________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
________________________________________________________________________________
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 0-8185
CHEMICAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2022454
(State of Incorporation) (I.R.S. Employer
Identification Number)
333 East Main Street
Midland, Michigan 48640
(Address of principal executive offices and zip code)
(517) 631-3310
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
The number of shares outstanding of the registrant's Common Stock, $10 par
value, as of October 16, 1995 was 9,173,873 shares.
________________________________________________________________________________
INDEX
CHEMICAL FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (unaudited, except
Consolidated Statement of Financial Position as of
December 31, 1994)
Consolidated Statement of Income for the three- and
nine-month periods ended September 30, 1995 and
September 30, 1994 3
Consolidated Statement of Financial Position as of
September 30, 1995, December 31, 1994 and September 30,
1994 4
Consolidated Statement of Cash Flows for the nine-month
periods ended September 30, 1995 and September 30, 1994 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans $ 15,663 $ 15,467 $ 46,684 $ 44,824
Interest on investment securities:
Taxable 9,082 7,842 26,601 23,502
Tax-exempt 493 608 1,517 1,675
TOTAL INTEREST ON SECURITIES 9,575 8,450 28,118 25,177
Interest on federal funds sold 1,184 848 3,274 2,354
Interest on deposits with unaffiliated banks 51 30 153 35
TOTAL INTEREST INCOME 26,473 24,795 78,229 72,390
INTEREST EXPENSE
Interest on deposits 10,562 8,653 30,762 25,890
Interest on short-term borrowings 412 328 1,189 816
Interest on long-term debt 205 207 628 528
TOTAL INTEREST EXPENSE 11,179 9,188 32,579 27,234
NET INTEREST INCOME 15,294 15,607 45,650 45,156
Provision for possible loan losses 260 278 750 811
NET INTEREST INCOME After Provision for
Possible Loan Losses 15,034 15,329 44,900 44,345
OTHER INCOME
Trust department income 651 625 1,995 1,890
Service charges on deposit accounts 1,286 1,112 3,754 3,222
Other charges and fees for customer services 507 435 1,590 1,550
Revenue from data processing services 242 249 766 766
Gains on sales of loans 54 64 489 157
Investment securities gains (loss) -- (2) (1) 265
Other 176 30 244 269
TOTAL OTHER INCOME 2,916 2,513 8,837 8,119
OPERATING EXPENSES
Salaries, wages and employee benefits 6,246 6,276 18,876 18,566
Occupancy expense-premises 1,066 1,071 3,247 3,245
Equipment rentals, depreciation and maintenance 684 748 2,069 2,164
Other 2,609 3,295 9,065 9,880
TOTAL OPERATING EXPENSES 10,605 11,390 33,257 33,855
-3-
INCOME BEFORE INCOME TAXES 7,345 6,452 20,480 18,609
Federal income taxes 2,435 2,105 6,678 5,810
NET INCOME $ 4,910 $ 4,347 $ 13,802 $ 12,799
NET INCOME PER COMMON SHARE $ .52 $ .47 $ 1.48 $ 1.38
See accompanying notes to consolidated financial statements.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
September 30 December 31 September 30
1995 1994 1994
(Unaudited) (Audited) (Unaudited)
(In thousands of dollars)
Cash and demand deposits due from banks $ 72,526 $ 83,456 $ 71,380
Federal funds sold 101,000 67,100 80,250
Interest bearing deposits with unaffiliated banks 2,977 2,967 2,000
Investment securities:
Held to maturity (market value $367,272 at 9/30/95,
$271,107 at 12/31/94, $265,820 at 9/30/94) 363,792 280,962 266,783
Available for sale (at market value) 326,491 382,569 402,424
Total investment securities 690,283 663,531 669,207
Loans:
Commercial and agricultural 122,556 119,533 123,129
Real estate construction 14,622 19,239 17,338
Real estate mortgage 446,886 449,086 442,750
Installment 137,803 152,318 161,116
Total loans 721,867 740,176 744,333
Less: Allowance for possible loan losses 15,784 15,095 15,110
Net loans 706,083 725,081 729,223
Premises and equipment 19,865 20,942 20,959
Accrued income 15,170 14,121 13,148
Other assets 13,666 16,219 16,025
TOTAL ASSETS $1,621,570 $1,593,417 $1,602,192
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 196,253 $ 196,654 $ 185,477
Interest bearing 1,171,008 1,170,047 1,178,323
Total deposits 1,367,261 1,366,701 1,363,800
Short-term borrowings:
Treasury tax and loan notes payable to the U.S.
