Chemical Financial Corporation reports first quarter 2019 net income of $62.9 million, representing $0.87 of earnings per diluted share

DETROIT, April 23, 2019 (GLOBE NEWSWIRE) -- Chemical Financial Corporation ("Chemical") (NASDAQ:CHFC) today announced 2019 first quarter net income of $62.9 million, or $0.87 per diluted share, compared to 2018 fourth quarter net income of $73.0 million, or $1.01 per diluted share, and 2018 first quarter net income of $71.6 million, or $0.99 per diluted share. Net income, excluding the change in fair of value in loan servicing rights and merger expenses (collectively, "significant items"), a non-GAAP financial measure, was $73.3 million, or $1.02 per diluted share, in the first quarter of 2019, compared to $75.3 million, or $1.04 per diluted share, in the fourth quarter of 2018 and $68.6 million, or $0.95 per diluted share, in the first quarter of 2018.⁽¹⁾  In addition, on April 23, 2019, our Board of Directors declared a second quarter dividend on our common stock of $0.34 per share. The dividend will be payable on June 21, 2019, to shareholders of record on June 7, 2019.

"Results for the quarter continue the path of our sound operating performance reflecting strong deposit growth, low loan charge-off rates and disciplined expense management," noted David T. Provost, Chief Executive Officer of Chemical and Thomas C. Shafer, Vice Chairman of Chemical and Chief Executive Officer of Chemical Bank. "As we look forward to the remainder of the year, we believe we have a solid loan pipeline to improve loan growth and continue to grow our net interest income. As we combine this loan growth with the focused control of our core operating expenses while maintaining other solid fundamentals, we believe we are in a solid position for a successful 2019."

Return on average assets was 1.17% for the first quarter of 2019, compared to 1.39% for the fourth quarter of 2018 and 1.47% for the first quarter of 2018. Return on average assets, excluding significant items, a non-GAAP financial measure, was 1.36% for the first quarter of 2019, compared to 1.44% for the fourth quarter of 2018 and 1.41% for the first quarter of 2018.⁽¹⁾  Return on average tangible shareholders' equity was 14.8% for the first quarter of 2019, compared to 17.8% for the fourth quarter of 2018 and 19.0% for the first quarter of 2018. Return on average tangible shareholders' equity, excluding significant items, a non-GAAP financial measure, was 17.2% for the first quarter of 2019, compared to 18.3% for the fourth quarter of 2018 and 18.2% for the first quarter of 2018.⁽¹⁾

Net interest income was $162.8 million for the first quarter of 2019, $0.6 million, or 0.4%, lower than the fourth quarter of 2018 and $11.0 million, or 7.2%, higher than the first quarter of 2018. The decrease in net interest income in the first quarter of 2019, compared to the fourth quarter of 2018, was primarily attributable to an increase in average deposit balances and cost of funds, partially offset by the benefit from an increase in average balances and yields earned on loans and investment securities. The increase in net interest income in the first quarter of 2019, compared to the first quarter of 2018, was primarily attributable to increases in average balances and yields earned on loans and investment securities, partially offset by increases in average interest-bearing deposit balances and cost of funds. First quarter of 2019 net loan growth was $54.3 million, or an annualized growth rate of 1.4%, and net loan growth over the past twelve months was $1.11 billion, or 7.8%. The investment securities portfolio grew by $277.6 million, compared to the fourth quarter of 2018, and $949.6 million, compared to the first quarter of 2018.

Net interest margin was 3.38% in the first quarter of 2019, compared to 3.42% in the fourth quarter of 2018 and 3.51% in the first quarter of 2018. Net interest margin (fully taxable equivalent (FTE)), a non-GAAP financial measure, was 3.42% in the first quarter of 2019, compared to 3.49% in the fourth quarter of 2018 and 3.56% in the first quarter of 2018.⁽¹⁾ The decrease in net interest margin (FTE), in the first quarter of 2019, compared to both the fourth quarter of 2018 and the first quarter of 2018, was primarily due to an increase in average deposit balances and cost of funds, partially offset by increases in average balances and yields earned on loans and investment securities. Average cost of funds was 1.13% in the first quarter of 2019, compared to 1.03% in the fourth quarter of 2018 and 0.64% in the first quarter of 2018. The average yield on the loan portfolio increased to 4.86% in the first quarter of 2019, compared to 4.80% in the fourth quarter of 2018 and 4.48% in the first quarter of 2018. Interest accretion from purchase accounting discounts on acquired loans contributed 22 basis points to the net interest margin (FTE), in the first quarter of 2019, compared to 23 basis points in the fourth quarter of 2018 and 29 basis points in the first quarter of 2018.

