Chemical Financial Corp. Reports Operating Results (10-Q)

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Apr 29, 2010
Chemical Financial Corp. (CHFC, Financial) filed Quarterly Report for the period ended 2010-03-31.

Chemical Financial Corp. has a market cap of $567.2 million; its shares were traded at around $23.73 with a P/E ratio of 57.8 and P/S ratio of 2.4. The dividend yield of Chemical Financial Corp. stocks is 3.4%.CHFC is in the portfolios of Richard Pzena of Pzena Investment Management LLC, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

Investment securities at March 31, 2010 totaled $690.7 million, a decrease of $33.1 million, or 4.6%, from December 31, 2009 and an increase of $80.5 million, or 13.2%, from March 31, 2009. The decrease in investment securities from December 31, 2009 was due to the Corporation not reinvesting proceeds from maturing investment securities and increasing its liquidity position. The increase in investment securities from March 31, 2009 was due to funds generated by increased customer deposits. Collateralized mortgage obligations (CMO) with variable interest rates and average maturities of less than three years comprised the largest category of investment securities and totaled $232.4 million, or 33.6%, of investment securities at March 31, 2010, compared to $223.8 million, or 30.9%, of investment securities at December 31, 2009 and $93.9 million, or 15.4%, of investment securities at March 31, 2009. The Corporation significantly increased the amount of CMO's with variable interest rates since March 31, 2009 to reduce its interest rate risk in a rising interest rate environment.

The Corporation's corporate bond portfolio, included in the available-for-sale securities portfolio, had an amortized cost of $29.2 million, with gross impairment of $0.2 million at March 31, 2010. All of the corporate bonds held at March 31, 2010 were of an investment grade, except one single issue investment security from Lehman Brothers Holdings Inc. (Lehman) and two corporate bonds from American General Finance Corporation (AGFC), a wholly-owned subsidiary of American General Finance Inc. (AGFI), which is wholly-owned indirectly by American International Group (AIG). The investment grade ratings obtained for the balance of the corporate bond portfolio indicated that the obligors' capacities to meet their financial commitments was "strong." During the third quarter of 2008, the Corporation recorded an OTTI loss of $0.4 million related to the write-down of the Lehman bond to fair value as the impairment was deemed to be other-than-temporary and entirely credit related. The Corporation's remaining amortized cost of the Lehman bond was $0.1 million at March 31, 2010. The gross impairment of $0.2 million existing at March 31, 2010 was attributable to one of the corporate bonds from AGFC with an amortized cost of $2.5 million and a maturity date of December 15, 2011. The impairment at March 31, 2010 of $0.2 million on the impaired AGFC bond improved from $0.5 million at December 31, 2009. All 2009 and 2010 quarterly and semi-annual interest payments on both AGFC corporate bonds owned by the Corporation were paid in full on the scheduled payment date. The Corporation performed an assessment of the likelihood that it would collect all of the contractual amounts due under the impaired AGFC corporate bond at March 31, 2010 and determined that the impairment was attributable to a lack of liquidity for this investment and that the impairment was temporary in nature at March 31, 2010.

At March 31, 2010, the Corporation held two trust preferred securities (TRUPs) in the held-to-maturity investment securities portfolio with a combined amortized cost of $10.5 million that had gross impairment of $6.9 million. One TRUP, with an amortized cost of $10.0 million, represented a 100% interest in a TRUP of a small non-public bank holding company in Michigan that was purchased in the second quarter of 2008. At March 31, 2010, the Corporation determined the fair value of this TRUP was $3.5 million. The second TRUP, with an amortized cost of $0.5 million, represented a 10% interest in a TRUP of another small non-public bank holding company in Michigan. At March 31, 2010, the Corporation determined the fair value of this TRUP was $0.1 million. The fair value measurements of the two TRUP investments were developed based upon market pricing observations of much larger banking institutions in an illiquid market adjusted by risk measurements. The fair values of the TRUPs were based on calculations of discounted cash flows and both observable inputs and appropriate risk adjustments that market participants would make for performance, liquidity and issuer specifics. See the additional discussion of the development of the fair values of the TRUPs in Note 2 to the consolidated financial statements.

