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Chemical Financial Corporation Reports Second Quarter 2006 Earnings

Company Release - 7/24/2006 9:00 AM ET

MIDLAND, Mich., July 24 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today announced 2006 second quarter net income of $12.2 million, or $0.49 per diluted share, versus reported net income of $13.2 million, or $0.53 per diluted share, in the second quarter of 2005.

Net income was $24.1 million, or $0.96 per diluted share, in the first six months of 2006, compared to net income of $26.7 million, or $1.06 per diluted share, in the first six months of 2005.

"Rising interest rates continued to negatively impact financial results during the second quarter. Increases in noninterest income were offset by a decrease in net interest income, due primarily to higher interest paid on deposits and short-term borrowings," said David B. Ramaker, Chairman, President and Chief Executive Officer of Chemical Financial Corporation.

"The implementation phase of our previously announced strategic restructuring plan, which we believe will position the Company to better capitalize on growth opportunities and enhance operating efficiencies, is nearing completion. During the quarter, we announced the acquisition of two branch offices in the Grand Rapids market, which is expected to be completed in the third quarter. In addition, to bolster organic growth, we initiated a system-wide sales and service training program to improve sales, cross sales and customer development and retention across our 123 branch office network. We continue to explore other avenues to enhance financial performance. Absent further interest rate increases, we are cautiously optimistic about the short- term financial outlook for the remainder of the year," added Ramaker.

During the second quarter of 2006, restructuring costs of $0.17 million were incurred. Management had estimated that total costs for the restructuring would not exceed $0.8 million in 2006 and would be incurred primarily during the first half of the year. Actual restructuring costs incurred in the first six months of 2006 were $0.56 million. Management anticipates incurring the remaining $0.24 million of restructuring costs during the third quarter of 2006.

Net interest income was $33.2 million in the second quarter of 2006, a decrease of 7.0 percent from second quarter 2005 net interest income of $35.7 million. The decrease in net interest income was attributable to decreases in both average interest-earning assets and the net interest margin, partially offset by a decrease in average interest-bearing liabilities. The net interest margin (on a tax-equivalent basis) fell from 4.10% in the second quarter of 2005 to 3.88% in the second quarter of 2006. The decline in net interest margin was primarily attributable to increases in rates paid on interest-bearing liabilities outstripping yields earned on interest-earning assets, as deposits continued to reprice more rapidly than loans in the rising interest rate environment.

Total assets were $3.73 billion at June 30, 2006, down slightly from $3.75 billion at December 31, 2005 and up slightly from $3.72 billion at June 30, 2005. At June 30, 2006, total loans were $2.76 billion, versus $2.71 billion at December 31, 2005 and $2.65 billion at June 30, 2005. Investment securities were $646 million at June 30, 2006, down from $722 million at December 31, 2005 and $799 million at June 30, 2005. The decrease in investment securities was primarily attributable to the Company using excess liquidity from maturing investment securities to fund loan growth.

Total deposits were $2.79 billion at June 30, 2006, down slightly from $2.82 billion at December 31, 2005 and from $2.82 billion at June 30, 2005. In the second quarter of 2006, the Company continued to experience strong competition for deposits in the markets it serves. Other liabilities, which include Federal Home Loan Bank advances, totaled $440 million at June 30, 2006, up from $428 million at December 31, 2005 and from $403 million at June 30, 2005.

The provision for loan losses was $400,000 in the second quarter of 2006, compared to $460,000 in the first quarter of 2006 and $730,000 in the second quarter of 2005. Net loan losses were $916,000 in the second quarter of 2006, compared to $454,000 in the first quarter of 2006 and $1,079,000 in the second quarter of 2005. Net loan losses in the second quarter of 2006 include a $0.6 million loss on a real estate commercial construction loan. The loan was deemed an impaired loan during the fourth quarter of 2005, with a $0.6 million impairment reserve. The remaining loan balance of $2.6 million was transferred to other real estate during the second quarter of 2006. The allowance for loan losses as a percentage of total loans was 1.22 percent at June 30, 2006, down from 1.27 percent at March 31, 2006 and from 1.27 percent at June 30, 2005. At June 30, 2006, nonperforming loans as a percentage of total loans were 0.99 percent, up from 0.73 percent at March 31, 2006 and up from 0.61 percent at June 30, 2005.

