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Chemical Financial Corporation reports 2018 second quarter net income of $69.0 million, representing $0.96 of earnings per diluted average share

Company Release - 7/24/2018 4:15 PM ET

Chemical Financial Corporation declares cash dividend on common stock of $0.34 per share, an increase of $0.06 per share

MIDLAND, Mich., July 24, 2018 (GLOBE NEWSWIRE) -- Chemical Financial Corporation ("Chemical," "we," "us" or "our") (NASDAQ:CHFC) today announced 2018 second quarter net income of $69.0 million, or $0.96 per diluted share, compared to 2018 first quarter net income of $71.6 million, or $0.99 per diluted share and 2017 second quarter net income of $52.0 million, or $0.73 per diluted share. In addition, on July 24, 2018, our Board of Directors declared a third quarter of 2018 dividend on our common stock of $0.34 per share. The third quarter of 2018 dividend will be payable on September 21, 2018, to shareholders of record on September 7, 2018. The third quarter of 2018 dividend represents a $0.06, or 21.4%, increase over the second quarter of 2018 dividend of $0.28.

"Our results for the quarter reflect our continued strong growth which included 10% annualized loan growth and an increase in net interest income of $5.7 million compared to the prior quarter. We are pleased with the improvement in our net interest margin and our ability to maintain our efficiency ratio in a period in which we were working diligently on completing substantial upgrades to our core operating systems," noted David T. Provost, Chief Executive Officer of Chemical and Thomas C. Shafer, Vice Chairman of Chemical and Chief Executive Office of Chemical Bank. "This past weekend we crossed a significant milestone with the successful completion of these upgrades. With the system transformation complete, we believe we are well positioned to continue our strong revenue growth through the optimal best-in-class service experience we are creating for our customers."

Our return on average assets was 1.39% during the second quarter of 2018, compared to 1.47% during the first quarter of 2018 and 1.14% in the second quarter of 2017. Our return on average tangible shareholders' equity was 17.8% in the second quarter of 2018, compared to 19.0% during the first quarter of 2018 and 14.3% in the second quarter of 2017.

Our net interest income was $157.5 million in the second quarter of 2018, $5.7 million, or 3.7%, higher than the first quarter of 2018 and $19.6 million, or 14.2%, higher than the second quarter of 2017. The increase in our net interest income in the second quarter of 2018, compared to both the first quarter of 2018 and the second quarter of 2017, was primarily attributable to increases in average balances and yields earned on loans and investment securities, partially offset by an increase in our cost of funds. For the second quarter of 2018, we experienced loan growth of $360.9 million, compared to the first quarter of 2018 and $912.3 million compared to June 30, 2017. Approximately 40% of loan growth in the second quarter of 2018 was within our commercial loan portfolio. Our investment securities portfolio grew by $158.6 million, compared to the first quarter of 2018, and $719.5 million, compared to June 30, 2017.

Our net interest margin was 3.54% in the second quarter of 2018, compared to 3.51% in the first quarter of 2018 and 3.41% in the second quarter of 2017. Our net interest margin (fully taxable equivalent (FTE)), a non-GAAP financial measure, was 3.59% in the second quarter of 2018, compared to 3.56% in the first quarter of 2018 and 3.48% in the second quarter of 2017.(1) The increase in our net interest margin (FTE),  in the second quarter of 2018, compared to both the first quarter of 2018 and the second quarter of 2017, was primarily due to increases in average balances and yields earned on loans and investment securities, partially offset by an increase in our cost of funds. The average yield on our loan portfolio increased to 4.63% in the second quarter of 2018, compared to 4.48% in the first quarter of 2018 and 4.22% in the second quarter of 2017. Interest accretion from purchase accounting discounts on acquired loans contributed 26 basis points to our net interest margin (FTE), in the second quarter of 2018, compared to 29 basis points in the first quarter of 2018 and 21 basis points in the second quarter of 2017. Our average cost of funds was 0.76% in the second quarter of 2018, compared to 0.64% in the first quarter of 2018 and 0.44% in the second quarter of 2017.

Our provision for loan losses was $9.6 million in the second quarter of 2018, compared to $6.3 million in the first quarter of 2018 and $6.2 million in the second quarter of 2017. The increase in the provision for loan losses in the second quarter of 2018, compared to the first quarter of 2018, was primarily the result of an increase in originated loan growth. The provision for loan losses in the second quarter of 2017 received the benefit of an improvement in credit quality indicators. We recorded all acquired loans at their estimated fair value at each respective acquisition date without a carryover of the related allowance and, as of both June 30, 2018 and March 31, 2018, we determined no allowance was needed for this population of loans.

Net loan charge-offs were $4.3 million, or 0.12% of average loans, in the second quarter of 2018, compared to $3.4 million, or 0.10% of average loans, in the first quarter of 2018 and $1.2 million, or 0.04% of average loans, in the second quarter of 2017. The increase in charge-offs in the second quarter of 2018, compared to both the first quarter of 2018 and the second quarter of 2017, was primarily due to charge-offs taken on loans individually evaluated for impairment with previously established specific reserves.

Our nonperforming loans totaled $66.7 million at June 30, 2018, compared to $61.8 million at March 31, 2018 and $50.9 million at June 30, 2017. Nonperforming loans comprised 0.46% of total loans at June 30, 2018, compared to 0.43% at March 31, 2018 and 0.37% at June 30, 2017. The increase in nonperforming loans in the second quarter of 2018, compared to the first quarter of 2018, was primarily due to a real estate construction loan relationship being downgraded to nonaccrual status. The increase in nonperforming loans at June 30, 2018, compared to June 30, 2017, was primarily due to an increase in commercial real estate nonaccrual loans and the real estate construction loan relationship downgraded to nonaccrual status in the second quarter of 2018.

