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Press Release

Chemical Financial Corporation Announces Third Quarter Operating Results

Company Release - 10/19/2004 10:21 AM ET

MIDLAND, Mich., Oct. 19 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today announced third quarter net income of $14.3 million, or $0.59 per diluted share, down $0.2 million as compared with net income of $14.5 million, or $0.61 per diluted share, in the third quarter of 2003. This represents a decrease of 1.2% in net income for the third quarter 2004. The returns on average assets and average equity during the third quarter of 2004 were 1.48% and 12.0%, respectively, as compared to 1.60% and 12.9%, respectively, for the third quarter of 2003.

Net income was $42.3 million, or $1.76 per diluted share in the first nine months of 2004, compared to net income of $42.2 million, or $1.78 per diluted share in the first nine months of 2003. This represents an increase of 0.3% in net income for the first nine months of 2004. Net income per share was lower than the prior year due to additional shares outstanding, primarily attributable to the exercise of employee stock options issued in connection with the acquisition of Caledonia Financial Corporation (Caledonia). The returns on average assets and average equity during the first nine months of 2004 were 1.46% and 12.0%, respectively, as compared to 1.58% and 12.8%, respectively, for the first nine months of 2003.

The most significant item impacting the financial results in the third quarter of 2004 as compared to the third quarter of 2003 was the reduction in mortgage refinance volume. The Corporation recognized record mortgage banking revenue in the third quarter of 2003 of $2.3 million as mortgage interest rates were at their lowest level in over forty years. In comparison, mortgage banking revenue was $1.0 million in the third quarter of 2004; a reduction of $1.3 million. Mortgage banking revenue in the third quarter of 2004 included a $.4 million recovery of a previously recorded impairment charge on capitalized mortgage loan servicing rights.

The Corporation was successful in offsetting the decline in mortgage banking revenue through an increase in net interest income. Net interest income increased $2.4 million, or 6.9%, to $37.2 million in the third quarter of 2004, as compared to the third quarter of 2003. The increase was primarily attributable to the acquisition of Caledonia on December 1, 2003. The remainder of the increase in net interest income was attributable to the net interest spread earned on the Corporation's transaction entered into during the first quarter of 2004, whereby $150 million was borrowed from the Federal Home Loan Bank and invested in mortgage-backed securities.

The Corporation's operating expenses increased $1.8 million, or 7.9%, in the third quarter of 2004, compared to the third quarter of 2003. Approximately $1.1 million of the increase was attributable to the Caledonia acquisition. Excluding expenses attributable to the operations acquired in the Caledonia transaction, operating expenses were up $0.7 million, or 3.1%. In addition, the provision for loan losses was $0.2 million higher and investment securities gains were $0.4 million lower in the third quarter of 2004 than in the third quarter of 2003. These items were partially offset by the Corporation realizing increases in trust services revenue and service charges on deposit accounts.

The Corporation's provision for loan losses for the quarter ended September 30, 2004 was $701 thousand as compared to net loan charge-offs of $624 thousand. As of September 30, 2004, the allowance for loan losses was $33.6 million and represented 1.29% of total loans. Nonperforming loans were $11.7 million, or .45% of total loans, at the current quarter-end. Net loan losses as a percentage of average loans (annualized) during the nine months ended September 30, 2004 were .09%, compared to .15% during the twelve months ended December 31, 2003.

Total assets of the Corporation at September 30, 2004 were $3.87 billion, up $164 million, or 4.4% over total assets reported at December 31, 2003. The $150 million Federal Home Loan Bank borrowing in the first quarter of this year increased total assets by this amount. Total loans increased $125 million, or 5.0%, during the nine months ended September 30, 2004 to $2.61 billion. Total deposits at September 30, 2004 were $2.98 billion, up $8 million, or 0.3% over total deposits at December 31, 2003.

Shareholders' equity at September 30, 2004 was $479 million, or $19.99 per share, and represented 12.4% of total assets and a tangible equity to asset ratio of 10.6% as of September 30, 2004.

Chemical Financial Corporation is the fourth largest bank holding company headquartered in Michigan. The Company's three subsidiary banks operate 133 banking offices and 2 loan production offices spread over 33 counties in the lower peninsula of Michigan.

Chemical Financial Corporation common stock trades on The Nasdaq Stock Market under the symbol CHFC and is one of the issues comprising the Nasdaq Financial 100 index.

Forward Looking Statements

This press release contains forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "intends," "should," "will," variations of such words and similar expressions are intended to identify forward-looking statements. These statements reflect management's current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions 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. Factors that could cause a difference include, among others: changes in the national and local economies or market conditions; changes in interest rates and banking regulations; the impact of competition from traditional or new sources; and the possibility that anticipated cost savings and revenue enhancements from mergers and acquisitions and bank consolidations may not be fully realized at all or within the expected time frames. These and other factors that may emerge could cause decisions and actual results to differ materially from current expectations. Chemical undertakes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.