On June 30, 2006, nonperforming assets totaled $36.9 million, up from $21.9 million at June 30, 2005 and $27.6 million at March 31, 2006. The increase in nonperforming assets from the previous quarter's end is due primarily to a $4.3 million increase in nonaccrual commercial loans and a $3.7 million increase in real estate commercial loans past due 90 days or more. While nonperforming assets have increased, management does not anticipate increased significant loss exposure as a result of this increase.

Total noninterest income was $10.5 million in the second quarter of 2006, up $0.8 million, or 7.8 percent, from the second quarter of 2005. In the second quarter of 2006, the Company experienced increases in service charges on deposit accounts, as well as increases in other fees for customer services, compared to the second quarter of 2005.

Operating expenses were $25.1 million in the second quarter of 2006, up $0.3 million, or 1.3 percent, from the second quarter of 2005, and unchanged from $25.1 million in the first quarter of 2006. Excluding restructuring expenses of $0.17 million incurred in the second quarter of 2006 in conjunction with the strategic restructuring, operating expenses in the second quarter of 2006 were $24.9 million. The Company's efficiency ratio was 56.8 percent in the second quarter of 2006, down from 57.3 percent in the first quarter of 2006, although up from 54.0 percent in the second quarter of 2005. The increase in the ratio from the prior year is primarily attributable to the decrease in net interest income.

The Company's return on average assets during the second quarter of 2006 was 1.32 percent, down from 1.41 percent in the second quarter of 2005 and up slightly from 1.28 percent in the first quarter of 2006. Shareholders' equity increased from $495 million at June 30, 2005 to $500 million at June 30, 2006. At June 30, 2006, the Company's book value stood at $20.14 per share versus $19.68 per share at June 30, 2005. The decline in return on assets combined with the increase in shareholders' equity resulted in a decline in return on average equity to 9.7 percent in the second quarter of 2006 from 10.8 percent in the second 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 123 banking offices spread over 32 counties in the lower peninsula of Michigan. At June 30, 2006, the Company had total assets of $3.73 billion. Chemical Financial Corporation common stock trades on The Nasdaq Stock Market, Inc. under the symbol CHFC and is one of the issues comprising The NASDAQ Global Select Market and 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 Financial Corporation 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 Second
                          Quarter Operating Results

          Consolidated Statements of Financial Position (Unaudited)
                        Chemical Financial Corporation


                                             June 30,  December 31,  June 30,
    (In thousands, except per share data)      2006        2005        2005
    Assets:
    Cash and cash due from banks             $110,457    $145,575    $105,261
    Federal funds sold                         36,500       6,600       5,000
    Interest-bearing deposits with
     unaffiliated banks                         5,211       5,321       5,804
    Investment securities - available for
     sale                                     549,532     594,491     658,594
    Investment securities - held to
     maturity                                  96,518     127,806     139,934
        Total Investment Securities           646,050     722,297     798,528
    Other securities                           25,683      21,051      21,052
    Commercial loans                          536,099     517,852     491,919
    Real estate commercial loans              706,213     704,684     714,393
    Real estate construction loans            155,463     158,376     129,144
    Real estate residential loans             812,407     788,679     766,447
    Consumer loans                            554,492     540,623     552,100
        Total Loans                         2,764,674   2,710,214   2,654,003
    Less: Allowance for loan losses            33,638      34,148      33,822
        Net Loans                           2,731,036   2,676,066   2,620,181
    Premises and equipment                     44,736      45,058      46,165
    Intangible assets                          70,229      71,496      73,031
    Interest receivable and other assets       60,740      55,852      47,078
        Total Assets                       $3,730,642  $3,749,316  $3,722,100
    Liabilities:
    Noninterest-bearing deposits             $535,537    $542,014    $531,667
    Interest-bearing deposits               2,255,816   2,277,866   2,292,512
        Total Deposits                      2,791,353   2,819,880   2,824,179
    Interest payable and other liabilities     28,162      28,008      27,526
    Securities sold under agreements to
     repurchase                               151,267     125,598      96,781
    Reverse repurchase agreements                   -      10,000      10,000
    Federal Home Loan Bank advances -
     short-term                               125,000      68,000      25,000
    Federal Home Loan Bank advances -
     long-term                                135,072     196,765     243,959
        Total Liabilities                   3,230,854   3,248,251   3,227,445
    Shareholders' Equity:
      Common stock, $1 par value               24,817      25,079      25,138
      Surplus                                 368,562     376,046     377,854
      Retained earnings                       116,875     106,507      93,650
      Accumulated other comprehensive loss    (10,466)     (6,567)     (1,987)
        Total Shareholders' Equity            499,788     501,065     494,655
        Total Liabilities and
         Shareholders' Equity              $3,730,642  $3,749,316  $3,722,100



