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Press Release

Chemical Financial Corporation Reports Third Quarter 2008 Results

Company Release - 10/27/2008 7:22 AM ET

MIDLAND, Mich., Oct. 27, 2008 (GLOBE NEWSWIRE) -- Chemical Financial Corporation (Nasdaq:CHFC) today announced a third quarter 2008 net loss of $1.0 million, or $0.04 per diluted share, versus net income of $10.6 million, or $0.44 per diluted share, in the third quarter of 2007.

Net income was $18.3 million, or $0.77 per diluted share, for the nine months ended September 30, 2008, compared to net income of $29.2 million, or $1.19 per diluted share, for the nine months ended September 30, 2007.

"Although third quarter net interest income was up significantly due primarily to our net interest margin increasing 52 basis points from the prior year's quarter, the increase was insufficient to overcome the previously disclosed $22 million loan loss provision we incurred during the quarter. The significantly higher provision resulted from the combination of deteriorating credit quality and a $10.1 million loss attributable to a single borrower engaged in a fraudulent loan transaction. The fraud loss, by itself, had a negative impact of $0.29 per share, after-tax, on our reported earnings," said David B. Ramaker, Chairman, Chief Executive Officer and President of Chemical Financial Corporation.

"The rapid deterioration in the national economy over the past quarter has had a significant impact on Michigan's struggling economy, which has translated into increases in loan losses, loan delinquencies and nonperforming assets. As a result, we increased our loan loss reserves. We felt that this action was necessary in the current environment, but are not satisfied with our reported earnings this quarter," noted Ramaker.

"At the same time, our strong balance sheet, healthy capital position and sufficient liquidity have left Chemical Financial well positioned even in this difficult economic environment. Earlier this month, the Board declared a quarterly dividend of $0.295 per share for the fourth quarter of 2008, a reflection of the Company's belief that our earnings potential is high and our capital position strong. In fact, at quarter's end, our Leverage and Tier One Risk-Based capital ratios remained more than double the regulatory benchmarks for well-capitalized institutions. Despite the struggles faced by the national and Michigan economies, we are poised to not only weather the current economic crisis, but to capitalize on opportunities which present themselves," added Ramaker.

Net interest income was $36.72 million in the third quarter of 2008, an increase of $4.25 million, or 13.1 percent, from third quarter 2007 net interest income of $32.47 million and an increase of $1.08 million, or 3.0 percent, from second quarter 2008 net interest income of $35.64 million. The increases in net interest income were attributable primarily to the increases in net interest margin. The net interest margin (on a tax-equivalent basis) in the third quarter of 2008 was 4.20 percent, up substantially from 3.68 percent in the third quarter of 2007 and up from 4.11 percent in the second quarter of 2008. The increases in net interest margin were primarily attributable to decreases in rates paid on interest-bearing liabilities exceeding decreases in rates earned on interest-earning assets, as deposits repriced more rapidly than loans in the falling interest rate environment experienced in the past 12 months.

Total assets were $3.79 billion at September 30, 2008, up slightly from $3.75 billion at December 31, 2007 and down from $3.82 billion at September 30, 2007. At September 30, 2008, total loans were $2.93 billion, versus $2.80 billion at December 31, 2007 and $2.81 billion at September 30, 2007. Federal funds sold were $2 million at September 30, 2008, down from $58 million at December 31, 2007 and $88 million at September 30, 2007. Investment securities were $566 million at September 30, 2008, down from $595 million at December 31, 2007 and down from $632 million at September 30, 2007. During the first nine months of 2008, the Company utilized excess liquidity to fund approximately $129 million in loan growth and reduce wholesale borrowings.

Total deposits were $2.94 billion at September 30, 2008, up slightly from $2.88 billion at December 31, 2007, although down from $2.97 billion at September 30, 2007. Long-term wholesale borrowings, comprised of Federal Home Loan Bank advances, totaled $90 million at September 30, 2008, down $60 million, or 40 percent, from $150 million at December 31, 2007 and down $35 million, or 28 percent, from $125 million at September 30, 2007.

