MERGERS AND ACQUISITIONS

Pending Merger with Talmer Bancorp, Inc.

On January 25, 2016, the Corporation entered into an Agreement and Plan of Merger with Talmer Bancorp, Inc. (Talmer). Under the terms of the merger agreement, each Talmer shareholder will receive $1.61 in cash and 0.4725 shares of the Corporation's common stock for each share of Talmer common stock, subject to adjustment in limited circumstances. Based on the 30-day volume weighted price per share of the Corporation's common stock as of January 25, 2016, the merger had a transaction value of approximately $1.1 billion. Following the completion of the merger, the Corporation intends to consolidate Talmer's wholly-owned subsidiary bank, Talmer Bank and Trust, with and into Chemical Bank. At December 31, 2015, Talmer had total assets of $6.6 billion, total loans of $4.8 billion and total deposits of $5.0 billion, including brokered deposits of $229 million. Talmer Bank and Trust is 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 81 full service banking offices located primarily within southeast Michigan and northeast Ohio, as well as in west Michigan, northeast Michigan, Chicago, Illinois, northern Indiana, and Las Vegas, Nevada. Completion of the merger is subject to regulatory approval and the approval of the Corporation's and Talmer's shareholders, in addition to satisfaction of other customary closing conditions.

Acquisition of Lake Michigan Financial Corporation

On May 31, 2015, the Corporation acquired all of 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. As of the May 31, 2015 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. The Bank of Holland and The Bank of Northern Michigan were consolidated with and into Chemical Bank on November 13, 2015. The Corporation recorded $102 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 in the Corporation's consolidated financial statements from the date of acquisition. The disclosure of Lake Michigan's post-acquisition revenue and net income is not practical due to the combining of Lake Michigan's operations with and into Chemical Bank during the fourth quarter of 2015. Acquisition-related expenses associated with the Lake Michigan transaction totaled $5.5 million during 2015.

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. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income for the current reporting period for 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	(5,031		)	⁽²⁾
Core deposit intangibles	8,003
Deferred tax assets, net	3,572			⁽²⁾
Deposits and borrowings, net	(3,182		)	⁽²⁾
Other assets and other liabilities	(157		)
Fair value of adjusted net assets acquired	85,773
Goodwill recognized as a result of the Lake Michigan transaction	$	101,621

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

⁽²⁾ Includes adjustments to the fair value as a result of additional valuation information obtained during the fourth 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 revised acquisition date estimated fair values, including the adjustments to the fair values identified and recorded from the acquisition date through December 31, 2015, of assets acquired and liabilities assumed from Lake Michigan (in thousands):



Assets
Cash and cash equivalents	$	39,301
Investment securities	66,699
Loans	985,542
Premises and equipment	10,975
Deferred tax asset, net	16,191
Goodwill	101,621
Core deposit intangible asset	8,003
Bank-owned life insurance	23,844
Other assets	37,659
Assets acquired, at fair value	1,289,835
Liabilities
Deposits	924,697
Short-term borrowings	30,000
Other borrowings	124,857
Other liabilities	22,887
Total liabilities acquired, at fair value	1,102,441
Total purchase price	$	187,394

During the three months ended December 31, 2015, additional valuation information was obtained related to the fair value of premises and equipment and other borrowings, which resulted in an adjustment to goodwill acquired in the Lake Michigan transaction. All amounts were previously reported in the Corporation's Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 30, 2015, with the exception of goodwill, premises and equipment, other borrowings and deferred tax assets, net. The adjustments recorded during the fourth quarter of 2015, which resulted in a $0.7 million increase to the preliminary amount of goodwill recorded for the Lake Michigan transaction, included a $1.0 million write-down to premises and equipment related to updated information obtained regarding the fair market value of certain vacant land and non-branch locations, a $0.1 million increase in the fair value assigned to other borrowings based on updated assumptions utilized as part of the valuation, and a $0.4 million increase in the amount of recognizable deferred tax assets based on the tax impact of these adjustments.

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 December 31, 2015, the outstanding contractual principal balance and the carrying amount of the Lake Michigan acquired loan portfolio were $864 million and $842 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 in the Corporation's consolidated financial statements from the date of acquisition. 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 during the second quarter of 2015. Acquisition-related expenses associated with the Monarch transaction totaled $2.3 million during 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. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income for the current reporting period for 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	1,826			⁽²⁾
Premises and equipment	(395		)	⁽²⁾
Core deposit intangibles	1,930
Mortgage servicing rights	315
Other assets and other liabilities	37
Fair value of adjusted net assets acquired	21,861
Goodwill recognized as a result of the Monarch transaction	$	5,330

⁽²⁾ Includes immaterial adjustments to the fair value as a result of additional valuation information obtained during the fourth quarter of 2015, including the corresponding tax effects.

Allocation of Purchase Price

The following schedule summarizes the the revised acquisition date estimated fair values, including the adjustments to the fair values identified and recorded from the acquisition date through December 31, 2015, of assets acquired and liabilities assumed from Monarch.