Treasury 11,303 9,849 10,867
Securities sold under agreements to repurchase 36,734 31,173 41,213
48,037 41,022 52,080
-4-
Interest payable and other liabilities 15,349 11,915 13,034
Long-term debt 12,097 12,099 14,101
Total liabilities 1,442,744 1,431,737 1,443,015
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares (10,000,000 at
December 31, 1994 and September 30, 1994)
Issued - 9,173,461 shares, 6,091,971 shares, and
6,087,456 shares, respectively 91,735 60,920 60,875
Surplus 57,900 57,770 57,791
Retained earnings 30,032 51,279 47,089
Unrealized net loss on securities available for sale (841) (8,289) (6,578)
Total shareholders' equity 178,826 161,680 159,177
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,621,570 $1,593,417 $1,602,192
See accompanying notes to consolidated financial statements.
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended
September 30
1995 1994
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,802 $ 12,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 750 811
Provision for depreciation and amortization 2,283 2,410
Investment securities (gains) loss 1 (265)
Net amortization of investment securities 1,456 2,650
Net increase in accrued income and other assets (1,129) (85)
Net increase in interest payable and other liabilities 3,421 960
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,584 19,280
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents assumed in acquisition of branch offices 14,661 8,273
Net increase in interest bearing deposits with unaffiliated banks (10) (2,000)
Proceeds from maturities of securities held to maturity 10,392 12,809
Purchases of securities held to maturity (92,870) (45,803)
Proceeds from maturities of securities available for sale 153,390 207,675
Proceeds from sales of securities available for sale 994 58,972
Purchases of securities available for sale (88,656) (235,927)
-5-
Net (increase) decrease in loans 17,799 (32,841)
Purchases of premises and equipment (819) (1,089)
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 14,881 (29,931)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and savings accounts (38,102) (25,624)
Net increase in certificates of deposit and other time deposits 22,771 10,155
Net increase in repurchase agreements and other short-term borrowings 7,015 15,964
Principal payments on long-term debt (2) (3)
Cash dividends (4,582) (3,832)
Proceeds from stock purchase plan 173 179
Proceeds from exercise of stock options 232 205
NET CASH USED FOR FINANCING ACTIVITIES (12,495) (2,956)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,970 (13,607)
Cash and cash equivalents at beginning of year 150,556 165,237
CASH AND CASH EQUIVALENTS AT END OF PERIOD $173,526 $151,630
See accompanying notes to consolidated financial statements.
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and long-term debt $ 32,038 $ 27,089
Federal income taxes paid 6,060 6,270
-6-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
NOTE A: BASIS OF PRESENTATION The accompanying unaudited consolidated
financial statements of Chemical Financial Corporation and subsidiaries
("Corporation") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
THE FINANCIAL STATEMENTS PRESENTED REFLECT ALL ADJUSTMENTS (CONSISTING SOLELY OF
NORMAL RECURRING ACCRUALS) WHICH ARE, IN THE OPINION OF MANAGEMENT, NECESSARY
FOR A FAIR PRESENTATION OF THE RESULTS OF OPERATIONS OF THE INTERIM PERIODS
PRESENTED. Operating results for the three- and nine-month periods ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Corporation's annual report on Form 10-K for the year ended December
31, 1994.
NOTE B: CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1995 the
Corporation adopted Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No. 118. Under the new standard, the allowance for possible loan losses in
1995, related to loans that are identified for evaluation in accordance with
SFAS No. 114, is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Prior to 1995, the allowance for possible loan
losses related to these loans was based on undiscounted cash flows or the fair
value of the collateral for collateral dependent loans. The adoption of SFAS
No. 114 did not have a significant impact on the Corporation's financial
position or results of operations.
