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Chemical Financial Corporation Announces Third Quarter 2005 Operating Results

Company Release - 10/21/2005 9:32 AM ET

MIDLAND, Mich., Oct. 21 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today announced 2005 third quarter net income of $13.61 million, or $0.54 per diluted share, down $0.69 million, or $0.03 per diluted share, as compared with net income of $14.30 million, or $0.57 per diluted share, in the third quarter of 2004.

Net income was $40.32 million or $1.60 per share in the first nine months of 2005, compared to net income of $42.28 million, or $1.68 per share in the first nine months of 2004. This represented a decrease of 4.6% in net income and 4.8% in earnings per share for the first nine months of 2005, compared to the prior year. The returns on average assets and average equity during the first nine months of 2005 were 1.42% and 11.0%, respectively, as compared to 1.46% and 12.0%, respectively, for the first nine months of 2004.

Third Quarter Operating Results

Net income and earnings per share in the third quarter of 2005 decreased 4.8% and 5.3%, respectively, from the third quarter of 2004. The decreases in net income and earnings per share were attributable to lower net interest income, an increase in the provision for loan losses and increased operating expenses. These items were partially offset by a modest increase in noninterest income and a lower effective federal income tax rate.

Net interest income of $35.1 million in the third quarter of 2005 was $2.0 million, or 5.4%, lower than in the third quarter of 2004. The decrease in net interest income was primarily attributable to a slight decrease in average interest-earning assets and the impact of the continued flattening of the interest yield curve. These factors were partially offset by a positive change in the mix of interest-earnings assets, with average loans up $81 million, or 3.1%, in the third quarter of 2005, as compared to the third quarter of 2004.

Average interest-earning assets were $3.56 billion in the third quarter of 2005, down $30 million, or 0.8% from the third quarter of 2004. The decrease in average interest-earning assets between the third quarter of 2005 and the third quarter of 2004 was primarily attributable to a decrease in investment securities that resulted primarily from a decline in customer deposits.

The net interest margin was 3.96% in the third quarter of 2005, compared to 4.16% in the third quarter of 2004. The decrease in net interest margin was primarily attributable to the increase in the average yield on interest- earning assets not keeping pace with the increase in the average cost of interest-bearing liabilities. The average yield on interest-earning assets increased 38 basis points in the third quarter of 2005, as compared to the third quarter of 2004, to 5.66%, while the average cost of interest-bearing liabilities increased 76 basis points, between the same periods, to 2.22%. The increase in the average yield on interest-earning assets was primarily driven by the increase in the interest yield on variable rate commercial loans and home equity lines of credit tied to prime. The increase in the average cost of interest-bearing liabilities continued to result from rising deposit interest rates, which have been driven by the overall rise in short-term market interest rates and increased competition for deposits.

The provision for loan losses ("provision") in the third quarter of 2005 was $1.5 million, an increase of $0.8 million over the $0.7 million provision recorded in the third quarter of 2004. The provision was also $0.7 million in both the first and second quarters of 2005. The increase in the provision in the third quarter of 2005 over the third quarter of 2004 was primarily driven by an increase in the Corporation's nonperforming commercial and commercial real estate loans and other watch credits, and also the overall increase in total loans during the third quarter of 2005. Based on these increases, the Corporation's allowance for loan losses evaluation methodology identified the need to increase the provision for loan losses over the level recorded in the first two quarters of 2005. The allowance for loan losses calculation includes reserve percentages for adversely-graded commercial loans that are adjusted over time using actual loan loss experience. The Corporation experienced a $4.2 million increase in nonperforming loans during the third quarter of 2005. Based on the Corporation's internal evaluation process as of September 30, 2005, the Corporation does not expect a significant increase in net loan losses to result from the increase in nonperforming loans and other watch loan credits that occurred during the three months ended September 30, 2005. Net loan charge-offs were $0.72 million in the third quarter of 2005, compared to $0.73 million and $1.08 million in the first and second quarters of 2005, respectively, and $0.62 million in the third quarter of 2004. Net loan losses as a percentage of average total loans were 0.13% on an annualized basis during the nine months ended September 30, 2005; slightly higher than the percentage for the twelve months ended December 31, 2004 of 0.11%.

