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Commercial real estate loans. Approximately 43% of our total loans were commercial
real estate loans, which include multifamily, farmland and commercial real estate
loans, with owner-occupied loans comprising approximately 43% of the commercial
real estate loan portfolio. Commercial real estate loan terms generally are
ten years or less, although payments may be structured on a longer amortization
basis. Interest rates may be fixed or adjustable, although rates typically will
not be fixed for a period exceeding 120 months, and we generally charge an origination
fee. We do not offer non-recourse loans. Risks associated with commercial real
estate loans include, among other things, fluctuations in the value of real
estate, new job creation trends, tenant vacancy rates and the quality of the
borrower’s management. We attempt to limit risk by analyzing a borrower’s
cash flow and collateral value on an ongoing basis. Also, we typically require
personal guarantees from the principal owners of the property, supported by
a review of their personal financial statements, as an additional means of mitigating
our risk.
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Construction and development loans. Construction and development loans, which
consist of loans for the construction of commercial projects, single family
residential properties and multifamily properties. Our construction and development
loans are made on both a “pre-sold” basis and on a “speculative”
basis. Construction and development loans are generally made with a term of
6 to 12 months, with interest accruing at either a fixed or floating rate and
paid monthly. These loans are secured by the underlying project being built.
For construction loans, loan to value ratios range from 75% to 80% of the developed/completed
value, while for development loans our loan to value ratios typically will not
exceed 70% to 75% of such value. Speculative loans are based on the borrower’s
financial strength and cash flow position, and we disburse funds in installments
based on the percentage of completion and only after the project has been inspected
by an experienced construction lender or third-party inspector.
Construction lending entails significant additional risks compared to commercial
real estate or residential real estate lending. One such risk is that loan funds
are advanced upon the security of the property under construction, which is
of uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and to calculate related loan-to-value ratios. We attempt to minimize
the risks associated with construction lending by limiting loan-to-value ratios
as described above. In addition, as to speculative development loans, we generally
make such loans only to borrowers that have a positive pre-existing relationship
with us.
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Commercial and industrial loans. Commercial and industrial loans primarily consist
of working capital lines of credit and equipment loans. We often make commercial
loans to borrowers with whom we have previously made a commercial real estate
loan. The terms of these loans vary by purpose and by type of underlying collateral.
We make equipment loans for a term of five years or less at fixed or variable
rates, with the loan fully amortized over the term and secured by the relevant
piece of equipment. Loans to support working capital typically have terms not
exceeding one year, and such loans are secured by accounts receivable or inventory.
Fixed rate loans are priced based on collateral, term and amortization. The
interest rate for floating rate loans is typically tied to the prime rate published
in The Wall Street Journal with a floor of 4.5%.
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Commercial lending generally involves different risks from those associated
with commercial real estate lending or construction lending. Although commercial
loans may be collateralized by equipment or other business assets (including
real estate, if available as collateral), the repayment of these types of loans
depends primarily on the creditworthiness and projected cash flow of the borrower
(and any guarantors). Thus, the general business conditions of the local economy
and the borrower’s ability to sell its products and services, thereby
generating sufficient operating revenue to repay us under the agreed upon terms
and conditions, are the chief considerations when assessing the risk of a commercial
loan. The liquidation of collateral is considered a secondary source of repayment
because equipment and other business assets may, among other things, be obsolete
or of limited resale value. We actively monitor certain financial measures of
the borrower, including advance rate, cash flow, collateral value and other
appropriate credit factors. We use commercial loan credit scoring models for
smaller level commercial loans.
Lending to Individuals. We make the following types of loans to our individual
customers:
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Consumer loans. Consumer loans represented 16% of our total loans. We make these
loans (which are normally fixed-rate loans) to individuals for a variety of
personal, family and household purposes, including auto loans, secured and unsecured
installment and term loans, second mortgages, home equity loans and home equity
lines of credit. Because many consumer loans are secured by depreciable assets
such as cars, boats and trailers, the loans are amortized over the useful life
of the asset. The amortization of second mortgages generally does not exceed
15 years and the rates generally are not fixed for more than 60 months. As a
general matter, in underwriting these loans, our loan officers review a borrower’s
past credit history, past income level, debt history and, when applicable, cash
flow, and determine the impact of all these factors on the ability of the borrower
to make future payments as agreed. A comparison of the value of the collateral,
if any, to the proposed loan amount, is also a consideration in the underwriting
process. Repayment of consumer loans depends upon the borrower’s financial
stability and is more likely to be adversely affected by divorce, job loss,
illness and personal hardships than repayment of other loans. A shortfall in
the value of any collateral also may pose a risk of loss to us for these types
of loans.
Auto loans comprised the largest component of our consumer loans and third largest
component of our overall loan portfolio, representing 80% of our total consumer
loans and 12% of our total loans. We have been an indirect lender for our auto
loans, meaning that the loans have been originated by automobile dealerships
and then assigned to us. These dealerships were selected based on our review
of their operating history and the dealership’s reputation in the marketplace,
which we believe helps to mitigate the risks of fraud or negligence by the dealership.
At all times, the decision whether or not to provide financing resided with
us.
In November 2015, the Bank announced that it was exiting the indirect auto loan
origination business. The Bank discontinued accepting indirect auto loan applications,
but continued to process and fund applications that were accepted on or before
that date. The Bank will continue to service the current auto loan portfolio
for its duration but expects this portfolio to decrease over time.
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Residential real estate. One-to-four family residential real estate loans, including
second mortgage loans, comprised approximately 21% of our total loans. Second
mortgage loans in this category include only loans we make to cover the gap
between the purchase price of a residence and the amount of the first mortgage;
all other second mortgage loans are considered consumer loans. Long-term fixed
rate mortgages are underwritten for resale to the secondary market; however,
we generally hold jumbo mortgage loans (i.e., loan amounts above $417,000) in
our portfolio and sell virtually all of our remaining mortgage loans on the
secondary market. Unless the borrower has private mortgage insurance, loan to
value ratios do not typically exceed 80%, although some of the mortgage loans
that we retain in our portfolio may have higher loan to value ratios. We use
an independent appraiser to establish collateral values. We generate residential
real estate mortgage loans through Bank referrals and contacts with real estate
agents in our markets. We do not originate subprime residential real estate
loans.