Our allowance for loan losses for our originated loan portfolio was $100.0 million, or 0.94% of originated loans, at June 30, 2018, compared to $94.8 million, or 0.95% of originated loans, at March 31, 2018 and $83.8 million, or 0.97% of originated loans, at June 30, 2017. Our allowance for loan losses of our originated loan portfolio as a percentage of nonperforming loans was 149.9% at June 30, 2018, compared to 153.3% at March 31, 2018 and 164.7% at June 30, 2017. The results of our quarterly re-estimation of cash flows on our acquired loan portfolios resulted in no allowance for our acquired loan portfolios as of June 30, 2018, March 31, 2018 or June 30, 2017.

Our noninterest income was $38.0 million in the second quarter of 2018, compared to $40.6 million in the first quarter of 2018 and $41.6 million in the second quarter of 2017. Noninterest income in the second quarter of 2018 decreased compared to the first quarter of 2018, primarily due to a $3.7 million decrease in net gain on sale of loans and other mortgage banking revenue, partially offset by a $0.9 million increase in wealth management revenue. Noninterest income in the second quarter of 2018 decreased compared to the second quarter of 2017, primarily due to a $3.9 million decrease in other charges and fees for customer services and a $1.0 million decrease in net gain on sale of loans and other mortgage banking revenue, partially offset by a $1.4 million increase in other noninterest income. Net gain on sale of loans and other mortgage banking revenue, included a $30 thousand detriment to earnings due to a change in fair value in loan servicing rights in the second quarter of 2018, compared to a $3.8 million benefit in the first quarter of 2018 and a $1.8 million detriment in the second quarter of 2017. The change in fair value in loan servicing rights provided no impact to diluted earnings per share in the second quarter of 2018, compared to a $0.04 benefit in the first quarter of 2018 and a $0.02 detriment in the second quarter of 2017. The Durbin amendment became effective for us on July 1, 2017, which resulted in a reduction in interchange fees included within other charges and fees for customer services in the second quarter of 2018 compared to the second quarter of 2017.

Our operating expenses were $104.6 million in the second quarter of 2018, compared to $101.6 million in the first quarter of 2018 and $98.2 million in the second quarter of 2017. We had no merger and restructuring expenses during the first or second quarters of 2018 and $0.5 million in the second quarter of 2017. Second quarter of 2018 included $1.7 million of impairment related to a federal historic tax credit placed into service during the quarter, included within other operating expense in our Consolidated Statements of Income, compared to $1.6 million of impairment related to a federal historic tax credit in the first quarter of 2018. Our core operating expenses, a non-GAAP financial measure, which excludes merger and restructuring expenses for the second quarter of 2017 and the impairment of federal historic tax credits for each period, were $102.8 million in the second quarter of 2018, an increase of $2.8 million, compared to $100.0 million for the first quarter of 2018, and an increase of $5.0 million compared to $97.8 million for the second quarter of 2017. Noninterest expense increased in the second quarter of 2018, compared to the first quarter of 2018, primarily due to increases in other operating expenses of $1.8 million, equipment and software of $0.6 million and salaries, wages and employee benefits of $0.6 million. Noninterest expense increased in the second quarter of 2018, compared to the second quarter of 2017, primarily due to increases in salaries, wages and employee benefits of $3.9 million, other operating expenses of $2.1 million and outside processing and service fees of $1.7 million, partially offset by a decrease in occupancy expense of $1.1 million. Costs related to our efforts to implement upgrades to our core operating systems were $5.6 million in the second quarter of 2018, made up of $3.2 million of expense and $2.4 million in costs that were capitalized. The first quarter of 2018 included costs related to our core operating system upgrades of $2.8 million, made up of $1.0 million of expense and $1.8 million in capitalized costs. Expense incurred related to our core operating system upgrades included $1.7 million of other expense, $1.0 million of outside processing and service fees, and $0.5 million of salaries, wages and employee benefits in the second quarter of 2018 and $0.8 million in outside processing and service fees and $0.2 million of other expense in the first quarter of 2018.

Our efficiency ratio is a measure of operating expenses as a percentage of net interest income and noninterest income. Our efficiency ratio was 53.5% in the second quarter of 2018, compared to 52.8% in the first quarter of 2018 and 54.7% in the second quarter of 2017. Our adjusted efficiency ratio, a non-GAAP financial measure, which excludes, as applicable, amortization of intangibles, merger expenses, impairment of income tax credits, the net interest income FTE adjustment, the change in fair value on loan servicing rights, and losses/gains from sale of investment securities, was 51.2% in the second quarter of 2018, compared to 51.6% in the first quarter of 2018 and 52.2% in the second quarter of 2017.(1)

Our effective tax rate was 15.3% in both the second quarter of 2018 and the first quarter of 2018, compared to 30.7% in the second quarter of 2017. Our tax rates for 2018 benefited from the enactment of the Tax Cuts and Jobs Act which reduced the federal corporate tax rate to 21% effective January 1, 2018. In addition, the second and first quarters of 2018 received a $1.9 million benefit and $1.5 million benefit, respectively, from federal historic tax credits placed into service during the quarter.

