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Press Release

Chemical Financial Corporation Reports Fourth Quarter 2006 Earnings

Company Release - 1/26/2007 10:06 AM ET

MIDLAND, Mich., Jan. 26, 2007 (PRIME NEWSWIRE) -- Chemical Financial Corporation's (Nasdaq:CHFC) Board of Directors today announced 2006 fourth quarter net income of $11.2 million, or $0.45 per diluted share, versus net income of $12.6 million, or $0.50 per diluted share, in the fourth quarter of 2005.

Net income was $46.8 million, or $1.88 per diluted share, for the twelve months ended December 31, 2006, compared to net income of $52.9 million, or $2.10 per diluted share, for the twelve months ended December 31, 2005.

"The quarter's financial performance continued to be impacted by a flat yield curve, a struggling state economy and fierce deposit pricing competition. Increases in noninterest income and reductions in operating expenses were more than offset by a decrease in net interest income and a higher provision for loan losses, resulting in lower net income," said David B. Ramaker, Chairman, President and Chief Executive Officer of Chemical Financial Corporation. "During the fourth quarter, we took steps to better position the Company for 2007 by repositioning our investment securities portfolio and reducing nonperforming assets."

"We are confident that our completed internal consolidation initiatives, the continued branch expansion and facilities improvements in key markets and the positive early results from our system-wide sales and service training program, will contribute to building franchise value going forward," added Ramaker.

Net interest income was $32.7 million in the fourth quarter of 2006, a decrease of 6.8 percent from fourth quarter 2005 net interest income of $35.1 million. The decrease in net interest income was attributable primarily to the decrease in net interest margin. The net interest margin (on a tax-equivalent basis) in the fourth quarter of 2006 was 3.73 percent, down from 3.99 percent in the fourth quarter of 2005 and 3.74 percent 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 re-priced more rapidly than loans in the rising interest rate environment experienced in the past 12 months. The Company continues to experience strong competition for deposits in the markets it serves, which when combined with the increased interest rate environment during 2006, limits the Company's ability to utilize deposit pricing as a means through which to control interest expense.

Total assets were $3.79 billion at December 31, 2006, down from $3.84 billion at September 30, 2006 and up slightly from $3.75 billion at December 31, 2005. At December 31, 2006, total loans were $2.81 billion, versus $2.82 billion at September 30, 2006 and $2.71 billion at December 31, 2005. With the exception of a modest decline in real estate construction loans, the Company has seen moderate growth across all loan types during the past year, which was partially attributable to the branch acquisitions completed in August 2006. Investment securities were $615 million at December 31, 2006, down from $638 million at September 30, 2006 and $722 million at December 31, 2005. The decrease in investment securities was primarily attributable to the Company using excess liquidity from maturing investment securities to fund higher yielding loan growth and the sale of investment securities in the fourth quarter.

Total deposits were $2.90 billion at December 31, 2006, down slightly from $2.96 billion at September 30, 2006 and up from $2.82 billion at December 31, 2005. Wholesale borrowings, primarily Federal Home Loan Bank advances, totaled $175 million at December 31, 2006, down $90 million, or 34%, from $265 million at December 31, 2005.

The provision for loan losses was $2.590 million in the fourth quarter of 2006, compared to $1.750 million in the third quarter of 2006 and $1.325 million in the fourth quarter of 2005. Net loan charge-offs were $3.84 million in the fourth quarter of 2006, compared to $0.44 million in the third quarter of 2006 and $1.78 million in the fourth quarter of 2005. The increase in the provision for loan losses in the fourth quarter of 2006, as compared to the previous quarter, was primarily reflective of increased net loan charge-offs in the fourth quarter of 2006. The two largest loan charge-offs recognized in the fourth quarter of 2006 were a $1.1 million write-down of a commercial real estate loan secured by a restaurant and a $0.4 million write-down of a commercial real estate loan secured by a residential condominium project. The Company's total specific allowance on impaired loans decreased $1.43 million during the fourth quarter of 2006 to $0.90 million at December 31, 2006 from $2.33 million at September 30, 2006. The allowance for loan losses of $34.1 million at December 31, 2006 was 1.21 percent of total loans, down from 1.25 percent of total loans at September 30, 2006 and 1.26 percent of total loans at December 31, 2005. At December 31, 2006, nonperforming loans as a percentage of total loans were 0.96 percent, down from 1.16 percent at September 30, 2006 and up from 0.73 percent at December 31, 2005.

