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T Bancshares, Inc.
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10-K
Mar 29, 3:52 PM ET
T Bancshares, Inc. 10-K
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Contents
38
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans held for investment are as follows:
At December 31, 2016, our loan portfolio included $71.6 million of loans, approximately 44.2% of our total funded loans, to the dental industry, as compared to $61.6 million, or 43.7% of total funded loans, at December 31, 2015. We believe that these loans are to credit worthy borrowers and are diversified geographically.
Periodically, the Company purchases participation interests in residential 1-4 family real estate mortgage loans that are partially or fully government guaranteed from a third party who is an approved Ginnie Mae securities issuer (the “Issuer”). Under the arrangement with the Issuer, in the event the Issuer subsequently pools the loans into a newly issued Ginnie Mae security, the Bank is entitled to receive a fractional percentage varying between 10% and 25% of the ultimate sales price of the securities over the Bank’s basis in the participation interest net of any unearned discount at the time of the securitization. If the loans are not securitized by the Issuer, the discount is accreted to interest income on a level-yield method over the life of the loans. During the year ended December 31, 2016, the Company purchased participation interest in one loan for $205,800 at a discount of $7,300. During the year ended December 31, 2015, the Company purchased participation interests in two loans totaling $173,700 at a discount of $5,200. There were no loans securitized during the years ended December 31, 2016 and 2015 and as a result no gain was recognized. At December 31, 2016 and 2015, the unearned discount was $141,000 and $248,000, respectively.
The Bank offers services to serve the small business community by offering 7(a) loans guaranteed by the SBA, loans promulgated under the SBA’s 504 loan program, and loans guaranteed by the USDA. These loans are generally guaranteed by the Agencies up to 75% to 80% of the principal balance. The Company records the guaranteed portion of the loans as held for sale. The Company periodically sells the guaranteed portion of selected SBA and USDA loans into the secondary market, on a servicing-retained basis. In calculating gain on the sale of loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.
During the year ended December 31, 2016, the Company sold $35.8 million of SBA and USDA loans, resulting in a gain on sale of loans of $3.0 million. During the year ended December 31, 2015, the Company sold $21.2 million of SBA loans, resulting in a gain on sale of loans of $1.9 million. In connection with the sales, the Company recorded a servicing asset of $833,000 and $493,000 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company had $11.2 million of SBA loans held for sale. As of December 31, 2015, the Company had $6.4 million of SBA loans held for sale.
During December 2015, the Bank sold one SBA loan that did not settle until January 2016. At December 31, 2015, the Bank recorded a receivable for the loans sold of approximately $2.0 million, which consists of approximately $1.8 million for the principal balance of the loan and $188,000 for the premium amount.
Loan Origination/Risk Management.
The Bank maintains written loan origination policies, procedures, and processes which address credit quality at several levels including individual loan level, loan type, and loan portfolio levels.
Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Bank utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.
Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.
Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.
Small Business Administration Lending- The Bank originates SBA loans which are sometimes sold into the secondary market. The Bank continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programs that the Bank offers are the basic 7(a) Loan Guaranty and the Certified Development Company (“CDC”), a Section 504 (“504”) program.
The 7(a) serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for working capital and up to 25 years for fixed assets. The 7(a) loan is approved and funded by a qualified lender, guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 75% of the loan amount depending on loan size. The Bank is required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) loans. The SBA 7(a) loans are generally variable interest rate loans. Gains recognized by the Bank on the sales of the guaranteed portion of these loans and the ongoing servicing income received are significant revenue sources for the Company. The servicing spread is 1% on the majority of loans.
The 504 program is an economic development-financing program providing long-term, low down payment loans to expanding businesses. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.
The SBA has designated the Bank as a “Preferred Lender”. As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority responsibility from the SBA.
The Bank also offers Business & Industry (“B & I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 75%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can have maturities up to 30 years and the rates can be fixed or variable.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
For all loan types, the Bank establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.
At the portfolio level, the Bank monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Bank also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Bank may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.
Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
Year-end non-accrual loans and restructured loans, segregated by class of loans, were as follows:
The restructuring of a loan is considered a “troubled debt restructuring” if due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses.
As of December 31, 2016, there was one commercial and industrial loan with a balance of approximately $9,000, which was on non-accrual, identified as troubled debt restructuring. The loan was restructured with a pre-modification balance of $16,000 during the second quarter of 2016. The modification included an extension of maturity date and reduction of payment amount. There were no other new troubled debt restructurings during 2016.
As of December 31, 2015, the Company had one commercial and industrial loan restructuring for $381,000 which was on non-accrual, with related allowance for loan losses of $2,000, identified as troubled debt restructuring. The modification consisted of extending the amortization period and reducing the interest rate to a below market interest rate. The loan defaulted and the outstanding balance of $344,000 was charged off during the second quarter of 2016.A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. There were no new troubled debt restructurings during 2015, and there were no troubled debt restructurings that defaulted under the modified terms during the year ended December 31, 2015.
As of December 31, 2016 and 2015, the Company had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The Company’s impaired loans and related allowance is summarized in the following table:
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company’s past due loans are as follows:
The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the past year. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Bank. Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.
Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past twelve months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.
Credit rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.
Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.
The following summarizes the Company’s internal ratings of its loans:
The Company’s recorded investment in loans as of December 31, 2016 and 2015 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows: