Chemical Financial Corporation Reports 2017 Third Quarter Operating Results

Conference Call Details

Chemical Financial Corporation will host a conference call to discuss its third quarter 2017 operating results on Wednesday, October 25, 2017, at 10:30 a.m. ET. Anyone interested may access the conference call on a live basis by dialing toll-free at 1-844-616-0064 and entering 658387 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 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.

For further information
David T. Provost, CEO
Dennis Klaeser, CFO
989-839-5350

MIDLAND, MI, October 24, 2017 -- Chemical Financial Corporation ("Corporation" or "Chemical") (NASDAQ:CHFC) today announced 2017 third quarter net income of $40.5 million, or $0.56 per diluted share, compared to 2017 second quarter net income of $52.0 million, or $0.73 per diluted share and 2016 third quarter net income of $11.5 million, or $0.23 per diluted share. Excluding merger and restructuring expenses and the change in fair value in loan servicing rights ("significant items"), net income in the third quarter of 2017 was $56.9 million, or $0.79 per diluted share, compared to $53.5 million, or $0.75 per diluted share, in the second quarter of 2017 and $37.4 million, or $0.75 per diluted share, in the third quarter of 2016.(1)

During the third quarter of 2017, significant items included restructuring expenses of $18.8 million, merger expenses of $2.4 million and a $4.0 million detriment to earnings due to the change in fair value in loan servicing rights, compared to merger expenses of $0.5 million and a $1.8 million detriment to earnings due to the change in fair value in loan servicing rights in the second quarter of 2017. The restructuring expenses incurred during the third quarter of 2017 were a result of the Corporation's previously announced restructuring efforts, consisting primarily of severance and retirement related expenses. The third quarter of 2016 included $37.5 million of merger expenses and a $1.2 million detriment to earnings due to the change in fair value in loan servicing rights.

"We are pleased with our core underlying trends this quarter, including increased net interest income, improved operating efficiency and a stable net interest margin," noted David T. Provost, Chief Executive Officer of Chemical Financial Corporation and Thomas C. Shafer, Vice Chairman of the Corporation and Chief Executive Officer of Chemical Bank. "With the enhancements we have made in the third quarter of 2017 in association with our restructuring efforts, we believe we are on target to achieve the long-term growth prospects established as part of our most recent merger performance targets."

The Corporation's return on average assets was 0.86% during the third quarter of 2017, compared to 1.14% during the second quarter of 2017 and 0.37% in the third quarter of 2016. The Corporation's return on average shareholders' equity was 6.1% in the third quarter of 2017, compared to 8.0% during the second quarter of 2017 and 2.9% in the third quarter of 2016. Excluding significant items, the Corporation's return on average assets was 1.21% during the third quarter of 2017, compared to 1.17% during the second quarter of 2017 and 1.22% in the third quarter of 2016 and, excluding significant items, the Corporation's return on average shareholders' equity was 8.6% in the third quarter of 2017, compared to 8.2% during the second quarter of 2017 and 9.6% in the third quarter of 2016. The Corporation's return on average tangible shareholders' equity was 10.9% in the third quarter of 2017, compared to 14.3% during the second quarter of 2017 and 4.7% in the third quarter of 2016. Excluding significant items, the Corporation's return on average tangible equity was 15.3% in the third quarter of 2017, compared to 14.7% during the second quarter of 2017 and 15.4% in the third quarter of 2016.(2)

Net interest income was $143.6 million in the third quarter of 2017, $5.7 million, or 4.1%, higher than the second quarter of 2017 and $46.8 million, or 48.4%, higher than the third quarter of 2016. The higher net interest income in the third quarter of 2017 compared to the second quarter of 2017 was driven by the positive impact of organic loan growth, an increase in the investment securities portfolio, improvement in yields on loans, and one additional day in the quarter. These benefits to net interest income were partially offset by the interest expense impact of increases in average deposits and short-term borrowings. The increase in net interest income in the third quarter of 2017 over the third quarter of 2016 was primarily attributable to organic loan growth and loans acquired in the merger with Talmer Bancorp, Inc. ("Talmer"). The Corporation experienced net organic loan growth of $166.0 million during the third quarter of 2017 and $1.12 billion during the twelve months ended September 30, 2017. The merger with Talmer added $4.88 billion of loans on August 31, 2016.

The net interest margin was 3.40% in the third quarter of 2017, compared to 3.41% in the second quarter of 2017 and 3.49% in the third quarter of 2016. The net interest margin (on a tax-equivalent basis) was 3.48% in both the third quarter of 2017 and second quarter of 2017, compared to 3.58% in the third quarter of 2016.(3) The net interest margin (on a tax-equivalent basis) in the third quarter of 2017, compared to the second quarter of 2017, was compressed due to an increase in the investment securities portfolio funded by an increase in average borrowings and time deposits. This compression was offset by an increase of 9 basis points in yield on total loans in the third quarter of 2017 to 4.31%, compared to the second quarter of 2017, primarily due to higher yields on originated loans and the benefit from interest rate adjustments on variable rate loans during the third quarter of 2017.

