Chemical Financial Corporation Announces 2014 Third Quarter Operating Results


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

Chemical Financial Corporation Reports 2014 Third Quarter Operating Results MIDLAND, MI, October 22, 2014 -- Chemical Financial Corporation (NASDAQ:CHFC) today announced 2014 third quarter net income of $16.8 million, or $0.51 per diluted share, compared to 2013 third quarter net income of $15.0 million, or $0.53 per diluted share, and 2014 second quarter net income of $16.2 million, or $0.54 per diluted share. For the nine months ended September 30, 2014, net income was $46.8 million, or $1.51 per diluted share, compared to net income for the nine months ended September 30, 2013 of $42.4 million, or $1.53 per diluted share. The declines in diluted per share earnings for the three and nine months ended September 30, 2014 were attributable to the higher number of outstanding shares resulting from the Corporation's September 2013 and June 2014 common equity offerings and nonrecurring transaction-related expenses incurred during 2014.

Nonrecurring transaction-related expenses attributable to the pending acquisition of Northwestern Bancorp, Inc. ("Northwestern") were $1.3 million and $2.2 million for the three and nine months ended September 30, 2014, respectively. Regulatory approval has been received and the Corporation expects to complete the acquisition on October 31, 2014, subject to the satisfaction of customary closing conditions.

Excluding nonrecurring transaction-related expenses, net income in the third quarter of 2014 was $17.6 million, or $0.53 per diluted share, up 17% over net income of $15.0 million in the third quarter of 2013.

“Chemical Financial enjoyed another quarter of strong earnings, as continued strength in the Michigan economy and solid performance across our banking franchise allowed us to post double-digit percentage growth in net income before the impact of nonrecurring transaction-related expenses,” noted David B. Ramaker, Chairman, Chief Executive Officer and President of Chemical Financial Corporation. “Michigan's improving economy, coupled with competitive share gains across our market footprint, were the primary drivers of this quarter’s results, enabling us to post double digit loan growth. Margins were stable and credit quality continued to improve.”

"With the receipt of regulatory approval for our previously announced acquisition of Northwestern Bancorp, Inc., the holding company for Northwestern Bank, we anticipate closing the acquisition on October 31, 2014, putting our surplus capital to work. We continue to believe our strategic partnership with Northwestern and its 25 locations across 11 northwestern Michigan counties will provide a compelling choice for the state's residents and businesses," added Ramaker.

Net income, excluding nonrecurring transaction-related expenses, in the third quarter of 2014 was 17% higher than the third quarter of 2013 due to a combination of higher net interest income, higher noninterest income and a lower provision for loan losses, which were partially offset by higher operating expenses. Net income, excluding nonrecurring transaction-related expenses, in the third quarter of 2014 was 5.6% higher than the second quarter of 2014, with the increase primarily attributable to higher net interest income. The Corporation's return on average assets was 1.04% during the third quarter of 2014, compared to 1.00% in the third quarter of 2013 and 1.04% in the second quarter of 2014.

The Corporation's return on average shareholders' equity was 8.4% in the third quarter of 2014, compared to 9.6% in the third quarter of 2013 and 9.1% in the second quarter of 2014. The decreases in return on average shareholders' equity in the third quarter of 2014, compared to both the third quarter of 2013 and the second quarter of 2014, was primarily attributable to increases in shareholders' equity resulting from the Corporation's September 2013 and June 2014 common equity offerings and nonrecurring transaction-related expenses. Nonrecurring transaction-related expenses in the third quarter of 2014 reduced the Corporation's return on average assets by 5 basis points and return on average shareholders' equity by 42 basis points.

Net interest income was $53.1 million in the third quarter of 2014, $3.8 million, or 7.7%, higher than the third quarter of 2013 and $1.6 million, or 3.1%, higher than the second quarter of 2014. The increase in net interest income in the third quarter of 2014 over the third quarter of 2013 was largely attributable to the positive impact of loan growth of $518 million, or 11.5%, during the twelve months ended September 30, 2014. The increase in net interest income in 2 the third quarter of 2014 over the second quarter of 2014 was also largely attributable to the positive impact of loan growth, with average loan balances up $139 million, or 2.9%, in the third quarter of 2014 over the second quarter of 2014.

The net interest margin (on a tax-equivalent basis) was 3.59% in the third quarter of 2014, compared to 3.58% in the third quarter of 2013 and 3.59% in the second quarter of 2014. The positive impact on the net interest margin attributable to loan growth during the three and twelve months ended September 30, 2014 was offset by a reduction in the average yield on the loan portfolio. The average yield on the loan portfolio was 4.23% in the third quarter of 2014, compared to 4.44% in the third quarter of 2013 and 4.26% in the second quarter of 2014. The average yield of the investment securities portfolio was 2.19% in the third quarter of 2014, compared to 2.05% in the third quarter of 2013 and 2.13% in the second quarter of 2014. Modest changes in the mix of customer deposits and the repricing of matured customer certificates of deposit resulted in the Corporation's average cost of funds declining to 0.25% in the third quarter of 2014 from 0.32% in the third quarter of 2013 and 0.27% in the second quarter of 2014.

The provision for loan losses was $1.5 million in the third quarter of 2014, compared to $3.0 million in the third quarter of 2013 and $1.5 million in the second quarter of 2014. The decrease in the provision for loan losses in the third quarter of 2014, compared to the third quarter of 2013, was attributable to the continued improvement in the overall credit quality of the loan portfolio.

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 $70.7 million at September 30, 2014, compared to $73.7 million at June 30, 2014 and $75.8 million at September 30, 2013. Nonperforming loans comprised 1.40% of total loans at September 30, 2014, compared to 1.51% at June 30, 2014 and 1.68% at September 30, 2013. The reduction in nonperforming loans during the three and twelve months ended September 30, 2014 was attributable to a combination of improving economic conditions and loan charge-offs.

Net loan charge-offs were $2.3 million, or 0.18% of average loans, in the third quarter of 2014, compared to $3.7 million, or 0.33% of average loans, in the third quarter of 2013 and $2.2 million, or 0.18% of average loans, in the second quarter of 2014.

At September 30, 2014, the allowance for loan losses of the originated loan portfolio was $76.5 million, or 1.60% of originated loans, compared to $77.3 million, or 1.67% of originated loans, at June 30, 2014 and $81.0 million, or 1.92% of originated loans, at September 30, 2013. The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 108% at September 30, 2014, compared to 105% at June 30, 2014 and 107% at September 30, 2013.

Noninterest income was $15.4 million in the third quarter of 2014, compared to $14.6 million in the third quarter of 2013 and $15.8 million in the second quarter of 2014. Noninterest income in the third quarter of 2014 was $0.7 million higher than the third quarter of 2013, with the increase primarily attributable to modest increases in wealth management revenue and electronic banking fees. Noninterest income in the third quarter of 2014 was $0.5 million lower than the second quarter of 2014, with the decrease primarily attributable to a $0.4 million reduction in the Corporation's secondary mortgage market indemnification reserve in the second quarter of 2014. Operating expenses were $42.7 million in the third quarter of 2014, compared to $39.5 million in the third quarter of 2013 and $42.4 million in the second quarter of 2014.

Operating expenses included nonrecurring transaction-related expenses attributable to the pending acquisition of Northwestern of $1.3 million in the third quarter of 2014 and $0.7 million in the second quarter of 2014. Excluding these nonrecurring transaction-related expenses, operating expenses in the third quarter of 2014 were $1.9 million, or 4.7%, higher than the third quarter of 2013 and $0.3 million lower than the second quarter of 2014. The increase in operating expenses in the third quarter of 2014, compared to the third quarter of 2013, was attributable to higher salaries and wages resulting from merit and market-driven salary adjustments that took effect at the beginning of 2014 and higher credit-related expenses resulting from lower net gains from the sale of other real estate properties.

The Corporation's efficiency ratio was 59.2% in the third quarter of 2014, 60.9% in the second quarter of 2014 and 61.0% in the third quarter of 2013.

