Retail Consumer Loans
One-to-Four Family Real Estate Lending. We originate loans secured by first
mortgages on one-to-four family residences typically for the purchase or refinance
of owner-occupied primary or secondary residences located primarily in our market
areas. We originate one-to-four family residential mortgage loans primarily
through referrals from real estate agents, builders, and from existing customers.
Walk-in customers are also important sources of loan originations. At June 30,
2015, $650.8 million, or 38.6%, of our loan portfolio consisted of loans secured
by one-to-four family residences.
We originate both fixed-rate loans and adjustable-rate loans. We generally originate
mortgage loans in amounts up to 80% of the lesser of the appraised value or
purchase price of a mortgaged property, but will also permit loan-to-value ratios
of up to 95%. For loans exceeding an 80% loan-to-value ratio we generally require
the borrower to obtain private mortgage insurance covering us for any loss on
the amount of the loan in excess of 80% in the event of foreclosure.
The majority of our one-to-four family residential loans are originated with
fixed rates and have terms of ten to 30 years.
We generally originate fixed rate mortgage loans with terms greater than fifteen
years for sale to various secondary market investors on a servicing released
basis. We also originate adjustable-rate mortgage, or ARM, loans which have
interest rates that adjust annually to the yield on U.S. Treasury securities
adjusted to a constant one-year maturity plus a margin. Most of our ARM loans
are hybrid loans, which after an initial fixed rate period of one, five, or
seven years will convert to an annual adjustable interest rate for the remaining
term of the loan. Our ARM loans have terms up to 30 years. Our pricing strategy
for mortgage loans includes setting interest rates that are competitive with
other local financial institutions and consistent with our asset/liability management
objectives. Our ARM loans generally have a floor interest rate set at the initial
interest rate, and a cap of two percentage points on rate adjustments during
any one year and six percentage points over the life of the loan. As a consequence
of using caps, the interest rates on these loans may not be as rate sensitive
as is our cost of funds.
We generally retain ARM loans that we originate in our loan portfolio rather
than selling them in the secondary market. The retention of ARM loans in our
loan portfolio helps us reduce our exposure to changes in interest rates. There
are, however, unquantifiable credit risks resulting from the potential of increased
interest to be paid by the customer as a result of increases in interest rates.
It is possible that during periods of rising interest rates the risk of default
on ARM loans may increase as a result of repricing and the increased costs to
the borrower. We attempt to reduce the potential for delinquencies and defaults
on ARM loans by qualifying the borrower based on the borrower’s ability
to repay the ARM loan assuming that the maximum interest rate that could be
charged at the first adjustment period remains constant during the loan term.
Another consideration is that although ARM loans allow us to increase the sensitivity
of our asset base due to changes in the interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. Because of these considerations, we have no assurance that yield increases
on ARM loans will be sufficient to offset increases in our cost of funds.
Most of our loans are written using generally accepted underwriting guidelines,
and are readily saleable to Freddie Mac, Fannie Mae, or other private investors.
Our real estate loans generally contain a “due on sale” clause allowing
us to declare the unpaid principal balance due and payable upon the sale of
the security property.
A portion of our loans are “non-conforming” because they do not
satisfy credit or other requirements due to personal and financial reasons (i.e.
divorce, bankruptcy, length of time employed, etc.), and other requirements,
imposed by secondary market purchasers. Many of these borrowers have higher
debt-to-income ratios, or the loans are secured by unique properties in rural
markets for which there are no sales of comparable properties to support the
value according to secondary market requirements. We may require additional
collateral or lower loan-to-value ratios to reduce the risk of these loans.
We believe that these loans satisfy a need in our local market areas. As a result,
subject to market conditions, we intend to continue to originate these types
of loans.
Property appraisals on real estate securing our one-to-four family loans in
excess of $250,000 that are not originated for sale are made by a state-licensed
or state-certified independent appraiser approved by the board of directors.
Appraisals are performed in accordance with applicable regulations and policies.
For loans that are less than $250,000, we may use the tax assessed value, broker
price opinions, and/or a property inspection in lieu of an appraisal. We generally
require title insurance policies on all first mortgage real estate loans originated.
Homeowners, liability, fire and, if required, flood insurance policies are also
required for one-to-four family loans. We do not originate permanent one-to-four
family mortgage loans with a negatively amortizing payment schedule, and currently
do not offer interest-only mortgage loans. We have not typically originated
stated income or low or no documentation one-to-four family loans.
