Commercial and Industrial Loans. We make commercial and industrial loans,
including commercial lines of credit, working capital loans, commercial real
estate-backed loans (including loans secured by owner occupied commercial properties),
term loans, equipment financing, acquisition, expansion and development loans,
borrowing base loans, real estate construction loans, homebuilder loans, restaurant
franchisees, hoteliers, government guaranteed loans, letters of credit and other
loan products, primarily in our target markets that are underwritten on the
basis of the borrower’s ability to service the debt from income. We take
as collateral a lien on general business assets including, among other things,
available real estate, accounts receivable, inventory and equipment and generally
obtain a personal guaranty of the borrower or principal. Our commercial and
industrial loans generally have variable interest rates and terms that typically
range from one to five years depending on factors such as the type and size
of the loan, the financial strength of the borrower/guarantor and the age, type
and value of the collateral. Fixed rate commercial and industrial loan maturities
are generally short-term, with three-to-five year maturities, or include periodic
interest rate resets. Terms greater than five years may be appropriate in some
circumstances, based upon the useful life of the underlying asset being financed
or if some form of credit enhancement, such as a government guarantee is obtained.
We also participate in syndicated loans (loans made by a group of lenders, including
us, who share or participate in a specific loan) with a larger regional financial
institution as the lead lender. Syndicated loans are typically made to large
businesses (which are referred to as shared national credits) or middle market
companies (which do not meet the regulatory definition of shared national credits),
both of which are secured by business assets or equipment, and also commercial
real estate. The syndicate group for both types of loans usually consists of
two to three other financial institutions. In particular, we frequently work
with a large regional financial institution, which is often the lead lender
with respect to these loans. We have grown this portfolio to diversify our balance
sheet, increase our yield and mitigate interest rate risk due to the variable
rate pricing structure of the loans. We have a defined set of credit guidelines
that we use when evaluating these credits. Although other large financial institutions
are the lead lenders on these loans, our credit department does its own independent
review of these loans and the approval process of these loans is consistent
with our underwriting of loans and our lending policies. We expect to continue
our syndicated lending program for the foreseeable future.
In 2015, we began to participate in mortgage finance loans with another institution,
“the originator.” These mortgage finance loans consist of ownership
interests purchased in single family residential mortgages funded through the
originator’s mortgage finance group. These loans are typically on our
balance sheet for 10 to 20 days. We have grown this portfolio with the intent
to diversify our balance sheet, increase our yield compared to other short term
investment opportunities and mitigate interest rate risk due to the variable
rate pricing structure of the loans. We have a defined set of credit guidelines
we use when evaluating these loans, our credit department does its own independent
review of these loans and the approval process of these loans is consistent
with our underwriting of loans and our lending policies. We expect to continue
our mortgage finance lending program for the foreseeable future.
In general, commercial and industrial loans may involve increased credit risk
and, therefore, typically yield a higher return. The increased risk in commercial
and industrial loans derives from the expectation that such loans generally
are serviced principally from the operations of the business, and those operations
may not be successful. Any interruption or discontinuance of operating cash
flows from the business, which may be influenced by events not under the control
of the borrower such as economic events and changes in governmental regulations,
could materially affect the ability of the borrower to repay the loan. In addition,
the collateral securing commercial and industrial loans generally includes moveable
property such as equipment and inventory, which may decline in value more rapidly
than we anticipate exposing us to increased credit risk. As a result of these
additional complexities, variables and risks, commercial and industrial loans
require extensive underwriting and servicing.
Commercial Real Estate Loans. We make commercial mortgage loans collateralized
by real estate, which may be owner occupied or non-owner occupied real estate.
Commercial real estate lending typically involves higher loan principal amounts
and the repayment is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service.
We require our commercial real estate loans to be secured by well-managed property
with adequate margins and generally obtain a guarantee from responsible parties.
Our commercial mortgage loans generally are collateralized by first liens on
real estate, have variable or fixed interest rates and amortize over a 10-to-20
year period with balloon payments or rate adjustments due at the end of three
to seven years. Periodically, we will utilize an interest rate swap to hedge
against long term fixed rate exposures. Commercial mortgage loans considered
for interest rate swap hedging typically have terms of greater than five years.
Payments on loans secured by such properties are often dependent on the successful
operation (in the case of owner occupied real estate) or management (in the
case of non-owner occupied real estate) of the properties. Accordingly, repayment
of these loans may be subject to adverse conditions in the real estate market
or the economy to a greater extent than other types of loans. In underwriting
commercial real estate loans, we seek to minimize these risks in a variety of
ways, including giving careful consideration to the property’s age, condition,
operating history, future operating projections, current and projected market
rental rates, vacancy rates, location and physical condition. The underwriting
analysis also may include credit verification, reviews of appraisals, environmental
hazards or reports, the borrower’s liquidity and leverage, management
experience of the owners or principals, economic condition and industry trends.
Real Estate Construction Loans. We make loans to finance the construction of
residential and non-residential properties. Construction loans generally are
collateralized by first liens on real estate and have floating interest rates.
We conduct periodic inspections, either directly or through an agent, prior
to approval of periodic draws on these loans. Underwriting guidelines similar
to those described above also are used in our construction lending activities.