The provision for loan losses was $22.0 million in the third quarter of 2008, compared to $6.5 million in the second quarter of 2008 and $2.9 million in the third quarter of 2007. Included in the provision for the third quarter of 2008 was $10.1 million attributable to the previously disclosed fraudulent loan transaction. Absent this event, the provision for the third quarter of 2008 would have been $11.9 million. Net loan charge-offs were $15.3 million in the third quarter of 2008, up substantially from $6.5 million in the second quarter of 2008 and $0.8 million in the third quarter of 2007. The increase in charge-offs in the third quarter of 2008, as compared to the second quarter of 2008, was due primarily to the fraudulent loan transaction. Absent this transaction, net charge-offs in the third quarter of 2008 would have been $5.2 million.

At September 30, 2008, nonperforming assets totaled $98.4 million, up from $87.8 million at June 30, 2008 and up from $62.8 million at September 30, 2007. Nonperforming loans were $82.7 million at September 30, 2008, compared to $71.9 million at June 30, 2008 and $53.6 million at September 30, 2007. At September 30, 2008, nonperforming loans as a percentage of total loans were 2.83 percent, up from 2.52 percent at June 30, 2008 and up from 1.90 percent at September 30, 2007.

The allowance for loan losses of $46.4 million at September 30, 2008 was up 16.9 percent from $39.7 million at June 30, 2008. The allowance at September 30, 2008 was 1.58 percent of total loans, up from 1.39 percent of total loans at June 30, 2008 and up from 1.36 percent of total loans at September 30, 2007. The allowance for loan losses as a percent of nonperforming loans was 56 percent at September 30, 2008, up from 55 percent at June 30, 2008, but down from 72 percent at September 30, 2007. As part of Chemical Financial Corporation's ongoing credit portfolio monitoring program, the Company makes periodic assessments of the quality of each nonperforming credit, the financial condition of the borrower and the value of any underlying collateral to identify potential loss exposure on nonperforming loans. The Company's nonperforming loans at September 30, 2008 included commercial, real estate commercial and residential development construction loans totaling $27.3 million, which have been analyzed and deemed to have sufficient collateral values so as not to require a specific impairment reserve on these loans at September 30, 2008.

Total noninterest income was $10.1 million in the third quarter of 2008, down $1.0 million, or 9.0 percent, from $11.1 million in the third quarter of 2007. The decrease from the prior year's quarter was attributable to the recognition of a $0.4 million other-than-temporary impairment loss on the value of a single issue debt security in the Company's available-for-sale securities portfolio and noninterest income in the third quarter of 2007 including $1.0 million of nonrecurring income from the recognition of insurance proceeds from fire damage to a branch building.

Operating expenses in the third quarter of 2008 were $26.8 million, up $1.6 million, or 6.3 percent, from $25.2 million in the third quarter of 2007. The increase was attributable to higher operating costs incurred across the Company's expense base, particularly in the areas of compensation expense, loan collection costs, other real estate write-downs and operating costs and marketing expenses related to our "Save Michigan" advertising campaign. The Company's efficiency ratio was 56.5 percent in the third quarter of 2008, up from 55.8 percent in the second quarter of 2008 and down from 57.1 percent in the third quarter of 2007. The decrease in the efficiency ratio from the prior year's quarter was primarily attributable to the increase in net interest income.

The Company's effective federal income tax rate was 48.1% in the third quarter of 2008, compared to 31.4% in the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, the Company's effective federal income tax rates were 31.5% and 32.1%, respectively. The differences between the federal statutory income tax rates and the Company's effective federal income tax rates are primarily a function of the proportion of the Company'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 third quarter of 2008 was (0.11) percent, down from 1.03 percent in the second quarter of 2008 and 1.10 percent in the third quarter of 2007. At September 30, 2008, the Company's book value stood at $21.19 per share versus $21.04 per share at September 30, 2007.

