Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A
Controls and Procedures
Item 9.B
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director
Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
A Note About Forward-Looking Statements
This report contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as
amended, such as statements relating to our financial condition,
prospective results of operations, future performance or
expectations, plans, objectives, prospects, loan loss allowance
adequacy, simulation of changes in interest rates, capital
spending, finance sources and revenue sources. These statements
relate to expectations concerning matters that are not historical
facts. Accordingly, statements that are based on management's
projections, estimates, assumptions, and judgments constitute
forward-looking statements. These forward looking statements, which
are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future
period or periods, or by the use of forward-looking terminology
such as "believe", "expect", "estimate", "anticipate", "continue",
"plan", "approximately", "intend", "objective", "goal", "project",
or other similar terms or variations on those terms, or the future
or conditional verbs such as "will", "may", "should", "could", and
"would".
Such forward-looking statements reflect our current views and
expectations based largely on information currently available to
our management, and on our current expectations, assumptions,
plans, estimates, judgments, and projections about our business and
our industry, and they involve inherent risks and uncertainties.
Although the Company believes that these forward-looking statements
are based on reasonable estimates and assumptions, they are not
guarantees of future performance and are subject to known and
unknown risks, uncertainties, contingencies, and other factors.
Accordingly, the Company cannot give you any assurance that our
expectations will in fact occur or that our estimates or
assumptions will be correct. The Company cautions you that actual
results could differ materially from those expressed or implied by
such forward-looking statements as a result of, among other
factors, the factors referenced in this report under Item 1A. "Risk
Factors"; changes in interest rates; competitive pressures from
other financial institutions; the effects of a deterioration in
general economic conditions on a national basis or in the local
markets in which the Company operates, including changes which
adversely affect borrowers' ability to service and repay our loans;
changes in loan defaults and charge-off rates; changes in the value
of securities and other assets, adequacy of loan loss reserves, or
deposit levels necessitating increased borrowing to fund loans and
investments; changes in government regulation; the risk that we may
not be successful in the implementation of our business strategy;
the risk that intangibles recorded in the Company's financial
statements will become impaired; and changes in assumptions used in
making such forward-looking statements. These forward-looking
statements speak only as of the date of this report and the Company
does not undertake any obligation to update or revise any of these
forward-looking statements to reflect events or circumstances
occurring after the date of this report.
PART I
Item 1. Business
Overview
Northeast Bancorp ("we," "our," "us," "Northeast" or the
"Company"), incorporated under Maine law in 1987, is a bank holding
company, registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended. The Company's primary subsidiary
and principal asset is its wholly-owned banking subsidiary,
Northeast Bank (the "Bank" or "Northeast Bank"), a Maine
state-chartered bank originally organized in 1872.
On December 29, 2010, the merger of the Company and FHB
Formation LLC, a Delaware limited liability company ("FHB"), was
consummated. As a result of the merger, the surviving company
received a capital contribution of $16.2 million (in addition to
the approximately $13.1 million in cash consideration paid to
former shareholders), and the former members of FHB collectively
acquired approximately 60% of the Company's outstanding common
stock. The Company applied the acquisition method of accounting, as
described in Accounting Standards Codification ("ASC") 805,
Business Combinations
("ASC 805") to the merger, which represents an acquisition by
FHB of Northeast, with Northeast as the surviving company.
In connection with the transaction, as part of the regulatory
approval process, the Company and the Bank made certain commitments
to the Federal Reserve, the most significant of which are (i) to
maintain a Tier 1 leverage ratio of at least 10%, (ii) to maintain
a total risk-based capital ratio of at least 15%, (iii) to limit
purchased loans to 40% of total loans, (iv) to fund 100% of the
Company's loans with core deposits (defined as non-maturity
deposits and non-brokered insured time deposits), and (v) to hold
commercial real estate loans (including owner-occupied commercial
real estate) to within 300% of total risk-based capital. On June
28, 2013, the Federal Reserve approved the amendment of the
commitment to hold commercial real estate loans to within 300% of
total risk-based capital to exclude owner-occupied commercial real
estate loans. All other commitments made to the Federal Reserve in
connection with the merger remain unchanged. The Company and the
Bank are currently in compliance with all commitments to the
Federal Reserve.
As of June 30, 2015, the Company, on a consolidated basis, had
total assets of $850.8 million, total deposits of $674.8 million,
and stockholders' equity of $112.8 million. The Company gathers
retail deposits through the Community Banking Division's ten
full-service branches in Maine and through its online deposit
program, ableBanking; originates loans through its Community
Banking Division; purchases and originates commercial loans on a
nationwide basis through its Loan Acquisition and Servicing Group
("LASG"); and originates Small Business Administration ("SBA")
loans on a nationwide basis through the Small Business
Administration National group ("SBA National").
Unless the context otherwise requires, references herein to the
Company include the Company and its subsidiary on a consolidated
basis.
Strategy
The Company's goal is to prudently grow its franchise, while
maintaining sound operations and risk management, by implementing
the following strategies:
Measured growth of our national commercial loan portfolio.
The Company purchases performing commercial real estate loans,
on a nationwide basis, typically at a discount from their
outstanding principal balances, producing yields higher than those
normally achieved on our originated loan portfolio. These loans are
purchased from a variety of sources, including banks, insurance
companies, investment funds and government agencies, either
directly or indirectly through a broker. We also
originate commercial real estate and commercial business loans
on a nationwide basis, including loans partially guaranteed by the
SBA.
Focus on core deposits.
The Company offers a full line of deposit products to customers
in the Community Banking Division's market area through its
ten-branch network. In addition, in June 2012, we launched our
online deposit program, ableBanking, a division of Northeast Bank,
to provide an additional channel through which to raise core
deposits to fund the Company's asset strategy.
Continuing our community banking tradition.
The Community Banking Division retains a high degree of local
autonomy and operational flexibility to better serve its customers.
The Community Banking Division's focus on sales and service allows
us to attract and retain core deposits in support of balance sheet
growth, and to continue to generate new commercial and residential
mortgage loans.
