CHFC 2017 Annual Report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 84 Note 1: Summary of Significant Accounting Policies Nature of Operations Chemical Financial Corporation ("Corporation" or "Chemical") operates in a single operating segment — commercial banking. The Corporation is a financial holding company, headquartered in Midland, Michigan, that operates through one commercial bank, Chemical Bank. Chemical Bank operates within Michigan, Northeast Ohio and Northern Indiana as a Michigan state-chartered commercial bank. Chemical Bank operates through an internal organizational structure of seven regional banking units and offers a full range of traditional banking and fiduciary products and services to the residents and business customers in the Corporation's geographical market areas. The products and services offered by the regional banking units, through branch banking offices, are generally consistent throughout the Corporation, as is the pricing of those products and services. The marketing of products and services throughout the Corporation's regional banking units is generally uniform, as many of the markets served by the regional banking units overlap. The distribution of products and services is generally uniform throughout the Corporation's regional banking units and is achieved primarily through retail branch banking offices, automated teller machines and electronically accessed banking products. The Corporation's primary sources of revenue are interest from its loan products and investment securities, service charges and fees from customer deposit accounts, wealth management revenue, net gain on sale of loans and other mortgage banking revenue. Basis of Presentation and Principles of Consolidation The accounting and reporting policies of the Corporation and its subsidiaries have been prepared in accordance with U.S. GenerallyAcceptedAccountingPrinciples ("GAAP"), Securities andExchangeCommission ("SEC") rules and interpretive releases and prevailing practices within the banking industry. The Consolidated Financial Statements of the Corporation include the accounts of the Corporation and its wholly owned subsidiaries. All significant income and expenses are recorded on the accrual basis. Intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. Use of Estimates Management makes estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying footnotes. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, expected cash flows from acquired loans, income and other taxes the valuation of loan servicing rights. Actual results could differ from these estimates. Business Combinations Pursuant to the guidance of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations ("ASC 805"), the Corporation recognizes assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the acquisition- related transaction and restructuring costs expensed in the period incurred. See Note 2 for further information regarding the Corporation's mergers and acquisitions. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and interest-bearing deposits held at the Federal Reserve Bank ("FRB"). Investment Securities Investment securities include investments in debt, trust preferred and preferred stock securities. Investment securities are accounted for in accordance with ASC Topic 320, Investments — Debt and Equity Securities ("ASC 320"), which requires investments to be classified within one of three categories (trading, held-to-maturity or available-for-sale). The Corporation held no trading investment securities at December 31, 2017 or 2016. Designation as an investment security held-to-maturity is based on the Corporation's intent and ability to hold the security tomaturity. Investment securities held-to-maturity are carried at amortized cost, adjusted for purchase price premiums and accretion of discounts. Investment securities that are not held-to-maturity are accounted for as securities available-for-sale, and are stated at estimated fair value, with the aggregate unrealized gains and losses classified as a component of accumulated other comprehensive income (loss), net of income taxes. Realized gains and losses on the sale of investment securities charges are determined using