The provision for loan losses was $5.5 million in the third quarter of 2017, compared to $6.2 million in the second quarter of 2017 and $4.1 million in the third quarter of 2016. The decrease in the provision for loan losses in the third quarter of 2017, compared to the second quarter of 2017, was primarily the result of a lower amount of net organic loan growth in addition to improvements in collateral position of loans that are individually evaluated for impairment, partially offset by $0.6 million of impairment recorded during the third quarter of 2017 as a result of the quarterly re-estimation of cash flows of the acquired loan portfolio. The increase in provision for loan losses in the third quarter of 2017, compared to the third quarter of 2016, was primarily the result of an increase in originated loan growth. Originated loan growth was $496.5 million in the third quarter of 2017, compared to $699.9 million in the second quarter of 2017 and $377.0 million in the third quarter of 2016. The growth in the originated loan portfolio was partially offset by run-off in the acquired loan portfolio of $330.5 million in the third quarter of 2017, compared to $305.9 million in the second quarter of 2017 and $190.9 million in the third quarter of 2016. 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 September 30, 2017, the allowance recorded for this population of loans was $0.6 million, reflecting impairment recorded during the third quarter of 2017.

Net loan charge-offs were $3.5 million, or 0.10% of average loans, in the third quarter of 2017, compared to $1.2 million, or 0.04% of average loans, in the second quarter of 2017 and $1.8 million, or 0.08% of average loans, in the third quarter of 2016. The increase in charge-offs in the third quarter of 2017 was primarily due to one commercial loan relationship.

The Corporation's nonperforming loans totaled $54.3 million at September 30, 2017, compared to $50.9 million at June 30, 2017 and $41.3 million at September 30, 2016. Nonperforming loans comprised 0.39% of total loans at September 30, 2017, compared to 0.37% at June 30, 2017 and 0.32% at September 30, 2016. The increase in the percentage of nonperforming loans to total loans at September 30, 2017, compared to June 30, 2017, was primarily due to an increase in commercial real estate nonaccrual loans.

At September 30, 2017, the allowance for loan losses was $85.8 million, including $85.2 million for the originated loan portfolio and $0.6 million for the acquired loan portfolio. The allowance for loan losses for the originated loan portfolio was $85.2 million, or 0.93% of originated loans at September 30, 2017, compared to $83.8 million, or 0.97% of originated loans, at June 30, 2017 and $73.8 million, or 1.09% of originated loans, at September 30, 2016. The reduction in the allowance for loan losses as a percentage of originated loans primarily reflects improvement in collateral position of loans individually evaluated for impairment. The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 156.9% at September 30, 2017, compared to 164.7% at June 30, 2017 and 178.6% at September 30, 2016. The allowance for loan losses for the acquired loan portfolio of $0.6 million was established during the third quarter of 2017 due to impairment identified in the quarterly re-estimation of cash flows.

Noninterest income was $32.1 million in the third quarter of 2017, compared to $41.6 million in the second quarter of 2017 and $27.8 million in the third quarter of 2016. Noninterest income in the third quarter of 2017 decreased compared to the second quarter of 2017, primarily due to decreases in net gain on sale of loans and other mortgage banking revenue of $4.6 million and other charges and fees for customer services of $3.1 million. The decrease in net gain on sale of loans and other mortgage banking revenue, included a $4.0 million detriment to earnings due to a change in fair value in loan servicing rights in the third quarter of 2017, compared to a $1.8 million detriment in the second quarter of 2017. The decrease in other charges and fees for customers services in the third quarter of 2017, compared to the second quarter of 2017, was primarily due to a reduction in interchange fees resulting from limitations set by the Durbin amendment, which became effective for the Corporation July 1, 2017.

Operating expenses were $119.5 million in the third quarter of 2017, compared to $98.2 million in the second quarter of 2017 and $106.1 million in the third quarter of 2016. Operating expenses included merger and restructuring expenses of $21.2 million in the third quarter of 2017, $0.5 million in the second quarter of 2017 and $37.5 million in the third quarter of 2016. The increase in merger and restructuring expenses in the third quarter of 2017, compared to the second quarter of 2017, was primarily due to the Corporation's previously announced restructuring efforts. Third quarter of 2017 other operating expenses included $3.1 million of impairment related to a federal housing tax credit placed into service in the third quarter of 2017. Excluding merger and restructuring expenses and the impairment of federal housing tax credit, core operating expenses were $95.2 million in the third quarter of 2017, a decrease of $2.5 million compared to the second quarter of 2017.(4) We expect a decline in operating expenses from the previously announced restructuring efforts to be evident in the fourth quarter of 2017.

