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Chemical Financial Corporation Reports Third Quarter 2006 Earnings

Company Release - 10/23/2006 9:02 AM ET

MIDLAND, Mich., Oct. 23 /PRNewswire-FirstCall/ -- Chemical Financial Corporation's (Nasdaq: CHFC) Board of Directors today announced 2006 third quarter net income of $11.5 million, or $0.46 per diluted share, versus net income of $13.6 million, or $0.54 per diluted share, in the third quarter of 2005.

Net income was $35.6 million, or $1.42 per diluted share, for the nine months ended September 30, 2006, compared to net income of $40.3 million, or $1.60 per diluted share, for the nine months ended September 30, 2005.

"Michigan's economy continues to struggle and that fact, coupled with the Federal Reserve's increases in interest rates earlier in the year, continued to negatively impact profitability, as our deposits have repriced more rapidly than our loans. Decreases in net interest income, caused primarily by higher interest paid on deposits and short-term borrowings, exceeded noninterest expense savings during the quarter," said David B. Ramaker, Chairman, President and Chief Executive Officer of Chemical Financial Corporation.

"During the quarter we completed implementation of our previously announced internal consolidation. We also have seen some early, positive signs from our system-wide retail sales and service training program, which we kicked off at the end of last quarter to help bolster long-term organic growth. In mid-August, we completed the previously announced purchase of two branches in the Grand Rapids market and opened new branches in Kalamazoo and Owosso, giving us a total of 127 branch offices at quarter's end. The acquisition of the two branches in the Grand Rapids market added $64 million in loans and $47 million in deposits at the date of the transaction. We are confident that our new structure and reconfigured branch network will allow us to more efficiently and effectively deliver high quality financial products and services to the markets we serve, while retaining the community banking orientation for which we are known," said Ramaker.

During the third quarter of 2006, no internal consolidation costs were incurred and no further costs are anticipated. Management had estimated that total costs for the internal consolidation would not exceed $800,000 in 2006; actual internal consolidation costs incurred during 2006 year-to-date total $562,000.

Net interest income was $32.7 million in the third quarter of 2006, a decrease of 6.8 percent from third quarter 2005 net interest income of $35.1 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 decreases in average interest-bearing liabilities. The net interest margin (on a tax-equivalent basis) fell from 3.96% in the third quarter of 2005 to 3.74% in the third quarter of 2006. The decline in net interest margin was primarily attributable to increases in rates paid on interest- bearing liabilities exceeding increases in rates earned on interest-earning assets, as deposits repriced more rapidly than loans in the rising interest rate environment experienced in the past 12 months. The Corporation continues to experience strong competition for deposits in the markets it serves, which when combined with the increasing interest rate environment, limits the Corporation's ability to utilize deposit pricing as a means through which to control interest expenses.

Total assets were $3.84 billion at September 30, 2006, up from $3.73 billion at June 30, 2006 and unchanged from $3.84 billion at September 30, 2005. At September 30, 2006, total loans were $2.82 billion, versus $2.76 billion at June 30, 2006 and $2.70 billion at September 30, 2005. Chemical has seen moderate loan growth across all types during the past year. Investment securities were $638 million at September 30, 2006, down from $646 million at June 30, 2006 and $766 million at September 30, 2005. The decrease in investment securities was primarily attributable to the Corporation using excess liquidity from maturing investment securities to fund loan growth.

Total deposits were $2.96 billion at September 30, 2006, up from $2.79 billion at June 30, 2006 and from $2.91 billion at September 30, 2005. Other liabilities, which include Federal Home Loan Bank advances, totaled $374 million at September 30, 2006, down from $440 million at June 30, 2006 and from $436 million at September 30, 2005. The Corporation has utilized seasonal liquidity from increased municipal deposits to temporarily reduce wholesale borrowings.

The provision for loan losses was $1,750,000 in the third quarter of 2006, compared to $400,000 in the second quarter of 2006 and $1,500,000 in the third quarter of 2005. Net loan losses were $440,000 in the third quarter of 2006, compared to $916,000 in the second quarter of 2006 and $719,000 in the third quarter of 2005. The increase in the provision for loan losses in the third quarter of 2006, as compared to the previous quarter, was primarily reflective of the increase in nonperforming loans during the third quarter of 2006. The allowance for loan losses of $35.3 million at September 30, 2006 was 1.25 percent of total loans, up from 1.22 percent of total loans at June 30, 2006 and down from 1.28 percent of total loans at September 30, 2005. At September 30, 2006, nonperforming loans as a percentage of total loans were 1.16 percent, up from 0.99 percent at June 30, 2006 and from 0.75 percent at September 30, 2005.

