One- to Four-Family Residential Loans. Our origination of residential mortgage
loans enables borrowers to purchase or refinance existing homes located in Clark,
Floyd, Harrison, Crawford and Washington Counties, Indiana, and the surrounding
areas. A significant portion of the residential mortgage loans that we had originated
before 2005 are secured by non-owner occupied properties. Loans secured by non-owner
occupied properties generally carry a greater risk of loss than loans secured
by owner-occupied properties, and our non-performing loan balances have increased
in recent periods primarily because of delinquencies in our non-owner occupied
residential loan portfolio.
Our residential lending policies and procedures conform to the secondary market
guidelines. We generally offer a mix of adjustable-rate mortgage loans and fixed-rate
mortgage loans with terms of 10 to 30 years. Borrower demand for adjustable-rate
loans compared to fixed-rate loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates, and the difference
between the interest rates and loan fees offered for fixed-rate mortgage loans
as compared to an initially discounted interest rate and loan fees for multi-year
adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans
and adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. The loan fees,
interest rates and other provisions of mortgage loans are determined by us based
on our own pricing criteria and competitive market conditions.
Interest rates and payments on our adjustable-rate mortgage loans generally
adjust annually after an initial fixed period that typically ranges from one
to five years. Interest rates and payments on our adjustable-rate loans generally
are adjusted to a rate typically equal to a margin above the one year U.S. Treasury
index. The maximum amount by which the interest rate may be increased or decreased
is generally one percentage point per adjustment period and the lifetime interest
rate cap is generally six percentage points over the initial interest rate of
the loan. However, a portion of the adjustable-rate mortgage loan portfolio
has a maximum amount by which the interest rate may be increased or decreased
of two percentage points per adjustment period and a lifetime interest rate
cap generally of six percentage points over the initial interest rate of the
loan.
Commercial Real Estate Loans. We offer fixed- and adjustable-rate mortgage
loans secured by commercial real estate. Our commercial real estate loans are
generally secured by small to moderately-sized office, retail and industrial
properties located in our primary market area and are typically made to small
business owners and professionals such as attorneys and accountants.
We originate fixed-rate commercial real estate loans, generally with terms up
to five years and payments based on an amortization schedule of 15 to 20 years,
resulting in “balloon” balances at maturity. We also offer adjustable-rate
commercial real estate loans, generally with terms up to five years and with
interest rates typically equal to a margin above the prime lending rate or the
London Interbank Offered Rate (LIBOR). Loans are secured by first mortgages,
generally are originated with a maximum loan-to-value ratio of 80% and often
require specified debt service coverage ratios depending on the characteristics
of the project. Rates and other terms on such loans generally depend on our
assessment of credit risk after considering such factors as the borrower’s
financial condition and credit history, loan-to-value ratio, debt service coverage
ratio and other factors.
Construction Loans. We originate construction loans for one-to four-family
homes and, to a lesser extent, commercial properties such as small industrial
buildings, warehouses, retail shops and office units. Construction loans are
typically for a term of 12 months with monthly interest only payments. Except
for speculative loans, discussed below, repayment of construction loans typically
comes from the proceeds of a permanent mortgage loan for which a commitment
is typically in place when the construction loan is originated. We originate
construction loans to a limited group of well-established builders in our primary
market area and we limit the number of projects with each builder. Interest
rates on these loans are generally tied to the prime lending rate. Construction
loans, other than land development loans, generally will not exceed the lesser
of 80% of the appraised value or 90% of the direct costs, excluding items such
as developer fees, operating deficits or other items that do not relate to the
direct development of the project. Generally, commercial construction loans
require the personal guarantee of the owners of the business. We also offer
construction loans for the financing of pre-sold homes, which convert into permanent
loans at the end of the construction period. Such loans generally have a six-month
construction period with interest only payments due monthly, followed by an
automatic conversion to a 15-year to 30-year permanent loan with monthly payments
of principal and interest. Occasionally, a construction loan to a builder of
a speculative home will be converted to a permanent loan if the builder has
not secured a buyer within a limited period of time after the completion of
the home. We generally disburse funds on a percentage-of-completion basis following
an inspection by a third party inspector.
Land and Land Development Loans. On a limited basis, we originate loans to
developers for the purpose of developing vacant land in our primary market area,
typically for residential subdivisions. Land development loans are generally
interest-only loans for a term of 18 to 24 months. We generally require a maximum
loan-to-value ratio of 75% of the appraisal market value upon completion of
the project. We generally do not require any cash equity from the borrower if
there is sufficient indicated equity in the collateral property. Development
plats and cost verification documents are required from borrowers before approving
and closing the loan. Our loan officers are required to personally visit the
proposed development site and the sites of competing developments. We also originate
loans to individuals secured by undeveloped land held for investment purposes.
Multi-Family Real Estate Loans. We offer multi-family mortgage loans that are
generally secured by properties in our primary market area. Multi-family loans
are secured by first mortgages and generally are originated with a maximum loan-to-value
ratio of 80% and generally require specified debt service coverage ratios depending
on the characteristics of the project. Rates and other terms on such loans generally
depend on our assessment of the credit risk after considering such factors as
the borrower’s financial condition and credit history, loan-to-value ratio,
debt service coverage ratio and other factors.
Consumer Loans. Although we offer a variety of consumer loans, our consumer
loan portfolio consists primarily of home equity loans, both fixed-rate amortizing
term loans with terms up to 15 years and adjustable rate lines of credit with
interest rates equal to a margin above the prime lending rate. We also offer
auto and truck loans, personal loans and small boat loans. Consumer loans typically
have shorter maturities and higher interest rates than traditional one-to four-family
lending. We typically do not make home equity loans with loan-to-value ratios
exceeding 90%, including any first mortgage loan balance. The procedures for
underwriting consumer loans include an assessment of the applicant’s payment
history on other debts and ability to meet existing obligations and payments
on the proposed loan. Although the applicant’s creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the collateral, if any, to the proposed loan amount.
Commercial Business Loans. We typically offer commercial business loans to
small businesses located in our primary market area. Commercial business loans
are generally secured by equipment and general business assets. Key loan terms
and covenants vary depending on the collateral, the borrower’s financial
condition, credit history and other relevant factors, and personal guarantees
are typically required as part of the loan commitment.