    Consolidated Statements of Financial Position (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries

                                    September 30,  December 31,  September 30,
    (In thousands)                        2004          2003           2003
    Assets:
    Cash and demand deposits due
     from banks                         $104,173      $131,184       $146,428
    Federal funds sold                   108,100        25,900         44,700
    Interest-bearing deposits with
     unaffiliated banks                   15,219         5,107         19,905
    Investment securities -
     available for sale                  743,343       728,499        767,562
    Investment securities -
     held to maturity                    156,692       193,363        236,911
        Total Investment Securities      900,035       921,862      1,004,473
    Commercial loans                     475,977       405,929        333,822
    Real estate construction loans       141,547       138,280         93,282
    Real estate commercial loans         669,880       628,815        562,937
    Real estate residential loans        771,201       767,199        765,539
    Consumer loans                       547,893       541,052        521,310
        Total Loans                    2,606,498     2,481,275      2,276,890
    Less: Allowance for loan losses       33,629        33,179         30,414
        Net Loans                      2,572,869     2,448,096      2,246,476
    Premises and equipment                47,646        49,616         47,044
    Intangible assets                     75,306        76,846         39,017
    Other assets                          49,602        50,277         42,983
        Total Assets                  $3,872,950    $3,708,888     $3,591,026
    Liabilities and Shareholders'
     Equity:
    Noninterest-bearing deposits        $546,387      $532,752       $500,463
    Interest-bearing deposits          2,428,916     2,434,484      2,369,351
        Total Deposits                 2,975,303     2,967,236      2,869,814
    FHLB borrowings                      285,191       155,373        148,573
    Other borrowings - short term        100,439        91,524         93,447
    Interest payable and other
     liabilities                          33,189        36,706         30,548
        Total Liabilities              3,394,122     3,250,839      3,142,382
    Shareholders' Equity:
      Common stock, $1 par value          23,948        23,801         23,685
      Surplus                            333,569       328,774        324,413
      Retained earnings                  118,000        94,746         87,106
      Accumulated other comprehensive
       income                              3,311        10,728         13,440
        Total Shareholders' Equity       478,828       458,049        448,644
        Total Liabilities and
         Shareholders' Equity         $3,872,950    $3,708,888     $3,591,026



    Consolidated Statements of Income (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries

                                          Quarter Ended     Nine Months Ended
                                          September 30,       September 30,
    (In thousands, except per share       2004     2003      2004      2003
     data)
    Interest Income:
    Interest and fees on loans           $38,347  $36,220  $113,306  $108,789
    Interest on investment securities:
      Taxable                              8,066    8,213    25,218    28,671
      Nontaxable                             511      612     1,602     1,928
        Total Interest on Investment
         Securities                        8,577    8,825    26,820    30,599
    Interest on federal funds sold           265      169       668       612
    Interest on deposits with
     unaffiliated banks                      129       23       292       180
        Total Interest Income             47,318   45,237   141,086   140,180

    Interest Expense:
    Interest on deposits                   7,437    8,262    22,651    28,555
    Interest on FHLB borrowings            2,570    2,083     7,694     6,273
    Interest on other borrowings -
     short term                              158      128       357       435
        Total Interest Expense            10,165   10,473    30,702    35,263
        Net Interest Income               37,153   34,764   110,384   104,917
    Provision for loan losses                701      540     2,108     2,107
        Net Interest Income after
         Provision for Loan Losses        36,452   34,224   108,276   102,810

    Noninterest Income:
    Service charges on deposit accounts    4,970    4,181    14,281    12,334
    Trust services revenue                 1,761    1,605     5,541     5,123
    Other charges and fees for customer
     services                              1,706    1,623     5,060     5,372
    Mortgage banking revenue                 960    2,308     2,820     5,716
    Investment securities gains                9      417     1,259       909
    Other                                    217      140       629       220
        Total Noninterest Income           9,623   10,274    29,590    29,674

    Operating Expenses:
    Salaries and employee benefits        14,385   13,287    43,879    40,570
    Occupancy and equipment                4,613    4,058    13,897    12,087
    Other                                  5,501    5,356    16,803    16,252
        Total Operating Expenses          24,499   22,701    74,579    68,909
    Income Before Income Taxes            21,576   21,797    63,287    63,575
        Federal income taxes               7,280    7,328    21,006    21,422
    Net Income                           $14,296  $14,469   $42,281   $42,153

    Net income per share:
      Basic                                $0.60    $0.61     $1.77     $1.78
      Diluted                               0.59     0.61      1.76      1.78

    Cash dividends per share              $0.265   $0.250    $0.795    $0.750

    Average shares outstanding:
      Basic                               23,946   23,674    23,924    23,685
      Diluted                             24,021   23,735    24,006    23,737