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Unrealized appreciation and depreciation (the
difference between fair market value and amortized cost) on securities
classified as available for sale is accounted for as an adjustment to
shareholders' equity in accordance with SFAS No. 115. Upon adoption, the
application of SFAS No. 115 resulted in a $4.14 million increase in
shareholder's equity which represented the unrealized appreciation, net of
taxes, of the Corporation's investments in debt and equity securities
classified as available for sale as of that date, which prior to January 1,
1994, had been carried at amortized cost.
-7-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995 (continued)
As of September 30, 1995, the impact of SFAS No. 115 was a $.8 million
decrease in shareholders' equity, net of taxes, as compared to an $8.3 million
decrease as of December 31, 1994 and a $6.6 million decrease as of September
30, 1994. The Corporation's investment portfolio is composed primarily of
U.S. Treasury securities with an average maturity of less than one and one-
half years. The significant increase in interest rates on short-term U.S.
Treasury securities throughout 1994 accounted for the overall net reduction in
the fair market value of the Corporation's portfolio of investment securities
available for sale during 1994. However, due to both maturities of investment
securities and the decline in interest rates on short-term U.S. Treasury
securities from December 31, 1994 to September 30, 1995, the SFAS No. 115
shareholders' equity adjustment declined significantly from December 31, 1994
to September 30, 1995.
NOTE C: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the dates indicated'
(in thousands of dollars):
September 30 December 31 September 30
1995 1994 1994
LOANS:
Commercial and agricultural $122,556 $119,533 $123,129
Real estate construction 14,622 19,239 17,338
Real estate mortgage 446,886 449,086 442,750
Installment 137,803 152,318 161,116
Total Loans $721,867 $740,176 $744,333
NONPERFORMING ASSETS:
Nonaccrual loans $2,638 $2,682 $1,695
Loans 90 days or more past due and
still accruing interest 786 296 324
Restructured loans 100 148 246
Total nonperforming loans 3,524 3,126 2,265
Other real estate owned <F1> 973 773 901
Total nonperforming assets $4,497 $3,899 $3,166
<FN>
<F1> Other real estate owned includes properties acquired through foreclosure,
and by acceptance of a deed in lieu of foreclosure, and other property held for
sale. A portion of the properties have been sold, with some financed at below
market terms.
</FN>
-8-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995 (continued)
NOTE D: ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses (in
thousands of dollars):
For the nine months
Ended September 30
1995 1994
ALLOWANCE FOR LOAN LOSSES
Balance as of January 1, $15,095 $14,383
Provision for loan losses 750 811
Gross loans charged-off (203) (248)
Gross recoveries of loans previously charged-off 142 164
Net loans charged off (61) (84)
Balance at September 30, $15,784 $15,110
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Registrant's financial condition and results
of operations during the periods included in the consolidated financial
statements included in this filing.
SUMMARY
The Corporation's net income was $4,910,000 in the third quarter of 1995, as
compared to net income of $4,347,000 during the third quarter of 1994.
Earnings per share in the third quarter of 1995 was $.52, compared to earnings
per share in the third quarter of 1994 of $.47.
Return on average assets in the third quarter of 1995 was 1.23%, compared to a
return on average assets of 1.08% during the third quarter of 1994. Return on
average equity for the three months ended September 30, 1995 and September 30,
1994 were 10.9% and 10.5%, respectively.
The Corporation's net income was $13,802,000 for the first nine months of
1995, as compared to net income of $12,799,000 during the first nine months of
1994. Earnings per share for the nine months ended September 30, 1995 was
$1.48, as compared to earnings per share for the first nine months of 1994 of
$1.38.
-9-
Return on average assets for the first nine months of 1995 was 1.17%, compared
to a return on average assets of 1.07% for the first nine months of 1994.
Return on average equity for the nine month periods ended September 30, 1995
and September 30, 1994 were 10.5% and 10.6%, respectively.
Total assets were $1.622 billion as of September 30, 1995, compared to $1.593
billion as of December 31, 1994 and $1.602 billion as of September 30, 1994.
Total loans increased $8.8 million, or 1.2%, from June 30, 1995 to $721.9
million as of September 30, 1995. Total loans as of September 30, 1995 were
$22.5 million, or 3.0%, lower than total loans as of September 30, 1994.
