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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- -----------------------------------------------------------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission File Number: 0-8185
CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-2022454
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
333 East Main Street
Midland, Michigan 48640
(Address of Principal Executive Offices) (Zip Code)
(517) 839-5350
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
The number of shares outstanding of the Registrant's Common Stock, $10 par
value, as of April 30, 1998, was 10,784,187 shares.
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INDEX
CHEMICAL FINANCIAL CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (unaudited, except
Consolidated Statement of Financial Position as of
December 31, 1997)
Consolidated Statement of Income for the Three Months Ended
March 31, 1998 and March 31, 1997 3
Consolidated Statement of Financial Position as of March 31,
1998, December 31, 1997 and March 31, 1997 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and March 31, 1997 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Unaudited)
THREE MONTHS ENDED
MARCH 31
----------------------------
1998 1997
--------- -----------
(In thousands, except per
share amounts)
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . $ 17,948 $ 16,734
Interest on investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . 10,319 9,646
Tax-exempt. . . . . . . . . . . . . . . . . . . . 552 541
--------- -----------
TOTAL INTEREST ON SECURITIES 10,871 10,187
Interest on federal funds sold. . . . . . . . . . . . . . 1,005 1,252
Interest on deposits with unaffiliated banks . . . . . . . . . 20
--------- -----------
TOTAL INTEREST INCOME 29,824 28,193
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . 11,827 10,977
Interest on short-term borrowings. . . . . . . . . . . . . 372 332
Interest on long-term debt . . . . . . . . . . . . . . . 149 148
--------- -----------
TOTAL INTEREST EXPENSE . . . . . . . . . . . . 12,348 11,457
--------- -----------
NET INTEREST INCOME 17,476 16,736
Provision for possible loan losses . . . . . . . . . . . . 219 329
--------- -----------
NET INTEREST INCOME after provision for
possible loan losses . . . . . . . . . . . . . . . . . 17,257 16,407
OTHER INCOME
Trust department income . . . . . . . . . . . . . . . . 810 728
Service charges on deposit accounts . . . . . . . . . . . . 1,222 1,294
Other charges and fees for customer services . . . . . . . . . 1,193 903
Gains on sales of residential mortgage loans . . . . . . . . . 184 34
Other . . . . . . . . . . . . . . . . . . . . . . 112 333
--------- -----------
TOTAL OTHER INCOME 3,521 3,292
-3-
OPERATING EXPENSES
Salaries, wages and employee benefits . . . . . . . . . . . 7,320 6,845
Occupancy expense . . . . . . . . . . . . . . . . . . 1,188 1,237
Equipment expense . . . . . . . . . . . . . . . . . . 833 748
Other . . . . . . . . . . . . . . . . . . . . . . 2,873 2,634
--------- -----------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . 12,214 11,464
--------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . 8,564 8,235
Federal income taxes . . . . . . . . . . . . . . . . . 2,785 2,709
--------- -----------
NET INCOME . . . . . . . . . . . . . . . . . $ 5,779 $ 5,526
========= ===========
NET INCOME PER SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . $ .54 $ .51
========= ===========
Diluted . . . . . . . . . . . . . . . . . . . . . $ .53 $ .51
========= ===========
CASH DIVIDENDS PER SHARE . . . . . . . . . . . . . . . $ .24 $ .20
========= ===========
See accompanying notes to consolidated financial statements.
