EXHIBIT 13
1995 ANNUAL REPORT
CHEMICAL FINANCIAL CORPORATION
FEATURING
CHEMICAL BANK
__________________
A FAMILY OF COMMUNITY BANKS
HIGHLIGHTS OF 1995
1995 marked the 21st consecutive year of increased operating earnings and
the 21st consecutive year of increased dividends:
- The Corporation paid a 3 for 2 stock split on January 20,
1995.
- 1995 Earnings were $19,731,000, up 8.0% over 1994 Earnings
of $18,268,000.
- 1995 Earnings per share were $2.12, up 7.6% over 1994
Earnings per share of $1.97.
- Return on average assets was 1.24% in 1995, compared to
1.14% in 1994.
- 1995 Dividends per share were $.68, up 21.4% over 1994
Dividends per share of $.56.
The Corporation's financial position remained strong at December 31, 1995.
Highlights as of this date follow:
- Total assets were $1.64 billion, up $50.5 million, or 3.2%,
from December 31, 1994.
- Shareholders' equity was $185.5 million and represented
11.3% of total assets.
- Total Capital as a percentage of risk-adjusted assets was
29%.
- U.S. Treasury and Agency securities accounted for 92% of the
Corporation's investment securities portfolio.
- The allowance for possible loan losses was $15,678,000, or
2.12% of total loans, compared to total nonperforming loans
of $2,597,000, or .35% of total loans.
During September 1995, the Corporation reached an agreement for the merger
of State Savings Bancorp, Inc., Caro, Michigan, with the Corporation. The
transaction is expected to be completed during the second quarter of 1996.
In addition, the Corporation acquired the Belding, Michigan, branch banking
office from First of America Bank-Michigan, N.A.
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REFERENCE GUIDE
HIGHLIGHTS OF 1995 . . . . . . . . . . . . . . . . . . . 2
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . 3
LETTER TO SHAREHOLDERS . . . . . . . . . . . . . . . . . 4
BOARD OF DIRECTORS AND CORPORATE INFORMATION . . . . . . 6
CHEMICAL BANK: A FAMILY OF COMMUNITY BANKS . . . . . . . 7
QUARTERLY FINANCIAL INFORMATION. . . . . . . . . . . . . 11
CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . 16
REPORT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS. . . . 25
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . 26
DIRECTORS AND OFFICERS OF AFFILIATES . . . . . . . . . . 40
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FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31
1995 1994 1993 1992 1991
OPERATING RESULTS (in thousands)
Net interest income. . . . . . . $ 61,357 $ 60,796 $ 60,113 $ 59,624 $ 54,170
Provision for possible
loan losses . . . . . . . . . . 1,053 1,081 1,089 1,414 2,214
Other income . . . . . . . . . . 11,693 10,880 11,482 10,420 8,920
Operating expenses . . . . . . . 42,606 43,826 44,936 44,087 40,873
Net operating income . . . . . . 19,731 18,268 17,268 16,541 13,671
Net income . . . . . . . . . . . 19,731 18,268 19,268 16,541 13,871
PER SHARE DATA
Net operating income . . . . . . $ 2.12 $ 1.97 $ 1.86 $ 1.81 $ 1.52
Net income . . . . . . . . . . . 2.12 1.97 2.08 1.81 1.55
Cash dividends . . . . . . . . . .68 .56 .51 .47 .44
Book value end-of-period . . . . 20.18 17.69 17.19 15.61 14.31
Market value end-of-period . . . 38.50 26.67 27.33 23.49 15.03
AT YEAR END (in thousands)
Total assets . . . . . . . . . . $1,643,880 $1,593,417 $1,589,693 $1,573,072 $1,494,713
Deposits . . . . . . . . . . . . 1,397,266 1,366,701 1,370,996 1,368,386 1,306,073
Long-term debt . . . . . . . . . 12,080 12,099 14,104 16,057 16,186
Shareholders' equity . . . . . . 185,544 161,680 156,379 141,241 127,981
FINANCIAL RATIOS
Return on average total
assets. . . . . . . . . . . . . 1.24% 1.14% 1.22% 1.08% .95%
Return on average
shareholders' equity. . . . . . 11.1 11.2 12.9 12.3 11.2
Average shareholders' equity to
average total assets. . . . . . 11.2 10.3 9.4 8.8 8.4
Cash dividends paid per share
to net income per share . . . . 32.1 28.4 24.4 25.8 28.4
Allowance for possible loan
losses to total loans . . . . . 2.12 2.04 2.02 1.94 1.78
Tangible equity to assets. . . . 11.0 9.9 9.6 8.7 8.3
________________________________________________________________________________
[LOAN COMPOSITION GRAPH] [BOOK VALUE PER SHARE GRAPH]
[CASH DIVIDENDS PER SHARE GRAPH]
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MESSAGE TO OUR SHAREHOLDERS
[PICTURE OF ALAN W. OTT--CHAIRMAN,
CHIEF EXECUTIVE OFFICER AND PRESIDENT]
In 1995, for the twenty-first consecutive year, earnings from
operations increased. Moreover, Net Income for the year ($19,731,000,
or $2.12 per common share) set a new record. In 1994, we reported Net
Income of $18,268,000, or $1.97 per share. Net Income increased 8.0%,
while Earnings Per Share increased 7.6%. Our Return on Average Assets
was 1.24%, up from 1.14% last year. The Return on Average Equity was
11.1%, compared to 11.2% one year ago. This slight decline was the
consequence of an 8.5% increase in Average Shareholders' Equity during
1995.
These results reflect positively on our efforts to seek
continuous, incremental improvements in our operations. Our market
niche is community banking in smaller cities and towns. To be
effective, we must constantly strive to reduce our overhead by
consolidating "back room" activities whenever possible, while keeping
the authority to make decisions affecting our customers, particularly
credit approvals, in the hands of our affiliate bank officers and
directors.
The Financial Statements that follow detail our 1995 performance.
While no individual items merit special comment, Total Operating
Expenses decreased by 2.8%. These savings were due, in large part, to
the recapitalization of the Bank Insurance Fund, which resulted in a
significant reduction in our Federal Deposit Insurance Corporation
(FDIC) insurance premiums in the second half of the year.
The most significant development of the year was the execution of
a definitive agreement to merge with State Savings Bancorp, Inc., the
holding company for State Savings Bank of Caro. When this transaction
closes, State Savings Bank of Caro will change its name to Chemical
Bank Thumb Area. Subsequently, we will transfer seven Thumb Region
branches currently operated by Chemical Bank Bay Area to the new Thumb
Area affiliate. At the same time, we will consolidate our present
downtown Caro office with the main office of State Savings Bank,
located just across the street. Chemical Bank Thumb Area will be the
largest bank in the Thumb, with total assets of approximately $180
million. We are confident that this new affiliate will allow us to
become a much more effective competitor in that prosperous
agricultural region.
In preparation for the transfer of Chemical Bank Bay Area's
branches to our newest affiliate, we are merging Chemical Bank Huron
into the Bay Area bank. Unless an unusual expansion opportunity
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presents itself, we believe limiting the total number of affiliate
banks to 10 is the most efficient and effective way to organize the
Corporation.
In a smaller, but significant move, we also acquired the Belding
branch of First of America Bank-Michigan, N.A. This office, with total
deposits of approximately $16 million, is now a branch of Chemical
Bank Montcalm.
As our customers adopt new technologies in their personal and
professional lives, they become more receptive to technology-based
banking services. Recognizing this trend, we introduced ChemConnect, a
new electronic banking service, in 1995. It allows our customers to
check their account balances, inquire about interest rates on deposits
and loans, transfer funds among accounts, verify check clearings and
obtain other information about their accounts.
We also added five ChemKey ATMs to our network last year and now
offer this popular service in 76 locations. A new central information
file now makes it faster and easier for our staff to check the status
of a customer's total relationship with our banks. Finally, we are
providing our business customers with new means of initiating
electronic funds transfers from their accounts. Beginning in January
1997, corporate customers will be able to remit their own tax payments
by electronic transfer to the Internal Revenue Service.
New developments are constantly changing customer expectations,
and we will be responsive to them. As a super-community bank, our
basic approach is to keep initial costs to a minimum by adopting
proven systems offered by established vendors. We intend to continue
to offer our customers the technology-based services they desire while
availing ourselves of every opportunity to reduce expenses without
affecting customer service.
We believe maintaining a first-rate technological capability and
continuing our efforts to develop a pervasive sales culture throughout
our organization will be two of the most important factors in the
success of our organization in the foreseeable future. The basics of
our business are not changing all that much, but the way we do
business is changing all the time. Consequently, we are always
prepared to incorporate that which is new and better in our
operations, while avoiding the undue risks of prematurely adopting
that which is new before it has been demonstrated to also be better.
In keeping with this philosophy, we incorporated a "shell"
insurance agency during the fourth quarter. This step was permitted by
recent changes to the Michigan Banking and Insurance Codes. Over time,
we anticipate offering our customers a variety of insurance products.
The sale of insurance products can be a source of additional fee
income with a long-term potential comparable to the continuing
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expansion of our trust activities. We are now offering trust services
at all our affiliate banks, with excellent results. We see prospects
for continued growth in the years ahead as more customers seek
professional assistance in the management and allocation of their
non-deposit financial assets.
We are always looking for new sources of fee income, which will
become increasingly important to all financial institutions in the
years ahead. That is one of the reasons we are now working more
closely with Capital BIDCO, Inc., in which we have had an investment
since 1990, to see if we can help our business customers accelerate
growth, finance acquisitions and restructure long-term debt. In some
situations, this partnership might allow us to help customers in ways
we could not alone, while providing new sources of fees.
Several valued colleagues retired during 1995. Ronald Phillips,
who had been president of Chemical Bank North since 1985 and a
Chemical Financial Corporation affiliate employee for almost 30 years,
retired under the provisions of our employees' retirement program on
March 31. At the Annual Meeting in April, we noted the retirement of
two affiliate directors. James S. Bicknell, III, left the board of
Chemical Bank Michigan following 39 years of service. James B.
Capitan, a director of Chemical Bank Key State, retired after serving
that bank for seven years. We thank these gentlemen for their loyalty
and contributions to the success of our organization and wish them
good fortune in the years ahead.
We are cautiously optimistic about our prospects in 1996. As it
has been for a number of years, maintaining our net interest margin
will be a significant challenge throughout the year. Our plan for
success is not complicated. Use technology to improve customer service
and reduce costs. Become better salespeople at all levels. Seek
increased fee income by providing additional services. Use our
affiliate bank officers and directors to keep us close to developments
in our markets and maintain the confidence of the people and business
organizations located there. And, most important, rely upon the good
people who work for Chemical Financial Corporation to constantly do
what is right ... for our customers, for the communities we serve and
for our shareholders.
Sincerely,
/s/ Alan W. Ott
Alan W. Ott
Chairman, Chief Executive Officer and President
[NET OPERATING INCOME PER SHARE GRAPH] [NET INCOME GRAPH]
[NET INCOME PER SHARE GRAPH] [TOTAL ASSETS GRAPH]
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THE COMPANY
Chemical Financial Corporation is a registered bank holding company
headquartered in Midland, Michigan, that operates ten bank affiliates
with eighty-five banking offices in twenty-four counties located
generally across the midsection of Michigan's lower peninsula. 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 also owns a bank-related company, CFC Data Corp, which
provides data processing services to both the Corporation's subsidiary
banks and non-affiliated business customers.
Because the Corporation is a bank holding company, its principal
operations are conducted by its subsidiaries.
The Parent Company serves as controlling shareholder and maintains
systems of financial, operational and administrative controls that
permit centralized evaluation of subsidiary operations. The Parent
Company also provides substantive assistance to its subsidiaries in
selected functional areas including accounting, operations, marketing,
investments, central purchasing, financial planning, internal
auditing, loan quality control, training, compliance with regulatory
requirements and personnel.
ANNUAL MEETING
The annual meeting of the shareholders will be held at the Midland
Center for the Arts, Midland, Michigan, on Monday, April 15, 1996, at
2:00 P.M.
DIVIDEND REINVESTMENT
The Corporation offers a dividend reinvestment program through KeyCorp
Shareholder Services, Inc., Cleveland, Ohio, whereby shareholders may
reinvest their Chemical Financial Corporation dividends in additional
shares of the Corporation's stock. Information concerning this
optional program is available from the Corporate Secretary, Chemical
Financial Corporation, P.O. Box 569, Midland, Michigan 48640.
Telephone (517) 839-5350.
ADDITIONAL 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,
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NASDAQ symbol: CHFC. As of December 31, 1995 there were four
registered market makers of Chemical Financial Corporation common
stock: A.G. Edwards & Sons, Inc., Stifel Nicolaus & Co., First of
Michigan Corporation and Roney & Company. The approximate number of
shareholders of record at December 31, 1995 was 3,500. Analysts,
investors, and others seeking financial or general information about
the Corporation are invited to contact Aloysius J. Oliver, Executive
Vice President and Secretary, or Lori A. Gwizdala, Senior Vice
President and Chief Financial Officer, Telephone (517) 839-5350.
EQUAL OPPORTUNITY EMPLOYERS
Chemical Financial Corporation and its subsidiaries are equal
opportunity employers.
REGISTRAR & TRANSFER AGENTS
KeyCorp Shareholder Services, Inc.
Investment Management and
Trust Services Center
P.O. Box 6477
Cleveland, Ohio 44101
Chemical Bank and Trust Company
333 East Main Street
Midland, Michigan 48640
BOARD OF DIRECTORS
JAMES A. CURRIE
EDUCATOR
MICHAEL L. DOW
CHAIRMAN, GENERAL AVIATION, INC.
ALAN W. OTT
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
FRANK P. POPOFF
CHAIRMAN, THE DOW CHEMICAL COMPANY
LAWRENCE A. REED
RETIRED, DOW CORNING CORPORATION
WILLIAM S. STAVROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE DOW CHEMICAL COMPANY
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OFFICERS
ALAN W. OTT
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
ALOYSIUS J. OLIVER
EXECUTIVE VICE PRESIDENT AND SECRETARY
LORI A. GWIZDALA
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
GLENN SWEENEY
VICE PRESIDENT AND CORPORATE AUDITOR
THEODORE J. GROENING
ASSISTANT VICE PRESIDENT AND ASSISTANT
FINANCIAL OFFICER
ROBERT S. RATHBUN
ASSISTANT VICE PRESIDENT AND CORPORATE LOAN
REVIEW AND COMPLIANCE OFFICER
JOSEPH W. TORRENCE
ASSISTANT VICE PRESIDENT AND CORPORATE
HUMAN RESOURCES OFFICER
SANDRA BARGERON
ASSISTANT VICE PRESIDENT AND AUDITOR
RUDOLPH R. RADOSA, JR.
AUDITOR
ROBERT E. SUTTON
LOAN REVIEW OFFICER
CORPORATE OFFICES
333 East Main Street
P.O. Box 569
Midland, Michigan 48640
Telephone: (517) 839-5350
Fax Number: (517) 839-5337
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CHEMICAL BANK
A FAMILY OF COMMUNITY BANKS
FINANCIAL STRENGTH
In today's world, FINANCIAL STRENGTH can be tenuous. But Chemical
Financial Corporation and its Chemical Bank affiliates remain a
rock-solid example of a community bank organization.
Our core business is still to accept deposits and make loans. Our
goal is to serve Michigan's smaller cities and towns where quality
financial services are most needed; our strategy is to keep our
overhead low, our services affordable. In doing so, we have
experienced success and growth.
Today's banking world is dominated by change - megamergers,
interstate banking, the encroachment of nontraditional players on
traditional banking roles. At Chemical Bank, we monitor these changes,
adjust to them, but hold to our steady forward course. Our first task
is to maintain our financial strength and growth. Because our first
responsibility is to the communities and people we serve.
CUSTOMER SERVICE
At Chemical Bank, CUSTOMER SERVICE takes on many forms - a
friendly smile, a kind word, a desire to understand a customer's needs
and a willingness to meet them. At Chemical Bank, customer service is
COMMUNITY SERVICE, neighbor helping neighbor.
But customer service goes beyond traditional courtesies at
Chemical Bank with advanced technology to meet the demand for greater
convenience, speed and access. Drive-thru windows, direct deposit,
ATMs and now even a sophisticated bank-by-phone system.
Customer service at Chemical Bank combines the human touch with
the electronic without sacrificing the "community" in community
banking.
COMMUNITY KNOWLEDGE
At many rural Chemical Bank branches, representatives trained in
agricultural finance help area farmers meet their goals. It is just
one example of the COMMUNITY KNOWLEDGE that Chemical Bank affiliates
use to help breathe life, as well as investment capital, into
Mid-Michigan. Knowledge that area business people all too often cannot
find at larger lending institutions.
Chemical Bank's knowledge is an understanding of a community's
people, resources and potential. This knowledge has led to the opening
of hundreds of small businesses, the growth of others into some of the
area's largest employers, and the satisfaction of thousands of
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individual customers with very individual needs. Only a bank that
knows its community is a community bank.
LOCAL INVOLVEMENT
A decade ago, downtown Midland was in decline. Competition and
age had robbed it of its vibrancy and attraction. But a group of civic
and business leaders, including officers of Chemical Financial
Corporation, rallied to its defense.
Community reinvestment is a legal requirement for all banks. At
Chemical Bank, it is also an individual imperative. LOCAL INVOLVEMENT
is vital to a community bank, because the quality of life of our
communities and the Chemical Bank people who live there is
interconnected.
Today, Chemical Bank people across the state can point to dozens
of community projects in which they've had a hand. They have helped
make their communities better for themselves, their families, their
neighbors, and the future. And, incidentally, today downtown Midland
is a beautiful, busy and vital area.
CHEMICAL BANK
A FAMILY OF COMMUNITY BANKS
Across the Lower Peninsula, from Big Rapids in the west to the
farmlands of the Thumb, from Grayling in the north to Marshall in the
south, Chemical Bank affiliates serve the citizens and communities of
Michigan.
Chemical Bank is a "family of community banks" providing a range
of quality financial services. To serve the small cities and rural
communities of Michigan is a conscious strategy of Chemical Financial
Corporation, parent company of the 10 Chemical Bank affiliates.
As a COMMUNITY BANK, Chemical Bank becomes a part of the
communities it serves. The needs of residents become the local bank's
routine; the prosperity of its industries becomes a key objective; the
community's future becomes the affiliate's future.
Chemical Bank is the epitome of a COMMUNITY BANK. Our goal is
continued financial strength, which empowers both the corporation and
the communities we serve. Our focus is on customer service; our
strength is community knowledge. And our impulses are toward local
involvement.
Across the middle of Michigan, a family of community banks makes
a difference in the lives of thousands and the economies upon which
they rely. It is the family of Chemical Banks.
