CHFC 2017 Annual Report

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows: December 31, (Dollars in thousands) 2017 2016 Deferred tax assets: Allowance for loan losses $ 20,446 $ 45,763 Acquisition-related fair value adjustments 27,607 54,704 Accrued stock-based compensation 4,082 18,891 Loss and tax credit carry forwards 57,969 76,446 Depreciation 2,954 11,270 Nonaccrual loan interest 6,155 9,465 Accrued expense 9,200 20,858 Other 9,127 15,751 Total deferred tax assets 137,540 253,148 Deferred tax liabilities: Loan servicing rights 13,446 20,450 Core deposit intangible assets 6,022 11,844 Goodwill 4,076 6,373 Prepaid expenses 7,390 4,873 Other 7,735 2,762 Total deferred tax liabilities 38,669 46,302 Net deferred tax asset before valuation allowance 98,871 206,846 Valuation allowance (1,150) (2,239) Net deferred tax asset $ 97,721 $ 204,607 On August 31, 2016, the Corporation merged with Talmer and recorded $151.9 million in deferred tax assets, net of valuation allowance. In connection with the merger, Talmer incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code ("IRC"). At August 31, 2016, Talmer had $102.8 million in gross federal net operating loss carry forwards, $88.7 million in gross realized built-in loss carry forwards, $1.0 million in federal tax credit carry forwards that expire from 2026 through 2035, and $14.9 million in federal alternative minimum tax credits with an indefinite life. The valuation allowance against the Corporation’s deferred tax assets at December 31, 2017 totaled $1.2 million and included $0.6 million due to IRC Section 382 limitations on the utilization of pre-ownership change loss and tax credit carry forwards associated with Talmer’s previously acquired entities and $0.6 million due to management’s estimate of capital loss carry forwards more likely than not to expire unutilized. Actual outcomes could vary from the Corporation's current estimates, resulting in future increases or decreases in the valuation allowance and corresponding future tax expense or benefit. Due to the substantial equity value of Talmer at the time of the ownership change, the entity was deemed to be in a net unrealized built-in gain position which allows for the utilization of certain carry forward attributes. Therefore, no additional valuation allowance was established against Talmer's net deferred tax assets. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2017 141