Acquisitions

Acquisition of Lake Michigan Financial Corporation

On May 31, 2015, the Corporation acquired all the outstanding stock of Lake Michigan Financial Corporation (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, the Corporation issued approximately 4.3 million shares of its common stock, based on an exchange ratio of 1.326 shares of its common stock, and paid $16.64 in cash, for each share of Lake Michigan common stock outstanding. Lake Michigan, a bank holding company which owned The Bank of Holland and The Bank of Northern Michigan, provided traditional banking services and products with five banking offices in Holland, Grand Haven, Grand Rapids, Petoskey and Traverse City, Michigan. The Bank of Holland and The Bank of Northern Michigan will be operated as separate subsidiaries of the Corporation until their planned consolidation with and into Chemical Bank in the fourth quarter of 2015 in conjunction with conversion of their core data systems to Chemical Bank's systems.

At the acquisition date, Lake Michigan added total assets of $1.24 billion, including total loans of $986 million, and total deposits of $925 million to the Corporation's consolidated statement of financial position. The Corporation recorded $101 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining the operations of the Corporation and Lake Michigan. In addition, the Corporation recorded $8.6 million of core deposit and other intangible assets in conjunction with the acquisition.

The results of the merged Lake Michigan operations are presented within the Corporation's consolidated financial statements from the acquisition date. The Bank of Holland and The Bank of Northern Michigan collectively contributed $9.7 million of net interest income, $0.5 million of noninterest income and $3.6 million of net income to the Corporation's consolidated statements of income for the three months ended September 30, 2015 and $12.9 million of net interest income, $0.8 million of noninterest income and $4.8 million of net income to the Corporation's consolidated statements of income for the four month period from the acquisition date of May 31, 2015 to September 30, 2015. Nonrecurring acquisition-related expenses associated with the Lake Michigan transaction totaled $0.9 million and $3.4 million during the three and nine months ended September 30, 2015, respectively.

The summary computation of the purchase price, including adjustments to reflect Lake Michigan's assets acquired and liabilities assumed at fair value and the allocation of the purchase price to the net assets of Lake Michigan is presented below. The acquisition accounting presented below may be further adjusted during a measurement period of up to one year beyond the acquisition date that provides the Corporation with the opportunity to finalize the acquisition accounting in the event that new information is identified that existed as of the acquisition date but was not known by the Corporation at that time. During the three months ended September 30, 2015, additional valuation information about the fair value of premises and equipment, core deposit intangibles and deferred tax assets was obtained which resulted in adjustments to the initial purchase price allocation. These adjustments resulted in an increase to goodwill acquired in the Lake Michigan transaction of $0.9 million. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income for the current reporting period for these adjustments that would have been recorded in a previous reporting period had these adjustments been recognized as of the acquisition date.

A summary of the purchase price and the excess of the purchase price over the fair value of adjusted net assets acquired (goodwill) follows (in thousands):



Fair value of the Corporation's common shares issued on May 31, 2015 (4,322,101 shares at a market price of $30.29 per share)	$	130,916
Fair value of Lake Michigan options converted to the Corporation's options	2,000
Cash paid to acquire outstanding stock	54,478
Total purchase price	$	187,394

Net assets acquired⁽¹⁾:
Lake Michigan shareholders' equity	$	89,280
Adjustments to reflect fair value of net assets acquired:
Loans	(22,600		)
Allowance for loan losses	15,888
Premises and equipment	(4,022		)	⁽²	⁾
Core deposit intangibles	8,003			⁽²	⁾
Deferred tax assets, net	3,172			⁽²	⁾
Deposits and borrowings, net	(3,048		)
Other assets and other liabilities	(157		)	⁽²	⁾
Fair value of adjusted net assets acquired	86,516
Goodwill recognized as a result of the Lake Michigan transaction	$	100,878

⁽¹⁾ All amounts were previously reported in the Corporation's Quarterly Report on Form 10-Q for the three- and six-month periods ended June 30, 2015, with the exceptions of premises and equipment, core deposit intangibles, deferred tax assets, net and other assets and other liabilities.

⁽²⁾ Includes adjustments to the fair value as a result of additional valuation information obtained during the third quarter of 2015, including the corresponding tax effects. A summary of these adjustments is included in the section "Allocation of Purchase Price" within this footnote.