-4-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
March 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
(Unaudited) (Unaudited)
(in thousands)
ASSETS
Cash and demand deposits due from banks . . . . . . . . $ 83,056 $ 95,794 $ 90,356
Federal funds sold . . . . . . . . . . . . . . . 82,650 49,750 106,700
Interest-bearing deposits with unaffiliated banks . . . . . 998
Investment securities:
Available for sale (at market value) . . . . . . . . 487,007 494,173 471,735
Held to maturity (market value $263,668 at 3/31/98,
$253,459 at 12/31/97, $204,102 at 3/31/97) . . . . . 261,818 251,020 203,923
------------- ------------ -------------
Total investment securities . . . . . . . . 748,825 745,193 675,658
Loans:
Commercial . . . . . . . . . . . . . . . . . 132,782 110,554 116,529
Real estate construction . . . . . . . . . . . . 30,697 31,143 24,856
Real estate mortgage. . . . . . . . . . . . . . 526,758 536,938 513,973
Consumer . . . . . . . . . . . . . . . . . 168,675 166,965 144,303
------------- ------------ -------------
Total loans . . . . . . . . . . . . . 858,912 845,600 799,661
Less: Allowance for possible loan losses. . . . . . . 17,548 17,359 16,865
------------- ------------ -------------
Net loans . . . . . . . . . . . . . . 841,364 828,241 782,796
Premises and equipment. . . . . . . . . . . . . . 20,189 20,416 19,481
Accrued income . . . . . . . . . . . . . . . . 15,292 14,573 14,883
Other assets . . . . . . . . . . . . . . . . . 10,670 11,133 14,340
------------- ------------ -------------
TOTAL ASSETS $ 1,802,046 $ 1,765,100 $ 1,705,212
============= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . $ 238,585 $ 237,763 $ 213,856
Interest bearing . . . . . . . . . . . . . . . 1,276,532 1,238,078 1,223,193
------------- ------------ -------------
Total deposits 1,515,117 1,475,841 1,437,049
Short-term borrowings:
Treasury tax and loan notes payable to the U.S. Treasury. . 7,196 11,206 11,378
Securities sold under agreements to repurchase . . . . . 28,340 30,990 22,106
------------- ------------ -------------
35,536 42,196 33,484
Interest payable and other liabilities . . . . . . . . 14,514 14,138 17,200
-5-
Long-term debt . . . . . . . . . . . . . . . . 9,000 9,000 9,000
------------- ------------ -------------
Total liabilities 1,574,167 1,541,175 1,496,733
Shareholders' equity:
Common stock, $10 par value:
Authorized - 15,000,000 shares
Issued - 10,784,040 shares, 10,753,011 shares,
and 10,228,394 shares, respectively. . . . . . . 107,840 107,530 102,284
Surplus . . . . . . . . . . . . . . . . . 87,222 87,086 69,702
Retained earnings. . . . . . . . . . . . . . . 31,094 27,904 39,115
Unrealized net gain (loss) on securities available for sale 1,723 1,405 (2,622)
------------- ------------ -------------
Total shareholders' equity 227,879 223,925 208,479
------------- ------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,802,046 $ 1,765,100 $ 1,705,212
============= ============ =============
See accompanying notes to consolidated financial statements.
-6-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
THREE MONTHS ENDED
MARCH 31
------------------
1998 1997
----------- ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,779 $ 5,526
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 219 329
Origination of loans held for sale (31,828) (4,379)
Proceeds from sales of loans 32,012 4,426
Gains on sales of loans (184) (34)
Gain on sale of branch office building (256)
Provision for depreciation and amortization 838 771
Net amortization of investment securities 145 532
Net increase in accrued income and other assets (629) (903)
Net increase in interest payable and other liabilities 570 3,149
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,922 9,161
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with unaffiliated banks 136
Proceeds from maturities of securities held to maturity 19,724 51,255
Purchases of securities held to maturity (30,631) (41,590)
Proceeds from maturities of securities available for sale 36,302 47,042
Purchases of securities available for sale (28,683) (81,111)
Net (increase) decrease in loans (13,281) 7,763
Proceeds from sale of branch office building 900
Purchases of premises and equipment (470) (420)
----------- ------------
NET CASH USED FOR INVESTING ACTIVITIES (17,039) (16,025)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts and
savings accounts 21,364 3,279
Net increase in certificates of deposit and other time deposits 17,912 3,855
Net decrease in repurchase agreements and other short-term
borrowings (6,660) (3,849)
-7-
Principal payments on long-term debt (1,000)
Cash dividends (2,588) (2,148)
Proceeds from stock purchase plan 70 59
Proceeds from exercise of stock options 181 146
Repurchases of common stock (139)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,279 203
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 20,162 (6,661)
Cash and cash equivalents at beginning of year 145,544 203,717
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 165,706 $ 197,056
=========== ============
See accompanying notes to consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits, short-term borrowings and long-term debt $ 11,910 $ 11,342
Federal income taxes paid - -
- ---------------------------------------------------------------------------------------------------------
-8-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
NOTE A: BASIS OF PRESENTATION The accompanying unaudited
consolidated financial statements of Chemical Financial Corporation
(the "Corporation") have been prepared in accordance with generally
accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present
fairly the financial condition and results of operations of the
Corporation for the periods presented. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporation's annual
report on Form 10-K for the year ended December 31, 1997.
