CHFC 2017 Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion describes our results of operations for the years ended December 31, 2017, 2016 and 2015 and also analyzes our financial condition as of December 31, 2017, as compared to December 31, 2016. This discussion should be read in conjunction with the " Selected Financial Data " and our audited Consolidated Financial Statements and accompanying footnotes thereto included elsewhere in thisAnnual Report. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods. We have made, and will continue tomake, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties.Actual resultsmay differmaterially fromthose contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see " Forward-Looking Statements " of this Annual Report. 35 Business Overview Chemical Financial Corporation is a financial holding company headquartered in Midland, Michigan with its business concentrated in a single industry segment - commercial banking. We, through our wholly-owned subsidiary bank, Chemical Bank (the "Bank"), offer a full range of traditional banking and fiduciary products and services. These products and services include business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, electronically accessed banking products, residential and commercial real estate financing, commercial lending, consumer financing, debit cards, safe deposit box services, money transfer services, automated teller machines, access to insurance and investment products, corporate and personal wealth management services, mortgage banking and other banking services. The principal markets for our products and services are communities in Michigan, Northeast Ohio and Northern Indiana where our bank branches are located and the areas surrounding these communities. As of December 31, 2017, we served these markets through 186 banking offices located in Michigan, 24 branches located in Northeast Ohio and two branches located in Northern Indiana. In addition to our banking offices, we operated seven loan production offices and 245 automated teller machines, both on- and off-bank premises. Chemical Bank operates through an internal organizational structure of seven regional banking units which are collections of branch banking offices organized by geographical region. Our principal source of revenue is interest and fees on loans, which accounted for 81.7% of total revenue in 2017, 76.2% of total revenue in 2016 and 76.7% of total revenue in 2015. Interest on investment securities, service charges and fees on deposit accounts, wealth management revenue and mortgage banking revenue are also significant sources of revenue, which combined, accounted for 20.3% of total revenue in 2017, 19.0% of total revenue in 2016 and 19.8% of total revenue in 2015. Revenue is influenced by overall economic factors including market interest rates, business and consumer spending, consumer confidence and competitive conditions in the marketplace. During the third quarter of 2017, we launched a project to identify strategies that could be deployed to drive revenue growth and steps to be taken to further improve operating efficiency as part of an effort to refine and clarify our overall strategic plan of how we allocate our capital across the organization and better position us for growth. The project resulted in restructuring efforts including a reduction of approximately 7% in total employees and consolidation of 25 branches completed during the fourth quarter of 2017 in addition to 13 branches that were consolidated during the third quarter of 2017. Under the restructuring efforts, we additionally discontinued our title insurance services and reduced resources devoted to indirect auto lending. The restructuring efforts produced more than $20 million of annualized savings, while half, or more, is planned to be reinvested in the hiring of new commercial bankers and key operational staff as well as making investment to enhance our core operating systems.