At December 31, 2006, nonperforming assets totaled $35.8 million, down from $42.7 million at September 30, 2006, although up from $26.5 million at December 31, 2005. The $6.9 million decrease in nonperforming assets from the previous quarter's end was due partially to the charge-off of a portion of the nonperforming loan portfolio and a $1.2 million reduction in repossessed assets.

Total noninterest income was $9.9 million in the fourth quarter of 2006, up $0.9 million, or 10 percent, from $9.0 million in the fourth quarter of 2005. An increase in other charges and fees for customer services and a gain on the sale of loans more than offset an increase in the losses on the sale of investment securities. During the fourth quarter of 2006, the Company recognized a $1.1 million gain attributable to the sale of $15 million in long-term fixed interest rate mortgage loans that were acquired in the third quarter 2006 branch acquisition transaction. In addition, during the fourth quarter of 2006, the Company incurred losses on the sale of investment securities totaling $1.33 million. In comparison, investment securities losses were $0.633 million in the fourth quarter of 2005, while there were no investment securities gains or losses in the third quarter of 2006. The fourth quarter 2006 investment securities losses were incurred in conjunction with a realignment of the Company's investment securities portfolio, as part of its interest rate risk management program. During the fourth quarter of 2006, the Company sold $68 million in U.S. Treasury and Agency securities at an average yield of 3.12 percent and invested the proceeds in the same type securities with a slightly longer duration at an average yield of 4.81 percent.

As a result of the Company's focus on expense controls, along with savings generated through the internal consolidation and branch realignment initiatives undertaken in 2006, operating expenses were slightly lower in 2006 than in 2005. Operating expenses were $23.5 million in the fourth quarter of 2006, down $0.4 million, or 1.7 percent, from the fourth quarter of 2005, and down $0.7 million, or 3.0 percent, from $24.2 million in the third quarter of 2006. The Company's efficiency ratio was 54.4 percent in the fourth quarter of 2006, up from 53.6 percent in the fourth quarter of 2005, although down from 56.1 percent in the third quarter of 2006. The increase in the efficiency ratio from the prior year was primarily attributable to the decrease in net interest income. Operating expenses were $97.9 million in 2006, down $0.6 million, or 0.6 percent, from total operating expenses of $98.5 million in 2005. The reduction in operating expenses in 2006 was primarily driven by a reduction in compensation costs. Total salaries, wages and employee benefits of $56.0 million in 2006 were $0.8 million, or 1.3 percent, lower than in 2005.

The Company's effective federal income tax rate was 32.0 percent in the fourth quarter of 2006, compared to 33.6 percent in the fourth quarter of 2005. The Company's effective tax rate in the fourth quarter of 2006 declined by 1.1 percent due to the recognition of a tax credit related to its participation/contribution to a community reinvestment project. The Company incurs operating expenses on this project.

The Company's return on average assets during the fourth quarter of 2006 was 1.18 percent, down from 1.32 percent in the fourth quarter of 2005 and down slightly from 1.20 percent in the third quarter of 2006. At December 31, 2006, the Company's book value stood at $20.74 per share versus $19.98 per share at December 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 8.7 percent in the fourth quarter of 2006 from 10.0 percent in the fourth quarter of 2005.

During the fourth quarter of 2006, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements" (SAB 108). In accordance with SAB 108, the Company recorded a $4.6 million cumulative increase, net of tax of $2.5 million, to retained earnings as of January 1, 2006. The adoption of SAB 108 increased book value per share $0.18 as of this date.

