Lending Activities
Credit Policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting
standards for all types of loans. Our lending staff follows pricing guidelines
established periodically by our management team. All loan approvals require two
signatures; no individual commercial loan authority is given to relationship managers.
Loans to $1,000,000 must be signed by the relationship manager and approved by
Credit Administration. Loans between $1,000,001 and $2,500,000 must be approved
by the Chief Credit Officer and Chief Lending Officer. Loans between $2,500,001
and $5,000,000 must be approved by the Credit and Risk Management Committee. Loans
between $5,000,001 and $6,500,000 must be approved by the Directors’ Loan
Committee with the prior approval of the Credit and Risk Management Committee.
Loans greater than $6,500,000 require full Board approval. Under the leadership
of our executive management team, we believe that we employ experienced lending
officers, secure appropriate collateral and carefully monitor the financial conditions
of our borrowers and the concentration of loans in our portfolio.
In addition to the normal repayment risks, all loans in the portfolio are subject
to the state of the economy and the related effects on the borrower and/or the
real estate market. Generally, longer-term loans have periodic interest rate adjustments
and/or call provisions. Senior management monitors the loan portfolio closely
to ensure that we minimize past due loans and that we swiftly deal with potential
problem loans.
The Bank also retains an outside, independent firm to review the loan portfolio.
This firm performs a detailed annual review. We use the results of the firm’s
report primarily to validate the risk ratings applied to loans in the portfolio
and identify any systemic weaknesses in underwriting, documentation or management
of the portfolio. Results of the annual review are presented to executive management,
the audit committee of the board and the full board of directors and are available
to and used by regulatory examiners when they review the Bank’s asset quality.
The Bank maintains the normal checks and balances on the loan portfolio not only
through the underwriting process but through the utilization of an internal credit
administration group that both assists in the underwriting and serves as an additional
reviewer of underwriting. The separately managed loan administration group also
has oversight for documentation, compliance and timeliness of collection activities.
Our outsourced internal audit firm also reviews documentation, compliance and
file management.
Commercial Lending
Our commercial lending consists of lines of credit, revolving credit facilities,
accounts receivable and inventory financing, term loans, equipment loans, small
business administration (SBA) loans, stand-by letters of credit and unsecured
loans. We originate commercial loans for any business purpose, including the
financing of leasehold improvements and equipment, the carrying of accounts
receivable, general working capital, contract administration and acquisition
activities. These loans typically have maturities of seven years or less. We
have a diverse client base and we do not have a concentration of these types
of loans in any specific industry segment. We generally secure commercial business
loans with accounts receivable and inventory, equipment, indemnity deeds of
trust and other collateral such as marketable securities, cash value of life
insurance, and time deposits at the Bank. Commercial business loans have a higher
degree of risk than residential mortgage loans because the availability of funds
for repayment generally depends on the success of the business. To help manage
this risk, we establish parameters/covenants at the inception of the loan to
provide early warning signals before payment default. We normally seek to obtain
appropriate collateral and personal guarantees from the borrower’s principal
owners. We are able, given our business model, to proactively monitor the financial
condition of the business.
Commercial Real Estate Lending
We finance commercial real estate for our clients, for both owner-occupied properties
and investor properties (including residential properties). We generally will
finance owner-occupied and investor commercial real estate at a maximum loan-to-value
ratio of 80%. Our underwriting policies and processes focus on the underlying
credit of the owner-occupied real estate and on the rental income stream (including
rent terms and strength of tenants) for investor commercial real estate as well
as an assessment of the underlying real estate. Risks inherent in managing a
commercial real estate portfolio relate to vacancy rates/absorption rates for
surrounding properties, sudden or gradual drops in property values as well as
changes in the economic climate. We attempt to mitigate these risks by carefully
underwriting loans of this type as well as by following appropriate loan-to-value
standards. We are cash flow lenders and never rely solely on property valuations
in reaching a lending decision. Personal guarantees are often required for commercial
real estate loans as they are for other commercial loans. Most of our real estate
loans carry fixed interest rates and amortize over 20 – 25 years with
five- to 10-year maturities. Properties securing our commercial real estate
loans primarily include office buildings, office condominiums, distribution
facilities, retail properties, manufacturing plants and apartment projects.
Substantially all of our commercial real estate loans are secured by properties
located in our primary market area.
Commercial real estate loans generally carry higher interest rates and have
shorter terms than one- to four-family residential mortgage loans. Commercial
real estate loans, however, entail significant additional risks as compared
with residential mortgage lending, as they typically involve larger loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the payment of loans secured by income producing properties typically depends
on the successful operation of the property, as repayment of the loan generally
is dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. Changes in economic conditions that are
not in the control of the borrower or lender could affect the value of the collateral
for the loan or the future cash flow of the property. Additionally, any decline
in real estate values may be more pronounced for commercial real estate than
residential properties.
