CHFC 2018 Annual Report

Operating Expenses The following table presents the major categories of operating expenses: Years Ended December 31, (Dollars in thousands) 2018 2017 2016 Operating expense Salaries and wages (1) $ 191,122 $ 179,992 $ 135,407 Employee benefits (1) 34,305 35,570 30,455 Occupancy 31,670 30,554 23,525 Equipment and software 31,761 32,248 24,408 Outside processing and service fees 45,387 35,142 21,199 FDIC insurance premiums (2) 18,508 11,190 7,407 Professional fees (2) 12,619 11,507 5,832 Intangible asset amortization (2) 5,716 6,089 5,524 Advertising and marketing (2) 8,175 5,907 3,740 Postage and express mail (2) 5,162 5,309 3,777 Training, travel and other employee expenses (2) 6,852 6,572 4,025 Telephone (2) 3,371 3,704 2,964 Supplies (2) 1,818 2,614 2,318 Donations (2) 2,664 1,775 1,951 Credit-related expenses (2) 4,841 5,772 (2,701) Merger expenses (3) — 8,522 61,134 Restructuring expenses (3) — 19,880 — Impairment of federal historic income tax credits (2)(3) 12,284 9,252 — Other (2) 7,943 10,395 7,453 Total operating expenses $ 424,198 $ 421,994 $ 338,418 Significant and other non-core items (3) 12,284 37,654 61,134 Operating expenses, core (non-GAAP) (3)(4) $ 411,914 $ 384,340 $ 277,284 Full-time equivalent staff (at December 31) 3,117 3,010 3,261 Average assets $20,200,530 $18,465,156 $12,037,155 Efficiency ratio - GAAP 54.3% 60.1% 67.2% Efficiency ratio - adjusted non-GAAP (4) 51.5% 51.9% 54.4% Total operating expenses as a percentage of total average assets 2.10% 2.29% 2.81% Total operating expenses as a percentage of total average assets - adjusted non- GAAP (4) 2.04% 2.08% 2.30% (1) Included within the line item "Salaries, wages and employee benefits" in the Consolidated Statements of Income. (2) Included within the line item "Other" operating expenses in the Consolidated Statements of Income. (3) Significant items are defined as merger and restructuring expenses during the years ended December 31, 2017 and December 31, 2016. The other non-core items are the impairment of federal historic income tax credits. (4) Please refer to the section entitled "Non-GAAP Financial Measures" for a reconciliation to the most directly comparable GAAP financial measure. Total operating expenses were $424.2 million in 2018, $422.0 million in 2017 and $338.4 million in 2016. Operating expenses included $12.3 million and $9.3 million of impairment taken on federal historic income tax credits in 2018 and 2017, respectively, and $28.4 million and $61.1 million of merger and restructuring expenses in 2017 and 2016, respectively. The merger and restructuring expenses are noted as "significant" items and the federal historic income tax credits are noted as "other non- core" items for the applicable periods. Operating expenses, core, a non-GAAP financial measure that excludes these significant and other non-core items for each applicable period, increased $27.6 million, or 7.2%, to $411.9 million in 2018, compared to $384.3 million in 2017, primarily due to increases in salaries and wages of $11.1 million, outside processing and service fees of $10.3 million, and FDIC insurance premiums of $7.3 million. Operating expenses, core, increased $107.1 million, or 38.6%, in 2017, compared to 2016, due largely to incremental operating costs associated with our merger with Talmer. 76