Residential Mortgage Loans. Our primary lending activity is the origination
of mortgage loans to enable borrowers to purchase or refinance existing homes
in the Banks’ respective market areas. We offer a mix of adjustable-rate
and fixed-rate mortgage loans with terms up to 30 years. Adjustable-rate loans
have an initial fixed term of one, three, five or seven years. After the initial
term, the rate adjustments on most of First Federal of Frankfort’s adjustable-rate
loans are indexed to the National Average Contract Interest Rate for Major Lenders
on the Purchase of Previously Occupied Homes. The interest rates on these mortgages
are adjusted once a year, with limitations on adjustments generally of one percentage
point per adjustment period, and a lifetime cap of five percentage points. We
determine loan fees charged, interest rates and other provisions of mortgage
loans on the basis of our own pricing criteria and competitive market conditions.
Some loans originated by the Banks have an additional advance clause which allows
the borrower to obtain additional funds at prevailing interest rates, subject
to managements’ approval.
The retention of adjustable-rate loans in the portfolio helps reduce our exposure
to increases in prevailing market interest rates. However, there are unquantifiable
credit risks resulting from potential increases in costs to borrowers in the
event of upward repricing of adjustable-rate loans. It is possible that during
periods of rising interest rates, the risk of default on adjustable-rate loans
may increase due to increases in interest costs to borrowers. However, despite
their popularity in some parts of the country, neither bank has offered adjustable-rate
loans that contractually allow for negative amortization. Such loans, under
some circumstances, can cause the balance of a closed-end loan to exceed the
original balance and perhaps surpass the value of the collateral. Further, although
adjustable-rate loans allow us to increase the sensitivity of our interest-earning
assets to changes in interest rates, the extent of this interest sensitivity
is limited by the initial fixed-rate period before the first adjustment and
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on our adjustable-rate loans will fully
adjust to compensate for increases in our cost of funds. Finally, adjustable-rate
loans may decrease at a pace faster than decreases in our cost of funds, resulting
in reduced net income.
Construction Loans. We originate loans to individuals to finance the construction
of residential dwellings for personal use or for use as rental property. On
a case-by-case basis we consider construction loans on other than owner-occupied,
residential property. Our construction loans generally provide for the payment
of interest only during the construction phase, which is usually less than one
year. Loans generally can be made with a maximum loan to value ratio of 80%
of the appraised value. Funds are disbursed as progress is made toward completion
of the construction based on site inspections by qualified bank staff.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction or development
and the estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit completion of
the development. If the estimate of value proves to be inaccurate, we may be
confronted, at or before the maturity of the loan, with a project having a value
which is insufficient to assure full repayment. As a result of the foregoing,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather
than the ability of the borrower or guarantor to repay principal and interest.
If we are forced to foreclose on a project before or at completion due to a
default, there can be no assurance that we will be able to recover the unpaid
balance and accrued interest on the loan, as well as related foreclosure and
holding costs.
Multi-Family Loans. We offer mortgage loans secured by multi-family property
(residential real estate comprised of five or more units.) We originate multi-family
real estate loans for terms of generally 25 years or less. Loan amounts generally
do not exceed 80% of the appraised value and tend to range much lower.
Nonresidential Loans. As opportunities arise, we offer mortgage loans secured
by nonresidential real estate, which is generally secured by commercial office
buildings, churches, condominiums and properties used for other purposes.
Loans secured by multi-family and nonresidential real estate generally have
larger balances and involve a greater degree of risk than one- to four-family
residential mortgage loans. Of primary concern in multi-family and nonresidential
real estate lending is the borrower’s creditworthiness and the feasibility
and cash flow potential of the project. Payments on loans secured by income
properties often depend on successful operation and management of the properties.
As a result, repayment of such loans may be subject to a greater extent than
residential real estate loans to adverse conditions in the real estate market
or the economy. To monitor cash flows on income properties, we require borrowers
and/or loan guarantors to provide annual financial statements on larger multi-family
and commercial real estate loans. In reaching a decision on whether to make
a multi-family or nonresidential real estate loan, we consider the net cash
flow of the project, the borrower’s expertise, credit history and the
value of the underlying property.
Commercial Non-mortgage Loans. We do not emphasize commercial non-mortgage loans,
which may be secured by vehicles used in business or by inventory and equipment
of the business or may be unsecured, although we do originate such loans on
a limited basis and generally require a pre-existing relationship with the Bank.
These loans are made only to businesses in our local market and we generally
require personal guarantees of well-established individuals for these loans.
Commercial loans involve an even greater degree of risk than real estate loans.
Consumer Lending. Our consumer loans include home equity lines of credit, loans
secured by savings deposits, automobile loans and unsecured or personal loans.
Our home equity loans are made at First Federal of Frankfort and are made on
the security of residential real estate and have terms of up to 15 years. Most
of First Federal of Frankfort’s home equity loans are second mortgages
subordinate only to first mortgages also held by the bank and do not exceed
80% of the estimated value of the property, less the outstanding principal of
the first mortgage. First Federal of Frankfort does offer home equity loans
up to 90% of the value less the balance of the first mortgage at a premium rate
to qualified borrowers. These loans are not secured by private mortgage insurance.
First Federal of Frankfort’s home equity loans require the monthly payment
of 1.0% to 2% of the unpaid principal until maturity, when the remaining unpaid
principal, if any, is due. First Federal of Frankfort’s home equity loans
bear variable rates of interest indexed to the prime rate for loans with 80%
or less loan-to-value ratio, and 2% above the prime rate for loans with a loan-to-value
ratio in excess of 80%. Interest rates on these loans can be adjusted monthly.