UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission File number 2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
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United States of America |
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(12 U.S.C. Section 3001 et. seq.)
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52-1157795 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
601
Pennsylvania Avenue N.W., North Building, Suite 750, Washington, D.C. 20004
(Address of principal executive offices) (Zip Code)
Registrants
telephone number, including area code (202) 349-7444
Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act: o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act: o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements of the past 90 days.
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Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Act): o Yes þ No
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the place at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrants
most recently completed second fiscal quarter: the registrants voting and non-voting common equity
is not traded on any market.
Indicate the number of shares outstanding of each of the registrants classes of common stock
at December 31, 2009: Class B 1,795,981 and Class C
254,373.
DOCUMENTS INCORPORATED BY REFERENCE:
None
This Form 10-K contains certain forward-looking statements which may be identified by the
use of words such as believe, expect, anticipate, should, planned, estimated and
potential. Examples of forward-looking statements include, but are not limited to, estimates with
respect to National Consumer Cooperative Banks financial condition, results of operations and
business that are subject to various factors which could cause actual results to differ materially
from these estimates and most other statements that are not historical in nature. These factors
include, but are not limited to, general and local economic conditions, changes in interest rates,
other-than-temporary impairment evaluations, deposit flows, demand for mortgage, commercial and
other loans, real estate values, performance of collateral underlying certain securities,
competition, changes in accounting principles, policies, or guidelines, changes in legislation or
regulation, and other economic, competitive, governmental, regulatory, and technological factors
affecting National Consumer Cooperative Banks operations, pricing products and services.
PART 1
ITEM 1. BUSINESS
GENERAL
The National Consumer Cooperative Bank (the Company) is a financial institution, organized
under the laws of the United States that primarily provides financial services to eligible
cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United
States. A cooperative enterprise is an organization owned by its members and engaged in producing
or furnishing goods, services, or facilities for the benefit of its members or voting stockholders
who are the ultimate consumers or primary producers of such goods, services, or facilities. The
Company is structured as a cooperative institution whose voting stock can only be owned by its
borrowers or those eligible to become its borrowers (or organizations controlled by such entities).
The Company operates directly and through its wholly owned subsidiaries, NCB Financial
Corporation and NCB, FSB. This Form 10-K provides information regarding the consolidated business
of the Company and its subsidiaries and, where appropriate and as indicated, provides information
specific to the Holding Company, NCB Financial Corporation or NCB, FSB. In general, unless
otherwise noted, references in this report to the Company refer to the Company and its subsidiaries
collectively. The chart below provides specific explanations of the various entities that may be
referenced throughout this Form 10-K:
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Entity |
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Principal Activities |
The Company
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Financial institution that primarily provides
financial services to eligible cooperatives or
enterprises controlled by eligible cooperatives.
Unless otherwise indicated, references to the
Company are references to the consolidated
business of the Company and its subsidiaries. |
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NCCB (Holding Company)
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References to the Holding Company are
references to the legal entity NCCB alone and
not its subsidiaries. |
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NCB Financial Corporation
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Intermediate holding company, wholly owned
subsidiary of the Company and owner of NCB, FSB. |
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NCB, FSB
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Federally chartered and Federal Deposit
Insurance Corporation (FDIC)-insured thrift
institution that provides a broad range of
financial services to cooperative and
non-cooperative customers. NCB, FSB is a wholly
owned subsidiary of NCB Financial Corporation
and is an indirect wholly owned subsidiary of
the Company. |
In the legislation chartering the Holding Company (the National Consumer Cooperative Bank Act
or the Act), Congress stated its finding that cooperatives have proven to be an effective means
of minimizing the impact of inflation and economic hardship on members/owners by narrowing
producer-to-consumer margins and price spreads, broadening ownership and control of economic
organizations to a larger base of consumers, raising the quality of goods and services available in
the marketplace and strengthening the nations economy as a whole. To further the development of
cooperative businesses, Congress specifically directed the Holding Company (1) to encourage the
development of new and existing cooperatives eligible for its assistance by providing specialized
credit and technical assistance; (2) to maintain broad-based control of the Holding Company by its
voting shareholders; (3) to encourage a broad-based ownership, control and active participation by
members in eligible cooperatives; (4) to assist in improving the quality and availability of goods
and services to consumers; and (5) to encourage ownership of its equity securities by cooperatives
and others.
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The Act also resulted in the formation of NCB Capital Impact, which is a non-profit
organization without capital stock organized under the laws of the District of Columbia to perform
only functions provided in the Act. NCB Capital Impact provides loans and technical support to
cooperative enterprises. Consistent with the Act, the Holding Company may make deductible,
voluntary contributions to NCB Capital Impact.
The Holding Company fulfills its statutory obligations in two fashions. First, through its
subsidiaries, it makes loans and offers other financing services, which afford cooperative
businesses substantially the same financing opportunities currently available for traditional
enterprises. Second, it provides financial and other assistance to NCB Capital Impact.
Under the Act, the Company must make annual patronage dividends to its patrons, which are
those cooperatives from whose loans or other business the Company derived interest or other income
during the year with respect to which a patronage dividend is declared. The Company allocates such
patronage dividends among its patrons generally in proportion to the amount of income derived
during the year from each patron. The Companys stockholders, as such, are not automatically
entitled to patronage dividends. They are entitled to patronage dividends only in the years when
they have patronized the Company and the amount of their patronage does not depend on the amount of
their stockholding. Under the Companys patronage dividend policy, patronage dividends may be paid
only from taxable income and only in the form of cash, Class B or Class C stock, or allocated
surplus.
The Company also makes certain non-patronage-based loans under the general lending authority
and incidental powers provisions of Section 102 of the Act to entities and individuals other than
eligible cooperatives, when the Company determines such loans to be incidental to and beneficial to
lending programs designed for eligible cooperatives.
The Act was passed on August 20, 1978, and the Holding Company commenced lending operations on
March 21, 1980. In 1981, Congress amended the Act (the Act Amendments) to convert the Class A
Preferred stock of the Holding Company previously held by the United States to Class A notes as of
December 31, 1981 (the Final Government Equity Redemption Date).
The Company maintains its executive offices at 601 Pennsylvania Avenue, N.W., Suite 750,
Washington, D.C. 20004. The telephone number of its executive offices is (202) 349-7444. The
Companys operations center is located in Arlington, Virginia. The Company also maintains regional
offices in Anchorage, Alaska, New York, New York, and Oakland, California. NCB, FSB maintains its
principal office in Hillsboro, Ohio and non-retail branches in New York, New York and Washington,
D.C.
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The Company originates various types of loans. The following are the primary types of such
loans.
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Consumer Loans, including auto
loans, include unsecured or
secured loans to individuals
primarily for personal use. If
secured, Consumer Loans are
secured by collateral other
than real estate. |
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Commercial Loans include
unsecured or secured loans to
businesses (including small
business SBA Loans and loans
to retailer members of
wholesaler cooperatives),
franchises, community
associations, cooperative
housing corporations (unsecured
only) and other entities to
refinance debt or fund capital
improvements. Commercial Loans
to businesses and franchises
are primarily secured by
personal property, rents or
other cash flows. Commercial
Loans to community associations
(Community Association Loans)
are secured by an assignment of
condominium or homeowner
assessments, accounts and rents
and the associations rights to
collect them. |
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Commercial loans that are used
for purposes other than the
development and/or ownership of
non-residential real property
but are secured by
non-residential real property
are categorized as Real Estate
Commercial Loans. |
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Real
Estate Residential Loans
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Residential Real Estate Loans
include Single-family
Residential Loans, Share Loans,
Cooperative Loans and
Multifamily Loans. |
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Single-family Residential Loans
are loans to individuals or
investors to purchase,
refinance, construct or improve
residential property consisting
of one to four dwellings and
are secured by the underlying
real estate. |
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Share Loans are loans to
individuals or investors living
in a cooperative housing
corporation (created for the
sole purpose of owning and
managing a residential
apartment property for the
benefit of its resident
shareholders) to finance the
purchase or refinance a share
within the cooperative. The
share or stock certificate
serves as collateral for the
loan. |
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Cooperative Loans are loans to
cooperative housing
corporations to refinance
existing debt or fund capital
improvements to the common
areas of the entire building.
Cooperative Loans are secured
by the first or second mortgage
in the land and buildings and
by an assignment of all leases,
receivables, accounts and
personal property of the
cooperative housing
corporation. |
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Multifamily Loans are loans to
businesses or investors to
purchase, refinance, construct
or improve residential property
consisting of five or more
dwellings (e.g. apartment
housing, student housing,
senior housing) and are secured
by the underlying real estate. |
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Real
Estate Commercial Loans
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Commercial Real Estate Loans
are loans to businesses
(including small business SBA
Loans) or investors to
purchase, refinance, construct
or improve non-residential
property (e.g., retail centers,
office buildings, industrial
properties or self storage
warehouse) and are secured by
the underlying real estate. |
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LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES
Eligibility Requirements
Cooperatives, cooperative-like organizations, and legally chartered entities primarily owned
and controlled by cooperatives are eligible to borrow from the Company on a patronage basis under
Section 108 of the Act if they are engaged in producing or furnishing goods, services or facilities
primarily for the benefit of their members or voting stockholders who are the ultimate consumers of
such goods, services or facilities. In addition, to be eligible to borrow from the Company under
Section 108 of the Act the borrower must, among other things, (1) be controlled by its members or
voting stockholders on a democratic basis; (2) agree not to pay dividends on voting stock or
membership capital in excess of such percentage per annum as may be approved by the Company; (3)
provide that its net savings shall be allocated or distributed to all members or patrons, in
proportion to their patronage, or retain such savings for the actual or potential expansion of
its services or the reduction of its charges
to the patrons; and (4) make membership available on a voluntary basis, without any social,
political, racial or religious discrimination and without any discrimination on the basis of age,
sex, or marital status to all persons who can make use of its services and are willing to accept
the responsibilities of membership. The Company may also purchase obligations issued by members of
eligible cooperatives. The Company maintains member finance programs for members of cooperatives
primarily in the food, franchise and hardware industries. In addition, organizations applying for
loans must comply with other technical and financial requirements that are customary for similar
loans from financial institutions.
Lending Authorities
The Board of Directors establishes its policies governing the lending operations in compliance
with the Act and management carries out the policies. Management in turn adopts and implements
guidelines and procedures consistent with stated Board directives. The Board of Directors and
management regularly review the lending policies and guidelines in order to make needed changes and
amendments.
Management may approve individual credit exposures of up to 75% of the single borrower-lending
limit, which is equal to 15% of the Companys capital (using the definition of capital for national
banks as set forth by the Office of the Comptroller of the Currency) without prior approval of the
Board. The President may delegate authorities up to this limit to such committees and individual
officers, as he may deem appropriate.
Cooperatives of Primary Producers
As provided by Section 105 of the Act the total dollar value of loans to cooperatives that
produce, market and furnish goods, services and facilities on behalf of their members as primary
producers (typically agricultural cooperatives) may not exceed 10% of the gross assets of the
Company.
Interest Rates
The Company seeks to price its loans to yield a reasonable risk adjusted return on its
portfolio in order to build and maintain its financial viability and to encourage the development
of new and existing cooperatives. In addition, to ensure that the Company will have access to
additional sources of capital in order to sustain its growth, the Company seeks to maintain a
portfolio that is competitively priced and of sound quality.
The Company takes the following factors, among others, into consideration in pricing its Real
Estate Loans: internal risk adjusted return objectives, prevailing market conditions, loan-to-value
ratios, lien position, borrower payment history, reserves, occupancy level and cash flow. The
Company fixes rates based on a basis point spread over U.S. Treasury securities with yields
adjusted to constant maturity of one, three, five, seven or ten years. Interest rates may be fixed
at the time of commitment for a period generally not exceeding 30 days. For Cooperative,
Multifamily and Commercial Real Estate Loans, the rate lock commitments can extend 12 months or
longer. Such loans that do rate-lock generally close absent unusual circumstances.
The Company originates Consumer and Commercial Loans at fixed and variable interest rates.
Loan pricing is based on prevailing market conditions, income and portfolio diversification
objectives and the overall assessment of risk of the transaction. Typically, Consumer and
Commercial Loan repayment schedules are structured by the Company with flat monthly principal
reduction plus interest on the outstanding balance.
Underwriting
When evaluating credit requests, the Company seeks to determine, among others, whether a
prospective borrower has and will have sound management, sufficient cash flow to service debt,
assets in excess of liabilities and a continuing demand for its products, services or use of its
facilities, so that the requested loan will be repaid in accordance with its terms.
The Company evaluates repayment ability based upon an analysis of a borrowers historical cash
flow and conservative projections of future cash flows from operations. This analysis focuses on
determining the predictability of future cash flows as a primary source of repayment.
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Security
Loans made by the Company are generally secured by specific collateral. If collateral
security is required, the value of the collateral must be reasonably sufficient to protect the
Company from loss, in the event that the primary sources of repayment of financing from the normal
operation of the cooperative, or refinancing, prove to be inadequate for debt repayment.
Collateral security alone is not a sufficient basis for the Company to extend credit. Unsecured
loans normally are made only to borrowers with strong financial conditions, operating results and
demonstrated repayment ability.
Loans Benefiting Low-Income Persons
Under the Act, the Board of Directors must use its best efforts to ensure that at the end of
each fiscal year at least 35% of the Companys outstanding commercial loans (together with NCB
Capital Impact) are to (1) cooperatives whose members are predominantly low-income persons, as
defined by the Company, and (2) other cooperatives that propose to undertake to provide specialized
goods, services, or facilities to serve the needs of predominantly low-income persons. The Company
defines a low-income person, for these purposes, as an individual whose familys income does not
exceed 80% of the median family income, adjusted for family size for the area where the cooperative
is located, as determined by the Department of Housing and Urban Development. During 2009, the
Company and NCB Capital Impact either directly funded or arranged the funding of over $391 million
to borrowers meeting the low-income definition.
Loans to Cooperatives for Residential Purposes
Section 108 (a) of the Act prohibits the Holding Company from making any loan to a
cooperative for the purpose of financing the construction, ownership, acquisition, or improvement
of any structure used primarily for residential purposes if, after giving effect to such loan, the
aggregate amount of all loans outstanding for such purpose would exceed 30 per centum of the gross
assets of the Holding Company.
To date, the 30% limitation on loans to housing cooperatives for such purposes has not
restricted the Companys ability to provide financial services to housing cooperatives. The
Company has been able to maintain its position in the cooperative real estate market without
increased real estate portfolio exposure by selling or securitizing real estate loans to secondary
market purchasers of such loans. The preponderance of the Companys real estate origination volume
in recent years has been predicated upon sale to secondary market purchasers. Capital markets
disruptions over the last few years resulted in a significant reduction in the profitability of
loans sold. Separately, however, NCB, FSB is not directly subject to the statutory limit. As of
December 31, 2009, approximately 3.8% of the total assets consisted of loans that are subject to
the limitation.
Community Reinvestment Act
Under the Community Reinvestment Act (CRA) and related regulations, depository institutions
such as NCB, FSB have an affirmative obligation to assist in meeting the credit needs of their
market areas, including low and moderate income areas, consistent with safe and sound banking
practice. Depository institutions are periodically examined for compliance with CRA and are
periodically assigned ratings in this regard. Banking regulators consider a depository
institutions CRA rating when reviewing applications to establish new branches, undertake new lines
of business, and/or acquire part or all of another depository institution. An unsatisfactory rating
can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank
holding company or its depository institution subsidiary.
COMPETITION
Congress created and capitalized the Company because it found that existing financial
institutions were not making adequate financial services available to cooperative, not-for-profit
business enterprises. However, the Company experiences considerable competition in lending to the
most credit-worthy cooperative enterprises.
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REGULATION
The Holding Company is organized under the laws of the United States. The Farm Credit
Administration examines the Holding Company periodically, but that agency has no regulatory or
enforcement powers over the Holding Company. In addition, the Government Accountability Office is
authorized to audit the Holding Company. Reports of such examinations and audits are to be
forwarded to Congress, which has the sole authority to amend or revoke the Holding Companys
charter. The Office of Thrift Supervision (OTS) regulates NCB, FSB. As a savings and loan
holding company, the Holding Company is subject to regulatory and enforcement powers of and
examination by the OTS pursuant to 12 U.S.C. § 1467a.
In connection with the insurance of deposit accounts, NCB, FSB, a federally insured savings
bank, is required to maintain minimum amounts of regulatory capital. If NCB, FSB fails to meet its
minimum required capital, the appropriate regulatory authorities may take such actions, as they
deem appropriate, to protect the Deposit Insurance Fund (DIF), NCB, FSB, and its depositors and
investors. Such actions may include various operating restrictions, limitations on liability
growth, limitations on deposit account interest rates, and investment restrictions. NCB, FSB is
also subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
The Holding Company and NCB, FSB are subject to a variety of federal, state and local laws,
including laws relating to anti-money laundering and privacy.
FURTHER INFORMATION
The Company makes available free of charge on its internet website its most recent Annual
Report on Form 10-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after the report has been
electronically filed or submitted to the Securities and Exchange Commission (the SEC). This
filing can be accessed on the Companys website at www.nccb.coop. All Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, applicable amendments
to those filings are accessible on the SECs website at www.sec.gov. The public may read
and copy any materials the Company files with the SEC at the SECs Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
Like other financial institutions, the Company is subject to a number of risks, many of which
are outside of the Companys direct control, though efforts are made to manage those risks while
optimizing returns. Among the risks assumed are: (1) credit risk, which is the risk that
loan and lease customers or other counterparties will be unable to perform their contractual
obligations, (2) market risk, which is the risk that changes in market rates and prices
will adversely affect the Companys financial condition or results of operation, (3) liquidity
risk, which is the risk that the Company will have insufficient cash or access to cash to meet
its funding and operating needs, (4) regulatory risk, which is the risk that regulatory
actions imposed on the Company could adversely affect its operations and limit certain operational
and funding activities, and (5) operational risk, which is the risk of loss resulting from
inadequate or failed internal processes, people and systems, or external events.
In addition to the other information included in this report, readers should carefully
consider that the following important factors, among others, could materially impact the Companys
business, future results of operations, and future cash flows.
(1) Credit Risk
Defaults in the repayment of loans may negatively impact the Companys business.
A borrowers default on its obligations under one or more of the Companys loans may result in
lost principal and interest income and increased operating expenses as a result of the allocation
of management time and resources to the foreclosure and collection or restructuring of the loan.
6
In certain situations, where collection efforts are unsuccessful or acceptable workout
arrangements cannot be reached, the Company may have to write-off the loan in whole or in part. In
such situations, the Company may acquire real estate or other assets, if any, which secure the loan
through foreclosure or other similar available remedies. In such cases, the amount owed under the
defaulted loan often exceeds the value of the assets acquired.
The Companys decisions regarding credit risk could be inaccurate and its allowance for loan
losses may be inadequate, which could materially and adversely affect the Companys business,
financial condition, results of operations and future prospects. Additional loan losses will likely
occur in the future and may occur at a rate greater than the Company has experienced to date.
In determining the size of the allowance, the Company relies on an analysis of its loan
portfolio, actual and projected loss experience and an evaluation of general economic conditions.
If the Companys assumptions prove to be incorrect, the current allowance may not be sufficient.
With the volatility of the economic decline and unprecedented nature of the events in the credit
and real estate markets during 2008 and 2009, the Companys allowance has increased and additional
increases may continue to be necessary if the local or national real estate markets and economies
continue to deteriorate. Significant additions to the allowance would materially decrease net
income. In addition, federal regulators periodically evaluate the adequacy of the Companys
allowance and may require an increase in the provision for loan and lease losses or recognition of
further loan charge-offs based on judgments different than those of the Companys management. Any
further increase in the Companys allowance or loan charge-offs could have a material adverse
effect on the Companys results of operations.
The Company originates non-mortgage loans to small to medium-sized commercial customers
primarily in the hardware, grocery, franchise, Employee Stock Ownership Plan (ESOP) and Alaska
and Native American markets. These loans may be secured by furniture, fixtures, and equipment,
inventory, and other collateral generally not considered as secure as real estate in the event of
liquidation. Should market conditions or other factors impair the cashflow and operations of the
Companys small to medium-sized commercial customers, the Company could face an increase in
delinquencies, increased provision requirements and/or losses that may adversely impact financial
performance.
The Company may be called upon to fund letters of credit related to municipal bonds.
Some of the Companys outstanding letters of credit have been issued in connection with
certain variable rate municipal bonds. Under these types of letters of credit, the Company can be
called upon to fund the amount of the municipal bonds in the event: (1) the holder seeks repayment
and the bond cannot be sold to another purchaser, (2) the lead bank cannot confirm the letter of
credit or (3) the borrower cannot repay the amount of the bond. In an effort to mitigate the risk
of possible future fundings of this kind, the Company has greatly curtailed marketing of this
product line and is actively reducing its exposure in this area. The Company cannot guarantee that
it will not have to provide further funding for these types of letters of credit which could impact
its financial condition.
(2) Market Risk
Continued adverse developments in the financial markets and deterioration in U.S. economic
conditions could have a material adverse effect on the Companys results of operations and
financial condition.
As a result of difficult worldwide economic conditions, the highly volatile debt and equity
markets, lack of liquidity, widening credit spreads and the collapse of several financial
institutions have resulted in significant realized and unrealized losses in the Companys
investment portfolio. Also, this market turmoil and tightening of credit has led to increased
commercial and consumer deficiencies, lack of customer confidence, increased market volatility and
widespread reduction in general business activity. The resulting economic pressure on consumers and
businesses and the lack of confidence in the financial markets may adversely affect the Companys
business, financial condition and results of operations.
Further deterioration or a continuation of recent market conditions may lead to a decline in
the value of the assets that the Company holds or in the creditworthiness of its borrowers. In
response to recent market disruptions, legislators and financial regulators have implemented a
number of mechanisms designed to add stability to the
financial markets, including the provision of direct and indirect assistance to financial
institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and
broker dealers, implementation of programs by the United States Federal Reserve to provide
liquidity to the commercial paper markets and other matters. While these mechanisms implemented
have stabilized the markets, to some degree, should these or other legislative or regulatory
initiatives fail to continue to stabilize and add liquidity to the financial markets, the Companys
business, financial condition, results of operations and prospects could be adversely affected.
7
A continuation or worsening of these financial market conditions would likely exacerbate the
adverse effects of these difficult market conditions on the Company and others in the financial
industry. In particular, the Company may continue to face the following risks in connection with
these events:
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Potential increase in regulation of the Companys industry. Compliance with such
regulation may increase the Companys costs and limit its ability to pursue business
opportunities. |
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The process the Company uses to estimate losses inherent in its credit exposure requires
difficult, subjective and complex judgments, including forecasts of economic conditions and
how these economic conditions might impair the ability of the Companys borrowers to repay
their loans. The level of uncertainty concerning economic conditions may adversely affect
the accuracy of these estimates which may, in turn, impact the reliability of the process. |
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NCB, FSB may be required to pay significantly higher premiums to the FDIC because market
developments have significantly depleted the insurance fund of the FDIC and reduced the
ratio of reserves to insured deposits. |
The Company relies on business relationships with other financial institutions to provide
funding and to hedge against interest rate risk. If the credit market remains disrupted, the
Company may have difficulty obtaining new financing or amending current financing if necessary in
the future. Pricing of financings may also rise if the credit markets remain unstable. In
addition, NCB, FSB relies on funding from the Federal Home Loan Bank of Cincinnati and the Federal
Reserve Bank. Should those institutions cease to be able to provide funding as a result of
continuing market disruptions, it would negatively impact NCB, FSBs operations.
The Company may not be able to attract and retain banking customers at current levels.
Competition in the banking industry coupled with the Companys relatively small size may limit
the ability of the Company to attract and retain real estate, commercial and retail banking
customers.
In particular, the Companys competitors include several major financial companies whose
greater resources may afford them a marketplace advantage by enabling them to maintain numerous
banking locations and mount extensive promotional and advertising campaigns. Additionally, banks
and other financial institutions with larger capitalization and financial intermediaries have
larger lending limits and are thereby able to serve the credit and investment needs of larger
customers. Areas of competition include interest rates for loans and deposits, efforts to obtain
deposits and range and quality of services provided. The Company also faces competition from
out-of-state financial intermediaries which have opened low-end production offices or which solicit
deposits in their respective market areas.
Because the Company maintains a smaller staff and has fewer financial and other resources than
the larger institutions with which it competes, it may be limited in its ability to attract
customers. In addition, some of the Companys current commercial banking customers may seek
alternative banking sources as they develop needs for credit facilities larger than the Company can
accommodate.
If the Company is unable to attract and retain banking customers, it may impact the Companys
loan origination volume and its results of operations and financial condition may otherwise be
negatively impacted.
8
NCB, FSBs deposit customers may pursue alternatives to deposits at its bank or seek higher
yielding deposits causing NCB, FSB to incur increased funding costs.
Checking and savings account balances and other forms of deposits can decrease when deposit
customers perceive alternative investments, such as the stock market or other non-depository
investments as providing superior
expected returns or seek to spread their deposits over several banks to maximize FDIC
insurance coverage. Furthermore, technology and other changes have made it more convenient for bank
customers to transfer funds into alternative investments including products offered by other
financial institutions or non-bank service providers. Increases in short-term interest rates could
increase transfers of deposits to higher yielding deposits. Efforts and initiatives NCB, FSB
undertakes to retain and increase deposits, including deposit pricing, can increase its costs. When
bank customers move money out of bank deposits in favor of alternative investments or into higher
yielding deposits, or spread their accounts over several banks, the Company can lose a relatively
inexpensive source of funds, thus increasing funding costs.
The Companys lines of business may be less diversified than its competitors.
The Company derives a significant amount of its earnings from blanket and share loan financing
to housing cooperatives and then from members thereof. To the extent that cooperatives become a
less favorable form of housing, become economically disadvantaged, or are negatively impacted by
changing market conditions, the Company may be unable to attract and/or retain such banking
customers and thereby may be unable to maintain or grow its business in this area and its results
of operations and financial condition may be negatively impacted.
Financial services companies depend on the accuracy and completeness of information about
customers and counterparties.
In deciding whether to extend credit or enter into other transactions, the Company may rely on
information furnished by or on behalf of customers and counterparties, including financial
statements, credit reports and other financial information. The Company may also rely on
representations of those customers, counterparties or other third parties, such as independent
auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or
misleading financial statements, credit reports or other financial information could have a
material adverse impact on the Companys business and, in turn, its financial condition and results
of operations.
The failure of other financial institutions could adversely affect the Company.
The Companys ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. The Company has exposure to different industries and counterparties, and routinely
executes transactions with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks, investment companies and other institutional clients.
In certain of these transactions the Company may be required to post collateral to secure the
obligations to the counterparties (i.e. future interest rate swaps). In the event of a bankruptcy
or insolvency proceeding involving one of such counterparties, the Company may experience delays in
recovering the assets posted as collateral or may incur a loss to the extent that the counterparty
was holding collateral in excess of the obligation to such counterparty. There is no assurance that
any such losses would not materially and adversely affect the Companys financial condition and
results of operations.
In addition, many of these transactions expose the Company to credit risk in the event of a
default by its counterparty or client. Also, the credit risk may be exacerbated when the collateral
held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover
the full amount of the loan or derivative exposure due to the Company. There is no assurance that
any such losses would not materially and adversely affect the Companys financial condition and
results of operations.
Weakness in the real estate market, particularly in New York City, could negatively impact the
Companys banking business.
The real estate portfolio contains a concentration of loans in the New York City area;
however, the majority of loans are to housing cooperatives with low loan-to-value ratios compared
to other Commercial Real Estate Loans.
With a loan concentration in the New York City area, a decline in local economic conditions
could adversely affect the values of the Companys real estate collateral and the Companys
operating performance. Consequently, a decline in local economic conditions in the New York City
area may have a greater effect on the
Companys earnings and capital than on the earnings and capital of larger financial
institutions whose real estate loan portfolios are geographically diverse.
9
In addition to considering the financial strength and cash flow characteristics of borrowers,
the Company often secures loans with real estate collateral. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If the Company is required to
liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate
values in the New York City area, its earnings and capital could be adversely affected.
A significant amount of the Companys Residential Real Estate Loans are secured by property in
the New York City area. Consequently, the Companys ability to continue to originate these loans
may be impaired by adverse changes in local and regional economic conditions in the New York City
area real estate markets, or by acts of nature, including earthquakes, hurricanes, flooding and
terrorist acts. Due to the concentration of real estate collateral, these events could have a
material adverse impact on the ability of the borrowers of the Company to repay their loans and
affect the value of the collateral securing these loans.
The Companys business is subject to interest rate risk and fluctuations in interest rates may
adversely affect its earnings.
Many of the Companys assets and liabilities are monetary in nature and subject to risk from
changes in interest rates. Like most financial institutions, the Companys earnings and
profitability depend significantly on net interest income, which is the difference between interest
income on interest-earning assets, such as loans and investment securities, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. the Company expects that it will
periodically experience gaps in the interest rate sensitivities of its assets and liabilities,
meaning that either the Companys interest-bearing liabilities will be more sensitive to changes in
market interest rates than its interest-earning assets, or vice versa. If market interest rates
should move contrary to the Companys position, this gap will work against the Company and its
earnings may be negatively affected. In light of the Companys current volume and mix of
interest-earning assets and interest-bearing liabilities, its interest rate margin could be
expected to decrease during periods of rising interest rates and, conversely, to increase during
periods of falling interest rates. The Company is unable to predict or control fluctuations of
market interest rates, which are affected by many factors including the following:
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Inflation; |
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Recession; |
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Changes in unemployment; |
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Governmental actions |
The Companys asset/liability management strategy may not be able to control its risk from
changes in market interest rates and it may not be able to prevent changes in interest rates from
having a material adverse effect on the Companys results of operations and financial condition.
See Quantitative and Qualitative Disclosures About Market Risk included in Part II, Item 7A of
this Form 10-K for a further discussion of the Companys sensitivity to interest rate changes.
Increases in interest rates may reduce demand for mortgage and other loans.
Higher interest rates increase the cost of mortgage and other loans to consumers and
businesses and may reduce demand for such loans, which may negatively impact the Companys profits
by reducing the amount of loan origination income.
The Company engages in derivative transactions, which expose it to credit and market risk.
The Company is exposed to credit and market risk as a result of its use of derivative
instruments. The Company maintains a risk management strategy that includes the use of derivative
instruments to mitigate the risk to
earnings caused by interest rate volatility. Use of derivative instruments is a component of
the Companys overall risk management strategy in accordance with a formal policy that is monitored
by management.
10
The derivative instruments utilized may include interest rate lock commitments, interest rate
swaps, financial futures contracts and forward loan sales commitments. Interest rate lock
commitments are created when borrowers lock in their contractual commitment to borrow funds at a
specific interest rate within the timeframes established by the Company. Interest rate swaps
involve the exchange of fixed and variable rate interest payments between two parties based upon a
notional principal amount and maturity date. Financial futures generally involve exchange-traded
contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Forward
loan sales commitments lock in the prices at which loans will be sold to investors.
The Company uses interest rate lock commitments, interest rate swaps, financial futures
contracts and forward loan sales commitments to hedge loan commitments prior to actually funding a
loan. During the commitment period, the loan commitments and related interest rate lock
commitments, interest rate swaps, financial futures contracts and forward loan sales commitments
are accounted for as derivatives and the changes in the fair value of these derivatives are
therefore recorded through the gain on sale of loans. Once a commitment becomes a loan, the
derivative associated with the commitment is designated as a hedge of the loan and is generally
kept in place until such loan is committed for sale.
The Company is exposed to credit and market risk as a result of its use of derivative
instruments. If the fair value of the derivative contract represents an asset, the counterparty
owes the Company and a repayment risk exists. If the fair value of the derivative contract
represents a liability, the Company owes the counterparty, so there is no repayment risk. The
Company minimizes repayment risk by entering into transactions with financially stable
counterparties that are specified by policy and reviewed periodically by management. When the
Company has multiple derivative transactions with a single counterparty, the net mark-to-market
exposure represents the netting of asset and liability exposures with that counterparty. The net
mark-to-market exposure with a counterparty is a measure of credit risk when there is a legally
enforceable master netting agreement between the Company and the counterparty. The Company uses
master netting agreements with the majority of its counterparties.
The Companys exposure to market risk is related to the impact that changes in interest rates
has on the fair value of a financial instrument or expected cash flows. The Company manages the
market risk associated with the interest rate hedge contracts by establishing formal policy limits
concerning the types and degree of risk that may be undertaken. Compliance with this policy is
monitored by management and reported to the Board of Directors.
The Company may be subject to a continuation of lower gains recorded from the sale of loans.
An important source of income for the Company is gains recorded from the sale of Multifamily,
Cooperative and Commercial Real Estate Loans. The gains are influenced by many variables,
including changes in interest rates and the demand of investors to purchase securities backed by
loans. The Company has continued to be negatively impacted by market changes which have
substantially reduced the volume of securitization transactions occurring in the marketplace. In
response to this development, the Company has expanded its relationship with Fannie Mae, allowing
the Company to continue to sell Cooperative and Multifamily Loans. This has allowed the Company to
offset market risk by more rapidly selling loans upon their origination. During 2008, the federal
government put Fannie Mae and Freddie Mac into conservatorship. Although no effect has been felt
as of yet by the Company, it is difficult to predict how the recession and federal government
financial support of Fannie Mae and Freddie Mac will affect the Companys business and results of
operations. The Company nevertheless continues to sell loans to Fannie Mae and expects to continue
to do so. If current market conditions continue, the Companys results of operations and financial
condition may be negatively impacted.
The Company is subject to other-than-temporary impairment risk.
The Company recognizes an impairment charge when the declines in the fair value of equity and
debt securities below their cost basis are judged to be other-than-temporary. Significant judgment
is used to identify events or circumstances that would likely have a significant adverse effect on
the future use of the investment. The Company considers various factors in determining whether an
impairment is other-than-temporary. At each reporting period the Company considers its intent and
ability to hold, or whether it is more likely than not that the
Company would be required to sell, securities before the expected recovery of the amortized
cost basis. Losses considered to be related to credit deterioration of the underlying issuer(s)
(e.g. expected cash flows will be less than the amortized cost basis of the investment security)
will be reflected in earnings. Declines in value related to market factors will be presented as a
component of accumulated other comprehensive income. Information about unrealized gains and losses
is subject to changing conditions. The values of securities with unrealized gains and losses will
fluctuate, as will the values of securities that the Company identifies as potentially distressed.
11
If the Companys intent to hold a security with an unrealized loss changes or it is required
to sell securities before the expected recovery of the amortized cost basis, the Company has and
will continue to write down its securities to fair value in the period that its intent to hold or
requirement to sell the security changes.
(3) Liquidity Risk
Adverse credit market conditions may affect the Companys ability to meet liquidity needs.
In recent years the financial markets have exerted downward pressures on availability of
liquidity and credit capacity for certain issuers. The Company needs liquidity to, among other
things, pay its operating expenses and interest on its debt, maintain its lending activities and
replace certain maturing liabilities. Without sufficient liquidity, the Company may be forced to
curtail its operations. The availability of additional financing will depend on a variety of
factors such as market conditions, the general availability of credit and the Companys credit
ratings and credit capacity. The Companys financial condition and cash flows could be materially
affected by continued disruptions in financial markets.
As of December 31, 2009, the Company believes that it has adequate liquidity to meet all of
its obligations. The Company plans to fund upcoming debt curtailments and maturities with some
combination of cash on hand, proceeds from the delivery of loans held-for-sale, the receipt of
interest and principal payments on loans receivable, and, potentially, through leveraging existing
assets at the Holding Company through the use of a securitization vehicle or a secured borrowing, disposing of certain
assets and raising funds from other capital sources. At this time, the Company does not have the
intent to sell any additional specific investment securities or loans, nor is the Company required
to sell any of its investments or loans at a loss such that the recognition of a loss is expected.
As disclosed in the Companys Form 10-Q for the period ended June 30, 2009, the Holding
Company was in default under its senior note purchase agreement and its revolving credit facility
due to a violation of certain financial covenants as a result of increased loan loss provisions and
charge-offs. During the third quarter of 2009, the Holding Company entered into forbearance
agreements that temporarily suspended the need for the Holding Company to comply with certain
financial covenants. On February 23, 2010, the Holding Company entered into amendments to each of
the senior note purchase agreements and the revolving credit facility agreement that extend through
December 15, 2010, the waivers and modifications already in place (see Note 16 for further
discussion).
In the event that the Holding Company is ultimately unable to meet its amortization
obligations under the most recent amendments to its senior note and revolving credit agreements,
the lenders and the noteholders have the right to call and demand immediate repayment of any and
all amounts due. Continued adverse conditions in the credit markets may make it difficult for the
Holding Company to refinance or further amend the agreement should it be required to do so in the
future. There is also no assurance that the Holding Company will continue to meet certain convents
required under the amended agreements. If the Holding Company cannot obtain adequate sources of
credit on favorable terms, or at all, its business, operating results and financial condition would
be adversely affected.
Adverse market conditions may also impact liquidity at NCB, FSB, which relies principally on
deposits, borrowings from the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank and
loan sales to Fannie Mae and other institutions.
Concentration in deposit relationships may affect the Companys ability to meet liquidity
needs.
The Companys deposits include brokered deposit relationships as well as customer deposit
relationships. Downgrades in ratings could result in the loss of access to the brokered deposit
market as well as the loss of
customer deposits. Expiration of the FDICs Transaction Account Guarantee Program that
provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts
not otherwise covered by the existing deposit insurance limit of $250,000, could result in the loss
of customer deposits.
12
Prepayments of loans may negatively impact the Companys business.
Customers with adjustable rate loans generally may prepay the principal amount of their
outstanding loans at any time. The speed at which such prepayments occur, as well as the size of
such prepayments, are within such customers discretion. If customers prepay the principal amount
of their loans, and the Company is unable to lend those funds to other borrowers or invest the
funds at the same or higher interest rates, interest income will be reduced. A significant
reduction in interest income could have a negative impact on results of operations and financial
condition.
Inability of customers to refinance loans may negatively impact the Companys liquidity.
The Company has projected future funding needs based on certain assumptions regarding existing
customers paying loans as they mature. In the event that the significant credit market disruption
and the general economic downturn continues, such customers may be unable to find alternative
sources of financing to payoff their loans to the Company. This could adversely affect the
Companys ability to fund new loans and meet its other operational costs.
The Companys cost of funds for banking operations may increase as a result of general
economic conditions, interest rates and competitive pressures.
The Companys cost of funds for banking operations may increase as a result of general
economic conditions, interest rates and competitive pressures. The Company has traditionally
obtained funds through the capital markets but more recently it has relied on borrowing capacity by
NCB, FSB from the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank and on customer
deposits at NCB, FSB. As a general matter, deposits are a less expensive source of funds than
borrowings, because interest rates paid for deposits are typically less than interest rates charged
for borrowings. Historically and in comparison to commercial banking averages, NCB, FSB has had a
higher percentage of its time deposits in denominations of $100,000 or more, in part because NCB,
FSB has been positioned to serve business customers rather than retail customers, and business
customers generally have higher levels of deposits. Within the banking industry, the amounts of
such deposits are generally considered more likely to fluctuate than deposits of smaller
denominations. If, as a result of general economic conditions, market interest rates, competitive
pressures or otherwise, the value of deposits at NCB, FSB decreases relative to its overall banking
operations, the Company may have to rely more heavily on borrowings as a source of funds in the
future. As a result of credit market disruptions and the need to renegotiate certain financial
covenants, the cost of borrowing by the Holding Company has increased, and there is no assurance
that further pricing increases will not occur. The cost of borrowings by NCB, FSB from the Federal
Home Loan Bank and the Federal Reserve Bank may also increase, resulting in a higher cost of funds
for NCB, FSB as well.
(4) Regulatory Risk
The Company is subject to increased regulatory scrutiny and is subject to certain business
limitations imposed by its principal banking regulator. Further, the Company may be subject to
more severe future regulatory actions, beyond the extent of the enforcement actions issued on March
15, 2010, if its financial condition or performance weakens.
Federal and state laws and regulations govern numerous matters including changes in the
ownership or control of federal savings associations and of their holding companies, maintenance of
adequate capital and the financial condition of a financial institution, permissible types, amounts
and terms of extension of credit and investments, permissible non-banking activities, the level of
reserves against deposits and restrictions on dividend payments. The Companys principal regulator, the OTS, possesses cease and
desist powers to prevent or remedy unsafe or unsound practices or violations of law by bank and
savings associations subject to its regulation. These and other restrictions limit the manner in
which the Company may conduct business and obtain financing.
13
Furthermore, the Companys business is affected not only by general economic conditions, but
also by the monetary policies of the Federal Reserve. Changes in monetary or legislative policies
may affect the interest rates the Company must offer to attract deposits and the interest rates it
must charge on loans, as well as the manner in which the Company offers deposits and makes loans.
NCB, FSB is expected to be subject to higher Federal Deposit Insurance Corporation deposit
insurance premiums than those prevailing in prior periods. These monetary policies have had, and
are expected to continue to have, significant effects on the operating results of depository
institutions generally. The Companys management and its board of directors have focused
particular attention on the areas of asset quality, capital management, and liquidity, seeking to
improve performance in each area in view of current unfavorable economic conditions.
On March 15, 2010, the Holding Company entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist with the OTS. The associated OTS Order (the OTS Order) provides
that the Holding Company pay no cash dividends or redeem or repurchase any equity stock, and, not
incur, issue, renew, rollover or increase any debt, except for the class A notes, without prior
approval of the OTS. The OTS Order also requires the Holding Company to submit to the OTS a
Business Plan within 45 days, and an updated Liquidity Risk Management Program within 30 days, both
for review and comment. The OTS Order does not specify minimum tangible equity capital ratios.
Rather, the Business Plan must establish such ratios that are commensurate with the Holding
Companys stand alone risk profile that addresses, among other things, the Holding Companys
significant off-balance sheet liabilities. The Business Plan must also address capital
preservation and enhancement strategies to achieve the minimum tangible equity capital ratios that
are established, strategies to ensure that the Holding Companys obligations are met on a
stand-alone basis without reliance on dividends from NCB, FSB and specific plans to reduce the
risks from its current debt levels and contingent liabilities. The OTS Order shall remain in
effect until terminated, modified, or suspended by written notice of such action by the OTS. The
OTS Order, however, does not prohibit the Holding Company from transacting its normal business.
On March 15, 2010, NCB Financial Corporation, the mid-tier holding company for NCB, FSB,
entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the
OTS. The associated Order (the Mid-Tier OTS Order) provides that NCB Financial Corporation pay no
cash dividends or redeem or repurchase any equity stock and shall not incur, issue, renew, rollover
or increase any debt, without prior approval of the OTS.
On March 15, 2010, NCB, FSB entered into a Supervisory Agreement with the OTS (together with
the OTS Order and the Mid-Tier OTS Order, the OTS Actions). The principal elements of the
Supervisory Agreement provide that NCB, FSB not increase its total assets during any quarter in
excess of an amount equal to net interest credited on deposit liabilities during the quarter
without prior approval and shall not declare or pay any dividends or make any other capital
distribution without the prior written approval of the OTS. Additionally, NCB, FSB must submit a
Business Plan within 45 days and a Liquidity Risk Management Program within 30 days for OTS review,
comment and approval. The Supervisory Agreement does not specify a minimum Tier 1 (Core) Capital
Ratio or a Total Risk-Based Capital Ratio. Rather, the Business Plan must establish such ratios
that are commensurate with the Associations risk profile. The Business Plan must also include
policies for maintaining an adequate allowance for loan and lease losses and various financial
projections to be updated periodically. The Supervisory Order will remain in effect until modified
or terminated by the OTS. The Supervisory Order does not, however, restrict NCB, FSB from
transacting its normal banking business. NCB, FSB has and will continue to serve clients in all
areas including making loans, subject to the limitation described above, accepting deposits and
processing banking transactions. All client deposits remain fully insured to the limits set by the
FDIC. NCB, FSB remains well capitalized for all regulatory purposes.
The Company has been actively engaged in responding to the concerns raised by the OTS and
believes that the Holding Company is in compliance with the OTS Order, NCB Financial Corporation is
in compliance with the Mid-Tier OTS Order and, NCB, FSB is in compliance with the Supervisory
Agreement. However, if the financial condition of the Company weakens, the OTS may, upon further
inspection, issue additional actions and require the Company to sell assets to increase liquidity, raise capital, or take other steps as they consider necessary.
14
NCB, FSB is subject to regulatory capital adequacy guidelines, and if it fails to meet these
guidelines, its financial condition would be adversely affected.
Under regulatory capital adequacy guidelines and other regulatory requirements, NCB, FSB, must
meet guidelines that include quantitative measures of assets, liabilities, and certain off-balance
sheet items, subject to qualitative judgments by regulators about components, risk weightings and
other factors. If NCB, FSB fails to meet these minimum capital guidelines and other regulatory
requirements, its financial condition would be materially and adversely affected. In the future,
the regulatory accords on international banking institutions to be reached by the Basel Committee
on Banking Supervision may require NCB, FSB to meet additional capital adequacy measures. NCB, FSB
cannot predict the final form of, or the effects of, the regulatory accords. NCB FSBs failure to
maintain the status of well-capitalized under its regulatory framework could affect the
confidence of its customers and banking relationships, thus compromising its competitive position.
In addition, failure to maintain the status of well-capitalized under NCB, FSBs regulatory
framework, or well-managed under regulatory examination procedures, could compromise NCB FSBs
status as a bank holding company and related eligibility for a streamlined review process for
acquisition proposals. NCB FSBs failure to maintain the status of well-capitalized under its
regulatory framework could also impact NCB, FSBs ability to expand its retail branching network
and its ability to comply with its servicing agreements.
(5) Operational Risk
The financial services industry is undergoing rapid technological changes. If the Company is
unable to adequately invest in and implement new technology-driven products and services, it may
not be able to compete effectively, may be subject to interruption and instability or the cost to
provide products and services may increase significantly.
The financial services industry is undergoing rapid technological changes with frequent
introduction of new technology-driven products and services. In addition to providing better
customer service, the effective use of technology increases efficiency and enables financial
service institutions to reduce costs. The Companys future success will depend, in part, upon the
Companys ability to address the customer needs by using technology to provide products and
services to enhance customer convenience, as well as to create additional operational efficiencies.
Many of the Companys competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new technology-driven products
and services, which could reduce the Companys ability to effectively compete and, in turn, have a
material adverse effect on its financial condition and results of operations.
The Company relies on technology to conduct much of its activity. The Companys technological
operations are vulnerable to disruptions from human error, natural disasters, power loss, computer
viruses, spam attacks, unauthorized access and other similar events. Disruptions to or instability
of the Companys internal or external technology that allows customers to use its products and
services could harm its business and reputation. In addition, technology systems, whether they be
the Companys own proprietary systems or the systems of third parties on whom it relies to conduct
portions of its operations, are potentially vulnerable to security breaches and unauthorized usage.
An actual or perceived breach of the security of technology could harm the Companys business and
reputation.
The Companys business continuity plans or data security systems could prove to be inadequate,
resulting in a material interruption in, or disruption to, the Companys business and a negative
impact on its results of operations.
The Company relies heavily on communications and information systems to conduct its business.
Any failure, interruption or breach in security of these systems, whether due to severe weather,
natural disasters, acts of war or terrorism, criminal activity or other factors, could result in
failures or disruptions in general ledger, deposit, loan, customer relationship management, and
other systems. While the Company has disaster recovery and other policies and procedures designed
to prevent or limit the effect of the failure, interruption or security breach of the Companys
information systems, there can be no assurance that any such failures, interruptions or security
breaches will not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions or security breaches of the Companys information systems
could damage the Companys reputation, result in a loss of customer business, subject the Company
to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial
liability, any of which could have a material adverse effect on its results of operations.
15
The Companys controls and procedures may fail or be circumvented which could have a material
adverse effect on its business, results of operations and financial condition.
The Company regularly reviews and updates its internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, not
absolute, assurances that the objectives of the system are met. Any failure or circumvention of the
Companys controls and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Companys business, results of operations
and financial condition.
Environmental liability associated with commercial real estate lending could result in losses.
In the course of its business, the Company may acquire, through foreclosure, properties
securing loans it has originated or purchased which are in default. Particularly in commercial
real estate lending, there is a risk that hazardous substances could be discovered on these
properties. In this event, the Company might be required to remove these substances from the
affected properties at the Companys sole cost and expense. The cost of this removal could
substantially exceed the value of affected properties. The Company may not have adequate remedies
against the prior owner or other responsible parties and could find it difficult or impossible to
sell the affected properties. These events could have a material adverse effect on the Companys
business, results of operations and financial condition.
New accounting pronouncements or interpretations may be issued by the accounting profession,
regulators or other government bodies which could change existing accounting methods. Changes in
accounting methods could negatively impact the Companys results of operations and financial
condition.
Current accounting and tax rules, standards, policies, and interpretations influence the
methods by which financial institutions conduct business, implement strategic initiatives and tax
compliance, and govern financial reporting and disclosures. These laws, regulations, rules,
standards, policies, and interpretations are constantly evolving and may change significantly over
time. Events that may not have a direct impact on the Company, such as the bankruptcy of major U.S.
companies, have resulted in legislators, regulators, and authoritative bodies, such as the
Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company
Accounting Oversight Board, and various taxing authorities, responding by adopting and/or proposing
substantive revision to laws, regulations, rules, standards, policies, and interpretations. New
accounting pronouncements and varying interpretations of accounting pronouncements have occurred
and may occur in the future. A change in accounting standards may adversely affect reported
financial condition and results of operations.