Construction Lending
Construction lending can cover funding for land acquisition, land development
and/or construction of residential or commercial structures. Our construction
loans generally bear a variable rate of interest and have terms of one to two
years. Funds are advanced on a percentage-of-completion basis. These loans are
generally repaid at the end of the development or construction phase, although
loans for commercial construction will often convert into a permanent commercial
real estate loans at the end of the term of the loan. Loan to value parameters
range from 65% of the value of raw land to 75% for developed land and 80% for
commercial or multifamily construction and residential construction. These loan-to-value
ratios represent the upper limit of advance rates to remain in compliance with
Bank policy. Typically, loan-to-value ratios should be somewhat lower than these
upper limits, requiring the borrower to provide significant equity at the inception
of the loan. Our underwriting looks not only at the value of the property but
the expected cash flows to be generated by sale of the parcels or leasing of
the completed construction. The borrower must have solid experience in this
type of construction and personal guarantees are required.
Construction lending entails significant risks compared with residential mortgage
lending. These risks involve larger loan balances concentrated with single borrowers
with funds advanced upon the security of the land or the project under construction.
The value of the project is estimated prior to the completion of construction.
Thus, it is more difficult to evaluate accurately the total loan funds required
to complete a project and related loan-to-value ratios. If the estimate of construction
or development cost proves to be inaccurate, we may be required to advance additional
funds beyond the amount originally committed in order to protect the value of
the property. Moreover, if the estimated value of the completed project proves
to be inaccurate, the borrower may hold a property with a value that is insufficient
to assure full repayment. To mitigate these risks, in addition to the underwriting
considerations noted above, we maintain an in-house construction monitoring
unit that has oversight for the projects and we require both site visits and
frequent reporting before funds are advanced.
Residential Real Estate Lending
We originate a variety of consumer-oriented residential real estate loans. Residential
mortgage loans consist primarily of first mortgage loans to individuals, most
of which have a loan-to-value not exceeding 89.9%. The remainder of this portion
of our portfolio consists of home equity lines of credit and fixed rate home
equity loans. Our residential real estate loans are generally for owner-occupied
single family homes. These loans are generally for a primary residence although
we will occasionally originate loans for a second home where the borrower has
strong credit. Our residential real estate loans are generally either fixed
rate loans with thirty-year terms for conventional mortgages , ten-year terms
for jumbo mortgages or five-, seven-, and 10-year adjustable rate mortgages
with a 30-year amortization.
Our home equity loans and home equity lines of credit are primarily secured
by a second mortgage on owner-occupied one-to-four family residences. Our home
equity loans are originated at fixed or adjustable interest rates and with terms
of between five and 20-years and are fully amortizing. Our home equity lines
allow for the borrower to draw against the line for ten years, after which the
outstanding balance is amortized over twenty years. Home equity lines of credit
carry a variable rate of interest and are interest only during the draw period.
Home equity loans and lines of credit are generally underwritten with a maximum
combined loan-to-value ratio of 80% although in some instances the combined
loan-to-value ratio may reach 89.9%. We require appraisals or valuations on
all real estate loans – both commercial and residential. At the time we
close a home equity loan or line of credit, we record a mortgage to perfect
our security interest in the underlying collateral. Home equity loans and lines
of credit greater than $50,000 also require title insurance, and borrowers must
obtain hazard insurance, and flood insurance, if applicable.
Home equity loans and lines of credit generally have greater risk than one-to-four
family residential mortgage loans. In these cases, we face the risk that collateral
for a defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance. In particular, because home equity loans are secured
by second mortgages, decreases in real estate values could adversely affect
the value of the property serving as collateral for these loans. Thus, the recovery
of such property could be insufficient to compensate us for the value of these
loans.
Our home equity loan portfolio gives us a diverse client base. Most of these
loans are in our primary market area, and the diversity of the individual loans
in the portfolio reduces our potential risk.
Consumer Lending
We offer various types of secured and unsecured consumer loans. Generally, our
consumer loans are made for personal, family or household purposes as a convenience
to our customer base. As a general guideline, a consumer’s total debt
service should not exceed 43% of their gross income. The underwriting standards
for consumer loans include a determination of the applicant’s payment
history on other debts and an assessment of his or her ability to meet existing
obligations and payments on the proposed loan.
