Chemical Financial Corporation Reports Third Quarter 2011 Results

MIDLAND, Mich., Oct. 25, 2011 (GLOBE NEWSWIRE) -- Chemical Financial Corporation (Nasdaq:CHFC) today announced 2011 third quarter net income of $11.6 million, or $0.42 per diluted share, up from 2011 second quarter net income of $11.0 million, or $0.40 per diluted share, and up from 2010 third quarter net income of $8.9 million, or $0.32 per diluted share. Net income was $31.8 million, or $1.16 per diluted share, for the nine months ended September 30, 2011, an increase of 93 percent on a per diluted share basis, compared to $15.6 million, or $0.60 per diluted share, for the nine months ended September 30, 2010.

"Our earnings performance has trended higher over the past two years as we continue to benefit from both a higher level of net interest income and a lower loan loss provision. We have made significant progress in credit quality during the year, with nonperforming assets down over $26 million to $149.1 million at September 30, 2011 from their peak of $175.2 million at December 31, 2010. We are pleased with the positive direction of our nonperforming assets and we will continue to focus on tactics to further improve credit quality," said David B. Ramaker, Chairman, Chief Executive Officer and President of the Company. 

"With the exception of a few sectors, we continue to experience sluggish loan demand, which is not surprising given the significant economic uncertainty. Many of our core Michigan small and middle-market business customers lack the short-term confidence to expand or borrow in this environment. As a result, our loan growth this year has been a direct result of initiatives designed to expand market share. In these economic times, we believe we can continue to achieve higher organic growth by focusing on the strategies which have proven successful. Additionally, we are well positioned to benefit from our initiatives related to expected consolidation opportunities in Michigan's banking industry," added Ramaker.

Net income in the third quarter of 2011 was up from the second quarter of 2011, with an increase in net interest income of $1.0 million, a reduction in the provision for loan losses of $0.6 million and a reduction in federal income tax expense of $0.7 million partially offset by an increase in operating expenses of $2.0 million. The increase in net income in the third quarter of 2011 over the third quarter of 2010 was primarily attributable to a decrease in the provision for loan losses of $2.2 million and a decrease in operating expenses of $0.8 million.

The Company's return on average assets during the third quarter of 2011 was 0.87 percent, up from 0.84 percent in the second quarter of 2011 and 0.67 percent in the third quarter of 2010. The return on average equity was 8.0 percent in the third quarter of 2011, up from 7.8 percent in the second quarter of 2011 and 6.3 percent in the third quarter of 2010.

Net interest income was $46.3 million in the third quarter of 2011, up $1.0 million, or 2.2 percent, from the second quarter of 2011 and up $0.4 million, or 0.8 percent, from the third quarter of 2010. The increase in net interest income of $1.0 million in the third quarter of 2011, as compared to the second quarter of 2011, was primarily attributable to a decrease in the cost of interest-bearing liabilities due to the continued declines in market interest rates, loan growth and one additional day during the third quarter, which were partially offset by a decline in the average yield on loans due to the lower interest rate environment. The net interest margin (on a tax-equivalent basis) in the third quarter of 2011 was 3.80 percent, up from 3.78 percent in the second quarter of 2011 and unchanged from 3.80 percent in the third quarter of 2010.

The provision for loan losses was $6.4 million in the third quarter of 2011, down from $7.0 million in the second quarter of 2011 and $8.6 million in the third quarter of 2010. Net loan charge-offs were $7.4 million in the third quarter of 2011, slightly higher than the $6.9 million in the second quarter of 2011, but lower than the $8.6 million in the third quarter of 2010. The provision for loan losses in the third quarter of 2011 was lower than net loan charge-offs for the first time in nineteen quarters due to improvement in the credit quality of the loan portfolio. During the third quarter of 2011, the Company's efforts to resolve and reduce the level of its nonaccrual loans reduced the specific allocation of the allowance for loan losses on nonaccrual loans (valuation allowance) by $2.2 million and was primarily achieved through loan charge-offs on nonaccrual loans. The valuation allowance was $8.7 million at September 30, 2011, compared to $10.9 million at June 30, 2011 and $17.8 million at September 30, 2010. For the nine months ended September 30, 2011, the provision for loan losses was $20.9 million compared to net loan charge-offs of $21.7 million. In comparison, the provision for loan losses and net loan charge-offs during the nine months ended September 30, 2010 were $35.3 million and $26.6 million, respectively.