Additionally, we have established specific loan portfolio concentration limits
for loans secured by residential rental property to prevent excessive credit
risk that could result from an elevated concentration of these loans. A primary
risk factor in non-owner occupied residential real estate lending is the consistency
of rental income of the property. Payments on loans secured by rental properties
often depend on the successful operation and management of the properties, as
well as, the ability of tenants to pay rent. As a result, repayment of such
loans may be subject to adverse economic conditions and unemployment trends,
and may be sensitive to changes in the supply and demand for such properties.
We consider and review a rental income cash flow analysis of the borrower and
consider the net operating income of the property, the borrower’s expertise,
credit history and profitability, and the value of the underlying property.
We generally require collateral on these loans to be a first mortgage along
with an assignment of rents and leases. We periodically monitor the performance
and cash flow sufficiency of certain residential rental property borrowers based
on a number of factors such as loan performance, loan size, total borrower credit
exposure, and risk grade.
Home Equity Lines of Credit. Our originated home equity lines of credit ("HELOCs"),
consisting of adjustable-rate lines of credit, have been the second largest
component of our retail loan portfolio over the past several years. The lines
of credit may be originated in amounts, together with the amount of the existing
first mortgage, typically up to 85% of the value of the property securing the
loan (less any prior mortgage loans) with an adjustable-rate of interest based
on The Wall Street Journal prime rate plus a margin. Currently, our home equity
line of credit floor interest rate is dependent on the overall loan to value,
and has a cap of 18% above the floor rate over the life of the loan. Originated
HELOCs generally have up to a 15-year draw period and amounts may be reborrowed
after payment at any time during the draw period. Once the draw period has lapsed,
the payment is amortized over a 15-year period based on the loan balance at
that time.
Our underwriting standards for originated HELOCs are similar to our one-to-four
family loan underwriting standards and include a determination of the applicant’s
credit history and an assessment of the applicant’s ability to meet existing
obligations and payments on the proposed loan. The stability of the applicant’s
monthly income may be determined by verification of gross monthly income from
primary employment, and additionally from any verifiable secondary income.
In December 2014, the Company began purchasing HELOCs originated by other financial
institutions.
The credit risk characteristics are different for these loans since they were
not originated by the Company and the collateral is located outside the Company’s
market area, primarily in several western states. All of these loans were originated
in 2012 or later and had an average FICO score of 772 and loan to values of
less than 90% at origination. The Company has established an allowance for loan
losses based on the historical losses in the states where these loans were originated.
The Company will monitor the performance of these loans and adjust the allowance
for loan losses as necessary.
HELOCs generally entail greater risk than do one-to-four family residential
mortgage loans where we are in the first lien position. For those home equity
lines secured by a second mortgage, it is unlikely that we will be successful
in recovering all or a portion of our loan proceeds in the event of default
unless we are prepared to repay the first mortgage loan and such repayment and
the costs associated with a foreclosure are justified by the value of the property.
Construction and Land/Lots. We have been an active originator of construction
to permanent loans to homeowners building a residence. In addition, we originate
land/lot loans predominately for the purchase or refinance of an improved lot
for the construction of a residence to be occupied by the borrower. All of our
construction and land/lot loans were made on properties located within our market
area.
Construction-to-permanent loans are made for the construction of a one-to-four
family property which is intended to be occupied by the borrower as either a
primary or secondary residence. Construction-to-permanent loans are originated
to the homeowner rather than the homebuilder and are structured to be converted
to a first lien fixed- or adjustable-rate permanent loan at the completion of
the construction phase. We do not originate construction phase only or junior
lien construction-to-permanent loans. The permanent loan is generally underwritten
to the same standards as our one-to-four family residential loans and may be
held by us for portfolio investment or sold in the secondary market. At June
30, 2015 our construction-to-permanent loans totaled $22.1 million and the average
loan size was $131,000. During the construction phase, which typically lasts
for six to 12 months, we make periodic inspections of the construction site
and loan proceeds are disbursed directly to the contractors or borrowers as
construction progresses. Typically, disbursements are made in monthly draws
during the construction period. Loan proceeds are disbursed based on a percentage
of completion. Construction-to-permanent loans require payment of interest only
during the construction phase. Prior to making a commitment to fund a construction
loan, we require an appraisal of the property by an independent appraiser. Construction
loans may be originated up to 95% of the cost or of the appraised value upon
completion, whichever is less; however, we generally do not originate construction
loans which exceed the lower of 80% loan to cost or appraised value without
securing adequate private mortgage insurance or other form of credit enhancement
such as the Federal Housing Administration or other governmental guarantee.