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[PICTURE OF A CASH DRAWER]
[PICTURE OF A BUSINESS MEETING]
[PICTURE OF A SPRINKLER SYSTEM]
[PICTURE OF A YOUTH ORCHESTRA]
FINANCIAL STRENGTH
CUSTOMER KNOWLEDGE
COMMUNITY KNOWLEDGE
LOCAL INVOLVEMENT
CORPORATE NETWORK
[CORPORATE LOCATIONS IN THE STATE OF MICHIGAN MAP]
CHEMICAL FINANCIAL CORPORATION
Chemical Financial Corporation is a bank holding company headquartered
in Midland, Michigan, with total assets of $1.64 billion as of
December 31, 1995. It is in the business of retail banking and related
services through its 10 Chemical Bank affiliates and data processing
services subsidiary.
Chemical Financial's principal markets for financial services are
smaller communities across Mid-Michigan, as depicted on the map above.
Chemical Financial operates 85 banking offices in 24 counties. As of
December 31, 1995, the Corporation had 955 employees (on a full-time
equivalent basis).
[C] Chemical Bank main office locations.
[C] State Savings Bank of Caro proposed affiliation to be completed
prior to June 30, 1996.
[Chemical Bank logo]
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QUARTERLY FINANCIAL INFORMATION
STOCK PRICE RANGES AND CASH DIVIDENDS
1995 1994
CASH CASH
HIGH LOW DIV. HIGH LOW DIV.
First quarter. . . . $ 27.50 $ 25.50 $ .16 $ 28.00 $ 26.67 $ .14
Second quarter . . . 28.25 27.50 .16 26.67 25.33 .14
Third quarter. . . . 36.00 28.25 .18 26.00 24.33 .14
Fourth quarter . . . 39.00 36.00 .18 26.67 25.00 .14
$ .68 $ .56
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 the actual transactions. As of December 31,
1995, there were 9,194,376 shares of Chemical Financial Corporation
common stock issued and outstanding held by approximately 3500
shareholders of record.
The earnings of the Corporation's subsidiary banks are the principal
source of funds to pay cash dividends. Consequently, cash dividends
are dependent upon the earnings, capital needs, regulatory
constraints, and other factors affecting each individual bank. See
Note H to the Consolidated Financial Statements for a discussion of
such limitations. Management expects the Corporation to declare and
pay regular quarterly cash dividends on its common shares in 1996.
_____________________________________________________________________
SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands, except per share data)
1995 1994
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
Interest income. . . . . $25,585 $26,171 $26,473 $27,337 $23,668 $23,927 $23,795 $25,344
Interest expense . . . . 10,434 10,966 11,179 11,630 9,175 8,871 9,188 9,704
Net interest income 15,151 15,205 15,294 15,707 14,493 15,056 15,607 15,640
Provision for possible
loan losses. . . . . . 250 240 260 303 264 269 278 270
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Investment securities
gains (losses). . . . . 115 152 (2)
Income before income
taxes. . . . . . . . . 6,505 6,630 7,345 8,911 5,783 6,374 6,452 8,160
Net income . . . . . . . 4,394 4,498 4,910 5,929 4,054 4,398 4,347 5,469
Net income per share . . .47 .49 .52 .64 .44 .47 .47 .59
[Chemical Bank logo]
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31
1995 1994 1993
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . $ 62,732 $ 60,397 $ 61,995
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . 36,015 31,881 35,084
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . 2,003 2,171 2,106
TOTAL INTEREST ON SECURITIES 38,018 34,052 37,190
Interest on federal funds sold . . . . . . . . . . . . . . . 4,612 3,219 2,136
Interest on deposits with unaffiliated banks . . . . . . . . 204 66
TOTAL INTEREST INCOME 105,566 97,734 101,321
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . . 41,824 35,041 39,714
Interest on short-term borrowings. . . . . . . . . . . . . . 1,552 1,159 837
Interest on long-term debt . . . . . . . . . . . . . . . . . 833 738 657
TOTAL INTEREST EXPENSE 44,209 36,938 41,208
NET INTEREST INCOME 61,357 60,796 60,113
Provision for possible loan losses - Note D. . . . . . . . . 1,053 1,081 1,089
NET INTEREST INCOME After Provision for
Possible Loan Losses. . . . . . . . . . . . . . . . . . . . 60,304 59,715 59,024
OTHER INCOME
Trust department income. . . . . . . . . . . . . . . . . . . 2,681 2,616 2,332
Service charges on deposit accounts. . . . . . . . . . . . . 5,074 4,356 4,239
Other charges and fees for customer services . . . . . . . . 2,098 2,067 2,075
Revenue from data processing services. . . . . . . . . . . . 1,011 1,032 1,011
Gains on sales of loans. . . . . . . . . . . . . . . . . . . 526 188 1,082
Investment securities gains. . . . . . . . . . . . . . . . . 265 437
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 356 306
TOTAL OTHER INCOME 11,693 10,880 11,482
OPERATING EXPENSES
Salaries, wages and employee benefits. . . . . . . . . . . . 24,661 24,424 24,730
Occupancy expense - premises . . . . . . . . . . . . . . . . 3,924 3,935 3,851
Equipment rentals, depreciation and maintenance. . . . . . . 2,616 2,785 2,665
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,405 12,682 13,690
TOTAL OPERATING EXPENSES 42,606 43,826 44,936
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INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES . . . . . . . . . . . . . . . . . . . 29,391 26,769 25,570
Federal income taxes . . . . . . . . . . . . . . . . . . . . 9,660 8,501 8,302
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLES . . . . . . . . . . . . . . 19,731 18,268 17,268
Cumulative effect on prior years of change
in accounting principles. . . . . . . . . . . . . . . . . . 2,000
NET INCOME $ 19,731 $ 18,268 $ 19,268
PER COMMON SHARE - NOTE A:
Income before cumulative effect of change in
accounting principles . . . . . . . . . . . . . . . . . . . $ 2.12 $ 1.97 $ 1.86
Cumulative effect on prior years of change
in accounting principles. . . . . . . . . . . . . . . . . . .22
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.12 $ 1.97 $ 2.08
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . $ .68 $ .56 $ .51
See notes to consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DECEMBER 31
1995 1994
(In thousands)
ASSETS
Cash and demand deposits due from banks. . . . . . . . . . . . $ 88,054 $ 83,456
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . 80,100 67,100
Interest bearing deposits with unaffiliated banks. . . . . . . 2,981 2,967
Investment securities - Notes A and C:
Held to maturity (estimated market value
$365,516,000 in 1995 and $271,107,000
in 1994). . . . . . . . . . . . . . . . . . . . . . . . . . 360,864 280,962
Available for sale (at estimated market value). . . . . . . . 341,670 382,569
Total investment securities 702,534 663,531
Loans - Note D . . . . . . . . . . . . . . . . . . . . . . . . 738,716 740,176
Less: Allowance for possible loan losses. . . . . . . . . . . 15,678 15,095
Net loans 723,038 725,081
Premises and equipment - Note A. . . . . . . . . . . . . . . . 19,821 20,942
Accrued income . . . . . . . . . . . . . . . . . . . . . . . . 15,060 14,121
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 12,292 16,219
TOTAL ASSETS $1,643,880 $1,593,417
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . $ 208,377 $ 196,654
Interest bearing. . . . . . . . . . . . . . . . . . . . . . . 1,188,889 1,170,047
Total deposits 1,397,266 1,366,701
Short-term borrowings:
Treasury tax and loan notes payable to the
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . 7,084 9,849
Securities sold under agreements to repurchase. . . . . . . . 28,139 31,173
35,223 41,022
Interest payable and other liabilities . . . . . . . . . . . . 13,767 11,915
Long-term debt - Note G. . . . . . . . . . . . . . . . . . . . 12,080 12,099
Total liabilities 1,458,336 1,431,737
Shareholders' equity - Notes H and I:
Common stock, $10 par value:
Authorized - 15,000,000 shares
(10,000,000 at December 31, 1994)
Issued and outstanding - 9,194,376 shares
in 1995 and 6,091,971 shares in 1994. . . . . . . . . . . . 91,944 60,920
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,918 57,770
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Retained earnings . . . . . . . . . . . . . . . . . . . . . . 34,307 51,279
Unrealized net gain (loss) on investment
securities available for sale . . . . . . . . . . . . . . . 1,375 (8,289)
Total shareholders' equity 185,544 161,680
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,643,880 $1,593,417
See notes to consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31
1995 1994 1993
(In thousands, except per share data)
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,731 $ 18,268 $ 19,268
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting
principles. . . . . . . . . . . . . . . . . . . . . . . (2,000)
Provision for possible loan losses. . . . . . . . . . . . 1,053 1,081 1,089
Provision for depreciation and amortization . . . . . . . 2,730 2,876 2,729
Investment securities gains . . . . . . . . . . . . . . . (265) (437)
Deferred income tax credits . . . . . . . . . . . . . . . (180) (175) (930)
Net amortization of investment securities . . . . . . . . 2,191 3,163 4,274
Net (increase) decrease in accrued income and
other assets . . . . . . . . . . . . . . . . . . . . . (748) (192) 1,409
Net increase (decrease) in interest payable
and other liabilities . . . . . . . . . . . . . . . . . 1,783 (222) (725)
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,560 24,534 24,677
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. . . . . . . . . . . . . . . . . . . . . (14) (2,967)
Proceeds from maturities of investment securities held
to maturity - Note C. . . . . . . . . . . . . . . . . . . . 13,574 16,865 190,229
Proceeds from sales of investment securities - Note C. . . . 32,399
Purchases of investment securities held to
maturity - Note C . . . . . . . . . . . . . . . . . . . . . (93,040) (65,070) (248,654)
Proceeds from maturities of investment securities
available for sale - Note C . . . . . . . . . . . . . . . . 201,593 267,876
Proceeds from sales of investment securities
available for sale - Note C . . . . . . . . . . . . . . . . 58,972
Purchases of investment securities available
for sale - Note C . . . . . . . . . . . . . . . . . . . . . (148,454) (278,387)
Net (increase) decrease in loans . . . . . . . . . . . . . . 490 (29,034) (1,303)
Purchases of premises and equipment. . . . . . . . . . . . . (1,081) (1,437) (1,611)
NET CASH USED IN INVESTING ACTIVITIES (12,271) (24,909) (28,940)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts . . . . . . . . . . . . . (11,017) (40,766) 44,881
Net increase (decrease) in certificates of
deposit and other time deposits . . . . . . . . . . . . 25,691 28,198 (42,271)
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Net increase (decrease) in short-term borrowings . . . . . . (5,799) 4,906 790
Proceeds from debt refinancing . . . . . . . . . . . . . . . 14,000
Principal payments on long-term debt . . . . . . . . . . . . (19) (2,005) (16,033)
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . (6,236) (5,111) (4,516)
Proceeds from stock purchase plan. . . . . . . . . . . . . . 236 243 195
Proceeds from exercise of stock options. . . . . . . . . . . 453 229 275
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,309 (14,306) (2,679)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,598 (14,681) (6,942)
Cash and cash equivalents at beginning of year 150,556 165,237 172,179
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 168,154 $ 150,556 $ 165,237
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid on deposits, short-term borrowings and
long-term debt. . . . . . . . . . . . . . . . . . . . . . . $ 43,301 $ 36,832 $ 42,081
Federal income taxes paid. . . . . . . . . . . . . . . . . . 9,183 9,220 9,170
See notes to consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED
NET GAIN (LOSS)
ON INVESTMENT
SECURITIES
COMMON RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
(In thousands)
BALANCES AT DECEMBER 31, 1992. . . . . . . . $ 48,821 $ 48,088 $ 44,332 $141,241
Stock split - 6 for 5. . . . . . . . . . . . 8,620 (8,620)
Net income for 1993. . . . . . . . . . . . . 19,268 19,268
Cash dividends paid. . . . . . . . . . . . . (4,516) (4,516)
Shares issued upon exercise of employee
stock options (including related tax
benefit). . . . . . . . . . . . . . . . . . 269 12 281
Shares issued from stock purchase plan . . . 29 76 105
BALANCES AT DECEMBER 31, 1993. . . . . . . . 57,739 48,176 50,464 156,379
Stock dividend - 5%. . . . . . . . . . . . . 2,887 9,455 (12,342)
Net income for 1994. . . . . . . . . . . . . 18,268 18,268
Cash dividends paid. . . . . . . . . . . . . (5,111) (5,111)
Shares issued upon exercise of employee
stock options (including related tax
benefit). . . . . . . . . . . . . . . . . . 248 (10) 238
Shares issued from stock purchase plan . . . 46 149 195
Adjustment to beginning balance for change
in accounting method - Notes A and C $ 4,138 4,138
Change in unrealized gains and (losses) on
investment securities available for sale (12,427) (12,427)
BALANCES AT DECEMBER 31, 1994. . . . . . . . 60,920 57,770 51,279 (8,289) 161,680
Stock split - 3 for 2. . . . . . . . . . . . 30,467 (30,467)
Net income for 1995. . . . . . . . . . . . . 19,731 19,731
Cash dividends paid. . . . . . . . . . . . . (6,236) (6,236)
Shares issued upon exercise of employee
stock options (including related tax
benefit). . . . . . . . . . . . . . . . . . 465 (6) 459
Shares issued from stock purchase plan . . . 92 154 246
Change in unrealized gains and (losses) on
investment securities available for sale 9,664 9,664
BALANCES AT DECEMBER 31, 1995. . . . . . . . $ 91,944 $ 57,918 $ 34,307 $ 1,375 $185,544
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Chemical Financial
Corporation and its subsidiaries conform to generally accepted
accounting principles and prevailing practices within the banking
industry. Management makes estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
footnotes. Actual results could differ from these estimates.
Significant accounting policies of Chemical Financial Corporation (the
Corporation) and its subsidiaries are described below:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Corporation include the
accounts of the parent company and its subsidiaries, all of which are
wholly-owned. All significant income and expenses are recorded on the
accrual basis. Intercompany accounts and transactions have been
eliminated in preparing the consolidated statements.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from unaffiliated banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Effective January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115).
Investment securities available for sale include those securities
which might be sold as part of the Corporation's management of
interest rate and prepayment risk, in response to changes in interest
rates, or a desire to increase liquidity.
In accordance with the provisions of SFAS 115, beginning January 1,
1994, investment securities available for sale are stated at estimated
market value, with the aggregate unrealized gains and losses, net of
income taxes, classified as a component of shareholders' equity. Prior
to January 1, 1994, all investment securities were carried at cost
adjusted for the amortization of premium and accretion of discount
over the terms of the securities. Realized gains and losses from the
sale of investment securities available for sale are determined using
the specific identification method and are classified as other income
in the consolidated statement of income.
On July 1, 1994, the Corporation reassessed its position relative to
the January 1, 1994 classification of $182 million of U.S. Treasury
securities, maturing in 1996 and 1997, as available for sale, and
reclassified these investment securities to the held to maturity
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category. As of July 1, 1994, the aggregate net unrealized loss on
these U.S. Treasury securities of approximately $6 million was
accounted for as a component of shareholders' equity and is being
amortized over the remaining lives of the securities as a yield
adjustment. This reclassification had no impact on 1994 net income and
will not have any impact on future net income. This reclassification
was based on the Corporation's then current and anticipated future
liquidity needs, the then current level of interest rates and the
Corporation's assumptions related to future interest rate trends.
INVESTMENT SECURITIES HELD TO MATURITY:
Designation as an investment security held to maturity is generally
made at the time of acquisition and is based on the Corporation's
intent and ability to hold the security to maturity. Securities held
to maturity are stated at cost adjusted for the amortization of
premium and accretion of discount to maturity, with the exception of
$182 million of U.S. Treasury securities reclassified on July 1, 1994
from the available for sale to the held to maturity investment
security category. The aggregate net unrealized loss of approximately
$6 million on these reclassified securities was accounted for as
component of shareholders' equity and is being amortized over the
remaining lives of the securities as a yield adjustment.
LOANS:
Loans are stated at their principal amount outstanding, net of
unearned income. Loan performance is reviewed regularly by loan review
personnel, loan officers and senior management. Loan interest income
is recognized on the accrual basis. A loan is placed in the nonaccrual
category when principal or interest is past due 90 days or more,
unless the loan is both well secured and in the process of collection,
or when in the opinion of management, there is sufficient reason to
doubt the collectability of future principal or interest. Interest
previously accrued, but not collected, is reversed and charged against
interest income at the time the loan is placed in nonaccrual status.
The future recognition of interest income on a nonaccrual loan is on
the cash basis.
Payments received on nonaccrual loans are recorded as principal
reductions if principal repayment is doubtful. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is maintained at a level that,
in management's judgment, is considered to be adequate to provide for
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potential loan losses. Management's evaluation is based on a
continuing review of the loan portfolio, including consideration of
actual loan loss experience, prospective financial condition of the
borrowers, balance of the loan portfolio, loan growth forecasts, and
current and prospective economic conditions.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated
depreciation. Premises and equipment are depreciated over the useful
lives of the assets. Depreciation is computed on the straight-line
method. The estimated useful lives are generally 25 to 35 years for
buildings and 3 to 15 years for equipment.
A summary of premises and equipment at December 31, follows:
1995 1994
(In thousands)
Bank premises. . . . . . . . . . . . . . . . . . $ 27,256 $ 27,798
Equipment. . . . . . . . . . . . . . . . . . . . 9,746 9,476
37,002 37,274
Less: Accumulated depreciation . . . . . . . . . 17,181 16,332
Total $ 19,821 $ 20,942
INTANGIBLE ASSETS:
Goodwill, representing the cost of investments in subsidiaries in
excess of the fair value of identifiable net assets at acquisition, is
being amortized over twenty years. Other acquired intangible assets,
such as those associated with acquired core deposits, are being
amortized over periods of between five and twenty years.
INCOME TAXES:
The Corporation files a consolidated income tax return and is
responsible for the payment of any tax liability of the consolidated
organization. Income tax expense is based on income, as reported in
the financial statements. When income and expenses are recognized in
different periods for tax purposes, applicable deferred taxes are
provided for in the financial statements. The Corporation adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS 109), in the first quarter of 1993. A fundamental
aspect of SFAS 109 is that deferred taxes are adjusted currently to
recognize the effects of changes in tax law, including tax rate
changes. The Corporation previously accounted for income taxes under
the deferred method required by Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes." Upon adoption of SFAS 109, the
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Corporation recorded an after tax gain of approximately $2,500,000,
primarily attributable to the accelerated recognition of unused tax
benefits, as permitted by the Statement. Prior year financial
statements were not restated.
