CHFC 2017 Annual Report

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 were $4.50 billion at December 31, 2017, an increase of $527.5 million, or 13.3%, from commercial real estate loans of $3.97 billion at December 31, 2016. Loans secured by owner occupied properties, non-owner occupied properties and vacant land comprised 40.3%, 57.9% and 1.8%, respectively, of our commercial real estate loans outstanding at December 31, 2017. Commercial real estate loans increased $1.86 billion, or 88.1%, during 2016 from commercial real estate loans of $2.11 billion at December 31, 2015, with $1.59 billion of the growth attributable to the merger with Talmer. Commercial real estate loans represented 31.8% of our loan portfolio at December 31, 2017, compared to 30.6% and 29.0% at December 31, 2016 and 2015, respectively. Commercial and commercial real estate lending are generally considered to involve a higher degree of risk than residential mortgage, consumer installment and home equity lending as they 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. We generally attempt to mitigate the risks associated with commercial and commercial real estate lending by, among other things, lending primarily in its market areas, lending across industry lines, not developing a concentration in any one line of business and using prudent loan-to-value ratios in the underwriting process. It is management's belief that our commercial and commercial real estate loan portfolios are generally well-secured. 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. 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. Amajority of our land development loans consist of loans to develop residential real estate. Land development loans are generally originated as interest only with the intention that the loan principal balance will be repaid through the sale of finished properties by the developers within twelve months of the completion date. Real estate construction and land development loans were $574.2 million at December 31, 2017 (comprised of approximately 90% real estate construction and 10% land development), an increase of $170.4 million, or 42.2%, compared to $403.8 million at December 31, 2016. Real estate construction and land development loans increased $171.7 million, or 74.0%, during 2016 from real estate construction and land development loans of $232.1 million at December 31, 2015, with $166.4 million of the growth attributable to the merger with Talmer. Real estate construction and land development loans represented 4.1% of our loan portfolio at December 31, 2017, compared to 3.1% and 3.2% at December 31, 2016 and 2015, respectively. Real estate construction and land development lending involves a higher degree of risk than commercial real estate lending and residential mortgage lending because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates, the need to obtain a tenant or purchaser of the property if it will not be owner-occupied or the need to sell developed properties. We generally attempt to mitigate the risks associated with real estate construction and land development lending by, among other things, lending primarily in our market areas, using prudent underwriting guidelines and closely monitoring the construction process. At December 31, 2017, $0.3 million, or 0.1%, of our $574.2 million of real estate construction and land development loans were considered impaired, whereby we determined it was probable that the full amount of principal and interest would not be collected on these loans in accordance with their original contractual terms. At December 31, 2016, $0.3 million, or 0.1% of our $403.8 million of real estate construction and land development loans were considered impaired. Consumer Loan Portfolio Our consumer loan portfolio is comprised of residential mortgage loans, consumer installment loans and home equity loans and lines of credit. Residential mortgage loans consist primarily of one- to four-family residential loans with fixed interest rates of fifteen years or less, with amortization periods generally from fifteen to thirty years. The loan-to-value ratio at the time of origination is generally 80% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance. Residential mortgage loans were $3.25 billion at December 31, 2017, an increase of $166.0 million, or 5.4%, from residential mortgage loans of $3.09 billion at December 31, 2016. Residential mortgage loans increased $1.66 billion during 2016 from residential mortgage loans of $1.43 billion at December 31, 2015 with $1.53 billion attributable to the merger with Talmer. Residential mortgage loans historically involve the least amount of credit risk in our loan portfolio. Residential mortgage loans also include loans to consumers for the construction of single family residences that are secured by these properties. Residential mortgage construction loans to consumers were $272.3 million at December 31, 2017, compared to $169.5 million at December 31, 2016 and $62.2 million at December 31, 2015. Residential mortgage loans represented 23.0%of our loan portfolio at December 31, 2017, compared to 23.8% and 19.7% at December 31, 2016 and 2015, respectively. We had residential mortgage loans with maturities beyond five years and that were at fixed interest rates totaling $495.8 million at December 31, 2017, compared to $463.8 million at December 31, 2016. 52