Company Quick10K Filing
Quick10K
Chemical Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$44.01 72 $3,150
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-23 Earnings, Other Events, Exhibits
8-K 2019-04-10 Regulation FD, Exhibits
8-K 2019-01-28 Other Events, Exhibits
8-K 2019-01-28 Enter Agreement, Officers, Amend Bylaw, Exhibits
8-K 2019-01-28 Earnings, Regulation FD, Exhibits
8-K 2019-01-28 Other Events, Exhibits
8-K 2019-01-22 Other Events
8-K 2019-01-11 Regulation FD, Exhibits
8-K 2018-11-06 Regulation FD, Exhibits
8-K 2018-10-23 Earnings, Other Events, Exhibits
8-K 2018-10-09 Regulation FD, Exhibits
8-K 2018-09-05 Regulation FD, Exhibits
8-K 2018-07-25 Other Events, Exhibits
8-K 2018-07-24 Earnings, Other Events, Exhibits
8-K 2018-07-11 Officers, Exhibits
8-K 2018-07-10 Regulation FD, Exhibits
8-K 2018-07-03 Officers, Exhibits
8-K 2018-04-30 Shareholder Vote
8-K 2018-04-24 Earnings, Other Events, Exhibits
8-K 2018-04-10 Regulation FD, Exhibits
8-K 2018-02-08 Regulation FD, Exhibits
8-K 2018-01-26 Amend Bylaw, Exhibits
8-K 2018-01-23 Earnings, Other Events, Exhibits
8-K 2018-01-09 Regulation FD, Exhibits
BLK BlackRock 72,530
MUFG Mitsubishi Ufj Financial Group 65,260
AGN Allergan 48,020
TCS Container Store 425
PCSB Pcsb Financial 345
RDHL Redhill Biopharma 241
AREX Approach Resources 36
USBL United States Basketball League 0
BASC Biostar Angel Stem Cell 0
PCC Powercomm Holdings 0
CHFC 2018-12-31
Part I.
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Note 1, Note 2 and Note 5 To Our Consolidated Financial Statements Contain Additional Information Related To Acquired Loans.
Note 17 To Our Consolidated Financial Statements Contains Additional Information Related To Income Taxes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Note 1: Summary of Significant Accounting Policies
Note 2: Mergers and Acquisitions
Note 3: Fair Value Measurements
Note 4: Investment Securities
Note 5: Loans
Note 6: Premises and Equipment
Note 7: Other Real Estate Owned and Repossessed Assets
Note 8: Goodwill
Note 9: Loan Servicing Rights
Note 10: Other Intangible Assets
Note 11: Derivative Instruments and Balance Sheet Offsetting
Note 12: Investments in Qualified Affordable Housing Projects, Federal Historic Projects and New Market Tax Credits
Note 13: Commitments, Contingencies and Guarantees
Note 14: Deposits
Note 15: Borrowings and Other Short-Term Liabilities
Note 16: Revenue From Contracts with Customers
Note 17: Income Taxes
Note 18: Share-Based Compensation
Note 19: Retirement Plans
Note 20: Equity
Note 21: Regulatory Capital and Reserve Requirements
Note 22: Parent Company Only Financial Statements
Note 23: Earnings per Common Share
Note 24: Accumulated Other Comprehensive Loss
Note 25: Summary of Quarterly Statements of Income (Unaudited)
Note 26: Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV.
Item 15. Exhibits, Financial Statement Schedules.
EX-10.28 exhibit1028ryanemploymenta.htm
EX-10.29 chfc201810-kexhibit1029for.htm
EX-10.30 chfc201810-kexhibit1030for.htm
EX-10.31 chfc201810-kexhibit1031for.htm
EX-10.32 chfc201810-kexhibit1032for.htm
EX-21 chfc201810-kexhibit21subsi.htm
EX-23.1 chfc201810-kexhibit231cons.htm
EX-23.2 chfc201810-kexhibit232cons.htm
EX-24 chfc201810-kexhibit24power.htm
EX-31.1 chfc201810-kexhibit311cert.htm
EX-31.2 chfc201810-kexhibit312cert.htm
EX-32 chfc201810-kexhibit320cert.htm
EX-99.1 chfc201810-kexhibit991dire.htm

Chemical Financial Earnings 2018-12-31

CHFC 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 chfc20181231-10xk.htm 10-K CHFC 2018 Document
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K 

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2018.
or
¨ 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)
Michigan
 
38-2022454
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
333 W. Fort Street, Suite 1800, Detroit, Michigan
 
48226
(Address of Principal Executive Offices)
 
(Zip Code)
(800) 867-9757
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $1 Par Value Per Share
 
The NASDAQ Stock Market
(Title of Class)
 
(Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Emerging growth company ¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes  ¨    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates of the registrant as of June 30, 2018, determined using the closing price of the registrant's common stock on June 29, 2018 of $55.67 per share, as reported on The NASDAQ Stock Market®, was $3.87 billion. The number of shares outstanding of the registrant's Common Stock, $1 par value per share, as of February 25, 2019, was 71,478,598 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of Chemical Financial Corporation for the May 7, 2019 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.
 
 
 
 
 



CHEMICAL FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy and us. Words and phrases such as "anticipates," "believes," "continue," "estimates," "expects," "forecasts," "future," "intends," "is likely," "judgment," "look ahead," "look forward," "on schedule," "opinion," "opportunity," "plans," "potential," "predicts," "probable," "projects," "should," "strategic," "trend," "will," and variations of such words and phrases or similar expressions are intended to identify such forward-looking statements. These statements include, among others, statements related to: our expectation to continue to pay quarterly dividends through 2019, our belief that unrealized losses on our investment securities at December 31, 2018 were temporary in nature, our strategic plan to develop customer relationships that will drive core deposit growth and stability, management's belief that our commercial and commercial real estate loan portfolios are generally well-secured, management's opinion that our borrowing capacity could be expanded, the impact of projected changes in net interest income assuming changes to short-term market interest rates, statements regarding our risk exposure in our primary markets, statements related to our proposed merger with TCF Financial Corporation ("TCF"), including the expected timing of the consummation of the merger, as well as statements related to the anticipated effects on results of operations and financial condition from expected developments. All statements referencing future time periods are forward-looking.

Management's 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 management's 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 economies on the banking industry, generally, and on us, specifically, are also inherently uncertain.

Forward-looking statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which change over time, are difficult to predict and are generally beyond our control. Accordingly, such 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. We undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Risk factors include, without limitation:

our ability to attract and retain new commercial lenders and other bankers as well as key operations staff in light of competition for experienced employees in the banking industry;
operational and regulatory challenges associated with our information technology systems and policies and procedures in light of our rapid growth and systems conversion in 2018;
our ability to grow deposits;
our inability to execute on our strategy to expand investments and commercial lending;
our inability to efficiently manage our operating expenses;
the possibility that our previously announced merger with TCF does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
the occurrence of any event, change or other circumstance that could give rise the to the right of Chemical, TCF or both to terminate the merger agreement;
the outcome of pending or threatened litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to our proposed merger with TCF;
the diversion of management time from core banking functions due to merger-related issues;
potential difficulty in maintaining relationships with clients, employees or business partners as a result of our proposed merger with TCF;
the possibility that the anticipated benefits of our proposed merger with TCF, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Chemical and TCF do business, or as a result of other unexpected factors or events;
the impact of purchase accounting with respect to the proposed merger with TCF, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
diversion of management's attention from ongoing business operations and opportunities as a result of the proposed merger with TCF;

3


potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger with TCF;
economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;
a general decline in the real estate and lending markets, particularly in our market areas, could negatively affect our financial results;
increased cybersecurity risk, including potential network breaches, business disruptions, or financial losses;
increases in competitive pressure in the banking and financial services industry;
increased capital requirements, other regulatory requirements or enhanced regulatory supervision;
the inability to sustain revenue and earnings growth;
the inability to efficiently manage operating expenses;
current or future restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;
legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;
changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired; and
economic, governmental, or other factors may prevent the projected population, residential, and commercial growth in the markets in which we operate.

In addition, risk factors include, but are not limited to, the risk factors described in Item 1A of this Annual Report. 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.
    
PART I.
Item 1. Business.

Overview

Chemical Financial Corporation (the "Corporation" or "Chemical"), headquartered in Detroit, Michigan, is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, incorporated in the State of Michigan in August 1973. In this Annual Report, unless the context indicates otherwise, all references to "we," "us," and "our" refer to Chemical Financial Corporation and Chemical Bank (the "Bank"). Our common stock is listed on the NASDAQ under the symbol "CHFC." On June 30, 1974, we acquired Chemical Bank and Trust Company pursuant to a reorganization in which the former shareholders of Chemical Bank and Trust Company became shareholders of Chemical. We changed the name of Chemical Bank and Trust Company to Chemical Bank on December 31, 2005.

Since our acquisition of Chemical Bank and Trust Company, we have acquired 25 community banks and 36 other branch bank offices through December 31, 2018. Our most recent transactions include our merger with Talmer Bancorp, Inc. ("Talmer") during the third quarter of 2016 and the acquisitions of Lake Michigan Financial Corporation ("Lake Michigan") and Monarch Community Bancorp, Inc. ("Monarch") during the second quarter of 2015. These transactions are discussed in more detail under the subheading "Mergers, Acquisitions and Branch Closings" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report.

Our business is concentrated in a single industry segment, commercial banking, which is conducted through our single commercial bank subsidiary, Chemical Bank. We offer a full range of traditional banking and fiduciary products and services to residents and business customers in our geographical market areas. These products and services include business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance and investment products, corporate and personal wealth management services, mortgage banking and other banking services. In addition, we own, directly or indirectly, various non-bank operating and non-operating subsidiaries.

At December 31, 2018, we had consolidated total assets of $21.50 billion, total loans of $15.27 billion, total deposits of$15.59 billion and shareholders' equity of $2.84 billion. For more information about our financial condition and results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included in this Annual Report.

4



Proposed Merger with TCF Financial Corporation

Chemical and TCF have entered into an Agreement and Plan of Merger, dated as of January 27, 2019, which we refer to as the "merger agreement". Under the merger agreement, Chemical and TCF have agreed to combine their respective companies in a merger of equals, pursuant to which TCF will merge with and into Chemical, with Chemical continuing as the surviving entity, in a transaction we refer to as "the merger." Immediately following the merger or at such later time as the parties may mutually agree, Chemical Bank will merge with and into TCF National Bank, with TCF National Bank as the surviving bank. The merger agreement was approved by the boards of directors of Chemical and TCF, and is subject to shareholder and regulatory approval and other customary closing conditions. The transaction is anticipated to close in the second half of 2019. The transaction is discussed in more detail in Note 26 to our Consolidated Financial Statements under Item 8 of this Annual Report.

Our Market Area    

Our principal market concentrations are in Michigan, Ohio and Northern Indiana where Chemical Bank's branches are located and the areas surrounding these communities. As of December 31, 2018, we served these markets through 212 banking offices. In addition to the banking offices, Chemical Bank operated eight loan production offices and over 237 automated teller machines, both on and off bank premises, as of December 31, 2018.

Lending Activities

We offer a range of lending services including both commercial and consumer loans. Our commercial loan portfolio is comprised of commercial, commercial real estate (which includes owner-occupied, non-owner occupied and vacant land) and real estate construction and land development loans. Our consumer loan portfolio is comprised of residential mortgage, consumer installment and home equity loans. Our customers are generally commercial businesses, professional service firms and retail consumers within our market areas. At December 31, 2018, total loans, net of allowance for loan losses, were $15.16 billion, representing 70.5% of our total assets.

A summary of the composition of our loan portfolio at December 31, 2018, 2017 and 2016 follows:
 
December 31,
 
2018
 
2017
 
2016
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
(Dollars in thousands)
 
Composition of Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
4,002,568

 
27
%
 
$
3,385,642

 
24
%
 
$
3,217,300

 
25
%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
2,059,557

 
13

 
1,813,562

 
13

 
1,697,238

 
13

Non-owner occupied
2,785,020

 
18

 
2,606,761

 
18

 
2,217,594

 
17

Vacant land
67,510

 

 
80,347

 
1

 
58,308

 

Total commercial real estate
4,912,087

 
31

 
4,500,670

 
32

 
3,973,140

 
30

Real estate construction and land development
597,212

 
4

 
574,215

 
4

 
403,772

 
3

Residential mortgage
3,458,666

 
23

 
3,252,487

 
23

 
3,086,474

 
24

Consumer installment
1,521,074

 
10

 
1,613,008

 
11

 
1,433,884

 
11

Home equity
778,172

 
5

 
829,245

 
6

 
876,209

 
7

Total composition of loans
$
15,269,779

 
100
%
 
$
14,155,267

 
100
%
 
$
12,990,779

 
100
%
    
Commercial Loan Portfolio

Commercial loans

We offer commercial loans and lines of credit 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. Our commercial loan portfolio is well diversified across business lines and has no concentration in any one industry.


5


In our credit underwriting process, we carefully evaluate the borrower's industry, management skills, operating performance, liquidity and financial condition. We underwrite commercial loans based on a multiple of repayment sources, including operating cash flow, liquidation of collateral and guarantor support, if any. We closely monitor the operating performance, liquidity and financial condition of the borrowers through analysis of required periodic financial statements and meetings with the borrower's management. We generally secure our commercial loans with inventory, accounts receivable, equipment, personal guarantees of the owner or other sources of repayment, although we may also obtain real estate as collateral.

Commercial Real Estate Loans

Our commercial real estate loans include loans that are secured by real estate occupied by the borrower for ongoing operations (owner occupied), non-owner occupied real estate leased to one or more tenants (non-owner occupied) and vacant land that has been acquired for investment or future land development (vacant land). Commercial real estate loans are subject to the same general risks, are particularly sensitive to fluctuations in the value of real estate and typically involve larger loan balances concentrated in a single borrower. In addition, the payment experience on loans secured by income-producing properties and vacant land loans is typically dependent on the success of the operation of the related project and is typically affected by adverse conditions in the real estate market and in the economy. Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness and ability to repay the loan. When we make new real estate loans, we obtain a security interest in real estate whenever possible, in addition to any other available collateral, to increase the likelihood of the ultimate repayment of the loan. We generally attempt to mitigate the risks associated with commercial real estate loans by, among other things, lending primarily in our market areas, lending across industry lines, not developing a concentration in any one line of business and using prudent loan-to-value ratios in our underwriting process.

Each commercial real estate borrower is evaluated on an individual basis to determine the business risks and credit profile of each borrower, and we generally require that a borrower maintain specific debt service covenants. To ensure secondary sources of payment and liquidity to support a loan, we review the financial statements of the operating company and the personal financial statements of the principal owners and may require their personal guarantees.

Real Estate Construction and Land Development Loans

Our real estate construction loans are primarily originated for construction of commercial properties and often convert to a commercial real estate loan at the completion of the construction period. Our 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. A majority of our land development loans consist of loans to develop residential real estate. Land development loans are generally originated as interest only with the intention that the loan principal balance 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 lending involves a higher degree of risk than commercial real estate lending and residential mortgage 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. We generally attempt to mitigate the risks associated with real estate construction and land development lending by, among other things, lending primarily in our market areas, using prudent underwriting guidelines and closely monitoring the construction process.

