Real Estate Loans
Loans secured by real estate are the principal component of our loan portfolio.
Real estate loans are subject to the same general risks as other loans and are
particularly sensitive to fluctuations in the value of real estate. Increases
in interest rates, declines in occupancy rates, fluctuations in the value of
real estate, as well as other factors arising after a loan has been made, could
negatively affect a borrower's cash flow, creditworthiness and ability to repay
the loan. When we make loans, we obtain a security interest in real estate whenever
possible, in addition to any other available collateral, to increase the likelihood
of the ultimate repayment of the loan. To control concentration risk, we monitor
collateral type and industry concentrations within this portfolio.
Real Estate Construction and Development Loans
We offer fixed and adjustable rate residential and commercial construction
loans to builders and developers and to consumers who wish to build their own
homes. Construction and development loans generally carry a higher degree of
risk than long-term financing of existing properties because repayment depends
on the ultimate completion of the project and usually on the subsequent leasing
and/or sale of the property.
Commercial, Financial and Agricultural and Owner-Occupied Real Estate Loans
We make loans for commercial purposes in various lines of businesses, including
the manufacturing industry, service industry, crop production industries and
professional service areas. While these loans may have real estate as partial
collateral, many are secured by various other assets of the borrower including
but not limited to accounts receivable, inventory, furniture, fixtures, and
equipment. Our underwriting and management of the credit take into consideration
the fluid nature of receivables and inventory collateral, where appropriate.
Our repayment analysis includes a consideration of the cash conversion cycle,
historical cash flow coverage, the predictability of future cash flows, together
with the overall capitalization of the borrower. We also participate in loan
syndications of senior secured commercial loans either directly with the lead
bank or on the secondary market. These loans are primarily to large publicly
traded companies throughout the United States and are secured by all assets
of the issuing company. These loans are underwritten to the same standards as
our originated portfolio.
These loans are underwritten based on the borrower’s ability to service
the debt from income from the business, as cash flow from the business is considered
the primary source of repayment.
Leases
Leases include equipment finance agreements and purchased commercial, business
purpose and municipal leases. Equipment finance agreements are originated and
serviced by the Company. These agreements are fully amortizing and recorded
at amortized cost. Equipment finance agreements are collateralized by a first
security interest in petroleum and convenience store equipment. For purchased
leases, the stream of payments and a first security interest in the collateral
is assigned to us. Our lease funding is based on a present value of the lease
payments at a discounted interest rate, which is determined based on the credit
quality of the lessee, the term of the lease compared to expected useful life,
and the type of collateral. Types of collateral include, but are not limited
to, medical equipment, rolling stock, franchise restaurant equipment and hardware/software.
Servicing of purchased leases is primarily retained by the loan originator,
as well as ownership of all residuals, if applicable. Lease financing is underwritten
by our Specialized Finance or Patriot Capital divisions using similar underwriting
standards as would be applied to a secured commercial loan requesting high loan-to-value
financing. Risks that are involved with lease financing receivables are credit
underwriting and borrower industry concentrations.
Consumer
We make a variety of loans to individuals for personal and household purposes,
including secured and unsecured installment loans and revolving lines of credit.
We underwrite consumer loans based on the borrower's income, current debt level,
personal financial statement composition, past credit history and the availability
and value of collateral. Consumer loan interest rates are both fixed and variable.
Although we typically require monthly payments of interest and a portion of
the principal on our loan products, we may offer consumer loans with a single
maturity date when a specific source of repayment is available. Consumer loans
not secured by real estate are generally considered to have higher risk because
they may be unsecured, or, if they are secured, the value of the collateral
may be more difficult to assess, more likely to decrease in value, and is more
difficult to control, than real estate. During 2015 we began emphasizing the
underwriting of consumer loans secured by cash value life insurance policies
which presents a lower collateral risk than other non-real estate secured consumer
loans.