Chemical Financial Corporation reports fourth quarter 2018 net income of $73.0 million, representing $1.01 of earnings per diluted average share

Globe Newswire 28-Jan-2019 6:04 AM

DETROIT, Jan. 28, 2019 (GLOBE NEWSWIRE) -- Chemical Financial Corporation ("Corporation" or "Chemical") (NASDAQ:CHFC) today announced 2018 fourth quarter net income of $73.0 million, or $1.01 per diluted share, compared to 2018 third quarter net income of $70.4 million, or $0.98 per diluted share, and 2017 fourth quarter net income of $9.4 million, or $0.13 per diluted share. Net income in the fourth quarter of 2017, excluding merger and restructuring expenses, the revaluation of our net deferred tax assets following the signing of the Tax Cuts and Jobs Act in December 2017 and losses on sales of investment securities taken as part of our treasury and tax management objectives (which we collectively refer to herein as "significant items"), a non-GAAP financial measure, was $62.7 million, or $0.87 per diluted share.⁽¹⁾ Net income for the full year 2018 was $284.0 million, or $3.94 per diluted share, compared to $149.5 million, or $2.08 per diluted share for the full year 2017. Net income for the full year 2017, excluding significant items, a non-GAAP financial measure, was $219.6 million, or $3.06 per diluted share.⁽¹⁾  As previously announced, on January 22, 2019, our Board of Directors declared a first quarter of 2019 dividend on our common stock of $0.34 per share. The first quarter of 2019 dividend will be payable on March 15, 2019, to shareholders of record on March 1, 2019.

"We are pleased with our results for the quarter which reflect loan growth fueling our continued trend of increasing net interest income, improvement in our operating efficiency and an increase in net interest margin," noted David T. Provost, Chief Executive Officer of the Corporation and Thomas C. Shafer, Vice Chairman of the Corporation and Chief Executive Office of Chemical Bank. "We fully recognize and have appreciation for the dedicated efforts of our employees who have strengthened our foundation and positioned us for continued growth and sound operating performance in the years to come."

Our return on average assets was 1.39% during the fourth quarter of 2018, compared to 1.37% in the third quarter of 2018, and 0.20% in the fourth quarter of 2017. Our return on average shareholders' equity was 10.4% in the fourth quarter of 2018, compared to 10.2% in the third quarter of 2018 and 1.4% in the fourth quarter of 2017. Our return on average tangible shareholders' equity, a non-GAP financial measure, was 17.8% in the fourth quarter of 2018, compared to 17.5% in the third quarter of 2018, and 2.5% in the fourth quarter of 2017. During the fourth quarter of  2017, our return on average assets and return on average tangible shareholders' equity, excluding significant items, both non-GAAP financial measures, was 1.31% and 16.5%, respectively.⁽¹⁾

Our net interest income was $163.5 million for the fourth quarter of 2018, $4.0 million, or 2.5%, higher than the third quarter of 2018, and $17.5 million, or 12.0%, higher than the fourth quarter of 2017. The increase in net interest income for the fourth quarter of 2018, compared to both the third quarter of 2018 and the fourth 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 average deposit balances and cost of funds. Fourth quarter 2018 net loan growth was $473.5 million, or an annualized growth rate of 12.8%, and net loan growth over the past twelve months was $1.11 billion, or 7.9%. Our investment securities portfolio grew by $300.7 million in the fourth quarter of 2018, compared to the third quarter of 2018, and $1.01 billion, compared to the fourth quarter of 2017.

