Commercial and Industrial Loans. The Bank originates secured loans for business
purposes. Loans are made to provide working capital to businesses in the form
of lines of credit, which may be secured by accounts receivable, inventory, equipment
or other assets. The financial condition and cash flow of commercial borrowers
are closely monitored by means of corporate financial statements, personal financial
statements and income tax returns. The frequency of submissions of required financial
information depends on the size and complexity of the credit and the collateral
that secures the loan. The Bank’s general policy is to obtain personal guarantees
from the principals of the commercial loan borrowers. Such loans are made to businesses
located in the Bank’s market area.
Commercial business loans generally involve a greater degree of risk than residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the mobility of collateral, the effects of general
economic conditions and the increased difficulty of evaluating and monitoring
these types of loans. Unlike residential mortgage loans, which generally are made
on the basis of the borrower’s ability to make repayment from his or her
employment and other income and which are secured by real property the value of
which tends to be more easily ascertainable, commercial business loans typically
are made on the basis of the borrower’s ability to make repayment from the
cash flow of the borrower’s business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent
on the success of the business itself and the general economic environment. If
the cash flow from business operations is reduced, the borrower’s ability
to repay the loan may be impaired.
Real Estate Development and Construction Loans. The Bank originates construction
loans to individuals and real estate developers in its market area. The advantages
of construction lending are that the market is typically less competitive than
more standard mortgage products, the interest rate typically charged is a variable
rate, which permits the Bank to protect against sudden changes in its costs
of funds, and the fees or “points” charged by the Bank to its customers
can be amortized over the shorter term of a construction loan, typically, one
to two years, which permits the Bank to recognize income received over a shorter
period of time.
The Bank provides interim real estate acquisition development and construction
loans to builders and developers. Real estate development and construction loans
to provide interim financing on the property are based on acceptable percentages
of the appraised value of the property securing the loan in each case. Real
estate development and construction loan funds are disbursed periodically at
pre-specified stages of completion. Interest rates on these loans are generally
adjustable. The Bank carefully monitors these loans with on-site inspections
and control of disbursements. These loans are generally made on properties located
in the Bank’s market area.
Development and construction loans are secured by the properties under development
and personal guarantees are typically obtained. Further, to assure that reliance
is not placed solely in the value of the underlying property, the Bank considers
the financial condition and reputation of the borrower and any guarantors, the
amount of the borrower’s equity in the project, independent appraisals,
costs estimates and pre-construction sale information.
Loans to residential builders are for the construction of residential homes
for which a binding sales contract exists and the prospective buyers have been
pre-qualified for permanent mortgage financing. Loans to residential developers
are made only to developers with a proven sales record. Generally, these loans
are extended only when the borrower provides evidence that the lots under development
will be sold to potential buyers satisfactory to the Bank.
The Bank also originates loans to individuals for construction of single family
dwellings. These loans are for the construction of the individual’s primary
residence. They are typically secured by the property under construction, occasionally
include additional collateral (such as a second mortgage on the borrower’s
present home), and commonly have maturities of six to twelve months.
Construction financing is labor intensive for the Bank, requiring employees
of the Bank to expend substantial time and resources in monitoring and servicing
each construction loan to completion. 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 is dependent largely
upon the accuracy of the initial estimate of the property’s value at completion
of construction and development, the accuracy of projections, such as the sales
of homes or the future leasing of commercial space, and the accuracy of the
estimated cost (including interest) of construction. Substantial deviations
can occur in such projections. 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, the Bank 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, the Bank may be confronted, at or
prior to the maturity of the loan, with a project having a value which is insufficient
to assure full repayment. Also, a construction loan that is in default can cause
problems for the Bank such as designating replacement builders for a project,
considering alternate uses for the project and site and handling any structural
and environmental issues that might arise.
Commercial Real Estate Mortgage Loans. The Bank originates mortgage loans secured
by commercial real estate. Such loans are primarily secured by office buildings,
retail buildings, warehouses and general purpose business space. Although terms
may vary, the Bank’s commercial mortgages generally have maturities of
twenty years, but re-price within five years.
Loans secured by commercial real estate are generally larger and involve a greater
degree of risk than one- to four-family residential mortgage loans. Of primary
concern in commercial and multi-family 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 are often dependent on the successful
operation or 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.
The Bank seeks to reduce the risks associated with commercial mortgage lending
by generally lending in its primary market area and obtaining periodic financial
statements and tax returns from borrowers. It is also the Bank’s general
policy to obtain personal guarantees from the principals of the borrowers and
assignments of all leases related to the collateral.
Residential Real Estate Mortgage Loans. The Bank originates adjustable and
fixed-rate residential mortgage loans. Such mortgage loans are generally originated
under terms, conditions and documentation acceptable to the secondary mortgage
market. Although the Bank has placed all of these loans into its portfolio,
a substantial majority of such loans can be sold in the secondary market or
pledged for potential borrowings.
Consumer Loans. The Bank offers a variety of consumer loans. These loans are
typically secured by residential real estate or personal property, including
automobiles. Home equity loans (closed-end and lines of credit) are typically
made up to 80% of the appraised or assessed value of the property securing the
loan in each case, less the amount of any existing prior liens on the property,
and generally have maximum terms of ten years, although the Bank does offer
a 90% loan to value product if certain conditions related to the borrower and
property are satisfied. The interest rates on second mortgages are generally
fixed, while interest rates on home equity lines of credit are variable.