PER SHARE AMOUNTS:
Primary net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding. Common equivalent shares consist of net shares issuable
under stock options outstanding. Fully diluted net income per share
has not been presented on the basis that it is not material. The
weighted average number of common shares used to compute earnings per
share was 9,313,876 in 1995, 9,268,718 in 1994 and 9,258,257 in 1993.
NOTE B - ACQUISITIONS
On September 22, 1995, the Corporation acquired a branch banking
office in Belding, Michigan from First of America Bank-Michigan, N.A.
Total deposits of approximately $16 million were assumed and merged
into an existing affiliate, Chemical Bank Montcalm. The transaction
was accounted for by the purchase method of accounting. The amount
assigned to core deposit intangibles was $1.1 million.
On June 9, 1994, the Corporation acquired a branch banking office in
Edenville, Michigan from First of America Bank-Mid Michigan, N.A. and
on September 16, 1994 the Corporation assumed the deposit liabilities
of the Freeland, Michigan office of Standard Federal Bank. Total
deposits of approximately $8.3 million were assumed in these
transactions. All deposits were merged into an existing affiliate,
Chemical Bank and Trust Company, and accounted for by the purchase
method of accounting. Amounts assigned to core deposit intangibles in
conjunction with the recording of these acquisitions were not
material.
On October 21, 1993, the Corporation completed its acquisition of Key
State Bank ("Key"), now Chemical Bank Key State, in Owosso, Michigan,
by exchanging 900,767 shares of the Corporation's common stock,
adjusted for the subsequent stock dividend and stock split, for all of
the outstanding common stock of Key. The merger was accounted for as a
pooling of interests and, therefore, the historical financial
statements have been restated to include the results of Key for all
periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVESTMENT SECURITIES
The following tables summarize the amortized cost and estimated market
value of investment securities available for sale and investment
securities held to maturity at December 31 of each year:
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AVAILABLE FOR SALE INVESTMENT SECURITIES
1995 1994
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(In thousands)
U.S. Treasury
and agency
securities. . . . . . . $324,743 $3,543 $214 $328,072 $378,687 $ 53 $ 8,081 $370,659
Mortgage-backed
securities. . . . . . . 3,198 64 3,262 4,260 6 92 4,174
Other debt
securities. . . . . . . 9,020 82 15 9,087 6,785 265 6,520
Total debt
securities. . . . . 336,961 3,689 229 340,421 389,732 59 8,438 381,353
Equity securities . . . 971 278 1,249 971 245 1,216
Total $337,932 $3,967 $229 $341,670 $390,703 $304 $ 8,438 $382,569
HELD TO MATURITY INVESTMENT SECURITIES
1995 1994
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(In thousands)
U.S. Treasury
and agency
securities. . . . . . . $321,685 $4,275 $628 $325,332 $237,568 $ 9,463 $228,105
States of the U.S.
and political
subdivisions. . . . . . 38,468 1,063 89 39,442 42,473 $431 818 42,086
Mortgage-backed
securities. . . . . . . 711 31 742 921 5 916
Total $360,864 $5,369 $717 $365,516 $280,962 $431 $10,286 $271,107
The amortized cost of U.S. Treasury and U.S. agencies, States of the
U.S. and political subdivisions and all other securities at December
31, 1993 were $607,239,000, $48,003,000 and $24,195,000, respectively,
whereas the estimated market values of these three categories of
investments at December 31, 1993 were $613,175,000, $50,230,000 and
$24,683,000, respectively.
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During 1994 and 1993, the Corporation sold U.S. Treasury securities
with estimated market values at the date of sale of approximately $59
million and $32 million, respectively. The gross realized gains on
such sales totaled $265,000 and $437,000, respectively. The securities
sold during 1994 were classified as available for sale. All of the
securities sold during 1994 and 1993 were scheduled to mature later in
that year. The Corporation sold these investment securities in both of
these years to take advantage of the unusually steep yield curve that
prevailed in the bond market at that time and reinvested the proceeds
in U.S. Treasury securities with maturities of between two and three
years.
The amortized cost and estimated market value of debt and equity
securities at December 31, 1995, by contractual maturity for both
available for sale and held to maturity investment securities follows:
AVAILABLE FOR SALE
ESTIMATED
AMORTIZED MARKET
COST VALUE
(In thousands)
Due in one year or less . . . . . . . . . . . . $ 101,169 $ 101,414
Due after one year through five years . . . . . 232,594 235,745
Mortgage-backed securities. . . . . . . . . . . 3,198 3,262
Equity securities . . . . . . . . . . . . . . . 971 1,249
Total $ 337,932 $ 341,670
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HELD TO MATURITY
ESTIMATED
AMORTIZED MARKET
COST VALUE
(In thousands)
Due in one year or less . . . . . . . . . . . . $ 192,911 $ 194,177
Due after one year through five years . . . . . 156,891 159,820
Due after five years through ten years. . . . . 8,669 9,066
Due after ten years . . . . . . . . . . . . . . 1,682 1,711
Mortgage-backed securities. . . . . . . . . . . 711 742
Total $ 360,864 $ 365,516
Investment securities with a book value of $98.1 million at December
31, 1995 were pledged to collateralize public fund deposits and for
other purposes as required by law; at December 31, 1994, the
corresponding amount was $93.6 million.
NOTE D - LOANS
The following summarizes loans as of December 31:
1995 1994
(In thousands)
Commercial and agricultural. . . . . . . . . . $ 116,630 $ 119,533
Real estate construction . . . . . . . . . . . 16,195 19,239
Real estate mortgage . . . . . . . . . . . . . 454,591 449,086
Installment. . . . . . . . . . . . . . . . . . 151,300 152,318
Total $ 738,716 $ 740,176
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
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significant subsidiaries totaled $21,062,000 at December 31, 1995 and
$22,131,000 at December 31, 1994. During 1995, there were $21,616,000
of new loans and other additions, while repayments and other
reductions totaled $22,685,000.
Changes in the Allowance for Possible Loan Losses were as follows for
the years ended December 31:
1995 1994 1993
(In thousands)
Balance at beginning of year . . . . . . . $ 15,095 $ 14,383 $ 13,805
Provision charged to operations . . . . . 1,053 1,081 1,089
Loan charge-offs. . . . . . . . . . . . . (645) (595) (868)
Loan recoveries . . . . . . . . . . . . . 175 226 357
Net loan charge-offs . . . . . . . . . (470) (369) (511)
Balance at end of year . . . . . . . . . . $ 15,678 $ 15,095 $ 14,383
Nonaccrual and renegotiated loans aggregated $1.7 million and $2.8
million at December 31, 1995 and 1994, respectively. Interest income
totaling $113,000 was recorded on the nonaccrual and renegotiated
loans in 1995. Additional interest income of $186,000 would have been
recorded during 1995 on these loans had they been current in
accordance with their original terms.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), as amended by SFAS
No. 118, was adopted January 1, 1995. These statements consider a loan
impaired when it is probable that payment of interest and principal
will not be made in accordance with the contractual terms of the loan
agreement. The adoption of these accounting standards had no effect on
the financial position or results of operations of the Corporation.
Impaired loans totaled $471,000 as of December 31, 1995 and required
an impairment allowance of $200,000 in accordance with SFAS 114. The
remaining impaired loan balance represented loans for which the fair
value exceeded the recorded investment in the loan, based on fair
value of the related collateral.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - FEDERAL INCOME TAXES
The difference between the federal statutory income tax rate and the
Corporation's effective income tax rate is primarily due to tax-exempt
interest on investments and loans. A reconciliation of the statutory
tax rate to the effective tax rate is shown below for the years ended
December 31:
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1995 1994 1993
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
(Dollars in thousands)
Tax at statutory rate. . . . $10,286 35% $ 9,369 35% $ 8,950 35%
Changes resulting from:
Tax-exempt income . . . . . (791) (2.7) (864) (3.2) (877) (3.4)
Other . . . . . . . . . . . 165 .6 (4) 229 .9
Total federal income
tax expense . . . . . . . . $ 9,660 32.9% $ 8,501 31.8% $ 8,302 32.5%
The provision for federal income taxes consists of the following for
the years ended December 31:
1995 1994 1993
(In thousands)
Current. . . . . . . . . . . . . . . . . $ 9,840 $ 8,676 $ 9,232
Deferred credit. . . . . . . . . . . . . (180) (175) (930)
$ 9,660 $ 8,501 $ 8,302
The Corporation adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109), effective January
1, 1993. The statement requires the use of the liability method of
accounting for deferred income taxes. As permitted under SFAS 109,
prior years' financial statements have not been restated. The
Corporation recorded an after tax gain for the cumulative effect of
the adoption of SFAS 109 of $2,500,000 in the first quarter of 1993.
The cumulative effect adjustment primarily resulted from the
accelerated recognition of unused tax benefits.
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:
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1995 1994
(In thousands)
Deferred tax assets:
Allowance for possible loan losses. . . . . . . . . $ 4,179 $ 3,958
Unrealized net loss on investment
securities available for sale . . . . . . . . . . 4,463
Employee benefit plans. . . . . . . . . . . . . . . 1,425 1,641
Expense accruals not yet tax deductible . . . . . . 955 881
Other . . . . . . . . . . . . . . . . . . . . . . . 435 547
Total deferred tax assets . . . . . . . . . . . . 6,994 11,490
Deferred tax liabilities:
Unrealized net gain on investment
securities available for sale . . . . . . . . . . 740
Tax over book depreciation. . . . . . . . . . . . . 706 786
Other . . . . . . . . . . . . . . . . . . . . . . . 438 571
Total deferred tax liabilities. . . . . . . . . . 1,884 1,357
Net deferred tax assets. . . . . . . . . . . . . . . $ 5,110 $10,133
Federal income taxes applicable to gains on securities transactions
amounted to $93,000 in 1994 and $153,000 in 1993 and are included in
federal income taxes on the consolidated statement of income.
NOTE F - PENSION AND POSTRETIREMENT BENEFITS
The Corporation has a noncontributory defined benefit pension plan
("Plan") covering all of its salaried employees. Normal retirement
benefits are based on years of service and the employee's average
annual pay of the five highest consecutive years during the ten years
preceding retirement. The Corporation's funding strategy has been to
contribute annually the maximum amount that can be deducted for
federal income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date but also for those
expected to be earned in the future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the Plan's funded status and amounts
recognized in the Corporation's statement of financial position at
December 31:
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1995 1994
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits
of $15,654,000 in 1995 and
$12,328,000 in 1994 . . . . . . . . . . . . . . $ 17,532 $ 13,975
Projected benefit obligation for service
rendered to date. . . . . . . . . . . . . . . . $ 24,619 $ 19,179
Plan assets at fair value. . . . . . . . . . . . . 30,403 24,477
Plan assets in excess of projected
benefit obligation. . . . . . . . . . . . . . . . 5,784 5,298
Unrecognized amortization of transition
amount. . . . . . . . . . . . . . . . . . . . . . (981) (1,159)
Other. . . . . . . . . . . . . . . . . . . . . . . (2,996) (2,918)
Prepaid pension expense recognized in
the statement of financial position . . . . . . . $ 1,807 $ 1,221
YEARS ENDED DECEMBER 31
1995 1994 1993
(In thousands)
Pension expense includes the
following components:
Service cost - benefits earned
during the period . . . . . . . . . . . $ 1,051 $ 1,257 $ 1,084
Interest cost on projected
benefit obligation. . . . . . . . . . . 1,513 1,401 1,318
Actual return on plan assets. . . . . . . (5,759) (171) (1,669)
Net amortization and deferral . . . . . . 3,453 (1,884) (135)
Pension expense . . . . . . . . . . . . . $ 258 $ 603 $ 598
Plan assets consist primarily of listed stocks, U.S. Government
securities, common stock of the Corporation (109,508 shares at
December 31, 1995) and investments in common trust funds of Chemical
Bank and Trust Company (the Corporation's major subsidiary). These
common trust funds consist of listed stocks and fixed income
securities, primarily U.S. Treasury notes.
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The weighted-average discount rates of 7.0% at December 31, 1995 and
8.0% at December 31, 1994 and the increase in future compensation
levels of 6.0% at December 31, 1995 and December 31, 1994 were used in
determining the actuarial present value of the projected benefit
obligation. The expected long-term rate of return on plan assets was
8% in 1995, 1994 and 1993.
In addition to the Corporation's defined benefit pension plan, the
Corporation provides postretirement medical and dental (to age 65)
benefits to salaried employees. Beginning January 1, 1994, eligibility
for such benefits was age 55 (age 60 prior to January 1, 1994) 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.
In 1993, the Corporation adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106). The Statement requires accounting for
postretirement benefits other than pensions on the accrual basis,
which necessitates measurement of the obligation to provide these
future benefits and the accrual of such cost during the employees
years of service. As of January 1, 1993, the Corporation determined
the accumulated obligation for retiree medical benefits to be
$2,469,000. The Corporation expensed $750,000 in 1992 and $350,000
annually in years 1989-1991 for a total of $1,800,000 toward this
obligation. Upon adoption of SFAS 106, the Corporation elected to
immediately recognize the net transition obligation of $669,000
related to postretirement medical benefits, rather than to amortize
the net transition obligation over future periods. This resulted in an
after tax charge to 1993 net income of approximately $500,000, which
was accounted for as a cumulative effect on prior years of a change in
accounting principle.
The following table presents the Corporation's postretirement benefit
obligation reconciled with amounts recognized in the statement of
financial position at December 31:
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1995 1994
(In thousands)
Accumulated postretirement benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . $ 827 $ 940
Fully eligible active plan participants . . . . 506 469
Other active plan participants. . . . . . . . . 1,310 1,455
2,643 2,864
Unrecognized net gain . . . . . . . . . . . . 528 74
Accrued postretirement benefit cost. . . . . . . $3,171 $2,938
The Corporation's postretirement benefit obligation is nonfunded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - CONTINUED
Net periodic postretirement benefit cost includes the following
components for the years ended December 31:
1995 1994
(In thousands)
Service cost - benefits earned during
the period. . . . . . . . . . . . . . . . . . . $ 133 $ 140
Interest cost on accumulated benefit
obligation. . . . . . . . . . . . . . . . . . . 199 186
Net amortization and deferral. . . . . . . . . . (18) (4)
Net periodic postretirement benefit cost . . . . $ 314 $ 322
At December 31, 1995, the weighted average annual assumed rates of
increase in the per capita cost of covered benefits (i.e., medical and
dental care cost trend rates) for 1996 were 9.67% for medical benefits
and 7.33% for dental benefits and are both assumed to decrease
uniformly to 5% in 2003 and remain at that level thereafter. At
December 31, 1994, the assumed 1995 medical and dental cost trend
rates were 10.50% and 7.83%, respectively, and were both assumed to
decrease uniformly to 6.5% in 2003 and remain at that level
thereafter. The medical and dental care cost trend rate assumptions
have a significant effect on the amounts reported. For example,
increasing both the assumed medical and dental care cost trend rates
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 and 1994 by
18.2% and 18%, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost
for 1995 by 20.8%.
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The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at December 31,
1995 and 1994, respectively.
NOTE G - LONG-TERM DEBT
Long-term debt consisted of the following obligations:
DECEMBER 31
1995 1994
(In thousands)
Chemical Financial Corporation:
Term note payable to unaffiliated
bank (6.625% at December 31, 1995). . . . . . . . $ 12,000 $ 12,000
Subsidiaries: Other notes payable . . . . . . . . 80 99
Total $ 12,080 $ 12,099
Principal payments on this term note payable are due as follows:
$7,000,000 in December 1999 and $5,000,000 in December 2000. Interest
on the term note payable is computed based upon one of three
alternative interest rate methods, which is elected by the Corporation
at the beginning of each interest period for 1, 3, 6 or 12 month
intervals. The three alternative interest rate methods are based upon
the prime rate of the unaffiliated bank, the Eurodollar rate or the
domestic certificate of deposit rate of the unaffiliated bank. The
$12,000,000 loan agreement includes various restrictions and covenants
pertaining to capital, earnings and additional indebtedness and is
secured by the stock of two of the Corporation's subsidiary banks.
NOTE H - RESTRICTED ASSETS AND DIVIDEND LIMITATIONS OF SUBSIDIARY
BANKS
Banking regulations require that banks maintain cash reserve balances
in vault cash or with the Federal Reserve or certain other qualifying
banks. The aggregate average amount of such reserve balances
maintained by the Corporation's subsidiary banks was $14.5 million for
the year ended December 31, 1995.
Banking regulations also limit the transfer of assets in the form of
dividends, loans or advances from the bank subsidiaries to the
Corporation. At December 31, 1995, substantially all of the assets of
the bank subsidiaries were restricted from transfer to the Corporation
in the form of loans or advances. Consequently, subsidiary dividends
are the principal source of funds for the Corporation. The payment of
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dividends by member banks of the Federal Reserve System, without
federal regulatory approval, is limited to the current year's retained
net income plus retained net income for the preceding two years, less
any required transfers to surplus. State chartered non-member banks
have additional dividend restrictions, including a requirement that
surplus amount to at least 20% of capital stock after payment of a
dividend. At January 1, 1996, approximately $26.9 million was
available for payment of dividends to the Corporation without
regulatory approval. In addition to the statutory limits, the
Corporation also considers the overall financial and capital position
of each subsidiary prior to making any cash dividend decisions.
NOTE I - STOCK OPTION PLAN
The Chemical Financial Corporation stock option plan provides for the
granting of options, incentive stock options, stock appreciation
rights, deferred stock or a combination thereof. At December 31, 1995,
there were a total of 97,472 shares available for the granting of
future awards under the Corporation's 1987 Plan. The plan provides
that the option price shall not be less than fair market value at the
date of grant, options become exercisable between one and five years
from the date of grant as determined by the Compensation Committee of
the Board of Directors, all awards expire no later than ten years and
one day after the date of grant, and options granted may be designated
nonstatutory options or incentive stock options.
Options granted may include an appreciation right that entitles the
awardee to receive a number of shares of common stock without payment
to the Corporation, calculated by dividing the difference between the
option price and the market price of the total number of shares in the
option at the expiration date of the option, by the market price of a
single share. As of December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, there were no outstanding options with stock appreciation rights.
During 1995, 400 options to purchase shares were granted at a price of
$30.75 per share, which first are exercisable at various dates from
July 17, 1996 through July 17, 2000. Options were exercised for 70,373
shares in 1995 (at $11.33 - $29.44 per share), 67,687 shares in 1994
(at $9.99 - $16.93 per share) and 67,573 shares in 1993 (at $6.35 -
$16.93 per share). At December 31, 1995, there were outstanding options to
purchase 316,678 shares (388,048 shares at December 31, 1994), exercisable
at prices ranging from $11.33 - $30.75 per share and expiring at various
dates from 1996 to 2005.