The prior year misstatements related to certain loan origination costs which were expensed rather than capitalized and amortized, expenses which had been accrued that were no longer required, trust fees that had been recorded on a cash basis, and property taxes that were prepaid that had been expensed. Amortization of the aforementioned loan origination costs for 2006 amounted to $0.7 million and was recorded in interest income in the fourth quarter. In addition, during the fourth quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS 158). SFAS 158 requires the net amount by which defined benefit and postretirement benefit obligations are over- or underfunded to be reported on the balance sheet, with the offset to accumulated other comprehensive income. The adoption of SFAS 158 changed the accounting for the Company's defined benefit pension, supplemental pension and postretirement benefit plans. In accordance with SFAS 158, the Company recorded a $5.0 million decrease to accumulated other comprehensive income, net of a deferred tax asset of $2.7 million, as of December 31, 2006. The adoption of SFAS 158 decreased book value per share $0.20 as of this date.

Chemical Financial Corporation is the third largest bank holding company headquartered in Michigan. The Company operates through a single subsidiary bank, Chemical Bank, with 127 banking offices spread over 31 counties in the lower peninsula of Michigan. At December 31, 2006, the Company had total assets of $3.79 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.


 Consolidated Statements of Financial Position (Unaudited)
 Chemical Financial Corporation


                                           December 31,   December 31,
(In thousands, except per share data)          2006           2005
 ---------------------------------------------------------------------
 Assets:
 Cash and due from banks                   $   135,544    $   145,575
 Federal funds sold                             49,500          6,600
 Interest-bearing deposits with
  unaffiliated banks                             5,712          5,321
 Investment securities - available for
  sale                                         520,867        594,491
 Investment securities - held to maturity       94,564        127,806
                                           -----------    -----------
  Total Investment Securities                  615,431        722,297
 Other securities                               22,131         21,051
 Loans held for sale                             5,667          3,519
 Loans:
 Commercial loans                              545,591        517,852
 Real estate commercial loans                  726,554        704,684
 Real estate construction loans                145,933        158,376
 Real estate residential loans                 835,263        785,160
 Consumer loans                                554,319        540,623
                                           -----------    -----------
  Total Loans                                2,807,660      2,706,695
 Less: Allowance for loan losses                34,098         34,148
                                           -----------    -----------
  Net Loans                                  2,773,562      2,672,547

 Premises and equipment                         49,475         45,058
 Intangible assets                              78,906         71,496
 Interest receivable and other assets           53,319         55,852
                                           -----------    -----------
  Total Assets                             $ 3,789,247    $ 3,749,316
                                           ===========    ===========
 Liabilities:
 Noninterest-bearing deposits              $   551,177    $   542,014
 Interest-bearing deposits                   2,346,908      2,277,866
                                           -----------    -----------
  Total Deposits                             2,898,085      2,819,880
 Interest payable and other liabilities         22,159         28,008
 Securities sold under agreements to
  repurchase                                   178,969        125,598
 Reverse repurchase agreements                      --         10,000
 Federal Home Loan Bank advances -
  short-term                                    30,000         68,000
 Federal Home Loan Bank advances -
  long-term                                    145,072        196,765
                                           -----------    -----------
  Total Liabilities                          3,274,285      3,248,251
 Shareholders' Equity:
  Common stock, $1 par value                    24,828         25,079
  Surplus                                      368,554        376,046
  Retained earnings                            130,530        106,507
  Accumulated other comprehensive loss          (8,950)        (6,567)
                                           -----------    -----------
   Total Shareholders' Equity                  514,962        501,065
                                           -----------    -----------
   Total Liabilities and Shareholders'
    Equity                                 $ 3,789,247    $ 3,749,316
                                           ===========    ===========

 Consolidated Statements of Income (Unaudited)
 Chemical Financial Corporation

                               Three Months Ended  Twelve Months Ended
 (In thousands, except per        December 31          December 31
 share data)                    2006      2005       2006      2005
 ---------------------------------------------------------------------
 Interest Income:
 Interest and fees on loans   $ 48,571  $ 43,775   $185,598  $164,830
 Interest on investment
  securities:
  Taxable                        5,867     6,535     24,391    28,289
  Nontaxable                       665       602      2,557     2,153
                              --------  --------   --------  --------
   Total Interest on
    Investment Securities        6,532     7,137     26,948    30,442
 Dividends on other
  securities                       401       222      1,268       927
 Interest on federal funds
  sold                             618       535      2,975     2,121
 Interest on deposits with
  unaffiliated banks                77       243        634       984
                              --------  --------   --------  --------
   Total Interest Income        56,199    51,912    217,423   199,304