Our net interest margin was 3.42% for both the fourth quarter of 2018 and the third quarter of 2018, compared to 3.39% for the fourth quarter of 2017. The net interest margin (fully taxable equivalent (FTE)), a non-GAAP financial measure, increased to 3.49% for the fourth quarter of 2018, compared to 3.48% for the third quarter of 2018, and 3.47% for the fourth quarter of 2017.⁽¹⁾  The increase in our net interest margin (FTE), for the fourth quarter of 2018, compared to both the third quarter of 2018 and the fourth 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 average interest-bearing deposit balances and cost of funds. Our average cost of funds was 1.03% for the fourth quarter of 2018, compared to 0.88% for the third quarter of 2018, and 0.56% for the fourth quarter of 2017. The average yield on our loan portfolio increased to 4.80% in the fourth quarter of 2018, compared to 4.68% in the third quarter of 2018 and 4.31% in the fourth quarter of 2017. Interest accretion from purchase accounting discounts on acquired loans contributed 23 basis points to our net interest margin (FTE) in both the fourth quarter of 2018 and the third quarter of 2018, compared to 22 basis points in the fourth quarter of 2017.

Our net interest income was $632.3 million for the year ended December 31, 2018, $74.8 million, or 13.4%, higher than the year ended December 31, 2017. The increase in net interest income for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily attributable to increases in average balances and yields earned on loans and investments securities, partially offset by increases in average interest-bearing deposit balances and cost of funds. Our average balance of loans outstanding during the year ended December 31, 2018 was up $998.3 million, compared to the prior year. Our net interest margin improved to 3.48% for the year ended 2018, compared to 3.40% for the year ended 2017. Our net interest margin (FTE), a non-GAAP financial measure, increased to 3.53% for the year ended 2018, compared to 3.48% for the year ended 2017.⁽¹⁾

Our provision for loan losses was $8.9 million for the fourth quarter of 2018, compared to $6.0 million for the third quarter of 2018 and $7.5 million for the fourth quarter of 2017. The higher provision for loan losses for the fourth quarter of 2018, compared to both the third quarter of 2018 and the fourth quarter of 2017, was primarily the result of an increase in originated loan growth. Our provision for loan losses was $30.8 million for the year ended December 31, 2018, compared to $23.3 million for the year ended December 31, 2017, with the increase primarily due to an increase in originated loan growth.

Net loan charge-offs were $3.0 million, or 0.08% of average loans, for the fourth quarter of 2018, compared to $2.0 million, or 0.05% of average loans, for the third quarter of 2018 and $1.4 million, or 0.04% of average loans, for the fourth quarter of 2017. Net loan charge-offs totaled $12.7 million, or 0.09% of average loans, for the year ended December 31, 2018, compared to $9.7 million, or 0.07% of average loans, for the year ended December 31, 2017. 

Our nonperforming loans totaled $85.4 million at December 31, 2018, compared to $96.7 million at September 30, 2018 and $63.1 million at December 31, 2017. Nonperforming loans comprised 0.56% of total loans at December 31, 2018, compared to 0.65% at September 30, 2018, and 0.45% at December 31, 2017. The decrease in nonperforming loans as a percentage of total loans at December 31, 2018, compared to September 30, 2018, was primarily due to the fourth quarter of 2018 settlement of a real estate construction loan relationship. The increase in nonperforming loans as a percentage of total loans at December 31, 2018, compared to December 31, 2017, was primarily due to commercial and commercial real estate loan relationships that were downgraded to nonaccrual status during the year ended December 31, 2018. Each nonperforming loan is individually evaluated for impairment and we have either established a specific reserve within our allowance for loan losses or charged the loan relationship down to the value of the underlying collateral.

Our total allowance for loan losses was $110.0 million at December 31, 2018. Our allowance for loan losses on our originated loan portfolio was $109.6 million, or 0.93% of originated loans, at December 31, 2018, compared to $103.1 million, or 0.93% of originated loans, at September 30, 2018 and $91.9 million, or 0.94% of originated loans, at December 31, 2017. Our allowance for loan losses on our originated loan portfolio as a percentage of nonperforming loans was 128.7% at December 31, 2018, compared to 106.6% at September 30, 2018, and 145.6% at December 31, 2017. 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 December 31, 2018 and September 30, 2018, our allowance for loan losses on our acquired loan portfolio was $420 thousand and $970 thousand, respectively.  At December 31, 2017, we determined no allowance was needed for our acquired loan portfolio.
           
