CHFC 2018 Annual Report

The BHC Act requires prior approval of the FRB for any direct or indirect acquisition of more than 5% of the voting shares of a commercial bank or its parent holding company by Chemical. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, Chemical's performance record under the Community Reinvestment Act of 1977 ("CRA"), Chemical's adherence to banking regulations and fair lending laws and the effectiveness of the subject organizations in combating money laundering activities. Interstate Banking and Branching Bank holding companies may acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed to the extent that state law would permit a bank chartered in that state to establish such a branch. Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC- insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches inMichigan by FDIC- insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting aMichigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located inMichigan.AMichigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank. Dividends Our primary source of funds available to pay dividends to shareholders is from dividends paid to us by Chemical Bank. Federal and state banking laws and regulations limit both the extent to which Chemical Bank can lend or otherwise supply funds to us and also place certain restrictions on the amount of dividends Chemical Bank may pay to us. BothChemical andChemical Bank are subject to regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums, which could prohibit the payment of dividends under circumstances where the payment could be deemed an unsafe and unsound banking practice. Chemical Bank is required to obtain prior approval from the FRB for the declaration and payment of dividends to us if the total of all dividends declared in any calendar year will exceed the total of (i) Chemical Bank's net income (as defined by regulation) for that year plus (ii) the retained net income (as defined by regulation) for the preceding two years. In addition, federal regulatory authorities have stated that banking organizations should generally pay dividends only out of current operating earnings. Further, the FRB has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximumallowable levels unless both asset quality and capital are very strong. Chemical Bank declared and paid dividends to us of $114.3 million and $165.0million in 2018 and 2017, respectively. Dividends received fromChemical Bank in the past are not necessarily indicative of amounts that may be paid or available to be paid in the future. Source of Strength Under FRB policy, we are expected to act as a source of financial strength to Chemical Bank and to commit resources to support Chemical Bank. Further, the FRB has discretion to require a bank holding company to divest itself of any bank or non- bank subsidiaries if the agency determines that any such divestiture may aid the depository institution's financial condition. In addition, if DIFS deems Chemical Bank's capital to be impaired, DIFS may require Chemical Bank to restore its capital by a special assessment on us as Chemical Bank's only shareholder. If we fail to pay any assessment, our directors would be required, under Michigan law, to sell the shares of Chemical Bank's stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore Chemical Bank's capital. 11