CHFC 2018 Annual Report

Shelf Registration On May 10, 2017, we filed an updated automatic shelf registration statement on Form S-3ASR with the SEC for an indeterminate amount of securities, which became immediately effective. The shelf registration statement provides us with the ability to raise capital, subject to SEC rules and limitations, if the board of directors decides to do so. 70 Results of Operations Overview Our net income in 2018 was $284.0 million, or $3.94, per diluted share, compared to net income in 2017 of $149.5 million, or $2.08 per diluted share, and net income in 2016 of $108.0 million, or $2.17 per diluted share. Net income in 2017, excluding significant items, a non-GAAPfinancial measure, was $219.6million, or $3.06 per diluted share. Significant items in 2017 consisted of a $46.7 million charge to income tax expense resulting from the revaluation of our net deferred tax assets completed following the signing of the Tax Cuts and Jobs Act in December 2017, merger and restructuring expenses of $28.4 million and fourth quarter of 2017 losses of $7.6 million on sales of investment securities as part of our treasury and tax management objectives. Net income in 2016, excluding significant items, a non-GAAP financial measure, was $143.7 million, or $2.88 per diluted share. Significant items in 2016 consisted of merger expenses of $61.1 million and a $7.4 million net gain on the sales of branches. We had no significant items during 2018. The increase in net income in 2018, excluding significant items, compared to 2017, was driven by an increase in net interest income, largely due to an increase in average balances and yields earned on loans and investment securities, partially offset by increases in average deposit balances and cost of funds, as well as the benefit from a decrease in our income tax following the enactment of the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018. The increase in net income in 2017, excluding significant items, compared to 2016, was primarily attributable to an increase in net interest income, resulting from an increase in average loans and securities and the impact of our merger with Talmer. Return on average assets was 1.41% in 2018, compared to 0.81% in 2017, and 0.90% in 2016. Return on average assets, excluding significant items, a non-GAAP financial measure, was 1.19% in both 2017 and 2016. Return on average shareholders' equity was 10.4% in 2018, compared to 5.7% in 2017 and 7.0% in 2016. Return on average shareholders' equity, excluding significant items, was 8.4% in 2017 and 9.3% in 2016. Our return on average tangible shareholders' equity was 17.9% in 2018, compared to 10.2% in 2017 and 11.2% in 2016. Our return on average tangible equity in both 2017 and 2016, excluding significant items, a non-GAAP financial measure, was 14.9%. Please refer to the section entitled "Non-GAAP Financial Measures" included within this Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation to the most directly comparable GAAP financial measures. Net Interest Income Net interest income is the difference between interest income on earning assets, such as loans, investment and non- marketable equity securities and interest-bearing deposits with the Federal Reserve Bank ("FRB") and other banks, and interest expense on liabilities, such as deposits and borrowings. Net interest income is our largest source of net revenue (net interest income plus noninterest income), representing 81.0%, 79.5% and 75.7% of net revenue in 2018, 2017 and 2016, respectively. Net interest income, on a fully taxable equivalent ("FTE") basis, is the difference between interest income and interest expense adjusted for the tax benefit received on tax-exempt commercial loans and investment securities. Net interest margin (FTE) is calculated by dividing net interest income (FTE) by average interest-earning assets. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Because noninterest-bearing sources of funds, or free funds (principally demand deposits and shareholders' equity), also support earning assets, the net interest margin exceeds the net interest spread. Average Balances, Fully Tax Equivalent ("FTE") Interest and Effective Yields and Rates The following table presents the average daily balances of our major categories of assets and liabilities, interest income and expense on a FTE basis, average interest rates earned and paid on the assets and liabilities, net interest income (FTE), net interest spread and net interest margin for 2018, 2017 and 2016. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. Please refer to the section entitled "Non-GAAP Financial Measures."