Chemical Financial Announces Second Quarter Results

Chemical Financial Corporation (“Chemical”) (NASDAQ:CHFC) Wednesday announced 2019 second quarter net income of $69.6 million, or $0.96 per diluted share, compared to 2019 first quarter net income of $62.9 million, or $0.87 per diluted share, and 2018 second quarter net income of $69.0 million, or $0.96 per diluted share. Net income, excluding the change in fair of value in loan servicing rights and merger expenses (collectively, “significant items”), a non-GAAP financial measure, was $76.3 million, or $1.06 per diluted share, in the second quarter of 2019, compared to $73.3 million, or $1.02 per diluted share, in the first quarter of 2019 and $69.0 million, or $0.96 per diluted share, in the second quarter of 2018.⁽¹⁾Net income for the second quarter of 2019 also included $4.2 million in net gain on sale of investment securities resulting from the repositioning of our securities portfolio as we plan for our future following the previously announced proposed merger of equals with TCF Financial Corporation (“TCF”), a benefit of $0.04 to diluted earnings per share.

“We are pleased with our core underlying trends for the quarter, including improvement in profitability ratios, increased net interest income driven by solid loan growth and a continued low operating efficiency ratio as a result of disciplined expense management,” noted David T. Provost, Chief Executive Officer of Chemical and Thomas C. Shafer, Vice Chairman of Chemical and Chief Executive Officer of Chemical Bank. “As we look forward to the remainder of the year, we plan to complete our proposed merger of equals with TCF on August 1, 2019. We believe the shared strategic vision and complementary strengths of the two organizations, as we bring together the best of both banks, will position us to provide a more robust product set to a broader customer base, with limited overlap and disruption positioning us to thrive in today’s evolving banking environment.”

Return on average assets was 1.27% for the second quarter of 2019, compared to 1.17% for the first quarter of 2019 and 1.39% for the second quarter of 2018. Return on average assets, excluding significant items, a non-GAAP financial measure, was 1.39% for the second quarter of 2019, compared to 1.36% for the first quarter of 2019 and 1.39% for the second quarter of 2018.⁽¹⁾Return on average tangible shareholders’ equity was 15.7% for the second quarter of 2019, compared to 14.8% for the first quarter of 2019 and 17.8% for the second quarter of 2018. Return on average tangible shareholders’ equity, excluding significant items, a non-GAAP financial measure, was 17.3% for the second quarter of 2019, compared to 17.2% for the first quarter of 2019 and 17.8% for the second quarter of 2018.⁽¹⁾

Net interest income was $165.2 million for the second quarter of 2019, $2.3 million, or 1.4%, higher than the first quarter of 2019 and $7.6 million, or 4.8%, higher than the second quarter of 2018. The increase in net interest income in the second quarter of 2019, compared to the first quarter of 2019, was primarily attributable to the benefit from an increase in average balances and yields earned on loans, partially offset by an increase in average short-term borrowings and cost of funds. The increase in net interest income in the second quarter of 2019, compared to the second quarter of 2018, was primarily attributable to increases in average balances and yields earned on loans and investment securities, partially offset by increases in average interest-bearing deposit balances and cost of funds. Second quarter of 2019 loan growth was $537.9 million, or an annualized growth rate of 14.0%, compared to the first quarter of 2019, and loan growth over the past twelve months was $1.28 billion, or 8.8%. The investment securities portfolio grew by $803.3 million, net of approximately $135 million of sales completed in the second quarter of 2019 to reposition the portfolio, compared to the second quarter of 2018.

