Chemical Financial Corporation Reports Fourth Quarter and Full Year 2014 Results

MIDLAND, Mich., Jan. 27, 2015 (GLOBE NEWSWIRE) -- Chemical Financial Corporation (Nasdaq:CHFC) today announced 2014 fourth quarter net income of $15.3 million, or $0.46 per diluted share, compared to 2013 fourth quarter net income of $14.4 million, or $0.48 per diluted share, and 2014 third quarter net income of $16.8 million, or $0.51 per diluted share. For the twelve months ended December 31, 2014, net income was $62.1 million, or $1.97 per diluted share, compared to net income for the twelve months ended December 31, 2013 of $56.8 million, or $2.00 per diluted share. The declines in diluted per share earnings for the three and twelve months ended December 31, 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 for the three and twelve months ended December 31, 2014 were $4.1 million and $6.4 million, respectively, with $3.5 million and $5.8 million, respectively, attributable to the acquisition of Northwestern Bancorp, Inc. ("Northwestern") and $0.6 million for both the three and twelve months ended December 31, 2014, respectively, attributable to the pending acquisitions of Monarch Community Bancorp, Inc. ("Monarch") and Lake Michigan Financial Corporation ("Lake Michigan"). As previously reported, the Corporation completed its acquisition of Northwestern on October 31, 2014. Accordingly, the results of Northwestern's operations are included since the acquisition date. The acquisition of Northwestern resulted in increases in the Corporation's total assets of $815 million, total loans of $475 million, total deposits of $794 million, and goodwill of $60 million.

Excluding nonrecurring transaction-related expenses, net income in the fourth quarter of 2014 was $18.4 million, or $0.56 per diluted share, up 28% over net income of $14.4 million in the fourth quarter of 2013. Excluding nonrecurring transaction-related expenses, net income in 2014 was $66.7 million, or $2.11 per diluted share, up 17% over net income of $56.8 million in 2013.

"Driven by strong loan growth and two months of results from the Northwestern transaction, Chemical Financial Corporation posted fourth quarter 2014 net income, excluding nonrecurring transaction-related expenses, that was 28% higher than the prior year's fourth quarter. This capped off a year which saw net income growth, excluding nonrecurring transaction-related expenses, of 17% over the prior year. While the addition of Northwestern played an important role in overall earning-asset growth, organic loan growth of $565 million was the primary driver of our portfolio growth during the year," noted David B. Ramaker, Chairman, Chief Executive Officer and President. "Notably, the organic loan growth was not only broadly distributed geographically across our four regions and by loan type, but was also persistent throughout the course of the year. We attribute the portfolio growth to Michigan's improving economy, coupled with competitive share gains across our market footprint. Earnings also benefited from stable net interest margins, improved credit quality and increased wealth management revenue."

"In addition to executing on our core community banking strategy during 2014, we had a very successful year in executing our acquisition growth strategy. Over the course of the year, we identified and reached agreements with three like-minded, community-oriented institutions with whom we agreed to partner going forward. We are already seeing benefits from the addition of Northwestern to the Chemical family, and we look forward to adding Monarch and Lake Michigan to our family as we expect those transactions to close during the course of 2015," added Ramaker.

Net income, excluding nonrecurring transaction-related expenses, in the fourth quarter of 2014 was 28% higher than the fourth quarter of 2013 due to higher net interest income, higher noninterest income, a lower provision for loan losses and the impact of the acquisition of Northwestern, which were partially offset by higher operating expenses. Net income, excluding nonrecurring transaction-related expenses, in the fourth quarter of 2014 was 5% higher than the third quarter of 2014, with the increase primarily attributable to the impact of the Northwestern acquisition and higher net interest income from legacy operations of Chemical Bank, both of which were offset by higher legacy operating expenses.

The Corporation's return on average assets was 0.87% during the fourth quarter of 2014, compared to 0.93% in the fourth quarter of 2013 and 1.04% in the third quarter of 2014. The Corporation's return on average shareholders' equity was 7.5% in the fourth quarter of 2014, compared to 8.4% in both the fourth quarter of 2013 and the third quarter of 2014. Nonrecurring transaction-related expenses in the fourth quarter of 2014 reduced the Corporation's return on average assets by 18 basis points and return on average shareholders' equity by 153 basis points.

