Menu

Press Release

Chemical Financial Corporation Reports Fourth Quarter 2007 Earnings

Company Release - 1/28/2008 8:02 AM ET

MIDLAND, Mich., Jan. 28, 2008 (PRIME NEWSWIRE) -- Chemical Financial Corporation's (Nasdaq:CHFC) Board of Directors today announced 2007 fourth quarter net income of $9.8 million, or $0.41 per diluted share, versus net income of $11.2 million, or $0.45 per diluted share, in the fourth quarter of 2006.

Net income was $39.0 million, or $1.60 per diluted share, for the twelve months ended December 31, 2007, compared to net income of $46.8 million, or $1.88 per diluted share, for the twelve months ended December 31, 2006.

"Although net interest income increased slightly over last year's fourth quarter, a higher provision for loan losses and higher operating expenses more than offset gains in net interest income and noninterest income," said David B. Ramaker, Chairman, President and Chief Executive Officer of Chemical Financial Corporation. "Although we have no direct exposure to subprime loans, overall credit quality remains a primary concern, with nonperforming loans more than doubling during the year as Michigan's already struggling economy continued to deteriorate in tandem with the slowdown in the national economy. We continue to proactively identify and address problem credits Company-wide.

"We continue to expect that, based on initial results we are experiencing, the investments we are making in talent, training and development, which focus primarily on front line customer relationship sales and service enhancements, will generate revenue growth going forward," added Ramaker.

The Company's previously announced retail banking reorganization, which involved realigning its 15 community bank structure into four regions while consolidating numerous back office and support functions, has been completed. During the fourth quarter of 2007, the Company incurred only $40,000 in expenses related to the completion of the reorganization, resulting in a total of approximately $1.7 million of reorganization expenses incurred during 2007.

Total assets were $3.75 billion at December 31, 2007, down from $3.82 billion at September 30, 2007 and $3.79 billion at December 31, 2006. At December 31, 2007, total loans were $2.80 billion, down slightly from $2.81 billion at September 30, 2007 and $2.81 billion at December 31, 2006. Over the past twelve months, increases in real estate commercial and residential loans have offset declines in commercial, real estate construction and consumer loans. Investment securities were $595 million at December 31, 2007, down from $632 million at September 30, 2007 and $615 million at December 31, 2006.

Total deposits were $2.88 billion at December 31, 2007, down from $2.97 billion at September 30, 2007 and $2.90 billion at December 31, 2006. Wholesale borrowings, solely Federal Home Loan Bank advances, totaled $150 million at December 31, 2007, up 20 percent from $125 million at September 30, 2007, although down 14 percent from $175.1 million at December 31, 2006.

Net interest income was $33.4 million in the fourth quarter of 2007, an increase of 2.2 percent from fourth quarter 2006 net interest income of $32.7 million. The increase in net interest income was attributable primarily to an increase in net interest margin. The net interest margin (on a tax-equivalent basis) in the fourth quarter of 2007 was 3.86 percent, up from 3.73 percent in the fourth quarter of 2006, and 3.68 percent in the third quarter of 2007. The increase in net interest margin was primarily attributable to decreases in rates paid on interest-bearing liabilities exceeding decreases in rates earned on interest-earning assets, as the benefits from declines in short-term interest rates during the second half of 2007 were more fully reflected across asset and liability categories during the fourth quarter.

The provision for loan losses was $4.5 million in the fourth quarter of 2007, compared to $2.9 million in the third quarter of 2007 and $2.6 million in the fourth quarter of 2006. For 2007, the provision for loan losses was $11.5 million, more than double the $5.2 million provision for loan losses in 2006. Net loan charge-offs were $3.4 million in the fourth quarter of 2007, compared to $0.8 million in the third quarter of 2007 and $3.8 million in the fourth quarter of 2006. For 2007, net loan charge-offs were $6.2 million, compared to $5.7 million in 2006. The increase in the provision for loan losses in the fourth quarter of 2007, as compared to the previous quarter, was attributable to higher net loan losses, higher impairment reserves and higher nonperforming loans and was also reflective of continued declines in real estate values in the markets the Company serves. The allowance for loan losses of $39.4 million at December 31, 2007 was 1.41 percent of total loans, up from 1.36 percent of total loans at September 30, 2007 and 1.21 percent of total loans at December 31, 2006. The allowance for loan losses allocated to impaired loans was $4.6 million at December 31, 2007, compared to $3.2 million at September 30, 2007 and $0.9 million at December 31, 2006. At December 31, 2007, nonperforming loans as a percentage of total loans were 2.26 percent, up from 1.90 percent at September 30, 2007 and up substantially from 0.96 percent at December 31, 2006.

