Chemical Financial Corporation Reports 2015 Third Quarter Operating Results

MIDLAND, Mich., Oct. 21, 2015 (GLOBE NEWSWIRE) -- Chemical Financial Corporation (the "Corporation") (NASDAQ:CHFC) today announced 2015 third quarter net income of $24.5 million, or $0.64 per diluted share, compared to 2014 third quarter net income of $16.8 million, or $0.51 per diluted share, and 2015 second quarter net income of $19.0 million, or $0.54 per diluted share. Net income was $61.3 million, or $1.72 per diluted share, for the nine months ended September 30, 2015, compared to $46.8 million, or $1.51 per diluted share, for the nine months ended September 30, 2014.

Excluding nonrecurring acquisition-related expenses, net income in the third quarter of 2015 was $25.1 million, or $0.65 per diluted share, compared to $17.6 million, or $0.53 per diluted share, in the third quarter of 2014 and $21.7 million, or $0.61 per diluted share, in the second quarter of 2015. For the first nine months of 2015, excluding nonrecurring acquisition-related expenses, net income was $65.5 million, or $1.84 per diluted share, compared to $48.3 million, or $1.55 per diluted share, during the first nine months of 2014.

“Chemical Financial Corporation’s 25 percent per share earnings growth over the prior year’s third quarter reflects the combined effects of the Northwestern Bancorp, Lake Michigan Financial Corporation and Monarch Community Bancorp acquisitions completed over the past year, augmented by sustained strong organic loan growth across our core banking franchise during that time,” noted David B. Ramaker, Chairman, Chief Executive Officer and President of Chemical Financial Corporation. “The Company’s ability to seamlessly integrate these acquisitions while sustaining growth across its expanding Michigan footprint is a testament to the continued strengthening of Michigan’s economy, the attractiveness of Chemical’s community-oriented approach to the Michigan businesses and customers we serve, and, importantly, the combined efforts of the 2,000 plus team members in the Chemical family.”

"We are on schedule to complete the consolidation of The Bank of Holland and The Bank of Northern Michigan in the fourth quarter of 2015. As we look to the future, we are confident that our proven ability to combine organic growth in the markets we currently serve with acquisitive growth will benefit our shareholders as we look to significantly drive total assets beyond the $10 billion level," added Ramaker.

The double digit percentage increases in earnings per share, excluding nonrecurring acquisition-related expenses, for the three- and nine-month periods ended September 30, 2015, compared to the same periods for the prior year, were primarily driven by higher net interest income due to organic loan growth over the last twelve months and incremental earnings from the acquisitions of Northwestern Bancorp, Inc. ("Northwestern"), Monarch Community Bancorp, Inc. ("Monarch") and Lake Michigan Financial Corporation ("Lake Michigan") that closed on October 31, 2014, April 1, 2015 and May 31, 2015, respectively. The increase in earnings per share in the third quarter of 2015, compared to the second quarter of 2015, was attributable to increases in net interest income and noninterest income from the legacy operations of Chemical Bank, in addition to incremental earnings from the Lake Michigan and Monarch transactions.

The Corporation's return on average assets, excluding nonrecurring acquisition-related expenses, was 1.08% during the third quarter of 2015, compared to 1.09% in the third quarter of 2014 and 1.07% in the second quarter of 2015. The Corporation's return on average shareholders' equity, excluding nonrecurring acquisition-related expenses, was 10.1% in the third quarter of 2015, compared to 8.8% in the third quarter of 2014 and 9.8% in the second quarter of 2015.

Net interest income was $73.6 million in the third quarter of 2015, $20.5 million, or 39%, higher than the third quarter of 2014 and $7.9 million, or 12%, higher than the second quarter of 2015. The increase in net interest income in the third quarter of 2015 over the third quarter of 2014 was largely attributable to the positive impact of organic loan growth and the impact of the Lake Michigan, Monarch and Northwestern transactions. The increase in net interest income in the third quarter of 2015 over the second quarter of 2015 was primarily attributable to the incremental benefit of the Lake Michigan transaction for the full quarter. The Corporation's net interest income also benefited from one additional day in the third quarter of 2015 and additional net interest income resulting from second and third quarter 2015 organic loan growth.

