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Chemical Financial Corporation Reports First Quarter 2006 Earnings

Company Release - 4/17/2006 8:36 AM ET

MIDLAND, Mich., April 17 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today reported earnings of $0.47 per diluted share for the first quarter of 2006 compared to first quarter 2005 earnings per diluted share of $0.53, a decrease of 11.3 percent. Net income for the first quarter of 2006 was $11.9 million compared to first quarter 2005 net income of $13.5 million.

"As anticipated, the effects of higher interest rates continued to impact our financial results. During the first quarter of 2006, decreasing net interest income resulted from higher interest paid on deposits and short-term borrowings, which was only partially offset by increases in interest earned on loans," said David B. Ramaker, President and Chief Executive Officer of Chemical Financial Corporation.

As announced previously, Chemical Financial Corporation is in the midst of a strategic restructuring which strives to position the Company to better capitalize on growth opportunities in high potential markets and enhance operating efficiencies.

"We have made substantial progress implementing the restructuring plan during the first quarter of 2006 and are on schedule. We have also initiated a comprehensive, system-wide sales and service training program to help bolster our people and the growth initiatives at all of our 124 banking offices. While we believe the steps we are taking to control costs and stimulate revenue growth will translate into improved financial performance in the future, the short-term financial outlook remains challenging," added Ramaker.

During the first quarter of 2006, restructuring costs of $385,000 were incurred. Management had estimated that total costs for the restructuring would not exceed $800,000 in 2006 and would be incurred primarily during the first half of the year.

Net interest income totaled $33.6 million in the first quarter of 2006, a decrease of 6.6 percent from first quarter 2005 net interest income of $35.9 million. Increased interest income from interest-earning assets was insufficient to overcome increased interest expense on interest-bearing liabilities, as well as the effects of a lower level of average earning assets. Net interest margin (on a tax equivalent basis) was 3.90 percent in the first quarter of 2006, down from 3.99 percent in the fourth quarter of 2005 and down from 4.11 percent in the prior year's first quarter. The decrease in the net interest margin during the first quarter of 2006 resulted primarily from increases in deposit rates.

Total assets were $3.74 billion at March 31, 2006, down slightly from $3.75 billion at December 31, 2005 and down slightly from $3.80 billion at March 31, 2005. At March 31, 2006, total loans were $2.70 billion, versus $2.71 billion at December 31, 2005 and $2.58 billion at March 31, 2005. Investment securities were $673 million at March 31, 2006, down from $722 million at December 31, 2005 and $880 million at March 31, 2005. The decrease in investment securities was primarily attributable to the Corporation using excess liquidity from maturing investment securities to temporarily decrease wholesale borrowings.

Total deposits were $2.87 billion at March 31, 2006, up from $2.82 billion at December 31, 2005 and down from $2.93 billion at March 31, 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. In the first quarter of 2006, the Company experienced an increase in seasonal/municipal customer deposits. Other liabilities, which include Federal Home Loan Bank advances, totaled $367 million at March 31, 2006, down substantially from $428 million at December 31, 2005 and down from $382 million at March 31, 2005.

The provision for loan losses was $460,000 in the first quarter of 2006, compared to $1.33 million in the prior year fourth quarter and $730,000 in the first quarter of 2005. Net loan losses were $454,000 in the first quarter of 2006, compared to $1.78 million in the fourth quarter of 2005 and $725,000 in the first quarter of 2005. The allowance for loan losses as a percentage of total loans was 1.27 percent at March 31, 2006, up slightly from 1.26 percent at December 31, 2005 and down from 1.33 percent at March 31, 2005. At March 31, 2006, nonperforming loans as a percentage of total loans were 0.73 percent, unchanged from 0.73 percent at December 31, 2005 and up from 0.42 percent at March 31, 2005.

Noninterest income was $9.8 million in the first quarter of 2006, reflecting a decrease of approximately $348,000 or 3.4 percent from the first quarter of 2005, as increases in fee income were unable to offset decreases in securities gains and mortgage banking revenue. For the first quarter of 2006, there were no net gains on sales of investment securities, whereas in the first quarter of 2005, the Company booked gains of approximately $1.1 million. Excluding gains on sales of investment securities, noninterest income increased 8.2 percent in the first quarter of 2006 compared to the first quarter of 2005.

Services charges on deposit accounts increased 8.1 percent to $5.1 million in the first quarter of 2006 from $4.7 million in the first quarter of 2005. Other charges and fees for customer services increased to $2.1 million in the first quarter of 2006 from $1.7 million in the first quarter of 2005. First quarter 2006 trust and investment services revenue was essentially unchanged from the first quarter of 2005, at $2.0 million. Mortgage banking revenue fell by 13.5 percent to $423,000 in the first quarter of 2006 from $489,000 in the first quarter of 2005, but was up from fourth quarter 2005 mortgage banking revenue of $371,000. The Corporation was servicing $533 million of residential mortgage loans that were sold in the secondary market at March 31, 2006, compared to $589 million at March 31, 2005.

