One- to Four-Family Residential Mortgage Lending. Our residential mortgage loan
originations are obtained from customers, residents of our local communities or
referrals from local real estate agents, attorneys and builders. The retention
of fixed rate one- to four-family residential mortgage loans in our loan portfolio
increases our interest rate risk in a rising interest rate environment, since
the yields earned on such fixed-rate assets would remain fixed, while the rates
paid by the Bank for deposits and borrowings may increase, which could lower net
interest income. In an effort to manage interest rate risk, the Bank sold low
yield, long-term fixed rate residential mortgages (primarily yields less than
5% and terms of 30 years) at origination on the secondary market, with servicing
retained, beginning in the fourth quarter of 2014 and during 2015. We plan to
continue this practice in the near future.
One- to four-family residential mortgage loan originations are generally for
terms of 10, 15, 20 or 30 years, amortized on a monthly basis with interest
and principal due either bi-weekly or monthly. One- to four-family residential
real estate loans may remain outstanding for significantly shorter periods than
their contractual terms as borrowers may refinance or prepay loans at their
option without penalty. Conventional one- to four-family residential mortgage
loans originated by us customarily contain “due-on-sale” clauses
that permit us to accelerate the indebtedness of the loan upon transfer of ownership
of the mortgaged property. We do not offer “interest only” mortgage
loans, subprime or “negative amortization” mortgage loans.
Home Equity Loans and Lines of Credit. We currently provide all-in-one home
equity lines of credit and have provided home equity loans in the past to our
customers. Home equity lines of credit are generally made for owner-occupied
homes, and are secured by first or second mortgages on residences. At December
31, 2015, home equity loans and lines of credit totaled $32.8 million, or 11.1%
of the total loan portfolio, of which 93.4% were adjustable rate loans and 6.6%
were fixed rate loans. The all-in-one home equity line of credit must have a
minimum line amount of $5,000 up to a maximum of 90% of the total loan-to-value
ratio. Home equity lines of credit products, which have interest rates tied
to the prime rate, generally have a 15 year draw period and a 15 year payback
period. Since 2010, our adjustable rate home equity loans include limits on
decreases in the interest rate of the loan. The decrease in the interest rate
may not be below the “floor” rate established at time of origination.
A customer has the option to convert either a portion, or the entire line of
credit balance, to a term loan at a fixed rate of interest. As the customer
pays down the balance on the term loan, the funds available on the line of credit
increase by a like amount. All-in-one home equity lines of credit have 30 year
maximum terms.
Home equity loans can be affected by economic conditions and the value of underlying
property. Home equity loans may have increased risk of loss if the Company does
not hold the first mortgage resulting in the Company being in a secondary position
in the event of collateral liquidation. During periods of rising interest rates,
the risk of default on home equity loans may increase due to the increase of
interest cost to the borrower.
Commercial Real Estate Loans. We originate commercial real estate loans to
finance or refinance the purchase of real property, which generally consists
of developed real estate, such as office buildings, warehouses, retail properties
and multi-family apartment complexes, which are typically held as collateral
for the loan. Commercial real estate lending involves additional risks compared
with one- to four-family residential lending, because payments on loans secured
by commercial real estate properties are often dependent on the successful operation
or management of the properties, the borrower’s ability to make repayments
from the cash flow of the borrower’s business or rental income and/or
the collateral value of the commercial real estate securing the loan, and repayment
of such loans may be subject to adverse conditions in the real estate market
or economic conditions to a greater extent than one- to four-family residential
mortgage loans. In addition tenancy of the properties needs to be monitored
as to lease rates, term of lease and tenant worthiness. Also, commercial real
estate loans typically involve larger loan balances to single borrowers or groups
of related borrowers, which generally require substantially greater evaluation
and oversight efforts. Our loan policies limit the amount of loans to a single
borrower or group of borrowers to reduce this risk and are designed to set such
limits within those prescribed by applicable federal and state statutes and
regulations. We engage a third party to conduct a credit review of the commercial
real estate portfolio, including compliance with the Bank’s underwriting
standards and policy requirements.
Construction Loans. We originate loans to finance the construction of both one-
to four-family homes and commercial real estate. These loans typically have
a 12 month or less construction period, whereby draws are taken and interest
only payments are made. As part of the draw process, inspection and lien checks
are required prior to the disbursement of the proceeds. Funds disbursed may
not exceed 80.0% of the loan-to-value of land and up to 80% of loan-to-value
of improvements any time during construction. Interest rates on disbursed funds
are based on the rates and terms set at time of closing. The majority of our
commercial real estate construction loans are variable rate loans with rates
tied to prime rate, plus a premium, while the majority of our one- to four-family
real estate construction loans are fixed rate loans. A floor rate is also established
on any variable rate loans. A minimum of interest only payments on disbursement
funds must be made on a monthly basis. At the end of the construction period,
the loan automatically converts to either a conventional residential or commercial
real estate mortgage, as applicable.
Commercial Loans. In addition to commercial real estate loans, we also engage
in commercial business lending to primarily small businesses, including business
installment loans, lines of credit, and other commercial loans. This loan was
performing in accordance with its terms on that date. Most of our commercial
loans have fixed interest rates, and are for terms generally not in excess of
5 years. Whenever possible, we collateralize these loans with a lien on business
assets and equipment and require personal guarantees from principals of the
borrower. Interest rates on commercial loans generally have higher yields than
rates on one- to four-family residential mortgages. We offer commercial loan
services designed to give business owners borrowing opportunities for modernization,
inventory, equipment, construction, consolidation, real estate, working capital,
vehicle purchases, and the refinancing of existing corporate debt.
Commercial loans are generally considered to involve a higher degree of risk
than residential mortgage loans because the collateral underlying the loans
may be in the form of furniture, fixtures, and equipment and/or inventory subject
to market obsolescence. Commercial loans may also involve relatively large loan
balances to single borrowers or groups of related borrowers, with the repayment
of such loans typically dependent on the successful operation and income stream
of the borrower. Such risks can be significantly affected by economic conditions.
In addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending. We engage a third
party to conduct credit reviews of the commercial loan portfolio, including
compliance with the Bank’s underwriting standards and policy requirements.
Consumer Loans. Generally, the volume of consumer lending has declined as borrowers
have opted for home equity lines of credit, where a mortgage-interest federal
tax deduction is available, as compared to unsecured loans or loans secured
by property other than residential real estate. We continue to make automobile
loans directly to borrowers and primarily on used vehicles. We make other consumer
loans, which may or may not be secured. The terms of such loans vary depending
on the collateral.
Consumer loans are generally originated at higher interest rates than residential
mortgage loans but also tend to have a higher credit risk due to the loans being
either unsecured or secured by rapidly depreciable assets. Furthermore, consumer
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. 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 consumer loans in the event of a default.
Despite these risks, our level of consumer loan delinquencies generally has
been low. No assurance can be given, however, that our delinquency rate or losses
will continue to remain low in the future.