Net interest income was $58.2 million in the fourth quarter of 2014, $6.9 million, or 13.5%, higher than the fourth quarter of 2013 and $5.2 million, or 9.8%, higher than the third quarter of 2014. The increases in net interest income in the fourth quarter of 2014 over both the fourth quarter of 2013 and the third quarter of 2014 were attributable to a combination of the acquisition of Northwestern and organic loan growth. Excluding the $475 million of loans acquired in the acquisition of Northwestern, total loans grew $172 million, or 3.4%, in the fourth quarter of 2014 and $565 million, or 12.2%, over the twelve months ended December 31, 2014.

The net interest margin (on a tax-equivalent basis) was 3.62% in the fourth quarter of 2014, compared to 3.63% in the fourth quarter of 2013 and 3.59% in the third quarter of 2014. The positive impact on the net interest margin attributable to loan growth during the three and twelve months ended December 31, 2014 was offset by a reduction in the average yield on the loan portfolio. The average yield on the loan portfolio was 4.22% in the fourth quarter of 2014, compared to 4.42% in the fourth quarter of 2013 and 4.23% in the third quarter of 2014. The average yield of the investment securities portfolio was 2.02% in the fourth quarter of 2014, compared to 2.07% in the fourth quarter of 2013 and 2.19% in the third quarter of 2014. The reduction in the average yield of the investment securities portfolio in the fourth quarter of 2014 was attributable to the acquisition of Northwestern, in which the Corporation acquired $230 million in investment securities at an average yield of 0.98%. 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 0.23% in the fourth quarter of 2014 from 0.30% in the fourth quarter of 2013 and 0.25% in the third quarter of 2014.

Net interest income was $212.6 million in 2014, $15.9 million, or 8.1%, higher than 2013, with the increase primarily attributable to loan growth in 2014. The acquisition of Northwestern and the favorable impact of interest-bearing deposits repricing lower during 2014 also contributed to increases in net interest income. These increases were partially offset by the unfavorable impact of interest-earning assets repricing during the year. The net interest margin (on a tax equivalent basis) was 3.59% in both 2014 and 2013.

The provision for loan losses was $1.5 million in the fourth quarter of 2014, compared to $2.0 million in the fourth quarter of 2013 and $1.5 million in the third quarter of 2014. The decrease in the provision for loan losses in the fourth quarter of 2014 compared to the fourth quarter of 2013 was due to continued improvement in the overall credit quality of the loan portfolio. The provision for loan losses was $6.1 million in 2014, compared to $11.0 million in 2013.

Net loan charge-offs were $2.8 million, or 0.21% of average loans, in the fourth quarter of 2014, compared to $4.5 million, or 0.39% of average loans, in the fourth quarter of 2013 and $2.3 million, or 0.18% of average loans, in the third quarter of 2014. The reduction in net loan charge-offs in the fourth quarter of 2014, compared to the fourth quarter of 2013, was due to the continued improvement in the overall credit quality of the loan portfolio and characteristics of an improving economy in the State of Michigan. The increase in net loan charge-offs in the fourth quarter of 2014, compared to the third quarter of 2014, was primarily attributable to the third quarter of 2014 including $0.4 million in higher loan loss recoveries. Net loan charge-offs totaled $9.5 million, or 0.19% of average loans, in 2014, compared to $16.4 million, or 0.38% of average loans, in 2013.

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 $71.2 million at December 31, 2014, compared to $70.7 million at September 30, 2014 and $82.0 million at December 31, 2013. Nonperforming loans comprised 1.25% of total loans at December 31, 2014, compared to 1.40% at September 30, 2014 and 1.76% at December 31, 2013. The reduction in nonperforming loans during the twelve months ended December 31, 2014 was attributable to a combination of improving economic conditions, the migration of loans to other real estate owned and loan charge-offs. The reduction in nonperforming loans as a percentage of total loans during the fourth quarter of 2014 was due to none of the $475 million of loans acquired in the acquisition of Northwestern being considered nonperforming loans based on the Corporation's accounting treatment under generally accepted accounting principles (GAAP).