We also require general liability, builder’s risk hazard insurance, title
insurance, and flood insurance (as applicable, for properties located or to
be built in a designated flood hazard area) on all construction loans. Subject
to market conditions, we expect this type of lending to continue and grow as
the economy improves.
Included in our construction and land/lot loan portfolio are land/lot loans,
which are typically loans secured by developed lots in residential subdivisions
located in our market areas. We originate these loans to individuals intending
to construct their primary or secondary residence on the lot within one year
from the date of origination. This portfolio may also include loans for the
purchase or refinance of unimproved land that is generally less than or equal
to five acres, and for which the purpose is to commence the improvement of the
land and construction of an owner-occupied primary or secondary residence within
one year from the date of loan origination.
Land/lot loans are typically originated in an amount up to 70% of the lower
of the purchase price or appraisal, are secured by a first lien on the property,
for up to a 20-year term, require payments of interest only and are structured
with an adjustable rate of interest on terms similar to our one-to-four family
residential mortgage loans. At June 30, 2015, our land/lot loans totaled $23.8
million and the average land/lot loan size was $60,000.
Construction and land/lot lending affords us the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than the rates and fees
generated by our one-to-four family permanent mortgage lending. Construction/permanent
loans, however, generally involve a higher degree of risk than our one-to-four
family permanent mortgage lending. If our appraisal of the value of the completed
residence proves to be overstated, we may have inadequate security for the repayment
of the loan upon completion of construction and may incur a loss. Land/lot loans
also pose additional risk because of the lack of income being produced by the
property and the potential illiquid nature of the collateral. These risks can
also be significantly impacted by supply and demand conditions.
Indirect Auto Finance. During the middle of fiscal year 2014, we added an indirect
auto finance line of business. Our indirect auto finance installment contracts
totaled $52.5 million, or 3.1% of our total loan portfolio. As an indirect lender,
we market to automobile dealerships, both manufacturer franchised dealerships
and independent dealerships, and provide automotive financing through installment
contracts on new and used vehicles from 54 auto dealerships located in western
North Carolina and upstate South Carolina. Working with strong dealerships within
our market area provides us with the opportunity to actively deepen customer
relationships through cross-selling opportunities, as 90.8% of our indirect
auto finance loans are originated to noncustomers.
The dealers are compensated via an industry standard commission, known as dealer
reserve, on marked-up interest rates or from flat rate commission amounts. Our
auto finance sales team uses purchased industry data to provide quantitative
analysis of dealer sales history to target strong dealerships as the starting
point of building long lasting, successful relationships. Local, quick decisions,
broad hour coverage, personalized customer service, and prompt contract funding
are keys to our success in this competitive line of business. Additionally,
our process has been designed to integrate with existing dealership practices,
utilize an industry leading decision engine, which provides our internal underwriters
with the tools needed to respond quickly to loans meeting our credit policy
criteria. Our underwriting procedures for indirect auto loans include an evaluation
of an applicant's credit profile along with certain applicant specific characteristics
to arrive at an estimate of the associated credit risk. Additionally, internal
underwriters may also verify an applicant's employment income and/or residency
or where appropriate, verify an applicant's payment history directly with the
applicant's creditors. We will also generally verify receipt of the automobile
and other information directly with the borrower.
Indirect auto finance customers receive a fixed rate loan in an amount and at
an interest rate that is commensurate to their FICO credit score, consumer payment
credit history, loan term, and based on our underwriting procedures. The amount
financed by us will generally be up to the full sales price of the vehicle plus
sales tax, dealer preparation fees, license fees and title fees, plus the cost
of service and warranty contracts and "GAP" insurance coverage obtained
in connection with the vehicle or the financing (such amounts in addition to
the sales price, collectively the "Additional Vehicle Costs"), Accordingly,
the amount financed by us generally may exceed, depending on the credit score
and applicant’s profile, in the case of new vehicles, the manufacturer's
suggested retail price of the financed vehicle and the Additional Vehicle Costs.
In the case of used vehicles, if the applicant meets our creditworthiness criteria,
the amount financed may exceed the vehicle's value as assigned by one of the
two standard reference sources of used cars and the Additional Vehicle Costs.
Because our primary focus for indirect auto loans is on the credit quality
of the customer rather than the value of the collateral, the collectability
of an indirect auto loan is more likely than a single-family first mortgage
loan to be affected by adverse personal circumstances. We rely on the borrower's
continuing financial stability, rather than on the value of the vehicle, for
the repayment of an indirect auto loan. Because automobiles usually rapidly
depreciate in value, it is unlikely that a repossessed vehicle will cover repayment
of the outstanding loan balance.