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 September 30, 2008, 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.

Safe Harbor Statement

This report 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. Management's determination of the provision and allowance for loan losses involves judgments that are inherently forward-looking. 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, 2007, 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


 (In thousands, except         September 30  December 31  September 30
  per share data)                  2008         2007         2007
 -------------------------------------------------------------------
 Assets:
 Cash and cash equivalents:
  Cash and cash due from banks  $  107,311   $  125,285   $   99,465
  Federal funds sold                 2,000       58,000       88,300
  Interest-bearing deposits
   with unaffiliated banks           4,579        6,228       15,226
                                ----------   ----------   ----------
    Total Cash and Cash
     Equivalents                   113,890      189,513      202,991
 Investment securities:
  Available for sale               455,158      503,271      533,611
  Held to maturity                 111,261       91,243       98,342
                                ----------   ----------   ----------
    Total Investment Securities    566,419      594,514      631,953
 Other securities                   22,142       22,135       22,135
 Loans held for sale                10,861        7,883        7,708

 Loans:
  Commercial                       574,006      515,319      534,503
  Real estate commercial           776,617      760,399      736,443
  Real estate construction         133,615      134,828      138,199
  Real estate residential          831,700      838,545      840,694
  Consumer                         612,433      550,343      565,140
                                ----------   ----------   ----------
   Total Loans                   2,928,371    2,799,434    2,814,979
 Allowance for loan losses         (46,412)     (39,422)     (38,386)
                                ----------   ----------   ----------
   Net Loans                     2,881,959    2,760,012    2,776,593

 Premises and equipment             51,471       49,930       48,293
 Goodwill                           69,908       69,908       69,908
 Other intangible assets             5,594        6,876        7,324
 Interest receivable and
  other assets                      65,842       53,542       55,857
                                ----------   ----------   ----------
   Total Assets                 $3,788,086   $3,754,313   $3,822,762
                                ==========   ==========   ==========

 Liabilities:
 Deposits:
  Noninterest-bearing           $  531,355   $  535,705   $  524,522
  Interest-bearing               2,412,521    2,339,884    2,442,692
                                ----------   ----------   ----------
   Total Deposits                2,943,876    2,875,589    2,967,214
 Interest payable and other
  liabilities                       23,606       22,848       23,285
 Short-term borrowings             224,684      197,363      203,322
 Federal Home Loan Bank
  advances - long-term              90,025      150,049      125,049
                                ----------   ----------   ----------
   Total Liabilities             3,282,191    3,245,849    3,318,870

 Shareholders' Equity:
  Common stock, $1 par value
   per share                        23,877       23,815       23,952
  Surplus                          346,652      344,579      347,569
  Retained earnings                139,037      141,867      138,817
  Accumulated other
   comprehensive loss               (3,671)      (1,797)      (6,446)
                                ----------   ----------   ----------
    Total Shareholders' Equity     505,895      508,464      503,892
                                ----------   ----------   ----------
    Total Liabilities and
     Shareholders' Equity       $3,788,086   $3,754,313   $3,822,762
                                ==========   ==========   ==========


 Consolidated Statements of Income (Unaudited)
 Chemical Financial Corporation

                               Three Months Ended   Nine Months Ended
 (In thousands,                    September 30        September 30
  except per share data)         2008       2007      2008      2007
 ---------------------------------------------------------------------
 Interest Income:
 Interest and fees on loans    $ 45,211   $ 48,346  $135,272  $143,850
 Interest on
  investment securities:
   Taxable                        5,333      6,299    16,645    18,667
   Tax-exempt                       738        688     2,120     2,018
 Dividends on other securities      211        182       795       755
 Interest on federal
  funds sold                        180      1,433     1,610     4,495
 Interest on deposits with
  unaffiliated banks                 15        209       191       383
                               --------   --------  --------  --------
   Total Interest Income         51,688     57,157   156,633   170,168