At December 31, 2014, the allowance for loan losses of the originated loan portfolio was $75.2 million, or 1.51% of originated loans, compared to $76.5 million, or 1.60% of originated loans, at September 30, 2014 and $78.6 million, or 1.81% of originated loans, at December 31, 2013. The decreases in the coverage of the Corporation's allowance for loan losses of the originated portfolio during the three and twelve months ended December 31, 2014 was due to growth in loans in the originated loan portfolio. The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 106% at December 31, 2014, compared to 108% at September 30, 2014 and 96% at December 31, 2013.

Noninterest income was $18.2 million in the fourth quarter of 2014, compared to $13.6 million in the fourth quarter of 2013 and $15.4 million in the third quarter of 2014. Noninterest income in the fourth quarter of 2014 was $4.6 million higher than the fourth quarter of 2013, with the increase attributable to both additional revenue and fees for services resulting from the incremental operations associated with the acquisition of Northwestern and higher wealth management revenue and service charges and fees for customer services related to legacy operations. Mortgage banking revenue in the fourth quarter of 2013 included $0.5 million of expense related to an increase in the Corporation's reserve for losses on sold loans. Noninterest income in the the fourth quarter of 2014 was $2.9 million higher than the third quarter of 2014, with the increase primarily attributable to the acquisition of Northwestern.

Noninterest income was $63.1 million in 2014, compared to $60.4 million in 2013. Excluding nonrecurring income in 2013 of $1.6 million, noninterest income was $4.3 million, or 7.3%, higher in 2014 than 2013, with the increase attributable to increases in all major categories of noninterest income, except for mortgage banking revenue, that was partially driven by the acquisition of Northwestern. Wealth management revenue was $16.0 million in 2014, compared to $14.0 million in 2013, with the increase largely due to an increase in equity market performance that led to increased assets under management and the acquisition of Northwestern, which added approximately $1.0 billion of assets under management to the Corporation's Wealth Management department as of the acquisition date. Mortgage banking revenue was $5.0 million in 2014, compared to $5.3 million in 2013, with the decrease due primarily to declines in the volume of loans sold in the secondary market. The Corporation sold $149 million of residential mortgage loans in the secondary market in 2014, compared to $211 million in 2013.

Operating expenses were $52.6 million in the fourth quarter of 2014, compared to $42.4 million in the fourth quarter of 2013 and $42.7 million in the third quarter of 2014. Operating expenses included nonrecurring transaction-related expenses of $4.1 million in the fourth quarter of 2014 and $1.3 million in the third quarter of 2014. Excluding these nonrecurring transaction-related expenses, operating expenses in the fourth quarter of 2014 were $6.1 million, or 14%, higher than the fourth quarter of 2013 and $7.1 million, or 17%, higher than the third quarter of 2014. The increase in operating expenses in the fourth quarter of 2014, compared to the fourth quarter of 2013, was primarily attributable to incremental operating costs associated with the acquisition of Northwestern. The increase was also attributable to increased employee compensation costs resulting from merit increases and market-based salary adjustments that took effect at the beginning of 2014 and higher group health care costs which were partially offset by lower donations expense. The increase in operating expenses in the fourth quarter of 2014, compared to the third quarter of 2014, was largely attributable to incremental operating costs associated with the acquisition of Northwestern in addition to higher group health care costs.

Operating expenses were $179.9 million in 2014, compared to $164.9 million in 2013. Operating expenses included nonrecurring transaction-related expenses of $6.4 million in 2014. Excluding these nonrecurring transaction-related expenses, operating expenses in 2014 were $8.6 million, or 5.2%, higher than 2013, due largely to a combination of incremental operating costs associated with the acquisition of Northwestern and increased employee compensation costs resulting from merit increases and market-based salary adjustments and higher group health care costs, in addition to higher expenses associated with occupancy, equipment and net other real estate costs related to legacy operations. These increases were partially offset by lower pension and donations expense.

