Real Estate Mortgage Loans. The principal component of our loan portfolio is
loans secured by real estate mortgages. Real estate loans are subject to the
same general risks as other loans and are particularly sensitive to fluctuations
in the value of real estate. 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.
We obtain a security interest in real estate whenever possible, in addition
to any other available collateral, in order to increase the likelihood of the
ultimate repayment of the loan.
These loans generally fall into one of two categories:
Residential Mortgage Loans and Home Equity Loans. We generally originate and
hold short-term and long-term first mortgages and traditional second mortgage
residential real estate loans. Generally, we limit the loan-to-value ratio on
our residential real estate loans to 90%. We offer fixed and adjustable rate
residential real estate loans with terms of up to 30 years. We also offer a
variety of lot loan options to consumers to purchase the lot on which they intend
to build their home. The options available depend on whether the borrower intends
to begin building within 12 months of the lot purchase or at an undetermined
future date. We also offer traditional home equity loans and lines of credit.
Our underwriting criteria for, and the risks associated with, home equity loans
and lines of credit are generally the same as those for first mortgage loans.
Home equity loans typically have terms of 10 years or less. We generally limit
the extension of credit to 90% of the available equity of each property, although
we may extend up to 100% of the available equity.
Commercial Real Estate. Commercial real estate loans generally have terms of
five years or less, although payments may be structured on a longer amortization
basis. We evaluate each borrower on an individual basis and attempt to determine
their business risks and credit profile. We attempt to reduce credit risk in
the commercial real estate portfolio by emphasizing loans on owner-occupied
office and retail buildings where the loan-to-value ratio, established by independent
appraisals, generally does not exceed 80%. We also generally require that a
borrower’s cash flow exceed 120% of monthly debt service obligations.
In order to ensure secondary sources of payment and liquidity to support a loan
request, we typically review all of the personal financial statements of the
principal owners and require their personal guarantees.
Real Estate Construction and Development Loans. We offer fixed and adjustable
rate residential and commercial construction loan financing to builders and
developers and to consumers who wish to build their own home. The term of construction
and development loans generally is limited to 18 months, although payments may
be structured on a longer amortization basis. Most loans will mature and require
payment in full upon the sale of the property. We believe that construction
and development loans generally carry a higher degree of risk than long-term
financing of existing properties because repayment depends on the ultimate completion
of the project and usually on the subsequent sale of the property. Specific
risks include:
cost overruns;
mismanaged construction;
inferior or improper construction techniques;
economic changes or downturns during construction;
a downturn in the real estate market;
rising interest rates which may prevent sale of the property; and
failure to sell completed projects in a timely manner.
We attempt to reduce risk associated with construction and development loans
by obtaining personal guarantees and by keeping the maximum loan-to-value ratio
at or below 65%-85% of the lesser of cost or appraised value, depending on the
project type. Generally, we do not have interest reserves built into loan commitments
but require periodic cash payments for interest from the borrower’s cash
flow.
Commercial Loans. We make loans for commercial purposes in various lines of
businesses, including the manufacturing industry, service industry, and professional
service areas. Commercial loans are generally considered to have greater risk
than first or second mortgages on real estate because they may be unsecured,
or if they are secured, the value of the collateral may be difficult to assess
and more likely to decrease than real estate.
Equipment loans typically will be made for a term of 10 years or less at fixed
or variable rates, with the loan fully amortized over the term and secured by
the financed equipment. Generally, we limit the loan-to-value ratio on these
loans to 75% of cost. Working capital loans typically have terms not exceeding
one year and usually are secured by accounts receivable, inventory, or personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal will typically be repaid as the assets securing
the loan are converted into cash, and in other cases principal will typically
be due at maturity. Trade letters of credit, standby letters of credit, and
foreign exchange will generally be handled through a correspondent bank as agent
for the Bank.
Our Charleston and Myrtle Beach markets have provided limited opportunities
for us to develop a commercial and industrial (“C&I”) loan portfolio.
