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Press Release

Chemical Financial Corporation Reports 2005 Fourth Quarter and Full Year Earnings

Company Release - 1/23/2006 9:29 AM ET
               Strategic Restructuring Initiatives on Schedule

MIDLAND, Mich., Jan. 23 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today reported earnings of $0.50 per diluted share for the fourth quarter of 2005 compared to fourth quarter 2004 earnings per diluted share of $0.57, a decrease of 12.3 percent. Net income for the fourth quarter of 2005 was $12.6 million compared to fourth quarter 2004 net income of $14.4 million. For the twelve months ended December 31, 2005, net income was $52.9 million, or $2.10 per diluted share, compared to net income of $56.7 million, or $2.25 per diluted share, for the twelve months ended December 31, 2004, a 6.7 percent decrease in diluted earnings per share between periods.

"The financial results for 2005 were less than satisfactory. Decreasing net interest income resulting from higher interest rates paid on deposits and short-term borrowings had a significant negative impact on fourth quarter and full year financial performance in 2005. The impact of rising rates was also evidenced in our mortgage banking operations, where net revenue decreased by 50 percent from 2004. While we anticipate we will continue to see unfavorable short-term financial effects from further interest rate increases, we expect that the magnitude and number of rate increases will be less severe going forward," said David B. Ramaker, President and CEO of Chemical Financial Corporation.

"We have taken significant steps during the year to stimulate future revenue growth while controlling costs, which we anticipate will over time translate into improved financial performance. While 2006 will continue to be a challenge for the Michigan economy, as well as our Company, we are optimistic that the initiatives we have employed will ultimately benefit our shareholders. Furthermore, our strong capital base positions us well for growth. We remain mindful of the potential effects of excess capital on shareholder returns, and will continue to examine our alternatives to efficiently utilize the Company's capital," Ramaker said.

During the fourth quarter of 2005, the Company announced it would undertake a strategic restructuring designed to reposition the bank holding company to better capitalize on growth opportunities in high potential markets and enhance operating efficiencies. The restructuring initiative, which resulted from an intensive examination of the Company's core retail banking franchise, encompassed consolidation of its three subsidiary state bank charters into a single state chartered institution, realigned the existing branch network, announced the closure of eight underperforming branches across the state to be completed in the first quarter of 2006, and reorganized senior management to place a greater emphasis on internal growth initiatives. Management estimated that total costs for the restructuring would not exceed $1 million, and would be incurred primarily during the first half of 2006. During the fourth quarter of 2005, restructuring costs of $0.2 million relating to employee severance were incurred. At year-end 2005, the implementation of the restructuring plan was on schedule, with the back-room

component of the consolidation of the three subsidiary banks scheduled to be completed in the second quarter of 2006.

The Company also announced during the fourth quarter of 2005 an increase in its dividend rate, from $0.265 per share paid in the fourth quarter of 2005 to $0.275 per share payable in the first quarter of 2006, an increase of 3.8 percent.

Fourth quarter 2005 net interest income was $35.1 million compared to fourth quarter 2004 net interest income of $37.3 million. The decrease was primarily due to increases in the rates paid on customer deposits and the unfavorable impact of lower average deposits outstanding. These items were partially offset by the positive impact on net interest income of higher average loans outstanding and higher yields earned on loans. Net interest margin (on a tax equivalent basis) was 3.99 percent in the fourth quarter of 2005, down from 4.18 percent in the prior year fourth quarter and up slightly from 3.96 percent in the third quarter of 2005. The Company's interest rate spread, on a fully taxable equivalent basis, decreased from 3.80 percent in the fourth quarter of 2004 to 3.39 percent in the fourth quarter of 2005, as increases in average interest yields earned on interest-earning assets failed to keep pace with increases in average interest rates paid on interest-bearing liabilities.

Total assets were $3.75 billion at December 31, 2005, down slightly from $3.76 billion at December 31, 2004, and down from $3.84 billion at September 30, 2005. At December 31, 2005, total loans were $2.71 billion, versus $2.59 billion at December 31, 2004 and $2.70 billion at September 30, 2005. Total loans increased by $125 million, or 4.8 percent, from December 31, 2004 to December 31, 2005, led by strong growth in business loans and real estate construction loans. Investment securities were $743 million at December 31, 2005, down from $893 million at December 31, 2004 and $787 million at September 30, 2005, as investment securities maturities were utilized to fund loan growth.