The Company is exposed to reputation, legal, compliance and other risks.
The Company is exposed to many types of operational risks, including reputation risk, legal
and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized
transactions by employees or operational errors, including clerical or record keeping errors or
those resulting from faulty or disabled computer or telecommunications systems. Negative public
opinion can result from the Companys actual or alleged conduct in any number of activities,
including lending practices and corporate governance and from actions taken by government
regulators and community organizations in response to those activities. Negative public opinion can
adversely affect the Companys ability to attract and keep customers and can expose it to
litigation and regulatory action. Given the volume of transactions at the Company, certain errors
may be repeated or compounded before they are discovered and successfully rectified. The Companys
necessary dependence upon automated systems to record and process its transaction volume may
further increase the risk that technical system flaws or employee tampering or manipulation of
those systems will result in losses that are difficult to detect. The Company may also be subject
to disruptions of its operating systems arising from events that are wholly or partially beyond its
control (for example, computer viruses or electrical or telecommunications outages), which may give
rise to disruption of service to customers and to financial loss or liability. the Company is
further exposed to the risk that its external vendors may be unable to fulfill their contractual
obligations (or will be subject to the same risk of fraud or operational errors by their respective
employees as is the Company) and to the risk that the Companys (or its vendors) business
continuity and data security systems prove to be inadequate.
16
The Company may not be able to attract and retain skilled people.
The Companys success depends in large part on the Companys ability to attract and retain key
people and there are a limited number of qualified persons with knowledge of and experience in the
banking industry in each of the Companys markets. Furthermore, recent demand for skilled finance
and accounting personnel among publicly traded companies has increased the importance of attracting
and retaining these people. The unexpected loss of services of one or more of the Companys key
personnel could have a material adverse impact on its business because of their skills, knowledge
of the Companys market, years of industry experience and the difficulty of promptly finding
qualified replacement personnel.
The Companys agreements with the OTS have placed limitations on its ability to make changes
to compensation and benefits for its senior executive officers which could adversely affect its
ability to attract and retain skilled people.
ITEM 2. PROPERTIES
The Company leases space for its Arlington, Virginia operations center, its Washington, D.C.
executive offices and for three principal regional offices located in Anchorage, Alaska, New York
City, New York and Oakland, California. The Company also maintains a Disaster Recovery facility in
Silver Spring, Maryland. NCB, FSB maintains its principal offices in Hillsboro, Ohio with retail
branches in Ohio and non-retail branches at the Company offices in New York, New York and
Washington, D.C. The Companys operations center and executive offices are approximately 76,000
and 3,500 square feet in size, respectively and regional offices range from approximately 2,900 to
9,700 square feet.
The rental expense for the fiscal year ended December 31, 2009 was $3.1 million for all
offices combined.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business the Company is involved in various types of disputes, which
may lead to litigation or other legal proceedings. The Company has determined that pending legal
proceedings will not have a material impact on the Companys financial condition or future
operations.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES
OF EQUITY SECURITIES
The Company currently has two classes of stock outstanding, the rights of which are summarized
as follows:
Class B Stock The Act permits Class B stock to be held by borrowers of the Company and
requires each patronage-based borrower from the Company under Section 108 of the Act to hold Class
B stock at the time the loan is made at a par value equal to 1% of its loan amount. The Act
prohibits the Company from paying dividends on Class B stock. There are two series of Class B
stock outstanding. Class B-1 stock is Class B stock purchased from existing holders of Class B-1
stock subsequent to May 1, 1992. Class B-1 stock previously included shares of Class B stock
purchased for cash from the Company between June 28, 1984 and May 1, 1992, of which there are none
outstanding. Class B-2 stock is Class B stock purchased for cash from the Company prior to June
28, 1984 and any Class B stock distributed as part of the Companys patronage refund distribution.
Class B stock is transferable to another eligible holder only with the approval of the Company.
The Company does not permit any transfers of Class B-2 stock and only permits transfers of Class
B-1 Stock at the stocks $100 par value and only as are required to permit new borrowers to obtain
their required holdings of Class B stock. In each instance, the Company specifies which holder(s)
are permitted to transfer their stock to the new borrower, based upon which Class B stockholders
with holdings of such stock beyond that required to support their loans have held such stock for
the longest time.
the Company also repurchased, at par value, any shares of Class B stock that it was required
to repurchase from holders by the terms of the contracts under which such stock was originally sold
by the Company. No such stock remains outstanding. Class B stock has voting rights, but such
voting rights are limited in accordance with the weighted voting system described in Item 10.
17
Class C Stock The Act permits Class C stock to be held only by cooperatives eligible to
borrow from the Company (or entities controlled by such borrowers). The Act allows the Company to
pay dividends on Class C stock, but so long as any Class A notes are outstanding, limits dividends
on Class C stock (or any other the Company stock) to the interest rate payable on such notes, which
was 3.81% in 2009 using a weighted average. In 1994, the Company adopted a policy under which
annual cash dividends on Class C stock of up to 2% of the Companys net income may be declared.
The policy does not provide any specific method to determine the amount, if any, of such dividend.
Whether any such dividends will be declared and if so, in what amount, rests within the discretion
of the Companys Board of Directors. In 1996, the Board approved a dividend de minimis provision
which states that Class C stock dividends shall not be distributed to a stockholder until such time
as the cumulative amount of the dividend payable to the stockholder is equal to, or exceeds,
twenty-five dollars ($25.00) unless specifically requested by the stockholder. Class C stock is
transferable to another eligible holder only with the approval of the Company. Class C stock has
voting rights, but such voting rights are limited in accordance with the weighted voting system
described in Item 10.
There is no established public trading market for any class of the Companys common equity and
it is unlikely that any such market will develop in view of the restrictions on the transfer of the
Companys stock as discussed above. Holders of Class B stock may use such stock to meet the Class
B stock ownership requirements established in the Act for patronage-based borrowers from the
Company or NCB, FSB and may be permitted by the Company, within the limits set forth above, to
transfer Class B stock to another patronage-based borrower from the Company or NCB, FSB.
As of December 31, 2009, there were 2,637 holders of Class B stock and 498 holders of Class C
stock.
Under the Companys current patronage dividend policy that became effective in 1995, as
amended, the Company makes the non-cash portion of the dividend in the form of Class B stock until
a patron has holdings of Class B stock of 12.5% of its loan amount and thereafter in Class C stock.
The cash portion of each patronage refund, if any, will be determined by the Companys Board of
Directors based upon its determination of the capital requirements of NCB, FSB and other factors,
in its discretion. The Companys agreements with the OTS places limitations on its ability to
declare, make and pay cash dividends or make capital distributions.
The Company distributed $7.3 million of its 2008 retained earnings for patronage dividends in
the form of stock during the third quarter of 2009. In order to conserve capital, The Board of
Directors determined that the cash portion of that patronage dividend would be zero; therefore, no
cash was paid out in patronage dividends in 2009. As of December 31, 2009, the Company has not
allocated any of its 2009 retained earnings for patronage dividends to be distributed during 2010.
The chart below shows the number of shares of stock issued by the Company during the past
three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Class B Stock Issued |
|
|
69,263 |
|
|
|
|
|
|
|
101,783 |
|
Class C Stock Issued |
|
|
3,258 |
|
|
|
|
|
|
|
6,464 |
|
18
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Profitability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
114,835 |
|
|
$ |
123,701 |
|
|
$ |
135,739 |
|
|
$ |
118,454 |
|
|
$ |
96,479 |
|
Total interest expense |
|
|
68,472 |
|
|
|
67,285 |
|
|
|
85,121 |
|
|
|
72,096 |
|
|
|
52,337 |
|
Net interest income |
|
|
46,363 |
|
|
|
56,416 |
|
|
|
50,618 |
|
|
|
46,358 |
|
|
|
44,142 |
|
Provision for loan losses |
|
|
44,099 |
|
|
|
18,650 |
|
|
|
152 |
|
|
|
3,667 |
|
|
|
470 |
|
Net interest income after provision for loan losses |
|
|
2,264 |
|
|
|
37,766 |
|
|
|
50,466 |
|
|
|
42,691 |
|
|
|
43,672 |
|
Non-interest income |
|
|
24,388 |
|
|
|
23,679 |
|
|
|
11,969 |
|
|
|
33,680 |
|
|
|
37,216 |
|
Non-interest expense |
|
|
73,409 |
|
|
|
58,259 |
|
|
|
63,571 |
|
|
|
55,532 |
|
|
|
53,099 |
|
Net (loss) income |
|
|
(44,638 |
) |
|
|
2,631 |
|
|
|
(472 |
) |
|
|
19,425 |
|
|
|
25,647 |
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest earning assets |
|
|
2.20 |
% |
|
|
2.84 |
% |
|
|
2.67 |
% |
|
|
2.68 |
% |
|
|
2.76 |
% |
Return on average assets |
|
|
-2.0 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
1.1 |
% |
|
|
1.5 |
% |
Return on average members equity |
|
|
-21.3 |
% |
|
|
1.2 |
% |
|
|
-0.2 |
% |
|
|
8.7 |
% |
|
|
12.0 |
% |
Efficiency |
|
|
103.8 |
% |
|
|
72.7 |
% |
|
|
101.6 |
% |
|
|
69.4 |
% |
|
|
65.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
35,730 |
|
|
$ |
14,278 |
|
|
$ |
90,949 |
|
|
$ |
242,847 |
|
|
$ |
232,024 |
|
Loans and lease financing |
|
|
1,693,689 |
|
|
|
1,957,191 |
|
|
|
1,523,958 |
|
|
|
1,380,738 |
|
|
|
1,263,703 |
|
Total assets |
|
|
2,093,537 |
|
|
|
2,154,892 |
|
|
|
1,871,776 |
|
|
|
1,829,477 |
|
|
|
1,694,567 |
|
Total borrowings |
|
|
614,553 |
|
|
|
590,726 |
|
|
|
574,443 |
|
|
|
743,769 |
|
|
|
679,654 |
|
Members equity |
|
|
184,589 |
|
|
|
225,514 |
|
|
|
222,763 |
|
|
|
227,838 |
|
|
|
219,008 |
|
Loans serviced for others |
|
|
5,845,743 |
|
|
|
5,550,592 |
|
|
|
5,346,251 |
|
|
|
4,682,056 |
|
|
|
4,086,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulltime equivalent employees |
|
|
248 |
|
|
|
316 |
|
|
|
327 |
|
|
|
306 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average members equity as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets |
|
|
9.6 |
% |
|
|
10.8 |
% |
|
|
11.8 |
% |
|
|
12.8 |
% |
|
|
12.9 |
% |
Average total loans and lease financing |
|
|
10.7 |
% |
|
|
12.1 |
% |
|
|
13.3 |
% |
|
|
14.3 |
% |
|
|
14.7 |
% |
Net average loans and lease financing to average total assets |
|
|
87.6 |
% |
|
|
87.6 |
% |
|
|
87.6 |
% |
|
|
88.2 |
% |
|
|
86.3 |
% |
Net average earning assets to average total assets |
|
|
94.7 |
% |
|
|
95.7 |
% |
|
|
96.1 |
% |
|
|
97.3 |
% |
|
|
95.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
36,468 |
|
|
|
27,067 |
|
|
|
17,714 |
|
|
|
19,480 |
|
|
|
20,193 |
|
Allowance for loan losses to loans outstanding |
|
|
2.1 |
% |
|
|
1.4 |
% |
|
|
1.1 |
% |
|
|
1.2 |
% |
|
|
1.4 |
% |
Nonaccrual loans |
|
|
71,401 |
|
|
|
17,434 |
|
|
|
13,324 |
|
|
|
21,600 |
|
|
|
14,200 |
|
Real estate owned |
|
|
2,315 |
|
|
|
659 |
|
|
|
310 |
|
|
|
193 |
|
|
|
10 |
|
Total non-performing assets |
|
|
73,716 |
|
|
|
18,093 |
|
|
|
13,634 |
|
|
|
21,793 |
|
|
|
14,210 |
|
Non-performing assets as a percentage of total assets |
|
|
3.5 |
% |
|
|
0.8 |
% |
|
|
0.7 |
% |
|
|
1.2 |
% |
|
|
0.8 |
% |
Non-performing assets as a percentage of total loans and
lease financing |
|
|
4.4 |
% |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
1.6 |
% |
|
|
1.1 |
% |
19
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this analysis is to provide the reader with information relevant to
understanding and assessing the Companys results of operations for each of the past three years
and financial condition for each of the past two years. In order to fully appreciate this analysis,
the reader is encouraged to review the consolidated financial statements and statistical data
presented in this document.
2009 Summary
The Companys financial results have been substantially impacted by the recessionary economic
conditions. The recession that the U.S. economy has faced prior to and during 2009, and continues
to face is impacting the Companys borrowers, and as a result, the Company is experiencing a higher
frequency of loan losses, both in number and severity, than in prior years. Specifically,
increased foreclosure rates, unemployment rates and credit scores, in localities in which many of
the Companys loans are most highly concentrated, have resulted in corresponding increases to the
Companys provision for loan losses which has been the primary reason for the Companys net
financial losses during 2009. Another factor impacting the Companys financial results during 2009
was significant impairments on investments, both realized and unrealized, as a result of the
volatile debt and equity markets, lack of liquidity, wide credit spreads and other events and
factors. Also, increased cost of funds and a significant increase in amortization of debt costs
related to the Holding Companys forbearance agreements have negatively impacted the Companys 2009
financial results.
Debt Amendments
As disclosed in the Companys Form 10-Q for the period ended June 30, 2009, the Holding
Company was in default under its senior note purchase agreement and its revolving credit facility
due to a violation of certain financial covenants. The covenant violations were primarily a result
of increased loan loss provisions and charge-offs, principally related to a small number of
borrowers experiencing pronounced financial difficulties, including several borrowers which have
filed for bankruptcy. NCB, FSB is not a guarantor under either the senior note purchase agreement
or the revolving credit facility. However, both facilities are secured by the assets of NCB Financial
Corporation, which has pledged all of the stock of NCB, FSB in connection with such guarantees.
On August 14, 2009, the Holding Company entered into forbearance agreements with each of the
required holders under each of the senior note purchase agreements and the revolving credit
facility agreement. The forbearance agreements were entered into under customary terms and
conditions, including the suspension of the need for the Holding Company to comply with certain
financial covenants for the duration of the initial forbearance period which had an expiration date
of November 16, 2009.
On November 16, 2009, the Holding Company entered into amendments of the forbearance
agreements which extended the forbearance period through February 17, 2010 then through February
23, 2010. In connection with the execution of the amended forbearance agreements, the Holding
Company repaid $12.5 million of the senior note debt and $18.5 million of the revolving credit
facility debt and paid a total forbearance amendment fee of $1.1 million.
On February 23, 2010, the Holding Company entered into amendments to each of the senior note
purchase agreements and the revolving credit facility agreement. As described below, these
amendments generally extended, through December 15, 2010, the waivers and modifications that have
been in place since August 14, 2009, under applicable forbearance agreements. These amendments
also contained provisions for the final maturities of the debt secured by the amendments and
established certain fees and milestones in connection therewith. The amendments removed substantially all of the
financial covenants compliance requirements. The Company full expects to remain in full compliance
with the remaining three financial covenants through the maturity date. No amendment, waiver or other
fees were required to be paid in connection with the extension of the forbearance period from
February 17, 2010 to December 15, 2010.
Since August 14, 2009, the Holding Company has paid down the aggregate debt outstanding under
the two facilities from $276.8 million to $87.6 million as of March 31, 2010. This repayment has
been largely funded by
principal payments and interest received on loans receivable and asset sales executed at par
or with discounts of less than 1%.
20
The Amendments were entered into under customary terms and conditions, with specific
provisions including:
|
|
|
Final maturity of December 15, 2010 for both facilities; |
|
|
|
|
No amendment or other closing fee; |
|
|
|
|
Interest rate on both facilities of 13.5%; |
|
|
|
|
Required to reduce the principal through paydowns such that maximum aggregate debt
outstanding is as follows: |
$68.0 million
on April 30, 2010 (aggregate outstanding was
$87.6 million as of March 31, 2010)
$60.0 million
on June 30, 2010
$30.0 million on September 30, 2010;
|
|
|
Not withstanding the amortization schedule, a fee of 2% of then-outstanding debt
will be due if secured debt is not fully repaid by June 30, 2010; |
|
|
|
|
Debt payments based on periodic cash sweeps of available cash over $50.0 million
through June 30, 2010, and $45.0 million thereafter; |
|
|
|
|
Fee of 0.20% of the then-outstanding debt if the ratio of then-outstanding debt to
performing loans and cash of the Holding Company is greater than the amounts, as
follows: · |
37%
on February 28, 2010 (actual was 31% as of February 28,
2010)
30%
on April 30, 2010
28%
on June 30, 2010
28% on September 30, 2010;
|
|
|
The Holding Company continues to not have access to the revolving line of credit; |
|
|
|
|
The Holding Company continues to be restricted from issuing any new extensions of
credit and remains bound by limitations on the extension of existing credits. As
contemplated, over the near term, the lending activities of the Holding Company will be
carried out, in part, by NCB, FSB and its affiliate NCB Capital Impact; |
|
|
|
|
Certain yield maintenance penalty attributable to the senior notes were added to the
principal balances thereof, as of August 14, 2009, and will be payable at maturity.
The aggregate yield maintenance was approximately $6.8 million. Because the lenders and
noteholders had the right to call and demand immediate repayment of any and all amounts
due through the initial forbearance period expiring November 16, 2009, the yield
maintenance penalty was fully amortized over the 90-day period from August 14, 2009 to
November 16, 2009, and was added to the outstanding balance of the revolving credit
facility and senior note balances. |
The Holding Company intends to work to repay or refinance these obligations on or before June
30, 2010. In the event that the Holding Company is ultimately unable to refinance or otherwise
meet its amortization obligations under the Amendments, the lenders and the noteholders have the
right to call and demand immediate repayment of any and all amounts due.
The Holding Company believes that it has adequate liquidity to meet all of its obligations for
the duration of the amended agreements and beyond. The Holding Company plans to fund loan
curtailments and 2010 debt maturities with some combination of cash on hand, proceeds from the
delivery of loans held-for-sale, the receipt of interest and principal payments on loans
receivable, and potentially, through leveraging existing assets through the
use of a securitization vehicle or another borrowing transaction, disposing of certain assets
and raising funds from other capital sources. At this time, the Holding Company does not have the
intent to sell any specific investment securities or loans, nor is it required to sell any of its
investments or loans at a loss.
21
Regulatory Matters
On March 15, 2010, the Holding Company entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist with the OTS. The associated OTS Order (the OTS Order) provides
that the Holding Company pay no cash dividends or redeem or repurchase any equity stock, and, not
incur, issue, renew, rollover or increase any debt, except for the class A notes, without prior
approval of the OTS. The OTS Order also requires the Holding Company to submit to the OTS a
Business Plan within 45 days, and an updated Liquidity Risk Management Program within 30 days, both
for review and comment. The OTS Order does not specify minimum tangible equity capital ratios.
Rather, the Business Plan must establish such ratios that are commensurate with the Holding
Companys stand alone risk profile that addresses, among other things, the Holding Companys
significant off-balance sheet liabilities. The Business Plan must also address capital
preservation and enhancement strategies to achieve the minimum tangible equity capital ratios that
are established, strategies to ensure that the Holding Companys obligations are met on a
stand-alone basis without reliance on dividends from NCB, FSB and specific plans to reduce the
risks from its current debt levels and contingent liabilities. The OTS Order shall remain in
effect until terminated, modified, or suspended by written notice of such action by the OTS. The
OTS Order, however, does not prohibit the Holding Company from transacting its normal business.
On March 15, 2010, NCB Financial Corporation, the mid-tier holding company for NCB, FSB,
entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the
OTS. The associated Order (the Mid-Tier OTS Order) provides that NCB Financial Corporation pay no
cash dividends or redeem or repurchase any equity stock and shall not incur, issue, renew, rollover
or increase any debt, without prior approval of the OTS.
On March 15, 2010, NCB, FSB entered into a Supervisory Agreement with the OTS (together with
the OTS Order and the Mid-Tier OTS Order, the OTS Actions). The principal elements of the
Supervisory Agreement provide that NCB, FSB not increase its total assets during any quarter in
excess of an amount equal to net interest credited on deposit liabilities during the quarter
without prior approval and shall not declare or pay any dividends or make any other capital
distribution without the prior written approval of the OTS. Additionally, NCB, FSB must submit a
Business Plan within 45 days and a Liquidity Risk Management Program within 30 days for OTS review,
comment and approval. The Supervisory Agreement does not specify a minimum Tier 1 (Core) Capital
Ratio or a Total Risk-Based Capital Ratio. Rather, the Business Plan must establish such ratios
that are commensurate with the Associations risk profile. The Business Plan must also include
policies for maintaining an adequate allowance for loan and lease losses and various financial
projections to be updated periodically. The Supervisory Order will remain in effect until modified
or terminated by the OTS. The Supervisory Order does not, however, restrict NCB, FSB from
transacting its normal banking business. NCB, FSB has and will continue to serve clients in all
areas including making loans, subject to the limitation described above, accepting deposits and
processing banking transactions. All client deposits remain fully insured to the limits set by the
FDIC. NCB, FSB continues to take deposits, make loans and provide other financial services to its
customers and remains well capitalized for regulatory purposes.
The Company has been actively engaged in responding to the concerns raised by the OTS and
believes that the Holding Company is in compliance with the OTS Order, NCB Financial Corporation is
in compliance with the Mid-Tier OTS Order and, NCB, FSB is in compliance with the Supervisory
Agreement. However, if the financial condition of the Company weakens, the OTS may, upon further
inspection, issue additional actions and require the Company to sell assets to increase liquidity, raise capital, or take other steps as they consider necessary.
These orders and agreements will remain in effect until terminated, modified, or suspended by
written notice of such action by the OTS, acting by and through its authorized representatives.
22
2009 and 2008 Financial Summary
The Companys net loss for the year ended December 31, 2009 was $44.6 million compared with
net income of $2.6 million for the year ended December 31, 2008. The primary factors contributing
to the net loss for
2009 were a $10.0 million decrease in net interest income, a $25.4 million increase in the
provision for loan losses and a $7.4 million increase in the provision for unfunded commitments.
Total assets decreased 2.9% or $61.4 million to $2.09 billion as of December 31, 2009 from
$2.15 billion as of December 31, 2008. A $263.5 million decrease in loans and lease financing
combined with a $38.3 million decrease in investment securities more than offset the $226.1 million
increase in cash and cash equivalents as of December 31, 2009.
The return on average total assets was -2.0% and 0.1 % for the years ended December 31, 2009
and 2008, respectively. For the years ended December 31, 2009 and 2008, the return on average
members equity was -21.3% and 1.2%, respectively.
Net Interest Income
The largest source of revenue is net interest income, which is the difference between interest
income on earning assets (primarily loans and securities) and interest expense on funding sources
(including interest bearing deposits and borrowings). Earning asset balances and related funding,
as well as changes in the levels of interest rates, impact net interest income. The difference
between the average yield on earning assets and the average rate paid for interest-bearing
liabilities is the net interest spread. Non-interest bearing sources of funds, such as demand
deposits and shareholders equity, also support earning assets. The impact of non-interest bearing
sources of funds is captured in net interest margin, which is calculated as net interest income
divided by average earning assets.
Net interest income for the year ended December 31, 2009 decreased $10.0 million or 17.7% to
$46.4 million compared with $56.4 million for the year ended December 31, 2008.
For the year ended December 31, 2009, interest income decreased 7.2% or $8.9 million, to
$114.8 million compared with $123.7 million for the year ended December 31, 2008. Aggregate yields
decreased from 6.23% in 2008 to 5.45% in 2009, contributing $16.4 million to the decrease in
interest income. However an increase in average earning balances of $122.9 million year-over-year,
partially offset in the amount of $7.5 million the overall decrease in interest income from 2008
to 2009. A significant volume of sales of loans and investments during the fourth quarter of 2009
resulted in the decrease of period end earning balances although average earning balances increased
year-over year. The majority of the Companys loan portfolio is indexed to rates that have
re-priced downward from December 31, 2008 to December 31, 2009, contributing $16.4 million to the
decrease.
Other interest income, consisting only of excess yield, is generated from the interest-only
non-certificated receivables held by the Company. The Company recognizes the excess of all cash
flows attributable to the beneficial interest estimated at the transaction date over the initial
investment (the accretable yield) as interest income over the life of the beneficial interest using
the effective yield method. Thus, based on the terms in each interest-only non-certificated
receivable, the Company is entitled to a cash interest payment. This is offset by the amortization
of the interest-only non-certificated receivable. Excess yield income was $2.2 million and $1.9
million for the years ended December 31, 2009 and 2008, respectively, an increase of $0.3 million.
Interest expense on borrowings increased $10.8 million or 36.4% from 2008 to 2009. The
increase was primarily attributable to fees incurred and increased interest costs related to the
Holding Companys forbearance agreements for its revolving credit facility and senior notes during
2009. As a result of the forbearance agreements, the scheduled maturity of the borrowings was
accelerated. Accordingly, the Company accelerated the amortization of issuance costs, included as
a component of interest expense, and other fees that were deferred and amortized over the
contractual maturity of the related debt arrangement. The acceleration of the amortization of
these deferred issuance costs increased interest expense by $11.3 million from $1.2 million in 2008
to $12.5 million in 2009. Also, related to the forbearance agreements, the interest rate on the
revolving credit facility has increased significantly during 2009 from approximately 350 basis
points over the prime rate at the beginning of 2009 to the current rate of 13.5%. The senior notes
interest rate has increased by more than 500 basis points over the initial rate during the year to
the current rate of 13.5% primarily as a result of the forbearance agreements.
23
Variable interest rates, to which NCB FSBs deposits are tied, have decreased significantly
from 2009 to 2008. Specifically, NCB FSBs costs of deposits have decreased 116 basis points from
3.35% in 2008 to 2.19% in
2009. NCB, FSB had $589.1 million and $612.5 million of brokered deposits all relating to
certificates of deposit as of December 31, 2009 and December 31, 2008, respectively. These
brokered deposits were 47.0% and 47.1% of total deposits as of December 31, 2009 and December 31,
2008, respectively. Of the $589.1 million of certificates of deposit, $113.5 million mature within
3 months and $475.6 million has a maturity ranging from 4 months to 72 months. The Company is
actively working to decrease this concentration of brokered deposits.
See Table 1 and Table 2 for detailed effects of changes in rates and balances outstanding by
specific product type and their effects on interest income and interest expense for 2009 and 2008.
Table 1
Changes in Net Interest Income
For the Years Ended December 31,
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Compared to 2008 |
|
|
2008 Compared to 2007 |
|
|
|
Change in |
|
|
Change in |
|
|
Increase |
|
|
Change in |
|
|
Change in |
|
|
Increase |
|
|
|
average |
|
|
average |
|
|
(Decrease) |
|
|
average |
|
|
average |
|
|
(Decrease) |
|
|
|
volume |
|
|
rate |
|
|
Net* |
|
|
volume |
|
|
rate |
|
|
Net* |
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans (Residential and Commercial) |
|
$ |
5,793 |
|
|
$ |
(9,388 |
) |
|
$ |
(3,595 |
) |
|
$ |
(1,758 |
) |
|
$ |
(5,984 |
) |
|
$ |
(7,742 |
) |
Consumer and Commercial Loans and Leases |
|
|
2,046 |
|
|
|
(5,591 |
) |
|
|
(3,545 |
) |
|
|
8,999 |
|
|
|
(9,948 |
) |
|
|
(949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and lease financing |
|
|
7,839 |
|
|
|
(14,979 |
) |
|
|
(7,140 |
) |
|
|
7,241 |
|
|
|
(15,932 |
) |
|
|
(8,691 |
) |
Investment securities and cash equivalents |
|
|
(325 |
) |
|
|
(1,720 |
) |
|
|
(2,045 |
) |
|
|
335 |
|
|
|
(2,898 |
) |
|
|
(2,563 |
) |
Other interest income |
|
|
14 |
|
|
|
305 |
|
|
|
319 |
|
|
|
(472 |
) |
|
|
(312 |
) |
|
|
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
7,528 |
|
|
|
(16,394 |
) |
|
|
(8,866 |
) |
|
|
7,104 |
|
|
|
(19,142 |
) |
|
|
(12,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
4,224 |
|
|
|
(13,797 |
) |
|
|
(9,573 |
) |
|
|
6,315 |
|
|
|
(12,075 |
) |
|
|
(5,760 |
) |
Borrowings |
|
|
(36 |
) |
|
|
10,796 |
|
|
|
10,760 |
|
|
|
(1,119 |
) |
|
|
(10,957 |
) |
|
|
(12,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
4,188 |
|
|
|
(3,001 |
) |
|
|
1,187 |
|
|
|
5,196 |
|
|
|
(23,032 |
) |
|
|
(17,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
3,340 |
|
|
$ |
(13,393 |
) |
|
$ |
(10,053 |
) |
|
$ |
1,908 |
|
|
$ |
3,890 |
|
|
$ |
5,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Changes in interest income and interest expense due to changes in rate and volume have been allocated to change in
average volume and change in average rate in proportion to the absolute dollar amounts in each. |
24
Table 2
Rate Related Assets and Liabilities
For the years ended December 31,
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
Income / |
|
|
Average |
|
|
Average |
|
|
Income / |
|
|
Average |
|
|
Average |
|
|
Income / |
|
|
Average |
|
|
|
Balance* |
|
|
Expense |
|
|
Rate/Yield |
|
|
Balance* |
|
|
Expense |
|
|
Rate/Yield |
|
|
Balance* |
|
|
Expense |
|
|
Rate/Yield |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans (Residential and Commercial) |
|
$ |
1,234,253 |
|
|
$ |
66,325 |
|
|
|
5.37 |
% |
|
$ |
1,133,851 |
|
|
$ |
69,920 |
|
|
|
6.17 |
% |
|
$ |
1,161,204 |
|
|
$ |
77,662 |
|
|
|
6.69 |
% |
Consumer and Commercial Loans and Leases |
|
|
717,972 |
|
|
|
42,860 |
|
|
|
5.97 |
% |
|
|
685,843 |
|
|
|
46,405 |
|
|
|
6.77 |
% |
|
|
566,812 |
|
|
|
47,354 |
|
|
|
8.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and lease financing |
|
|
1,952,225 |
|
|
|
109,185 |
|
|
|
5.59 |
% |
|
|
1,819,694 |
|
|
|
116,325 |
|
|
|
6.39 |
% |
|
|
1,728,016 |
|
|
|
125,016 |
|
|
|
7.23 |
% |
Investment securities and cash equivalents |
|
|
130,190 |
|
|
|
3,473 |
|
|
|
2.67 |
% |
|
|
140,036 |
|
|
|
5,518 |
|
|
|
3.94 |
% |
|
|
133,333 |
|
|
|
8,081 |
|
|
|
6.06 |
% |
Other interest income |
|
|
26,107 |
|
|
|
2,177 |
|
|
|
8.34 |
% |
|
|
25,930 |
|
|
|
1,858 |
|
|
|
7.17 |
% |
|
|
32,060 |
|
|
|
2,642 |
|
|
|
8.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
|
|
2,108,522 |
|
|
|
114,835 |
|
|
|
5.45 |
% |
|
|
1,985,660 |
|
|
|
123,701 |
|
|
|
6.23 |
% |
|
|
1,893,409 |
|
|
|
135,739 |
|
|
|
7.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(38,413 |
) |
|
|
|
|
|
|
|
|
|
|
(21,254 |
) |
|
|
|
|
|
|
|
|
|
|
(18,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
44,138 |
|
|
|
|
|
|
|
|
|
|
|
12,438 |
|
|
|
|
|
|
|
|
|
|
|
10,366 |
|
|
|
|
|
|
|
|
|
Other |
|
|
70,661 |
|
|
|
|
|
|
|
|
|
|
|
76,402 |
|
|
|
|
|
|
|
|
|
|
|
65,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
114,799 |
|
|
|
|
|
|
|
|
|
|
|
88,840 |
|
|
|
|
|
|
|
|
|
|
|
75,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,184,908 |
|
|
|
|
|
|
|
|
|
|
$ |
2,053,246 |
|
|
|
|
|
|
|
|
|
|
$ |
1,950,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,274,883 |
|
|
$ |
27,977 |
|
|
|
2.19 |
% |
|
$ |
1,122,383 |
|
|
$ |
37,550 |
|
|
|
3.35 |
% |
|
$ |
961,489 |
|
|
$ |
43,310 |
|
|
|
4.50 |
% |
Borrowings |
|
|
658,727 |
|
|
|
40,495 |
|
|
|
6.15 |
% |
|
|
659,402 |
|
|
|
29,735 |
|
|
|
4.51 |
% |
|
|
680,413 |
|
|
|
41,811 |
|
|
|
6.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
1,933,610 |
|
|
|
68,472 |
|
|
|
3.54 |
% |
|
|
1,781,785 |
|
|
|
67,285 |
|
|
|
3.78 |
% |
|
|
1,641,902 |
|
|
|
85,121 |
|
|
|
5.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
41,889 |
|
|
|
|
|
|
|
|
|
|
|
50,627 |
|
|
|
|
|
|
|
|
|
|
|
78,344 |
|
|
|
|
|
|
|
|
|
Members equity |
|
|
209,409 |
|
|
|
|
|
|
|
|
|
|
|
220,834 |
|
|
|
|
|
|
|
|
|
|
|
230,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
2,184,908 |
|
|
|
|
|
|
|
|
|
|
$ |
2,053,246 |
|
|
|
|
|
|
|
|
|
|
$ |
1,950,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earning assets |
|
$ |
174,912 |
|
|
|
|
|
|
|
|
|
|
$ |
203,875 |
|
|
|
|
|
|
|
|
|
|
$ |
251,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenues and spread |
|
|
|
|
|
$ |
46,363 |
|
|
|
1.91 |
% |
|
|
|
|
|
$ |
56,416 |
|
|
|
2.45 |
% |
|
|
|
|
|
$ |
50,618 |
|
|
|
1.98 |
% |
Net yield on interest earning assets |
|
|
|
|
|
|
|
|
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
2.67 |
% |
|
|
|
* |
|
Average loan balances include non-accrual loans. |
25
Non-interest Income
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Non-interest income for the |
|
|
|
years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Gain on sale of loans |
|
$ |
12,305 |
|
|
$ |
6,016 |
|
Letter of credit fees |
|
|
4,566 |
|
|
|
4,356 |
|
Servicing fees |
|
|
3,992 |
|
|
|
4,568 |
|
Real estate loan fees |
|
|
662 |
|
|
|
1,002 |
|
Commercial loan fees |
|
|
363 |
|
|
|
1,184 |
|
Prepayment fees |
|
|
221 |
|
|
|
735 |
|
Change in unrealized (loss) gain on derivatives |
|
|
(53 |
) |
|
|
3,256 |
|
Other |
|
|
2,332 |
|
|
|
2,562 |
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
24,388 |
|
|
$ |
23,679 |
|
|
|
|
|
|
|
|
Total non-interest
income increased slightly by $0.7 million or 3.0% from $23.7 million for the year ended December 31,
2008, to $24.4 million for the year ended December 31, 2009. Gain on sale of loans increased by $6.3
million or 104.5% year-over-year. The increase in gain on sale from 2008 to 2009 was due to two factors,
(1) an increase in volume
year-over-year, and (2) a decrease in losses realized on the sale of loans year-over-year. In late 2007,
the credit markets began deteriorating, and credit spreads at which loans were originated began to widen.
Consequently, loans originated in late 2007 were sold in 2008 at losses because the Company did not
effectively hedge this risk. In order to mitigate this risk, beginning in 2008 and throughout 2009,
the Company forward sold all loans, on a loan by loan basis, to investors at, or near, the date of
interest rate lock. This policy locked in the Companys gains and eliminated its exposure to credit and
interest rate risk that led to the losses realized in early 2008.
Other non-interest income includes cash management service fees, dividends on FHLB stock and
other miscellaneous income the Company earns.
In total, non-interest income amounted to 34.5% of total net revenue (net interest income plus
non-interest income) for the year ended December 31, 2009 compared with 29.6% for the year ended
December 31, 2008.
The following table shows the unpaid principal balance of loans sold and percentage of gain
for the years ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
Balance |
|
|
of Gain |
|
|
Balance |
|
|
of Gain |
|
Cooperative, Multifamily and Commercial Real
Estate Loans: |
|
$ |
381,956 |
|
|
|
1.33 |
% |
|
$ |
273,660 |
|
|
|
1.85 |
% |
Consumer Loans (auto loans) |
|
|
180,202 |
|
|
|
0.00 |
% |
|
|
357,179 |
|
|
|
0.00 |
% |
Single-family Residential Loans and Share Loans |
|
|
242,980 |
|
|
|
1.38 |
% |
|
|
166,199 |
|
|
|
1.52 |
% |
SBA Loans |
|
|
9,359 |
|
|
|
2.97 |
% |
|
|
9,553 |
|
|
|
4.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
814,497 |
|
|
|
1.50 |
% |
|
$ |
806,591 |
|
|
|
1.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Consumer Loan sales represent the sale, at par, of participations in auto loans. The
Company purchases and sells these notes within a 30-day cycle; therefore the Company does not earn
a gain on sale of these loans. The primary economic benefit to the Company of this program is the
net interest income it earns while these notes are on the balance sheet for this 30-day period.
26
Non-interest Expense
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense for the |
|
|
|
years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Compensation and employee benefits |
|
$ |
31,272 |
|
|
$ |
29,815 |
|
Contractual services |
|
|
8,495 |
|
|
|
5,482 |
|
Provision for unfunded commitments |
|
|
8,080 |
|
|
|
659 |
|
Occupancy and equipment |
|
|
6,675 |
|
|
|
7,470 |
|
Information systems |
|
|
4,295 |
|
|
|
4,627 |
|
Other-than-temporary impairment losses (OTTI) |
|
|
3,782 |
|
|
|
1,692 |
|
Loan costs |
|
|
3,462 |
|
|
|
2,479 |
|
FDIC premium |
|
|
2,551 |
|
|
|
823 |
|
Corporate development |
|
|
1,019 |
|
|
|
1,345 |
|
Travel and entertainment |
|
|
764 |
|
|
|
1,220 |
|
Lower of cost or market adjustment |
|
|
329 |
|
|
|
832 |
|
Loss (gain) on sale of investments
available-for-sale |
|
|
23 |
|
|
|
(167 |
) |
Other |
|
|
2,662 |
|
|
|
1,982 |
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
73,409 |
|
|
$ |
58,259 |
|
|
|
|
|
|
|
|
Non-interest expense for the year ended December 31, 2009, increased 25.9% or $15.1 million to
$73.4 million compared with $58.3 million for the corresponding prior year period primarily due to
a $7.4 million increase in the provision for unfunded commitments as a result of a $51.6 million
increase in criticized letters of credit, a $1.7 million increase in FDIC premiums resulting from
special fees assessed by the FDIC during 2009, a $3.0 million increase in contractual services for
legal fees relating to the forbearance agreements and a $2.1 million increase in OTTI losses
related to the OTTI of the Companys interest-only certificated receivables that were sold during
2009.
Although the Company had a reduction in headcount during 2009, its compensation and employee
benefits expense increased $1.5 million from 2008 to 2009. The primary cause of the year-over-year
increase in compensation and employees benefits expense is the severance expense for employees
affected by the Companys reduction in force during 2009 in order to align itself with changing
market conditions.
Credit Quality
To manage credit risk over a wide geographic area and lending in multiple industries, the
Company uses a team-based approval process, which relies upon the expertise of lending teams
familiar with particular segments of the industry in which the Company lends. Senior management
approves those credit facilities exceeding delegated lending authority for each team in an attempt
to ensure the quality of lending decisions. In order to keep abreast of economic events and market
conditions throughout the United States, various lending teams regularly perform financial analysis
of the industries and regions.
An inevitable aspect of the lending or risk assumption process is the fact that losses will be
incurred. The extent to which losses occur depends on the risk characteristics of the loan
portfolio. The Company emphasizes continuous credit risk management. Specific procedures have
been established that seek to eliminate undue credit risk. They include a multilevel approval
process, credit underwriting separate and apart from the approval process, and an ongoing
assessment of the credit condition of the portfolio. In addition, a risk rating system is designed
to classify each loan according to the risks unique to each credit facility.
Loans with risk characteristics that make their full and timely payment uncertain are assigned
to the Risk Management Department. The Risk Management Department determines, on a case-by-case
basis, the best course of action to restore a credit to an acceptable risk rating or to minimize
potential losses to the Company.
27
The allowance for loan losses is increased by the provision for loan losses and decreased by
the amount of charge-offs, net of recoveries. The allowance for loan losses is determined based on
risk ratings, current and future economic conditions, concentrations, diversification, portfolio
size, collateral and guarantee support and level of non-performing and delinquent credits, among
other relevant factors.
In determining the size of the allowance, the Company relies on an analysis of its
loan portfolio, probabilities of default and loss in event of default expected based on
historical actual losses, and an evaluation of general economic conditions. Federal
regulators periodically evaluate the adequacy of the Companys allowance and may require an
increase in the provision for loan and lease losses or recognition of further loan charge-offs
based on judgments different than those of the Companys management.
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Balance at beginning of year |
|
$ |
27,067 |
|
|
$ |
17,714 |
|
|
$ |
19,480 |
|
|
$ |
20,193 |
|
|
$ |
16,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
(4,355 |
) |
|
|
(2,111 |
) |
|
|
(715 |
) |
|
|
(254 |
) |
|
|
(118 |
) |
Commercial Loans |
|
|
(30,193 |
) |
|
|
(8,073 |
) |
|
|
(1,737 |
) |
|
|
(4,435 |
) |
|
|
(380 |
) |
Real Estate Loans
(Residential and
Commercial) |
|
|
(1,857 |
) |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(36,405 |
) |
|
|
(10,184 |
) |
|
|
(2,452 |
) |
|
|
(4,721 |
) |
|
|
(507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
824 |
|
|
|
144 |
|
|
|
297 |
|
|
|
1 |
|
|
|
|
|
Commercial Loans |
|
|
789 |
|
|
|
743 |
|
|
|
237 |
|
|
|
340 |
|
|
|
2,681 |
|
Real Estate Loans
(Residential and
Commercial) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,707 |
|
|
|
887 |
|
|
|
534 |
|
|
|
341 |
|
|
|
3,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(34,698 |
) |
|
|
(9,297 |
) |
|
|
(1,918 |
) |
|
|
(4,380 |
) |
|
|
2,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
44,099 |
|
|
|
18,650 |
|
|
|
152 |
|
|
|
3,667 |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
36,468 |
|
|
$ |
27,067 |
|
|
$ |
17,714 |
|
|
$ |
19,480 |
|
|
$ |
20,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan losses represented 2.2% and 1.4% of total loans and lease financing,
excluding loans held-for-sale, as of December 31, 2009 and December 31, 2008, respectively. The
allowance as a percentage of non-performing assets was 49.5% as of December 31, 2009 compared with
149.6% as of December 31, 2008. The decrease in this percentage can be primarily attributed to an
increase in non-performing assets and partially to a significant increase in charge-offs during
2009.
During 2009, the Company experienced additional weakness in the credit quality of its loan
portfolio, especially in the Healthcare and Employee Stock Ownership Plan (ESOP) portfolios
(included in Commercial Loans). Healthcare credits accounted for $20.1 million or 27.3% of
non-performing assets as of December 31, 2009. There were no non-performing assets in the
Healthcare segment as of December 31, 2008. ESOP credits accounted for $6.7 million or 9.1% of
non-performing assets as of December 31, 2009 and $0.3 million or 1.7% of non-performing assets as
of December 31, 2008. Cooperative Housing credits accounted for $12.1 million or 16.5% of the
non-performing assets as of December 31, 2009. There were no non-performing assets in the
Cooperative Housing segment as of December 31, 2008.
As of December 31, 2009 and December 31, 2008, reserves were deemed to be adequate to cover
the estimated loss exposure related to the impaired loans. As of December 31, 2009 and December
31, 2008, there were no commitments to lend additional funds to borrowers whose loans were
impaired.
28
Although the Single-family Residential and Share Loan portfolios continue to perform well,
there has been a steady increase in foreclosure and unemployment rates in localities in which these
loans are most highly concentrated. As a result of these factors, during 2009 the Companys
allowance for loan losses was adjusted to increase the allocation for those Single-family
Residential and Share Loans with an Acceptable rating from 18 basis points to 30 basis points of
the loan balance.
The Consumer Loan portfolio has not been performing well as a result of the increase in
unemployment rates and decrease of credit scores in localities in which these loans are most highly
concentrated. As a result of these factors, during 2009, the Companys allowance for loan losses
was adjusted for those Consumer Loans with an Acceptable or Watch List rating by an increase from 2
basis points to 6 basis points of the loan balance. The loss in the event of default for the
Companys Commercial Loans and Commercial Real Estate Loans was also increased due to continued
deterioration in those portfolios. The allowance for Consumer Loans with a Special Mention rating
was adjusted from 2 basis points to 7 basis points of the loan balance during 2009.
The Companys increased provision for loan losses and increased charge-off activity was
primarily driven by severe financial problems experienced by a limited number of borrowers. A
number of these borrowers had higher loan balances than the Companys typical borrower. Certain of
these borrowers also filed for bankruptcy protection during 2009. The increase in provision is
also a response to changes in loan quality, coupled with increased losses as a result of declining
Commercial Loan collateral values. During the third quarter of 2009, the Company adjusted certain
of the inputs in its allowance for loan loss calculation for its Single-family Residential Loan,
Share Loan, Commercial Loan, Commercial Real Estate Loan and Consumer Loan portfolios to reflect
the current market conditions. The adjustments resulted in an increase of $3.9 million to the
Companys allowance for loan losses as of December 31, 2009.
Of the $44.1 million provision for loan losses for 2009, $33.0 million was related to
Commercial Loans, $3.0 million was related to Real Estate Loans and $8.1 million was related to
Consumer Loans.
Net (charge-offs) recoveries were 1.8%, 0.5%, 0.1%, 0.3% and 0.2% of the average loan and
lease financing balance for the years ended December 31, 2009, 2008, 2007, 2006 and 2005,
respectively.
Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
As of December 31,
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Loan and lease financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Commercial Loans |
|
$ |
633,710 |
|
|
|
37.4 |
% |
|
$ |
744,918 |
|
|
|
38.1 |
% |
|
$ |
572,872 |
|
|
|
37.6 |
% |
|
$ |
532,356 |
|
|
|
38.6 |
% |
|
$ |
574,123 |
|
|
|
45.4 |
% |
Real Estate Loans (Residential and Commercial) |
|
|
1,059,822 |
|
|
|
62.6 |
% |
|
|
1,211,862 |
|
|
|
61.9 |
% |
|
|
950,512 |
|
|
|
62.4 |
% |
|
|
847,746 |
|
|
|
61.4 |
% |
|
|
684,951 |
|
|
|
54.2 |
% |
Leases |
|
|
157 |
|
|
|
0.0 |
% |
|
|
411 |
|
|
|
0.0 |
% |
|
|
574 |
|
|
|
0.0 |
% |
|
|
636 |
|
|
|
0.0 |
% |
|
|
4,629 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and lease financing |
|
$ |
1,693,689 |
|
|
|
100.0 |
% |
|
$ |
1,957,191 |
|
|
|
100.0 |
% |
|
$ |
1,523,958 |
|
|
|
100.0 |
% |
|
$ |
1,380,738 |
|
|
|
100.0 |
% |
|
$ |
1,263,703 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Commercial Loans |
|
$ |
27,159 |
|
|
|
74.5 |
% |
|
$ |
22,601 |
|
|
|
83.5 |
% |
|
$ |
10,907 |
|
|
|
61.6 |
% |
|
$ |
14,430 |
|
|
|
74.1 |
% |
|
$ |
14,780 |
|
|
|
73.2 |
% |
Real Estate Loans (Residential and Commercial) |
|
|
9,309 |
|
|
|
25.5 |
% |
|
|
4,466 |
|
|
|
16.5 |
% |
|
|
6,807 |
|
|
|
38.4 |
% |
|
|
5,050 |
|
|
|
25.9 |
% |
|
|
5,413 |
|
|
|
26.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses |
|
$ |
36,468 |
|
|
|
100.0 |
% |
|
$ |
27,067 |
|
|
|
100.0 |
% |
|
$ |
17,714 |
|
|
|
100.0 |
% |
|
$ |
19,480 |
|
|
|
100.0 |
% |
|
$ |
20,193 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Table 5
IMPAIRED ASSETS
As of December 31,
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Real estate owned |
|
$ |
2,315 |
|
|
$ |
659 |
|
|
$ |
310 |
|
|
$ |
193 |
|
|
$ |
10 |
|
Impaired loans |
|
|
97,748 |
|
|
|
20,377 |
|
|
|
13,324 |
|
|
|
21,600 |
|
|
|
14,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
100,063 |
|
|
$ |
21,036 |
|
|
$ |
13,634 |
|
|
$ |
21,793 |
|
|
$ |
14,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of loans and lease financing outstanding |
|
|
5.91 |
% |
|
|
1.07 |
% |
|
|
0.89 |
% |
|
|
1.58 |
% |
|
|
1.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A loan is considered impaired when, based on current information, it is probable the Company
will be unable to collect all amounts due under the contractual terms of the loan. As of December
31, 2009, the Company had an allowance of $14.7 million on the $97.7 million of impaired loans.
The aggregate average balance of impaired loans was $73.6 million and $16.3 million for the years
months ended December 31, 2009 and December 31, 2008, respectively. As of December 31, 2009, the
Companys impaired loans included $26.3 million of loans still accruing interest because the
borrower is making timely debt service payments; however, the loans were impaired due to actual or probable
deterioration in the financial condition or performance of the borrower or due to a significant
decline in the value of the collateral. The remaining $71.4 million of loans are not
accruing interest because the debt service payments were at least 90 days delinquent. As of December 31,
2008, the Companys impaired loans included $17.4 million of loans still accruing interest because
the borrower is making timely debt service payments; however, the loans were impaired due to actual or probable
deterioration in the financial condition or performance of the borrower or due to a significant
decline in the value of the collateral. The remaining
$3.0 million of loans were not
accruing interest because the debt service payments were at least 90 days delinquent. Although some of the
Companys loans are still accruing interest, the loans are considered impaired due to deterioration
in the financial condition of the borrower or due to a significant decline in the value of the
collateral.
Letters of Credit
As of December 31, 2009, the Company had outstanding letters of credit with a total commitment
amount of $245.2 million of which $67.9 million were classified as criticized with an associated
reserve for losses on these unfunded commitments of $10.3 million. As of December 31, 2008, the
Company had outstanding letters of credit with a total commitment amount of $293.7 million of which
$16.2 million were classified as criticized with an associated reserve for losses on these unfunded
commitments of $2.0 million. During 2008, the Company provided funding for eight letters of credit
for a total of $16.4 million of which $5.8 million was a result of the lead bank not being able to
confirm the letter of credit and $10.6 million was the result of an inability to sell the bond to
another purchaser. All amounts were recovered at the time the letter of credit was confirmed by
the lead bank or when the bonds were remarketed and sold to other third-parties. During 2009, one
letter of credit was funded in the amount of $6.9 million with probable loss of $5.1 million and
subsequently charged-off.
2008 and 2007 Financial Summary
The Companys net income for the year ended December 31, 2008 was $2.6 million compared with a
net loss of $0.5 million for the year ended December 31, 2007.
Total assets increased 15.1% or $283.1 million to $2.15 billion at December 31, 2008 from
$1.87 billion at December 31, 2007. A $433.2 million increase in loans and lease financing more
than offset a $76.7 million decrease in loans held-for-sale.
The return on average total assets was 0.1% and 0% for the years ended December 31, 2008 and
2007, respectively. For the years ended December 31, 2008 and 2007, the return on average members
equity was 1.2% and -0.2%, respectively.
30
Net Interest Income
Net interest income for the year ended December 31, 2008 increased $5.8 million or 11.5% to
$56.4 million compared with $50.6 million for 2007.
For the year ended December 31, 2008, interest income decreased 8.8% or $12.0 million, to
$123.7 million compared with $135.7 million for the year ended December 31, 2007. The total
average earning balances increased by $92.3 million while aggregate yields decreased from 7.17% in
2007 to 6.23% in 2008. The decrease in interest income resulted primarily from an increase in
average Consumer and Commercial Loan balances which was more than offset by a decrease in yields on
all loan types.
Interest income from Real Estate (Residential and Commercial) Loans decreased $7.7 million or
10.0%. A decrease in average balances of $27.4 million or 2.4% contributed $1.8 million to the
decrease while a decrease in the yield from 6.69% in 2007 to 6.17% in 2008 contributed $5.9 million
to the year-over-year decrease. Consumer and Commercial Loans and Lease interest income decreased
$0.9 million or 2.0%. The decrease in the yield from 8.35% in 2007 to 6.77% in 2008 contributed
$9.9 million to the decrease in income, while an increase in average balances of $119.0 million or
21.0% offset $9.0 million of the year-over-year decrease in income. Interest income from investment
securities and cash equivalents decreased by $2.6 million. A decrease in the yield from 6.06% in
2007 to 3.94% in 2008 contributed to the majority of the $2.6 million year-over-year decrease in
investment securities interest income.
Interest expense decreased $17.8 million or 20.9% from $85.1 million for the year ended
December 31, 2007 compared to $67.3 million for the year ended December 31, 2008.
Interest expense on deposits decreased $5.7 million or 13.4% from $43.3 million in 2007 to
$37.6 million in 2008. The average cost of deposits decreased by 115 basis points from 4.50% to
3.35% contributing $12.0 million to the decrease in interest expense. An increase of $160.9
million in the deposit average balance partially offset the decrease in expense by $6.3 million.
The weighted average rates on deposits at December 31, 2008 and 2007 were 2.75% and 4.19%,
respectively. The average maturity of the certificates of deposit at December 31, 2008 and 2007
were 10.9 months and 13.8 months, respectively. The growth of deposits remains a key component of
the Companys funding capability.
Interest expense on borrowings decreased by $12.1 million or 28.9%. The average balance on
borrowings decreased by $21.0 million, which was primarily driven by the decrease in FHLB advances
and contributed $1.1 million to the decrease in interest expense. The average cost of borrowings
decreased from 6.14% to 4.51%, contributing $11.0 million to the decrease.
See Table 1 and Table 2 for detailed effects of changes in rates and balances outstanding by
specific product type and their effects on interest income and interest expense for 2008 and 2007.
Non-Interest Income
Total non-interest income increased $11.7 million or 97.8% from $12.0 million for the year
ended December 31, 2007 to $23.7 million for the year ended December 31, 2008. This was driven by
an increase of $10.8 million in gain on sale of loans, including the derivative accounting
adjustment, from a loss of $1.5 million in 2007 to a gain of $9.3 million in 2008 due to the
mitigation of market risk. In order to mitigate risk, the Company forward sells loan commitments
on a loan by loan basis. The increase was also due to a $0.9 million increase in letter of credit
income due to new letters of credit issued during 2008.
In total, non-interest income amounted to 29.6% of total net revenue (net interest income plus
non-interest income) for the year ended December 31, 2008 compared with 19.1% for the year ended
December 31, 2007.
31
Non-Interest Expense
Non-interest expense for the year ended December 31, 2008 decreased 8.3% or $5.3 million to
$58.3 million compared with $63.6 million for the year ended December 31, 2007 primarily due to a
$2.9 million decrease in compensation and employee benefits resulting from: the decrease in regular
base salary due to the reduction in headcount, a reduction in bonuses and commissions due to the
economic downturn and a decrease in severance expense for employees in 2008 compared to 2007. Also
contributing to the decrease in non-interest expense from 2007 to 2008 was a $1.5 million decrease
in corporate development due to an overall effort to reduce corporate
expenses, a $1.3 million decrease in lease termination costs from 2007, and a $1.2 million
decrease in the lower of cost or market valuation resulting from implementation of a fair value
accounting standard. The decrease was partially offset by a $1.7 million increase in the loss on
investments available-for-sale for CMO investments that were other than temporarily impaired as of
December 31, 2008.
2009 and 2008 Fourth Quarter Results
The Companys net loss for the three months ended December 31, 2009 was $9.9 million. This
was an $8.9 million increase compared with a net loss of $1.0 million for the three months ended
December 31, 2008. For the three months ended December 31, 2009, net interest income decreased
45.2% or $7.0 million to $8.5 million compared with $15.5 million for the three months ended
December 31, 2008.
For the three months ended December 31, 2009, interest income decreased 11.1% or $3.6 million
to $28.9 million compared with $32.5 million for the three months ended December 31, 2008. The
decrease was primarily due to a $1.5 million decrease in commercial loans interest income resulting
from the decrease in yields during the three months ended December 31, 2009 compared to the same
period in 2008.
For the three months ended December 31, 2009, interest expense increased $3.4 million or 20.0%
from $17.0 million for the three months ended December 31, 2008 to $20.4 million for the three
months ended December 31, 2009. The increase in interest expense resulted primarily from a $6.6
million increase in total borrowings interest expense and a $3.2 million decrease in total deposit
interest expense. The increase in total borrowings was triggered by an increase in interest rates
due to the forbearance agreements and incurrence of fees associated with the forbearance agreements
that are included in interest expense. A reduction in yields from the three months ended 2009 to
the three months ended 2008 was the primary contributor to the overall decrease in deposit interest
expense.
For the three months ended December 31, 2009, total non-interest income remained stable at
$5.4 million for the three months ended December 31, 2009 and December 31, 2008.
Non-interest expense for the three months ended December 31, 2009 increased 37.2% or $5.1
million to $18.8 million compared with $13.7 million for the same period in 2008. This increase is
primarily due to a $3.5 million increase in compensation and employee benefits as a result of a
$2.7 million increase in bonuses and incentives and a $0.9 million increase in severance pay
expense. Also contributing to the quarter-over-quarter increase in non-interest expense is a $1.8
million increase in provisions for unfunded commitments.
The income tax benefit for the three months ended December 31, 2009 was $2.1 million, compared
with a tax provision of $46 thousand for the three months ended December 31, 2008. The decrease in
the tax provision was largely due to a $1.5 million reversal of the Companys valuation allowance
as a result of new legislation allowing the Company to carry back prior period net operating
losses. The decrease was also a result of NCB, FSBs net operating loss of $6.6 million for the
year ended December 31, 2009 compared to net income of $7.9 for the year ended December 31, 2008.
32
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
For the Three Months Ended
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Dec. 31 |
|
|
Sept. 30 |
|
|
June 30 |
|
|
Mar. 31 |
|
|
Dec. 31 |
|
|
Sept. 30 |
|
|
June 30 |
|
|
Mar. 31 |
|
Interest income |
|
$ |
28,925 |
|
|
$ |
28,063 |
|
|
$ |
28,436 |
|
|
$ |
29,412 |
|
|
$ |
32,549 |
|
|
$ |
30,448 |
|
|
$ |
30,232 |
|
|
$ |
30,473 |
|
Interest expense |
|
|
20,412 |
|
|
|
19,947 |
|
|
|
14,753 |
|
|
|
13,360 |
|
|
|
17,033 |
|
|
|
16,299 |
|
|
|
15,975 |
|
|
|
17,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,513 |
|
|
|
8,116 |
|
|
|
13,683 |
|
|
|
16,052 |
|
|
|
15,516 |
|
|
|
14,149 |
|
|
|
14,257 |
|
|
|
12,494 |
|
Provision for loan losses |
|
|
7,133 |
|
|
|
12,182 |
|
|
|
13,916 |
|
|
|
10,869 |
|
|
|
8,119 |
|
|
|
6,042 |
|
|
|
2,805 |
|
|
|
1,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income after provision for loan losses |
|
|
1,380 |
|
|
|
(4,066 |
) |
|
|
(233 |
) |
|
|
5,183 |
|
|
|
7,397 |
|
|
|
8,107 |
|
|
|
11,452 |
|
|
|
10,810 |
|
Non-interest income |
|
|
5,409 |
|
|
|
5,758 |
|
|
|
7,249 |
|
|
|
6,229 |
|
|
|
5,372 |
|
|
|
7,120 |
|
|
|
7,164 |
|
|
|
4,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
6,789 |
|
|
|
1,692 |
|
|
|
7,016 |
|
|
|
11,412 |
|
|
|
12,769 |
|
|
|
15,227 |
|
|
|
18,616 |
|
|
|
14,834 |
|
Non-interest expense |
|
|
18,759 |
|
|
|
22,542 |
|
|
|
17,538 |
|
|
|
14,829 |
|
|
|
13,749 |
|
|
|
14,773 |
|
|
|
15,256 |
|
|
|
14,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(11,970 |
) |
|
|
(20,850 |
) |
|
|
(10,522 |
) |
|
|
(3,417 |
) |
|
|
(980 |
) |
|
|
454 |
|
|
|
3,360 |
|
|
|
353 |
|
(Benefit) provision for income taxes |
|
|
(2,087 |
) |
|
|
889 |
|
|
|
(741 |
) |
|
|
(180 |
) |
|
|
46 |
|
|
|
456 |
|
|
|
110 |
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,883 |
) |
|
$ |
(21,739 |
) |
|
$ |
(9,781 |
) |
|
$ |
(3,237 |
) |
|
$ |
(1,026 |
) |
|
$ |
(2 |
) |
|
$ |
3,250 |
|
|
$ |
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases
Loans and leases outstanding, including loans held-for-sale, decreased $242.1 million or 12.3%
from $2.0 billion at December 31, 2008 to $1.7 billion at December 31, 2009.
The Consumer and Commercial Loan and Lease portfolio decreased 14.9% to $633.9 million at
December 31, 2009 compared with $745.3 million at December 31, 2008 due principally to a decrease
in Consumer and Commercial Loan and Lease portfolio originations.
The Real Estate (Residential and Commercial) Loan portfolio decreased 12.6% to $1.1 billion at
December 31, 2009 from $1.2 billion at December 31, 2008 due to a decrease in portfolio Real Estate
(Residential and Commercial) Loan originations during 2009. The Real Estate (Residential and
Commercial) Loan portfolio is substantially composed of Multifamily Loans, Single-family
Residential Loans and Share Loans.
The Companys Consumer and Commercial Loan portfolio has a concentration in the food retailing
and distribution industry. The loan types include lines of credit, revolving credits, and term
loans. These loans are typically collateralized with general business assets (e.g., inventory,
receivables, fixed assets, and leasehold interests). The loans will be repaid from cash flows
generated by the borrowers operating activities. The Companys exposure to credit loss in the
event of nonperformance by the other parties to the loan is the carrying amounts of the loans less
the realizable value of collateral.
33
The Companys loan portfolio is diversified both in terms of industry and geography. The
following is the distribution of the loans outstanding as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans |
|
|
Real Estate Loans |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
By Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast |
|
|
33.6 |
% |
|
|
35.1 |
% |
|
|
22.1 |
% |
|
|
22.1 |
% |
Northeast |
|
|
27.4 |
% |
|
|
22.6 |
% |
|
|
36.4 |
% |
|
|
43.1 |
% |
West |
|
|
27.3 |
% |
|
|
30.0 |
% |
|
|
28.4 |
% |
|
|
22.7 |
% |
Central |
|
|
11.7 |
% |
|
|
12.3 |
% |
|
|
13.1 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Loans |
|
|
|
2009 |
|
|
2008 |
|
By Borrower Type: |
|
|
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
|
|
|
Residential |
|
|
42.5 |
% |
|
|
42.4 |
% |
Commercial |
|
|
21.6 |
% |
|
|
20.9 |
% |
Commercial: |
|
|
|
|
|
|
|
|
Community Association |
|
|
7.2 |
% |
|
|
7.1 |
% |
Food retailing and distribution |
|
|
5.7 |
% |
|
|
5.4 |
% |
Non-Profit |
|
|
4.1 |
% |
|
|
3.1 |
% |
Franchise |
|
|
3.9 |
% |
|
|
4.9 |
% |
Hardware |
|
|
3.3 |
% |
|
|
3.3 |
% |
Employee Stock Ownership Plan |
|
|
3.1 |
% |
|
|
3.9 |
% |
Healthcare |
|
|
2.9 |
% |
|
|
2.4 |
% |
Mission |
|
|
2.0 |
% |
|
|
1.8 |
% |
Other |
|
|
3.7 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The Company originates Cooperative Loans (included in Residential Real Estate Loans) to
predominantly owner-occupied housing cooperatives. A significant portion of the Companys mortgage
loans are secured by real estate in New York City due to the citys extensive cooperative market.
As of December 31, 2009 and 2008, there were $351.7 million and $469.9 million of Cooperative Loans
secured by real estate in New York City, respectively, representing 20% and 24% of total loans and
leases outstanding, respectively. The collateral for Cooperative Loans consists of first mortgage
liens on the land and improvements of cooperatively owned, multifamily and single-family
residential properties and property leases. Furthermore, the Cooperative Loan portfolio includes
loans secured by second mortgage liens. In addition, certain unsecured lines of credit have been
issued to cooperative borrowers. The loans are repaid from operations of the cooperative. The
Companys exposure to credit loss in the event of nonperformance by other parties to the loans is
the carrying amounts of the loans less the value of the collateral.
34
Table 7
MATURITY SCHEDULE OF LOANS
As of December 31, 2009
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or |
|
|
One to Five |
|
|
Over Five |
|
|
|
|
|
|
Less |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
$ |
716 |
|
|
$ |
14,531 |
|
|
$ |
2,120 |
|
|
$ |
17,367 |
|
Commercial Loans |
|
|
75,040 |
|
|
|
241,102 |
|
|
|
300,201 |
|
|
|
616,343 |
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
21,896 |
|
|
|
159,313 |
|
|
|
499,527 |
|
|
|
680,736 |
|
Commercial |
|
|
31,688 |
|
|
|
155,438 |
|
|
|
191,960 |
|
|
|
379,086 |
|
Leases |
|
|
64 |
|
|
|
93 |
|
|
|
|
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
129,404 |
|
|
$ |
570,477 |
|
|
$ |
993,808 |
|
|
$ |
1,693,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate loans |
|
$ |
29,097 |
|
|
$ |
313,791 |
|
|
$ |
284,270 |
|
|
$ |
627,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate loans |
|
|
100,307 |
|
|
|
256,686 |
|
|
|
709,538 |
|
|
|
1,066,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
$ |
129,404 |
|
|
$ |
570,477 |
|
|
$ |
993,808 |
|
|
$ |
1,693,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources and Uses of Funds
The Companys principal sources of funds are loan sale proceeds, loan interest and principal
payment collections, deposits from customers and debt borrowings. The principal uses of funds are
repayment of debt, origination of loans and purchases of investment securities.
Cash
Provided by Operating Activities. The Companys net cash provided by operating
activities for the year ended December 31, 2009 was $25.7 million compared to
$129.5 million for
the year ended December 31, 2008. This $103.8 million decrease in cash provided was
primarily due
to a $173.3 million decrease in cash used to purchase loans-held-for-sale and a $25.4 million
increase in the provision for loan losses, partially offset by a $47.3 million decrease in net
income, a $114.0 million increase in cash used to originate loans for sale, net of principal
collections and a $156.4 million decrease in net proceeds from
sale of loans held-for-sale.
Cash Provided by (Used in) Investing Activities. The Companys net cash provided by investing
activities for the year ended December 31, 2009 was $235.7 million compared to net cash used in
investing activities of $439.8 million for the year ended
December 31, 2008. This $675.5 million
increase in cash provided by was primarily due to a $648.0 million decrease in cash used to
originate loans held-for-investment, and a $21.6 million net decrease in cash used to purchase
portfolio loans.
Cash (Used in) Provided by Financing Activities. The Companys net cash used in financing
activities for the year ended December 31, 2009 was $35.3 million compared to $286.5 million cash
provided by financing activities for the year ended December 31, 2008. The $321.8 million decrease
in cash provided was primarily due a $319.0 million decrease in cash provided by deposits.
35
Asset and Liability Management
Asset and liability management is the structuring of interest rate sensitivities of an
entitys assets and liabilities in order to manage the impact of changes in market interest rates
on net interest income. The Companys
liquidity and internal rate of return are managed by the Asset Liability Committee (ALCO),
composed of senior officers of the Company, which meets monthly. The fundamental role of the ALCO
is to devise and implement business strategies designed to enhance earnings and the economic value
of equity while simultaneously maintaining a prudent level of exposure to interest rate risk. The
ALCO devises balance sheet strategies for managing loans, investments, deposits, borrowed funds and
off-balance sheet transactions to achieve desired financial performance. The ALCO also develops
strategies for pricing various products and services as well as ensuring compliance with related
Board policies and established regulatory requirements.
Liquidity and Capital Resources
As of December 31, 2009, the Company believes that it has adequate liquidity to meet all its
obligations. The Companys total cash balance increased $226.1 million from December 31, 2008 to
December 31, 2009 as the result of significant cash proceeds from the receipt of principal and interest
payments on loans receivable and loan and investment security
sales during 2009. The Company intends to use available cash to reduce its concentration in
brokered deposits and for required debt payments on its senior notes and revolving credit facility.
The following describe the Companys primary sources and uses of liquidity as of December 31,
2009:
|
|
|
The Holding Company plans to fund the debt service on the revolving credit facility and
senior notes with some combination of cash on hand, proceeds from the delivery of loans
held-for-sale, the receipt of interest and principal payments on loans receivable, and, if
necessary, through leveraging existing assets of the Holding Company through the use of a
securitization vehicle or a secured borrowing arrangement, disposing of certain assets and
raising funds from other capital sources. As of December 31, 2009, the Company does not
have the intent to sell any specific investment securities or loans nor is it more likely
than not that the Company will sell any of its investments or loans at a loss. |
|
|
|
|
With respect to NCB, FSB, FHLB available unused borrowing capacity declined to $37.4
million as of December 31, 2009 compared to $192.1 million as of December 31, 2008 as a
result of NCB FSBs decline in deposit balances, additional borrowings by NCB, FSB and changes in the NCB, FSB
specific characteristics used by FHLB to determine borrowing
capacity. As of December 31, 2009, NCB, FSB had pledged eligible Share and Single-family
Residential Loans totaling $321.0 million, eligible Cooperative and Multifamily Loans
totaling $34.8 million and eligible Commercial Real Estate Loans totaling $86.7 million.
As of December 31, 2009, NCB, FSB had $21.6 million of investments pledged with the FHLB.
NCB, FSB did not have any investments pledged with the FHLB as of December 31, 2008. |
|
|
|
|
As of December 31, 2009, the FHLB of Cincinnati, with whom NCB, FSB banks, has not
provided notice of any potential dividend cancellations. Also, the FHLB capacity is not
affected by any debt amendments entered into by the Holding Company. |
|
|
|
|
NCB, FSB, established a Federal Reserve Bank borrowing facility in October 2009. Unused
borrowing capacity was $78.0 million as of December 31, 2009. |
|
|
|
|
NCB, FSBs brokered deposit balances were
$589.1 million and $612.5 million or 47.0% and
47.1% of total deposits as of December 31, 2009 and December 31, 2008, respectively. NCB,
FSB intends to reduce its concentration of brokered deposits over the next two years with
some combination of cash on hand, proceeds from the delivery of loans held for sale, the
receipt of interest and principal payments on loans receivable as well as growth in
non-brokered deposits. |
During 2009, the Holding Company invested $7.0 million in NCB, FSB through an investment in
the same amount in NCB Financial Corporation. Under the investment limitations in its credit
agreements, the Holding Company will not be able to invest any additional capital in NCB, FSB or
NCB Financial Corporation absent consent from the OTS.
During 2009, the Company sold $168.5 million of loans that were held for investment for
liquidity purposes. Of these total loans sold, $149.1 million were Residential Real Estate Loans
and $19.4 million were
Commercial Loans. During 2008, the Company sold $62.9 million of Residential Real Estate
Loans that were held for investment for liquidity purposes.
36
In the event that the Holding Company is ultimately unable to refinance or otherwise meet its
amortization obligations under the most recent amendments to its senior note and revolving credit
agreements, the lenders and the noteholders have the right to call and demand immediate repayment
of any and all amounts due.
Contractual Obligations
The Company has various financial obligations, including contractual obligations that may
require future cash payments. Further discussion of the nature of each obligation is included in
Notes 14 through 16 of the Notes to the Consolidated Financial Statements.
The following table presents, as of December 31, 2009, significant fixed and determinable
contractual obligations (including interest) to third parties by payment date (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or |
|
|
One to |
|
|
Three to |
|
|
Over Five |
|
|
|
|
|
|
Less |
|
|
Three Years |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
Deposits without a stated maturity |
|
$ |
361,652 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
361,652 |
|
Certificates of deposit |
|
|
476,944 |
|
|
|
284,160 |
|
|
|
113,114 |
|
|
|
20,176 |
|
|
|
894,394 |
|
Borrowings |
|
|
242,376 |
|
|
|
163,688 |
|
|
|
70,000 |
|
|
|
141,547 |
|
|
|
617,611 |
|
Operating leases |
|
|
3,658 |
|
|
|
7,161 |
|
|
|
7,157 |
|
|
|
24,899 |
|
|
|
42,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,084,630 |
|
|
$ |
455,009 |
|
|
$ |
190,271 |
|
|
$ |
186,622 |
|
|
$ |
1,916,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended December 31, 2009, deposits, all of which are held at NCB, FSB,
decreased 3.6% to $1.25 billion from $1.30 billion as of December 31, 2008 as a result of a slight
shift in funding source from deposits to borrowings (primarily FHLB and TLGP funds). The weighted
average rate on deposits as of December 31, 2009 was 1.8% compared to 2.8% as of December 31, 2008.
The average maturity of the certificates of deposit as of December 31, 2009 was 17.7 months
compared with 10.9 months as of December 31, 2008.
37
The carrying amounts and maturities of the Companys various debt instruments are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Balance |
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
Type |
|
2009 |
|
|
2008 |
|
|
Maturity Date |
|
|
|
|
|
|
|
|
|
|
|
Short-term FHLB |
|
$ |
|
|
|
$ |
23,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
128,394 |
|
|
|
202,000 |
|
|
December 2010 (1) |
|
|
|
|
|
|
|
|
|
|
|
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
June 2011 |
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
July 2011 |
Long-term FHLB |
|
|
25,000 |
|
|
|
20,000 |
|
|
August 2011 |
Long-term FHLB |
|
|
10,000 |
|
|
|
10,000 |
|
|
June 2012 |
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
June 2013 |
Long-term FHLB |
|
|
30,000 |
|
|
|
|
|
|
March 2014 |
Long-term FHLB |
|
|
20,000 |
|
|
|
|
|
|
August 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
145,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
87,092 |
|
|
|
105,000 |
|
|
December 2010 (1) |
|
|
|
|
|
|
|
|
|
|
|
TLGP debt |
|
|
25,000 |
|
|
|
|
|
|
February 2012 |
TLGP debt |
|
|
63,688 |
|
|
|
|
|
|
May 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
88,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debt Class A (current) |
|
|
|
|
|
|
2,500 |
|
|
|
Subordinated
debt Class A (current) |
|
|
23,989 |
|
|
|
|
|
|
December 2010 |
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debt Class A
(non-current) |
|
|
90,000 |
|
|
|
113,989 |
|
|
October 2020 |
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt |
|
|
51,547 |
|
|
|
51,547 |
|
|
January 2034 |
|
|
|
|
|
|
|
|
|
|
|
Debt
valuation and discount |
|
|
(157 |
) |
|
|
2,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
614,553 |
|
|
$ |
590,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Amendments to the revolving credit facility and senior notes agreements extended the maturity dates
from February 2010 to December 2010 for both facilities. |
NCB, FSB is a member of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB) and has a pledge
agreement with FHLB requiring advances to be secured by eligible mortgages or investments. The
pledged mortgages are required to have a principal balance of 175% to 250% and 135% to 400% of any
advances as of December 31, 2009 and December 31, 2008, respectively. NCB, FSBs FHLB borrowing
capacity is determined by the FHLB using several factors, including asset quality and performance,
capital, earnings, liquidity and credit ratings. Changes in the factors could increase or reduce
the available capacity.
As of December 31, 2009, the total FHLB facility was $205.9 million of which $145.0 million of
debt borrowings and $23.5 million in letters of credit were outstanding. As of December 31, 2008,
the total FHLB facility was $318.8 million of which $113.0 million of debt borrowings and $13.7
million in letters of credit were outstanding. NCB, FSBs total FHLB facility capacity decreased
from 2009 to 2008 due to a reduction in pledged collateral as a result of a combination of loan
sales and decreased loan collateral values from downgrades to credit ratings.
38
Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Discussion of the Companys commitments, contingent liabilities and off-balance sheet
arrangements is included in Note 10 of the Notes to the Consolidated Financial Statements.
Commitments to extend credit do not necessarily represent future cash requirements, as these
commitments may expire without being drawn on based upon the Companys historical experience.
Capital
The Companys average equity to average assets ratio was 9.6% for 2009 compared with 10.8% for
2008. As of December 31, 2009, NCB, FSB maintained capital levels well in excess of regulatory
requirements. NCB, FSBs capital exceeded the minimum capital requirements as of December 31, 2009
and 2008. (See Note 2 for further discussion).
Critical Accounting Policies
Fair Value Measurements
The disclosure of fair value measurements is required by FASB ASC Topic 820, which establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value into the following three categories (from highest to lowest priority):
|
|
|
Level 1 Inputs that represent quoted prices for identical instruments in active markets. |
|
|
|
|
Level 2 Inputs that represent quoted prices for similar instruments
in active markets, or quoted prices for identical instruments in
non-active markets. Also includes valuation techniques whose inputs
are derived principally from observable market data other than quoted
prices, such as interest rates or other market-corroborated means. |
|
|
|
|
Level 3 Inputs that are largely unobservable, as little or no
market data exists for the instrument being valued. |
The Company has categorized all assets and liabilities measured at fair value both on a
recurring and nonrecurring basis into the above three levels.
The determination of fair value for assets and liabilities categorized as Level 3 items
involves a great deal of subjectivity due to the use of unobservable inputs. In addition,
determining when a market is no longer active and placing little or no reliance on distressed
market prices requires the use of managements judgment. The need for greater management judgment
in determining fair values for Level 3 assets and liabilities has further been heightened by the
current challenging economic conditions, which have resulted in significant volatility in the fair
values of certain investment securities.
Other-Than-Temporary Impairment of Investments
The Companys investment securities portfolio and retained beneficial interests in securitized
financial assets are evaluated for impairment on a quarterly basis on an individual security basis.
The Company recognizes an impairment charge when the declines in the fair value of equity and debt
securities below their cost basis are judged to be other-than-temporary. Significant judgment is
used to identify events or circumstances that would likely have a significant adverse effect on the
future use of the investment. The Company reviews its investments for other-than-temporary
impairment considering the occurrence of events that would indicate that the carrying amount of the
investment exceeds its fair value on an other-than-temporary basis. Events include a decline in
distributable cash flows from the investment, a change in the expected useful life or other
significant events which would decrease the value of the investment.
In April 2009, the Financial Accounting Standards Board (FASB) issued new guidance regarding
the recognition and presentation of other-than-temporary impairments. This standard amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities. This standard also
modifies the requirements for recognition and presentation of other-than-temporary impairment
losses. Losses considered to be related to credit deterioration of the underlying issuer(s) (e.g.
expected cash flows will be less than the amortized cost basis of the investment security) will be
reflected in earnings. Declines in value related to market factors will be presented as a
component of accumulated other comprehensive income. The Company has adopted this standard,
applied the guidance to its existing debt securities as of January 1, 2009, and recognized the
effects of the standard as a change in accounting principle. Accordingly, at each reporting period
the Company considers its intent and ability to hold, or whether it is more likely than not that
the Company would be required to sell, securities before the expected recovery of the amortized
cost basis.
39
Allowance for Loan Losses and Reserves for Unfunded Commitments
The allowance for loan losses is an estimate of known and inherent losses in the Companys
loan portfolio. Management evaluates the adequacy of the allowance for loan losses based on
changes, if any, in the nature and amount of the assets and associated collateral, underwriting
activities, the composition of the loan portfolio (including product mix and geographic, industry
or customer-specific concentrations), trends in loan performance, regulatory guidance and economic
factors. The allowance for loan losses is accrued when the occurrence of the loss is probable and
can be estimated.
At each reporting period, loans are evaluated for impairment. A loan is considered impaired
when, based on current information it is probable the Company will be unable to collect all amounts
due under the contractual terms of the loan. Impairment is measured based upon the present value
of future cash flows discounted at the loans effective interest rate; or, the fair value of the
collateral, less estimated selling costs, if the loan is collateral-dependent. The Company will
generally continue to recognize interest income on impaired loans as long as the loan is not at
least 90 days delinquent on payments.
For all non-impaired loans, the Company has designed a risk rating system to classify each
loan according to the risk unique to the credit facility. The expected loss for each risk rating
is determined using historical loss factors and collateral position of the credit facility. All
non-impaired loans are evaluated individually and assigned a risk rating. Reserves on non-impaired
loans are calculated on a loan-by-loan basis based upon the probability of default and the expected
loss in the event of default for each risk rating, based on historical experience.
The Company continuously evaluates its portfolio of unfunded commitments to determine the
likelihood that a customer will draw on the commitment and the financial condition of the borrower
to determine the probability of loss in the event the commitment is funded and the potential
severity of such a loss. Generally, the same principals of accounting and methodologies used in
determining the allowance for loan losses are also used in determining the reserve for unfunded
commitments. A reserve percentage is applied to the unfunded commitment amounts using the same
reserve percentage matrices as the allowance for loan losses. After applying the reserve
percentage, a commitment usage factor, which is determined by the loan type, is also applied to the
commitment balance to calculate the full reserve for the unfunded commitment.
Servicing
Assets and Interest-only Receivables
The Company originates certain loans for sale. Prior to 2007, a significant portion of the
Companys loans were sold through securitizations. The securitization market ceased functioning in
late 2007 with the onset of the credit crises. Subsequent to 2007, the Company has continued its
loan sale activities; however, the loans are primarily sold to Fannie Mae and to other willing
buyers. The Company retains the service rights and recognizes mortgage servicing assets based on
an allocation of the total cost of the loans to the servicing assets and the loans (without the
servicing assets) based on their relative fair values.
Servicing assets, stated net of accumulated amortization, are amortized in proportion to the
remaining net servicing revenues estimated to be generated by the underlying loans. Furthermore,
servicing assets are assessed for impairment based on lower of cost or fair value. In addition,
mortgage-servicing assets must be stratified based on one or more predominant risk characteristics
of the underlying loans and impairment is recognized through a valuation allowance for each
impaired stratum.
Interest-only receivables are created when loans are sold and a portion of the interest
retained does not depend on the servicing work being performed. The interest-only receivables are
amortized to interest income using the interest method. Interest-only receivables that are
certificated have been included as investment securities. Interest-only receivables that are not
certificated are included as other assets.
40
Substantially all interest-only receivables pertain to Cooperative Loans. These mortgages are
typically structured with prepayment lockouts followed by prepayment penalties, yield maintenance
provisions, or defeasance through maturity. In calculating interest-only receivables, the Company
discounts the cash flows through the lockout or defeasance period. Cash flows beyond the lockout or
defeasance period are included in the fair value of the interest-only receivable only to the extent
that the Company is entitled to receive the prepayment or yield maintenance penalty.
Gains or losses on loan sales and securitizations depend, in part, on the previous carrying
amount of the loans involved in the transfer and are allocated between the loans sold and the
retained interests based on their relative fair value at the date of sale. Since quoted market
prices are generally not available, the Company estimates fair value of these interest-only
receivables by determining the present value of future expected cash flows using modeling
techniques that incorporate managements best estimates of key variables, including credit losses,
prepayment speeds, prepayment lockouts and discount rates commensurate with the risks involved.
Gains on sales and securitizations are reported in non-interest income.
The fair value of the interest-only receivables is determined using discounted future expected
cash flows at various discount rates. In an effort to maximize the value of interest-only
receivables, most cooperative mortgages have very strict prepayment restrictions. The most common
prepayment protection is a lockout period, followed by either a fixed percentage penalty, or some
form of yield maintenance. For loans that do not have prepayment options, the related interest-only
receivable is adjusted at the time of prepayment.
For certificated interest-only receivables, the discount rate of future expected cash flows is
equal to a spread over the benchmark index at which the respective loans were priced. For
non-certificated interest-only receivables, the discount rate of future expected cash flows is
equal to a market spread over the benchmark index for similar certificated interest-only
receivables adjusted by a premium to reflect the less liquid nature of the non-certificated
interest-only receivable. An appropriate spread, determined by reference to what market
participants would use for similar financial instruments, is added to the index to determine the
current discount rate.
The weighted average life of each interest-only receivable will vary based on the average life
of the underlying collateral.
Interest-only receivables that are subject to prepayment risk such that the Company may not
recover substantially all of its investment are recorded at fair value with subsequent adjustments
reflected in other comprehensive income or in earnings if the fair value of the interest-only
receivable has declined below its carrying amount and such decline has been determined to be other
than temporary.
Derivative
Instruments and Hedging Activities
The Company maintains a risk management strategy that includes the use of derivative
instruments to reduce unplanned earnings fluctuations caused by interest rate volatility. Use of
derivative instruments is a component of the Companys overall risk management strategy in
accordance with a formal policy that is monitored by management, which has delegated authority over
the interest rate risk management function.
The derivative instruments utilized may include interest rate lock commitments, interest rate
swaps, financial futures contracts and forward loan sales commitments. Interest rate lock
commitments are created when borrowers lock in their contractual commitment to borrow funds at a
specific interest rate and the lock is completed within the time frame established by the Company.
Interest rate swaps involve the exchange of fixed and variable rate interest payments between two
parties based upon a notional principal amount and maturity date. Financial futures contracts
generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the
future at specified prices. Forward loan sales commitments lock in the prices at which loans will
be sold to investors. Generally, the Company will enter into a forward
loan sales commitment at the same time as it enters into an interest rate lock commitment if
the intent is to originate and sell the loan.
41
The Company records all derivative instruments on the statement of condition at their fair
values. The Company does not enter into derivative transactions for speculative purposes. For
derivatives designated as hedges, the Company contemporaneously documents the hedging relationship,
including the risk management objective and strategy for undertaking the hedge, how effectiveness
will be assessed at inception and at each reporting period and the method for measuring
ineffectiveness. The Company evaluates the effectiveness of these transactions at inception and on
an ongoing basis. Ineffectiveness is recorded through earnings. For derivatives designated as cash
flow hedges, the fair value adjustment is recorded as a component of other comprehensive income,
except for the ineffective portion which is recorded in earnings. For derivatives designated as
fair value hedges, the fair value adjustments for both the hedged item and the hedging instrument
are recorded through the income statement with any difference considered the ineffective portion of
the hedge.
The Company discontinues hedge accounting prospectively when it is determined that the
derivative is no longer highly effective. In situations in which cash flow hedge accounting is
discontinued, the Company continues to carry the derivative at its fair value on the statement of
condition and recognize any subsequent changes in its fair value in earnings over the term of the
forecasted transaction. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the Company recognizes immediately in earnings any gains and
losses that were accumulated in other comprehensive income.
Income Taxes
The Act provides that the Holding Company shall be treated as a cooperative and subject to the
provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T and the Act, the
Holding Company issues its member-borrowers patronage dividends, which are tax deductible to the
Company thereby reducing its taxable income. All income generated by the Holding Company and its
subsidiaries, with the exception of certain income of NCB, FSB, qualifies as patronage income under
the Internal Revenue Code as amended by the Act with respect to the Company, with the consequence
that the Company is able to issue tax deductible patronage dividends with respect to all such
income. The Act also provides that the Company is exempt from state and local taxes with the
exception of real estate taxes. Certain of the Companys subsidiaries, however, are subject to
federal and state income taxes.
The Company provides for income taxes using the asset and liability approach; which requires
the recognition of deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts of the existing assets and
liabilities and their respective tax bases.
The term tax position refers to a position in a previously filed tax return or a position
expected to be taken in a future tax return that is reflected in measuring current or deferred
income tax assets and liabilities for interim or annual periods. A tax position can result in a
permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable
to future years, or a change in the expected realizability of deferred tax assets. The Company does
not currently have any uncertain tax positions.
New
Financial Accounting Standards
Effective January 1, 2009, the Company adopted new accounting guidance for disclosures about
derivative instruments and hedging activities. This guidance requires companies with derivative
instruments to disclose information about how and why a company uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and how derivative instruments
and related hedged items affect a companys financial position, financial performance, and cash
flows. The required disclosures include the fair value of derivative instruments and their gains
and losses in tabular format, information about credit-risk-related contingent features in
derivative agreements, counterparty credit risk, and the Companys strategies and objectives for
using derivative instruments. This guidance is
effective prospectively for periods beginning on or after November 15, 2008. The adoption
provided for enhanced disclosure but otherwise did not have a material impact on the Companys
consolidated financial condition or results of operations.
42
In April 2009, the Company adopted new accounting guidance for recognition and presentation of
other-than-temporary impairments. This standard modified the indicator of other-than-temporary
impairment for debt securities. In addition, it amended the amount of an other-than-temporary
impairment that is recognized in earnings when there are credit losses on a debt security for which
management does not intend to sell and for which it is more likely than not that the entity will
not have to sell prior to recovery of the amortized cost basis of the debt security. In those
situations, the portion of the total impairment that is attributable to the credit loss would be
recognized in earnings, and the remaining difference between the debt securitys amortized cost
basis and its fair value would be included in other comprehensive income. This guidance is
effective for interim and annual periods ending after June 15, 2009. The adoption of this standard
did not have a material impact on the Companys consolidated financial condition or results of
operations.
In April 2009, the Company adopted new accounting guidance for determining when a market for
an asset or a liability is active or inactive and determining when a transaction is distressed.
This standard reaffirmed the exit price objective of fair value measurements and provides guidance
on inactive markets and distressed transactions. This standard is to be applied prospectively and
is effective for interim and annual periods ending June 15, 2009. The adoption of this standard did
not have a material impact on the Companys consolidated financial condition or results of
operations.
In April 2009, the Company adopted new accounting guidance for interim disclosures about fair
value of financial instruments. This guidance requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements. This guidance requires those disclosures in summarized financial information
at interim reporting periods. This standard is effective for interim reporting periods ending after
June 15, 2009. The adoption provided for enhanced disclosure but otherwise did not have a material
impact on the Companys consolidated financial condition or results of operations.
On July 1, 2009, the Company adopted new accounting guidance for the FASB accounting standards
codification and the hierarchy of generally accepted accounting principles, the Codification. The
Codification is the exclusive authoritative reference for nongovernmental U.S. GAAP for use in
financial statements issued for interim and annual periods ending after September 15, 2009, except
for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The
Codification supersedes all existing non-SEC accounting and reporting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. The Company also has exposure to different industries and counterparties, and
routinely executes transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, investment companies and other
institutional clients. In the event of a bankruptcy or insolvency proceeding involving one of such
counterparties, the Company may experience delays in recovering the assets posted as collateral or
may incur a loss to the extent that the counterparty was holding collateral in excess of the
obligation to such counterparty.
In addition, many of these transactions expose the Company to credit risk in the event of a
default by its counterparty or client. Also, the credit risk may be exacerbated when the collateral
held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover
the full amount of the loan or derivative exposure due to the Company.
The Company is also exposed to interest rate risk. The Companys asset and liability
management process manages the Companys interest rate risk by structuring the balance sheet and
derivative portfolios to maximize net interest income while maintaining an acceptable level of risk
to changes in market interest rates. The achievement of this goal requires a balance between
profitability, liquidity, and interest rate risk.
43
Interest rate risk is managed by the ALCO in accordance with policies approved by the
Companys Board of Directors. The ALCO formulates strategies designed to ensure appropriate level
of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO
considers the impact on earnings and capital of the current outlook on interest rates, potential
changes in interest rates and liquidity, business strategies, and other factors. The ALCO meets
regularly to review, among other things, the sensitivity of assets and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, warehouse loans and commitments to originate loans (mortgage
pipeline), and the maturities of investments and borrowings. Additionally, the ALCO reviews
liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit
activity.
To effectively measure and manage interest rate risk, the Company uses simulation analyses to
determine the impact on net interest income of various interest rate scenarios, balance sheet
trends, and strategies. From these simulations, interest rate risk is quantified and appropriate
strategies are developed and implemented. Additionally, duration and market value sensitivity
measures are utilized to provide additional insights concerning the interest rate risk management
process. Executive management and the Companys Board of Directors review the overall interest
rate risk position and strategies on an ongoing basis. The Company has traditionally managed its
business to maintain limited exposure to changes in interest rates.
The Company at times, may hedge a portion of its interest rate risk by entering into certain
financial instruments including interest rate swaps, caps, floors, financial options, financial
futures contracts, and forward delivery contracts. A hedge is a transaction to reduce risk by
creating a relationship whereby changes in the value of the hedged asset or liability are offset in
whole or in part by changes in the value of the financial instrument used for hedging. The impact
of all hedging relationships is included in the following analysis.
The following tables present an analysis of the sensitivity of the Companys net interest
income and economic value of portfolio equity (market value of assets, less liabilities and
derivative instruments). The interest rate scenarios presented in the table include interest rates
at December 31, 2009 and December 31, 2008 as adjusted for instantaneous parallel rate changes
upward and downward of up to 200 basis points.
Net interest income was reasonably well insulated against the impact of changes in market
interest rates at both December 31, 2009 and December 31, 2008. The impact of changing market
interest rates is nonlinear due to the existence of customer options, primarily loan prepayments
options, embedded in the balance sheet.
Since there are limitations inherent in any methodology used to estimate the exposure to
changes in market interest rates, this analysis is not intended to be a forecast of the actual
effect of a change in market interest rates. The net interest income variability reflects the
Companys interest sensitivity gap (defined below) and other factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Change In |
|
|
|
Change In |
|
|
|
|
|
|
Economic Value |
|
|
|
Interest |
|
|
Change In Net |
|
|
of Portfolio |
|
|
|
Rates |
|
|
Interest Income |
|
|
Equity |
|
|
|
|
+200 |
|
|
|
-0.6 |
% |
|
|
-9.4 |
% |
|
|
|
+100 |
|
|
|
-0.2 |
% |
|
|
-4.4 |
% |
(1) |
|
|
-100 |
|
|
|
n/a |
|
|
|
n/a |
|
(1) |
|
|
-200 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Change In |
|
|
|
Change In |
|
|
|
|
|
|
Economic Value |
|
|
|
Interest |
|
|
Change In Net |
|
|
of Portfolio |
|
|
|
Rates |
|
|
Interest Income |
|
|
Equity |
|
|
|
|
+200 |
|
|
|
-9.6 |
% |
|
|
-15.1 |
% |
|
|
|
+100 |
|
|
|
-4.4 |
% |
|
|
-6.9 |
% |
|
|
|
-100 |
|
|
|
1.1 |
% |
|
|
2.7 |
% |
(1) |
|
|
-200 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
(1) |
|
Due to the low level of interest rates as of December 31, 2009 and 2008, it is not possible,
nor meaningful to disclose results for this scenario. |
44
Key assumptions used in the sensitivity analysis of net interest income and economic value of
portfolio equity include the following:
|
1. |
|
Balance sheet balances for various asset and liability classes are held constant for the
net interest
income simulations. |
|
|
2. |
|
Prepayment assumptions are predicated on an analysis of historical prepayment behavior
and management expectations. |
|
|
3. |
|
Spread relationships between various interest rate indices and interest-earning assets
and interest bearing
liabilities estimated based on the analysis of historical relationships and management
expectations. |
The interest rate sensitivity gap (gap) is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing within a given time
period. During a period of rising interest rates, a positive gap (where the amount of assets
maturing and repricing within one year exceeds liabilities maturing or repricing within one year)
would tend to have a positive impact on net interest income while a negative gap would tend to have
a detrimental impact. During a period of declining interest rates, a negative gap would tend to
have a positive impact on net interest income while a positive gap would tend to have a detrimental
impact. The Companys one-year cumulative gap analysis at December 31, 2009 was positive
$158.2 or 7.56% of assets. The one-year cumulative gap analysis at December 31, 2008 was negative $351.4
million or -16.31% of assets. These variations in gaps year over year are consistent with the
simulation results that show relative changes in net interest income in response to changes in
market interest rates.
While the gap position is a useful tool in measuring interest rate risk, it is difficult to
predict the effect of changing interest rates solely on that measure, without accounting for
alterations in the maturity or repricing characteristics of the balance sheet that occur during
changes in market interest rates. For example, the gap position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay more rapidly during
periods of declining interest rates than during periods of rising interest rates. Because of this
and other risk factors not contemplated by the gap position, an institution could have a matched
gap position in the current rate environment and still have its net interest income exposed to
interest rate risk.
45
The tables 8 and 9 set forth the expected maturity and repricing characteristics of the
Companys consolidated assets, liabilities and derivative contracts at December 31, 2009 and 2008.
