CHFC 2018 Annual Report

During the fourth quarter 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act, among other items, reduced the corporate income tax rate from a maximum rate of 35% to a flat tax rate of 21% effective January 1, 2018. Accounting guidance required the effects of changes in tax law be recognized and recorded in the interim period in which the law is enacted. As such, our deferred tax assets and liabilities which were valued at a federal rate of 35% prior to the enactment, were revalued to the enacted federal tax rate of 21%. The impact of enactment was $46.7 million increase to income tax expense related to continuing operations as a result of the revaluation of the net deferred tax asset of $46.0million and an acceleration of amortization expense on the low income housing tax credit investment portfolio of $0.7 million in the fourth quarter of 2017. We did not have any provisional adjustments to our net deferred tax asset as a result of the tax reform at December 31, 2017 under Staff Accounting Bulletin No. 118, but continued to obtain, prepare and analyze information as it became available during 2018 in order to complete the accounting requirements underASCTopic 740 by utilizing themeasurement period afforded under SAB 118. These adjustments were finalized with the filing of our 2017 Federal tax return in the fourth quarter and resulted in a tax benefit of $2.9 million. The increase in the effective income tax rate in 2017, compared to 2016, was primarily due to the $46.7 million charge to income tax expense from continuing operations resulting from the impact of the Tax Cuts and JobsAct.Additionally, the effective income tax rate was impacted by $7.9 million of tax benefit received from federal historic tax credits placed into service during 2017 and growth in lending on real estate projects that receive either low income housing or historic tax credits. See Note 17 to our Consolidated Financial Statements for additional details on income taxes. We had no uncertain tax positions during the three years ended December 31, 2018. 79 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"). We manage our funding liquidity risk to ensure stable, reliable and cost-effective sources of funds are available to satisfy deposit withdrawals and lending and investment opportunities. Our ability to meet our current financial obligations is a function of our balance sheet structure, our ability to liquidate assets and our access to alternative sources of funds. We manage our funding needs by maintaining a level of liquid funds through our asset/liability management process. Our largest sources of liquidity on a consolidated basis is our deposit base that comes 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 $1.95 billion during 2018 and increased $0.77 billion during 2017. Our loan-to-total deposits ratio was 95.6% at December 31, 2018 and 100.7% at December 31, 2017. We had $157.1 million of cash deposits held at the FRB at December 31, 2018, compared to $143.7 million at December 31, 2017. At December 31, 2018, we had unpledged investment securities available-for-sale with an amortized cost of $2.62 billion 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. We had short-term and long-term FHLB advances outstanding of $2.45 billion at December 31, 2018. Additional borrowing availability from the FHLB, subject to certain requirements, was $2.3 billion at December 31, 2018. We 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, 2018, we maintained an unused borrowing capacity of $117.4 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 and $305.0 million from unsecured overnight lines of credit from multiple third-party financial institutions at December 31, 2018. 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.