Consumer Loan Portfolio

Residential Mortgage  

Our residential mortgage loans consist primarily of one- to four-family residential loans with fixed and adjustable interest rates, with amortization periods generally from 15 to 30 years. 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. Residential mortgage loans also include loans to consumers for the construction of single family residences that are secured by these properties.

The mortgage loans that we originate to be held by us in our portfolio have generally been priced competitively with current market rates for such loans. We currently offer a number of adjustable-rate mortgage ("ARM") loans with terms of up to 30 years and interest rates that adjust at scheduled intervals based on the product selected. These interest rates can adjust annually, or remain fixed for an initial period of three, five, seven or ten years and thereafter adjust annually. The interest rates for ARM loans are generally indexed to the one-year U.S. Treasury Index or the one-year LIBOR rate. The ARM loans generally provide for periodic (not more than 2%) and overall (not more than 6%) caps on the increase or decrease in the interest rate at any adjustment date and over the life of the loan.

6



Because the majority of loans originated and retained in the residential portfolio are adjustable-rate one- to four-family mortgage loans, we limit our exposure to fluctuations in interest income due to rising interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the credit risks associated with adjustable-rate loans but also limit the interest rate sensitivity of such loans. We require that adjustable-rate loans held in the loan portfolio have payments sufficient to amortize the loan over its term and the loans do not have negative principal amortization.

Consumer Installment

Our consumer installment loans consist of relatively small loan amounts to consumers to finance personal items (primarily automobiles, recreational vehicles and marine vehicles) and are comprised primarily of indirect loans purchased from dealerships. We originate consumer installment loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. Consumer rates are both fixed and variable, with negotiable terms. Our consumer installment loans typically amortize over periods up to 60 months. Although we typically require monthly payments of interest and a portion of the principal on our loan products, we may offer consumer loans with a single maturity date when a specific source of repayment is available. Consumer loans not secured by real estate are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value, and is more difficult to control, than real estate.

Home Equity Loans and Lines of Credit

Our home equity loans and lines of credit are comprised of loans to consumers who utilize equity in their personal residence, including junior lien mortgages, as collateral to secure the loan or line-of-credit. The majority of our home equity lines of credit are comprised of loans with payments of interest only and original maturities of up to ten years. These home equity lines of credit include junior lien mortgages whereby the first lien mortgage is held by a nonaffiliated financial institution. We also originate home equity loans utilizing a computer-based credit scoring analysis to supplement the underwriting process.

Mortgage Banking Activity

Sale of Residential Real Estate Loans

We engage in mortgage banking as part of an overall strategy to deliver loan products to customers. As a result, we sell a large portion of the residential loans we originate to Fannie Mae, Freddie Mac, Ginnie Mae or, to a lesser extent, private investors, while typically retaining the rights to provide loan servicing to our customers. As part of our overall asset/liability management strategic objectives, we may also originate and retain certain adjustable and fixed interest rate residential loans. To reduce the interest rate risk associated with commitments made to borrowers for mortgage loans that have not yet been closed and that we intend to sell in the secondary markets, we routinely enter into commitments to sell loans or mortgage-backed securities, considered to be derivatives, to limit our exposure to potential movements in market interest rates. We monitor our interest rate risk position daily to maintain appropriate coverage of our loan commitments made to borrowers.

We use derivative instruments to mitigate the interest rate risk associated with commitments to make mortgage loans that we intend to sell. We also enter into contracts for the future delivery of residential mortgage loans in order to economically hedge potential adverse effects of changes in interest rates. These contracts are also derivative instruments. Derivative instruments are recognized at fair value in our consolidated balance sheets as either assets or liabilities.

Loan Servicing

We service residential and commercial mortgage loans for investors under contracts where we receive a fee for performing mortgage servicing activities on mortgage loans that are not owned by us and are not included on our balance sheet. This process involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a timely basis and maintaining custodial escrow accounts for the payment of principal and interest to investors, and property taxes and insurance premiums on behalf of borrowers.


7


As compensation for our loan servicing activities, we receive weighted average servicing fees of approximately 0.25% per year of the loan balances serviced, plus any late charges collected from the delinquent borrowers and other fees incidental to the services provided, offset by applicable subservicing fees. In the event of a default by the borrower, we receive no servicing fees until the default is cured. In times when interest rates are rising or at high levels, servicing mortgage loans can represent a steady source of noninterest income and can, at times, offset decreases in mortgage banking gains. Conversely, in times when interest rates are falling or at very low levels, servicing mortgage loans can become comparatively less profitable due to the rapid payoff of loans and the negative impact due to the change in fair value of the asset. We account for our loan servicing rights at fair value. The amount of loan servicing rights initially recorded is based on the fair value of the loan servicing rights determined on the date when the underlying loan is sold. Our determination of fair value and the amount we record is based on a valuation model using discounted cash-flow analysis and available market pricing. Third party valuations of the loan servicing rights portfolio are obtained on a regular basis and are used to determine the fair value of the servicing rights at the end of the reporting period. Estimates of fair value reflect the following variables:

anticipated prepayment speeds;
product type (i.e., conventional, government, balloon);
fixed or adjustable rate of interest;
interest rate;
servicing costs per loan;
discounted yield rate;
estimate of ancillary income; and
geographic location of the loan.

We monitor the level of our investment in mortgage servicing rights in relation to our other mortgage banking activities in order to limit our exposure to significant fluctuations in loan servicing income. Nonetheless, we remain exposed to significant potential volatility in the value of our loan servicing rights. Accordingly, in the future, we may sell loan servicing rights depending on a variety of factors, including capital sufficiency, the size of the mortgage servicing rights portfolio relative to total assets and current market conditions.

Credit Administration and Loan Review

Certain credit risks are inherent in making loans. These include repayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit policies and procedures. We employ consistent analysis and underwriting to examine credit information and prepare underwriting documentation. We monitor and approve exceptions to policy as required, and we also track and address technical exceptions.

Wealth Management

We offer services through the Wealth Management department of Chemical Bank. These services include investment management and custodial services; trust services; financial and estate planning; and retirement planning and employee benefit programs. The Wealth Management department earns revenue largely from fees based on the market value of those assets under management, which can fluctuate as the market fluctuates. The Wealth Management department had assets under custodial and management arrangements of $4.60 billion at December 31, 2018, $5.13 billion at December 31, 2017 and $4.41 billion at December 31, 2016. The Wealth Management department also sells investment products (largely annuity products and mutual funds) through its Chemical Financial Advisors program. Customer assets within the Chemical Financial Advisors program were $1.17 billion at December 31, 2018, $1.31 billion at December 31, 2017 and $1.15 billion at December 31, 2016.

Deposit Products

We offer a full range of deposit products and services that are typically available from most banks and savings institutions. These include consumer and business checking accounts, savings accounts, money market accounts and other time deposits of various types and maturity options. Interest bearing transaction accounts and time deposits are tailored to and offered at rates competitive with those offered in our primary market areas. In addition, we offer certain retirement account services. We solicit accounts from individuals, businesses, associations, organizations and governmental authorities. We believe that our significant branch network will assist us in continuing to attract and retain deposits from local customers in our market areas.

Employees

At December 31, 2018, we had approximately 3,100 full-time equivalent employees.

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Competition

The business of banking is highly competitive. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on loans and fees charged for services) and service (convenience and quality of services rendered to customers). In addition to competition from other commercial banks, we face significant competition from non-bank financial institutions, including savings and loan associations, credit unions, finance companies, insurance companies and investment firms. Credit unions and finance companies are particularly significant competitors in the consumer loan market. The financial services industry has become more competitive as technology advances have lowered barriers to entry, enabling more companies, including nonbank companies, to provide financial services. Technological advances may diminish the importance of depository institutions and other financial institutions. Mergers and acquisitions have also led to increased concentration in the banking industry, placing added competitive pressure on our core banking products and services as we see competitors enter some of our markets or offer similar products. We also compete for deposits with a broad range of other types of investments, including mutual funds and annuities.

The growth of our deposits can be impacted by competition from other investment products, such as mutual funds and various annuity products. These investment products are sold by a wide spectrum of organizations, such as brokerage and insurance companies, as well as by financial institutions. In response to the competition for other investment products, we, through our Chemical Financial Advisors program, offer a wide array of mutual funds, annuity products and marketable securities through an alliance with an independent, registered broker/dealer. We also compete with credit unions in most of our markets. These institutions are challenging competitors, as credit unions are exempt from federal income taxes, allowing them to potentially offer higher deposit rates.

Mergers, Acquisitions, Consolidations and Divestitures

Our current strategy for growth includes strengthening our presence in core markets, expanding into contiguous markets and broadening our product offerings, while taking into account the integration and other risks of growth. We evaluate strategic acquisition opportunities and conduct due diligence activities in connection with possible transactions. As a result, discussions, and in some cases, negotiations and transactions may take place and future acquisitions involving cash, debt or equity securities may occur, including future acquisitions that may extend beyond contiguous markets. These generally involve payment of a premium over book value and current market price, and therefore, dilution of book value per share will likely occur with any future transaction.

For more information, see the information under the heading "Mergers, Acquisitions and Branch Closings" included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which is here incorporated by reference.

Availability of Information

We file reports with the Securities and Exchange Commission (SEC). Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.     

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including the financial statements and the financial statement schedules, but not including exhibits to those reports, may be obtained without charge upon written request to Investor Relations, at 333 W. Fort Street, Suite 1800, Detroit, Michigan 48226-3154 and are accessible at no cost on our website at www.chemicalbank.com in the "Investor Information" section, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. No information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Copies of exhibits may be requested at the cost of 30 cents per page from our corporate offices.

Supervision and Regulation

Chemical Financial Corporation and Chemical Bank are subject to extensive supervision and regulation under various federal and state laws and regulations. The supervisory and regulatory framework is intended primarily for the protection of depositors and the banking system as a whole, and not for the protection of shareholders and creditors.


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Banks are subject to a number of federal and state laws and regulations that have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the U.S.A. PATRIOT Act, the Bank Secrecy Act, the Foreign Account Tax Compliance Act, Office of Foreign Assets Controls regulations, electronic funds transfer laws, redlining laws, predatory lending laws, laws prohibiting unfair and deceptive acts or practices, antitrust laws, environmental laws, anti-money laundering laws and privacy laws. These laws and regulations can have a significant effect on the operating and financial results of banks.

A summary of significant elements of some of the laws, regulations and regulatory policies applicable to Chemical and Chemical Bank follows below. The descriptions are qualified in their entirety by reference to the full text of the statutes, regulations and policies that are described. The following discussion is not intended to be a complete list of all of the activities regulated by the banking laws or of the impact of those laws and regulations on our operations. It is intended only to briefly summarize some material provisions. These statutes, regulations and policies are continually subject to review by Congress, state legislatures and federal and state regulatory agencies. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic conditions or new federal or state legislation may have on our business and earnings in the future.

Regulatory Agencies

Chemical is a legal entity separate and distinct from Chemical Bank. Chemical is regulated by the Federal Reserve Board ("FRB") as a financial holding company and a bank holding company under the Bank Holding Company Act of 1956 ("BHC Act"). The BHC Act provides for general regulation of financial holding companies by the FRB and functional regulation of banking activities by banking regulators. Chemical is also under the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. Chemical's common stock is traded on The NASDAQ Stock Market® ("NASDAQ") under the symbol CHFC and is subject to the NASDAQ Listing Rules.

Chemical Bank is chartered by the State of Michigan and supervised, examined and regulated by the Michigan Department of Insurance and Financial Services ("DIFS"). Chemical Bank, as a member of the Federal Reserve System, is also supervised, examined and regulated by the FRB. Chemical Bank is also subject to regulation by the Consumer Financial Protection Bureau, which has responsibility for enforcing the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, and Real Estate Settlement Procedures Act, and the Truth in Savings Act, among others, for institutions that have assets in excess of $10 billion. Deposits of Chemical Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent provided by law.

Bank Holding Company Activities

In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.

In order for Chemical to maintain financial holding company status, both Chemical and Chemical Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If Chemical or Chemical Bank ceases to meet these requirements, the FRB may impose corrective capital and/or managerial requirements and place limitations on Chemical's ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the FRB may require Chemical to divest of Chemical Bank. Chemical and Chemical Bank were both categorized as "well-capitalized" and "well-managed" as of December 31, 2018.


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The BHC Act requires prior approval of the FRB for any direct or indirect acquisition of more than 5% of the voting shares of a commercial bank or its parent holding company by Chemical. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, Chemical's performance record under the Community Reinvestment Act of 1977 ("CRA"), Chemical's adherence to banking regulations and fair lending laws and the effectiveness of the subject organizations in combating money laundering activities.

Interstate Banking and Branching

Bank holding companies may acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed to the extent that state law would permit a bank chartered in that state to establish such a branch.

Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. A Michigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank.

Dividends

Our primary source of funds available to pay dividends to shareholders is from dividends paid to us by Chemical Bank. Federal and state banking laws and regulations limit both the extent to which Chemical Bank can lend or otherwise supply funds to us and also place certain restrictions on the amount of dividends Chemical Bank may pay to us.

Both Chemical and Chemical Bank are subject to regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums, which could prohibit the payment of dividends under circumstances where the payment could be deemed an unsafe and unsound banking practice. Chemical Bank is required to obtain prior approval from the FRB for the declaration and payment of dividends to us if the total of all dividends declared in any calendar year will exceed the total of (i) Chemical Bank's net income (as defined by regulation) for that year plus (ii) the retained net income (as defined by regulation) for the preceding two years. In addition, federal regulatory authorities have stated that banking organizations should generally pay dividends only out of current operating earnings. Further, the FRB has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Chemical Bank declared and paid dividends to us of $114.3 million and $165.0 million in 2018 and 2017, respectively. Dividends received from Chemical Bank in the past are not necessarily indicative of amounts that may be paid or available to be paid in the future.

Source of Strength

Under FRB policy, we are expected to act as a source of financial strength to Chemical Bank and to commit resources to support Chemical Bank. Further, the FRB has discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that any such divestiture may aid the depository institution's financial condition. In addition, if DIFS deems Chemical Bank's capital to be impaired, DIFS may require Chemical Bank to restore its capital by a special assessment on us as Chemical Bank's only shareholder. If we fail to pay any assessment, our directors would be required, under Michigan law, to sell the shares of Chemical Bank's stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore Chemical Bank's capital.


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Change in Control

Two statutes, the BHC Act and the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review before any company acquires "control" of a bank or a bank holding company. Under the BHC Act, control is deemed to exist if a company acquires 25% or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of the board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. In guidance issued in 2008, the FRB has stated that it would not expect control to exist if a person acquires, in aggregate, less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such person's ownership does not include 15% or more of any class of voting securities. Prior FRB approval is necessary before an entity acquires sufficient control to become a bank holding company. Natural persons, certain non-business trusts, and other entities are not treated as companies (or bank holding companies), and their acquisitions are not subject to review under the BHC Act.

Under the Change in Bank Control Act, a person or company is required to file a notice with the FRB if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the FRB and the subsidiary bank's primary federal regulator must approve the change in control; at the bank level, only the bank's primary federal regulator is involved. Transactions subject to the BHC Act are exempt from Change in Control Act requirements.