Market Area and Competition
Northeast Bancorp is the holding company for Northeast Bank, a
full-service bank headquartered in Lewiston, Maine. We offer
traditional banking services through the Community Banking
Division, which operates ten full-service branches that serve
customers located in western and central Maine. From our Maine and
Boston locations, we also lend throughout the New England area. The
LASG purchases and originates commercial loans on a nationwide
basis. SBA National originates SBA loans on a nationwide basis for
the Bank's portfolio, and sells the guaranteed portion on certain
loans originated. ableBanking, a division of Northeast Bank, offers
savings products to consumers online.
The Community Banking Division's market area covers the six New
England states, with the majority of its activities centered in the
western and central regions of the State of Maine. We encounter
significant competition in the Community Banking Division market
area in originating loans, attracting deposits, and selling other
customer products and services. Our competitors include savings
banks, commercial banks, credit unions, mutual funds, insurance
companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries. Many of our primary
competitors there have substantially greater resources, larger
established customer bases, higher lending limits, extensive branch
networks, numerous ATMs and greater advertising and marketing
budgets. They may also offer services that we do not currently
provide.
The LASG has a nationwide scope in its loan purchasing,
origination, and servicing activities. It competes with regional
banks, national private equity funds, and community banks in its
bid to acquire performing commercial loans. SBA National has a
national scope in its SBA loan origination activities, and competes
with regional banks and community banks in its bid to originate
loans. ableBanking also has nationwide scope in its deposit
gathering activities and competes with banks and credit unions, as
well as other, larger, online direct banks having a national
reach.
Lending Activities
General
We conduct our loan-related activities through three primary
channels: the Community Banking Division, the LASG, and SBA
National. The Community Banking Division originates loans directly
to consumers and businesses located in its market area. The LASG
purchases primarily performing commercial real estate loans, on a
nationwide basis, typically at a discount from their outstanding
principal balances, producing yields higher than those normally
achieved on the Company's originated loan portfolio. The LASG also
originates commercial real estate and commercial business loans on
a nationwide basis. Pursuant to commitments made to the Federal
Reserve in connection with the merger, the Company is required to
limit purchased loans to 40% of total loans. At June 30, 2015, the
Company's ratio of purchased loans to total loans, including loans
held for sale, was 32.6%. SBA National originates loans to small
businesses, primarily through the SBA 7(a) program, which
provides
the partial guarantee of the SBA. At June 30, 2015, of our total
loan portfolio of $612.1 million, $220.2 million, or 36.0%, was
originated by the Community Banking Division, $380.9 million, or
62.2%, was purchased or originated by the LASG and $11.0 million,
or 1.8%, was originated by SBA National, excluding loans held for
sale.
The following table sets forth certain information concerning
our portfolio loan purchases and originations for the periods
indicated:
Year Ended June 30,
(Dollars in thousands)
Loans, including loans held for sale, beginning of year
528,361
443,970
Additions:
LASG Purchases and Originations:
130,502
61,665
82,654
79,823
Subtotal
213,156
141,488
SBA National Originations:
34,544
Community Bank Originations:
Residential mortgages held for sale
97,438
91,366
Residential mortgage held to maturity
45,525
Home equity
Commercial real estate
13,580
Commercial business
Consumer
126,427
141,690
Total originations and purchases
374,127
287,791
Reductions:
Sales of residential loans held for sale
(106,045
(88,015
Sales of portfolio loans
(22,351
(8,779
Charge-offs
Pay-downs and amortization, net
(152,682
(106,201
Total reductions
(281,316
(203,400
Loans, including loans held for sale, end of year
621,172
528,361
Annual percentage increase in loans
We individually underwrite the loans that we originate and all
loans that we purchase. Our loan underwriting policies are reviewed
and approved annually by our board of directors. Each loan,
regardless of whether it is originated or purchased, must meet
underwriting criteria set forth in our lending policies and the
requirements of applicable federal and state regulators. We
typically retain servicing rights for all loans that we originate
or purchase, except for residential loans that we originate and
sell servicing released in the secondary market.
Community Bank Originations
Originated Loan Portfolio.
Our Community Bank originated loan portfolio consists primarily
of loans to consumers and businesses in the Community Banking
Division's market area.
Residential Mortgage Loans.
We originate residential mortgage loans secured by one- to
four-family properties throughout Maine, southern New Hampshire,
and Massachusetts. Such
loans may be originated for sale in the secondary market or to
be held on the Bank's balance sheet. We also offer home equity
loans and home equity lines of credit, which are secured by first
or second mortgages on one- to four-family owner-occupied
properties and which are held on our balance sheet. At June 30,
2015, portfolio residential loans totaled $130.5 million, or 21.3%
of total loans. Of the residential loans we held for investment at
June 30, 2015, approximately 51.0% were adjustable rate. Included
in residential loans are home equity lines of credit and other
second mortgage loans aggregating approximately $24.3 million.
Commercial Real Estate Loans.
We originate multi-family and other commercial real estate loans
secured by property located primarily in the Community Banking
Division's market area. At June 30, 2015, commercial real estate
loans outstanding were $70.6 million, or 11.5% of total loans.
Although the largest commercial real estate loan originated by the
Community Banking Division had a principal balance of $3.2 million
at June 30, 2015, the majority of the commercial real estate loans
originated by the Community Banking Division had principal balances
less than $500 thousand.
Commercial Business Loans.
We originate commercial business loans, including term loans,
lines of credit and equipment and receivables financing to
businesses located primarily in the Community Banking Division's
market area. At June 30, 2015, commercial business loans
outstanding were $11.9 million, or 1.9% of total loans. At June 30,
2015, there were 122 commercial business loans outstanding with an
average principal balance of $97 thousand. The largest of these
commercial business loans had a principal balance of $2.7 million
at June 30, 2015.
Consumer Loans.
We originate, on a direct basis, automobile, boat and
recreational vehicle loans. At June 30, 2015, consumer loans
outstanding were $7.7 million, or 1.3% of total loans.
