National Consumer Cooperative Bank 10Q 2009 Q2 Quarterly report

National Consumer Cooperative Bank Inactive 10-Q2009 Q2 Quarterly report

Content analysis

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 2-99779

National Consumer Cooperative Bank

(Exact name of registrant as specified in its charter)


(12 U.S.C. Section 3001 et. seq.)		52-1157795

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


601 Pennsylvania Avenue, N.W., North Building, Suite 750, Washington, D.C.		20004

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:(202) 349-7444

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. Yesþ Noo

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). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See Definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filero		Accelerated filero		Non-accelerated filerþ		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of June 30, 2009: Class B 1,726,718; Class C 251,117.

National Consumer Cooperative Bank
(doing business as NCB) and Subsidiaries

INDEX


	Page No.
PART I FINANCIAL INFORMATION

Item 1 Consolidated Balance Sheets — June 30, 2009 (unaudited) and December 31, 2008		1

Consolidated Statements of (Loss) Income (unaudited) — for the three and six months ended June 30, 2009 and 2008		2

Consolidated Statements of Comprehensive (Loss) Income (unaudited) — for the three and six months ended June 30, 2009 and 2008		3

Consolidated Statements of Changes in Members’ Equity (unaudited) — for the six months ended June 30, 2009 and 2008		4

Consolidated Statements of Cash Flows (unaudited) — for the six months ended June 30, 2009 and 2008		5-6

Condensed Notes to the Consolidated Financial Statements (unaudited) — June 30, 2009		7-41

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) — for the six and three months ended June 30, 2009 and 2008		42-60

Item 3 Quantitative and Qualitative Disclosures about Market Risk		61

Item 4T Controls and Procedures		61

PART II OTHER INFORMATION

Item 1 Legal Proceedings		61

Item 1A Risk Factors		61

Item 6 Exhibits		61

Signatures		62

Exhibit 31.1
Exhibit 31.2
Exhibit 32

NATIONAL CONSUMER COOPERATIVE BANK

CONSOLIDATED BALANCE SHEETS
(in thousands)


	June 30, 2009			December 31, 2008
	(Unaudited)
Assets
Cash and cash equivalents	$	102,355		$	39,971
Investment securities
Available-for-sale		57,949			68,098
Held-to-maturity		387			387
Loans held-for-sale ($4.8 million and $0.5 million recorded at fair value, respectively per SFAS 159)		21,195			14,278
Loans and lease financing		1,913,240			1,957,191
Less: Allowance for loan losses		(40,701	)		(27,067	)

Net loans and lease financing		1,872,539			1,930,124
Other assets		103,283			102,034

Total assets	$	2,157,708		$	2,154,892


Liabilities and Members’ Equity
Liabilities
Deposits	$	1,266,567		$	1,300,071
Other liabilities		38,122			38,581
Borrowings
Short-term		175,600			225,000
Long-term		295,210			197,690
Subordinated debt		116,489			116,489
Junior subordinated debt		51,547			51,547

Total borrowings		638,846			590,726

Total liabilities		1,943,535			1,929,378

Members’ equity
Common stock		197,784			197,784
Retained earnings
Allocated		13,238			7,154
Unallocated		5,984			25,008
Accumulated other comprehensive loss		(2,833	)		(4,432	)

Total members’ equity		214,173			225,514

Total liabilities and members’ equity	$	2,157,708		$	2,154,892

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK

CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands)
(Unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Interest income
Loans and lease financing	$	27,116		$	28,284		$	55,089		$	56,545
Investment securities		828			1,474			1,700			3,192
Other interest income		492			474			1,059			968

Total interest income		28,436			30,232			57,848			60,705


Interest expense
Deposits		7,004			8,981			15,110			19,071
Short-term borrowings		2,671			2,209			3,977			4,568
Long-term debt, other borrowings and subordinated debt		5,078			4,785			9,025			10,315

Total interest expense		14,753			15,975			28,112			33,954


Net interest income		13,683			14,257			29,736			26,751

Provision for loan losses		13,916			2,805			24,785			4,489


Net interest income after provision for loan losses		(233	)		11,452			4,951			22,262


Non-interest income
Gain on sale of loans		3,486			2,998			6,620			577
Servicing fees		1,404			1,514			2,352			2,587
Letter of credit fees		1,244			1,129			2,261			2,145
Lower of cost or market valuation allowance		198			127			410			30
Real estate loan fees		139			160			336			312
SFAS 133 adjustment		49			154			143	��		3,304
Prepayment fees		27			324			107			569
Other		702			885			1,401			1,693

Total non-interest income		7,249			7,291			13,630			11,217


Non-interest expense
Compensation and employee benefits		7,124			9,035			15,565			17,297
Provision for losses on unfunded commitments		2,145			111			2,476			227
Occupancy and equipment		1,665			1,762			3,370			3,522
Other-than-temporary impairment losses (OTTI)		1,480			—			1,480			—
Less non-credit portion of OTTI recognized in other comprehensive income (before taxes)		(158	)		—			(158	)		—

