaired loans. The impaired loan balances represented loans for which their fair value exceeded the recorded investment in the loan, based on the 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: |
||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||||
(In thousands) |
||||||||||||||||
Tax at statutory rate |
$14,483 |
$13,589 |
$12,405 |
|||||||||||||
Changes resulting from: |
||||||||||||||||
Tax-exempt income |
(936 |
) |
(878 |
) |
(887 |
) |
||||||||||
Other |
124 |
|
69 |
|
35 |
|
||||||||||
Total federal income tax expense |
$13,671 |
|
$12,780 |
|
$11,553 |
|
||||||||||
The provision for federal income taxes consisted of the following for the years ended December 31: |
||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||||
(In thousands) |
||||||||||||||||
Current |
$14,232 |
$14,537 |
$11,503 |
|||||||||||||
Deferred (benefit) |
(561 |
) |
(1,757 |
) |
50 |
|
||||||||||
Total |
$13,671 |
|
$12,780 |
|
$11,553 |
|
||||||||||
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: |
||||||||||||||||
|
1999 |
|
1998 |
|||||||||||||
(In thousands) |
||||||||||||||||
Deferred tax assets: |
||||||||||||||||
Allowance for loan losses |
$5,764 |
$5,437 |
||||||||||||||
Employee benefit plans |
1,872 |
1,601 |
||||||||||||||
Expense accruals not yet tax deductible |
1,449 |
1,459 |
||||||||||||||
Investment securities available for sale |
1,073 |
|||||||||||||||
Other |
607 |
|
549 |
|||||||||||||
Total deferred tax assets |
10,765 |
9,046 |
||||||||||||||
Deferred tax liabilities: |
||||||||||||||||
Investment securities available for sale |
1,651 |
|||||||||||||||
Tax over book depreciation |
527 |
621 |
||||||||||||||
Other |
751 |
|
603 |
|||||||||||||
Total deferred tax liabilities |
1,278 |
|
2,875 |
|||||||||||||
Net deferred tax assets |
$9,487 |
|
$6,171 |
|||||||||||||
Federal income tax expense applicable to gains on securities transactions was $5,000 in 1999 and $3,000 in 1998 and is included in federal income taxes on the consolidated statement of income. |
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||||||||||
|
||||||||||||||
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 for 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. |
||||||||||||||
|
1999 |
|
1998 |
|
||||||||||
(In thousands) |
||||||||||||||
Change in benefit obligation: |
||||||||||||||
Benefit obligation at beginning of year |
$33,901 |
$30,022 |
||||||||||||
Service cost |
1,719 |
1,563 |
||||||||||||
Interest cost |
2,246 |
2,073 |
||||||||||||
Net actuarial (gain) loss |
(4,174 |
) |
1,269 |
|||||||||||
Benefits paid |
(1,074 |
) |
(1,026 |
) |
||||||||||
Benefit obligation at end of year |
$32,618 |
|
$33,901 |
|
||||||||||
Change in plan assets: |
||||||||||||||
Fair value of plan assets at beginning of year |
$49,219 |
$44,043 |
||||||||||||
Actual return on plan assets |
433 |
6,202 |
||||||||||||
Contributions by the Corporation |
- |
- |
||||||||||||
Benefits paid |
(1,074 |
) |
(1,026 |
) |
||||||||||
Fair value of plan assets at end of year |
$48,578 |
|
$49,219 |
|
||||||||||
Overfunded status of the plan |
$15,960 |
$15,318 |
||||||||||||
Unrecognized net actuarial gain |
(13,390 |
) |
(12,111 |
) |
||||||||||
Unrecognized net transition asset |
(274 |
) |
(451 |
) |
||||||||||
Unrecognized prior service cost |
(98 |
) |
(126 |
) |
||||||||||
Prepaid benefit cost |
$2,198 |
|
$2,630 |
|
||||||||||
Net periodic pension cost of the Plan consisted of the following for the years ended December 31: |
||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||
(In thousands) |
||||||||||||||
Service cost |
$1,719 |
$1,563 |
$1,339 |
|||||||||||
Interest cost |
2,246 |
2,073 |
1,897 |
|||||||||||
Expected return on plan assets |
(3,292 |
) |
(2,921 |
) |
(2,532 |
) |
||||||||
Amortization of transition amount |
(177 |
) |
(177 |
) |
(177 |
) |
||||||||
Amortization of prior service cost |
(28 |
) |
(28 |
) |
(28 |
) |
||||||||
Amortization of unrecognized net gain |
(36 |
) |
- |
|
- |
|
||||||||
Pension expense |
$ 432 |
|
$ 510 |
|
$ 499 |
|
||||||||
Weighted-average assumptions as of December 31: |
||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||
Discount rate used in determining |
|
|
|
|||||||||||
Expected return on assets |
8% |
8% |
8% |
|||||||||||
Rate of compensation increase |
5% |
5% |
5% |
|||||||||||
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. |
||||||||||||||
|
1999 |
|
1998 |
|
||||||||||
(In thousands) |
||||||||||||||
Change in benefit obligation: |
||||||||||||||
Benefit obligation at beginning of year |
$4,472 |
$4,274 |
||||||||||||
Service cost |
208 |
192 |
||||||||||||
Interest cost |
305 |
287 |
||||||||||||
Net actuarial gain |
(211 |
) |
(306 |
) |
||||||||||
Amendments |
(172 |
) |
- |
|||||||||||
Benefits paid, net of retiree contributions |
(96 |
) |
25 |
|
||||||||||
Benefit obligation at end of year |
$4,506 |
|
$4,472 |
|
||||||||||
Unfunded status of the plan |
$4,506 |
$4,472 |
||||||||||||
Unrecognized net actuarial gain (loss) |
137 |
(75 |
) |
|||||||||||
Unrecognized prior service cost |
162 |
|
8 |
|
||||||||||
Accrued postretirement benefit cost |
$4,805 |
|
$4,405 |
|
||||||||||
Net periodic postretirement benefit cost consisted of the following for the years ended December 31: |
||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
||||||||
(In thousands) |
||||||||||||||
Service cost |
$208 |
$192 |
$148 |
|||||||||||
Interest cost |
305 |
287 |
267 |
|||||||||||
Amortization of prior service cost |
(17 |
) |
(4 |
) |
(4 |
) |
||||||||
Net periodic postretirement benefit cost |
$496 |
|
$475 |
|
$411 |
|
||||||||
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% and 6.75% at December 31, 1999 and December 31, 1998, respectively. |
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|||||
For measurement purposes, the annual rates of increase in the per capita cost of covered health care benefits and dental benefits for 2000 were assumed at 7.05% and 6.01%, respectively. These rates were assumed to decrease gradually to
5.50% in 2003 and remain at that level thereafter. |
|||||
|
1-Percentage- |
1-Percentage- |
|||
(In thousands) |
|||||
Effect on total of service |
|
|
|||
Effect on postretirement |
|
|
|||
|
|||||
NOTE G - LONG-TERM DEBT |
|||||
Long-term debt consisted of the following obligations: |
|||||
December 31 |
|||||
|
1999 |
|
1998 |
||
(In thousands) |
|||||
Federal Home Loan Bank (FHLB) of Indianapolis |
|
||||
Term note payable to unaffiliated bank |
|
|
$8,000 |
||
Total |
$200 |
|
$8,000 |
||
The Corporation prepaid the $8,000,000 term note payable in December 1999 with no prepayment penalty. |
|||||
|
|||||
NOTE H - RESTRICTED |
|||||
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 $21.1 million for the year ended December 31, 1999. During 1999, 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. |
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||||||||||
|
|
|||||||||||||
NOTE I - CAPITAL |
|
|||||||||||||