Underwriting of Originated Loans.
Most residential loans, including those held for investment, are
originated in accordance with the standards of the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation,
the Federal Housing Authority, or other third party correspondent
lenders. Our underwriting and approval process for all other loans
originated by the Community Banking Division is as follows:
Most of our Community Bank originated loans are sourced through
relationships between loan officers and their third party referral
sources or current or previous customers.
After a loan officer has taken basic information from the
borrower, the request is submitted to the Community Banking
Division's loan production department. The loan production
department obtains comprehensive information from the borrower and
third parties, and conducts verification and analysis of the
borrower information, which is assembled into a single underwriting
package that is submitted for final approval.
Loans of $500 thousand or more (determined on a relationship
basis) require approval from the Community Banking Division Credit
Committee, which is comprised of senior managers of the Bank. Loans
of less than $500 thousand (determined on a relationship basis)
require approval from two officers with appropriate lending
authority.
SBA National
General.
SBA National, launched in November 2014, originates loans to
small businesses nationwide, most often through the SBA's 7(a)
program, which provides a partial government guarantee. Our loans
are typically secured by liens on business assets and mortgages on
commercial properties, as well as the SBA guarantees. We seek to
build a loan portfolio that is diverse with respect to geography,
loan type and collateral type.
The following table summarizes the SBA National loan portfolio
as of June 30, 2015.
Non-owner occupied commercial real estate
Owner occupied commercial real estate
1 - 4 family residential
10,963
The Company's SBA loan portfolio includes owner and non-owner
occupied loans as defined under regulatory call report
instructions. The regulatory call report instructions primarily
consider the primary source of repayment on the loan for this
determination. However, these loans meet the SBA requirements to be
considered owner occupied as the owner or controlling entity are
actively involved in the daily operations of the underlying core
business.
In addition to the loans held in the SBA National loan
portfolio, as of June 30, 2015, $1.9 million in the loans held for
sale portfolio were attributable to SBA National, which relates to
the guaranteed portion of the SBA National loans we expect to sell
in the secondary market.
Secondary Market for SBA Guarantees.
We typically sell the SBA-guaranteed portion of our
variable-rate originations (generally 75% of the principal balance)
at a premium in the secondary market. We generally retain a 25%
unguaranteed interest and the accompanying servicing rights to the
entire loan. We hold most fixed-rate SBA loan originations in
portfolio.
Competition for SBA Loans.
SBA National competes primarily with community banks and
regional banks nationwide. Capitalizing on our LASG origination
loan infrastructure, SBA National is in a position to review and
act quickly on a variety of lending opportunities. Risk management,
approvals, underwriting and other due diligence for these loans is
similar to that for the LASG loans. We believe that SBA National
has an advantage in originating commercial loans because of its
ability to utilize in-house staff to quickly and accurately screen
loan opportunities and accelerate the underwriting process.
Underwriting of SBA National Loans.
Our loan policies and procedures establish guidelines governing
our SBA lending program. Generally, these guidelines address the
types of loans that we seek, target markets, underwriting and
collateral requirements, terms, interest rate and yield
considerations and compliance with laws and regulations. All loans
or credit lines are subject to approval procedures and amount
limitations. Our policies are reviewed and approved at least
annually by our board of directors. We supplement our own
supervision of the loan underwriting and approval process with
periodic loan audits by internal personnel and outside
professionals experienced in loan review.
Loan Servicing.
We conduct all loan servicing for SBA National loans with an
in-house team of experienced asset managers who actively manage the
loan portfolio. Asset managers initiate and maintain regular
borrower contact, and ensure that the loan credit analysis is
accurate. Collateral valuations, property inspections, and other
collateral characteristics are updated periodically as a result of
our ongoing in-house real estate analysis. All asset management
activity and analysis is contained within a central database.
LASG Purchases and Originations
The LASG purchases and originates commercial loans secured by
income-producing collateral, and on a nationwide basis. Although
the Bank's legal lending limit was $22.3 million at
June 30, 2015, our credit policy currently requires prior Board
approval for the purchase or origination of a loan with an initial
investment greater than 10% of the Company's Tier 1 capital,
determined on a relationship basis. We focus primarily on loans
with balances between $1.0 million and $5.0 million. Purchased
loans are sourced on a nationwide basis from banks, insurance
companies, investment funds and government agencies, either
directly or indirectly through advisors. We seek to build a loan
portfolio that is diverse with respect to geography, loan type and
collateral type. Of the loans originated or purchased by the LASG
that were outstanding as of June 30, 2015, $269.8 million, or
70.8%, consisted of commercial real estate loans. The following
table summarizes the LASG loan portfolio as of June 30, 2015.
128,182
53,051
181,233
72,069
16,507
88,576
108,577
108,850
2,205
202,592
178,272
380,864
Since the inception of the LASG through June 30, 2015, we have
purchased loans for an aggregate investment of $386.3 million, of
which $82.7 million was purchased during fiscal 2015. We have also
originated loans totaling $235.3 million, of which $130.5 million
was originated in fiscal 2015. As of June 30, 2015, the unpaid
principal balance of loans purchased or originated by the LASG
ranged from $1 thousand to $12.0 million, with an average balance
of $892 thousand. Included in the balance are non-real estate
secured loans to broker-dealers, which have balances of $12.0
million each. The real estate loans were secured principally by
retail, industrial, mixed use, multi-family and office properties
in 36 states.
The following table shows the LASG loan portfolio stratified by
book value as of June 30, 2015.
Range
Amount
Percent
of Total
$0 - $500
54,930
$500 - $1,000
48,480
$1,000 - $2,000
69,332
$2,000 - $3,000
56,659
$3,000 - $4,000
24,857
Greater than $4,000
126,606
100.00
The following tables show the LASG loan portfolio by location
and type of collateral as of June 30, 2015.
