CHFC 2018 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. 2018 Compared to 2017 2017 Compared to 2016 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 $ 48,225 $ 54,257 $ 102,482 $ 185,042 $ 4,812 $ 189,854 Taxable investment securities/other assets 18,843 14,845 33,688 17,914 5,544 23,458 Tax-exempt investment securities 3,928 (1,340) 2,588 9,689 (498) 9,191 Interest-bearing deposits with the FRB and other banks (671) 2,154 1,483 1,615 1,074 2,689 Total change in interest income on interest-earning assets 70,325 69,916 140,241 214,260 10,932 225,192 Changes in Interest Expense on Interest-Bearing Liabilities: Interest-bearing demand deposits 60 5,099 5,159 1,015 578 1,593 Savings deposits 3,027 13,560 16,587 3,726 6,446 10,172 Time deposits 7,477 21,030 28,507 7,995 3,946 11,941 Collateralized customer deposits 92 1,246 1,338 87 879 966 Short-term borrowings 4,865 13,593 18,458 13,689 4,006 17,695 Long-term borrowings (2,998) 2,055 (943) 950 1,942 2,892 Total change in interest expense on interest-bearing liabilities 12,523 56,583 69,106 27,462 17,797 45,259 Total Change in Net Interest Income (FTE) (2) $ 57,802 $ 13,333 $ 71,135 $ 186,798 $ (6,865) $ 179,933 (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 21% in 2018 and 35% for 2017 and 2016. The presentation of net interest income on a FTE basis is not in accordance with GAAP, but is customary in the banking industry. 73 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 us experiencing a decrease, if any, in expected cash flows on acquired loans during each reporting period. The provision was $30.8 million in 2018, compared to $23.3 million in 2017 and $14.9 million in 2016. The increase in the provision in 2018, compared to 2017, was primarily due to the continued growth in our originated loan portfolio as a percentage of our total loans, an increase in impaired loans and impairment recorded resulting from our quarterly re-estimation of cash flows on acquired loans. Net originated loan growth was $2.10 billion in 2018, which was partially offset by run-off in our acquired loan portfolio of $0.98 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, 2018, the allowance recorded for this population of loans was $420 thousand, compared to no allowance at December 31, 2017. We experienced net loan charge-offs of $12.7 million, or 0.09% of average loans, in 2018, compared to $9.7 million, or 0.07% of average loans, in 2017 and $9.9 million, or 0.11% of average loans, in 2016. Net loan charge-offs in the commercial loan portfolio totaled $6.0 million in 2018, compared to $4.1 million in 2017 and $5.8 million in 2016 and represented 47.7% of total net loan charge-offs during 2018, compared to 42.1% during 2017 and 58.6% during 2016. Net loan charge-offs in the consumer loan portfolio totaled $6.6 million in 2018, compared to $5.6 million in 2017 and $4.1 million in 2016.