The net interest margin (on a tax-equivalent basis) was 3.55% in the third quarter of 2015, compared to 3.59% in both the third quarter of 2014 and the second quarter of 2015. The decrease in the net interest margin in the third quarter of 2015, compared to the second quarter of 2015, was attributable to a combination of the Corporation borrowing $100 million of long-term FHLB advances at an average interest rate of 1.48%, which were used to pay down short-term borrowings with an average interest rate of 0.25%, an increase in the Corporation's seasonal municipal deposits that were maintained at the Federal Reserve Bank (FRB) at approximately the same interest yield as the interest rate paid on the deposits, and the impact of a full quarter of the Lake Michigan transaction. The positive impact on the net interest margin attributable to organic loan growth during the twelve months ended September 30, 2015 was partially offset by a reduction in the average yield on the loan portfolio. The average yield on the loan portfolio was 4.15% in the third quarter of 2015, compared to 4.23% in the third quarter of 2014 and 4.17% in the second quarter of 2015. The average yield of the investment securities portfolio was 2.08% in the third quarter of 2015, compared to 2.19% in the third quarter of 2014 and 2.03% in the second quarter of 2015. Modest changes in the mix of customer deposits and the repricing of matured customer certificates of deposit was offset by the higher cost of $278 million of brokered deposits and $155 million of other wholesale borrowings acquired in the Lake Michigan transaction. The Corporation's average cost of funds was 0.25% in the third quarter of 2015, compared to 0.25% in the third quarter of 2014 and 0.22% in the second quarter of 2015.

The provision for loan losses was $1.5 million in the third quarter of 2015, unchanged from both the third quarter of 2014 and the second quarter of 2015. The Corporation's quarterly provision for loan losses remained relatively consistent throughout 2014 and the first nine months of 2015, despite significant organic growth in its loan portfolio, due primarily to a reduction in net loan charge-offs and strong credit quality.

Net loan charge-offs were $0.8 million, or 0.05% of average loans, in the third quarter of 2015, compared to $2.3 million, or 0.18% of average loans, in the third quarter of 2014 and $1.8 million, or 0.12% of average loans, in the second quarter of 2015. The reduction in net loan charge-offs in the third quarter of 2015, compared to the third quarter of 2014, was characteristic of an improving economy in the State of Michigan. Net loan charge-offs were 0.10% of average loans during the nine months ended September 30, 2015, compared to 0.18% of average loans for the same period in 2014.

The Corporation's nonperforming loans, consisting of nonaccrual loans, accruing loans past due 90 days or more as to principal or interest payments and nonperforming troubled debt restructurings, totaled $81.2 million at September 30, 2015, compared to $70.9 million at June 30, 2015 and $70.7 million at September 30, 2014. Nonperforming loans comprised 1.13% of total loans at September 30, 2015, compared to 1.01% at June 30, 2015 and 1.40% at September 30, 2014. The decrease in the percentage of nonperforming loans to total loans at September 30, 2015, compared to September 30, 2014, was partially due to the addition of $1.58 billion of total loans acquired in the Lake Michigan, Monarch and Northwestern transactions, with no corresponding increase in nonperforming loans as these acquired loans are not classified as nonperforming after the acquisition date since they are recorded in loan pools at their net realizable value.

The increase in nonperforming loans during the third quarter of 2015 was primarily due to a $10.4 million commercial loan relationship being downgraded to nonaccrual status during the quarter. As of September 30, 2015, the borrower, which primarily operates as a tier 1 and tier 2 supplier in the automotive manufacturing industry, has made all principal and interest payments under a forbearance agreement with the Corporation. Based on a collateral review for this loan relationship, the Corporation established a specific impairment reserve of $3.0 million for this loan relationship as of September 30, 2015. The Corporation determined that an additional provision for loan losses as a result of this downgrade was not required as the Corporation's allowance for loan losses was at a sufficient level to absorb estimated losses from this commercial loan relationship due to the continued decline in the Corporation's loan losses. The Corporation has another $4.4 million of loans in its acquired loan portfolio at September 30, 2015 related to this same loan relationship. These additional loans are not classified as nonperforming since they are recorded in loan pools at their net realizable value. Based on the collateral review for the portion of this loan relationship that is included in the acquired loan portfolio, the Corporation estimated a reduction in expected cash flows of $1.3 million on this loan relationship. The Corporation did not need to recognize a provision for loan losses for these $4.4 million of acquired loans based on the total remaining expected cash flows of the loan pool in which they are included.

At September 30, 2015, the allowance for loan losses of the originated loan portfolio was $75.6 million, or 1.33% of originated loans, compared to $74.9 million, or 1.40% of originated loans, at June 30, 2015 and $76.5 million, or 1.60% of originated loans, at September 30, 2014. The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 93% at September 30, 2015, compared to 106% at June 30, 2015 and 108% at September 30, 2014.