Net impairment losses recognized in earnings		1,322			—			1,322			—
Contractual services		1,375			1,309			2,811			2,367
Information systems		1,118			1,210			2,252			2,527
FDIC premium		1,006			181			1,456			406
Loan costs		843			715			1,564			1,125
Corporate development		257			361			543			651
Travel and entertainment		180			306			334			560
Loss (gain) on sale of investments available-for-sale		154			(11	)		95			(7	)
Other		349			404			731			1,091

Total non-interest expense		17,538			15,383			32,519			29,766


(Loss) income before income taxes		(10,522	)		3,360			(13,938	)		3,713

Income tax (benefit) provision		(741	)		110			(921	)		54

Net (loss) income	$	(9,781	)	$	3,250		$	(13,017	)	$	3,659


Distribution of net (loss) income
Patronage dividends	$	247		$	—		$	6,084		$	—
Retained earnings		(10,028	)		3,250			(19,101	)		3,659

	$	(9,781	)	$	3,250		$	(13,017	)	$	3,659

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the six months ended June 30, 2009 and 2008
(in thousands)
(Unaudited)


	2009			2008

Net (loss) income	$	(13,017	)	$	3,659

Other comprehensive (loss) income:
Non-credit portion of OTTI (Note 4)		(158	)		—
Unrealized holding gain (loss) before tax on available-for- sale investment securities and interest-only non-certificated receivables		1,928			(7,751	)
Tax effect		(94	)		91

Comprehensive loss	$	(11,341	)	$	(4,001	)

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the three months ended June 30, 2009 and 2008
(in thousands)
(Unaudited)


	2009			2008

Net (loss) income	$	(9,781	)	$	3,250

Other comprehensive (loss) income:
Non-credit portion of OTTI		(158	)		—
Unrealized holding gain (loss) before tax on available-for- sale investment securities and interest-only non-certificated receivables		2,064			(1,525	)
Tax effect		(91	)		41

Comprehensive (loss) income	$	(7,966	)	$	1,766

NATIONAL CONSUMER COOPERATIVE BANK

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
For the six months ended June 30, 2009 and 2008
(in thousands)
(Unaudited)


								Accumulated
			Retained		Retained			Other			Total
	Common		Earnings		Earnings			Comprehensive			Members’
	Stock		Allocated		Unallocated			Loss			Equity
Balance, December 31, 2008	$	197,784	$	7,154	$	25,008		$	(4,432	)	$	225,514
Adjustment to intially apply FSP115-2 (Note 4)		—		—		77			(77	)		—
Balance, January 1, 2009		197,784		7,154		25,085			(4,509	)		225,514
Net loss		—		—		(13,017	)		—			(13,017	)
Non-credit portion of 2009 OTTI (Note 4)		—		—		—			(158	)		(158	)
2009 patronage dividends retained in form of equity		—		6,084		(6,084	)		—			—
Unrealized gain on available-for-sale investment securities and interest-only non-certificated receivables, net of taxes		—		—		—			1,834			1,834

Balance, June 30, 2009	$	197,784	$	13,238	$	5,984		$	(2,833	)	$	214,173


								Accumulated
				Retained		Retained		Other			Total
	Common			Earnings		Earnings		Comprehensive			Members’
	Stock			Allocated		Unallocated		Loss			Equity
Balance, December 31, 2007	$	197,891		$	—	$	28,200	$	(3,328	)	$	222,763
Adjustment to initially apply SFAS 157 (Note 16)		—			—		1,224		—			1,224
Net income		—			—		3,659		—			3,659
Cancellation of stock		(107	)		—		107		—			—
Unrealized loss on available-for-sale investment securities and interest-only non-certificated receivables, net of taxes		—			—		—		(7,660	)		(7,660	)

Balance, June 30, 2008	$	197,784		$	—	$	33,190	$	(10,988	)	$	219,986

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2009 and 2008
(in thousands)
(Unaudited)


	2009			2008
Cash flows from operating activities
Net (loss) income	$	(13,017	)	$	3,659
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Provision for loan losses		24,785			4,489
Provision for losses on unfunded commitments		2,476			227
Amortization and writedown of interest-only receivables and servicing rights		5,990			5,779
Depreciation and amortization, other		1,559			1,688
Gain on sale of loans, including SFAS 133 adjustments		(6,763	)		(3,881	)
Loss on other-than-temporary impairment, net		1,322			—
Loss (gain) on sale of investments available-for-sale		95			(7	)
Purchase of loans held-for-sale		(80,696	)		(193,685	)
Loans originated for sale, net of principal collections		(231,593	)		(153,571	)
Lower of cost or market valuation allowance		(410	)		(30	)
Net proceeds from sale of loans held-for-sale		308,822			382,975
Decrease (increase) in other assets		6,477			(1,944	)
(Decrease) increase in other liabilities		(3,113	)		1,234

Net cash provided by operating activities		15,934			46,933


Cash flows from investing activities
Purchase of investment securities
Available-for-sale		(8,013	)		(45,848	)
Proceeds from maturities or repayments of investment securities
Available-for-sale		5,337			31,130
Proceeds from the sale of investment securities
Available-for-sale		10,741			12,592
Net decrease (increase) in loans and lease financing		29,263			(215,416	)
Purchase of portfolio loans		—			(27,591	)
Purchase of premises and equipment		(133	)		(444	)

