Mergers and Acquisitions

Merger with Talmer Bancorp, Inc.

On August 31, 2016, the Corporation completed the merger with Talmer for total consideration of $1.61 billion. As a result of the merger, the Corporation issued 32.1 million shares of its common stock based on an exchange ratio where each Talmer shareholder received 0.4725 shares of the Corporation's common stock, and $1.61 in cash, for each share of Talmer common stock. In conjunction with the merger, the Corporation entered into and drew on a $125.0 million credit facility, which is described in more detail in Note 14. The proceeds from the credit facility were used to pay off the Corporation's $25.0 million line-of-credit and a $37.5 million line-of-credit of Talmer, with the remaining proceeds used to partially fund the cash portion of the merger consideration. The Corporation incurred $61.1 million of merger and acquisition-related transaction expenses during the year ended December 31, 2016, primarily related to the merger with Talmer. As a result of the merger, Talmer Bank and Trust became a wholly-owned subsidiary of the Corporation. Subsequent to the merger with Talmer, in the fourth quarter of 2016, the Corporation sold the Talmer Bank and Trust single branch locations in Chicago, Illinois and Las Vegas, Nevada. Talmer Bank and Trust was consolidated with and into Chemical Bank during the fourth quarter of 2016.

The Company determined that the merger with Talmer constitutes a business combination as defined by ASC 805. Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition. Fair values were determined in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements. In many cases the determination of the fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The following allocation is based on the information that was available to make preliminary estimates of the fair value and may change as additional information becomes available and additional analyses are completed. While the Corporation believes that information provided a reasonable basis for estimating the fair values, it expects that it could obtain additional information and evidence during the measurement period that may result in changes to the estimated fair value amounts. This measurement period ends on the earlier of one year after the merger date or the date we receive the information about the facts and circumstances that existed at the merger date. Subsequent adjustments, if necessary, will be reflected in future filings. These refinements include: (1) changes in the estimated fair value of loans acquired; (2) changes in the estimated fair value of intangible assets acquired; (3) changes in deferred tax assets related to fair value estimates and a change in the expected realization of items considered to be net operating loss carry forwards and (4) a change in the goodwill caused by the net effect of these adjustments.



(Dollars in thousands)
Consideration paid:
Stock	$	1,504,811
Cash	107,638
Total consideration	1,612,449

Fair value of identifiable assets acquired⁽¹⁾:
Cash and cash equivalents	433,352
Investment securities:
Available-for-sale	808,894
Held-to-maturity	1,657
Loans held-for-sale	244,916
Loans⁽²⁾	4,882,402
Premises and equipment	38,793
Loan servicing rights	42,462
Other intangible assets⁽²⁾	19,088
Interest receivable and other assets⁽²⁾	395,119
Total identifiable assets acquired	6,866,683

Fair value of liabilities assumed⁽¹⁾:
Noninterest-bearing deposits	1,236,902
Interest-bearing deposits	4,057,716
Interest payable and other liabilities⁽²⁾	99,482
Securities sold under agreements to repurchase with customers	19,704
Short-term borrowings	387,500
Long-term borrowings	299,597
Total liabilities assumed	6,100,901

Fair value of net identifiable assets acquired	765,782
Goodwill resulting from acquisition	$	846,667

⁽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, 2016, with the exception of loans, other intangible assets, interest receivable and other assets and interest payable and other liabilities.

⁽²⁾Includes adjustments to the fair value as a result of additional valuation information obtained during the fourth quarter of 2016, including the corresponding tax effects.

During the fourth quarter of 2016, additional valuation information was obtained related to the fair value of the core deposit intangible and deferred tax assets, which resulted in an adjustment to goodwill acquired in the Talmer transaction. The adjustments recorded during the fourth quarter of 2016, which resulted in a $3.6 million decrease to the preliminary amount of goodwill recorded for the Talmer transaction, included a $6.7 million increase in the fair value of the other intangible assets related to updated information obtained regarding the fair market value of the core deposit intangible and a $2.5 million decrease in the amount of recognizable deferred tax assets primarily based on the tax impact of the core deposit intangible adjustment.

Information regarding loans accounted for under ASC 310-30 at the merger date is as follows:



(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	5,968,488
Contractual cash flows not expected to be collected (nonaccretable difference)	223,959
Expected cash flows	5,744,529
Interest component of expected cash flows (accretable yield)	862,127
Fair value at acquisition	$	4,882,402

At December 31, 2016, the outstanding contractual principal balance and the carrying amount of the Talmer acquired loan portfolio were $4.5 billion and $4.4 billion, respectively.

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. The Bank of Holland and the Bank of Northern Michigan were consolidated with and into Chemical Bank on November 13, 2015.

At the acquisition date, Lake Michigan added total assets of $1.24 billion, including total loans of $985.5 million, and total deposits of $924.7 million to the Corporation's consolidated statement of financial position. The Corporation recorded $101.1 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. 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. During the first quarter of 2016, the Corporation obtained additional information regarding the valuation of deferred tax assets, which resulted in a decrease to goodwill recognized in the transaction of $0.6 million.

