e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2011
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____________ to ____________
Commission File Number: 000-08185
CHEMICAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Michigan
(State or Other Jurisdiction
of Incorporation or Organization)
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38-2022454
(I.R.S. Employer
Identification No.) |
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235 E. Main Street
Midland, Michigan
(Address of Principal Executive Offices)
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48640
(Zip Code) |
(989) 839-5350
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the registrants Common Stock, $1 par value, as of July 22,
2011, was 27,456,907 shares.
INDEX
Chemical Financial Corporation
Form 10-Q
Index to Form 10-Q
2
Forward-Looking Statements
This report contains forward-looking statements that are based on managements beliefs,
assumptions, current expectations, estimates and projections about the financial services industry,
the economy and Chemical Financial Corporation (Chemical). Words such as anticipates, believes,
estimates, expects, forecasts, intends, is likely, judgment, plans, predicts,
projects, should, will, and variations of such words and similar expressions are intended to
identify such forward-looking statements. Such statements are based upon current beliefs and
expectations and involve substantial risks and uncertainties which could cause actual results to
differ materially from those expressed or implied by such forward-looking statements. These
statements include, among others, statements related to real estate valuation, future levels of
nonperforming loans, the rate of asset dispositions, future capital levels, future dividends,
future growth and funding sources, future liquidity levels, future profitability levels, future
deposit insurance premiums, the effects on earnings of future changes in interest rates, the future
level of other revenue sources, future economic trends, future initiatives to expand Chemicals
market share, and future opportunities for acquisitions. All statements referencing future time
periods are forward-looking. Managements determination of the provision and allowance for loan
losses; the carrying value of acquired loans, goodwill and mortgage servicing rights; the fair
value of investment securities (including whether any impairment on any investment security is
temporary or other-than-temporary and the amount of any impairment); and managements assumptions
concerning pension and other postretirement benefit plans involve judgments that are inherently
forward-looking. There can be no assurance that future loan losses will be limited to the amounts
estimated. All of the information concerning interest rate sensitivity is forward-looking. The
future effect of changes in the financial and credit markets and the national and regional economy
on the banking industry, generally, and on Chemical, specifically, are also inherently uncertain.
These statements are not guarantees of future performance and involve certain risks, uncertainties
and assumptions (risk factors) that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ
from what may be expressed or forecasted in such forward-looking statements. Chemical undertakes no
obligation to update, amend or clarify forward-looking statements, whether as a result of new
information, future events or otherwise.
Risk factors include, but are not limited to, the risk factors described in Item 1A of Chemicals
Annual Report on Form 10-K for the year ended December 31, 2010. These and other factors are
representative of the risk factors that may emerge and could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement.
3
Part I. Financial Information
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Item 1. |
|
Financial Statements |
Chemical Financial Corporation
Consolidated Statements of Financial Position
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June 30, |
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December 31, |
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June 30, |
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2011 |
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2010 |
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2010 |
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(Unaudited) |
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(Unaudited) |
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(In thousands, except share data) |
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Assets |
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Cash and cash equivalents: |
|
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Cash and cash due from banks |
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$ |
129,209 |
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$ |
91,403 |
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$ |
126,741 |
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Interest-bearing deposits with unaffiliated banks and others |
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271,070 |
|
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|
444,762 |
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|
270,217 |
|
|
|
|
|
|
|
|
|
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Total cash and cash equivalents |
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400,279 |
|
|
|
536,165 |
|
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|
396,958 |
|
Investment securities: |
|
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|
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|
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Trading securities, at fair value |
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1,389 |
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Available-for-sale at fair value |
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612,466 |
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578,610 |
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644,550 |
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Held-to-maturity (fair value $187,595 at June 30, 2011,
$159,188 at December 31, 2010 and $159,715 at June 30, 2010) |
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190,029 |
|
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|
165,400 |
|
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|
165,296 |
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|
|
|
|
|
|
|
|
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Total investment securities |
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|
802,495 |
|
|
|
744,010 |
|
|
|
811,235 |
|
Other securities |
|
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25,572 |
|
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27,133 |
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27,448 |
|
Loans held for sale |
|
|
6,874 |
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|
20,479 |
|
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|
10,871 |
|
Loans |
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|
3,748,010 |
|
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|
3,681,662 |
|
|
|
3,647,961 |
|
Allowance for loan losses |
|
|
(89,733 |
) |
|
|
(89,530 |
) |
|
|
(89,502 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
3,658,277 |
|
|
|
3,592,132 |
|
|
|
3,558,459 |
|
Premises and equipment (net of accumulated depreciation of
$84,731
at June 30, 2011, $80,792 at December 31, 2010 and
$76,764 at June 30, 2010) |
|
|
65,252 |
|
|
|
65,961 |
|
|
|
68,611 |
|
Goodwill |
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|
113,414 |
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|
113,414 |
|
|
|
109,149 |
|
Other intangible assets |
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|
12,327 |
|
|
|
13,521 |
|
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|
15,023 |
|
Interest receivable and other assets |
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119,568 |
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|
133,394 |
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|
122,762 |
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|
|
|
|
|
|
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Total Assets |
|
$ |
5,204,058 |
|
|
$ |
5,246,209 |
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|
$ |
5,120,516 |
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Liabilities and Shareholders Equity |
|
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Deposits: |
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|
|
|
|
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Noninterest-bearing |
|
$ |
813,863 |
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|
$ |
753,553 |
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$ |
680,751 |
|
Interest-bearing |
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|
3,437,113 |
|
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|
3,578,212 |
|
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3,518,431 |
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Total deposits |
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4,250,976 |
|
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|
4,331,765 |
|
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4,199,182 |
|
Interest payable and other liabilities |
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|
33,919 |
|
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|
37,533 |
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|
|
36,378 |
|
Short-term borrowings |
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|
276,600 |
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|
242,703 |
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|
242,271 |
|
Federal Home Loan Bank (FHLB) advances |
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71,928 |
|
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|
74,130 |
|
|
|
86,635 |
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|
|
|
|
|
|
|
|
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Total liabilities |
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|
4,633,423 |
|
|
|
4,686,131 |
|
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|
4,564,466 |
|
Shareholders equity: |
|
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|
|
|
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|
|
|
|
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Preferred stock, no par value: |
|
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Authorized 200,000 shares, none issued |
|
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Common stock, $1 par value per share: |
|
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Authorized 45,000,000 shares at June 30, 2011 and
30,000,000 at both December 31, 2010 and June 30,
2010; issued and outstanding 27,456,907 shares
at June 30, 2011, 27,440,006
shares at December 31, 2010 and 27,434,027 shares at
June 30, 2010 |
|
|
27,457 |
|
|
|
27,440 |
|
|
|
27,434 |
|
Additional paid-in capital |
|
|
430,134 |
|
|
|
429,511 |
|
|
|
429,021 |
|
Retained earnings |
|
|
126,477 |
|
|
|
117,238 |
|
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|
111,804 |
|
Accumulated other comprehensive loss |
|
|
(13,433 |
) |
|
|
(14,111 |
) |
|
|
(12,209 |
) |
|
|
|
|
|
|
|
|
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|
Total shareholders equity |
|
|
570,635 |
|
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|
560,078 |
|
|
|
556,050 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
5,204,058 |
|
|
$ |
5,246,209 |
|
|
$ |
5,120,516 |
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements (unaudited).
4
Chemical Financial Corporation
Consolidated Statements of Income
(Unaudited)
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|
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|
|
|
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Three Months Ended |
|
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Six Months Ended |
|
|
|
June 30, |
|
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June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands, except per share data) |
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
49,172 |
|
|
$ |
48,278 |
|
|
$ |
98,612 |
|
|
$ |
89,996 |
|
Interest on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,225 |
|
|
|
2,964 |
|
|
|
4,549 |
|
|
|
6,088 |
|
Tax-exempt |
|
|
1,393 |
|
|
|
1,221 |
|
|
|
2,872 |
|
|
|
2,203 |
|
Dividends on other securities |
|
|
368 |
|
|
|
295 |
|
|
|
491 |
|
|
|
377 |
|
Interest on deposits with unaffiliated banks and others |
|
|
281 |
|
|
|
204 |
|
|
|
590 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
53,439 |
|
|
|
52,962 |
|
|
|
107,114 |
|
|
|
99,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
7,551 |
|
|
|
9,202 |
|
|
|
15,429 |
|
|
|
17,902 |
|
Interest on short-term borrowings |
|
|
151 |
|
|
|
161 |
|
|
|
301 |
|
|
|
321 |
|
Interest on FHLB advances |
|
|
443 |
|
|
|
708 |
|
|
|
885 |
|
|
|
1,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
8,145 |
|
|
|
10,071 |
|
|
|
16,615 |
|
|
|
19,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
45,294 |
|
|
|
42,891 |
|
|
|
90,499 |
|
|
|
79,279 |
|
Provision for loan losses |
|
|
7,000 |
|
|
|
12,700 |
|
|
|
14,500 |
|
|
|
26,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
38,294 |
|
|
|
30,191 |
|
|
|
75,999 |
|
|
|
52,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
4,628 |
|
|
|
5,091 |
|
|
|
8,724 |
|
|
|
9,482 |
|
Wealth management revenue |
|
|
3,026 |
|
|
|
2,603 |
|
|
|
5,792 |
|
|
|
4,895 |
|
Other charges and fees for customer services |
|
|
2,728 |
|
|
|
2,333 |
|
|
|
5,386 |
|
|
|
4,341 |
|
Mortgage banking revenue |
|
|
499 |
|
|
|
915 |
|
|
|
1,563 |
|
|
|
1,633 |
|
Other |
|
|
21 |
|
|
|
58 |
|
|
|
209 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
10,902 |
|
|
|
11,000 |
|
|
|
21,674 |
|
|
|
20,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
|
|
18,068 |
|
|
|
17,214 |
|
|
|
36,393 |
|
|
|
31,721 |
|
Occupancy |
|
|
3,099 |
|
|
|
2,734 |
|
|
|
6,437 |
|
|
|
5,571 |
|
Equipment and software |
|
|
3,110 |
|
|
|
3,698 |
|
|
|
5,832 |
|
|
|
6,412 |
|
Other |
|
|
9,136 |
|
|
|
11,004 |
|
|
|
20,140 |
|
|
|
20,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
33,413 |
|
|
|
34,650 |
|
|
|
68,802 |
|
|
|
63,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,783 |
|
|
|
6,541 |
|
|
|
28,871 |
|
|
|
9,180 |
|
Federal income tax expense |
|
|
4,750 |
|
|
|
2,150 |
|
|
|
8,650 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
11,033 |
|
|
$ |
4,391 |
|
|
$ |
20,221 |
|
|
$ |
6,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
0.17 |
|
|
$ |
0.74 |
|
|
$ |
0.27 |
|
Diluted |
|
|
0.40 |
|
|
|
0.17 |
|
|
|
0.74 |
|
|
|
0.27 |
|
Cash Dividends Declared Per Common Share |
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.40 |
|
|
|
0.40 |
|
See accompanying notes to consolidated financial statements (unaudited).
5
Chemical Financial Corporation
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
|
|
(In thousands, except per share data) |
|
Balances at January 1, 2010 |
|
$ |
23,891 |
|
|
$ |
347,676 |
|
|
$ |
115,391 |
|
|
$ |
(12,647 |
) |
|
$ |
474,311 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
6,680 |
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment
securitiesavailable-for-sale, net of tax
expense of $207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384 |
|
|
|
|
|
Adjustment for pension and other
postretirement benefits, net of tax
expense of $29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,118 |
|
Shares issued stock options |
|
|
1 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Shares and stock options issued in the acquisition
of O.A.K. Financial Corporation |
|
|
3,530 |
|
|
|
80,167 |
|
|
|
|
|
|
|
|
|
|
|
83,697 |
|
Cash dividends declared of $0.40 per share |
|
|
|
|
|
|
|
|
|
|
(10,267 |
) |
|
|
|
|
|
|
(10,267 |
) |
Shares issued directors stock purchase plan |
|
|
12 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
Share-based compensation |
|
|
|
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010 |
|
$ |
27,434 |
|
|
$ |
429,021 |
|
|
$ |
111,804 |
|
|
$ |
(12,209 |
) |
|
$ |
556,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2011 |
|
$ |
27,440 |
|
|
$ |
429,511 |
|
|
$ |
117,238 |
|
|
$ |
(14,111 |
) |
|
$ |
560,078 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
20,221 |
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment
securitiesavailable-for-sale, net of tax
expense of $239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444 |
|
|
|
|
|
Adjustment for pension and other
postretirement benefits, net of tax
expense of $126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,899 |
|
Cash dividends declared of $0.40 per share |
|
|
|
|
|
|
|
|
|
|
(10,982 |
) |
|
|
|
|
|
|
(10,982 |
) |
Shares issued directors stock plans |
|
|
12 |
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
266 |
|
Share-based compensation |
|
|
5 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2011 |
|
$ |
27,457 |
|
|
$ |
430,134 |
|
|
$ |
126,477 |
|
|
$ |
(13,433 |
) |
|
$ |
570,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements (unaudited).
6
Chemical Financial Corporation
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,221 |
|
|
$ |
6,680 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
14,500 |
|
|
|
26,700 |
|
Gains on sales of loans |
|
|
(2,208 |
) |
|
|
(2,173 |
) |
Proceeds from sales of loans |
|
|
101,586 |
|
|
|
104,831 |
|
Loans originated for sale |
|
|
(85,773 |
) |
|
|
(103,842 |
) |
Proceeds from sale of trading securities |
|
|
|
|
|
|
1,083 |
|
Net gains on sales of other real estate and repossessed assets |
|
|
(703 |
) |
|
|
(915 |
) |
Net losses on disposal of premises and equipment and branch bank property |
|
|
17 |
|
|
|
350 |
|
Depreciation of premises and equipment |
|
|
4,076 |
|
|
|
3,667 |
|
Amortization of intangible assets |
|
|
1,904 |
|
|
|
1,324 |
|
Net amortization of premiums and discounts on investment securities |
|
|
1,713 |
|
|
|
1,208 |
|
Share-based compensation expense |
|
|
374 |
|
|
|
899 |
|
Net decrease in interest receivable and other assets |
|
|
10,477 |
|
|
|
4,531 |
|
Net increase (decrease) in interest payable and other liabilities |
|
|
(3,166 |
) |
|
|
1,217 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
63,018 |
|
|
|
45,560 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Investment securitiesavailable-for-sale: |
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions |
|
|
185,803 |
|
|
|
163,935 |
|
Purchases |
|
|
(220,747 |
) |
|
|
(149,449 |
) |
Investment securitiesheld-to-maturity: |
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal reductions |
|
|
30,763 |
|
|
|
21,510 |
|
Purchases |
|
|
(55,334 |
) |
|
|
(55,552 |
) |
Other securities: |
|
|
|
|
|
|
|
|
Proceeds from redemption |
|
|
1,561 |
|
|
|
|
|
Net increase in loans |
|
|
(86,502 |
) |
|
|
(52,817 |
) |
Proceeds from sales of other real estate and repossessed assets |
|
|
8,767 |
|
|
|
9,585 |
|
Purchases of premises and equipment and branch bank property, net |
|
|
(3,384 |
) |
|
|
(4,016 |
) |
Cash acquired, net of cash paid, in business combination |
|
|
|
|
|
|
17,177 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(139,073 |
) |
|
|
(49,627 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in noninterest-bearing and interest-bearing demand
deposits and savings accounts |
|
|
(60,655 |
) |
|
|
110,549 |
|
Net decrease in time deposits |
|
|
(20,134 |
) |
|
|
(22,733 |
) |
Net increase in securities sold under agreements to repurchase |
|
|
33,897 |
|
|
|
1,703 |
|
Repayment of FHLB advances |
|
|
(2,202 |
) |
|
|
(39,228 |
) |
Cash dividends paid |
|
|
(10,982 |
) |
|
|
(10,267 |
) |
Proceeds from directors stock purchase plan and exercise of stock options |
|
|
245 |
|
|
|
292 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(59,831 |
) |
|
|
40,316 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(135,886 |
) |
|
|
36,249 |
|
Cash and cash equivalents at beginning of period |
|
|
536,165 |
|
|
|
360,709 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
400,279 |
|
|
$ |
396,958 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
17,015 |
|
|
$ |
20,371 |
|
Federal income taxes paid (received) |
|
|
(849 |
) |
|
|
3,900 |
|
Loans transferred to other real estate and repossessed assets |
|
|
5,857 |
|
|
|
10,550 |
|
Business combination: |
|
|
|
|
|
|
|
|
Fair value of tangible assets acquired (noncash) |
|
|
|
|
|
|
753,671 |
|
Goodwill and identifiable intangible assets acquired |
|
|
|
|
|
|
49,555 |
|
Liabilities assumed |
|
|
|
|
|
|
736,706 |
|
Common stock issued |
|
|
|
|
|
|
83,697 |
|
See accompanying notes to consolidated financial statements (unaudited).
7
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Note 1: Significant Accounting Policies
Nature of Operations
Chemical Financial Corporation (Chemical or the Corporation) operates in a single operating segment
commercial banking. The Corporation is a financial holding company, headquartered in Midland,
Michigan, that operates through one commercial bank, Chemical Bank. Chemical Bank operates within
the State of Michigan as a state-chartered commercial bank. Chemical Bank operates through an
internal organizational structure of four regional banking units and offers a full range of
traditional banking and fiduciary products and services to the residents and business customers in
the banks geographical market areas. The products and services offered by the regional banking
units, through branch banking offices, are generally consistent throughout the Corporation, as is
the pricing of those products and services. The marketing of products and services throughout the
Corporations regional banking units is generally uniform, as many of the markets served by the
regional banking units overlap. The distribution of products and services is uniform throughout the
Corporations regional banking units and is achieved primarily through retail branch banking
offices, automated teller machines and electronically accessed banking products.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Corporation and its
subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, the consolidated financial statements do not include all of the
information and footnotes required by GAAP for complete financial statements and should be read in
conjunction with the Corporations consolidated financial statements and footnotes thereto included
in the Corporations Annual Report on Form 10-K for the year ended December 31, 2010. In the
opinion of management, the accompanying unaudited consolidated financial statements contain all
adjustments believed necessary to present fairly the financial condition and results of operations
of the Corporation for the periods presented. Operating results for the three and six months ended
June 30, 2011 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2011.
Use of Estimates
Management makes estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying footnotes. Estimates that are particularly susceptible to
significant change include the determination of the allowance for loan losses, expected cash flows
from acquired loans, fair value amounts related to business combinations, pension expense, income
taxes, goodwill and those assets that require fair value measurement. Actual results could differ
from these estimates.
Business Combinations
On April 30, 2010, the Corporation acquired 100% of O.A.K. Financial Corporation (OAK) for total
consideration of $83.7 million. Pursuant to the guidance of Accounting Standards Codification (ASC)
Topic 805, Business Combinations (ASC 805) effective for all acquisitions with closing dates after
January 1, 2009, the Corporation recognized the assets acquired and the liabilities assumed in the
OAK acquisition at their fair values as of the acquisition date with the related acquisition and
restructuring costs expensed in the period incurred. The Corporation recorded $43.5 million of
goodwill in conjunction with the acquisition, which represented the purchase price over the fair
values of the identifiable net assets acquired. Additionally, the Corporation recorded $9.8 million
of other intangible assets as a result of the OAK acquisition attributable to core deposits,
mortgage servicing rights and non-compete agreements acquired.
See Note 2 for further information regarding the OAK acquisition.
8
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Originated Loans
Originated loans include all of the Corporations portfolio loans, excluding loans acquired in the
OAK transaction.
Originated loans are stated at their principal amount outstanding, net of unearned income,
charge-offs and unamortized deferred fees and costs. Interest income on loans is reported based on
the level-yield method and includes amortization of deferred loan fees and costs over the loan
term. Net loan commitment fees for commitment periods greater than one year are deferred and
amortized into fee income on a straight-line basis over the commitment period.
Loan interest income is recognized on the accrual basis. The past due status of a loan is based on
the loans contractual terms. A loan is placed in the nonaccrual category when principal or
interest is past due 90 days or more (except for real estate residential loans that are transferred
at 120 days past due), unless the loan is both well-secured and in the process of collection, or
earlier when, in the opinion of management, there is sufficient reason to doubt the collectibility
of principal or interest. Interest previously accrued, but not collected, is reversed and charged
against interest income at the time the loan is placed in nonaccrual status. The subsequent
recognition of interest income on a nonaccrual loan is then recognized only to the extent cash is
received and where future collection of principal is probable. Loans are returned to accrual status
when principal and interest payments are brought current, payments have been received consistently
for a period of time and collectibility is no longer in doubt.
Loans Acquired in a Business Combination
Loans acquired in a business combination (acquired loans) consist of loans acquired in the
acquisition of OAK. Acquired loans were recorded at fair value, without a carryover of OAKs
associated allowance for loan losses related to these loans, through a fair value discount that
was, in part, attributable to deterioration in credit quality. The fair value discount was recorded
as a reduction of the acquired loans outstanding principal balances in the consolidated statement
of financial position at the acquisition date.
Those loans that qualify under ASC Topic 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality (ASC 310-30), are recorded at fair value at acquisition. The
calculation of the fair value of the acquired loans entailed estimating the amount and timing of
both principal and interest cash flows expected to be collected on such loans and then discounting
those cash flows at market interest rates. The excess of a loans expected cash flows at the
acquisition date over its estimated fair value is referred to as the accretable yield, which is
recognized into interest income over the remaining life of the loan on a level-yield basis. The
difference between a loans contractually required principal and interest payments at the
acquisition date and the cash flows expected to be collected at the acquisition date is referred to
as the nonaccretable difference, which includes an estimate of future credit losses expected to
be incurred over the life of the loan and interest payments that are not expected to be collected.
The estimate of expected credit losses was determined based on due diligence performed by executive
and senior officers of the Corporation, with assistance from third-party consultants. Decreases to
the expected cash flows in subsequent periods will require the Corporation to record a provision
for loan losses. Improvements in expected cash flows in subsequent periods will result in reversing
a portion of the nonaccretable difference, which is then classified as part of the accretable yield
and subsequently recognized into interest income over the remaining life of the loan.
The Corporation must make numerous assumptions, interpretations and judgments using internal and
third-party credit quality information to determine whether it is probable that the Corporation
will be able to collect all contractually required payments. This is a point in time assessment and
inherently subjective due to the nature of the available information and judgment involved.
Evidence of credit quality deterioration as of the purchase date may include credit metrics such as
past due and nonaccrual status, deterioration in borrower credit scores and negative changes to
loan-to-value percentages.
Acquired loans with an outstanding principal balance of $105 million at the acquisition date were
determined to be loans with deteriorated credit quality and, therefore, met the scope criteria set
forth in ASC 310-30. Further, the
9
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Corporation understands, as outlined in the American Institute of Certified Public Accountants
open letter to the Office of the Chief Accountant of the Securities and Exchange Commission (SEC)
dated December 18, 2009 and pending further standard setting, that for acquired loans that do not
meet the scope criteria of ASC 310-30, a company may elect to account for such acquired loans
pursuant to the provisions of either ASC 310-20, Nonrefundable Fees and Other Costs, or ASC 310-30.
The Corporation elected to apply ASC 310-30 by analogy to acquired loans that were determined not
to have deteriorated credit quality with an outstanding principal balance of $578 million at the
acquisition date and will follow the accounting and disclosure guidance of ASC 310-30 for these
loans. Accordingly, the Corporation applied ASC 310-30 to the entire loan portfolio acquired in the
acquisition of OAK with an outstanding principal balance of $683 million at the acquisition date.
None of the acquired loans were classified as debt securities.
ASC 310-30 allows investors to aggregate loans acquired into loan pools that have common risk
characteristics and thereby use a composite interest rate and expectation of cash flows expected to
be collected for the loan pools. Under the provisions of ASC 310-30, the Corporation aggregated
acquired loans into 14 pools based upon common risk characteristics, including types of loans,
commercial type loans with similar risk grades and whether loans were performing or nonperforming.
A pool is considered a single unit of accounting for the purposes of applying the guidance as
described above. A loan will be removed from a pool of acquired loans only if the loan is sold,
foreclosed, paid off or written off, and will be removed from the pool at the carrying value. If an
individual loan is removed from a pool of loans, the difference between its relative carrying
amount and the cash, fair value of the collateral, or other assets received would not affect the
effective yield used to recognize the accretable difference on the remaining pool. The Corporation
estimated the cash flows expected to be collected over the life of the pools of loans at
acquisition, and estimates quarterly thereafter, based on a set of assumptions including
expectations as to default rates, prepayment rates and loss severities. In the event that the
updated expected cash flows increase in a pool from those originally projected at acquisition date,
the Corporation will adjust the accretable yield amount with a resulting change in the amount
recognized in interest income in subsequent periods. In the event that the updated expected cash
flows in a pool decrease from those originally projected at the acquisition date, the Corporation
will consider that loan pool impaired, which results in the Corporation recording a charge to the
provision for loan losses.
Loans Modified Under Troubled Debt Restructurings
Loans modified under troubled debt restructurings (TDRs) involve granting a concession to a
borrower who is experiencing financial difficulty. Concessions generally include modifications to
original loan terms, including changes to a loans payment schedule or interest rate, which
generally would not otherwise be considered. The Corporations loans reported as TDRs continue to
accrue interest at the loans effective interest rate. TDRs are reported as nonperforming TDRs
until a six-month payment history of principal and interest payments, in accordance with the loan
modification, is sustained, at which time the Corporation moves them to a performing TDR status.
The Corporations TDRs to commercial borrowers generally consist of allowing borrowers to defer
scheduled principal payments and make interest only payments for a specified period of time at the
stated interest rate of the original loan agreement or lower payments due to a modification of the
loans contractual term. The Corporation does not expect to incur a loss on these loans based on
its assessment of the borrowers expected cash flows, and accordingly, no additional provision for
loan losses has been recognized related to these loans. These loans are individually evaluated for
impairment and transferred to nonaccrual status if it is probable that any remaining principal and
interest payments due on the loan will not be collected in accordance with the modified terms of
the loan.
The Corporations real estate residential TDRs generally consist of reducing a borrowers monthly
payments by decreasing the interest rate charged on the loan for a specified period of time
(generally 24 months). The Corporation recognizes additional provision for loan losses related to impairment on these loans
based on the present value of expected future cash flows discounted at the loans original
effective interest rate. These loans are moved to nonaccrual status if they become 90 days past due
as to principal or interest, or sooner if conditions warrant.
10
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Impaired Loans
A loan is defined to be impaired when it is probable that payment of principal and interest will
not be made in accordance with the original contractual terms of the loan agreement. Impaired loans
include all classes of nonaccrual loans, all reported TDRs and acquired loans that were not
performing in accordance with original contractual terms. Impaired loans are carried at the present
value of expected cash flows discounted at the loans effective interest rate or, if lower, at the
estimated fair value of the collateral, if the loan is collateral dependent.
Nonperforming Loans
Nonperforming loans are comprised of originated loans for which the accrual of interest has been
discontinued (nonaccrual loans), accruing loans contractually past due 90 days or more as to
interest or principal payments and nonperforming TDRs.
Allowance for Loan Losses
The allowance for loan losses (allowance) is presented as a reserve against loans. The allowance
represents managements assessment of probable loan losses inherent in the Corporations loan
portfolio.
Managements evaluation of the adequacy of the allowance is based on a continuing review of the
loan portfolio, actual loan loss experience, the underlying value of the collateral, risk
characteristics of the loan portfolio, the level and composition of nonperforming loans, the
financial condition of the borrowers, the balance of the loan portfolio, loan growth, economic
conditions, employment levels in the Corporations local markets, and special factors affecting
specific business sectors. The Corporation maintains formal policies and procedures to monitor and
control credit risk. Management evaluates the allowance on a quarterly basis in an effort to ensure
the level is adequate to absorb probable losses inherent in the loan portfolio.
The allowance provides for probable losses that have been identified with specific customer
relationships and for probable losses believed to be inherent in the remainder of the originated
loan portfolio, but that have not been specifically identified. The Corporation utilizes its own
loss experience to estimate inherent losses on loans. Internal risk ratings are assigned to each
commercial, real estate commercial, real estate construction and land development loan at the time
of approval and are subject to subsequent periodic reviews by senior management. The Corporation
performs a detailed credit quality review quarterly on all loans greater than $0.25 million that
have deteriorated below certain levels of credit risk, and may allocate a specific portion of the
allowance to such loans based upon this review. A portion of the allowance is allocated to the
remaining loans by applying projected loss ratios, based on numerous factors. Projected loss ratios
incorporate factors such as recent charge-off experience, trends with respect to adversely
risk-rated commercial, real estate commercial, real estate construction and land development loans,
trends with respect to past due and nonaccrual loans, changes in economic conditions and trends,
changes in the value of underlying collateral and other credit risk factors. This evaluation
involves a high degree of uncertainty.