Our noninterest income was $32.0 million for the fourth quarter of 2018, compared to $37.9 million for the third quarter of 2018, and $32.3 million for the fourth quarter of 2017. Noninterest income for the fourth quarter of 2018 was lower than the third quarter of 2018, primarily due to a decrease in net gain on sale of loans and other mortgage banking revenue of $5.9 million due to a detriment to earnings caused by a change in fair value in loan servicing rights and lower production volume, and a decrease in bank-owned life insurance of $0.9 million, partially offset by an increase in electronic banking fees of $0.8 million. Noninterest income in the fourth quarter of 2018 was slightly lower than the fourth quarter of 2017, primarily due to decreases in net gain on sale of loans and other mortgage banking revenue of $3.9 million, service charges and fees on deposit accounts of $1.3 million and other noninterest income of $2.6 million, partially offset by the $7.6 million loss on sale of investment securities incurred in the fourth quarter of 2017, as part of our treasury and tax management objectives. Net gain on sale of loans and other mortgage banking revenue included a $2.8 million detriment to earnings due to a change in fair value in loan servicing rights for the fourth quarter of 2018, compared to a $0.9 million benefit for the third quarter of 2018, and a $13 thousand detriment for the fourth quarter of 2017. The change in fair value in loan servicing rights was a detriment of $0.03 to diluted earnings per share for the fourth quarter of 2018, compared to a benefit of $0.01 for the third quarter of 2018 and no impact for the fourth quarter of 2017.
                   
Our noninterest income was $148.5 million for the year ended December 31, 2018, compared to $144.0 million for the year ended 2017, which increased primarily due to the $7.6 million loss on sale of investment securities incurred in the fourth quarter of 2017 and an increase in net gain on sale of loans and other mortgage banking revenue of $3.0 million for the year ended December 31, 2018, partially offset by a decrease in electronic banking fees of $5.9 million for the year ended December 31, 2018. Net gain on sale of loans and other mortgage banking revenue included a $1.8 million benefit to earnings due to a change in fair value in loan servicing rights for the year ended December 31, 2018, compared to a $6.4 million detriment for the year ended December 31, 2017.

Our operating expenses were $108.4 million for the fourth quarter of 2018, compared to $109.7 million for the third quarter of 2018, and $100.0 million for the fourth quarter of 2017. We had no merger and restructuring expenses during the fourth or third quarters of 2018, compared to $2.6 million for the fourth quarter of 2017. Fourth quarter of 2018 included $5.8 million of impairment related to federal historic tax credits, compared to $3.2 million for the third quarter of 2018 and $6.2 million for the fourth quarter of 2017, included within other operating expense. The fourth quarter of 2018 also included expense related to our efforts to implement upgrades to our core operating systems of $1.6 million, compared to $2.7 million for the third quarter of 2018. Our operating expenses excluding the impact of federal historic tax credits, core operating system conversion expense and merger and restructuring expenses, were $101.0 million for the fourth quarter of 2018, compared to $103.8 million for the third quarter of 2018 and $91.3 million for the fourth quarter of 2017. The $2.8 million decrease for the fourth quarter of 2018 operating expenses excluding the previously noted items, compared to the third quarter of 2018, was primarily due to $0.9 million of early lease termination expense in the third quarter of 2018, which reduced occupancy expense in the fourth quarter of 2018, and decreases in credit-related and other expenses included within other operating expenses. The $9.7 million increase in operating expenses excluding the previously noted items, compared to the fourth quarter of 2017, was primarily due to an increase in salaries, wages and employee benefits impacted by increases in staff to support our 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.