Our construction loans have terms that typically range from six months to two
years depending on factors such as the type and size of the development and
the financial strength of the borrower/guarantor. Loans are typically structured
with an interest only construction period. Loans are underwritten to either
mature at the completion of construction, or transition to a traditional amortizing
commercial real estate facility at the completion of construction, in line with
other commercial real estate loans held at the bank.
Construction loans generally involve additional risks attributable to the fact
that loan funds are advanced upon the security of a project under construction,
and the project is of uncertain value prior to its completion. Because of uncertainties
inherent in estimating construction costs, the market value of the completed
project and the effects of governmental regulation on real property, it can
be difficult to accurately evaluate the total funds required to complete a project
and the related loan-to-value ratio. As a result of these uncertainties, construction
lending often involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather than the ability
of a borrower or guarantor to repay the loan. If we are forced to foreclose
on a project prior to completion, there is no assurance that we will be able
to recover the entire unpaid portion of the loan. In addition, we may be required
to fund additional amounts to complete a project and it may be necessary to
hold the property for an indeterminate period of time subject to the regulatory
limitations imposed by local, state or federal laws.
1 – 4 Family Residential Mortgages. We make residential real estate loans
collateralized by owner occupied properties located in our market areas. We
offer a variety of mortgage loan products with amortization periods up to 30
years including traditional 30-year fixed loans and various adjustable rate
mortgages. Typically, loans with a fixed interest rate of greater than 10 years
are held for sale and sold on the secondary market, and adjustable rate mortgages
are held for investment. However, in connection with the acquisition of First
Independence, we acquired $71 million in residential real estate loans, with
a substantial amount having fixed interest rate terms of greater than 10 years.
Loans collateralized by one-to-four family residential real estate generally
are originated in amounts of no more than 80% of appraised value. Home equity
loans and HELOCs are generally limited to a combined loan-to-value ratio of
80%, including the subordinate lien. We retain a valid lien on real estate,
obtain a title insurance policy that insures that the property is free from
encumbrances and require hazard insurance.
From time to time we have purchased pools of residential mortgages originated
by other financial institutions to hold for investment with the intent to diversify
our residential mortgage loan portfolio, and increase our yield. These loans
purchased typically have an adjustable rate with a fixed period of no more than
10-years, and are collateralized by one-to-four family residential real estate.
We have a defined set of credit guidelines that we use when evaluating these
credits. Although these loans were originated and underwritten by another institution,
our mortgage and credit departments do their own independent review of these
loans.
Agricultural Loans. We offer both fixed-rate and adjustable-rate agricultural
real estate loans to our customers. We also make loans to finance the purchase
of machinery, equipment and breeding stock, seasonal crop operating loans used
to fund the borrower’s crop production operating expenses, livestock operating
and revolving loans used to purchase livestock for resale and related livestock
production expense.
Generally, our agricultural real estate loans amortize over periods not in excess
of 20 years and have a loan-to-value ratio of 80%. We also originate agricultural
real estate loans directly and through programs sponsored by the Farmers Home
Administration, an agency of the United States Department of Agriculture (“FHA”),
which provides a partial guarantee on loans underwritten to FHA standards. Agricultural
real estate loans generally carry higher interest rates and have shorter terms
than 1-4 family residential real estate loans. Agricultural real estate loans,
however, entail additional credit risks compared to one- to four-family residential
real estate loans, as they typically involve larger loan balances concentrated
with single borrowers or groups of related borrowers We generally require farmers
to obtain multi-peril crop insurance coverage through a program partially subsidized
by the Federal government to help mitigate the risk of crop failures.
Agricultural operating loans are generally originated at an adjustable- or fixed-rate
of interest and generally for a term of up to 7 years. In the case of agricultural
operating loans secured by breeding livestock and/or farm equipment, such loans
are originated at fixed rates of interest for a term of up to 5 years. We typically
originate agricultural operating loans on the basis of the borrower’s
ability to make repayment from the cash flow of the borrower’s agricultural
business. As a result, the availability of funds for the repayment of agricultural
operating loans may be substantially dependent on the success of the business
itself and the general economic environment. A significant number of agricultural
borrowers with these types of loans may qualify for relief under a chapter of
the U.S. Bankruptcy Code that is designed specifically for the reorganization
of financial obligations of family farmers and which provides certain preferential
procedures to agricultural borrowers compared to traditional bankruptcy proceedings
pursuant to other chapters of the U.S. Bankruptcy Code.
Consumer Loans. We make a variety of loans to individuals for personal and household
purposes, including secured and unsecured term loans and home improvement loans.
Consumer loans are underwritten based on the individual borrower’s income,
current debt level, past credit history and the value of any available collateral.
The terms of consumer loans vary considerably based upon the loan type, nature
of collateral and size of the loan. Consumer loans entail greater risk than
do residential real estate loans because they may be unsecured or, if secured,
the value of the collateral, such as an automobile or boat, may be more difficult
to assess and more likely to decrease in value than real estate. In such cases,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan balance. The remaining
deficiency often will not warrant further substantial collection efforts against
the borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower’s continuing financial stability,
and thus are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy. Furthermore, the application of various federal and
state laws may limit the amount which can be recovered on such loans.