In determining the allowance and the related provision for loan losses, the Corporation considers
four principal elements: (i) valuation allowances based upon probable losses identified during the
review of impaired commercial, real estate commercial, real estate construction and land
development loans, (ii) allocations established for adversely-rated commercial, real estate
commercial, real estate construction and land development loans and nonaccrual real estate
residential, consumer installment and home equity loans, (iii) allocations, by loan classes, on all
other loans based principally on the most recent three years of historical loan loss experience and
loan loss trends and (iv) an unallocated allowance based on the imprecision in the overall
allowance methodology.
The first element reflects the Corporations estimate of probable losses based upon the systematic
review of individually impaired commercial, real estate commercial, real estate construction and
land development loans in the originated loan portfolio. These estimates are based upon a number of objective factors, such as
payment history, financial condition of the borrower and discounted collateral exposure. The
Corporation measures the investment in an impaired loan based on one of three methods: the loans
observable market price; the fair value of the collateral; or, the present value of expected future
cash flows discounted at the loans effective interest rate. At June 30, 2011, loans in the
commercial loan portfolio that were in nonaccrual status were valued based on the fair value of the
collateral securing the loan, while TDRs in the commercial loan portfolio were valued based on the
present value of
11
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
expected future cash flows discounted at the loans effective interest rate. It is the
Corporations general policy to, at least annually, obtain new appraisals on impaired loans that
are primarily secured by real estate. When the Corporation determines that the fair value of the
collateral is less than the carrying value of an impaired loan on nonaccrual status and a portion
is deemed not collectible, the portion of the impairment that is deemed not collectible is charged
off (confirmed loss) and deducted from the allowance. The remaining carrying value of the impaired
loan is classified as a nonperforming loan. When the Corporation determines that the fair value of
the collateral is less than the carrying value of an impaired loan but believes it is probable it
will recover this impairment, the Corporation establishes a valuation allowance for such
impairment.
The second element reflects the application of the Corporations loan grade risk rating system.
This risk rating system is similar to those employed by state and federal banking regulators. Loans
in the commercial loan portfolio that are risk rated below a certain predetermined risk grade and
nonaccrual real estate residential and nonaccrual consumer installment and home equity loans are
assigned a loss allocation factor that is based upon a historical analysis of actual loan losses
incurred and a valuation of the type of collateral securing the loans.
The third element is determined by assigning allocations based principally upon the three-year
average of loss experience for each class of loan. Average losses may be adjusted based on current
loan loss experience and delinquency trends. This component considers the lagging impact of
historical charge-off ratios in periods where future loan charge-offs are expected to increase or
decrease, trends in delinquencies and nonaccrual loans, the changing portfolio mix in terms of
collateral, average loan balance, loan growth and the degree of seasoning in the various loan
portfolios. Loan loss analyses are performed quarterly.
The fourth element is based on factors that cannot be associated with a specific credit or loan
class and reflects an attempt to ensure that the overall allowance appropriately reflects a margin
for the imprecision necessarily inherent in the estimates of loan losses. Management maintains an
unallocated allowance to recognize the uncertainty and imprecision underlying the process of
estimating inherent loan losses in the loan portfolio. Determination of the probable losses
inherent in the portfolio, which are not necessarily captured by the allocation methodology
discussed above, involves the exercise of judgment. The unallocated allowance associated with the
imprecision in the risk rating system is based on a historical evaluation of the accuracy of the
risk ratings associated with loans. This unallocated portion of the allowance is judgmentally
determined and generally serves to compensate for the uncertainty in estimating inherent losses,
particularly in times of changing economic conditions, and also considers the possibility of
improper risk ratings. The unallocated portion of the allowance also takes into consideration
economic conditions within the State of Michigan and nationwide, including unemployment levels,
industry-wide loan delinquency rates, and declining commercial and residential real estate values
and historically high inventory levels of residential lots, condominiums and single family houses
held for sale.
Although the Corporation allocates portions of the allowance to specific loans and loan types, the
entire allowance is available for any loan losses that occur. Loans that are deemed not collectible
are charged off and deducted from the allowance. The provision for loan losses and recoveries on
loans previously charged off are added to the allowance. Collection efforts may continue and
recoveries may occur after a loan is charged off against the allowance.
Acquired loans are aggregated into pools based upon common risk characteristics. An allowance may
be recorded related to acquired loans, if an acquired loan pool experiences a decrease in expected
cash flows as compared to those projected at the acquisition date. On a quarterly basis, the
expected future cash flow of each pool is estimated based on various factors including changes in
property values of collateral dependent loans, default rates, loss severities and prepayment
speeds. Decreases in estimates of expected cash flows within a pool generally result in a charge to
the provision for loan losses and a corresponding increase in the allowance allocated to acquired
loans for the particular pool. Increases in estimates of expected cash flows within a pool
generally result first in a reduction in the allowance allocated to acquired loans for the
particular pool, and second in an adjustment to the accretable yield for the pool, which will
increase amounts recognized in interest income in subsequent periods.
Various regulatory agencies, as an integral part of their examination process, periodically review
the allowance. Such agencies may require additions to the allowance based on their judgment
reflecting information available to them at the time of their examinations.
12
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Fair Value Measurements
Fair value for assets and liabilities measured at fair value on a recurring or nonrecurring basis
refers to the price that would be received to sell an asset or paid to transfer a liability (an
exit price) in an orderly transaction between market participants in the market in which the
reporting entity transacts such sales or transfers based on the assumptions market participants
would use when pricing an asset or liability. Assumptions are developed based on prioritizing
information within a fair value hierarchy that gives the highest priority to quoted prices in
active markets and the lowest priority to unobservable data, such as the reporting entitys own
data.
The Corporation may choose to measure eligible items at fair value at specified election dates.
Unrealized gains and losses on items for which the fair value measurement option has been elected
are reported in earnings at each subsequent reporting date. The fair value option (i) may be
applied instrument by instrument, with certain exceptions, allowing the Corporation to record
identical financial assets and liabilities at fair value or by another measurement basis permitted
under GAAP, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to
entire instruments and not to portions of instruments. At June 30, 2011, December 31, 2010 and June
30, 2010, the Corporation had not elected the fair value option for any financial assets or
liabilities.
Share-Based Compensation
The Corporation has granted stock options, stock awards and restricted stock performance units to
certain executive and senior management employees. The Corporation accounts for share-based
compensation expense using the modified-prospective transition method. Under that method,
compensation expense is recognized for share-based awards granted after December 31, 2005, based on
the estimated grant date fair value as computed using the Black-Scholes option pricing model and
the probability of issuance for performance-based awards. The fair value of stock options is
recognized as compensation expense on a straight-line basis over the requisite service period. The
fair value of restricted stock performance units is recognized as compensation expense over the
requisite performance period.
Cash flows realized from the tax benefits of exercised stock option awards that result from actual
tax deductions that are in excess of the recorded tax benefits related to the compensation expense
recognized for those options (excess tax benefits) are classified as financing activities on the
consolidated statements of cash flows.
Income and Other Taxes
The Corporation is subject to the income and other tax laws of the United States and the State of
Michigan. These laws are complex and are subject to different interpretations by the taxpayer and
the various taxing authorities. In determining the provision for income and other taxes, management
must make judgments and estimates about the application of these inherently complex laws, related
regulations and case law. In the process of preparing the Corporations tax returns, management
attempts to make reasonable interpretations of the tax laws. These interpretations are subject to
challenge by the tax authorities upon audit or to reinterpretation based on managements ongoing
assessment of facts and evolving case law.
The Corporation and its subsidiaries file a consolidated federal income tax return. The provision
for federal income taxes is based on income and expenses, as reported in the consolidated financial
statements, rather than amounts reported on the Corporations federal income tax return. The
difference between the federal statutory income tax rate and the Corporations effective federal
income tax rate is primarily a function of the proportion of the Corporations interest income
exempt from federal taxation, nondeductible interest expense and other nondeductible expenses
relative to pretax income and tax credits. When income and expenses are recognized in different
periods for tax purposes than for book purposes, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
as income or expense in the period that includes the enactment date of the change.
13
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
On a quarterly basis, management assesses the reasonableness of its effective federal tax rate
based upon its current best estimate of taxable income and the applicable taxes expected for the
full year. Deferred tax assets and liabilities are reassessed on an annual basis, or sooner, if
business events or circumstances warrant. Management also assesses the need for a valuation
allowance for deferred tax assets on a quarterly basis using information about the Corporations
current and historical financial position and results of operations.
Income tax positions are evaluated to determine whether it is more-likely-than-not that a tax
position will be sustained upon examination based on the technical merits of the tax position. If a
tax position is more-likely-than-not to be sustained, a tax benefit is recognized for the amount
that is greater than 50% likely to be realized. Reserves for contingent tax liabilities
attributable to unrecognized tax benefits associated with uncertain tax positions are reviewed
quarterly for adequacy based upon developments in tax law and the status of audits or examinations.
The Corporation had no reserve for contingent income tax liabilities recorded at June 30, 2011,
December 31, 2010 or June 30, 2010.
The tax periods open to examination by the Internal Revenue Service include the calendar years
ended December 31, 2010, 2009, 2008 and 2007. The calendar years ended December 31, 2010, 2009 and
2008 are open to examination for the Corporations Michigan Business Tax and the calendar years
ended December 31, 2007 and 2006 are open to examination for the Michigan Single Business Tax of
the Corporation and certain subsidiaries of the Corporation.
Shareholders Equity
Common Stock Repurchase Programs
From time to time, the board of directors approves common stock repurchase programs allowing
management to repurchase shares of the Corporations common stock in the open market. The
repurchased shares are available for later reissuance in connection with potential future stock
dividends, the Corporations dividend reinvestment plan, employee benefit plans and other general
corporate purposes. Under these programs, the timing and actual number of shares subject to
repurchase are at the discretion of management and are contingent on a number of factors, including
the projected parent company cash flow requirements and the Corporations market price per share.
In January 2008, the board of directors of the Corporation authorized management to repurchase up
to 500,000 shares of the Corporations common stock under a stock repurchase program. Since the
January 2008 authorization, no shares have been repurchased. At June 30, 2011, there were 500,000
remaining shares available for repurchase under the Corporations stock repurchase programs.
Preferred Stock
On April 20, 2009, the shareholders of the Corporation authorized the board of directors of the
Corporation to issue up to 200,000 shares of preferred stock in connection with either an
acquisition by the Corporation of an entity that has shares of preferred stock issued and
outstanding pursuant to any program established by the United States government or participation by
the Corporation in any program established by the United States government. At June 30, 2011, no
shares of preferred stock were issued and outstanding.
Common Stock
On April 18, 2011, the shareholders of the Corporation approved an amendment to the restated
articles of incorporation to increase the number of authorized shares of common stock from
30,000,000 to 45,000,000.
14
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Legal Matters
The Corporation and Chemical Bank are subject to certain legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material adverse effect on the
consolidated financial condition or results of operations of the Corporation.
Pending Accounting Pronouncements
Determination of Troubled Debt Restructurings and Related Disclosures: In April 2011, the
Financial Accounting Standards Board (FASB) issued ASU No. 2011-02, Receivables (Topic 310): A
Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring (ASU 2011-02).
ASU 2011-02 provides additional clarifying guidance for creditors in determining whether
modifications to a receivable constitute a concession granted by the creditor; evaluating whether a
restructuring results in a delay in payment that is insignificant; and determining whether a debtor
is experiencing financial difficulties. ASU 2011-02 also establishes the effective date for certain
disclosures about loans modified under troubled debt restructurings that had been delayed by the
FASBs issuance of ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20. For public entities, ASU
2011-02 (including related disclosures) is effective for the first interim or annual period
beginning on or after June 15, 2011, with early adoption permitted. The adoption of ASU 2011-02 is
not expected to have a material impact on the Corporations consolidated financial condition or
results of operations.
Transfers and Servicing of Financial Assets: In April 2011, the FASB issued ASU No. 2011-03,
Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements
(ASU 2011-03). ASU 2011-03 modifies current guidance by eliminating (i) from the assessment of
effective control over transferred financial assets in connection with a repurchase agreement the
criterion requiring the transferor to have the ability to repurchase or redeem the financial assets
on substantially the agreed terms, even in the event of the transferees default, and (ii) the
condition requiring the transferor to have obtained sufficient collateral to demonstrate that
ability. ASU 2011-03 is effective for interim and annual periods beginning on or after December 15,
2011, with early adoption prohibited. The adoption of ASU 2011-03 is not expected to have a
material impact on the Corporations consolidated financial condition or results of operations.
Fair Value Measurement and Disclosure Requirements: In May 2011, the FASB issued ASU No. 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). The amended guidance of ASU 2011-04
(i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the
highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of
instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on
blockage factors to all three levels of the fair value hierarchy, and (v) requires additional
disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy,
quantitative and qualitative information and a description of an entitys valuation process for
Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not
measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or
after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 is not
expected to have a material impact on the Corporations consolidated financial condition or results
of operations.
Presentation of Comprehensive Income: In June 2011, the FASB issued ASU No. 2011-05, Comprehensive
Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 amends current
guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as
part of the statement of changes in shareholders equity, (ii) requiring the presentation of each
component of net income and each component of OCI either in a single continuous statement or in two
separate but consecutive statements, and (iii) requiring the presentation of reclassification
adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to
present components of OCI either before or after related income tax effects, the items that must be
reported in OCI, when an item of OCI should be reclassified to net income, or the computation of
earnings per share (which continues to be based on net income). ASU 2011-05 is effective for
interim and annual
15
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and
retrospective application required. The adoption of ASU 2011-05 is not expected to have a material
impact on the Corporations consolidated financial condition or results of operations.
Note 2: Acquisition
On April 30, 2010, the Corporation acquired 100% of OAK for total consideration of $83.7 million.
The total consideration consisted of the issuance of 3,529,772 shares of Chemical common stock with
a total value of $83.7 million based upon a price per share of the Corporations common stock of
$23.70 at the acquisition date, the exchange of 26,425 vested stock options for the outstanding
vested stock options of OAK with a value of the exchange at the acquisition date of approximately
$41,000 and approximately $8,000 of cash in lieu of fractional shares. The issuance of 3,529,772
shares of Chemical common stock was based on an exchange rate of 1.306 times the 2,703,009
outstanding shares of OAK at the acquisition date. There were no contingencies resulting from the
acquisition.
OAK, a bank holding company, owned Byron Bank, which provided traditional commercial banking
services and products through 14 banking offices serving communities in Ottawa, Allegan and Kent
counties in west Michigan. Byron Bank was consolidated with and into Chemical Bank on July 23,
2010. At the acquisition date, OAK had total assets of $820 million, including total loans of $627
million, and total deposits of $693 million, including brokered deposits of $193 million.
Upon acquisition, the OAK loan portfolio had contractually required principal and interest payments
receivable of $683 million and $97 million, respectively, expected principal and interest cash
flows of $636 million and $88 million, respectively, and a fair value of $627 million. The
difference between the contractually required payments receivable and the expected cash flows
represents the nonaccretable difference, which totaled $56 million at the acquisition date, with
$47 million attributable to expected credit losses. The difference between the expected cash flows
and fair value represents the accretable yield, which totaled $97 million at the acquisition date.
The outstanding contractual principal balance and the carrying amount of the acquired loan
portfolio were $565 million and $523 million, respectively, at June 30, 2011, compared to $597
million and $552 million, respectively, at December 31, 2010 and $665 million and $613 million,
respectively, at June 30, 2010, and there was no related allowance for loan losses at those dates.
Activity for the accretable yield, which includes contractually due interest, of acquired loans
follows:
|
|
|
|
|
|
|
Accretable Yield |
|
|
|
(In thousands) |
|
Balance at January 1, 2011 |
|
$ |
72,863 |
|
Additions |
|
|
|
|
Reductions |
|
|
|
|
Accretion recognized in interest income |
|
|
(17,098 |
) |
Reclassification from (to) nonaccretable difference |
|
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
$ |
55,765 |
|
|
|
|
|
16
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Note 3: Investment Securities
The following is a summary of the amortized cost and fair value of investment securities
available-for-sale and investment securities held-to-maturity at June 30, 2011, December 31, 2010
and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
108,957 |
|
|
$ |
283 |
|
|
$ |
36 |
|
|
$ |
109,204 |
|
State and political subdivisions |
|
|
43,793 |
|
|
|
1,163 |
|
|
|
6 |
|
|
|
44,950 |
|
Residential mortgage-backed securities |
|
|
111,760 |
|
|
|
4,036 |
|
|
|
191 |
|
|
|
115,605 |
|
Collateralized mortgage obligations |
|
|
283,840 |
|
|
|
775 |
|
|
|
371 |
|
|
|
284,244 |
|
Corporate bonds |
|
|
56,941 |
|
|
|
138 |
|
|
|
175 |
|
|
|
56,904 |
|
Preferred stock |
|
|
1,389 |
|
|
|
170 |
|
|
|
|
|
|
|
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
606,680 |
|
|
$ |
6,565 |
|
|
$ |
779 |
|
|
$ |
612,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
117,167 |
|
|
$ |
394 |
|
|
$ |
40 |
|
|
$ |
117,521 |
|
State and political subdivisions |
|
|
45,951 |
|
|
|
326 |
|
|
|
231 |
|
|
|
46,046 |
|
Residential mortgage-backed securities |
|
|
132,683 |
|
|
|
4,439 |
|
|
|
187 |
|
|
|
136,935 |
|
Collateralized mortgage obligations |
|
|
233,202 |
|
|
|
911 |
|
|
|
192 |
|
|
|
233,921 |
|
Corporate bonds |
|
|
43,115 |
|
|
|
99 |
|
|
|
467 |
|
|
|
42,747 |
|
Preferred stock |
|
|
1,389 |
|
|
|
51 |
|
|
|
|
|
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
573,507 |
|
|
$ |
6,220 |
|
|
$ |
1,117 |
|
|
$ |
578,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
163,194 |
|
|
$ |
730 |
|
|
$ |
82 |
|
|
$ |
163,842 |
|
State and political subdivisions |
|
|
47,312 |
|
|
|
561 |
|
|
|
|
|
|
|
47,873 |
|
Residential mortgage-backed securities |
|
|
152,112 |
|
|
|
4,582 |
|
|
|
335 |
|
|
|
156,359 |
|
Collateralized mortgage obligations |
|
|
247,407 |
|
|
|
661 |
|
|
|
711 |
|
|
|
247,357 |
|
Corporate bonds |
|
|
29,230 |
|
|
|
135 |
|
|
|
246 |
|
|
|
29,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
639,255 |
|
|
$ |
6,669 |
|
|
$ |
1,374 |
|
|
$ |
644,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
179,529 |
|
|
$ |
4,614 |
|
|
$ |
1,223 |
|
|
$ |
182,920 |
|
Trust preferred securities |
|
|
10,500 |
|
|
|
|
|
|
|
5,825 |
|
|
|
4,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
190,029 |
|
|
$ |
4,614 |
|
|
$ |
7,048 |
|
|
$ |
187,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
154,900 |
|
|
$ |
2,106 |
|
|
$ |
1,758 |
|
|
$ |
155,248 |
|
Trust preferred securities |
|
|
10,500 |
|
|
|
|
|
|
|
6,560 |
|
|
|
3,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
165,400 |
|
|
$ |
2,106 |
|
|
$ |
8,318 |
|
|
$ |
159,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
154,796 |
|
|
$ |
2,400 |
|
|
$ |
1,106 |
|
|
$ |
156,090 |
|
Trust preferred securities |
|
|
10,500 |
|
|
|
|
|
|
|
6,875 |
|
|
|
3,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
165,296 |
|
|
$ |
2,400 |
|
|
$ |
7,981 |
|
|
$ |
159,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Corporations residential mortgage-backed securities and collateralized
mortgage obligations are backed by a U.S. government agency (Government National Mortgage
Association) or a government sponsored enterprise (Federal Home Loan Mortgage Corporation or
Federal National Mortgage Association).
At June 30, 2011, the Corporation held $10.5 million of trust preferred investment securities that
were recorded as held-to-maturity, with $10.0 million of these securities representing a 100%
interest in a trust preferred investment security of a non-public bank holding company in Michigan
that has been assessed by the Corporation as financially strong. The remaining $0.5 million
represents a 10% interest in another trust preferred investment security of a non-public bank
holding company located in Michigan that incurred net losses in both 2010 and 2009, although
remained well-capitalized under regulatory guidelines during that time.
At June 30, 2011, it was the Corporations opinion that the market for trust preferred investment
securities was not active, and thus, in accordance with GAAP, when there is a significant decrease
in the volume and activity for an asset or liability in relation to normal market activity,
adjustments to transaction or quoted prices may be necessary or a change in valuation technique or
multiple valuation techniques may be appropriate. The fair values of the trust preferred investment
securities were based upon a calculation of discounted cash flows. The cash flows were discounted
based upon both observable inputs and appropriate risk adjustments that market participants would
make for nonperformance, illiquidity and issuer specifics. An independent third party provided the
Corporation with observable inputs based on the existing market and insight into appropriate rate
of return adjustments that market participants would require for the additional risk associated
with a single issue investment security of this nature. Using a model that incorporated the average
current yield of publicly traded performing trust preferred securities of large financial
institutions with no known material financial difficulties at June 30, 2011, and adjusted for both
illiquidity and the specific characteristics of the issuer, such as size, leverage position and
location, the Corporation calculated an implied yield of 45% on its $10.0 million trust preferred
investment security and 35% for its $0.5 million trust preferred investment security. Based upon
these implied yields, the fair values of the trust preferred investment securities were calculated
by the Corporation at $4.5 million and $0.2 million, respectively, resulting in a combined
impairment of $5.8 million. At June 30, 2011, the Corporation concluded that the $5.8 million of
combined impairment on the trust preferred investment securities was temporary in nature.
The following is a summary of the amortized cost and fair value of investment securities at June
30, 2011, by maturity, for both available-for-sale and held-to-maturity investment securities. The
maturities of residential mortgage-backed securities and collateralized mortgage obligations are
based on scheduled principal payments. The maturities of all other debt securities are based on
final contractual maturity.
18
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
102,789 |
|
|
$ |
103,451 |
|
Due after one year through five years |
|
|
365,277 |
|
|
|
367,800 |
|
Due after five years through ten years |
|
|
82,693 |
|
|
|
83,886 |
|
Due after ten years |
|
|
54,532 |
|
|
|
55,770 |
|
Preferred stock |
|
|
1,389 |
|
|
|
1,559 |
|
|
|
|
|
|
|
|
Total |
|
$ |
606,680 |
|
|
$ |
612,466 |
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
27,053 |
|
|
$ |
27,108 |
|
Due after one year through five years |
|
|
82,904 |
|
|
|
83,729 |
|
Due after five years through ten years |
|
|
50,426 |
|
|
|
51,995 |
|
Due after ten years |
|
|
29,646 |
|
|
|
24,763 |
|
|
|
|
|
|
|
|
Total |
|
$ |
190,029 |
|
|
$ |
187,595 |
|
|
|
|
|
|
|
|
The following schedule summarizes information for both available-for-sale and held-to-maturity
investment securities with gross unrealized losses at June 30, 2011, December 31, 2010 and June 30,
2010, aggregated by category and length of time that individual securities have been in a
continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
|
(In thousands) |
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
29,311 |
|
|
$ |
34 |
|
|
$ |
2,860 |
|
|
$ |
2 |
|
|
$ |
32,171 |
|
|
$ |
36 |
|
State and political subdivisions |
|
|
48,011 |
|
|
|
1,046 |
|
|
|
12,173 |
|
|
|
183 |
|
|
|
60,184 |
|
|
|
1,229 |
|
Residential mortgage-backed securities |
|
|
25,538 |
|
|
|
185 |
|
|
|
1,240 |
|
|
|
6 |
|
|
|
26,778 |
|
|
|
191 |
|
Collateralized mortgage obligations |
|
|
94,073 |
|
|
|
300 |
|
|
|
27,617 |
|
|
|
71 |
|
|
|
121,690 |
|
|
|
371 |
|
Corporate bonds |
|
|
24,853 |
|
|
|
147 |
|
|
|
2,468 |
|
|
|
28 |
|
|
|
27,321 |
|
|
|
175 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
4,675 |
|
|
|
5,825 |
|
|
|
4,675 |
|
|
|
5,825 |
|
|
|
|
Total |
|
$ |
221,786 |
|
|
$ |
1,712 |
|
|
$ |
51,033 |
|
|
$ |
6,115 |
|
|
$ |
272,819 |
|
|
$ |
7,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
20,117 |
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,117 |
|
|
$ |
40 |
|
State and political subdivisions |
|
|
71,900 |
|
|
|
1,863 |
|
|
|
3,800 |
|
|
|
126 |
|
|
|
75,700 |
|
|
|
1,989 |
|
Residential mortgage-backed securities |
|
|
26,117 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
26,117 |
|
|
|
187 |
|
Collateralized mortgage obligations |
|
|
57,556 |
|
|
|
170 |
|
|
|
9,616 |
|
|
|
22 |
|
|
|
67,172 |
|
|
|
192 |
|
Corporate bonds |
|
|
24,683 |
|
|
|
317 |
|
|
|
2,341 |
|
|
|
150 |
|
|
|
27,024 |
|
|
|
467 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,940 |
|
|
|
6,560 |
|
|
|
3,940 |
|
|
|
6,560 |
|
|
|
|
Total |
|
$ |
200,373 |
|
|
$ |
2,577 |
|
|
$ |
19,697 |
|
|
$ |
6,858 |
|
|
$ |
220,070 |
|
|
$ |
9,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
21,237 |
|
|
$ |
82 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,237 |
|
|
$ |
82 |
|
State and political subdivisions |
|
|
34,383 |
|
|
|
844 |
|
|
|
10,427 |
|
|
|
262 |
|
|
|
44,810 |
|
|
|
1,106 |
|
Residential mortgage-backed securities |
|
|
46,896 |
|
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
46,896 |
|
|
|
335 |
|
Collateralized mortgage obligations |
|
|
98,813 |
|
|
|
689 |
|
|
|
13,126 |
|
|
|
22 |
|
|
|
111,939 |
|
|
|
711 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
2,241 |
|
|
|
246 |
|
|
|
2,241 |
|
|
|
246 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,625 |
|
|
|
6,875 |
|
|
|
3,625 |
|
|
|
6,875 |
|
|
|
|
Total |
|
$ |
201,329 |
|
|
$ |
1,950 |
|
|
$ |
29,419 |
|
|
$ |
7,405 |
|
|
$ |
230,748 |
|
|
$ |
9,355 |
|
|
|
|
An assessment is performed quarterly by the Corporation to determine whether unrealized losses in
its investment securities portfolio are temporary or other-than-temporary by carefully considering
all available information. The Corporation reviews factors such as financial statements, credit
ratings, news releases and other pertinent
19
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
information of the underlying issuer or company to make its determination. Management did not believe any individual unrealized loss on any investment
security, as of June 30, 2011, represented an other-than-temporary
impairment (OTTI). Management believed that the unrealized losses on investment securities at June
30, 2011 were temporary in nature and due primarily to changes in interest rates, increased credit
spreads and reduced market liquidity and not as a result of credit-related issues. Unrealized
losses of $5.8 million in the trust preferred securities portfolio, related to trust preferred
securities of two well-capitalized bank holding companies in Michigan, were attributable to
illiquidity in certain financial markets. The Corporation performed an analysis of the
creditworthiness of these issuers and concluded that, at June 30, 2011, the Corporation expected to
recover the entire amortized cost basis of these investment securities.
At June 30, 2011, the Corporation did not have the intent to sell any of its impaired investment
securities and believed that it was more-likely-than-not that the Corporation will not have to sell
any such investment securities before a full recovery of amortized cost. Accordingly, at June 30,
2011, the Corporation believed the impairments in its investment securities portfolio were
temporary in nature. Additionally, no impairment loss was realized in the Corporations
consolidated statement of income for the six months ended June 30, 2011. However, there is no
assurance that OTTI may not occur in the future.
Note 4: Loans
Loan portfolio segments are defined as the level at which an entity develops and documents a
systematic methodology to determine its allowance. The Corporation has two loan portfolio segments
(commercial loans and consumer loans) which it uses in determining the allowance. Both quantitative
and qualitative factors are used by management at the loan portfolio segment level in determining
the adequacy of the allowance for the Corporation. Classes of loans are a disaggregation of an
entitys loan portfolio segments. Classes of loans are defined as a group of loans which share
similar initial measurement attributes, risk characteristics, and methods for monitoring and
assessing credit risk. The Corporation has seven classes of loans, which are set forth below.
Commercial Loans to varying types of businesses, including municipalities, school
districts and nonprofit organizations, for the purpose of supporting working capital, operational
needs and term financing of equipment. Repayment of such loans is generally provided through
operating cash flows of the business. Commercial loans are predominately secured by equipment,
inventory, accounts receivable, personal guarantees of the owner and other sources of repayment,
although the Corporation may also secure commercial loans with real estate.
Real estate commercial Loans secured by real estate occupied by the borrower for ongoing
operations, non-owner occupied real estate leased to one or more tenants and vacant land that has
been acquired for investment or future land development.
Real estate construction Secured loans for the construction of business properties. Real
estate construction loans often convert to a real estate commercial loan at the completion of the
construction period.
