CHFC 2017 Annual Report

A reconciliation of expected income tax expense at the federal statutory income tax rate and the amounts recorded in the Consolidated Financial Statements were as follows: Years Ended December 31, 2017 2016 2015 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Tax at statutory rate $ 89,706 35.0% $ 52,548 35.0% $ 43,341 35.0% Changes resulting from: Tax-exempt interest income (9,001) (3.5) (5,320) (3.5) (3,943) (3.2) State taxes, net of federal benefit 369 0.1 13 — — — Change in valuation allowance (1,089) (0.4) (706) (0.5) — — Bank-owned life insurance adjustments (1,696) (0.7) (832) (0.6) (124) (0.1) Director plan change in control — — (508) (0.3) — — Income tax credits, net (11,449) (4.4) (2,454) (1.6) (2,557) (2.1) Nondeductible transaction expenses 156 0.1 2,100 1.4 411 0.3 Tax benefits in excess of compensation costs on share-based payments (1) (5,886) (2.3) (2,240) (1.5) — — Impact of the Tax Cuts and Jobs Act (2) 46,660 18.2 — — — — Other, net (990) (0.4) (495) (0.4) (128) — Income tax expense $ 106,780 41.7% $ 42,106 28.0% $ 37,000 29.9% (1) The years ended December 31, 2017 and 2016 reflect the adoption of ASU 2016-09, as of January 1, 2016, which results in excess tax benefits recognized within "Income tax expense" rather than previously recognized directly into equity with "Additional paid-in- capital." Refer to Note 1, Summary of Significant Accounting Policies, for further details. (2) The year ended December 31, 2017 included the impact of the enactment of H.R.1 (the "Tax Cuts and Jobs Act"), which required a revaluation of net deferred tax assets and liabilities, see below for further details. On December 22, 2017, H.R.1 (known as the "Tax Cuts and Jobs Act") was signed into law. Among other provisions, the Tax Cuts and Jobs Act, reduces the statutory corporate income tax rate from a maximum rate of 35% to flat tax rate of 21%, effective January 1, 2018. ASC Topic 740 requires the recognition of the effects of tax law changes be recorded in the period in which the law is enacted. Therefore, the Corporation's deferred tax assets and liabilities which were previously valued at a federal rate of 35%, were revalued to the current enacted federal tax rate of 21%. The impact of the Tax Cuts and Jobs Act resulted in a $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 $46.0 million and an acceleration of amortization expense on the low income housing tax credit investment portfolio of $0.7 million. The SEC issued StaffAccounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act, thereby allowing a measurement period to reflect provisional adjustments as information becomes available. The measurement period includes the Tax Cuts and Jobs Acts' enactment date up until one year after. The Corporation does not have any provisional adjustments to its net deferred tax asset as a result of the tax reform at December 31, 2017 under Staff Accounting Bulletin No. 118, but the Corporation will have adjustments in 2018 to reflect the impact of the rate reduction on various deferred items that management reasonably estimated at December 31, 2017 and will true up with the filing of the 2017 tax return in 2018. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2017 140