    Financial Summary (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries
    (Dollars in thousands)

                                   Quarter Ended          Nine Months Ended
                                   September 30,            September 30,
                                  2004        2003        2004        2003
    Average Balances
    Total assets               $3,843,070  $3,591,135  $3,865,987  $3,576,236
    Total interest-earning
     assets                     3,591,860   3,384,140   3,615,976   3,383,906
    Total loans                 2,596,355   2,260,656   2,557,822   2,179,041
    Total deposits              2,954,315   2,870,826   2,990,828   2,863,047
    Total shareholders' equity    473,617     444,421     468,768     439,961

                                   Quarter Ended          Nine Months Ended
                                   September 30,            September 30,
                                  2004        2003        2004        2003
    Key Ratios (annualized
     where applicable)
    Net interest margin             4.16%       4.12%       4.12%       4.20%
    Efficiency ratio                52.0%       50.0%       53.1%       50.7%
    Return on average assets        1.48%       1.60%       1.46%       1.58%
    Return on average
     shareholders' equity           12.0%       12.9%       12.0%       12.8%
    Average shareholders'
     equity as a percent of
     average assets                 12.3%       12.4%       12.1%       12.3%
    Tangible shareholders'
     equity as a percent of
     total assets                                           10.6%       11.5%
    Total risk-based capital
     ratio                                                  17.1%       18.8%

                              September 30,  June 30,  March 31,  December 31,
                                   2004         2004      2004        2003
    Credit Quality Statistics
    Nonaccrual loans              $5,787       $5,413    $5,317      $6,691
    Loans 90 or more days past
     due and still accruing        5,914        5,488     6,559       4,656
    Total nonperforming loans     11,701       10,901    11,876      11,347
    Repossessed assets
     acquired (RAA)                6,924        7,344     6,294       6,002
    Total nonperforming assets    18,625       18,245    18,170      17,349
    Net loan charge-offs*            624          603       431       3,352

    Allowance for loan losses
     as a percent of total
     loans                          1.29%        1.30%     1.31%       1.34%
    Allowance for loan losses
     as a percent of
     nonperforming loans             288%         308%      282%        292%
    Nonperforming loans as a
     percent of total loans         0.45%        0.42%     0.47%       0.46%
    Nonperforming assets as a
     percent of total loans
     plus RAA                       0.71%        0.70%     0.71%       0.70%
    Net loan charge-offs as a
     percent of average loans
     (annualized)*                  0.10%        0.09%     0.07%       0.15%

                              September 30,  June 30,  March 31,  December 31,
                                  2004         2004      2004        2003
    Additional Data
    Goodwill                     $63,293      $63,293   $63,293     $63,293
    Core deposits and other
     intangibles                   8,572        9,138     9,613      10,289
    Mortgage servicing rights
     (MSR), net of MSR
     impairment reserve            3,441        3,252     3,235       3,264
    MSR impairment reserve             -          443       693         793
    Amortization of
     intangibles*                    931        1,079       851       3,718

    * Quarter only, except December 31, 2003 amount is twelve months ended.



    Selected Quarterly Information (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries
    (Dollars in thousands)

                                3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
                                  2004     2004     2004     2003     2003
    Summary of Operations
    Interest income             $47,318  $46,583  $47,185  $44,857  $45,237
    Interest expense             10,165   10,174   10,363   10,002   10,473
    Net interest income          37,153   36,409   36,822   34,855   34,764
    Provision for loan losses       701      661      746      727      540
    Net interest income after
     provision for loan losses   36,452   35,748   36,076   34,128   34,224
    Noninterest income            9,623   10,005    9,962    9,420   10,274
    Noninterest expense          24,499   24,920   25,160   23,014   22,701
    Income taxes                  7,280    6,967    6,759    6,971    7,328
    Net income                   14,296   13,866   14,119   13,563   14,469

    Per Common Share Data
    Net income:
         Basic                    $0.60    $0.58    $0.59    $0.57    $0.61
         Diluted                   0.59     0.58     0.59     0.57     0.61
    Cash dividends                0.265    0.265    0.265     0.25     0.25
    Book value                    19.99    19.56    19.63    19.25    18.94


SOURCE  Chemical Financial Corporation

    -0-                             10/19/2004
    /CONTACT:  David B. Ramaker , President & Chief Executive Officer,
+1-989-839-5269, or Lori A. Gwizdala, Executive Vice President & Chief
Financial Officer, +1-989-839-5358, both of Chemical Financial Corporation
 /
    /Company News On-Call:  http://www.prnewswire.com/comp/157448.html/
    /Web site:  http://chemicalbankmi.com /
    (CHFC)

CO:  Chemical Financial Corporation

ST:  Michigan
IN:  FIN
SU:  ERN

AM-TH 
-- DETU020 --
7370 10/19/2004 10:21 EDT http://www.prnewswire.com