Capital Requirements

Both Chemical and Chemical Bank are subject to regulatory "risk-based" capital guidelines. Failure to meet these capital guidelines could subject us or Chemical Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, Chemical Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") requires, among other things, federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: "well-capitalized," "adequately-capitalized," "undercapitalized," "significantly-undercapitalized" and "critically-undercapitalized." A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include common equity Tier 1, Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure. The total minimum regulatory capital ratios and well-capitalized minimum ratios are reflected in the table below.

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

In July 2013, the FRB and the FDIC approved final rules implementing the Basel Committee on Banking Supervision's (BCBS) capital guidelines for U.S. banks (commonly known as Basel III). Under Basel III, which became applicable to us and Chemical Bank on January 1, 2015, minimum capital requirements were increased for both the quantity and quality of capital held by Chemical and Chemical Bank. Basel III added a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, kept the total risk-based capital ratio unchanged at 8.0% and kept the minimum leverage ratio unchanged at 4.0%. In addition to meeting the minimum capital requirements, under the Basel III capital rules, Chemical and Chemical Bank must also maintain a capital conservation buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The capital conservation buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the capital conservation buffer is now at its fully phased-in level of 2.5%. Throughout 2018, the required capital conservation buffer was 1.875%. The Tier 1 leverage ratio is not impacted by the capital conservation buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the capital conservation buffer.
    

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The total minimum regulatory capital ratios and well-capitalized minimum ratios are reflected in the table below. The FRB has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the Basel III capital rules. For purposes of the FRB's Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as Chemical, must maintain a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater. If the FRB were to apply the same or a very similar well-capitalized standard to bank holding companies as that applicable to Chemical Bank, Chemical's capital ratios as of December 31, 2018 would exceed such revised well-capitalized standard. The FRB may require bank holding companies, including Chemical, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding company's particular condition, risk profile, and growth plans.
    
A summary of the actual and minimum Basel III regulatory capital ratios for Chemical and Chemical Bank as of December 31, 2018 follows:
 
Leverage Ratio
 
Common Equity Tier 1 Capital Ratio
 
Tier 1 Risk-Based Capital Ratio
 
Total Risk-Based Capital Ratio
 
 
 
 
 
 
 
 
Actual Capital Ratios:
 
 
 
 
 
 
 
Chemical Financial Corporation
8.7%
 
10.7%
 
10.7%
 
11.5%
Chemical Bank
8.6%
 
10.6%
 
10.6%
 
11.4%
Minimum for capital adequacy purposes
4.0%
 
4.5%
 
6.0%
 
8.0%
Minimum to be well capitalized under prompt corrective action regulations
5.0%
 
6.5%
 
8.0%
 
10.0%
Minimum for capital adequacy, including capital conservation buffer(1)
4.0%
 
7.0%
 
8.5%
 
10.5%
(1)
Reflects the now fully-phased in capital conservation buffer of 2.5%.

At December 31, 2018, Chemical's and Chemical Bank's capital ratios were above the well-capitalized standards and met the then-applicable capital conservation buffer and the capital conservation buffer on a fully phased-in basis. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately capitalized or undercapitalized institution as if the institution were in the next lower capital category. Additional information on Chemical's and Chemical Bank's capital ratios may be found under Note 21 to our Consolidated Financial Statements under Item 8 of this Annual Report.

FDIC Insurance

The FDIC formed the Deposit Insurance Fund ("DIF") in accordance with the Federal Deposit Insurance Reform Act of 2005 ("Reform Act"). The FDIC implemented the Reform Act to create a stronger and more stable insurance system. The FDIC maintains the insurance reserves of the DIF by assessing depository institutions an insurance premium. The DIF insures deposit accounts of Chemical Bank up to a maximum amount of $250,000 per separately insured depositor, per institution.

FDIC insured depository institutions are required to pay deposit insurance premiums based on an insured depository institution’s assessment base, calculated as its average consolidated total assets minus its average tangible equity. Chemical Bank’s current annualized premium assessments can range from $0.15 to $0.40 for each $100 of its assessment base. The rate charged depends on Chemical Bank’s performance on the FDIC’s "large and highly complex institution" risk-assessment scorecard, which includes factors such as Chemical Bank’s regulatory rating, its ability to withstand asset and funding-related stress, and the relative magnitude of potential losses to the FDIC in the event of Chemical Bank’s failure. Chemical's FDIC insurance premiums were $18.5 million in 2018, compared to $11.2 million in 2017 and $7.4 million in 2016.

In addition to ordinary assessments, the FDIC has the ability to impose special assessments in certain circumstances. Under the Dodd-Frank Act, the minimum designated reserve ratio for the deposit insurance fund was increased to 1.35%. In March 2016, the FDIC adopted rules to impose a surcharge, as required by the Dodd-Frank Act, on the quarterly deposit insurance assessments of insured depository institutions that are deemed under the rules to be "large institutions," generally defined to include banks, like Chemical Bank, with total consolidated assets of $10 billion or more, with such surcharges to continue until the reserve ratio reached 1.35%. The large institution surcharge became effective on July 1, 2016, and on September 30, 2018, the deposit insurance fund reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%. Accordingly, the last quarterly surcharge was reflected in large institutions' December 2018 assessment invoices, which covered the assessment period from July 1 through September 30. FDIC regulations provided for two changes to deposit insurance assessments upon reaching the minimum reserve ratio of 1.35%: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large institutions) will cease; and (2) small banks will receive assessment credits for the portion of their assessments that contributed

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to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.

Safety and Soundness Standards

As required by FDICIA, the federal banking agencies' prompt corrective action powers impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. These actions can include: requiring an insured depository institution to adopt a capital restoration plan guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution.

The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.

Depositor Preference

The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC on behalf of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Heightened Requirements for Bank Holding Companies with $10 Billion or More in Assets

Various federal banking laws and regulations, including rules adopted by the Federal Reserve pursuant to the requirements of the Dodd-Frank Act, impose heightened requirements on certain large banks and bank holding companies. Most of these rules apply primarily to bank holding companies with at least $250 billion in total consolidated assets, but certain rules also apply to banks and bank holding companies with at least $10 billion in total consolidated assets, including among other requirements, the following:

Consumer Financial Protection Bureau (CFPB) Examination. The Dodd-Frank Act, enacted in July 2010, represents a comprehensive overhaul of the financial services industry within the United States, including establishing the federal CFPB and requiring the CFPB and other federal agencies to implement many new and significant rules and regulations, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, such as Chemical Bank. Depository institutions with less than $10 billion in assets are subject to rules promulgated by the CFPB, which may increase their compliance risk and the costs associated with their compliance efforts, but these banks will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Chemical and Chemical Bank are now subject to examination by the CFPB.

The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The CFPB has issued a number of regulations related to the origination of mortgages, foreclosures, and overdrafts as well as many other consumer issues. These rules have impacted, and will continue to impact, the business practices of mortgage lenders, including us.


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Enhanced Prudential Standards. As a publicly traded bank holding company with $10 billion or more in consolidated assets, we must comply with certain provisions of the FRB's enhanced prudential standards. For example, Chemical is required to establish a stand-alone, board level risk committee that must have a formal written charter approved by the board of directors. The risk committee is charged with approving and periodically reviewing the risk-management policies of Chemical and overseeing the operation of its global risk-management framework. We have established a Risk Management Committee of the board of directors.

The Durbin Amendment. Beginning on January 1, 2017, we became subject to the so-called Durbin Amendment to the Dodd-Frank Act relating to debit card interchange fees. Under the Durbin Amendment and the FRB’s implementing regulations, bank issuers who are not exempt may only receive an interchange fee from merchants that is reasonable and proportional to the cost of clearing the transaction. The maximum permissible interchange fee is equal to no more than $0.21 plus five basis points of the transaction value for many types of debit interchange transactions. A debit card issuer may also recover $0.01 per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB.

The Volcker Rule

The Volcker Rule implements Section 619 of the Dodd-Frank Act. The Volcker Rule prohibits "banking entities," such as Chemical, Chemical Bank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as "covered funds") and engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments.

The Volcker Rule excepts certain transactions from the general prohibition against proprietary trading, including transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and, transactions as a fiduciary on behalf of customers. Banking entities may also engage in risk-mitigating hedges if the entity can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis. Banking entities with more than $50 billion in total consolidated assets and liabilities that engage in permitted trading transactions are required to implement enhanced compliance programs, to regularly report data on trading activities to the regulators, and to provide a CEO attestation that the entity’s compliance program is reasonably designed to comply with the Volcker Rule.

Consumer Protection Regulations

The activities of Chemical Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The loan operations of the Bank re also subject to federal laws applicable to credit transactions, such as:
  
the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit and servicing terms to consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;
the Home Mortgage Disclosure Act of 1975 and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities they serve;
the Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act and Regulation V, as well as the rules and regulations of the FDIC governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;
the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies; and
the Real Estate Settlement Procedures Act and Regulation X, which governs aspects of the settlement process for residential mortgage loans.


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The deposit operations of Chemical Bank are also subject to federal laws, such as:

the Federal Deposit Insurance Act, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;
the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

Community Reinvestment Act

Banks are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to: (1) obtain deposit insurance coverage for a newly chartered institution, (2) establish a new branch office that will accept deposits, (3) relocate an office, or (4) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the FRB will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to a financial holding company and from acquiring any company engaged in such activities. Chemical Bank's CRA rating was "satisfactory" as of December 31, 2018.

Financial Privacy

Federal banking regulations limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Chemical Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectation for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

Anti-Money Laundering and the USA Patriot Act

A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 ("BSA") and subsequent laws and regulations require Chemical Bank to take steps to prevent the use of the bank or its systems to facilitate the flow of illegal or illicit money or terrorist funds. Those requirements include ensuring effective board and management oversight, establishing policies and procedures, performing comprehensive risk assessments, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive independent audit of BSA compliance activities. The USA PATRIOT Act of 2001 ("USA Patriot Act") substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued, and in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to

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maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. In addition, bank regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus of the regulators in recent years. The regulators are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

Office of Foreign Assets Control Regulation

The United States Treasury Department Office of Foreign Assets Control ("OFAC") has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. OFAC sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Incentive Compensation

The regulatory agencies have issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

The FRB reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Chemical, that are not "large, complex banking organizations." The findings will be included in reports of examination. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Commercial Real Estate Guidance
In December 2015, the federal banking regulators released a statement entitled “Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Guidance”). In the CRE Guidance, the federal banking regulators (1) expressed concerns with institutions that ease commercial real estate underwriting standards, (2) directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and (3) indicated that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The federal banking regulators previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” which stated that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real estate loans (excluding loans secured by owner-occupied properties) represent 300% or more of its total capital and (2) the outstanding balance of such institution’s commercial real estate loan portfolio (excluding loans secured by owner occupied properties) has increased by 50% or more during the prior 36 months. As of December 31, 2018, aggregate non-owner occupied commercial real estate loans as a percentage of our total capital was 153.7%.

Fiscal and Monetary Policy
Banking is a business that depends largely on interest rate differentials. In general, the difference between the interest we pay on our deposits and other borrowings, and the interest we receive on our loans and securities holdings, constitutes the major portion of our earnings. Thus, our earnings and growth will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB regulates, among other things, the supply of money through various means, including open‑market dealings in United

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States government securities, the discount rate at which banks may borrow from the FRB, and the reserve requirements on deposits. We cannot predict the nature and timing of any changes in such policies and their impact on our business.

Item 1A. Risk Factors.

There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these significant risks and uncertainties are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one or more other factors, adversely affect our business, results of operations and/or financial condition, and the market price of our common stock could decline significantly. Additional risks and uncertainties not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.

Risks Related to our Business

If we fail to effectively manage credit risk, our business and financial condition will suffer.

We must effectively manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely manner, and/or may present inaccurate or incomplete information to us, and risks relating to the value of collateral. Collateral values are adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. In order to manage credit risk successfully, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our lenders follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.

Our allowance for loan losses, and fair value adjustments with respect to loans acquired in our acquisitions, may prove to be insufficient to absorb actual losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to net income that represents management's estimate of probable losses that have been incurred within our existing loan portfolio. The level of the allowance for loan losses reflects management's continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, the value of real estate, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions and declines in real estate values affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.

The application of the purchase method of accounting in our acquisitions (and any future acquisitions) will impact our allowance for loan losses. Under the purchase method of accounting, all acquired loans were recorded in our Consolidated Financial Statements at their estimated fair value at the time of acquisition and any related allowance for loan loss was eliminated because credit quality, among other factors, was considered in the determination of fair value. To the extent that our estimates of fair value are too high, we will incur losses associated with the acquired loans. The allowance associated with our purchased credit impaired loans reflects deterioration in cash flows since acquisition resulting from our quarterly re-estimation of cash flows which involves complex cash flow projections and significant judgment on timing of loan resolution.


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If our analysis or assumptions prove to be incorrect, our current allowance may not be sufficient, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance for loan losses would materially decrease our net income and adversely affect our general financial condition.

In addition, our regulators, as an integral part of their periodic examination, review our allowance for loan losses and may require an increase in the allowance for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

Finally, the measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board ("FASB") recently issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2020. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

See the sections captioned "Allowance for Loan Losses" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 - Loans in the notes to our Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, located elsewhere in this Annual Report for further discussion related to Chemical's process for determining the appropriate level of the allowance for loan losses.

We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.
    
We plan to grow our business both organically and through mergers and acquisitions. We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, we may engage in discussions or negotiations that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short- and long-term liquidity. Our merger and acquisition activities could be material and could require us to use a substantial amount of common stock, preferred stock, cash, other liquid assets, and/or incur debt. For example, in connection with our proposed merger of equals transaction with TCF announced on January 28, 2019, we will issue additional shares of our common stock to TCF stockholders, which will dilute our current shareholders' ownership interest in Chemical, and we will issue shares of a newly designated series of our preferred stock. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from our merger and acquisition activities, including our proposed merger with TCF, could have a material adverse effect on our financial condition and results of operations, including net income per common share.

Our merger and acquisition activities, including our proposed merger with TCF, could involve a number of additional risks, including the risks of:

delay in completing an acquisition or merger due to litigation or the regulatory approval process;
the recording of assets and liabilities of the acquired or merged company at fair value may materially dilute shareholder value at the transaction date and could have a material adverse effect on our financial condition and results of operations;
incurring the time and costs associated with identifying and evaluating potential acquisition or merger targets;
difficulty or unanticipated expense associated with converting the operating systems of the acquired or merged company into ours:
potential exposure to unknown or contingent liabilities of the acquired or merged company;
our estimates and judgments used to evaluate credit, operations, management and market risks with respect to the acquired or merged company may not be accurate;
our exposure to potential asset quality issues of the acquired or merged company;
the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

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diversion of our management's attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;
the introduction of new products and services into our business;
potential disruption to our business;
the incurrence and possible impairment of goodwill and other intangible assets associated with an acquisition or merger and possible adverse short-term effects on our results of operations;
the possible loss of key employees and customers of the acquired or merged company;
difficulty in estimating the value of the acquired or merged company; and
potential changes in banking or tax laws or regulations that may affect the acquired or merged company.