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Under
these capital requirements, the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. In addition, capital amounts and classifications are subject
to qualitative judgments by the regulators. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. |
At December 31, 1999 and 1998, the Corporation's and each of its bank
subsidiaries' capital ratios exceeded the quantitative capital ratios
required for an institution to be considered "well-capitalized." |
|||||||||||||
Risk-Based Capital |
||||||||||||||
Leverage |
Tier l |
Total |
||||||||||||
|
Amount
|
|
Ratio
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
||
(Dollars in millions) |
||||||||||||||
Corporation's capital |
$246 |
13 |
% |
$246 |
27 |
% |
$258 |
28 |
% |
|||||
Required capital - minimum |
57 |
3 |
37 |
4 |
73 |
8 |
||||||||
Required capital - "well capitalized" definition |
95 |
5 |
55 |
6 |
92 |
10 |
||||||||
Chemical Bank and Trust Company's capital |
77 |
12 |
77 |
29 |
80 |
31 |
||||||||
Required capital - minimum |
18 |
3 |
10 |
4 |
21 |
8 |
||||||||
Required capital - "well capitalized" definition |
31 |
5 |
16 |
6 |
26 |
10 |
||||||||
Chemical Bank Michigan's capital |
26 |
11 |
26 |
23 |
28 |
24 |
||||||||
Required capital - minimum |
7 |
3 |
5 |
4 |
9 |
8 |
||||||||
Required capital - "well capitalized" definition |
12 |
5 |
7 |
6 |
12 |
10 |
||||||||
Chemical Bank Bay Area's capital |
23 |
9 |
23 |
20 |
24 |
21 |
||||||||
Required capital - minimum |
7 |
3 |
5 |
4 |
9 |
8 |
||||||||
Required capital - "well capitalized" definition |
12 |
5 |
8 |
6 |
11 |
10 |
||||||||
|
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|||||||||||||||||||||||
|
|||||||||||||||||||||||
NOTE J - STOCK OPTIONS |
|||||||||||||||||||||||
The Corporation's stock option plan provides for grants of options, incentive
stock options, stock appreciation rights, or a combination thereof. At
December 31, 1999, there were a total of 526,197 shares available for
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 as specified in
the option agreement governing the option 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. |
|||||||||||||||||||||||
|
|
|
Weighted |
||||||||||||||||||||
Outstanding - January 1, 1997 |
503,622 |
$16.74 |
|||||||||||||||||||||
Activity during 1997: |
|||||||||||||||||||||||
Granted |
9,302 |
29.66 |
|||||||||||||||||||||
Exercised |
(61,682 |
) |
10.57 |
||||||||||||||||||||
Cancelled |
(3,341 |
) |
25.05 |
||||||||||||||||||||
Outstanding - December 31, 1997 |
447,901 |
17.79 |
|||||||||||||||||||||
Activity during 1998: |
|||||||||||||||||||||||
Granted |
131,250 |
31.67 |
|||||||||||||||||||||
Exercised |
(60,866 |
) |
11.61 |
||||||||||||||||||||
Cancelled |
(1,825 |
)
|
24.94 |
||||||||||||||||||||
Outstanding - December 31, 1998 |
516,460 |
22.02 |
|||||||||||||||||||||
Activity during 1999: |
|||||||||||||||||||||||
Granted |
25,725 |
30.30 |
|||||||||||||||||||||
Exercised |
(70,178 |
) |
11.79 |
||||||||||||||||||||
Cancelled |
(6,035 |
)
|
28.14 |
||||||||||||||||||||
Outstanding - December 31, 1999 |
465,972 |
|
$23.93 |
||||||||||||||||||||
The following table summarizes information about stock options outstanding
at December 31, 1999: |
|||||||||||||||||||||||
Options Outstanding |
|
|
|
Options Exercisable |
|||||||||||||||||||
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|||||||||||||
13,207 |
$ 8.71 |
.55 |
$ 8.71 |
13,207 |
$ 8.71 |
||||||||||||||||||
61,401 |
11.70 |
1.17 |
11.70 |
61,401 |
11.70 |
||||||||||||||||||
101,831 |
20.05 |
3.26 |
$18.54-21.25 |
101,541 |
20.04 |
||||||||||||||||||
126,668 |
25.05 |
6.83 |
25.05 |
113,934 |
25.05 |
||||||||||||||||||
162,865 |
|
31.34 |
|
8.93 |
|
29.66-31.67 |
|
100,423 |
|
41.55 |
|||||||||||||
465,972 |
|
$23.93 |
|
5.86 |
|
$8.71-$31.67 |
|
390,506 |
|
$22.77 |
|||||||||||||
(a) Weighted average remaining contractual life in years |
|||||||||||||||||||||||
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 1999, 1998 and 1997, 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): |
|||||||||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
||||||||||||||||||
Net income - as reported |
$27,709 |
$26,046 |
$23,889 |
||||||||||||||||||||
Net income - pro forma |
27,243 |
25,923 |
23,551 |
||||||||||||||||||||
Basic earnings per share - as reported |
1.96 |
1.84 |
1.69 |
||||||||||||||||||||
Basic earnings per share - pro forma |
1.93 |
1.83 |
1.67 |
||||||||||||||||||||
Diluted earnings per share - as reported |
1.94 |
1.82 |
1.67 |
||||||||||||||||||||
Diluted earnings per share - pro forma |
1.91 |
1.81 |
1.65 |
||||||||||||||||||||
The weighted average fair values of options granted during 1999, 1998 and 1997 were $7.96, $6.63 and $7.06 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: |
|||||||||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
||||||||||||||||||
Expected dividend yield |
2.7% |
2.2% |
2.2% |
||||||||||||||||||||
Expected stock volatility |
21.4% |
16.9% |
16.9% |
||||||||||||||||||||
Risk-free interest rate |
6.55% |
4.78% |
5.88% |
||||||||||||||||||||
Expected life of options - in years |
6.5 |
6.5 |
6.5 |
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||
|
|
|
NOTE K - COMMITMENTS AND |
NOTE L - DISCLOSURES ABOUT FAIR VALUE |
|
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 of the Corporation have not been drawn upon and, therefore, may not represent future cash requirements. 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. Collateral obtained upon exercise of commitments is
determined using management's credit evaluation of the borrowers and may include real estate, business assets, deposits and other items. 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. |
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 values 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. |
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||
Deposit liabilities: Long-term debt: |
Commitments to extend credit, standby letters of credit and undisbursed loans: |
|||||
1999 |
1998 |
|||||
|
Carrying |
Fair |
Carrying |
Fair |
||
(In thousands) |
||||||
Assets: |
||||||
Investment |
|
|
|
|
||
Loans |
990,827 |
980,370 |
880,222 |
892,812 |
||
Liabilities: |
||||||
Time deposits |
561,179 |
544,121 |
547,300 |
549,792 |
||
|
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
||||||||
|
||||||||
NOTE M - PARENT COMPANY ONLY FINANCIAL INFORMATION |
||||||||
Condensed financial statements of Chemical Financial Corporation (parent company) follow: |
||||||||
December 31 |
||||||||
Condensed Statement of Financial Position |
1999 |
|
1998 |
|||||
Assets |
(In thousands) |
|||||||
Cash on deposit at subsidiary bank |
$ 39,283 |
$ 15,246 |
||||||
Investment securities available for sale |
4,646 |
3,701 |
||||||
Investments in bank subsidiaries |
209,605 |
234,616 |
||||||
Investment in non-bank subsidiary |
2,166 |
1,978 |
||||||
Goodwill |
1,703 |
2,008 |
||||||
Other assets |
1,695 |
|