 Interest Expense:
 Interest on deposits           19,509    13,110     69,095    44,632
 Interest on securities sold
  under agreements to
  repurchase                     1,632       759      5,561     2,162
 Interest on reverse
  repurchase agreements             --        93        154       216
 Interest on Federal Home
  Loan Bank advances -
  short-term                       406       374      2,707       643
 Interest on Federal Home
  Loan Bank advances -
  long-term                      1,963     2,516      7,670     9,800
                              --------  --------   --------  --------
   Total Interest Expense       23,510    16,852     85,187    57,453
                              --------  --------   --------  --------
   Net Interest Income          32,689    35,060    132,236   141,851
 Provision for loan losses       2,590     1,325      5,200     4,285
                              --------  --------   --------  --------
   Net Interest Income after
    Provision for Loan Losses   30,099    33,735    127,036   137,566

 Noninterest Income:
 Service charges on deposit
  accounts                       5,232     5,235     20,993    20,371
 Trust and investment
  services revenue               2,062     1,946      7,906     7,909
 Other charges and fees for
  customer services              2,330     1,899      9,025     7,883
 Mortgage banking revenue          353       371      1,742     1,663
 Gain on the sale of loans       1,053        --      1,053        --
 Net gains/(losses) on sales
  of investment securities      (1,330)     (633)    (1,330)      541
 Other                             201       220        758       853
                              --------  --------   --------  --------
   Total Noninterest Income      9,901     9,038     40,147    39,220

 Operating Expenses:
 Salaries, wages and employee
  benefits                      13,426    13,225     56,012    56,766
 Occupancy and equipment         4,711     4,535     18,702    18,288
 Other                           5,344     6,118     23,160    23,409
                              --------  --------   --------  --------
   Total Operating Expenses     23,481    23,878     97,874    98,463
                              --------  --------   --------  --------
 Income Before Income Taxes     16,519    18,895     69,309    78,323

   Provision for federal
    income taxes                 5,291     6,341     22,465    25,445
                              --------  --------   --------  --------
 Net Income                   $ 11,228  $ 12,554   $ 46,844  $ 52,878
                              ========  ========   ========  ========
 Net income per share:
  Basic                       $   0.45  $   0.50   $   1.88  $   2.10
  Diluted                         0.45      0.50       1.88      2.10

 Cash dividends per share     $  0.275  $  0.265   $  1.100  $  1.060

 Average shares outstanding:
  Basic                         24,814    25,085     24,921    25,138
  Diluted                       24,845    25,137     24,955    25,193


 Financial Summary (Unaudited)
 Chemical Financial Corporation

                        Three Months Ended      Twelve Months Ended
 (Dollars in               December 31             December 31
  thousands)             2006        2005        2006        2005
 ---------------------------------------------------------------------
 Average Balances
 Total assets         $3,780,518  $3,770,911  $3,763,067  $3,788,469
 Total interest-
  earning assets       3,531,762   3,534,262   3,521,489   3,550,695
 Total loans           2,831,536   2,706,300   2,767,114   2,641,465
 Total deposits        2,888,243   2,847,645   2,861,916   2,886,209
 Total interest-
  bearing liabilities  2,697,451   2,692,834   2,692,410   2,718,267
 Total shareholders'
  equity                 511,891     498,745     505,683     493,419


