CHFC 2018 Annual Report

Valuation of Loan Servicing Rights We recognize as assets the rights to service 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. SeeNote 3 andNote 9 to our Consolidated Financial Statements for more information on fair valuemeasurements. 44 Accounting Standards Updates See Note 1 to our Consolidated Financial Statements included in this Annual Report for details of accounting pronouncements adopted during 2018. See the following section for a description of pronouncements that have been released but not yet adopted. Pending Accounting Pronouncements Standard Description/Required Date of Adoption Expected impact on the financial statements and other significant matters ASU No. 2016-02 - Leases (Topic 842) ASU No. 2018-01 - Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 ASU No. 2018-10 - Codification Improvements to Topic 842, Leases ASU No. 2018-11 - Leases (Topic 842) Targeted Improvements ASU No. 2018-20 - Leases (Topic 842): Narrow Scope Improvements for Lessors In February 2016, the FASB established Topic 842, Leases, by issuingAccounting Standards Update (ASU), No. 2016-02, which requires lessees to recognize leases on-balance sheet, lessors to classify leases as sales-type, direct financing, or operating, and disclose key information about leasing arrangements. Topic 842 was subsequently amended byASU No. 2018-01, Land Easement Practical Expedient forTransition toTopic 842;ASUNo. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; andASUNo. 2018-20, Narrow Scope Improvements for Lessors. This guidance provides that lessees will be required to recognize the following for all operating leases (with the exception of short- term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use (ROU) asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. Upon adoption, a modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. Required adoption date is January 1, 2019, with early adoption permitted. At adoption on January 1, 2019, we expect to recognize additional operating liabilities and ROU assets ranging from $35 million to $40 million, representing less than 1% of total assets. We will begin providing the newly required disclosures regarding our leasing activities beginning in our Form 10-Q for the first quarter of 2019. We intend to elect certain practical expedients in transition offered through the guidance, including foregoing the restatement of comparative periods, the ‘package of practical expedients’which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs, as well as the use of hindsight. We believe substantially all of our leases will continue to be classified as operating leases under the new standard. The adoption is not expected to have a material impact on our results of operations or significantly change our leasing activities.