Collateral Type
State
Multifamily
57,752
66,972
44,125
66,722
Hospitality
50,893
25,060
Retail
54,121
10,509
Industrial
34,225
Mixed use
20,758
17,348
71,630
10,107
Other real estate
15,281
Non-real estate
92,773
32,079
82,308
Loan Purchase Strategies.
The LASG's loan purchasing strategy involves the acquisition of
commercial loans, typically secured by real estate or other
business assets located throughout the United States. The LASG
includes a team of credit analysts, real estate analysts, servicing
specialists and legal counsel with extensive experience in the loan
acquisition business.
We acquire performing commercial loans typically at a discount
to their unpaid principal balances. While we acquire loans on a
nationwide basis, we seek to avoid significant concentration in any
geographic region or in any one collateral type. We do not seek
acquisition opportunities for which the primary collateral is land,
construction, or one- to four-family residential property, although
in a very limited number of cases, loans secured by such collateral
may be included in a pool of otherwise desirable loans.
We focus on servicing released, whole loan or lead participation
transactions so that we can control the management of our portfolio
through our experienced asset management professionals. Purchased
loans can be acquired as a single relationship or combined with
other borrowers in a larger pool. We generally avoid small average
balance transactions (i.e. less than $250 thousand) due to the
relatively higher operational and opportunity costs of managing and
underwriting these assets. Loans are bid to a minimal acceptable
yield to maturity based on the overall risk of the loan, including
expected repayment terms and the underlying collateral value.
Updated loan-to-value ratios and loan terms both influence the
amount of discount the Bank requires in determining whether a loan
meets the Bank's guidelines. We often achieve actual results in
excess of our minimal acceptable yield to maturity when a loan is
prepaid.
At June 30, 2015, purchased loans had an unpaid principal
balance of $239.9 million and a book value of $202.6 million,
representing discount across the portfolio of 15.5%.
The following table shows the purchased loan portfolio as of
June 30, 2015 by original purchase price percentage.
Initial Investment as a % of Unpaid Principal Balance
0% - 60%
60% - 70%
70% - 80%
30,282
80% - 90%
68,698
90% - 100%
93,952
Secondary Market for Commercial Loans.
Commercial whole loans are typically sold either directly by
sellers or through loan sale advisors. Because a central database
for commercial whole loans does not exist, we attempt to compile
our own statistics by both polling major loan sale advisors to
obtain their aggregate trading volume and tracking the deal flow
that we see directly via a proprietary database. This data reflects
only a portion of the total market, as commercial whole loans that
are sold in private direct sales or through other loan sale
advisors are not included in our surveys. In recent years, the
ratio of performing loans to total loans in the market has
increased, in part, because, we believe, sellers have worked
through their most troubled, non-performing loans or are looking to
minimize the discount they would receive in a secondary market
transaction. While the recent economic crisis has led to a high
level of trading volume, we also expect the market to remain active
in times of economic prosperity, as sellers tend to have additional
reserve capacity to sell their unwanted assets. Furthermore, we
believe that the continued consolidation of the banking industry
will create secondary market activity as acquirers often sell
non-strategic borrowing relationships or assets that create excess
loan concentrations.
Underwriting of Purchased Loans.
We review many loan purchase opportunities and commence
underwriting on a relatively small percentage of them. During
fiscal 2015, we reviewed approximately 128 transactions
representing loans with $1.2 billion in unpaid principal balance.
Of those transactions that we reviewed, we placed bids in 40
transactions representing loans with $161.5 million in unpaid
principal balance. Ultimately, we closed 22 transactions in which
we acquired $93.7 million in unpaid principal balance for an
aggregate purchase price of $82.7 million, or 88.2% of the unpaid
principal balance.
Each of our purchased loans is individually underwritten by a
team of in-house, seasoned analysts before being considered for
approval. Prior to commencing underwriting, each loan or portfolio
of loans is analyzed for its performance characteristics, loan
terms, collateral quality, and price expectations. We also consider
whether the loan or portfolio of loans would make our total
purchased loan portfolio more or less diverse with respect to
geography, loan type and collateral type. The opportunity is
underwritten once it has been identified as fitting our investment
parameters. While the extent of underwriting may vary based on
investment size, procedures generally include the following:
A loan analyst reviews and analyzes financial statements and
third party research, including credit reports and other data with
respect to the borrower, guarantors, corporate sponsors and any
major tenants, in order to assess credit risk.
With the assistance of local counsel, where appropriate, an
in-house attorney makes a determination regarding the quality of
loan documentation and enforceability of loan terms.
An in-house real estate specialist performs a detailed
evaluation of all real estate collateral, including canvassing
local market experts, conducting original market research for
trends and
sale and lease comparables, and creates a written valuation that
is based on current data reflecting what we believe are recent
trends.
An environmental assessment is performed on real estate
collateral.
A property inspection is performed on all real estate collateral
securing a loan, focusing on several characteristics, including,
among other things, the physical quality of the property, current
occupancy, general quality and occupancy within the neighborhood,
market position and nearby property listings.
A detailed underwriting package containing the results of all
this analysis and information is assembled and reviewed by a
separate credit analyst on our team before being submitted for
approval by the LASG Credit Committee.
Collateral Valuation.
The estimated value of the real property collateralizing the
loan is determined by the LASG's in-house real estate group, which
considers, among other factors, the type of property, its
condition, location and its highest and best use in its
marketplace. An inspection is conducted for the real property
securing all loans bid upon, and for all loans that represent an
investment in excess of $1.0 million, members of the LASG typically
conduct an in-person site inspection.
We generally view cash flow from operations as the primary
source of repayment on purchased loans. The LASG analyzes the
current and likely future cash flows generated by the collateral to
repay the loan. Also considered are minimum debt service coverage
ratios, consisting of the ratio of net operating income to total
principal and interest payments. For example, our credit policy
provides that the debt service coverage ratio for a purchased
commercial real estate loan generally should not be less than 120
percent of the monthly principal and interest payments resulting
from a re-amortization of the Bank's basis, at a market interest
rate.
Loan Pricing.