Land development Secured development loans are made to borrowers for the purpose of
infrastructure improvements to vacant land to create finished marketable residential and commercial
lots/land. Most land development loans are originated with the intention that the loans will be
paid through the sale of developed lots/land by the developers within twelve months of the
completion date. Land development loans at June 30, 2011 were primarily comprised of loans to
develop residential properties.
Real estate residential Loans secured by one- to four-family residential properties
generally with fixed interest rates of fifteen years or less. The loan-to-value ratio at the time
of origination is generally 80% or less. Real estate residential loans with a loan-to-value ratio
of more than 80% generally require private mortgage insurance.
Consumer installment Loans to consumers primarily for the purpose of home improvements
and acquiring automobiles, recreational vehicles and boats. These loans consist of relatively small
amounts that are spread across many individual borrowers.
20
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Home equity Loans whereby consumers utilize equity in their personal residence,
generally through a second mortgage, as collateral to secure the loan.
Commercial, real estate commercial, real estate construction and land development loans are
referred to as the Corporations commercial loan portfolio, while real estate residential, consumer
installment and home equity loans are referred to as the Corporations consumer loan portfolio.
A summary of loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Commercial loan portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
842,404 |
|
|
$ |
818,997 |
|
|
$ |
769,287 |
|
Real estate commercial |
|
|
1,065,606 |
|
|
|
1,076,971 |
|
|
|
1,081,860 |
|
Real estate construction |
|
|
91,152 |
|
|
|
89,234 |
|
|
|
119,449 |
|
Land development |
|
|
51,199 |
|
|
|
53,386 |
|
|
|
59,555 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
2,050,361 |
|
|
|
2,038,588 |
|
|
|
2,030,151 |
|
|
|
|
|
|
|
|
|
|
|
Consumer loan portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential |
|
|
825,860 |
|
|
|
798,046 |
|
|
|
768,156 |
|
Consumer installment |
|
|
517,405 |
|
|
|
503,132 |
|
|
|
509,508 |
|
Home equity |
|
|
354,384 |
|
|
|
341,896 |
|
|
|
340,146 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,697,649 |
|
|
|
1,643,074 |
|
|
|
1,617,810 |
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
3,748,010 |
|
|
$ |
3,681,662 |
|
|
$ |
3,647,961 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Monitoring
The Corporation maintains loan policies and credit underwriting standards as part of the process of
managing credit risk. These standards include making loans generally only within the Corporations
market areas. The Corporations lending markets generally consist of communities across the middle
to southern and western sections of the lower peninsula of Michigan. The Corporations lending
market areas do not include the southeastern portion of Michigan. The Corporation has no foreign
loans.
The Corporation has a loan approval process involving underwriting and individual and group loan
approval authorities to consider credit quality and loss exposure at loan origination. The loans in
the Corporations commercial loan portfolio are risk rated at origination based on the grading
system set forth below. The approval authority of relationship managers is established based on
experience levels, with credit decisions greater than $1.0 million requiring group loan authority
approval, except for four executive and senior officers who have varying limits exceeding $1.0
million and up to $2.5 million. With respect to the group loan authorities, the Corporation has a
loan committee, consisting of certain executive and senior officers, that meets weekly to consider
loans in the amount of $1.0 million to $2.5 million. A directors loan committee, consisting of ten
members of the board of directors, including the chief executive officer, and the senior credit
officer, meets regularly to consider loans in the amount of $2.5 million to $10 million. Loans over
$10 million require the approval of the board of directors.
The majority of the Corporations consumer loan portfolio is comprised of secured loans that are
relatively small and are evaluated at origination on a centralized basis against standardized
underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is
largely done on an exception basis. If payments are made on schedule, as agreed, then no further
monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to
the Corporations collection department for resolution, which generally occurs fairly rapidly and
often through repossession and foreclosure. Credit quality for the entire consumer loan portfolio
is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.
Loans in the commercial loan portfolio tend to be larger and more complex than those in the
consumer loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the
commercial loan portfolio have an assigned relationship manager, and most borrowers provide
periodic financial and operating information that allows the relationship managers to stay abreast
of credit quality during the life of the loans. The risk ratings of loans in the
21
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed
more frequently and reviewed by various loan committees within the Corporation at least quarterly.
The Corporation maintains a centralized independent loan review function that monitors the approval
process and on-going asset quality of the loan portfolio, including the accuracy of loan grades.
The Corporation also maintains an independent appraisal review function that participates in the
review of all appraisals obtained by the Corporation.
Credit Quality Indicators
The Corporation uses a nine grade risk rating system to monitor the ongoing credit quality of its
commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring
liquidity, debt capacity, coverage and payment behavior as shown in the borrowers financial
statements. The loan grades also measure the quality of the borrowers management and the repayment
support offered by any guarantors. A summary of the Corporations loan grades (or, characteristics
of the loans within each grade) follows:
Risk Grades 1-5 (Acceptable Credit Quality) All loans in risk grades 1-5 are considered
to be acceptable credit risks by the Corporation and are grouped for purposes of allowance for loan
loss considerations and financial reporting. The five grades essentially represent a ranking of
loans that are all viewed to be of acceptable credit quality, taking into consideration the various
factors mentioned above, but with varying degrees of financial strength, debt coverage, management
and factors that could impact credit quality. Business credits within risk grades 1 5 range from
Risk Grade 1: Prime Quality (factors include: excellent business credit; excellent debt capacity
and coverage; outstanding management; strong guarantors; superior liquidity and net worth;
favorable loan-to-value ratios; debt secured by cash or equivalents, or backed by the full faith
and credit of the U.S. Government) to Risk Grade 5: Acceptable Quality With Care (factors include:
acceptable business credit, but with added risk due to specific industry or internal situations).
Risk Grade 6 (Watch) A business credit that is not acceptable within the Corporations
loan origination criteria; cash flow may not be adequate or is continually inconsistent to service
current debt; financial condition has deteriorated as company trends/management have become
inconsistent; the company is slow in furnishing quality financial information; working capital
needs of the company are reliant on short-term borrowings; personal guarantees are weak and/or with
little or no liquidity; the net worth of the company has deteriorated after recent or continued
losses; the loan requires constant monitoring and attention from the Corporation; payment
delinquencies becoming more serious; if left uncorrected, these potential weaknesses may, at some
future date, result in deterioration of repayment prospects.
Risk Grade 7 (Substandard Accrual) A business credit that is inadequately protected
by the current financial net worth and paying capacity of the obligor or of the collateral pledged,
if any; management has deteriorated or has become non-existent; quality financial information is
unattainable; a high level of maintenance is required by the Corporation; cash flow can no longer
support debt requirements; loan payments are continually and/or severely delinquent; negative net
worth; personal guaranty has become insignificant; a credit that has a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. The Corporation still expects a full
recovery of all contractual principal and interest payments; however, a possibility exists that the
Corporation will sustain some loss if deficiencies are not corrected.
Risk Grade 8 (Substandard Nonaccrual) A business credit accounted for on a nonaccrual
basis that has all the weaknesses inherent in a loan classified as risk grade 7 with the added
characteristic that the weaknesses are so pronounced that, on the basis of current financial
information, conditions, and values, collection in full is highly questionable; a partial loss is
possible and interest is no longer being accrued. This loan meets the definition of an impaired
loan. The risk of loss requires analysis to determine whether a valuation allowance needs to be
established.
Risk Grade 9 (Substandard Doubtful) A business credit that has all the weaknesses
inherent in a loan classified as risk grade 8 and interest is no longer being accrued, but
additional deficiencies make it highly probable that liquidation will not satisfy the majority of
the obligation; the primary source of repayment is nonexistent and there is doubt as to the value
of the secondary source of repayment; the possibility of loss is likely, but current pending
factors could strengthen the credit. This loan meets the definition of an impaired loan. A loan
charge-off is recorded when management deems an amount uncollectible; however, the Corporation will
establish a valuation allowance for probable losses, if required.
22
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The Corporation considers all loans graded 1-5 as acceptable credit risks and structures and
manages such relationships accordingly. Periodic financial and operating data combined with regular
loan officer interactions are deemed adequate to monitor borrower performance. Loans with risk
grades of 6 and 7 are considered watch credits and the frequency of loan officer contact and
receipt of financial data is increased to stay abreast of borrower performance. Loans with risk
grades of 8 and 9 are considered problematic and require special care. Further, loans with risk
grades of 6-9 are managed and monitored regularly through a number of processes, procedures and
committees, including oversight by a loan administration committee comprised of executive and
senior management of the Corporation, which includes highly structured reporting of financial and
operating data, intensive loan officer intervention and strategies to exit, as well as potential
management by the Corporations special assets group.
The following schedule presents the recorded investment of loans in the commercial loan portfolio
by risk rating categories at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Portfolio Credit Exposure |
|
|
|
Credit Risk Profile by Creditworthiness Category |
|
|
|
|
|
|
|
Real Estate |
|
|
Real Estate |
|
|
Land |
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Construction |
|
|
Development |
|
|
Total |
|
|
|
(In thousands) |
|
June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5 |
|
$ |
637,709 |
|
|
$ |
673,117 |
|
|
$ |
69,609 |
|
|
$ |
15,684 |
|
|
$ |
1,396,119 |
|
Risk Grade 6 |
|
|
26,240 |
|
|
|
22,354 |
|
|
|
290 |
|
|
|
7,842 |
|
|
|
56,726 |
|
Risk Grade 7 |
|
|
20,766 |
|
|
|
49,993 |
|
|
|
182 |
|
|
|
651 |
|
|
|
71,592 |
|
Risk Grade 8 |
|
|
12,955 |
|
|
|
53,494 |
|
|
|
|
|
|
|
6,844 |
|
|
|
73,293 |
|
Risk Grade 9 |
|
|
1,431 |
|
|
|
3,830 |
|
|
|
|
|
|
|
2,089 |
|
|
|
7,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
699,101 |
|
|
|
802,788 |
|
|
|
70,081 |
|
|
|
33,110 |
|
|
|
1,605,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5 |
|
|
121,952 |
|
|
|
236,604 |
|
|
|
20,918 |
|
|
|
11,405 |
|
|
|
390,879 |
|
Risk Grade 6 |
|
|
7,127 |
|
|
|
11,126 |
|
|
|
|
|
|
|
1,749 |
|
|
|
20,002 |
|
Risk Grade 7 |
|
|
7,904 |
|
|
|
10,881 |
|
|
|
|
|
|
|
653 |
|
|
|
19,438 |
|
Risk Grade 8 |
|
|
6,285 |
|
|
|
4,207 |
|
|
|
153 |
|
|
|
4,282 |
|
|
|
14,927 |
|
Risk Grade 9 |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
143,303 |
|
|
|
262,818 |
|
|
|
21,071 |
|
|
|
18,089 |
|
|
|
445,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
842,404 |
|
|
$ |
1,065,606 |
|
|
$ |
91,152 |
|
|
$ |
51,199 |
|
|
$ |
2,050,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5 |
|
$ |
619,150 |
|
|
$ |
656,471 |
|
|
$ |
67,907 |
|
|
$ |
15,797 |
|
|
$ |
1,359,325 |
|
Risk Grade 6 |
|
|
22,173 |
|
|
|
39,653 |
|
|
|
737 |
|
|
|
8,935 |
|
|
|
71,498 |
|
Risk Grade 7 |
|
|
16,480 |
|
|
|
35,471 |
|
|
|
551 |
|
|
|
983 |
|
|
|
53,485 |
|
Risk Grade 8 |
|
|
16,061 |
|
|
|
57,287 |
|
|
|
|
|
|
|
6,537 |
|
|
|
79,885 |
|
Risk Grade 9 |
|
|
607 |
|
|
|
3,271 |
|
|
|
|
|
|
|
2,430 |
|
|
|
6,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
674,471 |
|
|
|
792,153 |
|
|
|
69,195 |
|
|
|
34,682 |
|
|
|
1,570,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades 1-5 |
|
|
119,943 |
|
|
|
249,495 |
|
|
|
19,796 |
|
|
|
12,667 |
|
|
|
401,901 |
|
Risk Grade 6 |
|
|
10,236 |
|
|
|
18,202 |
|
|
|
|
|
|
|
|
|
|
|
28,438 |
|
Risk Grade 7 |
|
|
6,050 |
|
|
|
14,896 |
|
|
|
|
|
|
|
457 |
|
|
|
21,403 |
|
Risk Grade 8 |
|
|
8,282 |
|
|
|
2,225 |
|
|
|
243 |
|
|
|
5,580 |
|
|
|
16,330 |
|
Risk Grade 9 |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
144,526 |
|
|
|
284,818 |
|
|
|
20,039 |
|
|
|
18,704 |
|
|
|
468,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
818,997 |
|
|
$ |
1,076,971 |
|
|
$ |
89,234 |
|
|
$ |
53,386 |
|
|
$ |
2,038,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The Corporation evaluates the credit quality of loans in the consumer loan portfolio, based
primarily on the aging status of the loan and payment activity. The following schedule presents the
recorded investment of loans in the consumer loan portfolio based on the credit risk profile of
loans in a performing status and loans in a nonperforming status at June 30, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan Portfolio Credit Exposure |
|
|
|
|
|
|
Credit Risk Profile Based on |
|
|
|
|
|
|
Aging Status and Payment Activity |
|
|
|
|
|
|
Real Estate |
|
|
Consumer |
|
|
|
|
|
|
Total |
|
|
|
Residential |
|
|
Installment |
|
|
Home Equity |
|
|
Consumer |
|
|
|
(In thousands) |
|
June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
$ |
771,086 |
|
|
$ |
509,114 |
|
|
$ |
300,828 |
|
|
$ |
1,581,028 |
|
Nonperforming |
|
|
30,930 |
|
|
|
3,215 |
|
|
|
4,926 |
|
|
|
39,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
802,016 |
|
|
|
512,329 |
|
|
|
305,754 |
|
|
|
1,620,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
|
22,750 |
|
|
|
5,076 |
|
|
|
48,245 |
|
|
|
76,071 |
|
Nonperforming |
|
|
1,094 |
|
|
|
|
|
|
|
385 |
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
23,844 |
|
|
|
5,076 |
|
|
|
48,630 |
|
|
|
77,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
825,860 |
|
|
$ |
517,405 |
|
|
$ |
354,384 |
|
|
$ |
1,697,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
$ |
733,461 |
|
|
$ |
495,203 |
|
|
$ |
286,854 |
|
|
$ |
1,515,518 |
|
Nonperforming |
|
|
37,638 |
|
|
|
1,846 |
|
|
|
3,895 |
|
|
|
43,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
771,099 |
|
|
|
497,049 |
|
|
|
290,749 |
|
|
|
1,558,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
|
25,406 |
|
|
|
6,083 |
|
|
|
50,873 |
|
|
|
82,362 |
|
Nonperforming |
|
|
1,541 |
|
|
|
|
|
|
|
274 |
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
26,947 |
|
|
|
6,083 |
|
|
|
51,147 |
|
|
|
84,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
798,046 |
|
|
$ |
503,132 |
|
|
$ |
341,896 |
|
|
$ |
1,643,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Nonperforming Loans
A summary of nonperforming loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
14,386 |
|
|
$ |
16,668 |
|
|
$ |
21,643 |
|
Real estate commercial |
|
|
57,324 |
|
|
|
60,558 |
|
|
|
57,085 |
|
Real estate construction and land development |
|
|
8,933 |
|
|
|
8,967 |
|
|
|
13,397 |
|
Real estate residential |
|
|
17,809 |
|
|
|
12,083 |
|
|
|
12,499 |
|
Consumer installment and home equity |
|
|
6,898 |
|
|
|
4,686 |
|
|
|
3,357 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
105,350 |
|
|
|
102,962 |
|
|
|
107,981 |
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or more as to
interest or principal payments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
629 |
|
|
|
530 |
|
|
|
2,108 |
|
Real estate commercial |
|
|
143 |
|
|
|
1,350 |
|
|
|
2,030 |
|
Real estate construction and land development |
|
|
|
|
|
|
1,220 |
|
|
|
436 |
|
Real estate residential |
|
|
1,729 |
|
|
|
3,253 |
|
|
|
2,842 |
|
Consumer installment and home equity |
|
|
1,243 |
|
|
|
1,055 |
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or more
as to interest or principal payments |
|
|
3,744 |
|
|
|
7,408 |
|
|
|
8,301 |
|
|
|
|
|
|
|
|
|
|
|
TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and real estate commercial |
|
|
15,443 |
|
|
|
15,057 |
|
|
|
7,791 |
|
Real estate residential |
|
|
11,392 |
|
|
|
22,302 |
|
|
|
18,856 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming TDRs |
|
|
26,835 |
|
|
|
37,359 |
|
|
|
26,647 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
135,929 |
|
|
$ |
147,729 |
|
|
$ |
142,929 |
|
|
|
|
|
|
|
|
|
|
|
25
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Impaired Loans
The following schedule presents impaired loans by classes of loans at June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Related |
|
|
|
Recorded |
|
|
Principal |
|
|
Valuation |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
|
(In thousands) |
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
7,278 |
|
|
$ |
9,096 |
|
|
$ |
2,127 |
|
Real estate commercial |
|
|
29,681 |
|
|
|
31,417 |
|
|
|
8,227 |
|
Land development |
|
|
2,225 |
|
|
|
2,234 |
|
|
|
522 |
|
Real estate residential |
|
|
22,156 |
|
|
|
22,156 |
|
|
|
745 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
61,340 |
|
|
|
64,903 |
|
|
|
11,621 |
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no related valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
22,315 |
|
|
|
29,976 |
|
|
|
|
|
Real estate commercial |
|
|
43,258 |
|
|
|
57,680 |
|
|
|
|
|
Real estate construction |
|
|
152 |
|
|
|
1,124 |
|
|
|
|
|
Land development |
|
|
11,872 |
|
|
|
17,625 |
|
|
|
|
|
Real estate residential |
|
|
17,809 |
|
|
|
17,809 |
|
|
|
|
|
Consumer installment |
|
|
3,205 |
|
|
|
3,205 |
|
|
|
|
|
Home equity |
|
|
3,693 |
|
|
|
3,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
102,304 |
|
|
|
131,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
29,593 |
|
|
|
39,072 |
|
|
|
2,127 |
|
Real estate commercial |
|
|
72,939 |
|
|
|
89,097 |
|
|
|
8,227 |
|
Real estate construction |
|
|
152 |
|
|
|
1,124 |
|
|
|
|
|
Land development |
|
|
14,097 |
|
|
|
19,859 |
|
|
|
522 |
|
Real estate residential |
|
|
39,965 |
|
|
|
39,965 |
|
|
|
745 |
|
Consumer installment |
|
|
3,205 |
|
|
|
3,205 |
|
|
|
|
|
Home equity |
|
|
3,693 |
|
|
|
3,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
163,644 |
|
|
$ |
196,015 |
|
|
$ |
11,621 |
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents information related to impaired loans for the three and six months
ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2011 |
|
|
Six months ended June 30, 2011 |
|
|
|
|
|
|
|
Interest Income |
|
|
|
|
|
|
Interest Income |
|
|
|
Average |
|
|
Recognized |
|
|
Average |
|
|
Recognized |
|
|
|
Recorded |
|
|
While on |
|
|
Recorded |
|
|
While on |
|
|
|
Investment |
|
|
Impaired Status |
|
|
Investment |
|
|
Impaired Status |
|
|
|
(In thousands) |
|
Commercial |
|
$ |
29,814 |
|
|
$ |
216 |
|
|
$ |
31,279 |
|
|
$ |
541 |
|
Real estate commercial |
|
|
71,050 |
|
|
|
152 |
|
|
|
72,464 |
|
|
|
396 |
|
Real estate construction |
|
|
196 |
|
|
|
15 |
|
|
|
216 |
|
|
|
30 |
|
Land development |
|
|
13,750 |
|
|
|
107 |
|
|
|
14,203 |
|
|
|
196 |
|
Real estate residential |
|
|
39,369 |
|
|
|
248 |
|
|
|
37,777 |
|
|
|
485 |
|
Consumer installment |
|
|
3,032 |
|
|
|
|
|
|
|
2,808 |
|
|
|
|
|
Home equity |
|
|
3,384 |
|
|
|
|
|
|
|
3,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
160,595 |
|
|
$ |
738 |
|
|
$ |
161,838 |
|
|
$ |
1,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The following schedule presents impaired loans by classes of loans at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Related |
|
|
|
Recorded |
|
|
Principal |
|
|
Valuation |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
|
(In thousands) |
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
8,289 |
|
|
$ |
8,675 |
|
|
$ |
2,947 |
|
Real estate commercial |
|
|
34,681 |
|
|
|
35,744 |
|
|
|
11,356 |
|
Land development |
|
|
1,881 |
|
|
|
1,984 |
|
|
|
663 |
|
Real estate residential |
|
|
22,302 |
|
|
|
22,302 |
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
67,153 |
|
|
|
68,705 |
|
|
|
15,772 |
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no related valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
28,597 |
|
|
|
39,927 |
|
|
|
|
|
Real estate commercial |
|
|
38,689 |
|
|
|
51,722 |
|
|
|
|
|
Land development |
|
|
10,498 |
|
|
|
15,039 |
|
|
|
|
|
Real estate residential |
|
|
12,083 |
|
|
|
12,083 |
|
|
|
|
|
Consumer installment |
|
|
1,751 |
|
|
|
1,751 |
|
|
|
|
|
Home equity |
|
|
2,935 |
|
|
|
2,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
94,553 |
|
|
|
123,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
36,886 |
|
|
|
48,602 |
|
|
|
2,947 |
|
Real estate commercial |
|
|
73,370 |
|
|
|
87,466 |
|
|
|
11,356 |
|
Land development |
|
|
12,379 |
|
|
|
17,023 |
|
|
|
663 |
|
Real estate residential |
|
|
34,385 |
|
|
|
34,385 |
|
|
|
806 |
|
Consumer installment |
|
|
1,751 |
|
|
|
1,751 |
|
|
|
|
|
Home equity |
|
|
2,935 |
|
|
|
2,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,706 |
|
|
$ |
192,162 |
|
|
$ |
15,772 |
|
|
|
|
|
|
|
|
|
|
|
The difference between an impaired loans recorded investment and the unpaid principal balance
represents either (i) for originated loans, a partial charge-off resulting from a confirmed loss
due to the value of the collateral securing the loan being below the loan balance and managements
assessment that full collection of the loan balance is not likely or (ii) for acquired loans that
meet the definition of an impaired loan, fair value adjustments recognized at the acquisition date
attributable to expected credit losses and the discounting of expected cash flows at market
interest rates. The difference between the recorded investment and the unpaid principal balance of
$32.4 million and $30.5 million at June 30, 2011 and December 31, 2010, respectively, includes
confirmed losses (partial charge-offs) of $22.6 million and $19.8 million, respectively, and fair
value discount adjustments of $9.8 million and $10.7 million, respectively. At June 30, 2011 and
December 31, 2010, there was no valuation allowance required for acquired loans, as no material
changes in expected cash flows had occurred since the acquisition date.
27
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The following schedule presents a summary of impaired loans between those with and without a
valuation allowance at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related |
|
|
|
Recorded |
|
|
Valuation |
|
|
|
Investment |
|
|
Allowance |
|
|
|
(In thousands) |
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
Commercial, real estate commercial, real estate construction and land development |
|
$ |
45,014 |
|
|
$ |
14,459 |
|
Real estate residential |
|
|
18,856 |
|
|
|
991 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
63,870 |
|
|
|
15,450 |
|
|
|
|
|
|
|
|
Impaired loans with no valuation allowance: |
|
|
|
|
|
|
|
|
Commercial, real estate commercial, real estate
construction and land development |
|
|
63,725 |
|
|
|
|
|
Real estate residential |
|
|
12,499 |
|
|
|
|
|
Consumer installment and home equity |
|
|
3,357 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
79,581 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
143,451 |
|
|
$ |
15,450 |
|
|
|
|
|
|
|
|
Impaired loans include $18.6 million, $21.4 million and $10.1 million at June 30, 2011, December
31, 2010 and June 30, 2010, respectively, of acquired loans that were not performing in accordance
with original contractual terms as a market yield adjustment was recognized on these loans in
interest income. Impaired loans also include $12.9 million at June 30, 2011 of performing TDRs.
