Commercial Real Estate Loans. Secured by mortgages on commercial property,
these loans are typically more complex and present a higher risk profile than
our consumer real estate loans. Commercial loans that are secured by owner-occupied
commercial real estate are repaid through operating cash flows of the borrower
whereas nonowner-occupied commercial real estate loans are generally dependent
on rental income. The typical maturity for these loans is three to five years;
however, payments may be amortized over a longer period. Interest rates on our
commercial real estate loans are generally fixed for five years or less after
which they adjust based upon a predetermined spread over an index. At times,
a rate may be fixed for longer than five years. As part of our credit underwriting
standards, we normally require personal guarantees from the principal owners
of the business supported by a review of the principal owners’ personal
financial statements and tax returns. As part of our enterprise risk management
process, we understand that risks associated with commercial real estate loans
include fluctuations in real estate values, the overall strength of the borrower,
the overall strength of the economy, new job creation trends, tenant vacancy
rates, environmental contamination, and the quality of the borrowers’
management. In order to mitigate and limit these risks, we analyze the borrowers’
cash flow and evaluate collateral value. Currently, the collateral securing
our commercial real estate loans includes a variety of property types, such
as office, warehouse, and retail facilities, multifamily properties, hotels,
mixed-use residential and commercial properties.
Residential Real Estate Loans. The Company offers first and second one-to-four
family mortgage loans and home equity lines of credit; the collateral for these
loans includes both owner-occupied residences and nonowner-occupied investment
properties. The owner-occupied primary residence loans generally present lower
levels of risk than commercial real estate loans; however, risks do still exist
because of possible fluctuations in the value of the real estate collateral
securing the loan, as well as changes in the borrowers’ financial condition.
The nonowner-occupied investment properties are more similar in risk to commercial
real estate loans, and therefore, are underwritten by assessing the property’s
income potential and appraised value. In both cases, we underwrite the Borrower’s
financial condition and evaluate his or her global cash flow position. Borrowers
may be affected by numerous factors, including job loss, illness, or other personal
hardship. As part of our product mix, the Company offers both portfolio and
secondary market mortgages; portfolio loans generally are based on a 1-year,
3-year or 5-year adjustable rate mortgages; while 15-year or 30-year fixed-rate
loans are generally sold to the secondary market.
Construction Loans. Typically, these loans have a term of one to two years and
the interest is paid monthly. Once the construction period terminates, some
of these loans will convert to a term loan carried in the Bank’s loan
portfolio with a maturity of one to five years. This portion of our loan portfolio
includes loans to small-to-medium sized businesses to construct owner-user properties,
loans to developers of commercial real estate investment properties, and loans
to residential developers. This type of loan is also made to individual clients
for construction of single family homes in our market area. An independent appraisal
is generally used to determine the value of the collateral and confirm that
the ratio of the loan principal to the value of the collateral will not exceed
the Bank’s policies. As the construction project progresses, loan proceeds
are requested by the borrower to complete phases of construction, and funding
is only disbursed after the project has been inspected by a third-party inspector
or experienced construction lender. Risks associated with construction loans
include fluctuations in the value of real estate, project completion risk, and
changes in market trends. The ability of the construction loan borrower to move
to permanent financing of the loan or sell the property upon completion of the
project is another risk factor that also may be affected by changes in market
trends after the initial funding of the loan.
Commercial Loans. The Company offers a wide range of commercial loans, including
small business loans, equipment financing, business lines of credit, and SBA
loans. Small-to-medium sized businesses, retail, and professional establishments,
make up our target market for commercial loans. Our lenders primarily underwrite
these loans based on the borrower’s ability to service the loan from cash
flow. Lines of credit and loans secured by accounts receivable and/or inventory
are monitored periodically by our staff. Loans secured by “all business
assets,” or a “blanket lien” are typically only made to highly
qualified borrowers due to the nonspecific nature of the collateral. Valuation
of business collateral is generally supported by an appraisal, purchase order,
or third party physical inspection. Personal guarantees of the principals of
business borrowers are usually required. Equipment loans generally have a term
of five years or less and may have a fixed or variable rate. Business lines
of credit generally do not exceed two years and typically, are secured by accounts
receivable, inventory, and the personal guarantees of the principals of the
business. Significant factors affecting a commercial borrower’s credit-worthiness
include the quality of management and the ability to evaluate changes in the
supply and demand characteristics affecting the business’ markets for
products and services and respond effectively to such changes. These loans may
be made unsecured or secured, but most are made on a secured basis. Risks associated
with our commercial loan portfolio include local, regional, and national market
conditions. Other risk factors could include changes in the borrower’s
management and fluctuations in collateral value. Additionally, there may be
refinancing risk if a commercial loan includes a balloon payment which must
be refinanced or paid off at loan maturity. In reference to our risk management
process, our commercial loan portfolio presents a higher risk profile than our
residential real estate and consumer loan portfolios. Therefore, we require
that all loans to businesses must have a clearly stated and reasonable payment
plan to allow for timely retirement of debt.
Consumer Loans. Our consumer loan portfolio is the smallest portion of our loan
portfolio, representing 2.0% of our total loan portfolio at December 31, 2015.
These loans are made for various consumer purposes, such as the financing of
automobiles, boats, and recreational vehicles. The payment structure of these
loans is normally on an installment basis. The risk associated with this category
of loans stems from the reduced collateral value for a defaulted loan; it may
not provide an adequate source of repayment of the principal. The underwriting
on these loans is primarily based on the borrower’s financial condition.
In some cases, consumer loans are unsecured credits that subject us to risk
when the borrower’s financial condition declines or deteriorates. Based
upon our current trend in consumer loans, we do not anticipate that consumer
loans will become a substantial component of our loan portfolio at any time
in the immediate future. Consumer loans are made at fixed-interest and variable-interest
rates and are based on the appropriate amortization for the asset and purpose.