Shareholders' equity increased $17.1 million, or 10.6%, from December 31, 1994
and $19.6 million, or 12.3%, from September 30, 1994, to $178.8 million, or
11% of total assets, as of September 30, 1995. As of September 30, 1995,
shareholders' equity per share was $19.49.
-10-
RESULTS OF OPERATIONS
NET INTEREST INCOME
An analysis of the components affecting operating earnings for the periods
presented in 1995 and 1994 is facilitated by segregating amounts into
categories of interest income, interest expense, other income, provision for
possible loan losses, operating expense and income tax expense. To improve
the comparability of the interest income component, interest income, shown in
the table which follows, is expressed on a fully taxable equivalent (FTE)
basis. For this purpose, tax-exempt interest earned has been adjusted as if
it had been subject to a federal income tax rate of 35%. The following
summary is a reconcilement of the tax equivalent amounts used in presenting
net interest income on a fully taxable equivalent basis to amounts shown in
the Corporation's quarterly consolidated statement of income.
Quarter Ended Nine Months Ended
9-30-95 9-30-94 9-30-95 9-30-94
(In thousands)
Interest income per quarterly
consolidated statement of income $26,473 $24,795 $78,229 $72,390
Add tax equivalent adjustment 291 365 914 1,068
Interest income (FTE) 26,764 25,160 79,143 73,458
Less interest expense 11,179 9,188 32,579 27,234
Net interest income (FTE) $15,585 $15,972 $46,564 $46,224
Other income is derived from trust services, service charges, data processing
and other bank related services, gains on sales of credit card, residential
mortgage and student loans, investment securities gains and miscellaneous
income. Operating expenses are comprised of salaries, wages and employee
benefits, occupancy expense, equipment expense, federal deposit insurance
premium expense and miscellaneous other operating expenses.
-11-
NET INTEREST INCOME (FTE)
The following table shows the effect that volume and rate changes had on the
net interest income (FTE) over the periods indicated.
Third Quarter 1995 Compared First Nine Months 1995 Compared
to Third Quarter 1994 to First Nine Months 1994
Increase (decrease) Increase (decrease)
due to changes in Combined due to changes in Combined
Average Average Increase Average Average Increase
Volume<F1> Yield/Rate<F1> (Decrease) Volume<F1> Yield/Rate<F1> (Decrease)
(In thousands)
Causes of increase (decrease) in net
interest income (FTE) due to:
CHANGES IN INTEREST INCOME ON
EARNING ASSETS:
Loans $ (728) $ 915 $ 187 $ (982) $2,783 $1,801
Taxable investment securities 319 921 1,240 652 2,447 3,099
Non-taxable investment securities (34) (146) (180) (150) (103) (253)
Federal funds sold 90 246 336 (254) 1,174 920
Interest bearing deposits with
unaffiliated banks 16 5 21 113 5 118
Total change in interest income
on earning assets (337) 1,941 1,604 (621) 6,306 5,685
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits (268) 2,177 1,909 (863) 5,735 4,872
Short-term borrowed funds (15) 99 84 (8) 381 373
Long-term debt (32) 30 (2) (83) 183 100
Total change in interest expense
on interest-bearing liabilities (315) 2,306 1,991 (954) 6,299 5,345
TOTAL INCREASE (DECREASE) IN NET
INTEREST INCOME (FTE) $ (22) $ (365) $ (387) $ 333 $ 7 $ 340
<FN>
<F1> The change in interest due to both rate and volume has been allocated to the
change due to volume and the change due to rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
</FN>
-12-
Net interest income (FTE) decreased $387,000, or 2.4%, in the third quarter of
1995 as compared to the third quarter of 1994. Net interest margin decreased
to 4.17% in the third quarter of 1995 from 4.26% in the third quarter of 1994.
The decrease in the net interest margin during the third quarter of 1995, as
compared to the third quarter of 1994, was primarily attributable to the
upward repricing of certificates of deposit which have matured within the
twelve month period ended September 30, 1995.
Net interest income (FTE) increased $340,000, or .7%, during the first nine
months of 1995 as compared to the first nine months of 1994. The 1995 year to
date increase in net interest income (FTE), as compared to the prior year, was
primarily attributable to the increase realized in the first quarter of 1995.
