We currently offer one-to-four family residential mortgage loans with terms
of 10, 15, 20, and 30 years. Our 10-year balloon loans provide for principal
and interest amortization of up to 30 years with a balloon payment at the end
of the term. All of our loans with terms of 15 years or greater amortize over
the term of the loan.
For one-to-four family first mortgage residential real estate loans, we may
generally lend up to 80% of the property’s appraised value, or up to 90%
of the property’s appraised value if the borrower obtains private mortgage
insurance. We require title insurance on all of our one-to-four family first
mortgage loans, and we also require that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount
equal to at least the lesser of the loan balance or the replacement cost of
the improvements on the property. We require a property appraisal for all mortgage
loans that are underwritten to comply with secondary market standards. Appraisals
are conducted by independent or in-house licensed appraisers from a list approved
by our board of directors. Our residential real estate loans include “due-on-sale”
clauses.
We consider a number of factors in originating multi-family real estate loans.
We evaluate the qualifications and financial condition of the borrower (including
credit history), profitability and expertise, as well as the value and condition
of the mortgaged property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the borrower’s
experience in owning or managing similar property and the borrower’s payment
history with us and other financial institutions. In evaluating the property
securing the loan, the factors we consider include the net operating income
of the mortgaged property before debt service and depreciation, the debt service
coverage ratio (the ratio of net operating income to debt service), and the
ratio of the loan amount to the appraised value of the mortgaged property. Multi-family
real estate loans are generally originated in amounts up to 85% of the lower
of the sale price or the appraised value of the mortgaged property securing
the loan. All multi-family real estate loans over $250,000 are appraised by
independent or in-house licensed appraisers approved by the board of directors.
All multi-family real estate loans below $250,000 must either have an independent
or in-house licensed appraisal or valuation.
Commercial real estate loans generally have higher interest rates than residential
mortgage loans. In addition, commercial real estate loans are more sensitive
to changes in market interest rates because they often have shorter terms to
maturity, and therefore, the interest rates adjust more frequently. Commercial
real estate loans often have significant additional risk compared to one-to-four
family residential mortgage loans, as they typically involve large loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the repayment of commercial real estate loans typically depends on the successful
operation of the related real estate project, and thus may be subject, to a
greater extent than residential mortgage loans, to adverse conditions in the
real estate market or in the economy generally.
Construction/speculative loans are made to area homebuilders or developers
who do not have, at the time the loan is originated, a signed contract with
a homebuyer who has a commitment for permanent financing with either the Bank
or another lender. The homebuyer may enter into a purchase contract either during
or after the construction period. These loans have the risk that the builder
will have to make interest and principal payments on the loan, and finance real
estate taxes and other holding costs of the completed home or lot for a significant
time after the completion of construction. Funds are disbursed in phases as
construction is completed. All construction/speculative loans typically require
that the builder-borrower personally guarantee the full repayment of the principal
and interest on the loan and make interest payments during the construction
phase. These loans are generally originated for a term of 12 months, with interest
rates that are tied to the prime lending rate. The Bank recognizes the relative
increased risk element for these types of loans and therefore generally observes
a loan-to-value ratio of no more than 80% of the lower of cost or the estimated
value of the completed property. In addition, we generally limit the number
of our construction/speculative loans per borrower based on their available
liquidity.
Commercial credit decisions are based upon a complete credit review of the
borrower. A determination is made as to the borrower’s ability to repay
in accordance with the proposed terms as well as an overall assessment of the
credit risks involved. Personal guarantees of borrowers are generally required.
In evaluating a commercial business loan, we consider debt service capabilities,
actual and projected cash flows and the borrower’s inherent industry risks.
Credit agency reports of an individual borrower’s or guarantor’s
credit history as well as bank checks and trade investigations supplement the
analysis of the borrower’s creditworthiness. Collateral supporting a secured
transaction is also analyzed to determine its marketability and liquidity. Commercial
business loans generally bear higher interest rates than residential loans,
but they also may involve a higher risk of default since their repayment generally
depends on the successful operation of the borrower’s business.
Consumer loans generally entail greater credit risk than residential mortgage
loans, particularly in the case of loans that are unsecured or are secured by
assets that tend to depreciate in value, such as automobiles. In these cases,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining value often does
not warrant further substantial collection efforts against the borrower. Further,
consumer loan collections depend on the borrower’s continuing financial
stability, and therefore are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy.