Residential Real Estate Loans
A principal lending activity of the Bank is to originate loans secured by first
mortgages on one-to-four family residences. The Bank typically originates residential
real estate loans through employees who are commissioned licensed mortgage originators
(in accordance with the mortgage lending compensation guidelines issued by the
CFPB). The Bank originates both fixed rate and adjustable rate mortgages.
The Bank currently sells the majority of the fixed rate 30 year residential
mortgage loans it originates to the FHLBB under the Mortgage Partnership Finance
program. The Bank typically retains loan servicing. The Bank retains some fixed
rate residential mortgage loans and those loans originated under its first time
home owner program.
The retention of adjustable rate residential mortgage loans in the portfolio
and the sale of longer term, fixed rate residential mortgage loans helps reduce
the Bank’s exposure to interest rate risk. However, adjustable rate mortgages
generally pose credit risks different from the credit risks inherent in fixed
rate loans primarily because as interest rates rise, the underlying debt service
payments of the borrowers rise, thereby increasing the potential for default.
Management believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less onerous than the interest rate
risks associated with holding long-term fixed rate loans in the loan portfolio.
Commercial Real Estate Loans
The Bank makes commercial real estate loans for the purpose of allowing borrowers
to acquire, develop, construct, improve or refinance commercial real estate
where the property is the primary collateral securing the loan, and the income
generated from the property is the primary repayment source. Office buildings,
light industrial, retail facilities or multi-family income properties, normally
collateralize commercial real estate loans. Among the reasons for management’s
continued emphasis on commercial real estate lending is the desire to invest
in assets with yields which are generally higher than yields on one-to-four
family residential mortgage loans, and are more sensitive to changes in interest
rates. These loans typically have terms/amortizations of up to ten and twenty
five years, respectively, and interest rates, which adjust over periods of three
to ten years, based on one of various rate indices.
Commercial real estate lending generally poses a greater credit risk than residential
mortgage lending to owner-occupants. The repayment of commercial real estate
loans depends on the business and financial condition of the borrower. Economic
events and changes in government regulations, which the Bank and its borrowers
do not control, could have an adverse impact on the cash flows generated by
properties securing commercial real estate loans and on the market value of
such properties.
Construction Loans
The Bank originates both residential and commercial construction loans. Typically,
loans are made to owner-borrowers who will occupy the properties as either their
primary or secondary residence and to licensed and experienced developers for
the construction of single-family homes or commercial properties.
The proceeds of commercial construction loans are disbursed in stages. Bank
officers, appraisers and/or independent engineers inspect each project’s
progress before additional funds are disbursed to verify that borrowers have
completed project phases.
Residential construction loans to owner-borrowers generally convert to a fully
amortizing long-term mortgage loan upon completion of construction. The typical
construction phase is generally twelve months.
Construction lending, particularly commercial construction lending, poses greater
credit risk than mortgage lending to owner-occupants. The repayment of commercial
construction loans depends on the business, the financial condition of the borrower,
and on the economic viability of the project financed. Economic events and changes
in government regulations, which the Bank and its borrowers do not control,
could have an adverse impact on the value of properties securing construction
loans and on the borrower’s ability to complete projects financed and
sell them for amounts anticipated at the time the projects commenced.
Commercial Loans
Commercial loans are generally made on a secured basis and are primarily collateralized
by equipment, inventory, accounts receivable and/or leases. Commercial loans
primarily provide working capital, equipment financing, financing for leasehold
improvements and financing for expansion. The Bank offers both term and revolving
commercial loans. Term loans have either fixed or adjustable rates of interest
and, generally, terms of between two and seven years. Term loans generally amortize
during their life, although some loans require a balloon payment at maturity
if the amortization exceeds seven years. Revolving commercial lines of credit
typically are renewable annually and have a floating rate of interest normally
indexed to the prime rate as published in the Wall Street Journal.
Commercial lending generally poses a higher degree of credit risk than real
estate lending. Repayment of both secured and unsecured commercial loans depends
substantially on the success of the borrower’s underlying business, financial
condition and cash flows. Unsecured loans generally involve a higher degree
of risk of loss than do secured loans because, without collateral, repayment
is primarily dependent upon the success of the borrower’s business.
Secured commercial loans are generally collateralized by equipment, inventory,
accounts receivable and leases. Compared to real estate, such collateral is
more difficult to monitor, its value is more difficult to validate, it may depreciate
more rapidly and it may not be as readily saleable if repossessed.
Consumer Loans
The Bank originates various types of consumer loans, including home equity
loans and lines of credit, auto and personal installment loans. Home equity
loans and lines of credit are generally secured by second mortgages placed on
one-to-four family owner-occupied properties. Home equity loans have fixed interest
rates, while home equity lines of credit adjust based on the prime rate as published
in the Wall Street Journal. Consumer loans are originated through the branch
network with the exception of Home Equity Lines of Credit, which are originated
by licensed Mortgage Lending Originator staff.