CHFC 2018 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, 2018 and 2017 were as follows: December 31, (Dollars in thousands) 2018 2017 Deferred tax assets: Allowance for loan losses $ 24,019 $ 20,446 Acquisition-related fair value adjustments 16,511 27,607 Unrealized loss on securities 10,040 2,751 Accrued stock-based compensation 3,239 4,082 Loss and tax credit carry forwards 30,169 57,969 Nonaccrual loan interest 10,830 6,155 Accrued expense 7,397 9,200 Other 4,888 9,330 Total deferred tax assets 107,093 137,540 Deferred tax liabilities: Loan servicing rights 14,941 13,446 Core deposit intangible assets 4,966 6,022 Goodwill 4,281 4,076 Deferred loan fees 4,963 4,551 Prepaid expenses 5,625 7,390 Other 5,894 3,184 Total deferred tax liabilities 40,670 38,669 Net deferred tax asset before valuation allowance 66,423 98,871 Valuation allowance (1,467) (1,150) Net deferred tax asset $ 64,956 $ 97,721 The valuation allowance against the Corporation’s deferred tax assets at December 31, 2018 and 2017 totaled $1.5 million and $1.2 million respectively. The valuation allowance at December 31, 2018 included management’s estimate of capital loss carry forwards more likely than not to expire unutilized. Included in the valuation allowance at December 31, 2017 was $0.6 million due to IRC Section 382 limitations on the utilization of pre-ownership change loss and tax credit carry forwards associated with 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. Management concluded that no valuation allowance was necessary on the remainder of the Corporation's net deferred tax assets at December 31, 2018 and 2017. This determination was based on the Corporation's history of pre-tax and taxable income over the prior three years, as well as management's expectations for sustainable profitability in the future. Management monitors deferred tax assets quarterly for changes affecting the ability to realize and the valuation allowance could be adjusted in future periods. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 148