Total noninterest income was $10.25 million in the third quarter of 2005, up $0.63 million or 6.5% from the third quarter of 2004. The Corporation experienced increases in a number of noninterest income categories, including trust and investment management services revenue, service charges on deposit accounts, ATM service fees, debit card revenue, and letter of credit fees, although these increases were partially offset by a decrease in mortgage banking revenue. Mortgage banking revenue of $0.32 million in the third quarter of 2005 was down $0.64 million, or 67%, from the third quarter of 2004. Mortgage banking revenue in the third quarter of 2004 was positively impacted by a $0.4 million reversal of previously recorded impairment on mortgage servicing rights. The Corporation was servicing $557 million of residential mortgage loans that were sold in the secondary market as of September 30, 2005, compared to $591 million as of September 30, 2004.

Operating expenses were $24.84 million in the third quarter of 2005, up $0.34 million, or 1.4%, from the third quarter of 2004. In comparison, operating expenses were $24.98 million and $24.76 million in the first and second quarters of 2005, respectively. The increase in operating expenses between the third quarter of 2005 and 2004 was primarily attributable to increases in external audit fees, consulting fees, use taxes on computer software license agreements, and an increase in personnel costs. The increases in operating expenses were partially offset by a decrease in incentive compensation expense of $0.46 million between the third quarters of 2005 and 2004. Incentive compensation expense was $0.03 million during the third quarter of 2005, compared to $0.69 million in each of the first two quarters of 2005, and $0.49 million during the third quarter of 2004.

The Corporation's federal income tax provision in the third quarter of 2005 was reduced $0.94 million as a result of federal income tax statutes expiring on September 30, 2005. The $0.94 million reduction in the federal income tax provision reduced the Corporation's effective federal income tax rate to 28.6% in the third quarter of 2005. In comparison, the effective federal income tax rate was 33.7% in the third quarter of 2004, and 33.9% and 33.8% in the first and second quarters of 2005, respectively.

The returns on average assets and average equity during the third quarter of 2005 were 1.42% and 10.9%, respectively, as compared to 1.48% and 12.0%, respectively, for the third quarter of 2004.

Balance Sheet and Capital Position

Total assets of the Corporation at September 30, 2005 were $3.842 billion, up $78 million or 2.1% from the $3.764 billion in total assets reported at December 31, 2004. Total deposits at September 30, 2005 were $2.908 billion, up $45 million, or 1.6% from total deposits of $2.863 billion at December 31, 2004.

Total loans were $2.700 billion at September 30, 2005, up $114.8 million, or 4.4% from total loans of $2.586 billion at December 31, 2004. The Corporation experienced modest increases in all loan categories during the nine months ended September 30, 2005. The Corporation achieved a $20.2 million, or 3.8% increase in consumer loans during the nine months ended September 30, 2005. The Corporation's success in increasing the consumer loan portfolio resulted largely from the combination of a special consumer loan program that offered lower interest rates on newer automobile and recreation vehicle loans and promotional pricing offered nationwide by some automobile manufacturers.

As of September 30, 2005, the allowance for loan losses was $34.6 million or 1.28% of total loans, while nonperforming loans were $20.3 million or 0.75% of total loans. In comparison, nonperforming loans as a percentage of total loans were 0.45% as of September 30, 2004 and 0.39% as of December 31, 2004. Nonperforming loans at September 30, 2005 increased $4.2 million or 26% from June 30, 2005 and were up $10.2 million or 102% from December 31, 2004. Nonperforming loans as of September 30, 2005 included two commercial real estate loan relationships with balances totaling approximately $5.0 million. The Corporation expects these two loans to no longer be in the nonperforming loan category at December 31, 2005, and therefore does not expect to record an additional provision for loan losses related to these two loans. In addition, nonperforming loans as of September 30, 2005 included $5.4 million of residential real estate loans that were either in nonaccrual status or past due greater than 90 days. These type of nonperforming loans have increased $1.3 million, or 31%, since December 31, 2004. Residential real estate loans by their nature are generally well secured, and based on the Corporation's previous loss experience on these loans, loan losses from these loans are expected to be immaterial.

Shareholders' equity at September 30, 2005 was $498 million or $19.82 per share and represented 13.0% of total assets. The Corporation's total risk- based capital and tangible equity to assets ratios were 17.5% and 11.3%, respectively, as of September 30, 2005.

