CHFC 2017 Annual Report

Valuation of Loan Servicing Rights We recognize as assets the rights to service mortgage loans for others, known as loan servicing rights (“LSRs”). As of January 1, 2017, we elected to account for LSRs under the fair value option. Prior to January 1, 2017, we accounted for LSRs at the lower of cost or fair value. To determine the fair value of LSRs, we use an independent third party valuation model requiring the incorporation of assumptions that market participants would use in estimating future net servicing income, which include estimates of prepayment speeds, discount rate, cost to service and escrow account earnings. Changes in the fair value of LSRs directly impacts earnings. See Notes 3 and 9 to our Consolidated Financial Statements for more information on fair value measurements. Accounting Standards Updates See Note 1 to our Consolidated Financial Statements included in this Annual Report for details of accounting pronouncements adopted during 2017. See the following section for a description of pronouncements that have been released but not yet adopted. Pending Accounting Pronouncements Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which implements a common revenue standard that clarifies the principles for recognizing revenue and supersedes most current revenue recognition guidance. The core principle of the revenue standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is intended to clarify and converge the revenue recognition principles under GAAP and International Financial Reporting Standards and to streamline revenue recognition requirements in addition to expanding required revenue recognition disclosures. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which provides a one year deferral to the effective date, therefore, ASU 2014-09 is effective for public companies for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. As such, we will adopt ASU 2014-09 as of January 1, 2018 and intend to use the modified transition approach. Approximately 79% of our revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. Following detailed review of our revenue streams not derived from net interest income on financial assets and liabilities, we identified the recognition of gains from other real estate sales financed by us to be in the scope of this amended guidance as the new standard is largely consistent with the existing guidance and current practices applied by our businesses. The cumulative effect of recognizing the deferred gain recorded under previous GAAP increases retained earnings by $1.2 million upon adoption as of January 1, 2018. Recognition and Measurement In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 amends current guidance by: (i) requiring equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income; (ii) allowing an entity to measure equity investments that do not have readily determinable fair values at either fair value or cost minus impairment, if any, plus or minus changes in observable prices, with changes in measurement recognized in net income; (iii) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iv) eliminating the requirement to disclose themethods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (v) requiring use the of exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vi) requiring recognition of changes in the fair value related to instrument-specific credit risk in other comprehensive income if the fair value option for financial liabilities is elected; (vii) requiring separate presentation in the financial statements of financial assets and financial liabilities by measurement category; and (viii) clarifying that an entity should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016-01 as of January 1, 2018 will not have a material impact on our consolidated financial condition or results of operations. 40