CHFC 2017 Annual Report

from the federal historic tax credit placed into service were partially offset by impairment recorded on the same tax credits included within other operating expenses. The decrease in the effective federal income tax rate in 2016, compared to 2015, was due primarily to an increase in available tax credits resulting from investments in qualified affordable housing and other tax credit projects obtained as part of our Lake Michigan transaction, tax benefits attributable to share-based compensation payments and additional tax-exempt interest income obtained through our merger with Talmer. See Note 16 to our Consolidated Financial Statements for additional details on income taxes. We had no uncertain tax positions during the three years ended December 31, 2017. 75 Liquidity Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding (referred to as "funding liquidity risk") or that we cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (referred to as "market liquidity risk"). Funding liquidity risk is managed to ensure stable, reliable and cost-effective sources of funds are available to satisfy deposit withdrawals and lending and investment opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. Our funding needs are managed by maintaining a level of liquid funds through our asset/liability management process. Our largest sources of liquidity on a consolidated basis are our deposits from consumer, business and municipal customers within our local markets, principal payments on loans, maturing investment securities, cash held at the FRB and unpledged investment securities available-for-sale. Total deposits increased $0.77 billion during 2017, compared to 2016, and increased $5.42 billion during 2016, compared to 2015. The increase in deposits during 2017 was primarily due to growth in customer deposits, which includes noninterest-bearing demand deposits, savings deposits and time deposits, of $644.3million, partially offset by a decrease in interest- bearing demand deposits of $101.4 million. The increase in deposits in 2016 was primarily attributable to $5.29 billion of deposits acquired in our merger with Talmer, which included $403.2 million of brokered deposits. Our loan-to-deposit ratio increased to 100.7% at December 31, 2017 from 98.3% at December 31, 2016 as a result of loans increasing $1.16 billion, or 9.0%, during 2017. We had $143.7 million of cash deposits held at the FRB at December 31, 2017, compared to $52.1 million at December 31, 2016. At December 31, 2017, we had unpledged investment securities available-for-sale with an amortized cost of $782.5 million and available unused wholesale sources of liquidity, including FHLB advances and borrowings from the discount window of the FRB. Chemical Bank is a member of the FHLB and as such has access to short-term and long-term advances from the FHLB that are generally secured by residential mortgage first lien loans. The Corporation had short-term and long-term FHLB advances outstanding of $2.3 billion at December 31, 2017. Additional borrowing availability from the FHLB, which is subject to certain requirements, was $193.5 million at December 31, 2017. The Corporation can also borrow from the FRB's discount window to meet short-term liquidity requirements. These borrowings are required to be secured by investment securities and/or certain loan types, with each category of assets carrying various borrowing capacity percentages. At December 31, 2017, we maintained an unused borrowing capacity of $114.0 million with the FRB's discount window based upon pledged collateral as of that date. We also had the ability to borrow an additional $425.0 million of federal funds from multiple third-party financial institutions at December 31, 2017. In addition, we have a credit agreement of $145.0 million consisting of a $125.0 million term line-of-credit and a $20.0 million revolving line-of-credit. The $20.0 million revolving line-of-credit and $105.0 million of the term line of credit was available for use at December 31, 2017. It is management's opinion that our borrowing capacity could be expanded, if deemed necessary, as we have additional borrowing capacity available at the FHLB and we have a significant amount of additional assets that could be used as collateral at the FRB's discount window. Wemanage our liquidity position to provide the cash necessary to pay dividends to shareholders, invest in new subsidiaries, enter new banking markets, pursue investment opportunities and satisfy other operating requirements. Our primary source of liquidity is dividends from Chemical Bank. Federal and state banking laws place certain restrictions on the amount of dividends that a bank may pay to its parent company. During the year ended December 31, 2017, Chemical Bank paid $165.0 million in dividends to the Corporation, and the Corporation paid cash dividends to shareholders of $78.5million. During 2016, Chemical Bank paid $110.5million in dividends to the Corporation and the Corporation paid cash dividends to shareholders of $49.4 million. The earnings of Chemical Bank are the principal source of funds to pay cash dividends to our shareholders. Chemical Bank had net income of $162.7 million during the year ended December 31, 2017, compared to net income of $129.1 million during the year ended December 31, 2016. Over the long term, cash dividends to shareholders are dependent upon earnings, capital requirements, regulatory restraints and other factors affecting Chemical Bank.