CHFC 2018 Annual Report

The excess of cash flows we expect to collect over the estimated fair value of a loan, or pool of loans, is referred to as the "accretable yield" and is recognized in interest income over the estimated remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments on a loan, or pool of loans, and the cash flows we expect to collect at acquisition, considering the impact of prepayments and estimates of future credit losses expected to be incurred over the life of the loan, or pool of loans, is referred to as the "nonaccretable difference" and is sensitive to unexpected prepayments and/or payoffs and changes in loan credit quality. We evaluate estimated cash flows on our acquired loans on a quarterly basis. These evaluations require us to continue to use key assumptions and estimates, similar to the initial estimate of fair value.Adecrease in estimated cash flows due to deterioration of credit quality will generally result in a charge to the provision for loan losses and a resulting increase to the allowance for loan losses in addition to a transfer from accretable yield to nonaccretable difference. A decrease in estimated cash flows due to unexpected prepayments and/or payoffs will generally result in a transfer from accretable yield to nonaccretable difference. Increases in the estimates of estimated cash flows will first reverse any previously established allowance for loan losses and then result in increases to the accretable yield, which will increase amounts recognized in interest income in subsequent periods. The disposition of acquired loans including loan sales to third parties, the receipt of payments in full or in part by the borrower and foreclosure of the underlying collateral, will result in removal of the loan from the acquired loan portfolio at its carrying amount. As a result of the significant amount of judgment involved in estimating future cash flows we expect to be collected on acquired loans, the adequacy of the allowance for loan losses could be significantly impacted by changes in cash flow expectations resulting from changes in the credit quality of acquired loans. Acquired loans that were classified as nonperforming loans before being acquired and acquired loans that are not performing in accordance with contractual terms subsequent to acquisition are not classified as nonperforming loans subsequent to acquisition because the loans are recorded in pools at net realizable value based on the principal and interest we expect to collect on such loans. Judgment is required to estimate the timing and amount of cash flows expected to be collected when the loans are not performing in accordance with the original contractual terms. Note 1, Note 2 and Note 5 to our Consolidated Financial Statements contain additional information related to acquired loans. Income and Other Taxes We are subject to the income and other tax laws of the United States, the States of Michigan, Ohio, Indiana and other states where nexus has been created. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provisions for income and other taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations and case law. In the process of preparing our tax returns, management attempts to make reasonable interpretations of enacted tax laws. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management's ongoing assessment of facts and evolving case law. On December 22, 2017, H.R.1, referred to as the "Tax Cuts and Jobs Act", was signed into law. The Tax Cuts and Jobs Act, among other items, reduced the corporate income tax rate from 35% to 21%, effective January 1, 2018. As such, we completed a revaluation of the net deferred tax assets and estimated a reduction in our deferred tax asset as of December 31, 2017. When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Management assesses the reasonableness of our effective federal tax rate on a quarterly basis based on management's estimate of taxable income and the applicable taxes expected for the full year, including the impact of any discrete items that have occurred. Deferred tax assets and liabilities are reassessed on a quarterly basis, including the need for a valuation allowance for deferred tax assets. The need for reserves for uncertain tax positions is reviewed quarterly based upon developments in tax law and the status of examinations or audits. Note 17 to our Consolidated Financial Statements contains additional information related to income taxes. 43