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.
Consumer loans generally have greater risk compared to longer-term loans secured
by improved, owner-occupied real estate, particularly consumer loans that are
secured by rapidly depreciable assets, such as automobiles. In these cases,
any repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower’s continuing financial stability
and thus are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy.
Second Mortgage Loans and Equity Lines of Credit. We offer second mortgage loans
and equity lines of credit secured by a first or second mortgage on residential
property. Second mortgage loans and equity lines of credit are made with fixed
or adjustable rates, and with combined loan-to-value ratios up to 90% on an
owner-occupied principal residence.
Second mortgage loans and 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 will be insufficient to compensate us for
loan losses and costs of foreclosure. When customers default on their loans,
we attempt to foreclose on the property and resell the property as soon as possible
to minimize foreclosure and carrying costs. However, the value of 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 second mortgage loans, decreases in real estate
values could adversely affect the value of property used as collateral for our
loans.
Construction Lending. We make construction loans to individuals for the construction
of their primary residences. These loans generally have maximum terms of 12
months, and upon completion of construction convert to conventional amortizing
mortgage loans. Our construction loans have rates and terms comparable to one-
to four-family residential real estate loans that we originate. During the construction
phase, the borrower generally pays interest only. The maximum loan-to-value
ratio of our owner-occupied construction loans is generally 80% of construction
costs or completed-appraised-value, whichever is less. Residential construction
loans are generally underwritten pursuant to the same guidelines used for originating
permanent residential mortgage loans. On occasion, we may consider loans for
the construction of commercial properties.
To a lesser extent, we will make loans for the construction of “presold”
homes. No more than two such loans may be outstanding to one builder/borrower
at any time. These loans generally have initial maximum terms of nine months,
although the term may be extended to up to 18 months. The loans generally carry
variable rates of interest. The maximum loan-to-value ratio of these construction
loans is generally 80% of construction costs or completed-appraised-value, whichever
is less.
Construction financing generally involves greater credit risk than long-term
financing on improved, owner-occupied real estate. Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the value
of the property at completion of construction compared to the estimated cost
(including interest) of construction and other assumptions. If the estimate
of construction cost is inaccurate, we may be required to advance additional
funds beyond the amount originally committed in order to protect the value of
the property. Moreover, if the estimated value of the completed project is inaccurate,
the borrower may hold a property with a value that is insufficient to assure
full repayment of the construction loan upon the sale of the property. Construction
loans also expose us to the risk that improvements will not be completed on
time in accordance with specifications and projected costs. In addition, the
ultimate sale or rental of the property may not occur as anticipated.
Our commercial business loans consist of term loans as well as regular lines
of credit and revolving lines of credit to finance short-term working capital
needs like accounts receivable and inventory. Our commercial lines of credit
are generally priced on an adjustable-rate basis and may be secured or unsecured.
We generally obtain personal guarantees with all commercial business loans.
Business assets such as accounts receivable, inventory, equipment, furniture
and fixtures may be used to secure lines of credit. Our lines of credit typically
have a maximum term of 12 months. We also originate commercial term loans to
fund long-term borrowing needs such as purchasing equipment, property improvements
or other fixed asset needs. We fix the maturity of a term loan to correspond
to 80% of the useful life of any equipment purchased or seven years, whichever
is less. Term loans can be secured with a variety of collateral, including business
assets such as accounts receivable and inventory or long-term assets such as
equipment, furniture, fixtures or real estate.