Table 8
INTEREST RATE SENSITIVITY
At December 31, 2009
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 12 |
|
|
|
|
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Months and |
|
|
|
|
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
Non-Interest |
|
|
|
|
|
|
30 days |
|
|
3 month |
|
|
6 month |
|
|
12 month |
|
|
Total |
|
|
Sensitive |
|
|
Total |
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
266,269 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
266,269 |
|
|
$ |
|
|
|
$ |
266,269 |
|
Investment securities |
|
|
2,423 |
|
|
|
6,943 |
|
|
|
2,525 |
|
|
|
2,021 |
|
|
|
13,912 |
|
|
|
16,280 |
|
|
|
30,192 |
|
Loans and leases* |
|
|
428,020 |
|
|
|
51,028 |
|
|
|
84,321 |
|
|
|
169,179 |
|
|
|
732,548 |
|
|
|
960,403 |
|
|
|
1,692,951 |
|
Other assets net |
|
|
85,438 |
|
|
|
273 |
|
|
|
417 |
|
|
|
862 |
|
|
|
86,990 |
|
|
|
17,135 |
|
|
|
104,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
782,150 |
|
|
$ |
58,244 |
|
|
$ |
87,263 |
|
|
$ |
172,062 |
|
|
$ |
1,099,719 |
|
|
$ |
993,818 |
|
|
$ |
2,093,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
163,157 |
|
|
$ |
106,857 |
|
|
$ |
128,199 |
|
|
$ |
206,590 |
|
|
$ |
604,803 |
|
|
$ |
507,165 |
|
|
$ |
1,111,968 |
|
Borrowings |
|
|
179,941 |
|
|
|
80,966 |
|
|
|
|
|
|
|
75,783 |
|
|
|
336,690 |
|
|
|
277,863 |
|
|
|
614,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
343,098 |
|
|
$ |
187,823 |
|
|
$ |
128,199 |
|
|
$ |
282,373 |
|
|
$ |
941,493 |
|
|
$ |
785,028 |
|
|
$ |
1,726,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-interest bearing, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
367,016 |
|
|
$ |
367,016 |
|
Effect of interest rate swap and
financial futures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & members equity,
net of derivatives |
|
$ |
343,098 |
|
|
$ |
187,823 |
|
|
$ |
128,199 |
|
|
$ |
282,373 |
|
|
$ |
941,493 |
|
|
$ |
1,152,044 |
|
|
$ |
2,093,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing differences |
|
$ |
439,052 |
|
|
$ |
(129,579 |
) |
|
$ |
(40,936 |
) |
|
$ |
(110,311 |
) |
|
$ |
158,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
439,052 |
|
|
$ |
309,473 |
|
|
$ |
268,537 |
|
|
$ |
158,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as % of total assets |
|
|
20.97 |
% |
|
|
14.78 |
% |
|
|
12.83 |
% |
|
|
7.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes loans held-for-sale and allowance for loan losses. |
46
Table 9
INTEREST RATE SENSITIVITY
At December 31, 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 12 |
|
|
|
|
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Interest - |
|
|
Months and |
|
|
|
|
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
sensitivity |
|
|
Non-Interest |
|
|
|
|
|
|
30 days |
|
|
3 month |
|
|
6 month |
|
|
12 month |
|
|
Total |
|
|
Sensitive |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
39,971 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
39,971 |
|
|
$ |
|
|
|
$ |
39,971 |
|
Investment securities |
|
|
2,216 |
|
|
|
2,692 |
|
|
|
7,637 |
|
|
|
10,229 |
|
|
|
22,774 |
|
|
|
45,711 |
|
|
|
68,485 |
|
Loans and leases* |
|
|
342,282 |
|
|
|
268,479 |
|
|
|
122,380 |
|
|
|
220,812 |
|
|
|
953,953 |
|
|
|
990,449 |
|
|
|
1,944,402 |
|
Other assets net |
|
|
58,126 |
|
|
|
785 |
|
|
|
6,452 |
|
|
|
12,804 |
|
|
|
78,167 |
|
|
|
23,867 |
|
|
|
102,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
442,595 |
|
|
$ |
271,956 |
|
|
$ |
136,469 |
|
|
$ |
243,845 |
|
|
$ |
1,094,865 |
|
|
$ |
1,060,027 |
|
|
$ |
2,154,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
393,139 |
|
|
$ |
166,133 |
|
|
$ |
222,369 |
|
|
$ |
230,607 |
|
|
$ |
1,012,248 |
|
|
$ |
196,960 |
|
|
$ |
1,209,208 |
|
Borrowings |
|
|
277,994 |
|
|
|
76,810 |
|
|
|
20,000 |
|
|
|
55,782 |
|
|
|
430,586 |
|
|
|
160,140 |
|
|
|
590,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
671,133 |
|
|
$ |
242,943 |
|
|
$ |
242,369 |
|
|
$ |
286,389 |
|
|
$ |
1,442,834 |
|
|
$ |
357,100 |
|
|
$ |
1,799,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-interest bearing, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
354,958 |
|
|
$ |
354,958 |
|
Effect of interest rate swap and
financial futures |
|
|
|
|
|
|
43,442 |
|
|
|
|
|
|
|
(40,000 |
) |
|
|
3,442 |
|
|
|
(3,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & members equity,
net of derivatives |
|
$ |
671,133 |
|
|
$ |
286,385 |
|
|
$ |
242,369 |
|
|
$ |
246,389 |
|
|
$ |
1,446,276 |
|
|
$ |
708,616 |
|
|
$ |
2,154,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing differences |
|
$ |
(228,538 |
) |
|
$ |
(14,429 |
) |
|
$ |
(105,900 |
) |
|
$ |
(2,544 |
) |
|
$ |
(351,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
(228,538 |
) |
|
$ |
(242,967 |
) |
|
$ |
(348,867 |
) |
|
$ |
(351,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as % of total assets |
|
|
-10.61 |
% |
|
|
-11.28 |
% |
|
|
-16.20 |
% |
|
|
-16.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes loans held-for-sale and allowance for loan losses. |
Table 8 indicates that on December 31, 2009 the Company had gaps (as a percentage of total
assets) of positive 7.19% and 12.46% at the one year and six month time horizons, respectively.
Table 9 indicates that on December 31, 2008, the Company had a negative gap (as a percentage of
total assets) of 16.31% and 16.20% at the one year and six month time horizons, respectively.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Companys financial statements and notes thereto are set forth beginning on the following
page. The Company is not subject to any of the requirements for supplementary financial
information contained in Item 302 of Regulation S-K.
48
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Members of National Consumer Cooperative Bank:
We have audited the accompanying consolidated balance sheets of National Consumer Cooperative Bank
and subsidiaries (the Company) as of December 31, 2009, and 2008, and the related consolidated
statements of operations, comprehensive (loss) income, changes in members equity, and cash flows
for each of the years in the three-year period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. Our
audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of National Consumer Cooperative Bank and subsidiaries as
of December 31, 2009, and 2008, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company has changed its method of
accounting for the assessment and recognition of other-than-temporary impairments on debt securities in 2009 due to the adoption, on January 1, 2009, of accounting guidance on
the recognition and presentation of other-than-temporary impairments, as codified within FASB ASC
Subtopic No. 320-10.
/s/ KPMG LLP
McLean, Virginia
March 31, 2010
NATIONAL
CONSUMER COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
258,406 |
|
|
$ |
28,789 |
|
Federal funds sold |
|
|
7,684 |
|
|
|
11,182 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
266,090 |
|
|
|
39,971 |
|
Restricted cash |
|
|
179 |
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
|
|
Available-for-sale (amortized cost of $29,453 and $71,869) |
|
|
29,805 |
|
|
|
68,098 |
|
Held-to-maturity |
|
|
387 |
|
|
|
387 |
|
Loans held-for-sale ($1.8 million and $0.5 million recorded at fair value,
respectively) |
|
|
35,730 |
|
|
|
14,278 |
|
Loans and lease financing |
|
|
1,693,689 |
|
|
|
1,957,191 |
|
Less: Allowance for loan losses |
|
|
(36,468 |
) |
|
|
(27,067 |
) |
|
|
|
|
|
|
|
Net loans and lease financing |
|
|
1,657,221 |
|
|
|
1,930,124 |
|
Other assets |
|
|
104,125 |
|
|
|
102,034 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,093,537 |
|
|
$ |
2,154,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,253,954 |
|
|
$ |
1,300,071 |
|
Other liabilities |
|
|
40,441 |
|
|
|
38,581 |
|
Borrowings |
|
|
614,553 |
|
|
|
590,726 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,908,948 |
|
|
|
1,929,378 |
|
|
|
|
|
|
|
|
Members equity |
|
|
|
|
|
|
|
|
Common stock |
|
|
205,035 |
|
|
|
197,784 |
|
Retained (deficit) earnings |
|
|
|
|
|
|
|
|
Allocated |
|
|
|
|
|
|
7,154 |
|
Unallocated |
|
|
(19,650 |
) |
|
|
25,008 |
|
Accumulated other comprehensive loss |
|
|
(796 |
) |
|
|
(4,432 |
) |
|
|
|
|
|
|
|
Total members equity |
|
|
184,589 |
|
|
|
225,514 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
2,093,537 |
|
|
$ |
2,154,892 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
50
NATIONAL
CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2009, 2008, and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and lease financing |
|
$ |
109,185 |
|
|
$ |
116,325 |
|
|
$ |
125,016 |
|
Investment securities |
|
|
3,473 |
|
|
|
5,518 |
|
|
|
8,081 |
|
Other interest income |
|
|
2,177 |
|
|
|
1,858 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
114,835 |
|
|
|
123,701 |
|
|
|
135,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
27,977 |
|
|
|
37,549 |
|
|
|
43,310 |
|
Borrowings |
|
|
40,495 |
|
|
|
29,736 |
|
|
|
41,811 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
68,472 |
|
|
|
67,285 |
|
|
|
85,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
46,363 |
|
|
|
56,416 |
|
|
|
50,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
44,099 |
|
|
|
18,650 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after |
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses |
|
|
2,264 |
|
|
|
37,766 |
|
|
|
50,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of loans |
|
|
12,305 |
|
|
|
6,016 |
|
|
|
(1 |
) |
Letter of credit fees |
|
|
4,566 |
|
|
|
4,356 |
|
|
|
3,423 |
|
Servicing fees |
|
|
3,992 |
|
|
|
4,568 |
|
|
|
4,651 |
|
Real estate loan fees |
|
|
662 |
|
|
|
1,002 |
|
|
|
1,515 |
|
Commercial loan fees |
|
|
363 |
|
|
|
1,184 |
|
|
|
428 |
|
Prepayment fees |
|
|
221 |
|
|
|
735 |
|
|
|
837 |
|
Change in unrealized (loss) gain on derivatives |
|
|
(53 |
) |
|
|
3,256 |
|
|
|
(1,468 |
) |
Other |
|
|
2,332 |
|
|
|
2,562 |
|
|
|
2,584 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
24,388 |
|
|
|
23,679 |
|
|
|
11,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
31,272 |
|
|
|
29,815 |
|
|
|
32,703 |
|
Contractual services |
|
|
8,495 |
|
|
|
5,482 |
|
|
|
5,944 |
|
Provision for losses on unfunded commitments |
|
|
8,080 |
|
|
|
659 |
|
|
|
488 |
|
Occupancy and equipment |
|
|
6,675 |
|
|
|
7,470 |
|
|
|
8,057 |
|
Information systems |
|
|
4,295 |
|
|
|
4,627 |
|
|
|
4,402 |
|
Other-than-temporary impairment losses (OTTI) (all OTTI is credit-related) |
|
|
3,782 |
|
|
|
1,692 |
|
|
|
|
|
Loan costs |
|
|
3,462 |
|
|
|
2,479 |
|
|
|
2,082 |
|
FDIC premium |
|
|
2,551 |
|
|
|
823 |
|
|
|
506 |
|
Corporate development |
|
|
1,019 |
|
|
|
1,345 |
|
|
|
2,814 |
|
Travel and entertainment |
|
|
764 |
|
|
|
1,220 |
|
|
|
1,449 |
|
Lower of cost or market adjustment |
|
|
329 |
|
|
|
832 |
|
|
|
2,070 |
|
Loss (gain) on sale of investments available-for-sale |
|
|
23 |
|
|
|
(167 |
) |
|
|
17 |
|
Deferred rent recognition related to lease termination |
|
|
|
|
|
|
|
|
|
|
(1,860 |
) |
Lease termination costs |
|
|
|
|
|
|
|
|
|
|
3,148 |
|
Other |
|
|
2,662 |
|
|
|
1,982 |
|
|
|
1,751 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
73,409 |
|
|
|
58,259 |
|
|
|
63,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(46,757 |
) |
|
|
3,186 |
|
|
|
(1,136 |
) |
|
Income tax (benefit) provision |
|
|
(2,119 |
) |
|
|
555 |
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(44,638 |
) |
|
$ |
2,631 |
|
|
$ |
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
Patronage dividend accrual |
|
$ |
(97 |
) |
|
$ |
7,154 |
|
|
$ |
|
|
Retained earnings |
|
|
(44,541 |
) |
|
|
(4,523 |
) |
|
|
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(44,638 |
) |
|
$ |
2,631 |
|
|
$ |
(472 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
51
NATIONAL
CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2009, 2008, and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Net (loss) income |
|
$ |
(44,638 |
) |
|
$ |
2,631 |
|
|
$ |
(472 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of previously unrealized losses due to
OTTI |
|
|
3,782 |
|
|
|
|
|
|
|
|
|
Remaining change in unrealized holding gain (loss)
before
tax on available-for-sale investment securities and
interest-only non-certificated receivables |
|
|
(174 |
) |
|
|
(1,173 |
) |
|
|
(4,227 |
) |
Tax effect |
|
|
105 |
|
|
|
69 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(40,925 |
) |
|
$ |
1,527 |
|
|
$ |
(4,692 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
52
NATIONAL
CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
For the Years Ended December 31, 2009, 2008, and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
Common |
|
|
Earnings |
|
|
Earnings |
|
|
Comprehensive |
|
|
Members |
|
|
|
Stock |
|
|
Allocated |
|
|
Unallocated |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
187,230 |
|
|
$ |
10,328 |
|
|
$ |
29,388 |
|
|
$ |
892 |
|
|
$ |
227,838 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
|
|
|
|
(472 |
) |
Adjustment to prior year dividends |
|
|
|
|
|
|
497 |
|
|
|
(485 |
) |
|
|
|
|
|
|
12 |
|
Cancellation of stock |
|
|
(164 |
) |
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
(9 |
) |
Other dividends paid |
|
|
|
|
|
|
|
|
|
|
(386 |
) |
|
|
|
|
|
|
(386 |
) |
2006 patronage dividends distributed in stock |
|
|
10,825 |
|
|
|
(10,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale investment
securities and non-certificated interest-only
receivables, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,220 |
) |
|
|
(4,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
197,891 |
|
|
|
|
|
|
|
28,200 |
|
|
|
(3,328 |
) |
|
|
222,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to adopt fair value accounting guidance |
|
|
|
|
|
|
|
|
|
|
1,224 |
|
|
|
|
|
|
|
1,224 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,631 |
|
|
|
|
|
|
|
2,631 |
|
Cancellation of stock |
|
|
(107 |
) |
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
2008 patronage dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained in form of equity |
|
|
|
|
|
|
7,154 |
|
|
|
(7,154 |
) |
|
|
|
|
|
|
|
|
Remaining change in unrealized loss on
available-for-sale investment securities and
non-certificated interest-only receivables, net of
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,104 |
) |
|
|
(1,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
197,784 |
|
|
|
7,154 |
|
|
|
25,008 |
|
|
|
(4,432 |
) |
|
|
225,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to opening balance (Note 1) |
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
(77 |
) |
|
|
|
|
Balance, January 1, 2009 |
|
|
197,784 |
|
|
|
7,154 |
|
|
|
25,085 |
|
|
|
(4,509 |
) |
|
|
225,514 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(44,638 |
) |
|
|
|
|
|
|
(44,638 |
) |
2008 patronage dividends distributed in stock |
|
|
7,251 |
|
|
|
(7,154 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
Recognition of previously unrealized losses due to OTTI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,782 |
|
|
|
3,782 |
|
Remaining change in unrealized loss on
available-for-sale investment securities and
non-certificated interest-only receivables, net of
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
205,035 |
|
|
$ |
|
|
|
$ |
(19,650 |
) |
|
$ |
(796 |
) |
|
$ |
184,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
53
NATIONAL
CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008, and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(44,638 |
) |
|
$ |
2,631 |
|
|
$ |
(472 |
) |
Adjustments to reconcile net (loss) income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
44,099 |
|
|
|
18,650 |
|
|
|
152 |
|
Provision for losses on unfunded commitments |
|
|
8,080 |
|
|
|
659 |
|
|
|
488 |
|
Amortization and writedown of interest-only-receivables and servicing rights |
|
|
11,821 |
|
|
|
12,369 |
|
|
|
11,402 |
|
Depreciation and amortization, other |
|
|
11,783 |
|
|
|
3,556 |
|
|
|
3,150 |
|
(Gain) loss on sale of loans including derivatives |
|
|
(12,252 |
) |
|
|
(9,272 |
) |
|
|
1,469 |
|
Net impairment losses recognized in earnings |
|
|
3,782 |
|
|
|
1,692 |
|
|
|
|
|
Loss on sale of investments available-for-sale |
|
|
23 |
|
|
|
(167 |
) |
|
|
17 |
|
Purchase of loans held-for-sale |
|
|
(181,834 |
) |
|
|
(355,136 |
) |
|
|
(222,489 |
) |
Loans originated for sale, net of principal collections |
|
|
(463,808 |
) |
|
|
(349,825 |
) |
|
|
(831,604 |
) |
Lower of cost or market valuation allowance |
|
|
329 |
|
|
|
832 |
|
|
|
2,070 |
|
Net proceeds from sale of loans held-for-sale |
|
|
652,496 |
|
|
|
808,824 |
|
|
|
1,195,830 |
|
Tenant improvement allowance |
|
|
|
|
|
|
|
|
|
|
3,656 |
|
Lease termination costs |
|
|
|
|
|
|
|
|
|
|
3,148 |
|
Lease termination incentive |
|
|
|
|
|
|
|
|
|
|
(1,585 |
) |
Deferred rent recognition related to lease termination |
|
|
|
|
|
|
|
|
|
|
(1,860 |
) |
Increase (decrease) in other assets |
|
|
2,804 |
|
|
|
1,410 |
|
|
|
(8,368 |
) |
Decrease in other liabilities |
|
|
(6,966 |
) |
|
|
(6,689 |
) |
|
|
(747 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
25,719 |
|
|
|
129,534 |
|
|
|
154,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash |
|
|
(179 |
) |
|
|
|
|
|
|
5,398 |
|
Purchase of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(8,016 |
) |
|
|
(63,004 |
) |
|
|
(77,044 |
) |
Proceeds from maturities of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
7,809 |
|
|
|
66,803 |
|
|
|
50,375 |
|
Held-to-maturity |
|
|
|
|
|
|
30 |
|
|
|
52 |
|
Proceeds from the sale of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
33,893 |
|
|
|
24,197 |
|
|
|
1,037 |
|
Net decrease (increase) in loans and lease financing |
|
|
208,317 |
|
|
|
(439,678 |
) |
|
|
(145,189 |
) |
Purchase of portfolio loans |
|
|
(5,971 |
) |
|
|
(27,591 |
) |
|
|
|
|
Purchase of premises and equipment |
|
|
(155 |
) |
|
|
(533 |
) |
|
|
(9,800 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
235,698 |
|
|
|
(439,776 |
) |
|
|
(175,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(46,952 |
) |
|
|
272,056 |
|
|
|
220,662 |
|
Increase in borrowings |
|
|
189,531 |
|
|
|
186,000 |
|
|
|
|
|
Repayment of borrowings |
|
|
(169,856 |
) |
|
|
(171,500 |
) |
|
|
(175,000 |
) |
Incurrence of debt amendment costs |
|
|
(3,486 |
) |
|
|
|
|
|
|
|
|
Incurrence of financing costs |
|
|
(4,535 |
) |
|
|
(67 |
) |
|
|
(1,287 |
) |
Patronage dividends paid |
|
|
|
|
|
|
|
|
|
|
(7,107 |
) |
Other dividends paid |
|
|
|
|
|
|
|
|
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(35,298 |
) |
|
|
286,489 |
|
|
|
36,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
226,119 |
|
|
|
(23,753 |
) |
|
|
15,968 |
|
Cash and cash equivalents, beginning of period |
|
|
39,971 |
|
|
|
63,724 |
|
|
|
47,756 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
266,090 |
|
|
$ |
39,971 |
|
|
$ |
63,724 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
54
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008, and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Supplemental schedule of non-cash investing
and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
5,159 |
|
|
$ |
1,087 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale transferred to loans
and lease financing, at the lower of cost
or market |
|
$ |
5,059 |
|
|
$ |
43,462 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans and lease financing to
loans held-for-sale, at the lower of cost
or market |
|
$ |
26,784 |
|
|
$ |
67,737 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
59,330 |
|
|
$ |
67,210 |
|
|
$ |
81,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
635 |
|
|
$ |
361 |
|
|
$ |
562 |
|
The accompanying notes are an integral part of these consolidated financial statements.
55
NATIONAL
CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009, 2008 and 2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The National Consumer Cooperative Bank (the Company) is a financial institution, organized
under the laws of the United States, that primarily provides financial services to eligible
cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United
States. A cooperative enterprise is an organization owned by its members and engaged in producing
or furnishing goods, services, or facilities for the benefit of its members or voting stockholders
who are the ultimate consumers or primary producers of such goods, services, or facilities. The
Company is structured as a cooperative institution whose voting stock can only be owned by its
borrowers or those eligible to become its borrowers (or organizations controlled by such entities).
The Company operates directly and through its wholly owned subsidiaries, NCB Financial
Corporation and NCB, FSB. This Form 10-K provides information regarding the consolidated business
of the Company and its subsidiaries and, where appropriate and as indicated, provides information
specific to the Holding Company, NCB Financial Corporation or NCB, FSB. In general, unless
otherwise noted, references in this report to the Company refer to the Company and its subsidiaries
collectively. The chart below provides specific explanations of the various entities that may be
referenced throughout this Form 10-K:
|
|
|
Entity |
|
Principal Activities |
The Company
|
|
Financial institution that primarily provides
financial services to eligible cooperatives or
enterprises controlled by eligible cooperatives.
Unless otherwise indicated, references to the
Company are references to the consolidated
business of the Company and its subsidiaries. |
|
NCCB (Holding Company)
|
|
References to the Holding Company are
references to the legal entity of NCCB alone and
not its subsidiaries. |
|
NCB Financial Corporation
|
|
Intermediate holding company wholly owned
subsidiary of the Company and owner of NCB, FSB. |
|
NCB, FSB
|
|
Federally chartered and Federal Deposit
Insurance Corporation (FDIC)-insured thrift
institution that provides a broad range of
financial services to cooperative and
non-cooperative customers. NCB, FSB is a wholly
owned subsidiary of NCB Financial Corporation
and is an indirect wholly owned subsidiary of
the Company. |
Principles of Consolidation
The consolidated financial statements include all of the accounts of the Company. All
significant inter-company balances and transactions have been eliminated. The consolidated
financial statements of the Company do not include the assets, liabilities or results of operations
of NCB Capital Trust I (Trust), a Delaware statutory trust formed by the
Company in 2003 in connection with the issuance of trust preferred securities.
Estimates
The preparation of financial statements in conformity with the U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of net interest income, non-interest
income and non-interest expense. The principal estimates
include: valuation of derivative instruments, valuation of interests retained as a result of loan
sales, allowance for loan losses, evaluation of investments for other-than-temporary impairment
(OTTI) and measurement of impairment, and valuation of deferred tax assets. While the Company
believes the estimates and assumptions are reasonable based on historical experience and other
factors, actual results could differ from those estimates and these differences could be material
to the financial statements.
56
Cash and Cash Equivalents
Cash equivalents include cash on hand, amounts due from banks, overnight investments and time
deposits. Although cash equivalents generally have maturities of ninety days or less, time
deposits subject to early withdrawal penalties and with maturities greater than ninety days have
been included in cash equivalents.
Investments
The Companys investment securities portfolio and retained beneficial interests in securitized
financial assets are evaluated for impairment on a quarterly basis on an individual security basis.
Securities that will be held for indefinite periods of time, including those that may be sold
in response to changes in market interest rates and related changes in the securitys prepayment
risk, needs for liquidity and changes in the availability and the yield of alternative investments
are classified as available-for-sale. These assets are carried at fair value. Securities that
management has the positive intent and ability to hold until maturity are classified as
held-to-maturity and are reported at amortized cost.
The Company recognizes an impairment charge when the declines in the fair value of equity and
debt securities below their cost basis are judged to be other-than-temporary. Significant judgment
is used to identify events or circumstances that would likely have a significant adverse effect on
the future use of the investment. The Company reviews its investments for other-than-temporary
impairment considering the occurrence of events that would indicate that the carrying amount of the
investment exceeds its fair value on an other-than-temporary basis. Events include a decline in
distributable cash flows from the investment, a change in the expected useful life or other
significant events which would decrease the value of the investment.
In April 2009, the Financial Accounting Standards Board (FASB) issued new guidance regarding
the recognition and presentation of other-than-temporary impairments. This standard amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities. This standard also
modifies the requirements for recognition and presentation of other-than-temporary impairment
losses. Losses considered to be related to credit deterioration of the underlying issuer(s) (e.g.
expected cash flows will be less than the amortized cost basis of the investment security) will be
reflected in earnings. Declines in value related to market factors will be presented as a
component of accumulated other comprehensive income. The Company has adopted this standard,
applied the guidance to its existing debt securities as of January 1, 2009, and recognized the
effects of the standard as a change in accounting principle. Accordingly, at each reporting period
the Company considers its intent and ability to hold, or whether it is more likely than not that
the Company would be required to sell, securities before the expected recovery of the amortized
cost basis. The Company recognized the effect of initially applying this standard which resulted
in a total of $77 thousand of market-related OTTI, as an increase in the retained earnings balance
as of January 1, 2009; with a corresponding change in accumulated other comprehensive loss.
Prior to adoption of this guidance, the Company recognized all other-than-temporary impairments
in earnings.
The evaluation of securities for impairment is subject to risks and uncertainties and is
intended to determine whether declines in fair value should be recognized in current period
earnings. The risks and uncertainties include changes in general economic conditions and future
changes in the factors mentioned in the proceeding paragraphs. It is reasonably possible that such
factors could change in the future which could result in other-than-temporary impairments.
Derivative Instruments and Hedging Activities
The Company maintains a risk management strategy that includes the use of derivative
instruments to reduce unplanned earnings fluctuations caused by interest rate volatility. Use of
derivative instruments is a
component of the Companys overall risk management strategy in accordance with a formal policy
that is monitored by management, which has delegated authority over the interest rate risk
management function.
57
The derivative instruments utilized may include interest rate lock commitments, interest rate
swaps, financial futures contracts and forward loan sales commitments. Interest rate lock
commitments are created when borrowers lock in their contractual commitment to borrow funds at a
specific interest rate and the lock is completed within the time frame established by the Company.
Interest rate swaps involve the exchange of fixed and variable rate interest payments between two
parties based upon a notional principal amount and maturity date. Financial futures contracts
generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the
future at specified prices. Forward loan sales commitments lock in the prices at which loans will
be sold to investors.
The Company uses the aforementioned derivative instruments to offset changes in fair value
associated with loan commitments prior to funding the loan. During the commitment period, these
derivatives are accounted for and recorded at fair value through the gain on sale of loans. After
funding, the loans are not designated in an accounting hedge, but generally continue to be
economically hedged with the related forward sale commitment.
The Company is exposed to credit and market risk as a result of its use of derivative
instruments. If the fair value of the derivative contract represents an asset, the counterparty
owes the Company and a repayment risk exists. If the fair value of the derivative contract
represents a liability, the Company owes the counterparty, so there is no repayment risk. The
Company minimizes repayment risk by entering into transactions with financially stable
counterparties that are specified by policy and reviewed periodically by management. When the
Company has multiple derivative transactions with a single counterparty, the net mark-to-market
exposure represents the netting of asset and liability exposures with that counterparty. The net
mark-to-market exposure with a counterparty is a measure of credit risk when there is a legally
enforceable master netting agreement between the Company and the counterparty. The Company uses
master netting agreements with the majority of its counterparties.
All derivatives are recognized on the balance sheet at fair value. When a derivative contract
is entered into, the Company determines whether or not it will be designated as a fair value hedge.
The Company has not entered into cash flow hedges in recent years. When entering into hedging
transactions, the Company documents the relationships between the hedging instruments and the
hedged items to link all derivatives that are designated as fair value hedges to specific assets
and liabilities on the balance sheet. The Company assesses, both at inception and on an on-going
basis, the effectiveness of all hedges in offsetting changes in fair values of hedged items. For
derivative instruments designated as a fair value hedge, the gain or loss on the derivative
instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged
risk is recognized in current earnings during the period of the change in fair values.
The Company discontinues hedge accounting prospectively when (1) the derivative is no longer
effective in offsetting changes in fair value of a hedged item; or (2) the derivative matures or is
sold, terminated or exercised.
When hedge accounting is discontinued because the derivative no longer qualifies as an
effective fair value hedge, the derivative will continue to be carried on the balance sheet at its
fair value and the hedged asset or liability will no longer be adjusted to reflect changes in fair
value attributable to the hedged risk. The derivative will be carried at fair value with the
changes in fair value recognized in earnings.
Fair Value Measurements
Accounting guidance allows the Company, at specified election dates, to measure certain
financial instruments at fair value. Unrealized gains and losses on financial instruments for
which the fair value option has been elected are included in earnings. Electing to use fair value
allows a better offset of the change in fair value of the loan and the derivative instruments used
to economically hedge them without the burden of complying with the requirements of derivative
accounting standards. Loan origination costs for those loans where the fair value election has
been made are recognized in non-interest expense as incurred.
58
In April 2009, the FASB issued additional guidance for estimating fair value in accordance
with fair value measurement accounting standards, when the volume and level of activity for the
asset or liability have significantly decreased. This new standard also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The Company has adopted and
applied the provisions of this guidance.
Loan Origination Fees, Commitment Fees, and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is
recognized as an adjustment to interest income over the contractual life of the loans or, with
respect to loans held-for-sale, as an adjustment to gain on sale of loans at the time of sale. The
remaining unamortized fees on loans repaid prior to maturity are recognized as interest income. If
a commitment is exercised during the commitment period, the remaining net fee or cost at the time
of exercise is recognized over the life of the loan as an adjustment of yield.
Loans and Lease Financing and Loans Held-for-Sale
Loans and lease financing are carried at their principal amounts outstanding, net of deferred
loan origination fees and costs, and any discounts and premiums. Loans held-for-sale for which the
Company has not elected the fair value option, are carried at the lower of cost or fair value. The
cost basis of a loan is net of deferred origination fees and costs, discounts and premiums and the
effects of hedge accounting or changes in fair value. The Company determines whether a loan would
qualify as held-for-sale at the time the loan is originated. However, at times the Companys
initial intent to sell or hold the loan for investment may change for various economic or liquidity
reasons.
Interest income is calculated in accordance with the terms of each individual loan and lease.
The Company typically discontinues the accrual of interest on loans when principal or interest are
ninety days or more in arrears or sooner when there is reasonable doubt as to collectability.
Loans may be reinstated to accrual status when all payments are brought current and, in the opinion
of management, collection of the remaining balance can be reasonably expected. Interest income
received on a non-accrual loan is applied to reduce principal and no interest income is recognized until
the loan becomes current.
When loans are sold, the gain or loss is recognized in the Statement of Operations as the
proceeds less the cost basis of the loan.
Allowance for Loan Losses and Reserves for Unfunded Commitments
The allowance for loan losses is an estimate of known and inherent losses in the Companys
loan portfolio. Management evaluates the adequacy of the allowance for loan losses based on
changes, if any, in the nature and amount of the assets and associated collateral, underwriting
activities, the composition of the loan portfolio (including product mix and geographic, industry
or customer-specific concentrations), trends in loan performance, regulatory guidance and economic
factors. The allowance for loan losses is accrued when the occurrence of the loss is probable and
can be estimated.
At each reporting period, loans are evaluated for impairment. A loan is considered impaired
when, based on current information it is probable the Company will be unable to collect all amounts
due under the contractual terms of the loan. Impairment is measured based upon the present value
of future cash flows discounted at the loans effective interest rate; or, the fair value of the
collateral, less estimated selling costs, if the loan is collateral-dependent. The Company will
generally continue to recognize interest income on impaired loans as long as the loan is not at
least 90 days delinquent on payments.
For all non-impaired loans, the Company has designed a risk rating system to classify each
loan according to the risk unique to the credit facility. The expected loss for each risk rating
is determined using historical loss factors and collateral position of the credit facility. All
non-impaired loans are evaluated individually and assigned a risk rating. Reserves on non-impaired
loans are calculated on a loan-by-loan basis based upon the probability of default and the expected
loss in the event of default for each risk rating, based on historical experience.
59
The Company charges off loans, (i.e. reduces the loan balance) when the loans are deemed to be
uncollectible, at which time the allowance for loan losses is reduced.
The same principals of accounting and methodologies used in determining the allowance for loan
losses are also used in determining the reserve for unfunded commitments. A reserve percentage is
applied to the unfunded commitment amounts using the same reserve percentage matrices as the
allowance for loan losses. After applying the reserve percentage, a commitment usage factor, which
is determined by the loan type, is also applied to the commitment balance to calculate the full
reserve for the unfunded commitment.
Loan Sales, Servicing Assets and Interest-only Receivables
Recognition of a gain or loss on the sale of loans requires that a transfer of financial
assets in which the Company surrenders control over the assets be accounted for as a sale to the
extent that consideration other than beneficial interests in the transferred assets is received in
exchange. The carrying value of the assets sold is allocated between the assets sold and the
retained interests and a gain or loss is recognized upon the sale.
To receive sale accounting for an asset transfer, the Company obtains a true sale analysis
of the treatment of the transfer under state law if the company was a debtor under the bankruptcy
code. The true sale analysis includes several legal factors including the nature and level of
recourse to the transferor and the nature of retained servicing rights. The true sale analysis is
not absolute and unconditional but rather contains provisions that make the transferred assets
bankruptcy remote should the transferor file for bankruptcy.
Prior to 2007, a significant portion of the Companys loans were sold through securitizations.
The securitization market ceased functioning in late 2007 with the onset of the credit crises.
Subsequent to 2007, the Company has continued its loan sale activities; however, the eligible loans
are primarily sold to Fannie Mae and to other willing buyers.
MSRs arise from contractual agreements between the Company and investors (or their agents)
related to securities and loans. MSRs represent assets when the benefits of servicing are expected
to be more than adequate compensation for the Companys servicing of the related loans. Under these
contracts, the Company performs loan servicing functions in exchange for fees and other
remuneration. The servicing functions typically performed include: collecting and remitting loan
payments, responding to borrower inquiries, accounting for principal and interest, holding
custodial (impound) funds for payment of property taxes and insurance premiums, counseling
delinquent mortgagors, supervising foreclosures and property dispositions, and generally
administering the loans. For performing these functions, the Company receives a servicing fee
ranging generally from 0.06% to 0.39% annually on the remaining outstanding principal balances of
the loans. The servicing fees are collected from the monthly payments made by the borrowers. In
addition, the Company generally receives other remuneration consisting of float benefits derived
from collecting and remitting mortgage payments, as well as rights to various mortgagor-contracted
fees such as late charges and prepayment penalties. In addition, the Company generally has the
right to solicit the borrowers for other products and services.
MSRs are recorded at fair value on the date of sale, and are subsequently stated net of
accumulated amortization and amortized in proportion to the remaining net servicing revenues
estimated for the underlying loans. Servicing assets are assessed for impairment based on lower of
cost or fair value. In addition, mortgage-servicing assets may be stratified based on one or more
predominant risk characteristics of the underlying loans and impairment is recognized through a
valuation allowance for each impaired stratum.
60
Interest-only certificated receivables were created when the Company sold loans in securitized
transactions and the portion retained by the Company did not depend on the servicing work being
performed. As part of the securitization process, an interest-only financial instrument was
created and evidenced by a document or certificate. Interest-only certificated receivables were
initially reported at their relative fair value, and subsequently amortized to interest income
using the interest method and were designated as available-for-sale securities. The fair value of the interest-only receivables is determined using discounted future expected
cash flows at various discount rates. For interest-only certificated receivables, the discounted
rate of future expected cash flows is equal to a spread over the benchmark index at which the
respective loans were priced. For quarterly valuations, the index is adjusted to reflect market
conditions. An appropriate spread, determined by reference to what market participants would use
for similar financial instruments, is added to the index to determine
the current discount rate. The Company has
not sold loans through a securitization since 2007; thus no new interest-only certificated
receivables have been created. As of December 31, 2009, the Company has sold all of its
interest-only certificated receivables.
Interest-only non-certificated receivables are created when the Company sells loans in
unsecuritized transactions to individual investors and a portion retained by the Company does not
depend on the servicing work being performed. Interest-only non-certificated receivables are
initially reported at their relative fair-value, and subsequently amortized to interest income
using the interest method. The interest-only non-certificated receivables are accounted for as
available-for-sale investments, however, because the loans related to the interest-only
non-certificated receivables are sold in unsecuritized transactions, and this interest in excess
cash flows is not evidenced by a document or certificate, the Company recognizes an interest-only
non-certificated asset and presents this asset along with mortgage servicing assets in other assets
on the consolidated balance sheet. The interest-only non-certificated receivables are valued using
discount rates derived from the commercial mortgage serving rights market.
Substantially all interest-only receivables pertain to Cooperative Loans made to cooperative
housing corporations. These mortgages are typically structured with prepayment lockouts followed by
prepayment penalties, yield maintenance provisions, or defeasance through maturity. In calculating
interest-only receivables, the Company discounts the cash flows through the lockout or defeasance
period. Cash flows beyond the lockout period are included in the fair value of the interest-only
receivable only to the extent that the Company is entitled to receive the prepayment or yield
maintenance penalty.
The weighted average life of each interest-only receivable will vary with the mortgage terms
that back the transaction.
Interest-only receivables are recorded at fair value with subsequent adjustments reflected in
other comprehensive income, or in earnings if the fair value of the interest-only receivable has
declined below its carrying amount and such decline has been determined to be other-than-temporary.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Buildings and
building improvements are depreciated on a straight-line basis over either their useful lives or 39
years. Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
Furnishings are depreciated using an accelerated method and are depreciated over five or seven
years. Equipment and software are depreciated using an accelerated method over seven, five or
three years, depending on the type of equipment or software.
Foreclosed Assets
Assets acquired through foreclosure are held-for-sale and are initially recorded at fair
value, less costs to sell, at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the assets are carried at the
lower of cost basis or fair value, less cost to sell. Losses at foreclosure are charged to the
allowance for loan losses. Subsequent gains and losses, as well as operating income or expense
related to foreclosed assets, are recorded in non-interest expense.
61
Income Taxes
The National Consumer Cooperative Bank Act (the Act) provides that the Holding Company shall
be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue
Code. Under Subchapter T and the Act, the Holding Company issues its member-borrowers patronage
dividends, which are tax deductible to the Company thereby reducing its taxable income. All income
generated by the Holding Company and its subsidiaries, with the exception of certain income of NCB,
FSB, qualifies as patronage income under the Internal Revenue Code as amended by the Act with
respect to the Company, with the consequence that the Company is able to issue tax deductible
patronage dividends with respect to all such income. The Act also provides that the Company is
exempt from state and local taxes with the exception of real estate taxes. Certain of the Companys
subsidiaries, however, are subject to federal and state income taxes.
The Company provides for income taxes using the asset and liability approach; which requires
the recognition of deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts of the existing assets and
liabilities and their respective tax bases.
The term tax position refers to a position in a previously filed tax return or a position
expected to be taken in a future tax return that is reflected in measuring current or deferred
income tax assets and liabilities for interim or annual periods. A tax position can result in a
permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable
to future years, or a change in the expected realizability of deferred tax assets. The Company does
not currently have any uncertain tax positions.
Subsequent
Events
The
Company has evaluated all subsequent events through March 31,
2010, which is the date the financial statements were issued.
New Accounting Standards
In
May 2009, the FASB issued new guidance regarding
subsequent events, which establishes the accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are available to be issued.
Specifically, this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The Company has adopted and applied the provisions of
this standard as of June 30, 2009.
In June 2009, the FASB issued the Accounting Standards Codification and the hierarchy of
Generally Accepted Accounting Principles (GAAP). The FASB Accounting Standards Codification (ASC)
will be the single source of authoritative U.S. accounting and reporting standards for
nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission
(SEC). All other literature not included in the FASB ASC is non-authoritative. The Company has
adopted and applied the provisions of this standard as of September 30, 2009.
The FASB issued new guidance regarding transfers and servicing of financial assets and
extinguishments of liabilities. This standard will require more information about transfers of
financial assets, including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. It eliminates the concept of a
qualifying special-purpose entity, changes the requirement for derecognizing financial assets,
and requires additional disclosures. This guidance is effective for the Companys reporting
periods beginning on January 1, 2010. The Company is in the final stages of adopting this guidance
and currently believes it will not have a material impact on its financial statements.
The FASB issued new guidance regarding the consolidation of variable interest entities. This
standard changes how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. The determination of
whether a company is required to consolidate an entity is base on, among other things, an entitys
purpose and design and a companys ability to direct the activities of the entity that most
significantly impact the entitys economic performance. This guidance is effective for the
Companys reporting periods beginning on January 1, 2010. The Company is in the final stages of
adopting this guidance and currently believes it will not have a material impact on its financial
statements.
62
2. SIGNIFICANT RISKS AND UNCERTAINTIES
Adverse Economic Conditions
The operating results of the Company depend largely on conditions in the credit markets and
capital markets, national economic conditions as well as economic conditions in the geographic
areas where the Companys borrowers reside or operate their business.
Prior to 2007, a significant part of the Companys income was derived from its loan
origination and securitization activities. The Company financed these activities through the use
of borrowings from its revolving credit facility and senior notes. The securitization market
ceased functioning in late 2007 with the onset of the credit crises. Transaction activity has
since increased, but remains far below historical levels. Subsequent to 2007, the Company has
continued its loan origination and sale activities; however, eligible loans are sold to Fannie Mae
and other willing buyers. The spreads on loans sold through securitization were typically higher
than the spreads earned on current loan sales and the Companys profitability, therefore, has been
adversely impacted.
During 2008 and 2009, deteriorating economic conditions, including declining real estate
values and increasing unemployment and commercial real estate vacancy rates, have had and may
continue to have an adverse impact on the quality of the Companys loan portfolios. These
conditions have caused deterioration in the quality of the loan portfolios, including: (i) an
increase in loan delinquencies, (ii) an increase in non-performing assets and foreclosures, and
(iii) a decline in the value of the underlying collateral.
The Company has increased its provision for loan losses in 2008 and 2009. The consolidated
provision for loan losses was $44.1 million for the year ended December 31, 2009, compared to $18.7
million for the same period in 2008. Additionally, non-performing loans have increased to $73.7
million as of December 31, 2009 from $3.6 million as of December 31, 2008 and loans charged-off
totaled $36.4 million in 2009 compared to $10.2 million in 2008. A further worsening of these
conditions would exacerbate the adverse effects on the profitability and capital levels of the
Company, and the Holding Company and NCB, FSB, individually.
The Holding Company violated certain financial covenants required under its revolving credit
facility and senior note agreements in both 2009 and 2008. These agreements have been amended on
several occasions requiring the payment of amendment fees and higher interest costs. The payment
of the fees and higher interest cost has further adversely impacted the results of the Companys
operations and its capital levels. The Company has taken actions to raise liquidity and repay the
amounts due under the revolving credit facility and senior note agreement and reduced the aggregate
outstanding balance to $87.6 million at March 31, 2010 from $215.5 million at December 31, 2009.
The Company expects to repay the remaining amounts due under the revolving credit facility and
senior note agreements on or before December 15, 2010. See Note 16 for a discussion of the Companys borrowings and debt maturities.
Regulatory Matters
On March 15, 2010, the Holding Company entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist with the Office of Thrift Supervision (OTS). The associated OTS
Order (the OTS Order) provides that the Holding Company pay no cash dividends or redeem or
repurchase any equity stock, and, not incur, issue, renew, rollover or increase any debt, except
for the class A notes, without prior approval of the OTS. The OTS Order also requires the Holding
Company to submit to the OTS a Business Plan within 45 days, and an updated Liquidity Risk
Management Program within 30 days, both for review and comment. The OTS Order does not specify
minimum tangible equity capital ratios. Rather, the Business Plan must establish such ratios that
are commensurate with the Holding Companys stand alone risk profile that addresses, among other
things, the Holding Companys significant off-balance sheet liabilities. The Business Plan must
also address capital preservation and enhancement strategies to achieve the minimum tangible equity
capital ratios that are established, strategies to ensure that the Holding Companys obligations
are met on a stand-alone basis without reliance on dividends from NCB, FSB and specific plans to
reduce the risks from its current debt levels and contingent liabilities. The OTS Order shall
remain in effect until terminated, modified, or suspended by written notice of such action by the
OTS. The OTS Order, however, does not prohibit the Holding Company from transacting their normal
business.
63
On March 15, 2010, NCB Financial Corporation entered into a Stipulation and Consent to the
Issuance of an Order to Cease and Desist with the OTS. The associated Order (the Mid-Tier OTS
Order) provides that NCB
Financial Corporation pay no cash dividends or redeem or repurchase any equity stock and shall
not incur, issue, renew, rollover or increase any debt, without prior approval of the OTS.
On March 15, 2010, NCB, FSB entered into a Supervisory Agreement with the OTS (together with
the OTS Order and the Mid-Tier OTS Order, the OTS Actions). The principal elements of the
Supervisory Agreement provide that NCB, FSB not increase its total assets during any quarter in
excess of an amount equal to net interest credited on deposit liabilities during the quarter
without prior approval and shall not declare or pay any dividends or make any other capital
distribution without the prior written approval of the OTS. Additionally, NCB, FSB must submit a
Business Plan within 45 days and a Liquidity Risk Management Program within 30 days for OTS review,
comment and approval. The Supervisory Agreement does not specify a minimum Tier 1 (Core) Capital
Ratio or a Total Risk-Based Capital Ratio. Rather, the Business Plan must establish such ratios
that are commensurate with the Associations risk profile. The Business Plan must also include
policies for maintaining an adequate allowance for loan and lease losses and various financial
projections to be updated periodically. The Supervisory Order will remain in effect until modified
or terminated by the OTS. The Supervisory Order does not, however, restrict NCB, FSB from
transacting its normal banking business. NCB, FSB has and will continue to serve clients in all
areas including making loans, subject to the limitation described above, accepting deposits and
processing banking transactions. All client deposits remain fully insured to the limits set by the
FDIC. NCB, FSB continues to take deposits, make loans and provide other financial services to its
customers and remains well capitalized for all regulatory purposes.
The Company has been actively engaged in responding to the concerns raised by the OTS and
believes that the Company is in compliance with the OTS Order, NCB Financial Corporation is in
compliance with the Mid-Tier OTS Order and, NCB, FSB is in compliance with the Supervisory
Agreement. However, if the financial condition of the Company weakens, the OTS may, upon further
inspection, issue additional actions and require the Company to sell
assets to increase liquidity,
raise capital, or take other steps as they consider necessary.
Capital Levels
The Holding Company and NCB Financial Corporation do not have depositors and are not subject
to regulatory capital requirements. However, NCB, FSB, as a federally chartered and federally
insured savings bank, is subject to various regulatory capital requirements.
During the first quarter of 2009, the Holding Company invested $7.0 million in NCB, FSB
through an investment in the same amount in NCB Financial Corporation. Under the investment
limitations in its credit agreements, the Holding Company will not be able to invest additional
capital in NCB, FSB absent consent from the OTS.
64
Under the regulatory guidelines, NCB, FSB was Well Capitalized at December 31, 2009 and
December 31, 2008. The following table summarizes NCB, FSBs capital and pro-forma minimum capital
requirements (ratios and dollars) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Capital (to tangible assets) |
|
$ |
157,124 |
|
|
|
9.89 |
% |
|
$ |
23,834 |
|
|
|
1.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
Total Risk-Based Capital (to risk-weighted assets) |
|
|
173,911 |
|
|
|
12.68 |
% |
|
|
109,742 |
|
|
|
8.00 |
% |
|
$ |
137,178 |
|
|
|
10.00 |
% |
Tier I Risk-Based Capital (to risk-weighted assets) |
|
|
156,724 |
|
|
|
11.42 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
82,307 |
|
|
|
6.00 |
% |
Core Capital (to adjusted tangible assets) |
|
|
157,124 |
|
|
|
9.89 |
% |
|
|
63,557 |
|
|
|
4.00 |
% |
|
|
79,446 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Capital (to tangible assets) |
|
$ |
156,775 |
|
|
|
9.89 |
% |
|
$ |
23,783 |
|
|
|
1.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
Total Risk-Based Capital (to risk-weighted assets) |
|
|
173,949 |
|
|
|
11.94 |
% |
|
|
116,571 |
|
|
|
8.00 |
% |
|
$ |
145,713 |
|
|
|
10.00 |
% |
Tier I Risk-Based Capital (to risk-weighted assets) |
|
|
156,316 |
|
|
|
10.73 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
87,428 |
|
|
|
6.00 |
% |
Core Capital (to adjusted tangible assets) |
|
|
156,775 |
|
|
|
9.89 |
% |
|
|
63,421 |
|
|
|
4.00 |
% |
|
|
79,277 |
|
|
|
5.00 |
% |
Managements Plans and Going Concern Considerations
In order to maintain compliance with the OTS Actions, the Company will need to take actions to
preserve capital and to enhance liquidity levels, and for the Holding Company specifically, take
actions to reduce the levels
of debt and contingent liabilities. The Companys ability to accomplish these goals may be
constrained by the current economic environment, and therefore the Company can give no assurances
that it will be able to preserve capital, reduce debt levels or reduce its exposure to contingent
liabilities.
The Companys level of non-performing assets is also vulnerable to general economic and
operating conditions, and the value of the real estate and other property that collateralize the
Companys loans. If the general economic conditions, consumer demand and the real estate market do
not improve or decline further, then the level of non-performing assets may continue to increase.