At September 30, 2006, nonperforming assets totaled $42.7 million, up from $36.9 million at June 30, 2006 and $26.8 million at September 30, 2005. The $5.8 million increase in nonperforming assets from the previous quarter's end was due primarily to a $4.5 million increase in nonaccrual commercial and commercial real estate loans, due in part to the struggling Michigan economy. Management believes the Corporation's nonperforming loans are generally well- secured.

Total noninterest income was $9.9 million in the third quarter of 2006, down $0.3 million, or 3 percent, from $10.2 million in the third quarter of 2005. Increases in mortgage banking revenue were insufficient to overcome slight decreases in trust and investment services revenue, service charges on deposit accounts and other noninterest income.

Operating expenses were $24.2 million in the third quarter of 2006, down $0.6 million, or 3 percent, from the third quarter of 2005, and down $0.9 million from $25.1 million in the second quarter of 2006. The Company's efficiency ratio was 56.1 percent in the third quarter of 2006, up from 54.2 percent in the third quarter of 2005, but down from 56.8 percent in the second quarter of 2006. The increase in the ratio from the prior year is primarily attributable to the decrease in net interest income.

The Corporation's effective federal income tax rate was 31.2% in the third quarter of 2006, compared to 28.6% in the third quarter of 2005. Both quarters' federal income tax provisions were lowered due primarily to a combination of the expiration of required tax reserves based on the statute of limitations over the Corporation's federal income tax liability and the reassessment of required tax accruals. In comparison, the effective federal income tax rate was 33.3% and 33.0% in the first and second quarters of 2006, respectively.

The Company's return on average assets during the third quarter of 2006 was 1.20 percent, down from 1.42 percent in the third quarter of 2005 and from 1.32 percent in the second quarter of 2006. Shareholders' equity increased from $498 million at September 30, 2005 to $509 million at September 30, 2006. At September 30, 2006, the Company's book value stood at $20.51 per share versus $19.82 per share at September 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 9.1 percent in the third quarter of 2006 from 10.9 percent in the third 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 127 banking offices spread over 32 counties in the lower peninsula of Michigan. At September 30, 2006, the Company had total assets of $3.84 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 Global Select Market.

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 Third Quarter Operating Results

    Consolidated Statements of Financial Position (Unaudited)
    Chemical Financial Corporation


                                             September    December   September
                                                 30,         31,         30,
    (In thousands, except per share data)       2006        2005        2005
    Assets:
    Cash due from banks                       $87,430    $145,575    $111,115
    Federal funds sold                         86,500       6,600      76,300
    Interest-bearing deposits with
     unaffiliated banks                         5,230       5,321      36,337

    Investment securities - available for
     sale                                     537,449     594,491     633,394
    Investment securities - held to
     maturity                                 100,980     127,806     132,898
        Total Investment Securities           638,429     722,297     766,292
    Other securities                           23,368      21,051      21,051

    Loans held for sale                        29,578       3,519       6,710

    Loans:
    Commercial loans                          539,349     517,852     504,189
    Real estate commercial loans              725,988     704,684     708,152
    Real estate construction loans            162,762     158,376     146,973
    Real estate residential loans             820,798     785,160     777,124

    Consumer loans                            568,935     540,623     557,256
        Total Loans                         2,817,832   2,706,695   2,693,694
    Less: Allowance for loan losses            35,348      34,148      34,603
        Net Loans                           2,782,484   2,672,547   2,659,091

    Premises and equipment                     47,559      45,058      45,123
    Intangible assets                          80,562      71,496      72,194
    Interest receivable and other assets       58,166      55,852      47,948
        Total Assets                       $3,839,306  $3,749,316  $3,842,161