Consumer loans may present greater credit risk than residential real estate
loans because many consumer loans are unsecured or are secured by rapidly depreciating
assets. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage, loss or depreciation. Consumer loan collections
also depend on the borrower’s continuing financial stability. If a borrower
suffers personal financial difficulties, the loan may not be repaid. Also, various
federal and state laws, including bankruptcy and insolvency laws, may limit
the amount we can recover on such loans.
Loan Originations, Purchases, Sales, Participations and Servicing
All loans that we originate are underwritten pursuant to our policies and procedures,
which incorporate standard underwriting guidelines. We originate both fixed
and variable rate loans. Our loan origination activity may be adversely affected
by a rising interest rate environment that typically results in decreased loan
demand. We occasionally sell participations in commercial loans to correspondent
banks if the amount of the loan exceeds our internal limits. More rarely, we
purchase loan participations from correspondent banks in the local market as
well. Those loans are underwritten in-house with the same standards as loans
directly originated. Our residential real estate loans originated for resale
are discussed under “Mortgage Banking Activities” below.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory underwriting standards
and loan origination procedures established by our board of directors. The loan
approval process is intended to assess the borrower’s ability to repay
the loan, the viability of the loan, and the adequacy of the value of the collateral
that will secure the loan, if applicable. To assess a business borrower’s
ability to repay, we review and analyze, among other factors: current income,
credit history including the Bank’s prior experience with the borrower,
cash flow, any secondary sources of repayment, other debt obligations in regards
to the equity/net worth of the borrower and collateral available to the Bank
to secure the loan.
We require appraisals or valuations of all real property securing one-to-four
family residential and commercial real estate loans and home equity loans and
lines of credit. All appraisers are state licensed or state certified appraisers,
and a list of approved appraisers is maintained and updated on an annual basis.
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of consumer
and business deposit products that include demand, money market, and savings
accounts, as well as time deposits. We offer through key technology partnerships
a competitive array of commercial cash management products, which allow us to
attract demand deposits. We believe that we pay competitive rates on our interest-bearing
deposits. As a relationship oriented organization, we generally seek to obtain
deposit relationships with our loan clients.
We offer Certificate of Deposit Registry Service (“CDARS”) and Insured
Cash Sweep (“ICS”) deposits to our customers. These programs allow
customers to deposit more than would normally be covered by FDIC insurance.
CDARS and ICS are nationwide programs that allow participating banks to “swap”
customer deposits so that no customer has greater than the insurable maximum
in one bank, while allowing the customer the convenience of maintaining a relationship
with only one bank.
Mortgage Banking Activities
In addition to originating residential mortgages to hold in our portfolio, we
also originate residential mortgage loans for resale in the secondary mortgage
market through our mortgage division. These loans are also underwritten pursuant
to standard underwriting guidelines. While our intent is to sell all loans originated
as loans held for sale, we occasionally are unable to sell a loan due to some
underwriting defect. These loans are transferred to the loan portfolio at the
lower of their cost or fair value as of the date of transfer. Loans held for
sale are sold with servicing rights released; gains or losses are recorded at
the sale commitment date.
We originate residential mortgage loans primarily as a correspondent lender.
Because the loans are originated within investor guidelines and designated automated
underwriting and product specific requirements as part of the loan application,
sold loans have limited recourse provisions. Most contracts with investors contain
recourse periods. In general, we may be required to repurchase a previously
sold mortgage loan, return the service release premium and/or pay an administrative
fee if there is non-compliance with defined loan origination or documentation
standards. In addition, we may have an obligation to repurchase a loan if the
mortgagor has defaulted or paid the loan off early in the loan term. The potential
default repurchase period varies by investor but can be up to nine months after
sale of the loan to the investor.
We enter into commitments to originate residential mortgage loans whereby the
interest rate on the loan is determined prior to funding (i.e. IRLCs). Such
IRLCs on mortgage loans to be sold into the secondary market are considered
derivatives. To protect against the price risk inherent in residential mortgage
loan commitments, we utilizes "best efforts” forward sales contracts
in delivering loans to investors. Under a "best efforts" contract,
we commit to deliver an individual mortgage loan of a specified principal amount
and quality to an investor and the investor commits to the price representing
a premium on the day the borrower commits to an interest rate that it will pay
for the loan it purchases from the Company if the loan to the underlying borrower
closes. We protect ourselves from changes in interest rates through the use
of forward sales commitments. The market values of IRLCs and forward sales contracts
are not readily ascertainable because they are not actively traded. Because
of the high correlation between IRLCs and forward sales contracts, we are not
generally exposed to gains or losses on loans as a result of changes in interest
rates.