Commercial and Industrial Loans. In nearly all cases, the Company’s commercial
loans are made in the Company’s market areas and are underwritten on the
basis of the borrower’s ability to service the debt from income. As a
general practice, the Company takes as collateral a lien on any available real
estate, equipment or other assets owned by the borrower and obtains a personal
guaranty of the borrower or principal. Working capital loans are primarily collateralized
by short-term assets whereas term loans are primarily collateralized by long-term
assets. In general, commercial loans involve more credit risk than residential
mortgage loans and commercial mortgage loans and, therefore, usually yield a
higher return. The increased risk in commercial loans is due to the type of
collateral securing these loans as well as the expectation that commercial loans
generally will be serviced principally from the operations of the business,
and those operations may not be successful. Historical trends have shown these
types of loans to have higher delinquencies than mortgage loans. As a result
of these additional complexities, variables and risks, commercial loans require
more thorough underwriting and servicing than other types of loans.
Commercial Real Estate. The Company makes commercial real estate loans collateralized
by owner-occupied and nonowner-occupied real estate to finance the purchase
of real estate. The Company’s commercial real estate loans are collateralized
by first liens on real estate, typically have variable interest rates (or five
year or less fixed rates) and amortize over a 15- to 20-year period. Payments
on loans secured by nonowner-occupied 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
or the economy to a greater extent than other types of loans. The Company seeks
to minimize these 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 in connection with
underwriting these loans. The underwriting analysis also includes credit verification,
analysis of global cash flow, appraisals and a review of the financial condition
of the borrower.
1-4 Family Residential Loans. The Company’s lending activities also include
the origination of 1-4 family residential mortgage loans (including home equity
loans) collateralized by owner-occupied residential properties located in the
Company’s market areas. The Company offers a variety of mortgage loan
portfolio products which generally are amortized over five to 25 years. Loans
collateralized by 1-4 family residential real estate generally have been originated
in amounts of no more than 89% of appraised value or have mortgage insurance.
The Company requires mortgage title insurance and hazard insurance. The Company
retains these portfolio loans for its own account rather than selling them into
the secondary market. By doing so, the Company incurs interest rate risk as
well as the risks associated with nonpayments on such loans. The Company’s
Home Loan Center offers a variety of mortgage loan products which are generally
amortized over 30 years, including FHA and VA loans. The Company sells the loans
originated by the Home Loan Center into the secondary market.
Construction, Land Development and Other Land Loans. The Company makes loans
to finance the construction of residential and, to a lesser extent, nonresidential
properties. Construction loans generally are collateralized by first liens on
real estate and have floating interest rates. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company’s construction lending activities. Construction
loans 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 the Company is forced to foreclose
on a project prior to completion, there is no assurance that the Company will
be able to recover all of the unpaid portion of the loan. In addition, the Company
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 the Company
has underwriting procedures designed to identify what it believes 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.
Agriculture Loans. The Company provides agriculture loans for short-term crop
production, including rice, cotton, milo and corn, farm equipment financing
and agriculture real estate financing. The Company evaluates agriculture borrowers
primarily based on their historical profitability, level of experience in their
particular agriculture industry, overall financial capacity and the availability
of secondary collateral to withstand economic and natural variations common
to the industry. Because agriculture loans present a higher level of risk associated
with events caused by nature, the Company routinely makes on-site visits and
inspections in order to identify and monitor such risks.
Consumer Loans. Consumer loans made by the Company include direct “A”-credit
automobile loans, recreational vehicle loans, boat loans, home improvement loans,
personal loans (collateralized and uncollateralized) and deposit account collateralized
loans. The terms of these loans typically range from 12 to 180 months and vary
based upon the nature of collateral and size of loan. Generally, consumer loans
entail greater risk than do real estate secured loans, particularly in the case
of consumer loans that are unsecured or collateralized by rapidly depreciating
assets such as automobiles. 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 does 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.