Assets
Cash and cash equivalents	$	32,171
Loans	121,783
Premises and equipment	3,039
Deferred tax assets, net
Net operating loss carryforward	7,900
Other	2,392
Interest receivable and other assets	6,972
Goodwill	5,330
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

During the three months ended December 31, 2015, additional valuation information was obtained related to the fair value of premises and equipment, which resulted in an immaterial adjustment to goodwill acquired in the Monarch transaction. All amounts were previously reported in the Corporation's Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 30, 2015, with the exception of goodwill, premises and equipment and deferred tax assets, net.

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 December 31, 2015, the outstanding contractual principal balance and the carrying amount of the Monarch acquired loan portfolio were $115 million and $108 million, respectively, and there was no related allowance for loan losses at that date.

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. As of the October 31, 2014 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 $60.3 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. During the fourth quarter of 2015 and prior to the end of the one year measurement period for finalizing the purchase price allocation, the Corporation obtained additional valuation information regarding the fair value of vacant land and closed branch locations, which resulted in a decrease to premises and equipment of $0.3 million, an increase to deferred tax assets of $0.1 million, and an increase to goodwill recognized in the transaction of $0.2 million. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income during 2015 for these adjustments that would have been recorded in a previous reporting period had these adjustments been recognized as of the acquisition date.

The results of the merged Northwestern operations are presented within the Corporation’s consolidated financial statements from the acquisition date. The disclosure of Northwestern's post-acquisition revenue and net income is not practical due to the combining of Northwestern Bank’s operations with and into Chemical Bank as of the October 31, 2014 acquisition date. Acquisition-related expenses associated with the Northwestern acquisition totaled $5.8 million during 2014.

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 $361 million and $330 million, respectively, at December 31, 2015, compared to $485 million and $452 million, respectively, at December 31, 2014.

Unaudited Pro Forma Combined Results of Operations

The following unaudited pro forma combined results of operations of Chemical, Lake Michigan, Monarch and Northwestern presents 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 these transactions been completed as of the dates and for the periods presented, nor are they necessarily 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 accordance with Article 11 of SEC Regulation S-X, transaction costs directly attributable to the acquisitions have been excluded.



	Year ended December 31,
	2015		2014
	(In thousands, except per share data)
Interest income	$	313,851	$	301,838
Interest expense	21,750		26,386
Net interest income	292,101		275,452
Provision for loan losses	6,500		7,484
Net interest income after provision for loan losses	285,601		267,968
Noninterest income	83,447		86,243
Operating expenses	237,146		243,618
Income before income taxes	131,902		110,593
Federal income tax expense	30,680		31,138
Net income	$	101,222	$	79,455
Net income per common share:
Basic	$	2.66	$	2.17
Diluted	2.64		2.16
Weighted average shares outstanding:
Basic	38,097		36,550
Diluted	38,369		36,770

Acquisition of 21 Branches

On December 7, 2012, Chemical Bank acquired 21 branches from Independent Bank, a subsidiary of Independent Bank Corporation. In addition to the branch offices, which are located in the northeast and Battle Creek regions of Michigan, the acquisition included $404 million in deposits and $44 million in loans. 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 acquisition of the branches, the Corporation recorded $6.8 million of goodwill and $5.6 million of core deposit intangible assets.

Acquisition of O.A.K. Financial Corporation

On April 30, 2010, the Corporation acquired O.A.K. Financial Corporation (OAK) for total consideration of $83.7 million. As a result of the acquisition, the Corporation issued 3.5 million shares of its common stock. OAK, a bank holding company that owned Byron Bank, provided traditional commercial 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, to the Corporation. The outstanding contractual principal balance and the carrying amount of the acquired OAK loan portfolio were $204 million and $183 million, respectively, at December 31, 2015, compared to $268 million and $246 million, respectively, at December 31, 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:



	Lake Michigan			Monarch			North-western			OAK			Total
Year Ended December 31, 2015
Balance at beginning of period	$	—		$	—		$	104,675		$	33,286		$	137,961
Addition attributable to acquisitions	190,246			37,914			—			—			228,160
Additions, net of reductions*	(12,991		)	1,336			(3,396		)	6,601			(8,450		)
Accretion recognized in interest income	(24,256		)	(4,692		)	(18,656		)	(11,810		)	(59,414		)
Reclassification from nonaccretable difference	—			—			—			—			—
Balance at end of period	$	152,999		$	34,558		$	82,623		$	28,077		$	298,257

Year Ended December 31, 2014
Balance at beginning of period							$	—		$	32,610		$	32,610
Addition attributable to acquisitions							110,003			—			110,003
Additions, net of reductions*							(1,605		)	5,411			3,806
Accretion recognized in interest income							(3,723		)	(14,735		)	(18,458		)
Reclassification from nonaccretable difference							—			10,000			10,000
Balance at end of period							$	104,675		$	33,286		$	137,961


*	Represents additions in 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.

As part of its ongoing assessment of the acquired loan portfolio, management determined during 2014 that the overall credit quality of the OAK acquired loan portfolio has improved, which had resulted in an improvement in expected cash flows of loan pools in the OAK acquired commercial loan portfolio. Accordingly, management reclassified $10.0 million during 2014 from the nonaccretable difference to the accretable yield for these acquired commercial loan pools, which will increase amounts recognized into interest income over the estimated remaining lives of these loan pools.