Our operating expenses were $424.2 million for the year ended December 31, 2018, compared to $422.0 million for the year ended 2017. We had no merger and restructuring expenses during the year ended December 31, 2018, compared to $28.4 million for 2017. The year ended December 31, 2018 included $12.3 million of impairment related to federal historic tax credits, compared to $9.3 million for 2017. The year ended December 31, 2018 also included expense related to our efforts to implement upgrades to our core operating systems of $8.5 million. Operating expenses, excluding the impact of federal historic tax credits, core operation system conversion expense and merger and restructuring expenses, were $403.4 million for the year ended December 31, 2018, an increase of $19.1 million compared to the year ended 2017, primarily due to an increase in salaries, wages and employee benefits impacted by increases in staff to support our 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.

Our efficiency ratio is a measure of operating expenses as a percentage of net interest income and noninterest income. Our efficiency ratio was 55.4% for the fourth quarter of 2018, compared to 55.6% for the third quarter of 2018 and 56.1% for the fourth quarter of 2017. Our efficiency ratio was 54.3% for the year ended December 31, 2018 and 60.1% for the year ended 2017. Our adjusted efficiency ratio, a non-GAAP financial measure, which excludes, as applicable, significant items, amortization of intangibles, 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 50.4% for the fourth quarter of 2018, compared to 52.8% for the third quarter of 2018 and 47.4% for the fourth quarter of 2017.⁽¹⁾ Our adjusted efficiency ratio was 51.5% for the year ended December 31, 2018 and 51.9% for the year ended 2017.⁽¹⁾

Our effective tax rate was 6.6% for the fourth quarter of 2018, compared to 13.8% for the third quarter of 2018 and 86.6% for the fourth quarter of 2017. Our tax rates for periods during 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. The tax rate for each period benefited from federal historic tax credits of $6.2 million for the fourth quarter of 2018, $3.2 million for the third quarter of 2018 and $6.2 million for the fourth quarter of 2017. 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 our 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. The fourth quarter of 2017 was also impacted by the $46.7 million charge to income tax expense as a result of the revaluation of our net deferred tax assets. The effective tax rate for the year ended December 31, 2018 was 12.9%, compared to 41.7% for the year ended 2017. The tax rate for each period benefited from federal historic tax credits of $12.9 million in the year ended December 31, 2018 and $9.3 million for the year ended December 31, 2017.

Our total assets were $21.50 billion at December 31, 2018, compared to $20.91 billion at September 30, 2018, and $19.28 billion at December 31, 2017. The increase in our total assets during both the fourth quarter of 2018 and the year ended December 31, 2018 was primarily attributable to net loan growth and additions to our investment securities portfolio.

Our total loans were $15.27 billion at December 31, 2018, an increase of $473.5 million, or 3.2%, from total loans of $14.80 billion at September 30, 2018, and an increase of $1.11 billion, or 7.9%, from total loans of $14.16 billion at December 31, 2017. We experienced originated loan growth of $699.3 million in the fourth quarter of 2018, compared to $448.9 million in the third quarter of 2018, and $591.3 million in the fourth quarter of 2017. Growth in our originated loan portfolio was partially offset by run-off in our acquired loan portfolio of $225.8 million in the fourth quarter of 2018, compared to $232.4 million in the third quarter of 2018, and $269.4 million in the fourth quarter of 2017. We experienced originated loan growth of $2.10 billion for the year ended December 31, 2018, partially offset by run-off in our acquired loan portfolio of $982.8 million.

Our investment securities portfolio totaled $3.65 billion at December 31, 2018, an increase of $300.7 million, from $3.35 billion at September 30, 2018, and an increase of $1.01 billion, from $2.64 billion at December 31, 2017. The increase in both the fourth quarter of 2018 and the year ended December 31, 2018 reflects our long-term plan to increase our investment securities portfolio as a percentage of total assets.