Our total assets were $20.28 billion at June 30, 2018, compared to $19.76 billion at March 31, 2018 and $18.78 billion at June 30, 2017. The increase in our total assets during both the second quarter of 2018 and the twelve months ended June 30, 2018 was primarily attributable to net loan growth and additions to our investment securities portfolio.

Our total loans were $14.58 billion at June 30, 2018, an increase of $360.9 million, from total loans of $14.22 billion at March 31, 2018 and an increase of $912.3 million, from total loans of $13.67 billion at June 30, 2017. We experienced originated loan growth of $684.0 million during the second quarter of 2018, compared to $265.1 million in the first quarter of 2018 and $699.9 million in the second quarter of 2017. Growth in our originated loan portfolio was partially offset by run-off in our acquired loan portfolio of $323.1 million in the second quarter of 2018, compared to $201.6 million in the first quarter of 2018 and $305.9 million in the second quarter of 2017.

Our investment securities portfolio totaled $3.13 billion at June 30, 2018, an increase of $158.6 million, compared to $2.97 billion at March 31, 2018, and an increase of $719.5 million, compared to $2.41 billion at June 30, 2017. The increase in the investment securities portfolio in both the second quarter of 2018 and the twelve months ended June 30, 2018 reflects our long-term plan to increase our investment securities portfolio as a percentage of total assets.

Our total deposits were $14.55 billion at June 30, 2018, compared to $13.97 billion at March 31, 2018 and $13.20 billion at June 30, 2017. The increase in deposits during the three months ended June 30, 2018 was due to increases in brokered deposits of $436.1 million and customer deposits of $147.6 million. Collateralized customer deposits were $378.9 million at June 30, 2018, compared to $490.1 million at March 31, 2018 and $310.0 million at June 30, 2017. Loans as a percentage of deposits plus collateralized customer deposits were 97.7% at June 30, 2018, compared to 98.3% at March 31, 2018 and 101.1% at June 30, 2017.

Our short-term borrowings were $2.10 billion at June 30, 2018, compared to $2.05 billion at both March 31, 2018 at June 30, 2017. At June 30, 2018 our short-term borrowings included $2.08 billion of short-term FHLB advances that we used to fund our short-term liquidity needs. Our long-term borrowings were $331.0 million at June 30, 2018, compared to $372.9 million at March 31, 2018 and $435.9 million at June 30, 2017.

Our shareholders' equity to total assets ratio was 13.6% at June 30, 2018, compared to 13.7% at March 31, 2018 and 14.1% at June 30, 2017. Our tangible shareholders' equity to tangible assets ratio, a non-GAAP financial measure, and total risk-based capital ratio were 8.3% and 11.3% (estimated), respectively, at June 30, 2018 compared to 8.3% and 11.2%, respectively, at March 31, 2018 and 8.4% and 11.1%, respectively, at June 30, 2017. (1) Our book value was $38.52 per share at June 30, 2018, compared to $37.91 per share at March 31, 2018 and $37.11 per share at June 30, 2017. Our tangible book value, a non-GAAP financial measure, was $22.33 per share at June 30, 2018, compared to $21.68 per share at March 31, 2018 and $20.89 per share at June 30, 2017.(1)

____________________
(1)  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 our second quarter 2018 operating results on Wednesday, July 25, 2018, at 10:30 a.m. ET. Anyone interested may access the conference call on a live basis by dialing toll-free at 855-719-5008 and entering 735645 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 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, 2018, we had total assets of $20.28 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, 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.

These non-GAAP financial measures have been included because we believe they 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

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. Words and phrases such as "anticipates," "believes," "plans," "continue," "estimates," "expects," "forecasts," "future," "intends," "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. These statements include, among others, our belief that we are well positioned to continue our strong revenue growth. 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 Chemical, specifically, are also inherently uncertain.

Forward-looking statements are based upon current beliefs and expectations and involve substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, such 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. We undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Risk factors include, without limitation, a downturn in the economy, particularly in our markets, volatile credit and financial markets both domestic and foreign, potential deterioration in real estate values, operational and regulatory challenges associated with our information technology systems and policies and procedures in light of our rapid growth , regulatory changes, excessive loan losses, 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, our inability to execute on our strategy to expand investments and commercial lending, and our inability to grow our deposits.

In addition, risk factors include, but are not limited to, the risk factors described in Item 1A of Chemical's Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Reports on Form 10-Q. 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.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Consolidated Statements of Financial Position (Unaudited)
Chemical Financial Corporation
(In thousands, except per share data)