28
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The following schedule presents the aging status of the recorded investment in loans by classes of
loans at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 |
|
|
61-89 |
|
|
Past Due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days |
|
|
Days |
|
|
90 Days |
|
|
Nonaccrual |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Past Due |
|
|
Past Due |
|
|
or More |
|
|
Loans |
|
|
Past Due |
|
|
Current |
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
6,480 |
|
|
$ |
2,888 |
|
|
$ |
629 |
|
|
$ |
14,386 |
|
|
$ |
24,383 |
|
|
$ |
674,718 |
|
|
$ |
699,101 |
|
Real estate commercial |
|
|
11,256 |
|
|
|
3,479 |
|
|
|
143 |
|
|
|
57,324 |
|
|
|
72,202 |
|
|
|
730,586 |
|
|
|
802,788 |
|
Real estate construction |
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
290 |
|
|
|
69,791 |
|
|
|
70,081 |
|
Land development |
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
8,933 |
|
|
|
9,142 |
|
|
|
23,968 |
|
|
|
33,110 |
|
Real estate residential |
|
|
7,284 |
|
|
|
226 |
|
|
|
1,729 |
|
|
|
17,809 |
|
|
|
27,048 |
|
|
|
774,968 |
|
|
|
802,016 |
|
Consumer installment |
|
|
4,302 |
|
|
|
1,056 |
|
|
|
|
|
|
|
3,205 |
|
|
|
8,563 |
|
|
|
503,766 |
|
|
|
512,329 |
|
Home equity |
|
|
2,635 |
|
|
|
702 |
|
|
|
1,243 |
|
|
|
3,693 |
|
|
|
8,273 |
|
|
|
297,481 |
|
|
|
305,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,166 |
|
|
$ |
8,641 |
|
|
$ |
3,744 |
|
|
$ |
105,350 |
|
|
$ |
149,901 |
|
|
$ |
3,075,278 |
|
|
$ |
3,225,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
18 |
|
|
$ |
|
|
|
$ |
7,659 |
|
|
$ |
|
|
|
$ |
7,677 |
|
|
$ |
135,626 |
|
|
$ |
143,303 |
|
Real estate commercial |
|
|
368 |
|
|
|
|
|
|
|
4,235 |
|
|
|
|
|
|
|
4,603 |
|
|
|
258,215 |
|
|
|
262,818 |
|
Real estate construction |
|
|
|
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
152 |
|
|
|
20,919 |
|
|
|
21,071 |
|
Land development |
|
|
|
|
|
|
|
|
|
|
5,045 |
|
|
|
|
|
|
|
5,045 |
|
|
|
13,044 |
|
|
|
18,089 |
|
Real estate residential |
|
|
128 |
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
1,222 |
|
|
|
22,622 |
|
|
|
23,844 |
|
Consumer installment |
|
|
168 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
|
4,846 |
|
|
|
5,076 |
|
Home equity |
|
|
370 |
|
|
|
107 |
|
|
|
385 |
|
|
|
|
|
|
|
862 |
|
|
|
47,768 |
|
|
|
48,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,052 |
|
|
$ |
169 |
|
|
$ |
18,570 |
|
|
$ |
|
|
|
$ |
19,791 |
|
|
$ |
503,040 |
|
|
$ |
522,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
6,788 |
|
|
$ |
3,645 |
|
|
$ |
530 |
|
|
$ |
16,668 |
|
|
$ |
27,631 |
|
|
$ |
646,840 |
|
|
$ |
674,471 |
|
Real estate commercial |
|
|
9,960 |
|
|
|
4,139 |
|
|
|
1,350 |
|
|
|
60,558 |
|
|
|
76,007 |
|
|
|
716,146 |
|
|
|
792,153 |
|
Real estate construction |
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689 |
|
|
|
68,506 |
|
|
|
69,195 |
|
Land development |
|
|
|
|
|
|
119 |
|
|
|
1,220 |
|
|
|
8,967 |
|
|
|
10,306 |
|
|
|
24,376 |
|
|
|
34,682 |
|
Real estate residential |
|
|
1,126 |
|
|
|
6,610 |
|
|
|
3,253 |
|
|
|
12,083 |
|
|
|
23,072 |
|
|
|
748,027 |
|
|
|
771,099 |
|
Consumer installment |
|
|
6,179 |
|
|
|
1,741 |
|
|
|
95 |
|
|
|
1,751 |
|
|
|
9,766 |
|
|
|
487,283 |
|
|
|
497,049 |
|
Home equity |
|
|
3,046 |
|
|
|
825 |
|
|
|
960 |
|
|
|
2,935 |
|
|
|
7,766 |
|
|
|
282,983 |
|
|
|
290,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,788 |
|
|
$ |
17,079 |
|
|
$ |
7,408 |
|
|
$ |
102,962 |
|
|
$ |
155,237 |
|
|
$ |
2,974,161 |
|
|
$ |
3,129,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
131 |
|
|
$ |
64 |
|
|
$ |
10,445 |
|
|
$ |
|
|
|
$ |
10,640 |
|
|
$ |
133,886 |
|
|
$ |
144,526 |
|
Real estate commercial |
|
|
993 |
|
|
|
|
|
|
|
3,302 |
|
|
|
|
|
|
|
4,295 |
|
|
|
280,523 |
|
|
|
284,818 |
|
Real estate construction |
|
|
736 |
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
979 |
|
|
|
19,060 |
|
|
|
20,039 |
|
Land development |
|
|
2,697 |
|
|
|
|
|
|
|
5,580 |
|
|
|
|
|
|
|
8,277 |
|
|
|
10,427 |
|
|
|
18,704 |
|
Real estate residential |
|
|
685 |
|
|
|
|
|
|
|
1,541 |
|
|
|
|
|
|
|
2,226 |
|
|
|
24,721 |
|
|
|
26,947 |
|
Consumer installment |
|
|
19 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
6,021 |
|
|
|
6,083 |
|
Home equity |
|
|
85 |
|
|
|
34 |
|
|
|
274 |
|
|
|
|
|
|
|
393 |
|
|
|
50,754 |
|
|
|
51,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,346 |
|
|
$ |
141 |
|
|
$ |
21,385 |
|
|
$ |
|
|
|
$ |
26,872 |
|
|
$ |
525,392 |
|
|
$ |
552,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Allowance for Loan Losses
Changes in the allowance were as follows for the three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Balance at beginning of period |
|
$ |
89,674 |
|
|
$ |
84,155 |
|
|
$ |
89,530 |
|
|
$ |
80,841 |
|
Provision for loan losses |
|
|
7,000 |
|
|
|
12,700 |
|
|
|
14,500 |
|
|
|
26,700 |
|
Loan charge-offs |
|
|
(8,306 |
) |
|
|
(8,297 |
) |
|
|
(16,948 |
) |
|
|
(20,195 |
) |
Loan recoveries |
|
|
1,365 |
|
|
|
944 |
|
|
|
2,651 |
|
|
|
2,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
|
(6,941 |
) |
|
|
(7,353 |
) |
|
|
(14,297 |
) |
|
|
(18,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
89,733 |
|
|
$ |
89,502 |
|
|
$ |
89,733 |
|
|
$ |
89,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule presents, by loan portfolio segment, the changes in the allowance for the
three and six months ended June 30, 2011 and details regarding the balance in the allowance and the
recorded investment in loans at June 30, 2011 by impairment evaluation method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Consumer |
|
|
|
|
|
|
|
|
|
Loan |
|
|
Loan |
|
|
|
|
|
|
|
|
|
Portfolio |
|
|
Portfolio |
|
|
Unallocated |
|
|
Total |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Changes in allowance for loan losses for the three months ended June 30, 2011: |
Beginning balance |
|
$ |
57,526 |
|
|
$ |
27,417 |
|
|
$ |
4,731 |
|
|
$ |
89,674 |
|
Provision for loan losses |
|
|
5,395 |
|
|
|
4,458 |
|
|
|
(2,853 |
) |
|
|
7,000 |
|
Charge-offs |
|
|
(5,276 |
) |
|
|
(3,030 |
) |
|
|
|
|
|
|
(8,306 |
) |
Recoveries |
|
|
927 |
|
|
|
438 |
|
|
|
|
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
58,572 |
|
|
$ |
29,283 |
|
|
$ |
1,878 |
|
|
$ |
89,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in allowance for loan losses for the six months ended June 30, 2011: |
Beginning balance |
|
$ |
59,443 |
|
|
$ |
27,338 |
|
|
$ |
2,749 |
|
|
$ |
89,530 |
|
Provision for loan losses |
|
|
9,090 |
|
|
|
6,281 |
|
|
|
(871 |
) |
|
|
14,500 |
|
Charge-offs |
|
|
(11,190 |
) |
|
|
(5,758 |
) |
|
|
|
|
|
|
(16,948 |
) |
Recoveries |
|
|
1,229 |
|
|
|
1,422 |
|
|
|
|
|
|
|
2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
58,572 |
|
|
$ |
29,283 |
|
|
$ |
1,878 |
|
|
$ |
89,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses balance at June 30, 2011 attributable to: |
Loans individually evaluated for impairment |
|
$ |
10,876 |
|
|
$ |
745 |
|
|
$ |
|
|
|
$ |
11,621 |
|
Loans collectively evaluated for impairment |
|
|
47,696 |
|
|
|
28,538 |
|
|
|
1,878 |
|
|
|
78,112 |
|
Loans acquired with deteriorated credit quality(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,572 |
|
|
$ |
29,283 |
|
|
$ |
1,878 |
|
|
$ |
89,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment (loan balance) at June 30, 2011: |
Loans individually evaluated for impairment |
|
$ |
98,211 |
|
|
$ |
22,156 |
|
|
$ |
|
|
|
$ |
120,367 |
|
Loans collectively evaluated for impairment |
|
|
1,506,869 |
|
|
|
1,597,943 |
|
|
|
|
|
|
|
3,104,812 |
|
Loans acquired with deteriorated credit quality(1) |
|
|
445,281 |
|
|
|
77,550 |
|
|
|
|
|
|
|
522,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,050,361 |
|
|
$ |
1,697,649 |
|
|
$ |
|
|
|
$ |
3,748,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The following presents, by loan portfolio segment, details regarding the balance in the allowance
and the recorded investment in loans at December 31, 2010 by impairment evaluation method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Consumer |
|
|
|
|
|
|
|
|
|
Loan |
|
|
Loan |
|
|
|
|
|
|
|
|
|
Portfolio |
|
|
Portfolio |
|
|
Unallocated |
|
|
Total |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Allowance for loan losses balance at December 31, 2010 attributable to: |
Loans individually evaluated for impairment |
|
$ |
14,966 |
|
|
$ |
806 |
|
|
$ |
|
|
|
$ |
15,772 |
|
Loans collectively evaluated for impairment |
|
|
44,477 |
|
|
|
26,532 |
|
|
|
2,749 |
|
|
|
73,758 |
|
Loans acquired with deteriorated credit quality(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,443 |
|
|
$ |
27,338 |
|
|
$ |
2,749 |
|
|
$ |
89,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment (loan balance) at December 31, 2010: |
Loans individually evaluated for impairment |
|
$ |
101,250 |
|
|
$ |
22,302 |
|
|
$ |
|
|
|
$ |
123,552 |
|
Loans collectively evaluated for impairment |
|
|
1,469,251 |
|
|
|
1,536,595 |
|
|
|
|
|
|
|
3,005,846 |
|
Loans acquired with deteriorated credit quality(1) |
|
|
468,087 |
|
|
|
84,177 |
|
|
|
|
|
|
|
552,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,038,588 |
|
|
$ |
1,643,074 |
|
|
$ |
|
|
|
$ |
3,681,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans acquired with deteriorated credit quality and loans to
which the Corporation elected to apply ASC 310-30 by analogy were
originally recorded at fair value at the acquisition date and the
risk of credit loss was recognized at that date based on estimates
of expected cash flows. There have been no material changes in
expected cash flows since the acquisition date. |
An allowance related to acquired loans was not required at June 30, 2011, December 31, 2010 and
June 30, 2010 due to no material changes in expected cash flows since the date of acquisition.
Note 5: Intangible Assets
The Corporation has recorded four types of intangible assets: goodwill, core deposit intangible
assets, mortgage servicing rights (MSRs) and non-compete agreements. Goodwill, core deposit
intangible assets and non-compete agreements arose as the result of business combinations or other
acquisitions. MSRs arose as a result of selling residential real estate mortgage loans in the
secondary market while retaining the right to service these loans and receive servicing income over
the life of the loan, as well as a result of the OAK acquisition. Amortization is recorded on the
core deposit intangible assets, MSRs and non-compete agreements. Goodwill is not amortized but is
evaluated at least annually for impairment. The annual goodwill impairment review was performed as
of September 30, 2010 and no impairment was indicated. No triggering events have occurred since the
annual goodwill impairment review that would require an interim valuation.
The following table shows the net carrying value of the Corporations intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Goodwill |
|
$ |
113,414 |
|
|
$ |
113,414 |
|
|
$ |
109,149 |
|
Core deposit intangible assets |
|
|
8,643 |
|
|
|
9,406 |
|
|
|
10,791 |
|
Mortgage servicing rights |
|
|
3,577 |
|
|
|
3,782 |
|
|
|
3,641 |
|
Non-compete agreements |
|
|
107 |
|
|
|
333 |
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
125,741 |
|
|
$ |
126,935 |
|
|
$ |
124,172 |
|
|
|
|
|
|
|
|
|
|
|
31
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
In conjunction with the OAK acquisition, the Corporation recorded $43.5 million of goodwill, $8.4
million in core deposit intangible assets, $0.7 million of mortgage servicing rights and $0.7
million of non-compete agreements as of the acquisition date.
The following table sets forth the carrying amount, accumulated amortization and amortization
expense of core deposit intangible assets that are amortizable and arose from business combinations
or other acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Gross original amount |
|
$ |
26,468 |
|
|
$ |
26,468 |
|
|
$ |
26,978 |
|
Accumulated amortization |
|
|
17,825 |
|
|
|
17,062 |
|
|
|
16,187 |
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
|
$ |
8,643 |
|
|
$ |
9,406 |
|
|
$ |
10,791 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended June 30 |
|
$ |
381 |
|
|
|
|
|
|
$ |
336 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the six months ended June 30 |
|
$ |
763 |
|
|
|
|
|
|
$ |
485 |
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011, the remaining amortization expense on core deposit intangible assets that existed
as of that date was estimated as follows (in thousands):
|
|
|
|
|
2011 |
|
$ |
764 |
|
2012 |
|
|
1,469 |
|
2013 |
|
|
1,309 |
|
2014 |
|
|
1,146 |
|
2015 |
|
|
1,066 |
|
2016 and thereafter |
|
|
2,889 |
|
|
|
|
|
Total |
|
$ |
8,643 |
|
|
|
|
|
The following shows the net carrying value and fair value of MSRs and the total loans that the
Corporation is servicing for others:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Net carrying value of MSRs |
|
$ |
3,577 |
|
|
$ |
3,782 |
|
|
$ |
3,641 |
|
|
|
|
|
|
|
|
|
|
|
Fair value of MSRs |
|
|
6,000 |
|
|
|
5,674 |
|
|
|
4,788 |
|
|
|
|
|
|
|
|
|
|
|
Loans serviced for others that have servicing rights capitalized |
|
|
904,468 |
|
|
|
891,937 |
|
|
|
865,613 |
|
|
|
|
|
|
|
|
|
|
|
The following table shows the activity for capitalized MSRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Balance at beginning of period |
|
$ |
3,832 |
|
|
$ |
3,059 |
|
|
$ |
3,782 |
|
|
$ |
3,077 |
|
Acquired in OAK transaction |
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
691 |
|
Additions |
|
|
203 |
|
|
|
269 |
|
|
|
711 |
|
|
|
626 |
|
Amortization |
|
|
(458 |
) |
|
|
(378 |
) |
|
|
(916 |
) |
|
|
(753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,577 |
|
|
$ |
3,641 |
|
|
$ |
3,577 |
|
|
$ |
3,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
There was no impairment valuation allowance recorded on MSRs as of June 30, 2011, December 31, 2010
or June 30, 2010.
Amortization expense on non-compete agreements totaled $0.1 million during the three months
ended June 30, 2011 and 2010 and $0.2 million and $0.1 million during the six months ended June 30,
2011 and 2010, respectively. Remaining amortization expense on non-compete agreements that existed
at June 30, 2011 was $0.1 million.
Note 6: Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of related tax benefit/expense were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
Net unrealized gains on investment
securitiesavailable-for-sale, net of related
tax expense of $2,025 at June 30, 2011,
$1,786 at December 31, 2010 and $1,853 at
June 30, 2010 |
|
$ |
3,761 |
|
|
$ |
3,317 |
|
|
$ |
3,442 |
|
Pension and other postretirement benefits
adjustment, net of related tax benefit of $9,258
at June 30, 2011, $9,384 at December 31,
2010 and $8,427 at June 30, 2010 |
|
|
(17,194 |
) |
|
|
(17,428 |
) |
|
|
(15,651 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(13,433 |
) |
|
$ |
(14,111 |
) |
|
$ |
(12,209 |
) |
|
|
|
|
|
|
|
|
|
|
Note 7: Regulatory Capital
The Corporation and Chemical Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Under these capital requirements, Chemical Bank must meet
specific capital guidelines that involve quantitative measures of assets and certain off-balance
sheet items as calculated under regulatory accounting practices. In addition, capital amounts and
classifications are subject to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Corporations
consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require minimum ratios
of Tier 1 capital to average assets (Leverage Ratio) and Tier 1 and Total capital to risk-weighted
assets. These capital guidelines assign risk weights to on- and off- balance sheet items in
arriving at total risk-weighted assets. Minimum capital levels are based upon the perceived risk of
various asset categories and certain off-balance sheet instruments.
At June 30, 2011, December 31, 2010 and June 30, 2010, Chemical Banks capital ratios exceeded the
quantitative capital ratios required for an institution to be considered well-capitalized.
Significant factors that may affect capital adequacy include, but are not limited to, a
disproportionate growth in assets versus capital and a change in mix or credit quality of assets.
33
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The summary below compares the Corporations and Chemical Banks actual capital amounts and ratios
with the quantitative measures established by regulation to ensure capital adequacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required to be |
|
|
|
|
|
|
|
|
|
|
Minimum |
|
Well Capitalized |
|
|
|
|
|
|
|
|
|
|
Required for |
|
Under Prompt |
|
|
|
|
|
|
|
|
|
|
Capital Adequacy |
|
Corrective Action |
|
|
Actual |
|
Purposes |
|
Regulations |
|
|
Capital |
|
|
|
|
|
Capital |
|
|
|
|
|
Capital |
|
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
486,917 |
|
|
|
13.0 |
% |
|
$ |
300,744 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
478,734 |
|
|
|
12.7 |
|
|
|
300,517 |
|
|
|
8.0 |
|
|
$ |
375,646 |
|
|
|
10.0 |
% |
Tier 1 Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
439,394 |
|
|
|
11.7 |
|
|
|
150,372 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
431,247 |
|
|
|
11.5 |
|
|
|
150,258 |
|
|
|
4.0 |
|
|
|
225,388 |
|
|
|
6.0 |
|
Leverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
439,394 |
|
|
|
8.6 |
|
|
|
203,915 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
431,247 |
|
|
|
8.5 |
|
|
|
203,878 |
|
|
|
4.0 |
|
|
|
254,847 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
473,471 |
|
|
|
12.9 |
% |
|
$ |
293,856 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
465,709 |
|
|
|
12.7 |
|
|
|
293,573 |
|
|
|
8.0 |
|
|
$ |
366,966 |
|
|
|
10.0 |
% |
Tier 1 Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
427,014 |
|
|
|
11.6 |
|
|
|
146,928 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
419,296 |
|
|
|
11.4 |
|
|
|
146,786 |
|
|
|
4.0 |
|
|
|
220,179 |
|
|
|
6.0 |
|
Leverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
427,014 |
|
|
|
8.4 |
|
|
|
204,426 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank |
|
|
419,296 |
|
|
|
8.2 |
|
|
|
204,291 |
|
|
|
4.0 |
|
|
|
255,363 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
497,838 |
|
|
|
13.6 |
% |
|
$ |
293,818 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank(1) |
|
|
485,947 |
|
|
|
13.2 |
|
|
|
293,819 |
|
|
|
8.0 |
|
|
$ |
367,273 |
|
|
|
10.0 |
% |
Tier 1 Capital to Risk-Weighted
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
451,387 |
|
|
|
12.3 |
|
|
|
146,909 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank(1) |
|
|
439,496 |
|
|
|
12.0 |
|
|
|
146,909 |
|
|
|
4.0 |
|
|
|
220,364 |
|
|
|
6.0 |
|
Leverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
451,387 |
|
|
|
9.6 |
|
|
|
188,515 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Chemical Bank(1) |
|
|
439,496 |
|
|
|
9.3 |
|
|
|
188,498 |
|
|
|
4.0 |
|
|
|
235,623 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes combined capital amounts and ratios of Chemical Bank and Byron Bank at June 30, 2010 as Byron Bank
was merged with and into Chemical Bank on July 23, 2010. |
34
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Note 8: Fair Value Measurements
Fair value, as defined by GAAP, is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A fair value
measurement assumes that the transaction to sell the asset or transfer the liability occurs in the
principal market for the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the principal (or most advantageous)
market used to measure the fair value of the asset or liability is not adjusted for transaction
costs. An orderly transaction is a transaction that assumes exposure to the market for a period
prior to the measurement date to allow for market activities that are usual and customary for
transactions involving such assets and liabilities; it is not a forced transaction. Market
participants are buyers and sellers in the principal market that are (i) independent,
(ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets
and to determine fair value disclosures. Investment securities available-for-sale are recorded
at fair value on a recurring basis. Additionally, the Corporation may be required to record other
assets at fair value on a nonrecurring basis, such as impaired loans, goodwill, other intangible
assets and other real estate and repossessed assets. These nonrecurring fair value adjustments
typically involve the application of lower of cost or market accounting or write-downs of
individual assets.
The Corporation determines the fair value of its financial instruments based on a three-level
hierarchy established by GAAP. The classification and disclosure of assets and liabilities within
the hierarchy is based on whether the inputs to the valuation methodology used for measurement are
observable or unobservable. Observable inputs reflect market-derived or market-based information
obtained from independent sources, while unobservable inputs reflect managements estimates about
market data. The three levels of inputs that may be used to measure fair value within the GAAP
hierarchy are as follows:
|
|
|
Level 1
|
|
Valuation is based upon quoted prices for identical instruments
traded in active markets. Level 1 valuations for the Corporation
include U.S. Treasury securities that are traded by dealers or
brokers in active over-the-counter markets. Valuations are
obtained from a third party pricing service for these investment
securities. |
|
|
|
Level 2
|
|
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in
the market. Level 2 valuations for the Corporation include
government sponsored agency securities, including securities
issued by the Federal Home Loan Bank, Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, Federal Farm
Credit Bank, Student Loan Marketing Corporation and the Small
Business Administration, securities issued by certain state and
political subdivisions, residential mortgage-backed securities,
collateralized mortgage obligations, corporate bonds and preferred
stock. Valuations are obtained from a third-party pricing service
for these investment securities. |
|
|
|
Level 3
|
|
Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models, yield curves and similar
techniques. The determination of fair value requires management
judgment or estimation and generally is corroborated by external
data, which includes third-party pricing services. Level 3
valuations for the Corporation include securities issued by
certain state and political subdivisions, trust preferred
securities, impaired loans, goodwill, core deposit intangible
assets, MSRs and other real estate and repossessed assets. |
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy, is set forth
below. These valuation methodologies were applied to all of the Corporations financial assets and
financial liabilities carried at fair value and all financial instruments disclosed at fair value.
In general, fair value is based upon quoted market prices, where available. If quoted market prices
are not available, fair value is based upon third-party pricing services when
35
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
available. Fair value
may also be based on internally developed models that primarily use, as inputs, observable
market-based parameters. Valuation adjustments may be required to record financial instruments at
fair value. Any such valuation adjustments are applied consistently over time. The Corporations
valuation methodologies may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values.
While management believes the Corporations valuation methodologies are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate of fair value at
the reporting date. Furthermore, the reported fair value amounts may change significantly after the
date of the statement of financial position from the amounts presented herein.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices, if available. If quoted prices are not available,
fair values are generally measured using independent pricing models or other model-based valuation
techniques that include market inputs, such as benchmark yields, reported trades, broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and
industry and economic events. Level 1 securities include U.S. Treasury securities that are traded
by dealers or brokers in active over-the-counter markets. Level 2 securities include securities
issued by government sponsored agencies, securities issued by certain state and political
subdivisions, residential mortgage-backed securities, collateralized mortgage obligations,
corporate bonds and preferred stock.
36
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Disclosure of Recurring Basis Fair Value Measurements
For assets measured at fair value on a recurring basis, quantitative disclosures about the fair
value measurements for each major category of assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Recurring Basis |
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
|
|
|
$ |
109,204 |
|
|
$ |
|
|
|
$ |
109,204 |
|
State and political subdivisions |
|
|
|
|
|
|
44,950 |
|
|
|
|
|
|
|
44,950 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
115,605 |
|
|
|
|
|
|
|
115,605 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
284,244 |
|
|
|
|
|
|
|
284,244 |
|
Corporate bonds |
|
|
|
|
|
|
56,904 |
|
|
|
|
|
|
|
56,904 |
|
Preferred stock |
|
|
|
|
|
|
1,559 |
|
|
|
|
|
|
|
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
612,466 |
|
|
$ |
|
|
|
$ |
612,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
$ |
|
|
|
$ |
117,521 |
|
|
$ |
|
|
|
$ |
117,521 |
|
State and political subdivisions |
|
|
|
|
|
|
46,046 |
|
|
|
|
|
|
|
46,046 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
136,935 |
|
|
|
|
|
|
|
136,935 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
233,921 |
|
|
|
|
|
|
|
233,921 |
|
Corporate bonds |
|
|
|
|
|
|
42,747 |
|
|
|
|
|
|
|
42,747 |
|
Preferred stock |
|
|
|
|
|
|
1,440 |
|
|
|
|
|
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
578,610 |
|
|
$ |
|
|
|
$ |
578,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities Trading |
|
$ |
|
|
|
$ |
1,389 |
|
|
$ |
|
|
|
$ |
1,389 |
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies |
|
|
|
|
|
|
163,842 |
|
|
|
|
|
|
|
163,842 |
|
State and political subdivisions |
|
|
|
|
|
|
47,873 |
|
|
|
|
|
|
|
47,873 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
156,359 |
|
|
|
|
|
|
|
156,359 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
247,357 |
|
|
|
|
|
|
|
247,357 |
|
Corporate bonds |
|
|
|
|
|
|
29,119 |
|
|
|
|
|
|
|
29,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
644,550 |
|
|
|
|
|
|
|
644,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
645,939 |
|
|
$ |
|
|
|
$ |
645,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no liabilities recorded at fair value on a recurring basis at June 30, 2011, December
31, 2010 and June 30, 2010.
37
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Corporation does not record loans at fair value on a recurring basis. However, from time to
time, a loan is considered impaired and an allocation of the allowance (valuation allowance) may be
established or a portion of the loan is charged off. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. The fair value of impaired loans is estimated using one of
several methods, including the loans observable market price, the fair value of the collateral or
the present value of the expected future cash flows discounted at the loans effective interest
rate. Those impaired loans not requiring a valuation allowance represent loans for which the fair
value of the expected repayments or collateral exceed the remaining carrying amount of such loans.
At June 30, 2011, December 31, 2010 and June 30, 2010, substantially all of the impaired loans were
evaluated based on the fair value of the collateral. Impaired loans, where a valuation allowance is
established or a portion of the loan is charged off based on the fair value of collateral, are
subject to nonrecurring fair value measurement and require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable market price or a
current appraised value, the Corporation records the impaired loan as a Level 2 valuation. When
management determines the fair value of the collateral is further impaired below the appraised
value or there is no observable market price or independent appraised value, the Corporation
records the impaired loan as a Level 3 valuation.
Goodwill is subject to impairment testing on an annual basis. The market and income approach
methods were used in the completion of the annual impairment testing. These valuation methods
require a significant degree of judgment. In the event these methods indicate that fair value is
less than the carrying value, the asset is recorded at fair value as determined by either of the
valuation models. Goodwill that is impaired and subject to nonrecurring fair value measurements is
a Level 3 valuation. At June 30, 2011, December 31, 2010 and June 30, 2010, no goodwill was
impaired, and therefore, goodwill was not recorded at fair value on a nonrecurring basis.
Other intangible assets consist of core deposit intangible assets and MSRs. These items are both
recorded at fair value when initially recorded. Subsequently, core deposit intangible assets are
amortized primarily on an accelerated basis over periods ranging from ten to fifteen years and are
subject to impairment testing whenever events or changes in circumstances indicate that the
carrying amount exceeds the fair value of the asset. If core deposit intangible asset impairment is
identified, the Corporation classifies impaired core deposit intangible assets subject to
nonrecurring fair value measurements as Level 3 valuations. The fair value of MSRs is initially
estimated using a model that calculates the net present value of estimated future cash flows using
various assumptions, including prepayment speeds, the discount rate and servicing costs. If the
valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value, as
determined by the model, through a valuation allowance. The Corporation classifies MSRs subject to
nonrecurring fair value measurements as Level 3 valuations. At June 30, 2011, December 31, 2010 and
June 30, 2010, there was no impairment identified for core deposit intangible assets or MSRs and,
therefore, no other intangible assets were recorded at fair value on a nonrecurring basis.
The carrying amounts for other real estate (ORE) and repossessed assets (RA) are reported in the
consolidated statements of financial position under interest receivable and other assets. ORE and
RA include real estate and other types of assets repossessed by the Corporation. ORE and RA are
recorded at the lower of cost or fair value upon the transfer of a loan to ORE or RA and,
subsequently, ORE and RA continue to be measured and carried at the lower of cost or fair value.
Fair value is based upon independent market prices, appraised values of the collateral or
managements estimation of the value of the collateral. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Corporation records ORE and
RA as a Level 2 valuation. When management determines the fair value of the collateral is further
impaired below the appraised value or there is no observable market price or there is no available
appraised value, the Corporation records the ORE and RA as a Level 3 valuation.
38
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Disclosure of Nonrecurring Basis Fair Value Measurements
For assets measured at fair value on a nonrecurring basis, quantitative disclosures about fair
value measurements for each major category of assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - Nonrecurring Basis |
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
68,766 |
|
|
$ |
68,766 |
|
Other real estate/repossessed assets |
|
|
|
|
|
|
|
|
|
|
24,607 |
|
|
|
24,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
93,373 |
|
|
$ |
93,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
64,883 |
|
|
$ |
64,883 |
|
Other real estate/repossessed assets |
|
|
|
|
|
|
|
|
|
|
27,510 |
|
|
|
27,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
92,393 |
|
|
$ |
92,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
66,450 |
|
|
$ |
66,450 |
|
Other real estate/repossessed assets |
|
|
|
|
|
|
|
|
|
|
21,724 |
|
|
|
21,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
88,174 |
|
|
$ |
88,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no liabilities recorded at fair value on a nonrecurring basis at June 30, 2011, December
31, 2010 and June 30, 2010.
Disclosures about Fair Value of Financial Instruments
GAAP requires disclosures about the estimated fair value of the Corporations financial
instruments, including those financial assets and liabilities that are not measured and reported at
fair value on a recurring or nonrecurring basis. However, the method of estimating fair value for
financial instruments that are not required to be measured on a recurring or nonrecurring basis, as
prescribed by ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820) does not incorporate
the exit-price concept of fair value. The Corporation utilized the fair value hierarchy in
computing the fair values of its financial instruments. In cases where quoted market prices were
not available, the Corporation employed present value methods using unobservable inputs requiring
managements judgment to estimate the fair values of its financial instruments, which are
considered Level 3 valuations. These Level 3 valuations are affected by the assumptions made and,
accordingly, do not necessarily indicate amounts that could be realized in a current market
exchange. It is also the Corporations general practice and intent to hold the majority of its
financial instruments until maturity and, therefore, the Corporation does not expect to realize the
estimated amounts disclosed.
The methodologies for estimating the fair value of financial assets and financial liabilities on a
recurring or nonrecurring basis are discussed above. At June 30, 2011, December 31, 2010 and June
30, 2010, the estimated fair values of cash and cash equivalents, interest receivable and interest
payable approximated their carrying values at those dates. The methodologies for other financial
assets and financial liabilities follow.
Fair value measurement for investment securities held-to-maturity is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using independent
pricing models or other model-based valuation techniques that include market inputs such as
benchmark yields, reported trades, broker/dealer quotes,
39
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry
and economic events. Fair value measurements using Level 2 valuations of investment
securitiesheld-to-maturity include certain securities issued by state and political subdivisions
and residential mortgage-backed securities. Level 3 valuations include certain securities issued by
state and political subdivisions and trust preferred securities.
Fair value measurements of other securities, which consisted of FHLB and Federal Reserve Bank (FRB)
stock, are based on their redeemable value, which is cost. The market for these stocks is
restricted to the issuer of the stock and subject to impairment evaluation.
The carrying amounts reported in the consolidated statements of financial position for loans
held-for-sale are at the lower of cost or market value. The fair values of loans held-for-sale are
based on the market price for similar loans in the secondary market. The fair value measurements
for loans held-for-sale are Level 2 valuations.
The fair value of variable interest rate loans that reprice regularly with changes in market
interest rates are based on carrying values. The fair values for fixed interest rate loans are
estimated using discounted cash flow analyses, using the Corporations interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The resulting
fair value amounts are adjusted to estimate the impact of changes in the credit quality of borrowers after the
loans were originated. The fair value measurements for loans are Level 3 valuations.
The fair values of deposit accounts without defined maturities, such as interest- and
noninterest-bearing checking, savings and money market accounts, are equal to the amounts payable
on demand. Fair value measurements for fixed-interest rate time deposits with defined maturities
are based on the discounted value of contractual cash flows, using the Corporations interest rates
currently being offered for deposits of similar maturities and are Level 3 valuations. The fair
values for variable-interest rate time deposits with defined maturities approximate their carrying
amounts.
