Commercial loans. We offer a wide range of commercial loans, including business
term loans, equipment financing and lines of credit to small and midsized businesses.
Our target commercial loan market is retail and professional establishments
and small to medium sized businesses. The terms of these loans vary by purpose
and by type of underlying collateral. The commercial loans primarily are underwritten
on the basis of the borrower’s ability to service the loan from cash flow.
We make equipment loans with conservative margins generally for a term of ten
years or less, supported by the useful life of the equipment, at fixed or variable
rates, with the loan fully amortizing over the term. Loans to support working
capital typically have terms not exceeding one year and usually are secured
by accounts receivable, inventory and personal guarantees of the principals
of the business and at times by the commercial real estate of the borrower.
For loans secured by accounts receivable or inventory, principal typically is
repaid as the assets securing the loan are converted into cash, and for loans
secured with other types of collateral, principal is typically due at maturity.
The quality of the commercial borrower’s management and its ability both
to properly evaluate changes in the supply and demand characteristics affecting
its markets for products and services and to effectively respond to such changes
are significant factors in a commercial borrower’s creditworthiness. Risks
associated with our commercial loan portfolio include those related to the strength
of the borrower’s business, which may be affected not only by local, regional
and national market conditions, but also changes in the borrower’s management
and other factors beyond the borrower’s control; those related to fluctuations
in value of any collateral securing the loan; and those related to terms of
the commercial loan, which may include balloon payments that must be refinanced
or paid off at the end of the term of the loan. Our commercial loan portfolio
presents a higher risk than our consumer real estate and consumer loan portfolios.
Commercial real estate loans. We offer real estate loans for commercial property
that is owner occupied as well as commercial property owned by real estate investors.
Commercial loans that are secured by owner-occupied commercial real estate and
primarily collateralized by operating cash flows are also included in this category
of loan. Commercial real estate loan terms generally are limited to ten years
or less, although payments may be structured on a longer amortization basis
of 20 to 30 years. The interest rates on our commercial real estate loans may
be fixed or adjustable, although rates typically are not fixed for a period
exceeding five to ten years. We generally charge an origination fee for our
services. We typically require personal guarantees from the principal owners
of the business or real estate supported by a review of the principal owners’
personal financial statements. Risks associated with commercial real estate
loans include fluctuations in the value of real estate, the overall strength
of the economy, new job creation trends, tenant vacancy rates, environmental
contamination, and the quality of the borrower’s management. We make efforts
to limit our risk by analyzing borrowers’ cash flow and collateral value
as well as all of the sponsors’ investment activities. The real estate
securing our existing commercial real estate loans includes a wide variety of
property types, such as owner-occupied offices/warehouses/production facilities,
office buildings, industrial, mixed-use residential/commercial, retail centers
and multifamily properties. Our commercial real estate loan portfolio presents
a higher risk than our consumer real estate and consumer loan portfolios.
Construction loans. Our construction portfolio includes loans to small and midsized
businesses to construct owner-user properties, loans to developers of commercial
real estate investment properties and residential developments and, to a lesser
extent, loans to individual clients for construction of single family homes
in our market. Construction and development loans are generally made with a
term of one to two years and interest is paid monthly. The ratio of the loan
principal to the value of the collateral, as established by independent appraisal,
typically will not exceed industry standards. Loan proceeds are disbursed based
on the percentage of completion and only after the project has been inspected
by an experienced construction lender or third-party inspector. Risks associated
with construction loans include fluctuations in the value of real estate, project
completion risk and change in market trends. We are also exposed to risk based
on the ability of the construction loan borrower to refinance the debt or sell
the property upon completion of the project, which may be affected by changes
in market trends since the time that we funded the construction loan.
Consumer real estate loans. We offer first lien one-to-four family mortgage
loans, as well as home equity lines of credit, in each case primarily on owner-occupied
primary residences. We also originate for resale one-to-four family mortgage
loans, which are classified as loans held for sale until sold to investors.
Although our consumer real estate loan portfolio presents lower levels of risk
than our commercial, commercial real estate and construction loan portfolios,
we are exposed to risk based on fluctuations in the value of the real estate
collateral securing the loan, as well as changes in the borrower’s financial
condition, which could be affected by numerous factors, including divorce, job
loss, illness or other personal hardship.
Consumer loans. We offer consumer loans as an accommodation to our existing
customers, but do not market consumer loans to persons who do not have a pre-existing
relationship with us. As of December 31, 2015, our consumer loans represented
less than 1% of our total loan portfolio. We do not expect our consumer loans
to become a material component of our loan portfolio at any time in the foreseeable
future. Although we do not engage in any material amount of consumer lending,
our consumer loans, which are underwritten primarily based on the borrower’s
financial condition and, in many cases, are unsecured credits, subject us to
risk based on changes in the borrower’s financial condition, which could
be affected by numerous factors, including those discussed above.