Net interest margin was 3.31% in the second quarter of 2019, compared to 3.38% in the first quarter of 2019 and 3.54% in the second quarter of 2018. Net interest margin (fully taxable equivalent (FTE)), a non-GAAP financial measure, was 3.36% in the second quarter of 2019, compared to 3.42% in the first quarter of 2019 and 3.59% in the second quarter of 2018.⁽¹⁾ The decrease in net interest margin (FTE), in the second quarter of 2019, compared to the first quarter of 2019, was primarily due to an increase in average interest-bearing liabilities and cost of funds, partially offset by increases in average balance and yield earned on loans. The decrease in net interest margin (FTE), in the second quarter of 2019, compared to the second quarter of 2018, was primarily due to an increase in average interest-bearing deposits and cost of funds, partially offset by increases in average balances and yields earned on loans and investment securities. Average cost of funds was 1.20% in the second quarter of 2019, compared to 1.13% in the first quarter of 2019 and 0.76% in the second quarter of 2018. The average yield on the loan portfolio increased to 4.90% in the second quarter of 2019, compared to 4.86% in the first quarter of 2019 and 4.63% in the second quarter of 2018. Interest accretion from purchase accounting discounts on acquired loans contributed 22 basis points to the net interest margin (FTE) in both the second and first quarters of 2019, compared to 26 basis points in the second quarter of 2018.

The provision for loan losses was $7.5 million in the second quarter of 2019, compared to $2.1 million in the first quarter of 2019 and $9.6 million in the second quarter of 2018. The increase in total provision for loan losses in the second quarter of 2019, compared to the first quarter of 2019, was primarily the result of an increase in originated loan growth. The decrease in the provision for loan losses in the second quarter of 2019, compared to the second quarter of 2018, was primarily the result of lower charge-offs.

Net loan charge-offs were $1.8 million, or 0.05% of average loans, in both the second and first quarters of 2019, compared to $4.3 million, or 0.12% of average loans, in the second quarter of 2018.

Nonperforming loans totaled $97.7 million at June 30, 2019, compared to $89.3 million at March 31, 2019 and $66.7 million at June 30, 2018. Nonperforming loans comprised 0.62% of total loans at June 30, 2019, compared to 0.58% at March 31, 2019 and 0.46% at June 30, 2018. The increase in nonperforming loans at June 30, 2019, compared to March 31, 2019 and June 30, 2018 was primarily due to commercial and commercial real estate loans downgraded to nonaccrual status. Each nonperforming loan is individually evaluated for impairment, and we have either established a specific reserve within the allowance for loan losses or charged the loan relationship down to the value of the underlying collateral.

The allowance for loan losses on the originated loan portfolio was $116.0 million, or 0.90% of originated loans, at June 30, 2019, compared to $110.3 million, or 0.91% of originated loans, at March 31, 2019 and $100.0 million, or 0.94% of originated loans, at June 30, 2018. The allowance for loan losses on the originated loan portfolio as a percentage of nonperforming loans decreased to 118.7% at June 30, 2019, compared to 123.5% at March 31, 2019 and 149.9% at June 30, 2018, primarily due to sustained low loan charge-off rates and improvement in historical loss factors for commercial loans. All acquired loans were recorded at their estimated fair value at each respective acquisition date without a carryover of the related allowance and, as of June 30, 2019, March 31, 2019 and June 30, 2018, we determined that no allowance was needed for the acquired loan portfolio.

Noninterest income was $38.2 million in the second quarter of 2019, compared to $24.9 million in the first quarter of 2019 and $38.0 million in the second quarter of 2018. Noninterest income in the second quarter of 2019 increased $13.3 million, compared to the first quarter of 2019, primarily related to increases in gain on sale of investment securities of $4.1 million, net gain on sale of loans and other mortgage banking revenue of $3.6 million and swap fee income of $2.1 million, included within other noninterest income. Noninterest income in the second quarter of 2019 increased $146 thousand, compared to the second quarter of 2018, primarily due to the benefit from sales of investment securities, partially offset by a decrease in net gain on sale of loans and other mortgage banking revenue. Net gain on sales of investment securities of $4.2 million provided a benefit of $0.04 to diluted earnings per share in the second quarter of 2019. Net gain on sale of loans and other mortgage banking revenue included a $5.5 million detriment to earnings due to a change in fair value in loan servicing rights in the second quarter of 2019, compared to a $7.6 million detriment in the first quarter of 2019 and a $30 thousand detriment in the second quarter of 2018. The change in fair value in loan servicing rights was a detriment of $0.06 to diluted earnings per share in the second quarter of 2019, compared to a detriment of $0.09 in the first quarter of 2019 and no impact in the second quarter of 2018.