Failure to successfully address these and other issues related to acquisitions and mergers could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy.

Future mergers and acquisitions may be delayed, impeded, or prohibited due to regulatory issues.

Our mergers and acquisitions, including our proposed merger with TCF, are subject to approval by a variety of federal and state regulatory agencies. The process for obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we or the target company has, or may have, with regulatory agencies, including, without limitation, issues related to anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, Community Reinvestment Act issues, and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential mergers and acquisitions that may result from these factors could have a material adverse effect on our business, and, in turn, our financial condition and results of operations.

We face risks and uncertainties related to our proposed merger with TCF.

Before the transactions contemplated in the merger agreement can be completed, various approvals must be obtained, including approval of the FRB and the Office of the Comptroller of the Currency. The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger.

Chemical and TCF have operated and, until the completion of the merger, will continue to operate independently. There can be no assurances that the businesses of Chemical and TCF can be integrated successfully. It is possible that the integration process could result in the loss of key Chemical employees or key TCF employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. The success of the merger will depend on, among other things, the ability of Chemical and TCF to combine their businesses in a manner that facilitates growth opportunities and realizes cost savings. However, if the combined company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected.


In addition, the merger agreement contains provisions that restrict each of Chemical’s and TCF’s ability to, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to its board of directors’ exercise of its fiduciary duties, engage in any negotiations concerning, or provide any confidential information relating to, any alternative acquisition proposals. These provisions, which include a $134.0 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Chemical from considering or proposing that acquisition, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Chemical than it might otherwise have proposed to pay.

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Failure to complete our proposed merger with TCF could negatively impact our business, financial results and stock price.

If our proposed merger with TCF is not completed for any reason, our ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the merger, we will be subject to a number of risks, including the following:

we may be required, under certain circumstances, to pay TCF a termination fee of $134.0 million under the merger agreement;
we will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;
the merger agreement places certain restrictions on the conduct of both Chemical’s and TCF’s business prior to completion of the merger, which may adversely affect our ability to execute certain of our business strategies; and
matters relating to the merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us, as an independent company.

In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. For example, we may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. The market price of our common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. We also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against us to perform our obligations under the merger agreement. If the merger is not completed, we cannot assure you that the risks described above will not materialize and will not materially affect our business, financial results and stock price.

We face risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and corresponding enforcement proceedings.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the "PATRIOT Act") and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file suspicious activity and currency transaction reports as appropriate. FinCEN, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition, results of operations and prospects. Sanctions that the regulators have imposed on banks that have not complied with all requirements have been especially severe. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Litigation filed against Talmer, its board of directors and Chemical could result in the payment of damages.
    
In connection with the Talmer merger transaction, purported Talmer shareholders have filed putative class action lawsuits against Talmer, its board of directors and Chemical. These lawsuits could result in substantial costs to us, including any costs associated with indemnification. The defense or settlement of the lawsuits may adversely affect our business, financial condition, results of operations, cash flows and market price.

Because our total assets exceed $10 billion, we are subject to additional regulation, increased supervision and increased costs.

The Dodd-Frank Act imposes additional regulatory requirements on financial institutions with $10 billion or more in total assets, such as us. We are subject to the following additional requirements:

supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws;
a modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets;

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heightened compliance standards under the Volcker Rule; and
enhanced supervision as a larger financial institution.

In addition, under the Durbin Amendment to the Dodd-Frank Act, institutions with $10 billion or more in assets are subject to a cap on the interchange fees that may be charged in certain electronic debit and prepaid card transactions. The maximum permissible interchange fee for electronic debit transactions is the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. In addition, an issuer may charge up to one cent on each transaction as a fraud prevention adjustment if the issuer meets certain fraud prevention standards.

The imposition of these regulatory requirements and increased supervision may require additional commitment of financial resources to regulatory compliance and may increase our cost of operations.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.

The financial services industry is continually undergoing technological change with introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to assist in meeting regulatory requirements. Our future success depends on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations and meet regulatory requirements as we continue to grow and expand our product and service offerings. Although we are committed to keeping pace with technological advances and to invest in new technology, our competitors may, through the use of new technologies that we have not implemented, whether due to cost or otherwise, be able to offer additional or superior products to those that we will be able to provide, which would put us at a competitive disadvantage.

We also may not be able to effectively implement new technology-driven products and services, be successful in marketing such products and services to our customers or replace technologies that are obsolete or out of date with new technologies, which could result in a loss of customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. In addition, the recent conversion of our core operating system and any future implementation of technological changes and upgrades to maintain current systems represent significant operational and customer challenges upon implementation and for some time afterwards. Key challenges include service interruptions, transaction processing errors and system conversion delays, which may cause us to alienate customers or fail to comply with applicable laws, and may cause us to incur additional expenses, which may be substantial. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may face increased pressure from purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans.

We sell fixed rate long-term residential mortgage loans we originate in the secondary market. Purchasers of residential mortgage loans, such as government sponsored entities, require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual or alleged failure to strictly conform to the purchaser's purchase criteria. As a result, we may face increased pressure from purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and we may face increasing expenses to defend against such claims. If we are required in the future to repurchase loans previously sold, reimburse purchasers for losses related to loans previously sold, or if we incur increasing expenses to defend against such claims, our financial condition and results of operations would be negatively affected.

We hold general obligation municipal bonds in our investment securities portfolio. If one or more issuers of these bonds were to become insolvent and default on its obligations under the bonds, it could have a negative effect on our financial condition and results of operations.

We held general obligation municipal bonds totaling $888.9 million at December 31, 2018, which were issued by many different municipalities with no significant concentration in any single municipality. There can be no assurance that the financial conditions of these municipalities will not be materially and adversely affected by future economic conditions. If one or more of the issuers of these bonds were to become insolvent and default on their obligations under the bonds, it could have a negative effect on our financial condition and results of operations.


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We are subject to liquidity risk in our operations, which could adversely affect our ability to fund our various obligations and jeopardize our business, financial condition and results of operations.

Liquidity risk is the possibility that we will not be able to meet our obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If we are unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources, we may not be able to grow our assets as quickly as we have historically. If customers move money out of bank deposits into other investments, we could lose a relatively low cost source of funds. This loss would require us to seek other funding alternatives, including wholesale funding, in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income. If we are unable to maintain adequate liquidity, then our business, financial condition and results of operations would be negatively affected.

General economic conditions, and in particular conditions in our core markets in Michigan, Ohio and Indiana, affect our business.

Our business is affected by general economic conditions in the United States, although most directly within our core markets in Michigan, Ohio and Indiana. Our success depends primarily on the general economic conditions in the States of Michigan, Ohio and Indiana and the specific local markets in which we operate. The economic conditions in these local markets have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant majority of our loans are to individuals and businesses in Michigan. Consequently, any prolonged decline in Michigan's economy could have a materially adverse effect on our financial condition and results of operations. While economic conditions have improved since the end of the economic recession, a return of recessionary conditions could impact the United States and our local markets which, in turn, could have a material adverse effect on our financial condition and results of operations.

If we do not adjust to changes in the financial services industry, our financial performance may suffer.

Our ability to maintain our financial performance and return on investment to shareholders will depend largely on our ability to continue to grow our loan portfolio and also, in part, on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and/or new customers. In addition to other banks, competitors include savings and loan associations, credit unions, securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the states in which we do business, regulation, and changes in technology and product delivery systems. New competitors may emerge to increase the degree of competition for our customers and services. Financial services and products are also constantly changing. Our financial performance will also depend, in part, upon customer demand for our products and services and our ability to develop and offer competitive financial products and service.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries in financial transactions, known as disintermediation, could result in the loss of fee income, the loss of customer deposits and income generated from those deposits and lending opportunities.

Changes in interest rates could reduce our net income and cash flow.

Our net income and cash flow depends, to a great extent, on the difference between the interest we earn on loans and securities and the interest we pay on deposits and other borrowings. Market interest rates are beyond our control, and they fluctuate in response to general economic conditions, the policies of various governmental and regulatory agencies and competition. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits, the interest received on loans and securities and the interest paid on deposits and other borrowings. Any significant adverse effects of changes in interest rates on the our results of operations, or any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. See the sections captioned "Net Interest Income" in Item 7. Management's Discussion and Analysis of Financial

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Condition and Results of Operations and "Market Risk" in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, located elsewhere in this Annual Report, for further discussion related to our management of interest rate risk.

We may be required to pay additional deposit insurance premiums to the FDIC, which could negatively impact earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as Chemical Bank, up to $250,000 per account. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. Depending upon the magnitude of future losses that the FDIC deposit insurance fund suffers, there can be no assurance that there will not be additional premium increases or assessments in order to replenish the fund. The FDIC may need to set a higher base rate schedule based on future financial institution failures and updated failure and loss projections. Potentially higher FDIC assessment rates than those currently projected or special assessments could have an adverse impact on our financial condition and results of operations.

Our evaluation of investment securities for other-than-temporary impairment involves subjective determinations and could materially impact our financial condition and results of operations.

Our evaluation of impairments in our investment securities portfolio involves a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of such investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's net income, projected net income and financial condition or future recovery prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and/or value of the underlying asset and also assessing the probability that an adverse change in future cash flows has occurred. The determination of the amount of other-than-temporary impairments is based upon our quarterly evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.

Additionally, our management considers a wide range of factors about the security issuer and uses judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been less than cost or amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) our intent and ability to retain the investment for a period of time sufficient to allow for the recovery of its value; (vii) unfavorable changes in forecasted cash flows on residential mortgage-backed and asset-backed securities; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. Impairments to the carrying value of our investment securities may need to be taken in the future, which could have a material adverse effect on our financial condition and results of operations.

We may be required to recognize an impairment of our goodwill or core deposit intangible assets, or to establish a valuation allowance against our deferred income tax assets, which could have a material adverse effect on our financial condition and results of operations.

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. We test goodwill at least annually for impairment. Substantially all of our goodwill at December 31, 2018 was recorded on the books of Chemical Bank. The fair value of Chemical Bank is impacted by the performance of its business and other factors. Core deposit intangible ("CDI") assets represent the estimated value of stable customer deposits, excluding time deposits, acquired in business combinations that provide a source of funds below market interest rates. We amortize our CDI assets over the estimated period the corresponding customer deposits are expected to exist. We test our CDI assets periodically for impairment. If we experience higher than expected deposit run-off, our CDI assets could be impaired. If we determined that our goodwill or CDI assets have been impaired, we must recognize a write-down by the amount of the impairment, with a corresponding charge to net income. Such write-downs could have a material adverse effect on our financial condition and results of operations. At December 31, 2018, we had $1.13 billion of goodwill, representing 40.0% of shareholders' equity. We had $28.6 million of CDI assets at December 31, 2018.

Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management's

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determination include our performance, including the ability to generate taxable net income. If, based on available information, it is more-likely-than-not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2018, we carried a valuation allowance against our deferred tax assets of $1.5 million. Charges to establish a valuation allowance with respect to our deferred tax assets could have a material adverse effect on the financial condition and results of operations.

We may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operations.

We are regularly involved in a variety of litigation arising out of the normal course of our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation or cause us to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

We are subject to the Community Reinvestment Act and federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

The Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act impose nondiscriminatory lending requirements on financial institutions. The Federal Reserve, the CFPB, the Department of Justice, and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

The impacts of recent tax reform are not yet fully known, and these and other tax regulations could be subject to potential legislative, administrative or judicial changes or interpretations.

The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, has had, and is expected to continue to have, far-reaching and significant effects on us, our customers and the U.S. economy. The act lowered the corporate federal statutory tax rate and eliminated or limited certain federal corporate deductions. While it is too early to evaluate all of the potential consequences of the act, such consequences could include lower commercial customer borrowings, either due to the increase in cash flows as a result of the reduction in the corporate statutory tax rate or the utilization by businesses in certain sectors of alternative non-debt financing and/or early retirement of existing debt. Further, there can be no assurance that any benefits realized as a result of the reduction in the corporate federal statutory tax rate will ultimately result in increased net income, whether due to decreased loan yields as a result of competition or other factors. Uncertainty also exists related to state and other taxing jurisdictions' response to federal tax reform, which we will continue to monitor and evaluate. Federal income tax treatment of corporations may be further clarified and modified by other legislative, administrative or judicial changes or interpretations at any time. Any such changes could adversely affect our business, financial condition and results of operations.

We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.

In the course of our business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of the affected properties. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties seeking damages for environmental contamination emanating from the site. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. If we were to become subject to significant environmental liabilities or costs, our business, results of operations and financial condition could be materially and adversely affected.


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We depend on the accuracy and completeness of information about our customers and counterparties.

In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an ongoing basis, we rely on information provided to us by or on behalf of our customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers and counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition or results of operations.

We operate in a highly competitive industry and market area.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources than us. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, other financial service businesses, including investment advisory and wealth management firms, mutual fund companies, and securities brokerage and investment banking firms, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. As customers' preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the Internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Because of this rapidly changing technology, our future success will depend in part on our ability to address our customers’ needs by using technology.

We compete with these institutions both in attracting deposits and assets under management, and in making new loans. We may not be able to compete successfully with other financial institutions in our markets, particularly with larger financial institutions operating in our markets that have significantly greater resources than us and offer financial products and services that we are unable to offer, putting us at a disadvantage in competing with them for loans and deposits and investment management clients, and we may have to pay higher interest rates to attract deposits, accept lower yields on loans to attract loans and pay higher wages for new employees, resulting in lower net interest margin and reduced profitability. In addition, many of our competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax.

Our ability to compete successfully depends on a number of factors, including, among other things:

our ability to develop, maintain and build long-term customer relationships based on quality service, high ethical standards and safe, sound assets;
our ability to expand our market position;
our ability to keep up-to-date with technological advancements in both delivering new products and maintaining existing products, while continuing to invest in cybersecurity and control operating costs;
the scope, relevance and pricing of products and services we offer to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability and have a material adverse effect on our financial condition and results of operations.

We depend on our executive officers and other key employees to continue the implementation of our long-term business strategy, and we could be harmed by the unexpected loss of their services.

We believe that our continued growth and future success will depend in large part on the skills of our executive officers and other key employees and our ability to motivate and retain these individuals, as well as our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business strategy may be lengthy. Employee retention may be particularly challenging during the pendency of our proposed merger with TCF, as employees of Chemical and TCF may experience uncertainty about their future roles with the combined company. If we are unable to retain personnel, including our key management, who are critical to the successful integration and our future operations, we could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment costs. If the services of any of our of key personnel should become unavailable for any reason, we may not

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be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, results of operation and future prospects. In addition, the loss of key personnel could diminish the anticipated benefits of the proposed merger with TCF.

The banking industry is heavily regulated and that regulation, together with any future legislation or regulatory changes, could limit or restrict our activities and adversely affect our operations or financial results.

We operate in an extensively regulated industry and we are subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Our compliance with banking regulations is costly and restricts some of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our business.