Net cash provided by (used in) investing activities		37,195			(245,577	)


Cash flows from financing activities
Net (decrease) increase in deposits		(33,898	)		60,177
(Decrease) increase in short-term borrowings		(49,400	)		81,700
Proceeds from long-term borrowings		118,499			25,000
Incurrence of debt amendment costs		(2,799	)		—
Repayment of long-term borrowings		(20,000	)		—
Incurrence of financing costs		(3,147	)		(62	)

Net cash provided by financing activities		9,255			166,815


Increase (decrease) in cash and cash equivalents		62,384			(31,829	)
Cash and cash equivalents, beginning of period		39,971			63,724

Cash and cash equivalents, end of period	$	102,355		$	31,895

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2009 and 2008
(in thousands)
(Unaudited)


	2009		2008
Supplemental schedule of non-cash investing and financing activities:

Loans transferred to other real estate owned	$	3,946	$	645

Loans held-for-sale transferred to loans and lease financing, at the lower of cost or market	$	354	$	43,462

Transfer of loans and lease financing to loans held-for-sale	$	—	$	24,462

Supplemental information:

Interest paid	$	28,539	$	34,662

Income taxes paid	$	354	$	—

The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL CONSUMER COOPERATIVE BANK

CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

1. BASIS OF PRESENTATION

The National Consumer Cooperative Bank, which does business as NCB, is a financial institution organized under the laws of the United States. NCB (sometimes referred to herein as the “Bank”) primarily provides financial services to eligible cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United States. A cooperative enterprise is an organization which is owned by its members and which is 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. NCB 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). NCB operates directly and through its wholly owned subsidiaries, NCB Financial Corporation, a holding company, and NCB, FSB, a federally chartered thrift institution. NCB, FSB provides a broad range of financial services to cooperative and non-cooperative customers. This Form 10-Q provides information regarding the consolidated business of NCB and its subsidiaries and, where appropriate and as indicated, provides information specific to NCB itself, NCB Financial Corporation or NCB, FSB. In general, unless otherwise noted, references in this report to NCB or the Bank refer to NCB and its subsidiaries collectively.

This Quarterly Report on Form 10-Q 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 NCB’s 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, debt covenants and compliance projections, 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 NCB’s operations, pricing products and services.

The interim consolidated financial statements presented in this Quarterly Report on Form 10-Q are in conformity with U.S. generally accepted accounting principles (GAAP), which have been applied on a consistent basis and follow general practices within the banking industry. In our opinion, these interim consolidated financial statements include all normal recurring adjustments necessary to fairly present NCB’s results of operations, financial condition and cash flows. The financial statements contained herein should be read in conjunction with the financial statements and accompanying notes in NCB’s Annual Report on Form 10-K.

NCB, directly and through NCB, FSB, originates various types of loans. The following are the primary types of such loans.

2. ACCOUNTING POLICIES AND ESTIMATES

Management is required to make certain estimates, judgments and assumptions that it believes to be reasonable based upon information available. These estimates, judgments, and assumptions affect the reported amounts of 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. While NCB 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.

Statement of Financial Accounting Standards No. 161

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”),“Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.” SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133.It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. NCB early adopted and applied the provisions of SFAS 161 effective December 31, 2008.

FASB Staff Position Financial Accounting Standards No. 157-4

In April 2009, the FASB issued FASB Staff Position FAS No. 157-4 (“FSP 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157,Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective beginning with NCB’s interim reporting period ending June 30, 2009, and has been applied prospectively. NCB has considered the disclosure requirements of FSP 157-4 in preparing these statements.

FASB Staff Position Financial Accounting Standards No. 107-1

In April 2009, the FASB issued FASB Staff Position FAS No. 107-1 (“FSP 107-1”), “Interim Disclosures about Fair Value of Financial Instruments.”FSP 107-1 requires full disclosures (not summarized as previously required) about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP is effective beginning with NCB’s interim reporting period ending June 30, 2009. NCB has adopted and applied the provisions of this FSP as of June 30, 2009 (see Note 16).

FASB Staff Position Financial Accounting Standards No. 115-2 and 124-2

In April 2009, the FASB issued FASB Staff Position FAS No. 115-2 and 124-2 (“FSP 115-2”),“Recognition and Presentation of Other-Than-Temporary Impairments.” FSP 115-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 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. NCB adopted FSP 115-2 for the reporting period ended June 30, 2009, and applied the guidance to its existing debt securities as of January 1, 2009, and recognized the effects of applying the FSP as a change in accounting principle. NCB recognized the effect of initially applying FSP 115-2, totaling $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.

Statement of Financial Accounting Standards No. 165

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, (“SFAS 165”),“Subsequent Events.”SFAS 165 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, SFAS 165 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. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009.

Statement of Financial Accounting Standards No. 166

On June 12, 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (“SFAS 166”), “Accounting for Transfers of Financial Assets.”SFAS 166 is a revision to Statement of Financial Accounting Standard No. 140,Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”and 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. SFAS 166 is effective for NCB’s reporting periods beginning on January 1, 2010 and NCB is currently evaluating the potential impact of this guidance.

