CHFC 2017 Annual Report

A summary of the composition of our loan portfolio at December 31, 2017, 2016 and 2015 follows: December 31, 2017 2016 2015 Amount Percent of Total Amount Percent of T l Amount Percent of T l (Dollars in thousands) Composition of Loans: Commercial $ 3,385,642 24% $ 3,217,300 25% $ 1,905,879 26% Commercial real estate 4,500,670 32 3,973,140 30 2,112,162 29 Real estate construction and land development 574,215 4 403,772 3 232,076 3 Residential mortgage 3,252,487 23 3,086,474 24 1,429,636 20 Consumer installment 1,613,008 11 1,433,884 11 877,457 12 Home equity 829,245 6 876,209 7 713,937 10 Total composition of loans $ 14,155,267 100% $ 12,990,779 100% $ 7,271,147 100% t t Commercial Loan Portfolio Commercial loans We offer commercial loans and lines of credit to varying types of businesses, including for profit businesses, municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital and operational needs and term financing of equipment. Our commercial loan portfolio is well diversified across business lines and has no concentration in any one industry. In our credit underwriting process, we carefully evaluate the borrower's industry, management skills, operating performance, liquidity and financial condition. We underwrite commercial loans based on a multiple of repayment sources, including operating cash flow, liquidation of collateral and guarantor support, if any.We closelymonitor the operating performance, liquidity and financial condition of the borrowers through analysis of required periodic financial statements and meetings with the borrower's management. We generally secure our commercial loans with inventory, accounts receivable, equipment, personal guarantees of the owner or other sources of repayment, although we may also obtain real estate as collateral. Commercial Real Estate Loans Our commercial real estate loans include loans that are secured by real estate occupied by the borrower for ongoing operations, non-owner occupied real estate leased to one or more tenants and vacant land that has been acquired for investment or future land development. Commercial real estate loans are subject to the same general risks and additionally are particularly sensitive to fluctuations in the value of real estate and typically involve larger loan balances concentrated in a single borrower. In addition, the payment experience on loans secured by income-producing properties and vacant land loans is typically dependent on the success of the operation of the related project and is typically affected by adverse conditions in the real estate market and in the economy. Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness and ability to repay the loan. When we make new real estate loans, we obtain a security interest in real estate whenever possible, in addition to any other available collateral, to increase the likelihood of the ultimate repayment of the loan. We generally attempt to mitigate the risks associated with commercial real estate loans by, among other things, lending primarily in our market areas, lending across industry lines, not developing a concentration in any one line of business and using prudent loan-to-value ratios in our underwriting process. Each commercial real estate borrower is evaluated on an individual basis to determine the business risks and credit profile of each borrower and we generally require that a borrower maintain specific debt service covenants. To ensure secondary sources of payment and liquidity to support a loan, we review the financial statements of the operating company and the personal financial statements of the principal owners and may require their personal guarantees. Real Estate Construction and Land Development Loans Our real estate construction loans are primarily originated for construction of commercial properties and often convert to a commercial real estate loan at the completion of the construction period. Our land development loans include loans made to developers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. A majority of our land development loans consist of loans to develop residential real estate. Land development loans 5