 June 30,
 2018
 March 31,
 2018
 December 31,
 2017
 June 30,
 2017
        
Assets       
Cash and cash equivalents:       
Cash and cash due from banks$222,748  $174,173  $226,003  $230,219 
Interest-bearing deposits with the Federal Reserve Bank and other banks and federal funds sold302,532  379,320  229,988  389,022 
Total cash and cash equivalents525,280  553,493  455,991  619,241 
Investment securities:       
Available-for-sale2,529,910  2,297,123  1,963,546  1,767,478 
Held-to-maturity602,687  676,847  677,093  645,605 
Total investment securities3,132,597  2,973,970  2,640,639  2,413,083 
Loans held-for-sale46,849  31,636  52,133  65,371 
Loans:       
Total loans14,579,693  14,218,747  14,155,267  13,667,372 
Allowance for loan losses(100,015) (94,762) (91,887) (83,797)
Net loans14,479,678  14,123,985  14,063,380  13,583,575 
Premises and equipment125,970  126,251  126,896  146,460 
Loan servicing rights70,364  68,837  63,841  64,522 
Goodwill1,134,568  1,134,568  1,134,568  1,133,534 
Other intangible assets31,407  32,833  34,271  37,322 
Interest receivable and other assets735,890  711,937  709,154  718,297 
Total Assets$20,282,603  $19,757,510  $19,280,873  $18,781,405 
Liabilities       
Deposits:       
Noninterest-bearing$3,894,259  $3,801,125  $3,725,779  $3,626,592 
Interest-bearing10,657,277  10,166,692  9,917,024  9,577,775 
Total deposits14,551,536  13,967,817  13,642,803  13,204,367 
Collateralized customer deposits378,938  490,107  415,236  310,042 
Short-term borrowings2,095,000  2,050,000  2,000,000  2,050,000 
Long-term borrowings330,956  372,908  372,882  435,852 
Interest payable and other liabilities175,174  171,975  181,203  141,702 
Total liabilities17,531,604  17,052,807  16,612,124  16,141,963 
Shareholders' Equity       
Preferred stock, no par value per share       
Common stock, $1 par value per share71,418  71,350  71,207  71,131 
Additional paid-in capital2,205,402  2,201,803  2,203,637  2,197,501 
Retained earnings521,530  472,604  419,403  404,939 
Accumulated other comprehensive loss(47,351) (41,054) (25,498) (34,129)
Total shareholders' equity2,750,999  2,704,703  2,668,749  2,639,442 
Total Liabilities and Shareholders' Equity$20,282,603  $19,757,510  $19,280,873  $18,781,405 

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Consolidated Statements of Income (Unaudited)
Chemical Financial Corporation
(In thousands, except per share data)

 Three Months Ended Six Months Ended
 June 30,
 2018
 March 31,
2018(1)
 June 30,
 2017
 June 30,
 2018
 June 30,
 2017
Interest Income         
Interest and fees on loans$165,388  $156,818  $141,314  $322,206  $273,799 
Interest on investment securities:         
Taxable14,706  12,419  7,125  27,125  11,881 
Tax-exempt5,998  5,556  4,426  11,554  8,661 
Dividends on nonmarketable equity securities2,189  1,901  1,246  4,090  1,867 
Interest on deposits with the Federal Reserve Bank and other banks and federal funds sold1,301  1,240  1,022  2,541  1,821 
Total interest income189,582  177,934  155,133  367,516  298,029 
Interest Expense         
Interest on deposits19,707  15,917  10,582  35,624  19,498 
Interest on collateralized customer deposits641  524  196  1,165  346 
Interest on short-term borrowings10,408  8,166  4,463  18,574  5,971 
Interest on long-term borrowings1,289  1,464  1,944  2,753  4,169 
Total interest expense32,045  26,071  17,185  58,116  29,984 
Net Interest Income157,537  151,863  137,948  309,400  268,045 
Provision for loan losses9,572  6,256  6,229  15,828  10,279 
Net interest income after provision for loan losses147,965  145,607  131,719  293,572  257,766 
Noninterest Income         
Service charges and fees on deposit accounts8,615  8,463  8,777  17,078  16,781 
Wealth management revenue7,188  6,311  6,958  13,499  12,785 
Other charges and fees for customer services5,874  5,754  9,734  11,628  18,625 
Net gain on sale of loans and other mortgage banking revenue8,844  12,535  9,879  21,379  19,039 
Gain on sale of investment securities3    77  3  167 
Other7,494  7,491  6,143  14,985  12,181 
Total noninterest income38,018  40,554  41,568  78,572  79,578 
Operating Expenses         
Salaries, wages and employee benefits56,148  55,557  52,247  111,705  112,141 
Occupancy7,679  8,011  8,745  15,690  16,137 
Equipment and software8,276  7,659  8,149  15,935  16,666 
Outside processing and service fees10,673  10,356  8,924  21,029  16,435 
Merger expenses    465    4,632 
Other21,785  20,027  19,707  41,812  36,422 
Total operating expenses104,561  101,610  98,237  206,171  202,433 
Income before income taxes81,422  84,551  75,050  165,973  134,911 
Income tax expense12,434  12,955  23,036  25,389  35,293 
Net Income$68,988  $71,596  $52,014  $140,584  $99,618 
Earnings Per Common Share:         
Weighted average common shares outstanding-basic71,329  71,231  70,819  71,280  70,725 
Weighted average common shares outstanding-diluted72,026  71,906  71,443  71,966  71,429 
Basic earnings per share$0.97  $1.01  $0.73  $1.97  $1.41 
Diluted earnings per share0.96  0.99  0.73  1.95  1.39 
Diluted earnings per share, excluding significant items (non-GAAP)0.96  0.99  0.73  1.95  1.43 
Cash Dividends Declared Per Common Share0.28  0.28  0.27  0.56  0.54 
Key Ratios (annualized where applicable):         
Return on average assets1.39% 1.47% 1.14% 1.43% 1.11%
Return on average tangible shareholders' equity, excluding significant items (non-GAAP)17.8% 19.0% 14.4% 18.4% 14.2%
Net interest margin (tax-equivalent basis) (non-GAAP)3.59% 3.56% 3.48% 3.58% 3.49%
Efficiency ratio - GAAP53.5% 52.8% 54.7% 53.1% 58.2%
Efficiency ratio - adjusted (non-GAAP)51.2% 51.6% 52.2% 51.4% 54.7%