Statement of Financial Accounting Standards No. 167

On, June 12, 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (“SFAS 167”),“Amendments to FASB Interpretation No. 46(R).”SFAS 167 is a revision to FASB Interpretation No. 46 (R),Consolidation of Variable Interest Entities, and 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 based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 is effective for NCB’s reporting periods beginning on January 1, 2010 and NCB is currently evaluating the potential impact of this guidance.

Statement of Financial Accounting Standards No. 168

On June 29, 2009, the FASB issued Statement of Financial Accounting Standards No. 168, (“SFAS 168”), “The FASB Accounting Standards Codification and the Hierarchy of General Accepted Accounting Principles (GAAP), which is a replacement of SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.”SFAS 168 will become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). SFAS 168 is the last numbered standard to be issued by the FASB under the old numbering system. There will no longer be accounting standards in the form of statements, staff positions, Emerging Issues Task Force abstracts, or AICPA Accounting statements of Position. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

NCB’s other critical accounting policies and a summary of NCB’s significant accounting policies are disclosed in its Form 10-K.

3. CASH AND CASH EQUIVALENTS

The composition of cash and cash equivalents is as follows (dollars in thousands):


	June 30,		December 31,
	2009		2008
Cash	$	84,311	$	25,677
Cash equivalents		18,044		14,294

Total	$	102,355	$	39,971

4. INVESTMENT SECURITIES

The composition of available-for-sale investment securities and interest-only non-certificated receivables (included as a component of other assets) as of June 30, 2009, are as follows (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Interest-only certificated receivables	$	27,023	$	18	$	(1,723	)	$	25,318
Interest-only non-certificated receivables		27,036		260		(1,379	)		25,917
U.S. Treasury and agency obligations		14,693		299		—			14,992
Mutual funds		378		—		—			378
Mortgage-backed securities & CMO’s		17,501		46		(316	)		17,231
Equity securities		51		—		(22	)		29

Total	$	86,682	$	623	$	(3,440	)	$	83,865

For the six months ending June 30, 2009, NCB purchased $8.0 million of U.S. Treasury and agency obligations. Also, $1.0 million of this type of security matured, $0.4 million were repaid and $10.2 million were sold during the six months ending June 30, 2009. The composition of available-for-sale investment securities and interest-only non-certificated receivables as of December 31, 2008, is as follows (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			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 & CMO’s		22,783		—		(2,086	)		20,697
Equity securities		52		—		(21	)		31

Total	$	99,888	$	1,027	$	(5,553	)	$	95,362

The following tables present the fair value of available-for-sale investment securities and interest-only non-certificated receivables with unrealized losses and the related unrealized loss amounts. The tables also disclose whether these securities have had unrealized losses for less than 12 consecutive months or for 12 consecutive months or longer.

The fair value of the securities and unrealized losses as of June 30, 2009 are as follows (dollars in thousands):


	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	$	—	$	—		$	24,324	$	(1,723	)	$	24,324	$	(1,723	)
Interest-only non-certificated receivables		—		—			22,723		(1,379	)		22,723		(1,379	)
Mortgage-backed securities & CMO’s		—		—			13,725		(316	)		13,725		(316	)
Equity securities		31		(22	)		—		—			31		(22	)

Total	$	31	$	(22	)	$	60,772	$	(3,418	)	$	60,803	$	(3,440	)

The fair value of the securities and unrealized losses as of December 31, 2008 are as follows (dollars in thousands):


	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 & CMO’s		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	)

NCB’s investment securities portfolio and retained beneficial interests in securitized financial assets are evaluated for other-than-temporary impairment on a quarterly basis. NCB’s management evaluates the cause of declines in the fair value of each security within each segment of the investment portfolio. NCB’s portfolio segments include: interest-only certificated receivables; interest-only non-certificated receivables; U.S. Treasury and agency obligations; mutual funds; mortgage-backed securities; collateralized mortgage obligations (“CMO’s”); and equity securities.

Interest-only receivables

The interest-only certificated and non-certificated receivables have experienced price declines because of increased pricing spreads demanded by the investor community and by illiquidity in the secondary market for these types of investments. Each of the interest-only receivables is collateralized only by loans originated by NCB. As of June 30, 2009, the collateral mortgages continue to perform and there have been no defaults nor do we expect there to be an adverse change in future cash flows. NCB expects to fully recover the amortized cost basis of these investment securities. Consequently as of June 30, 2009, the unrealized losses on the interest-only certificated and interest-only non-certificated securities are considered temporary in nature.

Mortgage-backed securities

As of June 30, 2009, NCB held mortgage-backed securities issued by Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae are now under the conservatorship of the U.S. Government. The timely payment of the principal and interest on the mortgage-backed securities are guaranteed by each issuer and now further supported by the U.S. government as the government has been providing funds to support Fannie Mae and Freddie Mac. Any decline in fair value of the mortgage-backed securities is temporary in nature as NCB expects to recover all contractual cash flows during its holding period and because these investments are now supported by the U.S. government. There were $3.7 million of principal repayments on the mortgage-backed securities during the six months ending June 30, 2009.