Consumer Lending. Our consumer loans consist of loans secured by deposits accounts
or personal property such as automobiles, boats, and motorcycles, as well as
unsecured consumer debt.
Consumer loans generally have shorter terms to maturity, which reduces our exposure
to changes in interest rates. In addition, management believes that offering
consumer loan products helps to expand and create stronger ties to our existing
customer base by increasing the number of customer relationships and providing
cross-marketing opportunities.
Our underwriting standards for consumer loans include a determination of the
applicant’s credit history and an assessment of the applicant’s
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant’s monthly income may be determined by verification
of gross monthly income from primary employment, and additionally from any verifiable
secondary income.
Consumer loans generally entail greater risk than do one-to-four family residential
mortgage loans, particularly in the case of consumer loans that are unsecured
or secured by rapidly depreciable assets, such as automobiles. In these cases,
any repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower’s continuing financial stability
and thus are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy.
Commercial Loans
Commercial Real Estate Lending. We originate commercial real estate loans, including
loans secured by hotels, office space, office/warehouse, retail strip centers,
vehicle dealerships, mini-storage facilities, medical and professional buildings,
retail sites, and churches located in our market areas. As of June 30, 2015,
$441.6 million or 26.2% of our total loan portfolio was secured by commercial
real estate property, including multifamily loans totaling $43.1 million, or
2.6% of our total loan portfolio. Of that amount, $182.6 million was identified
as owner occupied commercial real estate, and the remainder of $259.0 million
was secured by income producing, or non-owner-occupied commercial real estate.
Commercial real estate loans generally are priced at a higher rate of interest
than one-to-four family residential loans. Typically, these loans have higher
loan balances, are more difficult to evaluate and monitor, and involve a greater
degree of risk than one-to-four family residential loans. Often payments on
loans secured by commercial or multi-family properties are dependent on the
successful operation and management of the property; therefore, repayment of
these loans may be affected by adverse conditions in the real estate market
or the economy. We generally require and obtain loan guarantees from financially
capable parties based upon the review of personal financial statements. If the
borrower is a corporation, we generally require and obtain personal guarantees
from the corporate principals based upon a review of their personal financial
statements and individual credit reports.
The average outstanding loan size in our commercial real estate portfolio was
$357,000 as of June 30, 2015. Given the Bank’s recent expansions into
new mid-sized metropolitan areas, the Bank’s commercial focus is on developing
and fostering strong banking relationships with small to mid-size clients within
our market area.
We offer both fixed- and adjustable-rate commercial real estate loans. Our commercial
real estate mortgage loans generally include a balloon maturity of five years
or less. Amortization terms are generally limited to 20 years. Adjustable rate
based loans typically include a floor and ceiling interest rate and are indexed
to The Wall Street Journal prime rate, plus or minus an interest rate margin
and rates generally adjust daily. The maximum loan to value ratio for commercial
real estate loans is generally up to 80% on purchases and refinances. We require
appraisals of all non-owner occupied commercial real estate securing loans in
excess of $250,000, and all owner-occupied commercial real estate securing loans
in excess of $500,000, performed by independent appraisers. For loans less than
these amounts, we may use the tax assessed value, broker price opinions, and/or
a property inspection in lieu of an appraisal.
If we foreclose on a commercial real estate loan, our holding period for the
collateral typically is longer than for one-to-four family residential mortgage
loans because there are fewer potential purchasers of the collateral. Further,
our commercial real estate loans generally have relatively large balances to
single borrowers or related groups of borrowers. Accordingly, if we make any
errors in judgment in the collectability of our commercial real estate loans,
any resulting charge-offs may be larger on a per loan basis than those incurred
with our retail loan portfolios.
Construction and Development Lending. For many years, we had been an active
originator of commercial real estate construction loans in our market areas
to builders; however, as housing markets weakened in recent years we significantly
reduced our origination of new construction and development loans. Our construction
and development loans are predominately for the purchase or refinance of unimproved
land held for future residential development, improved residential lots held
for speculative investment purposes and for the future construction of speculative
one-to-four family or commercial real estate. We also originate construction
loans for the development of business properties and multi-family dwellings.
We have reduced the origination of new speculative construction and development
loans related to residential properties to select borrowers with whom we have
long-standing lending relationships. Currently, only the board of directors
and certain senior officers are authorized to approve speculative one-to-four
family construction loans or loans for the development of land into residential
lots.