Short-term borrowings consist of repurchase agreements. Fair value measurements for repurchase
agreements are based on the present value of future estimated cash flows using current interest
rates offered to the Corporation for debt with similar terms and are Level 2 valuations.
Fair value measurements for FHLB advances are estimated based on the present value of future
estimated cash flows using current interest rates offered to the Corporation for debt with similar
terms and are Level 2 valuations.
The Corporations unused commitments to extend credit, standby letters of credit and loan
commitments have no carrying amount and have been estimated to have no realizable fair value.
Historically, a majority of the unused commitments to extend credit have not been drawn upon and,
generally, the Corporation does not receive fees in connection with these commitments other than
standby letter of credit fees, which are not significant.
Fair value measurements have not been made for items that are not defined by GAAP as financial
instruments, including such items as the value of the Corporations Wealth Management department
and the value of the Corporations core deposit base. The Corporation believes it is impractical to
estimate a representative fair value for these types of assets, even though management believes
they add significant value to the Corporation.
A summary of carrying amounts and estimated fair values of the Corporations financial instruments
included in the consolidated statements of financial position are as follows:
40
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
June 30, 2010 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
Amount |
|
Value |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
400,279 |
|
|
$ |
400,279 |
|
|
$ |
536,165 |
|
|
$ |
536,165 |
|
|
$ |
396,958 |
|
|
$ |
396,958 |
|
Investment and other securities |
|
|
828,067 |
|
|
|
825,633 |
|
|
|
771,143 |
|
|
|
764,931 |
|
|
|
838,683 |
|
|
|
833,102 |
|
Loans held-for-sale |
|
|
6,874 |
|
|
|
6,874 |
|
|
|
20,479 |
|
|
|
20,479 |
|
|
|
10,871 |
|
|
|
10,871 |
|
Net loans |
|
|
3,658,277 |
|
|
|
3,651,307 |
|
|
|
3,592,132 |
|
|
|
3,601,805 |
|
|
|
3,558,459 |
|
|
|
3,528,397 |
|
Interest receivable |
|
|
15,621 |
|
|
|
15,621 |
|
|
|
15,761 |
|
|
|
15,761 |
|
|
|
15,604 |
|
|
|
15,604 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without defined
maturities |
|
$ |
2,678,064 |
|
|
$ |
2,678,064 |
|
|
$ |
2,738,719 |
|
|
$ |
2,738,719 |
|
|
$ |
2,617,734 |
|
|
$ |
2,617,734 |
|
Time deposits |
|
|
1,572,912 |
|
|
|
1,596,321 |
|
|
|
1,593,046 |
|
|
|
1,614,854 |
|
|
|
1,581,448 |
|
|
|
1,597,671 |
|
Interest payable |
|
|
2,487 |
|
|
|
2,487 |
|
|
|
2,887 |
|
|
|
2,887 |
|
|
|
3,217 |
|
|
|
3,217 |
|
Short-term borrowings |
|
|
276,600 |
|
|
|
276,600 |
|
|
|
242,703 |
|
|
|
242,703 |
|
|
|
242,271 |
|
|
|
242,271 |
|
FHLB advances |
|
|
71,928 |
|
|
|
73,380 |
|
|
|
74,130 |
|
|
|
75,166 |
|
|
|
86,635 |
|
|
|
88,500 |
|
Note 9: Earnings Per Common Share
Basic earnings per common share for the Corporation is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Basic earnings per common
share excludes any dilutive effect of common stock equivalents.
Diluted earnings per common share for the Corporation is computed by dividing net income by the sum
of the weighted average number of common shares outstanding and the dilutive effect of common stock
equivalents using the treasury stock method. Average shares of common stock for diluted net income
per common share include shares to be issued upon exercise of stock options granted under the
Corporations stock option plans, restricted stock performance units that may be converted to
stock, stock to be issued under the deferred stock compensation plan for non-employee directors and
stock to be issued under the stock purchase plan for non-employee advisory directors. For any
period in which a loss is recorded, the assumed exercise of stock options, restricted stock
performance units that may be converted to stock and stock to be issued under the deferred stock
compensation plan and the stock purchase plan would have an anti-dilutive impact on the loss per
common share and thus are excluded in the diluted earnings per common share calculation.
The following summarizes the numerator and denominator of the basic and diluted earnings per common
share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for both basic and diluted earnings
per common share, net income |
|
$ |
11,033 |
|
|
$ |
4,391 |
|
|
$ |
20,221 |
|
|
$ |
6,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share,
weighted average common shares outstanding |
|
|
27,454 |
|
|
|
26,270 |
|
|
|
27,453 |
|
|
|
25,093 |
|
Weighted average common stock equivalents |
|
|
43 |
|
|
|
30 |
|
|
|
37 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share |
|
|
27,497 |
|
|
|
26,300 |
|
|
|
27,490 |
|
|
|
25,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.40 |
|
|
$ |
0.17 |
|
|
$ |
0.74 |
|
|
$ |
0.27 |
|
Diluted earnings per common share |
|
|
0.40 |
|
|
|
0.17 |
|
|
|
0.74 |
|
|
|
0.27 |
|
41
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
The average number of exercisable employee stock option awards outstanding that were
out-of-the-money, whereby the option exercise price per share exceeded the market price per
share, and therefore, were not included in the computation of diluted earnings per common share
totaled 682,462 and 562,116 for the three months ended June 30, 2011 and 2010, respectively, and
659,875 and 560,644 for the six months ended June 30, 2011 and 2010, respectively.
Note 10: Share-Based Compensation Plans
During the three-month periods ended June 30, 2011 and 2010, share-based compensation expense
related to stock options and restricted stock performance units totaled $0.2 million and $0.7
million, respectively. During the six-month periods ended June 30, 2011 and 2010, share-based
compensation expense related to stock options and restricted stock performance units totaled $0.4
million and $0.9 million, respectively.
During the three-month period ended June 30, 2011, the Corporation granted options to purchase
99,172 shares of common stock and 51,598 restricted stock performance units to certain officers. At
June 30, 2011 there were 394,404 shares of common stock available for future grants under
share-based compensation plans.
Stock Options
The Corporation issues fixed stock options to certain officers. Stock options are issued at the
current market price of the Corporations common stock on the date of grant, generally vest ratably
over a three-year period and expire ten years from the date of grant.
A summary of activity for the Corporations stock options as of and for the six months ended June
30, 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested |
|
|
|
|
|
|
Stock Options Outstanding |
|
|
Stock Options Outstanding |
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Exercise |
|
|
Grant Date |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Price |
|
|
Fair Value |
|
|
Number of |
|
|
Exercise Price |
|
|
|
Options |
|
|
Per Share |
|
|
Per Share |
|
|
Options |
|
|
Per Share |
|
Outstanding at January 1, 2011 |
|
|
126,670 |
|
|
$ |
23.29 |
|
|
$ |
6.99 |
|
|
|
757,665 |
|
|
$ |
29.42 |
|
Granted |
|
|
99,172 |
|
|
|
19.95 |
|
|
|
6.12 |
|
|
|
99,172 |
|
|
|
19.95 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(62,459 |
) |
|
|
23.29 |
|
|
|
6.77 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,162 |
) |
|
|
30.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
163,383 |
|
|
$ |
21.27 |
|
|
$ |
6.54 |
|
|
|
840,675 |
|
|
$ |
28.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/vested at June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677,292 |
|
|
$ |
29.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual terms were 5.7 years for all outstanding stock options
and 4.8 years for exercisable stock options. The outstanding and exercisable stock options at June
30, 2011 had no intrinsic value as the closing price of the Corporations common stock on that date
of $18.76 per share was less than the exercise price of all stock options outstanding.
At June 30, 2011, unrecognized compensation cost related to stock options totaled $0.9 million.
This cost is expected to be recognized over a remaining weighted average period of 2.3 years.
42
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
Restricted Stock Performance Units
In addition to stock options, the Corporation also grants restricted stock performance units to
certain officers. The restricted stock performance units vest based on the Corporation achieving
certain performance target levels. Generally, the restricted stock performance units are eligible
to vest from 0.5x to 1.5x the number of units originally granted depending on which, if any, of the
performance target levels are met. However, if the minimum performance target level is not
achieved, no shares will become vested or be issued for that respective years restricted stock
performance units. Upon achievement of the performance target level and satisfaction of a service
condition, if applicable, the restricted stock performance units are converted into shares of the
Corporations common stock on a one-to-one basis. Compensation expense related to restricted stock
performance units is recognized over the expected requisite performance period, or requisite
service period for awards with multiple performance and service conditions.
A summary of the activity for restricted stock performance units as of and for the six months ended
June 30, 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding at January 1, 2011 |
|
|
80,852 |
|
|
$ |
22.99 |
|
Granted |
|
|
51,598 |
|
|
|
17.87 |
|
Converted into shares of common stock |
|
|
(2,427 |
) |
|
|
23.70 |
|
Forfeited/expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
130,023 |
|
|
$ |
20.99 |
|
|
|
|
|
|
|
|
At June 30, 2011, unrecognized compensation cost related to restricted stock performance unit
awards totaled $0.9 million. This cost is recognized based on the expected achievement of the
targeted earnings per common share level for the restricted stock performance units over
approximately two years.
Note 11: Pension and Other Postretirement Benefit Plans
The components of net periodic benefit cost (income) for the Corporations qualified and
nonqualified pension plans and nonqualified postretirement benefits plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
291 |
|
|
$ |
313 |
|
|
$ |
582 |
|
|
$ |
627 |
|
Interest cost |
|
|
1,208 |
|
|
|
1,209 |
|
|
|
2,415 |
|
|
|
2,418 |
|
Expected return on plan assets |
|
|
(1,582 |
) |
|
|
(1,431 |
) |
|
|
(3,164 |
) |
|
|
(2,862 |
) |
Amortization of prior service credit |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Amortization of unrecognized net loss |
|
|
269 |
|
|
|
124 |
|
|
|
539 |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
186 |
|
|
$ |
215 |
|
|
$ |
371 |
|
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Chemical Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits Plan |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Interest cost |
|
$ |
41 |
|
|
$ |
54 |
|
|
$ |
83 |
|
|
$ |
108 |
|
Amortization of prior service credit |
|
|
(81 |
) |
|
|
(81 |
) |
|
|
(162 |
) |
|
|
(162 |
) |
Amortization of unrecognized net gain |
|
|
(8 |
) |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit income |
|
$ |
(48 |
) |
|
$ |
(27 |
) |
|
$ |
(95 |
) |
|
$ |
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) Savings Plan expense for the Corporations match of participants base compensation
contributions and a 4% of eligible pay contribution to certain employees who are not grandfathered
under the pension plan was $0.7 million and $0.6 million for the three months ended June 30, 2011
and 2010, respectively, and $1.4 million and $1.1 million for the six months ended June 30, 2011
and 2010, respectively.
Note 12: Financial Guarantees
In the normal course of business, the Corporation is a party to financial instruments containing
credit risk that are not required to be reflected in the consolidated statements of financial
position. For the Corporation, these financial instruments are financial and performance standby
letters of credit. The Corporation has risk management policies to identify, monitor and limit
exposure to credit risk. To mitigate credit risk for these financial guarantees, the Corporation
generally determines the need for specific covenant, guarantee and collateral requirements on a
case-by- case basis, depending on the nature of the financial instrument and the customers
creditworthiness. At June 30, 2011, December 31, 2010 and June 30, 2010, the Corporation had $47.8
million, $44.9 million and $43.0 million, respectively, of outstanding financial and performance
standby letters of credit which expire in five years or less. The majority of these standby letters
of credit are collateralized. At June 30, 2011, December 31, 2010 and June 30, 2010, the
Corporations assessment determined there was $0.3 million of probable losses relating to standby
letters of credit, which has been recorded as an other liability in the Corporations statement of
financial position.
44
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is managements discussion and analysis of certain significant factors that have
affected Chemical Financial Corporations (Corporations) financial condition and results of
operations during the periods included in the consolidated financial statements included in this
filing.
Critical Accounting Policies
The Corporations consolidated financial statements are prepared in accordance with generally
accepted accounting principles (GAAP) and follow general practices within the industry in which the
Corporation operates. Application of these principles requires management to make estimates,
assumptions and complex judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on information available
as of the date of the financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates, assumptions and judgments. Actual results could
differ significantly from those estimates. Certain policies inherently have a greater reliance on
the use of estimates, assumptions and judgments and, as such, have a greater possibility of
producing results that could be materially different than originally reported. Management has
identified the determination of the allowance for loan losses, accounting for loans acquired in
business combinations, pension plan accounting, income and other taxes, fair value measurements and
the evaluation of goodwill impairment to be the accounting areas that require the most subjective
or complex judgments, and as such, could be most subject to revision as new or additional
information becomes available or circumstances change, including overall changes in the economic
climate and/or market interest rates. Therefore, management considers them to be critical
accounting policies and discusses them directly with the Audit Committee of the board of directors.
The Corporations significant accounting policies are more fully described in Note 1 to the audited
consolidated financial statements contained in the Corporations Annual Report on Form 10-K for the
year ended December 31, 2010 and the more significant assumptions and estimates made by management
are more fully described in Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies in the Corporations Annual Report on Form
10-K for the year ended December 31, 2010. There have been no material changes to those policies or
the estimates made pursuant to those policies during the most recent quarter.
Acquisition of O.A.K. Financial Corporation
On April 30, 2010, the Corporation acquired 100% of O.A.K. Financial Corporation (OAK) for total
consideration of $83.7 million. OAK, a bank holding company, owned Byron Bank, which provided
traditional banking services and products through 14 banking offices serving communities in
Ottawa, Allegan and Kent counties in west Michigan. At April 30, 2010, OAK had total assets of
$820 million, including total loans of $627 million, and total deposits of $693 million,
including brokered deposits of $193 million. The Corporation operated Byron Bank as a separate
subsidiary from the acquisition date until July 23, 2010, the date Byron Bank was consolidated
with and into Chemical Bank.
In connection with the acquisition of OAK, the Corporation recorded $43.5 million of goodwill.
Goodwill recorded is primarily attributable to the synergies and economies of scale expected from
combining the operations of the Corporation and OAK. In addition, the Corporation recorded $9.8
million of other intangible assets, including core deposit intangible assets of $8.4 million,
mortgage servicing rights of $0.7 million and non-compete agreements of $0.7 million, in
conjunction with the acquisition.
Summary
The Corporations net income was $11.0 million, or $0.40 per diluted share, in the second quarter
of 2011, compared to net income of $9.2 million, or $0.33 per diluted share, in the first quarter
of 2011 and net income of
$4.4 million, or $0.17 per diluted share, in the second quarter of 2010. The increase in net income
and earnings per share in the second quarter of 2011, compared to the first quarter of 2011, was
primarily attributable to a lower
45
provision for loan losses and lower operating expenses. The
increase in net income and earnings per share in the second quarter of 2011, compared to the second
quarter of 2010, was attributable to a lower provision for loan losses and the acquisition of OAK.
Return on average assets, on an annualized basis, in the second quarter of 2011 was 0.84%, compared
to 0.70% in the first quarter of 2011 and 0.36% in the second quarter of 2010. Return on average
equity, on an annualized basis, in the second quarter of 2011 was 7.8%, compared to 6.6% in the
first quarter of 2011 and 3.3% in the second quarter of 2010.
Total assets were $5.20 billion at June 30, 2011, a decrease of $42 million, or 0.8%, from total
assets of $5.25 billion at December 31, 2010 and an increase of $84 million, or 1.6%, from total
assets of $5.12 billion at June 30, 2010. Total loans were $3.75 billion at June 30, 2011, an
increase of $66 million, or 1.8%, from total loans of $3.68 billion at December 31, 2010 and an
increase of $100 million, or 2.7%, from total loans of $3.65 billion at June 30, 2010. Total
deposits were $4.25 billion at June 30, 2011, a decrease of $81 million, or 1.9%, from total
deposits of $4.33 billion at December 31, 2010, and an increase of $52 million, or 1.2%, from total
deposits of $4.20 billion at June 30, 2010.
At June 30, 2011, tangible shareholders equity was 8.9% of total assets, compared to 8.6% of total
assets at December 31, 2010 and 8.8% of total assets at June 30, 2010.
Financial Condition
Total Assets
Total assets were $5.20 billion at June 30, 2011, a decrease of $42 million, or 0.8%, from total
assets of $5.25 billion at December 31, 2010 and an increase of $84 million, or 1.6%, from total
assets of $5.12 billion at June 30, 2010.
Interest-earning assets were $4.85 billion at June 30, 2011, a decrease of $64 million, or 1.3%,
from interest-earning assets of $4.92 billion at December 31, 2010 and an increase of $86 million,
or 1.8%, from interest-earning assets of $4.77 billion at June 30, 2010.
The increases in total assets and interest-earning assets during the twelve months ended June 30,
2011 were primarily attributable to loan growth. The decreases in total assets and interest-earning
assets during the six months ended June 30, 2011 were primarily attributable to a decrease in
interest-bearing deposits with the Federal Reserve Bank resulting from seasonal decreases in
municipal customer deposits.
Investment Securities
The carrying value of investment securities totaled $802.5 million at June 30, 2011, an increase of
$58.5 million, or 7.9%, from investment securities of $744.0 million at December 31, 2010 and a
decrease of $8.7 million, or 1.1% from investment securities of $811.2 million at June 30, 2010.
The increase in investment securities during the six months ended June 30, 2011 was primarily
attributable to the Corporation investing a portion of its excess liquidity in collateralized
mortgage obligations and taxable securities of state and political subdivisions with average
maturities of approximately three years. At June 30, 2011, the Corporations investment securities
portfolio consisted of $109.2 million in government sponsored agency debt obligations comprised
primarily of senior bonds that were issued by the twelve regional Federal Home Loan Banks that make
up the Federal Home Loan Bank System (FHLBanks), fixed rate government sponsored agency instruments
backed by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), the Federal Farm Credit
Bank and the Small Business Administration, and variable rate instruments backed by the Student
Loan Marketing Corporation; $224.5 million in state and political subdivisions debt obligations
comprised primarily of general debt obligations of issuers primarily located in the State of
Michigan; $115.6 million in residential mortgage-backed securities comprised primarily of fixed
rate instruments backed by a U.S. government agency (Government National
46
Mortgage Association) or
government sponsored enterprises (Freddie Mac and Fannie Mae); $284.2 million of collateralized
mortgage obligations comprised primarily of variable rate instruments with average maturities of
less than three years backed by the same U.S. government agency and government sponsored
enterprises as the residential mortgage-backed securities; $56.9 million in corporate bonds
comprised primarily of debt obligations of large national financial organizations; $1.6 million of
preferred stock securities of two large banks; and $10.5 million of trust preferred securities
(TRUPs) comprised primarily of a 100% interest in a TRUP of a non-public bank holding company in
Michigan.
The Corporation records all investment securities in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments-Debt and Equity
Securities (ASC 320), under which the Corporation is required to assess equity and debt securities
that have fair values below their amortized cost basis to determine whether the decline
(impairment) is other-than-temporary. An assessment is performed quarterly by the Corporation to
determine whether unrealized losses in its investment securities portfolio are temporary or
other-than-temporary by carefully considering all available information. The Corporation reviews
factors such as financial statements, credit ratings, news releases and other pertinent information
of the underlying issuer or company to make its determination. In assessing whether a decline is
other-than-temporary, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than amortized cost, (ii) the financial condition and
near-term prospects of the issuer, (iii) the potential for impairments in an entire industry or
sub-sector and (iv) the potential for impairments in certain economically depressed geographical
locations.
The Corporations investment securities portfolio with a carrying value of $802.5 million at June
30, 2011, had gross impairment of $7.8 million at that date. Management believed that the
unrealized losses on investment securities were temporary in nature and due primarily to changes in
interest rates on the investment securities and market illiquidity and not as a result of
credit-related issues. Accordingly, at June 30, 2011, the Corporation believed the impairment in
its investment securities portfolio was temporary in nature and, therefore, no impairment loss was
realized in the Corporations consolidated statement of income for the six months ended June 30,
2011. However, due to market and economic conditions, other-than-temporary impairment (OTTI) may
occur as a result of material declines in the fair value of investment securities in the future. A
further discussion of the assessment of potential impairment and the Corporations process that
resulted in the conclusion that the impairment was temporary in nature follows.
At June 30, 2011, the Corporations investment securities portfolio included government sponsored
agencies, residential mortgage-backed securities and collateralized mortgage obligations, combined,
with gross impairment of $0.6 million, state and political subdivisions securities with gross
impairment of $1.2 million, corporate bonds with gross impairment of $0.2 million and trust
preferred securities with gross impairment of $5.8 million. The amortized costs and fair values of
investment securities are disclosed in Note 3 to the consolidated financial statements.
The government sponsored agencies, residential mortgage-backed securities and collateralized
mortgage obligations, included in the available-for-sale investment securities portfolio, had a
combined amortized cost of $504.6 million, with gross impairment of $0.6 million, at June 30, 2011.
Virtually all of the impaired investment securities in these three categories are backed by the
full faith and credit of the U.S. government, or a guarantee of a U.S. government agency or
government sponsored enterprise. The Corporation determined that the impairment on these investment
securities was attributable to the low level of market interest rates and that the impairment on
these investment securities was temporary in nature at June 30, 2011.
The state and political subdivisions securities, included in the available-for-sale and the
held-to-maturity investment securities portfolios, had an amortized cost totaling $223.3 million,
with gross impairment of $1.2 million, at June 30, 2011. The majority of these investment
securities are from issuers primarily located in the State of Michigan and are general obligations
of the issuer, meaning that repayment of these obligations is funded by general tax collections of
the issuer. The gross impairment was attributable to impaired state and political subdivisions
securities with an amortized cost of $61 million, with the majority of these investment securities
maturing beyond 2012. It was
the Corporations assessment that the impairment on these investment securities was attributable to
changes in market interest rates for these investment securities and the markets perception of the
Michigan economy causing illiquidity in the market for these investment securities and that the
impairment on these investment securities was temporary in nature at June 30, 2011.
47
The Corporations corporate bond portfolio, included in the available-for-sale investment
securities portfolio, had an amortized cost of $56.9 million, with gross impairment of $0.2
million, at June 30, 2011. All of the corporate bonds held at June 30, 2011 were of an investment
grade, except a single issue investment security of Lehman Brothers Holdings Inc. (Lehman) with a
remaining amortized cost of less than $0.1 million at June 30, 2011 and a corporate bond of
American General Finance Corporation (AGFC). At June 30, 2011, the AGFC corporate bond had an
amortized cost of $2.5 million and a maturity date of December 15, 2011. At June 30, 2011, the
Corporations assessment was that it was probable that it would collect all of the contractual
amounts due on the AGFC corporate bond. The investment grade ratings obtained for the balance of
the corporate bond portfolio, with a gross impairment of $0.2 million at June 30, 2011, indicated
that the obligors capacities to meet their financial commitments was strong. It was the
Corporations assessment that the gross impairment of $0.2 million on the corporate bond portfolio
at June 30, 2011 was attributable to the current level of market interest rates, and not due to
credit-related issues, and that the impairment on the corporate bond portfolio was temporary in
nature at June 30, 2011.
At June 30, 2011, the Corporation held two TRUPs in the held-to-maturity investment securities
portfolio, with a combined amortized cost of $10.5 million that had gross impairment of $5.8
million. One TRUP, with an amortized cost of $10.0 million, represented a 100% interest in a TRUP
of a non-public bank holding company in Michigan that was purchased in the second quarter of 2008.
At June 30, 2011, the Corporation determined that the fair value of this TRUP was $4.5 million. The
second TRUP, with an amortized cost of $0.5 million, represented a 10% interest in the TRUP of
another non-public bank holding company in Michigan. At June 30, 2011, the Corporation determined
the fair value of this TRUP was $0.2 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 further 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 values of the TRUPs
in Note 3 to the consolidated financial statements. Management reviewed financial information of
the issuers of the TRUPs at June 30, 2011. Based on this review, the Corporation concluded that the
significant decline in fair values of the TRUPs, compared to their amortized cost, was not
attributable to materially adverse conditions specifically related to the issuers.
The issuer of the $10.0 million TRUP reported net income in the first and second quarter of 2011
and in each of the three years ended December 31, 2010 and was categorized as well-capitalized
under applicable regulatory requirements during that time. Based on the Corporations analysis at
June 30, 2011, it was the Corporations opinion that this issuer appeared to be a financially sound
financial institution with sufficient liquidity to meet its financial obligations in 2011. Common
stock cash dividends were paid throughout 2010 and 2009 by the issuer and the Corporation
understands that the issuers management anticipates cash dividends to continue to be paid in the
future. All scheduled interest payments on this TRUP have been made on a timely basis. The
principal of $10.0 million of this TRUP matures in 2038, with interest payments due quarterly.
Based on the information provided by the issuer of the $10.0 million TRUP, it was the Corporations
opinion that, as of June 30, 2011, there had been no material adverse changes in the issuers
financial performance since the TRUP was issued and purchased by the Corporation and no indication
that any material adverse trends were developing that would suggest that the issuer would be unable
to make all future principal and interest payments under the TRUP. Further, based on the
information provided by the issuer, the issuer appeared to be a financially viable financial
institution with both the credit quality and liquidity necessary to meet its financial obligations
in 2011. At June 30, 2011, the Corporation was not aware of any regulatory issues, memorandums of
understanding or cease and desist orders that had been issued to the issuer or its subsidiaries. In
reviewing all available information regarding the issuer, including past performance and its
financial and liquidity position, it was the Corporations opinion that the future cash flows of
the issuer supported the carrying value of the TRUP at its original cost of $10.0 million at June
30, 2011. While the total fair value of the TRUP was $5.5 million below the Corporations amortized
cost at
June 30, 2011, it was the Corporations assessment that, based on the overall financial condition
of the issuer, the impairment was temporary in nature at June 30, 2011.
The issuer of the $0.5 million TRUP reported a small net loss in the first quarter of 2011 compared
to larger net losses reported in 2010 and 2009. At June 30, 2011, the issuer was categorized as
well-capitalized under applicable regulatory requirements. All scheduled interest payments on this
TRUP have been made on a timely basis. The principal of $0.5 million of this TRUP matures in 2033,
with interest payments due quarterly. At June 30, 2011, the
48
Corporation was not aware of any
regulatory issues, memorandums of understanding or cease and desist orders that had been issued to
the issuer of this TRUP or any subsidiary. In reviewing all financial information regarding the
$0.5 million TRUP, it was the Corporations opinion that the carrying value of this TRUP at its
original cost of $0.5 million was supported by the issuers financial position at June 30, 2011,
even though the fair value of the TRUP was $0.3 million below the Corporations amortized cost at
June 30, 2011. It was the Corporations assessment that the impairment was temporary in nature at
June 30, 2011.
At June 30, 2011, the Corporation expected to fully recover the entire amortized cost basis of each
impaired investment security in its investment securities portfolio at that date. Furthermore, at
June 30, 2011, the Corporation did not have the intent to sell any of its impaired investment
securities and believed that it was more likely-than-not that the Corporation would not have to
sell any of its impaired investment securities before a full recovery of amortized cost. However,
there can be no assurance that OTTI losses will not be recognized on the TRUPs or on any other
investment security in the future.
Loans
Chemical Bank is a full-service commercial bank and, therefore, the acceptance and management of
credit risk is an integral part of the Corporations business. At June 30, 2011, the Corporations
loan portfolio was $3.75 billion and consisted of loans to commercial borrowers (commercial, real
estate commercial, real estate construction and land development) totaling $2.05 billion, or 55% of
total loans, loans to borrowers for the purpose of acquiring residential real estate totaling $826
million, or 22% of total loans, and loans to consumer borrowers (consumer installment and home
equity) secured by various types of collateral totaling $872 million, or 23% of total loans, at
that date. Loans at fixed interest rates comprised approximately 72% of the Corporations total
loan portfolio at June 30, 2011 and December 31, 2010, compared to 73% at June 30, 2010.
The Corporation maintains loan policies and credit underwriting standards as part of the process of
managing credit risk. These standards include making loans generally only within the Corporations
market areas. The Corporations lending markets generally consist of communities across the middle
to southern and western sections of the lower peninsula of Michigan. The Corporations lending
market areas do not include the southeastern portion of Michigan. The Corporation has no foreign
loans or any loans to finance highly leveraged transactions. The Corporations lending philosophy
is implemented through strong administrative and reporting controls. The Corporation maintains a
centralized independent loan review function that monitors the approval process and ongoing asset
quality of the loan portfolio.
Total loans were $3.75 billion at June 30, 2011, an increase of $66 million, or 1.8%, from total
loans of $3.68 billion at December 31, 2010 and an increase of $100 million, or 2.7%, from total
loans of $3.65 billion at June 30, 2010. The increase in total loans during the six months ended
June 30, 2011 was due to increases in seasonal advances on commercial loan working lines of credit
during the second quarter of 2011 and the Corporation originating $50 million of fifteen-year
fixed-rate residential mortgage loans since year end 2010 that it held in its portfolio, as opposed
to selling them in the secondary market as has been its general practice. A summary of the
Corporations loan portfolio by category follows.
