CHFC 2018 Annual Report

Capital Capital supports current operations and provides the foundation for future growth and expansion. Our total shareholders' equity was $2.84 billion at December 31, 2018, an increase of $167.5 million, or 6.3%, from total shareholders' equity of $2.67 billion at December 31, 2017. Our total shareholders' equity as a percentage of total assets was 13.2% at December 31, 2018, compared to 13.8% at December 31, 2017. Our tangible shareholders' equity, which is defined as total shareholders' equity less goodwill and other acquired intangible assets, totaled $1.68 billion and $1.51 billion at December 31, 2018 and 2017, respectively. Our tangible shareholders' equity to tangible assets ratio was 8.3% at both December 31, 2018 and 2017. Tangible shareholders' equity and the tangible shareholders' equity to tangible assets ratio are non-GAAP financial measures. Please refer to the section entitled "Non-GAAP Financial Measures." Regulatory Capital Under the regulatory "risk-based" capital guidelines in effect for both banks and bank holding companies, minimum capital levels are based upon perceived risk in our various asset categories. These guidelines assign risk weights to on- and off- balance sheet items in arriving at total risk-weighted assets. Regulatory capital is divided by the computed total of risk-weighted assets to arrive at the risk-based capital ratios. Our risk-weighted assets for Chemical and Chemical Bank totaled $16.10 billion and $16.07 billion, respectively, at December 31, 2018, compared to $14.74 billion and $14.70 billion, respectively, at December 31, 2017. The increase in risk-weighted assets during 2018 was largely attributable to originated loan growth and increases in our investment securities portfolio. In July 2013, the FRB and the FDIC approved final rules implementing the Basel Committee on Banking Supervision's (BCBS) capital guidelines for U.S. banks (commonly known as Basel III). Under Basel III, which became applicable to us and Chemical Bank on January 1, 2015, minimum capital requirements were increased for both the quantity and quality of capital held by Chemical and Chemical Bank. Basel III added a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, kept the total risk-based capital ratio unchanged at 8.0% and kept the minimum leverage ratio unchanged at 4.0%. In addition to meeting the minimum capital requirements, under the Basel III capital rules, Chemical and Chemical Bank must also maintain a capital conservation buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The capital conservation buffer is calculated as a ratio of CET1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. The capital conservation buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the capital conservation buffer is now at its fully phased- in level of 2.5%. Throughout 2018, the required capital conservation buffer was 1.875%. The Tier 1 leverage ratio is not impacted by the capital conservation buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the capital conservation buffer. Chemical and Chemical Bank both continue to maintain strong capital positions, which exceeded the minimum capital adequacy levels prescribed by the FRB as shown in the following schedule: December 31, 2018 Leverage Ratio Common Equity Tier 1 Capital Ratio Tier 1 Risk- Based Capital Ratio Total Risk- Based Capital Ratio Actual Capital Ratios: Chemical Financial Corporation 8.7% 10.7% 10.7% 11.5% Chemical Bank 8.6 10.6 10.6 11.4 Minimum required for capital adequacy purposes 4.0 4.5 6.0 8.0 Minimum required for "well-capitalized" capital adequacy purposes 5.0 6.5 8.0 10.0 At December 31, 2018, Chemical's and Chemical Bank's regulatory capital ratios were above the well-capitalized standards and met the then-applicable capital conservation buffer and the capital conservation buffer on a fully phased-in basis. See Note 21 to our Consolidated Financial Statements for more information regarding Chemical's and Chemical Bank's regulatory capital ratios. 69