The provision for loan losses was $2.1 million in the first quarter of 2019, compared to $8.9 million in the fourth quarter of 2018 and $6.3 million in the first quarter of 2018. The decrease in total provision for loan losses in the first quarter of 2019, compared to the fourth quarter of 2018, was primarily the result of a decrease in originated loan growth, low loan charge-off rates and recoveries in the acquired loan portfolio. The decrease in the provision for loan losses in the first quarter of 2019, compared to the first quarter of 2018, was primarily the result of an improvement in overall credit quality.

Net loan charge-offs were $1.8 million, or 0.05% of average loans, in the first quarter of 2019, compared to $3.0 million, or 0.08% of average loans, in the fourth quarter of 2018 and $3.4 million, or 0.10% of average loans, in the first quarter of 2018.

Nonperforming loans totaled $89.3 million at March 31, 2019, compared to $85.4 million at December 31, 2018 and $61.8 million at March 31, 2018. Nonperforming loans comprised 0.58% of total loans at March 31, 2019, compared to 0.56% at December 31, 2018 and 0.43% at March 31, 2018. The increase in nonperforming loans as a percentage of total loans at March 31, 2019, compared to March 31, 2018, was primarily due to commercial and commercial real estate loan relationships that were downgraded to nonaccrual status during the second half of 2018. Each nonperforming loan is individually evaluated for impairment, and we have either established a specific reserve within the allowance for loan losses or charged the loan relationship down to the value of the underlying collateral.

The allowance for loan losses on the originated loan portfolio was $110.3 million, or 0.91% of originated loans, at March 31, 2019, compared to $109.6 million, or 0.93% of originated loans, at December 31, 2018 and $94.8 million, or 0.95% of originated loans, at March 31, 2018. The allowance for loan losses on the originated loan portfolio as a percentage of nonperforming loans decreased to 123.5% at March 31, 2019, compared to 128.2% at December 31, 2018 and 153.3% at March 31, 2018, primarily due to sustained low loan charge-off rates and stable overall credit quality. 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 both March 31, 2019 and March 31, 2018, it was determined that no allowance was needed for the acquired loan portfolio. As of December 31, 2018, the allowance for loan losses on the acquired loan portfolio was $420 thousand.

Noninterest income was $24.9 million in the first quarter of 2019, compared to $32.0 million in the fourth quarter of 2018 and $40.6 million in the first quarter of 2018. Noninterest income in the first quarter of 2019 decreased, compared to the fourth quarter of 2018, primarily related to the change in fair value in loan servicing rights, included within net gain on sale of loans and other mortgage banking revenue, and a decrease of $1.6 million in electronic banking fees, included within other charges and fees for customer services. Noninterest income in the first quarter of 2019 decreased, compared to the first quarter of 2018, primarily due to the change in fair value in loan servicing rights, included within net gain on sale of loans and other mortgage banking revenue. Net gain on sale of loans and other mortgage banking revenue included a $7.6 million detriment to earnings due to a change in fair value in loan servicing rights in the first quarter of 2019, compared to a $2.8 million detriment in the fourth quarter of 2018 and a $3.8 million benefit in the first quarter of 2018. The change in fair value in loan servicing rights was a detriment of $0.09 to diluted earnings per share in the first quarter of 2019, compared to a detriment of $0.03 in the fourth quarter of 2018 and a $0.04 benefit in the first quarter of 2018.