Operating expenses were $111.0 million in the second quarter of 2019, compared to $109.0 million in the first quarter of 2019 and $104.6 million in the second quarter of 2018. Operating expenses, core, a non-GAAP financial measure that excludes the impact of merger expenses and federal historic tax credits, were $107.7 million for the second quarter of 2019, compared to $103.6 million for the first quarter of 2019 and $102.8 million for the second quarter of 2018.⁽¹⁾ The $4.1 million increase in operating expenses, core, in the second quarter of 2019, compared to the first quarter of 2019, was primarily due to an increase in salaries, wages and employee benefits. The increase to salaries, wages and employee benefits in the second quarter of 2019, compared to the first quarter of 2019 was impacted by an increase in mortgage loan commission expense of $1.8 million and annual merit increases effective in April, partially offset by an increase in the deferral of loan origination costs due to higher loan production. The $4.9 million increase in operating expenses, core, in the second quarter of 2019, compared to the second quarter of 2018, was primarily due to an increase in salaries, wages and employee benefits impacted by annual merit increases and increases in staff to support our strategic focus on commercial lending growth and an increase in outside processing and service fees due to the substantial enhancements to our core operating systems. Second quarter of 2019 included $3.0 million of merger related expenses, or a detriment of $0.04 to diluted earnings per share, compared to $5.4 million of merger related expenses, or a detriment of $0.06 to diluted earnings per share in the first quarter of 2019. Impairment related to federal historic tax credits, included within other operating expense in our Consolidated Statements of Income, totaled $271 thousand in the second quarter of 2019 and $1.7 million in the second quarter of 2018.

The efficiency ratio is a measure of operating expenses as a percentage of net interest income and noninterest income. The efficiency ratio was 54.6% in the second quarter of 2019, compared to 58.1% in the first quarter of 2019 and 53.5% in the second quarter of 2018. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes, as applicable, the significant items defined above, amortization of intangibles, impairment of federal income tax credits, the net interest income FTE adjustment and gains from sale of investment securities, was 51.3% in the second quarter of 2019, compared to 51.7% in the first quarter of 2019 and 51.2% in the second quarter of 2018.⁽¹⁾

The effective tax rate was 18.0% in the second quarter of 2019, compared to 17.8% in the first quarter of 2019 and 15.3% in the second quarter of 2018. The tax rate for the second quarter of 2019 and second quarter of 2018 benefited from federal historic tax credits of $260 thousand and $1.9 million, respectively. The income tax benefit from the tax credits placed into service was partially offset by the impairment recorded on the same tax credits included within other operating expenses.

Total assets were $22.49 billion at June 30, 2019, compared to $21.80 billion at March 31, 2019 and $20.28 billion at June 30, 2018. The increase in total assets during the second quarter of 2019 was primarily attributable to net loan growth while the increase in the twelve months ended June 30, 2019 was additionally attributable to additions to the investment securities portfolio.

Total loans were $15.86 billion at June 30, 2019, an increase of $537.9 million, from total loans of $15.32 billion at March 31, 2019 and an increase of $1.28 billion, from total loans of $14.58 billion at June 30, 2018. Originated loan growth was $728.8 million during the second quarter of 2019, compared to $297.5 million in the first quarter of 2019 and $684.0 million in the second quarter of 2018. Growth in the originated loan portfolio was partially offset by run-off in the acquired loan portfolio of $190.9 million in the second quarter of 2019, compared to $243.2 million in the first quarter of 2019 and $323.1 million in the second quarter of 2018.

The investment securities portfolio totaled $3.94 billion at June 30, 2019, an increase of $12.3 million, compared to $3.92 billion at March 31, 2019, and an increase of $803.3 million, compared to $3.13 billion at June 30, 2018. The increase in the investment securities portfolio in both the second quarter of 2019 and the twelve months ended June 30, 2019 reflects our long-term plan to increase our investment securities portfolio as a percentage of total assets.