Chemical Financial Corporation is the fourth largest bank holding company headquartered in Michigan. The Company's three subsidiary banks operate banking offices spread over 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 laws and 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 Third Quarter Operating Results

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

                                   September 30,  December 31,  September 30,
    (In thousands)                     2005          2004           2004
    Assets:
    Cash and demand deposits
     due from banks                  $111,115      $106,565       $104,173
    Federal funds sold                 76,300        34,500        108,100
    Interest-bearing deposits
     with unaffiliated banks           36,337         5,869         15,219

    Investment securities -
     available for sale               654,445       716,757        743,343
    Investment securities -
     held to maturity                 132,898       176,517        156,692
              Total Investment
               Securities             787,343       893,274        900,035

    Commercial loans                  504,189       468,970        475,977
    Real estate construction loans    146,973       120,900        141,547
    Real estate commercial loans      708,152       697,779        669,880
    Real estate residential loans     783,834       760,834        771,201
    Consumer loans                    557,256       537,102        547,893
              Total Loans           2,700,404     2,585,585      2,606,498
    Less: Allowance for loan
     losses                            34,603        34,166         33,629
              Net Loans             2,665,801     2,551,419      2,572,869

    Premises and equipment             45,123        47,577         47,646
    Intangible assets                  72,194        74,421         75,306
    Other assets                       47,948        50,500         49,602
              Total Assets         $3,842,161    $3,764,125     $3,872,950

    Liabilities:
    Noninterest-bearing deposits     $521,969      $555,287       $546,387
    Interest-bearing deposits       2,386,605     2,308,186      2,428,916
              Total Deposits        2,908,574     2,863,473      2,975,303
    Other borrowings - short term     137,613       101,834        100,439
    Interest payable and other
     liabilities                       29,118        28,986         33,189
    FHLB borrowings                   268,959       284,996        285,191
              Total Liabilities     3,344,264     3,279,289      3,394,122

    Shareholders' Equity:
         Common stock, $1 par
          value                        25,127        25,169         23,948
         Surplus                      377,469       378,694        333,569
         Retained earnings            100,598        80,266        118,000
         Accumulated other
          comprehensive income/
          (loss)                       (5,297)          707          3,311
              Total Shareholders'
               Equity                 497,897       484,836        478,828
              Total Liabilities
               and Shareholders'
               Equity              $3,842,161    $3,764,125     $3,872,950



   Chemical Financial Corporation
 Announces Third Quarter Operating Results

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

                                         Quarter Ended      Nine Months Ended
                                         September 30,        September 30,
    (In thousands, except per           2005      2004       2005       2004
     share data)
    Interest Income:
    Interest and fees on loans        $42,023   $38,347   $121,055   $113,306
    Interest on investment
     securities:
        Taxable                         6,950     8,066     22,459     25,218
        Nontaxable                        539       511      1,551      1,602
            Total Interest on
             Investment Securities      7,489     8,577     24,010     26,820
    Interest on federal funds sold        682       265      1,586        668
    Interest on deposits with
     unaffiliated banks                   226       129        741        292
            Total Interest Income      50,420    47,318    147,392    141,086

    Interest Expense:
    Interest on deposits               11,851     7,437     31,522     22,651
    Interest on other borrowings -
     short term                           733       158      1,526        357
    Interest on FHLB borrowings         2,690     2,570      7,553      7,694
            Total Interest Expense     15,274    10,165     40,601     30,702
            Net Interest Income        35,146    37,153    106,791    110,384
    Provision for loan losses           1,500       701      2,960      2,108
            Net Interest Income after
                Provision for Loan
                Losses                 33,646    36,452    103,831    108,276

    Noninterest Income:
    Service charges on deposit
     accounts                           5,406     4,970     15,136     14,281
    Trust & investment management
     services revenue                   1,891     1,761      5,963      5,541
    Other charges and fees for
     customer services                  2,388     1,706      5,984      5,060
    Mortgage banking revenue              322       960      1,292      2,820
    Investment securities gains             3         9      1,174      1,259
    Other                                 239       217        633        629
            Total Noninterest Income   10,249     9,623     30,182     29,590

    Operating Expenses:
    Salaries and employee benefits     14,404    14,385     43,642     43,879
    Occupancy and equipment             4,480     4,613     13,753     13,897
    Other                               5,955     5,501     17,190     16,803
            Total Operating Expenses   24,839    24,499     74,585     74,579
    Income Before Income Taxes         19,056    21,576     59,428     63,287
            Federal income taxes        5,451     7,280     19,104     21,006
    Net Income                        $13,605   $14,296    $40,324    $42,281

    Net income per share:
        Basic                           $0.54     $0.58      $1.60      $1.69
        Diluted                          0.54      0.57       1.60       1.68

    Cash dividends per share           $0.265    $0.252     $0.795     $0.756

    Average shares outstanding:
        Basic                          25,134    25,144     25,156     25,120
        Diluted                        25,190    25,222     25,213     25,206