Management has been aggressively addressing liquidity needs to maintain an adequate cash flow
position to sustain operations and reduce debt levels. As of December 31, 2009, the Company
maintained liquid assets totaling $331.6 million as follows: cash balances totaling $266.1 million;
investment securities totaling $29.8 million; and loans held-for-sale totaling $35.7 million.
Additionally, the Company expects to sell additional loans and lease receivables not currently
presented as loans held-for-sale on its consolidated balance sheet as the Company identifies such
assets and identifies a willing and able buyer.
Additionally,
as reflected in the OTS Actions the OTS is monitoring the Companys performance closely. If the
Holding Company, NCB Financial Corporation or NCB, FSB were to engage in unsafe and unsound
banking practices, or there is deterioration in NCB, FSBs regulatory capital levels, the OTS has
various enforcement tools available to them including the issuance of capital directives, orders
to cease engaging in certain business activities and the issuance of modified or additional orders
or agreements, and could seek receivership of NCB, FSB.
65
The Holding Company has engaged financial advisors to assist in its efforts to raise
additional capital, sell assets and explore other strategic alternatives to reduce or refinance its
existing secured debt. Management continues to work to improve the profitability and capital
strength of the Company. Initiatives include improving asset quality, improving the Companys net
interest margin, growing non-interest income, and reducing non-interest expense. The consolidated
financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the normal course of business for the
foreseeable future, and do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets, or the amounts and classification of liabilities
or any other adjustments that might be necessary should the Company be unable to continue as a
going concern.
As indicated
above, NCB, FSB is not permitted to declare or pay any dividends or
make any other capital distributions to the Holding Company without the prior written approval
of the OTS. Currently, the Holding Company is not making any new loan originations or commitments
and continues to perform its obligations under existing contracts and
agreements. At December 31, 2009 and 2008, the Holding Company had assets of $670.2 million
and $727.6 million, respectively, and liabilities of $485.6 million and $502.1 million,
respectively. The Holding Company assets included investment in subsidiaries of $160.3 million
at December 31, 2009 and $158.2 million at December 31, 2008. The Holding Company liabilities
included outstanding debt of $455.9 million at December 31, 2009 and $477.7 million at
December 31, 2008. The Holding Company net interest income and net loss for the year ended
December 31, 2009 were ($5.8) million and ($44.6) million, respectively, and for the year ended
December 31, 2008 net interest income and net income were $11.9 million and $2.6 million,
respectively.
3. IMMATERIAL CORRECTION OF AN ERROR IN PRIOR PERIODS
During the first quarter of 2009, the Company identified an error related to the accounting
for a fair value adjustment recorded against one of its debt instruments related to a hedging
transaction. The cumulative fair value adjustment to the debt instrument was $1.2 million. This
fair value adjustment was recognized in non-interest income during the fourth quarter of 2008 at
the time when an interest rate swap was terminated. Because this debt was not also extinguished,
this basis adjustment should be amortized over the remaining term of
the debt instrument (the basis adjustment was fully amortized as of
December 31, 2009 as a result of the acceleration of the maturity
date under the forbearance agreement). As a result of this error, the Companys non-interest
income presented on its
consolidated statements of operations was overstated for the quarter and year ended
December 31,
2008 and long-term borrowings presented on its consolidated balance sheets was understated by $1.2
million as of December 31, 2008.
Management evaluated the materiality of the error from qualitative and quantitative
perspectives, and concluded that the error was immaterial to the fourth quarter of 2008 and the
year ended December 31, 2008. The Company has corrected the effect of the error on the consolidated
balance sheet as of December 31, 2008, as presented herein, by increasing long-term borrowings and
reducing retained earnings by $1.2 million from the amounts previously reported in its Annual
Report on Form 10-K as of December 31, 2008. The Company has also corrected the effect of the
error on the consolidated statement of operations for the year ended December 31, 2008, as
presented herein, by reducing non-interest income and thus net income by $1.2 million from the
amounts previously reported in its Annual Report on Form 10-K for the year ended December 31, 2008.
The consolidated statement of operations for the twelve months ended December 31, 2009 is not affected by this
error and includes amortization of $1.2 million related to the basis adjustment.
Effects of the error by line item follow:
Consolidated Balance Sheet as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
Impact of |
|
|
|
|
|
|
Reported |
|
|
Errors |
|
|
Corrected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
$ |
589,483 |
|
|
$ |
1,243 |
|
|
$ |
590,726 |
|
Total Liabilities |
|
|
1,928,135 |
|
|
|
1,243 |
|
|
|
1,929,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated retained earnings |
|
|
26,251 |
|
|
|
(1,243 |
) |
|
|
25,008 |
|
Total members equity |
|
|
226,757 |
|
|
|
(1,243 |
) |
|
|
225,514 |
|
66
Consolidated Statement of Income For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
Impact of |
|
|
|
|
|
|
Reported |
|
|
Errors |
|
|
Corrected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Borrowings |
|
$ |
29,756 |
|
|
$ |
(20 |
) |
|
$ |
29,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-interest income |
|
|
3,825 |
|
|
|
(1,263 |
) |
|
|
2,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,429 |
|
|
|
(1,243 |
) |
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of net income Retained Earnings |
|
|
(3,280 |
) |
|
|
(1,243 |
) |
|
|
(4,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,874 |
|
|
|
(1,243 |
) |
|
|
2,631 |
|
Consolidated Statement of Comprehensive Income For the Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
Impact of |
|
|
|
|
|
|
Reported |
|
|
Errors |
|
|
Corrected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,874 |
|
|
$ |
(1,243 |
) |
|
$ |
2,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
2,770 |
|
|
|
(1,243 |
) |
|
|
1,527 |
|
Consolidated Statement of Changes in Members Equity For the Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
Earnings |
|
|
Earnings |
|
|
Comprehensive |
|
|
Members |
|
|
|
Common Stock |
|
|
Allocated |
|
|
Unallocated |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 as previously reported |
|
$ |
197,784 |
|
|
$ |
7,154 |
|
|
$ |
26,251 |
|
|
$ |
(4,432 |
) |
|
$ |
226,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of errors |
|
|
|
|
|
|
|
|
|
|
(1,243 |
) |
|
|
|
|
|
|
(1,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 as corrected |
|
$ |
197,784 |
|
|
$ |
7,154 |
|
|
$ |
25,008 |
|
|
$ |
(4,432 |
) |
|
$ |
225,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Consolidated Statement of Cash Flow For the Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
Impact of |
|
|
|
|
|
|
Reported |
|
|
Errors |
|
|
Corrected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,874 |
|
|
$ |
(1,243 |
) |
|
$ |
2,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in other assets |
|
|
167 |
|
|
|
1,243 |
|
|
|
1,410 |
|
4. CASH AND CASH EQUIVALENTS
The composition of cash and cash equivalents at December 31 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Cash |
|
$ |
251,922 |
|
|
$ |
25,677 |
|
Cash equivalents |
|
|
14,168 |
|
|
|
14,294 |
|
Restricted cash |
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
266,269 |
|
|
$ |
39,971 |
|
|
|
|
|
|
|
|
The Companys restricted cash of $179 thousand as of December 31, 2009 is cash required to be
reserved under the Companys lease agreement for its New York office.
68
5. INVESTMENT SECURITIES
The composition of available-for-sale investment securities including interest-only
non-certificated receivables (included as a component of other assets) are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only non-certificated receivables |
|
$ |
25,971 |
|
|
$ |
201 |
|
|
$ |
(1,321 |
) |
|
$ |
24,851 |
|
U.S. Treasury and agency obligations |
|
|
12,783 |
|
|
|
203 |
|
|
|
|
|
|
|
12,986 |
|
Mortgage-backed securities and Collateralized Mortgage Obligations (CMOs) |
|
|
16,618 |
|
|
|
195 |
|
|
|
(24 |
) |
|
|
16,789 |
|
Equity securities |
|
|
52 |
|
|
|
|
|
|
|
(21 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,424 |
|
|
$ |
599 |
|
|
$ |
(1,366 |
) |
|
$ |
54,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only certificated receivables |
|
$ |
29,906 |
|
|
$ |
20 |
|
|
$ |
(2,072 |
) |
|
$ |
27,854 |
|
Interest-only non-certificated receivables |
|
|
28,019 |
|
|
|
619 |
|
|
|
(1,374 |
) |
|
|
27,264 |
|
U.S. Treasury and agency obligations |
|
|
18,247 |
|
|
|
388 |
|
|
|
|
|
|
|
18,635 |
|
Mutual funds |
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
881 |
|
Mortgage-backed securities and CMOs |
|
|
22,783 |
|
|
|
|
|
|
|
(2,086 |
) |
|
|
20,697 |
|
Equity securities |
|
|
52 |
|
|
|
|
|
|
|
(21 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99,888 |
|
|
$ |
1,027 |
|
|
$ |
(5,553 |
) |
|
$ |
95,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter and following the violation of certain loan covenants and the
execution of forbearance agreements (as discussed in Note 16) and the ongoing evaluation of the
liquidity needs, the Company concluded that it was more likely than not that the Company would be
required to sell the interest-only certificated securities before recovery of the amortized cost
basis. Accordingly, the Company recognized OTTI of $2.1 million on its interest-only certificated
receivables portfolio, included as a component of earnings, to record the amortized cost basis of
the interest-only certificated receivables at their estimated fair values. The interest-only
certificated receivables were sold during the fourth quarter of 2009 for total cash proceeds of
$23.4 million, the aggregate carrying amount upon sale.
The following tables present the duration of unrealized losses recognized on
available-for-sale investment securities and interest-only non-certificated receivables (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only non-certificated receivables |
|
$ |
1,111 |
|
|
$ |
(139 |
) |
|
$ |
21,073 |
|
|
$ |
(1,182 |
) |
|
$ |
22,184 |
|
|
$ |
(1,321 |
) |
Mortgage-backed securities and CMOs |
|
|
78 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
(24 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
(21 |
) |
|
|
29 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,189 |
|
|
$ |
(163 |
) |
|
$ |
21,102 |
|
|
$ |
(1,203 |
) |
|
$ |
22,291 |
|
|
$ |
(1,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only certificated receivables |
|
$ |
1,448 |
|
|
$ |
(26 |
) |
|
$ |
25,365 |
|
|
$ |
(2,046 |
) |
|
$ |
26,813 |
|
|
$ |
(2,072 |
) |
Interest-only non-certificated receivables |
|
|
|
|
|
|
|
|
|
|
18,044 |
|
|
|
(1,374 |
) |
|
|
18,044 |
|
|
|
(1,374 |
) |
Mortgage-backed securities and CMOs |
|
|
16,759 |
|
|
|
(293 |
) |
|
|
3,641 |
|
|
|
(1,793 |
) |
|
|
20,400 |
|
|
|
(2,086 |
) |
Equity securities |
|
|
31 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,238 |
|
|
$ |
(340 |
) |
|
$ |
47,050 |
|
|
$ |
(5,213 |
) |
|
$ |
65,288 |
|
|
$ |
(5,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment securities in an unrealized loss position are evaluated for
other-than-temporary impairment on a quarterly basis. The Companys management evaluates the cause
of declines in the fair value of each security within each segment of the investment portfolio. The
results of those evaluations are as follows:
Interest-only non-certificated receivables
The interest-only non-certificated receivables have been valued using discount rates derived
from the commercial mortgage serving rights market. The interest-only non-certificated receivables
are in an unrealized loss position primarily due to changes in the credit spreads demanded by
market participants from the time the asset was acquired to the balance sheet date. See note 24
for further disclosure related to key economic assumptions used to value these investments. Each
of the interest-only non-certificated receivables is collateralized only by loans originated by the
Company. As of December 31, 2009, the collateral mortgages continue to perform and the Company
does not expect there to be an adverse change in future cash flows. The Company does not view
these assets as a source of short-term liquidity and expects to fully recover the amortized cost
basis of these assets. Consequently as of December 31, 2009, the unrealized losses on the
interest-only non-certificated securities are considered temporary in nature.
CMOs
The Company acquired five CMO securities issued by Morgan Stanley in 2007 for a total par
value of $8.5 million. Management monitors the credit support of each of the bonds held by the
Company, the delinquency and default rates of the underlying collateral mortgages, and the credit
ratings of each of the bonds. Although there have been no cashflow interruptions on any of the
five CMO securities through December 31, 2009, the financial condition and credit quality of
certain underlying issuers or collateral has deteriorated over time. The Company projects expected
cashflows based on updated estimates of delinquencies, default rates and severity of losses in the
event of default and other factors.
During the fourth quarter of 2008, the Company recognized OTTI of $1.7 million on three of the
five CMO investment securities reducing the aggregate carrying value of these three securities to
$0.3 million. During the second quarter of 2009, and based on the then recent and further
deterioration in the financial condition of the underlying collateral mortgages, the Company
recognized OTTI of $1.5 million on a fourth CMO investment security, reducing the carrying value
from $1.8 million to $0.3 million. As of December 31, 2009 and after the recognition of OTTI on
four of the five CMO securities, the aggregate carrying value of these four CMO securities
was $0.7 million. As of December 31, 2009, the estimated fair value of the fifth CMO security
is greater than its amortized cost basis given the substantial amount of subordination to that
tranche. During the twelve months ending December 31, 2009, there were $0.7 million of principal
repayments on this fifth tranche of the CMO securities.
70
In applying the OTTI guidance, the Company estimated the market and credit-related OTTI using
discounted cash flow techniques that include bond default rates, expected losses in combination
with expected cash flows as compared to those expected at the time the investment was purchased and
other factors. As of December 31, 2009, all of the $1.5 million of OTTI recognized on the fourth
CMO in the second quarter of 2009 is credit-related. As of December 31, 2009, the Company does not
intend to sell nor is it more likely than not that the Company will be required to sell the CMO
investment securities.
The table below presents a roll-forward of the credit-related losses recognized in earnings
(dollars in thousands):
|
|
|
|
|
|
|
For the twelve months ended |
|
|
|
December 31, 2009 |
|
Balance, December 31, 2008 |
|
$ |
1,692 |
|
Adjustment to opening balance |
|
|
(77 |
) |
|
|
|
|
Balance, January 1, 2009 |
|
|
1,615 |
|
Credit impairments of interest-only certificated receivables and CMO securities |
|
|
3,634 |
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
5,249 |
|
|
|
|
|
The maturities of available-for-sale U.S. Treasury and agency obligations investment
securities are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Amortized |
|
|
Average |
|
|
Fair |
|
|
|
Cost |
|
|
Yield |
|
|
Value |
|
Within 1 year |
|
$ |
1,124 |
|
|
|
4.72 |
% |
|
$ |
1,143 |
|
After 1 year through 5 years |
|
|
10,704 |
|
|
|
1.25 |
% |
|
|
10,834 |
|
After 5 years through 10 years |
|
|
229 |
|
|
|
5.21 |
% |
|
|
252 |
|
After 10 years |
|
|
726 |
|
|
|
5.39 |
% |
|
|
757 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,783 |
|
|
|
1.86 |
% |
|
$ |
12,986 |
|
|
|
|
|
|
|
|
|
|
|
Mutual funds, equity securities, mortgage-backed securities, CMOs and interest-only
receivables are excluded from the maturity table. Mutual funds do not have contractual maturities.
Mortgage-backed securities, CMOs and interest-only receivables have contractual maturities, which
differ from actual maturities because borrowers may have the right to call or prepay obligations.
6. LOANS HELD-FOR-SALE
Loans held-for-sale by category are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Consumer Loans |
|
$ |
22,186 |
|
|
$ |
940 |
|
Commercial Loans |
|
|
1,650 |
|
|
|
8,766 |
|
Residential Real Estate Loans |
|
|
11,894 |
|
|
|
4,572 |
|
|
|
|
|
|
|
|
Total |
|
$ |
35,730 |
|
|
$ |
14,278 |
|
|
|
|
|
|
|
|
71
The Company has elected to measure, at the time of origination, certain Cooperative and
Multifamily Residential Real Estate Loans that were held-for-sale at fair value. Unrealized gains
and losses for these identified
loans are included in earnings. The Company has elected the fair value option for $1.8
million and $0.5 million of Residential Real Estate Loans as of December 31, 2009 and December 31,
2008, respectively.
During 2009 Consumer Loans with an unpaid principal balance of $21.9
million, originally held for investment, were transferred at the lower of cost or fair value to
loans held-for-sale. The loans were transferred as a result of a change in the Companys intent to
hold the loans. At the time of transfer the fair value of certain
loans were lower than the cost;
and therefore, the Company recognized a $0.4 million loss upon
the transfer. Of
the $21.9 million of these Consumer Loans transferred to loans
held-for-sale, $16.3 million have been sold in 2010. The Company still has
the intention of selling the remaining $5.6 million of loans transferred as of December 31, 2009.
During the fourth quarter of 2009, Residential Real Estate Loans with an unpaid principal
balance of $7.2 million were transferred at the lower of cost or fair value to loans held-for-sale
as a result of the Companys intent to sell these loans as of December 31, 2009. The loans were
ultimately sold during the first quarter of 2010.
Activity related to loans held-for-sale is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
14,278 |
|
|
$ |
90,949 |
|
Originations |
|
|
463,808 |
|
|
|
349,825 |
|
Purchases |
|
|
181,834 |
|
|
|
355,136 |
|
Sales* |
|
|
(645,513 |
) |
|
|
(806,591 |
) |
Transfer of loans and lease financing to loans held-for-sale |
|
|
26,784 |
|
|
|
67,737 |
|
Transfer of loans held-for-sale to loans and lease financing |
|
|
(5,059 |
) |
|
|
(43,462 |
) |
Change in valuation: derivatives |
|
|
(883 |
) |
|
|
(685 |
) |
Change in valuation: lower of cost or market valuation allowance |
|
|
481 |
|
|
|
1,369 |
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
35,730 |
|
|
$ |
14,278 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes write-off of unamortized deferred fees and costs of $0.3 million and $0.5
million, respectively. |
7. LOANS AND LEASE FINANCING
Loans and leases outstanding by category are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Consumer Loans |
|
$ |
17,367 |
|
|
$ |
53,101 |
|
Commercial Loans |
|
|
616,343 |
|
|
|
691,817 |
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
Residential |
|
|
680,736 |
|
|
|
817,538 |
|
Commercial |
|
|
379,086 |
|
|
|
394,324 |
|
Leases |
|
|
157 |
|
|
|
411 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,693,689 |
|
|
$ |
1,957,191 |
|
|
|
|
|
|
|
|
During 2009, $4.0 million of Residential Real Estate Loans held-for-sale were transferred, at
the lower of cost or fair value, to loans and lease financing as the market for those loans was
extremely limited. Also, during 2009, Commercial Loans with a total carrying value of $1.2
million, originally held-for-sale, were transferred at the lower of cost or fair value to loan and
lease financing. The loans were transferred as a result of a change in the Companys intent to
sell the loans as of December 31, 2009.
During 2009, the Company sold $168.5 million of loans that were held for investment for
liquidity purposes. Of these total loans sold, $149.1 million were Residential Real Estate Loans
and $19.4 million were Commercial Loans. During 2008, the Company sold $62.9 million of
Residential Real Estate Loans that were held for investment for liquidity purposes.
During 2009, the Company initiated a request to Fannie Mae to repurchase a loan that it had
sold with an unpaid principal balance of $6.0 million. The loan was repurchased in an effort to
facilitate managing other loans with the same borrower.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans |
|
|
Real Estate Loans |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
By Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast |
|
|
33.6 |
% |
|
|
35.1 |
% |
|
|
22.1 |
% |
|
|
22.1 |
% |
Northeast |
|
|
27.4 |
% |
|
|
22.6 |
% |
|
|
36.4 |
% |
|
|
43.1 |
% |
West |
|
|
27.3 |
% |
|
|
30.0 |
% |
|
|
28.4 |
% |
|
|
22.7 |
% |
Central |
|
|
11.7 |
% |
|
|
12.3 |
% |
|
|
13.1 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
72
8. IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it is probable
the Company will be unable to collect all amounts due under the contractual terms of the loan.
Outstanding principal of loans considered impaired totaled $97.7 million and $20.4 million as of
December 31, 2009 and December 31, 2008, respectively. The aggregate average balance of impaired
loans was $73.6 million, $16.3 million, and $18.6 million for the years ended December 31, 2009,
2008, and 2007, respectively. The interest income that was due, but not recognized on impaired
loans was $6.2 million, $1.1 million and $2.5 million for the years ended December 31, 2009, 2008
and 2007, respectively. As of December 31, 2009, the Companys impaired loans included $26.3
million of loans still accruing interest because the borrower is making timely debt service payments; however, the loans were impaired due to actual or probable
deterioration in the financial condition or performance of the borrower or due to a significant
decline in the value of the collateral. The remaining $71.4 million of loans are not accruing interest because the debt service payments were at least
90 days delinquent. As of December 31, 2008, the
Companys impaired loans included $17.4 million of
loans still accruing interest because the borrower was making timely debt service payments; however, the loans were impaired due to actual or probable
deterioration in the financial condition or performance of the borrower or due to a significant
decline in the value of the collateral. The
remaining $3.0 million of loans were not accruing interest because the debt service payments were at least 90
days delinquent. Although some of the Companys loans are still current on payments, the loans are
considered impaired due to deterioration in the financial condition of the borrower or due to a
significant decline in the value of the collateral.
As of December 31, 2009, the Company had an allowance of $14.3 million on the $97.7 million of
impaired loans. Of the $97.7 million of impaired loans, $24.7 million needed no allowance because
the fair value of the collateral was greater than the amount due to the Company on the loan.
As of December 31, 2008 the Company had an allowance of $6.3 million on the $20.4 million of
impaired loans. Of the $20.4 million of impaired loans, $7.6 million needed no allowance because
the fair value of the collateral was greater than the amount due to the Company on the loan.
The Company restructured three impaired loans during 2009 due to significant changes in the
current valuations of the properties collateralizing the loans. Prior to the restructuring, the
aggregate unpaid principal balance of the three loans was
$19.4 million with a total of $7.1 million of reserves on them. The aggregate unpaid principal balance of the three loans after
restructuring was $20.5 million. A total of $6.5 million of the aggregate restructured loan
balance was immediately charged-off. After charge-offs, the aggregate unpaid principal balance of
the restructured loans was $14.0 million with an aggregate reserve of $1.3 million as of December
31, 2009.
As of December 31, 2009 reserves were deemed to be adequate to cover the estimated loss
exposure related to the impaired loans. As of December 31, 2009, there were no commitments to lend
additional funds to borrowers whose loans were impaired.
9. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the components of the allowance for loan losses (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Allowance on impaired loans |
|
$ |
14,347 |
|
|
$ |
6,314 |
|
|
$ |
3,255 |
|
Allowance on non-impaired loans |
|
|
22,121 |
|
|
|
20,753 |
|
|
|
14,459 |
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses |
|
$ |
36,468 |
|
|
$ |
27,067 |
|
|
$ |
17,714 |
|
|
|
|
|
|
|
|
|
|
|
73
The following is a summary of the activity in the allowance for loan losses (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance at January 1 |
|
$ |
27,067 |
|
|
$ |
17,714 |
|
|
$ |
19,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
(4,355 |
) |
|
|
(2,111 |
) |
|
|
(715 |
) |
Commercial Loans |
|
|
(30,193 |
) |
|
|
(8,073 |
) |
|
|
(1,737 |
) |
Real Estate (Residential and Commercial) |
|
|
(1,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(36,405 |
) |
|
|
(10,184 |
) |
|
|
(2,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
824 |
|
|
|
144 |
|
|
|
297 |
|
Commercial Loans |
|
|
789 |
|
|
|
743 |
|
|
|
237 |
|
Real Estate (Residential and Commercial) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,707 |
|
|
|
887 |
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(34,698 |
) |
|
|
(9,297 |
) |
|
|
(1,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
44,099 |
|
|
|
18,650 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
36,468 |
|
|
$ |
27,067 |
|
|
$ |
17,714 |
|
|
|
|
|
|
|
|
|
|
|
During 2008 and 2009, deteriorating economic conditions, including declining real estate
values and increasing unemployment and commercial real estate vacancy rates, have had and may
continue to have an adverse impact on the quality of the Companys loan portfolios. These
conditions have caused deterioration in the quality of the loan portfolios, including: (i) an
increase in loan delinquencies, (ii) an increase in non-performing assets and foreclosures, and
(iii) a decline in the value of the underlying collateral. All of these factors have contributed
to the increase in the Companys provision for loan losses and charge-off activity.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND GUARANTY OBLIGATIONS
The Company is a party to financial instruments with off-balance sheet risk. These financial
instruments may include commitments to extend credit and standby letters of credit and involve, to
varying degrees, elements of credit and interest rate risk in excess of the amount recognized in
the balance sheets. The contract amounts of the instruments reflect the exposure that the
Company has in particular classes of financial instruments. The Company
may require collateral or other security to support off-balance sheet financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other parties to
the commitments to extend credit and standby letters of credit issued is represented by the
contract or notional amounts of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments.
74
Undrawn Lines
of Credit
In the normal course of business, the Company makes loan commitments to extend credit to
customers as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without being completely
drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
As
of December 31, 2009 and 2008, the Company had outstanding unfunded lines of credit of
$764.9 million and $912.4 million, respectively.
The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on
managements credit evaluation of the customer. Collateral varies, but may include accounts
receivable, inventory, property, plant and equipment, and residential and income-producing
commercial properties.
Standby Letters
of Credit
Standby letters of
credit can be either financial or performance-based. Financial standby letters of credit obligate
the Company to disburse funds to a third party if the customer fails to repay an outstanding loan
or debt instrument. For the Companys letters of credit issued in connection with certain
variable rate municipal bonds, the Company can be called upon to fund the amount of the municipal
bond in the event the holder seeks repayment and the bond cannot be sold to another purchaser.
Performance letters of credit obligate the Company to disburse funds if the customer fails to
perform a contractual obligation, including obligations of a non-financial nature. Issuance fees
associated with the standby letters of credit range from 0.80% to 4.50% of the commitment amount.
The standby letters of credit mature throughout 2010 to 2016.
As of December 31,
2009, the Company had outstanding letters of credit with a total commitment amount of $245.2 million
of which $73.4 million were classified as criticized with an associated reserve for losses on these
unfunded commitments of $10.5 million. As of December 31, 2008, the Company had outstanding letters
of credit with a total commitment amount of $293.7 million of which $16.2 million were classified as
criticized with an associated reserve for losses on these unfunded commitments of $2.0 million. Of
the $8.1 million provision for unfunded commitments for the twelve months ended December 31, 2009,
substantially all was due to an increase of $57.0 million in criticized letters of credit. If it becomes
probable that a letter of credit will be drawn, the Company will recognize an additional provision
for the estimated probable loss.
During 2008, the
Company provided funding for eight letters of credit for a total of $16.4 million of which $5.8 million
was a result of the lead bank not being able to confirm the letter of credit and $10.6 million was
the result of an inability to sell the bond to another purchaser. All amounts were recovered at the
time the letter of credit was confirmed by the lead bank or when the bonds were remarketed and sold
to other third-parties and no loss was incurred. During 2009, one letter of credit was funded in the
amount of $6.9 million with an expected loss of $5.1 million
recognized and charged-off.
For the Companys letters of credit issued in connection with certain variable rate municipal
bonds, the Company can be called upon to fund the amount of the municipal bond in the event the
holder seeks repayment and the bond cannot be sold to another purchaser. Performance letters of
credit obligate the Company to disburse funds if the customer fails to perform a contractual
obligation, including obligations of a non-financial nature. Of the $8.1 million provision for
unfunded commitments for the twelve months ended December 31,
2009, substantially all was due
to an increase of $57.0 million in criticized letters of credit. If it becomes probable that
a letter of credit will be drawn, the Company will recognize an additional provision for the
estimated probable loss.
A liability of $4.4 million related to the Companys obligation to stand ready to perform
under outstanding letters of credit was recorded in other liabilities, and a corresponding asset of
$5.2 million was recorded in other assets in the Consolidated Balance Sheet related to the issuance
fees from the stand by letters of credit as of December 31, 2009. A liability of $8.7 million
related to the Companys obligation to stand ready to perform under outstanding letters of credit
was recorded in other liabilities, and a corresponding asset of $9.0 million was recorded in other
assets in the Consolidated Balance Sheet as of December 31,
2008.
The fair value of guarantees and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the customers at the reporting date.
The contract or commitment amounts and the respective estimated fair value of the Companys
commitments to extend credit and standby letters of credit are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract or Commitment |
|
|
|
|
|
|
Amounts |
|
|
Estimated Fair Value |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Undrawn commitments to
extend credit |
|
$ |
764,888 |
|
|
$ |
912,427 |
|
|
$ |
3,824 |
|
|
$ |
4,562 |
|
Standby letters of credit |
|
$ |
245,165 |
|
|
$ |
293,711 |
|
|
$ |
8,451 |
|
|
$ |
12,131 |
|
In addition to the stand ready obligation, the Company has
recorded a reserve for letters of credit as disclosed below.
The following is a summary of the activity in the reserve for losses on unfunded commitments
of the letters of credit described above, which is included in other liabilities (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance at January 1 |
|
$ |
2,675 |
|
|
$ |
2,016 |
|
|
$ |
1,528 |
|
Provision for losses on unfunded commitments |
|
|
8,080 |
|
|
|
659 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
10,755 |
|
|
$ |
2,675 |
|
|
$ |
2,016 |
|
|
|
|
|
|
|
|
|
|
|
75
11. TRANSACTIONS WITH RELATED PARTIES
Section 103 of the Act, as amended, requires that holders of Classes B and C stock elect
twelve of the fifteen members of the Companys Board of Directors and that they have actual
cooperative experience. The Company voting stock is, by law, owned only by borrowers and entities
eligible to borrow. The election rules require that candidates for the Board of Directors have
experience as a director or senior officer of a cooperative organization that currently holds Class
B or Class C stock. Therefore, it is not unusual for Board members to be directors, executives or
employees of the Company borrowers. The Company therefore has conflict of interest policies, which
require, among other things, that a Board member be disassociated from decisions which pose a
conflict of interest or the appearance of a conflict of interest. Loan requests from cooperatives
with which members of the board may be affiliated are subject to the same eligibility and credit
criteria, as well as the same loan terms and conditions, as all other loan requests.
In addition, the Company through NCB, FSB, enters into transactions in the normal course of
business with its directors, officers, employees, and their immediate family members.
Activity related to loans and leases, including loans held-for-sale, to cooperatives
affiliated with the Companys Board of Directors (represents majority of activity) and to officers,
employees, and their immediate family members is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009 |
|
|
Additions |
|
|
Deductions |
|
|
December 31, 2009 |
|
Outstanding balances |
|
$ |
91,869 |
|
|
$ |
13,128 |
|
|
$ |
(27,139 |
) |
|
$ |
77,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 |
|
|
Additions |
|
|
Deductions |
|
|
December 31, 2008 |
|
Outstanding balances |
|
$ |
72,144 |
|
|
$ |
45,777 |
|
|
$ |
(26,052 |
) |
|
$ |
91,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the loans included in the table above are non-performing or delinquent.
During 2009, 2008, and 2007, the Company recorded interest income of $4.1 million, $4.7
million, and $6.5 million, respectively, on loans to related parties.
As of December 31, 2009 and 2008, deposits from cooperatives affiliated with the Companys
Board of Directors and their immediate families were $33.2 million and $64.0 million, respectively.
Certain officers and employees of the Company had deposits totaling $5.2 million and $4.4 million
as of December 31, 2009 and 2008, respectively. During 2009 and 2008 the Company recorded interest
income of $125 thousand and $122 thousand, respectively on these deposits.
12. PREMISES AND EQUIPMENT
Premises and equipment are included in other assets and consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Leasehold improvements |
|
$ |
10,766 |
|
|
$ |
10,819 |
|
Furniture and equipment |
|
|
6,012 |
|
|
|
6,204 |
|
Premises |
|
|
3,858 |
|
|
|
3,840 |
|
Other |
|
|
619 |
|
|
|
626 |
|
|
|
|
|
|
|
|
Total premises and equipment |
|
|
21,255 |
|
|
|
21,489 |
|
Less: accumulated depreciation |
|
|
(9,298 |
) |
|
|
(8,042 |
) |
|
|
|
|
|
|
|
Total premises and equipment, net |
|
$ |
11,957 |
|
|
$ |
13,447 |
|
|
|
|
|
|
|
|
76
Depreciation of premises and equipment included in non-interest expense for the years ended
December 31, 2009, 2008, and 2007 totaled $1.6 million, $2.2 million, and $2.0 million,
respectively.
13. OTHER ASSETS
Other assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Interest-only non-certificated receivables,
at fair value |
|
$ |
24,851 |
|
|
$ |
27,264 |
|
Mortgage servicing rights |
|
|
14,488 |
|
|
|
13,252 |
|
Premises and equipment, net |
|
|
11,957 |
|
|
|
13,447 |
|
Accrued interest receivable |
|
|
9,101 |
|
|
|
11,169 |
|
Federal Home Loan Bank stock |
|
|
9,651 |
|
|
|
9,651 |
|
FDIC prepaid premiums |
|
|
7,957 |
|
|
|
|
|
Fees receivable from letters of credit |
|
|
5,163 |
|
|
|
9,021 |
|
Debt issuance costs |
|
|
4,687 |
|
|
|
2,297 |
|
Equity method investments |
|
|
3,046 |
|
|
|
3,269 |
|
Other real estate owned |
|
|
2,315 |
|
|
|
659 |
|
Derivative assets |
|
|
1,419 |
|
|
|
2,258 |
|
Other prepaid assets |
|
|
2,864 |
|
|
|
1,231 |
|
Other |
|
|
6,626 |
|
|
|
8,516 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
104,125 |
|
|
$ |
102,034 |
|
|
|
|
|
|
|
|
The decision of some Federal Home Loan Banks (FHLB) to reduce dividend payments and restrict
redemptions of stock has not affected the Company. The FHLB of Cincinnati, with whom NCB, FSB
banks, has not reduced dividends or provided notice that they have suspended stock redemptions.
As of December 31, 2009, the FDIC premium represents NCB, FSBs assessed premiums from January
31, 2010 through March 31, 2013. The premium will be amortized over this same period.
As of December 31, 2009, $1.7 million of the $2.3 million other real estate owned balance is
related to two commercial properties.
14. LEASES
Minimum future rental payments on premises and office equipment under non-cancelable operating
leases having remaining terms in excess of one year as of December 31, 2009 are as follows (dollars
in thousands):
|
|
|
|
|
|
|
Amount |
|
2010 |
|
$ |
3,658 |
|
2011 |
|
|
3,543 |
|
2012 |
|
|
3,618 |
|
2013 |
|
|
3,609 |
|
2014 |
|
|
3,548 |
|
2015 and thereafter |
|
|
24,899 |
|
|
|
|
|
Total payments |
|
$ |
42,875 |
|
|
|
|
|
Rental expense on premises and office equipment for the years ended 2009, 2008, and 2007 was
$3.1 million, $3.2 million, and $3.9 million, respectively.
77
The Company is obligated to take additional space in the Arlington, Virginia office space
totaling approximately 10,800 rentable square feet on dates selected by the landlord in accordance
with the lease between September 2012 and September 2018.
15. DEPOSITS
Deposits are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Rate Paid |
|
|
Balance |
|
|
Rate Paid |
|
Non-interest bearing demand deposits |
|
$ |
141,493 |
|
|
|
|
|
|
$ |
90,423 |
|
|
|
|
|
Interest-bearing demand deposits |
|
|
211,228 |
|
|
|
1.06 |
% |
|
|
248,960 |
|
|
|
1.04 |
% |
Savings deposits |
|
|
8,930 |
|
|
|
0.27 |
% |
|
|
7,376 |
|
|
|
0.31 |
% |
Certificates of deposit |
|
|
892,303 |
|
|
|
2.25 |
% |
|
|
953,312 |
|
|
|
3.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,253,954 |
|
|
|
1.78 |
% |
|
$ |
1,300,071 |
|
|
|
2.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturities of certificates of deposit with a minimum denomination of $100,000
are as follows (dollars in thousands):
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
Within 3 months |
|
$ |
116,558 |
|
Over 3 months through 6 months |
|
|
104,160 |
|
Over 6 months through 12 months |
|
|
164,624 |
|
Over 12 months |
|
|
382,023 |
|
|
|
|
|
Total certificates of deposit |
|
$ |
767,365 |
|
|
|
|
|
As of December 31, 2009, the Company had one depositor with deposits in excess of 5% of the
Companys total deposits. This depositor had $95.1 million of certificates of deposit, or 7.6% of
the Companys total deposits of which $6.0 million are maturing within 3 months. The remaining
$89.1 million have maturities ranging from 4 months to 57 months.
The Company had $589.1 million and $612.5 million of brokered deposits all relating to
certificates of deposit as of December 31, 2009 and December 31, 2008, respectively. Of the $589.1
million of certificates of deposit, $113.5 million mature within 3 months and $475.6 million has a
maturity ranging from 4 months to 72 months. The Company is actively working on decreasing this
deposit concentration.
The Company has a Liquidity Policy and a Liquidity Contingency Plan, both board approved and
continually monitored that addresses NCB, FSBs cashflow needs. Specifically the cash flow needed
to satisfy maturing certificates would be derived from the sale of loans held-for-sale, loan
maturities and issuance of new certificates of deposit. Maturing certificates are further
supported by unused FHLB borrowing capacity which was $37.4 million and $192.1 million as of
December 31, 2009 and December 31, 2008, respectively and the borrowing capacity from the Federal
Reserve Bank (FRB), established in October 2009, which was $78.0 million as of December 31, 2009.
78
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the
amount of deposits insured by the Federal Deposit Insurance Corporation (FDIC) to $250,000. In
2008, the FDIC announced a new program the Transaction Account Guarantee Program that provided
unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not
otherwise covered by the existing deposit insurance limit of $250,000. This program is expected to
end on June 30, 2010. All eligible institutions were covered under the program for the first 30
days without incurring any costs. After the initial period, participating institutions are
assessed a 10 basis point surcharge on the additional insured deposits.
Deposit interest expense is summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest-bearing demand deposits |
|
$ |
2,623 |
|
|
$ |
4,884 |
|
|
$ |
10,750 |
|
Savings deposits |
|
|
24 |
|
|
|
37 |
|
|
|
81 |
|
Certificates of deposit |
|
|
25,330 |
|
|
|
32,628 |
|
|
|
32,479 |
|
|
|
|
|
|
|
|
|
|
|
Total deposit interest expense |
|
$ |
27,977 |
|
|
$ |
37,549 |
|
|
$ |
43,310 |
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of certificates of deposit are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than |
|
|
$100,000 |
|
|
|
|
|
|
$100,000 |
|
|
and Greater |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
89,512 |
|
|
$ |
385,342 |
|
|
$ |
474,854 |
|
2011 |
|
|
26,392 |
|
|
|
192,366 |
|
|
|
218,758 |
|
2012 |
|
|
5,605 |
|
|
|
59,797 |
|
|
|
65,402 |
|
2013 |
|
|
1,078 |
|
|
|
50,262 |
|
|
|
51,340 |
|
2014 |
|
|
1,277 |
|
|
|
60,496 |
|
|
|
61,773 |
|
2015 and thereafter* |
|
|
1,074 |
|
|
|
19,102 |
|
|
|
20,176 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,938 |
|
|
$ |
767,365 |
|
|
$ |
892,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes discount on
certificates of deposit. |
79
16. BORROWINGS
The carrying amounts and maturities of the Companys various debt instruments are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Balance |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
Type |
|
2009 |
|
|
2008 |
|
|
Maturity Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term FHLB |
|
$ |
|
|
|
$ |
23,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
128,394 |
|
|
|
202,000 |
|
|
December 2010 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
June 2011 |
|
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
July 2011 |
|
Long-term FHLB |
|
|
25,000 |
|
|
|
20,000 |
|
|
August 2011 |
|
Long-term FHLB |
|
|
10,000 |
|
|
|
10,000 |
|
|
June 2012 |
|
Long-term FHLB |
|
|
20,000 |
|
|
|
20,000 |
|
|
June 2013 |
|
Long-term FHLB |
|
|
30,000 |
|
|
|
|
|
|
March 2014 |
|
Long-term FHLB |
|
|
20,000 |
|
|
|
|
|
|
August 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
87,092 |
|
|
|
105,000 |
|
|
December 2010 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP debt |
|
|
25,000 |
|
|
|
|
|
|
February 2012 |
|
TLGP debt |
|
|
63,688 |
|
|
|
|
|
|
May 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debt Class A (current) |
|
|
|
|
|
|
2,500 |
|
|
|
|
|
Subordinated
debt Class A (current) |
|
|
23,989 |
|
|
|
|
|
|
December 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debt Class A (non-current) |
|
|
90,000 |
|
|
|
113,989 |
|
|
October 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt |
|
|
51,547 |
|
|
|
51,547 |
|
|
January 2034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
valuation and discount |
|
|
(157 |
) |
|
|
2,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
614,553 |
|
|
$ |
590,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Amendments to the revolving credit facility and senior notes agreements extended the
maturity dates from February 2010 to December 2010 for both facilities. |
Revolving Credit Facility and Senior Notes
The Holding Company is the borrower under a senior note purchase agreement and a revolving
credit facility as of December 31, 2009. NCB, FSB is not a guarantor under either agreement.
However, both facilities are secured by NCB Financial Corporation, which has pledged all of the
stock of NCB, FSB in connection with such guarantees. As of June 30, 2009, the Holding Company was
in default under its senior note purchase agreement and its revolving credit facility due to a
violation of certain financial covenants. The covenant violations were primarily a result of
increased loan loss provisions and charge-offs, principally related to a small number of borrowers
experiencing pronounced financial difficulties, including several borrowers which have filed for
bankruptcy.
On August 14, 2009, the Holding Company entered into forbearance agreements with each of the
required holders under each of the senior note purchase agreements and the revolving credit
facility agreement. The forbearance agreements were entered into under customary terms and
conditions, including the suspension of the need for the Holding Company to comply with certain
financial covenants for the duration of the initial forbearance period which had an expiration date
of November 16, 2009.
80
On November 16, 2009, the Holding Company entered into amendments of the forbearance
agreements which extended the forbearance period through February 17, 2010, then through February
23, 2010. In connection with the execution of the amended forbearance agreements, the Holding
Company repaid $12.5 million of the senior note debt and $18.5 million of the revolving credit
facility debt and paid a total forbearance amendment fee of $1.1 million.
On February 23, 2010, the Holding Company entered into amendments to each of the senior note
purchase agreements and the revolving credit facility agreement. As described below these
amendments generally extended, through December 15, 2010, the waivers and modifications that have
been in place since August 14, 2009 under applicable forbearance agreements. These amendments
also contained provisions for the final maturities of the debt agreement by the amendments and
certain fees and milestones in connection therewith. The amendments removed substantially all of the financial
covenants compliance requirements. The Company fully expects to remain in full compliance with the remaining
three financial covenants through the maturity date. No amendment, waiver or other fees were
required to be paid in connection with the extension of the forbearance period from February 17,
2010 to December 15, 2010.
Subsequent to December 31, 2009, the Holding Company has paid down the aggregate debt
outstanding under the two facilities from $215.5 million to $87.6 million as of March 31, 2010.
The repayments have been largely funded by receipt of principal and interest payments on loans
receivable held by the Holding Company, and loan and investment sales executed at par or with
discounts of less than 1%.
The Amendments were entered into under customary terms and conditions, with specific
provisions including:
|
|
|
Final maturity of December 15, 2010 for both facilities; |
|
|
|
No amendment or other closing fee; |
|
|
|
Interest rate on both facilities of 13.5%; |
|
|
|
Required to reduce the principal through paydowns such that maximum aggregate debt
outstanding is as follows: |
|
|
|
$68.0 million on April 30, 2010 (aggregate outstanding was $87.6 million as of
March 31, 2010)
$60.0 million on June 30, 2010
$30.0 million on September 30, 2010; |
|
|
|
Notwithstanding the amortization schedule, a fee of 2% of then-outstanding debt will
be due if secured debt is not fully repaid by June 30, 2010; |
|
|
|
Debt payments based on periodic cash sweeps of available cash over $50.0 million
through June 30, 2010, and $45.0 million thereafter; |
|
|
|
Fee of 0.20% of the then-outstanding debt if the ratio of then-outstanding debt to
performing loans and cash of the Holding Company is greater than the amounts, as
follows: |
|
|
|
37% on February 28, 2010 (actual is 31% as of February 28, 2010)
30% on April 30, 2010
28% on June 30, 2010
28% on September 30, 2010; |
|
|
|
The Holding Company continues to not have access to the revolving line of credit; |
|
|
|
The Holding Company continues to be restricted from issuing any new extensions of
credit and remains bound by limitations on the extension of existing credits. As
contemplated, over the near term, the lending activities of the Holding Company will be
carried out, in part, by NCB, FSB; |
81
|
|
|
Certain yield maintenance penalty attributable to the senior notes were added to the
principal balances thereof, as of August 14, 2009, and will be payable at maturity.
The aggregate yield maintenance was approximately $6.8 million. Because the lenders and
noteholders had the right to call and demand immediate repayment of any and all amounts
due through the initial forbearance period expiring November 16, 2009, the yield
maintenance penalty was fully amortized over the 90-day period from August 14, 2009 to
November 16, 2009 and was added to the outstanding balance of the revolving credit
facility and senior note balances. |
The Holding Company intends to repay or refinance these obligations on or before June
30, 2010. In the event that the Holding Company is ultimately unable to refinance or otherwise
meet its amortization obligations under the Amendments, the lenders and the noteholders have the
right to call and demand immediate repayment of any and all amounts due.
There were letters of credit outstanding of $0.4 million and $5.4 million as of December 31,
2009 and December 31, 2008, respectively under the revolving credit facility. As of December 31,
2009 and December 31, 2008, respectively, there was $87.1 million and $105.0 million outstanding
under the Senior Notes.
Federal
Home Loan Bank Borrowings (FHLB)
NCB, FSB has a pledge agreement with the FHLB requiring advances to be secured by eligible
mortgages or investments. The pledged mortgages are required to have a principal balance of 175%
to 250% as of December 31, 2009 and 135% to 400% as of December 31, 2008, of any advances. NCB,
FSBs FHLB borrowing capacity is determined by the FHLB using several factors, including asset
quality and performance, capital, earnings, liquidity and credit ratings. Changes in the factors
could increase or reduce the available capacity. Any amendments to the revolving credit and senior
note agreements have not impacted NCB, FSBs ability to borrow from the FHLB.
As of December 31, 2009, the total FHLB facility was $205.9 million of which $145.0 million of
debt borrowings and $23.5 million in letters of credit were outstanding. As of December 31, 2008,
the total FHLB facility was $318.8 million of which $113.0 million of debt borrowings and $13.7
million in letters of credit were outstanding. NCB, FSBs total FHLB facility capacity decreased
in 2009 from 2008 due to a reduction in pledged collateral as a result of a combination of loan
sales and decreased loan collateral values from downgrades to credit ratings.
As of December 31, 2009, NCB, FSB had pledged eligible Share and Single-family Residential
Loans totaling $321.0 million, eligible Cooperative and Multifamily Loans totaling $34.8 million
and eligible Commercial Real Estate Loans totaling $86.7 million. As of December 31, 2008, NCB,
FSB had pledged eligible Share and Single-family Residential Loans totaling $391.7 million,
eligible Cooperative and Multifamily Loans totaling $27.4 million and eligible Commercial Real
Estate Loans totaling $71.6 million. As of December 31, 2009, NCB, FSB had $21.6 million of
investments pledged with the FHLB. NCB, FSB did not have any investments pledged with the FHLB as
of December 31, 2008.
Federal Reserve Bank Borrowings (FRB)
NCB, FSB also has a blanket pledge agreement with the FRB requiring advances to be secured by
specific eligible mortgages with a principal balance of 154% 189% of such advances and an unused
borrowing capacity of $78.0 million as of December 31, 2009. NCB, FSB had pledged eligible
Commercial Loans totaling $132.3 million with the FRB as of December 31, 2009. This borrowing
arrangement was established in the fourth quarter of 2009, and no amounts have been drawn.
Temporary Liquidity Guarantee Program Borrowings (TLGP)
During the year ended December 31, 2009, NCB, FSB issued $13.7 million and the Holding Company
issued $75.0 million of senior unsecured debt guaranteed under the TLGP. Under the TLPG, the FDIC
temporarily guarantees newly issued senior unsecured debt in a total amount up to 125 percent of
the par or face value of senior unsecured debt outstanding, excluding debt extended to affiliates,
as of September 30, 2008, that is scheduled to
mature on or before June 30, 2009. Upon a payment default, the FDIC will continue to make
scheduled interest and principal payments under the terms of the debt instrument through its
maturity. The guarantee extends up to three years or December 31, 2012. In connection with this
debt issuance, NCB, FSB and the Holding Company incurred a total of $3.4 million of costs which
have been capitalized and included as a component of other assets.
82
Subordinated Debt
On December 31, 1981, the Holding Company issued unsecured subordinated debt to the U.S.
Treasury (Treasury) in the amount of $184.3 million as provided in the Act, as amended, in the
form of Class A notes in full redemption of the Class A Preferred stock previously owned by the
Government.
In November 2003 the Holding Company entered into a definitive Amended and Restated Financing
Agreement (the Amended Financing Agreement), with the Treasury relating to repayment of and
interest payable on the Class A notes maturing in 2020 that were originally issued by the Holding
Company to Treasury on December 31, 1981.