    Liabilities:
    Noninterest-bearing deposits             $524,373    $542,014    $521,969
    Interest-bearing deposits               2,432,561   2,277,866   2,386,605
        Total Deposits                      2,956,934   2,819,880   2,908,574
    Interest payable and other liabilities     27,135      28,008      29,118
    Securities sold under agreements to
     repurchase                               166,451     125,598     127,613
    Reverse repurchase agreements                   -      10,000      10,000
    Federal Home Loan Bank advances -
     short-term                                30,000      68,000      25,000
    Federal Home Loan Bank advances -
     long-term                                150,072     196,765     243,959
        Total Liabilities                   3,330,592   3,248,251   3,344,264

    Shareholders' Equity:
      Common stock, $1 par value               24,799      25,079      25,127
      Surplus                                 367,991     376,046     377,469
      Retained earnings                       121,546     106,507     100,598
      Accumulated other comprehensive loss     (5,622)     (6,567)     (5,297)
        Total Shareholders' Equity            508,714     501,065     497,897
        Total Liabilities and
         Shareholders' Equity              $3,839,306  $3,749,316  $3,842,161



   Chemical Financial Corporation Announces Third Quarter Operating Results

    Consolidated Statements of Income (Unaudited)
    Chemical Financial Corporation

                                         Three Months Ended  Nine Months Ended
                                            September 30,      September 30,
    (In thousands, except per share data)  2006     2005      2006      2005
    Interest Income:
    Interest and fees on loans           $47,843  $42,023  $137,027  $121,055
    Interest on investment securities:
      Taxable                              6,006    6,684    18,524    21,754
      Nontaxable                             661      539     1,892     1,551
        Total Interest on Investment
         Securities                        6,667    7,223    20,416    23,305
    Interest on other securities             178      266       867       705
    Interest on federal funds sold           785      682     2,357     1,586
    Interest on deposits with
     unaffiliated banks                       83      226       557       741
        Total Interest Income             55,556   50,420   161,224   147,392

    Interest Expense:
    Interest on deposits                  18,016   11,851    49,586    31,522
    Interest on securities sold under
     agreements to repurchase              1,665      641     3,929     1,403
    Interest on reverse repurchase
     agreements                                -       92       154       123
    Interest on Federal Home Loan Bank
     advances - short-term                 1,282      233     2,301       269
    Interest on Federal Home Loan Bank
     advances - long-term                  1,854    2,457     5,707     7,284
        Total Interest Expense            22,817   15,274    61,677    40,601
        Net Interest Income               32,739   35,146    99,547   106,791
    Provision for loan losses              1,750    1,500     2,610     2,960
        Net Interest Income after
              Provision for Loan Losses   30,989   33,646    96,937   103,831

    Noninterest Income:
    Service charges on deposit accounts    5,308    5,406    15,761    15,136
    Trust and investment services
     revenue                               1,745    1,891     5,844     5,963
    Other charges and fees for customer
     services                              2,308    2,388     6,695     5,984
    Mortgage banking revenue                 476      322     1,389     1,292
    Net gains on sales of investment
     securities                                -        3         -     1,174
    Other                                     59      239       557       633
        Total Noninterest Income           9,896   10,249    30,246    30,182

    Operating Expenses:
    Salaries, wages and employee
     benefits                             13,984   14,372    42,586    43,541
    Occupancy and equipment                4,439    4,480    13,991    13,753
    Other                                  5,773    5,987    17,816    17,291
        Total Operating Expenses          24,196   24,839    74,393    74,585
    Income Before Income Taxes            16,689   19,056    52,790    59,428
        Provision for federal income
         taxes                             5,199    5,451    17,174    19,104
    Net Income                           $11,490  $13,605   $35,616   $40,324

    Net income per share:
      Basic                                $0.46    $0.54     $1.42     $1.60
      Diluted                               0.46     0.54     $1.42      1.60

    Cash dividends per share              $0.275   $0.265    $0.825    $0.795

    Average shares outstanding:
      Basic                               24,800   25,134    24,957    25,156
      Diluted                             24,829   25,190    24,992    25,213



   Chemical Financial Corporation Announces Third Quarter Operating Results

    Financial Summary (Unaudited)
    Chemical Financial Corporation

                                 Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
    (Dollars in thousands)        2006        2005        2006        2005
    Average Balances
    Total assets               $3,785,236  $3,800,550  $3,757,186  $3,794,386
    Total interest-earning
     assets                     3,537,591   3,561,959   3,518,028   3,558,148
    Total loans                 2,807,848   2,677,776   2,745,405   2,619,616
    Total deposits              2,846,603   2,876,608   2,853,044   2,899,205
    Total shareholders' equity    503,486     496,405     503,591     491,624