                Consolidated Statements of Income (Unaudited)
                        Chemical Financial Corporation

                                          Three Months Ended Six Months Ended
                                               June 30,          June 30,
    (In thousands, except per share data)    2006     2005     2006     2005
    Interest Income:
    Interest and fees on loans             $45,474  $40,221  $89,184  $79,032
    Interest on investment securities:
      Taxable                                6,176    7,506   12,518   15,070
      Nontaxable                               611      522    1,231    1,012
        Total Interest on Investment
         Securities                          6,787    8,028   13,749   16,082
    Interest on other securities               348      222      689      439
    Interest on federal funds sold             621      251    1,572      904
    Interest on deposits with unaffiliated
     banks                                     161      290      474      515
        Total Interest Income               53,391   49,012  105,668   96,972

    Interest Expense:
    Interest on deposits                    16,496   10,478   31,570   19,671
    Interest on securities sold under
     agreements to repurchase                1,205      414    2,264      762
    Interest on reverse repurchase
     agreements                                 62       31      154       31
    Interest on Federal Home Loan Bank
     advances - short-term                     602       36    1,019       36
    Interest on Federal Home Loan Bank
     advances - long-term                    1,809    2,355    3,853    4,827
        Total Interest Expense              20,174   13,314   38,860   25,327
        Net Interest Income                 33,217   35,698   66,808   71,645
    Provision for loan losses                  400      730      860    1,460
        Net Interest Income after
              Provision for Loan Losses     32,817   34,968   65,948   70,185

    Noninterest Income:
    Service charges on deposit accounts      5,356    5,014   10,453    9,730
    Trust and investment services revenue    2,094    2,055    4,099    4,072
    Other charges and fees for customer
     services                                2,255    1,908    4,387    3,596
    Mortgage banking revenue                   490      481      913      970
    Net gains on sales of investment
     securities                                  -       82        -    1,171
    Other                                      323      213      498      394
        Total Noninterest Income            10,518    9,753   20,350   19,933

    Operating Expenses:
    Salaries, wages and employee benefits   14,012   14,625   28,602   29,169
    Occupancy and equipment                  4,766    4,517    9,552    9,273
    Other                                    6,298    5,621   12,043   11,304
        Total Operating Expenses            25,076   24,763   50,197   49,746
    Income Before Income Taxes              18,259   19,958   36,101   40,372
        Provision for federal income taxes   6,030    6,743   11,975   13,653
    Net Income                             $12,229  $13,215  $24,126  $26,719

    Net income per share:
      Basic                                  $0.49    $0.53    $0.96    $1.06
      Diluted                                 0.49     0.53     0.96     1.06

    Cash dividends per share                $0.275   $0.265   $0.550   $0.530

    Average shares outstanding:
      Basic                                 24,977   25,152   25,036   25,167
      Diluted                               25,010   25,200   25,075   25,224



                        Financial Summary (Unaudited)
                        Chemical Financial Corporation

                                 Three Months Ended       Six Months Ended
                                      June 30,                June 30,
    (Dollars in thousands)        2006        2005        2006        2005
    Average Balances
    Total assets               $3,715,334  $3,760,798  $3,742,930  $3,791,253
    Total interest-earning
     assets                     3,480,772   3,527,087   3,508,098   3,556,211
    Total loans                 2,731,421   2,604,615   2,713,680   2,590,054
    Total deposits              2,840,341   2,892,240   2,856,318   2,910,691
    Total shareholders' equity    503,306     490,813     503,646     489,194