CMO’s

NCB acquired five CMO securities issued by Morgan Stanley in 2007 with a total par value of $8.5 million. During the six months ending June 30, 2009, there were $0.2 million of principal repayments on the CMO’s. Management monitors the credit support of each of the bonds held by NCB, 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 June 30, 2009, the financial condition and credit quality of certain underlying issuers or collateral has deteriorated. NCB 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, NCB recognized OTTI of $1.7 million on three of the five CMO investment securities reducing the aggregate carrying value of these three securities to $5.7 million. During the second quarter of 2009, and based on NCB’s most recent estimates of the aforementioned factors, NCB recognized OTTI of $1.5 million on a fourth CMO investment security, reducing the carrying value from $1.8 million to $0.3 million. No OTTI was recognized for the fifth CMO security given the substantial amount of subordination to that tranche. As of June 30, 2009 and after the recognition of OTTI on four of the five CMO securities, the aggregate carrying value was $4.1 million.

The application of FSP 115-2 requires the presentation of credit-related OTTI as a charge to earnings. Market-related OTTI is presented as an adjustment to other comprehensive income and presented in NCB’s statement of members’ equity. Credit related OTTI is presented in earnings in the Statements of (Loss) Income. In applying FSP 115-2, NCB determined the market and credit related OTTI using discounted cash flow techniques. The application of FSP 115-2 resulted in the recognition of $158 thousand of market-related OTTI in other comprehensive income for the three and six months ending June 30, 2009. As of June 30, 2009, NCB does not intend to sell nor is it more likely than not that NCB will be required to sell the CMO investment securities.

As stated, NCB does not consider the interest-only receivables, mutual funds, mortgage-backed securities or equity securities (all classified as available-for-sale) to be other-than-temporarily impaired as of June 30, 2009. At this time, NCB does not intend to sell nor is it more than likely than not that NCB will be required to sell these investment securities. NCB’s intent to dispose or the likelihood of a disposition of one or more type(s) of investment securities may change in future periods because of market conditions, uncertainties and other unforeseen events.

The table below presents a roll-forward of the credit-related losses recognized in earnings. The beginning balance represents the OTTI for debt securities that occurred prior to January 1, 2009, which has been adjusted for the application of FSP 115-2. OTTI recognized in earnings in the first half of 2009 for credit-related OTTI is presented as additions in two components based upon whether the current period was the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit-related component is reduced if NCB sells, intends to sell or believe it will be required to sell previously credit-impaired debt securities. Additionally, the credit-related loss is reduced if NCB receives or expects to receive cashflows in excess of what was previously expected to be received over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit-related loss component of credit-impaired debt securities were as follows (dollars in thousands):


	For the three months ended			For the six months ended
	June 30, 2009			June 30, 2009
Balance, December 31, 2008	$	1,692		$	1,692
Adjustment to initially apply FSP115-2		(77	)		(77	)
Balance, January 1, 2009	$	1,615		$	1,615
Additions:
Initial credit impairments		1,322			1,322
Subsequent credit impairments		—			—

Reductions:
For securities sold		—			—
Due to change in intent to sell or requirements to sell		—			—
For increases in expected cashflows		—			—

Balance, June 30, 2009	$	2,937		$	2,937

The maturities of available-for-sale U.S. Treasury and agency obligations investment securities as of June 30, 2009 are as follows (dollars in thousands):


	2009
			Weighted
	Amortized		Average			Fair
	Cost		Yield			Value
Within 1 year	$	2,613		4.45	%	$	2,659
After 1 year through 5 years		10,734		1.53	%		10,921
Over 5 years		1,346		5.28	%		1,412

Total	$	14,693		2.39	%	$	14,992

The maturities of available-for-sale U.S. Treasury and agency obligations investment securities as of December 31, 2008 are as follows (dollars in thousands):


	2008
			Weighted
	Amortized		Average			Fair
	Cost		Yield			Value
Within 1 year	$	11,799		2.84	%	$	11,927
After 1 year through 5 years		4,679		3.62	%		4,881
Over 5 years		1,769		5.25	%		1,827

Total	$	18,247		3.27	%	$	18,635

Mutual funds, equity securities, mortgage-backed securities, and interest-only receivables are excluded from the maturity table. Mutual funds do not have contractual maturities. Mortgage-backed securities and interest-only receivables have contractual maturities which differ from actual maturities because borrowers may have the right to call or prepay obligations. Interest-only receivables pertain to Cooperative Loans to cooperative housing corporations.

The composition of held-to-maturity investment securities as of June 30, 2009 is as follows (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	387	$	—	$	(13	)	$	374

The composition of held-to-maturity investment securities as of December 31, 2008 is as follows (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	387	$	—	$	(13	)	$	374

The maturities of held-to-maturity investments as of June 30, 2009 are as follows (dollars in thousands):


	2009
			Weighted
	Amortized		Average			Fair
	Cost		Yield			Value
After 1 year through 5 years		387		4.14	%		374

Total	$	387		4.14	%	$	374

The maturities of held-to-maturity investments as of December 31, 2008 are as follows (dollars in thousands):


	2008
			Weighted
	Amortized		Average			Fair
	Cost		Yield			Value
After 1 year through 5 years		387		7.37	%		374

Total	$	387		7.37	%	$	374

There was no indication of OTTI for NCB’s held-to-maturity investments as of June 30, 2009 or December 31, 2008.