In determining the amount that we are willing to bid to acquire
individual loans or loan pools, the LASG considers the
following:
Collateral securing the loan;
Geographic location;
Financial resources of the borrower or guarantors, if any;
Recourse nature of the loan;
Age and performance of the loan;
Length of time during which the loan has performed in accordance
with its repayment term;
Yield expected to be earned; and
Servicing restrictions, if any.
In addition to the factors listed above and despite the fact
that purchased loans are typically performing loans, the LASG also
estimates the amount that we may realize through collection efforts
or foreclosure and sale of the collateral, net of expenses, and the
length of time and costs required to complete the collection or
foreclosure process in the event a loan becomes non-performing or
is non-performing at the time of purchase.
Approvals.
All loan purchases must be approved by the LASG Credit
Committee. This committee is comprised of members of the executive
management team and senior management from the LASG. Our credit
policy currently requires prior Board approval for the purchase of
a loan with an initial investment greater than 10% of the Company's
Tier 1 capital, determined on a relationship basis.
Competition for Purchased Loans.
The LASG competes primarily with community banks, regional banks
and private equity funds operating nationwide. We believe that we
often have a competitive advantage in bidding against private
equity funds on performing loans because those funds generally have
higher funding costs and, therefore, higher expectations for return
on investment than we do. Furthermore, private equity funds
typically do not compete for small balance commercial loans and
typically pursue larger, bulk transactions.
Due to improving credit quality over the past several years and
the continued low interest rate environment, the supply of loans
available for purchase has declined, competition has increased, and
spreads have tightened. Despite these trends, we believe that we
continue to have a competitive advantage in bidding against other
banks because we have a specialized group with experience in
purchasing commercial real estate loans. Additionally, most banks
we compete against are community banks looking to acquire loans in
their market; these banks usually have specific criteria for their
acquisition activities and do not pursue pools with collateral or
geographic diversity.
Loan Originations.
In addition to purchasing loans, the LASG also originates
commercial loans on a nationwide basis. Capitalizing on our
purchased loan infrastructure, LASG is in a position to review and
act quickly on a variety of lending opportunities. Risk management,
approvals, underwriting and other due diligence for these loans is
similar to that for purchased loans, with the exception of the
appraisal and documentation process, which mirrors more traditional
lenders in employing local attorneys and real estate appraisers to
assist in the process. We believe that the LASG has an advantage in
originating commercial loans because of its ability to utilize
in-house staff to quickly and accurately screen loan opportunities
and accelerate the underwriting process.
Loan Servicing.
We conduct all loan servicing for purchased and originated loans
with an in-house team of experienced asset managers who actively
manage the loan portfolio. Asset managers initiate and maintain
regular borrower contact, and ensure that the loan credit analysis
is accurate. Collateral valuations, property inspections, and other
collateral characteristics are updated periodically as a result of
our ongoing in-house real estate analysis. All asset management
activity and analysis is contained within a central database.
Investment Activities
Our securities portfolio and short-term investments provide and
maintain liquidity, assist in managing the interest rate
sensitivity of our balance sheet, and serve as collateral for
certain of our obligations. Individual investment decisions are
made based on the credit quality of the investment, liquidity
requirements, potential returns, cash flow targets, and consistency
with our asset/liability management objectives.
Sources of Funds
Deposits have traditionally been the primary source of the
Bank's funds for lending and other investment purposes. In addition
to deposits, the Bank obtains funds from the amortization and
prepayment of loans and mortgage-backed securities, the sale, call
or maturity of investment securities, advances from the Federal
Home Loan Bank of Boston (the "FHLB"), other term borrowings and
cash flows generated by operations.
Deposits
We offer a full line of deposit products to customers in western
and south-central Maine through our ten-branch network. Our deposit
products consist of demand deposit, NOW, money market, savings and
certificate of deposit accounts. Our customers access their funds
through ATMs, MasterCard® Debit Cards, Automated Clearing House
funds (electronic transfers) and checks. We also offer telephone
banking, online banking and bill payment, mobile banking and remote
deposit capture
services. Interest rates on our deposits are based upon factors
that include prevailing loan demand, deposit maturities,
alternative costs of funds, interest rates offered by competing
financial institutions and other financial service firms, and
general economic conditions. At June 30, 2015, we had core deposits
of $674.2 million, representing 99.9% of total deposits. We define
core deposits as non-maturity deposits and non-brokered insured
time deposits.
Our online deposit program, ableBanking, provides an additional
channel through which to obtain core deposits to support our
growth. ableBanking, which was launched in late fiscal 2012 as a
division of Northeast Bank, had $149.2 million in money market and
time deposits as of June 30, 2015. We also use deposit listing
services to gather deposits from time to time, in support of our
liquidity and asset/liability management objectives. At June 30,
2015, listing service deposits totaled $169.6 million, bearing a
weighted average term of 1.49 years.
Borrowings
While we currently consider core deposits (defined as
non-maturity deposits and non-brokered insured time deposits) as
our primary source of funding to support asset growth, advances
from the FHLB and other sources of wholesale funding remain an
important part of our liquidity contingency planning. Northeast
Bank may borrow up to 50.0% of its total assets from the FHLB, and
borrowings are typically collateralized by mortgage loans and
securities pledged to the FHLB. At June 30, 2015, we had $45.7
million of available borrowing capacity based on collateral.
Northeast Bank can also borrow from the Federal Reserve Bank of
Boston, with any such borrowing collateralized by consumer loans
pledged to the Federal Reserve.
For the foreseeable future, we expect to rely less on borrowings
than other banks of similar size, because of our regulatory
commitment to fund 100% of our loans with core deposits, although
the availability of FHLB and Federal Reserve Bank of Boston
advances and other sources of wholesale funding remain an important
part of our liquidity contingency planning.
Recent Technology and Operational Enhancements
Over the past few years, we have made investments in technology
and customer service to develop the infrastructure to support the
LASG, SBA National Group, ableBanking, and the Community Banking
Division. In fiscal 2014, we successfully converted the Bank's core
banking system from an "in-house" platform to a service-bureau
solution offering enhanced features and capabilities. We expect
that future investments in technology, customer service and
operational support functions will generally be proportionate to
our growth.