The Corporation's effective tax rate was 20.2% in the third quarter of 2017, compared to 30.7% in the second quarter of 2017 and 19.9% in the third quarter of 2016. The tax rate for the third quarter of 2017 benefited from a federal housing tax credit placed into service during the quarter. The income tax benefit from the tax credit placed into service was partially offset by the impairment recorded on the same tax credit included within other operating expenses. The tax rate for the third quarter of 2016 benefited from stock option exercises that occurred in the third quarter of 2016.

The efficiency ratio is a measure of operating expenses as a percentage of net interest income and noninterest income. The Corporation's efficiency ratio was 68.0% in the third quarter of 2017, compared to 54.7% in the second quarter of 2017 and 85.2% in the third quarter of 2016. The Corporation's adjusted efficiency ratio, which excludes significant items, amortization of intangibles, impairment of income tax credits, the net interest income FTE adjustment and gains from sale of investment securities and closed branch locations, was 51.2% in the third quarter of 2017, compared to 52.2% in the second quarter of 2017 and 52.7% in the third quarter of 2016.(5)

Total assets were $19.35 billion at September 30, 2017, compared to $18.78 billion at June 30, 2017 and $17.38 billion at September 30, 2016. The increase in total assets during the three months ended September 30, 2017 was primarily attributable to an increase in investment securities and loan growth that was funded primarily by an increase in deposits. During the quarter, the investment securities portfolio grew by $273.8 million to $2.69 billion at September 30, 2017. The increase in total assets during the twelve months ended September 30, 2017 was primarily attributable to organic loan growth and an increase in investment securities.

Total loans were $13.83 billion at September 30, 2017, an increase of $166.0 million, or 1.2%, from total loans of $13.67 billion at June 30, 2017 and an increase of $1.12 billion, or 8.8%, from total loans of $12.72 billion at September 30, 2016. The Corporation experienced organic loan growth of $166.0 million during the third quarter of 2017 and $1.12 billion during the twelve months ended September 30, 2017.

Total deposits were $13.81 billion at September 30, 2017, compared to $13.20 billion at June 30, 2017 and $13.27 billion at September 30, 2016. The increase in deposits during the three months ended September 30, 2017 was primarily due to an increase in interest-bearing demand accounts and other time deposits. The Corporation experienced organic growth in customer deposits of $591.8 million during the third quarter of 2017.

Securities sold under agreements to repurchase with customers were $414.6 million at September 30, 2017, compared to $310.0 million at June 30, 2017 and $326.8 million at September 30, 2016. Short-term borrowings were $1.90 billion at September 30, 2017, compared to $2.05 billion at June 30, 2017 and $400.0 million at September 30, 2016 and consisted of short-term FHLB advances utilized by the Corporation to fund short-term liquidity needs. Longterm borrowings were $397.8 million at September 30, 2017, compared to $435.9 million at June 30, 2017 and $676.6 million at September 30, 2016.

The Corporation's shareholders' equity to total assets ratio was 13.8% at September 30, 2017, compared to 14.1% at June 30, 2017 and 14.7% at September 30, 2016. The Corporation's tangible equity to tangible assets ratio and total risk-based capital ratio were 8.3% and 11.2% (estimated), respectively, at September 30, 2017 compared to 8.4% and 11.1%, respectively, at June 30, 2017 and 8.7% and 11.1%, respectively, at September 30, 2016. (6) The Corporation's book value was $37.57 per share at September 30, 2017, compared to $37.11 per share at June 30, 2017 and $36.37 per share at September 30, 2016. The Corporation's tangible book value was $21.36 per share at September 30, 2017, compared to $20.89 per share at June 30, 2017 and $19.99 per share at September 30, 2016.(7)


(1) Net income, excluding significant items, and diluted earnings per share, excluding significant items, are non-GAAP financial measures. 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.

(2) Return on average assets, excluding significant items, return on average shareholders’ equity, excluding significant items, return on average tangible shareholders' equity, and return on average tangible shareholders' equity, excluding significant items are non-GAAP financial measures. 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.

(3) Net interest margin, on a tax equivalent basis, is a non-GAAP financial measure. Please refer to the section entitled "Non-GAAP Financial Measures" in this press release and to the financial tables entitled "Average Balances, Fully Tax Equivalent (FTE) Interest and Effective Yields and Rates" for a reconciliation of net interest income used to compute net interest margin on a tax equivalent basis to the most directly comparable GAAP financial measure.

(4) Operating expenses excluding transaction expenses is a non-GAAP financial measure.

(5) Adjusted efficiency ratio is a non-GAAP financial measure. 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 measure.

(6) Tangible equity to tangible assets ratio is a non-GAAP financial measure. 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 measure.

(7) Tangible book value per share is a non-GAAP financial measure. 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 measure.