(1) First quarter 2018 information is revised to reflect the impact of the capitalization of certain costs associated with our core system transformation. The capitalization resulted in an increase in net income of $1.4 million, including a reduction in total operating expenses of $1.7 million, partially offset by an increase to income tax expense of $322 thousand for the first quarter of 2018.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Selected Quarterly Information (Unaudited)
Chemical Financial Corporation
(Dollars in thousands, except per share data)

 2nd
Quarter
2018
 1st
Quarter
2018(1)
 4th
Quarter
2017
 3rd
Quarter
2017
 2nd
Quarter
2017
 1st
Quarter
2017
Summary of Operations           
Interest income$ 189,582  $177,934  $169,162  $164,944  $155,133  $142,896 
Interest expense 32,045  26,071  23,257  21,316  17,185  12,799 
Net interest income 157,537  151,863  145,905  143,628  137,948  130,097 
Provision for loan losses 9,572  6,256  7,522  5,499  6,229  4,050 
Net interest income after provision for loan losses 147,965  145,607  138,383  138,129  131,719  126,047 
Noninterest income 38,018  40,554  32,319  32,122  41,568  38,010 
Operating expenses, excluding merger and restructuring expenses and impairment of income tax credits (non-GAAP) 102,845  99,976  91,298  95,241  97,772  100,029 
Merger and restructuring expenses     2,567  21,203  465  4,167 
Impairment of income tax credits 1,716  1,634  6,157  3,095     
Income before income taxes 81,422  84,551  70,680  50,712  75,050  59,861 
Income tax expense 12,434  12,955  61,234  10,253  23,036  12,257 
Net income$68,988  $71,596  $9,446  $40,459  $52,014  $47,604 
Significant items, net of tax     53,240  13,782  302  2,709 
Net income, excluding significant items$68,988  $71,596  $62,686  $54,241  $52,316  $50,313 
            
Per Common Share Data           
Net income:           
Basic$0.97  $1.01  $0.13  $0.57  $0.73  $0.67 
Diluted 0.96  0.99  0.13  0.56  0.73  0.67 
Diluted, excluding significant items (non-GAAP) 0.96  0.99  0.87  0.76  0.73  0.70 
Cash dividends declared 0.28  0.28  0.28  0.28  0.27  0.27 
Book value - period-end 38.52  37.91  37.48  37.57  37.11  36.56 
Tangible book value - period-end (non-GAAP) 22.33  21.68  21.21  21.36  20.89  20.32 
Market value - period-end 55.67  54.68  53.47  52.26  48.41  51.15 
            
Key Ratios (annualized where applicable)          
Net interest margin (taxable equivalent basis) (non-GAAP) 3.59% 3.56% 3.47% 3.48% 3.48% 3.49%
Efficiency ratio - adjusted (non-GAAP) 51.2% 51.6% 47.4% 51.2% 52.2% 57.4%
Return on average assets 1.39% 1.47% 0.20% 0.86% 1.14% 1.09%
Return on average shareholders' equity 10.2% 10.7% 1.4% 6.1% 8.0% 7.4%
Return on average tangible shareholders' equity (non-GAAP) 17.8% 19.0% 2.5% 10.9% 14.3% 13.3%
Average shareholders' equity as a percent of average assets 13.6% 13.7% 13.9% 14.0% 14.3% 14.8%
Capital ratios (period end):           
Tangible shareholders' equity as a percent of tangible assets 8.3% 8.3% 8.3% 8.3% 8.4% 8.8%
Total risk-based capital ratio (2) 11.3% 11.2% 11.0% 11.2% 11.1% 11.4%


(1) First quarter 2018 information is revised to reflect the impact of the capitalization of certain costs associated with our core system transformation. The capitalization resulted in an increase in net income of $1.4 million, including a reduction in total operating expenses of $1.7 million, partially offset by an increase to income tax expense of $322 thousand for the first quarter of 2018.
(2) Estimated at June 30, 2018.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Average Balances, Fully Tax Equivalent (FTE) Interest and Effective Yields and Rates(1) (Unaudited)
Chemical Financial Corporation
(Dollars in thousands)