Earnings Per Share
The Corporation adopted Statement of Financial Accounting Standard No.
128, Earnings Per Share ("SFAS 128"), on December 31, 1997. All
earnings per share amounts have been presented, and where appropriate
restated, to conform to the SFAS 128 requirements. SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effect of stock options. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. Basic earnings per share for the Corporation is
computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share for the
Corporation is computed by dividing net income by the sum of the
weighted average number of common shares outstanding and the dilutive
effect of outstanding employee stock options.
The following table summarizes the number of shares used in the
denominator of the basic and diluted earnings per share computations:
-9-
THREE MONTHS ENDED
MARCH 31
----------------------
1998 1997
--------- --------
(In thousands)
Denominator for basic earnings per share 10,776 10,737
====== ======
Denominator for diluted earnings per share 10,906 10,858
====== ======
-10-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
Comprehensive Income
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS 130
had no impact on the Corporation's net income or shareholders' equity.
SFAS 130 requires unrealized gains or losses on the Corporation's
investment securities available for sale, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
The components of comprehensive income, net of related tax, for the
three-month periods ended March 31, 1998 and 1997 are as follows:
1998 1997
------- --------
Net income $ 5,779 $5,526
Unrealized net gains/(losses) on securities available for sale 318 (2,440)
------- -------
Comprehensive income $ 6,097 $ 3,086
======= =======
The components of accumulated other comprehensive income, net of
related tax, at March 31, 1998, December 31, 1997 and March 31,
1997 are as follows:
MARCH 31 DECEMBER 31 MARCH 31
1998 1997 1997
-------- ----------- --------
Unrealized net gains/(losses) on
securities available for sale $ 1,723 $ 1,405 $ (2,622)
------- ------- --------
Accumulated comprehensive income $ 1,723 $ 1,405 $ (2,622)
======= ======= ========
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year financial statement presentation.
-11-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
NOTE B: LOANS AND NONPERFORMING ASSETS The following summarizes
loans and nonperforming assets at the dates indicated (in thousands of
dollars):
MARCH 31 DECEMBER 31 MARCH 31
LOANS: 1998 1997 1997
- ----- ----------- --------------- -------------
Commercial . . . . . . . . . . . . . . $ 132,782 $ 110,554 $ 108,733
Real estate construction . . . . . . . . . 30,697 31,143 24,856
Real estate mortgage . . . . . . . . . . 526,758 536,938 513,973
Consumer . . . . . . . . . . . . . . 168,675 166,965 152,099
----------- ------------- -------------
Total Loans . . . . . . . . . . . . . $ 858,912 $ 845,600 $ 799,661
=========== ============= =============
NONPERFORMING ASSETS:
- --------------------
Nonaccrual loans . . . . . . . . . . . . $ 1,890 $ 1,783 $ 1,585
Loans 90 days or more past due and
still accruing interest . . . . . . . . . 1,052 1,125 337
Restructured loans . . . . . . . . . . . 139
----------- ------------- -------------
Total nonperforming loans . . . . . . . . . 2,942 3,047 1,922
----------- ------------- -------------
Other real estate owned <F1> . . . . . . . . 368 798 830
----------- ------------- -------------
Total nonperforming assets . . . . . . . . $ 3,310 $ 3,845 $ 2,752
=========== ============= =============
<FN>
<F1> Other real estate owned includes properties acquired through foreclosure and by acceptance of a deed in
lieu of foreclosure, and other property held for sale.