 Interest Expense:
 Interest on deposits            12,986     21,037    43,047    62,290
 Interest on
  short-term borrowings             482      1,957     1,942     5,731
 Interest on Federal Home Loan
  Bank advances - long-term       1,500      1,690     4,902     5,480
                               --------   --------  --------  --------
   Total Interest Expense        14,968     24,684    49,891    73,501
                               --------   --------  --------  --------
   Net Interest Income           36,720     32,473   106,742    96,667
 Provision for loan losses       22,000      2,900    31,200     7,025
                               --------   --------  --------  --------

   Net Interest Income after
    Provision for Loan Losses    14,720     29,573    75,542    89,642

 Noninterest Income:
 Service charges on
  deposit accounts                5,316      5,039    15,097    15,243
 Trust and investment
  services revenue                1,925      2,034     6,042     6,221
 Other charges and fees for
  customer services               2,618      2,393     7,302     7,211
 Mortgage banking revenue           348        577     1,408     1,647
 Investment securities
  (losses) gains                   (438)        --     1,278         4
 Other                              285      1,014       466     2,130
                               --------   --------  --------  --------
   Total Noninterest Income      10,054     11,057    31,593    32,456

 Operating Expenses:
 Salaries, wages and
  employee benefits              15,075     14,463    44,364    44,975
 Occupancy                        2,472      2,361     7,602     7,721
 Equipment                        2,346      2,065     6,666     6,421
 Other                            6,857      6,281    21,847    20,032
                               --------   --------  --------  --------
   Total Operating Expenses      26,750     25,170    80,479    79,149
                               --------   --------  --------  --------
 Income (Loss) Before
  Income Taxes                   (1,976)    15,460    26,656    42,949
   Federal Income Tax
    Expense (Benefit)              (951)     4,850     8,400    13,786
                               --------   --------  --------  --------
 Net Income (Loss)             $ (1,025)  $ 10,610  $ 18,256  $ 29,163
                               ========   ========  ========  ========

 Net income (loss) per share:
   Basic                       $  (0.04)  $   0.44  $   0.77  $   1.19
   Diluted                        (0.04)      0.44      0.77      1.19

 Cash dividends per share         0.295      0.285     0.885     0.855

 Average shares outstanding:
   Basic                         23,836     24,091    23,827    24,520
   Diluted                       23,858     24,098    23,839    24,532


Financial Summary (Unaudited)
 Chemical Financial Corporation

                          Three Months Ended      Nine Months Ended
                             September 30           September 30
 (Dollars in thousands)    2008        2007       2008        2007
 --------------------------------------------------------------------
 Average Balances
 Total assets           $3,782,391  $3,812,654 $3,777,057  $3,799,670
 Total interest-earning
  assets                 3,542,031   3,576,667  3,544,785   3,565,767
 Total loans             2,898,784   2,813,746  2,841,873   2,803,141
 Total deposits          2,923,912   2,957,407  2,922,438   2,936,466
 Total interest-bearing
  liabilities            2,689,248   2,740,812  2,702,251   2,732,713
 Total shareholders'
  equity                   512,504     499,353    510,893     507,146


                           Three Months Ended     Nine Months Ended
                              September 30          September 30
                            2008        2007      2008        2007
 -------------------------------------------------------------------
 Key Ratios (annualized
  where applicable)
 Net interest margin
  (taxable equivalent
  basis)                      4.20%       3.68%      4.08%       3.68%
 Efficiency ratio             56.5%       57.1%      57.5%       60.5%
 Return on
  average assets             (0.11)%      1.10%      0.65%       1.03%
 Return on average
  shareholders' equity        (0.8)%       8.4%       4.8%        7.7%
 Average shareholders'
  equity as a percent
  of average assets           13.5%       13.1%      13.5%       13.3%
 Tangible shareholders'
  equity as a percent
  of total assets                                    11.6%       11.4%
 Total risk-based
  capital ratio                                      16.7%       17.1%