Since the recession ended, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. The burden of regulatory compliance has increased under the Dodd-Frank Act and has increased our costs of doing business and, as a result, may create an advantage for our competitors who may not be subject to similar legislative and regulatory requirements. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.

Furthermore, our regulators also have the ability to compel us to take certain actions, or restrict us from taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition or results of operations.

Our business needs and future growth may require us to raise additional capital, but that capital may not be available or may be dilutive.
    
We are required by federal and state regulatory authorities to maintain specified levels of capital to support our operations. We may need to raise additional capital, in the form of debt or equity, in the future to have sufficient capital resources to meet our commitments and to fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. In addition, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. We cannot assure that we will be able to raise additional capital in the future on terms acceptable to us or at all. Any occurrence that limits our access to capital, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Any inability to raise capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations and could be dilutive to both tangible book value and our share price.

In addition, an inability to raise capital when needed may subject us to increased regulatory supervision and the imposition of restrictions on our growth and business. These restrictions could negatively affect our ability to operate or further expand our operations through loan growth, acquisitions or the establishment of additional branches. These restrictions may also result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition, results of operations and our share price.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan. We can give no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.


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Our controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. A significant failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyberattacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

Our operations rely on the secure processing, storage and transmission of confidential and other sensitive business and consumer information on our computer systems and networks and third party providers. Under various federal and state laws, we are responsible for safeguarding such information. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (1) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (2) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (3) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.

Although we take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from within our organization. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified. In addition, the increasing reliance on technology systems and networks and the occurrence and potential adverse impact of attacks on such systems and networks, both generally and in the financial services industry, have enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber-security threats. As these threats, and government and regulatory oversight of associated risks, continue to evolve, we may be required to expend additional resources to enhance or expand upon the security measures we currently maintain.

In particular, information pertaining to us and our customers is maintained, and transactions are executed, on the networks and systems of us, our customers and certain of our third-party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our customers against fraud and security breaches and to maintain our clients’ confidence. While we have not experienced any material breaches of information security, such breaches may occur through intentional or unintentional acts by those having access or gaining access to our systems or our customers’ or counterparties’ confidential information, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. We cannot be certain that the security measures or third party processors we have in place to protect this sensitive data will be successful or sufficient to protect against all current and emerging threats designed to breach our systems or those of processors. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, a breach of our systems, or those of processors, could result in losses to us or our customers; loss of business and/or customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure

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to civil litigation and possible financial liability-any of which could have a material adverse effect on our business, financial condition and results of operations.

We depend on information technology and telecommunications systems of third-party servicers, and systems failures, interruptions or breaches of security involving these systems could have an adverse effect on our operations, financial condition and results of operations.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third-party servicers accounting systems and mobile and online banking platforms. We outsource some of our major systems, such as payment processing systems, and online banking platforms. To revise based on outsourced systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. In addition, failure of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties could disrupt our operations or adversely affect our reputation.

It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking, debit card services and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition or results of operations.

Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above or herein, and the cyber security measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.

As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. Although we review business continuity and backup plans for our vendors and take other safeguards to support our operations, such plans or safeguards may be inadequate. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

Additionally, regulators expect financial institutions to be responsible for all aspects of their performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks or security breaches of the networks, systems, devices, or software that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

We rely on quantitative models to manage certain accounting, risk management and capital planning functions.

We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, risk management and for capital planning purposes. Our modeling methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.

All models have certain limitations. Reliance on models presents the risk that our business decisions based on information incorporated from models will be adversely affected due to incorrect, missing or misleading information. In addition, our models

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may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses. Also, information that we provide to the public or regulators based on poorly designed models could be inaccurate or misleading.

Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. Some of our decisions that the regulators evaluate, including distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient. Accordingly, the failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators.

Our ability to maintain our reputation is critical to the success of our business, including our ability to attract and retain customer relationships, and failure to do so may materially adversely affect our performance.

The reputation of Chemical Bank is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. Damage to our reputation could undermine the confidence of our current and potential clients in our ability to provide financial services. Such damage could also impair the confidence of our investors, counterparties and business partners, and ultimately affect our ability to effect transactions or maintain or hire qualified management and personnel. Maintenance of our reputation depends not only on our success in controlling and mitigating the various risks described herein, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected. Further, negative public opinion can expose us to litigation and regulatory action, which would adversely affect our business, financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Common Stock

Investments in our common stock involve risk.

The market price of our common stock may fluctuate significantly in response to a number of factors, including, among other things:

Variations in quarterly or annual results of operations
Changes in dividends paid per share
Deterioration in asset quality, including declining real estate values
Changes in interest rates
Changes in tax laws
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by, or involving, Chemical or its competitors
Failure to integrate acquisitions or realize anticipated benefits from acquisitions
Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated
New regulations that limit or significantly change Chemical's ability to continue to offer existing banking products
Volatility of stock market prices and volumes
Issuance of additional shares of common stock or other debt or equity securities of Chemical
Changes in market valuations of similar companies
Uncertainties, disruptions and fluctuations in the credit and financial markets, either nationally or globally

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Changes in securities analysts' estimates of financial performance or recommendations
New litigation or contingencies or changes in existing litigation or contingencies
New technology used, or services offered, by competitors
Breaches in information security systems of Chemical and/or its customers and competitors
Changes in accounting policies or procedures required by standard setting or other regulatory agencies
New developments in the financial services industry
News reports relating to trends, concerns and other issues in the financial services industry
Perceptions in the marketplace regarding the financial services industry, the Corporation and/or its competitors
Rumors or erroneous information
Geopolitical conditions such as acts or threats of terrorism or military conflicts

We may issue debt and equity securities that are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

Our authorized capital stock includes 135 million shares of common stock and two million shares of preferred stock, which can be issued without further shareholder approval. As of December 31, 2018, we had 71,460,119 shares of common stock outstanding and had 1,301,285 shares reserved for issuance underlying options and restricted stock awards under our existing equity plans. As of December 31, 2018, we had no shares of preferred stock outstanding. In connection with our planned merger with TCF, which was announced on January 28, 2019, based on the number of shares of Chemical common stock and TCF common stock outstanding as of December 31, 2018, and based on the number of shares of Chemical common stock expected to be issued in the merger, the former stockholders of TCF, as a group, will receive shares in the merger constituting approximately 54% of the outstanding shares of Chemical common stock immediately after the merger. As a result, current shareholders of Chemical, as a group, will own approximately 46% of the outstanding shares of Chemical common stock immediately after the merger. In connection with the merger, we will also issue shares of our preferred stock, to be designated Series C 5.70% Series C Non-Cumulative Perpetual Preferred Stock, with equivalent rights, preferences, privileges, as those of the TCF Series C 5.70% Series C Non-Cumulative Perpetual Preferred Stock, for which they are exchanged. The merger, which is expected to close the late third or early fourth quarter of 2019, is subject to, among other things, required regulatory approvals and the affirmative vote of both our shareholders and TCF’s stockholders to approve or adopt the merger agreement, as applicable, and in the case of Chemical, to approve an amendment to our articles of incorporation to increase the number of authorized shares of Chemical common stock and to change our name to TCF Financial Corporation, effective only upon completion of the merger. In addition, in the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock.

In the event of our liquidation, our lenders and holders of our debt securities and preferred stock would receive a distribution of our available assets before distributions to the holders of our common stock. Our decision to incur debt and issue securities in future offerings may depend on market conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of our future offerings and debt financings, if any. Future offerings could reduce the value of shares of our common stock and dilute a shareholder's interest in Chemical.

Chemical relies on dividends from Chemical Bank for most of its revenue.

Chemical is a separate and distinct legal entity from Chemical Bank. It receives substantially all of its revenue from dividends from Chemical Bank. These dividends are the principal source of funds to pay cash dividends on Chemical's common stock. Various federal and/or state laws and regulations limit the amount of dividends that Chemical Bank may pay to Chemical. In the event Chemical Bank is unable to pay dividends to Chemical, Chemical may not be able to pay cash dividends on its common stock. The earnings of Chemical Bank have been the principal source of funds to pay cash dividends to 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. See the section captioned "Supervision and Regulation" in Item 1. Business and Note 21 - Regulatory Capital and Reserve Requirements in the notes to our Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this Annual Report.

Shares of our common stock are not insured deposits.

Shares of our common stock are not bank deposits and are not insured or guaranteed by the FDIC or any other governmental agency, and are subject to investment risk, including the possible loss of principal.
Item 1B. Unresolved Staff Comments.
None. 

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Item 2. Properties.
Our executive offices are located at 333 W. Fort Street, Suite 1800, in Detroit, Michigan, in an office building that is leased. The main branch office of Chemical Bank is located at 333 W. Fort Street, Suite 100, in Detroit, Michigan, in office space that we lease. We also operate a regional office located at 235 E. Main Street in downtown Midland, Michigan, in an office building that is owned by us.
We conduct business through 212 banking offices and eight loan production offices as of December 31, 2018. We have 186 banking offices located in Michigan, 24 banking offices located in Ohio and two banking offices located in Indiana through which we operate. Of our 212 banking offices, 33 are leased properties. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm's-length bargaining.
We consider our properties to be suitable and adequate for operating our banking business.
Item 3. Legal Proceedings.

On February 22, 2016, two putative class action and derivative complaints were filed in the Circuit Court for Oakland County, Michigan by individuals purporting to be shareholders of Talmer. The actions are styled Regina Gertel Lee v. Chemical Financial Corporation, et. al., Case No. 2016-151642-CB and City of Livonia Employees’ Retirement System v. Chemical Financial Corporation et. al., Case No. 2016-151641-CB. These complaints purport to be brought derivatively on behalf of Talmer against the individual defendants, and individually and on behalf of all others similarly situated against Talmer and Chemical (collectively, the "Defendants"). The complaints allege, among other things, that the directors of Talmer breached their fiduciary duties to Talmer’s shareholders in connection with the merger by approving a transaction pursuant to an allegedly inadequate process that undervalues Talmer and includes preclusive deal protection provisions, and that Chemical allegedly aided and abetted the Talmer directors in breaching their duties to Talmer’s shareholders. The complaints also allege that the individual defendants have been unjustly enriched. Both complaints seek various remedies on behalf of the putative class (consisting of all shareholders of Talmer who are not related to or affiliated with any defendant). They request, among other things, that the Court enjoin the merger from being consummated in accordance with its agreed-upon terms, direct the Talmer directors to exercise their fiduciary duties, rescind the merger agreement to the extent that it is already implemented, award the plaintiff all costs and disbursements in each respective action (including reasonable attorneys’ and experts’ fees), and grant such further relief as the court deems just and proper. The City of Livonia plaintiff amended its complaint on April 21, 2016 to add additional factual allegations, including but not limited to allegations that Keefe Bruyette & Woods, Inc. ("KBW") served as a financial advisor for the proposed merger despite an alleged conflict of interest, that Talmer’s board acted under actual or potential conflicts of interest, and that the defendants omitted and/or misrepresented material information about the proposed merger in the Form S-4 Registration Statement relating to the proposed merger. These two cases were consolidated as In re Talmer Bancorp Shareholder Litigation, case number 2016-151641-CB, per an order entered on May 12, 2016. On October 31, 2016, the plaintiffs in this consolidated action again amended their complaint, adding additional factual allegations, adding KBW as a defendant, and asserting that KBW acted in concert with Chemical to aid and abet breaches of fiduciary duty by Talmer's directors. The Defendants all filed motions for summary disposition seeking dismissal of all claims with prejudice. The Court issued an opinion and order on those motions on May 4, 2017 and granted dismissal to Chemical, but denied the motions filed by KBW and the individual defendants. KBW and the individual defendants filed an application seeking leave to appeal the Court's ruling to the Michigan Court of Appeals. That application was denied by the Michigan Court of Appeals on August 16, 2017. On June 8, 2017, the Defendants filed a notice with the Court that the plaintiffs had failed to timely certify a class as required by the Michigan Court Rules. Upon the filing of that notice, the City of Livonia case became an individual action brought by the two named plaintiffs, and cannot proceed as a class action. On October 19, 2017, the Defendants filed motions for summary disposition under MCR 2.116(C)-(10) in the City of Livonia case, again seeking the dismissal of the case. A hearing on those motions was held on April 11, 2018. On May 11, 2018, the Court issued its opinion and order granting the motion of the Defendants, and dismissing the case. On May 25, 2018, the plaintiffs filed a claim of appeal from the Court's decision with the Michigan Court of Appeals. By order dated August 7, 2018, the Michigan Court of Appeals consolidated the City of Livonia case with the Nicholl case discussed below. A ruling from the Court is awaited.

On June 16, 2016, the same putative class plaintiff that filed the City of Livonia state court action discussed in the preceding paragraph filed a complaint in the United States District Court for the Eastern District of Michigan, styled City of Livonia Employees’ Retirement System vChemical Financial Corporation, et. al., Docket No. 1:16-cv-12229. The plaintiff purports to bring this action "individually and on behalf of all others similarly situated," and requests certification as a class action. The Complaint alleges violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934 and alleges, among other things, that the Defendants issued materially incomplete and misleading disclosures in the Form S-4 Registration Statement relating to the proposed merger. The Complaint contains requests for relief that include, among other things, that the Court enjoin the proposed transaction unless and until additional information is provided to Talmer’s shareholders, declare that the Defendants violated the securities laws in connection with the proposed merger, award compensatory damages, interest, attorneys’ and experts’ fees, and that the Court grant such other relief as it deems just and proper. Talmer, Chemical, and the individual defendants all believe that the claims

32


asserted against each of them in this lawsuit are without merit and intend to vigorously defend against this lawsuit. On October 18, 2016, the Federal Court entered a stipulated order staying this action until the Oakland County Circuit Court issues rulings on motions for summary disposition In re Talmer Bancorp Shareholder Litigation, case number 2016-151641-CB. Following the Oakland County Circuit Court's denial of the Motions by KBW and the individual defendants and their ensuing application for leave to appeal that ruling, the Federal Court issued an order extending the stay of this action. On November 13, 2017, the Federal Court issued an Order Directing Plaintiff To Show Cause Why The Stay Should Not Be Lifted. On June 29, 2018, the Court issued an Order Lifting Stay. The plaintiff filed an amended complaint on July 27, 2018. In response to the amended complaint, the Defendants filed a Motion To Dismiss on August 24, 2018. A ruling on the Defendant's motion is awaited. On November 8, 2018, the Court entered an Order Staying Case Pending Appeal And Holding In Abeyance Motion To Dismiss. In the Order, the Court ruled that the case is stayed pending resolution of the appeals in the state court actions. The Order provides that if the Michigan Court of Appeals upholds the trial court decisions, and that ruling becomes final, the doctrine of collateral estoppel will preclude the plaintiffs in the City of Livonia and Nicholl cases from pursuing the federal case.

