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Chemical Financial Corporation Announces 2004 Fourth Quarter and Annual Operating Results

Company Release - 1/31/2005 9:22 AM ET

MIDLAND, Mich., Jan. 31 /PRNewswire-FirstCall/ -- The Board of Directors of Chemical Financial Corporation (Nasdaq: CHFC) today announced 2004 fourth quarter net income of $14.4 million or $0.57 per diluted share, as compared to net income of $13.6 million or $0.54 per diluted share in the fourth quarter of 2003. The Corporation's 2004 net income was $56.7 million or $2.25 per diluted share, compared to net income of $55.7 million or $2.23 per diluted share in 2003.

Fourth Quarter Operating Results

Net income and earnings per share in the fourth quarter of 2004 were up 6.2% and 5.6%, respectively, over the fourth quarter of 2003. The increases in net income and earnings per share were attributable to higher net interest income and a slightly lower effective federal income tax rate. These two items were partially offset by an increase in the provision for loan losses and higher operating expenses. Significantly lower mortgage banking revenue was offset by increases in service charges on deposit accounts and trust services revenue, and gains from the sales of a branch office and the Corporation's insurance agency book of business.

Net interest income of $37.25 million in the fourth quarter of 2004 was up $2.40 million, or 6.9% over the fourth quarter of 2003. The increase was attributable to the Caledonia Financial Corporation ("Caledonia") acquisition that was completed on December 1, 2003, the net interest spread earned on a $150 million borrowing from the Federal Home Loan Bank that was invested in mortgage-backed securities, increased loans, and a slightly higher net interest margin. The net interest margin was 4.18% in the fourth quarter of 2004, compared to 4.15% in the fourth quarter of 2003.

The Corporation's provision for loan losses in the fourth quarter of 2004 was $1.7 million, compared to net loan charge-offs of $1.2 million during the same period. The provision for loan losses in the fourth quarter of 2004 was $1.0 million higher than in the fourth quarter of 2003, primarily as a result of increased net loan charge-offs during the period. Even though net loan charge-offs were higher in the fourth quarter than in the previous three quarters of 2004, we believe the credit quality of the loan portfolio remained strong. As of December 31, 2004, nonperforming loans as a percentage of total loans were 0.39%, compared to 0.46% as of December 31, 2003.

Noninterest income was $9.7 million in the fourth quarter of 2004, an increase of $0.3 million or 3.4% over the fourth quarter of 2003. We experienced an increase in trust services revenue of $0.2 million, or 11% and an increase in service charges on deposit accounts of $0.4 million, or 9%. We also recognized gains of $0.6 million from the sales of a branch banking office in Lansing, Michigan that had deposits of approximately $6 million and the Corporation's insurance agency book of business. These increases were partially offset by a decrease in mortgage banking revenue. Mortgage banking revenue of $0.5 million in the fourth quarter of 2004 was $0.7 million or 59% lower than in the fourth quarter of 2003 as a result of the significant decline in residential mortgage loan refinance volume.

Operating expenses of $23.9 million in the fourth quarter of 2004 were up $0.9 million or 3.8% over the fourth quarter of 2003. This increase was primarily attributable to the Caledonia acquisition.

The Corporation's effective federal income tax rate was 32.7% in the fourth quarter of 2004, compared to 33.9% during the fourth quarter of 2003. The decrease in the effective federal income tax rate resulted in approximately a $0.3 million reduction in federal income tax expense in the fourth quarter of 2004 compared to the prior year. The decrease in the effective federal income tax rate was attributable to a reduction in federal income tax provisions previously recorded that are no longer required.

Annual Operating Results

Net income of $56.7 million in 2004 was up $1.0 million or 1.7% over 2003 net income. The increase in net income was primarily attributable to an increase in net interest income. The increase in net interest income was partially offset by an increase in the provision for loan losses and higher operating expenses.

Net interest income was $147.6 million in 2004, an increase of $7.9 million or 5.6% over 2003 net interest income. The increase in net interest income was attributable to the accretive effect of the Caledonia acquisition, the net interest spread earned on a $150 million Federal Home Loan Bank borrowing transaction and growth in loans during 2004.

The Corporation's provision for loan losses was $3.82 million for the twelve months ended December 31, 2004, compared to $2.83 million for 2003. Net loan charge-offs for 2004 totaled $2.81 million as compared to $3.35 million in 2003. Operating expenses of $98.5 million in 2004 were $6.5 million or 7.1% higher than in 2003. Over one-half of the increase in operating expenses in 2004 was attributable to the Caledonia acquisition.

Balance Sheet and Capital Position

Total assets of the Corporation at December 31, 2004 were $3.76 billion, up 1.5% over the $3.71 billion in total assets reported at December 31, 2003. Total deposits at December 31, 2004 were $2.86 billion, down 3.5% from total deposits of $2.97 billion at December 31, 2003.

Total loans were $2.59 billion at December 31, 2004, up $104 million or 4.2% from total loans of $2.48 billion at December 31, 2003. The increase in loans was attributable to increases in commercial and commercial real estate loans.

