CHFC 2018 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, 2018 2017 2016 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Tax at statutory rate $ 68,443 21.0% $ 89,706 35.0% $ 52,548 35.0% Changes resulting from: Tax-exempt interest income (6,513) (2.0) (9,001) (3.5) (5,320) (3.5) State taxes, net of federal benefit 434 0.1 369 0.1 13 — Change in valuation allowance 317 0.1 (1,089) (0.4) (706) (0.5) Bank-owned life insurance adjustments (838) (0.2) (1,696) (0.7) (832) (0.6) Director plan change in control — — — — (508) (0.3) Income tax credits, net (16,148) (4.9) (11,449) (4.4) (2,454) (1.6) Nondeductible transaction expenses — 156 0.1 2,100 1.4 Nondeductible FDIC insurance premiums 1,095 0.3 — — — — Tax benefit in excess of compensation costs on share-based payments (1) (1,782) (0.5) (5,886) (2.3) (2,240) (1.5) Impact of the Tax Cuts and Jobs Act (2) (2,939) (0.9) 46,660 18.2 — — Other, net (168) (0.1) (990) (0.4) (495) (0.4) Income tax expense $ 41,901 12.9% $106,780 41.7% $ 42,106 28.0% (1) Represents excess tax benefits resulting from the exercise or settlement of share-based payment transactions. (2) The year ended December 31, 2017 included the initial calculated 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. The year ended December 31, 2018 included the impact of analyzing additional information in the year following the enactment date of the Tax Cuts and Jobs Act that was not previously available, as allowed by Staff Accounting Bulletin (SAB) No. 118, issued in late December 2017. 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, reduced the statutory corporate income tax rate from a maximum rate of 35% to a 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% as of December 31, 2017. In addition, the SEC issued Staff Accounting 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. During the year ended December 31, 2017, 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 Corporation did 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 continued to obtain, prepare and analyze information as it became available during 2018 in order to complete the accounting requirements under ASC Topic 740 by utilizing the measurement period afforded under SAB 118. These adjustments were finalized with the filing of the Company's 2017 Federal tax return in the fourth quarter and resulted in a tax benefit of $2.9 million. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 147