The Corporation's efficiency ratio was 62.2% in the fourth quarter of 2014, 59.2% in the third quarter of 2014 and 63.7% in the fourth quarter of 2013. The Corporation's efficiency ratio was 61.6% for 2014 and 63.1% for 2013.

Total assets were $7.32 billion at December 31, 2014, compared to $6.60 billion at September 30, 2014 and $6.18 billion at December 31, 2013. The increase in total assets during the three months ended December 31, 2014 was attributable to the acquisition of Northwestern, which added $815 million of assets as of the acquisition date, while the increase in total assets during the twelve months ended December 31, 2014 was primarily attributable to the acquisition of Northwestern, in addition to an increase in deposits that was used to partially fund loan growth. Interest-bearing balances with the Federal Reserve Bank (FRB) totaled $8 million at December 31, 2014, compared to $248 million at September 30, 2014 and $180 million at December 31, 2013. The decrease in interest-bearing balances with the FRB during the three months ended December 31, 2014 was due to a decline in seasonal municipal deposit accounts and funding the $121 million all cash purchase price of Northwestern. The decrease in interest-bearing balances at the FRB during the twelve months ended December 31, 2014 was also 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. Investment securities were $1.07 billion at December 31, 2014, compared to $895 million at September 30, 2014 and $958 million at December 31, 2013. The increase in investment securities during the fourth quarter of 2014 was due to investment securities acquired in the acquisition of Northwestern.

Total loans were $5.69 billion at December 31, 2014, up from $5.04 billion at September 30, 2014 and $4.65 billion at December 31, 2013. Excluding the $475 million of loans acquired in the acquisition of Northwestern, loans increased $172 million, or 3.4%, and $565 million, or 12.2%, during the three and twelve months ended December 31, 2014, respectively. The increases in loans during the three and twelve months ended December 31, 2014 occurred across all loan categories and were largely attributable to a combination of improving economic conditions and increased market share. The increase in loans of $565 million during 2014 was attributable to increases in commercial loans of $133 million, or 11%, commercial real estate loans of $103 million, or 8%, real estate construction and land development loans of $47 million, or 43%, residential real estate loans of $43 million, or 5%, and consumer installment and home equity loans of $239 million, or 20%. As of the acquisition date, Northwestern added commercial loans of $46 million, commercial real estate loans of $223 million, real estate construction and land development loans of $14 million, residential real estate loans of $106 million and consumer installment and home equity loans of $86 million.

Total deposits were $6.08 billion at December 31, 2014, compared to $5.43 billion at September 30, 2014 and $5.12 billion at December 31, 2013. Excluding the $794 million of deposits acquired in the acquisition of Northwestern, the Corporation experienced growth in total deposits of $162 million, or 3.2%, during the twelve months ended December 31, 2014. Short-term borrowings were $389.5 million at December 31, 2014, compared to $323.1 million at September 30, 2014 and $327.4 million at December 31, 2013, with the increases during the three and twelve months ended December 31, 2014 attributable to $85 million of short-term borrowings in the form of federal funds sold and FHLB advances utilized by the Corporation to fund short-term liquidity needs.

At December 31, 2014, the Corporation's tangible equity to assets ratio and total risk-based capital ratio were 8.4% and 12.4%, respectively, compared to 10.5% and 15.0%, respectively, at September 30, 2014 and 9.4% and 14.0%, respectively, at December 31, 2013. The decreases in the Corporation's capital ratios at December 31, 2014, compared to both September 30, 2014 and December 31, 2013, were attributable to the Corporation's all cash acquisition of Northwestern, which resulted in the addition of $73 million of intangible assets, including $60 million of goodwill, as of the date of acquisition. At December 31, 2014, the Corporation's book value was $24.32 per share, compared to $24.47 per share at September 30, 2014 and $23.38 per share at December 31, 2013. At December 31, 2014, the Corporation's tangible book value was $18.35 per share, compared to $20.68 per share at September 30, 2014 and $19.17 per share at December 31, 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 and net interest margin on a fully taxable equivalent basis (FTE), 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, and information presented on a pro-forma basis. 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 fourth quarter and full year 2014 results on Wednesday, January 28, 2015 at 11 a.m. EDT. Anyone interested may access the conference call on a live basis by dialing toll-free at 1-888-364-3108 and entering 5170765 for the conference ID. The call will also be broadcast live over the Internet hosted at Chemical'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'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 178 banking offices spread over 46 counties in Michigan. At December 31, 2014, the Corporation had total assets of $7.3 billion, and on a pro-forma basis including the Corporation's recently announced pending acquisitions of Monarch and Lake Michigan, the Corporation would have total assets of approximately $8.7 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 the 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 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.