</FN>
-12-
CHEMICAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
NOTE C: ALLOWANCE FOR POSSIBLE LOAN LOSSES The following
summarizes the changes in the allowance for possible loan losses (in
thousands of dollars):
THREE MONTHS ENDED
MARCH 31
------------------------------
1998 1997
----------- -------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Balance as of January 1 . . . . . . . . . . . . . . . . . $ 17,359 $ 16,607
Provision for possible loan losses . . . . . . . . . . . . . 219 329
Gross loans charged-off . . . . . . . . . . . . . . . . . (89) (172)
Gross recoveries of loans previously charged-off . . . . . . . . 59 101
----------- -------------
Net loans charged-off . . . . . . . . . . . . . . . . . (30) (71)
----------- -------------
Balance at March 31 . . . . . . . . . . . . . . . . . . $ 17,548 $ 16,865
=========== =============
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Corporation's financial
condition and results of operations during the periods included in the
consolidated financial statements included in this filing.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this report, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the financial services industry,
the economy, and about the Corporation itself. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed
or forecasted in such forward-looking statements. Furthermore, the Corporation
undertakes no obligation to update, amend or clarify forward-looking statements
whether as a result of new information, future events or otherwise.
Future Factors include, but are not limited to, changes in interest rates and
interest rate relationships; demand for products and services; the degree of
competition by traditional and non-traditional competitors; changes in banking
regulations; changes in tax laws; changes in prices, levies and assessments;
the impact of technological advances; governmental and regulatory policy
changes; the outcomes of pending and future litigation and contingencies;
trends in customer behavior as well as their ability to repay loans; and
changes in the national economy. These are representative of the Future
Factors that could cause a difference between an ultimate actual outcome and
a preceding forward-looking statement.
SUMMARY
The Corporation's net income was $5,779,000 in the first quarter of
1998, as compared to net income of $5,526,000 during the first quarter
of 1997. Earnings per share in the first quarter of 1998 were $.53,
compared to earnings per share of $.51 in the first quarter of 1997.
Return on average assets in the first quarter of 1998 was 1.33%, the
same as during the first quarter of 1997. Return on average equity
for the three months ended March 31, 1998 and March 31, 1997 was
10.44% and 10.65%, respectively.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
Total assets were $1.802 billion as of March 31, 1998, up $37 million,
or 2%, from total assets of $1.765 billion as of December 31, 1997,
and up $97 million, or 5.7%, from total assets of $1.705 billion as of
March 31, 1997.
Total loans increased $59.3 million, or 7.4%, from March 31, 1997, and
$13.3 million, or 1.6%, from December 31, 1997 to $858.9 million as of
March 31, 1998. The increase in total loans from March 31, 1997 to
March 31, 1998 was attributable to increases in commercial, real
estate construction and consumer loans.
Shareholders' equity increased $19.4 million, or 9.3%, from March 31,
1997, to $227.9 million as of March 31, 1998, or $21.13 per share,
representing 12.6% of total assets. The increase was primarily
attributable to retained net income.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's net interest income for the first quarter of 1998
was $17.48 million, a $.74 million, or 4.4%, increase over the $16.74
million recorded in the first quarter of 1997. The increase in net
interest income was due primarily to a growth in noninterest bearing
deposits and loans. Average noninterest bearing deposits increased
$18 million, or 8.5%, in the first quarter of 1998 compared to the
first quarter of 1997. Average loans increased $47.2 million, or
5.9%, in the first quarter of 1998 compared to the first quarter of
1997. For the first quarter of 1998, the net interest margin was
4.35%, compared to 4.39% in the first quarter of 1997.
OTHER INCOME
Other income increased $229,000, or 7.0%, in the first quarter of 1998
as compared to the first quarter of 1997. The Corporation's trust
department income increased $82,000, or 11.3%, due to increased new
business. Other charges and fees for customer services increased
$316,000, or 38.3%, in the first quarter of 1998 compared to the first
quarter of 1997. The majority of this increase was due to increased
ATM fees, mutual fund sales, annuity sales and insurance commissions.
The Corporation began selling title, property and casualty insurance
products through subsidiaries of its lead affiliate bank in January
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
1997. The Corporation realized a gain of $256,000 from the sale of a
branch office building during the first quarter of 1997. This gain
was recorded in the "Other" category of other income.
The Corporation realized gains on the sale of residential mortgage
loans in the secondary market of $184,000 and $34,000 during the first
quarter of 1998 and 1997, respectively. The significant increase in
gains realized during the first quarter of 1998 was due to an
increased volume in residential mortgage loans sold in the secondary
market. The reduction in residential mortgage loan rates since
January 1, 1998 resulted in the Corporation experiencing an increase
in long-term residential mortgage loan volume from both new home
purchases and mortgage loan refinancing in the first quarter of 1998.