1,391 |
|||||
Total Assets |
$259,098 |
|
$258,940 |
|||||
Liabilities and Shareholders' Equity |
||||||||
Liabilities: |
||||||||
Long-term debt |
$ 8,000 |
|||||||
Other liabilities |
$ 9,517 |
|
9,101 |
|||||
Total Liabilities |
9,517 |
17,101 |
||||||
Shareholders' equity |
249,581 |
|
241,839 |
|||||
Total Liabilities and Shareholders' Equity |
$259,098 |
|
$258,940 |
|||||
Years Ended December 31 |
||||||||
Condensed Statement of Income |
1999 |
|
1998 |
|
1997 |
|||
Income |
(In thousands) |
|||||||
Cash dividends from bank subsidiaries |
$48,102 |
$11,968 |
$11,348 |
|||||
Cash dividends from non-bank subsidiary |
610 |
656 |
102 |
|||||
Interest income from subsidiary bank |
593 |
663 |
677 |
|||||
Other interest income and dividends |
117 |
|
82 |
|
12 |
|||
Total Income |
49,422 |
13,369 |
12,139 |
|||||
Expenses |
||||||||
Interest on long-term debt |
421 |
593 |
596 |
|||||
Operating expenses |
1,882 |
2,088 |
1,818 |
|||||
Amortization of goodwill |
305 |
|
305 |
|
305 |
|||
Total Expenses |
2,608 |
|
2,986 |
|
2,719 |
|||
Income Before Income Taxes and Equity in |
||||||||
Undistributed Net Income of Subsidiaries |
46,814 |
10,383 |
9,420 |
|||||
Federal income tax benefit |
558 |
|
738 |
|
658 |
|||
47,372 |
11,121 |
10,078 |
||||||
Equity in undistributed net income of: |
||||||||
Bank subsidiaries |
(19,851 |
) |
14,931 |
13,392 |
||||
Non-bank subsidiary |
188 |
|
(6 |
) |
419 |
|||
Net Income |
$27,709 |
|
$26,046 |
|
$23,889 |
|||
Years Ended December 31 |
||||||||
Condensed Statement of Cash Flows |
1999 |
|
1998 |
|
1997 |
|
||
Operating Activities |
(In thousands) |
|||||||
Net income |
$27,709 |
$26,046 |
$23,889 |
|||||
Equity in undistributed net income of subsidiaries |
19,663 |
(14,925 |
) |
(13,811 |
) |
|||
Other |
400 |
|
1,385 |
|
281 |
|
||
Net Cash Provided by Operating Activities |
47,772 |
12,506 |
10,359 |
|||||
Investing Activities |
||||||||
Purchases of investment securities available for sale |
(1,563 |
) |
(1,725 |
) |
(1,266 |
) |
||
Sales of investment securities available for sale |
756 |
|
|
|
|
|
||
Net Cash Used in Investing Activities |
(807 |
) |
(1,725 |
) |
(1,266 |
) |
||
Financing Activities |
||||||||
Principal payments on long-term debt |
(8,000 |
) |
(1,000 |
) |
(1,000 |
) |
||
Repurchases of common stock |
(4,155 |
) |
(37 |
) |
(467 |
) |
||
Proceeds from subsidiary directors' stock purchase plan |
278 |
295 |
259 |
|||||
Proceeds from exercise of stock options |
264 |
338 |
386 |
|||||
Cash dividends paid |
(11,315 |
) |
(10,359 |
) |
(9,003 |
) |
||
Net Cash Used in Financing Activities |
(22,928 |
) |
(10,763 |
) |
(9,825 |
) |
||
Increase (Decrease) in Cash |
24,037 |
18 |
(732 |
) |
||||
Cash at beginning of year |
15,246 |
|
15,228 |
|
15,960 |
|
||
Cash at End of Year |
$39,283 |
|
$15,246 |
|
$15,228 |
|
||
30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS |
To the Board of Directors |
31
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
|
|
|
FINANCIAL HIGHLIGHTS |
|
|
The following discussion and analysis is intended to cover the significant factors affecting Chemical Financial Corporation's (Corporation) consolidated statements of financial position and income, included herein. It is designed to
provide shareholders with a more comprehensive review of the operating results and financial position of the Corporation than could be obtained from an examination of the financial statements alone. |
Deposits |
32
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||||
TABLE 1. FIVE-YEAR
INCOME STATEMENT - TAX EQUIVALENT BASIS* - AS A PERCENTAGE OF |
|||||||||||||||
Years Ended December 31 |
|||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
1995 |
|
|||||
INTEREST INCOME |
|||||||||||||||
Interest and fees on loans |
4.10 |
% |
4.12 |
% |
4.06 |
% |
4.01 |
% |
3.90 |
% |
|||||
Interest on investment securities |
2.25 |
2.42 |
2.54 |
2.49 |
2.49 |
||||||||||
Interest on short-term investments |
.18 |
|
.27 |
|
.27 |
|
.28 |
|
.30 |
|
|||||
TOTAL INTEREST INCOME |
6.53 |
6.81 |
6.87 |
6.78 |
6.69 |
||||||||||
INTEREST EXPENSE |
|||||||||||||||
Interest on deposits |
2.38 |
2.61 |
2.68 |
2.62 |
2.62 |
||||||||||
Interest on short-term borrowings |
.09 |
.08 |
.08 |
.07 |
.09 |
||||||||||
Interest on long-term debt |
.02 |
|
.03 |
|
.03 |
|
.04 |
|
.05 |
|
|||||
TOTAL INTEREST EXPENSE |
2.49 |
|
2.72 |
|
2.79 |
|
2.73 |
|
2.76 |
|
|||||
NET INTEREST INCOME |
4.04 |
4.09 |
4.08 |
4.05 |
3.93 |
||||||||||
Provision for loan losses |
.03 |
.05 |
.06 |
.07 |
.06 |
||||||||||
NONINTEREST INCOME |
|||||||||||||||
Trust services revenue |
.21 |
.20 |
.19 |
.17 |
.16 |
||||||||||
Service charges and fees |
.54 |
.55 |
.53 |
.51 |
.52 |
||||||||||
Gains on sales of loans |
.04 |
.08 |
.01 |
.01 |
.03 |
||||||||||
Other |
.06 |
|
.03 |
|
.03 |
|
.03 |
|
.03 |
|
|||||
TOTAL NONINTEREST INCOME |
.85 |
.86 |
.76 |
.72 |
.74 |
||||||||||
OPERATING EXPENSES |
|||||||||||||||
Salaries, wages and benefits |
1.57 |
1.60 |
1.58 |
1.60 |
1.55 |
||||||||||
Occupancy |
.23 |
.24 |
.25 |
.25 |
.24 |
||||||||||
Equipment |
.18 |
.17 |
.18 |
.17 |
.17 |
||||||||||
Other |
.61 |
|
.67 |
|
.64 |
|
.65 |
|
.74 |
|
|||||
TOTAL OPERATING EXPENSES |
2.59 |
|
2.68 |
|
2.65 |
|
2.67 |
|
2.70 |
|
|||||
INCOME BEFORE INCOME TAXES |
2.27 |
2.22 |
2.13 |
2.03 |
1.91 |
||||||||||
Federal income taxes |
.72 |
.71 |
.67 |
.65 |
.59 |
||||||||||
Tax equivalent adjustment |
.08 |
|
.07 |
|
.08 |
|
.08 |
|
.08 |
|
|||||
NET INCOME |
1.47 |
% |
1.44 |
% |
1.38 |
% |
1.30 |
% |
1.24 |
% |
|||||
AVERAGE TOTAL ASSETS - In thousands |
$1,888,169 |
|
$1,804,022 |
|
$1,726,960 |
|
$1,688,214 |
|
$1,654,640 |
|
|||||
*Taxable equivalent basis using a federal income tax rate of 35%. |
|||||||||||||||
Cash Dividends |
Cash dividends per share in 1998 represented a 14.6% increase over cash
dividends per share in 1997. The compound annual growth rate of the Corporation's
cash dividends per share over the past five- and ten-year periods ended
December 31, 1999, was 15.6% and 12.2%, respectively. |
||||||||||||||
|
1999 |
1998 |
1997 |
1996 |
1995 |
||||||||||
Annual Dividend |
$.80 |
$.73 |
$.64 |
$.55 |
$.47 |
33
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
|
|
|
FINANCIAL HIGHLIGHTS - CONTINUED |
|
|
Business of the Corporation |
The single most important component in analyzing the results of the Corporation's
operations is net interest income. Net interest income (FTE) comprised
82.7% of net revenues in 1999, compared to 82.5% in 1998 and 84.3% in
1997. |
|
|
|
|
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 checking accounts and 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. |
Net interest
income (FTE) in 1999 was $76.3 million, up $2.5 million, or 3.3%, over 1998
net interest income (FTE) of $73.8 million. The increase in net interest
income during 1999 was primarily attributable to increases in average loans,
interest-bearing and noninterest-bearing deposits and shareholders' equity.
