Chemical Financial Corporation Announces Fourth Quarter and Full Year 2016 Results

Conference Call Details

            Chemical Financial Corporation will host a conference call to discuss its fourth quarter and full year 2016 operating results on Thursday, January 26, 2017 at 10:00 am ET.  Anyone interested may access the conference call on a live basis by dialing toll-free at 1-888-797-3007 and entering 879991 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, January 25, 2017 -- Chemical Financial Corporation ("Corporation" or "Chemical") (NASDAQ:CHFC) today announced 2016 fourth quarter net income of $47.2 million, or $0.66 per diluted share, compared to 2016 third quarter net income of $11.5 million, or $0.23 per diluted share, and 2015 fourth quarter net income of $25.5 million, or $0.66 per diluted share. For the year ended December 31, 2016, net income was $108.0 million, or $2.17 per diluted share, compared to net income for the year ended December 31, 2015 of $86.8 million, or $2.39 per diluted share.  The increase in net income in the fourth quarter, compared to both the third quarter of 2016 and the fourth quarter of 2015, was driven significantly by the reduction in merger and transaction-related expenses ("transaction expenses") from the completion of the Corporation's merger with Talmer Bancorp, Inc. ("Talmer") and the inclusion of Talmer operations for the full quarter compared to one month's inclusion of operations in the third quarter of 2016 and no inclusion during the fourth quarter of 2015.

            Excluding transaction expenses, net gain on the sale of branches and the change in fair value in loan servicing rights ("significant items"), net income for the fourth quarter of 2016 was $49.9 million, or $0.70 per diluted share, compared to $37.5 million, or $0.75 per diluted share, and $26.9 million, or $0.70 per diluted share in the third quarter of 2016 and the fourth quarter of 2015, respectively.(1)  Net income for the full year 2016, excluding significant items was $140.5 million, or $2.81 per diluted share, compared to $92.3 million, or $2.54 per diluted share for the full year 2015.(1)

                    During the fourth quarter of 2016, transaction expenses of $18.0 million were partially offset by $7.4 million of net gain on the sale of branches and a $6.4 million gain due to the change in fair value in loan servicing rights.  The third quarter of 2016 included the impact of $37.5 million of transaction expenses and a $1.3 million detriment to earnings due to the change in fair value in loan servicing rights, while the fourth quarter of 2015 included $2.1 million of transaction expenses.

            "Our fourth quarter financial results reflect both a solid finish to a milestone year and a strong base from which Chemical Financial Corporation will move forward.  During the quarter, we completed the integration of Talmer Bank and Chemical Bank, our fourth successful integration over the past two years.  Continued stable economic conditions in our core markets facilitated significant organic loan growth during the quarter, and we believe we have an attractive pipeline as we look forward to 2017," noted David B. Ramaker, Chief Executive Officer and President of the Corporation.  “Since year-end 2014, we have more than doubled our asset base and expanded our delivery network beyond Michigan into northeast Ohio and northern Indiana.  We have paired a targeted acquisition strategy with attractive organic growth across the Chemical franchise to achieve these results, never losing sight of our primary goal of meeting the financial service needs of the communities we serve and delivering strong results for our shareholders.”

            The Corporation's return on average assets was 1.09% during the fourth quarter of 2016, compared to 0.37% in the third quarter of 2016 and 1.11% in the fourth quarter of 2015.  The Corporation's return on average shareholders' equity was 7.4% in the fourth quarter of 2016, compared to 2.9% in the third quarter of 2016 and 10.2% in the fourth quarter of 2015.  Excluding significant items, the Corporation's return on average assets was 1.16% during the fourth quarter of 2016, compared to 1.22% in the third quarter of 2016 and 1.17% in the fourth quarter of 2015 and the Corporation's return on average shareholders' equity was 7.8% in the fourth quarter of 2016, compared to 9.6% in the third quarter of 2016 and 10.7% in the fourth quarter of 2015.(2)

            Net interest income was $132.4 million in the fourth quarter of 2016, $35.6 million, or 36.8%, higher than the third quarter of 2016 and $57.0 million, or 75.5%, higher than the fourth quarter of 2015.  The increase in net interest income in the fourth quarter of 2016 over the third quarter of 2016 was primarily attributable to loans acquired in the merger with Talmer, although also partially attributable to organic loan growth.  The increase in net interest income in the fourth quarter of 2016 over the fourth quarter of 2015 was attributable to the positive impact of 2016 organic loan growth and the impact of the merger with Talmer.  The Corporation experienced net organic loan growth of $275.0 million during the fourth quarter of 2016 and $837.2 million during the year ended December 31, 2016.  The merger with Talmer added $4.88 billion of loans on August 31, 2016.

