Real Estate—Residential 1-4 Family. Our residential mortgage loan department
primarily originates loans for sale into the secondary market. We generally
do not retain long-term, fixed rate residential real estate loans in our portfolio
due to interest rate and collateral risks and low levels of profitability.
Those residential loans to individuals that are retained in our loan portfolio
primarily consist of first liens on 1-4 family residential mortgages, home equity
loans and lines of credit. These held-for-investment loans are generally made
on the basis of the borrower’s ability to repay the loan from his or her
employment and other income and are secured by residential real estate, the
value of which is reasonably ascertainable. We also expect that the loan-to-value
ratios for held-to-investment loans will be sufficient to compensate for fluctuations
in real estate market value and to minimize losses that could result from a
downturn in the residential real estate market.
Real Estate—Commercial, Multi-Family and Farmland. We make commercial
mortgage loans to finance the purchase of real property as well as loans to
smaller business ventures, credit lines for working capital and short-term seasonal
or inventory financing, including letters of credit, that are also secured by
real estate. Commercial mortgage lending typically involves higher loan principal
amounts, and the repayment of loans is dependent, in large part, on sufficient
income from the properties collateralizing the loans to cover operating expenses
and debt service. As a general practice, we require our commercial mortgage
loans to be collateralized by well-managed income-producing property with adequate
margins and to be guaranteed by responsible parties. In addition, approximately
40% of our commercial mortgage loan portfolio is secured by owner-occupied commercial
buildings. We look for opportunities where cash flow from the business located
in the owner-occupied building provides adequate debt service coverage and the
guarantor’s net worth is primarily based on assets other than the project
we are financing. Our commercial mortgage loans are generally collateralized
by first liens on real estate, have fixed or floating interest rates and amortize
over a 10 to 25-year period with balloon payments generally due at the end of
one to seven years. Payments on loans collateralized by such properties are
often dependent on the successful operation or management of the properties.
Accordingly, repayment of these loans may be subject to adverse conditions in
the real estate market.
In underwriting commercial mortgage loans, we seek to minimize our risks in
a variety of ways, including giving careful consideration to the property’s
operating history, future operating projections, current and projected occupancy,
location and physical condition. Our underwriting analysis also includes credit
checks, reviews of appraisals and environmental hazards or EPA reports and a
review of the financial condition of the borrower. We attempt to limit our risk
by analyzing our borrowers’ cash flow and collateral value on a regular
and ongoing basis.
Real Estate—Construction. We also make construction and development loans
to residential and, to a lesser extent, commercial contractors and developers
located within our market areas. Construction loans generally are secured by
first liens on real estate and have floating interest rates. Construction loans
involve additional risks attributable to the fact that loan funds are advanced
upon the security of a project under construction, and the value of the project
is dependent on its successful completion. As a result of these uncertainties,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, upon 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 all of the unpaid portion of the loan. In addition,
we may be required to fund additional amounts to complete a project and may
have to hold the property for an indeterminate period of time. While we have
underwriting procedures designed to identify what we believe to be acceptable
levels of risks in construction lending, no assurance can be given that these
procedures will prevent losses from the risks described above. To further minimize
our risk, we have identified and targeted certain builders within our markets
with satisfactory performance throughout the last recession.
Commercial. Our commercial loan portfolio includes loans to smaller business
ventures, credit lines for working capital and short-term seasonal or inventory
financing, as well as letters of credit that are generally secured by collateral
other than real estate. Commercial borrowers typically secure their loans with
assets of the business, personal guaranties of their principals and often mortgages
on the principals’ personal residences. Our commercial loans are primarily
made within our market areas and are underwritten on the basis of the commercial
borrower’s ability to service the debt from income. In general, commercial
loans involve more credit risk than residential and commercial mortgage loans,
but less risk than consumer loans. The increased risk in commercial loans is
generally due to the type of assets collateralizing these loans. The increased
risk also derives from the expectation that commercial loans generally will
be serviced from the operations of the business, and those operations may not
be successful.
Consumer. We make a variety of loans to individuals for personal, family and
household purposes, including secured and unsecured installment and term loans.
Consumer loans entail greater risk than other loans, particularly in the case
of consumer loans that are unsecured or secured by depreciating assets such
as automobiles. In these cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment for the outstanding loan
balance. In addition, consumer loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be affected by job
loss, divorce, illness or personal hardships.
Niche Lending Initiatives. In the fourth quarter of 2013, we implemented four
new lending initiatives. First, TriNet Direct is a division focused on national
net lease lending and originates construction of pre-leased "build to suit"
projects and provides interim and long-term financing to professional developers
and private investors of commercial real estate on long-term leases to tenants
that are investment grade or have investment grade attributes. Second, we entered
into a partnership with an unaffiliated third-party that originates small balance,
unsecured consumer loans, primarily associated with home improvement additions,
including financing new or replacement HVAC units, roofs, windows and other
improvements. We are purchasing these consumer loans at a discount from the
originator. Third, we have established a business credit sales and support team
that originates structured loans secured by accounts receivable and inventory
within our markets. The business credit department was implemented as we believe
properly structured and monitored asset-based lending at the community bank
level is an under-served market that can generate above-average returns on a
risk-adjusted basis. The fourth lending initiative is a lending unit focused
on government lending, primarily originating and selling the guaranteed portion
of Small Business Administration ("SBA") and United State Department
of Agriculture ("USDA") loans. This fourth initiative provides a greater
impact on non-interest income through the premium and servicing of sold loans.
These initiatives are operating with distinct concentration limits and will
only supplement the loan growth generated by our traditional banking officers.
Credit Risks. The principal economic risk associated with each category of the
loans that we make is the creditworthiness of the borrower and the ability of
the borrower to repay the loan. General economic conditions and the strength
of the services and retail market segments affect borrower creditworthiness.
General factors affecting a commercial borrower’s ability to repay include
interest rates, inflation and the demand for the commercial borrower’s
products and services, as well as other factors affecting a borrower’s
customers, suppliers and employees.
Risks associated with real estate loans also include fluctuations in the value
of real estate, new job creation trends, tenant vacancy rates and, in the case
of commercial borrowers, the quality of the borrower’s management. Consumer
loan repayments depend upon the borrower’s financial stability and are
more likely to be adversely affected by divorce, job loss, illness and personal
hardships.
Lending Policies. Our Board of Directors has established and periodically reviews
FSGBank’s lending policies and procedures. We have established common
documentation and standards based on the applicable type of loan. There are
regulatory restrictions on the dollar amount of loans available for each lending
relationship.
National banking regulations provide that no loan relationship may exceed 15%
of a bank’s Tier 1 capital. In addition, we have established a tiered
“house” limit based on the credit risk rating of the loan. However,
these limits may not exceed our legal lending limit for each lending relationship.
Any loan request exceeding the house limit must be approved by a management
committee and is reported to a committee of our Board of Directors. We occasionally
sell participation interests in loans to other lenders, primarily when a loan
exceeds our house lending limits.
Concentrations. The retail nature of our commercial banking operations allows
for diversification of depositors and borrowers, and we believe that our business
does not depend upon a single or a few customers. We also do not believe that
our credits are concentrated within a single industry or group of related industries.
The economy in our Dalton, Georgia market area is generally dependent upon the
carpet industry and changes in construction of residential and commercial establishments.
While the Dalton economy is dominated by the carpet and carpet-related industries,
we do not have any one customer from whom more than 10% of our revenues are
derived. However, we have multiple customers, commercial and retail, that are
directly or indirectly affected by, or are engaged in businesses related to
the carpet industry that, in the aggregate, have historically provided greater
than 10% of our revenues.