Total deposits were $2.82 billion at December 31, 2005, down slightly from $2.86 billion at December 31, 2004 and from $2.91 billion at September 30, 2005. In 2005, the markets in which the Company operates saw intense competition for retail deposits translate into increases in deposit pricing and a slight erosion in core deposits. Other liabilities, which include Federal Home Loan Bank advances, totaled $428 million at December 31, 2005, up from $416 million at December 31, 2004, and down from $436 million at September 30, 2005.

The provision for loan losses was $1.3 million in the fourth quarter of 2005, compared to $1.7 million in the prior year fourth quarter and $1.5 million in the third quarter of 2005. Net loan losses were $1.8 million in the fourth quarter of 2005, compared to $1.2 million in the fourth quarter of 2004. The allowance for loan losses as a percentage of total loans was 1.26 percent as of December 31, 2005, down from 1.28 percent at September 30, 2005 and 1.32 percent at December 31, 2004. At December 31, 2005, nonperforming loans as a percentage of total loans were 0.73 percent, down slightly from 0.75 percent at September 30, 2005 and up from 0.39 percent at December 31, 2004. As the Michigan economy has slowed down, the Company's credit quality ratios have moderated somewhat from the very strong levels experienced over the past few years.

Noninterest income decreased 7 percent to $9.0 million in the fourth quarter of 2005 from $9.7 million in the fourth quarter of 2004. The decline in noninterest income during the 2005 fourth quarter, as compared to the prior year quarter, was driven primarily by a loss on the sale of investment securities and declining mortgage banking revenue, offset by increases in a number of noninterest income categories, including trust and investment management services and service charges on deposit accounts. Mortgage banking revenue decreased 27 percent to $371,000 for the fourth quarter of 2005 compared to $508,000 for the fourth quarter of 2004, but up 15 percent compared to $322,000 during the third quarter of 2005. The Corporation was servicing $544 million of residential mortgage loans that were sold in the secondary market as of December 31, 2005, compared to $596 million as of December 31, 2004.

For the fourth quarter of 2005, the Company incurred losses on the sale of investment securities totaling $633,000, as compared to gains of $108,000 in the fourth quarter of 2004 and gains of $3,000 in the third quarter of 2005. The fourth quarter 2005 losses were incurred in conjunction with a realignment of the Company's investment securities portfolio. During the quarter, the Company sold $37 million in low-yielding US government agency securities scheduled to mature in 2006 and 2007 and invested the proceeds in higher yielding mortgage-backed securities with longer maturities.

Operating expenses were $23.9 million in the fourth quarter of 2005, unchanged from $23.9 million in the fourth quarter of 2004 and down from $24.8 million in the third quarter of 2005. Operating expenses remained stable as increases in occupancy, equipment and other expenses were offset by a decrease in salary and employee benefits expense. The Company's efficiency ratio rose to 54.2 percent in 2005, from 52.6 percent in 2004, as a result of the decrease in net interest income.

The Company's return on average assets during 2005 was 1.40 percent, down slightly from 1.47 percent in 2004. Shareholders' equity increased from $485 million at December 31, 2004 to $501 million at December 31, 2005. During the year, the Company repurchased 126,900 shares of its common stock at an average price of $30.32 per share. At year-end 2005, the Company's book value stood at $19.98 per share, versus $19.26 at year-end 2004. The decline in return on assets combined with the increase in shareholders' equity resulted in a decline in return on average equity to 10.7 percent in 2005 from 12.0 percent in 2004.

