One- to Four-Family Mortgage Loans. Historically our primary lending origination
activity has been one- to four-family, owner-occupied, residential mortgage
loans secured by property located in our market area. We generate loans through
our marketing efforts, existing customers and referrals, real estate brokers,
builders and local businesses. We generally limit our one- to four-family loan
originations to the financing of loans secured by properties located within
our market area.
Our fixed-rate one- to four-family residential mortgage loans are generally
conforming loans, underwritten according to secondary market guidelines. We
generally originate both fixed- and adjustable-rate mortgage loans in amounts
up to the maximum conforming loan limits established by the Federal Housing
Finance Agency, which is currently $417,000 for single-family homes.
We originate for resale to the secondary market fixed-rate one- to four-family
residential mortgage loans with terms of 15 years or more. Our fixed-rate mortgage
loans amortize monthly with principal and interest due each month. Residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans
at their option. We offer fixed-rate one- to four-family residential mortgage
loans with terms of up to 30 years without prepayment penalty.
When underwriting residential real estate loans, we review and verify each
loan applicant’s income and credit history. Management believes that stability
of income and past credit history are integral parts in the underwriting process.
Generally, the applicant’s total monthly mortgage payment, including all
escrow amounts, is limited to 30% of the applicant’s total monthly income.
In addition, total monthly obligations of the applicant, including mortgage
payments, should not generally exceed 43% of total monthly income. Written appraisals
are generally required on real estate property offered to secure an applicant’s
loan. For one- to four-family real estate loans with loan to value ratios of
over 80%, we generally require private mortgage insurance. We require fire and
casualty insurance on all properties securing real estate loans. We may require
title insurance, or an attorney’s title opinion, as circumstances warrant.
We do not offer an “interest only” mortgage loan product on one-
to four-family residential properties (where the borrower pays interest for
an initial period, after which the loan converts to a fully amortizing loan).
We also do not offer loans that provide for negative amortization of principal,
such as “Option ARM” loans, where the borrower can pay less than
the interest owed on the loan, resulting in an increased principal balance during
the life of the loan. We do not offer a “subprime loan” program
(loans that generally target borrowers with weakened credit histories typically
characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies,
or borrowers with questionable repayment capacity as evidenced by low credit
scores or high debt-burden ratios) or Alt-A loans (traditionally defined as
loans having less than full documentation).
Commercial Real Estate Loans. Our underwriting standards for commercial real
estate 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 income approach is primarily utilized to
determine whether income generated from the applicant’s business or real
estate offered as collateral is adequate to repay the loan. We emphasize the
ratio of the property’s projected net cash flow to the loan’s debt
service requirement (generally requiring a minimum ratio of 120%). In underwriting
a loan, we consider the value of the real estate offered as collateral in relation
to the proposed loan amount. Generally, the loan amount cannot be greater than
80% of the value of the real estate. We usually obtain written appraisals from
either licensed or certified appraisers on all commercial real estate loans
in excess of $250,000. We assess the creditworthiness of the applicant by reviewing
a credit report, financial statements and tax returns of the applicant, as well
as obtaining other public records regarding the applicant.
Loans secured by commercial real estate generally involve a greater degree of
credit risk than one- to four-family residential mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors, including
the effects of general economic conditions on income producing properties and
the successful operation or management of the properties securing the loans.
Furthermore, the repayment of loans secured by commercial real estate is typically
dependent upon the successful operation of the related business and real estate
property. If the cash flow from the project is reduced, the borrower’s
ability to repay the loan may be impaired.
Agricultural Real Estate Loans. We originate and purchase agricultural real
estate loans. Our agricultural real estate loans are generally written up to
terms of thirty years with adjustable interest rates. The rates are generally
tied to the average yield on U.S. Treasury securities, adjusted to a constant
maturity of either one-year, three-years, or five-years and generally have a
specified floor. Many of our fixed-rate agricultural real estate loans are not
fully amortizing and therefore require a “balloon” payment at maturity.
We purchase from time to time agricultural real estate loan participations primarily
from other local institutions within our market area. All participation loans
are approved following a review to ensure that the loan satisfies our underwriting
standards.
Our underwriting standards for agricultural real estate 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
income approach is primarily utilized to determine whether income generated
from the applicant’s farm operation or real estate offered as collateral
is adequate to repay the loan. We emphasize the ratio of the property’s
projected cash flow to the loan’s debt service requirement (generally
requiring a minimum ratio of 120%). In underwriting a loan, we consider the
value of the real estate offered as collateral in relation to the proposed loan
amount. Generally, the loan amount cannot be greater than 75% of the value of
the real estate. We usually obtain written appraisals from either licensed or
certified appraisers on all agricultural real estate loans in excess of $250,000.