   Chemical Financial Corporation
 Announces Third Quarter Operating Results

    Financial Summary (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries

                                    Quarter Ended         Nine Months Ended
                                    September 30,           September 30,
    (Dollars in thousands)        2005        2004        2005        2004
    Average Balances
    Total assets               $3,800,550  $3,843,070  $3,794,386  $3,865,987
    Total interest-earning
     assets                     3,561,959   3,591,860   3,558,148   3,615,976
    Total loans                 2,677,776   2,596,355   2,619,616   2,557,822
    Total deposits              2,876,608   2,954,315   2,899,205   2,990,828
    Total shareholders' equity    496,405     473,617     491,624     468,768

                                    Quarter Ended         Nine Months Ended
                                    September 30,           September 30,
                                  2005        2004        2005        2004
    Key Ratios (annualized
     where applicable)
    Net interest margin              3.96%       4.16%       4.06%       4.12%
    Efficiency ratio                 54.2%       52.0%       54.3%       53.1%
    Return on average assets         1.42%       1.48%       1.42%       1.46%
    Return on average
     shareholders' equity            10.9%       12.0%       11.0%       12.0%
    Average shareholders'
     equity as a percent of
     average assets                  13.1%       12.3%       13.0%       12.1%
    Tangible shareholders'
     equity as a percent of
     total assets                                            11.3%       10.6%
    Total risk-based capital ratio                           17.5%       17.1%

                 September 30,  June 30,  March 31, December 31, September 30,
                     2005         2005      2005       2004          2004
    Credit Quality
     Statistics
    Nonaccrual
     loans          $9,913       $8,639    $7,823     $8,397        $5,787
    Loans 90 or
     more days
     past due
     and still
     accruing       10,364        7,426     2,914      1,653         5,914
    Total
     nonperforming
     loans          20,277       16,065    10,737     10,050        11,701
    Repossessed
     assets
     acquired
     (RAA)           6,511        5,848     6,544      6,799         6,924
    Total
     nonperforming
     assets         26,788       21,913    17,281     16,849        18,625
    Net loan
     charge
     offs - year-
     to-date         2,523        1,804       725      2,832         1,658

    Allowance for
     loan losses
     as a percent
     of total
     loans            1.28%        1.27%     1.33%      1.32%         1.29%
    Allowance for
     loan losses
     as a percent
     of nonperforming
     loans             171%         211%      318%       340%          288%
    Nonperforming
     loans as a
     percent of
     total loans      0.75%        0.61%     0.42%      0.39%         0.45%
    Nonperforming
     assets as a
     percent of
     total loans
     plus RAA         0.99%        0.82%     0.67%      0.65%         0.71%
    Net loan
     charge-offs
     as a percent
     of average
     loans - year-
     to-date
     (annualized)     0.13%        0.14%     0.11%      0.11%         0.09%

                 September 30,  June 30,  March 31, December 31, September 30,
                     2005         2005      2005       2004          2004
    Additional
     Data
    Goodwill       $63,293      $63,293   $63,293    $63,293       $63,293
    Core deposits
     and other
     intangibles     6,306        6,797     7,324      7,931         8,572
    Mortgage
     servicing
     rights (MSR)    2,595        2,941     3,111      3,197         3,441
    Amortization
     of intangibles
     - quarter-to-
     date              903          793       800        948           931



   Chemical Financial Corporation
 Announces Third Quarter Operating Results

    Selected Quarterly Information (Unaudited)
    Chemical Financial Corporation
 and Subsidiaries

    (In thousands,            3rd Qtr.  2nd Qtr.  1st Qtr.  4th Qtr.  3rd Qtr.
     except per share data)     2005      2005      2005      2004      2004
    Summary of Operations
    Interest income           $50,420   $49,012   $47,960   $48,164   $47,318
    Interest expense           15,274    13,314    12,013    10,914    10,165
    Net interest income        35,146    35,698    35,947    37,250    37,153
    Provision for loan losses   1,500       730       730     1,711       701
    Net interest income after
     provision for loan
     losses                    33,646    34,968    35,217    35,539    36,452
    Noninterest income         10,249     9,753    10,180     9,739     9,623
    Noninterest expense        24,839    24,763    24,983    23,890    24,499
    Income taxes                5,451     6,743     6,910     6,987     7,280
    Net income                 13,605    13,215    13,504    14,401    14,296

    Per Common Share Data
    Net income:
         Basic                  $0.54     $0.53     $0.54     $0.57     $0.58
         Diluted                 0.54      0.53      0.53      0.57      0.57
    Cash dividends              0.265     0.265     0.265     0.252     0.252
    Book value                  19.82     19.68     19.32     19.26     19.04


SOURCE  Chemical Financial Corporation

    -0-                             10/21/2005
    /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
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