In response to the failure of the City of Livonia case to qualify as a class action, on July 31, 2017, the same attorneys who filed the City of Livonia action field a new lawsuit in the Oakland County, Michigan Circuit Court, based on the Talmer transaction. That case is styled Kevin Nicholl v. Gary Torgow et al, Case No. 2017-160058-CB. The Nicholl case makes substantially the same claims as were brought in the City of Livonia case, and seeks certification of a shareholder class. The Nicholl case has been assigned to Judge Wendy Potts, the same judge presiding over the City of Livonia case. On November 22, 2017, the plaintiff filed a First Amended Complaint purporting to add the City of Livonia Employees’ Retirement System and Regina Gertel Lee as additional named plaintiffs in the case. The Defendants moved to strike the class allegations in the Nicholl case based on the failure of the plaintiffs to timely file a motion to certify a class. On April 2, 2018, the Court entered an opinion and order confirming that the class allegations in the Nicholl case are stricken, and the Nicholl case will proceed as an individual action only. On April 23, 2018, the plaintiffs filed a claim of appeal with the Michigan Court of Appeals from the Court’s April 2, 2018 opinion and order.

As in the City of Livonia case, the Defendants filed motions for summary disposition in the Nicholl case, seeking dismissal of the Nicholl case. Argument on these motions was heard on April 11, 2018, together with arguments on the summary disposition motions of the Defendants in the City of Livonia case. On May 8, 2018 the Court issued its opinion and order granting the motion of the Defendants, and dismissing the Nicholl case. On May 25, 2018 the plaintiffs filed a claim of appeal from the Court’s decision with the Michigan Court of Appeals. The Court’s dismissal of the Nicholl case obviates the April 23, 2018 appeal filed by the Nicholl plaintiff with respect to the Court’s order of April 2, 2018 finding that the plaintiff failed to timely certify a class in the Nicholl litigation. By order dated August 7, 2018, the Michigan Court of Appeals consolidated the Nicholl case with the City of Livonia case. A ruling from the Court is awaited.

On January 3, 2018, the plaintiffs in the City of Livonia case filed a Motion For Voluntary Dismissal Without Prejudice. Defendants filed an opposition to that motion. The Court did not rule on that motion, pending ruling on the Defendant’s summary disposition motions in the City of Livonia and Nicholl cases. The Court's dismissal of the City of Livonia case obviates the need for a ruling on this motion.

In addition, we 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 our Consolidated Financial Condition or Results of Operations.    

Item 4. Mine Safety Disclosures.
Not applicable.


33


PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on The NASDAQ Stock Market® under the symbol CHFC. As of December 31, 2018, there were approximately 71.5 million shares of our common stock issued and outstanding, held by approximately 4,665 shareholders of record.

The earnings of Chemical Bank are the principal source of funds to pay cash dividends to our shareholders. Accordingly, cash dividends are dependent upon the earnings, capital needs, regulatory constraints, and other factors affecting Chemical Bank. See Note 21 to our Consolidated Financial Statements in Item 8 of this Annual Report for a discussion of such limitations. We have paid regular cash dividends every quarter since we began operation as a bank holding company in 1973. Based on our financial condition at December 31, 2018, management expects to continue to pay quarterly cash dividends on our common shares in 2019. However, there can be no assurance as to future dividends because they are dependent on our future earnings, capital requirements and financial condition, and may require regulatory approval. On January 22, 2019, we declared a first quarter 2019 cash dividend of $0.34 per share, payable on March 15, 2019.

The following table summarizes the quarterly cash dividends paid to shareholders over the past five years.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
First quarter
$
0.28

 
$
0.27

 
$
0.26

 
$
0.24

 
$
0.23

Second quarter
0.28

 
0.27

 
0.26

 
0.24

 
0.23

Third quarter
0.34

 
0.28

 
0.27

 
0.26

 
0.24

Fourth quarter
0.34

 
0.28

 
0.27

 
0.26

 
0.24

Total
$
1.24

 
$
1.10

 
$
1.06

 
$
1.00

 
$
0.94


34


Shareholder Return
The following line graph compares our cumulative total shareholder return on our common stock over the last five years, assuming the reinvestment of dividends, to the Standard and Poor's (S&P) 500 Stock Index and the KBW Nasdaq Regional Banking Index (Ticker: KRX). Both of these indices are based upon total return (including reinvestment of dividends) and are market-capitalization-weighted indices. The S&P 500 Stock Index is a broad equity market index published by S&P. The KBW Nasdaq Regional Banking Index is published by Keefe, Bruyette & Woods, Inc. (KBW), an investment banking firm that specializes in the banking industry. The KBW Nasdaq Regional Banking Index is composed of 50 small- and mid-cap U.S. regional banks or thrifts that are publicly traded. The line graph assumes $100 was invested on December 31, 2013.
chart-51860c687d1b5d0ba10.jpg
The dollar values for total shareholder return plotted in the above graph are shown below:
 
 
December 31,
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Chemical Financial Corporation
 
$
100.00

 
$
99.92

 
$
115.31

 
$
186.87

 
$
188.56

 
$
132.21

KBW NASDAQ Regional Banking Index
 
100.00

 
102.42

 
108.48

 
150.80

 
153.45

 
126.59

S&P 500 Stock Index
 
100.00

 
113.69

 
115.26

 
129.50

 
157.22

 
150.33

Equity Compensation Plans
Information about our equity compensation plans as of December 31, 2018 is set forth in Part III, Item 12 of this Annual Report, and is here incorporated by reference.

35


Purchases of Equity Securities
The following schedule summarizes total monthly share repurchase activity for the fourth quarter of 2018:
 
 
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced
 Plans or Programs
October 1, 2018 to October 31, 2018
 
1,680

 
$
50.42

 

November 1, 2018 to November 30, 2018
 
5,277

 
46.53

 

December 1, 2018 to December 31, 2018
 
10,145

 
37.08

 

    Total
 
17,102

 
$
41.31

 

(1)
Represents shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by employees who received shares of our common stock in 2018 under our share-based compensation plans, as these plans permit employees to use our stock to satisfy such obligations based on the market value of our stock on the date of vesting or date of exercise, as applicable.

36


Item 6. Selected Financial Data.
The following table sets forth our selected historical consolidated financial information for the periods and as of the dates indicated. We derived our balance sheet and income statement data for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 from our audited Consolidated Financial Statements. You should read this information together with Management's Discussion and Analysis of Financial Condition and Results of Operations and our audited Consolidated Financial Statements and the related notes thereto, which are included elsewhere in this Annual Report. As noted in the following table, we have included certain non-GAAP financial measures, which should be read in conjunction with the section entitled "Non-GAAP Financial Measures" and the accompanying table entitled "Reconciliation of Non-GAAP Operating Results," for reconciliation of non-GAAP measures to the most directly comparable GAAP financial measure. The financial information includes the impact of our merger with Talmer on August 31, 2016, our acquisitions of Lake Michigan on May 31, 2015, Monarch on April 1, 2015 and Northwestern Bancorp, Inc. ("Northwestern") on October 31, 2014. See Note 2 to our Consolidated Financial Statements in Item 8 and under the subheading "Mergers, Acquisitions and Branch Closings" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report for additional information regarding our acquisitions. Our historical results shown in the following table and elsewhere in this Annual Report are not necessarily indicative of our future performance.
 
As of and for the years ended December 31,
(Dollars in thousands, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
Summary of Operations
 
 
 
 
 
 
 
 
 
Interest income
$
775,996

 
$
632,135

 
$
410,379

 
$
291,789

 
$
227,261

Interest expense
143,663

 
74,557

 
29,298

 
17,781

 
14,710

Net interest income
632,333

 
557,578

 
381,081

 
274,008

 
212,551

Provision for loan losses
30,750

 
23,300

 
14,875

 
6,500

 
6,100

Net interest income after provision for loan losses
601,583

 
534,278

 
366,206

 
267,508

 
206,451

Noninterest income
148,536

 
144,019

 
122,350

 
80,216

 
63,095

Operating expenses, core (non-GAAP)(1)(2)
411,914

 
384,340

 
277,284

 
216,090

 
173,537

Merger and restructuring expenses

 
28,402

 
61,134

 
7,804

 
6,388

Impairment of income tax credits
12,284

 
9,252

 

 

 

Income before income taxes
325,921

 
256,303

 
150,138

 
123,830

 
89,621

Income tax expense
41,901

 
106,780

 
42,106

 
37,000

 
27,500

Net income
$
284,020

 
$
149,523

 
$
108,032

 
$
86,830

 
$
62,121

Significant items, net of tax (non-GAAP)(1)(3)

 
70,033

 
35,695

 
5,484

 
4,555

Net income, excluding significant items(non-GAAP)(1)(3)
$
284,020


$
219,556


$
143,727


$
92,314


$
66,676

Per Common Share Data
 
 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
 
 
Basic
$
3.98

 
$
2.11

 
$
2.21

 
$
2.41

 
$
1.98

Diluted
3.94

 
2.08

 
2.17

 
2.39

 
1.97

Diluted, excluding significant items (non-GAAP)(1)(3)
3.94

 
3.06

 
2.88

 
2.54

 
2.11

Cash dividends declared and paid
1.24

 
1.10

 
1.06

 
1.00

 
0.94

Book value at end of period
39.69

 
37.48

 
36.57

 
26.62

 
24.32

Tangible book value per share (non-GAAP)(1)
23.54

 
21.21

 
20.20

 
18.73

 
18.57

Market value at end of period
36.61

 
53.47

 
54.17

 
34.27

 
30.64

Common shares outstanding (in thousands)
71,460

 
71,207

 
70,599

 
38,168

 
32,774

Average diluted common shares (in thousands)
72,025

 
71,513

 
49,603

 
36,353

 
31,588

(1)
Denotes a non-GAAP Financial Measure. Please refer to section entitled "Non-GAAP Financial Measures" included within this Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation to the most directly comparable GAAP financial measure.
(2)
Excludes merger expenses, restructuring expenses and impairment of income tax credits.
(3)
For 2017, "significant items" are defined to include the fourth quarter of 2017 charge to income tax expense resulting from the revaluation of our net deferred tax assets completed following the signing of the Tax Cuts and Jobs Act in December 2017, merger expenses, restructuring expenses and fourth quarter of 2017 losses on sales of investment securities as part of our treasury and tax management objectives. For years prior to 2017, "significant items" are defined to include merger expenses and gain on sales of branch offices.


37


 
As of and for the years ended December 31,
(Dollars in thousands, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
21,498,341

 
$
19,280,873

 
$
17,355,179

 
$
9,188,797

 
$
7,322,143

Investment securities
3,645,931

 
2,640,639

 
1,858,391

 
1,063,702

 
1,065,277

Loans
15,269,779

 
14,155,267

 
12,990,779

 
7,271,147

 
5,688,230

Deposits
15,593,282

 
13,642,803

 
12,873,122

 
7,456,767

 
6,078,971

Liabilities
18,662,081

 
16,612,124

 
14,773,653

 
8,172,823

 
6,525,010

Shareholders' equity
2,836,260

 
2,668,749

 
2,581,526

 
1,015,974

 
797,133

Tangible shareholders' equity (non-GAAP)(1)
1,682,383

 
1,510,011

 
1,425,998

 
714,901

 
606,419

Performance Ratios
 
 
 
 
 
 
 
 
 
Net interest margin
3.48
%
 
3.40
%
 
3.51
%
 
3.49
%
 
3.49
%
Net interest margin(fully taxable equivalent)(Non-GAAP)(1)(2)
3.53
%
 
3.48
%
 
3.60
%
 
3.58
%
 
3.59
%
Return on average assets
1.41
%
 
0.81
%
 
0.90
%
 
1.02
%
 
0.96
%
Return on average shareholders' equity
10.4
%
 
5.7
%
 
7.0
%
 
9.4
%
 
8.2
%
Return on average tangible shareholders' equity (Non-GAAP)(1)
17.9
%
 
10.2
%
 
11.2
%
 
12.9
%
 
10.4
%
Average shareholders' equity as a percentage of average assets
13.6
%
 
14.2
%
 
12.8
%
 
10.8
%
 
11.7
%
Efficiency ratio (GAAP)
54.3
%
 
60.1
%
 
67.2
%
 
63.2
%
 
65.3
%
Efficiency ratio adjusted (non-GAAP)(1)
51.5
%
 
51.9
%
 
54.4
%
 
58.7
%
 
60.9
%
Dividend payout ratio
31.5
%
 
52.9
%
 
48.8
%
 
41.8
%
 
47.7
%
Consolidated Capital Ratios
 
 
 
 
 
 
 
 
 
Shareholders' equity as a percentage of total assets
13.2
%
 
13.8
%
 
14.9
%
 
11.1
%
 
10.9
%
Tangible shareholders' equity as a percentage of tangible assets (non-GAAP)(1)
8.3
%
 
8.3
%
 
8.8
%
 
8.0
%
 
8.5
%
Common equity tier 1 capital(3)
10.7
%
 
10.2
%
 
10.7
%
 
10.6
%
 
N/A

Tier 1 leverage ratio(3)
8.7
%
 
8.3
%
 
9.0
%
 
8.6
%
 
9.3
%
Tier 1 risk-based capital ratio(3)
10.7
%
 
10.2
%
 
10.7
%
 
10.7
%
 
11.1
%
Total risk-based capital ratio(3)
11.5
%
 
11.0
%
 
11.5
%
 
11.8
%
 
12.4
%
Asset Quality
 
 
 
 
 
 
 
 
 
Net loan charge-offs
$
12,653

 
$
9,681

 
$
9,935

 
$
8,855

 
$
9,489

Net loan charge-offs as a percentage of average loans
0.09
%
 
0.07
%
 
0.11
%
 
0.13
%
 
0.19
%
Year end balances:
 
 
 
 
 
 
 
 
 
Allowance for loan losses — originated loans
$
109,564

 
$
91,887

 
$
78,268

 
$
73,328

 
$
75,183

Allowance for loan losses — acquired loans
420

 

 

 

 
500

Total nonaccrual loans
85,433

 
63,095

 
44,334

 
62,225

 
50,644

Total nonperforming assets
91,689

 
71,902

 
61,521

 
72,160

 
64,849

Allowance for originated loan losses as a percentage of total originated loans
0.93
%
 
0.94
%
 
1.05
%
 
1.26
%
 
1.51
%
Allowance for originated loan losses as a percentage of nonaccrual loans
128.2
%
 
145.6
%
 
176.5
%
 
117.8
%
 
148.5
%
Nonaccrual loans as a percentage of total loans
0.56
%
 
0.45
%
 
0.34
%
 
0.86
%
 
0.89
%
Nonperforming assets as a percentage of total assets
0.43
%
 
0.37
%
 
0.35
%
 
0.79
%
 
0.89
%
(1)
Denotes a non-GAAP Financial Measure. Please refer to section entitled "Non-GAAP Financial Measures" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a reconciliation to the most directly comparable GAAP financial measure.
(2)
Presented on a tax equivalent basis using a 21% tax rate for 2018 and a 35% tax rate for all prior periods presented.
(3)
The years ended December 31, 2018, 2017, 2016 and 2015 are under Basel III framework and the year ended December 31, 2014 is under the Basel I framework. The Common Equity Tier 1 (CET1) capital ratio is a new ratio introduced under the Basel III framework.

38


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion describes our results of operations for the years ended December 31, 2018, 2017 and 2016 and also analyzes our financial condition as of December 31, 2018, as compared to December 31, 2017. This discussion should be read in conjunction with the "Selected Financial Data" and our audited Consolidated Financial Statements and accompanying footnotes thereto included elsewhere in this Annual Report. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see "Forward-Looking Statements" of this Annual Report.