Operating expenses were $109.0 million in the first quarter of 2019, compared to $108.4 million in the fourth quarter of 2018 and $101.6 million in the first quarter of 2018. Operating expenses, core, a non-GAAP financial measure that excludes the impact of merger expenses and federal historic tax credits, were $103.6 million for the first quarter of 2019, compared to $102.6 million for the fourth quarter of 2018 and $100.0 million for the first quarter of 2018.⁽¹⁾  The $1.0 million increase in operating expenses, core, in the first quarter of 2019, compared to the fourth quarter of 2018, was primarily due to an increase in salaries, wages and employee benefits impacted by a decrease in the deferral of loan origination costs due to lower loan production and an increase in payroll taxes due to the beginning of a new tax year. The $3.6 million increase in operating expenses, core, in the first quarter of 2019, compared to the first quarter of 2018, was primarily due to an increase in salaries, wages and employee benefits impacted by increases in staff to support the strategic focus on commercial lending growth and an increase in outside processing and service fees due to the substantial enhancements to our core operating systems. First quarter of 2019 included $5.4 million of merger related expenses, resulting in a detriment of $0.06 to diluted earnings per share. Impairment related to federal historic tax credits, included within other operating expense in our Consolidated Statements of Income, totaled $5.8 million in the fourth quarter of 2018 and $1.6 million in the first quarter of 2018. Expense related to our efforts to implement upgrades to our core operating systems totaled $1.6 million in the fourth quarter of 2018 and $1.0 million in the first quarter of 2018.

The efficiency ratio is a measure of operating expenses as a percentage of net interest income and noninterest income. The efficiency ratio was 58.1% in the first quarter of 2019, compared to 55.4% in the fourth quarter of 2018 and 52.8% in the first quarter of 2018. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes, as applicable, the significant items defined above, amortization of intangibles, impairment of federal income tax credits, the net interest income FTE adjustment and gains from sale of investment securities, was 51.7% in the first quarter of 2019, compared to 50.4% in the fourth quarter of 2018 and 51.6% in the first quarter of 2018.⁽¹⁾

The effective tax rate was 17.8% in the first quarter of 2019, compared to 6.6% in the fourth quarter of 2018 and 15.3% in the first quarter of 2018. The tax rate for the fourth quarter of 2018 and first quarter of 2018 benefited from federal historic tax credits of $5.8 million and $1.5 million, respectively. The income tax benefit from the tax credits placed into service was partially offset by the impairment recorded on the same tax credits included within other operating expenses. The effective tax rate for the fourth quarter of 2018 also benefited from adjustments to tax provisional amounts related to the one year measurement period provided by Staff Accounting Bulletin No. 118 in order to finalize items that were not available in the enactment period associated with the passing of the Tax Cuts and Jobs Act and by certain changes in estimates associated with the filing of our final 2017 tax return.

Total assets were $21.80 billion at March 31, 2019, compared to $21.50 billion at December 31, 2018 and $19.76 billion at March 31, 2018. The increase in total assets during the first quarter of 2019 and the twelve months ended March 31, 2019 was primarily attributable to net loan growth and additions to the investment securities portfolio.

Total loans were $15.32 billion at March 31, 2019, an increase of $54.3 million, from total loans of $15.27 billion at December 31, 2018 and an increase of $1.11 billion, from total loans of $14.22 billion at March 31, 2018. Originated loan growth was $297.5 million during the first quarter of 2019, compared to $699.3 million in the fourth quarter of 2018 and $265.1 million in the first quarter of 2018. Growth in the originated loan portfolio was partially offset by run-off in the acquired loan portfolio of $243.2 million in the first quarter of 2019, compared to $225.8 million in the fourth quarter of 2018 and $201.6 million in the first quarter of 2018.

The investment securities portfolio totaled $3.92 billion at March 31, 2019, an increase of $277.6 million, compared to $3.65 billion at December 31, 2018, and an increase of $949.6 million, compared to $2.97 billion at March 31, 2018. The increase in the investment securities portfolio in both the first quarter of 2019 and the twelve months ended March 31, 2019 reflects our long-term plan to increase our investment securities portfolio as a percentage of total assets.

Total deposits increased to $16.06 billion at March 31, 2019, compared to $15.59 billion at December 31, 2018 and $13.97 billion at March 31, 2018. The increase in deposits during the first quarter of 2019 was primarily due to an increase in customer deposits of $419.3 million, with increases across all categories, and an increase in brokered deposits of $49.4 million. The increase in deposits during the twelve months ended March 31, 2019 was primarily due to increases of $1.71 billion in customer deposits and $383.1 million in brokered deposits. Collateralized customer deposits were $413.2 million at March 31, 2019, compared to $382.7 million at December 31, 2018 and $490.1 million at March 31, 2018. Loans, as a percentage of deposits plus collateralized customer deposits, were 93.0% at March 31, 2019, compared to 95.6% at December 31, 2018 and 98.3% at March 31, 2018.

