CHFC 2018 Annual Report

Salaries and wages were $191.1 million in 2018, compared to $180.0 million in 2017 and $135.4 million in 2016. Salaries and wages expense increased $11.1 million, or 6.2%, in 2018, compared to 2017, largely due to an increase in performance-based compensation expense as a result of a shift in the mix of employees and additional expense related to the implementation of upgrades to our core operating systems, partially offset by a reduction in share-based compensation expense. Salaries and wages increased $44.6 million, or 32.9%, in 2017, compared to 2016, primarily due 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 the year. Salary and wage expense related to the implementation of upgrades to our core operating systems was $1.4 million in 2018. Performance- based compensation expense was $40.2 million in 2018, compared to $33.8 million in 2017 and $21.8 million in 2016. Employee benefits expense was $34.3 million in 2018, compared to $35.6 million in 2017 and $30.5 million in 2016. Employee benefits expense decreased $1.3 million, or 3.6%, in 2018, compared to 2017, primarily due a reduction in 401(k) contribution expense. Employee benefits expense increased $5.1 million, or 16.8%, in 2017, compared to 2016, due primarily to incremental costs associated with our merger with Talmer. Our total compensation expenses, which include salaries and wages and employee benefits, as a percentage of total operating expenses were 53.1% in 2018, 51.1% in 2017 and 49.0% in 2016. Occupancy expense was $31.7 million in 2018, compared to $30.6 million in 2017 and $23.5 million in 2016. Occupancy expense increased $1.1 million, or 3.7%, in 2018, compared to 2017, primarily due to a $0.9 million of early lease termination expense resulting from the consolidation of office space housing our wealth management unit. The increase in occupancy expense in 2017 was $7.0 million, or 30%, compared to 2016, primarily due to incremental operating costs associated with our merger with Talmer, partially offset by the consolidation of branches as part of our restructuring efforts. Occupancy expense included depreciation expense on buildings of $6.6 million in 2018, $6.9 million in 2017 and $5.5 million in 2016. Equipment and software expense was $31.8 million in 2018, compared to $32.2 million in 2017 and $24.4 million in 2016. Equipment and software expense decreased $0.4 million, or 1.5%, in 2018, compared to 2017, primarily due to a decrease in software license expense. In 2017, the increase of $7.8 million, or 32.1%, compared to 2016, was due primarily to incremental operating costs associated with our merger with Talmer. Equipment and software expense included depreciation expense of $10.4 million in 2018, compared to $10.9 million in 2017 and $7.7 million in 2016. 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 our customers, including our core operating system and other items, such as our debit card, electronic banking and wealth management platforms. Outside processing and service fees were $45.4 million in 2018, compared to $35.1 million in 2017 and $21.2 million in 2016. Outside processing and service fees increased $10.3 million, or 29.2%, in 2018, compared to 2017, primarily due to core operating system conversion expenses and operating costs associated with the enhancement in our overall technology platform. Expenses specifically attributed to our core operating system conversion included within outside processing and service fees were $3.0million in 2018. The increase in outside processing and service fees of $13.9 million, or 65.8%, in 2017, compared to 2016, was due largely to incremental operating costs associated with our merger with Talmer. FDIC insurance premiums were $18.5 million in 2018, compared to $11.2 million in 2017 and $7.4 million in 2016. Changes in our FDIC insurance premiums are primarily due to changes in our assessment base, which consist of average consolidated total assets less average Tier 1 capital. Additionally, included in our FDIC insurance premiums is a special assessment or surcharge on large banks, defined as banks with $10 billion or more in assets, established under the Dodd-Frank Act to raise the deposit insurance fund minimum reserve ratio to 1.35%. The deposit insurance fund reached 1.36% on September 30, 2018, exceeding the statutorily required minimum reserve ratio of 1.35%. Accordingly, the last quarterly surcharge was reflected in large banks' December 2018 assessment invoices, which covered the assessment period from July 1 through September 30. Professional fees were $12.6 million in 2018, compared to $11.5 million in 2017 and $5.8 million in 2016. Professional fees increased $1.1 million, or 9.7%, in 2018, compared to 2017, primarily due to core operating system conversion expenses of $1.5 million. The increase in professional fees of $5.7 million, or 97.3%, in 2017, compared to 2016, was primarily due to incremental operating costs associatedwith themerger withTalmer and additional legal fees incurred in defense of various litigation matters. Advertising and marketing expenses were $8.2 million in 2018, compared to $5.9 million in 2017 and $3.7 million in 2016. Advertising and marketing expense increased $2.3 million, or 38.4%, in 2018, compared to 2017, primarily due to expenses attributed to our core operating system conversion of $1.2 million and an increase in community-related sponsorships. The increase 77