                                   Three Months Ended      Nine Months Ended
                                     September 30,           September 30,
                                    2006        2005        2006        2005
    Key Ratios (annualized
     where applicable)
    Net interest margin             3.74%       3.96%       3.81%       4.06%
    Efficiency ratio                56.1%       54.2%       56.7%       54.3%
    Return on average assets        1.20%       1.42%       1.27%       1.42%
    Return on average
     shareholders' equity            9.1%       10.9%        9.5%       11.0%
    Average shareholders'
     equity as a percent of
     average assets                 13.3%       13.1%       13.4%       13.0%
    Tangible shareholders'
     equity as a percent of
     total assets                                           11.4%       11.3%
    Total risk-based capital
     ratio                                                  17.1%       17.5%


                                 September                  December September
                                     30,   June 30, March 31,   31,      30,
                                    2006     2006     2006     2005     2005
    Credit Quality Statistics
    Nonaccrual loans              $23,113  $17,636  $13,902  $14,561   $9,913
    Loans 90 or more days past
     due and still accruing         9,505    9,618    5,773    5,136   10,364
    Total nonperforming loans      32,618   27,254   19,675   19,697   20,277
    Repossessed assets (RA)        10,062    9,615    7,905    6,801    6,511
    Total nonperforming assets     42,680   36,869   27,580   26,498   26,788
    Net loan charge-offs (year-
     to-date)                       1,810    1,370      454    4,303    2,523

    Allowance for loan losses as
     a percent of total loans       1.25%    1.22%    1.27%    1.26%    1.28%
    Allowance for loan losses as
     a percent of nonperforming
     loans                           108%     123%     174%     173%     171%
    Nonperforming loans as a
      percent of total loans        1.16%    0.99%    0.73%    0.73%    0.75%
    Nonperforming assets as a
      percent of total loans plus
      RA                            1.51%    1.33%    1.02%    0.98%    0.99%
    Nonperforming assets as a
      percent of total assets       1.11%    0.99%    0.74%    0.71%    0.70%
    Net loan charge-offs as a
     percent of average loans
     (year-to-date, annualized)     0.09%    0.10%    0.07%    0.16%    0.13%


                                 September                  December September
                                     30,   June 30, March 31,   31,      30,
                                    2006     2006     2006     2005     2005
    Additional Data
    Goodwill                      $70,999  $63,293  $63,293  $63,293  $63,293
    Core deposits and other
     intangibles                    7,030    4,743    5,246    5,780    6,306
    Mortgage servicing rights
     (MSR)                          2,533    2,193    2,283    2,423    2,595
    Amortization of intangibles
     (quarter-to-date)                618      683      718      776      903



   Chemical Financial Corporation Announces Third Quarter Operating Results

    Selected Quarterly Information (Unaudited)
    Chemical Financial Corporation

                                3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
    (In thousands, except per
     share data)                   2006     2006     2006     2005     2005
    Summary of Operations
    Interest income             $55,556  $53,391  $52,277  $51,912  $50,420
    Interest expense             22,817   20,174   18,686   16,852   15,274
    Net interest income          32,739   33,217   33,591   35,060   35,146
    Provision for loan losses     1,750      400      460    1,325    1,500
    Net interest income after
     provision for loan losses   30,989   32,817   33,131   33,735   33,646
    Noninterest income            9,896   10,518    9,832    9,038   10,249
    Noninterest expense          24,196   25,076   25,121   23,878   24,839
    Income taxes                  5,199    6,030    5,945    6,341    5,451
    Net income                   11,490   12,229   11,897   12,554   13,605

    Per Common Share Data
    Net income:
         Basic                    $0.46    $0.49    $0.47    $0.50    $0.54
         Diluted                   0.46     0.49     0.47     0.50     0.54
    Cash dividends                0.275    0.275    0.275    0.265    0.265
    Book value                    20.51    20.14    20.10    19.98    19.82


SOURCE Chemical Financial Corporation

Contact: Lori A. Gwizdala, CFO of Chemical Financial Corporation, +1-989-839-5358