In December 2003, the Holding Company, pursuant to the Amended Financing Agreement, made a
$53.6 million payment to Treasury to prepay its 91-day renewing Class A note. Also on that date,
the Holding Company replaced the remaining three Class A notes outstanding, in the aggregate amount
of $129.0 million, by issuing five new replacement Class A notes of renewing maturities.
At maturity, each note is replaced with a reissued note for the same term, with an interest
rate based upon the yield on Treasury securities of comparable maturities, as of the date of
repricing, plus 100 basis points, subject to the final maturity date of October 31, 2020, on which
date all remaining balances under the notes are due.
During 2009, $2.5 million of the subordinated debt (Class A Notes portion) was paid down
pursuant to the Amended Financing Agreement. During 2010, pursuant to the same agreement, $24.0
million of the subordinated debt is due to be paid down from the 7-year tranche. The interest
payments for each tranche are determined in accordance with the following schedule, which also
includes the carrying amounts of the subordinated debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Next Repricing |
|
|
Carrying |
|
Index |
|
Rate |
|
|
Date |
|
|
Amount |
|
91 day Treasury rate |
|
|
1.04 |
% |
|
15-Mar-10 |
|
$ |
36,810 |
|
2 year Treasury rate |
|
|
1.87 |
% |
|
15-Dec-11 |
|
|
15,718 |
|
3 year Treasury rate |
|
|
2.35 |
% |
|
15-Dec-12 |
|
|
22,564 |
|
7 year Treasury rate |
|
|
4.79 |
% |
|
15-Dec-10 |
|
|
32,847 |
|
10 year Treasury rate |
|
|
5.28 |
% |
|
15-Dec-13 |
|
|
6,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
113,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Next Repricing |
|
|
Carrying |
|
Index |
|
Rate |
|
|
Date |
|
|
Amount |
|
91 day Treasury rate |
|
|
1.02 |
% |
|
16-Mar-09 |
|
$ |
36,810 |
|
2 year Treasury rate |
|
|
4.31 |
% |
|
15-Dec-09 |
|
|
15,718 |
|
3 year Treasury rate |
|
|
5.63 |
% |
|
15-Dec-09 |
|
|
25,064 |
|
7 year Treasury rate |
|
|
4.79 |
% |
|
15-Dec-10 |
|
|
32,847 |
|
10 year Treasury rate |
|
|
5.28 |
% |
|
15-Dec-13 |
|
|
6,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
116,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
83
The following table shows, pursuant to the Amended Financing Agreement, the amortization
schedule of the five Class A notes (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Amortization |
|
|
|
Beginning |
|
|
Annual |
|
|
Periodic |
|
|
|
|
Year |
|
Balance |
|
|
Amortization |
|
|
Amortization |
|
|
Ending Balance |
|
2010 |
|
$ |
113,989 |
|
|
$ |
|
|
|
$ |
23,989 |
|
|
$ |
90,000 |
|
2011 |
|
|
90,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
85,000 |
|
2012 |
|
|
85,000 |
|
|
|
5,500 |
|
|
|
|
|
|
|
79,500 |
|
2013 |
|
|
79,500 |
|
|
|
6,050 |
|
|
|
|
|
|
|
73,450 |
|
2014 |
|
|
73,450 |
|
|
|
6,655 |
|
|
|
|
|
|
|
66,795 |
|
2015 |
|
|
66,795 |
|
|
|
7,320 |
|
|
|
|
|
|
|
59,475 |
|
2016 |
|
|
59,475 |
|
|
|
8,053 |
|
|
|
|
|
|
|
51,422 |
|
2017 |
|
|
51,422 |
|
|
|
8,858 |
|
|
|
|
|
|
|
42,564 |
|
2018 |
|
|
42,564 |
|
|
|
9,744 |
|
|
|
|
|
|
|
32,820 |
|
2019 |
|
|
32,820 |
|
|
|
10,718 |
|
|
|
|
|
|
|
22,102 |
|
2020 |
|
|
22,102 |
|
|
|
|
|
|
|
22,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
67,898 |
|
|
$ |
46,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Amended Financing Agreement provides for the deferral of principal payments. In the event
that a principal payment is not made, the rate on the note that is not paid will be repriced at the
then-current treasury rate for the tenure of that note plus 700 basis points. At the same time,
the rate on the remaining notes increase by 100 basis points and increase by an additional 100
basis points each six month period (up to a maximum add-on of 700 basis points) as long as the
deferred payment remains unpaid. Once the deferred payment is made, the rate on all of the notes
returns to the contract rate of the treasury rate plus 100 basis points.
The Class A notes and all related payments are subordinate to any secured and unsecured notes
and debentures thereafter issued by the Holding Company, but the notes and subordinated debt issued
by the Holding Company, that by its terms are junior to the Class A notes, have first preference
with respect to the Holding Companys assets over all classes of stock issued by the Holding
Company. The Holding Company currently cannot pay any dividend on any class of stock at a rate
greater than the statutory interest rate payable on the Class A notes (See Note 20).
Junior Subordinated Debt
In December 2003, the Holding Company sold $50.0 million of trust preferred securities through
a Delaware statutory business trust, NCB Capital Trust I (Trust). The Holding Company owns all
of the common securities of this Trust. The Trust has no independent assets or operations and
exists for the sole purpose of issuing preferred securities and investing the proceeds thereof in
an equivalent amount of junior subordinated debentures issued by the Holding Company. The junior
subordinated debentures, which are the sole assets of the Trust, are unsecured obligations of the
Holding Company, and are subordinate and junior in right of payment to all present and future
senior and subordinated indebtedness and certain other financial obligations of the Holding
Company. This debt is based on the 3-month LIBOR rate plus 290 bps and the rate resets every 3
months.
84
The following is a schedule of outstanding Junior Subordinated debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Carrying |
|
|
|
|
|
|
|
Maturity |
|
Amount |
|
Index |
|
Index Rate |
|
|
Date |
|
2009 |
|
3-month LIBOR |
|
|
0.28 |
% |
|
January 2034 |
|
$ |
51,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Carrying |
|
|
|
|
|
|
|
Maturity |
|
Amount |
|
Index |
|
Index Rate |
|
|
Date |
|
2008 |
|
3-month LIBOR |
|
|
4.82 |
% |
|
January 2034 |
|
$ |
51,547 |
|
As
of December 31, 2009, the Company has the following contractual debt maturities:
|
|
|
|
|
|
|
Amount |
|
|
2010 |
|
$ |
239,475 |
|
2011 |
|
|
65,000 |
|
2012 |
|
|
98,688 |
|
2013 |
|
|
20,000 |
|
2014 |
|
|
50,000 |
|
2015 and thereafter |
|
|
141,547 |
|
|
|
|
|
Total payments |
|
$ |
614,710 |
|
|
|
|
|
17. COMMON STOCK AND MEMBERS EQUITY
The Companys common stock consists of Class B stock owned by its borrowers and Class C stock
owned by entities eligible to borrow from the Company as presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Class B |
|
|
Class C |
|
|
Class B |
|
|
Class C |
|
Par value per share |
|
$ |
100 |
|
|
$ |
100 |
|
|
$ |
100 |
|
|
$ |
100 |
|
Shares authorized |
|
|
2,000,000 |
|
|
|
350,000 |
|
|
|
1,900,000 |
|
|
|
300,000 |
|
Shares issued and outstanding |
|
|
1,795,981 |
|
|
|
254,373 |
|
|
|
1,726,718 |
|
|
|
251,117 |
|
The changes in Class B and C common stock are described below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B |
|
|
Class C |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
162,736 |
|
|
$ |
24,494 |
|
|
$ |
187,230 |
|
2006 patronage dividends distributed in common stock |
|
|
10,178 |
|
|
|
647 |
|
|
|
10,825 |
|
Cancellation of stock |
|
|
(160 |
) |
|
|
(4 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
172,754 |
|
|
|
25,137 |
|
|
|
197,891 |
|
2007 patronage dividends distributed in common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of stock |
|
|
(82 |
) |
|
|
(25 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
172,672 |
|
|
|
25,112 |
|
|
|
197,784 |
|
2008 patronage dividends distributed in common stock |
|
|
6,926 |
|
|
|
325 |
|
|
|
7,251 |
|
Cancellation of stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
179,598 |
|
|
$ |
25,437 |
|
|
$ |
205,035 |
|
|
|
|
|
|
|
|
|
|
|
Members equity currently includes the two classes of common stock, allocated and unallocated
retained earnings, and accumulated other comprehensive income or loss. Allocated retained earnings
have been designated for patronage dividend distribution, whereas unallocated retained earnings
have not been designated.
Patronage-based borrowers from the Company or NCB, FSB under section 108 of the Act are
required to own Class B stock in the Company. Stock owned by a borrower may be cancelled by the
Company, at the Companys sole discretion, in case of certain events, including default.
85
18. EMPLOYEE BENEFITS
Substantially all employees are covered by a non-contributory, defined contribution retirement
plan. During 2009, the Company contributed 6% of each employees salary after one year of
employment. Total expense for the retirement plan for 2009, 2008, and 2007 was $1.1 million, $1.0
million, and $1.0 million, respectively. For 2010, the Company has modified this plan to a
discretionary profit sharing plan. Thus, beginning in 2010, it is at the Companys discretion, the
level of employer contribution. This modification gives the Company more flexibility in its
employer contribution in both up and down financial market cycles.
The Company maintains an employee thrift plan organized under Internal Revenue Code Section
401(k) and matches up to 6% of each participants salary for every 1% the employee contributes.
Participants receive vesting credit (non-forfeitable rights to the money in their 401(k) account)
based on their number of years of employment with the Company. Contributions and expenses for
2009, 2008, and 2007 were $1.1 million, $1.1 million and $1.2 million, respectively.
Participant matching contributions and earnings for the defined contribution retirement plan
and the thrift plan are vested in accordance with the following schedule:
|
|
|
|
|
Years of Service |
|
Vesting |
|
less than 2 years |
|
|
0 |
% |
2 |
|
|
20 |
% |
3 |
|
|
50 |
% |
4 |
|
|
70 |
% |
5 |
|
|
85 |
% |
6 |
|
|
100 |
% |
19. INCOME TAXES
The federal income tax provision is determined on the basis of non-member income generated by
NCB, FSB and reserves set aside for dividends on Class C stock. All of NCB, FSBs income is
subject to state taxation, while only certain of the Companys subsidiaries are subject to federal
taxation. The income tax benefit for the twelve months ended December 31, 2009 was $2.1 million
and the provision for the twelve months ended December 31, 2008 was $0.5 million. NCB, FSBs
effective weighted average state tax rate was approximately 5.4% as of December 31, 2009 compared
to 5.0% as of December 31, 2008. The effective combined tax rate for both federal and state tax
was approximately 4.5% as of December 31, 2009 compared to 1.7% as of December 31, 2008 resulting
from the impact of business activities that do not qualify as patronage income under the Internal
Revenue Code as amended by the Act with respect to the Holding Company.
During the third quarter of 2009, the Company determined that it was no longer more likely
than not that it would utilize a portion of its net deferred tax asset; therefore, the Company
recorded a partial valuation allowance of $1.5 million attributable to its federal deferred tax
assets. During November 2009 legislation was enacted to extend the net operating loss carry back
period to five years for either 2008 or 2009 net operating losses. In year five, the net operating
loss carry back would be limited to 50 percent of the entitys taxable income and no limitations on
the first four years. As a result of this new legislation, the Company was able to carry back
prior years net operating losses and reverse the valuation allowance of $1.5 million previously
recorded during the third quarter of 2009.
86
The (benefit) provision for income taxes consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
63 |
|
|
$ |
54 |
|
|
$ |
(274 |
) |
State and local |
|
|
70 |
|
|
|
646 |
|
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
133 |
|
|
|
700 |
|
|
|
(409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,185 |
) |
|
|
46 |
|
|
|
(21 |
) |
State and local |
|
|
(1,067 |
) |
|
|
(191 |
) |
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(2,252 |
) |
|
|
(145 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
$ |
(2,119 |
) |
|
$ |
555 |
|
|
$ |
(664 |
) |
|
|
|
|
|
|
|
|
|
|
The (benefit) provision for income taxes differs from the amount of income tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the
following differences (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Statutory U.S. tax rate |
|
$ |
(16,417 |
) |
|
$ |
1,506 |
|
|
$ |
(386 |
) |
Patronage dividends |
|
|
15,278 |
|
|
|
(1,405 |
) |
|
|
365 |
|
State and local taxes |
|
|
(997 |
) |
|
|
454 |
|
|
|
(369 |
) |
Other |
|
|
17 |
|
|
|
|
|
|
|
(274 |
) |
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
$ |
(2,119 |
) |
|
$ |
555 |
|
|
$ |
(664 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets net of liabilities, included in other assets, are composed of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Allowance for loan losses |
|
$ |
1,634 |
|
|
$ |
1,021 |
|
2009 potential net operating carryback claim |
|
|
1,633 |
|
|
|
|
|
Deferred commitment fees |
|
|
291 |
|
|
|
311 |
|
Security valuations |
|
|
173 |
|
|
|
161 |
|
Other |
|
|
138 |
|
|
|
120 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
3,869 |
|
|
|
1,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock dividends |
|
|
(642 |
) |
|
|
(632 |
) |
Mortgage servicing rights |
|
|
(365 |
) |
|
|
(294 |
) |
Other |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities |
|
|
(1,035 |
) |
|
|
(926 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,834 |
|
|
$ |
687 |
|
|
|
|
|
|
|
|
Substantially all
of the deferred tax assets result from the activities of the Bank. Given the Banks historical
ability and projected future ability to generate earnings, it is more likely than not that the deferred tax asset will be
realized.
87
20. INCOME AVAILABLE FOR DIVIDENDS ON STOCK
Under existing senior debt agreements, the aggregate amount of cash dividends on Class C
stock, together with patronage dividends payable in cash, is limited to the sum of $15,000,000 plus
50% of the Companys consolidated adjusted net income accumulation (or minus 100% of the Companys
consolidated adjusted net income in the case of a deficit) from January 1, 1992 through the end of
the most current fiscal year ended. If the aggregate amount of cash dividends and patronage
dividends payable in cash exceeds the limitation previously described, total patronage dividends
payable in cash and cash dividends payable on any calendar year may not exceed 20% of the Companys
taxable income for such calendar year. As of December 31, 2009, the Company was limited by the
restrictions detailed above and thus is restricted from paying any cash dividends or any stock. In
addition, the OTS Order provides that the Holding Company pay no cash dividends or redeem or
repurchase any equity stock without prior approval of the OTS.
Notwithstanding the above restriction, the Company is prohibited by law from paying dividends
on its Class C stock at a rate greater than the statutory interest rate payable on the subordinated
Class A notes. Those rates for 2009, 2008, and 2007 are 3.81%, 4.36% and 5.32%, respectively.
Consequently, the amounts available for payment on the Class C stock for 2009, 2008, and 2007 are
$1.0 million, $1.1 million, and $1.3 million, respectively. In addition, under the Act and its
bylaws, the Company may not pay dividends on its Class B stock.
21. DERIVATIVE FINANCIAL INSTRUMENTS
The estimated fair values of the Companys derivative instruments are recorded gross as a
component of other assets and other liabilities on the consolidated balance sheet as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
Contract/Commitment |
|
|
Estimated Fair |
|
|
Balance Sheet |
|
|
Contract/Commitment |
|
|
Estimated Fair |
|
|
|
Location |
|
Amounts |
|
|
Value |
|
|
Location |
|
|
Amounts |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
Other assets |
|
$ |
9,669 |
|
|
$ |
137 |
|
|
Other liabilities |
|
$ |
377 |
|
|
$ |
(1 |
) |
Cooperative and Multifamily Loans |
|
Other assets |
|
|
31,450 |
|
|
|
480 |
|
|
Other liabilities |
|
|
8,300 |
|
|
|
(109 |
) |
Rate lock commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
Other assets |
|
|
6,843 |
|
|
|
88 |
|
|
Other liabilities |
|
|
2,198 |
|
|
|
(21 |
) |
Cooperative and Commercial Real Estate Loans |
|
Other assets |
|
|
21,050 |
|
|
|
714 |
|
|
Other liabilities |
|
|
16,950 |
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as
hedging instruments |
|
|
|
$ |
74,012 |
|
|
$ |
1,419 |
|
|
|
|
|
|
$ |
22,825 |
|
|
$ |
(285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
Contract/Commitment |
|
|
Estimated |
|
|
Balance Sheet |
|
|
Contract/Commitment |
|
|
Estimated |
|
|
|
Location |
|
Amounts |
|
|
Fair Value |
|
|
Location |
|
|
Amounts |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as fair value hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements related to debt |
|
Other assets |
|
$ |
40,000 |
|
|
$ |
1,447 |
|
|
Other liabilities |
|
$ |
|
|
|
$ |
|
|
Interest rate swap agreements related to loans and loan
commitments |
|
Other assets |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,146 |
|
|
|
(795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
|
|
|
40,000 |
|
|
|
1,447 |
|
|
|
|
|
|
|
3,146 |
|
|
|
(795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements related to loans and loan
commitments |
|
Other assets |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
296 |
|
|
|
(53 |
) |
Financial futures contracts |
|
Other assets |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
500 |
|
|
|
(10 |
) |
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
Other assets |
|
|
1,512 |
|
|
|
4 |
|
|
Other liabilities |
|
|
4,282 |
|
|
|
(21 |
) |
Cooperative and Multifamily Loans |
|
Other assets |
|
|
22,660 |
|
|
|
127 |
|
|
Other liabilities |
|
|
9,925 |
|
|
|
(85 |
) |
Rate lock commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
Other assets |
|
|
8,661 |
|
|
|
165 |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Cooperative and Commercial Real Estate Loans |
|
Other assets |
|
|
32,585 |
|
|
|
600 |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
|
|
65,418 |
|
|
|
896 |
|
|
|
|
|
|
|
15,003 |
|
|
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
105,418 |
|
|
$ |
2,343 |
|
|
|
|
|
|
$ |
18,149 |
|
|
$ |
(964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had no derivatives designated as fair value or cash flow
hedging instruments. Changes in the fair values of the Companys designated hedge relationships
(2009 and prior) and undesignated derivative instruments are recorded in earnings as a component of the gain on sale
of loans.
The fair value of the Companys rate lock commitments to borrowers includes, as
applicable:
|
|
|
the assumed gain/loss of the expected loan sale to the investor; |
|
|
|
the effects of interest rate movements between the date of rate lock and the
balance sheet date; and |
|
|
|
the value of the mortgage servicing rights associated with the loan. |
The fair value of the Companys forward sales contracts to investors solely considers effects
of interest rate movements between the trade date and the balance sheet date. The market price
changes are multiplied by the notional amount of the forward sales contracts to measure the fair
value.
89
The methodologies and inputs used to value all of the Companys derivative instruments are
discussed in Note 24. The effect of the changes in fair value of the Companys derivative
instruments included in the gain on sale of loans in the Statement of Operations is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
Assumed Gain |
|
|
Interest Rate |
|
|
Servicing |
|
|
Total Fair Value |
|
|
|
(Loss) From |
|
|
Movement |
|
|
Rights |
|
|
Adjustment |
|
|
|
Loan Sale |
|
|
Effect |
|
|
Value |
|
|
Gain/(Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts |
|
$ |
|
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
10 |
|
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
132 |
|
Cooperative and Multifamily Loans |
|
|
|
|
|
|
329 |
|
|
|
|
|
|
|
329 |
|
Rate lock commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
|
54 |
|
|
|
(118 |
) |
|
|
(13 |
) |
|
|
(77 |
) |
Cooperative and Commercial Real Estate Loans |
|
|
330 |
|
|
|
(397 |
) |
|
|
26 |
|
|
|
(41 |
) |
Interest rate swap agreements related to loans
and loan commitments |
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
323 |
|
Interest rate swap agreements |
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value measurement, December 31, 2009 |
|
$ |
384 |
|
|
$ |
162 |
|
|
$ |
13 |
|
|
$ |
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 |
|
|
|
Assumed Gain |
|
|
Interest Rate |
|
|
Servicing |
|
|
Total Fair Value |
|
|
|
(Loss) From |
|
|
Movement |
|
|
Rights |
|
|
Adjustment |
|
|
|
Loan Sale |
|
|
Effect |
|
|
Value |
|
|
Gain/(Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts |
|
$ |
|
|
|
$ |
(27 |
) |
|
$ |
|
|
|
$ |
(27 |
) |
Forward sales commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
106 |
|
Cooperative and Multifamily Loans |
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
Rate lock commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family Residential and Share Loans |
|
|
85 |
|
|
|
32 |
|
|
|
59 |
|
|
|
176 |
|
Cooperative and Commercial Real Estate Loans |
|
|
469 |
|
|
|
612 |
|
|
|
69 |
|
|
|
1,150 |
|
Interest rate swap agreements related to loans
and loan commitments |
|
|
|
|
|
|
2,040 |
|
|
|
|
|
|
|
2,040 |
|
Interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value measurement, December 31, 2008 |
|
$ |
554 |
|
|
$ |
2,883 |
|
|
$ |
128 |
|
|
$ |
3,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22. FAIR VALUE MEASUREMENTS
During 2009 and 2008, the Company elected to measure, at the time of origination, certain
Cooperative and Multifamily Residential Real Estate Loans that were held-for-sale at fair value.
Unrealized gains and losses for these identified loans were included in earnings. Of the $11.9
million and $4.6 million of Residential Real Estate Loans held-for-sale disclosed in Note 6, the
contractual principal amount of loans for which the Company has elected the fair value option
totaled $1.8 million and $0.5 million as of December 31, 2009 and 2008, respectively. The
difference in fair value of these loans compared to their principal balance was $23 thousand and
$20 thousand and was recorded in gain on sale of loans as of December 31, 2009 and 2008,
respectively.
90
U.S. GAAP establishes a fair value hierarchy for valuation inputs that give the highest
priority to quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The fair value hierarchy is as follows:
|
|
|
Level 1 Financial assets and liabilities whose values are based on unadjusted quoted
prices in active markets for identical assets or liabilities that the Company has the
ability to access. |
|
|
|
Level 2 Financial assets and liabilities whose values are based on inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. These might include quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or
inputs that are derived principally from or corroborated by market data by correlation or
other means. |
|
|
|
Level 3 Financial assets and liabilities whose values are based on inputs that are
both unobservable and significant to the overall valuation. |
A description of the valuation methodologies used for instruments measured at fair value, as
well as the general classification of such instruments pursuant to the valuation hierarchy, is set
forth below. These valuation methodologies were applied to all of the Companys financial assets
and financial liabilities carried at fair value:
|
|
|
Interest-only Certificated Receivables as of December 31, 2009, these instruments were
sold. As of December 31, 2008, the interest-only certificated receivables were reported at
fair value utilizing Level 3 inputs, as limited secondary market information was available
but utilized for the valuation of the Companys interest-only receivables. |
|
|
|
Interest-only Non-Certificated Receivables reported at fair value utilizing Level 3
inputs, as limited secondary market information is available for the valuation of the
Companys interest-only receivables. |
|
|
|
U.S. Treasury and Agency Obligations and Mutual Funds reported at fair value utilizing
Level 1 inputs from readily observable data in active secondary fixed income markets. |
|
|
|
Mortgage-Backed Securities reported at fair value utilizing Level 2 inputs. As quoted
market prices in actively traded markets are not available, fair values are estimated by
using pricing models and quoted prices of securities with similar characteristics. |
|
|
|
CMOs a component of Mortgage-Backed Securities that the Company holds, are not traded
in active markets and there is little secondary market data that can be used. Therefore
the determination of the fair value of the CMOs is considered Level 3. |
|
|
|
Equity Securities and Mutual Funds traded in active markets; therefore, the pricing
inputs are considered Level 1. |
|
|
|
Derivative Instruments because the Companys derivative contracts are not listed on an
exchange and, therefore quoted market prices are not available, the Companys derivative
positions are valued using models that use readily observable market parameters and are
classified within Level 2 of the valuation hierarchy. |
|
|
|
Loans Held-For-Sale the Companys loans held-for-sale, for which the fair value option
has been elected, are reported at fair value. The Company determines the fair value of the
loans-held-for sale using discounted cash flow models which incorporate quoted observable
prices from market participants. Therefore, the Company classifies these loans
held-for-sale as Level 2. |
91
The following table summarizes financial assets and financial liabilities measured at fair
value on a recurring basis segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
Unobservable |
|
|
Balance as of |
|
|
|
Markets for Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
December 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only non-certificated
receivables |
|
$ |
|
|
|
$ |
|
|
|
$ |
24,851 |
|
|
$ |
24,851 |
|
U.S. Treasury and agency obligations |
|
|
12,986 |
|
|
|
|
|
|
|
|
|
|
|
12,986 |
|
Mortgage-backed securities & CMOs |
|
|
|
|
|
|
13,066 |
|
|
|
3,723 |
|
|
|
16,789 |
|
Equity securities |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
Derivative instruments |
|
|
|
|
|
|
1,419 |
|
|
|
|
|
|
|
1,419 |
|
Loans held-for-sale |
|
|
|
|
|
|
1,773 |
|
|
|
|
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,017 |
|
|
$ |
16,258 |
|
|
$ |
28,574 |
|
|
$ |
57,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
|
|
|
$ |
285 |
|
|
$ |
|
|
|
$ |
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
285 |
|
|
$ |
|
|
|
$ |
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
Unobservable |
|
|
Balance as of |
|
|
|
Markets for Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
December 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only certificated receivables |
|
$ |
|
|
|
$ |
|
|
|
$ |
27,854 |
|
|
$ |
27,854 |
|
Interest-only non-certificated
receivables |
|
|
|
|
|
|
|
|
|
|
27,264 |
|
|
|
27,264 |
|
U.S. Treasury and agency obligations |
|
|
18,635 |
|
|
|
|
|
|
|
|
|
|
|
18,635 |
|
Mutual funds |
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
881 |
|
Mortgage-backed securities and CMOs |
|
|
|
|
|
|
16,759 |
|
|
|
3,938 |
|
|
|
20,697 |
|
Equity securities |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
Derivative instruments |
|
|
|
|
|
|
2,258 |
|
|
|
|
|
|
|
2,258 |
|
Loans held-for-sale |
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,547 |
|
|
$ |
19,561 |
|
|
$ |
59,056 |
|
|
$ |
98,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
|
|
|
$ |
879 |
|
|
$ |
|
|
|
$ |
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
879 |
|
|
$ |
|
|
|
$ |
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
The table below summarizes the changes in fair value for all financial assets measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended December 31, 2009 |
|
|
|
Interest-Only |
|
|
Interest-Only |
|
|
Collateralized |
|
|
|
certificated |
|
|
Non-certificated |
|
|
Mortgage |
|
|
|
Receivables |
|
|
Receivables |
|
|
Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
27,854 |
|
|
$ |
27,264 |
|
|
$ |
3,938 |
|
Total gains or (losses) (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (1) |
|
|
(2,143 |
) |
|
|
|
|
|
|
(1,491 |
) |
Included in other comprehensive income |
|
|
2,053 |
|
|
|
(383 |
) |
|
|
1,955 |
|
Purchases, issuances, settlements and fundings |
|
|
|
|
|
|
2,391 |
|
|
|
|
|
Write down of asset due to prepayment |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
Principal repayments |
|
|
|
|
|
|
|
|
|
|
(681 |
) |
Amortization |
|
|
(4,845 |
) |
|
|
(4,372 |
) |
|
|
2 |
|
Sales |
|
|
(22,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
|
|
|
$ |
24,851 |
|
|
$ |
3,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended December 31, 2008 |
|
|
|
Interest-Only |
|
|
Interest-Only |
|
|
Collateralized |
|
|
|
Certificated |
|
|
Non-certificated |
|
|
Mortgage |
|
|
|
Receivables |
|
|
Receivables |
|
|
Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
33,828 |
|
|
$ |
29,932 |
|
|
$ |
7,255 |
|
Total gains or (losses) (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (1) |
|
|
|
|
|
|
|
|
|
|
(1,692 |
) |
Included in other comprehensive income |
|
|
(342 |
) |
|
|
359 |
|
|
|
(1,215 |
) |
Purchases, issuances, settlements and fundings |
|
|
|
|
|
|
1,494 |
|
|
|
|
|
Write down of asset due to prepayment |
|
|
|
|
|
|
(28 |
) |
|
|
|
|
Amortization |
|
|
(5,632 |
) |
|
|
(4,493 |
) |
|
|
(410 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
27,854 |
|
|
$ |
27,264 |
|
|
$ |
3,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These losses included in earnings have been recognized as OTTI losses on the
Companys Consolidated Statements of Operations for the twelve months ending December
31, 2009 and 2008. All CMOs were still held by the Company as of December 31, 2009.
The Companys interest-only certificated receivables were sold during the fourth
quarter of 2009. |
Certain financial assets and financial liabilities are measured at fair value on a
nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example, when there is evidence
of impairment). The following is a description of the valuation methodologies used for instruments
measured at fair value on a non-recurring basis as of December 31, 2009 and December 31, 2008:
|
|
|
Loans Held-For-Sale
the Companys loans held-for-sale for which the fair value option
has not been elected, are reported at the lower of cost or fair value. The cost basis,
including adjustments due to derivative accounting, of these loans was $30.0 million and
$4.4 million as of December 31, 2009 and December 31, 2008, respectively. The Company
determines the fair value of the loans-held-for sale measured at the lower of cost or fair
value using discounted cash flow models. Discounted cash flow models which incorporate
readily observable market data or a quoted price for an identical
asset are classified as Level 2. |
93
|
|
|
Mortgage servicing rights (MSRs) the Companys MSRs do not trade in an active, open
market with readily observable prices. While sales of MSRs do occur, precise terms and
conditions vary with each transaction and are not readily available. Accordingly, the
Company provides data on the MSRs to a third party who estimates the fair value of MSRs
using discounted cash flow (DCF) models that calculate the present value of estimated
future net servicing income. The valuation inputs are largely unobservable, therefore, MSRs
are classified within Level 3 of the valuation hierarchy. |
|
|
|
Impaired Loans the Companys impaired loans are evaluated and valued at the time the
loan is identified as impaired, at the lower of cost or fair value. Fair value is measured
based on the value of the collateral securing these loans and is classified at Level 3.
Collateral may be real estate and/or business assets including equipment, inventory and/or
accounts receivable. |
The following tables summarize the fair value of instruments measured on a non-recurring
basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Markets for Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
Balance as of |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
December 31, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
|
|
|
$ |
29,494 |
|
|
$ |
|
|
|
$ |
29,494 |
(1) |
Mortgage servicing
rights |
|
|
|
|
|
|
|
|
|
|
7,059 |
|
|
|
7,059 |
(2) |
Impaired loans |
|
|
|
|
|
|
|
|
|
|
83,094 |
|
|
|
83,094 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
29,494 |
|
|
$ |
90,153 |
|
|
$ |
119,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Markets for Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
Balance as of |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
December 31, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,028 |
|
|
$ |
4,028 |
(1) |
Mortgage servicing
rights |
|
|
|
|
|
|
|
|
|
|
4,351 |
|
|
|
4,351 |
(2) |
Impaired loans |
|
|
|
|
|
|
|
|
|
|
6,414 |
|
|
|
6,414 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,793 |
|
|
$ |
14,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Only loans held-for-sale with fair values below cost and for which the fair value option has
not been elected, are included in the table above. |
|
(2) |
|
Mortgage servicing rights are accounted for at amortized cost and tested on a quarterly basis
for impairment. The impairment test is segmented into the risk tranches, which are stratified,
based upon the predominant risk characteristics of the loans. The table above only includes
the fair value of the strata of mortgage servicing rights that were impaired as of the balance
sheet date. None of these impairments were considered other-than-temporary at December 31,
2009 and December 31, 2008. |
|
(3) |
|
This amount represents the fair value of impaired loans for which a valuation allowance has
been recognized. |
Guidance about fair value of financial instruments requires disclosure of fair value
information about financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices are not available for
identical or comparable instruments, fair values are based on estimates using the present value of
estimated cash flows using a discount rate commensurate with the risks involved or other valuation
techniques. The resulting fair values are affected by the assumptions used, including the discount
rate and estimates as to the amounts and timing of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent markets and, accordingly,
the fair values may not represent actual values of the financial instruments that could have been
realized as of year-end or that will be realized in the future.
94
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for purposes of this disclosure as of December 31, 2009 and December 31, 2008:
Cash and cash equivalents The carrying amount approximates fair value.
Loans and lease financing The fair market value of adjustable rate loans is estimated by
discounting the future cash flows using the rates at which similar loans would be made to
borrowers with similar credit quality and the same stated maturities. The fair value of
fixed rate commercial and other loans and leases, excluding loans held-for-sale, is
estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit quality and for the same remaining
maturities. This method of estimating fair value does not incorporate the exit price
concept in a fair value measurement and is appropriate for this specific disclosure.
Deposit liabilities The fair value of demand deposits, savings accounts, and certain money
market deposits is determined using a discounted cash flow approach and considers the value
of the customer relationship. The fair value of fixed-maturity certificates of deposit is
estimated using a discounted cash flow calculation that applies interest rates currently
being offered on certificates of deposits of similar remaining maturities.
Borrowings The fair value of borrowings is estimated by discounting the future cash flows
using the current borrowing rates at which similar types of borrowing arrangements with the
same remaining maturities could be obtained by the Company. In determining the fair value
of the Companys borrowings, the Company considered its own credit worthiness and ability to
repay the outstanding obligations upon their contractual maturity.
The following table summarizes the carrying amount and fair value of the financial instruments
that the Company has not measured at fair value on a recurring basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
266,090 |
|
|
$ |
266,090 |
|
|
$ |
39,971 |
|
|
$ |
39,971 |
|
Held-to-maturity investment securities |
|
|
387 |
|
|
|
372 |
|
|
|
387 |
|
|
|
374 |
|
Loans held-for-sale |
|
|
35,730 |
|
|
|
35,846 |
|
|
|
14,278 |
|
|
|
14,396 |
|
Loans and lease financing, net |
|
|
1,657,221 |
|
|
|
1,618,271 |
|
|
|
1,930,124 |
|
|
|
1,973,435 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,253,954 |
|
|
|
1,279,749 |
|
|
|
1,300,071 |
|
|
|
1,320,529 |
|
Borrowings |
|
|
614,553 |
|
|
|
527,888 |
|
|
|
590,726 |
|
|
|
548,413 |
|
95
23. SEGMENT REPORTING
The Companys reportable segments are strategic business units that provide diverse products
and services within the financial services industry. The Company has five reportable segments:
Commercial Lending, Real Estate Lending, Warehouse Lending, Retail and Consumer Lending, and Other.
The Commercial Lending segment provides financial services to cooperative and member-owned
businesses. The Real Estate Lending segment originates and services multi-family cooperative real
estate and community association loans (included in Commercial Loans in Note 7) nationally, with a
concentration in New York City. The Warehouse Lending segment originates Residential and
Commercial Real Estate Loans for sale in the secondary market. The Retail and Consumer Lending
segment provides traditional banking services such as lending and deposit gathering to retail,
corporate and commercial customers. The Other segment consists of the Companys unallocated
administrative income and expense, and net interest income from investments and corporate debt
after allocations to segments. The Other segment assets consist mostly of unallocated cash and cash
equivalents, investment securities, Federal Home
Loan Bank stock, premises and equipment and equity investment securities. The Company
evaluates segment performance based on earnings before taxes. The accounting policies of the
segments are substantially the same as those described in the summary of significant accounting
policies.
The following is the Companys segment reporting (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real |
|
|
|
|
|
|
Retail and |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Estate |
|
|
Warehouse |
|
|
Consumer |
|
|
|
|
|
|
NCB |
|
December 31, 2009 |
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Other |
|
|
Consolidated |
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
32,318 |
|
|
$ |
47,253 |
|
|
$ |
6,249 |
|
|
$ |
27,486 |
|
|
$ |
1,529 |
|
|
$ |
114,835 |
|
Interest expense |
|
|
9,357 |
|
|
|
35,340 |
|
|
|
3,088 |
|
|
|
16,255 |
|
|
|
4,432 |
|
|
|
68,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
22,961 |
|
|
|
11,913 |
|
|
|
3,161 |
|
|
|
11,231 |
|
|
|
(2,903 |
) |
|
|
46,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
24,691 |
|
|
|
13,618 |
|
|
|
|
|
|
|
5,790 |
|
|
|
|
|
|
|
44,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
5,408 |
|
|
|
3,417 |
|
|
|
12,605 |
|
|
|
1,553 |
|
|
|
1,405 |
|
|
|
24,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expense |
|
|
5,368 |
|
|
|
3,558 |
|
|
|
3,970 |
|
|
|
2,036 |
|
|
|
25,411 |
|
|
|
40,343 |
|
Overhead and support |
|
|
11,628 |
|
|
|
7,837 |
|
|
|
8,845 |
|
|
|
4,756 |
|
|
|
|
|
|
|
33,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
16,996 |
|
|
|
11,395 |
|
|
|
12,815 |
|
|
|
6,792 |
|
|
|
25,411 |
|
|
|
73,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before taxes |
|
$ |
(13,318 |
) |
|
$ |
(9,683 |
) |
|
$ |
2,951 |
|
|
$ |
202 |
|
|
$ |
(26,909 |
) |
|
$ |
(46,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
543,716 |
|
|
$ |
852,191 |
|
|
$ |
87,117 |
|
|
$ |
505,762 |
|
|
$ |
196,122 |
|
|
$ |
2,184,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
509,910 |
|
|
$ |
748,637 |
|
|
$ |
60,865 |
|
|
$ |
425,467 |
|
|
$ |
348,658 |
|
|
$ |
2,093,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real |
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Estate |
|
|
Warehouse |
|
|
Consumer |
|
|
|
|
|
|
NCB |
|
December 31, 2008 |
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Other |
|
|
Consolidated |
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
36,103 |
|
|
$ |
46,122 |
|
|
$ |
7,883 |
|
|
$ |
30,077 |
|
|
$ |
3,516 |
|
|
$ |
123,701 |
|
Interest expense |
|
|
19,764 |
|
|
|
23,469 |
|
|
|
3,960 |
|
|
|
16,251 |
|
|
|
3,841 |
|
|
|
67,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
16,339 |
|
|
|
22,653 |
|
|
|
3,923 |
|
|
|
13,826 |
|
|
|
(325 |
) |
|
|
56,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
12,275 |
|
|
|
4,629 |
|
|
|
|
|
|
|
1,746 |
|
|
|
|
|
|
|
18,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
6,585 |
|
|
|
4,384 |
|
|
|
9,759 |
|
|
|
1,923 |
|
|
|
1,028 |
|
|
|
23,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expense |
|
|
4,398 |
|
|
|
3,135 |
|
|
|
5,442 |
|
|
|
2,194 |
|
|
|
21,443 |
|
|
|
36,612 |
|
Overhead and support |
|
|
6,022 |
|
|
|
4,436 |
|
|
|
7,736 |
|
|
|
3,453 |
|
|
|
|
|
|
|
21,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
expense |
|
|
10,420 |
|
|
|
7,571 |
|
|
|
13,178 |
|
|
|
5,647 |
|
|
|
21,443 |
|
|
|
58,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
taxes |
|
$ |
229 |
|
|
$ |
14,837 |
|
|
$ |
504 |
|
|
$ |
8,356 |
|
|
$ |
(20,740 |
) |
|
$ |
3,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
524,470 |
|
|
$ |
707,111 |
|
|
$ |
117,704 |
|
|
$ |
531,160 |
|
|
$ |
172,801 |
|
|
$ |
2,053,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
577,063 |
|
|
$ |
847,259 |
|
|
$ |
68,505 |
|
|
$ |
532,424 |
|
|
$ |
129,641 |
|
|
$ |
2,154,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real |
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Estate |
|
|
Warehouse |
|
|
Consumer |
|
|
|
|
|
|
NCB |
|
December 31, 2007 |
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Lending |
|
|
Other |
|
|
Consolidated |
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
40,378 |
|
|
$ |
36,496 |
|
|
$ |
23,690 |
|
|
$ |
29,579 |
|
|
$ |
5,596 |
|
|
$ |
135,739 |
|
Interest expense |
|
|
22,110 |
|
|
|
20,487 |
|
|
|
18,399 |
|
|
|
19,437 |
|
|
|
4,688 |
|
|
|
85,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,268 |
|
|
|
16,009 |
|
|
|
5,291 |
|
|
|
10,142 |
|
|
|
908 |
|
|
|
50,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for
loan losses |
|
|
(1,488 |
) |
|
|
936 |
|
|
|
|
|
|
|
704 |
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
4,331 |
|
|
|
4,478 |
|
|
|
(396 |
) |
|
|
1,110 |
|
|
|
2,446 |
|
|
|
11,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expense |
|
|
6,455 |
|
|
|
3,205 |
|
|
|
4,837 |
|
|
|
3,197 |
|
|
|
24,067 |
|
|
|
41,761 |
|
Overhead and support |
|
|
8,383 |
|
|
|
4,006 |
|
|
|
5,371 |
|
|
|
4,050 |
|
|
|
|
|
|
|
21,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
14,838 |
|
|
|
7,211 |
|
|
|
10,208 |
|
|
|
7,247 |
|
|
|
24,067 |
|
|
|
63,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
$ |
9,249 |
|
|
$ |
12,340 |
|
|
$ |
(5,313 |
) |
|
$ |
3,301 |
|
|
$ |
(20,713 |
) |
|
$ |
(1,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24. LOAN SALES
The net proceeds from the sale of loans were $640.9 million and generated a total of $6.2
million in retained interests for the year ended December 31, 2009. The net proceeds from the sale
of loans were $451.7 million and generated a total of $3.6 million in retained interests for the
year ended December 31, 2008.
The Company does not retain any interests on Consumer Loan sales, which generated net proceeds
of $180.2 million and $357.2 million for the years ended December 31, 2009 and 2008, respectively.
97
In total, the Company generated a gain on the sale of loans of $12.3 million for the year
ended December 31, 2009 compared with a gain of $6.0 million for the year ended December 31, 2008
and a loss of $1 thousand for the year ended December 31, 2007.
The unpaid principal balance of loans serviced for others are not included in the accompanying
consolidated balance sheets. Changes in portfolio of loans serviced for others are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
5,550,592 |
|
|
$ |
5,346,251 |
|
Additions |
|
|
618,608 |
|
|
|
449,412 |
|
Loan payments and payoffs |
|
|
(323,457 |
) |
|
|
(245,071 |
) |
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
5,845,743 |
|
|
$ |
5,550,592 |
|
|
|
|
|
|
|
|
MSRs are periodically tested for impairment. The impairment test is segmented into the risk
tranches, which are stratified, based upon the predominant risk characteristics of the loans such
as loan balance, interest rate, length of time outstanding, principal and interest terms and
amortization terms.
Activity related to MSRs (included in servicing fees) was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family |
|
|
Multifamily, Cooperative and |
|
|
|
|
|
|
Residential Loans |
|
|
Commercial Real Estate Loans |
|
|
Total |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
2,878 |
|
|
$ |
2,888 |
|
|
$ |
10,374 |
|
|
$ |
10,532 |
|
|
$ |
13,252 |
|
|
$ |
13,420 |
|
Additions |
|
|
2,273 |
|
|
|
1,065 |
|
|
|
1,519 |
|
|
|
983 |
|
|
|
3,792 |
|
|
|
2,048 |
|
Amortization |
|
|
(1,177 |
) |
|
|
(891 |
) |
|
|
(1,064 |
) |
|
|
(938 |
) |
|
|
(2,241 |
) |
|
|
(1,829 |
) |
Change in valuation
allowance |
|
|
184 |
|
|
|
(184 |
) |
|
|
(499 |
) |
|
|
(203 |
) |
|
|
(315 |
) |
|
|
(387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
4,158 |
|
|
$ |
2,878 |
|
|
$ |
10,330 |
|
|
$ |
10,374 |
|
|
$ |
14,488 |
|
|
$ |
13,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the valuation allowance for MSRs (included as a component of other assets) were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family |
|
|
Multifamily, Cooperative and |
|
|
|
|
|
|
Residential Loans |
|
|
Commercial Real Estate Loans |
|
|
Total |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
(184 |
) |
|
$ |
|
|
|
$ |
(442 |
) |
|
$ |
(239 |
) |
|
$ |
(626 |
) |
|
$ |
(239 |
) |
Additional
write-downs |
|
|
(259 |
) |
|
|
(184 |
) |
|
|
(613 |
) |
|
|
(532 |
) |
|
|
(872 |
) |
|
|
(716 |
) |
Recoveries |
|
|
443 |
|
|
|
|
|
|
|
114 |
|
|
|
329 |
|
|
|
557 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31 |
|
$ |
|
|
|
$ |
(184 |
) |
|
$ |
(941 |
) |
|
$ |
(442 |
) |
|
$ |
(941 |
) |
|
$ |
(626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
The Companys MSR valuation process combines the use of sophisticated discounted cash flow
models to arrive at an estimate of fair value at the time of the loan sale and each subsequent
balance sheet date. The key assumptions used in the valuation of MSRs are mortgage prepayment
speeds, the discount rate of residual cash flows and the earnings rate of principal and interest
float, escrows and replacement reserves. These variables can and generally will change from
quarter to quarter as market conditions and projected interest rates change. Multiple models are
required to reflect the nature of the MSR of the different types of loans that the Company
services.
Key economic assumptions used in determining the fair value of MSRs at the time of sale were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted-average life (in years): |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
5.3 |
|
|
|
3.8 |
|
|
|
5.6 |
|
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
4.2 |
|
|
|
7.2 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average annual prepayment speed: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
14.9 |
% |
|
|
26.9 |
% |
|
|
20.0 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
2.6 |
% |
|
|
6.6 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual cash flow discount rate (annual): |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
11.5 |
% |
|
|
10.3 |
% |
|
|
10.0 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
9.2 |
% |
|
|
9.0 |
% |
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings rate principal and interest float, escrows and
replacement reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
2.75 |
% |
|
|
4.05 |
% |
|
|
5.00 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
0.77 |
% |
|
|
3.43 |
% |
|
|
5.41 |
% |
99
Key economic assumptions used in measuring the period-end fair value of the Companys MSRs and
the effect on the fair value of those MSRs from adverse changes in those assumptions are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Fair value of mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
$ |
4,867 |
|
|
$ |
2,878 |
|
|
$ |
4,277 |
|
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
11,214 |
|
|
|
12,013 |
|
|
|
13,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life (in years): |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
4.2 |
|
|
|
2.5 |
|
|
|
5.3 |
|
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
6.2 |
|
|
|
6.8 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average annual prepayment speed: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
20.7 |
% |
|
|
33.5 |
% |
|
|
20.2 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
2.6 |
% |
|
|
2.6 |
% |
|
|
2.9 |
% |
Impact on fair value of 10% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
$ |
(312 |
) |
|
$ |
(245 |
) |
|
$ |
(180 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(61 |
) |
|
|
(81 |
) |
|
|
(69 |
) |
Impact on fair value of 20% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
(629 |
) |
|
|
(500 |
) |
|
|
(343 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(121 |
) |
|
|
(161 |
) |
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual cash flows discount rate (annual): |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
10.3 |
% |
|
|
10.5 |
% |
|
|
10.0 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
9.2 |
% |
|
|
9.0 |
% |
|
|
9.0 |
% |
Impact on fair value of 10% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
$ |
(149 |
) |
|
$ |
(66 |
) |
|
$ |
(117 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(336 |
) |
|
|
(384 |
) |
|
|
(486 |
) |
Impact on fair value of 20% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
(289 |
) |
|
|
(129 |
) |
|
|
(228 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(657 |
) |
|
|
(748 |
) |
|
|
(947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Rate of principal and interest float, escrow and
replacement: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
5.0 |
% |
Multifamily, Cooperative and Commercial Real Estate Loans |
|
|
2.8 |
% |
|
|
3.0 |
% |
|
|
4.6 |
% |
Impact on fair value of 10% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
$ |
(51 |
) |
|
$ |
(82 |
) |
|
$ |
(120 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(330 |
) |
|
|
(404 |
) |
|
|
(597 |
) |
Impact on fair value of 20% adverse change: |
|
|
|
|
|
|
|
|
|
|
|
|
Share and Single-family Residential Loans |
|
|
(102 |
) |
|
|
(164 |
) |
|
|
(240 |
) |
Multifamily, Cooperative and Commercial Real
Estate Loans |
|
|
(659 |
) |
|
|
(808 |
) |
|
|
(1,194 |
) |
100
For interest-only receivables, the Company estimates fair value both at initial recognition
and on an ongoing basis through the use of discounted cash flow models. The key assumptions used in
the valuation of the Companys interest-only receivables at the time of sale are the life and
discount rate of the estimated cash flows which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted-average life (in years) |
|
|
9.3 |
|
|
|
9.5 |
|
|
|
8.7 |
|
Weighted-average annual discount rate |
|
|
9.00 |
% |
|
|
18.08 |
% |
|
|
6.44 |
% |
The decrease in the discount rate from December 31, 2008 to December 31, 2009 is attributable
to a change in the market in which the interest-only receivables were valued, from the
securitization market to a commercial mortgage servicing market.