5. LOAN SERVICING

The unpaid principal balance of loans serviced for others is not included in the accompanying consolidated balance sheets. Changes in the 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		225,830			190,789
Loan payments and payoffs		(183,568	)		(123,392	)

Balance at June 30	$	5,592,854		$	5,413,648

Refer to Note 18 for an analysis of mortgage servicing rights related to the above portfolio of loans serviced for others.

6. LOANS HELD-FOR-SALE

Loans held-for-sale by category are as follows (dollars in thousands):


	June 30,		December 31,
	2009		2008
Consumer Loans	$	1,760	$	940
Commercial Loans		2,865		8,766
Real Estate Loans:
Residential		16,570		4,572
Commercial		—		—

Total	$	21,195	$	14,278

Loans held-for-sale for which NCB has not elected the fair value option are recorded at the lower of cost or fair value. The fair value option under SFAS 159 was elected for $4.8 million and $0.5 million Residential Real Estate Loans as of June 30, 2009 and December 31, 2008, respectively. The Residential Real Estate Loans for which the fair value option was not elected amounted to $11.8 million and $4.1 million as of June 30, 2009 and December 31, 2008, respectively. As of June 30, 2009 and December 31, 2008, respectively, NCB recorded a valuation allowance of $0.2 million and $0.9 million to reflect the current market pricing for NCB’s loans held-for-sale accounted for at the lower of cost or fair value. See Note 16 for a discussion of the valuation allowance recorded against those loans for which the fair value option has been elected.

During the first half of 2009, $0.6 million of Residential Real Estate Loans were transferred, at the lower of cost or market value, to loans and lease financing as the market for those loans was extremely limited. At the time of transfer the fair value of certain loans were lower than the cost and therefore, NCB transferred the loans at $0.4 million and recognized a $0.2 million loss on the transfer date.

NCB has expanded its relationship with Fannie Mae, allowing NCB to continue to sell Cooperative and Multifamily Loans. This has allowed NCB 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. It is difficult to predict how the recession and financial support of Fannie Mae and Freddie Mac will affect NCB’s business and results of operations. NCB nevertheless continues to sell loans to Fannie Mae and expects to continue to do so.

7. LOANS AND LEASE FINANCING

Loans and leases outstanding by category are as follows (dollars in thousands):


	June 30,		December 31,
	2009		2008
Consumer Loans	$	44,407	$	53,101
Commercial Loans		658,248		691,817
Real Estate Loans:
Residential		827,111		817,538
Commercial		383,215		394,324
Leases		259		411

Total	$	1,913,240	$	1,957,191

8. IMPAIRED LOANS

A loan is considered impaired when, based on current information; it is probable NCB will be unable to collect all amounts due under the contractual terms of the loan. Outstanding principal of loans considered impaired totaled $86.5 million and $20.4 million as of June 30, 2009, and December 31, 2008, respectively. The aggregate average balance of impaired loans was $48.4 million and $16.3 million for the six months ending June 30, 2009, and the year ending December 31, 2008, respectively. The interest income that was due, but not recognized, on impaired loans was $3.4 million and $0.5 million for the six months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009, NCB had an allowance of $21.0 million on the $86.5 million of impaired loans. Of the $86.5 million of impaired loans, $18.0 million needed no allowance because the fair value of the collateral was greater than the amount owed on the loan.

As of December 31, 2008, NCB 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 owed on the loan.

As of June 30, 2009, there were no commitments to lend additional funds to borrowers whose loans were impaired.

9. ALLOWANCE FOR LOAN LOSSES AND UNFUNDED COMMITMENTS

The following is a summary of the components of the allowance for loan losses as of June 30, 2009 and December 31, 2008 (dollars in thousands):


	June 30,		December 31,
	2009		2008
Allowance on impaired loans	$	20,960	$	6,314
Allowance on other loans		19,741		20,753

Total allowance for loan losses	$	40,701	$	27,067

The following is a summary of the activity in the allowance for loan losses during the six months ended June 30 (dollars in thousands):


	2009			2008
Balance as of January 1	$	27,067		$	17,714


Charge-offs
Consumer Loans		(3,098	)		(1,013	)
Commercial Loans		(8,655	)		(43	)

Total charge-offs		(11,753	)		(1,056	)


Recoveries
Consumer Loans		403			49
Commercial Loans		199			192

Total recoveries		602			241


Net charge-offs		(11,151	)		(815	)


Provision for loan losses		24,785			4,489


Balance as of June 30	$	40,701		$	21,388

Of the $11.8 million of charge-offs for the six months ending June 30, 2009, $5.8 million was related to charge-offs of seven Commercial Loans, $2.9 million was related to various other Commercial Loans and $3.1 million was related to charge-offs of various Consumer Loans. Of the $1.1 million of charge-offs for the six months ending June 30, 2008, $0.6 million was related to charge-offs of Consumer Loans to two borrowers.

Of the $24.8 million provision for loan losses for the six months ended June 30, 2009, $17.4 million was related to six Commercial Loans, $1.5 million was related to one Real Estate Loan and $1.9 million was related to four Consumer Loans.

The higher provision for loan losses in 2009 compared to 2008 reflects an increase in the allowance for loan losses in response to changes in loan quality, coupled with increased losses as a result of declining Commercial Loan collateral values.

