CHFC 2018 Annual Report

If our analysis or assumptions prove to be incorrect, our current allowance may not be sufficient, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance for loan losses would materially decrease our net income and adversely affect our general financial condition. In addition, our regulators, as an integral part of their periodic examination, review our allowance for loan losses and may require an increase in the allowance for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Finally, the measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board ("FASB") recently issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2020. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model currently required under GAAP, which delays recognition until it is probable a loss has been incurred.Accordingly, we expect that the adoption of the CECLmodel will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations. See the sections captioned "Allowance for Loan Losses" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 - Loans in the notes to our Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, located elsewhere in this Annual Report for further discussion related to Chemical's process for determining the appropriate level of the allowance for loan losses. We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value. We plan to grow our business both organically and through mergers and acquisitions. We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, we may engage in discussions or negotiations that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short- and long-term liquidity. Our merger and acquisition activities could be material and could require us to use a substantial amount of common stock, preferred stock, cash, other liquid assets, and/or incur debt. For example, in connection with our proposed merger of equals transaction with TCF announced on January 28, 2019, we will issue additional shares of our common stock to TCF stockholders, which will dilute our current shareholders' ownership interest in Chemical, and we will issue shares of a newly designated series of our preferred stock. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from our merger and acquisition activities, including our proposed merger with TCF, could have a material adverse effect on our financial condition and results of operations, including net income per common share. Our merger and acquisition activities, including our proposed merger with TCF, could involve a number of additional risks, including the risks of: • delay in completing an acquisition or merger due to litigation or the regulatory approval process; • the recording of assets and liabilities of the acquired or merged company at fair value may materially dilute shareholder value at the transaction date and could have amaterial adverse effect on our financial condition and results of operations; • incurring the time and costs associated with identifying and evaluating potential acquisition or merger targets; • difficulty or unanticipated expense associatedwith converting the operating systems of the acquired ormerged company into ours: • potential exposure to unknown or contingent liabilities of the acquired or merged company; • our estimates and judgments used to evaluate credit, operations, management and market risks with respect to the acquired or merged company may not be accurate; • our exposure to potential asset quality issues of the acquired or merged company; • the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; 19