Real estate construction loans are originated for both business and residential properties, including land development. Land development loans are loans made to residential and commercial developers for infrastructure improvements to create finished marketable lots for residential or commercial construction. Real estate construction loans often convert to a real estate commercial or real estate residential loan at the completion of the construction period; however, most land development loans are originated with the intention that the loans will be paid through the sale of finished properties by the developers within twelve months of the completion date. Real estate construction loans were $124.8 million at March 31, 2010, an increase of $3.5 million, or 2.9%, from $121.3 million at December 31, 2009. Real estate construction loans to commercial borrowers represented the majority of these loans and were $107.5 million at March 31, 2010, an increase of $9.1 million, or 9.2%, from $98.4 million at December 31, 2009. The increase in real estate construction loans to commercial borrowers was primarily attributable to one project to finance the construction and renovation of a private recreational facility. At March 31, 2010, $14.8 million had been advanced by the Corporation on this project and another $3.9 million was committed for future advancements at that date. Real estate construction loans also include loans to consumers for the construction of single family residences that are secured by these properties. Real estate construction loans to consumers were $17.3 million at March 31, 2010, a decrease of $5.6 million, or 24.5%, from $22.9 million at 31 December 31, 2009. Real estate construction loans represented 4.2% of the Corporation's loan portfolio as of March 31, 2010 compared to 4.1% as of December 31, 2009

The average size of loan transactions with commercial borrowers is generally relatively small, which decreases the risk of loss within the commercial loan portfolio due to the lack of loan concentration. The Corporation's loan portfolio to commercial borrowers, defined as commercial, real estate commercial and real estate construction-commercial loans, is well diversified across business lines and has no concentration in any one industry. The total loan portfolio to commercial borrowers of $1.48 billion at March 31, 2010 included 81 loan relationships of $2.5 million or greater. These 81 borrowing relationships totaled $425.6 million and represented 29% of the loan portfolio to commercial borrowers at March 31, 2010. At March 31, 2010, seven of these borrowing relationships had outstanding balances of $10 million or higher, totaling $94.9 million or 6.4% of the loan portfolio to commercial borrowers as of that date. Further, the Corporation had 14 loan relationships at March 31, 2010 with loan balances greater than $2.5 million and unfunded credit amounts, that if advanced, could result in a loan relationship of $10 million or more.

Nonperforming real estate commercial loans were $58.6 million at March 31, 2010, an increase of $5.2 million, or 10%, from $53.4 million at December 31, 2009. At March 31, 2010, the Corporation's nonperforming real estate commercial loan portfolio was comprised of $33.5 million of loans secured by owner occupied real estate, $16.6 million of loans secured by non-owner occupied real estate and $8.5 million of loans secured by vacant land, resulting in approximately 6% of owner occupied real estate commercial loans, 10% of non-owner occupied real estate commercial loans and 35% of vacant land loans in a nonperforming status at March 31, 2010. At March 31, 2010, the Corporation's nonperforming real estate commercial loan portfolio was comprised of a diverse mix of commercial lines of business and was also geographically disbursed throughout the Company's market areas. The largest concentration of the $58.6 million in nonperforming real estate commercial loans at March 31, 2010 was one customer relationship totaling $6.6 million that is secured by a combination of vacant land and non-owner occupied commercial real estate. This same customer relationship has another $0.6 million included in nonperforming real estate construction loans (secured by residential real estate development). At March 31, 2010, $16.9 million of the nonperforming real estate commercial loans were in various stages of foreclosure with 61 borrowers. The Michigan economy remains weak, thus creating a difficult business environment for many lines of business across the state.

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