Commercial
Commercial loans are predominately loans to expand a business or finance asset
purchases. The underlying risk in the Commercial loan segment is primarily a function
of the reliability and sustainability of the cash flows of the borrower and secondarily
on the underlying collateral securing the transaction. From time to time, the
cash flows of borrowers may be less than historical or as planned. In addition,
the underlying collateral securing these loans may fluctuate in value. Most commercial
loans are secured by the assets financed or other business assets and most commercial
loans are further supported by a personal guarantee. However, in some instances,
short term loans are made on an unsecured basis. Agriculture production loans
are typically secured by growing crops and generally secured by other assets such
as farm equipment. Production loans are subject to weather and market pricing
risks. The Corporation has established underwriting standards and guidelines for
all commercial loan types.
The Corporation strives to maintain a geographically diverse commercial real estate
portfolio. Commercial real estate loans are primarily underwritten based upon
the cash flows of the underlying real estate or from the cash flows of the business
conducted at the real estate. Generally, these types of loans will be fully guaranteed
by the principal owners of the real estate and loan amounts must be supported
by adequate collateral value. Commercial real estate loans may be adversely affected
by factors in the local market, the regional economy, or industry specific factors.
In addition, Commercial Construction loans are a specific type of commercial real
estate loan which inherently carry more risk than loans for completed projects.
Since these types of loans are underwritten utilizing estimated costs, feasibility
studies, and estimated absorption rates, the underlying value of the project may
change based upon the inaccuracy of these projections. Commercial construction
loans are closely monitored, subject to industry standards, and disbursements
are controlled during the construction process.
Residential
Retail real estate mortgages that are secured by 1-4 family residences are generally
owner occupied and include residential real estate and residential real estate
construction loans. The Corporation typically establishes a maximum loan-to-value
ratio and generally requires private mortgage insurance if the ratio is exceeded.
The Corporation sells substantially all of its long-term fixed mortgages to
secondary market purchasers. Mortgages sold to secondary market purchasers are
underwritten to specific guidelines. The Corporation originates some mortgages
that are maintained in the bank’s loan portfolio. Portfolio loans are
generally adjustable rate mortgages and are underwritten to conform to Qualified
Mortgage standards. Several factors are considered in underwriting all Mortgages
including the value of the underlying real estate, debt-to-income ratio and
credit history of the borrower. Repayment is primarily dependent upon the personal
income of the borrower and can be impacted by changes in borrower’s circumstances
such as changes in employment status and changes in real estate property values.
Risk is mitigated by the sale of substantially all long-term fixed rate mortgages,
the underwriting of portfolio loans to Qualified Mortgage standards and the
fact that mortgages are generally smaller individual amounts spread over a large
number of borrowers.
Consumer
The consumer portfolio primarily consists of home equity loans and lines (typically
secured by a subordinate lien on a 1-4 family residence), secured loans (typically
secured by automobiles, boats, recreational vehicles, or motorcycles), cash/CD
secured, and unsecured loans. Pricing, loan terms, and loan to value guidelines
vary by product line. The underlying value of collateral dependent loans may
vary based on a number of economic conditions, including fluctuations in home
prices and unemployment levels. Underwriting of consumer loans is based on the
individual credit profile and analysis of the debt repayment capacity for each
borrower. Payments for consumer loans is typically set-up on equal monthly installments,
however, future repayment may be impacted by a change in economic conditions
or a change in the personal income levels of individual customers. Overall risks
within the consumer portfolio are mitigated by the mix of various loan products,
lending in various markets and the overall make-up of the portfolio (small loan
sizes and a large number of individual borrowers).