Commercial Real Estate and Multi-Family Lending. Consistent with our strategy
to diversify our loan portfolio and increase our yield, we are focused on increasing
our origination of commercial real estate and multifamily loans, with a target
loan size of between $2.0 million to $8.0 million.
We consider a number of factors in originating commercial real estate and multifamily
loans. We evaluate the qualifications and financial condition of the borrower,
including project-level and global cash flows, credit history, and management
expertise, as well as the value and condition of the property securing the loan.
When evaluating the qualifications of the borrower, we consider the financial
resources of the borrower, the borrower’s experience in owning or managing
similar property and the borrower’s payment history with us and other
financial institutions. In evaluating the property securing the loan, the factors
we consider include the net operating income of the mortgaged property before
debt service and depreciation, the ratio of the loan amount to the appraised
value of the mortgaged property and the debt service coverage ratio (the ratio
of net operating income to debt service). We generally require a debt service
coverage ratio of at least 1.20x for commercial real estate loans and 1.15x
for multifamily loans. All commercial real estate and multifamily loans are
appraised by outside independent appraisers approved by the Board of Directors.
We also have an independent third party review of each appraisal, and conduct
an internal valuation of any commercial real estate or multifamily property.
We generally extend credit based upon the lowest valuation of the three methods.
Personal guarantees are generally obtained from the principals of commercial
real estate and multifamily loans, although this requirement may be waived depending
upon the loan-to-value ratio and the debt service ratio associated with the
loan. We require borrowers to carry property and casualty insurance, and flood
insurance if the property is determined to be in a flood zone area. In addition,
all purchase-money and refinance borrowers are required to obtain title insurance.
Commercial and multifamily real estate loans entail greater credit risks compared
to one- to four-family residential real estate loans because they typically
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment of loans secured by income-producing
properties typically depends on the successful operation of the property, as
repayment of the loan generally is dependent, in large part, on sufficient income
from the property to cover operating expenses and debt service. Changes in economic
conditions that are not in the control of the borrower or lender could affect
the value of the collateral for the loan or the future cash flow of the property.
Additionally, any decline in real estate values may be more pronounced for commercial
and multifamily real estate than residential properties.
One- to Four-Family Residential Real Estate Lending. The focus of our lending
program was historically the origination of one- to four-family residential
real estate loans. We originate fixed-rate and adjustable-rate residential mortgage
loans and home equity loans.
Commercial Business Lending.
Our commercial business loans are generally secured by equipment, furniture
and fixtures, inventory, accounts receivable or other business assets, or, in
very limited circumstances, may be unsecured. If a commercial business loan
is secured by equipment, we fix the maturity of a term loan to correspond to
80% of the useful life of equipment purchased or seven years, whichever is less.
We also offer regular lines of credit and revolving lines of credit with terms
of up to 12 months to finance short-term working capital needs such as accounts
payable and inventory. Our commercial lines of credit are generally priced on
an adjustable-rate basis and may be secured or, in very limited circumstances,
unsecured. We generally obtain personal guarantees with commercial business
loans.
Construction and Land Lending.
Our residential construction loans generally have initial terms of 12 months
(subject to extension), during which the borrower pays interest only. Upon completion
of construction, these loans convert to conventional amortizing mortgage loans.
Our residential construction loans have rates and terms comparable to one- to
four-family residential real estate loans that we originate. The maximum loan-to-value
ratio of our residential construction loans is generally 80% of the lesser of
the appraised value of the completed property or the contract price for the
land plus the value of the improvements, and up to 90% for loans where the borrower
obtains private mortgage insurance. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential mortgage loans, except that all residential construction loans are
appraised by independent appraisers approved by the Board of Directors.
Consumer Lending.
Home Equity Lines of Credit. At September 30, 2015, we had $14.9 million, or
3.0% of our loan portfolio, in home equity lines of credit. Our home equity
lines of credit are secured by residential property, and generally have no set
maturity. We do not extend home equity lines of credit unless the combined loan-to-value
ratio of the first mortgage and the line of credit is less than 80%. We offer
fixed and variable rate home equity lines of credit, with variable rate home
equity lines of credit bearing interest rates based upon the prime rate, subject
to maximum rates.
Home equity lines of credit have greater risk than one- to four-family residential
real estate loans secured by first mortgages. We face the risk that the collateral
may not be sufficient to compensate us for the amount of the unpaid loan and
we may be unsuccessful in recovering the remaining balance from those customers.
Particularly with respect to our home equity lines of credit, decreases in real
estate values could adversely affect the value of property used as collateral.
The borrower is a local commercial real estate loan customer; however, the residential
property securing this loan is located out of our market area. Approximately
60% of our home equity lines of credit are secured by property where we also
hold the first mortgage.
Other Consumer Loans. Consumer loans other than home equity lines of credit
have either a variable or fixed-rate of interest for a term of up to 72 months,
depending on the type of collateral and the creditworthiness of the borrower.
Our consumer loans may be secured by deposits, automobiles, boats, motorcycles
or recreational vehicles, and loans of up to $3,000 may be unsecured.
Our education loans are all insured by Sallie Mae. We no longer originate education
loans.
Consumer loans generally have shorter terms to maturity, which reduces our exposure
to changes in interest rates. In addition, management believes that offering
consumer loan products helps to expand and create stronger ties to our existing
customer base by increasing the number of customer relationships and providing
cross-marketing opportunities.