The Corporation sold $32 million of fixed rate residential mortgage
loans with terms of fifteen years or greater in the secondary market
during the first quarter of 1998, compared to the sale of $4 million
of the same type loans during the first quarter of 1997.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses reflects management's judgment
of changing economic conditions, as well as increases and other
changes in the subsidiary banks' loan portfolios. It is management's
policy to control loan quality through a carefully structured review
of loan requests. In assessing the adequacy of the allowance for
possible loan losses (the "Allowance"), management believes that its
historical experience confirms, in principle, its judgment in what is
essentially a subjective decision. Based upon historical experience
and a constant evaluation of present and potential risks in the loan
portfolios, management believes that the Allowance is adequate.
During the three months ended March 31, 1998, the Corporation added
$219,000 to the Allowance through the provision for possible loan
losses, compared to $329,000 during the first three months of 1997.
During the first three months of 1998, the Corporation experienced net
loan charge-offs of $30,000, compared to net loan charge-offs of
$71,000 during the first three months of 1997.
OPERATING EXPENSES
Total operating expenses increased $750,000, or 6.5%, in the first
quarter of 1998 compared to the first quarter of 1997.
Salaries, wages and employee benefits increased $475,000, or 6.9%, in
the first quarter of 1998 over the first quarter of 1997. Occupancy
expense and equipment expense, combined, increased $36,000, or 1.82%,
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
in the first quarter of 1998 over the first quarter of 1997. Other
expense increased $239,000, or 9.1%, in the first quarter of 1998 over
the first quarter of 1997.
INCOME TAX EXPENSE
The Corporation's effective federal income tax rate was 32.5% and 32.9%
during the three months ended March 31, 1998 and March 31, 1997, respectively.
The effective federal income tax rate is a function of the proportion of the
Corporation's interest income exempt from federal taxation, nondeductible
interest expense and other nondeductible expenses.
BALANCE SHEET CHANGES
ASSET AND DEPOSIT CHANGES
Total assets increased $36.9 million, or 2.1%, from December 31, 1997
and increased $96.8 million, or 5.7%, from March 31, 1997 to $1.802
billion as of March 31, 1998. Total deposits increased $39.3 million,
or 2.7%, from December 31, 1997 and increased $78.1 million, or 5.4%,
from March 31, 1997 to $1.515 billion as of March 31, 1998. The
increases in both assets and deposits from March 31, 1997 to March 31,
1998 were primarily attributable to a transfer of Trust Department
assets out of a non-affiliated financial services organization into
deposits in the Corporation's lead subsidiary bank in June 1997.
Excluding the transfer of the Trust Department assets into the lead
subsidiary, total deposits were approximately unchanged at March 31,
1998 compared to March 31, 1997.
LOANS
The Corporation's subsidiary banks are generally located in rural
communities, where the demand for commercial loans which meet the
Corporation's credit standards historically has not been high. The
Corporation's philosophy is such that it will neither compromise on
loan quality nor make loans outside its banking markets to increase
its loan portfolio. The Corporation does not generally purchase
participation loans, which is a method utilized by many financial
institutions to increase the size of their loan portfolios.
Total loans as of March 31, 1998 were $858.9 million, as compared to
$799.7 million as of March 31, 1997 and $845.6 million as of December
31, 1997. The increase in total loans from March 31, 1997 to March
31, 1998 of $59.3 million was attributable to increases in commercial,
real estate construction and consumer loans.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
Real estate construction and mortgage loans increased $18.6 million,
or 3.5%, from March 31, 1997, and decreased $10.6 million, or 1.9%,
from December 31, 1997 to $557.5 million as of March 31, 1998. The
decrease in loans from December 31, 1997 was due to an increase in the
amount of residential mortgage loans sold in the secondary market,
resulting from the reduction in residential mortgage rates during the
first quarter of 1998. The Corporation experienced an increase in the
refinancing of real estate mortgages and consumers converting balloon
mortgage loans to long-term fixed rate loans as a result of lower
mortgage interest rates. The Corporation keeps balloon mortgage loans
in its own portfolio and generally sells the long-term fixed rate
residential mortgage loans in the secondary market. The Corporation
sold $32 million of fixed rate residential mortgage loans, with terms
of fifteen years or greater, in the secondary mortgage market in the
first quarter of 1998, compared to $4 million of similar type loans
sold during the first quarter of 1997. Real estate construction and
mortgage loans represented 64.9%, 67.2% and 67.4% of the Corporation's
loan portfolio as of March 31, 1998, December 31, 1997 and March 31,
1997, respectively.