During 1999, average loans increased $82 million, or 9.3%, average interest-bearing
deposits increased $40 million, or 3.2%, average noninterest-bearing deposits
increased $16 million, or 6.4%, and average shareholders' equity increased
$15 million, or 6.7%. During 1999, the average yield on interest-earning assets decreased to 6.98% from 7.26% in 1998. The average cost of interest-bearing liabilities in 1999 decreased to 3.46% from 3.75% in 1998. These decreases resulted from lower yields on all interest-earning asset categories and lower costs on all interest-bearing liability categories. The net result of the decreases in the average yield on interest-earning assets and average cost of interest-bearing liabilities was a decrease in the net interest margin during 1999 to 4.32% from 4.36% in 1998. Higher interest income due to loan growth in 1999 was partially offset by reduced investment asset income, as the Corporation partially funded loan growth with investment assets. Net interest income (FTE) in 1998 was $73.8 million, up $3.4 million, or 4.9%, over 1997 net interest income (FTE) of $70.4 |
34
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||
TABLE 2. AVERAGE BALANCES,
TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES* |
|||||||||||||
Years Ended December 31 |
|||||||||||||
1999
|
1998
|
1997
|
|||||||||||
|
|
Tax |
Effective |
|
|
Tax |
Effective |
|
|
Tax |
Effective |
|
|
ASSETS |
|||||||||||||
Earning Assets: |
|||||||||||||
Loans** |
$962,104 |
$77,371 |
8.04 |
% |
$879,886 |
$74,390 |
8.45 |
% |
$820,451 |
$70,198 |
8.56 |
% |
|
Taxable investment securities |
|
|
|
|
|
|
|
|
|
||||
Non-taxable investment |
|
|
|
|
|
|
|
|
|
||||
Federal funds sold |
67,881 |
3,382 |
4.98 |
88,883 |
4,809 |
5.41 |
86,045 |
4,699 |
5.46 |
||||
Interest-bearing deposits |
|||||||||||||
with unaffiliated banks |
1,907 |
84 |
4.40 |
|
2,055 |
111 |
5.40 |
|
415 |
33 |
7.95 |
|
|
Total interest |
|
|
|
|
|
|
|
|
|
||||
Less: Allowance for loan |
|
|
|
||||||||||
Other assets: |
|||||||||||||
Cash and due from banks |
88,663 |
82,481 |
78,216 |
||||||||||
Premises and equipment |
20,366 |
19,804 |
19,838 |
||||||||||
Accrued income and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
$1,888,169 |
|
|
|
$1,804,022 |
|
|
|
$1,726,960 |
|
|
|
|
LIABILITIES AND |
|||||||||||||
Interest-Bearing |
|||||||||||||
Interest-bearing demand |
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
490,614 |
12,607 |
2.57 |
472,212 |
12,876 |
2.73 |
442,195 |
11,545 |
2.61 |
||||
Time deposits |
557,099 |
27,219 |
4.89 |
549,414 |
28,983 |
5.28 |
556,259 |
29,367 |
5.28 |
||||
Short-term borrowed |
|
|
|
|
|
|
|
|
|
||||
Long-term debt |
8,023 |
428 |
5.33 |
|
8,994 |
593 |
6.59 |
|
9,236 |
596 |
6.45 |
|
|
Total interest |
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and |
|
|
|
||||||||||
Accrued expenses and |
|
|
|
||||||||||
Shareholders' equity |
245,364 |
|
|
|
230,045 |
|
|
|
215,957 |
|
|
|
|
Total Liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE) |
|
$76,296 |
|
|
|
$73,839 |
|
|
|
$70,404 |
|
|
|
Net Interest Margin |
|||||||||||||
(Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
*Taxable equivalent basis using a federal income tax rate of 35%. |
|||||||||||||
million. The increase in net interest income during 1998 was primarily
attributable to increases in average loans, savings deposits, noninterest-bearing
deposits and shareholders' equity. During 1998, average loans increased
$59 million, or 7.2%, average savings deposits increased $30 million,
or 6.8%, average noninterest-bearing deposits increased $26 million, or
11.6%, and average shareholders' equity increased $14 million, or 6.5%. |
cost of interest-bearing liabilities decreased to 3.75% from 3.79% in
1997. The slightly higher decrease in the average yield on interest-earning
assets was offset by the growth in noninterest-bearing deposits and shareholders'
equity, resulting in a 1 basis point increase in the net interest margin
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
resulted from slightly lower yields on all interest-earning asset categories
and lower costs on most interest-bearing liability categories. |
||||||||||||
continued on next page |
35
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
|
|
|
NET INTEREST INCOME - CONTINUED |
LOANS |
|
Net interest income (FTE) increased $2 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%. |
The Corporation's ten bank 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 generally only within the Corporation's 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. |
36
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||||||||
TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS* (In thousands) |
|||||||||||||||||||
1999 Compared to 1998 |
1998 Compared to 1997 |
||||||||||||||||||
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) |
|
|||||||
CHANGES IN INTEREST INCOME ON |
|||||||||||||||||||
Loans |
$6,350 |
$(3,369 |
) |
$2,981 |
$5,565 |
$(1,373 |
) |
$4,192 |
|||||||||||
Taxable investment securities |
961 |
(1,799 |
) |
(838 |
) |
671 |
(623 |
) |
48 |
||||||||||
Non-taxable investment securities |
(284 |
) |
(23 |
) |
(307 |
) |
(58 |
) |
(68 |
) |
(126 |
) |
|||||||
Federal funds sold |
(1,069 |
) |
(358 |
) |
(1,427 |
) |
154 |
(44 |
) |
110 |
|||||||||
Interest-bearing deposits with unaffiliated |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total change in interest income on
|
|
|
|
|
|
|
|
|
|||||||||||
CHANGES IN INTEREST EXPENSE ON |
|||||||||||||||||||
Interest-bearing demand deposits |
374 |
(479 |
) |
(105 |
) |
303 |
(520 |
) |
(217 |
) |
|||||||||
Savings deposits |
530 |
(799 |
) |
(269 |
) |
909 |
422 |
1,331 |
|||||||||||
Time deposits |
392 |
(2,156 |
) |
(1,764 |
) |
(359 |
) |
(25 |
) |
(384 |
) |
||||||||
Short-term borrowed funds |
392 |
(164 |
) |
228 |
277 |
(137 |
) |
140 |
|||||||||||
Long-term debt |
(60 |
) |
(105 |
) |
(165 |
) |
(16 |
) |
13 |
|
(3 |
) |
|||||||
Total change in interest expense
on |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
TOTAL INCREASE (DECREASE) IN |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
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. |
|||||||||||||||||||
TABLE 4. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE (Dollars in thousands) |
|||||||||||||||||||
Years Ended December 31 |
|||||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
1995 |
|
|||||||||
Distribution of Loans: |
|||||||||||||||||||
Commercial and agricultural |
$157,721 |
$137,020 |
$120,696 |
$122,584 |
$124,861 |
||||||||||||||
Real estate construction |
34,510 |
33,615 |
31,143 |
24,791 |
16,195 |
||||||||||||||
Real estate commercial |
120,990 |
95,130 |
95,182 |
98,113 |
102,356 |
||||||||||||||
Real estate residential |
457,018 |
429,297 |
441,756 |
412,080 |
370,098 |
||||||||||||||
Consumer |
238,778 |
|
203,231 |
|
156,823 |
|
150,085 |
|
147,068 |
|
|||||||||
Total loans outstanding at year end |
$1,009,017 |
|
$898,293 |
|
$845,600 |
|
$807,653 |
|
$760,578 |
|
|||||||||
Summary of Changes in the Allowance for Loan Losses: |
|||||||||||||||||||
Allowance for loan losses at beginning of year |
$18,071 |
$17,359 |
$16,607 |
$15,886 |
$15,295 |
||||||||||||||
Loans charged off: |
|||||||||||||||||||
Commercial and agricultural |
(80 |
) |
(111 |
) |
(114 |
) |
(250 |
) |
(433 |
) |
|||||||||
Real estate construction |
- |
- |
- |
- |
- |
||||||||||||||
Real estate commercial |
- |
- |
- |
(20 |
) |
- |
|||||||||||||
Real estate residential |
(2 |
) |
-
|
(26 |
) |
(35 |
) |
(3 |
) |
||||||||||
Consumer |
(527 |
) |
(438 |
) |
(480 |
) |
(386 |
) |
(230 |
) |
|||||||||
Total loan charge-offs |
(609 |