Our total deposits were $15.59 billion at December 31, 2018, compared to $15.44 billion at September 30, 2018, and $13.64 billion at December 31, 2017. The increase in deposits during the fourth quarter of 2018 was due to an increase in customer deposits of $78.3 million driven by interest-bearing demand and other time deposit accounts and an increase in brokered deposits of $70.2 million. The increase in deposits during the year ended December 31, 2018 was primarily due to increases of $1.42 billion in customer deposits, with increases across all categories, and $532.3 million in brokered deposits. Collateralized customer deposits were $382.7 million at December 31, 2018, compared to $377.5 million at September 30, 2018, and $415.2 million at December 31, 2017. Loans as a percentage of deposits plus collateralized customer deposits were 95.6% at December 31, 2018, compared to 93.5% at September 30, 2018 and 100.7% at December 31, 2017.

Our short-term borrowings were $2.04 billion at December 31, 2018, compared to $1.67 billion at September 30, 2018, and $2.00 billion at December 31, 2017. Our short-term borrowings include short-term FHLB advances that we used to fund our short-term liquidity needs. Our long-term borrowings were $426.0 million at December 31, 2018, compared to $431.0 million at September 30, 2018, and $372.9 million at December 31, 2017.

Our shareholders' equity to total assets ratio was 13.2% at December 31, 2018, compared to 13.3% at September 30, 2018, and 13.8% at December 31, 2017. Our tangible shareholders' equity to assets ratio, a non-GAAP financial measure, and total risk-based capital ratio, were 8.3% and 11.5% (estimated), respectively, at December 31, 2018, compared to 8.3% and 11.7%, respectively, at September 30, 2018, and 8.3% and 11.0%, respectively, at December 31, 2017.⁽¹⁾ Our book value was $39.69 per share at December 31, 2018, compared to $39.04 per share at September 30, 2018 and $37.48 per share at December 31, 2017. Our tangible book value, a non-GAAP financial measure, was $23.54 per share at December 31, 2018, compared to $22.87 per share at September 30, 2018, and $21.21 per share at December 31, 2017.⁽¹⁾

Subsequent Event

As announced and further described in a separate press release issued by Chemical today, Chemical and TCF Financial Corporation have entered into a merger agreement under which the companies will combine in an all stock merger of equals transaction.

Conference Call Details

In light of today's announcement that Chemical has entered into a merger agreement with TCF Financial Corporation ("TCF"), Chemical has canceled its live conference webcast to review fourth quarter 2018 financial results that was scheduled for Tuesday, January 29, 2019 at 10:30 am ET. Instead, Chemical and TCF will jointly host a live conference call and webcast today at 10:00 am ET to discuss the merger and Chemical will also discuss its fourth quarter 2018 financial results. To listen to the live call, please dial 888-378-4398 and enter 575396 for the conference ID. The webcast of the conference call, along with related slides, will be accessible through Chemical's and TCF's websites as well as through the joint transaction website www.PremierMidwestBank.com. The conference call will also be available for replay through TCF's and Chemical's websites.

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 212 banking offices located in Michigan, northeast Ohio and northern Indiana. At December 31, 2018, the Corporation had total consolidated assets of $21.50 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 and the S&P MidCap 400 Index. More information about the Corporation is available by visiting the "Investor Info" section of our 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 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 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

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 belief that we are positioned for continued growth and strong operating performance. 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 ability 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 ability to grow deposits; 
• our inability to execute on our strategy to expand investments and commercial lending;
• our inability to efficiently manage our operating expenses;
• 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;
• the timing of when historic tax credits are placed into service could impact 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; economic, governmental, or other factors may prevent the projected population, residential, and commercial growth in the markets in which we operate; and
• the risks, uncertainties and assumptions set forth under the heading "Cautionary Note Regarding Forward-Looking Statements" in the joint press release issued by Chemical and TCF on the date hereof with respect to the proposed merger transaction between Chemical and TCF.

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, 2017.  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.

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

Chemical Financial Corporation Announces Fourth Quarter and Full Year 2018 Operating Results

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