                         Sept 30  June 30  March 31  Dec 31  Sept 30
                           2008     2008     2008     2007     2007
 -------------------------------------------------------------------
 Credit Quality
  Statistics
 Nonaccrual loans        $69,719  $61,635  $61,360  $55,596  $40,341
 Loans 90 or more days
  past due and
  still accruing          13,012   10,288   10,570    7,764   13,282
 Total nonperforming
  loans                   82,731   71,923   71,930   63,360   53,623
 Repossessed assets (RA)  15,699   15,897   12,664   11,132    9,164
 Total nonperforming
  assets                  98,430   87,820   84,594   74,492   62,787
 Net loan charge-offs
  (year-to-date)          24,210    8,958    2,460    6,176    2,737

 Allowance for loan
  losses as a percent
  of total loans            1.58%    1.39%    1.42%    1.41%    1.36%
 Allowance for loan
  losses as a percent of
  nonperforming loans         56%      55%      55%      62%      72%
 Nonperforming loans as
  a percent of
  total loans               2.83%    2.52%    2.58%    2.26%    1.90%
 Nonperforming assets as
  a percent of total
  loans plus RA             3.34%    3.06%    3.02%    2.65%    2.22%
 Nonperforming assets as
  a percent of
  total assets              2.60%    2.35%    2.23%    1.98%    1.64%
 Net loan charge-offs as
  a percent of average
  loans (year-to-date,
  annualized)               1.14%    0.64%    0.35%    0.22%    0.13%


                         Sept 30  June 30  March 31 Dec 31   Sept 30
                           2008    2008     2008     2007     2007
 -------------------------------------------------------------------
 Additional Data -
  Intangibles
 Goodwill                $69,908  $69,908  $69,908  $69,908  $69,908
 Core deposit intangibles  3,266    3,609    4,062    4,593    5,024
 Mortgage servicing
  rights (MSR)             2,328    2,354    2,280    2,283    2,300
 Amortization of core
  deposit intangibles
  (quarter only)             343      453      531      431      431


 Nonperforming Assets (Unaudited)
 Chemical Financial Corporation

                           Sept 30  June 30  March 31  Dec 31  Sept 30
 (Dollars in thousands)      2008     2008     2008      2007    2007
 --------------------------------------------------------------------
 Nonaccrual loans:
  Commercial              $13,320  $10,918  $11,595  $10,961  $ 6,735
  Real estate
   commercial              24,230   17,915   19,235   19,672   19,664
  Real estate
   construction            14,513   15,157   17,206   12,979    4,573
  Real estate
   residential             12,869   11,955    9,267    8,516    7,244
  Consumer                  4,787    5,690    4,057    3,468    2,125
 --------------------------------------------------------------------
  Total nonaccrual loans   69,719   61,635   61,360   55,596   40,341
 Accruing loans
  contractually past due
  90 days or more as to
  interest or principal
  payments:
   Commercial               1,735    3,130    1,631    1,958    1,867
   Real estate
    commercial              6,586    2,948    2,865    4,170    5,367
   Real estate
    construction            1,096      676      392       --    1,076
   Real estate
    residential             2,910    2,746    4,742    1,470    3,918
   Consumer                   685      788      940      166    1,054
 --------------------------------------------------------------------
   Total accruing
    loans contractually
    past due 90 days or
    more as to interest
    or principal payments  13,012   10,288   10,570    7,764   13,282
 --------------------------------------------------------------------
 Total nonperforming
  loans                    82,731   71,923   71,930   63,360   53,623
 Other real estate and
  repossessed assets       15,699   15,897   12,664   11,132    9,164
 --------------------------------------------------------------------
 Total nonperforming
  assets                  $98,430  $87,820  $84,594  $74,492  $62,787
 ====================================================================


