One- to Four-Family Real Estate Portfolio Lending
Generally, one- to four-family residential loans are underwritten based on
the applicant’s employment, income, credit history and the appraised value
of the subject property. The Bank underwrites all loans on a fully indexed,
fully amortizing basis. The Bank will generally lend up to 80% of the lesser
of the appraised value or purchase price for one- to four-family residential
loans. Should a loan be granted with a loan-to-value ratio in excess of 80%,
private mortgage insurance would be required to reduce overall exposure to below
80%. Such collateral requirements are intended to protect the Bank from loss
in the event of foreclosure.
Properties securing one- to four-family residential mortgage loans are generally
appraised by independent fee appraisers. Borrowers are required to obtain title
and hazard insurance, and flood insurance, if necessary, in an amount not less
than the value of the property improvements. Management’s pricing strategy
for one- to four-family mortgage loans includes setting interest rates that
are competitive with other local financial institutions and consistent with
the Bank’s internal needs. Adjustable-rate loans are tied to a variety
of indices, including rates based on U.S. Treasury securities. The majority
of adjustable-rate loans carry an initial fixed rate of interest for either
three or seven years, which then converts to an interest rate that is adjusted
based upon the applicable index and in accordance with the promissory note.
As of December 31, 2015, the total amount of one- to four-family residential
mortgage loans allowing for interest only payments totaled $7.0 million, or
2.5% of the total one- to four-family mortgage loan portfolio, and 1.2% of the
total portfolio loans. We do not currently originate or purchase interest-only
one- to four-family residential mortgage loans and discontinued such activity
in December 2007.
The Bank’s home mortgages are structured with a five to 30-year maturity,
with amortizations up to 30 years. The majority of the one- to four-family mortgage
loans originated are secured by properties located in Northeast Florida, Central
Florida and Southeast Georgia. During 2008 and continuing throughout 2015, the
Bank implemented stricter underwriting guidelines related to the origination
of one- to four-family residential mortgage loans secured by investment property.
All of the residential real estate loans contain a “due on sale”
clause allowing the Bank to declare the unpaid principal balance due and payable
upon the sale of the security property, subject to certain laws. Loans originated
or purchased are generally underwritten and documented pursuant to Freddie Mac
or Fannie Mae guidelines.
The Bank also originates investor loans for one- to four-family properties,
and the majority of our lending activity has focused on owner-occupied property.
We have not in the past, nor do we currently, originate sub-prime loans, option-ARM
loans, non-QM loans, or other similar loans.
Multi-Family Loans
The majority of the loans are to borrowers who are experienced, in-market
real estate investors, and are secured by properties located in New York, New
York and Philadelphia, Pennsylvania. The majority of the loans were purchased
in two separate transactions during 2015. The underwriting for multi-family
residential loans is based on the cash flow of the property and includes underwriting
stresses for interest rate increases and a rise in cap rates. Multi-family residential
loans are generally originated with adjustable interest rates based on the prime
rate or U.S. Treasury securities. Loan-to-value ratios on multi-family residential
loans do not exceed 75% of the appraised value of the property securing the
loan. The net operating income must be sufficient to cover the payments related
to the outstanding debt. Rent or lease assignments are required in order for
us to be assured the cash flow from the project will be used to repay the debt.
Appraisals on properties securing multi-family residential loans are performed
by independent, state-licensed fee appraisers.
Payments on loans secured by multi-family real estate properties are often dependent
on the successful operation or management of the properties and, as such, repayment
of these loans may be subject to adverse conditions in the real estate market
or the economy. If the cash flow from the project is reduced, or if leases are
not obtained or renewed, the borrower’s ability to repay the loan may
be impaired.
Commercial Real Estate Lending
The Bank offers commercial real estate loans for both permanent financing and
construction. Our current strategy has been to focus primarily on permanent
financing for owner occupied businesses and income producing properties. These
loans are typically secured by small retail establishments, office buildings,
or other income producing properties located in the Bank’s primary market
areas.
The Bank originates both fixed-rate and adjustable-rate commercial real estate
loans. The interest rate on adjustable-rate loans is tied to a variety of indices,
including rates based on the prime rate and U.S. Treasury securities. The majority
of the Bank’s adjustable-rate loans carry an initial fixed-rate of interest,
for either five, seven or ten years, and then convert to an interest rate that
is adjusted based upon the current index rate for another period up to ten years.
Loan-to-value ratios on commercial real estate loans generally do not exceed
80% of the appraised value of the property securing the loan. These loans require
monthly payments, amortize up to 25 years, and generally have maturities of
up to 10 years and may carry pre-payment penalties.
Loans secured by commercial real estate are underwritten based on the cash flow
of the borrower or income producing potential of the property and the financial
strength of the borrower and guarantors. Loan guarantees are generally obtained
from financially capable parties based on a review of personal financial statements.
The Bank generally requires commercial real estate borrowers with aggregate
balances in excess of $500,000 to submit financial statements, including rent
rolls if applicable, annually. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must
be sufficient to cover the payments related to the outstanding debt. The Bank
generally requires an income-to-debt service ratio of 1.2 times debt. Additionally,
the Bank considers interest and cap rate stresses to account for the potential
of rising interest rates and the effect on the borrower’s ability to repay
and valuation of the collateral. Rent or lease assignments are required in order
for us to be assured the cash flow from the project will be used to repay the
debt. Appraisals on properties securing commercial real estate loans are performed
by independent, state-licensed fee appraisers approved by the Bank’s Board
of Directors. The majority of the properties securing commercial real estate
loans are located in the Bank’s market areas.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation and management of
the owner’s business or successful management of the property, repayment
of such loans may be subject to adverse conditions in the real estate market
or the economy. If the cash flow from the project is reduced, or if leases are
not obtained or renewed, the borrower’s ability to repay the loan may
be impaired.
Land Loans
In an effort to prevent potential exposure to additional credit risk, the Bank
no longer originates new land loans unless the borrower is acquiring the land
as part of the development of a property for individual residential or commercial
use. Generally, these loans carry a higher rate of interest than permanent residential
loans. The Bank generally assesses the borrower’s ability to repay, credit
history, appraised value of the subject property, and the intended end use of
the property to underwrite land loans.
Loans secured by land generally involve a greater degree of credit risk than
one- to four-family residential mortgage loans.
Real Estate Construction Lending
Residential construction loans are generally made for the construction of homes
to individual borrowers. Generally, construction loans are limited to a loan
to value ratio not to exceed 80% based on the lesser of construction costs or
the appraised value of the property upon completion. The Bank originates only
residential construction loans to individual borrowers whose intent is to occupy
the house upon completion.
Commercial construction loans are generally made for the construction of commercial,
owner-occupied properties and investment income producing properties with credit
tenant leases in place at closing with rents commencing upon completion of construction.
These loans are limited to a loan to value not to exceed 80% based on the lesser
of construction costs or the appraised value of the property upon completion,
and are underwritten based on the owner’s anticipated cash flow or the
lease income from tenants.
Home-Equity Lending
The Bank generally originates fixed-term, fully amortizing home equity loans
and home equity lines of credit. Due to the decline of both real estate values
in our market areas and the increased risk inherent with second lien real estate
financing, the Bank ceased originating home equity lines of credit in January
2009, but began originating home equity lines of credit again in 2014 under
stricter credit criteria. The Bank generally underwrites one- to four-family
home equity loans and lines of credit based on the applicant’s employment
and credit history and the appraised value of the subject property. Presently,
the Bank will lend up to 80% of the appraised value less any prior liens. In
limited circumstances, the Bank may lend up to 90% of the appraised value less
any prior liens. This ratio may be reduced in accordance with internal guidelines
given the risk and credit profile of the borrower. Properties securing one-
to four-family mortgage loans are generally appraised by independent fee appraisers.
The Bank requires a title search and hazard insurance, and flood insurance,
if necessary, in an amount not less than the value of the property improvements.
Currently, home equity loans are retained in our loan portfolio.
Consumer Loans
Consumer loans, except for those secured by manufactured homes, have shorter
terms to maturity and are principally fixed rate, thereby reducing exposure
to changes in interest rates, and carry higher rates of interest than one- to
four-family residential mortgage loans. Consumer loans have an inherently greater
risk of loss because they are predominantly secured by rapidly depreciable assets,
such as automobiles or manufactured homes. In these cases, repossessed collateral
for a defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance. As a result, 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.
Real Estate Construction Lending
Residential construction loans are generally made for the construction of homes
to individual borrowers. Generally, construction loans are limited to a loan
to value ratio not to exceed 80% based on the lesser of construction costs or
the appraised value of the property upon completion. The Bank originates only
residential construction loans to individual borrowers whose intent is to occupy
the house upon completion.
Commercial construction loans are generally made for the construction of commercial,
owner-occupied properties and investment income producing properties with credit
tenant leases in place at closing with rents commencing upon completion of construction.
These loans are limited to a loan to value not to exceed 80% based on the lesser
of construction costs or the appraised value of the property upon completion,
and are underwritten based on the owner’s anticipated cash flow or the
lease income from tenants.
Home-Equity Lending
The Bank generally originates fixed-term, fully amortizing home equity loans
and home equity lines of credit. The Bank generally underwrites one- to four-family
home equity loans and lines of credit based on the applicant’s employment
and credit history and the appraised value of the subject property. Presently,
the Bank will lend up to 80% of the appraised value less any prior liens. In
limited circumstances, the Bank may lend up to 90% of the appraised value less
any prior liens. This ratio may be reduced in accordance with internal guidelines
given the risk and credit profile of the borrower. Properties securing one-
to four-family mortgage loans are generally appraised by independent fee appraisers.
The Bank requires a title search and hazard insurance, and flood insurance,
if necessary, in an amount not less than the value of the property improvements.
Currently, home equity loans are retained in our loan portfolio.