At December 31, 2007, nonperforming assets totaled $74.5 million, up from $62.8 million at September 30, 2007 and up significantly from $35.8 million at December 31, 2006. The increase in nonperforming assets from the previous quarter end was primarily attributable to two residential real estate development loans totaling $9.3 million transferred to nonaccrual status in the fourth quarter. One loan in the amount of $3.2 million is secured by a residential condominium project located in western Michigan. At December 31, 2007, the Company established a $1 million impairment reserve on this loan, as the fair value of the collateral of this loan was determined to be less than the principal balance of the loan. The second loan in the amount of $6.1 million is secured by a luxury condominium project and marina in southwest Michigan. At December 31, 2007, the Company established a $0.27 million impairment reserve on this loan, as the fair value of the collateral of this loan was determined to be slightly less than the principal balance of the loan.

The allowance for loan losses as a percent of nonperforming loans has decreased from 127 percent at December 31, 2006 to 62 percent at December 31, 2007. A significant portion of the Company's nonperforming loans at December 31, 2007 involve specific real estate commercial loans which have been analyzed and deemed to have sufficient collateral values so as not to require allocation of the allowance for loan losses to these loans.

Total noninterest income was $10.8 million in the fourth quarter of 2007, up $0.9 million, or 9.4 percent, from $9.9 million in the fourth quarter of 2006, but down from $11.1 million in the third quarter of 2007. The increase over the prior year's quarter was primarily attributable to slightly higher service charges on deposit accounts, fees for customer services and mortgage banking revenue. The decline in noninterest income in the fourth quarter of 2007, compared to the third quarter of 2007, was primarily attributable to a decrease in other income due to noninterest income in the third quarter of 2007 including a $1 million gain on an insurance settlement received for fire damage to a branch building.

Due in part to the expenses incurred with the Company's retail banking reorganization, as described above, operating expenses increased from $97.9 million in 2006 to $104.7 million in 2007. During the fourth quarter of 2007, operating expenses were $25.5 million, up $2.0 million, or 9 percent, from the fourth quarter of 2006, and up $0.3 million, or 1 percent, from $25.2 million in the third quarter of 2007. The Company's efficiency ratio was 56.9 percent in the fourth quarter of 2007, up from 54.4 percent in the fourth quarter of 2006, although down from 57.1 percent in the third quarter of 2007. The change in the efficiency ratio from the prior year is primarily attributable to the increase in operating expenses.

The Corporation's effective federal income tax rate was 30.9 percent in the fourth quarter of 2007, compared to 32.0 percent in the fourth quarter of 2006, and 31.8 percent compared to 32.4 percent for the years ended December 31, 2007 and December 31, 2006, respectively. The difference between the federal statutory income tax rate and the Corporation's effective federal income tax rate is primarily a function of the proportion of the Corporation's interest income exempt from federal taxation, nondeductible interest expense and other nondeductible expenses relative to pretax income and tax credits.

The Company's return on average assets during the fourth quarter of 2007 was 1.04 percent, down from 1.18 percent in the fourth quarter of 2006 and 1.10 percent in the third quarter of 2007. The decline in return on assets resulted in a decline in return on average equity to 7.8 percent in the fourth quarter of 2007 from 8.6 percent in the fourth quarter of 2006. At December 31, 2007, the Company's book value stood at $21.35 per share versus $20.46 per share at December 31, 2006.

During the fourth quarter of 2007, the Company repurchased 137,700 shares of its common stock at an average price of $23.37 per share; bringing total share repurchases for the year 2007 to 1,023,000 shares. On January 22, 2008, the Board of Directors authorized management, in its discretion, to purchase up to 500,000 shares of the Corporation's common stock.

Chemical Financial Corporation is the third-largest bank holding company headquartered in Michigan. The Company operates through a single subsidiary bank, Chemical Bank, with 129 banking offices spread over 31 counties in the lower peninsula of Michigan. At December 31, 2007, the Company had total assets of $3.75 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 that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Chemical Financial Corporation itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "judgment," "plans," "predicts," "projects," "should," "will," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") 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. Chemical Financial Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

Risk factors include, but are not limited to, the risk factors described in Item 1A in Chemical Financial Corporation's annual report on Form 10-K for the year ended December 31, 2006; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized fully or at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.