 Summary of Loan Loss Experience (Unaudited)
 Chemical Financial Corporation

                                  Three Months Ended
                    -------------------------------------------------
(Dollars in         Sept 30   June 30   March 31   Dec 31    Sept 30
  thousands)           2008     2008      2008       2007      2007
 --------------------------------------------------------------------
 Allowance for
  loan losses
  at beginning of
   period            $ 39,664  $ 39,662  $ 39,422  $ 38,386  $ 36,254
  Provision for
   loan losses         22,000     6,500     2,700     4,475     2,900

  Loans charged
   off:
    Commercial        (11,468)   (1,474)     (591)     (550)     (208)
    Real estate
     commercial          (673)   (3,373)   (1,304)   (1,415)       --
    Real estate
     construction        (923)   (1,070)      (16)     (850)     (134)
    Real estate
     residential         (749)     (358)     (245)     (306)      (64)
    Consumer           (1,776)     (612)     (540)     (596)     (501)
 --------------------------------------------------------------------
    Total loan
     charge-offs      (15,589)   (6,887)   (2,696)   (3,717)     (907)
  Recoveries of
   loans previously
   charged off:
    Commercial             74       228        77        90        18
    Real estate
     commercial            68        32        20         1        19
    Real estate
     construction          --        --        29        30        --
    Real estate
     residential           50         5        22        12         4
    Consumer              145       124        88       145        98
 --------------------------------------------------------------------
   Total loan
    recoveries            337       389       236       278       139
 --------------------------------------------------------------------
   Net loan
    charge-offs       (15,252)   (6,498)   (2,460)   (3,439)     (768)
 --------------------------------------------------------------------
  Allowance for
   loan losses at
   end of period     $ 46,412  $ 39,664  $ 39,662  $ 39,422  $ 38,386
 ====================================================================


 Selected Quarterly Information (Unaudited)
 Chemical Financial Corporation

 (In thousands,
  except per       3rd Qtr.   2nd Qtr.  1st Qtr.   4th Qtr.   3rd Qtr.
  share data)        2008       2008      2008       2007       2007
  --------------------------------------------------------------------
  Summary of
   Operations
  Interest
   income         $ 51,688   $ 51,508   $ 53,437   $ 55,726   $ 57,157
  Interest
   expense          14,968     15,872     19,051     22,304     24,684
                  ----------------------------------------------------
  Net interest
   income           36,720     35,636     34,386     33,422     32,473
  Provision for
   loan losses      22,000      6,500      2,700      4,475      2,900
  Net interest
   income after
   provision for
   loan losses      14,720     29,136     31,686     28,947     29,573
  Noninterest
   income           10,054     11,959      9,580     10,832     11,057
  Operating
   expenses         26,750     26,885     26,844     25,522     25,170
                  ----------------------------------------------------
  Income (Loss)
   Before Income
   Taxes            (1,976)    14,210     14,422     14,257     15,460
  Federal Income
   Tax Expense
   (Benefit)          (951)     4,600      4,751      4,411      4,850
                  ----------------------------------------------------
  Net Income
   (Loss)         $ (1,025)  $  9,610   $  9,671   $  9,846   $ 10,610

  --------------------------------------------------------------------
  Per Common
   Share Data
  Net income
   (loss):
     Basic        $  (0.04)  $   0.40   $   0.41   $   0.41   $   0.44
     Diluted         (0.04)      0.40       0.41       0.41       0.44
  Cash dividends     0.295      0.295      0.295      0.285      0.285
  Book value -
   period-end        21.19      21.58      21.60      21.35      21.04
  Market value -
   period-end        31.14      20.40      23.84      23.79      24.25
CONTACT:  Chemical Financial Corporation
          Lori A. Gwizdala, CFO
          989 839 5358