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



(Dollars in thousands)
Stock	$	132,916
Cash	54,478
Total consideration	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		)
Core deposit intangibles	8,003
Deferred tax assets, net⁽²⁾	4,096
Deposits and borrowings, net	(3,182		)
Other assets and other liabilities⁽²⁾	(121		)
Fair value of adjusted net assets acquired	86,333
Goodwill recognized as a result of the Lake Michigan transaction	$	101,061

⁽¹⁾ All amounts were previously reported in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2015, with the exception of 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 first quarter of 2016, including the corresponding tax effects.

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, 2016, of assets acquired and liabilities assumed from Lake Michigan (in thousands):



(Dollars 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	16,715
Goodwill	101,061
Core deposit intangible asset	8,003
Bank-owned life insurance	23,844
Other assets	37,695
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

Information regarding loans accounted for under ASC 310-30 at the merger date is as follows:



(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	1,198,388
Contractual cash flows not expected to be collected (nonaccretable difference)	22,600
Expected cash flows	1,175,788
Interest component of expected cash flows (accretable yield)	190,246
Fair value at acquisition	$	985,542

The outstanding contractual principal balance and the carrying amount of the Lake Michigan acquired loan portfolio were $656.1 million and $634.2 million, respectively, at December 31, 2016, compared to $864.4 million and $841.8 million, respectively, at December 31, 2015.

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. Monarch Community Bank was consolidated with and into Chemical Bank on May 8, 2015.

At the acquisition date, Monarch added total assets of $182.8 million, including total loans of $121.8 million, and total deposits of $144.3 million to the Corporation's consolidated statement of financial position. 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.

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



(Dollars in thousands)
Stock	$	26,988
Cash	203
Total consideration	$	27,191

Net assets acquired:
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
Premises and equipment	(415		)
Core deposit intangibles	1,930
Mortgage servicing rights	315
Other assets and other liabilities	48
Fair value of adjusted net assets acquired	21,852
Goodwill recognized as a result of the Monarch transaction	$	5,339

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 Monarch.



(Dollars in thousands)
Assets
Cash and cash equivalents	$	32,171
Loans	121,783
Premises and equipment	3,019
Deferred tax assets, net
Net operating loss carryforward	7,900
Other	2,392
Interest receivable and other assets	6,972
Goodwill	5,339
Core deposit intangibles	1,930
Mortgage servicing rights	1,284
Assets acquired, at fair value	182,790
Liabilities
Deposits	144,300
FHLB advances	8,000
Interest payable and other liabilities	3,299
Total liabilities acquired, at fair value	155,599
Total purchase price	$	27,191

Information regarding loans accounted for under ASC 310-30 at the merger date is as follows:



(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	166,797
Contractual cash flows not expected to be collected (nonaccretable difference)	7,100
Expected cash flows	159,697
Interest component of expected cash flows (accretable yield)	37,914
Fair value at acquisition	$	121,783

The outstanding contractual principal balance and the carrying amount of the Monarch acquired loan portfolio were $92.4 million and $86.4 million, respectively, at December 31, 2016, compared to $114.9 million and $108.3 million, respectively, at December 31, 2015.

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 $121.0 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 $815.0 million, including total loans of $475.3 million, and total deposits of $794.4 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.

The results of the merged Northwestern operations are presented within the Corporation’s consolidated financial statements from the acquisition date. Acquisition-related expenses associated with the Northwestern acquisition totaled $5.8 million during 2014.

Information regarding loans accounted for under ASC 310-30 at the merger date is as follows:



(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	618,788
Contractual cash flows not expected to be collected (nonaccretable difference)	33,500
Expected cash flows	585,288
Interest component of expected cash flows (accretable yield)	110,003
Fair value at acquisition	$	475,285

The outstanding contractual principal balance and the carrying amount of the Northwestern acquired loan portfolio were $283.1 million and $254.1 million, respectively, at December 31, 2016, compared to $361.3 million and $329.9 million, respectively, at December 31, 2015.

Unaudited Pro Forma Combined Results of Operations

The following unaudited pro forma financial information presents the consolidated results of operation of the Corporation and Talmer as if the merger had occurred as of January 1, 2015, Lake Michigan and Monarch as if the acquisitions had occurred as of January 1, 2014 and Northwestern as if the acquisition had occurred as of January 1, 2013. 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 Talmer, 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.



	Years ended December 31,
(In thousands, except per share data)	2016		2015		2014
Net interest and other income	$	492,323	$	654,962	$	361,695
Net Income	115,847		142,504		79,455
Earnings per share:
Basic	$	1.65	$	2.03	$	2.17
Diluted	$	1.62	$	2.01	$	2.16

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:



(Dollars in thousands)	Talmer			Lake Michigan			Monarch			Northwestern			OAK			Total
Year Ended December 31, 2016
Balance at beginning of period	$	—		$	152,999		$	34,558		$	82,623		$	28,077		$	298,257
Addition attributable to acquisitions	862,127			—			—			—			—			862,127
Additions, net of reductions*	—			(3,552		)	(1,908		)	(6,985		)	1,091			(11,354		)
Accretion recognized in interest income	(63,917		)	(33,031		)	(5,468		)	(15,791		)	(13,352		)	(131,559		)
Reclassification from nonaccretable difference	—			5,000			—			10,000			7,500			22,500
Balance at end of period	$	798,210		$	121,416		$	27,182		$	69,847		$	23,316		$	1,039,971

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		)
Balance at end of period	$	—		$	152,999		$	34,558		$	82,623		$	28,077		$	298,257


*	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.