Commercial loans consist of loans to varying types of businesses, including municipalities, school
districts and nonprofit organizations, for the purpose of supporting working capital and
operational needs and term financing of equipment. Repayment of such loans is generally provided
through operating cash flows of the customer. Commercial loans are generally secured with
inventory, accounts receivable, equipment, personal guarantees of the owner or other sources of
repayment, although the Corporation may also obtain real estate as collateral.
Commercial loans were $842.4 million at June 30, 2011, an increase of $23.4 million, or 2.9%, from
commercial loans of $819.0 million at December 31, 2010 and an increase of $73.1 million, or 9.5%,
from commercial loans of $769.3 million at June 30, 2010. The increase in commercial loans during
the six months ended June 30, 2011 was primarily due to increases in seasonal advances on working
lines of credit during the second quarter of 2011. Commercial loans represented 22.5% of the
Corporations loan portfolio at June 30, 2011, compared to 22.2% and 21.1% at December 31, 2010 and
June 30, 2010, respectively.
Real estate commercial loans include loans that are secured by real estate occupied by the borrower
for ongoing operations, non-owner occupied real estate leased to one or more tenants and vacant
land that has been acquired for
49
investment or future land development. Real estate commercial loans
were $1.07 billion at June 30, 2011, a decrease of $11.4 million, or 1.1%, from real estate
commercial loans of $1.08 billion at December 31, 2010 and a decrease of $16.3 million, or 1.5%,
from real estate commercial loans of $1.08 million at June 30, 2010. Loans secured by owner
occupied properties, non-owner occupied properties and vacant land comprised 64%, 33% and 3%,
respectively, of the Corporations real estate commercial loans outstanding at June 30, 2011. Real
estate commercial loans represented 28.4% of the Corporations loan portfolio at June 30, 2011,
compared to 29.3% and 29.6% at December 31, 2010 and June 30, 2010, respectively.
Real estate commercial lending is generally considered to involve a higher degree of risk than real
estate residential lending and typically involves larger loan balances concentrated in a single
borrower. In addition, the payment experience on loans secured by income-producing properties and
vacant land loans are typically dependent on the success of the operation of the related project
and are typically affected by adverse conditions in the real estate market and in the economy.
The Corporation generally attempts to mitigate the risks associated with commercial and real estate
commercial lending by, among other things, lending primarily in its market areas, lending across
industry lines, not developing a concentration in any one line of business and using prudent
loan-to-value ratios in the underwriting process. The weakened economy in Michigan has resulted in
higher loan delinquencies, customer bankruptcies and real estate foreclosures. Based on current
economic conditions in Michigan, management expects real estate foreclosures to remain higher than
historical averages. It is also managements belief that the loan portfolio is generally
well-secured, despite declining market values for all types of real estate in the State of Michigan
and nationwide.
Real estate construction and land development loans are primarily originated for land development
and construction of commercial properties. Land development loans include loans made to developers
for the purpose of infrastructure improvements to vacant land to create finished marketable
residential and commercial lots/land. Real estate construction loans often convert to a real estate
commercial loan at the completion of the construction period; however, most land development loans
are originated with the intention that the loans will be repaid through the sale of finished
properties by the developers within twelve months of the completion date. Real estate construction
and land development loans were $142.4 million at June 30, 2011, a decrease of $0.2 million from
real estate construction and land development loans of $142.6 million at December 31, 2010 and a
decrease of $36.6 million, or 20.5%, from real estate construction and land development loans of
$179.0 million at June 30, 2010. The Corporations land development loans totaled $51.2 million,
$53.4 million and $59.6 million at June 30, 2011, December 31, 2010 and June 30, 2010,
respectively, and consisted primarily of loans to develop land for the future construction of
residential real estate properties. Real estate construction and land development loans represented
3.8% of the Corporations loan portfolio at June 30, 2011, compared to 3.9% and 4.9% at December
31, 2010 and June 30, 2010, respectively.
Real estate construction lending involves a higher degree of risk than real estate commercial
lending and real estate residential lending because of the uncertainties of construction, including
the possibility of costs exceeding the initial estimates, the need to obtain a tenant or purchaser
of the property if it will not be owner-occupied or the need to sell developed properties. The
Corporation generally attempts to mitigate the risks associated with construction lending by, among
other things, lending primarily in its market areas, using prudent underwriting guidelines and
closely monitoring the construction process. The Corporations risk in this area has increased
since early 2008 due to the recessionary economic environment within the State of Michigan. The
sale of lots and units in both residential and commercial development projects remains weak, as
customer demand also remains low, resulting in the inventory of unsold lots and housing units
remaining high across the State of Michigan. The unfavorable economic
environment in Michigan has resulted in the inability of most developers to sell their finished
developed lots and units within their original expected time frames. Accordingly, few of the
Corporations land development borrowers have sold developed lots or units since early 2008 due to
the unfavorable economic environment.
The Corporations commercial loan portfolio, comprised of commercial, real estate commercial, real
estate construction and land development loans, is well diversified across business lines and has
no concentration in any one industry. The commercial loan portfolio totaling $2.05 billion at June
30, 2011 included 140 loan relationships of $2.5 million or greater. These 140 borrowing
relationships totaled $745.5 million and represented 36.4% of the commercial loan portfolio at June
30, 2011 and included 11 borrowing relationships that had outstanding balances of $10 million or
higher, totaling $151.7 million, or 7.4%, of the commercial loan portfolio at that date. Further,
the Corporation had nine loan relationships at June 30, 2011 with loan balances greater than $2.5
million and less than
50
$10 million, totaling $58.3 million, that had unfunded credit amounts that,
if advanced, could result in a loan relationship of $10 million or more.
Real estate residential loans consist primarily of one- to four-family residential loans with fixed
interest rates of fifteen years or less. The Corporation has historically sold fixed interest rate
real estate residential loans originated with maturities of fifteen years and over in the secondary
market. However, during 2010 and the first six months of 2011, the Corporation originated $71
million and $50 million, respectively, of fifteen year fixed rate real estate residential loans
that it retained in its portfolio. The loan-to-value ratio at the time of origination is generally
80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage
insurance.
Real
estate residential loans were $825.9 million at June 30, 2011, an increase of $27.9 million,
or 3.5%, from real estate residential loans of $798.0 million at December 31, 2010 and an increase
of $57.7 million, or 7.5%, from real estate residential loans of $768.2 million at June 30, 2010.
The increases in real estate residential loans from December 31, 2010 and from June 30, 2010 were
due to the Corporation electing to hold in its portfolio fifteen-year term fixed interest rate real
estate residential loans, as previously discussed, that historically have
been sold in the secondary market. While real estate residential loans have historically involved
the least amount of credit risk in the Corporations loan portfolio, the risk on these loans has
increased with the increase in the unemployment rate in the State of Michigan and the decrease in
real estate property values in the State of Michigan. Real estate residential loans also include
loans to consumers for the construction of single family residences that are secured by these
properties. Real estate residential construction loans to consumers were $16.5 million at June 30,
2011, compared to $15.3 million at December 31, 2010 and $18.0 million at June 30, 2010. Real
estate residential loans represented 22.0% of the Corporations loan portfolio at June 30, 2011,
compared to 21.7% and 21.1% at December 31, 2010 and June 30, 2010, respectively.
The Corporations consumer loans consist of relatively small loan amounts to consumers to finance
personal items; primarily automobiles, recreational vehicles, boats and home improvements. These
loans are spread across many individual borrowers, which minimizes the risk per loan transaction.
Collateral values, particularly those of automobiles, recreational vehicles and boats, are
negatively impacted by many factors, such as new car promotions, the physical condition of the
collateral and even more significantly, overall economic conditions. Consumer loans also include
home equity loans, whereby consumers utilize equity in their personal residence, generally through
a second mortgage, as collateral to secure the loan.
Consumer installment and home equity loans (collectively referred to as consumer loans) were $871.8
million at June 30, 2011, an increase of $26.8 million from consumer loans of $845.0 million at
December 31, 2010 and an increase of $22.1 million, or 2.6%, from consumer loans of $849.7 million
at June 30, 2010. The increase in consumer loans from December 31, 2010 was due to the
Corporations extended consumer loan promotional program. Consumer loans include indirect loans for
automobile, recreational vehicle and boat financing purchased from dealerships. At June 30, 2011,
approximately 45% of consumer loans were secured by the borrowers personal residences (primarily
second mortgages), 24% by automobiles, 19% by recreational vehicles, 9% by marine vehicles and the
remaining 3% was mostly unsecured. Consumer loans represented 23.3% of the Corporations loan
portfolio at June 30, 2011, compared to 22.9% and 23.3% at December 31, 2010 and June 30, 2010,
respectively.
Consumer loans generally have shorter terms than residential mortgage loans, but generally involve
more credit risk than real estate residential lending because of the type and nature of the
collateral. The Corporation originates consumer loans utilizing a computer-based credit scoring
analysis to supplement the underwriting process. Consumer lending collections are dependent on the
borrowers continuing financial stability and are more likely to
be affected by adverse personal situations. The unemployment rate in the State of Michigan was
10.5% at June 30, 2011, down from 11.1% at December 31, 2010, and 12.6% at June 30, 2010, although
higher than the national average of 9.2% at June 30, 2011. The Corporation has experienced
decreases in losses on consumer loans, with net loan losses totaling 70 basis points (annualized)
of average consumer loans during the first six months of 2011, compared to 116 basis points of
average consumer loans in 2010. The credit risk on home equity loans has historically been low as
property values of residential real estate have historically increased year over year. However,
credit risk has increased since the beginning of 2008 as property values have declined throughout
the State of Michigan, thus increasing the risk of insufficient collateral, and in many instances
no collateral on some home equity loans, as the majority of these loans are secured by a second
mortgage on the borrowers residences.
51
Nonperforming Assets
Nonperforming assets consist of originated loans for which the accrual of interest has been
discontinued (nonaccrual loans), originated loans that are past due as to principal or interest by
90 days or more and are still accruing interest and originated loans that have been modified under
troubled debt restructurings (TDRs) due to a decline in the credit quality of the borrower that
have not satisfied the Corporations payment policy (as described below) to be considered
performing (collectively referred to as nonperforming loans) and assets obtained through
foreclosures and repossessions, including foreclosed and repossessed assets acquired as a result of
the OAK transaction. The Corporation transfers an originated loan that is 90 days or more past due
to nonaccrual status (except for real estate residential loans that are transferred at 120 days
past due), 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 originated loan that is 90 days or more past due (120 days or more past due on real estate
residential loans) and still accruing interest is probable. TDRs continue to be reported as
nonperforming loans until a six-month payment history of principal and interest payments is
sustained in accordance with the loan modification, at which time the Corporation moves the loan to
a performing TDR status.
Nonperforming assets were $160.5 million at June 30, 2011, compared to $172.2 million at March 31,
2011 and $175.2 million at December 31, 2010, and represented 3.08%, 3.23% and 3.34%, respectively,
of total assets. The decline in nonperforming assets during the second quarter of 2011 was
primarily attributable to the Corporation classifying $12.9 million of nonperforming TDRs to
performing status during the quarter due to the borrowers sustained repayment history under the
modified loan terms. It is managements belief that the elevated levels of nonperforming assets are
primarily attributable to the unfavorable economic climate within the State of Michigan, that has
existed for more than four years, which has resulted in cash flow difficulties being encountered by
many business and consumer loan customers. The unemployment rate in Michigan was 10.5% at June 30,
2011, compared to 9.2% nationwide. The Corporations nonperforming assets are not concentrated in
any one industry or any one geographical area within Michigan, other than $9.1 million in
nonperforming land development loans. At June 30, 2011, there were four commercial loan
relationships exceeding $2.5 million, totaling $15.9 million, that were in nonperforming status.
Based on declines in both residential and commercial real estate appraised values due to the
weakness in the Michigan economy over the past several years, management continues to evaluate and,
when appropriate, 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 managements belief that nonperforming assets will remain
at elevated levels throughout 2011.
52
The following schedule provides a summary of nonperforming assets, including the composition of
nonperforming loans, by major loan category.
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
14,386 |
|
|
$ |
15,672 |
|
|
$ |
16,668 |
|
Real estate commercial |
|
|
57,324 |
|
|
|
59,931 |
|
|
|
60,558 |
|
Real estate construction and land development |
|
|
8,933 |
|
|
|
9,414 |
|
|
|
8,967 |
|
Real estate residential |
|
|
17,809 |
|
|
|
15,505 |
|
|
|
12,083 |
|
Consumer installment and home equity |
|
|
6,898 |
|
|
|
5,774 |
|
|
|
4,686 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
105,350 |
|
|
|
106,296 |
|
|
|
102,962 |
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days
or more as to interest or principal payments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
629 |
|
|
|
455 |
|
|
|
530 |
|
Real estate commercial |
|
|
143 |
|
|
|
459 |
|
|
|
1,350 |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
|
|
1,220 |
|
Real estate residential |
|
|
1,729 |
|
|
|
191 |
|
|
|
3,253 |
|
Consumer installment and home equity |
|
|
1,243 |
|
|
|
1,091 |
|
|
|
1,055 |
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days
or more as to interest or principal payments |
|
|
3,744 |
|
|
|
2,196 |
|
|
|
7,408 |
|
|
|
|
|
|
|
|
|
|
|
TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and real estate commercial |
|
|
15,443 |
|
|
|
15,201 |
|
|
|
15,057 |
|
Real estate residential |
|
|
11,392 |
|
|
|
22,166 |
|
|
|
22,302 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming TDRs |
|
|
26,835 |
|
|
|
37,367 |
|
|
|
37,359 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
135,929 |
|
|
|
145,859 |
|
|
|
147,729 |
|
Other real estate and repossessed assets(1) |
|
|
24,607 |
|
|
|
26,355 |
|
|
|
27,510 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
160,536 |
|
|
$ |
172,214 |
|
|
$ |
175,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of total loans |
|
|
3.63 |
% |
|
|
3.96 |
% |
|
|
4.01 |
% |
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percent of total assets |
|
|
3.08 |
% |
|
|
3.23 |
% |
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes property acquired through foreclosure and by
acceptance of a deed in lieu of foreclosure and other
property held for sale, including properties acquired as a
result of the OAK transaction. |
The following schedule provides the composition of nonperforming loans, by major loan category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
20,186 |
|
|
|
15 |
% |
|
$ |
21,946 |
|
|
|
15 |
% |
|
$ |
22,511 |
|
|
|
15 |
% |
Real estate commercial |
|
|
67,620 |
|
|
|
50 |
|
|
|
69,772 |
|
|
|
48 |
|
|
|
71,652 |
|
|
|
49 |
|
Real estate construction
and land development |
|
|
9,052 |
|
|
|
6 |
|
|
|
9,414 |
|
|
|
6 |
|
|
|
10,187 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
96,858 |
|
|
|
71 |
|
|
|
101,132 |
|
|
|
69 |
|
|
|
104,350 |
|
|
|
71 |
|
Real estate residential |
|
|
30,930 |
|
|
|
23 |
|
|
|
37,862 |
|
|
|
26 |
|
|
|
37,638 |
|
|
|
25 |
|
Consumer installment and
home equity |
|
|
8,141 |
|
|
|
6 |
|
|
|
6,865 |
|
|
|
5 |
|
|
|
5,741 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
135,929 |
|
|
|
100 |
% |
|
$ |
145,859 |
|
|
|
100 |
% |
|
$ |
147,729 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans were $135.9 million at June 30, 2011, a decrease of $10.0 million, or
6.9%, compared to $145.9 million at March 31, 2011 and a decrease of $11.8 million, or 8.0%,
compared to $147.7 million at December 31, 2010. The Corporations nonperforming loans to
commercial borrowers (commercial, real estate
53
commercial and real estate construction and land development), including TDRs, were $96.9
million at June 30, 2011, a decrease of $4.2 million, or 4.2%, from $101.1 million at March 31,
2011 and a decrease of $7.5 million, or 7.2%, from $104.4 million at December 31, 2010.
Nonperforming loans to commercial borrowers comprised 71% of total nonperforming loans at June 30,
2011, compared to 69% at March 31, 2011 and 71% at December 31, 2010. The majority of the
Corporations 2011 net loan charge-offs occurred within these three commercial loan categories,
with 63% and 70% of net loan charge-offs during the three and six months ended June 30, 2011,
respectively, attributable to commercial borrowers. Nonperforming real estate residential loans,
including TDRs, were $30.9 million at June 30, 2011, a decrease of $7.0 million, or 18%, from $37.9
million at March 31, 2011 and a decrease of $6.7 million, or 18%, from $37.6 million at December
31, 2010. Nonperforming consumer loans were $8.1 million at June 30, 2011, an increase of $1.2
million, or 17%, from $6.9 million at March 31, 2011 and an increase of $2.4 million, or 42%, from
$5.7 million at December 31, 2010. The decline in nonperforming loans during the second quarter of
2011 was primarily attributable to the Corporation classifying $12.9 million of nonperforming TDRs
($2.1 million of TDRs-commercial and real estate commercial and $10.8 million of TDRs-real estate
residential) to performing status during the quarter due to the borrowers sustained repayment
history in accordance with the loan modification.
The following schedule summarizes changes in nonaccrual loans during the three and six months ended
June 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2011 |
|
|
June 30, 2011 |
|
|
|
(In thousands) |
|
Balance at beginning of period |
|
$ |
106,296 |
|
|
$ |
102,962 |
|
Additions during period |
|
|
17,687 |
|
|
|
39,462 |
|
Principal balances charged off |
|
|
(7,027 |
) |
|
|
(15,192 |
) |
Transfers to other real estate/repossessed assets |
|
|
(2,386 |
) |
|
|
(4,305 |
) |
Return to accrual status |
|
|
(1,519 |
) |
|
|
(6,342 |
) |
Payments received |
|
|
(7,701 |
) |
|
|
(11,235 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
105,350 |
|
|
$ |
105,350 |
|
|
|
|
|
|
|
|
The following schedule presents data related to nonperforming loans to commercial borrowers by
dollar amount at June 30, 2011, March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Borrowers |
|
|
Amount |
|
|
Borrowers |
|
|
Amount |
|
|
Borrowers |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
$5,000,000 or more |
|
|
1 |
|
|
$ |
7,114 |
|
|
|
1 |
|
|
$ |
7,277 |
|
|
|
1 |
|
|
$ |
7,227 |
|
$2,500,000 - $4,999,999 |
|
|
3 |
|
|
|
8,834 |
|
|
|
4 |
|
|
|
11,577 |
|
|
|
6 |
|
|
|
17,071 |
|
$1,000,000 - $2,499,999 |
|
|
16 |
|
|
|
28,552 |
|
|
|
17 |
|
|
|
28,684 |
|
|
|
18 |
|
|
|
29,246 |
|
$500,000 - $999,999 |
|
|
21 |
|
|
|
14,999 |
|
|
|
23 |
|
|
|
15,827 |
|
|
|
22 |
|
|
|
14,483 |
|
$250,000 - $499,999 |
|
|
56 |
|
|
|
20,386 |
|
|
|
54 |
|
|
|
19,999 |
|
|
|
50 |
|
|
|
18,188 |
|
Under $250,000 |
|
|
192 |
|
|
|
16,973 |
|
|
|
187 |
|
|
|
17,768 |
|
|
|
202 |
|
|
|
18,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
289 |
|
|
$ |
96,858 |
|
|
|
286 |
|
|
$ |
101,132 |
|
|
|
299 |
|
|
$ |
104,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming commercial loans were $20.2 million at June 30, 2011, a decrease of $1.7 million, or
7.8%, from $21.9 million at March 31, 2011 and a decrease of $2.3 million, or 10%, from $22.5
million at December 31, 2010. The nonperforming commercial loans at June 30, 2011 were not
concentrated in any single industry.
Nonperforming real estate commercial loans were $67.6 million at June 30, 2011, a decrease of $2.2
million, or 3.2%, from $69.8 million at March 31, 2011 and a decrease of $4.1 million, or 5.7% from
$71.7 million at December 31, 2010. At June 30, 2011, the Corporations nonperforming real estate
commercial loans were comprised of $35.6 million of loans secured by owner occupied real estate,
$24.2 million of loans secured by non-owner occupied real estate and $7.8 million of loans secured
by vacant land, resulting in approximately 7% of owner occupied real estate commercial loans, 11%
of non-owner occupied real estate commercial loans and 32% of vacant
54
land loans in a nonperforming status at June 30, 2011. At June 30, 2011, the Corporations
nonperforming real estate commercial loans were comprised of a diverse mix of commercial lines of
business and were also geographically disbursed throughout the Corporations market areas. The
largest concentration of the $67.6 million in nonperforming real estate commercial loans at June
30, 2011 was one customer relationship totaling $6.8 million that was secured by a combination of
vacant land and non-owner occupied commercial real estate. This same customer relationship had
another $0.3 million included in nonperforming real estate construction and land development loans.
At June 30, 2011, $16.4 million of the nonperforming real estate commercial loans were in various
stages of foreclosure with 61 borrowers. Challenges remain in the Michigan economy, thus creating a
difficult business environment for many lines of business across the state.
Nonperforming real estate construction and land development loans were $9.1 million at June 30,
2011, a decrease of $0.3 million, or 3.2%, from $9.4 million at March 31, 2011 and a decrease of
$1.1 million, or 11%, from $10.2 million at December 31, 2010. At June 30, 2011, 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 $9.1 million of
nonperforming loans secured by land development projects represented 27% of total originated land
development loans outstanding of $33.1 million at June 30, 2011. The economy in Michigan has
adversely impacted housing demand throughout the state and, accordingly, a significant percentage
of the Corporations residential real estate development borrowers have experienced cash flow
difficulties associated with a significant decline in sales of both lots and residential real
estate.
Nonperforming real estate residential loans were $30.9 million at June 30, 2011, a decrease of $7.0
million, or 18%, from $37.9 million at March 31, 2011 and a decrease of $6.7 million, or 18%, from
$37.6 million at December 31, 2010. The decrease at June 30, 2011 was attributable to the
Corporation classifying $10.8 million of real estate residential TDRs as performing TDRs during the
second quarter of 2011 due to the borrowers sustained repayment history. At June 30, 2011, a total
of $9.5 million of nonperforming real estate residential loans were in various stages of
foreclosure.
Nonperforming consumer loans were $8.1 million at June 30, 2011, an increase of $1.2 million, or
17%, from $6.9 million at March 31, 2011 and an increase of $2.4 million, or 42%, from $5.7 million
at December 31, 2010.
The unfavorable economic climate in Michigan has resulted in an increasing number of both business
and consumer customers with cash flow difficulties and thus the inability to maintain their loan
balances in a performing status. The Corporation determined that it was probable that certain
customers who were past due on their loans, if provided a reduction in their monthly payment for a
limited time period, would be able to bring their loan relationship to a performing status and was
believed by the Corporation to potentially result in a lower level of loan losses and loan
collection costs than if the Corporation currently proceeded through the foreclosure process with
these borrowers.
The Corporations nonperforming TDRs-commercial and real estate commercial generally consist of
allowing borrowers to defer scheduled principal payments and make interest only payments for a
short period of time (generally six months to one year) at the stated interest rate of the original
loan agreement or lower payments due to a modification of the loans contractual terms. The
outstanding balance of these loans was $15.4 million at June 30, 2011, compared to $15.2 million at
March 31, 2011 and $15.1 million at December 31, 2010. The Corporation does not expect to incur a
loss on these loans based on its assessment of the borrowers expected cash flows, and accordingly,
no additional provision for loan losses has been recognized related to these loans. These loans are
individually evaluated for impairment and transferred to nonaccrual status if conditions change and
it is probable that any remaining principal and interest payments due on the loan will not be
collected in accordance with the modified contractual terms of the loan. During the second quarter
of 2011, the Corporation classified $2.1 million of nonperforming TDRs-commercial and real estate
commercial as performing TDRs due to the borrowers sustained repayment history.
The Corporations nonperforming TDRs-real estate residential generally consist of reducing a
borrowers monthly payments by decreasing the interest rate charged on the loan to 3% for a
specified period of time (generally 24 months). The outstanding loan balance of these loans was
$11.4 million at June 30, 2011, compared to $22.2 million at March 31, 2011 and $22.3 million at
December 31, 2010. The decrease during the second quarter of 2011 was attributable to the
Corporation classifying $10.8 million of nonperforming TDRs-real estate residential as
55
performing TDRs due to the borrowers sustained repayment history. The Corporation recognized $0.1
million and $0.2 million of additional provision for loan losses during the three and six months
ended June 30, 2011, respectively, related to impairment on these loans based on the present value
of expected future cash flows discounted at the loans original effective interest rate. These
loans are moved to nonaccrual status when the loan becomes ninety days past due as to principal or
interest, or sooner if conditions warrant.
Other real estate and repossessed assets is a component of nonperforming assets that includes
residential and commercial real estate and development properties acquired through foreclosure or
by acceptance of a deed in lieu of foreclosure, and also other personal and commercial assets.
Other real estate and repossessed assets were $24.6 million at June 30, 2011, a decrease of $1.8
million, or 6.8%, from $26.4 million at March 31, 2011 and a decrease of $2.9 million, or 11%, from
$27.5 million at December 31, 2010.
The following schedule provides the composition of other real estate and repossessed assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
|
|
|
|
Other real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Vacant land |
|
$ |
7,811 |
|
|
$ |
8,501 |
|
|
$ |
9,149 |
|
Commercial properties |
|
|
8,564 |
|
|
|
9,102 |
|
|
|
8,604 |
|
Residential real estate properties |
|
|
5,236 |
|
|
|
5,088 |
|
|
|
6,189 |
|
Residential development properties |
|
|
2,529 |
|
|
|
3,106 |
|
|
|
3,035 |
|
|
|
|
|
|
|
|
|
|
|
Total other real estate |
|
|
24,140 |
|
|
|
25,797 |
|
|
|
26,977 |
|
Repossessed assets |
|
|
467 |
|
|
|
558 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
Total other real estate and repossessed assets |
|
$ |
24,607 |
|
|
$ |
26,355 |
|
|
$ |
27,510 |
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes other real estate and repossessed asset activity during the three
and six months ended June 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2011 |
|
|
June 30, 2011 |
|
|
|
(In thousands) |
|
Balance at beginning of period |
|
$ |
26,355 |
|
|
$ |
27,510 |
|
Additions |
|
|
3,443 |
|
|
|
6,085 |
|
Write-downs to fair value |
|
|
(430 |
) |
|
|
(924 |
) |
Dispositions |
|
|
(4,761 |
) |
|
|
(8,064 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
24,607 |
|
|
$ |
24,607 |
|
|
|
|
|
|
|
|
The historically large inventory of real estate properties for sale across the State of Michigan
has resulted in an increase in the Corporations carrying time and cost of holding other real
estate. Consequently, the Corporation had $11.0 million in real estate properties at June 30, 2011
that had been held in excess of one year as of that date, of which $2.6 million was vacant land,
$4.1 million were commercial properties, $2.3 million were residential real estate properties and
$2.0 million were residential development properties. Due to the redemption period on foreclosures
being relatively long in Michigan (six months to one year) and the Corporation having a significant
number of nonperforming loans that were in the process of foreclosure at June 30, 2011, it is
anticipated that the level of other real estate will remain at elevated levels throughout 2011.
Other real estate properties are carried at the lower of cost or fair value less estimated costs to
sell.
At June 30, 2011, all of the other real estate properties had been written down to fair value
through either a charge-off at the transfer of the loan to other real estate, a write-down recorded
as an operating expense to recognize a further market value decline of the property after the
initial transfer date or recording at fair value in conjunction with the OAK acquisition.
Accordingly, at June 30, 2011, the carrying value of other real estate of $24.1 million was
reflective of $33.9 million in fair value adjustments, resulting in the carrying value at June 30,
2011 representing 42% of the contractual loan balance remaining at the time the property was
transferred to other real estate.
There were 125 other real estate properties sold during the first six months of 2011 for net
proceeds of $7.1 million. On an average basis, the net proceeds from these sales represented 112%
of the carrying value of the property at the
56
time of sale, although the net proceeds represented 42% of the remaining contractual loan balance
at the time the Corporation received title to the properties.
Impaired Loans
A loan is considered impaired when management determines it is probable that all of the principal
and interest due will not be collected according to the original contractual terms of the loan
agreement. In most instances, impairment is measured based on the fair market value of the
underlying collateral. Impairment may also be measured based on the present value of expected
future cash flows discounted at the loans effective interest rate. A portion of the allowance for
loan losses may be specifically allocated to impaired loans. The process of measuring impaired
loans and the allocation of the allowance for loan losses requires judgment and estimation. The
eventual outcome may differ from amounts estimated. A discussion of the allowance for loan losses
is included under the subheading, Allowance for Loan Losses, below.