We assess the creditworthiness of the applicant by reviewing a credit report,
financial statements and tax returns of the applicant, as well as obtaining
other public records regarding the applicant.
Loans secured by agricultural real estate generally involve a greater degree
of credit risk and carry larger loan balances than one- to four-family residential
mortgage loans. This increased credit risk is a result of several factors, including
the effects of general economic and market conditions on farm operations and
the successful operation or management of the properties securing the loans.
The repayment of loans secured by agricultural estate is typically dependent
upon the successful operation of the farm and real estate property. If the cash
flow is reduced, the borrower’s ability to repay the loan may be impaired.
Home Equity Loans. The maximum amount of a home equity loan or line of credit
is generally 95% of the appraised value of a borrower’s real estate collateral
less the amount of any prior mortgages or related liabilities. Home equity loans
and lines of credit are approved with both fixed and adjustable interest rates
which we determine based upon market conditions. Such loans may be fully amortized
over the life of the loan or have a balloon feature. Generally, the maximum
term for home equity loans is 10 years.
Our underwriting standards for home equity 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. We also consider the length of employment with the borrower’s
present employer as well as the amount of time the borrower has lived in the
local area. Creditworthiness of the applicant is of primary consideration; however,
the underwriting process also includes a comparison of the value of the collateral
in relation to the proposed loan amount.
Home equity loans entail greater risks than one- to four-family residential
mortgage loans, which are secured by first lien mortgages. In such cases, collateral
repossessed after a default may not provide an adequate source of repayment
of the outstanding loan balance because of damage or depreciation in the value
of the property or loss of equity to the first lien position. Further, home
equity loan payments are dependent on the borrower’s continuing financial
stability, and therefore are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Finally, the application of various
Federal and state laws, including Federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans in the event
of a default.
Commercial Business Loans. We originate commercial business loans to borrowers
located in our market area which are secured by collateral other than real estate
or which can be unsecured. We also purchase participations of commercial business
loans from other lenders, which may be made to borrowers outside our market
area. All of the commercial business loan participations were outside of our
market area. Commercial business loans are generally secured by equipment and
inventory and generally are offered with adjustable rates tied to the prime
rate or the average yield on U.S. Treasury securities, adjusted to a constant
maturity of either one-year, three-years or five-years and various terms of
maturity generally from three years to five years. On a limited basis, we will
originate unsecured business loans in those instances where the applicant’s
financial strength and creditworthiness has been established. Commercial business
loans generally bear higher interest rates than residential loans, but they
also may involve a higher risk of default since their repayment is generally
dependent on the successful operation of the borrower’s business. We generally
obtain personal guarantees from the borrower or a third party as a condition
to originating business loans.
Our underwriting standards for commercial business loans include a determination
of the applicant’s ability to meet existing obligations and payments on
the proposed loan from normal cash flows generated in the applicant’s
business. We assess the financial strength of each applicant through the review
of financial statements and tax returns provided by the applicant. The creditworthiness
of an applicant is derived from a review of credit reports as well as a search
of public records. We periodically review business loans following origination.
We request financial statements at least annually and review them for substantial
deviations or changes that might affect repayment of the loan. Our loan officers
may also visit the premises of borrowers to observe the business premises, facilities,
and personnel and to inspect the pledged collateral. Underwriting standards
for business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.
Agricultural Business Loans. Agricultural business loans are generally secured
by equipment and blanket security agreements on all farm assets. These loans
are generally offered with fixed rates with terms up to five years. Agricultural
business loans generally bear lower interest rates than residential loans due
to competitive market pressures. While the repayment of our agricultural business
loans is generally dependent on the successful operation of the farm operation,
we have experienced a good history of low default rates. We generally obtain
personal guarantees from the borrower as a condition to originating agricultural
business loans.
Our underwriting standards for agricultural business loans include a determination
of the applicant’s ability to meet existing obligations and payments on
the proposed loan from normal cash flows generated in the applicant’s
business. We assess the financial strength of each applicant through the review
of financial statements, pro-forma cash flow statements, and tax returns provided
by the applicant. The creditworthiness of an applicant is derived from a review
of credit reports as well as a search of public records. We request financial
statements at least annually and review them for substantial deviations or changes
that might affect repayment of the loan. Our loan officers may also visit the
premises of borrowers to observe the operation, facilities, equipment, and personnel
and to inspect the pledged collateral. Underwriting standards for agricultural
business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.