            The net interest margin was 3.48% in the fourth quarter of 2016, compared to 3.49% in the third quarter of 2016 and 3.55% in the fourth quarter of 2015.  The net interest margin (on a tax-equivalent basis) was 3.56% in the fourth quarter of 2016, compared to 3.58% in the third quarter of 2016 and 3.64% in the fourth quarter of 2015.(3)  The decrease in the net interest margin (on a tax-equivalent basis) in the fourth quarter of 2016, compared to the third quarter of 2016, was due primarily to an increase in FHLB borrowing costs, while the decrease in the fourth quarter of 2016, compared to the fourth quarter of 2015, was largely due to an increase in cost of funds significantly due to debt obtained related to transactions. The average yield on the loan portfolio was 4.18% in the fourth quarter of 2016, compared to 4.12% in the third quarter of 2016 and 4.16% in the fourth quarter of 2015.  Interest accretion from purchase accounting discounts on acquired loans contributed 14 basis points to the Corporation's net interest margin (on a tax-equivalent basis) in the fourth quarter of 2016, compared to 11 basis points in the third quarter of 2016 and four basis points in the fourth quarter of 2015.  Interest accretion on acquired loans comprised 16 basis points of the yield on the Corporation's loan portfolio in the fourth quarter of 2016, compared to 13 basis points in the third quarter of 2016 and five basis points in the fourth quarter of 2015.  The Corporation's average cost of funds was 0.33% in the fourth quarter of 2016, compared to 0.25% in both the third quarter of 2016 and the fourth quarter of 2015.

            Net interest income was $381.1 million for the year ended December 31, 2016, $107.1 million, or 39.1%, higher than 2015, with the increase attributable to a combination of organic loan growth and the impact of the merger with Talmer.  The average balance of loans outstanding during the year ended December 31, 2016 were up $2.71 billion compared to the prior year, with the increase driven by the $4.88 billion of loans added on August 31, 2016 from the merger with Talmer and the $837.2 million of organic loan growth during 2016.  The net interest margin was 3.51% in 2016 and 3.49% in 2015.  The net interest margin (on a tax equivalent basis) was 3.60% in 2016 and 3.58% in 2015.(3)

            The provision for loan losses was $6.3 million in the fourth quarter of 2016, compared to $4.1 million in the third quarter of 2016 and $2.0 million in the fourth quarter of 2015.  The increase in the provision for loan losses in the fourth quarter of 2016, compared to both the third quarter of 2016 and the fourth quarter of 2015, was primarily due to organic growth in the loan portfolio.  The provision for loan losses was $14.9 million for the year ended December 31, 2016, compared to $6.5 million in 2015, with the increase primarily due to organic growth in the loan portfolio.

            Net loan charge-offs were $1.8 million, or 0.06% of average loans, in the fourth quarter of 2016, compared to $1.8 million, or 0.08% of average loans, in the third quarter of 2016 and $4.3 million, or 0.24% of average loans, in the fourth quarter of 2015. The decrease in net loan charge-offs in the fourth quarter of 2016, compared to the fourth quarter of 2015, was partially attributable to a $1.6 million net loan charge-off from one commercial loan relationship occurring in the fourth quarter of 2015.  Net loan charge-offs totaled $9.9 million, or 0.11% of average loans, during the year ended December 31, 2016, compared to $8.9 million, or 0.13% of average loans, in 2015.