Chemical Financial Corporation is the fourth largest bank holding company headquartered in Michigan. Effective December 31, 2005, the Company's banking operations began operating as a single subsidiary bank, Chemical Bank, with 132 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 acquisitions, restructurings 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)                                  2005               2004
    Assets:
    Cash and demand deposits due from
     banks                                        $145,575           $106,565
    Federal funds sold                               6,600             34,500
    Interest-bearing deposits with
     unaffiliated banks                              5,321              5,869
    Investment securities - available
     for sale                                      615,542            716,757
    Investment securities - held to
     maturity                                      127,806            176,517
        Total Investment Securities                743,348            893,274
    Commercial loans                               517,852            468,970
    Real estate commercial loans                   704,684            697,779
    Real estate construction loans                 158,376            120,900
    Real estate residential loans                  788,679            760,834
    Consumer loans                                 540,623            537,102
        Total Loans                              2,710,214          2,585,585
    Less: Allowance for loan losses                 34,148             34,166
        Net Loans                                2,676,066          2,551,419
    Premises and equipment                          45,058             47,577
    Intangible assets                               71,496             74,421
    Other assets                                    55,852             50,500
        Total Assets                            $3,749,316         $3,764,125
    Liabilities:
    Noninterest-bearing deposits                  $542,014           $555,287
    Interest-bearing deposits                    2,277,866          2,308,186
        Total Deposits                           2,819,880          2,863,473
    Securities sold under agreements to
     repurchase                                    125,598            101,834
    Interest payable and other
     liabilities                                    28,008             28,986
    FHLB/other borrowings                          274,765            284,996
        Total Liabilities                        3,248,251          3,279,289
    Shareholders' Equity:
      Common stock, $1 par value                    25,079             25,169
      Surplus                                      376,046            378,694
      Retained earnings                            106,507             80,266
      Accumulated other comprehensive
       income/(loss)                                (6,567)               707
        Total Shareholders' Equity                 501,065            484,836
        Total Liabilities and
         Shareholders' Equity                   $3,749,316         $3,764,125



    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)                                 2005     2004      2005      2004
    Interest Income:
    Interest and fees on loans           $43,775  $39,228  $164,830  $152,534
    Interest on investment securities:
      Taxable                              6,757    7,906    29,216    33,124
      Nontaxable                             602      502     2,153     2,104
        Total Interest on Investment
         Securities                        7,359    8,408    31,369    35,228
    Interest on federal funds sold           535      409     2,121     1,077
    Interest on deposits with
     unaffiliated banks                      243      119       984       411
        Total Interest Income             51,912   48,164   199,304   189,250

    Interest Expense:
    Interest on deposits                  13,110    8,090    44,632    30,741
    Interest on securities sold under
     agreements to repurchase                759      225     2,162       582
    Interest on FHLB/other borrowings      2,983    2,599    10,659    10,293
        Total Interest Expense            16,852   10,914    57,453    41,616
        Net Interest Income               35,060   37,250   141,851   147,634
    Provision for loan losses              1,325    1,711     4,285     3,819
        Net Interest Income after
              Provision for Loan Losses   33,735   35,539   137,566   143,815

    Noninterest Income:
    Service charges on deposit accounts    5,235    5,020    20,371    19,301
    Trust and investment management
     services revenue                      1,946    1,855     7,909     7,396
    Other charges and fees for customer
     services                              1,899    1,535     7,883     6,595
    Mortgage banking revenue                 371      508     1,663     3,328
    Investment securities gains/(losses)    (633)     108       541     1,367
    Other                                    220      713       853     1,342
        Total Noninterest Income           9,038    9,739    39,220    39,329

    Operating Expenses:
    Salaries and employee benefits        13,225   13,698    56,766    57,497
    Occupancy and equipment                4,535    4,223    18,288    18,120
    Other                                  6,118    5,969    23,409    22,852
        Total Operating Expenses          23,878   23,890    98,463    98,469
    Income Before Income Taxes            18,895   21,388    78,323    84,675
        Federal income taxes               6,341    6,987    25,445    27,993
    Net Income                           $12,554  $14,401   $52,878   $56,682

    Net income per share:
      Basic                                $0.50    $0.57     $2.10     $2.26
      Diluted                               0.50     0.57      2.10      2.25

    Cash dividends per share              $0.265   $0.252    $1.060    $1.010

    Average shares outstanding:
      Basic                               25,085   25,159    25,138    25,130
      Diluted                             25,137   25,253    25,193    25,218



    Chemical Financial Corporation Announces Fourth Quarter Operating Results

    Financial Summary (Unaudited)
    Chemical Financial Corporation and Subsidiaries

                                     Quarter Ended        Twelve Months Ended
                                      December 31,            December 31,
    (Dollars in thousands)           2005       2004        2005        2004
    Average Balances
    Total assets               $3,770,911  $3,825,625  $3,788,469  $3,856,036
    Total interest-earning
     assets                     3,534,262   3,584,096   3,550,695   3,608,157
    Total loans                 2,706,300   2,598,138   2,641,465   2,567,956
    Total deposits              2,847,645   2,932,435   2,886,209   2,976,150
    Total shareholders' equity    498,745     482,525     493,419     472,226



