Single-Family Residential Real Estate Lending. The Bank is an originator of
single-family, residential real estate loans in its market area. The Bank originates
fixed-rate and adjustable-rate mortgage loans at competitive interest rates.
Generally, the Bank retains fixed-rate mortgages with maturities of less than
10 years, while fixed-rate loans with longer maturities may be retained in the
portfolio or sold in the secondary market. The Bank also originates conventional
mortgage loans in its market area, which are underwritten, closed and sold servicing-retained
in the secondary market. The Bank also originates government mortgage loans
which are underwritten, closed and sold servicing-released to an outside investor.
Construction Lending. The Bank also offers residential and commercial construction
loans, with a substantial portion of such loans originated to date being for
the construction of single-family dwellings in the Bank’s primary market
area. Residential construction loans are offered primarily to individuals building
their primary, investment or secondary residence, as well as to selected local
builders to build single-family dwellings. Generally, loans to owner/occupants
for the construction of their own single-family residential properties are originated
in connection with the permanent loan on the property and have a construction
term of 6 to 18 months. Such loans are offered on a fixed-rate or adjustable-rate
basis. Generally, interest rates on residential construction loans made to the
owner/occupant have interest rates during the construction period above the
rate offered by the Bank on the permanent loan product selected by the borrower.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans, generally limiting them to loans secured by properties in its primary
market area and to borrowers with whom it has other loan relationships. The
Bank’s commercial real estate loan portfolio includes loans to finance
the acquisition of small office buildings and commercial and industrial buildings
with a preference to owner occupied properties. Commercial real estate loans
are originated for three to ten year terms with interest rates that adjust based
on either the prime rate as quoted in The Wall Street Journal, plus a negotiated
margin of between 0.0% and 2.0% for shorter term loans, or on a fixed-rate basis
with interest calculated on a 15 to 20 year amortization schedule, generally
with a balloon payment due after three to ten years.
Commercial and Industrial Business Lending. The Bank originates commercial
and industrial business loans to small and medium sized businesses in its market
area. The Bank’s commercial borrowers are generally small businesses engaged
in manufacturing, distribution, retailing, service companies, or professionals
in healthcare, engineering, architecture, accounting and law. Commercial and
industrial business loans are generally made to finance the purchase of inventory,
new or used equipment or commercial vehicles, to support trading assets and
for short-term working capital. Such loans generally are secured by equipment
and inventory, and when appropriate, cross-collateralized by a real estate mortgage,
although commercial and industrial business loans are sometimes granted on an
unsecured basis. Such loans generally are made for terms of five years or less,
depending on the purpose of the loan and the collateral, with loans to finance
operating expenses made for one year or less, with interest rates that typically
either adjust daily at a rate equal to the prime rate as stated in The Wall
Street Journal, plus a margin of between 0.0% and 2.5% or at a negotiated fixed
rate.
Consumer lending allows the Bank to earn yields higher than those on single-family
residential lending. However, consumer loans have greater risks than residential
mortgage loans, particularly in the case of unsecured loans or loans secured
by rapidly depreciable assets such as automobiles. Repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. The remaining deficiency oftentimes does not warrant further
collection efforts against the borrower. In addition, consumer loan collections
are dependent on the borrower’s continuing financial stability, and are
more likely to be adversely affected by events such as job loss, divorce, illness
or personal bankruptcy. Further, the application of various state and federal
laws, including federal and state bankruptcy and insolvency law, may limit the
amount which may be recovered. In underwriting consumer loans, the Bank considers
the borrower’s credit history, an analysis of their income and ability
to repay the loan, and the value of the collateral.