 Three Months Ended
 June 30, 2018 March 31, 2018 June 30, 2017
 Average
Balance
 Interest
(FTE)
 Effective
Yield/
Rate (1)
 Average
Balance
 Interest
(FTE)
 Effective
Yield/
Rate (1)
 Average
Balance
 Interest
(FTE)
 Effective
Yield/
Rate (1)
Assets                 
Interest-earning assets:                 
Loans (1)(2)$14,389,574  $166,125  4.63% $14,224,926  $ 157,568  4.48% $13,513,927  $ 142,128  4.22%
Taxable investment securities2,019,003  14,706  2.91  1,781,995   12,419  2.79  1,364,358   7,125  2.09 
Tax-exempt investment securities(1)1,020,567  7,592  2.98  1,010,092   7,033  2.79  882,445   6,781  3.07 
Other interest-earning assets189,654  2,189  4.63  180,084   1,901  4.28  166,244   1,246  3.01 
Interest-bearing deposits with the FRB and other banks and federal funds sold228,464  1,301  2.28  262,910   1,240  1.91  302,022   1,022  1.36 
Total interest-earning assets17,847,262  191,913  4.31  17,460,007   180,161  4.17  16,228,996   158,302  3.91 
Less: allowance for loan losses(96,332)     (92,648)     (80,690)    
Other assets:                 
Cash and cash due from banks219,751      226,660      222,954     
Premises and equipment126,570      126,742      145,320     
Interest receivable and other assets1,753,742      1,737,116      1,748,119     
Total assets$19,850,993      $19,457,877      $18,264,699     
Liabilities and shareholders' equity              
Interest-bearing liabilities:                 
Interest-bearing checking deposits$2,597,610  $1,393  0.22% $2,767,267  $1,225  0.18% $2,682,652  $1,289  0.19%
Savings deposits4,116,683  6,074  0.59  4,047,004   4,937  0.49  3,881,260   3,047  0.31 
Time deposits3,468,395  12,240  1.42  3,262,568   9,755  1.21  2,958,436   6,246  0.85 
Collateralized customer deposits399,911  641  0.64  409,077   524  0.52  337,670   196  0.23 
Short-term borrowings2,249,655  10,408  1.86  2,055,556   8,166  1.61  1,689,835   4,463  1.06 
Long-term borrowings336,985  1,289  1.53  372,886   1,464  1.59  474,086   1,944  1.65 
Total interest-bearing liabilities13,169,239  32,045  0.98  12,914,358   26,071  0.82  12,023,939   17,185  0.57 
Noninterest-bearing deposits3,792,803      3,688,581       3,499,686      
Total deposits and borrowed funds16,962,042  32,045  0.76  16,602,939   26,071  0.64  15,523,625   17,185  0.44 
Interest payable and other liabilities181,605      186,613      134,557     
Shareholders' equity2,707,346      2,668,325      2,606,517     
Total liabilities and shareholders' equity$19,850,993      $19,457,877      $18,264,699     
Net Interest Spread (Average yield earned on interest-earning assets minus average rate paid on interest-bearing liabilities) 3.33%     3.35%     3.34%
Net Interest Income (FTE)  $159,868      $ 154,090      $ 141,117   
Net Interest Margin (Net Interest Income (FTE) divided by total average interest-earning assets)  3.59%     3.56%     3.48%
Reconciliation to Reported Net Interest Income                
Net interest income, fully taxable equivalent (non-GAAP) $159,868      $ 154,090      $ 141,117   
Adjustments for taxable equivalent interest (1):                
Loans  (737)      (750)      (814)  
Tax-exempt investment securities  (1,594)      (1,477)      (2,355)  
Total taxable equivalent interest adjustments (2,331)      (2,227)      (3,169)  
Net interest income (GAAP)  $157,537      $ 151,863      $ 137,948   
Net interest margin (GAAP)  3.54%      3.51%      3.41%  


(1) Fully taxable equivalent (FTE) basis using a federal income tax rate of 21% for the three months ended June 30, 2018 and March 31, 2018 and 35% for the three months ended June 30, 2017. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry.
(2) Nonaccrual loans and loans held-for-sale are included in average balances reported and are included in the calculation of yields. Tax equivalent interest also includes net loan fees.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Average Balances, Fully Tax Equivalent (FTE) Interest and Effective Yields and Rates (1) (Unaudited)
Chemical Financial Corporation
(Dollars in thousands)

  Six Months Ended
  June 30, 2018 June 30, 2017
  Average
Balance
 Interest
(FTE)
 Effective
Yield/
Rate (1)
 Average
Balance
 Interest (FTE) Effective
Yield/
Rate (1)
Assets  
Interest-earning assets:            
Loans (1)(2) $14,307,705  $323,693  4.55% $13,335,876  $275,421  4.16%
Taxable investment securities 1,901,154  27,125  2.85  1,185,915  11,881  2.00 
Tax-exempt investment securities (1) 1,015,358  14,625  2.88  872,034  13,276  3.04 
Other interest-earning assets 184,895  4,090  4.46  134,962  1,867  2.79 
Interest-bearing deposits with the FRB and other banks and federal funds sold 245,592  2,541  2.09  285,746  1,821  1.28 
Total interest-earning assets 17,654,704  372,074  4.24  15,814,533  304,266  3.87 
Less: allowance for loan losses (94,500)     (79,658)    
Other assets:            
Cash and cash due from banks 223,186      226,061     
Premises and equipment 126,656      145,680     
Interest receivable and other assets 1,745,475      1,764,925     
Total assets $19,655,521      $17,871,541     
Liabilities and Shareholders' Equity            
Interest-bearing liabilities:            
Interest-bearing demand deposits $2,681,970  $2,618  0.20% $2,789,762  $2,307  0.17%
Savings deposits 4,082,036  11,011  0.54  3,862,033  4,768  0.25 
Time deposits 3,366,051  21,995  1.32  2,955,768  12,423  0.85 
Collateralized customer deposits 404,468  1,165  0.58  335,679  346  0.21 
Short-term borrowings 2,153,069  18,574  1.74  1,293,232  5,971  0.93 
Long-term borrowings 354,909  2,753  1.56  506,379  4,169  1.66 
Total interest-bearing liabilities 13,042,503  58,116  0.90  11,742,853  29,984  0.51 
Noninterest-bearing deposits 3,740,979      3,402,981     
Total deposits and borrowed funds 16,783,482  58,116  0.70  15,145,834  29,984  0.40 
Interest payable and other liabilities 184,096      130,140     
Shareholders' equity 2,687,943      2,595,567     
Total liabilities and shareholders' equity $19,655,521      $17,871,541     
Net Interest Spread (Average yield earned on interest-earning assets minus average rate paid on interest-bearing liabilities)     3.34%     3.36%
Net Interest Income (FTE)   $313,958      $274,282   
Net Interest Margin (Net Interest Income (FTE) divided by total average interest-earning assets)     3.58%     3.49%
             