As of December 31, 2004, the allowance for loan losses was $34.17 million or 1.32% of total loans, while nonperforming loans were $10.05 million or 0.39% of total loans. Nonperforming loans were down $1.7 million or 14.1% from September 30, 2004, and down $1.3 million or 11.4% from December 31, 2003. Nonperforming assets as a percentage of loans plus repossessed assets were 0.65% as of December 31, 2004, compared to 0.70% as of December 31, 2003. Net loan losses as a percentage of average total loans were 0.11% in 2004, compared to 0.15% in 2003.

Shareholders' equity at December 31, 2004 was $485 million or $19.26 per share and represented 12.9% of total assets. The Corporation's total risk- based capital and tangible equity to asset ratios were 17.5% and 11.1%, respectively, as of December 31, 2004.

Chemical Financial Corporation is the fourth largest bank holding company headquartered in Michigan. The Company's three subsidiary banks operate "Chemical Bank" branch offices throughout 32 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.


    Chemical Financial Corporation
 Announces Fourth Quarter Operating Results

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


                                                December 31,      December 31,
    (In thousands)                                    2004              2003
    Assets:
    Cash and demand deposits due from
     banks                                        $106,565          $131,184
    Federal funds sold                              34,500            25,900
    Interest-bearing deposits with
     unaffiliated banks                              5,869             5,107
    Investment securities - available for
     sale                                          716,757           728,499
    Investment securities - held to
     maturity                                      176,517           193,363
        Total Investment Securities                893,274           921,862
    Commercial loans                               468,970           405,929
    Real estate construction loans                 120,900           138,280
    Real estate commercial loans                   697,779           628,815
    Real estate residential loans                  760,834           767,199
    Consumer loans                                 537,102           541,052
        Total Loans                              2,585,585         2,481,275
    Less: Allowance for loan losses                 34,166            33,179
        Net Loans                                2,551,419         2,448,096
    Premises and equipment                          47,577            49,616
    Intangible assets                               74,421            76,846
    Other assets                                    50,500            50,277
        Total Assets                            $3,764,125        $3,708,888
    Liabilities and Shareholders' Equity:
    Noninterest-bearing deposits                  $555,287          $532,752
    Interest-bearing deposits                    2,308,186         2,434,484
        Total Deposits                           2,863,473         2,967,236
    FHLB borrowings                                284,996           155,373
    Other borrowings - short term                  101,834            91,524
    Interest payable and other
     liabilities                                    28,986            36,706
        Total Liabilities                        3,279,289         3,250,839
    Shareholders' Equity:
      Common stock, $1 par value                    25,169            23,801
      Surplus                                      378,694           328,774
      Retained earnings                             80,266            94,746
      Accumulated other comprehensive
       income                                          707            10,728
        Total Shareholders' Equity                 484,836           458,049
        Total Liabilities and
         Shareholders' Equity                   $3,764,125        $3,708,888




    Chemical Financial Corporation
 Announces Fourth Quarter Operating Results

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

                                           Quarter Ended   Twelve Months Ended
                                            December 31,       December 31,
    (In thousands, except per share
     data)                                 2004     2003      2004      2003
    Interest Income:
    Interest and fees on loans           $39,228  $36,046  $152,534  $144,835
    Interest on investment securities:
      Taxable                              7,906    8,029    33,124    36,700
      Nontaxable                             502      590     2,104     2,518
        Total Interest on Investment
         Securities                        8,408    8,619    35,228    39,218
    Interest on federal funds sold           409      137     1,077       749
    Interest on deposits with
     unaffiliated banks                      119       55       411       235
        Total Interest Income             48,164   44,857   189,250   185,037

    Interest Expense:
    Interest on deposits                   8,090    7,790    30,741    36,345
    Interest on FHLB borrowings            2,599    2,108    10,293     8,381
    Interest on other borrowings - short
     term                                    225      104       582       539
        Total Interest Expense            10,914   10,002    41,616    45,265
        Net Interest Income               37,250   34,855   147,634   139,772
    Provision for loan losses              1,711      727     3,819     2,834
        Net Interest Income after
              Provision for Loan Losses   35,539   34,128   143,815   136,938

    Noninterest Income:
    Service charges on deposit accounts    5,020    4,601    19,301    16,935
    Trust services revenue                 1,855    1,671     7,396     6,794
    Other charges and fees for customer
     services                              1,535    1,233     6,595     6,605
    Mortgage banking revenue                 508    1,238     3,328     6,954
    Investment securities gains              108      387     1,367     1,296
    Other                                    713      290     1,342       510
        Total Noninterest Income           9,739    9,420    39,329    39,094

    Operating Expenses:
    Salaries and employee benefits        13,672   13,910    57,551    54,480
    Occupancy and equipment                4,223    3,879    18,120    15,966
    Other                                  5,995    5,225    22,798    21,477
        Total Operating Expenses          23,890   23,014    98,469    91,923
    Income Before Income Taxes            21,388   20,534    84,675    84,109
        Federal income taxes               6,987    6,971    27,993    28,393
    Net Income                           $14,401  $13,563   $56,682   $55,716