NOTE J - COMMITMENTS AND OTHER MATTERS
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
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contract. Commitments generally have fixed expiration dates or other
termination clauses. Historically, the majority of the commitments
have not been drawn upon, and therefore do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by the Corporation upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income producing commercial
properties. Standby letters of credit are conditional commitments
issued generally by the Corporation to guarantee the performance of a
customer to a third party. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers
and are subject to the Corporation's normal credit policies. The
Corporation at any point in time also has approved but undisbursed
loans. The majority of these undisbursed loans will convert to a
booked loan within a three month period.
Loan commitments, standby letters of credit and undisbursed loans were
$95 million, $3.1 million and $31 million, respectively, at December
31, 1995 and $93 million, $3.1 million and $21 million, respectively,
at December 31, 1994. Most of the loan commitments and standby letters
of credit at December 31, 1995 expire one year from their contract
date, except for $12.7 million which extend for more than five years.
The Corporation's loan commitments, standby letters of credit and
undisbursed loans have been estimated to have no realizable fair
value, as historically the majority of the loan commitments have not
been drawn upon and generally the Corporation does not receive any
fees in connection with these agreements.
There are no material lease rental payments or noncancelable lease
commitments outstanding at December 31, 1995.
Expenses included in the category of "Other" operating expenses which
were in excess of 1% of interest and other income were Federal Deposit
Insurance Corporation (FDIC) premium expense which totaled $1,561,000
in 1995, $2,834,000 in 1994 and $3,092,000 in 1993 and stationery and
supplies expense which totaled $1,193,000 in 1994 and $1,135,000 in
1993.
NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires disclosures
about the estimated fair values of the Corporation's financial
instruments. The Corporation utilized quoted market prices, where
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available, to compute the fair value of its financial instruments. In
cases where quoted market prices were not available, the Corporation
used present value methods to estimate the fair values of its
financial instruments. These estimates of fair value are significantly
affected by the assumptions made and, accordingly, do not necessarily
indicate amounts which could be realized in a current market exchange.
It is also the Corporation's general practice and intent to hold the
majority of its financial instruments until maturity and, therefore,
the Corporation does not expect to realize the estimated amounts
disclosed.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated statement of financial position for cash and federal
funds sold approximate those assets' fair values.
INTEREST BEARING DEPOSITS WITH UNAFFILIATED BANKS: Fair values for
these assets are based on quoted market prices.
INVESTMENT SECURITIES: Fair values for investment securities are based
on quoted market prices.
LOANS RECEIVABLE: For variable rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain mortgage loans (e.g.,
one-to-four family residential) are based on quoted market prices of
similar loans sold in secondary market source transactions. The fair
values for other loans (e.g., commercial real estate, rental property
mortgage, commercial, agricultural and installment) are estimated
using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality. The resulting amounts are adjusted to estimate the
effect of declines in the credit quality of borrowers since the loans
were originated.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits
(e.g., interest and noninterest checking, passbook savings and money
fund accounts) are, by definition, equal to the amounts payable on
demand. The carrying amounts for variable rate certificates of deposit
and other time deposits approximate their fair values at the reporting
date. As of December 31, 1995 and December 31, 1994, the Corporation
had total interest bearing deposits of $700,359,000 and $729,491,000,
respectively, for which SFAS 107 defined their fair values to be equal
to their carrying values. Fair values for fixed rate certificates of
deposit and other time deposits are based on the discounted value of
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contractual cash flows, using interest rates currently being offered
for deposits of similar remaining maturities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - CONTINUED
SHORT-TERM BORROWINGS: The carrying amounts of borrowings under
repurchase agreements and other short-term borrowings approximate
their fair values.
LONG-TERM BORROWINGS: The carrying amounts of the Corporation's
variable rate long-term borrowing and the subsidiaries' fixed rate
long-term borrowings approximate fair value. The subsidiaries' fixed
rate borrowing rates have been estimated to approximate their current
incremental borrowing rates for similar types of borrowing
arrangements.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND
UNDISBURSED LOANS: The Corporation's loan commitments, standby letters
of credit and undisbursed loans have been estimated to have no
realizable fair value, as historically the majority of the loan
commitments have not been drawn upon and generally the Corporation
does not receive any fees in connection with any of these commitments.
Estimates of fair value have not been made for items which are not
defined by SFAS 107 as financial instruments, including such items as
the Corporation's core deposit intangibles and the value of its trust
and data processing operations. The Corporation believes it is
impractical to estimate a representational fair value for these types
of assets, even though they add significant value to the Corporation.
The estimated fair value of the Corporation's financial instruments
are as follows:
DECEMBER 31
1995 1994
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(In thousands)
FINANCIAL ASSETS:
Cash and cash
equivalents . . . . . . . . $ 168,154 $ 168,154 $ 150,556 $ 150,556
Interest bearing
deposits with un-
affiliated banks. . . . . . 3,016 3,051 3,002 2,918
Investment securities . . . . 702,534 707,186 663,531 653,676
Loans . . . . . . . . . . . . 727,345 744,084 729,166 713,618
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FINANCIAL LIABILITIES:
Noninterest bearing
deposits. . . . . . . . . . 208,377 208,377 196,654 196,654
Interest bearing
deposits. . . . . . . . . . 1,191,233 1,188,337 1,171,664 1,167,838
Securities sold
under agreements
to repurchase . . . . . . . 28,139 28,139 31,173 31,173
Long-term debt. . . . . . . . 12,080 12,080 12,099 12,099
UNRECOGNIZED FINANCIAL
INSTRUMENTS:
Commitments to extend
credit. . . . . . . . . . . -- -- -- --
Standby letters of
credit. . . . . . . . . . . -- -- -- --
Undisbursed loans . . . . . . -- -- -- --
NOTE L - PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of Chemical Financial Corporation
(parent company) follow:
CONDENSED STATEMENT OF FINANCIAL POSITION
DECEMBER 31
1995 1994
(In thousands)
ASSETS
Cash on deposit at subsidiary bank. . . . . . . . $ 15,377 $ 13,168
Investments in bank subsidiaries. . . . . . . . . 183,906 160,918
Investment in non-bank subsidiary . . . . . . . . 1,465 1,272
Goodwill. . . . . . . . . . . . . . . . . . . . . 2,925 3,230
Other assets. . . . . . . . . . . . . . . . . . . 1,439 1,384
Total Assets $205,112 $179,972
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt. . . . . . . . . . . . . . . . . . $ 12,000 $ 12,000
Other liabilities . . . . . . . . . . . . . . . . 7,568 6,292
Total Liabilities 19,568 18,292
Shareholders' equity . . . . . . . . . . . . . . . 185,544 161,680
Total Liabilities and Shareholders' Equity $205,112 $179,972
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31
1995 1994 1993
(In thousands)
INCOME
Cash dividends from
bank subsidiaries . . . . . . . . . . . . . . $ 7,213 $ 6,940 $ 7,788
Cash dividends from
non-bank subsidiary . . . . . . . . . . . . . 326 320 302
Interest received from
subsidiary bank . . . . . . . . . . . . . . . 621 428 291
Other income . . . . . . . . . . . . . . . . . 33 21 21
. . . . . . . . . . . . . . . . . . . . . . 8,193 7,709 8,402
EXPENSES
Interest on long-term debt . . . . . . . . . . 826 732 622
Other operating expenses . . . . . . . . . . . 1,493 1,382 1,651
Amortization of goodwill . . . . . . . . . . . 305 305 305
. . . . . . . . . . . . . . . . . . . . . . 2,624 2,419 2,578
INCOME BEFORE INCOME TAXES
AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES. . . . . . . . . . 5,569 5,290 5,824
Federal income tax benefit . . . . . . . . . . 609 680 611
Cumulative effect on prior years
of a change in accounting principle. . . . . . (30)
. . . . . . . . . . . . . . . . . . . . . . 6,178 5,970 6,405
Equity in undistributed
net income of:
Bank subsidiaries . . . . . . . . . . . . . 13,360 12,137 12,774
Non-bank subsidiary . . . . . . . . . . . . 193 161 89
NET INCOME $19,731 $18,268 $19,268
-41-
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31
1995 1994 1993
(In thousands)
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . $19,731 $18,268 $19,268
Less equity in undistributed net
income of subsidiaries. . . . . . . . . . . . (13,553) (12,298) (12,863)
Other. . . . . . . . . . . . . . . . . . . . . 1,578 860 1,734
Cash provided by operations. . . . . . . . . . 7,756 6,830 8,139
FINANCING ACTIVITIES
Proceeds from debt refinancing . . . . . . . . 14,000
Decrease in long- term debt. . . . . . . . . . (2,000) (14,000)
Proceeds from subsidiary
directors stock purchase plan . . . . . . . . 236 243 195
Proceeds from exercise
of stock options. . . . . . . . . . . . . . . 453 229 275
Cash dividends paid. . . . . . . . . . . . . . (6,236) (5,111) (4,267)
Cash used in financing activities. . . . . . . (5,547) (6,639) (3,797)
Increase in cash . . . . . . . . . . . . . . . 2,209 191 4,342
Cash at beginning of year. . . . . . . . . . . 13,168 12,977 8,635
Cash at end of year. . . . . . . . . . . . . . $15,377 $13,168 $12,977
-42-
REPORT OF ERNST & YOUNG, LLP
INDEPENDENT AUDITORS
To the Board of Directors
Chemical Financial Corporation
We have audited the accompanying consolidated statement of financial
position of Chemical Financial Corporation and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Chemical Financial Corporation and subsidiaries at December 31,
1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes A , E and F to the Financial Statements, in 1993
the Corporation adopted Financial Accounting Standards Board
Statements 106 and 109.
/S/ ERNST & YOUNG LLP
Detroit, Michigan
January 19, 1996
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MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
The following discussion and analysis is intended to cover the
significant factors affecting the Corporation's consolidated
statements of financial position and income, included herein. It is
designed to provide shareholders with a more comprehensive review of
the operating results and financial position of the Corporation than
could be obtained from an examination of the financial statements
alone. This discussion should be read in conjunction with the
financial highlights on page 3, Tables 1-10, beginning on page 27, and
the consolidated financial statements and notes thereto beginning on
page 12. During the three year period ended December 31, 1995, the
Corporation made the following acquisitions: On September 22, 1995,
the Corporation acquired a branch banking office in Belding, Michigan
from First of America Bank-Michigan, N.A. The branch had total deposit
liabilities of approximately $16 million and was merged into an
existing affiliate. On June 9, 1994, the Corporation acquired a branch
banking office in Edenville, Michigan from First of America Bank-Mid
Michigan, N.A. and on September 16, 1994 assumed the deposit
liabilities of the Freeland, Michigan office of Standard Federal Bank.
Total deposits of approximately $8.3 million were assumed in the 1994
transactions. These deposits were also merged into an existing
affiliate. The 1994 and 1995 branch acquisitions were accounted for by
the purchase method of accounting. On October 21, 1993, the
Corporation acquired 100% of the outstanding common stock of Key State
Bank ("Key"), headquartered in Owosso, Michigan. As of the acquisition
date, Key had approximately $161 million in total assets, $109 million
in total loans and $13 million in shareholders' equity. Key is being
operated as a separate banking subsidiary of the Corporation under the
name Chemical Bank Key State, with its main office remaining in
Owosso. The acquisition was accounted for by the pooling of interests
method of accounting for a business combination. In accordance with
this method, all historical financial statement amounts and financial
ratios, except for cash dividends per share, were restated to include
Key as if it had always been a subsidiary of the Corporation. These
acquisitions were all natural extensions of the Corporation's market
area and thus were designed to strengthen the Corporation's presence
in mid-Michigan.
In September 1995, the Corporation entered into an agreement with
State Savings Bancorp, Inc. ("SSBI") for the merger of SSBI with the
Corporation. SSBI is a bank holding company, with its headquarters in
Caro, Michigan. As of December 31, 1995, SSBI, on a consolidated
basis, had total assets of approximately $62 million, total net loans
of approximately $21.6 million and shareholders' equity of
approximately $9.3 million. SSBI is the parent company of State
Savings Bank of Caro ("State Savings"). State Savings conducts its
-44-
business from its main office and auto bank branch in Caro and a
branch office in Fairgrove, Michigan. SSBI and its subsidiary are
engaged in the commercial banking business. The transaction will be
accomplished by an exchange of the Corporation's shares for all of the
outstanding shares of SSBI, in a pooling of interests combination. The
merger transaction is expected to be completed during the first half
of 1996.
NET INCOME
Net income was $19,731,000, or $2.12 per share, in 1995, compared to
$18,268,000, or $1.97 per share, in 1994. 1995 net income of
$19,731,000 represented an 8.0% increase over 1994 net income, while
1995 earnings per share of $2.12 represented a 7.6% increase over 1994
earnings per share. In 1993, net income was $19,268,000, or $2.08 per
share, including a one time $2,000,000 ($0.22 per share), after-tax,
net gain attributable to the adoption of two new accounting standards.
Net income has increased at an average annual compound rate of 8.1%
during the five year period ended December 31,1995, while earnings per
share has grown at an average annual compound rate of 7.3% during the
same period.
The Corporation's return on average assets was 1.24% in 1995, 1.14% in
1994 and 1.22% in 1993. The Corporation's return on average
shareholders' equity was 11.1% in 1995, 11.2% in 1994 and 12.9% in
1993.
DEPOSITS
Total deposits as of December 31, 1995 were $1.397 billion, up $30.5
million, or 2.2%, from total deposits of $1.367 million as of
December 31, 1994. Approximately one-half of this increase was
attributable to the acquisition of the branch banking office in
Belding, Michigan from First of America Bank-Michigan, N.A.
The rate of growth in the Corporation's deposits continues to be
impacted by competition for customer deposits from other investment
products. Mutual funds and various annuity products are clearly the
two most significant products in competition for customer deposits.
These products are sold by a wide spectrum of organizations, including
both bank and nonbank financial institutions and nonfinancial
institutions, such as brokerage and insurance companies. Accordingly,
the Corporation offers mutual fund investments as an alternative
investment vehicle to its customers. In addition, the Trust Department
of Chemical Bank and Trust Company, the Corporation's principal
subsidiary, offers customers an investment product, "ChemVest
Advantage," which provides customers with professional assistance in
spreading their funds among a variety of institutional mutual funds.
-45-
ASSETS
Total assets of the Corporation were $1.644 billion as of December 31,
1995, up approximately $50 million, or 3.2%, from total assets as of
December 31, 1994 of $1.593 billion.
CASH DIVIDENDS
The Corporation paid a cash dividend of $.16 per share in both the
first and second quarters and then increased the quarterly cash
dividend 12.5% to $.18 per share for the third and fourth quarters,
resulting in total cash dividends of $.68 per share in 1995. Total
1995 cash dividends paid per share represented a 21.4% increase over
1994 cash dividends paid per share of $.56.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Corporation has paid regular cash dividends every quarter since it
was organized as a bank holding company in 1973. The Corporation's
annual cash dividends per share over the past five years, adjusted for
prior years' stock dividends and stock splits, were as follows:
1995 1994 1993 1992 1991
Annual Dividend. . . . . . . $.68 $.56 $.51 $.47 $.44
Cash dividends paid per share in 1994 represented a 10.25% increase
over cash dividends paid in 1993, while cash dividends paid per share
in 1993 represented a 9.1% increase over cash dividends paid in 1992.
The compound annual growth rate of the Corporation's cash dividends
per share over the past five and ten year periods ended December 31,
1995, was 11.2% and 10.5%, respectively.
The earnings of the Corporation's subsidiaries are the principal
source of funds to pay cash dividends to shareholders. Cash dividends
are dependent upon the earnings of the Corporation's subsidiaries, as
well as capital requirements, regulatory restraints and other factors
affecting each of the Corporation's subsidiary banks.
-46-
TABLE 1. FIVE-YEAR INCOME STATEMENT -
TAX EQUIVALENT BASIS<F*> - AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
YEARS ENDED DECEMBER 31
1995 1994 1993 1992 1991
INTEREST INCOME
Interest and fees on loans . . . . . . . 3.96% 3.80% 3.96% 4.48% 5.02%
Interest on investment securities. . . . 2.45 2.20 2.42 2.72 3.17
Interest on short-term investments . . . .30 .21 .13 .18 .32
TOTAL INTEREST INCOME 6.71 6.21 6.51 7.38 8.51
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . 2.63 2.20 2.52 3.27 4.55
Interest on short-term borrowings. . . . .10 .07 .05 .07 .10
Interest on long-term debt . . . . . . . .05 .05 .04 .07 .09
TOTAL INTEREST EXPENSE 2.78 2.32 2.61 3.41 4.74
NET INTEREST INCOME (FTE) 3.93 3.89 3.90 3.97 3.77
Provision for possible loan losses . . . .07 .07 .07 .09 .15
OTHER INCOME
Trust department income. . . . . . . . . .17 .16 .15 .14 .13
Service charges and fees . . . . . . . . .45 .40 .40 .40 .39
Revenue from data processing . . . . . . .06 .07 .06 .07 .07
Gains on sales of loans. . . . . . . . . .03 .01 .07 .02
Investment securities gains. . . . . . . .02 .03 .03
Other. . . . . . . . . . . . . . . . . . .02 .02 .02 .02 .02
TOTAL OTHER INCOME .73 .68 .73 .68 .61
OPERATING EXPENSES
Salaries, wages and benefits . . . . . . 1.55 1.53 1.57 1.58 1.53
Occupancy expense. . . . . . . . . . . . .25 .25 .24 .26 .25
Equipment expense. . . . . . . . . . . . .16 .17 .17 .18 .19
Other. . . . . . . . . . . . . . . . . . .71 .79 .87 .86 .82
TOTAL OPERATING EXPENSES 2.67 2.74 2.85 2.88 2.79
INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES . . . . . . . . . 1.92 1.76 1.71 1.68 1.44
Federal income taxes . . . . . . . . . . .60 .53 .52 .52 .43
Tax equivalent adjustment. . . . . . . . .08 .09 .09 .08 .08
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES . . . . . . . . . 1.24 1.14 1.10 1.08 .93
Cumulative effect on prior years of
change in accounting principles . . . . .12 .02
NET INCOME 1.24% 1.14% 1.22% 1.08% .95%
-47-
AVERAGE TOTAL ASSETS -
In thousands. . . . . . . . . . . . . . $1,592,454 $1,596,203 $1,576,786 $1,528,442 $1,465,503
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35% in 1993-1995 and 34% in
1991-1992.
</FN>
-48-
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS - CONTINUED
BUSINESS OF THE CORPORATION
Chemical Financial Corporation ("Corporation") is a bank holding
company. The Corporation's business is concentrated in a single
industry segment-commercial banking. The Corporation, through its ten
banking subsidiaries, offers a full range of commercial banking
services. These banking services include accepting deposits,
residential and commercial real estate financing, commercial lending,
consumer financing, debit cards, safe deposit box services, money
transfer services, automated teller machines, corporate and personal
trust services and other banking services. The Corporation also has a
data processing subsidiary. This subsidiary provides data processing
services to the Corporation's ten subsidiary banks and to outside
customers. The data processing services provided to the Corporation's
subsidiaries represented 68% of total revenue of the data processing
subsidiary in 1995.