Unfunded Commitments

Standby letters of credit can be either financial or performance-based. Financial standby letters of credit obligate NCB to disburse funds to a third party if the customer fails to repay an outstanding loan or debt instrument. For NCB’s letters of credit issued in connection with certain variable rate municipal bonds, NCB 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 NCB to disburse funds if the customer fails to perform a contractual obligation, including obligations of a non-financial nature. Of the $2.5 million provision for unfunded commitments for the six months ended June 30, 2009, $2.2 million was due to the downgrade of three letters of credit in the amount of $13.0 million of which no amounts have been funded. Of the $13.0 million, $3.0 million is related to a Commercial Loan with a reserve for losses of $1.5 million and $10.0 million is related to variable rate municipal bonds in connection with healthcare facilities with a reserve for losses of $1.9 million.

The following is a summary of the activity in the reserve for losses on the unfunded commitments of the letters of credit, described above, which is included in other liabilities (dollars in thousands):


	2009
Balance as of January 1	$	2,675
Provision for losses on unfunded commitments		2,476

Balance as of June 30	$	5,151


	2008
Balance as of January 1	$	2,016
Provision for losses on unfunded commitments		227

Balance as of June 30	$	2,243

10. OTHER ASSETS

Other assets consisted of the following as of (dollars in thousands):


	June 30,		December 31,
	2009		2008
Interest-only non-certificated receivables, at fair value	$	25,917	$	27,264
Mortgage servicing rights		13,892		13,252
Premises and equipment, net		12,739		13,447
Accrued interest receivable		9,833		11,169
Federal Home Loan Bank stock		9,651		9,651
Valuation of letters of credit		7,370		9,021
Debt issuance costs		7,240		2,297
Other real estate owned		3,988		659
Equity method investments		3,185		3,269
Prepaid assets		2,274		1,231
Derivative assets		2,044		2,258
Other		5,150		8,516


Total other assets	$	103,283	$	102,034

The $3.3 million increase in other real estate owned is mainly due to two commercial properties in the amount of $2.9 million.

11. DEPOSITS

Deposits consisted of the following as of (dollars in thousands):


	June 30, 2009					December 31, 2008
			Average					Average
	Balance		Rate Paid			Balance		Rate Paid
Non-interest bearing demand deposits	$	78,134		—		$	90,423		—
Interest-bearing demand deposits		272,024		0.95	%		248,960		1.04	%
Savings deposits		8,451		0.29	%		7,376		0.31	%
Certificates of deposit		907,958		2.63	%		953,312		3.48	%

Total deposits	$	1,266,567		2.08	%	$	1,300,071		2.75	%

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $751.6 million and $675.2 million as of June 30, 2009 and December 31, 2008, respectively.

As of June 30, 2009 and December 31, 2008, the scheduled maturities of certificates of deposit with a minimum denomination of $100,000 are as follows (dollars in thousands):


	June 30,		December 31,
	2009		2008
Within 3 months	$	233,801	$	176,774
Over 3 months through 6 months		129,114		143,744
Over 6 months through 12 months		149,006		189,644
Over 12 months		239,639		165,046

Total certificates of deposit	$	751,560	$	675,208

NCB has a Liquidity Policy and a Liquidity Contingency Plan, both board approved and continually monitored that addresses NCB, FSB’s cashflow needs. Specifically, the cash flow needed to satisfy maturing certificates would be derived from cash, the sale of loans held-for-sale, loan maturities, issuance of new certificates of deposit and advances from the FHLB. Deposits are held at NCB,FSB.

Maturing certificates are further supported by unused Federal Home Loan Bank borrowing capacity which is $129.6 million as of June 30, 2009.

Deposit interest expense is summarized as follows (dollars in thousands):


	For the three months ended				For the six months ended
	June 30,				June 30,
	2009		2008		2009		2008
Interest-bearing demand deposits	$	708	$	1,125	$	1,419	$	2,884
Savings deposits		6		9		12		19
Certificates of deposit		6,289		7,847		13,679		16,168

Total deposit interest expense	$	7,003	$	8,981	$	15,110	$	19,071

12. BORROWINGS

As of June 30, 2009 and December 31, 2008, NCB’s short-term borrowings, as disclosed on its consolidated balance sheet, consisted of advances from the FHLB, due within one year, of $10.6 million and $23.0 million, respectively and a short-term revolving line of credit with an outstanding balance of $165.0 million and $202.0 million, respectively.

As of June 30, 2009, NCB’s long-term borrowings, as disclosed on its consolidated balance sheet, consisted of advances from the FHLB, maturing between June 2011 and March 2014 of $100.0 million, $55.0 million of privately placed debt due in December 2009, $50.0 million of privately placed debt due in December 2010 and $88.7 million of senior unsecured debt issued under the Temporary Liquidity Guarantee Program (“TLGP”). During the first quarter of 2009, NCB issued $25.0 million of senior unsecured TLGP debt with a maturity date of February 15, 2012. In connection with this debt issuance, NCB incurred $0.9 million of costs which have been capitalized and included as a component of other assets. The capitalized costs are amortized on a level yield basis. During the second quarter of 2009, NCB issued an additional $50.0 million of senior unsecured debt under the TLGP with a maturity of May 27, 2012, of which $13.7 million was issued by NCB, FSB itself. In connection with this debt issuance, NCB incurred $2.3 million of costs which have been capitalized and included as a component of other assets.

