Commercial and Industrial Loans This portfolio consists of loans and lines
of credit to businesses for equipment purchases, working capital, debt refinancing
or restructuring, business acquisition or expansion, Small Business Administration
(“SBA”) loans, and domestic standby letters of credit. Typically,
commercial and industrial loans are secured by general business security agreements
and personal guarantees. The Company offers variable, adjustable, and fixed-rate
commercial and industrial loans. The Company also has commercial and industrial
loans that have an initial period where interest rates are fixed, generally
for one to five years, and thereafter are adjustable based on various market
indices. Fixed-rate loans are priced at either a margin over various market
indices with maturities that correspond to the maturities of the notes or to
match competitive conditions and yield requirements. Term loans are generally
amortized over a three to seven year period. Commercial lines of credit generally
have a term of one year and are subject to annual renewal thereafter. The Company
performs an annual credit review of all commercial and industrial borrowers
having an exposure to the Company of $500,000 or more.
Multi-family and Commercial Real Estate Loans The Company’s multi-family
and commercial real estate loan portfolios consist of fixed-rate and adjustable-rate
loans originated at prevailing market rates usually tied to various market indices.
This portfolio generally consists of loans secured by apartment buildings, office
buildings, retail centers, warehouses, and industrial buildings. Loans in this
portfolio may be secured by either owner or non-owner occupied properties. Loans
in this portfolio typically do not exceed 80% of the lesser of the purchase
price or an independent appraisal by an appraiser designated by the Company.
Loans originated with balloon maturities are generally amortized on a 25 to
30 year basis with a typical balloon term of 3 to 5 years. However, if a multi-family
or commercial real estate borrower desires a fixed-rate loan with a balloon
maturity beyond five years, the Company generally requires the borrower to commit
to an adjustable-rate loan that is converted back into a fixed-rate exposure
through an interest rate swap agreement between the Company and the borrower.
Construction and Development Loans Construction and development loans typically
have terms of 18 to 24 months, are interest-only, and carry variable interest
rates tied to a market index. Disbursements on these loans are based on draw
requests supported by appropriate lien waivers. Construction loans typically
convert to permanent loans at the completion of a project, but may or may not
remain in the Company’s loan portfolio depending on the competitive environment
for permanent financing at the end of the construction term. Development loans
are typically repaid as the underlying lots or housing units are sold. Construction
and development loans are generally considered to involve a higher degree of
risk than mortgage loans on completed properties. The Company's risk of loss
on a construction and development loan is dependent largely upon the accuracy
of the initial estimate of the property's value at completion of construction,
the estimated cost of construction, the appropriate application of loan proceeds
to the work performed, the borrower's ability to advance additional construction
funds if necessary, and the stabilization period for lease-up after the completion
of construction. In addition, in the event a borrower defaults on the loan during
its construction phase, the construction project often needs to be completed
before the full value of the collateral can be realized by the Company. The
Company performs an annual credit review of its construction and development
loans over $500,000.
Residential Mortgage Loans The Company originates primarily conventional fixed-rate
residential mortgage loans and adjustable-rate residential mortgage (“ARM”)
loans with maturity dates up to 30 years. Such loans generally are underwritten
to the Federal National Mortgage Association (“Fannie Mae”) and
other regulatory standards, including those specified in the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
In general, ARM loans are retained by the Company in its loan portfolio. Conventional
fixed-rate residential mortgage loans are generally sold in the secondary market
without recourse, although the Company typically retains the servicing rights
to such loans. When the Company sells residential mortgage loans in the secondary
market, it makes representations and warranties to the purchasers about various
characteristics of each loan, including the underwriting standards applied and
the documentation being provided. Failure of the Company to comply with the
requirements established by the purchaser of the loan may result in the Company
being required to repurchase the loan. There have not been any material instances
where the Company has been required to repurchase loans.
Home Equity Loans Home equity loans are typically secured by junior liens on
owner-occupied one- to four-family residences, but in many instances are secured
by first liens on such properties. Underwriting procedures for the home equity
and home equity lines of credit loans include a comprehensive review of the
loan application, an acceptable credit score, verification of the value of the
equity in the home, and verification of the borrower’s income.
The Company originates fixed-rate home equity term loans with loan-to-value
ratios of up to 89.99% (when combined with any other mortgage on the property).
Pricing on fixed-rate home equity term loans is periodically reviewed by management.
Generally, loan terms are in the three to fifteen year range in order to minimize
interest rate risk.
The Company also originates home equity lines of credit. Home equity lines of
credit are variable-rate loans secured by first liens or junior liens on owner-occupied
one- to four-family residences. Current interest rates on home equity lines
of credit are tied to an index rate, adjust monthly after an initial interest
rate lock period, and generally have floors that vary depending on the loan-to-value
ratio. Home equity line of credit loans are made for terms up to 10 years and
require minimum monthly payments.
Other Consumer Loans Other consumer loans generally have shorter terms and higher
rates of interest than conventional mortgage loans, but typically involve more
credit risk because of the nature of the collateral and, in some instances,
the absence of collateral. In general, other consumer loans are more dependent
upon the borrower's continuing financial stability, more likely to be affected
by adverse personal circumstances, and often secured by rapidly depreciating
personal property. In addition, various laws, including bankruptcy and insolvency
laws, may limit the amount that may be recovered from a borrower. The Company
believes that the higher yields earned on other consumer loans compensate for
the increased risk associated with such loans and that consumer loans are important
to the Company’s efforts to increase the interest rate sensitivity and
shorten the average maturity of its loan portfolio.