Single-family residential loans. The Bank primarily originates 30 year fixed-rate
loans secured by single-family residences. Moreover, it is the Bank's general
policy to include in the documentation evidencing its conventional mortgage
loans a due-on-sale clause, which facilitates adjustment of interest rates on
such loans when the property securing the loan is sold or transferred.
All of the Bank's mortgage lending is subject to written, nondiscriminatory
underwriting standards, loan origination procedures and lending policies prescribed
by the Company's Board of Directors. Property valuations are required on all
real estate loans. Appraisals are prepared by independent appraisers approved
by the Bank's management, and reviewed by the Bank's staff. Property evaluations
are sometimes utilized in lieu of appraisals on single-family real estate loans
of $250,000 or less and are reviewed by the Bank's staff. Detailed loan applications
are obtained to determine the borrower's ability to repay and the more significant
items on these applications are verified through the use of credit reports,
financial statements or written confirmations.
Depending on the size of the loan involved, a varying number of officers of
the Bank must approve the application before the loan can be granted. Federal
guidelines limit the amount of a real estate loan made to a specified percentage
of the value of the property securing the loan, as determined by an evaluation
at the time the loan is originated. This is referred to as the loan-to-value
ratio. Maximum loan-to-value ratios for each type of real estate loan are established
by the Company's Board of Directors.
When establishing general reserves for loans with loan-to-value ratios exceeding
80% that are not insured by private mortgage insurance, the Bank considers the
additional risk inherent in these products, as well as their relative loan loss
experience, and provides reserves when deemed appropriate.
Construction loans. The Bank originates construction loans to finance construction
of single-family and multi-family residences as well as commercial properties.
These loans to builders are generally indexed to the "prime rate"
and normally have maturities of two years or less. Loans made to individuals
for construction of their home generally are 30 year fixed rate loans. The Bank's
policies provide that for residential construction loans, loans may be made
for 85% or less of the appraised value of the property upon completion. As a
result of activity over the past four decades, the Bank believes that builders
of single-family residences in its primary market areas consider it to be a
construction lender of choice. Because of this history, the Bank has developed
a staff with in-depth land development and construction experience and working
relationships with selected builders based on their operating histories and
financial stability.
Construction lending involves a higher level of risk than single-family residential
lending due to the concentration of principal in a limited number of loans and
borrowers, and the effects of general economic conditions in the homebuilding
industry. Moreover, a construction loan can involve additional risks because
of the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost (including interest) of the project.
Land loans. The Bank's land development loans are of a short-term nature and
are generally made for 75% or less of the appraised value of the unimproved
property. Funds are disbursed periodically at various stages of completion as
authorized by the Company's personnel. The interest rate on these loans generally
adjusts daily in accordance with a designated index.
Land development loans involve a higher degree of credit risk than long-term
financing on owner-occupied real estate. Mitigation of risk of loss on a land
development loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of development compared to the estimated
cost (including interest) of development and the financial strength of the borrower.
The Bank's permanent land loans (also called consumer lot loans) are generally
made on improved land, with the intent of building a primary or secondary residence.
These loans are limited to 80% or less of the appraised value of the property,
up to a maximum loan amount of $350,000. The interest rate on permanent land
loans is generally fixed for 20 years.
Multi-family residential loans. Multi-family residential (five or more dwelling
units) loans generally are secured by multi-family rental properties, such as
apartment buildings. In underwriting multi-family residential loans, the Bank
considers a number of factors, which include the projected net cash flow to
the loan's debt service requirement, the age and condition of the collateral,
the financial resources and income level of the borrower and the borrower's
experience in owning or managing similar properties. Multi-family residential
loans are originated in amounts up to 80% of the appraised value of the property
securing the loan.
Loans secured by multi-family residential real estate generally involve a greater
degree of credit risk than single-family residential 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
effects of general economic conditions on income-producing properties, and the
increased difficulty of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by multi-family mortgages typically depends upon
the successful operation of the related real estate property. If the cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired. The Bank seeks to minimize these risks through its underwriting policies,
which require such loans to be qualified at origination on the basis of the
property's income and debt service ratio. The Bank generally limits its multi-family
residential loans to $10.0 million on any one loan.
It is the Bank's policy to obtain title insurance ensuring that it has a valid
first lien on the mortgaged real estate serving as collateral. Borrowers must
also obtain hazard insurance prior to closing and, when required by regulation,
flood insurance. Borrowers may be required to advance funds on a monthly basis,
together with each payment of principal and interest, to a mortgage escrow account
from which the Bank makes disbursements for items such as real estate taxes,
hazard insurance premiums and private mortgage insurance premiums when due.
Commercial and industrial loans. The Bank makes various types of business loans
to customers in its market area for working capital, acquiring real estate,
equipment or other business purposes, such as acquisitions. The terms of these
loans generally range from less than one year to a maximum of ten years. The
loans are either negotiated on a fixed-rate basis or carry adjustable interest
rates indexed to the Libor rate, prime rate or another market rate.