Impaired loans totaled $163.6 million at June 30, 2011, an increase of $2.2 million, compared to
$161.4 million at March 31, 2011 and an increase of $1.9 million, compared to $161.7 million at
December 31, 2010. A summary of impaired loans at June 30, 2011, March 31, 2011 and December 31,
2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial borrowers |
|
$ |
80,643 |
|
|
$ |
85,017 |
|
|
$ |
86,193 |
|
Consumer borrowers |
|
|
24,707 |
|
|
|
21,279 |
|
|
|
16,769 |
|
Nonperforming TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial borrowers |
|
|
15,443 |
|
|
|
15,201 |
|
|
|
15,057 |
|
Real estate residential |
|
|
11,392 |
|
|
|
22,166 |
|
|
|
22,302 |
|
Performing TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial borrowers |
|
|
2,125 |
|
|
|
|
|
|
|
|
|
Real estate residential |
|
|
10,764 |
|
|
|
|
|
|
|
|
|
Acquired loans not performing in accordance with
original contractual terms |
|
|
18,570 |
|
|
|
17,747 |
|
|
|
21,385 |
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
163,644 |
|
|
$ |
161,410 |
|
|
$ |
161,706 |
|
|
|
|
|
|
|
|
|
|
|
After analyzing the various components of the customer relationships and evaluating the underlying
collateral of impaired loans, it was determined that impaired loans to commercial borrowers
totaling $39.2 million at June 30, 2011 required a specific allocation of the allowance for loan
losses (valuation allowance), compared to $37.9 million at March 31, 2011 and $44.9 million at
December 31, 2010.
57
The following schedule summarizes impaired loans to commercial borrowers and the related valuation
allowance at June 30, 2011, March 31, 2011 and December 31, 2010 and partial loan charge-offs
(confirmed losses) taken on these impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inherent |
|
|
|
|
|
|
|
Valuation |
|
|
Confirmed |
|
|
Loss |
|
|
|
Amount |
|
|
Allowance |
|
|
Losses |
|
|
Percentage |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans to commercial borrowers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With valuation allowance and no charge-offs |
|
$ |
24,196 |
|
|
$ |
5,987 |
|
|
$ |
|
|
|
|
25 |
% |
With valuation allowance and charge-offs |
|
|
14,988 |
|
|
|
4,889 |
|
|
|
3,563 |
|
|
|
46 |
|
With charge-offs and no valuation allowance |
|
|
29,582 |
|
|
|
|
|
|
|
19,021 |
|
|
|
39 |
|
Without valuation allowance or charge-offs |
|
|
29,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
98,211 |
|
|
$ |
10,876 |
|
|
$ |
22,584 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired acquired loans |
|
|
18,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans to commercial borrowers |
|
$ |
116,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans to commercial borrowers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With valuation allowance and no charge-offs |
|
$ |
23,697 |
|
|
$ |
7,595 |
|
|
$ |
|
|
|
|
32 |
% |
With valuation allowance and charge-offs |
|
|
14,226 |
|
|
|
3,581 |
|
|
|
3,157 |
|
|
|
39 |
|
With charge-offs and no valuation allowance |
|
|
26,492 |
|
|
|
|
|
|
|
20,120 |
|
|
|
43 |
|
Without valuation allowance or charge-offs |
|
|
35,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100,219 |
|
|
$ |
11,176 |
|
|
$ |
23,277 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired acquired loans |
|
|
17,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans to commercial borrowers |
|
$ |
117,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired originated loans to commercial borrowers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With valuation allowance and no charge-offs |
|
$ |
33,056 |
|
|
$ |
12,015 |
|
|
$ |
|
|
|
|
36 |
% |
With valuation allowance and charge-offs |
|
|
11,795 |
|
|
|
2,951 |
|
|
|
1,551 |
|
|
|
34 |
|
With charge-offs and no valuation allowance |
|
|
20,033 |
|
|
|
|
|
|
|
18,277 |
|
|
|
48 |
|
Without valuation allowance or charge-offs |
|
|
36,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
101,250 |
|
|
$ |
14,966 |
|
|
$ |
19,828 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired acquired loans |
|
|
21,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans to commercial borrowers |
|
$ |
122,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed losses represent partial loan charge-offs on impaired loans due primarily to the receipt
of a recent third-party property appraisal indicating the value of the collateral securing the loan
is below the loan balance and management believes the full collection of the loan balance is not
likely.
The Corporations valuation allowance for impaired commercial, real estate commercial and real
estate construction and land development loans was $10.9 million at June 30, 2011, a decrease of
$0.3 million from $11.2 million at March 31, 2011 and a decrease of $4.1 million from $15.0 million
at December 31, 2010. The decrease in the valuation allowance is primarily reflective of partial
loan charge-offs of impaired loans during the three and six months ended June 30, 2011 combined
with stability in the credit quality of the loan portfolio. Additionally, the Corporation had a
valuation allowance attributable to TDRs-real estate residential of $0.7 million at June 30, 2011,
compared to $0.8 million at both March 31, 2011 and December 31, 2010. The Corporations
TDRs-commercial borrowers of $15.4 million, $15.2 million and $15.1 million at June 30, 2011, March
31, 2011 and December 31, 2010, respectively, did not require a valuation allowance as the
Corporation expects to collect the full principal and interest owed on each loan.
58
Impaired loans included acquired loans totaling $18.6 million, $17.7 million and $21.4 million at
June 30, 2011, March 31, 2011 and December 31, 2010, respectively, that were not performing in
accordance with the original contractual terms of the loans. At June 30, 2011, March 31, 2011 and
December 31, 2010, there was no valuation allowance required for acquired impaired loans, as no
material changes in expected cash flows had occurred since the acquisition date. These loans were
recorded at their estimated fair value, which included estimated credit losses, at the acquisition
date and are considered performing due to the application of ASC 310-30 as discussed in Note 1 to
the consolidated financial statements under the subheading, Loans Acquired in a Business
Combination.
Allowance for Loan Losses
The allowance for loan losses (allowance) provides for probable losses in the originated loan
portfolio that have been identified with specific customer relationships and for probable losses
believed to be inherent in the remainder of the originated loan portfolio but that have not been
specifically identified. The allowance is comprised of specific valuation allowances (assessed for
originated loans that have known credit weaknesses), pooled allowances based on assigned risk
ratings and historical loan loss experience for each loan type, and an unallocated allowance for
imprecision in the subjective nature of the specific and pooled allowance methodology. Management
evaluates the allowance on a quarterly basis in an effort to ensure the level is adequate to absorb
probable losses inherent in the loan portfolio. This evaluation process is inherently subjective as
it requires estimates that may be susceptible to significant change and has the potential to affect
net income materially. The Corporations methodology for measuring the adequacy of the allowance
includes several key elements, which includes a review of the loan portfolio, both individually and
by category, and includes consideration of changes in the mix and volume of the loan portfolio,
actual loan loss experience, review of collateral values, the financial condition of the borrowers,
industry and geographical exposures within the portfolio, economic conditions and employment levels
of the Corporations local markets and other factors affecting business sectors. Management
believes that the allowance is currently maintained at an appropriate level, considering the
inherent risk in the loan portfolio. Future significant adjustments to the allowance may be
necessary due to changes in economic conditions, delinquencies or the level of loan losses
incurred.
The Corporations allowance at June 30, 2011 did not include losses inherent in the acquired loan
portfolio, as an allowance was not carried over on the date of acquisition. The acquired loans were
recorded at their estimated fair value at the date of acquisition, with the estimated fair value
including a component for expected credit losses. A portion of the allowance, however, may be set
aside in the future, related to the acquired loans, if an acquired loan pool experiences a decrease
in expected cash flows as compared to those expected at the acquisition date. An allowance related
to acquired loans was not required at June 30, 2011 due to no material changes in expected cash
flows since the date of acquisition.
The Corporations allowance was $89.7 million at both June 30, 2011 and March 31, 2011, compared to
$89.5 million at both December 31, 2010 and June 30, 2010. The allowance as a percentage of
originated loans was 2.78% at June 30, 2011, compared to 2.85% at March 31, 2011, 2.86% at December
31, 2010 and 2.95% at June 30, 2010. The allowance as a percentage of nonperforming loans was 66%
at June 30, 2011 compared to 61% at both March 31, 2011 and December 31, 2010 and 63% at June 30,
2010. The allowance as a percentage of nonperforming loans, net of impaired originated loans for
which the expected loss has been charged-off, was 84% at June 30, 2011, compared to 75% at March
31, 2011, 70% at December 31, 2010 and 74% at June 30, 2010.
The following schedule summarizes the allowance as a percentage of nonperforming loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
March 31, |
|
December 31, |
|
|
2011 |
|
2011 |
|
2010 |
|
|
(In thousands) |
Allowance for loan losses |
|
$ |
89,733 |
|
|
$ |
89,674 |
|
|
$ |
89,530 |
|
Nonperforming loans |
|
|
135,929 |
|
|
|
145,859 |
|
|
|
147,729 |
|
Allowance as a percent of nonperforming loans |
|
|
66 |
% |
|
|
61 |
% |
|
|
61 |
% |
Allowance as a percent of nonperforming
loans, net of impaired originated loans for
which the expected loss has been charged-off |
|
|
84 |
% |
|
|
75 |
% |
|
|
70 |
% |
59
Economic conditions in the Corporations markets, all within Michigan, were generally less
favorable than those nationwide during 2010. Economic challenges remain in Michigan and are
expected to continue in 2011. Accordingly, management believes net loan losses, delinquencies and
nonperforming loans will remain at elevated levels during 2011.
Total Deposits
Total deposits were $4.25 billion at June 30, 2011, a decrease of $81 million, or 1.9%, from total
deposits of $4.33 billion at December 31, 2010, and an increase of $52 million, or 1.2%, from total
deposits of $4.20 billion at June 30, 2010. The decrease in total deposits from year end 2010 was
primarily attributable to the Corporation paying off brokered deposits acquired in the OAK
transaction. The increase in total deposits for the twelve-month period ended June 30, 2011 was
primarily attributable to growth in customer deposits of $141 million during the twelve-month
period ended June 30, 2011 that was offset by the Corporation paying off maturing brokered deposits
that were acquired in the OAK transaction. At June 30, 2011, the Corporation had $110 million in
remaining brokered deposits that were acquired in the OAK acquisition. The Corporation intends to
continue to use its liquidity to pay off brokered deposits as they mature, with $26 million
maturing during the remainder of 2011.
The Corporations competitive position within many of its market areas has historically limited its
ability to materially increase core deposits without adversely impacting the weighted average cost
of the deposit portfolio. While competition for core deposits remained strong throughout the
Corporations markets during 2010 and the first six months of 2011, the Corporations increased
efforts to expand its deposit relationships with existing customers, the Corporations financial
strength and a general trend in customers holding more liquid assets, resulted in the Corporation
experiencing a significant increase in customer deposits during 2010. Total deposits increased $141
million, excluding brokered deposits acquired in the OAK transaction, during the twelve months
ended June 30, 2011, while during the same time frame, the Corporation experienced a decrease in
the average cost of its deposits.
Borrowed Funds
Short-term borrowings, comprised of securities sold under agreements to repurchase with customers,
were $276.6 million at June 30, 2011, compared to $242.7 million at December 31, 2010 and $242.3
million at June 30, 2010. Securities sold under agreements to repurchase are funds deposited by
customers that are secured by investment securities that are owned by Chemical Bank, although not
covered by FDIC insurance. These funds have been a stable source of liquidity for Chemical Bank,
much like its core deposit base. The increase of $34.3 million in securities sold under agreements
to repurchase during the twelve-month period ended June 30, 2011, was primarily due to increases
attributable to municipal and business customers. The Corporations securities sold under
agreements to repurchase do not qualify as sales for accounting purposes.
Federal Home Loan Bank (FHLB) advances are comprised of borrowings from the FHLB that have original
maturities of greater than one year. FHLB advances totaled $71.9 million at June 30, 2011, compared
to $74.1 million at December 31, 2010 and $86.6 million at June 30, 2010. On April 30, 2010, the
Corporation acquired $35.9 million of FHLB advances in conjunction with the OAK acquisition, of
which $21.9 million were outstanding at June 30, 2011. FHLB advances are secured under a blanket
security agreement of real estate residential first lien loans with an aggregate book value equal
to at least 155% of the advances. At June 30, 2011, the carrying value of real estate residential
first lien loans eligible for collateral under the blanket security agreement was $774 million.
The scheduled principal reductions on FHLB advances outstanding at June 30, 2011, including
amortization of the unamortized fair value premium of $0.8 million attributable to the OAK
acquisition, were as follows (in thousands):
|
|
|
|
|
2011 |
|
$ |
28,871 |
|
2012 |
|
|
8,767 |
|
2013 |
|
|
28,025 |
|
2014 |
|
|
5,734 |
|
2015 |
|
|
531 |
|
|
|
|
|
Total |
|
$ |
71,928 |
|
|
|
|
|
60
At June 30, 2011, the Corporations additional borrowing availability through the FHLB, based on
the amount of FHLB stock owned by the Corporation and subject to the FHLBs credit requirements and
policies, was $269 million. At June 30, 2011, the Corporation had agreements in place to obtain up
to $30 million in additional liquidity through borrowings from the Federal Reserve Banks discount
window at the Corporations discretion.
Credit Related Commitments
The Corporation has credit related commitments that may impact its liquidity. The following
schedule summarizes the Corporations loan commitments and expected expiration dates by period at
June 30, 2011. Since many of these commitments historically have expired without being drawn upon,
the total amount of these commitments does not necessarily represent future cash requirements of
the Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
than |
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit |
|
$ |
427,243 |
|
|
$ |
98,757 |
|
|
$ |
65,227 |
|
|
$ |
58,928 |
|
|
$ |
650,155 |
|
Loan commitments |
|
|
157,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,125 |
|
Standby letters of credit |
|
|
30,741 |
|
|
|
13,243 |
|
|
|
3,795 |
|
|
|
10 |
|
|
|
47,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
615,109 |
|
|
$ |
112,000 |
|
|
$ |
69,022 |
|
|
$ |
58,938 |
|
|
$ |
855,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Total shareholders equity was $570.6 million at June 30, 2011, compared to $560.1 million at
December 31, 2010 and $556.1 million at June 30, 2010. Total shareholders equity as a percentage
of total assets was 11.0% as of June 30, 2011, compared to 10.7% at December 31, 2010 and 10.9% at
June 30, 2010. Tangible shareholders equity as a percentage of total assets was 8.9% at June 30,
2011, compared to 8.6% at December 31, 2010 and 8.8% at June 30, 2010.
The Corporation and Chemical Bank continue to maintain strong capital positions which significantly
exceeded the minimum levels prescribed by the Federal Reserve at June 30, 2011, as shown in the
following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
Total |
|
|
|
|
|
|
Risk-Based |
|
Risk-Based |
|
|
Leverage |
|
Capital |
|
Capital |
Actual Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Chemical Financial Corporation |
|
|
8.6 |
% |
|
|
11.7 |
% |
|
|
13.0 |
% |
Chemical Bank |
|
|
8.5 |
|
|
|
11.5 |
|
|
|
12.7 |
|
Minimum required for capital adequacy purposes |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
8.0 |
|
Minimum required for well-capitalized capital adequacy purposes |
|
|
5.0 |
|
|
|
6.0 |
|
|
|
10.0 |
|
On April 18, 2011, the shareholders of the Corporation approved an amendment to the restated
articles of incorporation to increase the number of authorized shares of common stock from
30,000,000 to 45,000,000.
Results of Operations
Net Interest Income
Interest income is the total amount earned on funds invested in loans, investment and other
securities, federal funds sold and interest-bearing deposits with unaffiliated banks and others.
Interest expense is the amount of interest paid on interest-bearing checking and savings accounts,
time deposits, short-term borrowings and FHLB advances. Net interest income, on a fully taxable
equivalent (FTE) basis, is the difference between interest income and interest
61
expense adjusted for the tax benefit on tax-exempt commercial loans and investment securities. Net
interest margin is calculated by dividing net interest income (FTE) by average interest-earning
assets, annualized as applicable. Net interest spread is the difference between the average yield
on interest-earning assets and the average cost of interest-bearing liabilities. Because
noninterest-bearing sources of funds, or free funds (principally demand deposits and shareholders
equity), also support earning assets, the net interest margin exceeds the net interest spread.
Net interest income (FTE) was $46.5 million in the second quarter of 2011, compared to $44.0
million in the second quarter of 2010 and $46.5 million in the first quarter of 2011. The increase
in net interest income (FTE), compared to the second quarter of 2010, was primarily attributable to
the acquisition of OAK on April 30, 2010.
The presentation of net interest income on an FTE basis is not in accordance with GAAP but is
customary in the banking industry. This non-GAAP measure ensures comparability of net interest
income arising from both taxable and tax-exempt loans and investment securities. The adjustments to
determine net interest income (FTE) were $1.3 million and $1.1 million for the second quarters of
2011 and 2010, respectively and $1.3 million for the first quarter of 2011. These adjustments were
computed using a 35% federal income tax rate.
Net interest income is the most important source of the Corporations earnings and thus is critical
in evaluating the results of operations. Changes in the Corporations net interest income are
influenced by a variety of factors, including changes in the level and mix of interest-earning
assets and interest-bearing liabilities, the level and direction of interest rates, the difference
between short-term and long-term interest rates (the steepness of the yield curve) and the general
strength of the economies in the Corporations markets. Risk management plays an important role in
the Corporations level of net interest income. The ineffective management of credit risk, and more
significantly interest rate risk, can adversely impact the Corporations net interest income.
Management monitors the Corporations consolidated statement of financial position to reduce the
potential adverse impact on net interest income caused by significant changes in interest rates.
The Corporations policies in this regard are further discussed under the subheading Market Risk.
The Federal Reserve Board influences the general market rates of interest, including the deposit
and loan rates offered by many financial institutions. The prime interest rate, which is the rate
offered on loans to borrowers with strong credit, was 3.25% at the end of 2008 and remained at this
historically low rate through June 30, 2011.
Net interest income (FTE) of $46.5 million in the second quarter of 2011 was $2.6 million, or 5.9%,
higher than net interest income (FTE) of $44.0 million in the second quarter of 2010. The increase
was due to an increase in the average volume of interest-earning assets that was partially offset
by an increase in the volume of interest-bearing liabilities. The increases were primarily
attributable to the acquisition of OAK on April 30, 2010. The average volume of interest-earning
assets in the second quarter of 2011 increased $393.8 million, or 8.7%, compared to the second
quarter of 2010. The average volume of interest-bearing liabilities in the second quarter of 2011
increased $230.7 million, or 6.4%, compared to the second quarter of 2010. Net interest margin was
3.78% in the second quarter of 2011, compared to 3.88% in the second quarter of 2010. The average
yield on interest-earning assets decreased 32 basis points to 4.45% in the second quarter of 2011,
from 4.77% in the second quarter of 2010, with the decline partially attributable to the
Corporation maintaining a higher level of liquidity during the second quarter of 2011 than in the
second quarter of 2010. The Corporations average cash deposits held at the Federal Reserve Bank of
Chicago (FRB) during the second quarter of 2011 were $424 million, compared to $289 million during
the second quarter of 2010. These cash deposits earned an interest rate of approximately 25 basis
points. The average cost of interest-bearing liabilities decreased 26 basis points to 0.85% in the
second quarter of 2011, from 1.11% in the second quarter of 2010. The decrease in the cost of
interest-bearing liabilities was attributable primarily to the lag effect of declines in market
interest rates beginning in 2008 and the Corporation utilizing its excess liquidity to pay-off
maturing higher-rate FHLB advances.
Net interest income (FTE) was $46.5 million in both the second quarter and first quarter of 2011.
The average volume of interest-earning assets and interest-bearing liabilities in the second
quarter of 2011 was relatively flat, compared to the first quarter of 2011. Net interest margin was
3.78% in both the second quarter and first quarter of 2011. The average yield on interest-earning
assets decreased 3 basis points to 4.45% in the second quarter of 2011,
62
from 4.48% in the first quarter of 2011. The average cost of interest-bearing liabilities decreased
2 basis points to 0.85% in the second quarter of 2011 from 0.87% in the first quarter of 2011. The
decrease in the yield on interest-earning assets and the cost of interest-bearing liabilities was
primarily attributable to the continued historic low interest rate environment.
The Corporations balance sheet has historically been liability sensitive, meaning that
interest-bearing liabilities have generally repriced more quickly than interest-earning assets.
Therefore, the Corporations net interest margin has historically increased in sustained periods of
declining interest rates and decreased in sustained periods of increasing interest rates. However,
during 2009 and 2010, the Corporation became more asset sensitive as it increased its holdings of
variable rate investment securities and cash deposits at the FRB to lessen the impact on net
interest income and net interest margin of rising interest rates. At June 30, 2011, approximately
43% of the Corporations investment securities were variable rate compared to 44% at December 31,
2010 and 42% at June 30, 2010. Approximately 28% of the Corporations loans were at variable
interest rates at both June 30, 2011 and December 31, 2010 compared to 27% at June 30, 2010.
The Corporation is primarily funded by core deposits which is a lower-cost funding base than
wholesale funding and historically has had a positive impact on the Corporations net interest
income and net interest margin. However, based on the historically low level of market interest
rates and the Corporations current low levels of interest rates on its core deposit transaction
accounts, further market interest rate reductions would likely not result in a significant decrease
in interest expense.
The following schedule presents the average daily balances of the Corporations major categories of
assets and liabilities, interest income and expense on an FTE basis, average interest rates earned
and paid on the assets and liabilities, net interest income (FTE), net interest spread and net
interest margin for the three and six months ended June 30, 2011 and 2010.
63
Average Balances, Tax Equivalent Interest and Effective Yields and Rates* (Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Tax |
|
|
Effective |
|
|
|
|
|
|
Tax |
|
|
Effective |
|
|
|
Average |
|
|
Equivalent |
|
|
Yield/ |
|
|
Average |
|
|
Equivalent |
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans** |
|
$ |
3,712,538 |
|
|
$ |
49,700 |
|
|
|
5.37 |
% |
|
$ |
3,443,507 |
|
|
$ |
48,715 |
|
|
|
5.67 |
% |
Taxable investment securities |
|
|
592,064 |
|
|
|
2,225 |
|
|
|
1.50 |
|
|
|
629,039 |
|
|
|
2,964 |
|
|
|
1.88 |
|
Tax-exempt investment securities |
|
|
168,085 |
|
|
|
2,116 |
|
|
|
5.04 |
|
|
|
136,479 |
|
|
|
1,848 |
|
|
|
5.42 |
|
Other securities |
|
|
26,755 |
|
|
|
368 |
|
|
|
5.52 |
|
|
|
25,753 |
|
|
|
295 |
|
|
|
4.59 |
|
Federal funds sold and interest-
bearing deposits with
unaffiliated banks and others |
|
|
429,148 |
|
|
|
281 |
|
|
|
0.26 |
|
|
|
299,965 |
|
|
|
204 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
4,928,590 |
|
|
|
54,690 |
|
|
|
4.45 |
|
|
|
4,534,743 |
|
|
|
54,026 |
|
|
|
4.77 |
|
Less: Allowance for loan losses |
|
|
91,497 |
|
|
|
|
|
|
|
|
|
|
|
88,534 |
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash due from banks |
|
|
108,993 |
|
|
|
|
|
|
|
|
|
|
|
111,842 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
65,159 |
|
|
|
|
|
|
|
|
|
|
|
64,613 |
|
|
|
|
|
|
|
|
|
Interest receivable and other assets |
|
|
243,999 |
|
|
|
|
|
|
|
|
|
|
|
218,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,255,244 |
|
|
|
|
|
|
|
|
|
|
$ |
4,841,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
790,197 |
|
|
$ |
362 |
|
|
|
0.18 |
% |
|
$ |
723,193 |
|
|
$ |
462 |
|
|
|
0.26 |
% |
Savings deposits |
|
|
1,148,380 |
|
|
|
663 |
|
|
|
0.23 |
|
|
|
1,086,083 |
|
|
|
1,085 |
|
|
|
0.40 |
|
Time deposits |
|
|
1,563,892 |
|
|
|
6,526 |
|
|
|
1.67 |
|
|
|
1,480,472 |
|
|
|
7,655 |
|
|
|
2.07 |
|
Short-term borrowings |
|
|
282,806 |
|
|
|
151 |
|
|
|
0.21 |
|
|
|
242,261 |
|
|
|
161 |
|
|
|
0.27 |
|
FHLB advances |
|
|
72,403 |
|
|
|
443 |
|
|
|
2.45 |
|
|
|
94,946 |
|
|
|
708 |
|
|
|
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,857,678 |
|
|
|
8,145 |
|
|
|
0.85 |
|
|
|
3,626,955 |
|
|
|
10,071 |
|
|
|
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
797,259 |
|
|
|
|
|
|
|
|
|
|
|
651,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowed funds |
|
|
4,654,937 |
|
|
|
|
|
|
|
|
|
|
|
4,278,564 |
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities |
|
|
34,807 |
|
|
|
|
|
|
|
|
|
|
|
34,030 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
565,500 |
|
|
|
|
|
|
|
|
|
|
|
528,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity |
|
$ |
5,255,244 |
|
|
|
|
|
|
|
|
|
|
$ |
4,841,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread (Average yield
earned minus average rate paid) |
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
|
|
|
|
|
|
|
|
|
|
3.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE) |
|
|
|
|
|
$ |
46,545 |
|
|
|
|
|
|
|
|
|
|
$ |
43,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (Net Interest
Income (FTE) divided by total
average interest-earning assets) |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Taxable equivalent basis using a federal income tax rate of 35%. |
|
** |
|
Nonaccrual loans and loans held-for-sale are included in average
balances reported and are included in the calculation of yields. Also,
tax equivalent interest includes net loan fees. |
64
Average Balances, Tax Equivalent Interest and Effective Yields and Rates* (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Tax |
|
|
Effective |
|
|
|
|
|
|
Tax |
|
|
Effective |
|
|
|
Average |
|
|
Equivalent |
|
|
Yield/ |
|
|
Average |
|
|
Equivalent |
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans** |
|
$ |
3,699,978 |
|
|
$ |
99,679 |
|
|
|
5.42 |
% |
|
$ |
3,218,708 |
|
|
$ |
90,883 |
|
|
|
5.68 |
% |
Taxable investment securities |
|
|
583,334 |
|
|
|
4,549 |
|
|
|
1.56 |
|
|
|
619,360 |
|
|
|
6,088 |
|
|
|
1.97 |
|
Tax-exempt investment securities |
|
|
169,158 |
|
|
|
4,362 |
|
|
|
5.16 |
|
|
|
121,001 |
|
|
|
3,334 |
|
|
|
5.51 |
|
Other securities |
|
|
26,943 |
|
|
|
491 |
|
|
|
3.67 |
|
|
|
23,950 |
|
|
|
377 |
|
|
|
3.17 |
|
Federal funds sold and interest-
bearing deposits with
unaffiliated banks and others |
|
|
466,478 |
|
|
|
590 |
|
|
|
0.26 |
|
|
|
311,408 |
|
|
|
420 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
4,945,891 |
|
|
|
109,671 |
|
|
|
4.46 |
|
|
|
4,294,427 |
|
|
|
101,102 |
|
|
|
4.74 |
|
Less: Allowance for loan losses |
|
|
91,940 |
|
|
|
|
|
|
|
|
|
|
|
86,342 |
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash due from banks |
|
|
110,597 |
|
|
|
|
|
|
|
|
|
|
|
102,404 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
65,346 |
|
|
|
|
|
|
|
|
|
|
|
59,309 |
|
|
|
|
|
|
|
|
|
Interest receivable and other assets |
|
|
245,454 |
|
|
|
|
|
|
|
|
|
|
|
192,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,275,348 |
|
|
|
|
|
|
|
|
|
|
$ |
4,562,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
825,385 |
|
|
$ |
780 |
|
|
|
0.19 |
% |
|
$ |
681,215 |
|
|
$ |
851 |
|
|
|
0.25 |
% |
Savings deposits |
|
|
1,147,954 |
|
|
|
1,348 |
|
|
|
0.24 |
|
|
|
1,033,771 |
|
|
|
2,116 |
|
|
|
0.41 |
|
Time deposits |
|
|
1,576,700 |
|
|
|
13,301 |
|
|
|
1.70 |
|
|
|
1,380,825 |
|
|
|
14,935 |
|
|
|
2.18 |
|
Short-term borrowings |
|
|
276,816 |
|
|
|
301 |
|
|
|
0.22 |
|
|
|
240,439 |
|
|
|
321 |
|
|
|
0.27 |
|
FHLB advances |
|
|
72,952 |
|
|
|
885 |
|
|
|
2.45 |
|
|
|
90,553 |
|
|
|
1,582 |
|
|
|
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,899,807 |
|
|
|
16,615 |
|
|
|
0.86 |
|
|
|
3,426,803 |
|
|
|
19,805 |
|
|
|
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
781,037 |
|
|
|
|
|
|
|
|
|
|
|
602,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowed funds |
|
|
4,680,844 |
|
|
|
|
|
|
|
|
|
|
|
4,028,938 |
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities |
|
|
31,410 |
|
|
|
|
|
|
|
|
|
|
|
31,772 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
563,094 |
|
|
|
|
|
|
|
|
|
|
|
501,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity |
|
$ |
5,275,348 |
|
|
|
|
|
|
|
|
|
|
$ |
4,562,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread (Average yield
earned minus average rate paid) |
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
|
|
|
|
|
|
|
|
|
|
3.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE) |
|
|
|
|
|
$ |
93,056 |
|
|
|
|
|
|
|
|
|
|
$ |
81,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (Net Interest
Income (FTE) divided by total
average interest-earning assets) |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Taxable equivalent basis using a federal income tax rate of 35%. |
|
** |
|
Nonaccrual loans and loans held-for-sale are included in average
balances reported and are included in the calculation of yields. Also,
tax equivalent interest includes net loan fees. |
65
The following schedule allocates the dollar change in net interest income (FTE) between the portion
attributable to changes in the average volume of interest-earning assets and interest-bearing
liabilities, including changes in the mix of assets and liabilities and changes in average interest
rates earned and paid.