Allocation of Purchase Price

The following schedule summarizes the original acquisition date estimated fair values and the revised acquisition date estimated fair values, including the adjustments to the fair values identified and recorded during the third quarter of 2015, of assets acquired and liabilities assumed from Lake Michigan:



	Original Allocation		Adjustments			Revised Allocation
	(In thousands)
Assets
Cash and cash equivalents	$	39,301	$	—		$	39,301
Investment securities	66,699		—			66,699
Loans	985,542		—			985,542
Premises and equipment	13,673		(1,689		)	11,984
Deferred tax asset, net	14,888		903			15,791
Goodwill	100,002		876			100,878
Core deposit intangible asset	7,303		700			8,003
Bank-owned life insurance	23,844		—			23,844
Other assets	38,449		(790		)	37,659
Assets acquired, at fair value	1,289,701		—			1,289,701
Liabilities
Deposits	924,697		—			924,697
Short-term borrowings	30,000		—			30,000
Other borrowings	124,723		—			124,723
Other liabilities	22,887		—			22,887
Total liabilities acquired, at fair value	1,102,307		—			1,102,307
Total purchase price	$	187,394	$	—		$	187,394

The adjustments recorded during the third quarter of 2015, which resulted in a $0.9 million increase to the preliminary amount of goodwill recorded for the Lake Michigan transaction, included a $1.7 million write-down to premises and equipment related to updated information obtained regarding the fair market value of a leased branch location, a $0.7 million increase in the fair value assigned to the acquired core deposit intangible asset based on updated assumptions obtained as part of the valuation, a $0.8 million reclassification of federal income taxes receivable to the deferred tax asset, and a $0.9 million increase in the amount of recognizable deferred tax assets based on the tax impact of these adjustments and net of a $0.2 million reduction in deferred tax assets based on updated information available related to the utilization of future tax benefits related to certain tax credit projects.

Upon acquisition, the Lake Michigan loan portfolio had contractually required principal and interest payments receivable of $1.01 billion and $190.2 million, respectively, expected principal and interest cash flows of $986.1 million and $189.6 million, respectively, and a fair value of $985.5 million. The difference between the contractually required payments receivable and the expected cash flows represents the nonaccretable difference, which totaled $22.6 million at the acquisition date, with $22.0 million attributable to expected credit losses. The difference between the expected cash flows and fair value represents the accretable yield, which totaled $190.2 million at the date of acquisition. At September 30, 2015, the outstanding contractual principal balance and the carrying amount of the Lake Michigan acquired loan portfolio were $914 million and $891 million, respectively, and there was no related allowance for loan losses at that date.

Acquisition of Monarch Community Bancorp, Inc.

On April 1, 2015, the Corporation acquired all of the outstanding stock of Monarch Community Bancorp, Inc. (Monarch) in an all-stock transaction valued at $27.2 million. As a result of the acquisition, the Corporation issued 860,575 shares of its common stock based on an exchange ratio of 0.0982 shares of its 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. As of the April 1, 2015 acquisition date, Monarch added total assets of $183 million, including total loans of $122 million, and total deposits of $144 million to the Corporation's consolidated statement of financial position. Monarch Community Bank was consolidated with and into Chemical Bank on May 8, 2015. In connection with the acquisition of Monarch, the Corporation recorded $5.3 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining the operations of the Corporation and Monarch. In addition, the Corporation recorded $1.9 million of core deposit intangible assets in conjunction with the acquisition.

The results of the merged Monarch operations are presented within the Corporation's consolidated financial statements from the acquisition date. The disclosure of Monarch's post-acquisition revenue and net income is not practical due to the combining of Monarch's operations with and into Chemical Bank early in the second quarter of 2015. Nonrecurring acquisition-related expenses associated with the Monarch acquisition totaled $2.3 million during the nine months ended September 30, 2015.

The summary computation of the purchase price, including adjustments to reflect Monarch's assets acquired and liabilities assumed at fair value and the allocation of the purchase price to the net assets of Monarch is presented below. The acquisition accounting presented below may be further adjusted during a measurement period of up to one year beyond the acquisition date that provides the Corporation with the opportunity to finalize the acquisition accounting in the event that new information is identified that existed as of the acquisition date but was not known by the Corporation at that time. During the three months ended September 30, 2015, additional valuation information was obtained about the fair value of the deferred tax assets which resulted in adjustments to the initial purchase price allocation. These adjustments resulted in a decrease to goodwill acquired in the Monarch transaction of $0.1 million. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income for the current reporting period for these adjustments that would have been recorded in a previous reporting period had these adjustments been recognized as of the acquisition date.

