CHFC 2018 Annual Report

Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2018 Government and government- sponsored enterprises $ 167,164 $ 1,672 $ 62,200 $ 1,683 $ 229,364 $ 3,355 State and political subdivisions 190,551 1,932 657,327 14,016 847,878 15,948 Residential mortgage-backed securities 20,679 85 123,757 3,738 144,436 3,823 Collateralized mortgage obligations 496,356 5,268 656,208 19,752 1,152,564 25,020 Corporate bonds 169,431 5,888 103,688 5,551 273,119 11,439 Trust preferred securities 34,623 1,640 2,725 164 37,348 1,804 Total $ 1,078,804 $ 16,485 $1,605,905 $ 44,904 $2,684,709 $ 61,389 December 31, 2017 Government and government- sponsored enterprises $ 63,818 $ 510 $ 24,621 $ 438 $ 88,439 $ 948 State and political subdivisions 437,407 12,268 349,242 10,093 786,649 22,361 Residential mortgage-backed securities 93,508 383 56,576 1,243 150,084 1,626 Collateralized mortgage obligations 713,525 7,235 73,707 1,249 787,232 8,484 Corporate bonds 71,447 1,138 47,878 454 119,325 1,592 Trust preferred securities — — 11,164 172 11,164 172 Total $ 1,379,705 $ 21,534 $ 563,188 $ 13,649 $1,942,893 $ 35,183 An assessment is performed quarterly by the Corporation to determine whether unrealized losses in its debt securities portfolio are temporary or other-than-temporary by carefully considering all reasonably available information. The Corporation reviews factors such as financial statements, credit ratings, news releases and other pertinent information of the underlying issuer or company to make its determination. Management did not believe any individual unrealized loss on any debt security as of December 31, 2018, represented an other-than-temporary impairment (OTTI) as the unrealized losses for these securities resulted primarily from changes in benchmark U.S. Treasury interest rates and not credit issues. Management believed that the unrealized losses on debt securities at December 31, 2018 were temporary in nature and due primarily to changes in interest rates and reduced market liquidity and not as a result of credit-related issues. At December 31, 2018, the Corporation did not have the intent to sell any of its impaired debt securities and believed that it was more-likely-than-not that the Corporation will not have to sell any such debt securities before a full recovery of amortized cost. Accordingly, at December 31, 2018, the Corporation believed the impairments in its debt securities portfolio were temporary in nature. However, there is no assurance that OTTI may not occur in the future. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 115 Note 5: Loans Loan portfolio segments are defined as the level at which an entity develops and documents a systematic methodology to determine its allowance. The Corporation has two loan portfolio segments (commercial loans and consumer loans) that it uses in determining the allowance. Both quantitative and qualitative factors are used by management at the loan portfolio segment level in determining the adequacy of the allowance for the Corporation. Classes of loans are a disaggregation of an entity's loan portfolio segments. Classes of loans are defined as a group of loans which share similar initial measurement attributes, risk characteristics and methods for monitoring and assessing credit risk. The Corporation has six classes of loans, which are set forth below. Commercial — Loans and lines of credit to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, personal guarantees of the owner and other sources of repayment, although the Corporation may also secure commercial loans with real estate.