Commercial loans increased $16.3 million, or 13.9%, from March 31,
1997, and $22.2 million, or 20.1%, from December 31, 1997 to $132.8
million as of March 31, 1998. Commercial loans represented 15.5%,
13.1% and 14.6% of the Corporation's loan portfolio as of March 31,
1998, December 31, 1997 and March 31, 1997, respectively. The
increase was achieved through a concerted sales effort by the
Corporation to increase commercial loans.
Consumer loans increased $24.4 million, or 16.9%, from March 31, 1997,
and $1.7 million, or 1.0%, from December 31, 1997 to $168.7 million as
of March 31, 1998. The increase from March 31, 1997 was the result of
several consumer loan promotions which offered lower interest rates on
certain types of consumer loans during the twelve month period ended
March 31, 1998. These various consumer loan promotions offered loans
with annual percentage rates ranging from 7.40% to 7.99% and maximum
terms varying from 48 to 60 months. The Corporation has utilized
special promotions to increase consumer loans during the past eight
years. Consumer loans represented 19.6%, 19.7% and 18.0% of total
loans as of March 31, 1998, December 31, 1997 and March 31, 1997,
respectively.
The Corporation's total loan to deposit ratio as of March 31, 1998, December
31, 1997 and March 31, 1997 was 56.7%, 57.3% and 55.6%, respectively.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The Corporation traditionally has had a conservative loan underwriting policy.
This is evidenced by its historically low loan losses and low ratio of
nonperforming loans to total loans. For the three-month period ended March
31, 1998, the Corporation experienced net loan charge-offs of $30,000, as
compared to net loan charge-offs of $71,000 during the three-month period
ended March 31, 1997.
Nonperforming loans consist of loans which are past due for principal or
interest payments by 90 days or more and still accruing interest, loans for
which the accrual of interest has been discontinued and other loans which have
been renegotiated to less than market terms due to a serious weakening of the
borrower's financial condition. Nonperforming loans were $2.9 million as of
March 31, 1998, $3.0 million as of December 31, 1997 and $1.9 million as of
March 31, 1997, and represented .34%, .36% and .24% of total loans as of
those dates, respectively.
The allowance for possible loan losses at March 31, 1998 was $17,548,000 and
represented 2.04% of total loans.
LIQUIDITY
The maintenance of an adequate level of liquidity is necessary to ensure that
sufficient funds are available to meet customers' loan demands and deposit
withdrawals. The banking subsidiaries' primary liquidity sources consist of
investment securities, those maturing within one year and those classified as
available for sale, maturing loans and federal funds sold. As of March 31,
1998, the Corporation's investment securities portfolio had an average life of
less than two years. In addition, at March 31, 1998, the Corporation held only
$2.7 million in mortgage-backed securities, which represented less than one
percent of the investment securities portfolio, and had no other derivatives.
CAPITAL RESOURCES
As of March 31, 1998, shareholders' equity was $227.9 million, compared to
$223.9 million as of December 31, 1997 and $208.5 million as of March 31,
1997, resulting in an increase of $19.4 million, or 9.3%, from March 31, 1997.