Volume and Rate Variance Analysis* (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2011 Compared to 2010 |
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
Due to Changes in |
|
|
Combined |
|
|
|
Average |
|
|
Average |
|
|
Increase/ |
|
|
|
Volume** |
|
|
Yield/Rate** |
|
|
(Decrease) |
|
Changes in Interest Income on Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
3,636 |
|
|
$ |
(2,651 |
) |
|
$ |
985 |
|
Taxable investment/other securities |
|
|
(156 |
) |
|
|
(510 |
) |
|
|
(666 |
) |
Tax-exempt investment securities |
|
|
407 |
|
|
|
(139 |
) |
|
|
268 |
|
Federal funds sold and interest-bearing deposits with
unaffiliated banks and others |
|
|
85 |
|
|
|
(8 |
) |
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Total change in interest income on interest-earning assets |
|
|
3,972 |
|
|
|
(3,308 |
) |
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Interest Expense on Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
30 |
|
|
|
(130 |
) |
|
|
(100 |
) |
Savings deposits |
|
|
31 |
|
|
|
(453 |
) |
|
|
(422 |
) |
Time deposits |
|
|
476 |
|
|
|
(1,605 |
) |
|
|
(1,129 |
) |
Short-term borrowings |
|
|
25 |
|
|
|
(35 |
) |
|
|
(10 |
) |
FHLB advances |
|
|
(150 |
) |
|
|
(115 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
Total change in interest expense on interest-bearing
liabilities |
|
|
412 |
|
|
|
(2,338 |
) |
|
|
(1,926 |
) |
|
|
|
|
|
|
|
|
|
|
Total Change in Net Interest Income (FTE) |
|
$ |
3,560 |
|
|
$ |
(970 |
) |
|
$ |
2,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Taxable equivalent basis using a federal income tax rate of 35%. |
|
** |
|
The change in interest income and interest expense due to both volume
and rate has been allocated to the volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the
change in each. |
66
Volume and Rate Variance Analysis* (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2011 Compared to 2010 |
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
Due to Changes in |
|
|
Combined |
|
|
|
Average |
|
|
Average |
|
|
Increase/ |
|
|
|
Volume** |
|
|
Yield/Rate** |
|
|
(Decrease) |
|
Changes in Interest Income on Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
13,079 |
|
|
$ |
(4,283 |
) |
|
$ |
8,796 |
|
Taxable investment/other securities |
|
|
(286 |
) |
|
|
(1,139 |
) |
|
|
(1,425 |
) |
Tax-exempt investment securities |
|
|
1,256 |
|
|
|
(228 |
) |
|
|
1,028 |
|
Federal funds sold and interest-bearing deposits with
unaffiliated banks and others |
|
|
194 |
|
|
|
(24 |
) |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
Total change in interest income on interest-earning assets |
|
|
14,243 |
|
|
|
(5,674 |
) |
|
|
8,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Interest Expense on Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
145 |
|
|
|
(216 |
) |
|
|
(71 |
) |
Savings deposits |
|
|
154 |
|
|
|
(922 |
) |
|
|
(768 |
) |
Time deposits |
|
|
1,914 |
|
|
|
(3,548 |
) |
|
|
(1,634 |
) |
Short-term borrowings |
|
|
45 |
|
|
|
(65 |
) |
|
|
(20 |
) |
FHLB advances |
|
|
(271 |
) |
|
|
(426 |
) |
|
|
(697 |
) |
|
|
|
|
|
|
|
|
|
|
Total change in interest expense on interest-bearing
liabilities |
|
|
1,987 |
|
|
|
(5,177 |
) |
|
|
(3,190 |
) |
|
|
|
|
|
|
|
|
|
|
Total Change in Net Interest Income (FTE) |
|
$ |
12,256 |
|
|
$ |
(497 |
) |
|
$ |
11,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Taxable equivalent basis using a federal income tax rate of 35%. |
|
** |
|
The change in interest income and interest expense due to both volume
and rate has been allocated to the volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the
change in each. |
Provision for Loan Losses
The provision for loan losses (provision) is an increase to the allowance to provide for probable
losses inherent in the originated loan portfolio and for impairment of pools of acquired loans that
results from the Corporation experiencing a decrease in cash flows of acquired loans compared to
expected cash flows estimated at the acquisition date. The Corporation did not recognize any
provision related to the acquired portfolio during the six months ended June 30, 2011 as there were
no significant changes in expected cash flows compared to cash flows estimated at the date of
acquisition.
The provision was $7.0 million in the second quarter of 2011, compared to $7.5 million in the first
quarter of 2011 and $12.7 million in the second quarter of 2010. The Corporation experienced net
loan charge-offs of $6.9 million in the second quarter of 2011, compared to $7.4 million in the
first quarter of 2011 and $7.3 million in the second quarter of 2010. Net loan charge-offs as a
percentage of average loans were 0.75% (annualized) in the second quarter of 2011, compared to
0.80% in the first quarter of 2011 and 0.86% in the second quarter of 2010. Net loan charge-offs of
commercial, real estate commercial and real estate construction and land development loans totaled
$4.3 million in the second quarter of 2011, compared to $5.6 million in the first quarter of 2011
and $4.0 million in the second quarter of 2010 and represented 63% of total net loan charge-offs
during the second quarter of 2011, compared to 76% during the first quarter of 2011 and 54% during
the second quarter of 2010. The commercial loan portfolios net loan charge-offs in the first six
months of 2011 and in 2010 were not concentrated in any one industry or borrower. Net loan
charge-offs of residential real estate and consumer loans totaled $2.6 million in the second
quarter of 2011, compared to $1.7 million in the first quarter of 2011 and $3.4 million in the
second quarter of 2010.
67
The Corporations provision of $7.0 million in the second quarter of 2011 approximated net loan
charge-offs for the quarter, although was $0.5 million lower than the provision in the first
quarter of 2011 of $7.5 million. The level of the provision in the second quarter of 2011 was
reflective of the credit quality of the loan portfolio that included lower net loan charge-offs,
modest decreases in nonperforming loans and no significant changes in risk grade categories of the
commercial loan portfolio. The decrease in net loan charge-offs in the second quarter of 2011,
compared to the first quarter of 2011, was attributable to the stabilization in overall credit
quality of the Corporations loan portfolio. It is managements belief that the overall credit
quality of the Corporations loan portfolio during the six months ended June 30, 2011 continues to
be impacted by the economic environment in the State of Michigan, with the state unemployment rate
at 10.5% at June 30, 2011, compared to 10.3% at March 31, 2011 and 11.1% at December 31, 2010. The
Corporations loan portfolio has no concentration in the automotive sector and management has
identified its direct exposure to this industry as not material, although the economic impact of
the decline in the production of automobiles continues to have an effect on the general economy
within Michigan.
Noninterest Income
Noninterest income was $10.9 million and $21.7 million for the three and six months ended June 30,
2011, respectively. The following includes the major components of noninterest income during the
three months ended June 30, 2011, March 31, 2011 and June 30, 2010 and the six months ended June
30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
Service charges on deposit accounts |
|
$ |
4,628 |
|
|
$ |
4,096 |
|
|
$ |
5,091 |
|
|
$ |
8,724 |
|
|
$ |
9,482 |
|
Wealth management revenue |
|
|
3,026 |
|
|
|
2,766 |
|
|
|
2,603 |
|
|
|
5,792 |
|
|
|
4,895 |
|
Electronic banking fees |
|
|
1,443 |
|
|
|
1,607 |
|
|
|
1,357 |
|
|
|
3,050 |
|
|
|
2,420 |
|
Other fees for customer services |
|
|
897 |
|
|
|
769 |
|
|
|
668 |
|
|
|
1,666 |
|
|
|
1,346 |
|
Mortgage banking revenue |
|
|
499 |
|
|
|
1,064 |
|
|
|
915 |
|
|
|
1,563 |
|
|
|
1,633 |
|
Insurance commissions |
|
|
388 |
|
|
|
282 |
|
|
|
308 |
|
|
|
670 |
|
|
|
575 |
|
Other |
|
|
21 |
|
|
|
188 |
|
|
|
58 |
|
|
|
209 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Income |
|
$ |
10,902 |
|
|
$ |
10,772 |
|
|
$ |
11,000 |
|
|
$ |
21,674 |
|
|
$ |
20,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income of $10.9 million in the second quarter of 2011 increased $0.1 million, or 1.2%,
compared to $10.8 million in the first quarter of 2011, with the increase attributable to higher
service charges on deposit accounts and wealth management revenue offset by lower mortgage banking
revenue.
Service charges on deposit accounts of $4.6 million in the second quarter of 2011 increased $0.5
million, or 13%, compared to $4.1 million in the first quarter of 2011. Historically, the
Corporations service charges on deposit accounts are lowest in the first quarter, in part, due to
it being the quarter with the fewest days.
Wealth management revenue of $3.0 million in the second quarter of 2011 increased $0.2 million, or
9.4%, compared to $2.8 million in the first quarter of 2011, due primarily to increases in assets
under management resulting from gains in the equity markets and increases in sales of mutual funds,
annuity products and marketable securities through the Corporations Chemical Financial Advisors
program.
Mortgage banking revenue of $0.5 million in the second quarter of 2011 decreased $0.6 million, or
53%, compared to $1.1 million in the first quarter of 2011 due primarily to a decrease in the
volume of loans sold. The Corporation sold $31 million of real estate residential loans in the
secondary mortgage market during the second quarter of 2011, compared to $69 million during the
first quarter of 2011. The Corporation expects the volume of loans sold to remain low throughout
the remainder of 2011.
68
Noninterest income of $10.9 million in the second quarter of 2011 decreased $0.1 million, or 0.9%,
compared to $11.0 million in the second quarter of 2010, with the decrease attributable to the
impact of changes in regulatory requirements regarding the processing of certain electronic ATM and
debit card transactions and lower mortgage banking revenue resulting from declines in the volume of
loans sold that were mostly offset by higher service charges and electronic banking fees
attributable to the acquisition of OAK and higher wealth management revenue resulting from
increases in assets under management and higher equity market valuations upon which fees are
assessed.
Operating Expenses
Total operating expenses were $33.4 million and $68.8 million in the three and six months ended
June 30, 2011, respectively. The following includes the major categories of operating expenses
during the three months ended June 30, 2011, March 31, 2011 and June 30, 2010 and the six months
ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
Salaries and wages |
|
$ |
14,970 |
|
|
$ |
14,949 |
|
|
$ |
14,573 |
|
|
$ |
29,919 |
|
|
$ |
26,143 |
|
Employee benefits |
|
|
3,098 |
|
|
|
3,376 |
|
|
|
2,641 |
|
|
|
6,474 |
|
|
|
5,578 |
|
Occupancy |
|
|
3,099 |
|
|
|
3,338 |
|
|
|
2,734 |
|
|
|
6,437 |
|
|
|
5,571 |
|
Equipment and software |
|
|
3,110 |
|
|
|
2,722 |
|
|
|
3,698 |
|
|
|
5,832 |
|
|
|
6,412 |
|
Outside processing / service fees |
|
|
1,640 |
|
|
|
1,668 |
|
|
|
1,081 |
|
|
|
3,308 |
|
|
|
2,031 |
|
FDIC insurance premiums |
|
|
1,219 |
|
|
|
1,769 |
|
|
|
1,920 |
|
|
|
2,988 |
|
|
|
3,408 |
|
Professional fees |
|
|
1,290 |
|
|
|
1,259 |
|
|
|
1,890 |
|
|
|
2,549 |
|
|
|
3,307 |
|
Loan collection costs |
|
|
871 |
|
|
|
1,128 |
|
|
|
1,173 |
|
|
|
1,999 |
|
|
|
2,294 |
|
Other real estate and
repossessed asset
expenses |
|
|
559 |
|
|
|
964 |
|
|
|
637 |
|
|
|
1,523 |
|
|
|
1,259 |
|
Postage and courier |
|
|
830 |
|
|
|
822 |
|
|
|
767 |
|
|
|
1,652 |
|
|
|
1,549 |
|
Advertising and marketing |
|
|
674 |
|
|
|
514 |
|
|
|
620 |
|
|
|
1,188 |
|
|
|
1,094 |
|
Intangible asset amortization |
|
|
479 |
|
|
|
511 |
|
|
|
337 |
|
|
|
990 |
|
|
|
485 |
|
Supplies |
|
|
445 |
|
|
|
406 |
|
|
|
421 |
|
|
|
851 |
|
|
|
784 |
|
Telephone |
|
|
308 |
|
|
|
441 |
|
|
|
462 |
|
|
|
749 |
|
|
|
843 |
|
Other |
|
|
821 |
|
|
|
1,522 |
|
|
|
1,696 |
|
|
|
2,343 |
|
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
$ |
33,413 |
|
|
$ |
35,389 |
|
|
$ |
34,650 |
|
|
$ |
68,802 |
|
|
$ |
63,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses of $33.4 million in the second quarter of 2011 decreased $2.0 million, or
5.6%, compared to $35.4 million in the first quarter of 2011, with the decrease primarily due to
lower FDIC insurance premiums, loan collection costs, other real estate (ORE) and repossessed asset
(RA) expenses and other expenses.
FDIC insurance premiums of $1.2 million in the second quarter of 2011 decreased $0.6 million, or
31%, compared to $1.8 million in the first quarter of 2011, with the decrease due primarily to a
lower assessment rate. Effective April 1, 2011, the Corporations assessment base changed from
average deposits to average assets less average Tier 1 capital and the assessment rate declined
from approximately 16 basis points to 9 basis points, on an annualized basis. The Corporations
FDIC insurance premiums for the remainder of 2011 are expected to be approximately $1.2 million
each quarter.
Loan collection costs of $0.9 million in the second quarter of 2011 decreased $0.2 million, or 23%,
compared to $1.1 million in the first quarter of 2011, with the decrease due partially to
stabilization in credit quality of the Corporations nonperforming loans.
69
ORE and RA expenses of $0.6 million in the second quarter of 2011 decreased $0.4 million, or 42%,
compared to $1.0 million in the first quarter of 2011, with the decrease due partially to
stabilization in real estate values of ORE properties. The Corporation recognized a net gain from
the sale and/or writedown of ORE properties of $0.1 million in the second quarter of 2011, compared
to a net loss of $0.3 million in the first quarter of 2011.
Other expenses of $0.8 million in the second quarter of 2011 decreased $0.7 million, or 46%,
compared to $1.5 million in the first quarter of 2011, with the decrease primarily due to the
reversal of $1.2 million of state tax expense accruals resulting from the elimination of a
contingent liability. At June 30, 2011, the Corporation had $0.5 million of remaining contingent
state tax expense accruals.
Total operating expenses of $33.4 million in the second quarter of 2011 decreased $1.3 million, or
3.6%, compared to $34.7 million in the second quarter of 2010. The decrease was primarily
attributable to the second quarter of 2010 including $2.3 million of OAK acquisition-related
transaction expenses and the reversal of $1.2 million of state tax expense accruals in the second
quarter of 2011, that were partially offset by increased operating expenses due to the acquisition
of OAK. Total operating expenses of $68.8 million in the six months ended June 30, 2011 were $5.0
million higher than the same period of 2010 due primarily to the acquisition of OAK.
Income Tax Expense
The Corporations effective federal income tax rate was 30.1% and 30.0% for the three and six
months ended June 30, 2011, respectively, compared to 32.9% and 27.2% for the three and six months
ended June 30, 2010, respectively. The difference between the federal statutory income tax rate and
the Corporations effective federal income tax rate is primarily a function of the proportion of
the Corporations interest income exempt from federal taxation, nondeductible interest expense,
nondeductible acquisition expenses and other nondeductible expenses relative to pre-tax net income
and tax credits.
The Corporation records income tax expense for interim periods based on its best estimate of the
effective income tax rate expected to be applicable for the full year. However, when a reliable
estimate for the full year cannot be made, the Corporation utilizes the actual effective income tax
rate on a year-to-date basis. The Corporation recorded income tax expense for the three and six
month periods ended June 30, 2011 and 2010 using its best estimate of the effective income tax rate
expected for the full year and applied that rate on a year-to-date basis.
Liquidity Risk
Liquidity risk is the possibility of the Corporation being unable to meet current and future
financial obligations in a timely manner and the adverse impact on net interest income if the
Corporation was unable to meet its funding requirements at a reasonable cost.
Liquidity is managed to ensure stable, reliable and cost-effective sources of funds are available
to satisfy deposit withdrawals and lending and investment opportunities. The Corporations largest
sources of liquidity on a consolidated basis are the deposit base that comes from consumer,
business and municipal customers within the Corporations local markets, principal payments on
loans, cash held at the FRB, unpledged investment securities available-for-sale and federal funds
sold. Total deposits decreased $81 million, or 1.9%, during the six months ended June 30, 2011,
with the majority of the decrease due to the Corporation paying off maturing brokered deposits
acquired in the OAK transaction. The Corporations loan-to-deposit ratio increased to 88% at June
30, 2011 from 85% and 87% at December 31, 2010 and June 30, 2010, respectively. At June 30, 2011,
the Corporation had $265 million of cash deposits held at the FRB that were not invested in federal
funds sold due to the low interest rate environment. In addition, at June 30, 2011, the Corporation
had $151 million of unpledged investment securities available-for-sale. The Corporation also has
available unused wholesale sources of liquidity, including FHLB advances and borrowings from the
discount window of the FRB.
Chemical Bank is a member of the FHLB and as such has access to short-term and long-term advances
from the FHLB that are generally secured by real estate residential first lien loans. The
Corporation considers advances from
70
the FHLB as its primary wholesale source of liquidity. FHLB
advances decreased $2.2 million during the six months ended June 30, 2011 to $72 million at that
date. The Corporations additional borrowing availability from the FHLB, based on its FHLB capital
stock and subject to certain requirements, was $269 million at June 30, 2011. Chemical Bank can
also borrow from the FRBs discount window to meet short-term liquidity requirements. These
borrowings are required to be secured by investment securities and/or certain loan types, with each
category of assets carrying various borrowing capacity percentages. At June 30, 2011, Chemical Bank
maintained an unused borrowing capacity of $30 million with the FRBs discount window based upon
pledged collateral as of that date, although it is managements opinion that this borrowing
capacity could be expanded, if deemed necessary, as Chemical Bank has a significant amount of
additional assets that could be used as collateral at the FRBs discount window.
The Corporation manages its liquidity primarily through dividends from Chemical Bank. The
Corporation manages its liquidity position to provide the cash necessary to pay dividends to
shareholders, invest in new subsidiaries, enter new banking markets, pursue investment
opportunities and satisfy other operating requirements.
Federal and state banking laws place certain restrictions on the amount of dividends that a bank
may pay to its parent company. During the first six months of 2011, Chemical Bank paid $11.0
million in cash dividends to the Corporation, and the Corporation paid cash dividends to
shareholders of $11.0 million. At June 30, 2011, the Corporation maintained $5 million of cash
which it held in a deposit account at Chemical Bank. During 2010, Chemical Bank paid $21.3 million
in dividends to the Corporation and the Corporation paid cash dividends to shareholders of $21.2
million. The earnings of Chemical Bank have been the principal source of funds to pay cash
dividends to the Corporations shareholders. Over the long term, cash dividends to shareholders are
dependent upon earnings, as well as capital requirements, regulatory restraints and other factors
affecting Chemical Bank.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial
instruments due primarily to changes in interest rates. Interest rate risk is the Corporations
primary market risk and results from timing differences in the repricing of interest rate sensitive
assets and liabilities and changes in relationships between rate indices due to changes in interest
rates. The Corporations net interest income is largely dependent upon the effective management of
interest rate risk. The Corporations goal is to avoid a significant decrease in net interest
income, and thus an adverse impact on the profitability of the Corporation, in periods of changing
interest rates. Sensitivity of earnings to interest rate changes arises when yields on assets
change differently from the interest costs on liabilities. Interest rate sensitivity is determined
by the amount of interest-earning assets and interest-bearing liabilities repricing within a
specific time period and the magnitude by which interest rates change on the various types of
interest-earning assets and interest-bearing liabilities. The management of interest rate
sensitivity includes monitoring the maturities and repricing opportunities of interest-earning
assets and interest-bearing liabilities. The Corporations interest rate risk is managed through
policies and risk limits approved by the boards of directors of the Corporation and Chemical Bank
and an Asset and Liability Committee (ALCO). The ALCO, which is comprised of executive and senior
management from various areas of the Corporation and Chemical Bank, including finance, lending,
investments and deposit gathering, meets regularly to execute asset and liability management
strategies. The ALCO establishes guidelines and monitors the sensitivity of earnings to changes in
interest rates. The goal of the ALCO process is to manage the impact on net interest income and the
net present value of future cash flows of probable changes in interest rates within authorized risk
limits.
The primary technique utilized by the Corporation to measure its interest rate risk is simulation
analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest
income under a variety of scenarios that incorporate changes in interest rates, the shape of the
Treasury yield curve, interest rate relationships and the mix of assets and liabilities and loan
prepayments. These forecasts are compared against net interest income projected in a stable
interest rate environment. While many assets and liabilities reprice either at maturity or in
accordance with their contractual terms, several balance sheet components demonstrate
characteristics that require an evaluation to more accurately reflect their repricing behavior. Key
assumptions in the simulation analysis include prepayments on loans, probable calls of investment
securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity and
customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation
and revision in a dynamic environment. As a result, the simulation analysis cannot precisely
forecast the impact of rising and falling interest rates on net interest income. Actual results
will differ from simulated results due to many
71
other factors, including changes in balance sheet
components, interest rate changes, changes in market conditions and management strategies.
The Corporations interest rate sensitivity is estimated by first forecasting the next twelve
months of net interest income under an assumed environment of constant market interest rates. The
Corporation then compares the results of various simulation analyses to the constant interest rate
forecast (base case). At June 30, 2011, the Corporation projected the change in net interest income
during the next twelve months assuming short-term market interest rates were to uniformly and
gradually increase or decrease by up to 200 basis points in a parallel fashion over the entire
yield curve during the same time period. These projections were based on the Corporations assets
and liabilities remaining static over the next twelve months, while factoring in probable calls and
prepayments of certain investment securities and real estate residential and consumer loans. The
ALCO regularly monitors the Corporations forecasted net interest income sensitivity to ensure that
it remains within established limits.
A summary of the Corporations interest rate sensitivity at June 30, 2011 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve month interest rate change projection (in basis points) |
|
-200 |
|
-100 |
|
0 |
|
+100 |
|
+200 |
|
|
|
Percent change in net interest income vs. constant rates |
|
|
(5.3 |
)% |
|
|
(2.7 |
)% |
|
|
|
|
|
|
1.4 |
% |
|
|
1.8 |
% |
At June 30, 2011, the Corporations model simulations projected that 100 and 200 basis point
increases in interest rates would result in positive variances in net interest income of 1.4% and
1.8%, respectively, relative to the base case over the next 12-month period, while decreases in
interest rates of 100 and 200 basis points would result in negative variances in net interest
income of 2.7% and 5.3%, respectively, relative to the base case over the next 12-month period. The
likelihood of a decrease in interest rates beyond 100 basis points at June 30, 2011 was considered
to be unlikely given prevailing interest rate levels.
The Corporations mix of interest-earning assets and interest-bearing liabilities has historically
resulted in its interest rate position being liability sensitive. To mitigate this, during 2010 and
2009, the Corporation adjusted its liability sensitive position by significantly increasing the
amount of variable rate instruments in its investment securities and loan portfolios. Variable rate
investment securities at June 30, 2011 of $344 million comprised 43% of total investment securities
at that date, compared to $325 million, or 44% of total investment securities, at December 31, 2010
and $342 million, or 42% of total investment securities, at June 30, 2010. In addition, the
Corporations percentage of loans at variable interest rates were approximately 28% at both June
30, 2011 and December 31, 2010, compared to 27% at June 30, 2010.
72
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information concerning quantitative and qualitative disclosures about market risk is contained in
the discussion regarding interest rate risk and sensitivity under the captions Liquidity Risk and
Market Risk herein and in the Corporations Annual Report on Form 10-K for the year ended
December 31, 2010.
The Corporation does not believe that there has been a material change in the nature or categories
of the Corporations primary market risk exposure, or the particular markets that present the
primary risk of loss to the Corporation. As of the date of this report, the Corporation does not
know of or expect there to be any material change in the general nature of its primary market risk
exposure in the near term. The methods by which the Corporation manages its primary market risk
exposure, as described in its Annual Report on Form 10-K for the year ended December 31, 2010, have
not changed materially during the current year. As of the date of this report, the Corporation does
not expect to make material changes in those methods in the near term. The Corporation may change
those methods in the future to adapt to changes in circumstances or to implement new techniques.
The Corporations market risk exposure is mainly comprised of its vulnerability to interest rate
risk. Prevailing interest rates and interest rate relationships are largely determined by market
factors that are beyond the Corporations control. All information provided in response to this
item consists of forward-looking statements. Reference is made to the section captioned
Forward-Looking Statements in this report for a discussion of the limitations on the
Corporations responsibility for such statements. In this discussion, near term means a period of
one year following the date of the most recent consolidated statement of financial position
contained in this report.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Corporations
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Corporations disclosure controls and procedures. Based on and
as of the time of that evaluation, the Corporations management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Corporations disclosure controls and
procedures were effective as of the end of the period covered by this report. There was no change
in the Corporations internal control over financial reporting that occurred during the three
months ended June 30, 2011 that has materially affected, or that is reasonably likely to materially
affect, the Corporations internal control over financial reporting.
73
Part II. Other Information
Item 1A. Risk Factors
Information concerning risk factors is contained in the discussion in Item 1A, Risk Factors, in
the Corporations Annual Report on Form 10-K for the year ended December 31, 2010. As of the date
of this report, the Corporation does not believe that there has been a material change in the
nature or categories of the Corporations risk factors, as compared to the information disclosed in
the Corporations Annual Report on Form 10-K for the year ended December 31, 2010.
74
Item 6. Exhibits
Exhibits. The following exhibits are filed as part of this report on Form 10-Q:
|
|
|
Exhibit |
|
|
Number |
|
Document |
|
|
|
3.1
|
|
Restated Articles of Incorporation. Previously filed as Exhibit 3.1 to the
registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2011,
filed with the SEC on May 5, 2011. Here incorporated by reference. |
|
|
|
3.2
|
|
Bylaws. Previously filed as Exhibit 3.2 to the registrants Current Report on
Form 8-K dated January 20, 2009, filed with the SEC on January 23, 2009. Here
incorporated by reference. |
|
|
|
4.1
|
|
Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference. |
|
|
|
4.2
|
|
Bylaws. Exhibit 3.2 is here incorporated by reference. |
|
|
|
10.1
|
|
Amended and Restated Stock Incentive Plan of 2006. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. §1350. |
|
|
|
101.1
|
|
Interactive Data File.* |
|
|
*
|
As provided in Rule 406T of
Regulation S-T, this information shall not be deemed
Filed for purposes of Section 11 and 12 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to liability under those sections. |
75
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CHEMICAL FINANCIAL CORPORATION
|
|
Date: August 3, 2011 |
By: |
/s/ David B. Ramaker
|
|
|
|
David B. Ramaker |
|
|
|
Chairman of the Board, Chief Executive Officer and
President
(Principal Executive Officer) |
|
|
|
|
|
Date: August 3, 2011 |
By: |
/s/ Lori A. Gwizdala
|
|
|
|
Lori A. Gwizdala |
|
|
|
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer) |
|
76
Exhibit Index
Exhibits. The following exhibits are filed as part of this report on Form 10-Q:
|
|
|
Exhibit |
|
|
Number |
|
Document |
|
|
|
3.1
|
|
Restated Articles of Incorporation. Previously filed as Exhibit 3.1 to the
registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2011,
filed with the SEC on May 5, 2011. Here incorporated by reference. |
|
|
|
3.2
|
|
Bylaws. Previously filed as Exhibit 3.2 to the registrants Current Report on
Form 8-K dated January 20, 2009, filed with the SEC on January 23, 2009. Here
incorporated by reference. |
|
|
|
4.1
|
|
Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference. |
|
|
|
4.2
|
|
Bylaws. Exhibit 3.2 is here incorporated by reference. |
|
|
|
10.1
|
|
Amended and Restated Stock Incentive Plan of 2006. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. §1350. |
|
|
|
101.1
|
|
Interactive Data File.* |
|
*
|
As provided in Rule 406T of
Regulation S-T, this information shall not be deemed
Filed for purposes of Section 11 and 12 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to liability under those sections. |
77