CHEMICAL FINANCIAL CORP. is a multi-bank holding company. The company business is concentrated in a single industry segment commercial banking. Subsidiaries offer a full range of commercial banking and fiduciary services. These include accepting deposits residential and commercial real estate financing commercial lending consumer financing debit cards safe deposit services automated teller machines money transfer services corporate and personal trust services and other banking services. Chemical Financial Corp. has a market cap of $513.6 million; its shares were traded at around $21.5 with a P/E ratio of 56.5 and P/S ratio of 2. The dividend yield of Chemical Financial Corp. stocks is 5.5%. Chemical Financial Corp. had an annual average earning growth of 3.3% over the past 10 years.
Highlight of Business Operations:Investment securities at September 30, 2009 totaled $644.9 million, an increase of $97.4 million, or 17.8%, from December 31, 2008. The increase in investment securities was funded by increased customer deposits. The increased funds were partially invested in collateralized mortgage obligations (CMO), primarily variable rate instruments with average maturities of less than three years. CMO investment securities totaled $154.0 million, or 23.9%, of investment securities at September 30, 2009, compared to $37.3 million, or 6.8%, of investment securities at December 31, 2008. Additionally, during the nine months ended September 30, 2009, the Corporation slightly changed the mix of its investment securities portfolio as it re-invested funds from maturing U.S. Treasury, mortgage-backed securities and corporate bonds into state and political subdivisions investment securities, as opportunities in local municipal markets increased due to a reduction in demand nationally for local municipal securities. State and political subdivisions investment securities, which consist primarily of issuers located in the State of Michigan and are general obligations of the issuers, totaled $125.3 million, or 19.4%, of investment securities at September 30, 2009, compared to $90.0 million, or 16.4%, of investment securities at December 31, 2008.
At September 30, 2009, the Corporation's corporate bond portfolio had an amortized cost of $32.3 million, with gross impairment of $0.6 million on investment securities totaling $4.6 million at fair value. All of the corporate bonds held at September 30, 2009 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 a $0.4 million loss 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 less than $0.1 million at September 30, 2009. The impairment existing at September 30, 2009 was attributable to the two corporate bonds from AGFC with a combined amortized cost/par value of $2.7 million that had impairment of $0.6 million at that date. Both AGFC corporate bonds are senior unsecured obligations. The amortized cost/par value amounts of the two bonds were $0.2 million and $2.5 million with maturity dates of September 1, 2010 and December 15, 2011, respectively.
At September 30, 2009, the Corporation owned $10.5 million at amortized cost of trust preferred securities that had gross impairment of $7.4 million. Of the $10.5 million balance, $10.0 million represented a 100% interest in a trust preferred security (TRUP) of a small non-public bank holding company in Michigan (issuer) that was purchased in the second quarter of 2008. At September 30, 2009, the Corporation determined the fair value of the TRUP was $3.0 million. The fair value measurement was developed based upon market pricing observations of much larger banking institutions in an illiquid market adjusted by risk measurements. The fair value of the TRUP was based on a calculation of discounted cash flows, based upon 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 value of the TRUP in Note 2 to the consolidated financial statements.
The average size of commercial loan transactions 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 $1.46 billion at September 30, 2009 included 74 loan relationships of $2.5 million or greater. These 74 borrowing relationships totaled $401.3 million and represented 27.5% of the loan portfolio to commercial borrowers at September 30, 2009. Further, at September 30, 2009, only five of these borrowing relationships were $10 million or higher, totaling $68.3 million, or 4.7%, of the loan portfolio to commercial borrowers as of that date. These five loans were performing at September 30, 2009.
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 $118.1 million at September 30, 2009, a decrease of $0.9 million, or 0.7%, from December 31, 2008 and represented 3.9% of the Corporation's loan portfolio as of September 30, 2009 compared to 4.0% as of December 31, 2008. Real estate construction loans to commercial borrowers represented the majority of these loans and were $99.7 million at September 30, 2009, an increase of $10.0 million, or 11.1%, from December 31, 2008. 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 $18.4 million at September 30, 2009, a decrease of $10.9 million, or 37.1%, from December 31, 2008.
Nonperforming assets consist of loans for which the accrual of interest has been discontinued, loans which are past due as to principal or interest by ninety days or more and are still accruing interest, loans which have been modified due to a decline in the credit quality of the borrower and assets obtained through foreclosures and repossessions. The Corporation transfers a loan that is ninety days or more past due to nonaccrual status, unless it believes the loan is both well secured and in the process of collection. Accordingly, the Corporation has determined that the collection of accrued and unpaid interest on any loan that is ninety days or more past due and still accruing interest is probable. Nonperforming assets were $157.5 million as of September 30, 2009, compared to $142.8 million as of June 30, 2009 and $113.3 million as of December 31, 2008, and represented 3.7%, 3.6% and 2.9%, respectively, of total assets. It is management's belief that the continued increase in nonperforming assets is primarily attributable to the continued severe recessionary economic climate within Michigan, which has resulted in cash flow difficulties being encountered by many business and consumer loan customers. The Corporation's nonperforming assets are not concentrated in any one industry or any one geographical area within Michigan, other than $16.4 million in nonperforming residential development loans (included in real estate construction) made in the bank's various lending market areas throughout the state. At September 30, 2009, there were seven loan relationships exceeding $2.5 million, totaling $28.6 million, which were in nonperforming status. As it continues to be well publicized nationwide that appraisal values of both residential and commercial real estate properties have generally declined, the Corporation likewise 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 or obtain new appraisals to compute estimated fair market values of real estate secured loans. Due to the economic climate within Michigan, it is management's belief that nonperforming assets will continue to remain at elevated levels through the end of 2009 and into 2010.
Read the The complete ReportCHFC is in the portfolios of Richard Pzena of Pzena Investment Management LLC.