ACQUISITIONS

Pending Acquisition of Monarch Community Bancorp, Inc.

On October 31, 2014, the Corporation entered into an Agreement and Plan of Merger with Monarch Community Bancorp, Inc. (Monarch). Under the terms of the merger agreement, the Corporation will exchange 0.0982 shares of its common stock for each share of Monarch common stock outstanding. Based on the closing price of the Corporation's common stock on December 31, 2014, the merger has a transaction value of approximately $27.0 million. The merger has received regulatory approval. Completion of the merger is subject to the approval of Monarch's shareholders and satisfaction of other customary closing conditions.

In connection with the pending merger with Monarch, two purported Monarch stockholders have filed putative class action lawsuits against Monarch, its board of directors, Monarch Community Bank, the Corporation and Chemical Bank. Among other remedies, the plaintiffs seek to enjoin the merger. Monarch and the Corporation have entered into a memorandum of understanding with the plaintiffs regarding the settlement of these lawsuits, which is subject to court approval. If this litigation is not resolved, these lawsuits could prevent or delay completion of the merger and result in substantial costs to Monarch and the Corporation, including any costs associated with indemnification. Additional lawsuits may be filed against Monarch, the Corporation or the directors and officers of either company in connection with the merger. The defense or settlement of any lawsuit or claim that remains unresolved at the effective time of the merger may adversely affect the Corporation's business, financial condition, results of operations, cash flows and market price.

Pending Acquisition of Lake Michigan Financial Corporation

On January 5, 2015, the Corporation entered into an Agreement and Plan of Merger with Lake Michigan Financial Corporation (Lake Michigan). Under the terms of the merger agreement, each Lake Michigan shareholder will receive $16.64 in cash and 1.326 shares of the Corporation's common stock for each share of Lake Michigan common stock. Based on the 30-day volume weighted price per share of the Corporation's common stock as of January 5, 2015, the merger has a transaction value of approximately $184.1 million. Completion of the merger is subject to regulatory approval and the approval of Lake Michigan's shareholders, in addition to satisfaction of other customary closing conditions.

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 $60.0 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. 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 acquisition date. Acquisition-related transaction expenses associated with the Northwestern acquisition totaled $5.8 million during 2014.

The summary computation of the purchase price, including adjustments to reflect Northwestern’s assets acquired and liabilities assumed at fair value and the allocation of the purchase price to the net assets of Northwestern 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.

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):



Cash paid to acquire outstanding stock	$	119,428
Cash paid for stock option cancellation agreements	1,580
Cash paid in acquisition	$	121,008

Net assets acquired:
Northwestern shareholders' equity	$	70,081
Adjustments to reflect fair value of net assets acquired:
Loans	(32,500		)
Allowance for loan losses	16,453
Deferred tax assets, net	5,787
Premises and equipment	(8,961		)
Core deposit intangibles	12,891
Mortgage servicing rights	1,568
Goodwill	(2,050		)
Other real estate	(800		)
Estimated losses on sold loans	(1,650		)
Other assets and other liabilities	225
Fair value or adjusted net assets acquired	61,044
Goodwill recognized as a result of the Northwestern transaction	$	59,964

Allocation of Purchase Price

The preliminary acquisition date estimated fair values of the assets acquired and liabilities assumed of Northwestern were as follows (in thousands):



Assets
Cash and cash equivalents	$	106,748
Investment securities	230,358
Loans	475,285
Premises and equipment	18,770
Deferred tax asset, net	8,557
Interest receivable and other assets	14,211
Goodwill	59,964
Core deposit intangible asset	12,891
Mortgage servicing rights asset	9,235
Assets acquired, at fair value	936,019
Liabilities
Deposits	794,447
Subordinated debt obligation	10,310
Interest payable and other liabilities	10,254
Total liabilities acquired, at fair value	815,011
Total cash purchase price	$	121,008

The Corporation repaid the subordinated debt obligation on December 31, 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. At December 31, 2014, the outstanding contractual principal balance and the carrying amount of the Northwestern acquired loan portfolio were $485 million and $452 million, respectively, and there was no related allowance for loan losses at that date.

Unaudited Pro Forma Combined Results of Operations

The following unaudited pro forma combined results of operations of Chemical and Northwestern presents results as if the acquisition 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 necessarily indicative of future results. In particular, no adjustments have been made to eliminate the amount of 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 acquisition have been excluded.



	Year ended December 31,
	2014		2013
	(In thousands, except per share data)
Interest income	$	247,748	$	241,499
Interest expense	16,221		20,014
Net interest income	231,527		221,485
Provision for loan losses	6,825		18,329
Net interest income after provision for loan losses	224,702		203,156
Noninterest income	79,229		82,492
Operating expenses	201,289		206,025
Income before income taxes	102,642		79,623
Federal income tax expense	32,209		23,777
Net income	$	70,433	$	55,846
Net income per common share:
Basic	$	2.25	$	1.98
Diluted	2.23		1.97
Weighted average shares outstanding:
Basic	31,367		28,183
Diluted	31,588		28,352

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. OAK 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 $268 million and $246 million, respectively, at December 31, 2014, compared to $320 million and $295 million, respectively, at December 31, 2013.

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:



	Years Ended December 31,
	2014									2013
	Northwestern			OAK			Total			Total
	(In thousands)
Balance at beginning of period	$	—		$	32,610		$	32,610		$	49,390
Addition attributable to Northwestern transaction	110,003			—			110,003			—
Additions, net of reductions*	(1,605		)	5,411			3,806			(29		)
Accretion recognized in interest income	(3,723		)	(14,735		)	(18,458		)	(16,876		)
Reclassification from nonaccretable difference	—			10,000			10,000			125
Balance at end of period	$	104,675		$	33,286		$	137,961		$	32,610


*	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 has determined that the overall credit quality of the OAK acquired loan portfolio has improved, which has 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.