Employees
As of June 30, 2015, the Company employed 174 full-time and 17
part-time employees. The Company's employees are not represented by
any collective bargaining unit. The Company believes that its
relations with its employees are good.
Other Subsidiaries
At June 30, 2015, the Bank had four wholly-owned non-bank
subsidiaries:
Northeast Bank Insurance Group, Inc. ("NBIG"). The insurance
agency assets of NBIG were sold on September 1, 2011. The entity
currently holds the real estate formerly used in its insurance
agency business.
200 Elm Realty, LLC, which was established to hold commercial
real estate acquired as a result of loan workouts.
500 Pine Realty, LLC, which was established to hold residential
real estate acquired as a result of loan workouts.
17 Dogwood Realty, LLC, which was established to hold commercial
real estate acquired as a result of loan workouts.
The Company's wholly-owned subsidiary, ASI Data Services, Inc.
("ASI"), is an inactive corporate subsidiary. ASI initially
provided data processing services to the Company and its
subsidiaries. The Company's board transferred the assets and
operations of ASI to the Bank in 1996.
Supervision and Regulation
As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the Company is
subject to regulation and supervision by the Federal Reserve. As a
Federal Deposit Insurance Corporation ("FDIC") insured
Maine-chartered bank, the Bank is subject to regulation and
supervision by the Maine Bureau of Financial Institutions (the
"Bureau") and the FDIC. This regulatory framework is intended to
protect depositors, the federal deposit insurance fund, consumers
and the banking system as a whole, and not necessarily investors in
the Company. The following discussion is qualified in its entirety
by reference to the full text of the statutes, regulations,
policies and guidelines described below.
Bank Holding Company Regulation
Unless a bank holding company becomes a financial holding
company under the Gramm-Leach-Bliley Act ("GLBA") as discussed
below, the BHCA generally prohibits a bank holding company from
acquiring a direct or indirect interest in or control of more than
5% of the voting shares of any company that is not a bank or a bank
holding company. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve before it may
acquire substantially all of the assets of any bank, or ownership
or control of any voting shares of a bank, if, after such
acquisition, it would own or control, directly or indirectly, more
than 5% of the voting stock of such bank. In addition, the BHCA
generally prohibits a bank holding company from engaging directly
or indirectly in activities other than those of banking, managing
or controlling banks or furnishing services to its subsidiary
banks. However, a bank holding company may engage in, and may own
shares of companies engaged in certain activities, that the Federal
Reserve had determined as of November 11, 1999 to be so closely
related to banking or managing and controlling banks so as to be
incident thereto.
Under GLBA, bank holding companies that qualify and have elected
to be treated as financial holding companies are permitted to offer
their customers virtually any type of service that is financial in
nature or incidental thereto, including banking, securities
underwriting, insurance (both underwriting and agency), and
merchant banking. Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, (the "Dodd-Frank Act") however, a bank
holding company and its affiliates are prohibited from engaging in
proprietary trading and from sponsoring and investing in hedge
funds and private equity funds, except as permitted under certain
limited circumstances. In order to engage in financial activities
under GLBA, a bank holding company must qualify and register with
the Federal Reserve as a "financial holding company" by
demonstrating that the bank holding company and each of its
depository institution subsidiaries is "well capitalized" and "well
managed." A financial holding company may not engage in new
activities not permissible for all bank holding companies or
acquire a company engaged in any activity that is not permissible
for all bank holding companies if any depository institution
subsidiary of the company has received on its most recent
examination under the Community Reinvestment Act of 1977 ("CRA") a
rating less than "satisfactory." Although the Company believes that
it meets the qualifications to become a financial holding company
under GLBA,
it has not elected "financial holding company" status, but
rather to retain its pre-GLBA bank holding company regulatory
status for the present time.
The Company is required by the BHCA to file an annual report and
additional reports required with the Federal Reserve. The Federal
Reserve also makes periodic inspections of the Company and its
subsidiaries.
Dividend Restrictions
The Company is a legal entity separate and distinct from the
Bank. The revenue of the Company (on a parent company only basis)
is derived primarily from interest and dividends from the Bank. The
right of the Company, and consequently the right of shareholders of
the Company, to participate in any distribution of the assets or
earnings of the Bank through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors
of the Bank (including depositors), except to the extent that
certain claims of the Company in a creditor capacity may be
recognized.
It is the policy of the Federal Reserve that bank holding
companies should pay dividends only out of current earnings and
only if, after paying such dividends, the bank holding company
would remain adequately capitalized. The Federal Reserve has the
authority to prohibit a bank holding company, such as the Company,
from paying dividends if it deems such payment to be an unsafe or
unsound practice.
The FDIC has the authority to use its enforcement powers to
prohibit a bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound
practice. Federal law also prohibits the payment of dividends by a
bank that will result in the bank failing to meet its applicable
capital requirements on a pro forma basis. Maine law requires the
approval of the Bureau for any dividend that would reduce a bank's
capital below prescribed limits.
Source of Strength
Under the Dodd-Frank Act, the Company is required to serve as a
source of financial strength for the Bank in the event of the
financial distress of the Bank. This provision codifies the
longstanding policy of the Federal Reserve. In addition, any
capital loans by a bank holding company to any of its bank
subsidiaries are subordinate to the payment of deposits and to
certain other indebtedness. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a bank
subsidiary will be assumed by the bankruptcy trustee and entitled
to a priority of payment.