Total assets were $6.60 billion at September 30, 2014, compared to $6.23 billion at June 30, 2014 and $6.26 billion at September 30, 2013. The increase in total assets during the three months ended September 30, 2014 was largely attributable to an increase in seasonal municipal deposits, with a large portion of the funds received being held in interest-bearing balances at the Federal Reserve Bank (FRB). The increase in total assets during the twelve months ended September 30, 2014 was largely attributable to an increase in deposits that was used to partially fund loan growth. Interest-bearing balances at the FRB totaled $248.0 million at September 30, 2014, compared to $1.3 million at June 30, 2014 and $357.3 million at September 30, 2013. Investment securities were $894.8 million at September 30, 2014, compared to $924.1 million at June 30, 2014 and $987.7 million at September 30, 2013. The decreases in interestbearing balances at the FRB and investment securities during the twelve months ended September 30, 2014 were attributable to the Corporation utilizing some of the liquidity from its excess funds held at the FRB and maturing investment securities to also fund loan growth.

Total loans were $5.04 billion at September 30, 2014, up from $4.90 billion at June 30, 2014 and $4.52 billion at September 30, 2013. During the three and twelve months ended September 30, 2014, total loans increased $142.1 million, or 2.9%, and $518.2 million, or 11.5%, respectively. The increases in loans during the three and twelve months ended September 30, 2014 generally occurred across all major loan categories, although most notably in the Corporation's consumer loan portfolio, and were largely attributable to a combination of continued improving economic conditions and increased market share. The increase in loans of $142.1 million during the third quarter of 2014 was attributable to increases in consumer installment and home equity loans of $52.5 million, or 4.0%, commercial loans of $27.6 million, or 2.3%, commercial real estate loans of $24.3 million, or 1.9%, real estate construction and land development loans of $24.1 million, or 21.5%, and residential mortgage loans of $13.7 million, or 1.4%.

Total deposits were $5.43 billion at September 30, 2014, compared to $5.09 billion at June 30, 2014 and $5.19 billion at September 30, 2013. The increase in total deposits during the third quarter of 2014 was largely attributable to a seasonal increase in municipal customer deposits. The Corporation experienced an increase in total deposits of $241 million, or 4.6%, during the twelve months ended September 30, 2014.

At September 30, 2014, the Corporation's tangible equity to assets ratio and total risk-based capital ratio were 10.5% and 15.0%, respectively, compared to 11.0% and 15.3%, respectively, at June 30, 2014 and 8.9% and 14.2%, respectively, at September 30, 2013. The increases in the Corporation's capital ratios at September 30, 2014, compared to September 30, 2013, were largely attributable to the Corporation’s June 2014 public offering of common stock. At September 30, 2014, the Corporation's book value was $24.47 per share, compared to $24.22 per share at June 30, 2014 and $22.61 per share at September 30, 2013. At September 30, 2014, the Corporation's tangible book value was $20.68 per share, compared to $20.42 per share at June 30, 2014 and $18.36 per share at September 30, 2013.

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 on a fully taxable equivalent basis (FTE) and information presented excluding nonrecurring transaction-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 2014 operating results on Thursday, October 23, 2014 at 11:00 a.m. EDT. Anyone interested may access the conference call on a live basis by dialing toll-free at 1-800-390-5360 and entering 7350138 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 a single subsidiary bank, Chemical Bank, with 157 banking offices spread over 38 counties in Michigan. At September 30, 2014, the Corporation had total assets of $6.6 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 Chemical Financial Corporation (Corporation). Words and phrases such as "anticipates," "believes," "continue," "estimates," "expects," "forecasts," "intends," "is likely," "judgment," "look forward," "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. 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 post retirement 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 forwardlooking. 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 contain forward-looking statements regarding the Corporation's outlook or expectations with respect to the planned acquisition of Northwestern Bancorp, Inc. (Northwestern), the expected costs to be incurred in connection with the acquisition, Northwestern’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 both the transaction and the integration of Northwestern into the Corporation after closing include, without limitation:

The impact of the completion of the transaction on the Corporation's financial statements will be affected by the timing of the transaction, including in particular the ability to complete the acquisition in the fourth quarter of 2014.

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 Northwestern's business and operations into the Corporation, which will include conversion of Northwestern's operating systems and procedures, may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to Northwestern'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 Northwestern’s loan portfolio than expected and deposit attrition may be greater than expected.

Risk factors also include, but are not limited to, the risk factors described under "Risk Factors" (including the risk factors under the heading "Risk Factors - Risks Related to the Pending Merger with Northwestern") in the Corporation's Prospectus Supplement, dated June 19, 2014, and in Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013. 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.