) |
(549 |
) |
(620 |
) |
(691 |
) |
(666 |
) |
|||||||||
Recoveries of loans previously charged off: |
|||||||||||||||||||
Commercial and agricultural |
59 |
118 |
193 |
92 |
60 |
||||||||||||||
Real estate construction |
- |
- |
- |
- |
- |
||||||||||||||
Real estate commercial |
10 |
10 |
10 |
17 |
18 |
||||||||||||||
Real estate residential |
- |
19 |
- |
7 |
10 |
||||||||||||||
Consumer |
176 |
|
150 |
|
167 |
|
168 |
|
104 |
|
|||||||||
Total loan recoveries |
245 |
|
297 |
|
370 |
|
284 |
|
192 |
|
|||||||||
Net loan charge-offs |
(364 |
) |
(252 |
) |
(250 |
) |
(407 |
) |
(474 |
) |
|||||||||
Provision for loan losses |
483 |
|
964 |
|
1,002 |
|
1,128 |
|
1,065 |
|
|||||||||
Allowance for loan losses at year end |
$18,190 |
|
$18,071 |
|
$17,359 |
|
$16,607 |
|
$15,886 |
|
|||||||||
Ratio of net charge-offs during the year |
|||||||||||||||||||
to average loans outstanding |
.04 |
% |
.03 |
% |
.03 |
% |
.05 |
% |
.06 |
% |
|||||||||
Ratio of allowance for loan losses at year end |
|||||||||||||||||||
to total loans outstanding at year end |
1.80 |
% |
2.01 |
% |
2.05 |
% |
2.06 |
% |
2.09 |
% |
|||||||||
continued on next page |
37
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
|
|
|
LOANS - CONTINUED |
|
|
Commercial loans totaled $157.7 million as of December 31, 1999, an increase of $20.7 million, or 15.1%, over total commercial loans as of December 31, 1998 of $137 million. The growth in the commercial loan portfolio during 1999 was the
result of enhanced sales and marketing efforts within the Corporation's market areas including a concerted effort to increase business lending to tax-exempt organizations located within its markets. During 1999, loans to tax-exempt organizations increased
$13.3 million, or 65.2%, to $33.6 million as of December 31, 1999. Commercial loans increased $16.3 million, or 13.5%, in 1998 after a slight decrease of $1.9 million, or 1.5%, during 1997. Commercial loans represented 15.6%, 15.3% and 14.3% of total
loans outstanding as of December 31, 1999, 1998 and 1997, respectively. |
estate loans originated during 1997, which were sold in the secondary mortgage market. The significantly higher level of long-term fixed interest rate loans sold during 1998 was attributable to the significant decrease in mortgage interest
rates during 1998. The decline in interest rates during 1998 prompted customers of new mortgages to choose the long-term fixed interest rate mortgage products over the balloon and variable interest rate mortgage products and created incentives for
existing mortgage customers to refinance their mortgages at lower fixed interest rates. |
38
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||||||||||||||||
TABLE 5. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in thousands) |
|||||||||||||||||||||||||||
|
December 31, 1999 |
|
December 31, 1998 |
|
|||||||||||||||||||||||
|
1 Year |
|
1 to 5 |
|
Over 5 |
|
|
|
1 Year |
|
1 to 5 |
|
Over 5 |
|
|
||||||||||||
Loan Maturities: |
|||||||||||||||||||||||||||
Commercial and agricultural |
|
|
|
|
|
|
|
|
|||||||||||||||||||
Real estate construction |
19,643 |
12,268 |
2,599 |
34,510 |
24,367 |
6,170 |
3,078 |
33,615 |
|||||||||||||||||||
Real estate commercial |
10,068 |
|
100,425 |
|
10,497 |
|
120,990 |
|
41,572 |
|
43,693 |
|
9,865 |
|
95,130 |
|
|||||||||||
Total |
$109,001 |
|
$183,856 |
|
$20,364 |
|
$313,221 |
|
$144,956 |
|
$97,000 |
|
$23,809 |
|
$265,765 |
|
|||||||||||
Percent of Total |
35 |
% |
59 |
% |
6 |
% |
100 |
% |
55 |
% |
36 |
% |
9 |
% |
100 |
% |
|||||||||||
|
December 31, 1999 |
|
December 31, 1998 |
|
|||||||||||||||||||||||
Interest Sensitivity: |
|||||||||||||||||||||||||||
Above loans maturing after one |
|||||||||||||||||||||||||||
year which have: |
|||||||||||||||||||||||||||
Fixed interest rates |
$182,546 |
89 |
% |
$ 96,761 |
80 |
% |
|||||||||||||||||||||
Variable interest rates |
21,674 |
|
11 |
|
24,048 |
|
20 |
|
|||||||||||||||||||
Total |
$204,220 |
|
100 |
% |
$120,809 |
|
100 |
% |
|||||||||||||||||||
|
|||||||||||||||||||||||||||
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 or deferral of interest or principal because
of deterioration in the financial position of the borrower. A five year
history of nonperforming loans is presented in Table 6. |
.20% as of December 31, 1998 and .21% as of December 31, 1997. Accruing
loans past due 90 days or more were $.61 million as of December 31, 1999,
compared to $1.32 million as of December 31, 1998 and $1.13 million as
of December 31, 1997. Renegotiated loans were $.82 million as of December
31, 1999 and $.14 million as of December 31, 1997. |
||||||||||||||||||||||||||
TABLE 6. SUMMARY OF NONPERFORMING LOANS (In thousands) |
|||||||||||||||||||||||||||
December 31 |
|||||||||||||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
1995 |
||||||||||||||||||
Loans accounted for on a nonaccrual basis* |
$1,937 |
$1,785 |
$1,783 |
$1,341 |
$1,658 |
||||||||||||||||||||||
Accruing loans contractually past due 90 days or |
|||||||||||||||||||||||||||
more as to interest or principal payments: |
|||||||||||||||||||||||||||
Commercial and agricultural |
9 |
39 |
447 |
7 |
118 |
||||||||||||||||||||||
Real estate construction |
- |
- |
- |
- |
- |
||||||||||||||||||||||
Real estate commercial |
- |
653 |
- |
- |
375 |
||||||||||||||||||||||
Residential real estate |
415 |
492 |
557 |
271 |
372 |
||||||||||||||||||||||
Consumer |
190 |
|
132 |
|
121 |
|
261 |
|
104 |
||||||||||||||||||
614 |
1,316 |
1,125 |
539 |
969 |
|||||||||||||||||||||||
Renegotiated loans |
821 |
|
- |
|
139 |
|
- |
|
84 |
||||||||||||||||||
Total |
$3,372 |
|
$3,101 |
|
$3,047 |
|
$1,880 |
|
$2,711 |
||||||||||||||||||
*Interest income totaling $164,000 was recorded on the nonaccrual and renegotiated loans in 1999. Additional interest income of $102,000 would have been recorded during 1999 on these loans had they been current in accordance with their original terms. |
|||||||||||||||||||||||||||
|
39
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||
TABLE 7. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) |
|||||||||||
December 31 |
|||||||||||
1999 |
1998 |
1997 |
|||||||||
|
|
Percent |
|
|
Percent |
|
|
Percent |
|
||
Commercial and agricultural |
$5,915 |
15.6 |
% |
$5,562 |
15.3 |
% |
$4,975 |
14.3 |
% |
||
Real estate construction |
518 |
3.4 |
701 |
3.7 |
623 |
3.7 |
|||||
Real estate commercial |
2,420 |
12.0 |
2,250 |
10.6 |
2,325 |
11.3 |
|||||
Real estate residential |
3,427 |
45.3 |
3,220 |
47.8 |
3,313 |
52.2 |
|||||
Consumer |
4,775 |
23.7 |
4,065 |
22.6 |
3,673 |
18.5 |
|||||
Not allocated |
1,135 |
|
|
2,273 |
|
|
2,450 |
|
|
||
Total |
$18,190 |
100 |
% |
$18,071 |
100 |
% |
$17,359 |
100 |
% |
||
1996 |
1995 |
||||||||||
|
|
Percent |
|
|
|
Percent |
|||||
Commercial and agricultural |
$5,351 |
15.1 |
% |
$5,510 |
16.5 |
% |
|||||
Real estate construction |
496 |
3.1 |
324 |
2.1 |
|||||||
Real estate commercial |
2,521 |
12.2 |
2,276 |
13.4 |
|||||||
Real estate residential |
3,091 |
51.0 |
2,776 |
48.7 |
|||||||
Consumer |
3,487 |
18.6 |
3,381 |
19.3 |
|||||||
Not allocated |
1,661 |
|
|
|
1,619 |
|
|
||||
Total |
$16,607 |
100 |
% |
|
$15,886 |
100 |
% |
||||
|
|||||||||||
NONPERFORMING LOANS - CONTINUED |
|||||||||||
not be collected. In most instances, impairment is measured based on
the fair value of the underlying collateral. Impairment may also be measured
based on the present value of expected future cash flows discounted at
the loan's effective interest rate. Impairment losses are included in
the provision for loan losses. The Corporation measures impairment on
all large balance nonaccrual commercial and commercial real estate loans.
