CHFC 2018 Annual Report

Activity for the accretable yield, which includes contractually due expected cash flows 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 Year Ended December 31, 2018 Balance at beginning of period $ 731,353 $ 95,124 $ 22,496 $ 60,814 $ 17,110 $ 926,897 Accretion recognized in interest income (164,614) (24,722) (3,881) (17,988) (10,214) (221,419) Net reclassification (to) from nonaccretable difference (1)(2) (61,407) 2,730 (783) (1,371) 2,678 (58,153) Balance at end of period $ 505,332 $ 73,132 $ 17,832 $ 41,455 $ 9,574 $ 647,325 Year Ended December 31, 2017 Balance at beginning of period $ 798,210 $ 121,416 $ 27,182 $ 69,847 $ 23,316 $1,039,971 Accretion recognized in interest income (175,678) (29,077) (4,533) (20,318) (12,563) (242,169) Net reclassification (to) from nonaccretable difference (1) 108,821 2,785 (153) 11,285 6,357 129,095 Balance at end of period $ 731,353 $ 95,124 $ 22,496 $ 60,814 $ 17,110 $ 926,897 Year Ended December 31, 2016 Balance at beginning of period $ — $ 152,999 $ 34,558 $ 82,623 $ 28,077 $ 298,257 Addition attributable to acquisitions 862,127 — — — — 862,127 Accretion recognized in interest income (63,917) (33,031) (5,468) (15,791) (13,352) (131,559) Net reclassification (to) from nonaccretable difference (1) — 1,448 (1,908) 3,015 8,591 11,146 Balance at end of period $ 798,210 $ 121,416 $ 27,182 $ 69,847 $ 23,316 $1,039,971 (1) The net reclassification results from changes in expected cash flows of the acquired loans which may include increases in the amount of contractual principal and interest expected to be collected due to improvement in credit quality, increases in balances outstanding from advances, renewals, extensions and interest rates; as well as reductions in contractual principal and interest expected to be collected due to credit deterioration, payoffs, and decreases in interest rates. (2) The 2018 net reclassification from accretable to nonaccretable difference in the Talmer portfolio was primarily the result of unexpected prepayments and payoffs. Chemical Bank has extended loans to its directors, executive officers and their affiliates. These loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the time, and did not involve more than the normal risk of repayment by the borrower. The aggregate loans outstanding to the directors, executive officers and their affiliates totaled $3.6 million at December 31, 2018 and $3.8 million at December 31, 2017. During 2018 and 2017, there were $3.8 million and $44.1 million, respectively, of new loans and other additions, while repayments and other reductions totaled $4.0 million and $64.2 million, respectively. Credit Quality Monitoring The Corporation maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally only within the Corporation's market areas. The Corporation's lending markets generally consist of communities throughout Michigan, Ohio and Northern Indiana. The Corporation, through Chemical Bank, has a commercial loan portfolio approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Corporation's commercial loan portfolio are risk rated at origination based on the grading system set forth below. The approval authority of relationship managers is established based on experience levels, with credit decisions greater than $1.25 million requiring credit officer approval and credit decisions greater than $3.0 million requiring group loan authority approval, except for six executive and senior officers who have varying loan limits up to $8.0 million. With respect to the group loan authorities, Chemical Bank has various regional loan committees that meet weekly to consider loan ranging in amounts from $3.0 million to $7.0 million, and a senior loan committee, consisting of certain executive and senior officers, that meets weekly to consider loans ranging in amounts from $7.0 million up to Chemical Bank's internal lending limit, depending on risk rating and credit action Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 118