CHFC 2017 Annual Report

Volume and Rate Variance Analysis The below table presents the effect of volume and rate changes on interest income and expense. Changes in volume are changes in the average balance multiplied by the previous year's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. 2017 Compared to 2016 2016 Compared to 2015 Increase (Decrease) Due to Changes in Combined Increase/ (Decrease) Increase (Decrease) Due to Changes in Combined Increase/ (Decrease) (Dollars in thousands) Average Volume (1) Average Yield/ Rate (1) Average Volume (1) Average Yield/ Rate (1) Changes in Interest Income on Interest-Earning Assets: Loans $ 185,042 $ 4,812 $ 189,854 $ 114,289 $ (2,055) $ 112,234 Taxable investment securities/other assets 17,914 5,544 23,458 1,144 1,384 2,528 Tax-exempt investment securities 9,689 (498) 9,191 5,781 (808) 4,973 Interest-bearing deposits with the FRB and other banks 1,615 1,074 2,689 730 315 1,045 Total change in interest income on interest-earning assets 214,260 10,932 225,192 121,944 (1,164) 120,780 Changes in Interest Expense on Interest-Bearing Liabilities: Interest-bearing demand deposits 1,015 578 1,593 485 1,327 1,812 Savings deposits 3,726 6,446 10,172 537 828 1,365 Time deposits 7,995 3,946 11,941 4,800 (362) 4,438 Short-term borrowings 13,776 4,885 18,661 3,265 (433) 2,832 Long-term borrowings 950 1,942 2,892 1,007 62 1,069 Total change in interest expense on interest-bearing liabilities 27,462 17,797 45,259 10,094 1,422 11,516 Total Change in Net Interest Income (FTE) (2) $ 186,798 $ (6,865) $ 179,933 $ 111,850 $ (2,586) $ 109,264 (1) The change in interest income and interest expense due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Fully taxable equivalent basis using a federal income tax rate of 35%. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry. 69 Provision for Loan Losses The provision for loan losses ("provision") is an increase to the allowance, as determined by management, to provide for probable losses inherent in the originated loan portfolio and for impairment in pools of acquired loans that results from experiencing a decrease, if any, in expected cash flows of acquired loans during each reporting period. The provision was $23.3 million in 2017, compared to $14.9 million in 2016 and $6.5 million in 2015. The increase in the provision in 2017, compared to 2016, was primarily due to an increase in originated loan growth. Originated loan growth was $2.29 billion in 2017, which was partially offset by run- off in the acquired loan portfolio of $1.12 billion during the same period. All acquired loans were recorded at their estimated fair value at each respective acquisition date without a carryover of the related allowance and, as of December 31, 2017, no allowance was determined to be needed for acquired loans as a decrease in expected cash flows was not evident. We experienced net loan charge-offs of $9.7 million in 2017, compared to $9.9 million in 2016 and $8.9 million in 2015. Net loan charge-offs as a percentage of average loans were 0.07% in 2017, compared to 0.11% in 2016 and 0.13% in 2015. Net loan charge-offs in the commercial loan portfolio totaled $4.1 million in 2017, compared to $5.8 million in 2016 and $4.2 million in 2015 and represented 42.1% of total net loan charge-offs during 2017, compared to 58.6% during 2016 and 47.4% during 2015. Net loan charge-offs in the consumer loan portfolio totaled $5.6 million in 2017, compared to $4.1 million in 2016 and $4.7 million in 2015. The provision of $23.3 million in 2017 was $13.6 million higher than 2017 net loan charge-offs, and the provision of $14.9 million in 2016 was $4.9 million higher than 2016 net loan charge-offs. The provision was higher in both 2017 and 2016 primarily related to the impact of the significant increase in originated growth in the loan portfolio in each period.