Shareholders' equity as a percentage of total assets was 12.6% as of March 31,
1998, 12.7% at December 31, 1997 and 12.2% as of March 31, 1997. Total equity
included an after-tax unrealized net gain of $1.7 million as of March 31, 1998,
$1,405,000 as of December 31, 1997 and an after-tax unrealized net loss of
$2,622,000 as of March 31, 1997, on investment securities available for sale in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
A statement of changes in shareholders' equity covering the three-month periods
ended March 31, 1998 and March 31, 1997 follows:
THREE MONTHS ENDED
MARCH 31
-------------------------------
1998 1997
------------ -------------
Total shareholders' equity as of January 1, $ 223,925 $ 207,269
Net income 5,779 5,526
Dividends (2,588) (2,148)
Shares issued upon exercise of employee stock options 181 146
Shares issued from director stock purchase plan 264 265
Repurchases of common stock (139)
Change in unrealized gains and losses on securities
available for sale 318 (2,440)
------------ -------------
Total shareholders' equity as of end of period $ 227,879 $ 208,479
============ =============
The following table represents the Corporation's regulatory capital
ratios as of March 31, 1998:
TIER 1 TOTAL
RISK-BASED RISK-BASED
LEVERAGE CAPITAL CAPITAL
--------------- -------------- ----------
Chemical Financial Corporation - actual ratio 12.6% 30.0% 31.3%
Regulatory Minimum Ratio 3.0 4.0 8.0
Ratio considered "well capitalized" by
regulatory agencies 5.0 6.0 10.0
The Corporation's Tier 1 and Total capital ratios under the risk-based
capital measure at March 31, 1998 are high due to the Corporation
holding $637 million in investment securities and other assets which
are assigned a 0% risk rating, $262 million in assets which are
assigned a 20% risk rating and $448 million in residential real estate
mortgages and other assets which are assigned a 50% risk rating.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
These three risk ratings (0%, 20% and 50%) represent 73% of the
Corporation's total risk-based assets (including off-balance sheet
items) as of March 31, 1998.
OTHER
The Corporation paid a 5% stock dividend on December 30, 1997. All
per share amounts have been adjusted for this stock dividend.
There are currently no known trends, events or uncertainties that
management believes may be reasonably expected to have a material
effect on the Corporation's liquidity, capital resources or financial
performance.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The information concerning quantitative and qualitative disclosures
about market risk contained under the caption "Liquidity and Interest
Sensitivity" on pages 37 through 41 (inclusive) of the Corporation's
Annual Report to Shareholders for the year ended December 31, 1997 is
here incorporated by reference. Such Annual Report was previously
filed as Exhibit 13 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997.
The Corporation does not believe that there has been a material change
in the nature or categories of the Corporation's primary market risk
exposures, or the particular markets that present the primary risk of
loss to the Corporation. As of the date of this report, the
Corporation does not know of or expect there to be any material change
in the general nature of its primary market risk exposure in the near
term. The methods by which the Corporation manages its primary market
risk exposures, as described in the sections of its Annual Report to
Shareholders incorporated by reference in response to this item, have
not changed materially during the current year. As of the date of
this report, the Corporation does not expect to make material changes in
those methods in the near term. The Corporation may change those methods
in the future to adapt to changes in circumstances or to implement new
techniques.
The Corporation's market risk exposure is mainly comprised of its
vulnerability to interest rate risk. Prevailing interest rates and
interest rate relationships are primarily determined by market factors
which are beyond the Corporation's control. All information provided
in response to this item consists of forward-looking statements.
Reference is made to the section captioned "Forward-Looking
Statements" in Item 2 of this report for a discussion of the
limitations on the Corporation's responsibility for such statements.
In this discussion, "near term" means a period of one year following
the date of the most recent statement of financial position contained
in this report.
-22-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to this
report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 RESTATED ARTICLES OF INCORPORATION. Previously
filed as Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995. Here incorporated by reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's Form S-8 Registration Statement No. 33-47356
filed with the Commission on April 28, 1992.
Here incorporated by reference.
27 FINANCIAL DATA SCHEDULE.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the quarter covered by this Form 10-Q.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CHEMICAL FINANCIAL CORPORATION
Date: May 12, 1998 By /S/ALOYSIUS J. OLIVER
Aloysius J. Oliver
Chief Executive Officer and
President
(Principal Executive Officer)
Date: May 12, 1998 By /S/LORI A. GWIZDALA
Lori A. Gwizdala
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
-24-
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed as
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995. Here incorporated by
reference.
3.2 BYLAWS. Previously filed as Exhibit 4(b) to the
Registrant's S-8 Registration Statement No. 33-47356 filed
with the Commission on April 28, 1992. Here incorporated by
reference.
27 FINANCIAL DATA SCHEDULE.