Chemical Financial’s new leader is making it clear that he is sold on increased commercial lending and improved technology.

The trade-offs are significant cuts in branches and headcount and scaled back dealings in auto lending. The Midland, Mich., company has also decided to stop offering title insurance.

The moves, which mark the first strategic shift by new CEO David Provost, take into account changing customer preferences and a branch network that swelled after Chemical bought Talmer Bancorp last year. Provost was Talmer’s CEO.

Chemical’s past acquisitions and “significant technological advances” have provided a chance to improve efficiency, said Dennis Klaeser, the company's chief financial officer. Within that context, the effort “makes logical sense.”

The $19 billion-asset company disclosed in a regulatory filing Wednesday that it is in the process of closing 38 branches, or 15% of its network. It will also cut about 7% of its workforce, or roughly 235 jobs, by the end of this month. Among those leaving is Leonardo Amat, Chemical’s chief operating officer of business operations.

The effort should reduce annual expenses by $20 million, with some of the savings factoring into the bottom line in the fourth quarter. The cuts are in addition to the $52 million in annual expenses Chemical eliminated nearly a year ago in association with the Talmer deal.

Chemical said it plans to use some of the new savings to hire commercial lenders and pursue higher-yielding loans.

The company will incur a total of $18 million in charges during the third and fourth quarters, largely to cover severance and retirement expenses.

The latest initiative is “substantial,” Scott Siefers, an analyst at Sandler O’Neill, wrote in a note to clients, estimating that the targeted expenses represent about 5% of the company’s annualized core expense run rate.

The decision to scale back in indirect auto came after management determined that those loans were producing lower rates of return compared to other forms of credit.

The company’s consumer installment portfolio, which includes indirect auto, had been growing. That portfolio increased by 8.4% in the second quarter compared to the end of 2016, to $1.6 billion.

Auto loans make up about $900 million of the portfolio, Klaeser said.

Chemical will continue to make auto loans to prime borrowers, though it will “back off a bit” to redirect resources to middle-market commercial lending, where it sees an opportunity to steal market share from larger competitors, Klaeser said.

As the economies in Ohio, Indiana and Michigan expand, Chemical wants to lend more to manufacturing, service and distribution firms that “have substantially higher rates of return,” Klaeser said.

The effort comes shortly after Provost became Chemical’s CEO, succeeding David Ramaker, who in late June unexpectedly announced plans to step down. The sudden switch caught many at Chemical off guard.

The cost-cutting initiative shows that Provost is looking to quickly instill a “proactive” and “opportunistic” culture at Chemical, Christopher McGratty, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients. It is encouraging that management wants to funnel some of the savings into “longer-term revenue-enhancing strategies,” he added.

Siefers predicted that Chemical’s plan could boost this year’s earnings per share by 2.5%. McGratty nudged his 2017 estimate up by 1%, while increasing his 2018 number by 1.5%.

Chemical bought Talmer in August 2016, paying $1.1 billion in one of the year’s biggest bank deals. Chemical said when it announced the deal in early 2016 that it expected to cut about $52 million in annual noninterest expenses.

The acquisition catapulted Chemical beyond the $10 billion-asset regulatory threshold, triggering mandatory stress tests and caps on interchange fees. Those factors were expected to reduce the company’s earnings by $7 million in 2017 and $12 million the next year.

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