                                         Quarter Ended    Twelve Months Ended
                                          December 31,        December 31,
                                         2005     2004      2005      2004
    Key Ratios (annualized where
     applicable)
    Net interest margin                  3.99%    4.18%     4.04%     4.13%
    Efficiency ratio                     53.6%    51.0%     54.2%     52.6%
    Return on average assets             1.32%    1.50%     1.40%     1.47%
    Return on average shareholders'
     equity                              10.0%    11.9%     10.7%     12.0%
    Average shareholders' equity as a
       percent of average assets         13.2%    12.6%     13.0%     12.2%
    Tangible shareholders' equity as a
       percent of total assets                              11.7%     11.1%
    Total risk-based capital ratio                          17.8%     17.5%



                                   December  September  June  March  December
                                      31,       30,      30,    31,     31,
                                     2005      2005     2005   2005    2004
    Credit Quality Statistics
    Nonaccrual loans               $14,561   $9,913   $8,639  $7,823  $8,397
    Loans 90 or more days past due
       and still accruing            5,136   10,364    7,426   2,914   1,653
    Total nonperforming loans       19,697   20,277   16,065  10,737  10,050
    Repossessed assets acquired
     (RAA)                           6,801    6,511    5,848   6,544   6,799
    Total nonperforming assets      26,498   26,788   21,913  17,281  16,849
    Net loan charge-offs (year-to-
     date)                           4,304    2,523    1,804     725   2,832

    Allowance for loan losses as a
       percent of total loans         1.26%    1.28%    1.27%   1.33%   1.32%
    Allowance for loan losses as a
       percent of nonperforming loans  173%     171%     211%    318%    340%
    Nonperforming loans as a
       percent of total loans         0.73%    0.75%    0.61%   0.42%   0.39%
    Nonperforming assets as a
       percent of total loans plus
        RAA                           0.98%    0.99%    0.82%   0.67%   0.65%
    Net loan charge-offs as a percent
     of
       average loans (year-to-date,
        annualized)                   0.16%    0.13%    0.14%   0.11%   0.11%



                            December  September  June   March   December
                               31,       30,      30,     31,      31,
                              2005      2005     2005    2005     2004
    Additional Data
    Goodwill               $63,293   $63,293  $63,293  $63,293  $63,293
    Core deposits and other
     intangibles             5,780     6,306    6,797    7,324    7,931
    Mortgage servicing
     rights (MSR)            2,423     2,595    2,941    3,111    3,197
    Amortization of
     intangibles (quarter-
     to-date)                  776       903      793      800      948




       Chemical Financial Corporation Announces Fourth Quarter Operating
                                    Results

    Selected Quarterly Information (Unaudited)
    Chemical Financial Corporation and Subsidiaries

                                4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr.
    (In thousands, except per
     share data)                  2005     2005     2005     2005     2004
    Summary of Operations
    Interest income             $51,912  $50,420  $49,012  $47,960  $48,164
    Interest expense             16,852   15,274   13,314   12,013   10,914
    Net interest income          35,060   35,146   35,698   35,947   37,250
    Provision for loan losses     1,325    1,500      730      730    1,711
    Net interest income after
     provision
         for loan losses         33,735   33,646   34,968   35,217   35,539
    Noninterest income            9,038   10,249    9,753   10,180    9,739
    Noninterest expense          23,878   24,839   24,763   24,983   23,890
    Income taxes                  6,341    5,451    6,743    6,910    6,987
    Net income                   12,554   13,605   13,215   13,504   14,401

    Per Common Share Data
    Net income:
         Basic                    $0.50    $0.54    $0.53    $0.54    $0.57
         Diluted                   0.50     0.54     0.53     0.53     0.57
    Cash dividends                0.265    0.265    0.265    0.265    0.252
    Book value                    19.98    19.82    19.68    19.32    19.26



SOURCE  Chemical Financial Corporation
    -0-                             01/23/2006
    /CONTACT:  Lori A. Gwizdala, CFO of Chemical Financial Corporation,
+1-989-839-5358/
    /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

TH
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1486 01/23/2006 09:29 EST http://www.prnewswire.com