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 Howard 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 systems 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 Mortgage 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 commercial real estate at a maximum loan–to-value
of 85% and non-owner occupied at a maximum loan-to-value of 80%. Our underwriting
policies and processes focus on the underlying credit of the owner for owner
occupied real estate and on the rental income stream (including rent terms and
strength of tenants) for non-owner occupied 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 but have
five- to seven-year maturities. Properties securing our commercial real estate
loans primarily include office buildings, office condominiums, distribution
facilities and manufacturing plants. Substantially all of our commercial real
estate loans are secured by properties located in our 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 both residential and commercial construction will often convert into
a permanent mortgage loans at the end of the term of the loan. Loan to value
parameters range from 65% of the value of land to 75% for developed land, 80%
for commercial or multifamily construction and 85% for 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 completed construction. The borrower must have solid experience
in this type of construction and personal guarantees are usually 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 Mortgage Lending
We offer 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 85%. The remainder of this portion
of our portfolio consists of home equity lines of credit and fixed rate home
equity loans.
Our residential mortgage 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 extremely strong credit.
Our residential mortgage loans were historically fixed rate loans with 15- or
30-year terms. We now also originate variable rate loans with a five- to seven-year
term, although such loans have a longer amortization schedule.
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 interest rates and with terms of between
five and 30 years for primary residences and between five and 15 years for secondary
and rental properties, and are fully amortizing. Our home equity lines allow
for the borrower to draw against the line for ten years, after which the line
is refinanced into a ten-year fixed loan, with the possibility of a one-time
extension of five years. Home equity lines of credit carry a variable rate of
interest and minimum monthly payments during the draw period, which are the
greater of (i) $50.00 or (ii) depending on credit score, loan-to-value and debt-to-income
ratios, either the interest due or interest due plus 1% of the outstanding loan
balance. Home equity loans and lines of credit are generally underwritten with
a maximum loan-to-value ratio of 85% (80% when appraised value is greater than
$1 million) for a primary residence when combined with the principal balance
of the existing mortgage loan; for home equity loans on secondary and rental
properties, the maximum loan-to-value ratio is 65%. We require appraisals 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 also require title insurance, and borrowers must obtain hazard insurance
and, with respect properties located in a flood hazard area, flood insurance.
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.
Loans secured by second mortgages have greater risk than owner-occupied residential
loans secured by first mortgages. When customers default on their loans we attempt
to foreclose on the property. However, the value of the collateral may not be
sufficient to compensate for the amount of the unpaid loan, and we may be unsuccessful
in recovering the remaining balance from these customers. In addition, decreases
in property values could adversely affect the value of properties used as collateral
for the loans. These second lien loans represent a smaller portion of our portfolio.
Our home equity and home improvement loan portfolio gives us a diverse client
base. Although most of these loans are in our primary market area, 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 40% 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.
Mortgage Banking
Our residential mortgage loans consist of residential first and second mortgage
loans, residential construction loans and home equity lines of credit and term
loans secured by the residences of borrowers. Second mortgage and home equity
lines of credit are used for home improvements, education and other personal
expenditures. We make mortgage loans with a variety of terms, including fixed,
floating and variable interest rates, with maturities ranging from three months
to thirty years.
Residential mortgage loans generally are made on the basis of the borrower's
ability to repay the loan from his or her salary and other income and are secured
by residential real estate, the value of which is generally readily ascertainable.
These loans are made consistent with our appraisal and real estate lending policies,
which detail maximum loan-to-value ratios and maturities. Residential mortgage
loans and home equity lines of credit secured by owner-occupied property generally
are made within the guidelines of our investors.
Howard Bank generates revenue by providing an extensive line of consumer real
estate products and services to customers nationwide. Howard Bank offers products
available to customers through a retail network of mortgage loan officers and
bankers as well as a sales force offering our customers direct telephone access
to our products.