CHFC 2018 Annual Report

in advertising and marketing expenses of $2.2 million, or 57.9%, in 2017, compared to 2016, was primarily due to incremental operating costs associated with the merger with Talmer. Credit-related expenses are comprised of other real estate ("ORE") net costs and loan collection costs. ORE net costs are comprised of costs to carry ORE, such as property taxes, insurance and maintenance costs, fair value write-downs after a property 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 $4.8 million in 2018, compared to $5.8 million in 2017 and a net benefit of $2.7 million in 2016. Credit- related expenses decreased $1.0 million in 2018, compared to 2017, primarily due to a decrease in operating expenses due to a reduction in our ORE assets. 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. We recognized fair value write-downs and net gains on the sale of ORE properties of $0.1 million in 2018, $1.4 million in 2017 and $4.7 million in 2016. ORE operating and loan collection costs were $4.6 million in 2018, $6.7 million in 2017 and $3.0 million in 2016. Impairment of federal historic income tax credits of $12.3 million in 2018 and $9.3 million in 2017 were the result of federal historic tax credits placed into service in each respective period. In 2018, the $12.3 million of impairment, or $9.7 million net of tax, was more than offset by the benefit received on the same tax credits which resulted in a reduction of income tax expense of $12.9 million. In 2017, the $9.3 million of impairment, or $6.0 million net of tax, was more than offset by the benefit received on the same tax credits which resulted in a reduction of income tax expense of $7.9 million. There were no impairment of federal historic tax credits in 2016. We incurred restructuring expenses of $19.9 million during the second half of 2017. Our restructuring efforts included us identifying strategies that could be deployed to drive revenue growth and to further improve operating efficiency as part of an effort to refine and clarify our overall strategic plan of how we allocate our capital across the organization and better position us for growth. Our restructuring efforts resulted in a reduction of approximately 7% in total employees and our consolidation of 25 branches completed in the fourth quarter of 2017, in addition to 13 branches that were consolidated in the third quarter of 2017. As part of our restructuring efforts, we also discontinued our title insurance services and reduced resources devoted to indirect auto lending. All other categories of operating expenses not discussed above totaled $33.5 million in 2018, $45.0 million in 2017 and $89.1 million in 2016. All other categories of operating expenses decreased $11.5 million, or 25.5%, in 2018, compared to 2017, primarily due to merger expenses of $8.5 million recognized in 2017. The decrease of $44.1 million, or 49.5%, in 2017, compared to 2016, in all other categories of operating expenses was due largely to the decrease in merger related expenses, partially offset by incremental costs associated with our merger with Talmer and restructuring expense recognized in 2017. Our efficiency ratio, which measures total operating expenses divided by the sum of net interest income (FTE) and noninterest income, was 54.3% in 2018, compared to 60.1% in 2017 and 67.2% in 2016. 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, gain (loss) from sale of investment securities and closed branch locations, was 51.5% in 2018, compared to 51.9% in 2017 and 54.4% in 2016. Please refer to the section entitled "Non-GAAP Financial Measures" included within this Management’s Discussion and Analysis of Financial Condition andResults of Operations for a reconciliation of core operating expenses and the adjusted efficiency ratio to the most directly comparable GAAP financial measures. 78 Income Taxes Our effective income tax rate was 12.9% in 2018, 41.7% in 2017 and 28.0% in 2016. The fluctuations in our effective income tax rate reflect changes each year in the proportion of interest income exempt from taxation and other nondeductible expenses relative to pretax income and tax credits. The decrease in our effective income tax rate in 2018, compared to 2017, was primarily due to the 2017 increase to income tax expense of $46.7 million as a result of the enactment of the Tax Cuts and Jobs Act, the benefit from the enactment of the Tax Cuts and Jobs Act which reduced the federal corporate tax rate (as discussed below) and a $5.0 million increase in the benefit from federal historic tax credits, partially offset by the benefit from stock option exercises that occurred in 2017. The income tax benefit from the federal historic tax credits placed into service were partially offset by impairment recorded on the same tax credits included within other operating expenses.