Mergers and Acquisitions

Merger with Talmer

On August 31, 2016, the Corporation completed a 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 paid $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 7. 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 $37.5 million and $43.1 million of merger and acquisition-related transaction expenses during the three and nine months ended September 30, 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 single branch locations in Chicago, Illinois and Las Vegas, Nevada. Please refer to Note 1 for further details related to these transactions.

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. As of September 30, 2016, Talmer Bank and Trust had 81 full service banking offices located primarily within southeast Michigan and northeast Ohio, as well as in west Michigan, northeast Michigan, and northern Indiana. Talmer Bank and Trust is expected to be 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 are, and 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:
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	4,882,864
Premises and equipment	38,793
Loan servicing rights	42,462
Other intangible assets	12,399
Interest receivable and other assets	397,660
Total identifiable assets acquired	6,862,997

Fair value of liabilities assumed:
Noninterest-bearing deposits	1,236,902
Interest-bearing deposits	4,057,968
Interest payable and other liabilities	99,176
Securities sold under agreements to repurchase with customers	19,704
Short-term borrowings	387,500
Long-term borrowings	299,597
Total liabilities assumed	6,100,847

Fair value of net identifiable assets acquired	762,150
Goodwill resulting from acquisition	$	850,299

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	$	5,968,950
Contractual cash flows not expected to be collected (nonaccretable difference)	223,959
Expected cash flows	5,744,991
Interest component of expected cash flows (accretable yield)	862,127
Fair value at acquisition	$	4,882,864

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 with pro forma adjustments to give effect to any change in interest income due to the accretion of the discount (premium) associated with the fair value adjustments to acquired loans, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2015.



Dollars in thousands	For the three months ended,
	September 30, 2016		September 30, 2015
Net interest and other income	$	176,102	$	163,933
Net Income	9,320		38,849
Earnings per share:
Basic	$	0.13	$	0.55
Diluted	0.13		0.55



Dollars in thousands	For the nine months ended,
	September 30, 2016		September 30, 2015
Net interest and other income	$	504,831	$	460,791
Net Income	84,808		93,764
Earnings per share:
Basic	$	1.20	$	1.39
Diluted	1.19		1.37

Acquisition of Lake Michigan Financial Corporation

On May 31, 2015, the Corporation acquired all 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, 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 $100.9 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. During the first quarter 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 $0.5 million. In accordance with ASU 2015-16, no amounts were recorded in the consolidated statements of income during 2016 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 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. The outstanding contractual principal balance and the carrying amount of the Lake Michigan acquired loan portfolio were $697.4 million and $675.0 million, respectively, at September 30, 2016, compared to $864.0 million and $842.0 million, respectively, at December 31, 2015. There was no related allowance for loan losses at those dates.

Acquisition of Monarch Community Bancorp, Inc.

On April 1, 2015, the Corporation acquired all of the outstanding stock of 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.

As of the April 1, 2015 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.

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. The outstanding contractual principal balance and the carrying amount of the Monarch acquired loan portfolio were $97.1 million and $91.0 million, respectively, at September 30, 2016, compared to $115.0 million and $108.0 million, respectively, at December 31, 2015. There was no related allowance for loan losses at those dates.

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 $475.0 million, and total deposits of $794.0 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.

Upon acquisition, the Northwestern loan portfolio had contractually required principal and interest payments receivable of $507.0 million and $112.0 million, respectively, expected principal and interest cash flows of $481.0 million and $104.0 million, respectively, and a fair value of $475.0 million. The difference between the contractually required payments receivable and the expected cash flows represents the nonaccretable difference, which totaled $34.0 million at the acquisition date, with $26.0 million attributable to expected credit losses. The difference between the expected cash flows and fair value represents the accretable yield, which totaled $110.0 million at the acquisition date. The outstanding contractual principal balance and the carrying amount of the Northwestern acquired loan portfolio were $296.7 million and $266.7 million, respectively, at September 30, 2016, compared to $361.0 million and $330.0 million, respectively, at December 31, 2015.

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 $404.0 million in deposits and $44.0 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

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 $627.0 million, and total deposits of $693.0 million, including brokered deposits of $193.0 million. Upon acquisition, the OAK loan portfolio had contractually required principal payments receivable of $683.0 million and a fair value of $627.0 million. The outstanding contractual principal balance and the carrying amount of the OAK acquired loan portfolio were $165.3 million and $150.4 million, respectively, at September 30, 2016, compared to $204.0 million and $183.0 million, respectively, at December 31, 2015.

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			North-western			OAK			Total
Three Months Ended September 30, 2016
Balance at beginning of period	$	—		$	125,343		$	30,859		$	73,746		$	26,592		$	256,540
Addition attributable to acquisitions	862,127			—			—			—			—			862,127
Additions (reductions)⁽¹⁾	—			6,565			114			526			19			7,224
Accretion recognized in interest income	(17,415		)	(7,968		)	(1,322		)	(3,890		)	(3,423		)	(34,018		)
Balance at end of period	$	844,712		$	123,940		$	29,651		$	70,382		$	23,188		$	1,091,873

Three Months Ended September 30, 2015
Balance at beginning of period	$	—		$	188,310		$	35,805		$	91,758		$	32,175		$	348,048
Additions attributable to acquisitions	—			—			—			—			—			—
Additions (reductions) ⁽¹⁾	—			(747		)	(351		)	(1,337		)	1,202			(1,233		)
Accretion recognized in interest income	—			(10,704		)	(2,085		)	(4,376		)	(2,825		)	(19,990		)
Balance at end of period	$	—		$	176,859		$	33,369		$	86,045		$	30,552		$	326,825

(1) 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.



(Dollars in thousands)	Talmer			Lake Michigan			Monarch			North-western			OAK			Total
Nine Months Ended September 30, 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 (reductions)⁽¹⁾	—			(3,800		)	(749		)	(5,322		)	(182		)	(10,053		)
Accretion recognized in interest income	(17,415		)	(25,259		)	(4,158		)	(11,919		)	(9,707		)	(68,458		)
Reclassification from nonaccretable difference	—			—			—			5,000			5,000			10,000
Balance at end of period	$	844,712		$	123,940		$	29,651		$	70,382		$	23,188		$	1,091,873

Nine Months Ended September 30, 2015
Balance at beginning of period	$	—		$	—		$	—		$	104,675		$	33,286		$	137,961
Additions attributable to acquisitions	—			190,246			37,914			—			—			228,160
Additions (reductions) ⁽¹⁾	—			803			(1,492		)	(4,196		)	6,417			1,532
Accretion recognized in interest income	—			(14,190		)	(3,053		)	(14,434		)	(9,151		)	(40,828		)
Balance at end of period	$	—		$	176,859		$	33,369		$	86,045		$	30,552		$	326,825

As part of its ongoing assessment of the acquired loan portfolios, management has determined that the overall credit quality of the Northwestern and OAK acquired loan portfolios has improved, which has resulted in an improvement in expected cash flows of certain loan pools in these acquired loan portfolios. Accordingly, management reclassified $5.0 million during the nine months ended September 30, 2016 from the nonaccretable difference to the accretable yield for each of these acquired loan portfolios, which will increase amounts recognized into interest income over the estimated remaining lives of the loan pools within these portfolios.