During the first quarter of 1995, increases in both average loans and net
interest margin resulted in a $611,000 increase in net interest income (FTE) as
compared to the first quarter of 1994. During the first quarter of 1995, the
increased yield on loans and investments more than offset the effect of the
upward repricing of certificates of deposit. Net interest margin increased to
4.20% during the first nine months of 1995 as compared to 4.15% during the first
nine months of 1994.
OTHER INCOME
Other income increased $403,000, or 16.0%, in the third quarter of 1995 and
$718,000, or 8.8%, in the first nine months of 1995 as compared to these same
periods in 1994.
The Corporation's trust department income, income from service charges on
deposit accounts and other charges and fees for customer services were
$272,000, or 12.5%, higher in the third quarter of 1995 than in the third
quarter of 1994. Trust department income increased 4.2% due to an increase in
services provided, while service charge income on deposit accounts and other
charges and fees for customer services increased 15.9% due to increased fees
on business checking accounts and on some customer services.
PROVISION FOR LOAN LOSSES
The provision for possible loan losses reflects management's judgment of
changing economic conditions, as well as increases and other changes in the
subsidiary banks' loan portfolios. It is management's policy to control loan
quality through a carefully structured review of loan requests. In assessing
the adequacy of the allowance for possible loan losses ("allowance"),
management believes that its historical experience confirms, in principle, its
judgment in what is essentially a subjective decision. Based upon historical
experience and a constant evaluation of present and potential risks in the
loan portfolios, management believes that the allowance is adequate. During
the three and nine months ended September 30, 1995, the Corporation added
$260,000 and $750,000, respectively, to the allowance through the provision
for possible loan losses, as compared to $278,000 and $811,000, respectively,
during these same periods in 1994. Net loan charge-offs during the three- and
-13-
nine-month periods ended September 30, 1995 were $27,000 and $61,000,
respectively, compared to net charge-offs of $38,000 and $84,000,
respectively, during these same periods in 1994.
OPERATING EXPENSES
Total operating expenses were down $785,000, or 6.9%, during the third quarter
of 1995 and $598,000, or 1.8%, during the first nine months of 1995, as
compared to these same periods in 1994. Operating expenses were down due to
the reduction in Federal Deposit Insurance Corporation (FDIC) premiums,
effective June 1, 1995. FDIC premiums were reduced 83% as a result of the
full capitalization of the Bank Insurance Fund to a 1.25% ratio. Consequently,
the Corporation's FDIC premiums were approximately $800,000 lower in the third
quarter of 1995 than in the third quarter of 1994. Excluding FDIC premiums,
all other operating expenses were relatively stable in the third quarter of
1995, as compared to the third quarter of 1994.
The Corporation's operating philosophy includes an objective of controlling
operating expenses, and accordingly, it has been successful in its efforts
thereto.
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 33.2% and 32.6%,
respectively, during the three and nine months ended September 30, 1995,
compared to 32.6% and 31.2%, respectively, during these same periods in 1994.
The effective federal income tax rate is a function of the Corporation's
interest income exempt from federal taxation, non-deductible interest expense
and other non-deductible expenses.
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets increased $28 million, or 1.8%, from December 31, 1994, and $19
million, or 1.2%, from September 30, 1994, to $1.622 billion as of September
30, 1995. Total deposits increased $560,000, or .04%, from December 31, 1994
and increased $3.461 million, or .25%, from September 30, 1994, to $1.367
billion as of September 30, 1995. These increases in assets and deposits are
attributable to the acquisition of the Belding, Michigan banking branch office
from First of America Bank-Michigan, N.A. on September 22, 1995. The branch
had deposits of approximately $16 million as of that date. The Corporation
merged this branch office into its affiliate Chemical Bank Montcalm,
headquartered in Stanton, Michigan.
LOANS
The Corporation's subsidiary banks are generally located in rural communities,
where the demand for commercial loans which meet the Corporation's credit
standards historically has not been high. The Corporation's philosophy is
-14-
such that it will neither compromise on loan quality nor make loans outside
its banking markets to increase its loan portfolio. The Corporation does not
generally purchase participation loans, which is a method utilized by many
financial institutions to increase the size of their loan portfolios.
