CHFC 2017 Annual Report

the specific identification method and are included within noninterest income in the Consolidated Statements of Income. Premiums and discounts on investment securities are amortized over the estimated lives of the related investment securities based on the effective interest yield method and are included in interest income in the Consolidated Statements of Income. The Corporation assesses equity and debt securities that have fair values below amortized cost basis to determine whether declines (impairment) are other-than-temporary. If the Corporation intends to sell an impaired security or it is more-likely-than- not that the Corporation will be required to sell an impaired security prior to the recovery of its amortized cost, an other-than- temporary impairment ("OTTI") write-down is recognized in earnings equal to the entire difference between the investment security's amortized cost basis and its fair value. In assessing whether OTTI exists, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the potential for impairments in an entire industry or sub-sector and (iv) the potential for impairments in certain economically depressed geographical locations. For the years ended December 31, 2017, 2016 and 2015, the Corporation did not recognize OTTI. Nonmarketable Equity Securities The Corporation is required to hold non-marketable equity securities, comprised of Federal Home Loan Bank of Indianapolis ("FHLB") and FRB stock, as a condition of membership. These securities are accounted for at cost, which equals par or redemption value, and included in "interest receivable and other assets" on the Consolidated Statements of Financial Position. These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities. These securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. FHLB stock can only be redeemed upon giving a five year written notice and FRB stock can only be redeemed upon giving six months written notice, with no more than 25.0% eligible for redemption in any calendar year. The Corporation records these non-marketable equity securities as a component of other assets and they are periodically evaluated for impairment. Management considers these non-marketable equity securities to be long-term investments.Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value, if applicable. The estimated loss is recognized as a loss from equity investments in other noninterest income in the Consolidated Statements of Income. The Corporation's ownership of FHLB stock totaled $112.0 million at December 31, 2017 and $58.0 million at December 31, 2016. The Corporation's ownership of FRB stock totaled $68.1 million at December 31, 2017 and $39.4 million at December 31, 2016. Loans Held for Sale Mortgage and construction loans intended for sale in the secondary market are carried at fair value based on the Corporation's election of the fair value option. The estimated fair value of loans held for sale are based on quoted market prices for securities backed by similar types of loans, where available, or by discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral. The fair value includes the servicing value of the loans as well as any accrued interest. These loans are sold both with servicing rights retained and with servicing rights released. Originated Loans Held for Investment Originated loans include the Corporation's entire portfolio loans held for investment, excluding loans acquired in business combinations, as further discussed below. Originated loans are stated at their principal amount outstanding, net of unearned income, charge-offs and unamortized deferred fees and costs. Loan interest income is recognized on the accrual basis. Deferred loan fees and costs are amortized over the loan term based on the level-yield method. Net loan commitment fees are deferred and amortized into fee income on a straight-line basis over the commitment period. If a loan is transferred from the loan held for investment portfolio to the held for sale portfolio, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off. The loans are transferred at fair value determined using the same methods described above for held for sale loans. When loans classified as held for investment are transferred to loans held for sale due to a change in intent, cash flows associated with the loans will be classified in the Consolidated Statements of Cash Flows as operating or investing, as appropriate, in accordance with the initial classification of the loans. The past due status of a loan is based on the loan's contractual terms. A loan is placed in nonaccrual status (accrual of interest is discontinued) when principal or interest is past due 90 days or when doubt exists as to the ultimate collection of principal or interest, unless the loan is both well-secured and in the process of collection, or earlier when, in the opinion of management, there is sufficient reason to doubt the collectibility of principal or interest. Interest previously accrued, but not collected, is reversed and charged against interest income at the time the loan is placed in nonaccrual status. Subsequent receipts of interest while a loan is in nonaccrual status are recorded as a reduction of principal. Loans are returned to accrual status when principal and interest Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2017 85