Certain Transactions by Bank Holding Companies with their
Affiliates
There are various statutory restrictions on the extent to which
bank holding companies and their non-bank subsidiaries may borrow,
obtain credit from or otherwise engage in "covered transactions"
with their insured depository institution subsidiaries. The
Dodd-Frank Act amended the definition of affiliate to include any
investment fund for which the depository institution or one of its
affiliates is an investment adviser. An insured depository
institution (and its subsidiaries) may not lend money to, or engage
in other covered transactions with, its non-depository institution
affiliates if the aggregate amount of covered transactions
outstanding involving the bank, plus the proposed transaction,
exceeds the following limits: (a) in the case of any one such
affiliate, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed
10% of the capital stock and surplus of the insured depository
institution; and (b) in the case of all affiliates, the aggregate
amount of covered transactions of the insured depository
institution and its subsidiaries cannot exceed 20% of the capital
stock and surplus of the insured depository institution. For this
purpose, "covered transactions" are defined by statute to include a
loan or extension of credit to an affiliate, a purchase of or
investment in securities issued by an affiliate, a purchase of
assets from an affiliate, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to
any
person or company, the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate, securities borrowing or
lending transactions with an affiliate that creates a credit
exposure to such affiliate, or a derivatives transaction with an
affiliate that creates a credit exposure to such affiliate. Covered
transactions are also subject to collateral security requirements.
Covered transactions as well as other types of transactions between
a bank and a bank holding company must be on market terms and not
otherwise unduly favorable to the holding company or an affiliate
of the holding company. Moreover, Section 106 of the Bank Holding
Company Act Amendments of 1970 provides that, to further
competition, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property
of any kind, or furnishing of any service.
Regulation of the Bank
As a Maine-chartered bank, the Bank is subject to the
supervision of and regulation by the Bureau and the FDIC, as the
Bank's insurer of deposits. This supervision and regulation is for
the protection of depositors, the FDIC's Deposit Insurance Fund
("DIF"), and consumers, and is not for the protection of the
Company's shareholders. The prior approval of the Bureau and the
FDIC is required, among other things, for the Bank to establish or
relocate an additional branch office, assume deposits, or engage in
any merger, consolidation, purchase or sale of all or substantially
all of the assets of any bank. Under the Dodd-Frank Act, the
Federal Reserve may directly examine the subsidiaries of the
Company, including the Bank.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements.
The Federal Reserve has issued risk-based and leverage capital
rules applicable to bank holding companies such as the Company, and
the FDIC has issued similar rules that apply to insured state
nonmember banks, such as the Bank. These guidelines are intended to
reflect the relationship between the banking organization's capital
and the degree of risk associated with its operations based on
transactions recorded on-balance sheet as well as off-balance sheet
items. The FRB and the FDIC may from time to time require that a
banking organization maintain capital above the minimum levels
discussed below, due to the banking organization's financial
condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments
and specify minimum amounts of capital as a percentage of assets
that banking organizations are required to maintain. Common equity
Tier 1 capital for banks and bank holding companies consists of
common stockholders' equity and related surplus. Tier 1 capital for
banks and bank holding companies generally consists of the sum of
common shareholders' equity, non-cumulative perpetual preferred
stock, and related surplus and, in certain cases and subject to
limitations, minority interest in consolidated subsidiaries, less
goodwill, other non-qualifying intangible assets and certain other
deductions. Tier 2 capital generally consists of hybrid capital
instruments, perpetual debt and mandatory convertible debt
securities, cumulative perpetual preferred stock, term subordinated
debt and intermediate-term preferred stock, and, subject to
limitations, allowances for loan losses. The sum of Tier 1 and Tier
2 capital less certain required deductions represents qualifying
total risk-based capital.
Prior to the effectiveness of certain provisions of the
Dodd-Frank Act, bank holding companies were permitted to include
trust preferred securities and cumulative perpetual preferred stock
in Tier 1 capital, subject to limitations. However, the FRB's
capital rule applicable to bank holding companies permanently
grandfathers nonqualifying capital instruments, including trust
preferred securities, issued before May 19, 2010 by depository
institution holding companies with less than $15 billion in total
assets as of December 31, 2009, subject to a limit of 25% of Tier 1
capital. In addition, under rules that became effective January 1,
2015, accumulated other comprehensive income (positive or negative)
must be reflected in Tier 1 capital; however, the Company was
permitted to make a one-time, permanent
election to continue to exclude accumulated other comprehensive
income from capital. In March 2015, the Company made a one time,
permanent election to continue to exclude accumulated other
comprehensive income from capital.
Under the capital rules, risk-based capital ratios are
calculated by dividing Tier 1 and total risk-based capital,
respectively, by risk-weighted assets. Assets and off-balance sheet
credit equivalents are assigned to one of several risk-weight
categories, based primarily on relative risk. The rules require
banks and bank holding companies to maintain a minimum common
equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio
of 6%, a total capital ratio of 8% and a leverage ratio of 4%.
Additionally, subject to a transition schedule, the capital rules
require a bank holding company to establish a capital conservation
buffer of Tier 1 capital in an amount above the minimum risk-based
capital requirements for "adequately capitalized" institutions
equal to 2.5% of total risk weighted assets, or face restrictions
on the ability to pay dividends, pay discretionary bonuses, and to
engage in share repurchases.
Under rules effective January 1, 2015, a bank holding company,
such as the Company, is considered "well capitalized" if the bank
holding company (i) has a total risk based capital ratio of at
least 10%, (ii) has a Tier 1 risk-based capital ratio of at least
6%, and (iii) is not subject to any written agreement order,
capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure. In
addition, the FDIC has amended its prompt corrective action rules
to reflect the revisions made by the revised capital rules
described above. Under the FDIC's revised rules, which became
effective January 1, 2015, an insured state nonmember bank is
considered "well capitalized" if it (i) has a total risk-based
capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital
ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of
6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater;
and (iv) is not subject to any written agreement, order, capital
directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure.
The Company and the Banks are considered "well capitalized"
under all regulatory definitions.