Noninterest income was $11.2 million in the third quarter of 2011, up slightly from $10.9 million in the second quarter of 2011 and $11.1 million in the third quarter of 2010. The increase in noninterest income in the third quarter of 2011, as compared to the second quarter of 2011, was due primarily to higher mortgage banking revenue that was partially offset by a decline in wealth management revenue. Mortgage banking revenue was $0.7 million higher in the third quarter of 2011, as compared to the second quarter of 2011, while wealth management revenue was $0.4 million lower.

Operating expenses were $35.4 million in the third quarter of 2011, up from $33.4 million in the second quarter of 2011 and down from $36.2 million in the third quarter of 2010. The increase in operating expenses of $2.0 million in the third quarter of 2011, as compared to the second quarter of 2011, was primarily attributable to higher state tax expense, salaries, wages and employee benefits expense and credit-related expenses. State tax expense was $0.9 million higher due to the reversal of state tax expense in the second quarter of 2011 as a result of the elimination of a valuation reserve during that quarter. Salaries, wages and employee benefits were $1.2 million higher due to increases in both salaries and group health expenses. Credit-related operating expenses of $2.2 million in the third quarter of 2011 were $0.8 million higher than the second quarter of 2011 due primarily to property taxes on other real estate properties that are largely incurred in the third quarter of the year. The Company's efficiency ratio was 60.2 percent in the third quarter of 2011, compared to 58.2 percent in the second quarter of 2011 and 62.3 percent in the third quarter of 2010.

Total assets were $5.44 billion at September 30, 2011, up from $5.20 billion at June 30, 2011 and up slightly from $5.40 billion at September 30, 2010. The increase in assets during the third quarter of 2011 was largely attributable to an increase in interest-bearing balances held at the Federal Reserve Bank (FRB) resulting from higher funds derived from seasonal deposits of municipal customers. The Company continues to maintain significant amounts of funds generated from deposit growth over the last two years at the FRB, further enhancing the Company's liquidity position, with $479 million in balances held at the FRB at September 30, 2011, compared to $265 million at June 30, 2011.

Total loans were $3.76 billion at September 30, 2011, compared to $3.75 billion at June 30, 2011 and $3.64 billion at September 30, 2010. The increase in loans of $120 million, or 3.3 percent, during the twelve months ended September 30, 2011 was driven primarily by increases in real estate residential loans and commercial loans. Real estate residential loans increased $93 million, or 12.4 percent, and commercial loans increased $64 million, or 8.1 percent, during the twelve months ended September 30, 2011. The growth in real estate residential loans during the twelve months ended September 30, 2011 was primarily attributable to the Company originating $73 million of conforming real estate residential loans with amortization periods of fifteen years that it kept in the loan portfolio, rather than selling these loans in the secondary market as has historically been the Company's general practice, due to an overall low level of loan demand and increased competition for new loans. Total loans increased $12.4 million, or 0.3 percent, in the third quarter of 2011 and $78.8 million, or 2.1 percent, during the nine months ended September 30, 2011. Investment securities were $797 million at September 30, 2011, compared to $802 million at June 30, 2011 and $766 million at September 30, 2010.