This press release may contain forward-looking statements regarding the Corporation's outlook or expectations with respect to the planned acquisitions of Monarch and Lake Michigan, the expected costs to be incurred in connection with the acquisitions, Monarch's and Lake Michigan's future performance and consequences of their integration into the Corporation and the impact of the transactions on the Corporation's future performance.

Risk factors relating to both of these transactions and the integration of Monarch and Lake Michigan into the Corporation after closing include, without limitation:

Completion of the transactions is dependent on, among other things, receipt of regulatory approvals and shareholder approvals from Monarch and Lake Michigan shareholders, the timing of which cannot be predicted with precision at this point and which may not be received at all.

The impact of the completion of the transactions on the Corporation's financial statements will be affected by the timing of the transactions.

The transactions 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 Monarch's and Lake Michigan's business and operations into the Corporation, which will include conversion of operating systems and procedures, may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to Monarch's, Lake Michigan's or the Corporation's existing businesses.

The Corporation's ability to achieve anticipated results from the transactions is dependent on the state of the economic and financial markets going forward. Specifically, the Corporation may incur more credit losses from Monarch's and Lake Michigan's loan portfolios than expected and deposit attrition may be greater than expected.

In addition, 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, 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.

No Offer or Solicitation

This communication is not intended to and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy or an invitation to purchase or subscribe for any securities or the solicitation of any vote or approval in any jurisdiction pursuant to any merger agreement associated with the Monarch or Lake Michigan transactions or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Additional Information about the Transactions

Chemical filed a registration statement on Form S-4 with the Securities and Exchange Commission (SEC) to register the securities that the Monarch shareholders will receive if the Monarch transaction is consummated. Chemical will file a registration statement on Form S-4 with the SEC to register securities that the Lake Michigan shareholders will receive if the Lake Michigan transaction is consummated. The registration statements contain or will contain a prospectus, a proxy statement for the meeting at which the Monarch or Lake Michigan shareholders will consider approval of the transaction, as applicable, and other relevant documents concerning the transactions. Investors are urged to read the applicable registration statement, the prospectus and proxy statement, and any other relevant documents when they become available because they will contain important information about Chemical, Monarch, Lake Michigan, and the transactions. Investors will be able to obtain the documents free of charge at the SEC's website, www.sec.gov, by contacting Chemical Financial Corporation, 235 East Main Street, P.O. Box 569, Midland, MI 48640-0569, Attention: Ms. Lori A. Gwizdala, Investor Relations, telephone 800-867-9757 or by contacting, as applicable, Monarch Community Bancorp. Inc., 375 N. Willowbrook Road, Coldwater, Michigan 49036, Attention: Ms. Rebecca S. Crabill, Investor Relations, telephone 517-279-3956, or Lake Michigan Financial Corporation, 150 Central Avenue, Holland, Michigan 49423, Attention: Mr. James Luyk, Investor Relations, telephone 616-546-4078. INVESTORS SHOULD READ THE APPLICABLE PROSPECTUS AND PROXY STATEMENT AND OTHER DOCUMENTS FILED OR TO BE FILED WITH THE SEC CAREFULLY BEFORE MAKING A DECISION CONCERNING THE TRANSACTIONS.

Monarch and Lake Michigan, and their respective directors, executive officers, and certain other members of management and employees, may be soliciting proxies from Monarch or Lake Michigan shareholders, as applicable, in favor of the transactions. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of Monarch or Lake Michigan shareholders in connection with the proposed transactions will be set forth in the applicable prospectus and proxy statement when it is filed with the SEC. Free copies of this document may be obtained as described above.