Residential Real Estate Loans
The residential real estate category contains loans principally to consumers
secured by residential real estate. The Company's residential real estate lending
policy requires each loan to have viable repayment sources. Residential real
estate loans are evaluated for the adequacy of these repayment sources at the
time of approval, based upon measures including credit scores, debt-to-income
ratios, and collateral values. Credit risk for residential real estate loans
arises from borrowers lacking the ability or willingness to repay the loan or
by a shortfall in the value of the residential real estate in relation to the
outstanding loan balance in the event of a default and subsequent liquidation
of the real estate collateral. The residential real estate portfolio includes
both conforming and non-conforming mortgage loans.
Conforming mortgage loans represent loans originated in accordance with underwriting
standards set forth by the government-sponsored entities (“GSEs”),
including the Federal National Mortgage Association (“Fannie Mae”),
the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and
the Government National Mortgage Association (“Ginnie Mae”), which
serve as the primary purchasers of loans sold in the secondary mortgage market
by mortgage lenders. These loans are generally collateralized by one-to-four-family
residential real estate, have loan-to-collateral value ratios of 80% or less
or have mortgage insurance to insure down to 80%, and are made to borrowers
in good credit standing. Substantially all fixed-rate conforming loans originated
are sold in the secondary mortgage market. For any loans retained by the Company,
title insurance insuring the priority of its mortgage lien, as well as fire
and extended coverage casualty insurance protecting the properties securing
the loans is required. Borrowers may be required to advance funds, with each
monthly payment of principal and interest, to a loan escrow account from which
the Company makes disbursements for items such as real estate taxes and mortgage
insurance premiums. Appraisers approved by the Company appraise the properties
securing substantially all of the Company's residential mortgage loans.
Non-conforming mortgage loans represent loans that generally are not saleable
in the secondary market to the GSEs for inclusion in conventional mortgage-backed
securities due to the credit characteristics of the borrower, the underlying
documentation, the loan-to-value ratio, or the size of the loan, among other
factors. The Company originates non-conforming loans for its own portfolio and
for sale to third-party investors, usually large mortgage companies, under commitments
by the mortgage company to purchase the loans subject to compliance with pre-established
investor criteria. Non-conforming loans generated for sale include loans that
may not be underwritten using customary underwriting standards. These loans
typically are held after funding for thirty days or less, and are included in
residential mortgages held for sale. The Company's current practice is to sell
both conforming and non-conforming loans on a servicing released basis.
The Company makes residential real estate development and construction loans
generally to provide interim financing on property during the development and
construction period. Borrowers include builders, developers and persons who
will ultimately occupy the single-family dwelling. Residential real estate development
and construction loan funds are disbursed periodically as pre-specified stages
of completion are attained based upon site inspections. Interest rates on these
loans are usually adjustable. Loans to individuals for the construction of primary
personal residences are typically secured by the property under construction,
frequently include additional collateral (such as a second mortgage on the borrower's
present home), and commonly have maturities of twelve to eighteen months. The
Company attempts to obtain the permanent mortgage loan under terms, conditions
and documentation standards that permit the sale of the mortgage loan in the
secondary mortgage loan market.
Commercial Loans and Leases
Included in this category are commercial real estate loans, commercial construction
loans, leases and other commercial loans. Over the years, the Company’s
commercial loan clients have come to represent a diverse cross-section of small
to mid-size local businesses within our market footprint, whose owners and employees
are often established Bank customers. Such banking relationships are a natural
business for the Company, with its long-standing community roots and extensive
experience in serving and lending to this market segment.
Commercial loans are evaluated for the adequacy of repayment sources at the
time of approval and are regularly reviewed for any possible deterioration in
the ability of the borrower to repay the loan. Collateral generally is required
to provide the Company with an additional source of repayment in the event of
default by a commercial borrower. The structure of the collateral package, including
the type and amount of the collateral, varies from loan to loan depending on
the financial strength of the borrower, the amount and terms of the loan, and
the collateral available to be pledged by the borrower, but generally may include
real estate, accounts receivable, inventory, equipment or other assets. Loans
also may be supported by personal guarantees from the principals of the commercial
loan borrowers. The financial condition and cash flow of commercial borrowers
are closely monitored by the submission of corporate financial statements, personal
financial statements and income tax returns. The frequency of submissions of
required information depends upon the size and complexity of the credit and
the collateral that secures the loan. Credit risk for commercial loans arises
from borrowers lacking the ability or willingness to repay the loan, and in
the case of secured loans, by a shortfall in the collateral value in relation
to the outstanding loan balance in the event of a default and subsequent liquidation
of collateral. The Company has no commercial loans to borrowers in similar industries
that exceed 10% of total loans.
Included in commercial loans are credits directly originated by the Company
and, to a lesser extent, syndicated transactions or loan participations that
are originated by other lenders. The Company's commercial lending policy requires
each loan, regardless of whether it is directly originated or is purchased,
to have viable repayment sources. The risks associated with syndicated loans
or purchased participations are similar to those of directly originated commercial
loans, although additional risk may arise from the limited ability to control
actions of the primary lender. Shared National Credits (SNC), as defined by
the banking regulatory agencies, represent syndicated lending arrangements with
three or more participating financial institutions and credit exceeding $20.0
million in the aggregate.
Consumer Loans
Consumer lending continues to be important to the Company’s full-service,
community banking business. This category of loans includes primarily home equity
loans and lines, installment loans and personal lines of credit.
The home equity category consists mainly of revolving lines of credit to consumers
that are secured by residential real estate. Home equity lines of credit and
other home equity loans are originated by the Company for typically up to 90%
of the appraised value, less the amount of any existing prior liens on the property.
While home equity loans have maximum terms of up to twenty years and interest
rates are generally fixed, home equity lines of credit have maximum terms of
up to ten years for draws and thirty years for repayment, and interest rates
are generally adjustable. The Company secures these loans with mortgages on
the homes (typically a second mortgage). Purchase money second mortgage loans
originated by the Company have maximum terms ranging from ten to thirty years.
These loans generally carry a fixed rate of interest for the entire term or
a fixed rate of interest for the first five years, re-pricing every five years
thereafter at a predetermined spread to the prime rate of interest. Home equity
lines are generally governed by the same lending policies and subject to credit
risk as described for residential real estate loans.