            The Corporation's nonperforming loans totaled $44.3 million at December 31, 2016, compared to $41.3 million at September 30, 2016 and $62.2 million at December 31, 2015.  Nonperforming loans comprised 0.34% of total loans at December 31, 2016, compared to 0.32% at September 30, 2016 and 0.86% at December 31, 2015. The reduction in nonperforming loans as a percentage of total loans at December 31, 2016, compared to December 31, 2015, was due to the combined impact of overall improvements in credit quality within the Corporation's loan portfolios and the addition of $4.88 billion of loans acquired in the Talmer merger that are all classified as performing as these acquired loans are recorded in pools at their net realizable value.

            At December 31, 2016, the allowance for loan losses of the originated loan portfolio was $78.3 million, or 1.05% of originated loans, compared to $73.8 million, or 1.09% of originated loans, at September 30, 2016 and $73.3 million, or 1.26% of originated loans, at December 31, 2015.   The decrease in the allowance coverage as a percentage of originated loans at December 31, 2016, compared to December 31, 2015, was primarily due to an overall improvement in credit quality and a decline in net credit charge-offs.  The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 176.5% at December 31, 2016, compared to 178.6% at September 30, 2016 and 117.8% at December 31, 2015.

            Noninterest income was $54.3 million in the fourth quarter of 2016, compared to $27.8 million in the third quarter of 2016 and $20.1 million in the fourth quarter of 2015.  Noninterest income in the fourth quarter of 2016 was higher than the third quarter of 2016 and the fourth quarter of 2015 primarily due to incremental revenue resulting from the merger with Talmer, in addition to a net gain on the sales of the Chicago, Illinois and Las Vegas, Nevada branches totaling $7.4 million and a $6.4 million benefit to earnings due to a change in fair value in loan servicing rights included within "mortgage banking revenue".

            Noninterest income was $122.4 million for the year ended December 31, 2016, compared to $80.2 million in 2015.  The increase was primarily due to incremental revenue resulting from the merger with Talmer in August 2016 and the acquisitions of Lake Michigan Financial Corporation in May 2015 and Monarch Community Bancorp in April 2015.

            Operating expenses were $114.3 million in the fourth quarter of 2016, compared to $106.1 million in the third quarter of 2016 and $57.8 million in the fourth quarter of 2015.  Operating expenses included transaction expenses of $18.0 million in the fourth quarter of 2016, $37.5 million in the third quarter of 2016 and $2.1 million in the fourth quarter of 2015.  Excluding transaction expenses, operating expenses were $96.3 million in the fourth quarter of 2016, $27.6 million, or 40.2%, higher than the third quarter of 2016 and $40.5 million, or 72.7%, higher than the fourth quarter of 2015. The increase in operating expenses, excluding transaction expenses, in the fourth quarter of 2016, compared to both the third quarter of 2016 and the fourth quarter of 2015, was due to the incremental expenses resulting from the merger with Talmer.

            Operating expenses were $338.4 million for the year ended December 31, 2016, compared to $223.9 million in 2015.  Operating expenses included transaction expenses of $61.1 million in 2016 and $7.8 million in 2015. Excluding these transaction expenses, operating expenses were $277.3 million in 2016, an increase of $61.2 million, or 28.3%, over 2015, with the increase due primarily to incremental operating costs associated with the merger with Talmer.

            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 61.2% in the fourth quarter of 2016, 85.2% in the third quarter of 2016 and 60.5% in the fourth quarter of 2015. The Corporation's efficiency ratio was 67.2% for the year ended December 31, 2016 and 63.2% for 2015.  The Corporation's adjusted efficiency ratio, which excludes transaction expenses, changes in fair value of the legacy Talmer loan servicing portfolio, amortization of intangibles and net gains on sales of branches, closed branch locations and investment securities, was 53.7% in the fourth quarter of 2016, 52.6% in the third quarter of 2016 and 55.8% in the fourth quarter of 2015.  The Corporation's adjusted efficiency ratio was 54.4% for the year ended December 31, 2016 and 58.7% for 2015.(4)

            Total assets were $17.36 billion at December 31, 2016, compared to $17.38 billion at September 30, 2016 and $9.18 billion at December 31, 2015.  The increase in total assets during the twelve months ended December 31, 2016 was primarily attributable to the merger with Talmer.  As of the merger date, Talmer added total assets of $7.71 billion, including total loans of $4.88 billion and goodwill of $846.7 million. 