Total deposits were $15.88 billion at June 30, 2019, compared to $16.06 billion at March 31, 2019 and $14.55 billion at June 30, 2018. The decrease in deposits during the second quarter of 2019 was primarily due to a seasonal decrease in municipal interest-bearing checking deposits, partially offset by an increase in non-interest bearing checking deposits. The increase in deposits during the twelve months ended June 30, 2019 was primarily due to increases of $1.31 billion in customer deposits and $19.7 million in brokered deposits. Collateralized customer deposits were $291.7 million at June 30, 2019, compared to $413.2 million at March 31, 2019 and $378.9 million at June 30, 2018. Loans, as a percentage of deposits plus collateralized customer deposits, were 98.1% at June 30, 2019, compared to 93.0% at March 31, 2019 and 97.7% at June 30, 2018.

Short-term borrowings were $2.62 billion at June 30, 2019, compared to $1.74 billion at March 31, 2019 and $2.10 billion at June 30, 2018. Short-term borrowings include short-term FHLB advances that we used to fund our short-term liquidity needs, including to support loan growth. Long-term borrowings were $426.1 million at both June 30, 2019 and March 31, 2019, compared to $331.0 million at June 30, 2018.

Our shareholders’ equity to total assets ratio was 13.1% at June 30, 2019, compared to 13.3% at March 31, 2019 and 13.6% at June 30, 2018. Tangible shareholders’ equity to tangible assets ratio, a non-GAAP financial measure, and total risk-based capital ratio were 8.4% and 11.5% (estimated), respectively, at June 30, 2019, compared to 8.5% and 11.7%, respectively, at March 31, 2019 and 8.3% and 11.4%, respectively, at June 30, 2018.⁽¹⁾ Book value was $41.27 per share at June 30, 2019, compared to $40.50 per share at March 31, 2019 and $38.52 per share at June 30, 2018. Tangible book value, a non-GAAP financial measure, was $25.18 per share at June 30, 2019, compared to $24.39 per share at March 31, 2019 and $22.33 per share at June 30, 2018.⁽¹⁾If the proposed merger with TCF closes as anticipated on August 1, 2019, the combined company Board of Directors intends to declare the third quarter of 2019 common and preferred stock dividends on that date for the combined company. These dividends are expected to be payable in the third quarter of 2019.

Please refer to the section entitled “Non-GAAP Financial Measures” in this press release and to the financial tables entitled “Reconciliation of Non-GAAP Financial Measures” for a reconciliation to the most directly comparable GAAP financial measures.

Conference Call Details

Chemical Financial Corporation will host a conference call to discuss second quarter of 2019 operating results on Thursday, July 25, 2019, at 11:00 a.m. ET. Anyone interested may access the conference call on a live basis by dialing toll-free at 888-378-4398 and entering 339057 for the conference ID. The call will also be broadcast live over the Internet hosted at Chemical Financial Corporation’s website at www.chemicalbank.com under the “Investor Information” section. A copy of the slide-show presentation can be accessed on Chemical Financial Corporation’s website and an audio replay of the call will remain available on Chemical Financial Corporation’s website for at least 14 days.

About Chemical Financial Corporation

Chemical Financial Corporation is the largest banking company headquartered and operating branch offices in Michigan. We operate through our subsidiary bank, Chemical Bank, with 212 banking offices located primarily in Michigan, northeast Ohio and northern Indiana. At June 30, 2019, we had total consolidated assets of $22.49 billion. Chemical Financial Corporation’s common stock trades on The NASDAQ Stock Market under the symbol CHFC and is one of the issuers comprising The NASDAQ Global Select Market and the S&P MidCap 400 Index. More information about Chemical Financial Corporation is available by visiting the “Investor Information” section of our website at www.chemicalbank.com.