Consequently, all commercial and commercial real estate loans identified
as impaired are included in the nonaccrual loan category. |
The provision was approximately $.5 million in 1999 and $1 million in
both 1998 and 1997. The Corporation experienced net loan losses of approximately
$.36 million in 1999 and $.25 million in both 1998 and 1997. The Corporation's
provision exceeded actual net loan losses by $.12 million in 1999, $.71
million in 1998, and $.75 million in 1997. The Corporation's allowance
increased to $18.2 million as of December 31, 1999 and represented 1.80%
of total loans, compared to 2.01% at December 31, 1998 and 2.05% at December
31, 1997. |
||||||||||
|
|
||||||||||
PROVISION AND ALLOWANCE |
NONINTEREST INCOME |
||||||||||
The provision for loan losses (provision) is the amount added to the allowance for loan losses (allowance) 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 mix and volume of the loan portfolio, actual loan loss experience, the financial condition of the borrowers, industry and geographic exposures within the portfolio, economic conditions and employment levels of the Corporation's local markets, 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. |
Noninterest income is derived primarily from trust services, deposit
account fees, fees for other customer services and gains on the sales
of residential real estate loans. Noninterest income totaled $16 million
in 1999, $15.6 million in 1998 and $13.1 million in 1997. Noninterest
income increased $.4 million, or 2.5%, in 1999 and $2.49 million, or 19%,
in 1998 over the prior year. Noninterest income as a percentage of total
revenue in 1999, 1998 and 1997 was 11.6%, 11.4% and 10.1%, respectively. |
40
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
estate loans totaled $.7 million in 1999, compared to $1.5 million in 1998 and $.2 million in 1997. The significant increase in the origination of long-term fixed interest rate residential real estate loans in 1998 was primarily the result
of the significant decline in residential real estate loan interest rates. The lower interest rates in 1998 created an incentive for customers to choose long-term fixed interest rate products over variable rate or balloon mortgage products, whether they
were obtaining a new residential real estate loan or refinancing an existing loan. |
Salaries, wages and employee benefits remain the largest component of operating expenses. These expenses totaled $29.7 million in 1999, $28.9 million in 1998 and $27.3 million in 1997. Salaries, wages and employee benefits expense
increased $.8 million, or 2.9%, in 1999. The Corporation was able to maintain 1999 personnel costs at only slightly higher costs than 1998 by achieving a 1.9% reduction in employee benefits cost, while salaries and wages increased 4.1%. Salaries, wages
and employee benefits expense increased $1.6 million, or 5.9%, in 1998. Personnel expenses as a percentage of operating expenses were 61% in 1999 and 60% in 1998 and 1997. |
|
|
|
|
OPERATING EXPENSES |
INCOME TAXES |
|
Total operating expenses were $49 million in 1999, $48.3 million in 1998, and $45.7 million in 1997. |
The Corporation's effective federal income tax rate was 33% in 1999, 32.9% in 1998 and 32.6% in 1997, 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, nondeductible interest expense and other nondeductible expenses relative to pretax income. |
|
continued on next page |
41
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||||||
TABLE 8. MATURITIES
AND YIELDS* OF INVESTMENT SECURITIES AT DECEMBER 31, 1999 (Dollars in |
|||||||||||||||||
Maturity** |
|||||||||||||||||
|
|
|
After One |
|
After Five |
|
|||||||||||
|
Amount |
Yield |
|
Amount |
Yield |
|
Amount |
Yield |
|
||||||||
Available for Sale: |
|||||||||||||||||
U.S. Treasury and agencies |
$180,456 |
5.69 |
% |
$214,196 |
5.68 |
% |
|||||||||||
Other securities |
17,000 |
5.67 |
|
10,043 |
5.68 |
|
$272 |
8.28 |
% |
||||||||
Total Investment Securities |
|||||||||||||||||
Available for Sale |
197,456 |
5.69 |
224,239 |
5.68 |
272 |
8.28 |
|||||||||||
Held to Maturity: |
|||||||||||||||||
U.S. Treasury and agencies |
117,862 |
5.73 |
83,417 |
5.45 |
- |
- |
|||||||||||
States of the U.S. and |
|||||||||||||||||
political subdivisions |
7,493 |
7.23 |
19,275 |
7.68 |
8,593 |
7.95 |
|||||||||||
Other securities |
2,996 |
5.84 |
|
2,143 |
6.10 |
|
- |
- |
|
||||||||
Total Investment Securities |
|||||||||||||||||
Held to Maturity |
128,351 |
5.82 |
|
104,835 |
5.87 |
|
8,593 |
7.95 |
|
||||||||
Total Investment Securities |
$325,807 |
5.74 |
% |
$329,074 |
5.74 |
% |
$8,865 |
7.96 |
% |
||||||||
|
|
|
Total |
|
Total |
|
|||||||||||
|
Amount |
Yield |
|
Amount |
Yield |
|
|
|
|||||||||
Available for Sale: |
|||||||||||||||||
U.S. Treasury and agencies |
$394,652 |
5.68 |
% |
$394,652 |
|||||||||||||
Other securities |
$6,073 |
5.89 |
% |
33,388 |
5.89 |
|
33,388 |
|
|||||||||
Total Investment Securities |
|||||||||||||||||
Available for Sale |
6,073 |
5.89 |
428,040 |
5.69 |
428,040 |
||||||||||||
Held to Maturity: |
|||||||||||||||||
U.S. Treasury and agencies |
- |
- |
201,279 |
5.53 |
199,663 |
||||||||||||
States of the U.S. and |
|||||||||||||||||
political subdivisions |
1,580 |
7.92 |
36,941 |
7.66 |
36,952 |
||||||||||||
Other securities |
54 |
5.27 |
|
5,193 |
5.88 |
|
5,160 |
|
|||||||||
Total Investment Securities |
|||||||||||||||||
Held to Maturity |
1,634 |
7.83 |
|
243,413 |
5.93 |
|
241,775 |
|
|||||||||
Total Investment Securities |
$7,707 |
6.35 |
% |
$671,453 |
5.78 |
% |
$669,815 |
|
|||||||||
*Yields are weighted by amount and time to contractual maturity and are
on a taxable equivalent basis using a 35% federal income tax rate. |
|||||||||||||||||
|
|
||||||||||||||||
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
bank subsidiaries. |
securities classified as available for sale and investment securities
classified as held to maturity maturing within one year. These sources
of liquidity are supplemented by new deposits and by loan payments received
from customers. As of December 31, 1999, the Corporation held $74 million
in federal funds sold, $428 million in investment securities available
for sale and $128 million in other investment securities maturing within
one year. These short-term assets represented approximately 40.4% of total
deposits as of December 31, 1999. |
||||||||||||||||
TABLE 9. MATURITY ANALYSIS OF INVESTMENT SECURITIES |
|||||||||||||||||
(as a % of total portfolio) |
December 31 |
||||||||||||||||
|
1999 |
|
1998 |
|
1997 |
|
|||||||||||
Maturity: |
|||||||||||||||||
Under 1 year |
48.5 |
% |
46.6 |
% |
33.7 |
% |
|||||||||||
1-5 years |
49.0 |
50.8 |
63.4 |
||||||||||||||
5-10 years |
1.3 |
1.5 |
2.0 |
||||||||||||||
Over 10 years |
1.2 |
|
1.1 |
|
.9 |
|
|||||||||||
Total |
100 |
% |
100 |
% |
100 |
% |
42
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||||||||||||||
TABLE 10. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE (Dollars in thousands) |
||||||||||||||
December 31 |
||||||||||||||
1999 |
1998 |
1997 |
||||||||||||
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||
Maturity: |
||||||||||||||
Within 3 months |
$79,996 |
72 |
% |
$66,976 |
70 |
% |
$59,482 |
70 |
% |
|||||
After 3 but within 6 months |
17,206 |
15 |
18,468 |
19 |
12,371 |
15 |
||||||||
After 6 but within 12 months |
9,566 |
9 |
6,497 |
7 |
6,677 |
8 |
||||||||
After 12 months |
4,674 |
|
4 |
|
4,329 |
|
4 |
|
6,550 |
|
7 |
|
||
Total |
$111,442 |
|
100 |
% |
$96,270 |
|
100 |
% |
$85,080 |
|
100 |
% |
||
Table 10 presents the maturity distribution of time deposits of $100,000 or more at the end of each of the last three years. Time deposits of $100,000 or more and the percentage of these deposits to total deposits increased slightly during
1999 to $111.4 million, or 7.1 % of total deposits, as of December 31, 1999, compared to $96.3 million, or 6.2% of total deposits, as of December 31, 1998 and $85.1 million, or 5.8% of total deposits, as of December 31, 1997. The percentage of time
