What are Kentucky Bancshares Inc's Business Segments?
Commercial: These loans to businesses do not have real estate as the underlying
collateral. Instead of real estate, collateral could be business assets such as
equipment or accounts receivable or the personal guarantee of one or more guarantors.
These loans generally present a higher level of risk than loans secured by commercial
real estate because in the event of default by the borrower, the business assets
must be liquidated and/or guarantors pursued for deficit funds. Business assets
are worth more while they are in use to produce income for the business and worth
significantly less if the business is no longer in operation.
Real estate construction: Real estate construction consist of loans secured by
real estate for additions or alterations to existing structures, as well as constructing
new structures. They include fixed and floating rate loans. Real estate construction
loans generally present a higher level of risk than loans secured by 1-4 family
residential real estate primarily because of the length of the construction period
and the potential change in prices of construction materials.
Real Estate Mortgage:
1-4 family residential: Loans secured by 1-4 family residential real estate represent
the lowest risk of loans for the Company. They include fixed and floating rate
loans as well as loans for commercial purposes or consumer purposes. The Company
generally does not hold subprime residential mortgages. Borrowers with loans in
this category, whether for commercial or consumer purposes, tend to make their
payments timely as they do not want to risk foreclosure and loss of property.
Multifamily residential: Loans secured by multifamily residential real estate
consist primarily of loans secured by apartment buildings and can be either fixed
or floating rate loans. Multi-family residential real estate loans generally present
a higher level of risk than loans secured by 1-4 family residential real estate
because the borrower’s repayment ability typically comes from rents from
tenants. Local economic and employment fluctuations impact rent rolls and potentially
the borrower’s repayment ability.
Non-farm & non-residential: Loans secured by non-farm non-residential real
estate consist of loans secured by commercial real estate that is not owner occupied.
These loans generally consist of loans collateralized by property whereby rents
received from commercial tenants of the borrower are the source of repayment.
These loans generally present a higher level of risk than loans secured by owner
occupied commercial real estate because repayment risk is expanded to be dependent
on the success of multiple businesses which are paying rent to the borrower. If
multiple businesses fail due to deteriorating economic conditions or poor business
management skills, the borrower may not have enough rents to cover their monthly
payment. Repayment risk is also increased depending on the level of surplus available
commercial lease space in the local market area.
Agricultural: These loans to agricultural businesses do not have real estate as
the underlying collateral. Instead of real estate, collateral could be assets
such as equipment or accounts receivable or the personal guarantee of one or more
guarantors. These loans generally present a higher level of risk than loans secured
by real estate because in the event of default by the borrower, the assets must
be liquidated and/or guarantors pursued for deficit funds. Farm assets are worth
more while they are in use to produce income and worth significantly less if the
farm is no longer in operation.
Consumer: Consumer loans are generally loans to borrowers for non-business purposes.
They can be either secured or unsecured. Consumer loans are generally small in
the individual amount of principal outstanding and are repaid from the borrower’s
private funds earned from employment. Consumer lending risk is very susceptible
to local economic trends. If there is a consumer loan default, any collateral
that may be repossessed is generally not well maintained and has a diminished
value. For this reason, consumer loans tend to have higher overall interest rates
to cover the higher cost of repossession and charge-offs. However, due to their
smaller average balance per borrower, consumer loans are collectively evaluated
for impairment in determining the appropriate allowance for loan losses.
Other: All other loan types are aggregated together for credit risk evaluation
due to the varying nature but small number of the remaining types of loans in
the Company’s loan portfolio. Loans in this segment include but are not
limited to overdrafts. Due to their smaller balance, other loans are collectively
evaluated for impairment in determining the appropriate allowance for loan losses.
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