A summary of the purchase price and the excess of the purchase price over the fair value of adjusted net assets acquired (goodwill) follows (in thousands):



Fair value of the Corporation's common shares issued on April 1, 2015 (860,575 shares at a market price of $31.36 per share)	$	26,988
Cash paid	203
Total purchase price	$	27,191

Net assets acquired⁽¹⁾:
Monarch shareholders' equity	15,270
Adjustments to reflect fair value of net assets acquired:
Loans	(7,150		)
Allowance for loan losses	2,128
Deferred tax assets, net:
Net operating loss carryforward	7,900
Other	1,817			⁽²⁾
Premises and equipment	(370		)
Core deposit intangibles	1,930
Mortgage servicing rights	315
Other assets and other liabilities	37
Fair value of adjusted net assets acquired	21,877
Goodwill recognized as a result of the Monarch transaction	$	5,314

⁽¹⁾ All amounts were previously reported in the Corporation's Quarterly Report on Form 10-Q for the three- and six-month periods ended June 30, 2015, with the exception of deferred tax assets, net.

⁽²⁾ Includes adjustments to the fair value as a result of additional valuation information obtained during the third quarter of 2015. A summary of these adjustments is included in the section "Allocation of Purchase Price" within this footnote.

Allocation of Purchase Price

The following schedule summarizes the acquisition date estimated fair values, including the adjustments to the fair values identified and recorded during the third quarter of 2015, of assets acquired and liabilities assumed from Monarch:



Assets
Cash and cash equivalents	$	32,171
Loans	121,783
Premises and equipment	3,064
Deferred tax assets, net
Net operating loss carryforward	7,900
Other	2,383
Interest receivable and other assets	6,972
Goodwill	5,314
Core deposit intangibles	1,930
Mortgage servicing rights	1,284
Assets acquired, at fair value	182,801
Liabilities
Deposits	144,311
FHLB advances	8,000
Interest payable and other liabilities	3,299
Total liabilities acquired, at fair value	155,610
Total purchase price	$	27,191

The estimated fair values presented in the above schedule include adjustments recorded during the third quarter of 2015, which resulted in a $0.1 million decrease to the preliminary amount of goodwill recorded for the Monarch transaction, related to a $0.1 million increase in the amount of recognizable deferred tax assets based on updated information obtained during the quarter.

Upon acquisition, the Monarch loan portfolio had contractually required principal and interest payments receivable of $128.9 million and $37.8 million, respectively, expected principal and interest cash flows of $122.6 million and $37.1 million, respectively, and a fair value of $121.8 million. The difference between the contractually required payments receivable and the expected cash flows represents the nonaccretable difference, which totaled $7.1 million at the acquisition date, with $6.3 million attributable to expected credit losses. The difference between the expected cash flows and fair value represents the accretable yield, which totaled $37.9 million at the date of acquisition. At September 30, 2015, the outstanding contractual principal balance and the carrying amount of the Monarch acquired loan portfolio were $119 million and $112 million, respectively, and there was no related allowance for loan losses at that date.

Upon acquisition, Monarch incurred an ownership change within the meaning of IRC Section 382. At April 1, 2015, Monarch had $22.6 million in gross federal net operating loss carryforwards that expire between 2028-2034, which the Corporation expects to utilize. The Corporation expects to utilize these net operating losses, in part, as Monarch was in a net unrealized built-in gain position as of the acquisition date. Monarch also had $1.7 million of general business credits that expire between 2026-2032, which the Corporation does not expect to utilize.

Unaudited Pro Forma Combined Results of Operations

The following presentation of unaudited pro forma combined results of operations of Chemical, Lake Michigan, Monarch, and Northwestern presents these results as if the acquisitions had been completed as of the beginning of each period indicated. The unaudited pro forma combined results of operations are presented solely for information purposes and are not intended to represent or be indicative of the consolidated results of operations that Chemical would have reported had this transaction been completed as of the dates and for the periods presented, nor are they indicative of future results. In particular, no adjustments have been made to eliminate the amount of Lake Michigan's, Monarch's, or Northwestern's provision for loan losses incurred prior to the acquisition date that would not have been necessary had the acquired loans been recorded at fair value as of the beginning of each period indicated. In addition, no adjustment has been made for the lost opportunity cost associated with the all-cash purchase of Northwestern. In accordance with Article 11 of SEC Regulation S-X, transaction costs directly attributable to the acquisition have been excluded.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(In thousands, except per share data)
Interest income	$	78,851	$	76,651	$	233,136	$	224,740
Interest expense	5,234		6,526		16,596		20,152
Net interest income	73,617		70,125		216,540		204,588
Provision for loan losses	1,500		1,950		4,500		5,985
Net interest income after provision for loan losses	72,117		68,175		212,040		198,603
Noninterest income	20,215		22,209		63,395		65,696
Operating expenses	57,365		60,863		180,147		183,084
Income before income taxes	34,967		29,521		95,288		81,215
Federal income tax expense	9,915		8,569		21,192		24,011
Net income	$	25,052	$	20,952	$	74,096	$	57,204
Net income per common share:
Basic	$	0.66	$	0.55	$	1.95	$	1.59
Diluted	0.65		0.55		1.93		1.58
Weighted average shares outstanding:
Basic	38,123		37,944		38,072		36,071
Diluted	38,393		38,139		38,319		36,307

Acquisition of Northwestern Bancorp, Inc.