                                    Three Months Ended    Six Months Ended
                                         June 30,              June 30,
                                     2006        2005      2006       2005

    Key Ratios (annualized where
     applicable)
    Net interest margin              3.88%      4.10%      3.89%      4.11%
    Efficiency ratio                 56.8%      54.0%      57.0%      54.4%
    Return on average assets         1.32%      1.41%      1.30%      1.42%
    Return on average shareholders'
     equity                           9.7%      10.8%       9.7%      11.0%
    Average shareholders' equity as
     a percent of average assets     13.5%      13.1%      13.5%      12.9%
    Tangible shareholders' equity as
     a percent of total assets                             11.7%      11.6%
    Total risk-based capital ratio                         17.8%      17.7%



                                                              Sept.
                                 June 30, March 31,  Dec. 31,  30,   June 30,
                                    2006     2006     2005    2005     2005
    Credit Quality Statistics
    Nonaccrual loans               $17,636  $13,902  $14,561  $9,913  $8,639
    Loans 90 or more days past due
      and still accruing             9,618    5,773    5,136  10,364   7,426
    Total nonperforming loans       27,254   19,675   19,697  20,277  16,065
    Repossessed assets (RA)          9,615    7,905    6,801   6,511   5,848
    Total nonperforming assets      36,869   27,580   26,498  26,788  21,913
    Net loan charge-offs (year-to-
     date)                           1,370      454    4,303   2,523   1,804

    Allowance for loan losses as a
      percent of total loans          1.22%    1.27%    1.26%   1.28%   1.27%
    Allowance for loan losses as a
      percent of nonperforming
       loans                           123%     174%     173%    171%    211%
    Nonperforming loans as a
      percent of total loans          0.99%    0.73%    0.73%   0.75%   0.61%
    Nonperforming assets as a
      percent of total loans plus
       RA                             1.33%    1.02%    0.98%   0.99%   0.82%
    Nonperforming assets as a
      percent of total assets         0.99%    0.74%    0.71%   0.70%   0.59%
    Net loan charge-offs as a
     percent of
      average loans (year-to-date,
       annualized)                    0.10%    0.07%    0.16%   0.13%   0.14%



                                                   December September
                                 June 30, March 31,   31,      30,   June 30,
                                   2006     2006     2005     2005     2005
    Additional Data
    Goodwill                     $63,293  $63,293  $63,293  $63,293  $63,293
    Core deposits and other
     intangibles                   4,743    5,246    5,780    6,306    6,797
    Mortgage servicing rights
     (MSR)                         2,193    2,283    2,423    2,595    2,941
    Amortization of intangibles
     (quarter-to-date)               683      718      776      903      793



                  Selected Quarterly Information (Unaudited)
                        Chemical Financial Corporation

                              2nd Qtr. 1st Qtr.  4th Qtr.  3rd Qtr. 2nd Qtr.
    (In thousands, except per
     share data)                 2006     2006     2005     2005     2005
    Summary of Operations
    Interest income             $53,391  $52,277  $51,912  $50,420  $49,012
    Interest expense             20,174   18,686   16,852   15,274   13,314
    Net interest income          33,217   33,591   35,060   35,146   35,698
    Provision for loan losses       400      460    1,325    1,500      730
    Net interest income after
     provision
         for loan losses         32,817   33,131   33,735   33,646   34,968
    Noninterest income           10,518    9,832    9,038   10,249    9,753
    Noninterest expense          25,076   25,121   23,878   24,839   24,763
    Income taxes                  6,030    5,945    6,341    5,451    6,743
    Net income                   12,229   11,897   12,554   13,605   13,215

    Per Common Share Data
    Net income:
         Basic                    $0.49    $0.47    $0.50    $0.54    $0.53
         Diluted                   0.49     0.47     0.50     0.54     0.53
    Cash dividends                0.275    0.275    0.265    0.265    0.265
    Book value                    20.14    20.10    19.98    19.82    19.68

SOURCE Chemical Financial Corporation