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

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Nov 01, 2012
Chemical Financial Corp. (CHFC, Financial) filed Quarterly Report for the period ended 2012-09-30.

Chemical Financial Corporation has a market cap of $647.3 million; its shares were traded at around $23.57 with a P/E ratio of 12.8 and P/S ratio of 2.5. The dividend yield of Chemical Financial Corporation stocks is 3.6%.

Highlight of Business Operations:

On May 23, 2012, Chemical Bank, the wholly-owned banking subsidiary of the Corporation, entered into a purchase and assumption agreement with Independent Bank, a wholly-owned banking subsidiary of Independent Bank Corporation, to acquire 21 branches located in the Northeastern and Battle Creek regions of Michigan. Under the terms of the agreement, Chemical Bank will assume approximately $420 million in customer deposits at a blended premium of approximately 2.93% and acquire approximately $50 million of loans at a discount of 1.75%. The branch acquisition, which has received regulatory approval, is expected to close during the fourth quarter of 2012. The Corporation expects the branch acquisition to be accretive to earnings per share upon closing, excluding estimated one-time transaction related expenses of $2.9 million, of which $1.1 million of transaction related expenses were incurred during the first nine months of 2012 and $1.8 million are estimated to be incurred during the fourth quarter of 2012. The Corporation anticipates recognizing goodwill of approximately $7 million related to the branch acquisition.

Nonperforming real estate construction and land development loans were $8.4 million at September 30, 2012, an increase of $3.3 million, or 64%, from $5.1 million at June 30, 2012 and an increase of $1.8 million, or 28%, from $6.6 million at December 31, 2011. The significant increase in nonperforming real estate construction and land development loans was due primarily to one loan relationship totaling $3.4 million moving to nonaccrual status during the third quarter of 2012. Nonperforming real estate construction and land development loans comprised 9.3% of total real estate construction and land development loans at September 30, 2012 compared to 5.4% at June 30, 2012 and 5.6% at December 31, 2011. At September 30, 2012, all of the nonperforming real estate construction and land development loans were land development loans secured primarily by residential real estate improved lots and housing units. The $8.4 million of nonperforming loans secured by land development projects represented 34% of total originated land development loans outstanding of $24.5 million at September 30, 2012 and required a specific allocation of the allowance for loan losses of $0.4 million at that date. The economy in Michigan has adversely impacted housing demand throughout the state since 2008 and, accordingly, a significant percentage of the Corporation's residential real estate development borrowers have experienced cash flow difficulties associated with a significant decline in sales of both lots and residential real estate.

Net interest income (FTE) of $48.2 million in the third quarter of 2012 was $0.5 million, or 1.0%, higher than net interest income (FTE) of $47.7 million in the second quarter of 2012, with the increase primarily attributable to one additional day during the third quarter and an increase in average loans of $80 million, or 2.0%, that was partially offset by the net impact of interest-earning assets and interest-bearing liabilities repricing during the quarter. The net interest margin in the third quarter of 2012 was 3.76%, compared to 3.80% in the second quarter of 2012. The average yield on interest-earning assets decreased nine basis points to 4.19% in the third quarter of 2012, from 4.28% in the second quarter of 2012. The average cost of deposits and borrowed funds decreased five basis points to 0.46% in the third quarter of 2012 from 0.51% in the second quarter of 2012. The decreases in the yield on interest-earning assets and the cost of funds were primarily attributable to the continued historical low interest rate environment and the repricing of loans and deposits to current market interest rates upon maturity or renewal.

Net interest income (FTE) of $48.2 million in the third quarter of 2012 was $0.6 million, or 1.2%, higher than net interest income (FTE) of $47.6 million in the third quarter of 2011, with the increase primarily attributable to an increase in average loans of $225 million, or 5.9%, between the two quarters that was partially offset by the net impact of interest-earning assets and interest-bearing liabilities repricing during the twelve months ended September 30, 2012. Net interest margin was 3.76% in the third quarter of 2012, compared to 3.80% in the third quarter of 2011. The average yield on interest-earning assets decreased 22 basis points to 4.19% in the third quarter of 2012, from 4.41% in the third quarter of 2011. The average cost of deposits and borrowed funds decreased 19 basis points to 0.46% in the third quarter of 2012, from 0.65% in the third quarter of 2011. The decreases in the yield on interest-earning assets and the cost of funds were primarily attributable to the continued historical low interest rate environment, the repricing of loans and deposits to current market interest rates upon maturity or renewal and a slight change in the mix of deposits resulting from a portion of funds from maturing time deposit accounts being transferred by customers to noninterest-bearing demand accounts. Accordingly, average time deposits of $1.43 billion in the third quarter of 2012 were $124 million, or 7.9%, less than in the third quarter of 2011, while average noninterest-bearing accounts were $980 million in the third quarter of 2012 were $118 million, or 13.7%, higher than in the third quarter of 2011.

Noninterest income was $12.1 million in the third quarter of 2012, compared to $13.3 million in the second quarter of 2012 and $11.2 million in the third quarter of 2011. Noninterest income in the second quarter of 2012 included $0.6 million from the partial insurance recovery of a 2008 branch cash loss and $0.2 million of other nonrecurring income. Excluding nonrecurring income, noninterest income in the third quarter of 2012 was $0.4 million, or 3.5%, lower than the second quarter, with the decrease attributable to lower wealth management revenue. Noninterest income in the third quarter of 2012 was $0.8 million, or 7.5%, higher than the third quarter of 2011, with the increase primarily attributable to increases in mortgage banking revenue and service charges and fees on deposit accounts.

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