Short-term borrowings were $1.74 billion at March 31, 2019, compared to $2.04 billion at December 31, 2018 and $2.05 billion at March 31, 2018. Short-term borrowings include short-term FHLB advances that we used to fund our short-term liquidity needs. Long-term borrowings were $426.0 million at both March 31, 2019 and December 31, 2018, compared to $372.9 million at March 31, 2018.

Shareholders' equity to total assets ratio was 13.3% at March 31, 2019, compared to 13.2% at December 31, 2018 and 13.7% at March 31, 2018. Tangible shareholders' equity to tangible assets ratio, a non-GAAP financial measure, and total risk-based capital ratio were 8.5% and 11.7% (estimated), respectively, at March 31, 2019, compared to 8.3% and 11.5%, respectively, at December 31, 2018 and 8.3% and 11.2%, respectively, at March 31, 2018.⁽¹⁾  Book value was $40.50 per share at March 31, 2019, compared to $39.69 per share at December 31, 2018 and $37.91 per share at March 31, 2018. Tangible book value, a non-GAAP financial measure, was $24.39 per share at March 31, 2019, compared to $23.54 per share at December 31, 2018 and $21.68 per share at March 31, 2018.⁽¹⁾

Conference Call Details

Chemical Financial Corporation will host a conference call to discuss first quarter of 2019 operating results on Wednesday, April 24, 2019, at 10:30 a.m. ET. Anyone interested may access the conference call on a live basis by dialing toll-free at 888-378-4398 and entering 911188 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 can be accessed on Chemical Financial Corporation's website 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 March 31, 2019, we had total consolidated assets of $21.80 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, tangible shareholders' equity to tangible assets, 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.

Management used non-GAAP financial measures as follows; in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. We believe these non-GAAP financial measures 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

Statements included in this press release which are not historical in nature are intended to be, and hereby are identified as, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding our loan pipeline, future loan growth, increases in net interest income, and the belief that we are in a solid position for a successful 2019. 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.

Management's determination of the provision and allowance for loan losses; the carrying value of acquired loans, goodwill and loan 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. 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 subject to risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:

• 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;
• operational and regulatory challenges associated with our information technology systems and policies and procedures in light of our rapid growth and systems conversion in 2018;
• our inability to grow deposits;
• our ability to execute on our strategy to expand investments and commercial lending;
• our inability to efficiently manage our operating expenses;
• the possibility that our previously announced merger with TCF Financial Corporation ("TCF") does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
• the occurrence of any event, change or other circumstance that could give rise to the right of Chemical, TCF or both to terminate the merger agreement;
• the outcome of pending or threatened litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to our proposed merger with TCF;
• potential difficulty in maintaining relationships with clients, employees or business partners as a result of our proposed merger with TCF;
• the possibility that the anticipated benefits of our proposed merger with TCF, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Chemical and TCF do business, or as a result of other unexpected factors or events;
• the impact of purchase accounting with respect to the proposed merger with TCF, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
• diversion of management's attention from ongoing business operations and opportunities as a result of the proposed merger with TCF;
• potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger with TCF;
• economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;
• a general decline in the real estate and lending markets, particularly in our market areas, could negatively affect our financial results;
• increased cybersecurity risk, including potential network breaches, business disruptions, or financial losses;
• increases in competitive pressure in the banking and financial services industry;
• increased capital requirements, other regulatory requirements or enhanced regulatory supervision;
• our inability to sustain revenue and earnings growth;
• the timing of when historic tax credits are placed into service could impact operating expenses;
• our inability to efficiently manage operating expenses;
• current or future restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;
• legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;
• changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired; and
• economic, governmental, or other factors may prevent the projected population, residential, and commercial growth in the markets in which we operate.

Additional factors that could cause results to differ materially from those described above can be found in the risk factors described in Item 1A of Chemical’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2018 and Quarterly Reports on Form 10-Q. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results. Chemical disclaims any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law.

⁽¹⁾ Estimated at March 31, 2019.

(1) Fully taxable equivalent (FTE) basis using a federal income tax rate of 21%. 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.

(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.
(3) Included within the line item "Other" noninterest income in the Consolidated Statements of Income.

(1) Included within the line item "Salaries, wages and employee benefits" in the Consolidated Statements of Income.
(2) Included within the line item "Other" operating expenses in the Consolidated Statements of Income.

(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.

(1) Assumes significant items are deductible at an income tax rate of 21%.

For further information:
David T. Provost, CEO
Dennis L. Klaeser, CFO
800-867-9757