Residential Mortgage Loans
A principal lending activity of the Bank is to originate loans secured by first
mortgages on one-to-four family residences. The Bank originates residential
real estate loans through commissioned mortgage loan officers throughout the
state and retail bank branches within our branch footprint. Residential mortgages
are generally underwritten according to Federal Home Loan Mortgage Association
(“Freddie Mac”) and Federal National Mortgage Association (“Fannie
Mae”) guidelines for loans they designate as “A” or “A-”
(these are referred to as “conforming loans”). Private mortgage
insurance is generally required for loans with loan-to-value ratios in excess
of 80%. The Bank also originates loans above conforming loan amount limits,
referred to as “jumbo loans.” The Bank may also sell loans to other
secondary market investors, either on a servicing retained or servicing released
basis. The Bank is an approved originator of loans for sale to Fannie Mae, Merrimack
Mortgage Company, the Connecticut Housing Finance Authority (“CHFA”)
and the Massachusetts Housing Finance Authority (“MHFA”).
Commercial Real Estate Loans
The Company makes commercial real estate loans throughout its market area for
the purpose of acquiring, developing, constructing, improving or refinancing
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. Small office buildings, industrial facilities and retail facilities
normally collateralize commercial real estate loans. This portfolio also includes
commercial one-to-four family and multifamily properties. These properties are
primarily located in Connecticut and Massachusetts, but also expand throughout
the Northeast and certain Mid-Atlantic states through our regional commercial
real estate lending (“Regional CRE”) program. Regional CRE program
provides geographic diversification within the overall commercial real estate
loan portfolio and the properties financed are high quality, income producing
and have experienced sponsorships. Loans may generally be made with amortizations
of up to 30 years and with interest rates that are fixed or adjust periodically.
Most commercial mortgages are originated with final maturities of 20 years or
less. The Bank generally requires that borrowers have debt service coverage
ratios (the ratio of available cash flows before debt service to debt service)
of at least 1.15 times. Loans at origination may be made up to 80% of appraised
value. Generally, commercial mortgages require personal guarantees by the principals.
Credit enhancements in the form of additional collateral or guarantees are normally
considered for start-up businesses without a qualifying cash flow history. 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 market interest rates.
Construction Loans
The Company originates both residential and commercial construction loans. Typically
loans are made to owner-borrowers who will occupy the properties (residential
construction) and to licensed and experienced developers for the construction
of single-family home developments (commercial construction). We extend loans
to residential subdivision developers for the purpose of land acquisition, the
development of infrastructure and the construction of homes.
Residential construction loans to owner-borrowers generally convert to a fully
amortizing long-term mortgage loan upon completion of construction which generally
is 12 to 36 months. Commercial construction loans generally have terms of 12
to 36 months. Some construction-to-permanent loans have fixed interest rates
for the permanent portion, but the Company originates mostly adjustable rate
construction loans. The proceeds of commercial construction loans are disbursed
in stages and the terms may require developers to pre-sell a certain percentage
of the properties they plan to build before the Company will advance any construction
financing. Company officers, appraisers and/or independent engineers inspect
each project’s progress before additional funds are disbursed to verify
that borrowers have completed project phases.
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 and financial condition of the borrower
and on the economic viability of the project financed. A number of borrowers
have more than one construction loan outstanding with the Company at any one
time. Economic events and changes in government regulations, which the Company
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, if not the borrower’s residence, sell
them for amounts anticipated at the time the projects commenced. Construction
lending contains a unique risk characteristic as loans are originated under
market and economic conditions that may change between the time of origination
and the completion and subsequent purchaser financing of the property.
Commercial Business Loans
Commercial loans primarily provide working capital, equipment financing, financing
for leasehold improvements and financing for expansion. Commercial loans are
frequently collateralized by equipment, inventory, accounts receivable, and/or
general business assets and are generally supported by personal guarantees.
Depending on the collateral used to secure the loans, commercial business loans
are typically made up to 80% of the value of the loan collateral. A significant
portion of the Bank’s commercial and industrial loans are also collateralized
by real estate, but are not classified as commercial real estate loans because
such loans are not made for the purpose of acquiring, developing, constructing,
improving or refinancing the real estate securing the loan, nor is the repayment
source income generated directly from such real property. The Company participates
in a shared national credit (“SNC”) program, which engages in the
participation and purchase of credits with other “supervised” unaffiliated
banks or financial institutions, specifically loan syndications and participations.
These loans generate earning assets to increase profitability of the Bank and
diversify commercial loan portfolios by providing opportunities to participate
in loans to borrowers in other regions or industries the Bank might otherwise
have no access. The Company offers both term and revolving commercial loans.
Term loans have either fixed or adjustable rates of interest and, generally,
terms of between 3 and 7 years and amortize on the same basis.