Business Overview

Chemical Financial Corporation is a financial holding company headquartered in Detroit, Michigan, Our common stock is listed on the NASDAQ under the symbol "CHFC." At December 31, 2018, we had consolidated total assets of $21.50 billion, total loans of $15.27 billion, total deposits of $15.59 billion and total shareholders' equity of $2.84 billion.

Our business is concentrated in a single industry segment, commercial banking, which is conducted through our single commercial bank subsidiary, Chemical Bank. We offer a full range of traditional banking and fiduciary products and services to residents and business customers in our geographical areas. These products and services include business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance and investment products, corporate and personal wealth management services, mortgage banking and other banking services.

The principal markets for our products and services are communities in Michigan, Northeast Ohio and Northern Indiana where our bank branches are located and the areas surrounding these communities. As of December 31, 2018, we served these markets through 186 banking offices located in Michigan, 24 branches located in Northeast Ohio and two branches located in Northern Indiana. In addition to our banking offices, we operated eight loan production offices and 237 automated teller machines, both on and off bank premises. In addition, we own, directly or indirectly, various non-bank operating and non-operating subsidiaries.

Our principal source of revenue is interest and fees on loans, which accounted for 86.6% of total revenue in 2018, 81.7% of total revenue in 2017 and 76.2% of total revenue in 2016. Interest on investment securities, service charges and fees on deposit accounts, wealth management revenue and mortgage banking revenue are also significant sources of revenue, which combined, accounted for 23.7% of total revenue in 2018, 20.8% of total revenue in 2017 and 19.6% of total revenue in 2016. Revenue is influenced by overall economic factors including market interest rates, business and consumer spending, consumer confidence and competitive conditions in the marketplace.

Proposed Merger with TCF Financial Corporation

Chemical and TCF Financial Corporation ("TCF") have entered into an Agreement and Plan of Merger, dated as of January 27, 2019. Under the merger agreement, Chemical and TCF have agreed to combine their respective companies in a merger of equals, pursuant to which TCF will merge with and into Chemical, with Chemical continuing as the surviving entity. Immediately following the merger or at such later time as the parties may mutually agree, Chemical Bank will merge with and into TCF National Bank, with TCF National Bank as the surviving bank. The merger agreement was approved by the boards of directors of Chemical and TCF, and is subject to shareholder and regulatory approval and other customary closing conditions. The transaction is anticipated to close in the second half of 2019. The transaction is discussed in more detail in Note 26 to our Consolidated Financial Statements under Item 8 of this Annual Report.

2017 Restructuring Efforts

During the third quarter of 2017, we launched a project to identify strategies that could be deployed to drive revenue growth and steps to be taken to further improve operating efficiency as part of an effort to refine and clarify our overall strategic plan of how we allocate our capital across the organization and better position ourselves for growth. The project resulted in

39


restructuring efforts including a reduction of approximately 7% in total employees and consolidation of 25 branches, each of which were completed during the fourth quarter of 2017, in addition to 13 branches that were consolidated during the third quarter of 2017. Under the restructuring efforts, we also discontinued our title insurance services and reduced resources devoted to indirect auto lending.
Mergers, Acquisitions and Branch Closings
Since our acquisition of Chemical Bank and Trust Company in 1974, we have acquired 25 community banks and 36 other branch bank offices through December 31, 2018. Our most recent transactions include our merger with Talmer Bancorp, Inc. ("Talmer") during the third quarter of 2016, our acquisitions of Lake Michigan Financial Corporation ("Lake Michigan") and Monarch Community Bancorp, Inc. ("Monarch") during the second quarter of 2015 and our acquisition of Northwestern Bancorp, Inc. ("Northwestern") in the fourth quarter of 2014.
Merger with Talmer Bancorp, Inc.
On August 31, 2016, we acquired all the outstanding stock of Talmer for total consideration of $1.61 billion, which included stock consideration of $1.50 billion and cash consideration of $107.6 million. As a result of the merger, we issued 32.1 million shares of our common stock based on an exchange ratio of 0.4725 shares of our common stock, and paid $1.61 in cash, for each share of Talmer common stock outstanding. Talmer, a bank holding company, owned Talmer Bank and Trust, which was consolidated with and into Chemical Bank effective November 10, 2016. Talmer Bank and Trust operated a full service community bank offering a full suite of commercial banking, retail banking, mortgage banking, wealth management and trust services to small and medium-sized businesses and individuals through 80 full service banking offices located primarily within southeast Michigan and northeast Ohio, as well as in west Michigan, northeast Michigan, and northern Indiana. The merger with Talmer resulted in increases in our total assets of $7.71 billion, including total loans of $4.88 billion, total deposits of $5.29 billion and investment securities of $810.6 million. In connection with the merger with Talmer, we recorded $847.7 million of goodwill, which was primarily due to the synergies and economies of scale expected from combining our operations with those of Talmer. In addition, we recorded $19.1 million of core deposit intangibles in conjunction with the merger.
We incurred $8.5 million and $61.1 million of merger and acquisition-related transaction expenses during the years ended December 31, 2017 and 2016, respectively, primarily related to the merger with Talmer, which reduced diluted earnings per share by $0.08 in 2017 and $0.81 in 2016.
Acquisition of Lake Michigan Financial Corporation
On May 31, 2015, we acquired all of the outstanding stock of Lake Michigan for total consideration of $187.4 million, which included stock consideration of $132.9 million and cash consideration of $54.5 million. As a result of the acquisition, we issued approximately 4.3 million shares of our common stock, based on an exchange ratio of 1.326 shares of our common stock, and paid $16.64 in cash, for each share of Lake Michigan common stock outstanding. Lake Michigan, a bank holding company, owned The Bank of Holland and The Bank of Northern Michigan, which combined operated five banking offices in Holland, Grand Haven, Grand Rapids, Petoskey and Traverse City, Michigan. The Bank of Holland and The Bank of Northern Michigan were consolidated with and into Chemical Bank on November 13, 2015. The acquisition of Lake Michigan resulted in increases in total assets of $1.24 billion, including total loans of $985.5 million, and total deposits of $924.7 million, as of the acquisition date. In connection with the acquisition of Lake Michigan, we recorded $101.1 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining our operations with those of Lake Michigan. In addition, we recorded $8.6 million of core deposit and other intangible assets in conjunction with the acquisition.
Acquisition expenses associated with the acquisition of Lake Michigan totaled $5.5 million during 2015, which reduced net income per common share by $0.11 in 2015.
Acquisition of Monarch Community Bancorp, Inc.
On April 1, 2015, we acquired all of the outstanding stock of Monarch in an all-stock transaction valued at $27.2 million. As a result of the acquisition, we issued 860,575 shares of our common stock based on an exchange ratio of 0.0982 shares of our common stock for each share of Monarch common stock outstanding. Monarch, a bank holding company, owned Monarch Community Bank, which operated five full service branch offices in Coldwater, Marshall, Hillsdale and Union City, Michigan. Monarch Community Bank was consolidated with and into Chemical Bank on May 8, 2015. The acquisition of Monarch resulted in increases in our total assets of $182.8 million, including total loans of $121.8 million, and total deposits of $144.3 million, as of the acquisition date. In connection with the acquisition of Monarch, we recorded $5.3 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining our operations with Monarch. In addition, we recorded $1.9 million of core deposit intangible assets in conjunction with the acquisition.
Acquisition expenses associated with the acquisition of Monarch totaled $2.3 million during 2015, which reduced net income per common share by $0.04 in 2015.

40


Acquisition of Northwestern Bancorp, Inc.
On October 31, 2014, we acquired all of the outstanding stock of Northwestern for total cash consideration of $121.0 million. Northwestern, a bank holding company, owned Northwestern Bank, provided traditional banking services and products through 25 banking offices serving communities in the northwestern lower peninsula of Michigan. At the acquisition date, Northwestern added total assets of $815.0 million, including total loans of $475.3 million, and total deposits of $794.4 million, to our operations. Northwestern Bank was consolidated with and into Chemical Bank as of the acquisition date. In connection with the acquisition of Northwestern, we recorded $60.3 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining our operations with those of Northwestern. In addition, we recorded $12.9 million of core deposit intangible assets in conjunction with the acquisition.
Acquisition expenses associated with the acquisition of Northwestern totaled $5.8 million during 2014, which reduced net income per common share by $0.14 in 2014.
Branch Closings and Consolidation
On April 15, 2016, we closed eleven branch locations which were identified as having a small core deposit base and/or being in close proximity to other Chemical Bank branch locations.
In conjunction with the consolidation of Talmer Bank and Trust with and into Chemical Bank during the fourth quarter of 2016, we closed seven branches in communities where Talmer Bank and Trust and Chemical Bank had overlapping branches.
Expenses associated with the closing of the aforementioned branch office locations were not significant, with the exception of $1.0 million of fair value write-downs recognized in the second quarter of 2016 related to the eleven branch locations that were closed, as the majority of the employees of these closed branch offices were transferred to other nearby Chemical Bank branch locations or other open positions within Chemical Bank.
During the third quarter of 2017 we initiated restructuring efforts that included the consolidation of 25 branches in the fourth quarter of 2017. These branch consolidations were in addition to the 13 branches consolidated during the third quarter 2017. The expense related to branch closings was approximately $5.1 million during the year ended December 31, 2017, included in "restructuring expenses" on our Consolidated Statements of Income. At December 31, 2018, we operated a total of 212 branches.

Critical Accounting Policies
    
Our Consolidated Financial Statements are prepared in accordance with United States generally accepted accounting principles ("GAAP"), Securities and Exchange Commission ("SEC") rules and interpretive releases and general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions and complex judgments that affect the amounts reported in our Consolidated 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, our Consolidated 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. We utilize third-party sources to assist with developing estimates, assumptions and judgments regarding certain amounts reported in our Consolidated Financial Statements and accompanying notes. When third-party sources are utilized, our management remains responsible for complying with GAAP. To execute management's responsibilities, we have processes in place to develop an understanding of the third-party methodologies and to design and implement specific internal controls over valuation.

The significant accounting policies we follow are presented in Note 1 to our Consolidated Financial Statements included in Item 8 of this Annual Report. These policies, along with the disclosures presented in the other notes to our Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," provide information on how significant assets and liabilities are measured in our Consolidated Financial Statements and how those measurements are determined. Based on the techniques used and the sensitivity of financial statement amounts to the methods, estimates and assumptions underlying those amounts, management has identified the determination of the allowance for loan losses, accounting for acquired loans, income and other taxes and the valuation of loan servicing rights 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. Management reviews the following critical accounting policies with the Audit Committee of the board of directors at least annually.


41


Allowance for Loan Losses

We use a defined methodology to quantify the necessary allowance for loan losses ("allowance") and related provision for loan losses, but there can be no assurance that the methodology will successfully identify and estimate all of the losses that are inherent in our loan portfolio. Our methodology uses our historical loss experience (net charge-offs) adjusted for qualitative factors, including trends in credit quality, composition of and growth in our loan portfolio, and the overall economic environment in our markets. These qualitative factors include many estimates and judgments. As a result, we could record future provisions for loan losses that may be significantly different than the levels that have been recorded in the three-year period ended December 31, 2018. Note 1 and Note 5 to our Consolidated Financial Statements further describe the methodology we use to determine the allowance. In addition, a discussion of the factors driving changes in the amount of the allowance is included under the subheading "Allowance for Loan Losses" in "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Our allowance has two components: (1) the allowance for loan losses (including both our originated and acquired loan portfolios) and (2) the reserve for unfunded credit commitments. Unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance represents management’s estimate of probable credit losses inherent in our loan and unfunded credit commitment portfolios as of period end.

We calculate the allowance with the objective of maintaining a reserve sufficient to absorb losses inherent in the loan portfolio. We consider the allowance to be a critical accounting estimate because it requires significant judgment and the use of estimates to determine the amount and timing of expected cash flows on acquired loans and impaired loans, the collateral values on impaired loans, and estimated losses on pools of homogeneous originated loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The principal assumption used in deriving the allowance is the estimate of a loss percentage for each type of loan.

In determining the allowance for the originated loan portfolio and the related provision for loan losses, we consider three principal elements: (1) valuation allowances based on probable losses identified during the review of impaired loans, (2) reserves, by loan classes, on all other loans based on six-years of historical loan loss experience, loan loss trends and consideration of estimated loss emergence periods, and (3) a reserve for qualitative factors that take into consideration risks inherent in the originated loan portfolio that differ from historical loan loss experience.

We have a loan review function that is independent of the loan origination function. At least annually, the loan review function performs a detailed credit quality review, including analysis of collateral values, of the majority of the loans in our commercial loan portfolio, with a particular focus on larger balance loans and loans that have deteriorated below certain levels of credit risk. In many cases, the estimate of collateral values includes significant judgments and assumptions.

The following section, "Accounting for Acquired Loans", describes the process for determining the allowance for the acquired loan portfolio.

Accounting for Acquired Loans under ASC Topic 310-30

ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30), provides guidance for accounting for loans acquired in a business combination that have experienced a deterioration in credit quality since origination for which it is probable that the purchaser will be unable to collect all contractually required payments, including both principal and interest. Such purchased loans are considered impaired.

In assessing credit quality deterioration, we must make numerous assumptions, interpretations and judgments using internal and third-party credit quality information to determine whether or not it is probable that we 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 acquisition date may include statistics such as past due and nonaccrual status, recent borrower credit scores and loan-to-value percentages. Those loans that qualify under ASC 310-30 are recorded at fair value at acquisition, which involves estimating the expected cash flows to be collected, both principal and interest, discounted at the prevailing market rate of interest. Accordingly, the associated allowance for loan losses on these loans is not carried over at the acquisition date. ASC 310-30 also allows purchasers to aggregate acquired loans into loan pools with common risk characteristics and apply a composite interest rate and estimate cash flow expectations for all loans in the pool. We elected to apply ASC 310-30, by analogy, to loans acquired in our Talmer, Lake Michigan, Monarch, Northwestern and O.A.K.Financial Corporation ("OAK") acquisitions and, therefore, we follow the accounting and disclosure guidance of ASC 310-30 for all of these acquired loans.


42


The excess of cash flows we expect to collect over the estimated fair value of a loan, or pool of loans, is referred to as the "accretable yield" and is recognized in interest income over the estimated remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments on a loan, or pool of loans, and the cash flows we expect to collect at acquisition, considering the impact of prepayments and estimates of future credit losses expected to be incurred over the life of the loan, or pool of loans, is referred to as the "nonaccretable difference" and is sensitive to unexpected prepayments and/or payoffs and changes in loan credit quality.

