CHFC 2017 Annual Report

is transferred to ORE and net gains/losses from the disposition of ORE. Loan collection costs include legal fees, appraisal fees and other costs recognized in the collection of loans with deteriorated credit quality and in the process of foreclosure. Credit- related expenses were $5.8 million in 2017, a net benefit of $2.7 million in 2016 and an expense of $0.6 million in 2015. Credit- related expenses increased $8.5 million in 2017, compared to 2016, primarily due to a lower net gain on sale of ORE and an increase in incremental operating costs associated with additional properties added in our merger with Talmer. Credit-related expenses decreased $3.3 million in 2016, compared to 2015, due to $2.0 million in higher net gains on the sale of ORE properties and a reduction of $0.9 million in ORE operating and loan collection costs. We recognized net gains on the sale of ORE properties of $1.4 million in 2017, $4.7 million in 2016 and $2.7 million in 2015. ORE operating and loan collection costs were $6.7 million in 2017, $3.0 million in 2016 and $3.3 million in 2015. All other categories of operating expenses totaled $44.1 million in 2017, $32.4 million in 2016 and $25.2 million in 2015. All other categories of operating expenses increased $11.7 million, or 36%, in 2017, compared to 2016, and increased $7.2 million, or 28.5%, in 2016, compared to 2015, due largely to incremental costs associated with our merger with Talmer. Our efficiency ratio, which measures total operating expenses divided by the sum of net interest income (FTE) and noninterest income, was 60.1% in 2017, 67.2% in 2016 and 63.2% in 2015. Our adjusted efficiency ratio, a non-GAAP financial measure that excludes merger expenses, restructuring expenses, the change in fair value in loan servicing rights, amortization of intangibles, impairment of historic income tax credits, net interest income FTE adjustment, gains on sales of branches, loss/gain from sale of investment securities and closed branch locations, was 51.9% in 2017, 54.4% in 2016 and 58.7% in 2015. Please refer to the section entitled "Non-GAAP Financial Measures." 74 Income Taxes During the fourth quarter 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, reduces the corporate income tax rate from a maximum rate of 35% to a flat tax rate of 21% effective January 1, 2018. Accounting guidance requires the effects of changes in tax law be recognized and recorded in the interim period in which the law is enacted. As such, our 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%. 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. In addition to the reduction in the statutory corporate income tax rate and revaluation of deferred taxes, the Tax Cuts and Jobs Act provides for several additional provisions that may impact us in future years, including the following: • FDIC Insurance Premiums: The new law limits the amount of FDIC insurance premiums a bank with over $10 billion in consolidated assets may take as a deduction for tax purposes. • Employee Compensation: The Act eliminates certain performance-based exceptions to IRC Section 162(m) for publicly-held corporations. This new provision also clarifies the definition of a "covered person" falling under the limitations defined in IRC Section 162(m). • Business Meals and Entertainment Expenses: Certain provisions governing the deductibility of business meals and entertainment expenses, whether partially or in full, have changed or been eliminated. • Acquired Asset Expensing: The Act provides for immediate expensing of the full cost of certain qualified business assets, in this case both new and used property, placed in service on or after September 27, 2017 through January 1, 2023. • Corporate Alternative Minimum Tax: The new law prospectively repeals the corporate alternative minimum tax (AMT) and allows for the use of any previously recorded AMT credit carryovers against future taxable income. Unused AMT credit carryover may become partially or fully refundable over multiple years from 2018 to 2022. Our effective federal income tax rate was 41.7% in 2017, 28.0% in 2016 and 29.9% in 2015. The fluctuations in our effective federal income tax rate reflect changes each year in the proportion of interest income exempt from federal taxation, nondeductible transaction costs and other nondeductible expenses relative to pretax income and tax credits. The increase in our effective federal income tax rate in 2017, compared to 2016, was primarily due to the $46.7 million charge to income tax expense from continuing operations resulting from the impact of the Tax Cuts and Jobs Act discussed previously. Additionally, the increase was also impacted by $7.9 million of tax benefit received from federal historic tax credits placed into service during 2017 and growth in lending on real estate projects that receive either low income housing or historic tax credits. The income tax benefit