deposits of $100,000 or more with a maturity of less than three months was 72% as of December 31, 1999 and 70% as of December 31, 1998 and 1997. The Corporation does not utilize these deposits as a source of liquidity, therefore it is able to invest the
funds generated from these deposits in investments of similar maturity. |
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. Throughout 1999, the forecasted exposure to changes in interest rates was within the Corporation's established policy limits. The
Corporation has not used 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, 1999. 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. |
|||||||||||||
continued on next page |
43
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||
TABLE 11. SCHEDULE
OF RATE SENSITIVE ASSETS AND LIABILITIES BY REPRICING OR MATURITY |
|||||||||
|
1-182 |
|
183-366 |
|
Over 1 |
|
|
||
Interest-Earning Assets: |
|||||||||
Loans |
$232,518 |
$130,211 |
$646,288 |
$1,009,017 |
|||||
Investment securities |
179,402 |
146,405 |
345,646 |
671,453 |
|||||
Other interest-earning assets |
73,971 |
|
- |
|
- |
|
73,971 |
||
Total Interest-Earning Assets |
$485,891 |
|
$276,616 |
|
$991,934 |
|
$1,754,441 |
||
Interest-Bearing Liabilities: |
|||||||||
Non-maturing deposits |
$130,990 |
- |
$611,472 |
$742,462 |
|||||
Time deposits |
316,674 |
|
113,119 |
|
131,386 |
|
561,179 |
||
Total Interest-Bearing Deposits |
447,664 |
113,119 |
742,858 |
1,303,641 |
|||||
Other interest-bearing liabilities |
61,909 |
|
- |
|
184 |
|
62,093 |
||
Total Interest-Bearing Liabilities |
$509,573 |
|
$113,119 |
|
$743,042 |
|
$1,365,734 |
||
Gap |
$(23,682 |
) |
$163,497 |
$248,892 |
$388,707 |
||||
Cumulative gap |
$(23,682 |
) |
$139,815 |
$388,707 |
|||||
Cumulative rate-sensitive ratio |
.95 |
1.22 |
1.28 |
||||||
Cumulative gap as a percentage |
|||||||||
of total earning assets |
(1.4 |
)% |
8.0 |
% |
22.2 |
% |
|||
|
|
||||||||
LIQUIDITY AND INTEREST |
|
||||||||
Table 11 illustrates that as of December 31, 1999, the Corporation's
cumulative rate sensitive ratio (rate sensitive assets to rate sensitive
liabilities) in the 1-182 day repricing category was .95, and 1.22 in
the cumulative one-year (1-366 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 deposits 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. |
year. This model is based solely on parallel changes in market interest
rates and does not reflect the levels of interest rate risk that may arise
from other factors such as changes in the spreads between key market rates
or in the shape of the Treasury yield curve. This measurement of interest
rate risk exposure on net interest income at year-end 1999, projected
over the succeeding twelve months, indicated that the Corporation's net
interest income in 2000 would not be materially adversely impacted by
a gradual increase or decrease in interest rates of 100 basis points. |
44
MANAGEMENT'S DISCUSSION AND ANALYSIS |
|||||||||||||||
TABLE 12. FINANCIAL INSTRUMENTS (Dollars in thousands) |
|||||||||||||||
Principal Amount Maturing in: |
|||||||||||||||
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
||||||
Rate Sensitive Assets: |
|||||||||||||||
Fixed interest rate loans |
$286,981 |
$189,947 |
$148,442 |
$110,244 |
$28,955 |
||||||||||
Average interest rate |
7.51% |
7.80% |
7.69% |
7.61% |
7.53% |
||||||||||
Variable interest rate loans |
$59,002 |
$7,226 |
$4,783 |
$1,867 |
$593 |
||||||||||
Average interest rate |
9.27% |
9.45% |
9.40% |
9.46% |
9.48% |
||||||||||
Fixed interest rate securities |
$325,807 |
$142,022 |
$161,994 |
$21,077 |
$3,981 |
||||||||||
Average interest rate |
5.90% |
5.15% |
5.84% |
6.63% |
7.78% |
||||||||||
Other interest-earning assets |
$73,971 |
- |
- |
- |
- |
||||||||||
Average interest rate |
5.31% |
- |
- |
- |
- |
||||||||||
Rate Sensitive Liabilities: |
|||||||||||||||
Noninterest-bearing deposits |
$10,322 |
$9,910 |
$9,513 |
$9,133 |
$8,767 |
||||||||||
Interest-bearing demand and |
|||||||||||||||
savings deposits |
$155,449 |
$23,481 |
$22,541 |
$21,640 |
$20,774 |
||||||||||
Average interest rate |
4.44% |
1.91% |
1.91% |
1.91% |
1.91% |
||||||||||
Time deposits |
$429,793 |
$80,083 |
$40,471 |
$8,967 |
$372 |
||||||||||
Average interest rate |
4.84% |
5.18% |
5.17% |
5.18% |
5.25% |
||||||||||
Fixed interest rate borrowings |
$1,817 |
$16 |
$17 |
$18 |
$19 |
||||||||||
Average interest rate |
5.10% |
5.64% |
5.64% |
5.64% |
5.64% |
||||||||||
Variable interest rate |
|||||||||||||||
borrowings |
$60,092 |
- |
- |
- |
- |
||||||||||
Average interest rate |
3.85% |
- |
- |
- |
- |
||||||||||
Outstanding |
Outstanding |
||||||||||||||
|
Thereafter |
|
Total |
|
Fair Value |
|
Total |
|
Fair Value |
||||||
Rate Sensitive Assets: |
|||||||||||||||
Fixed interest rate loans |
$165,225 |
$929,794 |
$919,337 |
$802,407 |
$814,997 |
||||||||||
Average interest rate |
7.43% |
7.60% |
7.83% |
||||||||||||
Variable interest rate loans |
$5,752 |
$79,223 |
$79,223 |
$95,886 |
$95,886 |
||||||||||
Average interest rate |
9.50% |
9.32% |
8.81% |
||||||||||||
Fixed interest rate securities |
$16,572 |
$671,453 |
$669,815 |
$729,823 |
$733,406 |
||||||||||
Average interest rate |
6.93% |
5.81% |
5.89% |
||||||||||||
Other interest-earning assets |
- |
$73,971 |
$73,971 |
$118,150 |
$118,150 |
||||||||||
Average interest rate |
- |
5.31% |
4.76% |
||||||||||||
Rate Sensitive Liabilities: |
|||||||||||||||
Noninterest-bearing deposits |
$210,416 |
$258,061 |
$258,061 |
$272,388 |
$272,388 |
||||||||||
Interest-bearing demand and |
|||||||||||||||
savings deposits |
$498,578 |
$742,462 |
$742,462 |
$734,583 |
$734,583 |
||||||||||
Average interest rate |
1.91% |
2.44% |
2.36% |
||||||||||||
Time deposits |
$1,493 |
$561,179 |
$544,121 |
$547,300 |
$549,792 |
||||||||||
Average interest rate |
5.36% |
4.92% |
5.09% |
||||||||||||
Fixed interest rate borrowings |
$114 |
$2,001 |
$2,001 |
$1,761 |
$1,761 |
||||||||||
Average interest rate |
5.64% |
5.15% |
4.80% |
||||||||||||
Variable interest rate |
|||||||||||||||
borrowings |
- |
$60,092 |
$60,092 |
$59,489 |
$59,489 |
||||||||||
Average interest rate |
- |
3.85% |
3.63% |
||||||||||||
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CAPITAL |
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Capital provides the foundation for future growth and expansion. The
major component of capital is shareholders' equity. |
|||||||||||||||
|
Risk Based |
||||||||||||||
|
Ratio |
|
Tier 1 |
|
Total |
|
|||||||||
Chemical Financial |
13 |
% |
27 |
% |
28 |
% |
|||||||||
Regulatory capital ratios - |
|
|
|
||||||||||||
Regulatory capital ratios - |
|
|
|
||||||||||||
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 $389 million of investment securities and other assets which are assigned a 0% risk rating, $451 million of investment securities and other assets which are assigned a 20% risk rating, and $497 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 71% of the Corporation's total assets as of December 31, 1999. As of December 31, 1999, all of the Corporation's bank 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. |
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continued on next page |
45
MANAGEMENT'S DISCUSSION AND ANALYSIS |
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OUTLOOK |
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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. |
A FHC may go beyond traditional bank holding company powers and engage in activities that the Federal Reserve deems to be "financial in nature." Prior to the passage of the Act, banks and their subsidiaries could pursue many activities,
such as selling insurance, dealing in certain securities, and offering investment advisory services. However, prior regulatory rules generally placed limits on the extent of a bank's and bank holding company's involvement in those activities, or created
