Wall Street analysts had been expecting Chemical Financial Corporation, holding company for Chemical Bank, to produce second quarter earnings around 74-cents per share. While those analysts were close, when you adjust the bank’s financial performance for non-recurring costs, you find the bank beating the street by a penny.
Chemical Financial Corporation announced 2017 second quarter net income of $52.0 million, or $0.73 per diluted share this week, compared to 2017 first quarter net income of $47.6 million, or $0.67 per diluted share and 2016 second quarter net income of $25.8 million, or $0.67 per diluted share. Excluding transaction expenses and the change in fair value in loan servicing rights, net income in the second quarter of 2017 was $53.5 million, or $0.75 per diluted share, compared to $50.7 million, or $0.71 per diluted share, in the first quarter of 2017 and $27.8 million, or $0.72 per diluted share, in the second quarter of 2016. In early trading today, the company’s stock is enjoying a 1.5-percent gain, topping $49-per share.
During the second quarter of 2017, significant items included transaction expenses of $0.5 million and a $1.8 million detriment to earnings due to the change in fair value in loan servicing rights, compared to transaction expenses of $4.2 million and a $0.5 million detriment to earnings due to the change in fair value in loan servicing rights in the first quarter of 2017. Transaction expenses for the second quarter of 2016 were $3.1 million.
Chemical Financial’s CEO David Provost and Chemical Bank’s CEO, also serving as the holding company’s Vice Chair, Thomas Shafer issued a statement saying, “We are encouraged by the underlying trends this quarter including improved operating expense trends, fee income and quality loan growth.” The two bank execs added, “Going forward, we will seek to further improve our fundamentals by carefully assessing how we allocate capital and focusing on strategies to enhance revenue growth while continuing to improve our operating efficiency.”
Chemical’s return on average assets was 1.14-percent during the second quarter of 2017, compared to 1.09-percent during the first quarter of 2017 and 1.10-percent in the second quarter of 2016. Their return on average shareholders’ equity was 8.0-percent in the second quarter of 2017, compared to 7.4-percent during the first quarter of 2017 and 10.0-percent in the second quarter of 2016. Excluding significant items, the corporation’s return on average assets was 1.17-percent during the second quarter of 2017, compared to 1.16-percent during the first quarter of 2017 and 1.19-percent in the second quarter of 2016 and their return on average shareholders’ equity was 8.2-percent in the second quarter of 2017, compared to 7.8-percent during the first quarter of 2017 and 10.7-percent in the second quarter of 2016. Chemical’s return on average tangible shareholders’ equity was 14.3-percent in the second quarter of 2017, compared to 13.3-percent during the first quarter of 2017 and 14.3-percent in the second quarter of 2016. Excluding significant items, the return on average tangible equity was 14.7-percent in the second quarter of 2017, compared to 14.2-percent during the first quarter of 2017 and 15.4-percent in the second quarter of 2016.
Net interest income was $137.9 million in the second quarter of 2017, $7.9 million, or 6.0-percent, higher than the first quarter of 2017 and $60.5 million, or 78.0-percent, higher than the second quarter of 2016. The higher net interest income in the second quarter of 2017 compared to the first quarter of 2017 was driven by the positive impact of organic loan growth, an increase in the investment securities portfolio, an increase in interest accretion from purchase accounting discounts on acquired loans, and one additional day in the quarter. These benefits to net interest income were partially offset by the interest expense impact of increases in short-term borrowings and deposits.
The net interest margin was 3.41-percent in both the second quarter of 2017 and the first quarter of 2017, compared to 3.60-percent in the second quarter of 2016. The net interest margin (on a tax-equivalent basis) was 3.48-percent in the second quarter of 2017, compared to 3.49-percent in the first quarter of 2017 and 3.70-percent in the second quarter of 2016. The net interest margin (on a tax-equivalent basis) in the second quarter of 2017, compared to the first quarter of 2017, was compressed due to an increase in the investment securities portfolio funded by an increase in short-term borrowings. This compression was offset by an increase of 11 basis points in yield on total loans in the second quarter of 2017 to 4.22-percent, compared to the first quarter of 2017, primarily due to an increase of interest accretion from purchase accounting discounts on acquired loans and an increase in the average coupon rates on loans.
Operating expenses were $98.2 million in the second quarter of 2017, compared to $104.2 million in the first quarter of 2017 and $59.1 million in the second quarter of 2016. Operating expenses included transaction expenses of $0.5 million in the second quarter of 2017, $4.2 million in the first quarter of 2017 and $3.1 million in the second quarter of 2016. Excluding these transaction expenses, operating expenses were $97.8 million in the second quarter of 2017, compared to $100.0 million in the first quarter of 2017 and $56.0 million in the second quarter of 2016. The decrease in operating expenses, excluding transaction expenses, in the second quarter of 2017, compared to the first quarter of 2017 was primarily due to a decrease of $7.6 million in salaries, wages and employee benefits expenses, aided by a decrease in payroll taxes mostly attributable to stock option exercises during the first quarter of 2017 and an increase in the deferral of loan origination costs due to increased loan production and revised loan origination costs based on an updated loan origination cost study. The increase in operating expenses, excluding transaction expenses, in the second quarter of 2017, compared to the second quarter of 2016, was primarily attributable to incremental expenses resulting from the merger with Talmer.
Total assets were $18.78 billion at June 30, 2017, compared to $17.64 billion at March 31, 2017 and $9.51 billion at June 30, 2016. The increase in total assets during the three months ended June 30, 2017 was primarily attributable to an increase in investment securities available-for-sale and loan growth that was funded by an increase in short-term FHLB advances. During the quarter, the investment securities portfolio grew by $490.0 million to $2.41 billion at June 30, 2017. The increase in total assets during the twelve months ended June 30, 2017 was primarily attributable to the merger with Talmer, organic loan growth and an increase in investment securities available-for-sale.
Total loans were $13.67 billion at June 30, 2017, an increase of $394.0 million, or 3.0-percent, from total loans of $13.27 billion at March 31, 2017 and an increase of $6.02 billion, or 78.7-percent, from total loans of $7.65 billion at June 30, 2016. The Corporation experienced organic loan growth of $394.0 million during the second quarter of 2017 and $1.14 billion during the twelve months ended June 30, 2017. The Corporation added $4.88 billion of loans as part of the merger with Talmer on August 31, 2016.
Total deposits were $13.20 billion at June 30, 2017, compared to $13.13 billion at March 31, 2017 and $7.46 billion at June 30, 2016. The Corporation experienced organic growth in customer deposits of $72.0 million during the second quarter of 2017. Chemical added $5.29 billion of deposits as part of the merger with Talmer that was completed on August 31, 2016, including $403.2 million of brokered deposits. The corporation reduced the balance of brokered deposits by $351.2 million during the period of September 30, 2016 to June 30, 2017.
