Residential Mortgage Loans. Hamilton Bank originates mortgage loans secured
by owner occupied one- to four-family residential properties. To a lesser extent,
we have also acquired, participated and made loans to investors for the purchase
of one- to four-family residential properties that are not owner-occupied.
Historically, the terms of our one- to four-family mortgage loans retained in
our portfolio ranged from 10 to 30 years. Beginning in 2009, in order to lower
our interest rate risk in a rising rate environment, we have sold to the secondary
market the majority of our one- to four-family fixed rate loans that have been
originated with terms exceeding 10 years.
We generally do not make new one- to four-family mortgage loans on owner-occupied
properties with loan-to-value ratios exceeding 95% at the time the loan is originated,
and all loans with loan-to-value ratios in excess of 80% require private mortgage
insurance. Loan to value ratios on refinances may not exceed 80%, and loan-to-value
ratios for non-owner occupied properties may not exceed 85%. In addition, borrower
debt may generally not exceed 43% of the borrower’s monthly cash flow.
With respect to borrower debt on loans secured by non-owner occupied properties,
we look to the investor’s aggregate debt and cash flows from all investment
properties the investor operates. We require all properties securing residential
mortgage loans to be appraised by a board-approved independent appraiser.
Commercial Real Estate Loans. We originate commercial real estate loans in
the Greater Baltimore area that are secured by properties used for business
purposes such as small office buildings or retail facilities. We have increased
our origination of commercial real estate loans over the last several years,
and intend to continue to grow this portion of our loan portfolio in the future.
Our commercial real estate loans are underwritten based on our loan underwriting
polices. Our policies provide that such loans may be made in amounts of up to
85% of the appraised value of the property, provided that the property is more
than 50% owner-occupied, or 75% of the appraised value of the property if it
is not owner-occupied. Our commercial real estate loans typically have terms
of 5 to 10 years and amortize for a period of up to 25 years. In the past year
we have originated an increased amount of commercial real estate loans with
terms of 7 to 10 years based upon the strength of the property cash flow and
loan to value ratio. Interest rates may be fixed or adjustable. If adjustable,
then they are generally based on the Prime rate of interest or LIBOR.
The regulatory loan-to-one borrower limit is 15% of a bank’s unimpaired
capital plus unimpaired surplus.
Commercial real estate lending involves additional risks compared to one- to
four-family residential lending because payments on loans secured by commercial
real estate properties are often dependent on the successful operation or management
of the properties, and/or the collateral value of the commercial real estate
securing the loan. Repayment of such loans may be subject, to a greater extent
than residential loans, to adverse conditions in the real estate market or the
economy. Also, commercial real estate loans typically involve large loan balances
to single borrowers or groups of related borrowers. Commercial real estate loans
generally have a higher rate of interest and shorter term than residential mortgage
loans because of increased risks associated with commercial real estate lending.
We seek to minimize these risks through our underwriting standards. We have
experienced a decrease over the past several years in delinquencies and non-performing
loans in our commercial real estate loan portfolio.
Commercial Business Loans. We originate commercial business loans and lines
of credit secured by non-real estate business assets. These loans are generally
originated to small and middle market businesses in our primary market area.
Our commercial business loans are generally used for working capital purposes
or for acquiring equipment, inventory or furniture, and are primarily secured
by business assets other than real estate, such as business equipment, inventory
and accounts receivable. We have increased our origination of commercial business
loans over the last few years and intend to continue to grow this portfolio
at a moderate pace.
Our commercial business loans have terms up to 5 years at both fixed and adjustable
rates of interest, although, adjustable rates of interest are preferred and
obtained when possible. Our commercial business loans are underwritten based
on our commercial business loan underwriting policies. We typically avoid making
commercial business loans to purchase highly specialized, custom made equipment
which may be difficult to dispose of in the event of default. When making commercial
business loans, we consider the financial statements, lending history and debt
service capabilities of the borrower (generally requiring a minimum debt service
coverage ratio of 1.20:1.00), the projected cash flows of the business, and
the value of the collateral, if any. The majority all commercial business loans
are guaranteed by the principals of the borrower.
Hamilton Bank is also qualified to make Small Business Administration (“SBA”)
loans. The SBA program is an economic development program which finances the
expansion of small businesses. Under the SBA program, we originate and fund
loans under the SBA 7(a) Loan Program which qualify for guarantees up to 85%
for loans less than or equal to $150,000 and 75% for loans greater than $150,000.
We also originate loans under the SBA’s CDC/504 Loan Program in which
we generally provide 50% of the financing, taking a first lien on the real property
as collateral. We do not treat the SBA guarantee as a substitute for a borrower
meeting our credit standards, and, except for minimum capital levels or maximum
loan terms, the borrower must meet our other credit standards as applicable
to loans outside the SBA process.
Commercial business loans generally have a greater credit risk than one- to
four-family residential mortgage loans. Unlike residential mortgage loans, which
generally are made on the basis of the borrower’s ability to make repayment
from his or her employment and other income, and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
are of higher risk and typically are made on the basis of the borrower’s
ability to make repayment from the cash flow of the borrower’s business.
As a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself.
Further, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. We seek to minimize these risks through our underwriting standards.
Home Equity Loans and Lines of Credit. In addition to traditional one- to four-family
residential mortgage loans, we offer home equity loans and lines of credit that
are secured by the borrower’s primary or secondary residence.
Home equity loans and lines of credit are generally underwritten using the same
criteria that we use to underwrite one- to four-family residential mortgage
loans. Home equity loans and lines of credit may be underwritten with a loan-to-value
ratio of up to 80% when combined with the principal balance of the existing
first mortgage loan. Our home equity loans are primarily originated with fixed
rates of interest with terms of up to 20 years. Our home equity lines of credit
are originated with adjustable-rates based on the prime rate of interest minus
an applicable margin and require interest paid monthly. Home equity loans and
lines of credit are available in amounts of between $10,000 and $1.0 million.
Home equity loans and lines of credit secured by second mortgages have greater
risk than one- to four-family residential mortgage loans secured by first mortgages.
We face the risk that the collateral will be insufficient to compensate us for
loan losses and costs of foreclosure. When customers default on their loans,
we attempt to foreclose on the property and resell the property as soon as possible
to minimize foreclosure and carrying costs. However, the value of the collateral
may not be sufficient to compensate us for the amount of the unpaid loan and
we may be unsuccessful in recovering the remaining balance from those customers.
Particularly with respect to our home equity loans and lines of credit, decreases
in real estate values could adversely affect the value of property securing
the loan.
Construction Loans. We originate construction loans for both commercial and
residential real estate. Construction loans we originate generally provide for
the payment of interest only during the construction phase. At the end of the
construction phase, the loan converts to a permanent mortgage loan at the same
or a different rate of interest. The construction period on the residential
homes is typically nine to twelve months, at which time Hamilton Bank is repaid
through permanent financing by a third party with servicing released.
Before making a commitment to fund a construction loan, Hamilton Bank requires
detailed cost estimates to complete the project and an appraisal of the property
by an independent licensed appraiser. Hamilton Bank also reviews and inspects
each property before disbursement of funds during the term of the construction
loan. Loan proceeds are disbursed after inspection based on the percentage of
completion method. Construction loans for one- to four-family residential real
estate may be underwritten with a loan-to-value ratio of up to 80% or 95% with
private mortgage insurance. Commercial construction loans generally may not
exceed a loan-to-value ratio of 75% to 80%.
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan
is, to a great degree, dependent upon the successful and timely completion of
construction. Various potential factors including construction delays or the
financial viability of the builder may further impair the borrower’s ability
to repay the loan.