One-to-Four Family Residential Real Estate Lending. The increase in the one-to-four
family loans in 2015 is the result of additional mortgage lending staff and
an increased emphasis on originating shorter term fixed rate and adjustable
rate mortgage loans that were placed into the portfolio during 2015. The majority
of the longer term loans that were originated during the year continued to be
sold into the secondary market in order to manage the Company’s interest
rate risk position.
The Company offers conventional fixed rate one-to-four family loans that have
maximum terms of 30 years. In order to manage interest rate risk, the Company
typically sells the majority of fixed rate loan originations with terms to maturity
of 15 years or greater that are eligible for sale in the secondary market. The
interest rates charged on the fixed rate loan products are based on the secondary
market delivery rates, as well as other competitive factors. The Company also
originates fixed rate loans with terms up to 30 years that are insured by the
Federal Housing Authority (FHA), Veteran’s Administration (VA), Minnesota
Housing Finance Agency, Iowa Finance Authority, or United States Department
of Agriculture-Guaranteed Housing.
The Company also offers one-year adjustable rate mortgages (ARMs) at a margin
(generally 350 to 450 basis points) over the yield on the Average Weekly One
Year U.S. Treasury Constant Maturity Index for terms of up to 30 years. The
ARM loans offered by the Company allow the borrower to select (subject to pricing)
an initial period of one year, three years, or five years between the loan origination
and the date the first interest rate change occurs. The ARMs generally have
a 200 basis point annual interest rate change cap and a lifetime cap of 600
basis points over or under the initial rate. The Company’s originated
ARMs do not permit negative amortization of principal, generally do not contain
prepayment penalties and are not convertible into fixed rate loans. Because
of the low interest rate environment that has existed over the last few years,
a limited number of ARM loans have been originated as consumers have generally
opted for the longer term fixed rate loans.
In underwriting one-to-four family residential real estate loans, the Company
evaluates the borrower's credit history, ability to make principal, interest
and escrow payments, the value of the property that will secure the loan, and
debt to income ratios. Properties securing one-to-four family residential real
estate loans made by the Company are appraised by independent appraisers. The
Company originates residential mortgage loans with loan-to-value ratios up to
100% for owner-occupied homes and up to 85% for non-owner-occupied homes; however,
private mortgage insurance is generally required to reduce the Company's exposure
to 80% or less of the value on most loans. The Company generally seeks to underwrite
its loans in accordance with secondary market, FHA or VA standards. However,
the Company does originate shorter term fixed rate and adjustable rate one-to-four
family loans for its portfolio that do not meet certain secondary market guidelines.
Commercial Real Estate and Multi-Family Lending. The Company originates permanent
commercial real estate and multi-family loans secured by properties located
primarily in its market area. It also purchases a limited amount of participations
in commercial real estate and multi-family loans originated by third parties.
The commercial real estate and multi-family loan portfolio includes loans secured
by motels, hotels, apartment buildings, churches, ethanol plants, manufacturing
plants, land developments, office buildings, business facilities, shopping malls,
nursing homes, golf courses, restaurants, warehouses, convenience stores, and
other non-residential building properties primarily located in the upper Midwestern
portion of the United States.
Construction Lending. The Company makes construction loans to individuals for
the construction of their residences and to builders for the construction of
one-to-four family residences. It also makes a limited number of loans to builders
for houses built on speculation. Construction loans also include commercial
real estate loans.
Almost all loans to individuals for the construction of their residences are
structured as permanent loans. These loans are made on the same terms as residential
loans, except that during the construction phase, which typically lasts up to
twelve months, the borrower pays interest only. Generally, the borrower also
pays a construction fee at the time of origination plus other costs associated
with processing the loan. Residential construction loans are underwritten pursuant
to the same guidelines used for originating residential loans on existing properties.
Consumer Lending. The Company originates a variety of consumer loans, including
home equity loans (open-end and closed-end), automobile, recreational vehicles,
mobile home, lot loans, loans secured by deposit accounts and other loans for
household and personal purposes.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The Company's consumer loans
are made at fixed or adjustable interest rates, with terms up to 20 years for
secured loans and up to five years for unsecured loans.
Commercial Business Lending. The Company maintains a portfolio of commercial
business loans to borrowers associated with the real estate industry as well
as to retail, manufacturing operations, and professional firms. The Company's
commercial business loans generally have terms ranging from six months to five
years and may have either fixed or variable interest rates. The Company's commercial
business loans generally include personal guarantees and are usually, but not
always, secured by business assets such as inventory, equipment, leasehold interests
in equipment, fixtures, real estate and accounts receivable. The underwriting
process for commercial business loans includes consideration of the borrower's
financial statements, tax returns, projections of future business operations,
and inspection of the subject collateral, if any.