The Company’s primary markets are generally concentrated in real estate
lending. However, in order to diversify our lending portfolio, the Company began
a syndicated loan program in 2014 to purchase nationally syndicated C&I
loans to retain in the loan portfolio. These loans typically have terms of seven
years and are tied to a floating rate index such as LIBOR or prime. To effectively
manage this new line of lending, the Company hired an experienced senior lending
executive with relevant experience to lead and manage this area of the loan
portfolio and engaged a consulting firm that specializes in syndicated loans.
The Company’s policy currently limits the syndicated loan portfolio not
to exceed 75% of the Bank’s Tier 1 regulatory capital.
Consumer Loans. We make a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment loans and revolving lines
of credit. Consumer loans are underwritten based on the borrower’s income,
current debt level, past credit history, and the availability and value of collateral.
Consumer rates are both fixed and variable, with negotiable terms. Our installment
loans typically amortize over periods up to 72 months. Although we typically
require monthly payments of interest and a portion of the principal on our loan
products, we will offer consumer loans with a single maturity date when a specific
source of repayment is available. Consumer loans are generally considered to
have greater risk than first or second mortgages on real estate because they
may be unsecured, or, if they are secured, the value of the collateral may be
difficult to assess and more likely to decrease in value than real estate.
Mortgage Banking Activities
As summarized below, our mortgage banking segment associated with Crescent Mortgage
Company is comprised of two primary businesses: correspondent lending and loan
servicing.
Correspondent Lending. Our mortgage banking operations are conducted mainly
through the Bank’s wholesale mortgage origination subsidiary, Crescent
Mortgage Company, which is headquartered in Atlanta, Georgia. These operations
consist of the purchase of mortgage loans and table funded originations as well
as the sale and servicing of a variety of residential mortgage loan products.
Crescent Mortgage Company lends in 45 states and partners with over 2,000 community
banks, credit unions, and quality mortgage brokers. Crescent Mortgage Company
focuses on originating residential real estate loans, some of which conform
to Federal Housing Administration (FHA), Veterans Affairs (VA) and Rural Development
standards (RD). Loans originated that meet FHA standards qualify for the FHA’s
insurance program whereas loans that meet VA and RD standards are guaranteed
by their respective federal agencies.
Mortgage loans that do not qualify under these programs are commonly referred
to as conventional loans. Conventional real estate loans could be conforming
and non-conforming. Conforming loans are residential real estate loans that
meet the standards for sale under the Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) programs whereas loans
that do not meet those standards are referred to as non-conforming residential
real estate loans. In addition, Crescent Mortgage Company offers certain jumbo
mortgage products which meet underwriting requirements of certain correspondent
lenders. The Company’s strategy is to grow market share through superior
service and competitive pricing and high quality mortgage products. Crescent
Mortgage Company generally sells mortgages it acquires to a number of investors
like FNMA and FHLMC or major banking correspondents.
Our mortgage banking profitability depends on maintaining sufficient volume
of loan originations combined with maintaining a profitable margin upon ultimate
sale. Changes in the level of interest rates, competition and the local economy
affect the number of loans originated and the amount of loan sales and loan
fees earned.
Loan Servicing. We retain the rights to service loans on a portion of loans
we sell, and collect a servicing fee for loans we sell on the secondary market,
as part of our mortgage banking activities. These rights are known as mortgage
servicing rights, or MSRs, where the owner of the MSR acts on behalf of the
mortgage loan owner and has the contractual right to receive a stream of cash
flows in exchange for performing specified mortgage servicing functions. These
duties typically include, but are not limited, to performing loan administration,
collection, and default activities, collection and remittance of loan payments,
responding to customer inquiries, accounting for principal and interest, holding
custodial (impound) funds for the payment of property taxes and insurance premiums,
counseling delinquent mortgagors, modifying loans, supervising foreclosures,
and property dispositions. Crescent Mortgage Company uses a third party sub-servicer
to perform the servicing duties and responsibilities for which we pay a fee.