Operating expenses were $25.1 million in the first quarter of 2006, up from $23.9 million in the fourth quarter of 2005 and up slightly from $25.0 million in the first quarter of 2005. Excluding $385,000 in expenses incurred with the strategic restructuring, operating expenses in the first quarter of 2006 were $24.7 million. The Company's efficiency ratio rose to 57.3 percent in the first quarter of 2006 from 54.7 percent in the first quarter of 2005, primarily as a result of the decrease in net interest income.

The Company's return on average assets during the first quarter of 2006 was 1.28 percent, down from 1.43 percent in the prior year's first quarter. Shareholders' equity increased from $487 million at March 31, 2005 to $505 million at March 31, 2006. At March 31, 2006, the Company's book value stood at $20.10 per share versus $19.32 per share at March 31, 2005. The decline in return on assets combined with the increase in shareholders' equity resulted in a decline in return on average equity to 9.6 percent in the first quarter of 2006 from 11.2 percent in the first quarter of 2005.

Chemical Financial Corporation is the fourth largest bank holding company headquartered in Michigan. The Company operates through a single subsidiary bank, Chemical Bank, with 124 banking offices spread over 32 counties in the lower peninsula of Michigan. At March 31, 2006, the Company had total assets of $3.74 billion. 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 First Quarter Operating Results

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


                                           March 31,  December 31,   March 31,
    (In thousands, except per share data)    2006         2005         2005
    Assets:
    Cash due from banks                    $92,404      $145,575      $94,135
    Federal funds sold                      85,600         6,600       51,500
    Interest-bearing deposits with
     unaffiliated banks                     22,448         5,321       37,151

    Investment securities - available
     for sale                              571,262       594,491      720,752
    Investment securities - held to
     maturity                              102,222       127,806      159,467
            Total Investment Securities    673,484       722,297      880,219
    Other securities                        25,683        21,051       19,986

    Commercial loans                       521,792       517,852      480,553
    Real estate commercial loans           704,547       704,684      696,018
    Real estate construction loans         157,087       158,376      122,951
    Real estate residential loans          791,869       788,679      756,468
    Consumer loans                         522,558       540,623      520,800
            Total Loans                  2,697,853     2,710,214    2,576,790
    Less: Allowance for loan losses         34,154        34,148       34,171
            Net Loans                    2,663,699     2,676,066    2,542,619

    Premises and equipment                  44,699        45,058       46,671
    Intangible assets                       70,822        71,496       73,728
    Other assets                            59,240        55,852       50,881
            Total Assets                $3,738,079    $3,749,316   $3,796,890

    Liabilities:
    Noninterest-bearing deposits           522,790      $542,014     $525,272
    Interest-bearing deposits            2,343,349     2,277,866    2,402,675
            Total Deposits               2,866,139     2,819,880    2,927,947
    Interest payable and other
     liabilities                            34,934        28,008       33,828
    Securities sold under agreements
     to repurchase                         129,392       125,598       94,445
    Reverse repurchase agreements           10,000        10,000            -
    Federal Home Loan Bank advances -
     short-term                             35,000        68,000            -
    Federal Home Loan Bank advances -
     long-term                             158,093       196,765      253,979
            Total Liabilities            3,233,558     3,248,251    3,310,199

    Shareholders' Equity:
        Common stock, $1 par value          25,101        25,079       25,185
        Surplus                            376,501       376,046      379,149
        Retained earnings                  111,501       106,507       87,096
        Accumulated other comprehensive
         loss                               (8,582)       (6,567)      (4,739)
            Total Shareholders' Equity     504,521       501,065      486,691
            Total Liabilities and
             Shareholders' Equity       $3,738,079    $3,749,316   $3,796,890




    Chemical Financial Corporation Announces First Quarter Operating Results

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

                                                        Three Months Ended
                                                             March 31,
    (In thousands, except per share data)             2006              2005
    Interest Income:
    Interest and fees on loans                     $43,710           $38,811
    Interest on investment securities:
      Taxable                                        6,342             7,564
      Nontaxable                                       620               490
        Total Interest on Investment
         Securities                                  6,962             8,054
    Interest on other securities                       341               217
    Interest on federal funds sold                     951               653
    Interest on deposits with
     unaffiliated banks                                313               225
        Total Interest Income                       52,277            47,960

    Interest Expense:
    Interest on deposits                            15,074             9,193
    Interest on securities sold under
     agreements to repurchase                        1,059               348
    Interest on reverse repurchase
     agreements                                         92                 -
    Interest on Federal Home Loan Bank
     advances - short-term                             417                 -
    Interest on Federal Home Loan Bank
     advances - long-term                            2,044             2,472
        Total Interest Expense                      18,686            12,013
        Net Interest Income                         33,591            35,947
    Provision for loan losses                          460               730
        Net Interest Income after
         Provision for Loan Losses                  33,131            35,217

    Noninterest Income:
    Service charges on deposit accounts              5,097             4,716
    Trust and investment services revenue            2,005             2,017
    Other charges and fees for customer
     services                                        2,132             1,688
    Mortgage banking revenue                           423               489
    Net gains on sales of investment
     securities                                          -             1,089
    Other                                              175               181
        Total Noninterest Income                     9,832            10,180