Generally, a bank, upon receiving notice that it is not
adequately capitalized (i.e., that it is "undercapitalized"),
becomes subject to the prompt corrective action provisions of
Section 38 of FDIA that, for example, (i) restrict payment of
capital distributions and management fees, (ii) require that the
Federal Reserve monitor the condition of the institution and its
efforts to restore its capital, (iii) require submission of a
capital restoration plan, (iv) restrict the growth of the
institution's assets and (v) require prior regulatory approval of
certain expansion proposals. A bank that is required to submit a
capital restoration plan must concurrently submit a performance
guarantee by each company that controls the bank. A bank that is
"critically undercapitalized" (i.e., has a ratio of tangible equity
to total assets that is equal to or less than 2.0%) will be subject
to further restrictions, and generally will be placed in
conservatorship or receivership within 90 days.
Deposit Insurance.
Deposits in the Bank are insured by the FDIC to the maximum
extent permitted by law. Pursuant to the Dodd-Frank Act, FDIC
deposit insurance has been permanently increased from $100,000 to
$250,000 per depositor for deposits maintained by the depositor in
the same right and capacity. The FDIA, as amended by the Federal
Deposit Insurance Reform Act and the Dodd-Frank Act, requires the
FDIC to set a ratio of deposit insurance reserves to estimated
insured deposits of the Bankthe designated reserve ratioof 1.35%.
The FDIC utilizes a risk-based assessment system that imposes
insurance premiums based upon a risk matrix that takes into account
a bank's capital level and supervisory rating ("CAMELS rating").
CAMELS ratings reflect the applicable bank regulatory agency to
applicable limits by the DIF and are subject to deposit,
management, earnings, liquidity and sensitivity to risk. Assessment
rates may also vary for certain institutions based on long term
debt issuer ratings, secured or brokered deposits. Pursuant to the
Dodd-Frank Act, deposit premiums are based on assets rather than
insurable deposits. To determine its actual deposit
insurance premiums, the Bank computes the base amount on its
average consolidated assets less its average tangible equity
(defined as the amount of Tier 1 capital) and its applicable
assessment rate. Assessment rates range from 2.5 to 9 basis points
on the broader assessment base for banks in the lowest risk
category up to 30 to 45 basis points for banks in the highest risk
category.
Under the FDIA, the FDIC may terminate deposit insurance upon a
finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.
Safety and Soundness Standard.
The FDIA requires the federal bank regulatory agencies to
prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation
and compensation, fees and benefits, and such other operational and
managerial standards as the agencies deem appropriate. Guidelines
adopted by the federal bank regulatory agencies establish general
standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and
benefits. In general, these guidelines require, among other things,
appropriate systems and practices to identify and manage the risk
and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In
addition, the federal banking agencies adopted regulations that
authorize, but do not require, an agency to order an institution
that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit
an acceptable compliance plan or fails in any material respect to
implement an acceptable compliance plan, the agency must issue an
order directing action to correct the deficiency and may issue an
order directing other actions of the types to which an
undercapitalized institution is subject under the "prompt
corrective action" provisions of FDIA. See "Regulatory Capital
Requirements" above. If an institution fails to comply with such an
order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Depositor Preference.
The FDIA provides that, in the event of the "liquidation or
other resolution" of an insured depository institution, the claims
of depositors of the institution, including the claims of the FDIC
as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver, will have
priority over other general unsecured claims against the
institution. If an insured depository institution fails, insured
and uninsured depositors, along with the FDIC, will have priority
in payment ahead of unsecured, non-deposit creditors, including
depositors whose deposits are payable only outside of the United
States and the parent bank holding company, with respect to any
extensions of credit they have made to such insured depository
institution.
Activities and Investments of Insured State Banks
The powers of a Maine-chartered bank, such as the Bank, include
provisions designed to provide Maine banks with competitive equity
to the powers of national banks. GLBA includes a section of the
FDIA governing subsidiaries of state banks that engage in
"activities as principal that would only be permissible" for a
national bank to conduct in a financial subsidiary. This provision
permits state banks, to the extent permitted under state law, to
engage in certain new activities, which are permissible for
subsidiaries of a financial holding company. Further, it expressly
preserves the ability of a state bank to retain all existing
subsidiaries. Because Maine law explicitly permits banks chartered
by the state to engage in all activities permissible for
federally-chartered banks, the Bank is permitted to form
subsidiaries to engage in the activities authorized by GLBA. In
order to form a financial subsidiary, a
state bank must be well-capitalized, and the state bank would be
subject to certain capital deduction, risk management and affiliate
transaction rules.
Consumer Protection Regulation
The Company and the Bank are subject to a number of federal and
state laws designed to protect consumers and prohibit unfair or
deceptive business practices. These laws include the Equal Credit
Opportunity Act, the Fair Housing Act, Home Ownership Protection
Act, the Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act of 2003 ("FACT Act"), GLBA, the
Truth in Lending Act, CRA, the Home Mortgage Disclosure Act, the
Real Estate Settlement Procedures Act, the National Flood Insurance
Act, Electronic Funds Transfer Act, Truth in Savings Act, Secure
and Fair Enforcement Act, Expedited Funds Availability Act, and
various state law counterparts. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which
financial institutions must interact with customers when taking
deposits, making loans, collecting loans and providing other
services. Further, the Dodd-Frank Act established the CFPB, which
has the responsibility for making rules and regulations under the
federal consumer protection laws relating to financial products and
services. The CFPB also has a broad mandate to prohibit unfair or
deceptive acts and practices and is specifically empowered to
require certain disclosures to consumers and draft model disclosure
forms. Failure to comply with consumer protection laws and
regulations can subject financial institutions to enforcement
actions, fines and other penalties. The FDIC examines the Bank for
compliance with CFPB rules and enforces CFPB rules with respect to
the Bank.
Mortgage Reform
The Dodd-Frank Act prescribes certain standards that mortgage
lenders must consider before making a residential mortgage loan,
including verifying a borrower's ability to repay such mortgage
loan. The Dodd-Frank Act also allows borrowers to assert violations
of certain provisions of the Truth-in-Lending Act as a defense to
foreclosure proceedings. Under the Dodd-Frank Act, prepayment
penalties are prohibited for certain mortgage transactions and
creditors are prohibited from