    Net income per share:
      Basic                                $0.57    $0.55     $2.26     $2.24
      Diluted                               0.57     0.54      2.25      2.23

    Cash dividends per share              $0.252   $0.238    $1.010    $0.952

    Average shares outstanding:
      Basic                               25,159   24,904    25,130    24,878
      Diluted                             25,253   25,004    25,218    24,944




    Chemical Financial Corporation
 Announces Fourth Quarter Operating Results

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

                                   Quarter Ended        Twelve Months Ended
                                    December 31,            December 31,
                                  2004        2003        2004        2003
    Average Balances
    Total assets               $3,825,625  $3,585,924  $3,856,036  $3,578,678
    Total interest-earning
     assets                     3,584,096   3,372,706   3,608,157   3,381,083
    Total loans                 2,598,138   2,352,269   2,567,956   2,222,704
    Total deposits              2,932,435   2,883,412   2,976,150   2,868,180
    Total shareholders' equity    482,525     436,855     472,226     439,178

                                      Quarter Ended        Twelve Months Ended
                                        December 31,            December 31,
                                     2004        2003        2004        2003
    Key Ratios (annualized
     where applicable)
    Net interest margin             4.18%       4.15%       4.13%       4.18%
    Efficiency ratio                51.0%       51.5%       52.6%       50.9%
    Return on average assets        1.50%       1.50%       1.47%       1.56%
    Return on average
     shareholders' equity           11.9%       12.3%       12.0%       12.7%
    Average shareholders'
     equity as a percent
     of average assets              12.6%       12.2%       12.2%       12.3%
    Tangible shareholders'
     equity as a percent
     of total assets                                        11.1%       10.5%
    Total risk-based capital
     ratio                                                  17.5%       16.6%



                                Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
                                    2004     2004     2004     2004     2003
    Credit Quality Statistics
    Nonaccrual loans               $8,397   $5,787   $5,413   $5,317   $6,691
    Loans 90 or more days past
     due and still accruing         1,653    5,914    5,488    6,559    4,656
    Total nonperforming loans      10,050   11,701   10,901   11,876   11,347
    Repossessed assets acquired
     (RAA)                          6,799    6,924    7,344    6,294    6,002
    Total nonperforming assets     16,849   18,625   18,245   18,170   17,349
    Net loan charge offs -
     year-to-date                   2,832    1,658    1,034      431    3,352

    Allowance for loan losses as
     a percent of total loans        1.32%    1.29%    1.30%    1.31%    1.34%
    Allowance for loan losses as
     a percent of
      nonperforming loans             340%     288%     308%     282%     292%
    Nonperforming loans as a
      percent of total loans         0.39%    0.45%    0.42%    0.47%    0.46%
    Nonperforming assets as a
      percent of total loans plus
       RAA                          0.65%    0.71%    0.70%    0.71%    0.70%
    Net loan charge-offs as a
     percent of average loans
     - year-to-date (annualized)    0.11%    0.09%    0.08%    0.07%    0.15%


                                Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
                                   2004     2004     2004     2004     2003
    Additional Data
    Goodwill                      $63,293  $63,293  $63,293  $63,293  $63,293
    Core deposits and other
     intangibles                    7,931    8,572    9,138    9,613   10,289
    Mortgage servicing rights
     (MSR), net of MSR
     impairment reserve             3,197    3,441    3,252    3,235    3,264
    MSR impairment reserve              -        -      443      693      793
    Amortization of intangibles*      948      931    1,079      851    3,779

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



    Chemical Financial Corporation
 Announces Fourth Quarter Operating Results

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

                                4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr.
                                  2004     2004     2004     2004     2003
    Summary of Operations
    Interest income             $48,164  $47,318  $46,583  $47,185  $44,857
    Interest expense             10,914   10,165   10,174   10,363   10,002
    Net interest income          37,250   37,153   36,409   36,822   34,855
    Provision for loan losses     1,711      701      661      746      727
    Net interest income after
     provision
     for loan losses             35,539   36,452   35,748   36,076   34,128
    Noninterest income            9,739    9,623   10,005    9,962    9,420
    Noninterest expense          23,890   24,499   24,920   25,160   23,014
    Income taxes                  6,987    7,280    6,967    6,759    6,971
    Net income                   14,401   14,296   13,866   14,119   13,563

    Per Common Share Data
    Net income:
         Basic                    $0.57    $0.58    $0.55    $0.56    $0.55
         Diluted                   0.57     0.57     0.55     0.56     0.54
    Cash dividends                0.252    0.252    0.252    0.252    0.238
    Book value                    19.26    19.04    18.63    18.70    18.33

SOURCE  Chemical Financial Corporation

    -0-                             01/31/2005
    /CONTACT:  David B. Ramaker, +1-989-839-5269, or Lori A. Gwizdala,
+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

ML-AM
-- DEM010 --
2616 01/31/2005 09:22 EST http://www.prnewswire.com