We evaluate estimated cash flows on our acquired loans on a quarterly basis. These evaluations require us to continue to use key assumptions and estimates, similar to the initial estimate of fair value. A decrease in estimated cash flows due to deterioration of credit quality will generally result in a charge to the provision for loan losses and a resulting increase to the allowance for loan losses in addition to a transfer from accretable yield to nonaccretable difference. A decrease in estimated cash flows due to unexpected prepayments and/or payoffs will generally result in a transfer from accretable yield to nonaccretable difference. Increases in the estimates of estimated cash flows will first reverse any previously established allowance for loan losses and then result in increases to the accretable yield, which will increase amounts recognized in interest income in subsequent periods. The disposition of acquired loans including loan sales to third parties, the receipt of payments in full or in part by the borrower and foreclosure of the underlying collateral, will result in removal of the loan from the acquired loan portfolio at its carrying amount. As a result of the significant amount of judgment involved in estimating future cash flows we expect to be collected on acquired loans, the adequacy of the allowance for loan losses could be significantly impacted by changes in cash flow expectations resulting from changes in the credit quality of acquired loans.

Acquired loans that were classified as nonperforming loans before being acquired and acquired loans that are not performing in accordance with contractual terms subsequent to acquisition are not classified as nonperforming loans subsequent to acquisition because the loans are recorded in pools at net realizable value based on the principal and interest we expect to collect on such loans. Judgment is required to estimate the timing and amount of cash flows expected to be collected when the loans are not performing in accordance with the original contractual terms.

Note 1, Note 2 and Note 5 to our Consolidated Financial Statements contain additional information related to acquired loans.

Income and Other Taxes

We are subject to the income and other tax laws of the United States, the States of Michigan, Ohio, Indiana and other states where nexus has been created. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provisions 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 our tax returns, management attempts to make reasonable interpretations of enacted tax laws. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management's ongoing assessment of facts and evolving case law. On December 22, 2017, H.R.1, referred to as the "Tax Cuts and Jobs Act", was signed into law. The Tax Cuts and Jobs Act, among other items, reduced the corporate income tax rate from 35% to 21%, effective January 1, 2018. As such, we completed a revaluation of the net deferred tax assets and estimated a reduction in our deferred tax asset as of December 31, 2017.

When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the 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.
    
Management assesses the reasonableness of our effective federal tax rate on a quarterly basis based on management's estimate of taxable income and the applicable taxes expected for the full year, including the impact of any discrete items that have occurred. Deferred tax assets and liabilities are reassessed on a quarterly basis, including the need for a valuation allowance for deferred tax assets. The need for reserves for uncertain tax positions is reviewed quarterly based upon developments in tax law and the status of examinations or audits.
    
Note 17 to our Consolidated Financial Statements contains additional information related to income taxes.


43


Valuation of Loan Servicing Rights
    
We recognize as assets the rights to service loans for others, known as loan servicing rights ("LSRs"). As of January 1, 2017, we elected to account for LSRs under the fair value option. Prior to January 1, 2017, we accounted for LSRs at the lower of cost or fair value. To determine the fair value of LSRs, we use an independent third party valuation model requiring the incorporation of assumptions that market participants would use in estimating future net servicing income, which include estimates of prepayment speeds, discount rate, cost to service and escrow account earnings. Changes in the fair value of LSRs directly impacts earnings. See Note 3 and Note 9 to our Consolidated Financial Statements for more information on fair value measurements.

Accounting Standards Updates

See Note 1 to our Consolidated Financial Statements included in this Annual Report for details of accounting pronouncements adopted during 2018. See the following section for a description of pronouncements that have been released but not yet adopted.

Pending Accounting Pronouncements    
Standard
Description/Required Date of Adoption
Expected impact on the financial statements and other significant matters
ASU No. 2016-02 - Leases (Topic 842)

ASU No. 2018-01 - Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842

ASU No. 2018-10 - Codification Improvements to Topic 842, Leases

ASU No. 2018-11 - Leases (Topic 842) Targeted Improvements

ASU No. 2018-20 - Leases (Topic 842): Narrow Scope Improvements for Lessors
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU), No. 2016-02, which requires lessees to recognize leases on-balance sheet, lessors to classify leases as sales-type, direct financing, or operating, and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow Scope Improvements for Lessors.

This guidance provides that lessees will be required to recognize the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use (ROU) asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.

Upon adoption, a modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

Required adoption date is January 1, 2019, with early adoption permitted.
At adoption on January 1, 2019, we expect to recognize additional operating liabilities and ROU assets ranging from $35 million to $40 million, representing less than 1% of total assets. We will begin providing the newly required disclosures regarding our leasing activities beginning in our Form 10-Q for the first quarter of 2019.

We intend to elect certain practical expedients in transition offered through the guidance, including foregoing the restatement of comparative periods, the ‘package of practical expedients’ which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs, as well as the use of hindsight.

We believe substantially all of our leases will continue to be classified as operating leases under the new standard. The adoption is not expected to have a material impact on our results of operations or significantly change our leasing activities.


44


Standard
Description/Required Date of Adoption
Expected impact on the financial statements and other significant matters
ASU No. 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU No. 2018-19 - Codification Improvements to Topic 326, Financial Instruments: Credit Losses
This standard amends the guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The measurement of expected credit loss should be based on relevant information about past events, current conditions, and reasonable forecasts. An allowance will be recognized for purchased credit-deteriorated assets through a gross-up approach measuring the amortized cost as the sum of the purchase price and estimated credit loss at the acquisition date. Adjustments in allowance will be recognized immediately in earnings. The newly required disclosures include both qualitative and quantitative information about an entity’s financial assets and the allowance for credit losses, including among others: (a) how an entity developed its allowance for financial assets measured at amortized cost, (b) information about the credit quality for financial receivables and net investments in leases measured at amortized cost, and (c) an allowance roll-forward for available-for-sale securities and an aging analysis for securities past due.
The amendments in the 2018 update clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842.
Required adoption date of January 1, 2020, with early adoption permitted as of January 1, 2019. Currently, we do not have plans for early adoption.


Upon adoption, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the potential impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption could be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. We have been working with an industry leading vendor and using their software program to develop a model to determine the expected credit losses in our loan portfolio. Starting in the fourth quarter of 2018, we began to develop and refine multiple scenarios and identify portfolio segmentation. We will continue this process in 2019 and run parallel analysis with our current credit loss model. We will additionally continue our analysis of other applicable requirements of the standard.


ASU No. 2017-04, Intangible - Goodwill and Other (Topic 350)
Accounting for goodwill impairment is simplified by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Subsequent to the adoption, goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance largely remains unchanged.

Required adoption date of January 1, 2020, with early adoption permitted.

Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960)
This update clarifies the reporting requirements by an employee benefit plan for its interest in a master trust and removes redundancy relating to 401(h) account disclosures. The amendment requires a plan's interest in a master trust to be presented in separate line items in the statement of net assets available and in the statement of changes in net assets available. Additionally, the requirement to disclose the percentage interest in the master trust is removed and replaced by the required disclosure of the dollar amount of interest in each investment type.

Required adoption date of January 1, 2019, with early adoption permitted.

Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU No. 2018-07, Compensation-Stock Compensation (Topic 718)
This update expands the scope of stock compensation requirements to include share-based payment transactions for acquiring goods and services from nonemployees. The amendment requires that nonemployee share-based payment awards meet the accounting requirements of employee share-based payment awards.

Required adoption date of January 1, 2019, with early adoption permitted.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.

45


Standard
Description/Required Date of Adoption
Expected impact on the financial statements and other significant matters
ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
This update clarifies the scope and the accounting guidance for contributions received and contributions made. The guidance clarifies the criteria on determining whether a contribution is conditional or unconditional.

Required adoption date of January 1, 2019, with early adoption permitted.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU No. 2018-09, Codification Improvements
This update clarifies and makes minor improvements to the current codification. The amendments are made to a number of subtopics in order to allow for clearer understanding of the codification.

Required adoption date of January 1, 2019, with early adoption permitted.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclose Framework-Changes to the Disclosure Requirements for Fair Value Measurement
The amendments in this update improves the effectiveness of fair value measurement disclosures and modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement based on the concepts in the Concept Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, including considerations of costs and benefits.

The additional disclosure requirements include disclosing the change in unrealized gains(losses) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements or other quantitative information. The update also removes the disclosure requirements for: the amount of and reasons for transfers between Level 1 and Level 2 hierarchies, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.

Required adoption date of January 1, 2020, with early adoption permitted. Currently, we do not have plans for early adoption.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant based on the concepts in the Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements.

Required adoption date of January 1, 2021, with early adoption permitted. Currently, we do not have plans for early adoption.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
The amendments in this update permit the use of an alternative reference rate, the OIS rate based on SOFR, as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury (UST) Rate, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate.

Required adoption date of January 1, 2019, with early adoption permitted.
Adoption is not expected to have a material impact on our consolidated financial condition or results of operations.


46


Non-GAAP Financial Measures
This Annual Report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include our operating expenses, core (which excludes merger and restructuring expenses and impairment of income tax credits); tangible book value per share; tangible shareholders' equity; presentation of net interest income and net interest margin on a fully taxable equivalent ("FTE") basis; operating expenses, efficiency ratio (which excludes merger and restructuring expenses, impairment of income tax credits and amortization of intangibles); the adjusted efficiency ratio (which excludes merger and restructuring expenses, impairment of income tax credits, amortization of intangibles, net interest FTE adjustments, the change in fair value of loan servicing rights and gains and losses from sale of investment securities) and other information presented excluding significant items (merger and restructuring expenses, certain losses on sale of investment securities and gain on sale of branch offices) including net income, diluted earnings per share, return on average assets, return on average shareholders' equity and return on average tangible shareholders' equity. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below. A reconciliation of net interest income and net interest margin (FTE) to the most directly comparable GAAP financial measure can be found under the subheading "Average Balances, Fully Taxable Equivalent (FTE) Interest and Effective Yields and Rates" of this Annual Report.

47


 
Year Ended December 31,
(Dollars in thousands, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
Reconciliation of Non-GAAP Operating Results
 
 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
 
 
Net income, as reported
$
284,020

 
$
149,523

 
$
108,032

 
$
86,830

 
$
62,121

Merger expenses

 
8,522

 
61,134

 
7,804

 
6,388

Restructuring expenses

 
19,880

 

 

 

Gain on sales of branch offices

 

 
(7,391
)
 

 

Losses on sales of investment securities(1)

 
7,556

 

 

 

Significant items

 
35,958

 
53,743

 
7,804

 
6,388

Income tax benefit(2)

 
(12,585
)
 
(18,048
)
 
(2,320
)
 
(1,833
)
Revaluation of net deferred tax assets

 
46,660

 

 

 

Significant items, net of tax

 
70,033

 
35,695

 
5,484

 
4,555

Net income, excluding significant items
$
284,020

 
$
219,556

 
$
143,727

 
$
92,314

 
$
66,676

Diluted Earnings Per Share
 
 
 
 
 
 
 
 
 
Diluted earnings per share, as reported
$
3.94

 
$
2.08

 
$
2.17

 
$
2.39

 
$
1.97

Effect of significant items, net of tax

 
0.98

 
0.71

 
0.15

 
0.14

Diluted earnings per share, excluding significant items
$
3.94

 
$
3.06

 
$
2.88

 
$
2.54

 
$
2.11

Return on Average Assets
 
 
 
 
 
 
 
 
 
Return on average assets, as reported
1.41
%
 
0.81
%
 
0.90
%
 
1.02
%
 
0.96
%
Effect of significant items, net of tax

 
0.38

 
0.29

 
0.07

 
0.07

Return on average assets, excluding significant items
1.41
%
 
1.19
%
 
1.19
%
 
1.09
%
 
1.03
%
Return on Average Shareholders' Equity
 
 
 
 
 
 
 
 
 
Return on average shareholders' equity, as reported
10.4
%
 
5.7
%
 
7.0
%
 
9.4
%
 
8.2
%
Effect of significant items, net of tax

 
2.7

 
2.3

 
0.6

 
0.6

Return on average shareholders' equity, excluding significant items
10.4
%
 
8.4
%
 
9.3
%
 
10.0
%
 
8.8
%
Return on Average Tangible Shareholders' Equity
 
 
 
 
 
 
 
 
 
Average shareholders' equity
$
2,740,399

 
$
2,627,862

 
$
1,546,721

 
$
919,328

 
$
754,211

Average goodwill, CDI and noncompete agreements, net of tax
1,156,371

 
1,155,734

 
582,536

 
245,894

 
157,634

Average tangible shareholders' equity
$
1,584,028

 
$
1,472,128

 
$
964,185

 
$
673,434

 
$
596,577

Return on average tangible shareholders' equity
17.9
%
 
10.2
%
 
11.2
%
 
12.9
%
 
10.4
%
Effect of significant items, net of tax

 
4.7

 
3.7

 
0.8

 
0.8

Return on average tangible shareholders' equity, excluding significant items
17.9
%
 
14.9
%
 
14.9
%
 
13.7
%
 
11.2
%
Efficiency Ratio
 
 
 
 
 
 
 
 
 
Net interest income
$
632,333

 
$
557,578

 
$
381,081

 
$
274,008

 
$
212,551

Noninterest income
148,536

 
144,019

 
122,350

 
80,216

 
63,095

Total revenue - GAAP
780,869

 
701,597

 
503,431

 
354,224

 
275,646

Net interest income FTE adjustment
9,458

 
13,078

 
9,642

 
7,452

 
5,975

Loan servicing rights change in fair value (gains) losses
(1,827
)
 
6,375


(5,112
)
 

 

Gains on sale of branch offices

 


(7,391
)
 

 

(Gains) losses from closed branch locations and sale of investment securities
(224
)
 
7,388

 
(669
)
 
(779
)
 

Total revenue - non-GAAP
$
788,276

 
$
728,438

 
$
499,901

 
$
360,897

 
$
281,621

Operating expenses - GAAP
$
424,198

 
$
421,994

 
$
338,418

 
$
223,894

 
$
179,925

Merger expenses

 
(8,522
)
 
(61,134
)
 
(7,804
)
 
(6,388
)
Restructuring expenses

 
(19,880
)
 

 

 

Impairment of income tax credits(3)
(12,284
)
 
(9,252
)
 

 

 

Operating expense, core - Non-GAAP
411,914

 
384,340

 
277,284

 
216,090

 
173,537

Amortization of intangibles
(5,716
)
 
(6,089
)
 
(5,524
)
 
(4,389
)
 
(2,029
)
Operating expenses, efficiency ratio - Non-GAAP
$
406,198

 
$
378,251

 
$
271,760

 
$
211,701

 
$
171,508

Efficiency ratio - GAAP
54.3
%
 
60.1
%
 
67.2
%
 
63.2
%
 
65.3
%
Efficiency ratio - adjusted Non-GAAP
51.5
%
 
51.9
%
 
54.4
%
 
58.7
%
 
60.9
%
(1) Fourth quarter of 2017 losses on sales of investment securities are deemed a significant item for 2017 as they were taken as part of our treasury and tax management objectives associated with the Tax Cuts and Jobs Act.
(2)   Assumes merger expenses are deductible at an income tax rate of 35%, except for the impact of estimated nondeductible expenses incurred in periods when merger and acquisition transactions are completed.
(3)  The impairment of income tax credits is related to federal historic tax credits that provide a reduction to our income tax expense. The impairment, included within other operating expenses, is more than offset by a reduction to our income tax expense related to the same tax credits included within other operating expenses.

48


 
 
Year Ended December 31,
(Dollars in thousands, except per share data)
 
2018
 
2017
 
2016
 
2015
 
2014
Total operating expenses as a percentage of total average assets