Chemical Financial Corporation announced second quarter earnings results this afternoon and beat the street on earnings estimates while falling a bit short on revenue estimates while still making strides in the market. The Midland-based institution, which has multiple bank branches around Michigan's Great Southwest, reports second quarter net income of $25.7-million, or $0.67 per diluted share, compared to 2016 first quarter net income of $23.3 million, or $0.60 per diluted share and 2015 second quarter net income of $19.0 million, or $0.54 per diluted share. Net income was $49.0 million, or $1.27 per diluted share, for the six months ended June 30, 2016, compared to $36.9 million, or $1.08 per diluted share, for the six months ended June 30, 2015.
Merger and acquisition-related transaction expenses attributable to the pending merger with Talmer Bancorp, Inc., which was announced on January 26, 2016, were $3.1-million in the second quarter of 2016, $2.6-million in the first quarter of 2016 and $5.6- million for the six months ended June 30, 2016, while transaction expenses attributable to the April 1, 2015 acquisition of Monarch Community Bancorp, Inc. and the May 31, 2015 acquisition of Lake Michigan Financial Corporation were $3.5-million and $4.8-million for the three- and six- month periods ended June 30, 2015, respectively. Excluding transaction expenses, net income in the second quarter of 2016 was $27.7-million, or $0.72 per diluted share, compared to $24.9-million, or $0.65 per diluted share, in the first quarter of 2016 and $21.7-million, or $0.61 per diluted share, in the second quarter of 2015. Net income, excluding transaction expenses, was $52.6-million, or $1.37 per diluted share, for the six months ended June 30, 2016, compared to $40.4-million, or $1.18 per diluted share, for the six months ended June 30, 2015.
David Ramaker is Chairman, CEO & President of Chemical Financial. He says, "We are pleased to report another quarter of solid financial results, with second quarter per share net income growing by double-digit annual rates, excluding transaction expenses, over last year’s second quarter. This sustained growth is not only reflective of the efforts of the extended Chemical team, but also of the reception of our products and community banking philosophy among the communities and customers we serve."
Ramaker adds, "Interest income in the quarter was aided by the loan interest accretion attributable to the higher than anticipated credit quality of the Byron Bank and Northwestern Bank acquired portfolios." He says, "Our ability to continue to execute at a high level while a significant portion of our senior management team concentrates on past and pending mergers and acquisitions is a testament to our core banking team’s focus on serving our customers."
The Corporation's return on average assets was 1.11% during the second quarter of 2016, compared to 1.01% in the first quarter of 2016 and 0.94% in the second quarter of 2015. The Corporation's return on average shareholders' equity was 10.0% in the second quarter of 2016, compared to 9.2% in the first quarter of 2016 and 8.6% in the second quarter of 2015. Excluding transaction expenses, the Corporation's return on average assets was 1.19% during the second quarter of 2016, compared to 1.09% in the first quarter of 2016 and 1.07% in the second quarter of 2015 and the Corporation's return on average shareholders' equity was 10.8% in the second quarter of 2016, compared to 9.9% in the first quarter of 2016 and 9.8% in the second quarter of 2015.
Net interest income was $77.5-million in the second quarter of 2016, $3.2-million, or 4.3%, higher than the first quarter of 2016 and $11.8-million, or 18%, higher than the second quarter of 2015. The increase in net interest income in the second quarter of 2016, compared to the first quarter of 2016, was primarily attributable to loan growth in the second quarter of 2016 and an increase in the amount of interest accretion recognized on acquired loans resulting from improvements in expected cash flows from certain pools of acquired loans. During the second quarter of 2016, the Corporation transferred $10-million of nonaccretable discount to accretable yield due to lower expected losses on loans acquired in both the 2010 acquisition of OAK Financial Corporation and the 2014 acquisition of Northwestern Bancorp, Inc. The Corporation's net interest income included $2.5-million of interest accretion on acquired loans in the second quarter of 2016, compared to $0.7-million in the first quarter of 2016 and $0.8-million in the second quarter of 2015. The increase in net interest income in the second quarter of 2016 over the second quarter of 2015 was primarily attributable to the positive impact of organic loan growth and the impact of the Corporation's acquisition of Lake Michigan.
The net interest margin (on a tax-equivalent basis) was 3.70% in the second quarter of 2016, compared to 3.60% in the first quarter of 2016 and 3.59% in the second quarter of 2015. The average yield on the loan portfolio was 4.19% in the second quarter of 2016, compared to 4.13% in the first quarter of 2016 and 4.17% in the second quarter of 2015. Interest accretion on acquired loans contributed 11 basis points to the Corporation's net interest margin in the second quarter of 2016, compared to 3 basis points in the first quarter of 2016 and 4 basis points in the second quarter of 2015. Interest accretion on acquired loans comprised 13 basis points of the yield on the Corporation's loan portfolio in the second quarter of 2016, compared to 4 basis points in the first quarter of 2016 and 5 basis points in the second quarter of 2015. The average yield of the investment securities portfolio was 2.34% in the second quarter of 2016, compared to 2.29% in the first quarter of 2016 and 2.03% in the second quarter of 2015. The Corporation's average cost of funds was 0.27% in the second quarter of 2016, compared to 0.25% in the first quarter of 2016 and 0.22% in the second quarter of 2015.