                          Three Months Ended      Twelve Months Ended
                             December 31             December 31
                           2006        2005        2006        2005
 ---------------------------------------------------------------------
 Key Ratios (annualized
  where applicable)
 Net interest margin
  (taxable equivalent
  basis)                    3.73%       3.99%       3.82%       4.04%
 Efficiency ratio           54.4%       53.6%       56.1%       54.2%
 Return on average assets   1.18%       1.32%       1.24%       1.40%
 Return on average
  shareholders' equity       8.7%       10.0%        9.3%       10.7%
 Average shareholders'
  equity as a percent of
  average assets            13.5%       13.2%       13.4%       13.0%
 Tangible shareholders'
  equity as a percent of
  total assets                                      11.8%       11.7%
 Total risk-based capital
  ratio                                             17.6%       17.8%


                   Dec. 31   Sept. 30   June 30   March 31  Dec. 31
                     2006      2006       2006      2006      2005
 ------------------------------------------------------------------
 Credit Quality
  Statistics
 Nonaccrual loans   $20,239   $23,113   $17,636   $13,902   $14,561
 Loans 90 or more
  days past due
  and still
  accruing            6,671     9,505     9,618     5,773     5,136
 Total
  nonperforming
  loans              26,910    32,618    27,254    19,675    19,697
 Repossessed
  assets (RA)         8,852    10,062     9,615     7,905     6,801
 Total
  nonperforming
  assets             35,762    42,680    36,869    27,580    26,498
 Net loan charge-
  offs (year-to-
  date)               5,650     1,810     1,370       454     4,303

 Allowance for
  loan losses as
  a percent of
  total loans          1.21%     1.25%     1.22%     1.27%     1.26%
 Allowance for
  loan losses as a
  percent of
  nonperforming
  loans                 127%      108%      123%      174%      173%
 Nonperforming
  loans as a
  percent of
  total loans          0.96%     1.16%     0.99%     0.73%     0.73%
 Nonperforming
  assets as a
  percent of
  total loans
  plus RA              1.27%     1.51%     1.33%     1.02%     0.98%
 Nonperforming
  assets as a
  percent of total
  assets               0.94%     1.11%     0.99%     0.74%     0.71%
 Net loan
  charge-offs as
  a percent of
  average loans
  (year-to-date,
  annualized)          0.20%     0.09%     0.10%     0.07%     0.16%


                   Dec. 31   Sept. 30   June 30   March 31  Dec. 31
                     2006      2006       2006      2006      2005
 ------------------------------------------------------------------
 Additional Data
 - Intangibles
 Goodwill           $70,129   $70,999   $63,293   $63,293   $63,293
 Core deposits and
  other intangibles   6,379     7,030     4,743     5,246     5,780
 Mortgage servicing
  rights (MSR)        2,398     2,533     2,193     2,283     2,423
 Amortization of
  intangibles
  (quarter-to-date)     857       618       683       718       776


 Selected Quarterly Information (Unaudited)
 Chemical Financial Corporation

                      4th Qtr.  3rd Qtr.  2nd Qtr.  1st Qtr.  4th Qtr.
                        2006      2006      2006      2006      2005
 ---------------------------------------------------------------------
 Summary of Operations
 (In thousands)
 Interest income       $56,199   $55,556   $53,391   $52,277   $51,912
 Interest expense       23,510    22,817    20,174    18,686    16,852
 Net interest income    32,689    32,739    33,217    33,591    35,060
 Provision for loan
  losses                 2,590     1,750       400       460     1,325
 Net interest income
  after provision
  for loan losses       30,099    30,989    32,817    33,131    33,735
 Noninterest income      9,901     9,896    10,518     9,832     9,038
 Noninterest expense    23,481    24,196    25,076    25,121    23,878
 Income taxes            5,291     5,199     6,030     5,945     6,341
 Net income             11,228    11,490    12,229    11,897    12,554

 ---------------------------------------------------------------------
 Per Common Share Data
 Net income:
  Basic                $  0.45   $  0.46   $  0.49   $  0.47   $  0.50
  Diluted                 0.45      0.46      0.49      0.47      0.50
 Cash dividends          0.275     0.275     0.275     0.275     0.265
 Book value              20.74     20.51     20.14     20.10     19.98
CONTACT:  Chemical Financial Corporation
          Lori A. Gwizdala, CFO
          (989) 839-5358