Noninterest income was $20.2 million in the third quarter of 2015, compared to $15.4 million in the third quarter of 2014 and $20.7 million in the second quarter of 2015. Noninterest income in the third quarter of 2015 was higher than the third quarter of 2014, with all major categories of noninterest income higher and largely attributable to incremental revenue due to the Lake Michigan, Monarch and Northwestern transactions. Noninterest income in the third quarter of 2015 was slightly lower than the second quarter of 2015, with the decrease largely attributable to lower wealth management revenue, which was partially offset by incremental revenue attributable to the Lake Michigan transaction. The reduction in wealth management revenue was primarily attributable to a reduction in asset-based fees that resulted from the general decline in the equity markets during the third quarter of 2015 and $0.2 million of seasonal tax-related revenue realized in the second quarter of 2015.

Operating expenses were $58.3 million in the third quarter of 2015, compared to $42.7 million in the third quarter of 2014 and $56.8 million in the second quarter of 2015. Operating expenses included nonrecurring acquisition-related expenses attributable to acquisitions of $0.9 million in the third quarter of 2015, $1.3 million in the third quarter of 2014 and $3.5 million in the second quarter of 2015. Excluding these nonrecurring acquisition-related expenses, operating expenses were $57.4 million in the third quarter of 2015, $15.9 million, or 38%, higher than the third quarter of 2014 and $4.0 million, or 7.6%, higher than the second quarter of 2015. The increase in operating expenses in the third quarter of 2015, compared to the third quarter of 2014, was primarily attributable to incremental operating costs associated with the Lake Michigan, Monarch and Northwestern transactions, while the increase in the third quarter of 2015, compared to the second quarter of 2015, was primarily attributable to incremental operating costs associated with the Lake Michigan transaction for the full quarter.

Nonrecurring acquisition-related expenses attributable to the Lake Michigan and Monarch acquisitions were $5.7 million for the nine months ended September 30, 2015, while nonrecurring acquisition-related expenses attributable to the acquisition of Northwestern were $2.2 million for the nine months ended September 30, 2014. The Corporation expects to incur approximately $1.5 million of nonrecurring acquisition-related expenses in the fourth quarter of 2015 in connection with the consolidations and related systems conversions of The Bank of Holland and The Bank of Northern Michigan with and into Chemical Bank.

The Corporation's efficiency ratio was 59.9% in the third quarter of 2015, 60.5% in the second quarter of 2015 and 59.2% in the third quarter of 2014.

Total assets were $9.26 billion at September 30, 2015, compared to $9.02 billion at June 30, 2015 and $6.60 billion at September 30, 2014. The increase in total assets during the three months ended September 30, 2015 was attributable to an increase in seasonal municipal deposits that were utilized to fund loan growth. The increase in total assets during the twelve months ended September 30, 2015 was largely attributable to the Lake Michigan, Monarch and Northwestern transactions, in addition to an organic increase in customer deposits of $374 million that was used to partially fund loan growth. Interest-bearing balances at the FRB totaled $109 million at September 30, 2015, compared to $16 million at June 30, 2015 and $248 million at September 30, 2014. The increase in interest-bearing balances at the FRB during the third quarter of 2015 was attributable to an increase in seasonable municipal deposit accounts. Investment securities were $1.14 billion at September 30, 2015, compared to $1.16 billion at June 30, 2015 and $895 million at September 30, 2014. The increase in investment securities during the twelve months ended September 30, 2015 was due to investment securities acquired in the Lake Michigan and Northwestern transactions.

Total loans were $7.22 billion at September 30, 2015, up $181 million, or 2.6%, from total loans of $7.03 billion at June 30, 2015 and up $2.18 billion, or 43%, from total loans of $5.04 billion at September 30, 2014. The increase in loans during the three months ended September 30, 2015 was attributable to organic loan growth. The increase in loans during the twelve months ended September 30, 2015 was attributable to $1.58 billion of loans acquired in the Lake Michigan, Monarch and Northwestern acquisitions and $592 million of organic loan growth.

Total deposits were $7.62 billion at September 30, 2015, compared to $7.29 billion at June 30, 2015 and $5.43 billion at September 30, 2014. The increase in deposits during the third quarter of 2015 was attributable to a $350 million increase in seasonal municipal deposit accounts. Short-term borrowings were $330 million at September 30, 2015, compared to $532 million at June 30, 2015 and $323 million at September 30, 2014. Other borrowings were $248 million at September 30, 2015 and $148 million at June 30, 2015. The Corporation had no other borrowings at September 30, 2014. The increase in other borrowings during the third quarter of 2015 was attributable to the Corporation borrowing $100 million of long-term FHLB advances which were used to pay down certain short-term borrowings. The decrease in short-term borrowings during the third quarter of 2015 was attributable to funds obtained from the long-term FHLB advances and seasonal municipal deposit accounts. The increase in total deposits and other borrowings during the twelve months ended September 30, 2015 was largely attributable to the acquisitions of Lake Michigan, Monarch and Northwestern. The Corporation acquired $1.86 billion in deposits and $163 million in combined borrowings as of the respective acquisition dates for these transactions.