Total loans as of September 30, 1995 were $721.9 million, as compared to
$713.1 million as of June 30, 1995, $744.3 million as of September 30, 1994
and $740.2 million as of December 31, 1994.
Real estate mortgage and real estate construction loans, combined, declined
$6.8 million, or 1.5%, from December 31, 1994 to $461.5 million as of
September 30, 1995. This decline was partially attributable to the
Corporation selling a portion of the residential mortgage loans originated
since December 31, 1994 in the secondary mortgage lending market. Real estate
construction and mortgage loans represented approximately 63.9% and 63.3% of
the Corporation's loan portfolio as of September 30, 1995 and December 31,
1994, respectively.
Installment loans decreased $14.5 million, or 9.5%, from December 31, 1994 to
$137.8 million as of September 30, 1995. The decrease in installment loans
between December 31, 1994 and September 30, 1995 was due to repayment of
installment loans made during the Corporation's Money Bonanza installment loan
promotions over the past five years and the sale of the Corporation's $3.2
million credit card loan portfolio in the second quarter of 1995. During each
of the past five years the Corporation's affiliate banks offered installment
loans at below market interest rates during special promotion periods. These
loans had maximum maturities, at origination, of between forty-eight and sixty
months. Due to the short average amortization periods of these loans,
repayments are currently exceeding new loans originated. Installment loans
represented approximately 19.1% and 20.6% of total loans as of September 30,
1995 and December 31, 1994, respectively.
Commercial and agricultural loans increased $3.0 million, or 2.5%, from
December 31, 1994 to $122.6 million as of September 30, 1995. Commercial and
agricultural loans represented 17.0% and 16.1%, of the Corporation's loan
portfolio as of September 30, 1995 and December 31, 1994, respectively.
The Corporation's total loan to deposit ratios as of September 30, 1995,
December 31, 1994 and September 30, 1994 were 52.8%, 54.2% and 54.6%,
respectively.
The Corporation traditionally has had a conservative loan underwriting policy.
This is evidenced by its historically low loan losses and low ratio of
nonperforming loans to total loans. For the three- and nine-month periods
ended September 30, 1995 the Corporation experienced net charge-offs of
$27,000 and $61,000, respectively, compared to net charge-offs of $38,000 and
$84,000, respectively, during these same periods in 1994.
Nonperforming loans consist of loans which are past due for principal or
interest payments by ninety days or more and still accruing interest, loans
-15-
for which the accrual of interest has been discontinued and loans which have
been renegotiated to less than market terms due to a serious weakening of the
borrower's financial condition. Nonperforming loans were $3.5 million as of
September 30, 1995, compared to $2.2 million as of September 30, 1994 and
represented .49% and .30% of total loans as of these dates, respectively. The
increase in nonperforming loans between these two dates is primarily
attributable to two secured commercial loans, one of which is in bankruptcy.
The Corporation's allowance for loan losses as of September 30, 1995 was 4.48
times total nonperforming loans.
The allowance for possible loan losses at September 30, 1995 was $15,784,000
and represented 2.19% of total loans and 448% of nonperforming loans as of
that date.
LIQUIDITY
The maintenance of an adequate level of liquidity is necessary to ensure that
sufficient funds are available to meet customers' loan demand and deposit
withdrawals. The banking subsidiaries' primary liquidity sources consist of
investment securities, those maturing within one year and those classified as
available for sale, maturing loans and federal funds sold. Federal funds sold
increased substantially during the second quarter of 1995. As of September 30,
1995 federal funds sold were $101 million, as compared to $62.85 million and
$67.1 million, as of June 30, 1995 and December 31, 1994, respectively. The
1995 third quarter increase was attributable to the acquisition of the branch
banking office of another banking organization in September, 1995, and a
significant increase in temporary large municipal deposits, included as
securities sold under agreements to repurchase on the statement of financial
condition as of September 30, 1995, which were invested in federal funds sold.