Total deposits were $4.48 billion at September 30, 2011, compared to $4.25 billion at June 30, 2011 and $4.47 billion at September 30, 2010. The Company experienced an increase of $230 million, or 5.4 percent, in total deposits during the third quarter of 2011, with the increase attributable to a seasonal increase in deposits of municipal customers. The Company used a portion of its liquidity to pay off maturing Federal Home Loan Bank (FHLB) advances and brokered deposits that were acquired in the 2010 acquisition of O.A.K. Financial Corporation (OAK) and the Company intends to continue to pay off these wholesale funding sources as they mature. FHLB advances totaled $46.0 million at September 30, 2011, down from $71.9 million at June 30, 2011 and $85.4 million at September 30, 2010. Brokered deposits totaled $98 million at September 30, 2011, down from $110 million at June 30, 2011 and $182 million at September 30, 2010.

At September 30, 2011, the Company's tangible equity to assets ratio and total risk-based capital ratio were 8.6 percent and 13.1 percent, respectively, compared to 8.9 percent and 13.0 percent, respectively, at June 30, 2011. At September 30, 2011, the Company's book value was $21.02 per share, compared to $20.78 per share at June 30, 2011.

The credit quality of the Company's loan portfolio showed improvement during the third quarter of 2011. At September 30, 2011, the Company's $3.27 billion of originated loans, representing all loans other than those acquired in the OAK acquisition, had nonaccrual loans and loans past due 90 days or more totaling $94.1 million, compared to $109.1 million at June 30, 2011 and $119.4 million at September 30, 2010, representing declines of 13.7 percent and 21.1 percent, respectively. The Company's nonperforming loans also include commercial, real estate commercial and real estate residential loans that have been modified and a concession granted due to financial difficulties being experienced by customers (nonperforming troubled debt restructurings) of $26.3 million at September 30, 2011, down from $26.8 million at June 30, 2011 and $28.5 million at September 30, 2010. At September 30, 2011, the Company's $495 million of acquired loans, representing loans acquired in the OAK acquisition, were overall performing slightly better than expected, despite the establishment of a $1.3 million allowance for loan losses on acquired loans during the third quarter of 2011 that was primarily attributable to one of the loan pools experiencing a decline in expected cash flows.

Other real estate and repossessed assets totaled $28.7 million at September 30, 2011, compared to $24.6 million at June 30, 2011 and $22.7 million at September 30, 2010. The net increase in the third quarter of 2011 was primarily attributable to the addition of eight foreclosed properties totaling $4.5 million during the quarter.

At September 30, 2011, the allowance for loan losses of the originated portfolio was $87.4 million, or 2.68 percent of originated loans, compared to 2.78 percent at June 30, 2011 and 2.94 percent at September 30, 2010. The allowance for loan losses of the originated portfolio as a percentage of nonperforming loans was 73 percent at September 30, 2011, compared to 66 percent at June 30, 2011 and 61 percent at September 30, 2010. At September 30, 2011, nonperforming loans as a percentage of total loans were 3.20 percent, down from 3.63 percent at June 30, 2011 and 4.06 percent at September 30, 2010.

Chemical Financial Corporation is the second-largest bank holding company headquartered and operating branch offices in Michigan. The Company operates through a single subsidiary bank, Chemical Bank, with 142 banking offices spread over 32 counties in the lower peninsula of Michigan. At September 30, 2011, the Company had total assets of $5.4 billion. Chemical Financial Corporation's common stock trades on The NASDAQ Stock Market under the symbol CHFC and is one of the issues comprising the NASDAQ Global Select Market. More information about the Company is available by visiting the investor relations section of its website at www.chemicalbankmi.com.

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. Words such as "continue," "focus," "improving," "see," "would," "expectations," "opportunities," "will," "intend," "strategies," "trend" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to the credit quality of the loan portfolio, future levels of nonperforming loans, future economic trends and conditions, future strategies to expand market share and initiatives related to expected consolidation opportunities in Michigan's banking industry. All statements referencing future time periods are forward-looking. Management's determination of the provision and allowance for loan losses, the carrying value of acquired loans, goodwill, mortgage servicing rights and other real estate owned and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involve judgments that are inherently forward-looking. Management's assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated or that other real estate owned can be sold for its carrying value or at all. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on the Company, specifically, are also inherently uncertain. 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. The Company 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 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010. 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.