barriers to entry. The Act allows for a more efficient means for bank holding companies to offer all financial services within the new structure - the FHC. The Corporation is eligible to become a FHC, but has made no determination as to, if, or when it
will acquire this new status as of the date of this Annual Report. |
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|
NEW REGULATORY DEVELOPMENTS |
|
|
Gramm-Leach-Bliley Act of 1999 |
The Act also requires financial institutions to disclose their privacy policy to customers and provides protections to customers against the transfer and use of nonpublic personal information by financial institutions. |
46
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
|
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YEAR 2000 READINESS DISCLOSURE |
||
The Corporation experienced no Year 2000 problems or difficulties as the date changed to January 1, 2000 (Y2K). In addition, based on its knowledge as of January 31, 2000, the Corporation does not anticipate that any significant problems
or difficulties will arise during 2000 related to Y2K. |
During the first half of 1999, the Corporation completed its testing of all systems and software programs and completed its Y2K Contingency Plan. As of June 30, 1999, the Corporation had received communications from its third party suppliers and customers regarding their status in preparing for Y2K. In addition, as of June 30, 1999, based on the testing performed, it was the Corporation's opinion that all of its systems were Y2K compliant. The Corporation used the remainder of 1999 to test the Contingency Plan. The Corporation's 1999 Y2K expenditures were approximately $250,000, primarily equipment purchases that were capitalized. |
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OTHER MATTERS |
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The assessment phase identified that the Corporation's core operating system was not Y2K compliant. In February 1998, the core operating system was converted to a new system. The cost of converting to the new core 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 the fourth quarter of 1997 at a cost of approximately $1 million, which was capitalized. The previous mainframe computer and core operating system software were fully depreciated prior to 1997. In addition to the conversion of the core operating software in 1998, the Corporation completed the necessary upgrades and conversions of all other mission critical information and non-information systems during 1998. This resulted in the replacement
of computer hardware, primarily desktop computers, and software at a cost of $525,000 during 1998, which were capitalized. During 1998, the Corporation also initiated formal communications with its significant suppliers and large customers to determine
the extent to which the Corporation's interface systems and operations were vulnerable to those third parties' failures to resolve their own Y2K issues. These communications included identifying the Corporation's material borrowers and assessing these
borrowers' Y2K readiness. |
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," "judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"projects," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, certain statements under the captions "New Regulatory Developments" and "Year 2000 Readiness Disclosure" are
forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (Future Factors) that are difficult to predict with regard to timing, extent, likelihood and degree of
occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events or otherwise. |
47
DIRECTORS AND OFFICERS OF AFFILIATES |
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CHEMICAL BANK AND TRUST |
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DIRECTORS |
HONORARY DIRECTOR |
Vice Presidents and |
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CFC DATA CORP |
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DIRECTORS |
48
DIRECTORS AND OFFICERS OF AFFILIATES |
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CHEMICAL BANK BAY AREA |
CHEMICAL BANK SOUTH |
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DIRECTORS |
DOMINIC MONASTIERE |
DIRECTORS |
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CHEMICAL BANK MONTCALM |
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DIRECTORS |
49
DIRECTORS AND OFFICERS OF AFFILIATES |
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CHEMICAL BANK CENTRAL |
CHEMICAL BANK MICHIGAN |
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DIRECTORS |
DIRECTORS |
Vice Presidents |
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CHEMICAL BANK NORTH |
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DIRECTORS |
50
DIRECTORS AND OFFICERS OF AFFILIATES |
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CHEMICAL BANK WEST |
CHEMICAL BANK KEY STATE |
CHEMICAL BANK THUMB AREA |
DIRECTORS |
DIRECTORS |
DIRECTORS |
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51
CORPORATE DIRCTORS AND OFFICERS |
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BOARD OF DIRECTORS |
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JAMES A. CURRIE
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MICHAEL L. DOW
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TERENCE F. MOORE
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ALOYSIUS J. OLIVER
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ALAN W. OTT
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FRANK P. POPOFF
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LAWRENCE A. REED
|
WILLIAM S. STAVROPOULOS
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EXECUTIVE OFFICERS |
OFFICERS |
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ALAN W. OTT ALOYSIUS J. OLIVER DAVID B. RAMAKER BRUCE M. GROOM LORI A. GWIZDALA WILLIAM C. LAUDERBACH |
GLENN SWEENEY DAVID P. VERMILYE JOSEPH W. TORRENCE THEODORE J. GROENING SANDRA BARGERON ROBERT E. SUTTON JONATHAN P. BUSHEY CHERYL HASSEN SWARTHOUT |
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EXECUTIVE MANAGEMENT COMMITTEE |
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(from left to right) DAVID B. RAMAKER, |
52
CORPORATE INFORMATION |
|
THE COMPANY |
Chemical Financial Corporation is a registered bank holding company headquartered in Midland, Michigan, that operates ten bank affiliates with eighty-seven 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 a property and casualty 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 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, 1999, there were seven registered market makers of Chemical Financial Corporation common stock: A.G. Edwards & Sons, Inc.; Herzog, Heine, Geduld, Inc.; Keefe, Bruyette & Woods, Inc.; Raymond, James & Associates; Sherwood Securities Corp.;
Spear, Leeds & Kellogg; and Stifel, Nicolaus & Company. The approximate number of shareholders at December 31, 1999 was 6,200. This number includes an estimate for individual participants in the security positions of certain shareholders of
record. 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. |
|
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 Chemical Bank and Trust Company |
|
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 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 17, 2000, at 2:00 P.M. |
|
CORPORATE INFORMATION |
Chemical Financial Corporation |
|
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. |
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[PICTURES OF A COUPLE, HOUSE BEING BUILT, TWO WOMEN AND A MAN AT A RESTAURANT, SCENIC AND COWS]
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333 East Main Street Telephone: (517) 839-5350 www.chemicalbankmi.com
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