One- to Four-Family Residential Real Estate Loans. The Bank currently originates
both fixed rate and adjustable rate one- to four-family residential mortgage
loans to be sold into the secondary market. Loans originated to be held in the
Bank’s loan portfolio are typically originated as fixed or adjustable
rate simple interest loans with a maturity of up to fifteen years and an amortization
period generally not more than fifteen years. The Bank's residential loans typically
include "due on sale" clauses.
These ARMs provide for an interest rate that adjusts periodically in accordance
with a designated index plus a margin. The Bank's adjustable rate loans are
assumable (generally without release of the initial borrower), do not contain
prepayment penalties and do not provide for negative amortization and typically
contain "due on sale" clauses. Adjustable rate loans decrease the
risks associated with changes in interest rates but involve other risks, primarily
because as interest rates rise, the payment by the borrower rises to the extent
permitted by the terms of the loan, thereby increasing the potential for default.
At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates.
The Bank’s residential mortgage loans generally do not exceed 80% of the
lesser of purchase price or appraised value of the collateral. However, pursuant
to the underwriting guidelines adopted by the Board of Directors, the Bank may
lend up to 100% of the value of the property securing a one- to four-family
residential loan with private mortgage insurance or other similar protection
to support the portion of the loan that exceeds 80% of the value. The Bank may,
on occasion, extend a loan up to 90% of the value of the secured property without
private mortgage insurance coverage. However, these exceptions are minimal and
are only approved on loans with exceptional credit scores, sizeable asset reserves,
or other compensating factors.
The Bank’s home equity and second mortgage loans are fixed rate loans
with fully amortized terms of up to fifteen years, variable rate interest only
loans with terms up to three years, or home equity lines of credit. The variable
rate loans are typically tied to the Wall Street Journal Prime Rate (“Prime
Rate”), plus a margin commensurate with the risk as determined by the
borrower’s credit score. Home equity lines of credit are typically either
fixed rate for a term of no longer than one year or variable rate with terms
up to five years. The Bank generally limits the total loan-to-value on these
mortgages to 85% of the value of the secured property if the Bank holds the
first mortgage and 80% if the first mortgage is held by another party.
Multifamily Residential Real Estate Loans.
The Bank has originated both fixed rate and adjustable rate multifamily loans.
Fixed rate loans are generally originated with amortization periods not to exceed
25 years, and typically have balloon periods no longer than ten years. Adjustable
rate loans are typically amortized over terms up to 25 years, with interest
rate adjustments periodically. The Bank’s loan policy limits loan-to-value
percentages on multifamily real estate loans to 80%. It is also the Bank's general
policy to obtain loan guarantees on its multifamily residential real estate
loans from the principals of the borrower, however, the Bank may waive this
requirement in certain circumstances.
The success of such projects is sensitive to changes in supply and demand conditions
in the market for multifamily real estate as well as regional and economic conditions
generally.
Nonfarm Nonresidential Loans.
Many of the Bank’s nonfarm nonresidential loans are collateralized by
properties such as office buildings, strip and small shopping centers, churches,
convenience stores and mini-storage facilities. Loans to borrowers that are
corporations, limited liability companies or other such legal entities are also
typically personally guaranteed by the principals of the borrowing entity. The
financial strength of the guarantors of the loan is also a primary underwriting
factor.
Regulatory guidelines and the Bank’s policies require that properties
securing nonfarm nonresidential loans over $250,000 be appraised by licensed
real estate appraisers pursuant to state licensing requirements and federal
regulations. The Bank underwrites nonfarm nonresidential loans specifically
in relation to the type of property being collateralized. Primary underwriting
considerations for these loans include the creditworthiness of the borrower,
the quality and location of the real estate, the sustainable cash flows of the
project, projected occupancy rates, the quality of management involved with
the project and the financial strength of the guarantor, if applicable. As part
of the underwriting of these loans, the Bank prepares a cash flow analysis that
includes a vacancy rate projection, expenses for taxes, insurance, maintenance
and repair reserves as well as debt coverage ratios. The Bank’s nonfarm
nonresidential loans are generally originated with amortization periods not
to exceed 25 years and are structured with three to ten year balloon terms.
The Bank attempts to keep maturities of these loans as short as possible in
order to enable the Bank to better manage its interest rate risk profile.
Nonfarm nonresidential lending entails additional risks as compared to the Bank’s
one- to four-family residential property loans. The repayment on such loans
is typically dependent on the successful operation of the real estate project,
which is sensitive to changes in supply and demand conditions in the market
for commercial real estate, and on regional and economic conditions.
Farmland Loans. The types of credits in this category include loans secured
by real estate employed for row crop and livestock production, pasture and grazing,
forestry and timber purposes and other similar uses. The terms for these loans
are generally five years or less with fixed or floating rates of interest and
amortization periods typically not to exceed ten years. The underwriting of
these loans is based primarily on the cash flow generated by the intended productive
use of the property and the financial strength of the borrowing entity and the
guarantors of the loan, if any.
The risks associated with these loans tend to be directly related to the economics
of the underlying property use. There are certain macro-level factors, including
environmental and weather patterns, national and global supply and demand for
the product and the national political environment, that affect the strength
of the agricultural, livestock and timber sectors. The experience and success
of the borrower in the market segment, the Bank’s history with the borrower
and the financial strength of any guarantors are all considered when extending
loans in this category. Advance rates on these types of loans generally do not
exceed 75% of the value of the real estate.
Construction and Land Development Loans.
The Bank’s residential and commercial construction loans generally have
fixed interest rates or variable rates that float with the Prime Rate and have
typically been issued for terms of twelve to twenty-four months. However, the
Bank has originated construction loans with longer terms, although this practice
has generally been limited to larger projects that could not be completed in
the typical twelve to twenty-four month period. Construction loans are typically
made with a maximum loan-to-value percentage of 80% of the appraised value of
the proposed project.
Commercial Loans. This portfolio includes loans with funds used for commercial
purposes including loans to finance working capital needs, including agricultural;
purchase equipment; support accounts receivable and inventory and other similar
business needs.
Primary underwriting considerations for these loans include a review of the
historical and prospective cash flows of the borrower and the sustainability
of these cash flows, the expected long term viability of the business, the quality
and marketability of the collateral (if any) and the financial support offered
by any guarantors to the transaction. The Bank's commercial loans are originated
with fixed and variable interest rates and maturities between one and five years.
These loans are typically based on a maximum fifteen year amortization schedule.
Consumer Loans. The Bank's vehicle loans are typically originated for the purchase
of new and used cars and trucks. Such loans are generally originated with a
maximum term of six years. The Bank may offer extended terms on automobile loans
to some customers based upon their creditworthiness.
Other consumer loans consist primarily of deposit account loans and unsecured
loans. Loans secured by deposit accounts are generally originated for up to
95% of the deposit account balance, with a hold placed on the account restricting
the withdrawal of the deposit account balance.