 Consolidated Statements of Financial Position (Unaudited)
 Chemical Financial Corporation
                                                     December 31,
                                                  2007          2006
 ---------------------------------------------------------------------
 Assets:
 Cash and cash due from banks                 $  125,285    $  135,544
 Federal funds sold                               58,000        49,500
 Interest-bearing deposits with
  unaffiliated banks                               6,228         5,712
 Investment securities - available for sale      503,271       520,867
 Investment securities - held to maturity         91,243        94,564
 Other securities                                 22,135        22,131
 Loans held for sale                               7,883         5,667
 Loans:
     Commercial loans                            525,894       545,591
     Real estate commercial loans                747,400       726,554
     Real estate construction loans              137,252       145,933
     Real estate residential loans               838,545       835,263
     Consumer loans                              550,343       554,319
                                              ----------    ----------
       Total Loans                             2,799,434     2,807,660
 Less: Allowance for loan losses                  39,422        34,098
                                              ----------    ----------
       Net Loans                               2,760,012     2,773,562
 Premises and equipment                           49,930        49,475
 Goodwill                                         69,908        70,129
 Other intangible assets                           6,876         8,777
 Interest receivable and other assets             53,542        53,319
                                              ----------    ----------
       Total Assets                           $3,754,313    $3,789,247
                                              ==========    ==========
 Liabilities:
 Noninterest-bearing deposits                 $  535,705    $  551,177
 Interest-bearing deposits                     2,339,884     2,346,908
                                              ----------    ----------
       Total Deposits                          2,875,589     2,898,085
 Interest payable and other liabilities           22,848        29,235
 Short-term borrowings                           197,363       208,969
 Federal Home Loan Bank advances - long-term     150,049       145,072
                                              ----------    ----------
       Total Liabilities                       3,245,849     3,281,361
 Shareholders' Equity:
     Common stock, $1 par value per share         23,815        24,828
     Surplus                                     344,579       368,554
     Retained earnings                           141,867       123,454
     Accumulated other comprehensive loss         (1,797)       (8,950)
                                              ----------    ----------
       Total Shareholders' Equity                508,464       507,886
                                              ----------    ----------
       Total Liabilities and
        Shareholders' Equity                  $3,754,313    $3,789,247
                                              ==========    ==========

 Consolidated Statements of Income (Unaudited)
 Chemical Financial Corporation

 (In thousands, except per share data)

                             Three Months Ended    Twelve Months Ended
                                 December 31           December 31
                               2007       2006       2007       2006
 ---------------------------------------------------------------------
 Interest Income:
 Interest and fees
  on loans                  $ 47,630   $ 48,571    $191,480   $185,598
 Interest on investment
  securities:
   Taxable                     6,260      5,867      24,927     24,391
   Tax-exempt                    701        665       2,719      2,557
 Dividends on other
  securities                     361        401       1,116      1,268
 Interest on federal
  funds sold                     640        618       5,135      2,975
 Interest on deposits
  with unaffiliated banks        134         77         517        634
                            --------   --------    --------   --------
   Total Interest Income      55,726     56,199     225,894    217,423

 Interest Expense:
 Interest on deposits         18,944     19,509      81,234     69,095
 Interest on short-term
  borrowings                   1,596      2,038       7,327      8,422
 Interest on Federal Home
  Loan Bank advances
  - long-term                  1,764      1,963       7,244      7,670
                            --------   --------    --------   --------
   Total Interest Expense     22,304     23,510      95,805     85,187
                            --------   --------    --------   --------
   Net Interest Income        33,422     32,689     130,089    132,236
 Provision for loan losses     4,475      2,590      11,500      5,200
                            --------   --------    --------   --------
   Net Interest Income
    after provision for
    Loan Losses               28,947     30,099     118,589    127,036

 Noninterest Income:
 Service charges on
  deposit accounts             5,306      5,232      20,549     20,993
 Trust and investment
  services revenue             2,126      2,062       8,347      7,906
 Other charges and fees
  for customer services        2,539      2,330       9,750      9,025
 Mortgage banking revenue        470        353       2,117      1,742
 Gains on the sale of
  acquired loans                  --      1,053          --      1,053
 Investment securities
  gains (losses)                  --     (1,330)          4     (1,330)
 Other                           391        201       2,521        758
                            --------   --------    --------   --------
   Total Noninterest
    Income                    10,832      9,901      43,288     40,147