Key economic assumptions used in subsequently measuring the fair value of the Companys
interest-only receivables and the effect on the fair value of the interest-only receivables from
adverse changes in those assumptions are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Fair value |
|
$ |
24,851 |
|
|
$ |
55,118 |
|
Weighted-average life (in years) |
|
|
8.9 |
|
|
|
5.9 |
|
Weighted average annual discount rate |
|
|
9.00 |
% |
|
|
9.00 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(683 |
) |
|
$ |
(1,372 |
) |
Impact on fair value of 20% adverse change |
|
|
(1,335 |
) |
|
|
(2,688 |
) |
All of the sensitivities above are hypothetical and should be used with caution. The effect of
a variation in a particular assumption on the fair value of the retained interest is calculated
independently without changing any other assumption. In reality, changes in one factor may result
in changes in another factor, which might compound or counteract the sensitivities.
The following table summarizes the cash flows received from loan sale activity and retained
interests (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Net proceeds from auto loan sales |
|
$ |
180,202 |
|
|
$ |
357,179 |
|
Net proceeds from all other loan sales |
|
|
640,858 |
|
|
|
451,645 |
|
Servicing fees received |
|
|
6,547 |
|
|
|
6,781 |
|
Cash flows received on interest-only receivables |
|
|
13,309 |
|
|
|
13,992 |
|
25. PATRONAGE DIVIDENDS
Under the National Consumer Cooperative Bank Act, the Company must make annual patronage
dividends to its stock-holding patrons, which are those cooperatives from whose loans or other
business the Company derived interest or other income during the year with respect to which a
patronage dividend is declared. The Company allocates its patronage dividends among its patrons
generally in proportion to the amount of income derived during the year from each patron. The
Company stockholders, as such, are not automatically entitled to patronage dividends. They are
entitled to patronage dividends only in the years when they have patronized the Company, and thus
the amount of their patronage is not determined by the number of shares they hold. Under the
Companys current patronage dividend policy, patronage dividends may be paid only from taxable
income and only in the form of cash, Class B or Class C stock, or allocated surplus.
101
Under the Companys current patronage dividend policy, the Company makes the non-cash portion
of the patronage dividend in the form of Class B stock until a patron has holdings of Class B stock
of 12.5% of its loan amount; and thereafter, in Class C stock. The patronage dividend with respect
to 2008 did not have a cash component. The cash portion of each patronage refund, if any, will be
determined by the Companys Board of Directors based upon its determination of the capital
requirements of the Company and other factors, in its discretion.
The Company distributed $7.3 million of its 2008 retained earnings for patronage dividends in
the form of stock during the third quarter of 2009. In order to conserve capital, the Board of
Directors determined that the cash portion of that patronage dividend would be zero; therefore, no
cash was paid out in patronage dividends in 2009.
As of December 31, 2009, the Company has not allocated any of its 2009 retained earnings for
patronage dividends to be distributed during 2010.
26. LEGAL PROCEEDINGS
The Company is involved in various litigation arising from the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters will not have a material
adverse effect on the Companys consolidated financial position, results of operations, or
liquidity.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The Companys management, including its Chief Executive Officer and Chief Financial Officer,
evaluated the Companys disclosure controls and procedures as of December 31, 2009 pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures are
functioning effectively to provide reasonable assurance that the Company can meet its obligations
to disclose in a timely manner material information required to be included in the Companys
reports under the Exchange Act.
There has been no change in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
102
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of National Consumer Cooperative Bank and subsidiaries is responsible for
establishing and maintaining effective internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of, the Companys principal
executive and principal financial officers and effected by the Companys board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles (GAAP) and includes those policies and procedures
that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company; |
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on its financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections or evaluations of effectiveness regarding future periods are
subject to the risk that controls may become inadequate because of changes in conditions or that
the degree of compliance with policies or procedures may deteriorate.
The Companys management assessed the effectiveness of its internal control over financial
reporting as of December 31, 2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
ControlIntegrated Framework. Based on this assessment, management has concluded that the
Companys internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only
managements report in this annual report.
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard L. Reed
|
|
|
Charles E. Snyder
|
|
|
|
Richard L. Reed |
|
|
President and Chief Executive Officer
|
|
|
|
Chief Financial Officer |
|
|
103
ITEM 9B. OTHER INFORMATION
None.
104
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors and executive officers of the Company and the positions held by each are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Term as |
|
|
|
|
|
|
Year First |
|
Director of |
|
|
|
|
|
|
Elected or |
|
Holding |
|
|
|
|
Position |
|
Appointed |
|
Company |
|
Age |
Irma Cota |
|
Chairperson of the Board of Directors and Director |
|
2004 |
|
2010 |
|
56 |
Stuart M. Saft |
|
Vice Chairperson of the Board of Directors and Director |
|
2007 |
|
2010 |
|
62 |
Charles E. Snyder |
|
President and Chief Executive Officer |
|
1983 |
|
|
|
56 |
Roger B. Collins |
|
Director |
|
2005 |
|
2011 |
|
61 |
Peter A. Conrad |
|
Director |
|
2008 |
|
2011 |
|
60 |
Steven F. Cunningham |
|
Director |
|
2005 |
|
2011 |
|
68 |
Jane Garcia |
|
Director |
|
2009 |
|
2012 |
|
56 |
William F. Hampel |
|
Director |
|
2004 |
|
2010 |
|
58 |
Janis Herschkowitz * |
|
Director |
|
2007 |
|
2010 |
|
50 |
Alfred A. Plamann |
|
Director |
|
2008 |
|
2011 |
|
67 |
Kenneth Rivkin |
|
Director |
|
2009 |
|
2012 |
|
53 |
Robynn Shrader |
|
Director |
|
2009 |
|
2012 |
|
45 |
Walden Swanson |
|
Director |
|
2007 |
|
2010 |
|
60 |
Nguyen Van Hanh * |
|
Director |
|
2007 |
|
2010 |
|
72 |
Judy Ziewacz |
|
Director |
|
2009 |
|
2012 |
|
57 |
Steven A. Brookner |
|
Executive Managing Director, the Company; Chief Executive Officer, NCB, FSB |
|
1997 |
|
|
|
46 |
Patrick N. Connealy |
|
Managing Director, Chief Credit Officer, the Company |
|
1986 |
|
|
|
53 |
Frank Fasano |
|
Chief Information Officer |
|
1997 |
|
|
|
43 |
Mark W. Hiltz |
|
Managing Director, Chief Risk Officer |
|
1982 |
|
|
|
61 |
Kathleen M. Luzik |
|
Managing Director, the Company; Chief Operating Officer, NCB, FSB |
|
1991 |
|
|
|
46 |
James C. Oppenheimer |
|
General Counsel and Corporate Secretary |
|
2008 |
|
|
|
41 |
Richard L. Reed |
|
Executive Managing Director, Chief Financial Officer,
the Company; Chief Financial Officer, NCB Financial Corporation and NCB, FSB |
|
1985 |
|
|
|
51 |
|
|
|
* |
|
Presidentially appointed Directors who will serve until their successors are appointed and
confirmed. |
Irma Cota is President and CEO of North County Health Services, a Comprehensive Community
Health Center with 11 clinic sites and a staff of 527. She is a former President of California
Primary Care Association and past President of the San Diego Council of Community Clinics. Ms.
Cota holds a masters degree in public health from San Diego State University. Having over thirty
years of experience specializing in health/medical, Ms. Cota has extensive experience in working
with non-profit boards of directors. Ms. Cotas experience and skills acquired through that
experience provides the Board with a wealth of knowledge regarding health clinics, which are a
substantial customer base.
Stuart M. Saft is a Partner and Chairman of the real estate practice at Dewey & LeBoeuf.
Prior to that, Mr. Saft was a Partner and Chairman of the Real Estate division at Wolf Haldenstein
Adler Freeman & Herz LLP. Mr. Saft is also Chairman of the Council of New York Cooperatives and
Condominiums. Mr. Saft holds a Doctor of Jurisprudence from Columbia University Law School. Mr.
Saft provides the Board with the perspective of someone with a depth of Real Estate experience.
105
Charles E. Snyder was named President and Chief Executive Officer of the Company in January
1992. He had been Corporate Vice President and Chief Financial Officer of the Company from 1983 to
December 1991.
Roger Collins is Chairman and Chief Executive Officer of Harps Food Stores, Inc., a regional
grocery chain located in Arkansas, Oklahoma, and Missouri. He currently serves on the boards of
directors of Associated Wholesale Grocers and the National Grocers Association. Mr. Collins has a
B.A. in economics from Rice University and an MBA from the University of Texas at Austin. Mr.
Collins provides the Board with the experience of a leading executive in an important customer
segment.
Peter A. Conrad is President and Chief Executive Officer of the Cooperative Central Bank in
Boston, Massachusetts. Mr. Conrad has been a trustee of the Cooperative Banks Employees Retirement
Association (CBERA) and the Cooperative Banks Employees Benefit Association (CBEBA) since June,
2005. Mr. Conrad provides the Board with a wealth of banking experience.
Steven F. Cunningham is the owner of S.F. Cunningham Enterprises, LLC. Mr. Cunningham
previously served as President and Director of Elite Distributors Insurance Co., located in Grand
Cayman. Mr. Cunningham was also a director of Mutual Services Cooperative and chair of the
National Cooperative Business Associations Board of Directors. Mr. Cunningham has a bachelors
degree in accounting from Lehigh University, Bethlehem, Pennsylvania. Mr. Cunningham provides the
Board with experience of an executive of a large purchasing cooperative, an important customer
segment.
Jane Garcia is the Chief Executive Officer of La Clinica de La Raza, and has served in that
role since April 1983. As CEO of La Clinica de La Raza, she oversees long-range fiscal and program
planning and manages the day-to-day operations of a $62 million comprehensive health care operation
in California. She is a board member of Alta Bates Summit Medical Center and the California
Primary Care Association. Ms. Garcia holds a Bachelors degree from Yale University and a Master
of Public Health degree from the University of California, Berkeley. Ms. Garcias experience and
skills acquired through that experience provides the Board with a wealth of knowledge regarding
health clinics, which are a substantial customer base.
William F. Hampel is Senior Vice President for Research and Policy Analysis and Chief
Economist of Credit Union National Association located in Washington, D.C. Mr. Hampel holds a
Bachelor of Arts degree in Economics from University of Dallas and a PhD in Economics from Iowa
State University. Mr. Hampel was a member of the board of CUNA Credit Union from 1991 to 2004
serving as secretary, treasurer, vice president, and chair. Mr. Hampel is also a member of CUNAs
regulatory and legislative advocacy team. Mr. Hampel provides the Board with a long history of
banking and economic experience.
Janis Herschkowitz is President and Chief Executive Office of PRL, Inc, a group of
manufacturing companies located in Cornwall, Pennsylvania. Ms. Herschkowitz is also Chairperson of
the National Federation of Independent Business for the state of Pennsylvania. Ms. Herschkowitz
holds a Bachelor of Arts degree in International Relations from Penn State University and a Masters
in Business Administration in Finance from the University of Texas. Ms. Herschkowitz provides the
Board with the experience of a successful small business owner.
Alfred A. Plamann is President & Chief Executive Officer of Unified Grocers, Inc. located in
Los Angeles, California. Currently, he serves on the Economic Advisory Council of the
12th District of the Federal Reserve, as well as the Board of the Food Marketing
Institute and the National Cooperative Grocers Association. He is a Board member of the Los
Angeles Area Chamber of Commerce and the Town Hall of Los Angeles, a Board of Visitors member of
the George L. Graziadio School of Business & Management Pepperdine University and a member of the
Southern California Chapter of the National Association of Corporate Directors and Weingart Center
Association, a non-profit organization that provides assistance to the homeless in Los Angeles.
Mr. Plamann holds a B.S. in accounting and real estate from the University of Colorado and an
M.B.A. from the University of Pennsylvania (Wharton). Mr. Plamann provides the Board with the
experience of a leading executive in an important customer segment.
106
Kenneth A. Rivkin is the Managing Director of Hermes Financial Management. For more than
twenty-five years, Mr. Rivkin worked in commercial and investment banking at Credit Suisse, Bank of
America, and their predecessors. He is a member of a housing cooperative and a current board
director of 227 East 57th Street Corporation. Mr. Rivkin holds a Bachelors degree from
Brown University and a Masters degree from the Sloan School of Management at MIT. Mr. Rivkin
provides the Board with the experience of a commercial and investment banker plus cooperative
resident.
Robynn Shrader is the Chief Executive Officer of National Cooperative Grocers Association. In
this role, she oversees a national trade organization/purchasing co-op representing 111 independent
businesses in 32 states with over $1 billion in annual sales volume. A member of the New Pioneer
Cooperative Board of Directors, she holds a Bachelors degree from San Diego State University. Ms.
Shrader provides the Board with the experience of a leading executive in an important customer
segment.
Walden Swanson is a Founder and former Chief Executive Officer of CoopMetrics, the first
cooperative incorporated under the progressive Minnesota cooperative statutes. He serves now as
Director of Special Projects. Mr. Swanson has served on numerous cooperative boards, including NCB
Capital Impact, the National Cooperative Business Association, the Cooperative Development Fund,
and the Central Committee of the International Cooperative Alliance. He was inducted into the
Cooperative Hall of Fame in 2008. Mr. Swansons broad cooperative experience provides the Board
with a depth of knowledge on cooperative principals and issues.
Nguyen Van Hanh is an Affiliate Professor of George Mason University, specializing in
international economics and higher education reform. Prior to his appointment to the NCB Board,
Dr. Van Hanh served as Director of the U.S. Office of Refugee Resettlement during 2001-2006,
working on microfinance and economic self-sufficiency for low-income minorities. He holds a
Masters degree and a PhD in Economics from the University of California at Davis, having earlier
received a Bachelor of Science with high honors and a Masters of Science degree in Agricultural
Science both from the University of Florida. Dr. Van Hanh provides a low-income perspective to the
Board.
Judy Ziewacz is the Executive Director of the Office of Energy Independence of the State of
Wisconsin. In this role, she helps the state expand in new markets of green energy, clean
technology and new products. She was the Executive Director of the Cooperative Development
Foundation and was a member of the Board of Group Health Cooperative in Madison, WI. Ms. Ziewacz
holds a Bachelors degree from the University of Wisconsin. Ms. Ziewacz provides the Board with
extensive experience in both cooperative and new energy finance.
Steven A. Brookner is the Chief Executive Officer of NCB, FSB since November 2001 and
Executive Managing Director at the Company responsible for overseeing the real estate originations,
capital markets, servicing and investor reporting functions of the Company. From 1997 through
September 1998, he was a Managing Director responsible for strategic initiatives and new product
development. Previously, he was a partner of Hamilton Securities Group for one year and Co-founder
and Principal of BNC & Associates, a financial and management consulting firm, for five years.
Patrick N. Connealy is a Managing Director and Chief Credit Officer of the Company. Prior to
joining the Company in 1986, he worked as a supervisory officer with the Farm Credit Administration
in Washington, DC, and as assistant vice president and loan officer for the Farm Credit Bank of
Omaha.
Frank Fasano is the Chief Information Office of the Company. Prior to becoming CIO, he served
as Chief Technology Officer, Senior Vice President, and Vice President of IT Operations. Mr.
Fasano joined the Company in 1997 and is a graduate of Georgetown University.
Mark W. Hiltz is a Managing Director and Chief Risk Officer of the Company. He was a
Corporate Vice President and Manager of Special Assets from 1994 to 1998 and a Senior Vice
President of the Special Assets Department from 1986 to 1994. Previously he was Vice President of
Loan Administration from 1983 to 1986 and General Auditor from 1982 to 1983.
107
Kathleen M. Luzik is a Managing Director of the Company, and Chief Operating Officer of NCB,
FSB. Ms. Luzik joined the Company in 1991, and has held positions as a real estate underwriter and
lender, business development officer, vice president of secondary marketing, and managing director
of real estate loan servicing. In 1999, she was named managing director of the Companys Real
Estate Group where she was responsible for all operational activities of the Real Estate Group,
overseeing the National Real Estate and Master Servicing Teams. Prior to joining the Company, Ms.
Luzik was a financial analyst for the Patrician Financial Company.
James C. Oppenheimer is the General Counsel and Secretary of the Company. Prior to joining
the Company in 2008, he was a partner at Goodwin Procter LLP in Washington D.C. He graduated from
the University of Chicago Law School in 1997 with honors.
Richard L. Reed is Executive Managing Director and Chief Financial Officer of the Company. He
was named Senior Vice President and Chief Financial Officer in 1994. Prior to that, he was Vice
President and Treasurer from 1992 to 1994. He was Vice President, Treasury from 1989 to 1992.
Non-Incumbent Nominees for Directorships
L. Ray Moncrief
Kevin O Connor
Cynthia Richardson
Mark B. Shernicoff
Michael J. Mercer
Campbell C. Johnson III
L. Ray Moncrief is the Executive Vice President and Chief Operating Officer of Kentucky
Highlands Investment Corporation. As COO, he is responsible for participating in policy decisions
and investing activities of the company. Ray is also President and Chief Executive Officer of
Mountain Ventures, Inc., a SBIC, Fund Manager of the Southern Appalachian Fund, a New Markets
Venture Capital Fund and Meritus Ventures, LP, a RBIC. Ray also monitors and advises all debt and
equity products for these companies and is responsible for workouts and turnarounds for the
companies. Ray also leads the team to express a value of the companies investment portfolios.
Mr. Moncrief would provide the Board with cooperative and investment experience.
Kevin OConnor is Senior Vice President of Business Development for Kidz Bop, LLC/Razor & Tie,
LLC. Kevin is the company and brand ambassador for all business-to-business relations toy
companies, kids brands, media companies, video game publishers, book publishers, international
partners, musicians, artists and authors. Kevins duties include creating, pitching and initiating
operations for new ventures, including touring, licensing, teen music and preschool music labels,
TV channels, international extensions and sponsorships. Mr. OConnor would bring the Board small
business experience.
Cynthia Richardson is a Registered Occupational Therapist with Aging in America Morningside
House Nursing Home, Inc. Cynthia provides treatment for patients with various diagnoses. Ms.
Richardson would provide the Board with experience in health care, an important customer segment.
Mark B. Shernicoff was President of Zucker and Shernicoff, CPAs when he retired in 2007. His
duties included supervision of professional staff in the performance of audits of cooperative
housing corporations and residential condominium associations and their income tax returns,
operating and capital budgets and related issues. Mr. Shernicoff would bring the Board cooperative
and financial experience.
Micheal J. Mercer is President and Chief Executive Officer of Georgia Credit Union Affiliates.
In this capacity, he is responsible for the state trade association and several other state-level
credit union support organizations. Mr. Mercer has represented the interests of Georgia credit
unions in numerous ways for more than two decades. Mr. Mercer would bring to the Board banking
experience.
108
Campbell C. Johnson III is Chairman and Chief Executive Officer of Urban Housing Alliance.
His duties include assisting low and moderate-income persons and families, seniors and disabled
individuals in maintaining ownership of their homes and their quality of life. Campbell also helps
homeowners, cooperative associations and small landlords fight property assessment increases.
Campbell also helps tenants form and strengthen effective tenant associations to assess
organizational potential of cooperative structures to support decent housing and rent
stabilization. Mr. Campbell would bring to the Board housing experience.
Incumbent Nominees for Directorships
Walden Swanson
Stuart M. Saft
COMPOSITION OF BOARD OF DIRECTORS
The Act provides that the Board of Directors of the Company shall consist of 15 persons
serving three-year terms. An officer of the Company may not also serve as a director. The
President of the United States is authorized to appoint three directors with the advice and consent
of the Senate. Of the Presidential appointees, one must be selected from among proprietors of
small business concerns that are manufacturers or retailers; one must be selected from among the
officers of the agencies and departments of the United States; and one must be selected from among
persons having extensive experience representing low-income cooperatives eligible to borrow from
the Company. Janis Herschkowitz is the Presidential appointee from among proprietors of small
business concerns. Nguyen Van Hanh is the Presidential appointee from among persons representing
low-income cooperatives. The seat for the presidential appointee from among the officers of the
agencies and departments of the United States is currently vacant.
The holders of Class B and Class C stock elect the remaining 12 directors. Under the bylaws of
the Company, each stockholder-elected director must have at least three years experience as a
director or senior officer of the class of cooperatives that he or she represents. The five
classes of cooperatives are: (a) housing, (b) consumer goods, (c) low-income cooperatives, (d)
consumer services, and (e) all other eligible cooperatives. At all times each class must have at
least one, but not more than three, directors representing it on the Board.
No director may be elected to more than two consecutive full terms. After expiration of the
term of a director, he or she may continue to serve until a successor has been elected or has been
appointed and qualified.
COMMITTEES OF THE BOARD
The Board of Directors directs the management of the Company and establishes the policies of
the Company governing its funding, lending, and other business operations. In this regard, the
Board has established a number of committees, such as Audit/Risk Management, Mission Banking/Low
Income, Executive/Compensation, Corporate Governance and Strategic Planning Committees.
The Audit/Risk Management Committee assists the Board of Directors in fulfilling its statutory
and fiduciary responsibilities. It is responsible for overseeing all examinations and audits,
monitoring all accounting and financial reporting practices, determining that there are adequate
administrative and internal accounting controls and assuring that the Company, its subsidiaries and
affiliate are operating within prescribed policies and procedures and in conformance with the
applicable conflict of interest policies. The members of the committee are Roger B. Collins
(Chair), William F. Hampel, Kenneth A. Rivkin, Stuart M. Saft, and Peter Conrad. The Board of
Directors has determined that Roger B. Collins, is an audit committee financial expert and is
independent, as those terms are defined in applicable regulations of the Securities and Exchange
Commission (Item 407) under Regulation S-K).
The Mission Banking/Low Income Committee is responsible for evaluating the Companys best
efforts to achieve 35 percent of loans outstanding to low income cooperatives in accordance with
established policies and for recommending to management ways in which the Company can further
leverage its resources to have maximum impact on low income communities. The Committee is also
responsible for collaborating with NCB Capital Impact to establish a plan for the creation and
implementation of a development banking strategy that integrates and focuses
resources across the Company and NCB Capital Impact, resulting in a range of development
banking financial services that can be delivered to low income communities and other community
development financial institutions. The members of the committee are Steven F. Cunningham (Chair),
Alfred Plamann, Irma Cota, Nguyen Van Hanh, Walden Swanson, Jane Garcia and Robynn Shrader.
109
The Executive/Compensation Committee exercises all powers of the Board of Directors when
failure to act until the next regular meeting will adversely affect the best interests of the
Company, authorizes actions on fast moving issues when authority is granted by the entire Board,
reviews and approves loans in excess of management authority and loan policy exceptions, serves as
the appeal authority for loan turndowns, recommends nominees to the Board to fill unexpired terms
of previously elected board members and reviews and recommends the consolidated annual budget for
board approval. The members are Irma Cota (Chair), Stuart Saft, Steven Cunningham, Peter Conrad,
William Hampel and Roger B. Collins.
The Executive/Compensation Committee is also responsible for assuring that the senior
executives are compensated effectively in a manner consistent with the stated compensation strategy
of the Company. The Executive/Compensation Committee also communicates the compensation policies to
the members and the reasoning behind such policies, and recommends to the Board retainer and
meeting fees for the Board of Directors and Committees of the Board. They also review the
Companys compensation strategy for executive council and matters relating to management
succession. The Executive/Compensation Committee reviews the Companys employee benefit programs.
The Corporate Governance Committee, formerly called the Nominating Committee, annually
oversees the election for the Company directors. The committee periodically drafts election rules
on behalf of the Board of Directors and reviews modifications and election materials. The
Committee reviews the eligibility of nominees taking into consideration financial experience, size
of constituency, organization represented, leadership and ability. The members of the committee are
Peter Conrad (Chair), Irma Cota, Janis L. Herschkowitz, Judy Ziewacz, Kenneth A. Rivkin and Robynn
Shrader.
The Strategic Planning Committee monitors and reviews all the Company-related entities
planning activities delegated to them by the Board. The members of the committee are Irma Cota
(Chair) and the full Board of Directors.
CODE OF ETHICS
The Company has adopted a code of conduct and ethics that includes the Company Senior
Financial Officers Code of Ethics that applies to the Companys principal executive officer,
principal financial officer and principal accounting officer. A copy of the code is filed as an
exhibit to this annual report.
110
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview
The Companys executive compensation program is designed to attract, retain, motivate and
reward talented executives, including named executive officers (NEOs), who contribute to the
Companys growth and success. These objectives also guide the Company in establishing all of its
compensation programs. As a result, the executive compensation program for the Companys NEOs has
the same overall structure as the Companys other compensation programs.
Compensation Philosophy and Objectives
The Companys philosophy is that as employees, including its NEOs, progress to higher levels
at the Company, an increasing proportion of their pay should be linked to the Companys success.
In keeping with that philosophy, the Company bases compensation packages on a number of factors:
the level of job responsibility, individual performance, company performance and marketplace
considerations. The Companys executive compensation program rewards NEOs for sustained financial
and operating performance and leadership excellence. In this way, the programs serve as a
mechanism to build loyalty among the Companys executives, including the NEOs, align their
interests with the Companys Strategic Plan and encourage them to remain at the Company for long
and productive careers. As a result of recent regulatory enforcement actions placed on the
Company, the Company must seek regulatory approval prior to making changes to the compensation
agreements of its directors or most senior executive officers.
Implementing the Companys Philosophy and Objectives
The Board of Directors (the Board) has delegated the authority and responsibility to
establish and administer the Companys executive compensation to the Executive/Compensation
Committee (the Committee). The Committee determines the overall compensation goals, how to
implement them and who administers them, including delegating authority to the CEO and involving
management to help design performance incentive compensation.
Benchmarking
The Company strives to provide competitive overall compensation for its Chief Executive
Officer (CEO) and other NEOs and to achieve an appropriate mix between base salary, incentive
compensation and other benefits. To further these goals, the Company periodically engages
independent executive compensation consultants to review CEO and other NEO compensation packages.
Annually, the Committee reconsiders whether to retain an independent consultant or to rely on
previously provided information. The Committee and the CEO each use these reviews as a reference
to inform their judgment in setting total CEO and other NEO compensation, respectively, in line
with company objectives and in a manner that is competitive with comparable organizations in the
banking and financial services industry with assets of at least $2 billion and an employee
population under 500. To determine significant changes in individual CEO and NEO compensation, the
Company considers significant changes to a NEOs responsibility and significant changes in the
relevant market. To further its goal of fostering executive commitment and long-term service, the
Company seeks to compensate NEOs with total compensation packages within the 50th to
75th percentile range of the relevant market data.
As a result of the poor economic conditions substantially impacting the Companys financial
results, the Company has not been able to meet its goal to compensate its NEOs with total
compensation packages within the 50th to 75th percentile range of the
relevant market data.
111
Compensation Decisions
Under its delegated authority, the Committee determines and administers the CEOs compensation
package, which is approved by the Board. After reviewing market data and reports from the
independent consultants, the Committee meets with the CEO to discuss and determine his annual
compensation package and individual performance objectives for the year. For 2009, the CEOs
individual goals and performance objectives for the Company included (1) achieve budgeted net
income, (2) focus on external and internal customers, (3) maintain a strong risk management
culture, (4) improve operating efficiency, and (5) achieve mission related goals. The Committee
sets the CEOs overall compensation package and reports its decision to the Board. At the end of
the year, the Board conducts a performance evaluation of the CEO in light of the agreed upon
objectives, his contribution to the Company performance, and other leadership accomplishments. The
Committee takes the Boards evaluation into consideration when it determines the CEOs award under
the LTIP (as defined below), and the Committee recommends to the Board an award under the STIP (as
defined below) along with any other changes to the CEOs compensation.
The Committee delegates responsibility to the CEO to evaluate and determine compensation
packages for the other NEOs. The other NEOs, along with the other executives, each write a Max
Plan, which consists of individual goals and objectives linked to the wider the Company
performance goals. The executives, including the other NEOs, present them to the CEO for approval.
At the end of the year, the CEO carefully evaluates each of the other NEOs performance by
reference to individual Max Plans and assesses each individuals achievement of agreed upon
objectives, contribution to the Company performance and other leadership accomplishments. After
evaluation, the CEO determines any merit increases in base salary for the upcoming year and
incentive compensation awards for the executives, including the other NEOs. For both the CEO and
the other NEOs, past compensation is not a factor in determining incentive plan awards.
Components of 2009 Executive Compensation
The elements of the Companys executive compensation programs are:
|
|
|
short-term incentive compensation; |
|
|
|
long-term incentive compensation; |
|
|
|
core employee benefits; |
|
|
|
retirement benefits; and |
|
|
|
perquisites and other personal benefits. |
In 2009, the Company distributed compensation among base salary, cash incentive awards and
other benefits. For the CEO, these elements were paid approximately in the following percentages:
68% for base salary, 0% for incentive compensation and 32% for other benefits. For Mr. Brookner,
these elements were paid approximately in the following percentages: 74% for base salary, 0% for
incentive compensation and 26% for other benefits. The other NEOs were paid in the following
approximate percentages: 87% for base salary, 0% for incentive compensation and 13% for other
benefits.
Base Salary
The Company provides its employees, including its NEOs, a base salary for services performed
each year. To attract, retain and motivate its employees, the Company sets base salaries at
approximately the 50th percentile of the market, but they vary depending on the scope of
responsibilities, skill set, long-term performance and the period of time performing those
responsibilities. Typically, the Company reviews base salary levels annually as part of each
individuals performance review and also upon any change in job responsibilities.
The annual salary review for the CEO and other NEOs takes into account the following factors:
|
|
|
individual performance; |
|
|
|
market value of the NEOs responsibility and skill set; and |
|
|
|
contribution to the Company. |
112
After review, the Committee recommends merit increases for the CEO based on individual
performance and may recommend adjustments to base salary. The CEO, in turn, may implement merit
increases or other adjustments to the base salaries of other NEOs based on the individual
performance and other factors.
Performance-Based Incentive Compensation
The Company believes incentive compensation should represent a significant portion of
executive compensation to align the interests of the Company executives, including NEOs, with the
the Company Strategic Plan and reflect the fact that the performance of high-level executives
impacts the Companys success and growth. As a result, the Company has two non-equity cash
incentive plans for its NEOs: the Executive Management Short-Term Incentive Plan (the STIP) and
the Executive Long-Term Incentive Plan (the LTIP, collectively with the STIP, the Incentive
Plans). In furtherance of the Companys philosophy to reward financial operating success and to
encourage long-term commitment, the Incentive Plans compensate NEOs for performance success by
reference to specific company short-term and long-term performance goals, and to individual
achievements with respect to the STIP only.
Executive Management Short-Term Incentive Plan
The STIP is an annual cash incentive program for certain Company executives, including the
NEOs. Each year, the Committee reviews the plan objectives, specific performance goals established
for each objective, weights assigned to each of them and potential awards under the STIP.
Thereafter, the Committee recommends the plan to the Board for any action and approval. Consistent
with the Companys overall compensation philosophy, the objectives in the STIP parallel those of
the performance plans for teams and individuals throughout the Company, including the NEOs.
Performance under the plan is reviewed by management quarterly and communicated to STIP
participants to motivate them to achieve the performance goals.
STIP for 2009
As a result of recent economic conditions that have severely impacted the Companys financial
performance, the Companys critical performance areas for its 2009 STIP were not met. Those
critical performance areas included (1) Earnings, (2) Asset Quality, (3) Liquidity, (4) Capital
Maintenance, (5) Regulatory Compliance, and (6) Compliance with loan agreement covenants.. It is
within the discretion of the Committee for the CEO and within the discretion of the CEO for the
other executives, including the NEOs to determine the actual amount of an award (if any) under the
STIP. For 2009 the Committee and the CEO exercised that discretion due to the Companys overall
financial performance and incentive targets not being met and made no awards to the CEO or other
NEOs under the 2009 STIP.
STIP for 2010
In light of the current economic conditions continuing to affect the Companys financial
performance, a 2010 STIP had not been approved by the Board as of the date of this filing. The
Company may still approve a 2010 STIP at a later date and any awards payable under the 2010 STIP
will be made in 2011.
Executive Management Long-Term Incentive Plan
In 1999, in furtherance of motivating and retaining executives for the long-term, the Company
established the LTIP to provide long-term incentive awards for the Companys executives, including
NEOs, consistent with the Companys long-term strategic plan. The LTIP sets forth company-wide
performance goals for a three year period and establishes award levels proportionally to the stated
performance goals.
In 1999, the Board delegated to the Committee the authority and responsibility to administer
the LTIP and approve the participants, the measurement period, potential awards and the performance
goals. Pursuant to that authority, the Committee reviews and approves LTIP awards (if any) for the
CEO based on approved performance goals specified in the plan. In addition, the Committee
delegated its authority to the CEO to administer the LTIP with respect to the other executives,
including the other NEOs. Pursuant to that authority, the CEO determines the
other executives awards, including the NEO awards, by reference to approved performance goals
specified in the plan.
113
Each LTIP has a three year performance period and executives, including NEOs, receive awards,
if earned, based on achievement of the Company strategic long-term performance goals but only at
the end of the entire period. Awards vest at the end of the three year period and are based on a
percentage of a NEOs Aggregate Base Salary, which is the sum of the NEOs base salary in years
one and two of the applicable plan period. Awards, if earned, are payable more frequently than
every three years; they are payable every other year because a new LTIP period commences at the
beginning of the third year of the immediately preceding three year LTIP period. This structure
encourages long-term commitment because executives, including NEOs, only receive long-term
incentive compensation, if at all, every other year based on the Companys previous three years of
performance.
If employment terminates before an award vests due to cause or involuntary termination, then
it is forfeited. In the event of death, disability or retirement before the end of a LTIP three
year period, the NEO or the NEOs beneficiary is entitled to a prorated award (if any) based upon
the number of months that the NEO was employed during the plan period. If a change in control
occurs, awards vest at the target performance level as of the date of the change in control, unless
the Companys actual performance exceeds the target level on such date, in which case, any awards
vest at the superior performance level.
In January 2007, the Committee approved the 2007 to 2009 LTIP for the period of January 1,
2007 through December 31, 2009. The Committee used the 2007 to 2009 Strategic Plan to set the
performance goals. The threshold and target percentages of Aggregate Base Salary were set at the
same level as under the previous two LTIP periods, but increased the maximum percent of Aggregate
Base Salary from 81.25% to 87.5% for the CEO and from 56.25% to 62.5% for the other executives,
including the NEOs. These maximum thresholds are computed by multiplying the maximum percentage
available (70% for the CEO and 50% for the other NEOs) by 25% (the increase for a low income market
development adjustment) and adding those two figures for the maximum percentage. The Committee
designated (1) financial strength; (2) value to customers; and (3) deposit growth as the overall
categories of performance goals. The category of value to customers was the only one met for the
2007 to 2009 LTIP as shown in the table below:
|
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Performance Goal Met for |
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|
|
Threshold Goal |
|
|
01/01/07 12/31/09 LTIP |
|
Weight |
|
Achieved |
|
Awards |
Value to Customers:
Total commitments
and financial
transactions
arranged for
customers including
loans, leases,
letters of credit,
private placements
and deals closed by
referral sources
|
|
|
25 |
% |
|
$5.5 billion 2007
through 2009
|
|
CEO: 5% of Base Salary
NEOs: 3.75% of Base Salary |
No awards have been paid for the 2007 to 2009 LTIP as of the date of this filing because the
Committee had not certified performance and approved the cash awards.
In 2008, the Committee certified performance and approved cash awards for the 2005 to 2007
LTIP at 31.9% of Aggregate Base Salary for the CEO and 22.2% of Aggregate Base Salary for the other
NEOs for the 2005 to 2007 LTIP. As a result, the Summary Compensation Table includes the awards
earned under the 2005 to 2007 LTIP in the 2007 Non-Equity Incentive Plan Compensation column.
As of the date of filing the Compensation Committee had not approved a LTIP for the period
2009 to 2011. The Committee determined, given the severe economic conditions within the U.S, that
it needed more time to establish a plan for this three year period to ensure that it would both
meet the strategic objectives of the Company and be a suitable incentive to the Companys
executives, including its NEOs.
114
Benefits
Core Employee Benefits
The Company offers core employee benefits to all of its employees, including its NEOs, to meet
their needs in the event of illness or injury and to enhance productivity and job satisfaction with
programs that focus on work/life balance. The Company provides life insurance coverage and
accidental death and dismemberment insurance at three times annual salary up to a maximum of
$1,000,000 for the CEO and $750,000 for the other NEOs. The Company also provides travel accident
insurance, workers compensation and retirement insurance.
Through its consumer banking program, the Company provides all of its employees, including its
NEOs, and directors the opportunity to earn an extra one percent interest on deposits, reduced fees
on a variety of checking and savings accounts, a one percent lower interest rate than otherwise
available for consumer loans and a one percent rebate up to $10,000 annually on mortgage loans.
In keeping with the Companys goal of rewarding long-term commitment, the Company honors
employees, including its NEOs, with cash service awards for every five years of service beginning
on an employees fifth anniversary in varying amounts depending on the length of service.
Retirement Benefits
To facilitate employee retention, the Company provides employees, including NEOs,
opportunities to save for retirement under the Company Retirement and 401(k) Plan. Employees who
participate select from a variety of options to invest their retirement savings. The Company
balances the savings and retirement plans effectiveness as a compensation and retention tool with
their cost.
Employees, including NEOs, may make pre-tax contributions qualified under section 401(k) of
the Internal Revenue Code (IRC). Each eligible employee, including the NEOs, may elect to
contribute up to 60% of base salary or $16,500 (the limit prescribed by the IRC) for 2009. The
Company matches employee contributions up to 6% of base salary. With continuous service, the
Companys matching contributions vest incrementally after two years and fully vest after six years.
For 2009, the Company also made non-elective retirement contributions under the Companys plan
for all of its employees, including the NEOs, beginning one year after their employment with the
Company. The Company contributed approximately 6% of each eligible employees base salary up to
$245,000, as limited by IRC. For 2010, the Company has modified this plan to a discretionary
profit sharing plan. Thus, it is now at the Companys discretion as to the level of employer
contribution. This modification gives the Company more flexibility in its employer contribution in
both up and down financial market cycles. Like the Companys 401(k) matching contributions,
retirement account contributions vest incrementally after two years and fully vest after six years
with continuous service.
The two plans are combined and maintained in one account. The Companys Retirement and 401(k)
Plan is a tax-qualified defined contribution plan. the Company does not have any tax-qualified
defined benefit pension plans.
Deferred Compensation
NEOs Deferred Compensation Plan
The Company has also implemented an unfunded Deferred Compensation Plan to motivate and retain
executives, including the NEOs, and directors by providing them with additional flexibility in
structuring the timing of their compensation payments. The Company provides this benefit to allow
NEOs to save for retirement in a tax-efficient manner at minimal cost to the Company. Because
other similarly situated financial institutions provide deferred compensation plans, the Company
believes that its Deferred Compensation Plan is an important recruitment and retention tool.
115
Under the Deferred Compensation Plan, NEOs may defer receipt of base salary and cash incentive
compensation payments. Any amount deferred is credited with interest at a rate equal to the
average yield on actively traded U.S. Treasury issues, adjusted to a constant maturity of one year
plus one percent. The reported interest rate is determined in December of the prior year. In 2009
and 2008 the interest rate credited to these accounts was not above market; accordingly, earnings
on deferred amounts under the Deferred Compensation Plan do not appear in the Summary Compensation
Table. The interest rate credited to these accounts under the Deferred Compensation Plan in 2007
was above market; accordingly, earnings on deferred amounts that were above market appear in
the summary compensation table. The Company pays compensation benefits deferred under the plan on
July 1 or December 31 following a NEOs retirement, disability or termination. Accumulated amounts
under the Deferred Compensation Plan and the NEOs deferred compensation agreement are shown in the
Nonqualified Deferred Compensation Table and are discussed in further detail under the heading
Nonqualified Deferred Compensation. As shown in the Nonqualified Deferred Compensation Table,
none of the NEOs deferred any compensation during 2009.
CEOs Deferred Compensation Plan
The Company also entered into a deferred compensation agreement with the Companys CEO, on
November 4, 1994. The CEOs deferred compensation agreement is also an incentive for him to
continue serving as the Companys President. Under his deferred compensation agreement, the CEO
may elect to defer an amount or percentage of his compensation. Interest is credited to the
account on the last day of each quarter in an amount equal to 100 basis points above the yield on a
five-year U.S. Treasury Note with a maturity date on or nearest to the date of such quarterly
credit. Like the accounts under the Companys Deferred Compensation Plan, the CEOs account is
unfunded. The interest rate credited under the CEOs deferred compensation agreement in 2009, 2008
or 2007 was not above market; accordingly, those earnings do not appear on the summary
compensation table.
The Company does not pay compensation benefits deferred under the CEOs compensation agreement
earlier than three months after the date of the CEOs retirement or other termination of
employment. Accumulated amounts under the Deferred Compensation Plan and the CEOs deferred
compensation agreement are shown in the Nonqualified Deferred Compensation Table and are discussed
in further detail under the heading Nonqualified Deferred Compensation. As shown in the
Nonqualified Deferred Compensation Table, the CEO did not defer any compensation during 2009.
Perquisites and Other Personal Benefits
The Company provides its executives, including its NEOs, with perquisites and other personal
benefits that are reasonable and consistent with its overall compensation program to better enable
the Company to attract and retain superior employees for key positions. These benefits are
reflected in the Summary Compensation Table in the All Other Compensation column. These benefits
include monetary service awards, discretionary spot awards for individual achievement, premiums
paid on life insurance policies, in some instances payments to defray income tax incurred with
respect to those life insurance premiums, and a car allowance for the CEO. The Committee annually
reviews the level of perquisites and other personal benefits provided to its executives to ensure
that they are consistent with the Companys compensation philosophy and objectives.
Salary Continuation Program
The Company has a salary continuation program to assist eligible employees in transitioning to
other employment. Employees, including NEOs, are eligible for the program with the approval of the
applicable division head and the Managing Director of Human Resources. This program is an
efficient and cost-saving way to provide extended protection and financial reassurance to the
Company employees, including NEOs, and thereby facilitates the Companys retention and productivity
goals. It is competitive with the programs offered by comparable organizations.
116
To participate in the program employees must have at least 90 days of service at the Company.
The amount of salary continuation available under the program increases with the length of service
at the Company up to a maximum of one year of service and is contingent on the employee executing a
release. Eligible employees, including the NEOs, also may continue to receive medical insurance
benefits and will receive payment for vacation accrued as of the date of termination. Salary
continuation benefits cease in certain circumstances, including when the person dies, or continues
employment with the Company or an acquiring entity in a non-comparable position. Other than the
salary continuation program available to the Company employees generally, the Company does not have
severance agreements with its NEOs, other than the CEO.
The Company has a severance agreement with the CEO to provide reasonable and conservatively
competitive payments and benefits if terminates him without cause. Termination for cause includes
but is not limited to the CEOs failure to perform substantial duties, gross negligence, bad faith
or willful misconduct.
The CEOs severance agreement also provides benefits in the event of the CEOs voluntary
termination without good cause on nine months prior written notice. In exchange for the Companys
agreement to pay severance under this agreement, the CEO must comply with non-competition and
confidentiality provisions and provide limited consulting services to the Company for three years
up to a maximum of 15 days per year on matters to which he devotes significant time while at the
Company.
The CEOs severance agreement was amended in 2008. Among other changes, the agreement
extended the CEOs severance from 18 to 24 months in certain circumstances. Also, as a result of
recent regulatory enforcement actions placed on the Company, the Company may not make severance
payments except permitted under its general severance policy.
For a more detailed description of these post-employment benefits, see the discussion under
Potential Payments upon Termination or Change in Control.
THE COMPENSATION COMMITTEE REPORT
The Executive/Compensation Committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and,
based on such review and discussion, the Executive/Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in the Companys annual report on Form
10-K.
Irma Cota, Chair
Stuart M. Saft
Roger B. Collins
Steven F. Cunningham
Peter A. Conrad
William F. Hampel
117
COMPENSATION OF THE OFFICERS
The Summary Compensation Table below summarizes the total compensation earned by each of the
Companys NEOs for the years ended December 31, 2009, 2008 and 2007.
SUMMARY COMPENSATION TABLE
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Change in Pension |
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Value and |
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Nonqualified |
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Non-Equity |
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Deferred |
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All Other |
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Incentive Plan |
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Compensation |
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Compensation |
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Name and Principal Position |
|
Year |
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Salary |
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|
Compensation (1) |
|
|
Earnings (2) |
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|
(3) |
|
|
Total |
|
Charles E. Snyder, |
|
|
2009 |
|
|
$ |
539,040 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
356,806 |
|
|
$ |
895,846 |
|
President & Chief Executive Officer |
|
|
2008 |
|
|
$ |
524,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
245,363 |
|
|
$ |
770,136 |
|
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|
2007 |
|
|
$ |
523,412 |
|
|
$ |
307,567 |
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|
$ |
|
|
|
$ |
249,855 |
|
|
$ |
1,080,834 |
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Richard L. Reed |
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2009 |
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$ |
310,739 |
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$ |
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$ |
|
|
|
$ |
46,586 |
|
|
$ |
357,325 |
|
Executive
Managing Director & Chief Financial Officer |
|
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2008 |
|
|
$ |
303,160 |
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|
$ |
|
|
|
$ |
|
|
|
$ |
44,009 |
|
|
$ |
347,169 |
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|
|
|
2007 |
|
|
$ |
302,188 |
|
|
$ |
124,582 |
|
|
$ |
|
|
|
$ |
42,796 |
|
|
$ |
469,566 |
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Steven A. Brookner |
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2009 |
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$ |
403,997 |
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$ |
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$ |
|
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$ |
144,586 |
|
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$ |
548,583 |
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Executive Managing Director of the Company & |
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2008 |
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$ |
395,902 |
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$ |
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$ |
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$ |
142,009 |
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$ |
537,911 |
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Chief Executive Officer of NCB, FSB |
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2007 |
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$ |
389,736 |
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$ |
146,546 |
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$ |
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$ |
141,304 |
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$ |
677,586 |
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Kathleen M. Luzik |
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2009 |
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$ |
299,118 |
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$ |
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$ |
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$ |
46,586 |
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|
$ |
345,704 |
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Managing Director of the Company and |
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2008 |
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$ |
292,118 |
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$ |
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$ |
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$ |
44,009 |
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$ |
336,127 |
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Chief Operating Officer of NCB, FSB |
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2007 |
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$ |
289,510 |
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$ |
110,536 |
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|
$ |
216 |
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$ |
42,776 |
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$ |
443,038 |
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James C. Oppenheimer |
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2009 |
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$ |
281,875 |
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$ |
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$ |
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$ |
37,524 |
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$ |
319,399 |
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General Counsel and Corporate Secretary |
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2008 |
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$ |
275,000 |
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$ |
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$ |
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$ |
11,033 |
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$ |
286,033 |
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2007 |
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$ |
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$ |
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$ |
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$ |
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$ |
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(1) |
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It is within the discretion of the Committee for the CEO and within the discretion
of the CEO for the other executives, including the NEOs to determine the actual amount of an
award (if any) under the STIP. As a result of the continued negative impact of the economy on
the Companys financial results, Committee and the CEO exercised its discretion and made no
awards under the 2009 STIP. For the same reasons, there were no amounts paid under the 2007
to 2009 LTIP. |
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|
The 2008 STIP specified three objectives, all of which were required to be achieved before
any payment would be made. Because one of the objectives, Grow Core Profitablity was not
achieved, no payment under the 2008 STIP was made to either the CEO or other NEOs. |
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|
For the 2007 to 2009 LTIP, the Committee certified performance and approved cash awards for
plan performance at 31.9% of Aggregate Base Salary for the CEO and 22.2% of Aggregate Base
Salary for the other NEOs. As a result, the Summary Compensation Table includes the award
amounts earned in 2007 for the CEO and each NEO under the 2005 to 2007 LTIP. |
118
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For 2007, the Non-Equity Incentive Plan Compensation column reflects cash awards to the NEOs
for performance in 2007 under the STIP. The 2007 STIP specified a maximum amount that may
be awarded to the CEO and the other NEOs for a given balanced score achieved for 2007 under
the 2007 STIP. The Company achieved a balanced score of 80 points under the 2007 STIP
scorecard. Accordingly, the Companys score of 80 points under the plan was enough for an
award of up to 40% of Adjusted Base Salary and up to 30% of Adjusted Base Salary for the CEO
and the other executives, including NEOs, respectively. However, it is within the
discretion of the Committee for the CEO and within the discretion of the CEO for the other
executives, including the NEOs to determine the actual amount of an award (if any) under the
STIP. For 2007 the Committee and the CEO exercised that discretion due to the Companys
overall financial performance and made no awards under the 2007 STIP. |
|
(2) |
|
This amount is the above market interest earned on deferred compensation for 2007.
The effective interest rate for 2007 was 6.1%, which was 0.33% above the applicable market.
