CHFC 2018 Annual Report

Under the proportional amortization method, the Corporation amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits. The Corporation recognized additional income tax expense attributable to the amortization of investments in qualified affordable housing projects of $4.2 million, $3.4 million and $2.6 million during the years ended December 31, 2018, 2017 and 2016, respectively. The Corporation's remaining investment in qualified affordable housing projects accounted for under the proportional amortization method totaled $84.9 million at December 31, 2018 and $51.4 million at December 31, 2017. Under the equity method, the Corporation's share of the earnings or losses is included in "Other" operating expenses on the Consolidated Statements of Income. The Corporation's remaining investment in new market projects accounted for under the equity method totaled $13.3 million and $17.3 million at December 31, 2018 and 2017, respectively. The Corporation's unfunded equity contributions relating to investments in qualified affordable housing projects, federal historic tax projects and new market projects is recorded in "Interest payable and other liabilities" on the Consolidated Statements of Financial Position. The Corporation's remaining unfunded equity contributions totaled $72.0 million and $48.1 million at December 31, 2018 and 2017, respectively. Management analyzes these investments for potential impairment when events or changes in circumstances indicate that it is more-likely-than-not that the carrying amount of the investment will not be r ea lized. An impairment loss is measured as the amount by which the carrying amount of an investment exceeds its fair value. During the year ended December 31, 2018, federal housing tax credits resulted in income tax benefit of $12.9 million, partially offset by impairment expense of $12.3 million , representing $9.7 million net of tax, recorded in "other noninterest expense. " During the year ended December 31, 2017, federal housing tax credits were placed into service resulting in income tax benefit of $7.9 million, partially offset by impairment expense of $9.3 million , representing $6.0 million net of tax, recorded in "Other" operating expenses. There was no impairment loss recognized as of December 31, 2016. The Corporation consolidates variable interest entities ("VIEs") in which it is the primary beneficiary. In general, a VIE is an entity that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (ii) has a group of equity owners that are unable to make significant decisions about its activities or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns as generated by its operations. If any of these characteristics are present, the entity is subject to a variable interest consolidation model, and consolidation is based on variable interests, not on ownership of the entity's outstanding voting stock. Variable interests are defined as contractual, ownership, or other monetary interests in an entity that change with fluctuations in the entity's net asset value. The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has the power to direct the activities and absorb losses or the right to receive benefits. The Corporation is a significant limited partner in the qualified affordable housing, federal historic and new market projects it has invested in. These projects meet the definition of VIEs. However, the Corporation is not the primary beneficiary of any of the VIEs in which it holds a limited partnership interest; therefore, the VIEs are not consolidated in the Consolidated Financial Statements. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 140 Note 13: Commitments, Contingencies and Guarantees Commitments In the normal course of business, the Corporation offers a variety of financial instruments containing credit risk that are not required to be reflected in the Consolidated Statements of Financial Position. These financial instruments include outstanding commitments to extend credit, approved but undisbursed loans (undisbursed loan commitments), credit lines, commercial letters of credit and standby letters of credit. The Corporation has risk management policies to identify, monitor and limit exposure to credit risk. Tomitigate credit risk for these financial guarantees, the Corporation generally determines the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer's creditworthiness. At December 31, 2018 and 2017, the Corporation had $119.0 million and $187.6 million, respectively, of outstanding financial and performance standby letters of credit. Themajority of these standby letters of credit are collateralized. The Corporation determined that there were no potential losses from standby letters of credit at December 31, 2018 and 2017. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may not