 Operating Expenses:
 Salaries, wages and
  employee benefits           14,033     13,426      59,008     56,012
 Occupancy                     2,451      2,245      10,172      9,534
 Equipment                     2,301      2,289       8,722      8,842
 Other                         6,737      5,521      26,769     23,486
                            --------   --------    --------   --------
   Total Operating
    Expenses                  25,522     23,481     104,671     97,874
                            --------   --------    --------   --------
 Income Before Income
  Taxes                       14,257     16,519      57,206     69,309
   Provision for
    federal income taxes       4,411      5,291      18,197     22,465
                            --------   --------    --------   --------
 Net Income                 $  9,846   $ 11,228    $ 39,009   $ 46,844
                            ========   ========    ========   ========
 Net income per share:
   Basic                    $   0.41   $   0.45    $   1.60   $   1.88
   Diluted                      0.41       0.45        1.60       1.88

 Cash dividends
  per share                 $  0.285   $  0.275    $  1.140   $  1.100

 Average shares
  outstanding:
   Basic                      23,884     24,814      24,360     24,921
   Diluted                    23,893     24,845      24,371     24,955


 Financial Summary (Unaudited)
 Chemical Financial Corporation

 (Dollars in thousands)
                          Three Months Ended     Twelve Months Ended
                             December 31             December 31
                           2007        2006        2007        2006
 ---------------------------------------------------------------------
 Average Balances
 ----------------
 Total assets           $3,741,603  $3,780,518  $3,785,034  $3,763,067
 Total interest-earning
  assets                 3,510,614   3,531,762   3,551,867   3,521,489
 Total loans             2,814,004   2,831,536   2,805,880   2,767,114
 Total deposits          2,883,060   2,888,243   2,923,004   2,861,916
 Total interest-bearing
  liabilities            2,677,572   2,697,451   2,718,814   2,692,410
 Total shareholders'
  equity                   502,260     516,434     505,915     510,255

 Key Ratios (annualized
  where applicable)
 ----------------------
 Net interest margin (taxable
  equivalent basis)           3.86%       3.73%       3.73%       3.82%
 Efficiency ratio             56.9%       54.4%       59.6%       56.1%
 Return on average assets     1.04%       1.18%       1.03%       1.24%
 Return on average
  shareholders' equity        7.8%        8.6%        7.7%        9.2%
 Average shareholders'
  equity as a percent of
  average assets              13.4%       13.7%       13.4%       13.6%
 Tangible shareholders'
  equity as a percent of
  total assets                                        11.7%       11.6%
 Total risk-based capital ratio                       17.3%       17.5%


                          Dec. 31  Sept. 30  June 30  March 31  Dec. 31
                            2007     2007     2007      2007     2006
 ---------------------------------------------------------------------
 Credit Quality Statistics
 -------------------------
 Nonaccrual loans          $55,596  $40,341  $36,119  $28,748  $20,239
 Loans 90 or more days
  past due and still
  accruing                   7,764   13,282   11,704    6,441    6,671
 Total nonperforming loans  63,360   53,623   47,823   35,189   26,910
 Repossessed assets (RA)    11,132    9,164    9,177    9,250    8,852
 Total nonperforming
  assets                    74,492   62,787   57,000   44,439   35,762
 Net loan charge-offs
  (year-to-date)             6,176    2,737    1,969      707    5,650

 Allowance for loan losses
  as a percent of total
  loans                       1.41%    1.36%    1.30%    1.25%    1.21%
 Allowance for loan losses
  as a percent of non-
  performing loans              62%      72%      76%     100%     127%
 Nonperforming loans as a
  percent of total loans      2.26%    1.90%    1.71%    1.26%    0.96%
 Nonperforming assets as a
  percent of total loans
  plus RA                     2.65%    2.22%    2.03%    1.58%    1.27%
 Nonperforming assets as a
  percent of total assets     1.98%    1.64%    1.51%    1.16%    0.94%
 Net loan charge-offs as a
  percent of average loans
 (year-to-date, annualized)   0.22%    0.13%    0.14%    0.10%    0.20%

 Additional Data
  - Intangibles
 ---------------
 Goodwill                  $69,908  $69,908  $69,908  $69,908  $70,129
 Core deposit intangibles    4,593    5,024    5,455    5,886    6,379
 Mortgage servicing
  rights (MSR)               2,283    2,300    2,302    2,299    2,398
 Amortization of
  intangibles (quarter only)   731      651      665      734      857


 Nonperforming Assets (Unaudited)
 Chemical Financial Corporation

 (Dollars in thousands)