The principal markets for the Corporation's commercial banking
services are communities within Michigan in which the Corporation's
subsidiaries are located and the areas immediately surrounding these
communities. As of December 31, 1995, the Corporation served these 54
communities through 85 banking offices in 24 counties, located
generally across the mid-section of Michigan. In addition to the
banking offices, the Corporation operated 76 automated teller
machines, both on and off bank premises, as of December 31, 1995.
The principal sources of revenues for the Corporation are interest and
fees on loans, which accounted for 53% of total revenues in 1995, 56%
in 1994 and 55% in 1993. Interest on investment securities is also a
significant source of revenue, accounting for 32% of revenues in 1995,
31% in 1994 and 33% in 1993. Chemical Bank and Trust Company,
headquartered in Midland, Michigan, is the Corporation's largest
subsidiary and lead bank and represented 29% of total loans and 33% of
total deposits, as of December 31, 1995.
On December 19, 1994, the Corporation declared a 3 for 2 stock split
which was paid January 20, 1995.
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in loans,
investment securities and other money market instruments, such as
federal funds sold and interest-bearing deposits with other banks.
Interest expense is the amount of interest paid on interest-bearing
checking accounts, such as NOW accounts, savings and time deposits, as
well as on short and long-term debt. The amount of net interest income
-49-
(or the difference between interest income and interest expense)
varies from year to year according to the volume and the mix of assets
and liabilities and the level of interest rates. The tax equivalent
adjustment restates tax-exempt interest income (from municipal bonds
and tax-exempt loans) on a basis as if it were taxable interest
income. Net interest income is referred to as being on a fully taxable
equivalent (FTE) basis after this adjustment is made. The net interest
margin is net interest income (FTE) as a percentage of average earning
assets. Interest spread is the difference between the average yield on
earnings assets and the average cost of interest-bearing liabilities.
The single most important component in analyzing the results of the
Corporation's operations is net interest income. Net interest income
is influenced by a variety of factors including changes in the volume
of earning assets, changes in the mix of earning assets and
interest-bearing liabilities, the proportion of earning assets that
are funded by noninterest-bearing liabilities (demand deposits) and
equity capital, market rates of interest and variations in interest
sensitivity in the differing types of interest-bearing assets and
liabilities. Some of these factors are controlled to a certain extent
by management policies and actions. However, conditions beyond
management's control also have a significant impact on changes in net
interest income, such as changes in market interest rates. Over the
three year period ended December 31, 1995, the prime lending rate
changed substantially. The prime lending rate was 6.0% at the
beginning of 1993 and remained at this rate until March 1994, when it
increased to 6.25%. The prime lending rate continued to increase
throughout 1994 and ended the year at 8.5%. Early in 1995, the prime
lending rate increased to 9.0%, however it was reduced twice later in
the year to end 1995 at 8.5%.
Other significant factors that impact net interest income include the
strength of credit demands by customers, competition from other
financial institutions, the growth of deposit accounts by non-bank
financial competitors and the continued growth in mutual fund
investments.
Table 2, on page 29, presents for 1995, 1994 and 1993, average daily
balances of the Corporation's major assets and liabilities, interest
income and expense on a fully taxable equivalent (FTE) basis, average
interest rates earned and paid on the Corporation's assets and
liabilities, net interest income (FTE), interest spread (FTE) and net
interest margin (FTE). Net interest income (FTE) in 1995 was
$62,577,000, up $392,000 over 1994 net interest income (FTE) of
$62,185,000. The increase in net interest income during 1995 was
primarily attributable to increases in both average
noninterest-bearing deposits and shareholders' equity. During 1995,
-50-
the Corporation's average noninterest-bearing deposits increased $12.2
million, or 6.8%, while average shareholders' equity increased $14
million, or 8.5%. The net interest margin was 4.19% in 1995, compared
to 4.17% in 1994 and 4.19% in 1993. The consistency of this ratio over
the last three years is an indication of the Corporation's ability to
manage its net interest margin through a continually changing interest
rate environment. The interest spread was 3.50% in 1995, compared to
3.67% in 1994. The average yield on interest earning assets increased
to 7.15% in 1995 from 6.65% in 1994, an increase of .50%. In contrast,
the average cost of interest-bearing liabilities increased by .67% in
1995 to 3.65%, from 2.98% in 1994. The higher liability cost increase
during 1995 resulted in the .17% decrease in interest spread.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net interest income (FTE) in 1994 was $62,185,000, an increase of
$724,000 over 1993 net interest income (FTE) of $61,461,000. The
increase in net interest income in 1994 was also largely attributable
to an increase in the Corporation's average noninterest-bearing
deposits and shareholders' equity, which combined increased $28.8
million, or 9.1%, during 1994. The Corporation was also successful in
deploying these additional funds into loans, with average loans
increasing $28.35 million, or 4%, in 1994. The net interest margin was
4.17% in 1994, down slightly from 4.19% in 1993. The interest spread
was 3.67% in 1994, compared to 3.70% in 1993. The slight decline in
the net interest margin and interest spread, during 1994, was
primarily due to the average yield on earning assets declining
slightly more than the decrease in the average cost of interest
bearing liabilities and the nominal growth in total assets. During
1994, the average yield on earning assets declined .35% to 6.65%,
while the average cost of interest bearing liabilities declined .32%
to 2.98%.
-51-
TABLE 2. AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND EFFECTIVE YIELDS AND RATES<F*> (Dollars in Thousands)
YEARS ENDED DECEMBER 31
1995 1994 1993
TAX EFFECTIVE TAX EFFECTIVE TAX EFFECTIVE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
ASSETS
Earning Assets:
Loans <F1> <F2> . . . . . . . . . $ 723,005 $ 62,981 8.71% $ 736,962 $60,710 8.24% $ 708,614 $ 62,314 8.79%
Taxable investment
securities. . . . . . . . . . . 653,376 36,015 5.51 636,559 31,881 5.01 649,634 35,084 5.40
Non-taxable investment
securities. . . . . . . . . . . 34,603 2,974 8.59 36,647 3,247 8.86 37,440 3,135 8.37
Federal funds sold. . . . . . . . 78,975 4,612 5.84 78,645 3,219 4.09 71,388 2,136 2.99
Interest-bearing deposits
with unaffiliated banks . . . . 2,974 204 6.86 1,096 66 6.02
Total interest income/
Total earning assets 1,492,933 106,786 7.15 1,489,909 99,123 6.65 1,467,076 102,669 7.00
Less: Allowance for
possible loan losses. . . . . (15,519) (14,853) (14,103)
Other assets:
Cash and due from banks . . . . . 71,427 76,440 78,681
Premises and equipment. . . . . . 20,641 21,772 22,303
Accrued income and
other assets . . . . . . . . . . 22,972 22,935 22,829
Total Assets $1,592,454 $1,596,203 $1,576,786
LIABILITIES AND EQUITY
Interest-Bearing Liabilities:
Interest-bearing demand
deposits. . . . . . . . . . . . $ 215,402 $ 5,032 2.34% $ 232,357 $ 5,036 2.17% $ 221,249 $ 5,542 2.50%
Savings deposits. . . . . . . . . 429,694 10,361 2.41 486,419 10,839 2.23 495,175 13,738 2.77
Time deposits . . . . . . . . . . 516,483 26,431 5.12 469,821 19,166 4.08 485,063 20,434 4.21
Short-term borrowed
funds . . . . . . . . . . . . . 36,698 1,552 4.23 37,743 1,159 3.07 32,159 837 2.60
Long-term debt. . . . . . . . . . 12,094 833 6.89 13,954 738 5.29 14,624 657 4.49
Total interest expense/
Total interest-bearing liabilities 1,210,371 44,209 3.65 1,240,294 36,938 2.98 1,248,270 41,208 3.30
Noninterest-bearing
deposits. . . . . . . . . . . 192,562 180,344 166,282
Total deposits and
borrowed funds . . . . . . . 1,402,933 1,420,638 1,414,552
Accrued expenses and
other liabilities . . . . . . 11,797 11,826 13,247
-52-
Shareholders' equity . . . . . . . 177,724 163,739 148,987
Total Liabilities and Equity $1,592,454 $1,596,203 $1,576,786
Interest Spread (Average yield
earned minus average
rate paid). . . . . . . . . . 3.50% 3.67% 3.70%
Net Interest Income (FTE). . . . . $ 62,577 $62,185 $ 61,461
Net Interest Margin (FTE)
(Net interest income/Total
average earning assets). . . 4.19% 4.17% 4.19%
<FN>
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
<F1> Nonaccrual loans are included in average balances reported and are used to calculate
yields.
<F2> Interest includes loan fees of $1,600,000 in 1995, $1,564,000 in 1994 and $2,321,000 in
1993.
</FN>
-53-
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME - CONTINUED
TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS<F*> (In Thousands)
1995 COMPARED TO 1994 1994 COMPARED TO 1993
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)
Causes of increase (decrease) in
net interest income (FTE):
CHANGES IN INTEREST INCOME ON
EARNING ASSETS:
Loans . . . . . . . . . . . . . . . . . $ (1,199) $ 3,470 $ 2,271 $ 1,563 $ (3,167) $(1,604)
Taxable investment securities . . . . . 859 3,275 4,134 (695) (2,508) (3,203)
Non-taxable investment securities . . . (178) (95) (273) (67) 179 112
Federal funds sold. . . . . . . . . . . 14 1,379 1,393 234 849 1,083
Interest-bearing deposits with
unaffiliated banks. . . . . . . . . . 128 10 138 66 66
Total change in interest income
on earning assets . . . . . . . . . (376) 8,039 7,663 1,101 (4,647) (3,546)
CHANGES IN INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Deposits. . . . . . . . . . . . . . . . (813) 7,596 6,783 (422) (4,251) (4,673)
Short-term borrowed funds . . . . . . . (33) 426 393 158 164 322
Long-term debt. . . . . . . . . . . . . (107) 202 95 (31) 112 81
Total change in interest
expense on interest-bearing
liabilities . . . . . . . . . . . . (953) 8,224 7,271 (295) (3,975) (4,270)
TOTAL INCREASE IN
NET INTEREST INCOME (FTE). . . . . . . . $ 577 $ (185) $ 392 $ 1,396 $ (672) $ 724
<FN>
For both the 1995-1994 comparison and the 1994-1993 comparison, the
changes in net interest income on a fully taxable equivalent basis due
to both volume and rate have been allocated to volume and rate changes
in proportion to the relationship of the absolute dollar amounts of
the change in each.
<F*>Taxable equivalent basis using a federal income tax rate of 35%.
</FN>
-54-
TABLE 4. SUMMARY OF LOANS AND LOAN LOSS EXPERIENCE (Dollars in Thousands)
YEARS ENDED DECEMBER 31
1995 1994 1993 1992 1991
DISTRIBUTION OF LOANS:
Commercial and agricultural loans. . . . $116,630 $119,533 $147,500 $155,766 $154,179
Real estate construction loans . . . . . 16,195 19,239 14,141 20,102 25,604
Real estate mortgage loans . . . . . . . 454,591 449,086 436,302 439,349 436,825
Installment loans. . . . . . . . . . . . 151,300 152,318 113,992 96,282 102,513
Total loans outstanding at
year end. . . . . . . . . . . . . . . $738,716 $740,176 $711,935 $711,499 $719,121
SUMMARY OF CHANGES IN ALLOWANCE:
Allowance for possible loan
losses at beginning of year . . . . . . $ 15,095 $ 14,383 $ 13,805 $ 12,794 $ 11,851
Loans charged off:
Commercial and agricultural . . . . . . (430) (315) (601) (433) (1,106)
Real estate mortgage. . . . . . . . . . (3) (76) (33) (71) (178)
Installment . . . . . . . . . . . . . . (212) (204) (234) (238) (466)
Total loan charge-offs . . . . . . . (645) (595) (868) (742) (1,750)
Recoveries of loans previously
charged off:
Commercial and agricultural . . . . . . 56 58 182 99 230
Real estate mortgage. . . . . . . . . . 28 40 30 28 42
Installment . . . . . . . . . . . . . . 91 128 145 212 207
Total loan recoveries . . . . . . . 175 226 357 339 479
Net loan charge-offs. . . . . . . . (470) (369) (511) (403) (1,271)
Provisions charged against
operations. . . . . . . . . . . . . . . 1,053 1,081 1,089 1,414 2,214
Allowance for possible loan losses
at year end . . . . . . . . . . . . . . $ 15,678 $ 15,095 $ 14,383 $ 13,805 $ 12,794
Ratio of net charge-offs during the
year to average loans outstanding . . . .07% .05% .07% .06% .18%
Ratio of allowance for possible loan
losses at year end to total loans
outstanding at year end . . . . . . . . 2.12% 2.04% 2.02% 1.94% 1.78%
-55-
Table 3, above, allocates the dollar change in net interest income
(FTE) between the portion attributable to changes in the average
volume of interest-bearing assets and liabilities, including changes
in the mix of assets and liabilities, and changes in average interest
rates earned and paid. Table 3 shows that, during 1995, through an
increase in the volume and change in the mix of interest-bearing
assets and liabilities, the Corporation's net interest income (FTE)
increased $577,000. The 1995 increase due to changes in the volume and
mix of interest-bearing assets and liabilities was primarily
attributable to the combined increase
MANAGEMENT'S DISCUSSION AND ANALYSIS
in average noninterest-bearing deposits and shareholders' equity of $26.2
million, or 7.6%, in 1995. However, the overall change in interest rates
had the impact of reducing net interest income (FTE) by $185,000, to
result in a net increase of $392,000 in net interest income (FTE) during
1995. The 1995 decrease in net interest income (FTE) due to changes in
interest rates was attributable to the average cost of interest bearing
deposits increasing greater than the average yield on earning assets.
Total net interest income (FTE) was up $724,000 in 1994, compared to
1993. The increase in 1994 was primarily attributable to changes in
the volume and mix of interest-bearing assets, which resulted
primarily from a combined increase in average noninterest-bearing
deposits and shareholders' equity of 9.1%, and a 4% increase in
average loans, between 1993 and 1994.
LOANS
The Corporation's ten banking subsidiaries are full service community
banks, therefore the acceptance and management of credit risk is an
integral part of the Corporation's business. The Corporation maintains
a conservative loan policy and strict credit underwriting standards.
These standards include the granting of loans, almost exclusively,
only within the Corporation's defined market areas. The Corporation
has no foreign loans nor any loans to finance highly leveraged
transactions. The Corporation's conservative 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. In addition,
the Corporation continues to maintain an aggressive loan charge-off
policy.
The Corporation's loan portfolio is well diversified geographically,
as well as along industry lines and, therefore, is reasonably
sheltered from adverse economic impact in any one industry or
geographic area. An additional strength of the Corporation's loan
-56-
portfolio is that approximately fifty percent of the portfolio, as of
December 31, 1995, was comprised of credits granted to consumers in
the form of residential mortgages and lines of credit secured by first
and second residential mortgages.
Total loans as of December 31, 1995 were $738.7 million, a decrease of
$1.5 million, or .2%, compared to total loans of $740.2 million as of
December 31, 1994. The decrease in total loans during 1995 was largely
attributable to the sale of student loans and the credit card loan
portfolio, which combined totaled approximately $4 million, and the
sale of $15.6 million of residential mortgage loans in the secondary
market.
The Corporation's geographical market area consists of generally small
cities across mid Michigan. The lack of substantive growth in the
Corporation's market areas and continuing increased competition have
impacted the Corporation's loan growth over the past few years. The
Corporation continues to experience a significant level of competition
from larger regional banks, located outside the Corporation's market
areas, in the commercial loan area, and from large local credit unions
in the installment loan area. The competition for residential mortgage
loans has also intensified significantly over the last few years, as
mortgage companies have expanded sales efforts nationwide.
Real estate mortgage loans, including real estate construction loans,
comprise the majority of the Corporation's loan portfolio. As of
December 31, 1995, 1994 and 1993, total real estate mortgage loans,
including real estate construction loans, were $470.8 million, $468.3
million and $450.4 million, respectively. Real estate mortgage loans,
including real estate construction, as a percentage of total loans
were 64% as of December 31, 1995, compared to 63% as of both December
31, 1994 and December 31, 1993. Approximately eighty percent of the
real estate mortgage portfolio, as of December 31, 1995, was secured
by residential real estate. Real estate mortgage loans, including real
estate construction, increased $2.5 million, or .5%, during 1995,
compared to increasing $17.9 million, or 4%, during 1994, and
decreasing $9 million, or 2%, during 1993. The Corporation originated
$15.6 million of residential mortgage loans during 1995, which were
sold in the secondary mortgage market. This compares with $13.6
million of residential mortgage loans originated during 1994 and $55
million of residential mortgage loans originated during 1993, which
were sold in the secondary mortgage market. During 1994 and 1995, it
was the Corporation's general practice to keep residential real estate
mortgage loans, with original maturities of fifteen years or less, in
its own loan portfolio and sell those loans with longer maturities in
the secondary mortgage market. In contrast, during 1993, the
Corporation sold residential mortgage loans with varying maturities
and interest rates, and during 1992 sold only those loans with thirty
-57-
year maturities in the secondary mortgage market. The servicing rights
were retained on all of the residential mortgage loans sold in the
secondary mortgage market. As of December 31, 1995, the Corporation
was servicing $79 million of residential mortgage loans, which had
been originated by the Corporation in its market areas and
subsequently sold in the secondary mortgage market. Prior to 1992, the
Corporation kept all residential mortgage loans originated in its own
loan portfolio. The Corporation has been successful in managing the
interest rate risk on the residential real estate mortgage portfolio
through the promotion of its three and five year balloon mortgage
products. As of December 31, 1995, approximately 40% of the
residential mortgage loan portfolio represented balloon type mortgage
loans, repriceable three or five years from the mortgage origination
date.
Installment loans totaled $151.3 million as of December 31, 1995,
compared to $152.3 million as of December 31, 1994 and $114 million as
of December 31, 1993. Installment loans represented 20.5%, 20.6% and
16% of total loans outstanding as of December 31, 1995, December 31,
1994 and December 31, 1993, respectively. The Corporation experienced
increased competition for consumer installment loans during 1995. In
addition, the Corporation sold its $2.9 million credit card
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS - CONTINUED
portfolio during 1995. The Corporation sold its credit card portfolio
due to competition for this product from other providers offering credit
cards at no annual fee and the proliferation of co-branded credit
cards. Even though installment loans did not increase during 1995, the
Corporation's affiliate banks were able to originate new loans during
the year to replace substantially all of the approximately $4.5
million per month in scheduled loan payments and other payoffs. The
Corporation's affiliate banks began a special installment loan
promotion in October 1995 which was ongoing through the beginning of
1996. The affiliate banks offered 7.83% consumer installment loans
with maturities up to forty-eight months to qualifying borrowers.