On October 31, 2014, the Corporation acquired all of the outstanding stock of Northwestern Bancorp, Inc. (Northwestern) for total cash consideration of $121 million. Northwestern, a bank holding company which 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 million, including total loans of $475 million, and total deposits of $794 million to the Corporation. Northwestern Bank was consolidated with and into Chemical Bank as of the acquisition date. In connection with the acquisition of Northwestern, the Corporation recorded $60.1 million of goodwill, which was primarily attributable to the synergies and economies of scale expected from combining the operations of the Corporation and Northwestern. In addition, the Corporation recorded $12.9 million of core deposit intangible assets in conjunction with the acquisition. Subsequent to the original acquisition date valuation of assets and liabilities, the Corporation obtained additional valuation information regarding the fair value of other real estate owned (ORE) and deferred and current federal income tax assets, which resulted in a decrease to ORE of $0.3 million, a reclassification in federal income tax receivable to deferred tax assets of $0.1 million, an increase to deferred tax assets of $0.2 million, and an increase to goodwill recognized in the transaction of $0.1 million. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income for the current reporting period for these adjustments that would have been recorded in a previous reporting period had these adjustments been recognized as of the acquisition date.

Upon acquisition, the Northwestern loan portfolio had contractually required principal and interest payments receivable of $507 million and $112 million, respectively, expected principal and interest cash flows of $481 million and $104 million, respectively, and a fair value of $475 million. The difference between the contractually required payments receivable and the expected cash flows represents the nonaccretable difference, which totaled $34 million at the acquisition date, with $26 million attributable to expected credit losses. The difference between the expected cash flows and fair value represents the accretable yield, which totaled $110 million at the acquisition date. The outstanding contractual principal balance and the carrying amount of the Northwestern acquired loan portfolio were $379 million and $347 million, respectively, at September 30, 2015, compared to $485 million and $452 million, respectively, at December 31, 2014.

Acquisition of 21 Branches

On December 7, 2012, Chemical Bank acquired 21 branches from Independent Bank, a subsidiary of Independent Bank Corporation, located in the Northeast and Battle Creek regions of Michigan, including $404 million in deposits and $44 million in loans (branch acquisition transaction). The purchase price of the branch offices, including equipment, was $8.1 million and the Corporation paid a premium on deposits of $11.5 million, or approximately 2.85% of total deposits. The loans were purchased at a discount of 1.75%. In connection with the branch acquisition transaction, the Corporation recorded goodwill of $6.8 million and other intangible assets attributable to customer core deposits of $5.6 million.

Acquisition of O.A.K. Financial Corporation (OAK)

On April 30, 2010, the Corporation acquired OAK in an all-stock transaction for total consideration of $83.7 million. OAK provided traditional banking services and products through 14 banking offices serving communities in Ottawa, Allegan and Kent counties in west Michigan. At the acquisition date, OAK added total assets of $820 million, including total loans of $627 million, and total deposits of $693 million, including brokered deposits of $193 million. Upon acquisition, the OAK loan portfolio had contractually required principal payments receivable of $683 million and a fair value of $627 million. The outstanding contractual principal balance and the carrying amount of the OAK acquired loan portfolio were $219 million and $198 million, respectively, at September 30, 2015, compared to $268 million and $246 million, respectively, at December 31, 2014 and $286 million and $263 million, respectively, at September 30, 2014.

Accretable Yield

Activity for the accretable yield, which includes contractually due interest for acquired loans that have been renewed or extended since the date of acquisition and continue to be accounted for in loan pools in accordance with ASC 310-30, follows:



	Nine Months Ended September 30,
	2015															2014
	Lake Michigan			Monarch			North-western			OAK			Total			OAK
	(In thousands)
Balance at beginning of period	$	—		$	—		$	104,675		$	33,286		$	137,961		$	32,610
Additions attributable to acquisitions	190,246			37,914			—			—			228,160			—
Additions (reductions)*	803			(1,492		)	(4,196		)	6,417			1,532			4,493
Accretion recognized in interest income	(14,190		)	(3,053		)	(14,434		)	(9,151		)	(40,828		)	(11,262		)
Reclassification from nonaccretable difference	—			—			—			—			—			10,000
Balance at end of period	$	176,859		$	33,369		$	86,045		$	30,552		$	326,825		$	37,349

*Represents additions of estimated contractual interest expected to be collected from acquired loans being renewed or extended, less reductions in contractual interest resulting from the early payoff of acquired loans.