                       Dec. 31  Sept. 30   June 30  March 31  Dec. 31
                        2007      2007      2007      2007      2006
 ---------------------------------------------------------------------
 Nonaccrual loans:
  Commercial           $10,961   $ 6,735   $ 5,810   $ 4,891   $ 4,203
  Real estate
   commercial           19,672    19,664    19,163    14,621     9,612
  Real estate
   construction         12,979     4,573     4,483     3,283     2,552
  Real estate
   residential           8,516     7,244     4,967     4,660     2,887
  Consumer               3,468     2,125     1,696     1,293       985
 ---------------------------------------------------------------------
   Total nonaccrual
    loans               55,596    40,341    36,119    28,748    20,239
 Accruing loans con-
  tractually past due
  90 days or more as to
  interest or principal
  payments:
   Commercial            1,958     1,867     1,564     2,030     1,693
   Real estate
    commercial           4,170     5,367     5,561     2,342     2,232
   Real estate
    construction            --     1,076       884        --       174
   Real estate
    residential          1,470     3,918     2,352     1,350     1,158
   Consumer                166     1,054     1,343       719     1,414
 ---------------------------------------------------------------------
    Total accruing loans
     contractually past
     due 90 days or more
     as to interest or
     principal payments  7,764    13,282    11,704     6,441     6,671
 ---------------------------------------------------------------------
 Total nonperforming
  loans                 63,360    53,623    47,823    35,189    26,910
 Other real estate and
  repossessed assets    11,132     9,164     9,177     9,250     8,852
 ---------------------------------------------------------------------
 Total nonperforming
  assets               $74,492   $62,787   $57,000   $44,439   $35,762
 =====================================================================


 Summary of Loan Loss Experience (Unaudited)
 Chemical Financial Corporation

 (Dollars in thousands)

                                      Three Months Ended
                       -----------------------------------------------
                       Dec. 31  Sept. 30   June 30  March 31  Dec. 31
                        2007      2007      2007      2007      2006
 ---------------------------------------------------------------------
 Allowance for loan
  losses at beginning
  of period            $38,386   $36,254   $35,016   $34,098   $35,348
 Loans charged off:
  Commercial              (550)     (208)     (435)     (429)   (1,056)
  Real estate
   commercial           (1,415)       --      (186)      (74)     (964)
  Real estate
   construction           (850)     (134)     (221)      (67)   (1,201)
  Real estate
   residential            (306)      (64)      (96)      (18)     (108)
  Consumer                (596)     (501)     (488)     (350)     (677)
 ---------------------------------------------------------------------
   Total loan
    charge-offs         (3,717)     (907)   (1,426)     (938)   (4,006)
 Recoveries of loans
  previously charged
  off:
   Commercial               90        18        42        99        52
   Real estate
    commercial               1        19        --         1         1
   Real estate
    construction            30        --        --        --        --
   Real estate
    residential             12         4         1         1        --
   Consumer                145        98       121       130       113
 ---------------------------------------------------------------------
    Total loan recoveries  278       139       164       231       166
 ---------------------------------------------------------------------
   Net loan charge-offs (3,439)     (768)   (1,262)     (707)   (3,840)
 Provision for loan
  losses                 4,475     2,900     2,500     1,625     2,590
 ---------------------------------------------------------------------
 Allowance for loan
  losses at end
  of period            $39,422   $38,386   $36,254   $35,016   $34,098
 =====================================================================

 Selected Quarterly Information (Unaudited)
 Chemical Financial Corporation

 (In thousands, except per share data)

                       4th Qtr.  3rd Qtr.  2nd Qtr.  1st Qtr.  4th Qtr.
                         2007      2007      2007      2007      2006
 ---------------------------------------------------------------------
 Summary of Operations
 Interest income       $55,726   $57,157   $57,086   $55,925   $56,199
 Interest expense       22,304    24,684    24,666    24,151    23,510
 Net interest income    33,422    32,473    32,420    31,774    32,689
 Provision for loan
  losses                 4,475     2,900     2,500     1,625     2,590
 Net interest income
  after provision for
  loan losses           28,947    29,573    29,920    30,149    30,099
 Noninterest income     10,832    11,057    11,356    10,043     9,901
 Noninterest expense    25,522    25,170    27,221    26,758    23,481
 Income taxes            4,411     4,850     4,543     4,393     5,291
 Net income            $ 9,846   $10,610   $ 9,512   $ 9,041   $11,228

 ---------------------------------------------------------------------
 Per Common Share Data
 Net income:
  Basic                $  0.41   $  0.44   $  0.39   $  0.36   $  0.45
  Diluted                 0.41      0.44      0.39      0.36      0.45
 Cash dividends          0.285     0.285     0.285     0.285     0.275
 Book value              21.35     21.04     20.79     20.86     20.46
CONTACT: Chemical Financial Corporation
         Lori A. Gwizdala, CFO
         989-839-5358