Construction Lending
We make local construction and land acquisition and development loans. Residential
houses and commercial real estate under construction and the underlying land secure
these construction loans. These loans are concentrated in our local market. Because
the interest rate charged on these loans usually floats with the market, these
loans assist us in managing our interest rate risk. Construction lending entails
significant additional risks, compared to residential mortgage lending. Construction
loans often involve larger loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the value of the building under construction
is only estimable when the loan funds are disbursed. Thus, it is more difficult
to evaluate accurately the total loan funds required to complete a project and
related loan-to-value ratios. To mitigate the risks associated with construction
lending, we generally limit loan amounts to 80% of appraised value in addition
to analyzing the creditworthiness of the borrower. We also obtain a first lien
on the property as security for construction loans and typically require personal
guarantees from the borrower’s principal owners.
Commercial Business Loans
Commercial business loans generally have a higher degree of risk than loans secured
by real property, although they have higher yields. To manage these risks, we
typically obtain appropriate collateral and personal guarantees from the borrower’s
principal owners and monitor the financial condition of the related business.
Residential mortgage loans generally are made on the basis of the borrower’s
ability to make repayment from employment and other income and are secured by
real estate whose value tends to be readily ascertainable. In contrast, commercial
business loans typically are made on the basis of the borrower’s ability
to make repayment from the related business’ cash flow and are secured by
business assets, such as commercial real estate, accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of commercial
business loans is substantially dependent on the success of the business itself.
Furthermore, the collateral for commercial business loans may depreciate over
time and generally cannot be appraised with as much precision as residential real
estate. We have a loan review and monitoring process to regularly assess the repayment
ability of commercial borrowers.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real
estate in our market area, including commercial buildings and offices, recreational
facilities, small shopping centers, churches and hotels. Commercial real estate
loans typically involve larger loan balances concentrated with single borrowers
or groups of related borrowers. Additionally, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of a business or a real estate project and thus may be subject, to
a greater extent, to adverse conditions in the real estate market or in the
economic environment. Our commercial real estate loan underwriting criteria
requires an examination of debt service coverage ratios, the borrower’s
creditworthiness and prior credit history and reputation, and we typically require
personal guarantees or endorsements of the borrower’s principal owners.
In addition, we carefully evaluate the location of the security property.
Residential Real Estate Lending
All residential mortgage loans originated by us contain a “due-on-sale”
clause providing that we may declare the unpaid principal balance due and payable
upon sale or transfer of the mortgaged premises. In connection with residential
real estate loans, we require title insurance, hazard insurance and, if appropriate,
flood insurance. We do not require escrows for real estate taxes and insurance.
Consumer Lending
We offer various secured and unsecured consumer loans, including unsecured personal
loans and lines of credit, automobile loans, boat loans, deposit account loans,
installment and demand loans and credit cards. Such loans are generally made
to customers with whom we have a pre-existing relationship. We currently originate
all of our consumer loans in our local market area.
Consumer loans may entail greater risk than residential mortgage loans, particularly
in the case of consumer loans that are under-secured, such as loans secured
by rapidly depreciable assets like automobiles. Any repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment as
a result of the greater likelihood of damage, loss or depreciation. Due to the
relatively small amounts involved, any remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy.
The underwriting standards we employ to mitigate the risk for consumer loans
include a determination of the applicant’s payment history on other debts
and an assessment of the applicant’s ability to meet existing obligations
and payments on the proposed loan. The stability of the applicant’s monthly
income may be determined by verification of gross monthly income from primary
employment and from any verifiable secondary income. Although creditworthiness
of the applicant is of primary consideration, the underwriting process also
includes an analysis of the value of the security in relation to the proposed
loan amount.