Reconciliation to Reported Net Interest Income            
Net interest income, fully taxable equivalent (non-GAAP)   $313,958      $274,282   
Adjustments for taxable equivalent interest (1):            
Loans   (1,487)     (1,622)  
Tax-exempt investment securities   (3,071)     (4,615)  
Total taxable equivalent interest adjustments   (4,558)     (6,237)  
Net interest income (GAAP)   $309,400      $268,045   
Net interest margin (GAAP)   3.53%     3.41%  

 

(1) Fully taxable equivalent (FTE) basis using a federal income tax rate of 21% for the six months ended June 30, 2018 and 35% for the six months ended June 30, 2017. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry.
(2) Nonaccrual loans and loans held-for-sale are included in average balances reported and are included in the calculation of yields. Tax equivalent interest also includes net loan fees.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Noninterest Income and Operating Expenses Information (Unaudited)
Chemical Financial Corporation
(Dollars in thousands)

 2nd
Quarter
2018
 1st
Quarter
2018
 4th
Quarter
2017
 3rd
Quarter
2017
 2nd
Quarter
2017
 1st
Quarter
2017
  
Noninterest income           
Service charges and fees on deposit accounts$8,615  $8,463  $9,073  $9,147  $8,777  $8,004 
Wealth management revenue(1)7,188  6,311  6,539  6,188  6,958  5,827 
Other fees for customer services1,624  1,697  1,944  2,254  2,252  2,074 
Electronic banking fees4,250  4,057  5,578  4,370  7,482  6,817 
Net gain on sale of loans and other mortgage banking revenue8,874  8,783  7,938  9,282  11,681  9,679 
Change in fair value in loan servicing rights(1)(30) 3,752  (13) (4,041) (1,802) (519)
Gain (loss) on sale of investment securities3    (7,556) 1  77  90 
Bank-owned life insurance1,669  891  1,377  1,124  1,106  1,211 
Other5,825  6,600  7,439  3,797  5,037  4,827 
Total noninterest income$38,018  $40,554  $32,319  $32,122  $41,568  $38,010 


(1) Included within the line item "Other charges and fees for customer services" in the Consolidated Statements of Income.
(2) Included within the line item "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income.


 2nd
Quarter
2018
 1st
Quarter
2018(1)
 4th
Quarter
2017
 3rd
Quarter
2017
 2nd
Quarter
2017
 1st
Quarter
2017
  
Operating expenses           
Salaries and wages$47,810  $45,644  $41,866  $44,641  $44,959  $48,526 
Employee benefits8,338  9,913  5,497  7,949  7,288  11,368 
Occupancy7,679  8,011  7,546  6,871  8,745  7,392 
Equipment and software8,276  7,659  8,000  7,582  8,149  8,517 
Outside processing and service fees10,673  10,356  9,081  9,626  8,924  7,511 
FDIC insurance premiums4,473  5,629  4,556  2,768  2,460  1,406 
Professional fees3,004  2,458  3,483  3,489  2,567  1,968 
Intangible asset amortization1,426  1,439  1,525  1,526  1,525  1,513 
Credit-related expenses1,467  1,306  803  1,874  1,895  1,200 
Merger expenses    1,511  2,379  465  4,167 
Restructuring expenses    1,056  18,824     
Impairment of income tax credit1,716  1,634  6,157  3,095     
Other9,699  7,561  8,941  8,915  11,260  10,628 
Total operating expenses$104,561  $101,610  $100,022  $119,539  $98,237  $104,196 


(1) First quarter 2018 information is revised to reflect the impact of the capitalization of certain costs associated with our core system transformation. The capitalization resulted in a reduction in total operating expenses of $1.7 million for the first quarter of 2018.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Composition of Loans and Deposits and Additional Information on Intangible Assets (Unaudited)
Chemical Financial Corporation
(Dollars in Thousands)

     Loan
Growth
       Loan
Growth
 Jun 30,
 2018
 Mar 31,
 2018
 Three
Months
Ended
June 30,
2018
 Dec 31,
 2017
 Sep 30,
 2017
 Jun 30,
 2017
 Twelve
Months
Ended
June 30,
2018
              
Composition of Loans             
Commercial loan portfolio:             
Commercial$3,576,438  $3,427,285  4.4% $3,385,642  $3,319,965  $3,360,161  6.4%
Commercial real estate:             
Owner-occupied1,863,563  1,832,824  1.7  1,813,562  1,718,404  1,695,947  9.9 
Non-owner occupied2,728,103  2,680,801  1.8  2,606,761  2,514,538  2,550,396  7.0 
Vacant land79,606  74,751  6.5  80,347  83,036  77,980  2.1 
Total commercial real estate4,671,272  4,588,376  1.8  4,500,670  4,315,978  4,324,323  8.0 
Real estate construction618,985  559,780  10.6  574,215  501,413  446,678  38.6 
Subtotal - commercial loans8,866,695  8,575,441  3.4  8,460,527  8,137,356  8,131,162  9.0 
Consumer loan portfolio:             
Residential mortgage3,325,277  3,264,620  1.9  3,252,487  3,221,307  3,125,397  6.4 
Consumer installment1,587,327  1,572,240  1.0  1,613,008  1,615,983  1,553,967  2.1 
Home equity800,394  806,446  (0.8) 829,245  858,722  856,846  (6.6)
Subtotal - consumer loans5,712,998  5,643,306  1.2  5,694,740  5,696,012  5,536,210  3.2 
Total loans$14,579,693  $14,218,747  2.5% $14,155,267  $13,833,368  $13,667,372  6.7%


     Deposit
Growth
       Deposit
Growth
 Jun 30,
 2018
 Mar 31,
 2018
 Three
Months
Ended
June 30,
2018
 Dec 31,
 2017
 Sep 30,
 2017
 Jun 30,
 2017
 Twelve
Months
Ended
June 30,
2018
Composition of Deposits             
Noninterest-bearing demand$3,894,259  $3,801,125  2.5% $3,725,779  $3,688,848  $3,626,592  7.4%
Savings and money market accounts3,841,540  3,774,975  1.8  3,655,671  3,743,826  3,702,524  3.8 
Interest-bearing checking2,514,232  2,701,055  (6.9) 2,724,415  2,974,478  2,605,673  (3.5)
Brokered deposits1,087,959  651,846  66.9  453,227  416,926  406,174  167.9 
Other time deposits3,213,546  3,038,816  5.7  3,083,711  2,981,167  2,863,404  12.2 
Total deposits$14,551,536  $13,967,817  4.2% $13,642,803  $13,805,245  $13,204,367  10.2%


 June 30,
 2018
 March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
          
Additional Data - Intangibles         
Goodwill$1,134,568  $1,134,568  $1,134,568  $1,134,568  $1,133,534 
Loan servicing rights70,364  68,837  63,841  62,195  64,522 
Core deposit intangibles (CDI)31,407  32,833  34,259  35,747  37,235 
Noncompete agreements    13  50  87 

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Nonperforming Assets (Unaudited)
Chemical Financial Corporation
(Dollars in thousands)

 Jun 30,
 2018
 Mar 31,
 2018
 Dec 31,
 2017
 Sep 30,
 2017
 Jun 30,
 2017
 Mar 31,
 2017
Nonperforming Assets           
Nonperforming Loans (1):           
Nonaccrual loans:           
Commercial$20,741  $20,000  $19,691  $15,648  $18,773  $16,717 
Commercial real estate:           
Owner-occupied16,103  19,855  19,070  16,295  11,683  12,575 
Non-owner occupied9,168  5,489  5,270  4,361  3,600  3,793 
Vacant land3,135  4,829  5,205  4,494  4,440  4,460 
Total commercial real estate28,406  30,173  29,545  25,150  19,723  20,828 
Real estate construction5,704  77  77  78  56  79 
Residential mortgage7,974  7,621  8,635  8,646  7,714  6,749 
Consumer installment945  922  842  875  757  755 
Home equity2,972  3,039  4,305  3,908  3,871  2,713 
Total nonaccrual loans(1)66,742  61,832  63,095  54,305  50,894  47,841 
Other real estate and repossessed assets5,828  7,719  8,807  10,605  14,582  16,395 
Total nonperforming assets$72,570  $69,551  $71,902  $64,910  $65,476  $64,236 
Accruing loans contractually past due 90 days or more as to interest or principal payments, excluding acquired loans accounted for under ASC 310-30:
Commercial$472  $322  $  $3,521  $58  $1,823 
Commercial real estate:           
Owner-occupied461      144    700 
Non-owner occupied    13       
Vacant land16        262   
Total commercial real estate477    13  144  262  700 
Home equity713  913  1,364  2,367  2,026  1,169 
Total accruing loans contractually past due 90 days or more as to interest or principal payments$1,662  $1,235  $1,377  $6,032  $2,346  $3,692 


(1) Acquired loans, accounted for under Accounting Standards Codification 310-30, that are not performing in accordance with contractual terms are not reported as nonperforming loans because these loans are recorded in pools at their net realizable value based on the principal and interest we expect to collect on these loans.

Chemical Financial Corporation Announces 2018 Second Quarter Operating Results

 

Summary of Allowance and Loan Loss Experience (Unaudited)
Chemical Financial Corporation
(Dollars in thousands)

 2nd
Quarter
2018
 1st
Quarter
2018
 4th
Quarter
2017
 3rd
Quarter
2017
 2nd
Quarter
2017
 1st
Quarter
2017
 Six Months Ended
       Jun 30,
 2018
 Jun 30,
 2017
Allowance for loan losses - originated loan portfolio      
Allowance for loan losses - beginning of period$94,762  $91,887  $85,181  $83,797  $78,774  $78,268  $91,887  $78,268 
Provision for loan losses 9,572  6,256  8,101  4,920  6,229  4,050  15,828  10,279 
Net loan (charge-offs) recoveries:              
Commercial (517) (1,252) (613) (2,348) (239) (1,999) (1,769) (2,238)
Commercial real estate:               
Owner-occupied (1,656) 341  (232) (170) (173) 725  (1,315) 552 
Non-owner occupied 92  (456) 748  (7) (35) 21  (364) (14)
Vacant land (921) (448) 267  3  3  (16) (1,369) (13)
Total commercial real estate (2,485) (563) 783  (174) (205) 730  (3,048) 525 
Real estate construction   26  (1)     (9) 26  (9)
Residential mortgage (88) (53) (142) (44) 19  (567) (141) (548)
Consumer installment (994) (997) (1,318) (857) (747) (1,310) (1,991) (2,057)
Home equity (235) (542) (104) (113) (34) (389) (777) (423)
Net loan charge-offs (4,319) (3,381) (1,395) (3,536) (1,206) (3,544) (7,700) (4,750)
Allowance for loan losses - end of period 100,015  94,762  91,887  85,181