In 2009 and 2008 the interest earned on deferred compensation was not above market. |
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(3) |
|
For each NEO, the amount shown in the All Other Compensation column is comprised
of the following for 2009: |
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The Companys contribution of $5,638 for Mr. Oppenheimer and $14,700 to the retirement
contribution accounts of each of the other NEOs, which is further explained in the
Compensation, Discussion and Analysis under the heading Retirement Benefits. |
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The Companys matching contribution of $14,700 to the 401(k) contribution accounts of each
NEO, which is further explained in the Compensation, Discussion and Analysis under the
heading Retirement Benefits. |
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The Companys insurance premium payments in the amount of $1,920 for the CEO and $1,440 for
all other NEOs. |
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The Companys health insurance premium payments in the amount of $15,170 for all NEOs. |
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The Companys long-term disability insurance premiums in the amount of $10,066 for the CEO
and $576 for all other NEOs. |
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The All Other Compensation column for Mr. Snyder and Mr. Brookner includes $183,900 and
$98,000, respectively, to pay life insurance policy premiums and to defray income tax
incurred with respect to those life insurance premiums. Mr. Snyders compensation also
includes a $106,600 tax liability make whole (see the Narrative to the Deferred Compensation
Table for more detail) and a $9,750 car allowance. |
Narrative to the Summary Compensation Table
For 2009, 2008 and 2007, each of the NEOs received one or more forms of cash compensation in
base salary, non-equity incentive compensation, retirement and savings plans contributions, and
some other personal benefits as described in the footnotes (2) and (3) to the Summary Compensation
Table. In addition, the Companys NEOs participate in the Companys core benefits programs as
described in the Compensation Discussion and Analysis under the heading Benefits. The Companys
NEOs did not receive any payments during 2009, 2008 and 2007 that would be characterized as
Bonus, Stock Awards or Option Awards, and as a result, the Company has not included those
columns in its Summary Compensation Table.
The Company has no written employment agreements with its NEOs, except the CEO. The Company
has an agreement with its CEO, pursuant to which the Company agrees to continue to employ him and
the CEO agrees to devote his time, attention, skills and efforts to the performance of his duties.
If the Company terminates him without cause or if he resigns, in some circumstances, the agreement
provides for post-employment benefits. The
CEOs post-employment benefits are described more fully under the heading Post-Employment
Benefits in the Compensation Discussion and Analysis and under the heading Potential Payments on
Termination of Employment or Change in Control.
119
The following table sets forth the range of potential awards available under the Companys
2009 STIP, described in the Compensation Discussion and Analysis, under the heading
Performance-Based Incentive Compensation. The amounts in the table above are calculated based on
the NEOs salaries at December 31, 2009, which differ from the NEOs total 2009 salary reflected in
the Summary Compensation Table. The STIP provides performance based cash awards. The Company has
no equity incentive plans. The fact that no payments were actually awarded under this plan is
reflected in the Summary Compensation Table.
Grants of Plan-Based Awards 2009
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Estimated Future Payouts Under Non- |
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Equity Incentive Plan Awards |
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Grant |
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Action |
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Threshold |
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Target |
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Maximum |
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Name |
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Date (1) |
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Date (2) |
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Plan (3) |
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Amount |
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Amount |
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|
Amount |
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Charles E. Snyder |
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01/01/09 |
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|
02/01/09 |
|
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STIP |
(4) |
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$ |
0 to $134,760 |
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|
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$ |
242,568 |
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Richard L. Reed |
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01/01/09 |
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02/01/09 |
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|
STIP |
(4) |
|
$0 to $62,148 |
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|
|
$ |
108,759 |
|
Steven A. Brookner |
|
|
01/01/09 |
|
|
|
02/01/09 |
|
|
|
STIP |
(4) |
|
$0 to $80,799 |
|
|
|
|
|
$ |
141,399 |
|
Kathleen M. Luzik |
|
|
01/01/09 |
|
|
|
02/01/09 |
|
|
|
STIP |
(4) |
|
$0 to $59,824 |
|
|
|
|
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$ |
104,691 |
|
James C. Oppenheimer |
|
|
01/01/09 |
|
|
|
02/01/09 |
|
|
|
STIP |
(4) |
|
$0 to $56,375 |
|
|
|
|
|
$ |
98,656 |
|
|
|
|
(1) |
|
The grant date is the date that begins the measurement period under the applicable
Incentive Plan. |
|
(2) |
|
The action date listed in this column is the date the Company adopted the plan
setting forth the performance goals, with the weights attributable to each goal and the
corresponding potential awards. |
|
(3) |
|
This column indicates the plan applicable to the potential awards. |
|
(4) |
|
Under the 2009 STIP, the Company determined the actual award by reference to the
performance by the Company over three objectives for the one year period, as described in the
Compensation Discussion and Analysis under the heading Short-Term Incentive Compensation for
2009. The STIP only has a set maximum percentage of Adjusted Base Salary potentially
available, but no stated target or minimum. In other words, even if the Company had achieved
performance sufficient to earn the minimum required performance level, whether any amount and
how much would have been awarded under the plan is discretionary. Accordingly, to show the
fact that the minimum performance level could result in varying percentages of Adjusted Base
Salary available as an award or none at all, the Company has shown the threshold under the
plan as the range of potential awards up to the maximum award. In light of the structure of
this plan, the target amount in the table is blank. Under the 2009 STIP, the threshold
percentages ranged from 0% to 25% and from 0% to 20% of Adjusted Base Salary, respectively for
the CEO and the other NEOs. The maximum percentages were 45% and 35%, respectively for the
CEO and the other NEOs. |
No awards were actually made under this plan for 2009.
120
Nonqualified Deferred Compensation
The Deferred Compensation Table below sets forth certain information with respect to non-tax
qualified deferrals of compensation by the Companys NEOs, none of whom deferred any compensation
in 2009.
Deferred Compensation Table 2009
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Aggregate |
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Executive |
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Aggregate |
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Withdrawals/ |
|
|
|
|
|
|
Contributions |
|
|
Earnings |
|
|
Distributions |
|
|
Aggregate Balance at |
|
Name |
|
in 2009 |
|
|
in 2009 |
|
|
in 2009 |
|
|
12/31/09 |
|
Charles E. Snyder |
|
$ |
|
|
|
$ |
21,368 |
|
|
$ |
|
|
|
$ |
682,657 |
|
Kathleen M. Luzik |
|
|
|
|
|
|
1,133 |
|
|
|
(131,186 |
) |
|
|
|
|
None of the 2009 earnings or amounts included in the aggregate balance at December 31, 2009
are included in the Summary Compensation Table.
Narrative to Deferred Compensation Table
Eligible participants, including NEOs, in the Deferred Compensation Plan may elect to defer up
to 100% of incentive compensation payments and up to 25% of their base salary. To defer
compensation under the plan, participants generally must submit an irrevocable election no later
than December 31st of the year preceding the year in which the compensation to be
deferred is to be earned.
The Company maintains unfunded individual accounts for each participant and credits each
account with the amount deferred by the participant and interest at the rate of actively traded
U.S. Treasury issues, adjusted to a constant maturity of one year, plus one percent. The reported
interest rate is determined in December of the prior year. For 2009, the interest rate determined
as of December 31, 2008 was 1.49%.
Payments under the Deferred Compensation Plan will commence following the NEOs separation of
service from the Company or after the NEO has reached the age of 65, if still employed by the
Company. However, a NEO may be allowed to access funds in his deferred compensation account
earlier than the beginning of the first month following retirement or separation from the Company
under certain circumstances upon a showing of financial hardship. Distributions are made in lump
sum, or in annual installments over a maximum of five (5) years, generally, at the election of the
participant.
Under the CEOs deferred compensation agreement, he may elect to defer some amount or
percentage of his compensation. Interest is credited to his account on the last day of each
quarter in an amount equal to 100 basis points plus the yield on a five-year U.S. Treasury Note
with a maturity date on or nearest to the date of such quarterly credit.
The Company does not pay compensation benefits deferred under the CEOs deferred compensation
agreement earlier than thirty (30) days after the date of the CEOs separation of service from the
Company. At that time pursuant to the agreement, the Company makes annual payments on the
anniversary of such termination date in equal amounts of $25,000 or 20% of the account balance or
in a lump sum. In the event of death prior to the date of final payment, the remaining balance is
paid to his beneficiary on the 60th day after his death. Like the Deferred Compensation
Plan, this account is unfunded.
The Company does not make contributions to any accounts under the Deferred Compensation Plan
or under the CEOs deferred compensation agreement, other than the credited interest. Accordingly,
the Company has not included a column for registrants contributions.
121
The agreement was amended to eliminate the requirement that, absent a written election to the
contrary, the Company would defer ten percent (10%) of the CEOs salary each year. Also in 2008,
the Company agreed to make the CEO whole for any tax liability he incurred in 2009 as a result of
the Companys failure to have deferred ten percent (10%) of his income in the years 2005 through
2008, during which time he did not make an election. The payment to Mr. Snyder in that regard was
approximately $106,600. This payment is included in Mr. Snyders 2009 All other Compensation in
the Summary Compensation Table.
Potential Payments Upon Termination of Employment or Change of Control
The discussion and tables below describe potential payments and benefits to which each NEO
would be entitled under certain circumstances (Trigger Events) if the NEOs employment with the
Company terminates. Trigger Events include: voluntary termination with good reason; voluntary
termination without good reason; involuntary termination for cause; involuntary termination without
cause; termination due to death, disability, or retirement; and termination due to change of
control. The applicable Trigger Events under each agreement or program entitling the NEO to
payments or benefits upon termination or change of control vary and are described in more detail
below.
The payments and benefits discussed and shown in the tables below do not include payments and
benefits to the extent they are provided on a non-discriminatory basis to salaried employees upon
termination generally, including continued participation in health, dental or vision insurance;
salary continuation for up to one year; payment of accrued vacation leave; and 401(k) and
retirement plan benefits. The amounts shown on the tables in this section assume that the
effective date of each Trigger Event is December 31, 2009, and reflect the estimated amounts earned
and payable as of that date. The actual amounts to be paid can only be determined at the time any
such event occurs.
Regular benefits under the Company Retirement and 401(k) Plan
See Retirement Benefits in the Compensation Discussion and Analysis.
Deferred Compensation
Under the Deferred Compensation Plan applicable to the NEOs (except the CEO), in the event of
a separation of service, the unfunded amount credited to each NEO is payable under the terms of the
plan. Assuming a Trigger Event effective December 31, 2009, the amounts are payable beginning
January 1, 2010. Amounts are payable either in a lump sum or annual installments over 5 years, as
elected by the NEO or the NEOs beneficiary, subject to certain limitations in the plan.
Under the CEOs deferred compensation agreement, if a separation of service occurred
retirement or termination of employment occurred on December 31, 2009, then the Company would be
obligated to make annual payments to the CEO or his beneficiary beginning on February 1, 2010 in
the amount of 20% of the unfunded amount. However, as a result of recent regulatory enforcement
actions placed on the Company, there are now limitations on changes to senior executive
compensation.
The amounts payable under the Deferred Compensation Plan and the CEOs deferred compensation
agreement upon separation from service are shown in the Nonqualified Deferred Compensation Table.
LTIP
The LTIP rewards performance over a three-year measurement period. The current three-year
measurement period spans from January 1, 2007 through December 31, 2009 (2007 to 2009 LTIP). In
the event of death or disability, before the end of the three-year period, the award amount is
prorated based on the number of months employed during the three-year measurement period.
122
To determine the award for termination due to death or disability occurring on December 31,
2009, the terms of the LTIP provide for the following assumptions: (1) that the NEO received the
same base salary that he or she was receiving on the date of the applicable event, and (2) that the
Company achieved the target level of performance without regard to the actual level achieved. For
2009, the awards available for meeting the target performance goals were 50% of Aggregate Base
Salary and 30% of Aggregate Base Salary for the CEO and the other NEOs, respectively. Under these
circumstances, the amount of the award is prorated based on the number of months an employee was
employed under the plan. Where the death or disability occurs on December 31, 2009, the employee
would have been employed for the full 36 months under the 2007 to 2009 LTIP. The certification of
performance and approval of awards are presumed under these circumstances and the Company is deemed
to have achieved the target level of performance without regard to the actual level achieved and
without any certification and approval. Accordingly, with respect to the 2007 to 2009 LTIP the
amount would not be prorated and the amount payable would be the full amount of the target level.
For termination due to change of control, the NEOs are entitled to an award based on the rate
for performance meeting target goals or the rate for actual performance estimated on the applicable
date, if higher. The estimated performance as of December 31, 2009 was below the target rate, thus
the applicable rate for termination due to a change in control is at the target goal level of 50%
of Aggregate Base Salary and 30% of Aggregate Base Salary for the CEO and the other NEOs,
respectively. Unlike awards made for termination due to death or disability, payments for
termination due to change of control are not subject to any prorating.
If employment terminated on December 31, 2009 due to cause or involuntary termination, the
requisite certification of performance and approval of awards under the LTIP would not have
occurred and the LTIP award would be forfeited.
The amounts payable under each LTIP for termination due to death or disability and change in
control occurring on December 31, 2009 for each NEO is shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
2007 2009 LTIP Payable for Termination |
|
|
|
Due to Death or |
|
|
Due to Change in |
|
Name |
|
Disability |
|
|
Control |
|
Charles E. Snyder |
|
$ |
794,173 |
|
|
$ |
794,173 |
|
Richard L. Reed |
|
|
274,826 |
|
|
|
274,826 |
|
Steven A. Brookner |
|
|
356,363 |
|
|
|
356,363 |
|
Kathleen M. Luzik |
|
|
264,224 |
|
|
|
264,224 |
|
James C. Oppenheimer |
|
|
167,063 |
|
|
|
167,063 |
|
STIP
In the event a NEO is terminated for cause or involuntarily terminated without cause, the STIP
is forfeited. For all other Trigger Events, assuming the date of the Trigger Event is December 31,
2009 and the Company achieved all objectives under the 2009 STIP, the CEO and the other NEOs,
within the discretion of the Committee and the CEO, respectively, are eligible for an award under
the plan up to 45% of 2009 Adjusted Base Salary for the CEO and 35% of 2009 Adjusted Base Salary
for the other NEOs. The 2008 STIP required that each of the three objectives must be achieved
before any payout could be made under the plan. Because one of the objectives, Grow Core
Profitablity was not achieved, no payment under the 2008 STIP was made to either the CEO or other
NEOs.
123
Life Insurance Proceeds
As reflected in the Summary Compensation Table in the All Other Compensation column and
described in the notes to it, the Company pays premiums on life insurance policies for each of its
NEOs and pays premiums for additional life insurance for Mr. Snyder and Mr. Brookner. The policies
available for all NEOs have a face value of $1,000,000 and $750,000 for the CEO and the other NEOs,
respectively. The supplemental policies for Mr. Snyder and Mr. Brookner have with a face value of
$2,640,970 and $3,076,000, respectively. All ownership rights of the supplemental policies belong
to Mr. Snyder and Mr. Brookner. In the event of death, the insurer, not the Company, would pay the
face value of the deceased NEOs policy or policies, as the case may be, to the designated
beneficiary. Also, in the event of Mr. Snyders death, the Company would be entitled to a payment
of $177,823 from the proceeds to reimburse it for the initial premium paid by the Company in 2002.
Due to changes in federal tax laws and the enactment of Sarbarnes-Oxley, the Company now pays the
premiums on behalf of Mr. Snyder and treats the entire premium payment as taxable compensation to
him, as described in more detail above in the section titled Perquisites and Other Personal
Benefits.
Because all regular salaried employees of the Company are entitled to life insurance for three
times base salary up to a maximum amount of $500,000, the amounts shown below reflect only the
additional benefits to which the NEOs are entitled. The CEO is also entitled to continued premium
payments for his additional life insurance policy for six months following termination under
certain circumstances under his severance agreement, as described in more detail below in the
section titled Benefits Payable to the CEO under Severance Agreement.
|
|
|
|
|
|
|
Life Insurance Payable for |
|
Name |
|
Termination Due to Death |
|
Charles E. Snyder |
|
$ |
2,963,147 |
(1) |
Richard L. Reed |
|
|
250,000 |
|
Steven A. Brookner |
|
|
3,326,000 |
(1) |
Kathleen M. Luzik |
|
|
250,000 |
|
James C. Oppenheimer |
|
|
|
|
|
|
|
(1) |
|
These amounts are based upon the face value of Mr. Snyders and Mr. Brookners
supplemental policies, less, in Mr. Snyders case, the amount payable to the Company to
reimburse it for the initial premium. The policies are variable life insurance policies and
the actual amount of the death benefit will vary depending on the earnings on the investment
options selected by the NEO under the policy. |
Benefits Payable to the CEO under Severance Agreement
The Company has no severance agreements with its NEOs, except its CEO. Under his severance
agreement, the CEO receives cash payments and other employee benefits for any Trigger Event except
termination for cause or for death. The severance agreement entitles him to receive continued
salary payments in an amount that is the greater of (1) his base salary at the rate on the
termination date, or (2) if within the 60 days prior to his termination his salary was reduced, his
salary prior to such reduction, for twenty four (24) months following termination, other than for
cause or as a result of death. Because regular salaried employees of the Company are entitled to
salary continuation for up to one year, based on years of service, the amount shown in the table
reflects the additional twelve (12) months of base salary to which the CEO would be entitled under
the severance agreement. However, as a result of recent regulatory enforcement actions placed on
the Company, there are now limitations on changes to senior executive compensation.
In addition to salary continuation, the CEO is entitled to other benefits. Many of these
benefits are also available to regular salaried employees of the Company under its salary
continuation program. Benefits to which the CEO would be entitled under the severance agreement
not otherwise available to regular salaried the Company employees are: payment of accrued sick
leave; an amount equal to the cost of the Company providing the Company Retirement and 401(k) Plan
benefits as though the CEO continued to be employed by the Company during the first
six months following involuntary termination other than for cause or death; premium payments
for the CEOs supplemental life insurance policy for six months following termination; and payment
of additional disability buy-up insurance premiums for six months. As of December 31, 2009, the
CEO had zero accrued sick leave. The estimated amounts payable for a Trigger Event except
termination for cause or for death, for the remaining benefits are shown in the table below.
124
If both parties agree, the CEO may be paid in one lump-sum for the value of all of his
severance benefits to the extent permitted under Section 409A of the United States Internal Revenue
Code. If the CEO is terminated for a disability that renders him unable to perform his job, the
benefits payable under the severance agreement are reduced by the amount of any disability benefits
actually received under any other Company employee disability benefits. If the CEO secures new
employment during the payout period, then the Companys obligation to pay benefits is terminated or
reduced as follows: If the new position has a base salary plus bonus or incentive compensation
(the New Compensation) equal to at least 90% of the CEOs base salary plus an amount equal to his
average incentive compensation for the five fiscal years preceding the termination year (the Old
Compensation), then his severance benefit terminates. Otherwise, his severance benefit is reduced
to an amount that combined with the New Compensation, equals 90% of his Old Compensation.
In exchange for severance benefits, the CEO must execute a mutual release under which the CEO
releases the Company of any obligations arising from the CEOs employment, with the exception of
the CEOs earned deferred compensation, and the Company releases the CEO of any claims it has or
may have against the CEO. Payment of severance benefits is contingent on certain provisions for
the three years beginning on termination, including the non-competition and confidentiality
provisions pursuant to which the CEO may not (1) become a substantial owner, employee or agent of
any Company competitor, or (2) induce any officer of the Company or an affiliate to leave the
Company or engage in a competitive business. Furthermore, during that period, the CEO must provide
limited consulting services to the Company upon request up to a maximum of 15 days per year, on
matters to which he devoted significant time while at the Company and thereafter, cooperate with
any governmental investigation or any litigation arising out of matters to which he devoted
significant amounts of time while at the Company.
If the CEO voluntarily terminates employment without good reason, but provides the Company at
least nine months prior notice, then the CEO is entitled to continuation of salary for one year.
However, because regular salaried employees of the Company are entitled to salary continuation for
up to one year, based on years of service, the CEO receives no greater payments under this
provision, as reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
Benefits Payable to CEO Under Severance Agreement |
|
|
|
Any Termination in |
|
|
|
|
|
|
Employment, Except |
|
|
|
|
|
|
Termination for Cause or |
|
|
Voluntary Termination |
|
|
|
for Death |
|
|
Without Good Reason |
|
Salary continuation |
|
$ |
539,040 |
|
|
$ |
|
|
Accrued sick leave |
|
|
|
|
|
|
|
|
Continued retirement payments |
|
|
14,700 |
|
|
|
|
|
401(k) Pension |
|
|
14,700 |
|
|
|
|
|
Premium payments for supplement life insurance policy |
|
|
91,950 |
|
|
|
|
|
Premium payments for additional disability buy-up
insurance |
|
|
4,745 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
665,135 |
|
|
$ |
|
|
|
|
|
|
|
|
|
125
Director Compensation Table 2009
|
|
|
|
|
|
|
Fees Earned or |
|
Name |
|
Paid in Cash |
|
Irma Cota, Chairperson |
|
$ |
40,555 |
|
Stuart M. Saft |
|
|
32,250 |
|
Roger B. Collins |
|
|
31,750 |
|
Peter Conrad |
|
|
18,500 |
|
Steven Cunningham |
|
|
32,500 |
|
William Hampel |
|
|
5,000 |
|
Grady B. Hedgespeth |
|
|
3,250 |
|
Janis Herschkowitz |
|
|
15,244 |
|
Rosemary Mahoney |
|
|
6,750 |
|
Stephanie McHenry |
|
|
5,250 |
|
Richard A. Parkinson |
|
|
5,000 |
|
Alfred A. Plamann |
|
|
30,250 |
|
Walden Swanson |
|
|
5,500 |
|
Nguyen Van Hanh |
|
|
9,369 |
|
Kenneth Rivkin |
|
|
24,500 |
|
Robyn Shrader |
|
|
21,750 |
|
Jane Garcia |
|
|
23,500 |
|
Judy Ziewacz |
|
|
18,500 |
|
David G. Nason * |
|
|
|
|
|
|
|
* |
|
As the Presidential appointee from among the officers of the agencies and departments of the
United States, Mr. Nason was not entitled to director compensation during his tenure as a member of
the Board of Directors. |
Narrative to Director Compensation Table
Members of the Companys Board of Directors (the Board) receive cash compensation for their
Board service as shown in the preceding table. Under the Act, directors who are appointed by the
President of the United States from among proprietors of small business and from persons with
experience in low-income cooperatives are entitled to (1) compensation at the daily equivalent of
the compensation of a GS 18 civil servant which amounted in 2009 to $662 a day, and (2) travel
expenses. Typically, these directors receive compensation for no more than nine days a year. The
director appointed by the President of the United States from among the employees of the United
States Government is not entitled to any compensation from the Company, other than reimbursement of
expenses.
Directors elected by shareholders are entitled to (1) annual retainer of $13,000, (2) $1,000
for serving as the chair of any committee, except the annual compensation for the Audit Committee
Chair is $3,000, (3) $1,000 for each board meeting attended, (4) $500 for each committee meeting
attended in person up to two meetings per day, (5) one-half of the above amounts for meetings if
attended by conference call or webinar and (6) travel expenses. The Chair of the Board is entitled
to $8,000 in compensation in addition to the above amounts. Directors of subsidiary corporations
are entitled to (1) $500 for each board meeting attended and half that amount for attending such
meetings via conference call or webinar and (2) travel expenses. Chairs of affiliate/subsidiary
boards are entitled to an additional compensation of $3,000 per year.
The Company directors do not receive stock or option awards or non-equity incentive plan
compensation for their service as directors. They are entitled to participate in some of the
benefit programs, which are generally available to all Company employees. Directors may
participate in the Companys Deferred Compensation Plan under the same terms as the NEOs as
described under the heading Nonqualified Deferred Compensation. None of the current Company
directors have elected to participate in the Deferred Compensation Plan.
126
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Stock Ownership of Certain Stockholders and Management
Three of the Companys stockholders own in excess of 5% of the outstanding shares of the
Companys Class B or Class C stock. The shareholders purchased a portion of this stock in
connection with sizable loans made by the Company to them and received a portion of the stock as
patronage dividends from the Company. The Companys voting policy, however, does not allocate
voting rights solely based on the number of shares of Class B or Class C stock held and prohibits
any one stockholder from being allocated more than five percent of the votes allocated in
connection with any stockholder action.
The following table shows those cooperatives that owned more than 5 percent of the Companys
Class B or Class C stock as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Stock |
|
|
Class C Stock |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
Name of Shareholders |
|
Shares |
|
|
Class |
|
|
Shares |
|
|
Class |
|
The Co-operative Central Bank |
|
|
30,500 |
|
|
|
1.70 |
% |
|
|
29,614 |
|
|
|
11.64 |
% |
Greenbelt Homes, Inc. |
|
|
14,440 |
|
|
|
0.80 |
% |
|
|
29,518 |
|
|
|
11.60 |
% |
Group Health, Inc. * |
|
|
14,227 |
|
|
|
0.79 |
% |
|
|
15,068 |
|
|
|
5.92 |
% |
|
|
|
* |
|
Included in Group Health, Inc. is Central Minnesota Group Health Plans (who is affiliated
with Group Health, Inc.) 5,469 and 3,588 shares of Class B and Class C stock, respectively. |
Because the Act restricts ownership of the Companys Class B and Class C stock to eligible
cooperatives, the Companys officers and directors do not own any Class B or Class C stock,
although cooperatives with which such officers and directors are affiliated may own such stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Transactions
In the ordinary course of business, the Company has made loans at prevailing interest rates
and terms to directors and executive officers of the Company and to certain entities to which these
individuals are related. As of December 31, 2009 and 2008, loans to executive officers and current
directors of the company and its affiliates, including loans to their associates, totaled $55.8
million and $68.5 million, respectively. During 2009, loan additions were $4.7 million and loan
repayments were $17.3 million. There were no related party loans that were impaired, non-accrual,
past due, restructured or potential problems as of December 31, 2009 or December 31, 2008.
The Company had term loans with Harps Food Stores, Inc. of which Mr. Collins is President and
CEO. As of December 31, 2009, the term loans had outstanding balances totaling $6.6 million.
The Company entered into an agreement with Unified Western Grocers (UWG) of which Mr. Plamann
is President and Chief Executive Officer, to purchase member loans originated or to originate loans
directly to members of UWG. The outstanding amount of the loans as of December 2009 was $42.5
million. The Company also had a $14.9 million revolving line of credit to UWG of which there was
$2.9 million outstanding as of December 31, 2009.
The Company had a $10.0 million revolving line of credit to NCB Capital Impact of which there
was $3.8 million outstanding as of December 31, 2009.
127
The Company believes that the foregoing transactions contain terms comparable to those
obtainable in an arms length transaction. The Company has determined that these loans were made
in the ordinary course of business on substantially the same terms, including interest and
collateral, as those prevailing at the time for comparable transactions with other persons and did
not involve more than the normal risk of collectability or present unfavorable features. The loans
were made in accordance with the Companys lending policies and regulatory requirements, properly
approved and evaluated for disclosure in the financial statements.
Director Independence
Each director is considered by the Company to be an independent director. The Company uses
the independence standards adopted by the NASDAQ Stock Market, Inc. (NASDAQ). (The Company does
not have any securities listed on NASDAQ, but SEC rules require that reporting companies such as
the Company select independence standards of a national securities exchange or national securities
association, such as NASDAQ). Most importantly, no director is an officer of, or employed by, the
Company or any of its subsidiaries. Although some cooperatives associated with directors have loan
relationships with the Company (described in the section above), no director has a relationship
that, in the opinion of the Companys Board of Directors, would interfere with the exercise of
independent judgment of the director in carrying out his or her responsibilities.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company has paid or expects to pay the following fees to KPMG LLP for work performed in
2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Audit fees |
|
$ |
562 |
|
|
$ |
520 |
|
All other fees |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
Total fees |
|
$ |
562 |
|
|
$ |
534 |
|
|
|
|
|
|
|
|
Audit fees include fees for services that would normally be provided by the accountant in
connection with the statutory and regulatory filings or engagements and that generally only an
independent accountant can provide. In addition to fees for an audit or review in accordance with
generally accepted auditing standards, this category contains fees for comfort letters, statutory
audits, consents, and assistance with and review of documents filed with the SEC. Audit-related
fees, which there were none for 2009 or 2008, are assurance related services that are traditionally
performed by the independent accountant, such as: employee benefit plan audits, due diligence
related to mergers and acquisitions, internal control reviews, attest services that are not
required by statute or regulation and consultation concerning financial accounting and reporting
standards. Tax fees would, which there were none for 2009 or 2008, relate to the review of
corporate tax filings. No other fees have been incurred by the Company.
The audit committee has reviewed the fees paid to KPMG LLP. These policies and procedures
involve annual pre-approval by the Audit Committee of the types of services to be provided by the
Companys independent auditor and fee limits for each type of service on both a per engagement and
aggregate level. Additional service engagements that exceed these pre-approved limits must be
submitted to the Audit Committee for further pre-approval.
128
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15(a)(1) The following financial statements are filed as a part of this report.
Financial Statements as of December 31, 2009, 2008 and 2007:
|
|
|
|
|
Page # |
|
|
49 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
54-55 |
|
|
|
|
|
|
|
56-102 |
|
|
|
Item 15(a)(2) Not applicable
Items 15(a)(3) and 15(b) The following exhibits are filed as a part of this report.
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
|
|
|
(a)
|
|
|
3.1 |
|
|
National Consumer Cooperative Bank Act, as amended through 1981 |
|
|
|
|
|
|
|
(c)
|
|
|
3.2 |
|
|
1989 Amendment to National Consumer Cooperative Bank Act |
|
|
|
|
|
|
|
(ss)
|
|
|
3.3 |
|
|
Bylaws of the Company |
|
|
|
|
|
|
|
(ss)
|
|
|
4.1 |
|
|
Election Rules of the Company. For other instruments defining the rights of security holders, see Exhibits
3.1 and 3.2 |
|
|
|
|
|
|
|
(h)
|
|
|
4.11 |
|
|
Form of Indenture for Debt Securities |
|
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|
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|
|
(i)
|
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|
4.12 |
|
|
Form of Fixed Rate Medium-term Note |
|
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|
|
(j)
|
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4.13 |
|
|
Form of Floating Rate Medium-term Note |
|
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|
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(mm)
|
|
|
10.1 |
|
|
Noteholder Forbearance Agreement, dated August 14, 2009 with Senior noteholders |
|
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|
|
|
|
(mm)
|
|
|
10.2 |
|
|
Forbearance Agreement, dated August 14, 2009 with respect to revolving credit facility with a syndicate of
banks, with Sun Trust as administrative agent |
|
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*(qq)
|
|
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10.3 |
|
|
Deferred Compensation Agreement with Charles E. Snyder |
|
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|
*(x)
|
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10.4 |
|
|
Severance Agreement with Charles E. Snyder |
|
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|
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|
*(qq)
|
|
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10.5 |
|
|
Employment Agreement with Charles E. Snyder |
|
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|
|
(b)
|
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|
10.7 |
|
|
Subordination Agreement with Consumer Cooperative Development Corporation (now NCB Capital Impact) |
129
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
|
|
|
(pp)
|
|
|
10.8 |
|
|
Amended and Restated Noteholder Forbearance Agreement, dated November 16, 2009 with NCB, NCB Financial
Corporation and holders of NCBs Senior Notes |
|
|
|
|
|
|
|
(pp)
|
|
|
10.9 |
|
|
Amended and Restated Forbearance Agreement, dated November 16, 2009 with NCB and Sun Trust Bank as
administrative agent and various banks |
|
|
|
|
|
|
|
*(x)
|
|
|
10.13 |
|
|
NCCB Executive Long-Term Incentive Plan Approved 7/28/03 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.14 |
|
|
NCCB Executive Long-Term Incentive Plan Approved 1/19/05 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.15 |
|
|
NCCB Executive Long-Term Incentive Plan Approved 1/23/07 |
|
|
|
|
|
|
|
(n)
|
|
|
10.25 |
|
|
Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company (Dec. 2001) |
|
|
|
|
|
|
|
*(p)
|
|
|
10.31 |
|
|
Split Dollar Agreement with Chief Executive Officer |
|
|
|
|
|
|
|
*(x)
|
|
|
10.33 |
|
|
NCCB Executive Short-Term Incentive Plan for 2004 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.32 |
|
|
NCCB Executive Short-Term Incentive Plan for 2005 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.35 |
|
|
NCCB Executive Short-Term Incentive Plan for 2006 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.36 |
|
|
NCCB Executive Short-Term Incentive Plan for 2007 |
|
|
|
|
|
|
|
(w)
|
|
|
10.37 |
|
|
Amended and Restated Financing Agreement with U.S. Treasury dated November 26, 2003 |
|
|
|
|
|
|
|
*(ii)
|
|
|
10.38 |
|
|
NCCB Executive Short-Term Incentive Plan for 2008 |
|
|
|
|
|
|
|
*(qq)
|
|
|
10.39 |
|
|
NCCB Executive Short-Term Incentive Plan for 2009 |
|
|
|
|
|
|
|
(x)
|
|
|
10.43 |
|
|
First Amendment dated December 9, 2003 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential
Insurance Company of America et al |
|
|
|
|
|
|
|
(x)
|
|
|
10.44 |
|
|
Purchase Agreement relating to Trust Preferred Securities dated December 15, 2003 |
|
|
|
|
|
|
|
(x)
|
|
|
10.45 |
|
|
Indenture related to Junior Subordinated Debt Securities dated December 17, 2003 |
|
|
|
|
|
|
|
(x)
|
|
|
10.46 |
|
|
Guarantee Agreement dated December 17, 2003 |
|
|
|
|
|
|
|
*(x)
|
|
|
10.47 |
|
|
Memorandum of Understanding with Respect to Tax Treatment of Employer Payments under Split Dollar Arrangement
with CEO, dated December 30, 2003 |
|
|
|
|
|
|
|
(ee)
|
|
|
10.48 |
|
|
Blanket Agreement for Advances with Federal Home Loan Bank of Cincinnati dated June 30, 2006 |
|
|
|
|
|
|
|
(z)
|
|
|
10.51 |
|
|
Second Amendment dated December 31, 2004 to Note Purchase and
Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
|
|
|
|
|
|
|
*(z)
|
|
|
10.52 |
|
|
Memorandum of Understanding With Respect to Tax Treatment of Employer
Payments Under Split- Dollar Agreement with Charles Snyder |
130
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
|
|
|
(ii)
|
|
|
10.53 |
|
|
First Amendment dated October 16, 2006 to Credit Agreement among NCB, various banks and SunTrust Bank, as
administrative agent |
|
|
|
|
|
|
|
*(z)
|
|
|
10.54 |
|
|
Agreement to Provide Supplemental Retirement Benefits for CEO of NCB, FSB |
|
|
|
|
|
|
|
(bb)
|
|
|
10.55 |
|
|
Lease for 2011 Crystal Drive, Arlington, Virginia 22202 |
|
|
|
|
|
|
|
(dd)
|
|
|
10.56 |
|
|
Credit Agreement among NCB, various banks and SunTrust Bank, as administrative agent |
|
|
|
|
|
|
|
(hh)
|
|
|
10.57 |
|
|
Second Amendment dated September 28, 2007 to Credit Agreement among NCB, various banks and SunTrust Bank, as
administrative agent |
|
|
|
|
|
|
|
(ii)
|
|
|
10.58 |
|
|
Third Amendment dated December 31, 2007 to Credit Agreement among NCB, various banks and SunTrust Bank, as
administrative agent |
|
|
|
|
|
|
|
(ii)
|
|
|
10.59 |
|
|
Second Amendment dated March 31, 2008 to Note Purchase Agreement with Metropolitan Life Insurance Company et al |
|
|
|
|
|
|
|
(ii)
|
|
|
10.60 |
|
|
Third Amendment dated December 28, 2006 to Note Purchase and Uncommitted Master Shelf Agreement with
Prudential Insurance Company of America et al |
|
|
|
|
|
|
|
(ii)
|
|
|
10.61 |
|
|
Fourth Amendment dated December 31, 2007 to Note Purchase and Uncommitted Master Shelf Agreement with
Prudential Insurance Company of America et al |
|
|
|
|
|
|
|
(ii)
|
|
|
10.62 |
|
|
Fifth Amendment dated February 25, 2008 to Note Purchase and Uncommitted Master Shelf Agreement with
Prudential Insurance Company of America et al |
|
|
|
|
|
|
|
(nn)
|
|
|
10.63 |
|
|
Sixth Amendment and Limited Waiver dated March 31, 2009 to Note Purchase and Uncommitted Master Shelf Agreement |
|
|
|
|
|
|
|
(nn)
|
|
|
10.64 |
|
|
Fourth Amendment to Credit Agreement and Limited Waiver dated March 31, 2009 among NCB, various banks and Sun
Trust Bank, as administrative agent |
|
|
|
|
|
|
|
(oo)
|
|
|
10.65 |
|
|
Security Agreement with NCB and Sun Trust Bank as collateral agent dated April 30, 2009 |
|
|
|
|
|
|
|
(oo)
|
|
|
10.66 |
|
|
Guarantee Agreement with NCB Financial Corporation and Sun Trust Bank as collateral agent dated April 30, 2009 |
|
|
|
|
|
|
|
(oo)
|
|
|
10.67 |
|
|
Pledge and Security Agreement with NCB Financial Corporation and Sun Trust Bank dated April 30, 2009 |
|
|
|
|
|
|
|
(ss)
|
|
|
10.68 |
|
|
Seventh Amendment and Limited Waiver to the Note Purchase and Uncommitted Master Shelf Agreement dated
February 23, 2010 |
|
|
|
|
|
|
|
(ss)
|
|
|
10.69 |
|
|
Fifth Amendment to Credit Agreement and Limited Waiver dated February 23, 2010 among NCB, various banks and
Sun Trust Bank, as administrative agent |
|
|
|
|
|
|
|
(rr)
|
|
|
10.70 |
|
|
Stipulation and Consent to Order to Cease and Desist and its associated regulatory order, among NCB Financial
Corporation and the Office of Thrift Supervision dated March 15, 2010 |
|
|
|
|
|
|
|
(rr)
|
|
|
10.71 |
|
|
Stipulation and Consent to Order to Cease and Desist and its associated regulatory order, among NCCB and the
Office of Thrift Supervision dated March 15, 2010 |
131
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
|
|
|
(rr)
|
|
|
10.72 |
|
|
Supervisory Agreement among NCB, FSB and the Office of Thrift Supervision dated March 15, 2010 |
|
|
|
|
|
|
|
(ss)
|
|
|
10.73 |
|
|
Letter Amendment to Credit Agreement dated March 30, 2010 among NCCB, various banks and Sun Trust Capital
Markets, Inc. as lead arranger and book manager |
|
|
|
|
|
|
|
(jj)
|
|
|
13 |
|
|
2008 Annual Report |
|
|
|
|
|
|
|
(ss)
|
|
|
14 |
|
|
NCCB Senior Financial Officers Code of Ethics |
|
|
|
|
|
|
|
(tt)
|
|
|
21.1 |
|
|
List of Subsidiaries and Affiliates of NCCB |
|
|
|
|
|
|
|
(ss)
|
|
|
23.1 |
|
|
Consent of KPMG LLP |
|
|
|
|
|
|
|
(n)
|
|
|
24.11 |
|
|
Power of Attorney by Stephanie McHenry |
|
|
|
|
|
|
|
(x)
|
|
|
24.19 |
|
|
Power of Attorney by Irma Cota |
|
|
|
|
|
|
|
(x)
|
|
|
24.20 |
|
|
Power of Attorney by Grady B. Hedgespeth |
|
|
|
|
|
|
|
(x)
|
|
|
24.21 |
|
|
Power of Attorney by Rosemary Mahoney |
|
|
|
|
|
|
|
(x)
|
|
|
24.22 |
|
|
Power of Attorney by Richard A. Parkinson |
|
|
|
|
|
|
|
(z)
|
|
|
24.26 |
|
|
Power of Attorney by William Hampel |
|
|
|
|
|
|
|
(aa)
|
|
|
24.27 |
|
|
Power of Attorney of Roger Collins |
|
|
|
|
|
|
|
(aa)
|
|
|
24.28 |
|
|
Power of Attorney of Steven Cunningham |
|
|
|
|
|
|
|
(ii)
|
|
|
24.29 |
|
|
Power of Attorney of Janis Herschkowitz |
|
|
|
|
|
|
|
(ii)
|
|
|
24.30 |
|
|
Power of Attorney of Nguyen Van Hanh |
|
|
|
|
|
|
|
(ii)
|
|
|
24.31 |
|
|
Power of Attorney of Stuart M. Saft |
|
|
|
|
|
|
|
(ii)
|
|
|
24.32 |
|
|
Power of Attorney of Walden Swanson |
|
|
|
|
|
|
|
(qq)
|
|
|
24.33 |
|
|
Power of Attorney of Peter A. Conrad |
|
|
|
|
|
|
|
(qq)
|
|
|
24.34 |
|
|
Power of Attorney of Alfred A. Plamann |
|
|
|
|
|
|
|
(ss)
|
|
|
24.35 |
|
|
Power of Attorney of Jane Garcia |
|
|
|
|
|
|
|
(ss)
|
|
|
24.36 |
|
|
Power of Attorney of Kenneth Rivkin |
|
|
|
|
|
|
|
(ss)
|
|
|
24.37 |
|
|
Power of Attorney of Robynn Shrader |
132
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
|
|
(ss)
|
|
24.38 |
|
|
Power of Attorney of Judy Ziewacz |
|
|
|
|
|
|
(ss)
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications |
|
|
|
|
|
|
(ss)
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications |
|
|
|
|
|
|
(ss)
|
|
32 |
|
|
Section 1350 Certifications |
|
|
|
|
|
|
(ss)
|
|
99.1 |
|
|
Registrants 2010 Election Materials |
|
|
|
* |
|
Exhibits marked with an asterisk are management contracts or compensatory plans. |
|
(a) |
|
Incorporated by reference to the exhibit of the same number filed as part of Registration
Statement No. 2-99779 (Filed August 20, 1985). |
|
(b) |
|
Incorporated by reference to the exhibit of the same number filed as part of Amendment No. 1
to Registration Statement No. 2-99779 (Filed May 7, 1986). |
|
(c) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 1989 (File No. 2-99779). |
|
(d) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the three months ended June 30, 1992 (File No. 2-99779). |
|
(e) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 1994 (File No. 2-99779). |
|
(f) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 1995 (File No. 2-99779). |
|
(g) |
|
Incorporated by reference to Exhibit 10.16 filed as part of the registrants annual report on
Form 10-K for the year ended December 31, 1989 (File No. 2-99779). |
|
(h) |
|
Incorporated by reference to Exhibit 4.1 filed as part of Amendment No. 1 to Registration
Statement No. 333-17003 (Filed January 21, 1997). |
|
(i) |
|
Incorporated by reference to Exhibit 4.2 filed as part of Amendment No. 1 to Registration
Statement No. 333-17003(Filed January 21, 1997). |
|
(j) |
|
Incorporated by reference to Exhibit 4 to the registrants report on Form 8-K filed February
11, 1997 (File No. 2-99779). |
|
(k) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 1997 (File No. 2-99779). |
|
(l) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the quarter ended June 30, 1999 (File No. 2-99779). |
|
(m) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 1999 (File No. 2-99779). |
|
(n) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 2001 (File No. 2-99779). |
|
(o) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the quarter ended March 31, 2002 (File No. 2-99779). |
|
(p) |
|
Incorporated by reference to exhibit 17 filed as part of the registrants quarterly report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 2-99779). |
133
|
|
|
(q) |
|
Incorporated by reference to exhibit 20 filed as part of the registrants quarterly report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 2-99779). |
|
(r) |
|
Incorporated by reference to exhibit 28 filed as part of the registrants quarterly report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 2-99779). |
|
(s) |
|
Incorporated by reference to exhibit 99 filed as part of the registrants quarterly report on
Form 10-Q for the quarter ended September 30, 2002 (File No. 2-99779). |
|
(t) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 2002 (File No. 2-99779). |
|
(u) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the quarter ended March 31, 2003 (File No. 2-99779). |
|
(v) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the quarter ended June 30, 2003 (File No. 2-99779). |
|
(w) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed December 23, 2003 (File No. 2-99779). |
|
(x) |
|
Incorporated by reference to the exhibit of the same number filed as part the registrants
annual report on |
|
|
|
Form 10-K for the year ended December 31, 2003 (File No. 2-99779). |
|
(y) |
|
Incorporated by reference to the exhibit of the same number filed as part the registrants
quarterly report on
Form 10-Q for the quarter ended March 31, 2004 (File No. 2-99779). |
|
(z) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the year ended December 31, 2004 (File No. 2-99779) |
|
(aa) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report Form 10-K for the period ended December 31, 2005 (File No. 2-99779) |
|
(bb) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K, January 30, 2006 (File No. 2-99779) |
|
(cc) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the period ended March 31, 2006 (File No. 2-99779) |
|
(dd) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed May 5, 2006 (File No. 2-99779) |
|
(ee) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the period ended June 30, 2006 (File No. 2-99779) |
|
(ff) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report Form 10-K for the period ended December 31, 2006 (File No. 2-99779) |
|
(gg) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the period ended March 31, 2007 (File No. 2-99779) |
|
(hh) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the period ended September 30, 2007 (File No. 2-99779) |
134
|
|
|
(ii) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the period ended December 31, 2007 (File No. 2-99779) |
|
(jj) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
quarterly report on Form 10-Q for the period ended March 31, 2009 (File No. 2-99779) |
|
(mm) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed August 17, 2009 (File No. 2-99779) |
|
(nn) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed April 3, 2009 (File No. 2-99779) |
|
(oo) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed May 5, 2009 (File No. 2-99779) |
|
(pp) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed November 19, 2009 (File No. 2-99779) |
|
(qq) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
annual report on Form 10-K for the period ended December 31, 2008 (File No. 2-99779) |
|
(rr) |
|
Incorporated by reference to the exhibit of the same number filed as part of the registrants
report on Form 8-K filed March 19, 2010 (File No. 2-99779) |
|
(ss) |
|
Filed herewith |
|
(tt) |
|
Included in Part I of this report or Form 10-K |
**********
Item 14(c) All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements, or the notes thereto.
135
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto
duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
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DATE: March 31, 2010 |
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/s/ Charles E. Snyder
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Charles E. Snyder |
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President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
noted:
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Signature |
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Date |
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Chairperson of the Board of Directors
and Director
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03/31/10 |
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*/s/ Stuart M. Saft
Stuart M. Saft
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Vice Chairperson of the
Board of Directors and Director
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03/31/10 |
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/s/ Charles E. Snyder
Charles E. Snyder
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President and Chief Executive
Officer
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03/31/10 |
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*/s/ Peter A. Conrad
Peter A. Conrad
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Director
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03/31/10 |
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*/s/ Roger B. Collins
Roger B. Collins
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Director
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03/31/10 |
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*/s/ Steven F. Cunningham
Steven F. Cunningham
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Director
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03/31/10 |
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*/s/ Jane Garcia
Jane Garcia
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Director
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03/31/10 |
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*/s/ William F. Hampel
William F. Hampel
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Director
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03/31/10 |
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*/s/ Janis Herschkowitz
Janis Herschkowitz
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Director
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03/31/10 |
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*/s/ Alfred A. Plamann
Alfred A. Plamann
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Director
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03/31/10 |
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*/s/ Kenneth Rivkin
Kenneth Rivkin
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Director
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03/31/10 |
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*/s/ Robynn Shrader
Robynn Shrader
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Director
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03/31/10 |
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*/s/ Walden Swanson
Walden Swanson
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Director
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03/31/10 |
136
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Signature |
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Title |
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Date |
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*/s/ Nguyen Van Hanh
Nguyen Van Hanh
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Director
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03/31/10 |
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*/s/ Judy Ziewacz
Judy Ziewacz
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Director
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03/31/10 |
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/s/ Richard L. Reed
Richard L. Reed
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Executive Managing Director,
Principal Financial Officer
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03/31/10 |
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/s/ David Sanders
David Sanders
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Senior Vice President, Principal
Accounting Officer
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03/31/10 |
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* By:
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/s/ Richard L. Reed
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Richard L. Reed |
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(Attorney-in-Fact) |
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137
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY
REGISTRANTS, WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its information the
registrants election materials for its 2010 annual meeting. The registrant has not yet distributed
the 2009 annual report to stockholders and will furnish such report to the Commission when it is
sent to security holders.
Exhibit Index
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Ex. No. |
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Exhibit |
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3.3 |
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Bylaws of NCCB |
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4.1 |
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Election Rules of NCCB. For other instruments defining the rights of security holders, see
Exhibits 3.1 and 3.2 |
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10.68 |
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Seventh Amendment and Limited Waiver to the Note Purchase and Uncommitted Master Shelf
Agreement dated February 23, 2010 |
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10.69 |
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Fifth Amendment to Credit Agreement and Limited Waiver dated February 23, 2010 among NCB,
various banks and Sun Trust Bank, as administrative agent |
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10.73 |
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Letter Amendment to Credit Agreement dated March 30, 2010 among NCCB, various banks and
Sun Trust Capital Markets, Inc. as lead arranger and book manager |
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14 |
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NCCB Senior Financial Officers Code of Ethics |
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23.1 |
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Consent of KPMG LLP |
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24.35 |
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Power of Attorney of Jane Garcia |
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24.36 |
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Power of Attorney of Kenneth Rivkin |
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24.37 |
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Power of Attorney of Robynn Shrader |
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24.38 |
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Power of Attorney of Judy Ziewacz |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certifications |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certifications |
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32 |
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Section 1350 Certifications |
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99.1 |
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Registrants 2010 Election Materials |
138