The increase in federal funds sold during the third quarter of 1995 was
temporary, as the available funds from the branch acquisition were partially
invested in U.S. Treasury securities in October, 1995 and the temporary large
municipal deposits declined as anticipated during October, 1995. As of
September 30, 1995 the Corporation's investment securities portfolio had an
average life of approximately one and one-half years. In addition, at September
30, 1995 the Corporation held only $4.2 million in mortgage backed securities,
which represented less than one percent of the investment securities portfolio,
and had no other derivatives or any investments in instruments considered "junk
bonds".
CAPITAL RESOURCES
As of September 30, 1995, shareholders' equity was $178.8 million compared to
$159.2 million as of September 30, 1994, an increase of $19.6 million, or
12.3%. Shareholders' equity as a percentage of total assets as of September
30, 1995 was 11.0% compared to 9.9% as of September 30, 1994. Total equity as
of September 30, 1995 and September 30, 1994 included an after-tax unrealized
net loss of $.8 million and $6.6 million, respectively, on available for sale
investment securities, in accordance with Statement of Financial Accounting
-16-
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (see note B to the Consolidated Financial Statements).
A statement of changes in shareholders' equity covering the nine-month periods
ended September 30, 1995 and September 30, 1994 follows.
For the nine months
ended September 30
1995 1994
(In thousands)
Total shareholders' equity as of January 1, $161,680 $156,379
Net income 13,802 12,799
Dividends (4,582) (3,832)
Shares issued upon exercise of employee
stock options 232 215
Shares issued from stock purchase plan 246 194
Adjustment to beginning balance for change
in accounting method of available for
sale investment securities (See Note B
to the consolidated financial statements) -- 4,138
Change in unrealized gains (losses) on
available for sale securities (See Note B
to the consolidated
financial statements) 7,448 (10,716)
Total shareholders' equity as of end of period $178,826 $159,177
The following table represents the Corporation's regulatory capital ratios as
of September 30, 1995.
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Chemical Financial Corporation - actual ratio 11.1% 27.1% 28.5%
Regulatory Minimum Ratio 3.0 4.0 8.0
Ratio considered "well capitalized" by 5.0 6.0 10.0
regulatory agencies
The Corporation's Tier 1 and Total capital ratios under the risk based capital
measure at September 30, 1995 are high due to the Corporation holding $650
-17-
million in investment securities and other assets which are assigned a 0% risk
rating, $208 million in assets which are assigned a 20% risk rating and $373
million in residential real estate mortgages and other assets which are
assigned a 50% risk rating. These three risk ratings (i.e., 0%, 20% and 50%)
represented 74% of the Corporation's total risk-based assets (including off-
balance sheet items) as of September 30, 1995.
OTHER
The Corporation declared a 3 for 2 stock split in December, 1994 which was
paid on January 20, 1995. All per share amounts have been adjusted to reflect
this split.
On September 19, 1995 the Corporation and State Savings Bancorp, Inc. reached
a preliminary agreement for the merger of State Savings Bancorp, Inc. with the
Corporation. State Savings Bancorp, Inc., is a one bank Michigan bank holding
company, with banking offices in Caro and Fairgrove, Michigan. State Savings
Bancorp, Inc. had total assets of $60 million as of September 30, 1995. The
merger is subject to approvals of regulatory agencies and the shareholders of
State Savings Bancorp, Inc. The merger is expected to be consummated during
the first half of 1996.
The Corporation completed the acquisition of the Belding, Michigan branch office
of First of America Bank-Michigan, N.A. on September 22, 1995. The branch had
total deposits of approximately $16 million and was merged into Chemical Bank
Montcalm, headquartered in Stanton, Michigan.
Other than as discussed above, there are currently no known trends, events or
uncertainties that management believes may be reasonably expected to have a
material effect on the Corporation's liquidity, capital resources or financial
performance.
-18-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
Form 10-Q.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: November 8, 1995 By /S/ ALAN W. OTT
Alan W. Ott, Chairman,
Chief Executive Officer and
President (duly authorized
signatory for Registrant)
Date: November 8, 1995 By /S/ LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President,
Chief Financial Officer and
Treasurer (principal financial
and accounting officer)
-20-
EXHIBIT INDEX
EXHIBIT
11. Statement Regarding Computation of Earnings Per Share
27. Financial Data Schedule
-21-