Chemical Financial Corp. Reports Operating Results (10-Q)
Chemical Financial Corp. has a market cap of $627.7 million; its shares were traded at around $22.88 with a P/E ratio of 41.5 and P/S ratio of 2.7. 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: Total assets were $5.12 billion as of June 30, 2010, up $1.12 billion, or 28.1%, from $4.00 billion at June 30, 2009, and up $0.83 billion, or 19.3%, from $4.29 billion at March 31, 2010. Total loans were $3.65 billion as of June 30, 2010, an increase of $0.67 billion, or 22.5%, from June 30, 2009, and an increase of $0.66 billion, or 22.1%, from March 31, 2010. Total deposits were $4.20 billion as of June 30, 2010, an increase of $1.07 billion, or 34.1%, from June 30, 2009, and an increase of $0.72 billion, or 20.9%, from March 31, 2010.
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 June 30, 2010. All of the corporate bonds held at June 30, 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 were "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 37 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 June 30, 2010. The gross impairment of $0.2 million existing at June 30, 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 June 30, 2010 of $0.2 million on the impaired AGFC bond was unchanged from March 31, 2010 and 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 June 30, 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 June 30, 2010.
Total loans were $3.65 billion at June 30, 2010, an increase of $660 million from March 31, 2010, $655 million from December 31, 2009 and $670 million from June 30, 2009. The increases in total loans from March 31, 2010, December 31, 2009 and June 30, 2009 were due primarily to the loans acquired in the acquisition of OAK. At April 30, 2010, OAK's loan portfolio was recorded by the Corporation at its fair value of $631 million and was comprised of commercial loans totaling $192 million, real estate commercial loans totaling $294 million, real estate construction loans totaling $42 million, real estate residential loans totaling $34 million and consumer loans totaling $69 million. A summary of the Corporation's loan portfolio by category follows.
Real estate construction loans are originated for both business and residential properties, including land and real estate development. Development loans include loans made to residential and commercial developers for infrastructure improvements to create finished marketable properties. 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 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 $179.0 million at June 30, 2010, compared to $124.8 million at March 31, 2010 and $121.3 million at December 31, 2009, with the increases due primarily to the acquisition of OAK. Real estate construction loans to commercial borrowers represented the majority of these loans and were $161.0 million at June 30, 2010, compared to $107.5 million at March 31, 2010 and $98.4 million at December 31, 2009. 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 $18.0 million at June 30, 2010, compared to $17.3 million at March 31, 2010 and $22.9 million at December 31, 2009. Real estate construction loans represented 4.9% of the Corporation's loan portfolio as of June 30, 2010, compared to 4.2% at March 31, 2010 and 4.1% at December 31, 2009.
40 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 loans, is well diversified across business lines and has no concentration in any one industry. The total loan portfolio to commercial borrowers of $2.03 billion at June 30, 2010 included 135 loan relationships of $2.5 million or greater. These 135 borrowing relationships totaled $679.7 million and represented 34% of the loan portfolio to commercial borrowers at June 30, 2010. At June 30, 2010, eight of these borrowing relationships had outstanding balances of $10 million or higher, totaling $114.5 million or 5.7% of the loan portfolio to commercial borrowers as of that date. Further, the Corporation had six loan relationships at June 30, 2010 with loan balances greater than $2.5 million and unfunded credit amounts, which if advanced, could result in a loan relationship of $10 million or more.
Nonperforming assets were $164.7 million as of June 30, 2010, compared to $148.9 million at March 31, 2010 and $153.3 million at December 31, 2009, and represented 3.2%, 3.5% and 3.6%, respectively, of total assets. The decrease in this ratio was attributable to the acquisition of OAK, which increased total assets $820 million at the acquisition date, with no increase in nonperforming loans, as previously discussed. It is management's belief that the elevated levels of nonperforming assets are primarily attributable to the continued unfavorable economic climate within the State of Michigan, which has resulted in cash flow difficulties being encountered by many business and consumer loan customers. The unemployment rate in Michigan was 13.2% at June 30, 2010, compared to 9.5% nationwide. The Corporation's nonperforming assets are not concentrated in any one industry or any one geographical area within Michigan, other than $10.4 million in nonperforming residential real estate development loans (included in real estate construction). At June 30, 2010, there were seven commercial loan relationships exceeding $2.5 million, totaling $24.7 million, that were in nonperforming status. The Corporation continues to experience declines in both residential and commercial real estate appraisal values due to the weakness in the economy in Michigan. Based on the declines in both residential and commercial real estate values, management continues to evaluate and discount appraised values and obtain new appraisals to compute estimated fair market values of impaired real estate secured loans and other real estate properties. Due to the economic climate within Michigan, it is management's belief that nonperforming assets will remain at elevated levels throughout 2010.
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