Non-GAAP Financial Measures

This press release contains references to financial measures that are not defined in generally accepted accounting principles (“GAAP”). Such non-GAAP financial measures include net income (excluding significant items), diluted earnings per share (excluding significant items), return on average assets, return on average shareholders’ equity and return on average tangible shareholders’ equity (each excluding significant items), tangible book value per share, tangible shareholders’ equity to tangible assets, the presentation of net interest income and net interest margin on a FTE basis, core operating expenses, operating expenses-efficiency ratio, and the adjusted efficiency ratio.

Management used non-GAAP financial measures as follows; in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. We believe these non-GAAP financial measures are helpful for investors to analyze and evaluate our financial condition. However, these non-GAAP financial measures have inherent limitations and should not be considered in isolation or as a substitute for GAAP measures. In addition, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP historical measures in this press release with other companies’ non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure may be found in the financial tables included with this press release.

Forward-Looking Statements

Statements included in this press release which are not historical in nature are intended to be, and hereby are identified as, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding Chemical Financial loan pipeline, future loan growth, increases in net interest income, and the belief that we are in a solid position for a successful 2019. Words and phrases such as “anticipate,” “believe,” “plan,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “is likely,” “judgment,” “look ahead,” “look forward,” “on schedule,” “opinion,” “opportunity,” “potential,” “predicts,” “probable,” “projects,” “should,” “strategic,” “trend,” “will,” and variations of such words and phrases or similar expressions are intended to identify such forward-looking statements.

Management’s determination of the provision and allowance for loan losses; the carrying value of acquired loans, goodwill and loan servicing rights; 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); and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. The future effect of changes in the financial and credit markets and the national and regional economies on the banking industry, generally, and on Chemical, specifically, are also inherently uncertain.

Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:

our inability to attract and retain new commercial lenders and other bankers as well as key operations staff in light of competition for experienced employees in the banking industry;
operational and regulatory challenges associated with our information technology systems and policies and procedures in light of our rapid growth and systems conversion in 2018;
our inability to grow deposits;
our ability to execute on our strategy to expand investments and commercial lending;
our inability to efficiently manage our operating expenses;
the possibility that our previously announced merger with TCF does not close when expected or at all because conditions to closing are not satisfied on a timely basis or at all;
the occurrence of any event, change or other circumstance that could give rise to the right of Chemical, TCF or both to terminate the merger agreement;
the outcome of pending or threatened litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to our proposed merger with TCF;
potential difficulty in maintaining relationships with clients, employees or business partners as a result of our proposed merger with TCF;
the possibility that the anticipated benefits of our proposed merger with TCF, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Chemical and TCF do business, or as a result of other unexpected factors or events;
the impact of purchase accounting with respect to the proposed merger with TCF, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
diversion of management’s attention from ongoing business operations and opportunities as a result of the proposed merger with TCF;
potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger with TCF;
economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;
a general decline in the real estate and lending markets, particularly in our market areas, could negatively affect our financial results;
increased cybersecurity risk, including potential network breaches, business disruptions, or financial losses;
increases in competitive pressure in the banking and financial services industry;
increased capital requirements, other regulatory requirements or enhanced regulatory supervision;
our inability to sustain revenue and earnings growth;
the timing of when historic tax credits are placed into service could impact operating expenses;
our inability to efficiently manage operating expenses;
our inability to increase our investment securities portfolio as a percentage of total assets;
current or future restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;
legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;
changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired; and
economic, governmental, or other factors may prevent the projected population, residential, and commercial growth in the markets in which we operate.

Additional factors that could cause results to differ materially from those described above can be found in the risk factors described in Item 1A of Chemical’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2018, in the Joint Proxy Statement/Prospectus regarding the proposed merger that was filed with the SEC on May 3, 2019 pursuant to Rule 424(b)(3) by Chemical and in Quarterly Reports on Form 10-Q. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results. Chemical disclaims any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law.

For further information:
David T. Provost, CEO
Dennis L. Klaeser, CFO
800-867-9757