            Total loans were $12.99 billion at December 31, 2016, up $275.0 million, or 2.2%, from total loans of $12.72 billion at September 30, 2016 and up $5.72 billion, or 78.7%, from total loans of $7.27 billion at December 31, 2015.  As of the merger date, the Corporation added $4.88 billion of loans as part of the merger with Talmer.  Loan growth of $275.0 million during the fourth quarter of 2016 resulted from the impact of $702.5 million growth in the originated loan portfolio, partially offset by a $427.5 million decrease in the acquired loan portfolios.  Loan growth, excluding the impact of the Talmer acquisition, of $837.2 million during the year ended December 31, 2016 resulted from the impact of $1.65 billion growth in the originated loan portfolio, partially offset by an $813.2 million decrease in the acquired loan portfolios.

            Total deposits were $12.87 billion at December 31, 2016, compared to $13.27 billion at September 30, 2016 and $7.46 billion at December 31, 2015. As of the merger date, the Corporation added $5.29 billion of deposits as part of the merger with Talmer, including $403.2 million of brokered deposits.  During the fourth quarter of 2016, the Corporation reduced the balance of brokered deposits by $248.5 million.  The Corporation experienced net run-off in customer deposits of $402.4 million during the fourth quarter of 2016; however, the Corporation also experienced net organic growth in customer deposits of $317.3 million for the year ended December 31, 2016.

            Securities sold under agreements to repurchase with customers were $343.0 million at December 31, 2016, compared to $326.8 million at September 30, 2016 and $297.2 million at December 31, 2015.  Short-term borrowings were $825.0 million at December 31, 2016, compared to $400.0 million at September 30, 2016 and $100.0 million at December 31, 2015 and consisted of short-term FHLB advances utilized by the Corporation to fund short-term liquidity needs.  Long-term borrowings were $597.8 million at December 31, 2016, compared to $676.6 million at September 30, 2016 and $242.4 million at December 31, 2015.  The increase in borrowings during the twelve months ended December 31, 2016 was primarily attributable to the merger with Talmer and the Corporation borrowing $125.0 million under a three-year credit facility to partially fund the cash portion of the merger consideration.

            The Corporation's shareholders' equity to total assets ratio was 14.9% at December 31, 2016, compared to 14.7% at September 30, 2016 and 11.1% at December 31, 2015.  The Corporation's tangible shareholders' equity to assets ratio and total risk-based capital ratio were 8.8% and 11.5% (estimated), respectively, at December 31, 2016, compared to 8.7% and 11.1%, respectively, at September 30, 2016 and 8.1% and 11.8%, respectively, at December 31, 2015.(5)  The Corporation's book value was $36.57 per share at December 31, 2016, compared to $36.37 per share at September 30, 2016 and $26.62 per share at December 31, 2015.  The Corporation's tangible book value was $20.20 per share at December 31, 2016, compared to $19.99 per share at September 30, 2016 and $18.78 per share at December 31, 2015.(6)

About Chemical Financial Corporation

            Chemical Financial Corporation is the largest banking company headquartered and operating branch offices in Michigan. The Corporation operates through its subsidiary bank, Chemical Bank, with 249 banking offices located in Michigan, northeast Ohio and northern Indiana. At December 31, 2016, the Corporation had total assets of $17.36 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 the Corporation is available by visiting the "Investor Info" section of its website at www.chemicalbank.com.

Non-GAAP Financial Measures

            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 tangible assets ratio, tangible book value per share, presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, and information presented excluding significant items, including net income, diluted earnings per share, return on average assets, return on average shareholders' equity, operating expenses and the efficiency ratio. 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. 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 the Corporation. Words and phrases such as "anticipates," "believes," "continue," "estimates," "expects," "forecasts," "future," "intends," "is likely," "judgment," "look ahead," "look forward," "on schedule," "opinion," "opportunity," "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.

            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, 2015. 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.


(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, and return on average 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) 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.

(5) 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.

(6) 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.