Commercial Real Estate Loans are generally originated in amounts up to 80% of
the appraised value of the mortgaged property. The majority of the Bank’s
commercial real estate loans have been originated with adjustable rates of interest,
the majority of which are quoted at a spread to the Wall Street Prime rate for
the initial fixed rate period with subsequent adjustments at a spread to the
Wall Street Prime rate. The Bank's commercial real estate loans are generally
permanent loans secured by improved property such as office buildings, retail
stores, small shopping centers, medical offices, motels, churches and other
non-residential buildings.
To originate commercial real estate loans, the Bank generally requires a mortgage
and security interest in the subject real estate, personal guarantees of the
principals, a security interest in the related personal property, and a standby
assignment of rents and leases. Because of the small number of commercial real
estate loans and the relationship of each borrower to the Bank, each such loan
has differing terms and conditions applicable to the particular borrower.
Loans secured by commercial real estate are generally larger and involve a greater
degree of risk than residential mortgage loans. Because payments on loans secured
by commercial real estate are often dependent on successful operation or management
of the properties, repayment of such loans may be subject, to a greater extent,
to adverse conditions in the real estate market or the economy. The Bank seeks
to minimize these risks by careful underwriting, requiring personal guarantees,
lending only to established customers and borrowers otherwise known by the Bank,
and generally restricting such loans to its primary Market Area.
The Bank utilizes its knowledge of the local market conditions and appraisals
to evaluate the development cost and estimate projected lot prices and absorption
rates to assess loans on residential subdivisions. The Bank typically loans
up to 75% of the appraised value over terms up to two years. Development loans
generally involve a greater degree of risk than residential mortgage loans because
(1) the funds are advanced upon the security of the land which has a materially
lower value prior to completion of the infrastructure required of a subdivision,
(2) the cash flow available for debt repayment is a function of the sale of
the individual lots, and (3) the amount of interest required to service the
debt is a function of the time required to complete the development and sell
the lots.
Commercial Business Loans. As of December 31, 2015, the Bank had commercial
business loans totaling $81.0 million or 16% of the Bank's total loan portfolio.
Commercial business loans are generally secured by business assets, such as
accounts receivable, equipment and inventory. Unlike residential mortgage loans,
which generally are made on the basis of the borrower's ability to make repayment
from his or her employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
are of higher risk and typically are made on the basis of the borrower's ability
to make repayment from the cash flow of the borrower's business. As a result,
the availability of funds for the repayment of commercial business loans may
be substantially dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. The
Bank expects to continue to expand its commercial business lending as opportunities
present themselves.
One- to Four-Family Mortgage Loans. The Bank offers fixed- and adjustable-rate
(“ARM”) first mortgage loans secured by one- to four-family residences
in the Bank's primary lending area. Typically, such residences are single family
homes that serve as the primary residence of the owner. However, there are a
number of loans originated by the Bank which are secured by non-owner occupied
properties. Loan originations are generally obtained from existing or past customers,
members of the local community, attorney referrals, established builders and
realtors within our Market Area. Originated mortgage loans in the Bank's portfolio
include due-on-sale clauses which provide the Bank with the contractual right
to deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Bank's consent.
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage loans
in its primary lending area. With regard to multi-family mortgage loans, the
Bank generally requires personal guarantees of the principals as well as a security
interest in the real estate. Multi-family mortgage loans are generally originated
in amounts of up to 80% of the appraised value of the property. A portion of
the Bank’s multi-family mortgage loans have been originated with adjustable
rates of interest which are quoted at a spread to the FHLB advance rate for
the initial fixed rate period with subsequent adjustments based on the Wall
Street prime rate.
Construction loans originated by the Bank are generally secured by permanent
mortgage loans for the construction of owner-occupied residential real estate
or to finance speculative construction secured by residential real estate or
owner-operated commercial real estate. This portion of the Bank’s loan
portfolio consists of speculative loans, i.e., loans to builders who are speculating
that they will be able to locate a purchaser for the underlying property prior
to or shortly after the time construction has been completed.
Construction loans are made to contractors who have sufficient financial strength
and a proven track record, for the purpose of resale, as well as on a "pre-sold"
basis. Construction loans made for the purpose of resale generally provide for
interest only payments at floating rates and have terms of six months to fifteen
months. Construction loans for speculative purposes, models, and commercial
properties typically have loan to value ratios of up to 80%. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction lending by its nature entails significant additional risks as compared
with one-to four-family mortgage lending, attributable primarily to the fact
that funds are advanced upon the security of the project under construction
prior to its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of
the ultimate project and the ability of the borrower or guarantor to repay the
loan. Because of these factors, the analysis of the prospective construction
loan projects requires an expertise that is different in significant respects
from that which is required for residential mortgage lending. The Bank attempts
to address these risks through its underwriting and construction monitoring
procedures.