Through December 31, 1995, the affiliate banks generated $31.6 million
of these promotion loans. The 1995 installment loan promotion was the
Corporation's affiliate banks' sixth year of offering a special
interest rate on consumer installment loans during a promotion period.
Installment loans increased $38.3 million, or 33.6%, during 1994. This
increase was attributable to the 1994 installment loan promotion. A
total of $78.6 million of consumer installment loans, at an interest
rate of 5.9% and up to a forty-eight month amortization, were
generated during the 1994 promotion period. The 1993 installment loan
promotion generated $41.7 million of installment loans, at an interest
rate of 6.9% and up to a sixty month amortization.
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Historically, the average life of the Corporation's installment loan
portfolio has been approximately three years. This short average life
and the success of the installment loan promotions in recent years in
generating new loans results in significant reductions each year in
installment loan balances through loan payments and payoffs.
Consequently, during both 1995 and 1994, the installment loan
portfolio did not increase by the amount of new loans generated during
the loan promotion periods in each of these years.
Commercial loans, during 1995, decreased $2.9 million, or 2.4%, to
$116.6 million as of December 31, 1995. Commercial loans decreased $28
million, or 19%, during 1994 to $119.5 million as of December 31,
1994. A portion of the decline during the past two years was
attributed to the sale of $5 million of student loans in the secondary
market. The expansion of commercial lending efforts by larger regional
banks into smaller communities has impacted the Corporation's
commercial lending growth rate. The combination of the efforts by
these larger financial institutions and the location of the majority
of the Corporation's subsidiary banks in smaller communities, where
the demand for commercial loans which meet the Corporation's credit
standards, has historically not been particularly strong, contributed
to the decline of the Corporation's commercial loans during 1994 and
1995. Commercial loans represented 15.8%, 16.1% and 20.7% of total
loans as of December 31, 1995, December 31, 1994 and December 31,
1993, respectively.
Table 5 presents the maturity distribution of commercial and
agricultural loans, real estate construction and nonresidential real
estate mortgage loans. These loans represented 32% and 33% of total
loans as of December 31, 1995 and December 31, 1994, respectively. The
percentage of these loans maturing within one year was 41% at December
31, 1995, compared to 44% at December 31, 1994. Of those loans with
maturities beyond one year, the percentage of loans with variable
interest rates was 42% at December 31, 1995, compared to 46% at
December 31, 1994. The decline in the percentage of these type loans,
with both maturities beyond one year and variable interest rates, has
continued over the past two years as a result of the strong customer
demand to convert loans to fixed interest rates. The percentage of
these type loans maturing beyond five years remained low at 12% as of
December 31, 1995, compared to 15% at December 31, 1994. It is
management's opinion that these loan maturities and the mix between
loans with variable and fixed interest rates remain at acceptable
levels to provide the Corporation sufficient flexibility in
maintaining a balance between interest rate-sensitive assets and
liabilities.
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TABLE 5. COMPARISON OF LOAN MATURITIES AND INTEREST SENSITIVITY (Dollars in Thousands)
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1994
DUE IN DUE IN
1 YEAR 1 TO 5 OVER 5 1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL OR LESS YEARS YEARS TOTAL
LOAN MATURITIES:
Commercial and
agricultural. . . . . $ 72,528 $ 37,238 $ 6,864 $ 116,630 $ 75,231 $ 37,778 $ 6,524 $ 119,533
Real estate
construction. . . . . 9,830 5,020 1,345 16,195 10,229 4,012 4,998 19,239
Non-residential real
estate mortgage . . . 12,644 67,229 20,100 99,973 22,506 58,361 26,361 107,228
Total $ 95,002 $ 109,487 $ 28,309 $ 232,798 $ 107,966 $ 100,151 $ 37,883 $ 246,000
Percent of Total 41% 47% 12% 100% 44% 41% 15% 100%
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1994
INTEREST SENSITIVITY:
Above loans maturing after
one year which have:
Fixed interest rates. . . . . . . . . $ 79,983 58% $ 74,456 54%
Variable interest rates . . . . . . . 57,813 42 63,578 46
Total $ 137,796 100% $ 138,034 100%
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MANAGEMENT'S DISCUSSION AND ANALYSIS
NONPERFORMING LOANS
Nonperforming loans include loans accounted for on a nonaccrual basis,
accruing loans contractually past due 90 days or more as to interest
or principal payments and other loans whose terms have been
renegotiated to provide for a reduction of interest or principal
because of a deterioration in the financial position of the borrower.
The Corporation maintains an aggressive loan charge-off policy. The
Corporation's practice is to immediately charge to the allowance for
possible loan losses specifically identified credit losses. This
determination is made for each loan at the time of transfer to
nonperforming status, after giving consideration to collateral value
and the borrower's ability to repay the loan principal.
Nonaccrual loans were $1,658,000 as of December 31, 1995, compared to
$2,682,000 as of December 31, 1994, and represented .22% and .36% of
total loans, as of December 31, 1995 and December 31, 1994,
respectively. Accruing loans past due 90 days or more were $855,000 as
of December 31, 1995, compared to $296,000 as of December 31, 1994.
Renegotiated loans were $84,000 as of December 31, 1995, compared to
$148,000 as of December 31, 1994. Total nonperforming loans were $2.6
million, or .35% of total loans, as of December 31, 1995, compared to
$3.1 million, or .42% of total loans, as of December 31, 1994.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses ("provision") is the amount
added to the allowance for possible loan losses ("allowance") on a
monthly basis to absorb potential loan losses. The allowance is
maintained at a level considered by management to be adequate to
absorb potential future loan losses. This evaluation is based on a
continuous review of the loan portfolio, both individually and by
category, and includes consideration of changes in the type and volume
of the loan portfolio, actual loan loss experience, the present and
prospective financial condition of borrowers, industry and geographic
exposures within the portfolio, general economic conditions,
prospective as well as current, and special factors affecting specific
business sectors. This evaluation process is reviewed by the
Corporation's centralized independent loan review personnel, who
monitor the credit quality of the Corporation's loan portfolio using
uniform procedures and reporting systems.
The provision in 1995 was $1,053,000, compared to $1,081,000 in 1994
and $1,089,000 in 1993. The Corporation experienced net loan losses of
$470,000 in 1995, $369,000 in 1994 and $511,000 in 1993. The
Corporation's provision exceeded actual net loan losses by $583,000 in
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1995, $712,000 in 1994 and $578,000 in 1993. We are proud to report
that the provision has exceeded the Corporation's net loan losses each
year since the formation of the holding company in 1973. The
Corporation's allowance increased to $15,678,000 as of December 31,
1995 and represented 2.12% of total loans, compared to 2.04% at
December 31, 1994 and 2.02% at December 31, 1993. As of December 31,
1995, 1994 and 1993, the allowance represented 604%, 483% and 451% of
nonperforming loans, respectively.
The Corporation adopted Statements of Financial Accounting Standards
(SFAS) Nos. 114 and 118, regarding the accounting for impaired loans,
in the first quarter of 1995, without impact to the consolidated
financial statements.
The allocation of the allowance in Table 7, on page 34, is based upon
ranges of estimates and is not intended to imply either limitations on
the usage of the allowance or exactness of the specific amounts. The
entire allowance is available to absorb any future loan losses without
regard to the categories in which the loan losses are classified.
TABLE 6. SUMMARY OF NONPERFORMING LOANS (In Thousands)
(DECEMBER 31)
1995 1994 1993 1992 1991
Loans accounted for on a
nonaccrual basis<F*>. . . . . . . . . . . $ 1,658 $ 2,682 $ 2,318 $ 3,049 $ 4,215
Accruing loans contractually past
due 90 days or more as to interest
or principal payments:
Commercial, agricultural and
real estate construction 118 93 101 498 228
Real estate mortgage. . . . . . . . . . 647 125 368 315 462
Installment . . . . . . . . . . . . . . 90 78 89 140 205
855 296 558 953 895
Renegotiated loans<F**>. . . . . . . . . . 84 148 311 361 209
Total $ 2,597 $ 3,126 $ 3,187 $ 4,363 $ 5,319
<FN>
<F*>The Corporation's policy is to transfer a loan to nonaccrual status
whenever:
(1) it is determined that interest should be recorded on the cash
basis instead of the accrual basis because of a deterioration in
the financial position of the borrower,
(2) it is determined that payment in full of interest or principal
cannot be expected, or
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(3) the loan has been in default for a period of 90 days or more
unless it is both well secured and in the process of collection
(this category excludes 1 to 4 family residential loans and
consumer installment loans).
<F**>Loans whose terms have been renegotiated to provide a reduction
of interest or principal because of a deterioration in the
financial position of the borrower.
Interest income totaling $113,000 was recorded on the nonaccrual
and renegotiated loans in 1995. Additional interest income of
$186,000 would have been recorded during 1995 on these loans if
the loans had been current in accordance with their original
terms.
</FN>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISIONS FOR POSSIBLE LOAN LOSSES - CONTINUED
TABLE 7. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in Thousands)
DECEMBER 31
1995 1994 1993 1992 1991
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TO TO TO TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
Commercial and agri-
cultural loans. . . . $ 5,458 15.8% $ 4,909 16.1% $ 5,559 20.7% $ 5,489 21.9% $ 5,184 21.4%
Real estate construc-
tion loans. . . . . . 324 2.2 385 2.6 300 2.0 300 2.8 300 3.6
Real estate mort-
gage loans. . . . . . 5,000 61.5 4,940 60.7 4,579 61.3 4,561 61.8 3,956 60.7
Installment loans. . . 3,329 20.5 3,351 20.6 2,507 16.0 2,140 13.5 2,218 14.3
Not allocated. . . . . 1,567 1,510 1,438 1,315 1,136
Total $15,678 100% $15,095 100% $14,383 100% $13,805 100% $12,794 100%
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OTHER INCOME
Other income is derived primarily from trust services, deposit account
fees, fees for customer services, revenues from data processing
services, investment securities gains and gains on the sale of loans.
Other income in 1995 totaled $11,693,000, an increase of $813,000, or
7.5%, from 1994 other income of $10,880,000. The increase was
primarily attributable to an increase in service charges on deposit
accounts. Service charges on deposit accounts were $5,074,000 in 1995,
up $718,000, or 16.5%, from 1994 service charge income of $4,356,000.
This increase resulted from the implementation of a new service fee
schedule on large business accounts on January 1, 1995.
The Corporation realized gains on the sales of loans during 1995 of
$526,000, compared to $188,000 during 1994. The increase was
attributable to the sale of the Corporation's credit card loan
portfolio during the second quarter of 1995. The increased gain on the
sale of loans was partially offset by the lack of investment
securities gains during 1995, compared to 1994. During 1994, the
Corporation realized $265,000 in investment securities gains.
Other income in 1994 was $10,880,000, a decrease of $602,000, or 5.2%,
from 1993 other income of $11,482,000. The decrease was attributable
to the decline in gains realized on the sale of residential mortgage
loans in the secondary mortgage market and reduced investment
securities gains during 1994, compared to 1993. During 1994, the
Corporation sold $13.6 million of residential loans in the secondary
mortgage market and realized gains of $188,000, compared to the sale
of $55 million of residential mortgage loans and the realization of
$1,082,000 in gains during 1993. The decline in the number of
residential mortgage loans sold during 1994 was attributable to the
steady increase in residential mortgage interest rates throughout 1994
and the resulting significant reduction in the number of residential
mortgages refinanced. During 1994, the Corporation generally kept
residential mortgage loans originated with a maturity of fifteen years
or less in its own loan portfolio and sold those loans with maturities
beyond fifteen years in the secondary mortgage market. In contrast,
during most of 1993, the Corporation sold the majority of residential
mortgage loans originated, in the secondary mortgage market, to reduce
the interest rate risk of the mortgage loan portfolio.
The Corporation did not realize any gains on the sale of investment
securities in 1995, compared to gains of $265,000 in 1994 and $437,000
in 1993. The Corporation sold approximately $59 million of U.S.
Treasury securities during 1994, which were classified as available
for sale, and $32 million during 1993. All of the securities sold in
both 1994 and 1993 were scheduled to mature later in that year and
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were sold to take advantage of the unusually steep yield curve that
prevailed in the bond market at that time. The reduction in gains on
the sales of loans and investments in 1994 was partially offset by an
increase in Trust department income. During 1994, Trust department
income increased $284,000, or 12.2%. The increase resulted from a
combination of service fee increases and an increase in the volume of
accounts being serviced.
Investment securities gains and gains on the sale of residential
mortgage loans accounted for $526,000, or 4.5%, of 1995 other income,
$453,000, or 4.2%, of 1994 other income and $1,519,000, or 13.2%, of
1993 other income.
The Corporation will adopt Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122), on
January 1, 1996. Management has estimated that the adoption of SFAS
122 will not have a significant impact on the consolidated financial
statements.
OPERATING EXPENSES
Total operating expenses were $42.61 million, $43.83 million and
$44.94 million in 1995, 1994 and 1993, respectively. Total operating
expenses as a percentage of total average assets were 2.67% in 1995,
2.74% in 1994 and 2.85% in 1993 and can be reviewed in more detail and
in relation to the other components of net income in Table 1, on page
27.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The reduction in operating expenses in 1995, compared to 1994, was
attributable to the reduction in Federal Deposit Insurance Corporation
(FDIC) insurance expense. FDIC insurance expense is included in other
operating expenses. The FDIC adopted a new premium rate schedule for
Bank Insurance Fund (BIF) members in the third quarter of 1995. The
new rate schedule, which continues to determine assessments based on a
bank's risk-based capital levels, reduced each of the Corporation's
subsidiary banks' annual deposit insurance premium from 23.0 cents to
4.0 cents per $100 of insured deposits. The lower rate resulted in a
$1.27 million savings in FDIC insurance expense for the Corporation in
1995, compared to 1994. Each of the Corporation's subsidiary banks
qualified for the lowest possible assessment rate in 1994 and 1993 of
.23% of deposits. FDIC insurance premium expense included in other
operating expenses in 1995, 1994 and 1993 was $1,561,000, $2,834,000
and $3,092,000, respectively.
In the fourth quarter of 1995, the FDIC voted to lower deposit
insurance premiums to the legal annual minimum of $2,000 for
well-capitalized banks for the first six months of 1996. Consolidated
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FDIC insurance expense in 1996 is expected to be significantly lower
than in 1995, since all of the Corporation's subsidiary banks qualify
for the premium reduction.
The largest component of operating expenses is the category of
salaries, wages and employee benefits, which accounted for 58% of
operating expenses during 1995, compared to 56% and 55% in 1994 and
1993, respectively. Salaries, wages and benefits cost in 1995 were
$24.66 million, up $237,000, or less than 1%, compared to 1994.
Full-time equivalent employees were 955 at December 31, 1995, compared
to 961 at December 31, 1994. The Corporation was successful in
maintaining 1995 total employee costs, at approximately 1994 levels,
by achieving a 4.5% reduction in employee benefits cost. Salaries,
wages and employee benefits cost in 1994 were $306,000, or 1.3%, less
than in 1993. The decrease in 1994 total employee costs, compared to
1993, was also attributable to a decline in employee benefits cost.
On January 1, 1993 the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). The Statement
requires accounting for postretirement benefits other than pensions on
the accrual basis, which necessitates measurement of the obligation to
provide these future benefits and the accrual of such costs during the
employees' years of service. Upon adoption of SFAS 106, the
Corporation immediately recognized the net transition obligation of
$669,000 related to postretirement medical benefits, rather than
amortize it over future periods. The aftertax effect of immediately
recognizing the net transition obligation was $500,000 and was
accounted for in 1993 net income as a cumulative effect on prior years
of a change in accounting principles. Postretirement medical benefits
expense included in the category of salaries, wages and employee
benefits in 1995, 1994 and 1993 was $314,000, $322,000 and $305,000,
respectively.
Occupancy and equipment expense totaled $6.54 million, $6.72 million
and $6.52 million in 1995, 1994 and 1993, respectively. Occupancy and
equipment expense in 1995 decreased $180,000, or 2.7%, compared to
these same costs in 1994. These costs increased slightly during 1994,
compared to 1993, as a result of the Corporation's subsidiary bank,
Chemical Bank Montcalm, opening a new full service branch banking
office in Lakeview, Michigan during 1994. The Corporation has made a
concerted effort over the years to control these costs.
Other operating expenses totaled $11.41 million, $12.68 million and
$13.69 million in 1995, 1994 and 1993, respectively. The reduction in
other operating expenses in 1995, compared to 1994, was a result of
the reduction in FDIC insurance expense. The $1.01 million, or 7.4%,
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decrease in 1994 other operating expenses, compared to 1993 other
operating expenses, was primarily attributable to the incurrence of
$830,000 of acquisition related expenses by Key State Bank, prior to
its acquisition by the Corporation. The acquisition was accounted for
by the pooling of interests accounting method. The Corporation has
also made a concerted effort over the years to control other operating
expenses.
The Corporation's efficiency ratio, defined as total operating
expenses divided by the sum of net interest income (FTE) and other
income, excluding net securities gains and the 1995 gain on the sale
of the credit card portfolio, was 57.6% in 1995, compared to 60.2% in
1994 and 62.0% in 1993.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), was issued by the Financial
Accounting Standards Board and is effective for 1996 financial
statements. The Corporation will adopt SFAS 123 on January 1, 1996. It
is the Corporation's current intention that it will continue
accounting for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as
permitted by the new standard, in lieu of adopting the recognition
provisions of SFAS 123.
INCOME TAXES
The Corporation's effective federal income tax rate was 32.9% in 1995,
31.8% in 1994 and 32.5% in 1993, 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,
non-deductible interest expense and other non-deductible expenses
relative to pretax income.
The Corporation adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109) effective January 1,
1993, which requires the use of the liability method of accounting for
deferred income taxes. As permitted under the new rules, prior years'
financial statements were not restated. The Corporation recorded an
aftertax gain
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES - CONTINUED
for the cumulative effect of the adoption of SFAS 109 of $2,500,000
in the first quarter of 1993. The cumulative effect adjustment primarily
resulted from the accelerated recognition of unused tax benefits.
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Tax-exempt income (FTE), net of related non-deductible interest
expense, amounted to $3.5 million in 1995, $4 million in 1994 and
$3.85 million in 1993. The proportion of the Corporation's total
interest income (FTE) derived from tax-exempt investment securities
was 2.6% in 1995, compared to 3.1% in 1994 and 2.8% in 1993.
Income before income taxes on a fully taxable equivalent basis was
$30,611,000 in 1995, $28,158,000 in 1994 and $26,918,000 in 1993,
which represented an 8.7% increase in 1995 over 1994 and a 4.6%
increase in 1994 over 1993.
LIQUIDITY AND INTEREST SENSITIVITY
The Corporation manages its liquidity to ensure that it has the
ability to meet the cash withdrawal needs of its depositors, provide
funds for borrowers and at the same time ensure that the Corporation's
own cash requirements are met. The Corporation accomplishes these
goals through the management of liquidity at two levels - the parent
company and the banking subsidiaries.
The parent company's sources of funds have been dividends from
subsidiaries, borrowings from unaffiliated banks and proceeds from
equity issuances. During the three year period ended December 31,
1995, the parent company's primary source of funds was subsidiary
dividends. The parent company manages its liquidity position to
provide the cash necessary to pay dividends to shareholders, service
debt, invest in subsidiaries, enter new banking markets, pursue
investment opportunities and satisfy other operating requirements.
Federal and state banking laws place certain restrictions on the
amount of dividends which a bank may pay to its parent company. Such
restrictions have not had, and are not expected to have, any material
effect on the Corporation's ability to meet its cash obligations or
impede its ability to manage its liquidity needs. Under current
regulatory restrictions, the Corporation's subsidiaries could upstream
$26.9 million to the parent company in 1996, without obtaining
regulatory approval. In addition to the potential $26.9 million in
funds available from subsidiaries, the parent company had $15.4
million in cash on hand as of December 31, 1995.
The subsidiary banks manage liquidity to insure adequate funds are
available to meet the cash flow needs of depositors and borrowers. The
subsidiary banks' most readily available sources of liquidity are
federal funds sold, investment securities classified as available for
sale and investment securities classified as held to maturity maturing
within one year. These sources of liquidity are supplemented by new
deposits and by loan payments received from customers. As of December
31, 1995, the Corporation held $80.1 million in federal funds sold,
$341.7 million in investment securities available for sale and
$192.9 million in other investment securities maturing within one
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year. These short term assets represented 44% of total deposits as of
December 31, 1995.
Historically, the Corporation's investment securities portfolio has
been very short term in nature, with the average life of the portfolio
consistently being less than two years. As of December 31, 1995, the
Corporation's investment securities portfolio had an average life of
1.44 years, with approximately $294 million in investment securities,
or 42%, of the investment securities portfolio maturing during 1996,
and another $218 million, or 31%, of the investment securities
portfolio maturing during 1997. The combination of the 1996 and 1997
scheduled maturities, results in 73% of the Corporation's investment
securities portfolio maturing within two years of December 31, 1995.
As of December 31, 1994, 69% of the securities portfolio was scheduled
to mature within two years. The maturity analysis of the investment
securities portfolio is summarized in Tables 9 and 10, on page 38.
Table 8, on page 37, presents the maturity distribution of time
deposits of $100,000 or more at the end of each of the last three
years. The Corporation, historically, has not utilized time deposits
of $100,000 or more as a source of liquidity. Time deposits of
$100,000 or more and the percentage of these deposits to total
deposits increased slightly during 1995 to $97.7 million, or 7% of
total deposits, as of December 31, 1995, compared to $92 million, or
6.7% of total deposits, as of December 31, 1994 and $62.8 million, or
4.6% of total deposits, as of December 31, 1993. The significant
increase in the amount of these deposits during 1994 was attributable
to the increase in the interest rates on time deposits and the
widening of the interest rate spread between interest-bearing demand
deposit interest rates and time deposit interest rates. The percentage
of time deposits of $100,000 or more with a maturity of less than
three months was 84% at both December 31, 1995 and December 31, 1994
and 79% as of December 31, 1993. As the Corporation does not utilize
these deposits as a source of liquidity, it is able to invest the
funds generated from these deposits in investments of like or similar
maturity. The Corporation has, and expects to continue to have, more
than sufficient funds to meet the liquidity requirement of these
deposits.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
TABLE 8. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR
MORE (Dollars in Thousands)
DECEMBER 31
1995 1994 1993
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Maturity
Within 3 months . . . . . $ 82,172 84% $ 77,436 84% $ 49,217 79%
Within 3 to 6 months. . . 4,865 5 5,557 6 3,959 6
Within 6 to 12 months . . 6,954 7 4,687 5 4,536 7
Over 12 months. . . . . . 3,707 4 4,301 5 5,091 8
Total $ 97,698 100% $ 91,981 100% $ 62,803 100%
Interest rate sensitivity is determined by the amount of interest
earning assets and interest bearing liabilities repricing within a
specific time period and the magnitude by which interest rates change
on the various types of earning assets and interest bearing
liabilities. The management of interest rate sensitivity includes
monitoring the maturities and repricing opportunities of
interest-earning assets and interest-bearing liabilities. Interest
rate sensitivity management aims at achieving reasonable stability in
both net interest income and the net interest margin through periods
of changing interest rates. The Corporation's goal is to avoid a
significant decrease in net interest income and thus an adverse impact
on the profitability of the Corporation in periods of changing
interest rates. It is necessary to analyze projections of net interest
income based upon the repricing characteristics of the Corporation's
earning assets and interest bearing deposits and the varying magnitude
by which interest rates may change on loans, investments and interest
bearing deposit accounts.
Interest rate sensitivity and liquidity management are managed by a
number of techniques, as no single interest rate risk measurement tool
satisfies both objectives. The primary techniques utilized by the
Corporation are asset and liability repricing schedules, commonly
referred to as static gap analysis, and simulation analysis. Static
gap analysis is used to monitor the Corporation's liquidity position
and to assist in the measurement of interest rate sensitivity. The
Corporation's static gap remained in a somewhat neutral position
throughout the year, reflecting little change from year-end 1994
levels. As of December 31, 1995, the Corporation's static gap analysis
indicated a cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities of 96% on a six month basis and 104% on
a one year basis. This compares with ratios at December 31, 1994 of
90% on a six month basis and 100% on a one year basis. In computing
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these ratios, variable rate loans and time deposits were included in
the time frame of their earliest repricing. Municipal NOW accounts
have no contractual maturity, however they are repriceable daily at
the Corporation's discretion. The Corporation has determined that
these accounts are interest rate sensitive and have included them
within the six month category of repricing for the computation of
static gap. Money fund accounts, which are noncorporate limited
transaction savings accounts, also have no contractual maturity and
can reprice daily at the Corporation's discretion. Based on the
Corporation's statistical analysis, money fund accounts have been
determined to be only partially interest rate sensitive, and therefore
20% of these accounts were included within the six month category of
repricing for the computation of static gap. Passbook savings, retail
NOW and ChemCash accounts, which totaled $421 million as of December
31, 1995, have no contractual maturity date and can reprice daily at
the Corporation's discretion. These accounts are believed by
management to be predominately noninterest rate sensitive, and
therefore were not included in the computation of static gap. It is
important to emphasize that the computation of static gap does not
address the fact that the repricing of certain categories of assets
and liabilities are subject to competitive and other influences that
are beyond the control of the Corporation. As a result, certain assets
and liabilities mature or reprice in periods other than in their
contractual period. The Corporation recognizes the limitations of
static gap analysis as a tool in managing interest rate risk and,
therefore utilizes other methods, including simulation analysis.
Simulation analysis is used to project the potential effects of
various interest rate environments on the balance sheet mix and net
interest income. Simulation analysis involves the analysis of net
interest income and the corresponding quantification of interest rate
risk, attributable to changes in interest rate levels and
relationships, asset and liability mixes and loan prepayment
characteristics. While many assets and liabilities reprice either at
maturity or in accordance with their contractual terms, several
balance sheet components demonstrate characteristics that require an
evaluation to more accurately reflect their pricing behavior.
Assumptions based on historical pricing relationships and experience
and anticipated market reactions are made to certain core deposit and
loan categories to reflect changes in interest rate costs and yields
relative to changes in market interest rates. The results of this
simulation analysis provide additional information needed to assess
the proper balance sheet structure and manage net interest income.
The management of net interest income must address two objectives. It
must consider the liquidity needs of the Corporation and be designed
to minimize the risk of a significant decline in net interest income
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in a period of significantly rising or declining interest rates. The
Corporation has historically been successful in managing net interest
income in periods of both rising and declining interest rates through
effectively managing the maturity schedule of its investment
securities portfolio. Note C to the consolidated financial statements
and Table 9 include the maturities of investment securities as of
December
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND INTEREST SENSITIVITY - CONTINUED
31, 1995. In addition, Note C discloses both the amortized cost and
estimated market values of the Corporation's investment securities
portfolio as of December 31, 1995, 1994 and 1993.
The Corporation expects to keep the average maturity of its investment
securities portfolio to under three years, while generally holding in
its own loan portfolio residential real estate loans with original
maturities of fifteen years of less. The Corporation has not used and
does not intend to use interest rate swaps or other derivatives in the
management of interest rate risk. As of December 31, 1995, the
Corporation held approximately $4 million in mortgage backed
securities and had no investments in any instruments considered "junk
bonds." It is management's opinion, based upon the use of static gap
analysis and simulation techniques, that the Corporation's 1996 net
interest income will not be materially impacted by a moderately rising
or declining interest rate environment.
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TABLE 9. MATURITIES AND YIELDS<F*> OF INVESTMENT SECURITIES AT DECEMBER 31, 1995 (Dollars in
Thousands)
MATURING<F**>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL MARKET
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE
AVAILABLE FOR SALE:
U.S. Treasury and agencies . $ 97,927 5.71% $230,145 5.95% $328,072 5.92% $328,072
Other securities . . . . . . 3,537 4.83 6,660 6.93 $1,283 7.00% $2,118 6.43% 13,598 6.67 13,598
Total Investment Securities
Available for Sale. . . . . 101,464 5.68 236,805 5.98 1,283 7.00 2,118 6.43 341,670 5.89 341,670
HELD TO MATURITY:
U.S. Treasury and agencies . 183,415 5.17 138,270 6.21 321,685 5.89 325,332
States of the U.S. and
political subdivisions. . . 9,496 8.82 18,621 7.81 8,669 8.78 1,682 8.91 38,468 8.33 39,442
Other securities . . . . . . 711 8.31 711 8.31 742
Total Investment Securities
Held to Maturity. . . . . . 192,911 5.35 157,602 6.40 8,669 8.78 1,682 8.91 360,864 5.91 365,516
Total Investment Securities $294,375 5.46% $394,407 6.15% $9,952 8.56% $3,800 7.62% $702,534 5.90% $707,186
<FN>
<F*>Taxable equivalent basis using a 35% federal income tax rate.
<F**>Based on final contractual maturity.
</FN>
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TABLE 10. MATURITY ANALYSIS OF INVESTMENT SECURITIES (as a % of total
portfolio)
DECEMBER 31
1995 1994 1993
Under 1 year. . . . . . . 41.9% 29.9% 45.7%
1-5 years . . . . . . . . 56.1 66.6 50.9
5-10 years. . . . . . . . 1.4 1.9 2.5
Over 10 years . . . . . . .6 1.6 .9
Total 100% 100% 100%
CAPITAL
Capital provides the foundation for future growth and expansion. The
major component of capital is shareholders' equity. Effective January
1, 1994, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
specifies that investment securities available for sale are to be
carried at estimated market value with a corresponding, net of tax,
offset in shareholders' equity. As of December 31, 1995, the SFAS 115
adjustment was an unrealized net gain of $1.375 million in
shareholders' equity, compared to an unrealized net loss of $8.289
million as of December 31, 1994. See Notes A and C to the consolidated
financial statements.
Shareholders' equity, including the SFAS 115 adjustment, was $185.5
million as of December 31, 1995, an increase of $23.9 million, or
14.8%, from total shareholders' equity as of December 31, 1994. The
1995 increase was derived almost exclusively from net income retained
(net income remaining after cash dividends to shareholders) and the
change in the SFAS 115 equity adjustment. The SFAS 115 adjustment
increased shareholders' equity $9.7 million during 1995.
The ratio of shareholders' equity to total assets was 11.3% at
December 31, 1995, compared to 10.1% at December 31, 1994 and 9.8% at
December 31, 1993. The Corporation's tangible equity ratio was 11.1%
and 9.9% as of December 31, 1995 and December 31, 1994, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Under the regulatory "risk-based" capital guidelines in effect for
both banks and bank holding companies, minimum capital levels are
based upon perceived risk in the Corporation's various asset
categories. These guidelines assign risk weights to on-and-off balance
-75-
sheet items in arriving at total risk-adjusted assets. Regulatory
capital is divided by the computed total of risk-adjusted assets to
arrive at the risk-based capital ratios.
The following table compares the Corporation's capital ratios with
regulatory capital guidelines as of December 31, 1995:
RISK BASED CAPITAL RATIOS
LEVERAGE TIER 1 TOTAL
Chemical Financial Corporation's
capital ratios. . . . . . . . . . . . . . . . 11.07% 27.73% 28.75%
Regulatory capital ratios "well
capitalized" definition . . . . . . . . . . . 5.00 6.00 10.00
Regulatory capital ratios -
minimum requirements. . . . . . . . . . . . . 3.00 4.00 8.00
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 $666 million in investment
securities and other assets, which are assigned a 0% risk rating, and
$379 million in loans secured by first liens on residential real
estate properties, which are assigned a 50% risk rating. These two
categories of assets represented 64% of the Corporation's total assets
as of December 31, 1995.
REGULATORY CHANGES
On September 9, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act") was signed into law. This new
federal legislation provided for nationwide interstate banking on
September 29, 1995 and also provides for interstate branching. The
Federal Reserve Board has authority to approve an application for an
interstate acquisition, regardless of whether such transaction is
permitted under the law of the state in which the bank to be acquired
is located. This authority of the Federal Reserve Bank eliminates the
states' authority to discriminate against out-of-state bank holding
companies. Interstate branching provides for a single bank to acquire
or establish branches in other states. Under interstate branching, a
bank does not need to be part of a holding company to cross state
lines. Effective June 1, 1997, banks may consolidate existing bank
operations and branch interstate. The Act enables states to determine
at what level they wish to participate in interstate branching. States
may opt in early, before the June 1, 1997 effective date, and states
may opt-out before this date.
-76-
The provisions of the Act regarding interstate banking and branching
are complex and thus it remains unclear what effect future
developments in nationwide banking and branching will have on the
Corporation. During 1995, mergers and acquisitions between large
financial institutions in different states did occur. As a
consequence, banking consolidation and interstate banking and
branching could have an impact on the Corporation. The Corporation has
no intention to pursue the acquisition of banks or branch banking
offices outside of the state of Michigan. Certainly, major bank
holding companies will continue to consolidate their bank subsidiaries
into a single bank statewide, and possibly nationwide, and interstate
acquisitions nationwide will continue. The Corporation will continue
to closely observe future developments in this area and is committed
to acting in the best interests of its shareholders.
OUTLOOK
The Corporation's philosophy is that it intends to be a "family" of
community banks, which operates under the direction of local Boards of
Directors, a holding company management team and a Corporate Board of
Directors. The Corporation strives to remain a quality sales and
service organization, and is dedicated to controlled growth and
sustained profitability, through the preservation of the community
banking concept, in an ever changing and increasingly competitive
environment.
The Corporation has designed its policies regarding asset/liability
management, liquidity, lending, investment strategy and expense
control to provide for the safety and soundness of the organization,
continued earnings growth and the avoidance of wide fluctuations in
earnings from one year to the next. The Corporation continues to
successfully manage its operations, and thus offset its lower than
peer net interest margin, which results from its conservative lending
and investment policies, with lower than peer loan losses and
operating expenses. This strategy resulted in an increase in earnings
per share of 7.6% and a return on assets of 1.24%, during 1995.
The banking industry is affected by the overall level of inflation,
primarily by the impact inflation has on the overall level and trend
of interest rates and the growth of operating expenses. It is
necessary for the Corporation to position itself so that changes in
the overall level and trend of interest rates, both on a short term
and long term basis, do not significantly adversely impact its net
interest income. It is also necessary for the Corporation to
continually monitor the growth of operating expenses and maintain an
appropriate ratio of equity to assets. The successful management of
these items should result in the Corporation continuing to meet its
objectives and the goals established within its operating philosophy.
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There are currently no known trends, events or uncertainties that
management believes may be reasonably expected to have a material
effect on the Corporation's financial performance.
-78-
DIRECTORS AND OFFICERS OF AFFILIATES
CHEMICAL BANK AND TRUST COMPANY
DIRECTORS TERENCE F. MOORE DIRK B. WALTZ
STUART J. BERGSTEIN President Retired
President MidMichigan Regional
Community Drug Stores, Inc. Health Systems ST. LOUIS OFFICE
ADVISORY BOARD
LAWRENCE E. BURKS MARY M. NEELY LAWRENCE E. BURKS
President Community Volunteer President
JAMES A. CURRIE ALAN W. OTT DANIEL L. DOEPKER
Educator Chairman and President
Chief Executive Officer Mid-West Building
DALE T. DEAN Distributors, Inc.
President FRANK P. POPOFF
4-D Builders Supply, Inc. Chairman DOUGLAS F. McKIM
The Dow Chemical Company Chairman
MICHAEL L. DOW Lodewyk, Nesen & McKim, Inc.
Chairman LAWRENCE A. REED
General Aviation, Inc. Retired ALAN W. OTT
Dow Corning Corporation Chairman and
DR. DAVID E. FRY Chief Executive Officer
President GARY S. SMITH, M.D.
Northwood University Midland Family Physicians, P.C. DUANE OXENDALE
Regional Manager
RICHARD A. HAZLETON WILLIAM S. STAVROPOULOS Michigan Livestock Exchange
Chairman and President and
Chief Executive Officer Chief Executive Officer WILLIAM C. THIEMKEY, D.O.
Dow Corning Corporation The Dow Chemical Company Physician
JAMES R. JENKINS DIRK D. WALTZ BRADLY E. VIBBER
Vice President, Dirk Waltz Buick-Olds-Jeep, Inc. Senior Vice President and
Manager
Secretary and General Counsel
Dow Corning Corporation LAWRENCE J. WASHINGTON, JR. JAMES F. WAGAR
Vice President Secretary-Treasurer
JAMES A. KENDALL Human Resources Playbuoy Pontoon
Attorney at Law Chemicals and Plastics Manufacturing, Inc.
Currie & Kendall, P.C. The Dow Chemical Company
OFFICERS
F.R. LEHMAN HONORARY DIRECTORS ALAN W. OTT
Retired A.T. BLISS, JR. Chairman and
Dow Chemical U.S.A. Retired Chief Executive Officer
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LAWRENCE E. BURKS VICE PRESIDENTS AND JON D. CATLIN
President TRUST OFFICERS REGINA CURTIS
KIRK W. FISHER SHERON DEIBERT
THOMAS J. ALEXANDER RICHARD J. STRINGER MARY G. GREEN
Executive Vice President and PATRICIA ZIMMERMAN CHERYL K. MEYERS
Cashier NANCY MILTON
CONTROLLER SHERRY A. MIZER
BRUCE M. GROOM GRETCHEN L. RODAMMER JANET K. SCHOENBINE
Senior Vice President BARBARA E. SLAGEL
and Senior Trust Officer ASSISTANT VICE PRESIDENTS MARK J. STEINKE
CARL R. AHEARN TAMARA J. SWINSON
WILLIAM IDONI RUTH BOMAN MARLENE TETU
Senior Vice President ROBERT O. BURGESS, JR. PEGGY L. TUCKER
KIMBERLEE R. BUTCHER SANDRA TURK
CHARLES F. KINNEY G. THOMAS CIMBALIK TINA A. WALLACE
Senior Vice President JANET M. McGUIRE SHARON YODER
SELENA NOBLE
WILLIAM C. LAUDERBACH MONICA A. SANGER BUILDING AND
Senior Vice President and VICTOR L. SCHULTZ MAINTENANCE OFFICER
Investment Officer RONALD D. SCHWEIGERT CHESTER CANTRELL
ROBERT J. WALTERS
LARRY M. NOBLE CAROL WIERMAN
Senior Vice President SHERYL K. WILLIG
JUDE T. PATNAUDE ASSISTANT VICE PRESIDENTS
Senior Vice President and AND TRUST OFFICERS
Trust Officer HERBERT E. HARDY
J.R. HESANO
GLENN W. PIETENPOL NORMA KENDALL
Senior Vice President and GUY D. MERRIAM
Trust Officer
TRUST OFFICERS
BRADLY E. VIBBER MARK SOVEREEN
Senior Vice President PICCOLA SWEEBE
VICE PRESIDENTS ASSISTANT TRUST OFFICERS
SHARON E. BOWEN SHELLY L. CAUFIELD
JOANN M. BURGESS WILLIAM HAIGH
ROBERT W. BURNS
ALAN C. CHRISTENSEN AUDITOR
W. ROGER MIKUSEK AUDREY J. GRIFFIN
ROGER D. NEMETH
CORA J. POST ASSISTANT CASHIERS
DARLENE R. SLATER WAYNE A. BARBER
BETH E. BRICK
-80-
DIRECTORS AND OFFICERS OF AFFILIATES
CFC DATA CORP CHEMICAL BANK BAY AREA
DIRECTORS DIRECTORS THOMAS H. TABOR
STUART J. BERGSTEIN GARY E. ANDERSON President
President President Herman Hiss & Co.
Community Drug Stores, Inc. Dow Corning Corporation
MERLE J. WIELAND
JAMES R. JENKINS LORI A. GWIZDALA Vice President
Vice President, Senior Vice President Wieland Sales, Inc.
Secretary and General Counsel Chief Financial Officer
Dow Corning Corporation and Treasurer CARO/MARLETTE
Chemical Financial Corporation ADVISORY BOARD
TERENCE F. MOORE WILLIAM L. BORTEL
President MARVIN J. KOCIBA Agricultural Consultant
MidMichigan Regional Farm Owner and Operator
Health Systems JUDITH A. ETTEMA
DOMINIC MONASTIERE Owner
ALOYSIUS J. OLIVER President Everts Card Shop
Executive Vice President
Chemical Financial Corporation ALAN W. OTT DR. PAUL A. GOLSCH
Chairman, Chief Executive Optometrist
ALAN W. OTT Officer and President
Chairman, Chief Executive Chemical Financial Corporation DOUGLAS H. HERRINGSHAW
Officer and President Executive Vice President
Chemical Financial Corporation DONALD L. PIETZ
President KENNETH G. McLAREN
THOMAS H. PETERSEN PICO, Inc. Owner
Executive Vice President and Simonson/McLaren Agency
General Manager GERALDINE F. PRIESKORN
Vice President DOMINIC MONASTIERE
JOHN A. REISNER Prieskorn Variety Stores Inc. President
President
Chemical Bank West RICHARD B. RANSFORD RICHARD B. RANSFORD
President President
OFFICERS Ransford Funeral Home, Inc. Ransford Funeral Home, Inc.
ALOYSIUS J. OLIVER
President ROBERT D. SAROW RICHARD N. SYKES
Attorney at Law Secretary
THOMAS H. PETERSEN Learman, Peters, Sarow & B. Sykes Ltd.
Executive Vice President and McQuillan
General Manager CASS CITY
GARY D. STEADMAN ADVISORY BOARD
ALAN W. OTT President DUANE W. CHIPPI
Treasurer Gary D. Steadman, Inc. President
Cass City Oil & Gas Company
LORI A. GWIZDALA
Secretary
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RICHARD T. DONAHUE GLEN H. TOWNLEY ASSISTANT CASHIERS
Farm Owner and Operator Owner BETTE M. BURTON
Harbor Beach Insurance Agency RONALD D. ERNDT
DOUGLAS H. HERRINGSHAW LYNN M. HANSEN
Executive Vice President OFFICERS SUZANNE E. HUTCHINSON
ALAN W. OTT JUDITH A. MARCINIAK
WILLIAM L. KRITZMAN Chairman SUSAN M. MILLER
President and Treasurer MARSHA K. MOORE
Kritzman's, Inc. DOMINIC MONASTIERE SHERRYL M. SEELEY
President CHERYL D. WILDER
DOMINIC MONASTIERE KAREN L. WOOD
President DOUGLAS H. HERRINGSHAW
Executive Vice President
GERALDINE F. PRIESKORN
Vice President JAMES E. BOLTON
Prieskorn Variety Stores Inc. Senior Vice President
K. MICHAEL WEAVER RICHARD J. Van AKKER
Owner Senior Vice President
Coachlight Pharmacy
ROBERT M. WOLAK
ROBERT V. WISCHMEYER Senior Vice President
Plant Manager
Agri Sales, Inc. (Bad Axe) VICE PRESIDENTS
CRAIG A. BISHOP
HARBOR BEACH/BAD AXE MICHAEL F. BOICE
ADVISORY BOARD TARI E. DETZLER
KENNETH C. BOOMS DUANE R. Mc CULLOCH
Retired President GALE L. MIELENS
Booms Silo Co. Inc. BEVERLY J. PERRY
MARY JO TOPORSKI
DOUGLAS H. HERRINGSHAW THOMAS R. WILCOX
Executive Vice President
ASSISTANT VICE PRESIDENTS
MARVIN J. KOCIBA JANET A. BERTRAND
Farm Owner and Operator WILLIAM D. BOKHART
R. JAMES MERRILL
DOMINIC MONASTIERE LYNN C. PAVLICHEK
President
CASHIER
PATRICIA J. ROGGENBUCK CHARLES L. BROWN
Secretary
Helena Valley Farms AUDITOR
FELICIA M. CARR
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DIRECTORS AND OFFICERS OF AFFILIATES
CHEMICAL BANK SOUTH CHEMICAL BANK MONTCALM
DIRECTORS JEOFFREY A. THORREZ DIRECTORS
JUDITH A. BOROWITZ President ROBERT K. BRUNDAGE
President Concord Manufacturing Co. Realtor
RONALD J. DeGRAW JACK H. TOWNSEND LAWRENCE E. BURKS
Attorney Chairman and President
Schroeder, DeGraw, Kendall, Chief Executive Officer Chemical Bank and Trust Co.
Mayhall, DeGraw & Dickerson Michigan Kitchen Distributors
DONALD BURNS
ROBERT W. FRAHM DR. MELVIN L. VULGAMORE President
President President Montcalm Community College
Frahm Chevrolet-Buick- Albion College
Pontiac Company GARY COPP
OFFICERS Secretary/Manager
EUGENE D. HAMAKER EUGENE D. HAMAKER Carson City Lumber Co.
Retired/Consultant Chairman
Metalab C. NORMAN CROOKS
JUDITH A. BOROWITZ Farmer
DENNIS J. LaFLEUR President
President ALAN E. GRUNEWALD
Chemical Bank Michigan MARVIN N. ITTNER Professor of Finance
Vice President Michigan State University
WILLIAM C. LAUDERBACH
Senior Vice President and REBECCA L. VETTEL THOMAS W. KOHN
Investment Officer Vice President President
Chemical Bank and Trust Co.
ASSISTANT VICE PRESIDENT AND CHARLES E. MILLER, JR.
ALAN W. OTT CASHIER Insurance
Chairman, Chief Executive CAROL R. HAYDEN Miller-Gamwell Agency
Officer and President
Chemical Financial Corporation ASSISTANT VICE PRESIDENT ALAN W. OTT
TERI E. FOGEL Chairman, Chief Executive
JOYCE J. SPICER Officer and President
Administrative Assistant AUDITOR Chemical Financial Corporation
Albion Division ELIZABETH A. WONUS
Harvard Industries, Inc. MELVIN SCHNEPP
ASSISTANT CASHIERS Retired
WILLIAM K. STOFFER BARBARA A. KEITH Schnepp Funeral Homes, Inc.
Chairman and DIANE M. RAMIREZ
Chief Executive Officer
Albion Machine and Tool Co.
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CHEMICAL BANK CENTRAL
OFFICERS DIRECTORS OFFICERS
ALAN W. OTT JACK R. BENEDICT ALAN W. OTT
Chairman President Chairman
The Benedict Manufacturing Co.
THOMAS W. KOHN KARL W. LINEBAUGH
President BRUCE M. GROOM President
Senior Vice President and
GLENN L. WOOD Senior Trust Officer PHILIP R. KEATING
Senior Vice President Chemical Bank and Trust Co. Executive Vice President
DARLA BARTLETT LELAND HICKOX, M.D. MARY L. WITHERS
Cashier Physician Cashier
VICE PRESIDENTS KARL W. LINEBAUGH ASSISTANT VICE PRESIDENTS
DAVID BARKER President JAMES GARRETT
DIANE BEACH DAVID J. LANGWORTHY
BRUCE COLE RONALD MOHNKE JEAN A. MISENAR
ROBERT HILL Rogers-Mohnke Funeral Home
LAWRENCE M. LAGROW AUDITOR
JEAN SOUTHWARD LINDA L.H. MYERS ROBERT D. GAMMONS
Assistant Superintendent
ASSISTANT VICE PRESIDENT Mecosta-Osceola Intermediate ASSISTANT CASHIERS
KAY MEISTER School District KENDA DIESON
MARJORIE A. RICHARDS
AUDITOR ALAN W. OTT JANET ROWLAND
KIMBERLY SIBURT Chairman, Chief Executive KELLIE J. SHANKEL
Officer and President
ASSISTANT CASHIERS Chemical Financial Corporation COMPLIANCE AND CRA
AMY S. ANDERSEN OFFICER
CONNIE COLLAR WILLIAM R. PRUITT MARY K. SUCKOW
TAMALA HARRINGTON Pruitt-Livingston Funeral Home
DORIS RASMUSSEN
DONNA STRATTON CARL M. SCHUBERG
LINDA TUCKER Auctioneer-Farmer
KAREN YAW
FRANKLIN C. WHEATLAKE
Chairman
Wheatlake Enterprises
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CHEMICAL BANK MICHIGAN
DIRECTORS WILLIAM C. ODYKIRK ROBIN R. GROVE
ROBERT H. BEACOM Ody Enterprises LINDA C. HALL
Retired STEVEN J. KINGSBURY
Chemical Bank Michigan ALAN W. OTT TAMMY L. MILLER
Chairman, Chief Executive CAROL PETERSON
JOHN M. BICKNELL Officer and President DAVID T. PRAWDZIK
Retired Retailer Chemical Financial Corporation SUSAN D. SPEARY
LORI STOUT
DONALD D. CLARKE GUERDON E. SCHUMACHER STANLEY L. WARNER
Crop Farmer Retired
AUDITOR
VINCENT L. DEMASI ALBERT F. WENTWORTH CHRISTINE J. LAWSON
Owner, Clare Hardware Dairy Farmer
ASSISTANT CASHIERS
A.J. DOHERTY, III OFFICERS THEOLA CLEVELAND
A.J. Doherty Motor Inns, Inc. ALAN W. OTT ELAINE DUNKLE
Chairman JUDITH A. GROVE
WAYNE FRUCHEY VERA MARSHALL
Perry's IGA/Countryside IGA DENNIS J. LaFLEUR SUE E. WHITE
President
JOSEPH F. JOHNSTON
Retired JAMES A. ALLEN
Johnston Elevator Senior Vice President
DENNIS J. LaFLEUR RONNIE L. POWELL
President Senior Vice President
FRANK J. MARTIN, D.O. RODERICK F. BEAMISH
Physician Vice President
CLAY MAXWELL JANET GILLARD
Maxwell Seed Farms Vice President
RICHARD M. MOSER DAVID P. VERMILYE
Owner, Woods Household Vice President and Cashier
Furniture & Appliances
BRENDA J. HAVENS
BETTY M. MUSSELL Comptroller
Community Volunteer
ASSISTANT VICE PRESIDENTS
JOSEPH F. MYERS CHARLES ABMLE
Myers for Tires DALLAS L. GEROW
-85-
DIRECTORS AND OFFICERS OF AFFILIATES
CHEMICAL BANK NORTH CHEMICAL BANK WEST
DIRECTORS OFFICERS DIRECTORS
WILLIAM L. CAREY ALAN W. OTT THOMAS J. ALEXANDER
Attorney at Law Chairman Executive Vice President
and Cashier/Chem Bk & Trust
Co.
JERRY M. DeWITT G. JOE SWAIN
Owner President RONALD L. BLACKMAN
Fox Run Country Club President
MARK W. FURST Blackman Iron & Metal, Inc.
ROSE E. DULEY GLEASON Vice President
Retired NANCY BOWMAN
Crawford County Library RANDALL A. SEYMOUR C.P.A.
Vice President
RONALD D. FRASER HAROLD CNOSSEN
Owner J. ELAINE SWEENEY Prosperous Farms
Grayling Holiday Inn Vice President and
Cashier WAYNE EVERETT
WILLIAM IDONI Everett Office Plus
Senior Vice President ASSISTANT VICE PRESIDENTS
Chemical Bank and Trust SHARON NIEBRZYDOWSKI JAMES B. HINKAMP, II
Company SHELBY J. NORMAN Executive Vice President
JANE A. RANDALL
SAMUEL P. MARRA ANDREA M. WEISS ALAN W. OTT
Retired Chairman, Chief Executive
Hunt Drug Store, Inc. AUDITOR Officer and President
CAROL D. WHITE Chemical Financial Corporation
ALAN W. OTT
Chairman, Chief Executive ASSISTANT CASHIERS JOHN A. REISNER
Officer and President SANDRA L. EGBERS President
Chemical Financial Corporation TAMARA L. GALVANI
SHARON A. VARISCO OFFICERS
RONALD M. PHILLIPS ALAN W. OTT
Retired Chairman
Chemical Bank North
JOHN A. REISNER
G. JOE SWAIN President
President
JAMES B. HINKAMP, II
JERRY WALKER Executive Vice President
Vice President
Jack Millikin, Inc. BARBARA HANCOCK
Cashier
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KRISTINE E. BOWEN DOMINIC MONASTIERE
Vice President President
Chemical Bank Bay Area
WENDY S. MOORE
Vice President ALAN W. OTT
Chairman, Chief Executive
AGRICULTURE REPRESENTATIVE Officer and President
THOMAS WINKEL Chemical Financial
Corporation
AUDITOR
SUSAN PARSONS DAVID S. RAMSAY
Lee/Ramsay Funeral Home
ASSISTANT CASHIERS
DARYL HESSELINK DONALD L. WILTSE
ROXANNE PRINCE Wiltse Chevrolet,
SUSAN SCHWAGER Oldsmobile, Buick, Inc.
MARY JO SHIVLIE
OFFICERS
ALAN W. OTT
CHEMICAL BANK HURON Chairman
DIRECTORS JAMES DANEK
HOWARD BARRIGER President
Teacher
Standish Sterling High School RODNEY R. LOOMIS
President Senior Vice President
Barriger Builders
JANIE L. WILLIAMSON
RONALD E. CHRISTIE Vice President and Cashier
Band Director
Au Gres Sims Schools SANDRA A. METZGER
Assistant Vice President
JAMES E. DANEK
President DEBORAH K. MORGAN
Assistant Vice President
KARL N. EDMONDS
AuGres Parts & Service AUDITOR
DEBBIE DEWALD
GERALD HEINRICH
Heinrich Lumber Company ASSISTANT CASHIERS
DEBRA CLAYTON-
THERON P. HOLLAND MOREFIELD
Hollands IGA MARY DURUSSEL
JEAN SAXON
OTIS McKINLEY, D.D.S. KAREN SCHAFFER
WILLIAM TILLEN
-87-
CHEMICAL BANK KEY STATE
DIRECTORS OFFICERS
DAVID ELOW DAVID ELOW
Retired Industrialist Chairman
MARGARET S. GULICK DAVID B. RAMAKER
President and Chief Executive President
Officer
Memorial Healthcare Center JOHN F. HARRISON
Senior Vice President and
WILLIAM P. HOWE Cashier
President
Mid-Michigan Construction VICE PRESIDENTS
ARTHUR C. ELBRACHT
MICHAEL G. MAJZEL, JR. ROBERT L. HARDY
Self-Employed Crop Farmer JOHN H. LARZELERE
ALOYSIUS J. OLIVER ASSISTANT VICE PRESIDENTS
Executive Vice President P. JOSEPH DALY
Chemical Financial Corporation LORI L. EDINGTON
NITA L. JONES
ALAN W. OTT DONNA S. McAVOY
Chairman, Chief Executive
Officer and President ASSISTANT VICE PRESIDENT
Chemical Financial Corporation AND CONTROLLER
LAWRENCE V. BORZA
HERBERT F. PENHORWOOD
Retired Industrialist ASSISTANT VICE PRESIDENT
AND AUDITOR
DAVID B. RAMAKER DONALD D. LEVI
President
ASSISTANT CASHIERS
HOWARD S. SHAND JANA L. BARTRAM
President BARBARA M. BUCSI
William E. Walter, Inc. DONALD J. CRATER
JAMES R. FARHAT
PHILIP R. WELCH MICHELLE M. HOLDEN
President JAMES D. JONES
Michigan Lake Products, Inc. SUSAN K. LYNDE
MARY M. PIPER
CAROL A. ROWELL
LINDA K. SOVIS
CHEMICAL FINANCIAL CORPORATION
333 East Main
P. O. Box 569
Midland, MI 48640-0569
-88-