LHFI Secured by Construction, Land Development, and Other Land – Construction
and land development loans include loans for both commercial and residential
properties to builders/developers and to consumers. This category also includes
loans secured by vacant land, except land known to be used or usable for agricultural
purposes, such as crop and livestock production. Repayment is normally derived
from the sale of the underlying property or from permanent financing, which
refinances Trustmark’s initial loan. Trustmark’s engagement in this
type of lending is restricted to projects within its geographic markets and
is generally extended to those builders and developers exhibiting the highest
credit quality with significant equity invested in the project. The underwriting
process for these loans includes analysis of the financial position and strength
of both the borrower and guarantor, experience with similar projects in the
past, market demand and prospects for successful completion of the proposed
project within the established budget and schedule, values of underlying collateral
and availability of permanent financing. Risk within this portfolio is mitigated
through adherence to policies and lending limits, periodic target credit reviews
of the different segments of this portfolio, inspection of projects throughout
the life of the loan and routine monitoring of financial information and collateral
values as they are updated.
LHFI Secured by Construction, Land Development, and Other Land – Construction
and land development loans include loans for both commercial and residential
properties to builders/developers and to consumers. This category also includes
loans secured by vacant land, except land known to be used or usable for agricultural
purposes, such as crop and livestock production. Repayment is normally derived
from the sale of the underlying property or from permanent financing, which
refinances Trustmark’s initial loan. Trustmark’s engagement in this
type of lending is restricted to projects within its geographic markets and
is generally extended to those builders and developers exhibiting the highest
credit quality with significant equity invested in the project. The underwriting
process for these loans includes analysis of the financial position and strength
of both the borrower and guarantor, experience with similar projects in the
past, market demand and prospects for successful completion of the proposed
project within the established budget and schedule, values of underlying collateral
and availability of permanent financing. Risk within this portfolio is mitigated
through adherence to policies and lending limits, periodic target credit reviews
of the different segments of this portfolio, inspection of projects throughout
the life of the loan and routine monitoring of financial information and collateral
values as they are updated.
Inherent in real estate construction lending is the risk that the full value
of the collateral does not exist at the time the loan is granted. Construction
lending also inherently includes the risk associated with a borrower’s
ability to successfully complete a proposed project on time and within budget.
Further, adverse changes in the market occurring between the start of construction
and completion of the projects can result in slower sales rates and lower sales
prices than originally anticipated which could impact the underlying real estate
collateral values and timely and full repayment of these loans. Rising interest
rates can adversely affect the cost of construction and the financial viability
of real estate projects. Higher interest rates may also result in higher capitalization
rates, thereby reducing a property’s value. As a result of this risk profile,
LHFI secured by construction, land development and other land are considered
to be higher risks than other real estate loans.
LHFI and LHFS Secured by Residential Properties – Residential real estate
loans consist of first and junior liens on residential properties that are extended
in the geographic markets in which Trustmark operates as well as mortgage products,
originated and purchased, that are underwritten to secondary market standards.
Credit underwriting standards include verification of income, valuation of collateral
and evaluation of the borrower’s credit history and repayment capacity.
Portfolio performance is continuously evaluated through updated credit bureau
scores and monitoring of repayment performance.
Credit performance of consumer residential real estate loans is highly dependent
on housing values and household income which, in turn are highly dependent on
national, regional and local economic factors. Rising interest rates, rising
unemployment rates and other adverse changes in these economies may have a negative
effect on the ability of Trustmark’s borrowers to repay these loans and
negatively affect value of the underlying residential real estate collateral.
LHFI Secured by Nonfarm, Nonresidential Properties – Trustmark provides
financing for both owner-occupied commercial real estate as well as income-producing
commercial real estate. Trustmark seeks to maintain a balance of owner-occupied
and income-producing real estate loans that moderates its risk to the specific
risks of each type of loan. Commercial real estate term loans are typically
collateralized by liens on real property. Both types of commercial real estate
loans are underwritten to lending policies that include maximum loan-to-value
ratios, minimum equity requirements, acceptable amortization periods and minimum
debt service coverage requirements, based on property type. Income-producing
commercial real estate loans also generally require cash equity and are subject
to exposure limits for a single project. All exceptions to established guidelines
are subject to stringent internal review and require specific approval. As with
commercial loans, the borrower’s financial strength and capacity to repay
their obligations remain the primary focus of underwriting. Financial strength
is evaluated based upon analytical tools that consider historical and projected
cash flows and performance in addition to analysis of the proposed project for
income-producing properties. Additional support offered by guarantors is also
considered.
Risk for owner-occupied commercial real estate is driven by the creditworthiness
of the underlying borrowers, particularly cash flow from the borrowers’
business operations as well as the risk of a shortfall in collateral. Credit
performance of loans secured by commercial income-producing real estate can
be negatively affected by national, regional and local economic conditions,
which may result in deteriorating tenant credit profiles, tenant losses, reduced
rental/lease rates and higher than anticipated vacancy rates, all contributing
to declines in value or liquidity of the underlying real estate collateral.
Other factors, such as increasing interest rates, may result in higher capitalization
rates, thereby reducing a property’s value.
Commercial and Industrial LHFI – Commercial loans (other than commercial
loans related to real estate assets, which are summarized above) are made to
many types of businesses for various purposes, such as short-term working capital
loans that are usually secured by accounts receivable and inventory, equipment
and fixed asset purchases that are secured by those assets and term financing
for those within Trustmark’s geographic markets. Trustmark’s credit
underwriting process for commercial loans includes analysis of historical and
projected cash flows and performance, evaluation of financial strength of both
borrowers and guarantors as reflected in current and detailed financial information
and evaluation of underlying collateral to support the credit. Credit risk within
the commercial loan portfolio is managed through adherence to specific commercial
lending policies and internally established lending authorities, diversification
within the portfolio and monitoring of the portfolio on a continuing basis.