At September 30, 2015, the Corporation's tangible equity to assets ratio and total risk-based capital ratio were 7.8% and 11.5%, respectively, compared to 7.8% and 11.7%, respectively, at June 30, 2015 and 10.5% and 15.0%, respectively, at September 30, 2014. The decrease in the Corporation's capital ratios at September 30, 2015, compared to September 30, 2014, was attributable to the Lake Michigan, Monarch and Northwestern acquisitions. At September 30, 2015, the Corporation's book value was $26.18 per share, compared to $25.74 per share at June 30, 2015 and $24.47 per share at September 30, 2014. At September 30, 2015, the Corporation's tangible book value was $18.32 per share, compared to $17.87 per share at June 30, 2015 and $20.68 per share at September 30, 2014.

This press release contains references to financial measures which are not defined in generally accepted accounting principles ("GAAP"). Such non-GAAP financial measures include the Corporation's tangible equity to assets ratio, presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, and information presented excluding nonrecurring acquisition-related expenses, including net income, diluted earnings per share, return on average assets, return on average shareholders' equity and operating expenses. These non-GAAP financial measures have been included as the Corporation believes they are helpful for investors to analyze and evaluate the Corporation's financial condition.

Chemical Financial Corporation will host a conference call to discuss its third quarter 2015 operating results on Thursday, October 22, 2015, at 10:30 a.m. EDT. Anyone interested may access the conference call on a live basis by dialing toll-free at 1-888-556-4997 and entering 6459217 for the conference ID. The call will also be broadcast live over the Internet hosted at Chemical Financial Corporation's website at www.chemicalbankmi.com under the "Investor Info" section. A copy of the slide-show presentation and an audio replay of the call will remain available on Chemical Financial Corporation's website for at least 14 days.

Chemical Financial Corporation is the second largest banking company headquartered and operating branch offices in Michigan. The Corporation operates through its subsidiary banks, Chemical Bank, The Bank of Holland and The Bank of Northern Michigan, with 187 banking offices spread over 47 counties in Michigan. At September 30, 2015, the Corporation had total assets of $9.3 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 Corporation 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 the Corporation. Words and phrases such as "anticipates," "believes," "beyond," "continue," "estimates," "expects," "forecasts," "future," "intends," "is likely," "judgment," "look forward," "on schedule," "opinion," "plans," "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. 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 future levels of loan charge-offs, future levels of provisions for loan losses, real estate valuation, future levels of nonperforming assets, the rate of asset dispositions, future capital levels, future dividends, future growth and funding sources, future liquidity levels, future profitability levels, future deposit insurance premiums, future asset levels, the effects on earnings of future changes in interest rates, the future level of other revenue sources, future economic trends and conditions, future initiatives to expand the Corporation’s market share, expected performance and cash flows from acquired loans, future effects of new or changed accounting standards, future opportunities for acquisitions, opportunities to increase top line revenues, the Corporation’s ability to grow its core franchise, future cost savings and the Corporation’s ability to maintain adequate liquidity and capital based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators. 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 and mortgage 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. There can be no assurance that future loan losses will be limited to the amounts estimated. All of the information concerning interest rate sensitivity is 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 the Corporation, 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 Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

This press release may also contain forward-looking statements regarding the Corporation's outlook or expectations with respect to its recently completed acquisition of Lake Michigan, the expected costs to be incurred in connection with the acquisition, Lake Michigan's future performance and consequences of its integration into the Corporation and the impact of the transaction on the Corporation’s future performance.

Risk factors relating to this transaction and the integration of Lake Michigan into the Corporation after closing include, without limitation:

• The transaction may be more expensive to complete and the anticipated benefits, including anticipated cost savings and strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events.
• The integration of Lake Michigan's business and operations into the Corporation, which will include conversion of operating systems and procedures, may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to Lake Michigan's or the Corporation's existing businesses.
• The Corporation's ability to achieve anticipated results from the transaction is dependent on the state of the economic and financial markets going forward. Specifically, the Corporation may incur more credit losses from Lake Michigan's loan portfolio than expected and deposit attrition may be greater than expected.

In addition, risk factors include, but are not limited to, the risk factors described in Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014. 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.