CHFC 2017 Annual Report

i Restructur ng expenses of $19.9 illim on in 2017 were incurred as a result of our restructuring efforts that took place during the second half of the year. The restructuring efforts included an approximate 7% net reduction in total employees, the consolidation of 25 branches, the discontinuation of our title insurance services, whichwas operatingwith approximately breakeven financial results, and a reduction of resources devoted to indirect auto lending, The restructuring efforts produced more than $20 million of annualized savings, while half, or more, is planned to be reinvested in the hiring of new commercial bankers and key operational staff as well as making investment to enhance our core operating systems. Restructuring expenses primarily included $14.0 million of severance and retirement related expenses and $5.1 million of occupancy expense. There were no restructuring expenses in 2016 or 2015. Impairment of federal historic income tax credits of $9.3 million in 2017 was a result of federal historic tax credits placed into service. The $9.3 million of impairment, or $6.0 million net of tax, is 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 such impairment of federal historic tax credits in 2016 or 2015. Salaries and wages were $180.0 million in 2017, $135.4 million in 2016 and $104.5 million in 2015. Salaries and wages expense increased $44.6 million, or 32.9%, in 2017, compared to 2016, and increased $30.9 million, or 29.6%, in 2016, compared to 2015. The increases in both 2017 and 2016 were due primarily to incremental costs associated with our merger with Talmer in addition to merit increases and market-based salary adjustments that took effect at the beginning of each year. Performance-based compensation expense was $33.8 million in 2017, compared to $21.8 million in 2016 and $17.5 million in 2015. Employee benefits expense was $33.8 million in 2017, $29.8 million in 2016 and $23.4 million in 2015. Employee benefits expense increased $4.0 million, or 13.5%, in 2017, compared to 2016, due primarily to incremental costs associated with our merger with Talmer. Employee benefits expense increased $6.4 million, or 27.2%, in 2016, compared to 2015, due primarily to incremental costs associated with our merger and acquisition transactions, partially offset by lower pension plan expenses. Pension plan expense was a benefit of $1.5 million in 2017, compared to expenses of $0.1 million in 2016 and $1.6 million in 2015. The decrease in pension plan expense was largely attributable to changes in the pension plan's projected benefit obligations due to an amendment to the Chemical Financial Corporation Employees’ Pension Plan effective September 30, 2017 to cease accruing additional benefits. Our total compensation expenses, which include salaries and wages and employee benefits, as a percentage of total operating expenses were 50.7% in 2017, 48.8% in 2016 and 57.1% in 2015. Occupancy expense was $30.6 million in 2017, $23.5 million in 2016 and $18.2 million in 2015. Occupancy expense increased $7.0 million, or 30%, in 2017, compared to 2016, and increased $5.3 million, or 29%, in 2016, compared to 2015, primarily due to incremental operating costs associated with our merger with Talmer, partially offset by the consolidation of branches in 2017 as part of our restructuring efforts. Occupancy expense included depreciation expense on buildings of $6.9 million in 2017, $5.5 million in 2016 and $4.8 million in 2015. Equipment and software expense was $32.2 million in 2017, $24.4 million in 2016 and $18.6 million in 2015. Equipment and software expense increased $7.8 million, or 32%, in 2017, compared to 2016, and increased $5.8 million, or 31.4%, in 2016, compared to 2015, due primarily to incremental operating costs associated with our merger with Talmer. Equipment and software expense included depreciation expense of $10.9 million in 2017, compared to $7.7 million in 2016 and $6.2 million in 2015. Outside processing and service fees are primarily comprised of amounts paid to third-party vendors related to the outsourcing of certain day-to-day functions that are integral to our ability to provide services to its customers, including such things as our debit card, electronic banking and wealth management platforms. Outside processing and service fees were $35.1 million in 2017, $21.2 million in 2016 and $15.2 million in 2015. Outside processing and service fees increased $13.9 million, or 66%, in 2017, compared to 2016, and increased $6.0 million, or 39.4%, in 2016, compared to 2015, due largely to incremental operating costs associated with our merger with Talmer. FDIC insurance premiums were $11.2 million in 2017, $7.4 million in 2016 and $5.5 million in 2015. The increase in FDIC insurance premiums in 2017, compared to 2016, and the increase in 2016, compared to 2015, was attributable to an increase in our assessment base, which consists of average consolidated total assets less average Tier 1 capital, largely resulting from our merger with Talmer, which was partially offset by reductions in our assessment rate resulting from improvement in earnings and the overall credit quality of our loan portfolio. Professional fees were $11.5 million in 2017, $5.8 million in 2016 and $4.8 million in 2015. Professional fees increased $5.7 million, or 97%, in 2017, compared to 2016, and increased $1.0 million, or 20.4%, in 2016, compared to 2015, primarily due to incremental operating costs associated with the merger with Talmer and additional legal fees incurred in defense of various litigation matters. 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 73