    Operating Expenses:
    Salaries, wages and employee benefits           14,590            14,544
    Occupancy and equipment                          4,786             4,756
    Other                                            5,745             5,683
        Total Operating Expenses                    25,121            24,983
    Income Before Income Taxes                      17,842            20,414
        Provision for federal income
         taxes                                       5,945             6,910
    Net Income                                     $11,897           $13,504

    Net income per share:
      Basic                                          $0.47             $0.54
      Diluted                                         0.47              0.53

    Cash dividends per share                        $0.275            $0.265

    Average shares outstanding:
      Basic                                         25,097            25,183
      Diluted                                       25,140            25,247



    Chemical Financial Corporation Announces First Quarter Operating Results

    Financial Summary (Unaudited)
    Chemical Financial Corporation and Subsidiaries

                                                       Three Months Ended
                                                             March 31,
    (Dollars in thousands)                             2006              2005
    Average Balances
    Total assets                                 $3,770,833        $3,822,046
    Total interest-earning assets                 3,535,728         3,585,659
    Total loans                                   2,695,742         2,575,331
    Total deposits                                2,872,473         2,929,347
    Total shareholders' equity                      503,990           487,557


                                                        Three Months Ended
                                                              March 31,
                                                       2006              2005
    Key Ratios (annualized where applicable)
    Net interest margin                               3.90%             4.11%
    Efficiency ratio                                  57.3%             54.7%
    Return on average assets                          1.28%             1.43%
    Return on average shareholders' equity             9.6%             11.2%
    Average shareholders' equity as a
      percent of average assets                       13.4%             12.8%
    Tangible shareholders' equity as a
      percent of total assets                         11.8%             11.1%
    Total risk-based capital ratio                    18.1%             17.7%


                                March   December  September   June      March
                              31, 2006  31, 2005  30, 2005  30, 2005  31, 2005
    Credit Quality Statistics
    Nonaccrual loans           $13,902   $14,561    $9,913    $8,639    $7,823
    Loans 90 or more days past
     due and still accruing      5,773     5,136    10,364     7,426     2,914
    Total nonperforming loans   19,675    19,697    20,277    16,065    10,737
    Repossessed assets (RA)      8,411     6,801     6,511     5,848     6,544
    Total nonperforming assets  28,086    26,498    26,788    21,913    17,281
    Net loan charge-offs (year-
     to-date)                      454     4,303     2,523     1,804       725

    Allowance for loan losses as
     a percent of total loans    1.27%     1.26%     1.28%     1.27%     1.33%
    Allowance for loan losses as
     a percent of nonperforming
     loans                        174%      173%      171%      211%      318%
    Nonperforming loans as a
      percent of total loans     0.73%     0.73%     0.75%     0.61%     0.42%
    Nonperforming assets as a
      percent of total loans
      plus RA                    1.04%     0.98%     0.99%     0.82%     0.67%
    Nonperforming assets as a
      percent of total assets    0.75%     0.71%     0.70%     0.59%     0.46%
    Net loan charge-offs as a
     percent of average loans
     (year-to-date, annualized)  0.07%     0.16%     0.13%     0.14%     0.11%


                                March   December  September   June      March
                              31, 2006  31, 2005  30, 2005  30, 2005  31, 2005
    Additional Data
    Goodwill                   $63,293   $63,293   $63,293   $63,293   $63,293
    Core deposits and other
     intangibles                 5,246     5,780     6,306     6,797     7,324
    Mortgage servicing rights
     (MSR)                       2,283     2,423     2,595     2,941     3,111
    Amortization of intangibles
     (quarter-to-date)             718       776       903       793       800




    Chemical Financial Corporation Announces First Quarter Operating Results

    Selected Quarterly Information (Unaudited)
    Chemical Financial Corporation and Subsidiaries

                               1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
    (In thousands, except per
     share data)                  2006     2005     2005     2005     2005
    Summary of Operations
    Interest income             $52,277  $51,912  $50,420  $49,012  $47,960
    Interest expense             18,686   16,852   15,274   13,314   12,013
    Net interest income          33,591   35,060   35,146   35,698   35,947
    Provision for loan losses       460    1,325    1,500      730      730
    Net interest income after
     provision for loan losses   33,131   33,735   33,646   34,968   35,217
    Noninterest income            9,832    9,038   10,249    9,753   10,180
    Noninterest expense          25,121   23,878   24,839   24,763   24,983
    Income taxes                  5,945    6,341    5,451    6,743    6,910
    Net income                   11,897   12,554   13,605   13,215   13,504

    Per Common Share Data
    Net income:
         Basic                    $0.47    $0.50    $0.54    $0.53    $0.54
         Diluted                   0.47     0.50     0.54     0.53     0.53
    Cash dividends                0.275    0.265    0.265    0.265    0.265
    Book value                    20.10    19.98    19.82    19.68    19.32


SOURCE  Chemical Financial Corporation
    -0-                             04/17/2006
    /CONTACT:  Lori A. Gwizdala, Chief Financial Officer 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 RCN

KN
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