The provision for loan losses was $3.0-million in the second quarter of 2016, compared to $1.5-million in both the first quarter of 2016 and the second quarter of 2015. The increase in the provision for loan losses was due to loan growth, with loans in the Corporation's originated loan portfolio up $377-million during the second quarter of 2016. Net loan charge-offs were $1.8-million, or 0.10% of average loans, in the second quarter of 2016, compared to $4.5-million, or 0.25% of average loans, in the first quarter of 2016 and $1.8-million, or 0.12% of average loans, in the second quarter of 2015. Net loan charge-offs in the second quarter of 2016 and in the first quarter of 2016 included $1.0-million and $2.9-million, respectively, of losses from one commercial loan relationship.
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 $62.0-million at June 30, 2016, compared to $73.3-million at March 31, 2016 and $70.9-million at June 30, 2015. The $11.3-million, or 15%, decrease in nonperforming loans during the second quarter of 2016 was attributable to a combination of $6.4-million of principal paydowns, $3.9-million of nonaccrual loans being upgraded to accruing status during the quarter, and net loan charge-offs. Nonperforming loans comprised 0.81% of total loans at June 30, 2016, compared to 0.99% at March 31, 2016 and 1.01% at June 30, 2015.
At June 30, 2016, the allowance for loan losses of the originated loan portfolio was $71.5-million, or 1.12% of originated loans, compared to $70.3-million, or 1.17% of originated loans, at March 31, 2016 and $74.9-million, or 1.40% of originated loans, at June 30, 2015. The allowance for loan losses of the originated loan portfolio as a percentage of nonperforming loans was 115% at June 30, 2016, compared to 96% at March 31, 2016 and 106% at June 30, 2015.
Operating expenses were $59.1million in the second quarter of 2016, compared to $58.9 million in the first quarter of 2016 and $56.8 million in the second quarter of 2015. Operating expenses included transaction expenses of $3.1 million in the second quarter of 2016, $2.6-million in the first quarter of 2016 and $3.5-million in the second quarter of 2015. Excluding these transaction expenses, operating expenses were $56.0-million in the second quarter of 2016, $0.3-million lower than the first quarter of 2016 and $2.7-million, or 5%, higher than the second quarter of 2015. The decrease in operating expenses in the second quarter of 2016, compared to the first quarter of 2016, was primarily attributable to a $0.7-million reduction in payroll tax expenses (these are highest in the first quarter of the year) and a $1.4-million reduction in credit related expenses. The reduction in credit related expenses was driven by higher gains from the sale of other real estate properties and a $0.7-million gain resulting from the receipt of life insurance proceeds on a policy the Corporation had previously obtained as collateral on a loan. These decreases were partially offset by $1.1-million of higher outside services expense and a $1.0-million write-down included in occupancy expenses associated with the closure of several branch locations during the quarter. A portion of the increase in outside services during the quarter was attributable to the seasonal trust fees described above and increases in various project costs, many of which have been accelerated to complete them in advance of the pending Talmer merger.
Total assets were $9.51-billion at June 30, 2016, compared to $9.30-billion at March 31, 2016 and $9.02-billion at June 30, 2015. The increase in total assets during the three months ended June 30, 2016 was attributable to loan growth that was largely funded by an increase in Federal Home Loan Bank (FHLB) advances. The increase in total assets during the twelve months ended June 30, 2016 was also attributable to loan growth that was funded by a combination of organic growth in customer deposits, an increase in FHLB advances and proceeds from maturing investment securities. Investment securities were $1.01-billion at June 30, 2016, compared to $1.03-billion at March 31, 2016 and $1.16-billion at June 30, 2015.
Total loans were $7.65-billion at June 30, 2016, up $280-million, or 3.8%, from total loans of $7.37-billion at March 31, 2016 and up $613-million, or 8.7%, from total loans of $7.03-billion at June 30, 2015. During the second quarter of 2016, consumer installment loans grew $151-million, commercial real estate and real estate construction loans grew $58-million, residential mortgage loans grew $33-million, commercial loans grew $31-million and home equity loans grew $7-million.
Total deposits were $7.46-billion at June 30, 2016, compared to $7.65-billion at March 31, 2016 and $7.29-billion at June 30, 2015. The decrease in deposits during the second quarter of 2016 was primarily attributable to a $183-million decline in seasonal municipal deposit accounts. The increase in total deposits during the twelve months ended June 30, 2016 was attributable to organic growth in customer deposits of $268-million, or 3.8%, which was partially offset by a decrease of $96-million related to maturing brokered deposits that were acquired in the Lake Michigan transaction.
Chemical Financial Corporation will host a conference call to discuss its second quarter 2016 operating results toomorrow, Wednesday, July 27, 2016, at 10:30 a.m. ET. Anyone interested may access the conference call on a live basis by dialing toll-free at 1-800-930-7709 and entering 485377 for the conference ID. The call will also be broadcast live over the Internet hosted at Chemical Financial Corporation's website at www.chemicalbankmi.com under the "Investor Info" section. A copy of the slide-show presentation and an audio replay of the call will remain available on Chemical Financial Corporation's website for at least 14 days.