As of December 31, 2008, NCB’s long-term borrowings, as disclosed on its consolidated balance sheet, included $70.0 million of FHLB advances maturing between June 2011 and June 2012, $20.0 million of FHLB advances that matured in June 2009, $55.0 million of privately placed debt due in December 2009 and $50.0 million of privately placed debt due in December 2010.

As of June 30, 2009 and December 31, 2008, NCB’s subordinated debt, as disclosed on its balance sheet, includes $2.5 million of Class A Notes due December 2009 and $114.0 million of Class A Notes due between December 2010 and October 2020.

As of June 30, 2009 and December 31, 2008, NCB’s junior subordinated debt, as disclosed on its balance sheet, includes $51.5 million of trust preferred securities through a Delaware statutory business trust maturing in January 2034.

As disclosed in NCB’s 2008 Annual Report on Form 10-K, NCB violated certain financial covenants contained in the short-term revolving credit facility and senior note purchase agreements. On March 31, 2009, NCB executed amendments to these agreements. The amendments changed certain covenant thresholds and required NCB to pledge its assets to secure the debt under such agreements and to have NCB Financial Corporation, a wholly owned subsidiary of NCB, guarantee the debt and pledge the stock of NCB, FSB, a federally chartered savings bank wholly owned by NCB Financial Corporation. Pursuant to those requirements, on April 30, 2009, NCB executed a Security Agreement with the agent and NCB Financial Corporation executed a Guarantee Agreement and a Pledge and Security Agreement with the same agent. In connection with the amendments, as of June 30, 2009, NCB incurred $2.8 million of costs which have been capitalized and included as a component of other assets. The capitalized costs are amortized on a level yield basis over the remaining contractual maturity of each debt agreement.

NCB was in default under its senior note purchase agreement and its revolving credit facility due to a violation of certain financial covenants because of increased loan loss provisions and charge-off’s principally related to a small number of borrowers experiencing pronounced financial difficulties, including several borrowers which have filed for bankruptcy. On August 14, 2009, NCB entered into a forbearance agreement with each of the required holders under each of NCB’s senior note purchase agreement and NCB’s revolving credit facility. The forbearance agreements were entered into under customary terms and conditions, including the suspension of the need for NCB to comply with certain financial covenants for the duration of the forbearance period. Other provisions include:

	•		a forbearance period that will expire on November 16, 2009 under the senior note purchase agreement and the revolving credit facility by each of the counterparties under those instruments.

	•		agreement by NCB to a minimum liquidity covenant during the duration of the forbearance period.

	•		the insertion of an additional asset quality target for NCB’s loan portfolio.

	•		agreement by NCB that certain yield maintenance amounts on account of the notes due 2009 and the notes due 2010 will be added to the principal balances thereof, and will be payable at maturity. The aggregate yield maintenance amount is approximately $6.8 million.

	•		an increase in the rates of interest to 300 basis points over the current rate for the senior note purchase agreement and 200 points over the base rate for the revolving credit facility. Prior to the interest rate increases, the interest rate for the senior note purchase agreement was fixed at 8.5% and the revolving credit facility was LIBOR plus 3.5% or prime (base rate) plus 1.0% as of June 30, 2009.

	•		the payment of a forbearance fee of 25 basis points of the aggregate outstanding principal amount of the senior notes and the aggregate principal amount outstanding of the revolving credit facility. Total forbearance fees are approximately $0.7 million.

Until a further agreement is reached with the banks under the revolving credit facility, NCB does not have access to the revolving line of credit. NCB intends to use the 90-day forbearance period to work with the lenders, noteholders and regulatory authorities to outline and begin implementation of a plan to address its debt burden and maximize liquidity.

In the event that NCB is ultimately unable to reach an agreement to amend its existing loan agreements or otherwise repay and extinguish the senior note agreement and revolving credit agreement prior to the expiration or termination of the forbearance agreements, the lenders and the noteholders have the right to call and demand immediate repayment of any and all amounts due.

Although NCB believes that we have adequate liquidity to meet all of our obligations for the duration of the forbearance period and we do not have the intent to sell any specific investment securities or loans nor is it more likely than not that we will be required to sell any of our investments that are currently impaired, we may need to monetize certain assets to raise funds to meet our obligations under the senior note agreement and credit agreement if we cannot reach agreement with our lenders or if the forbearance agreement otherwise terminates or expires without addressing NCB’s debt burden.

Notwithstanding any additional curtailments that may arise in negotiations during the forbearance period, and as of June 30, 2009, NCB has the following scheduled debt maturities between June 30, 2009 and December 31, 2010:

	•		$2.5 million Class A Notes due December 2009

	•		$55.0 million of privately placed debt due December 2009

	•		$50.0 million of privately placed debt due December 2010

	•		$24.0 million of Class A notes amortization due December 2010


13.		REGULATORY CAPITAL AND RETAINED EARNINGS OF NCB, FSB

NCB, FSB is a wholly owned and consolidated subsidiary of NCB. In connection with the insurance of deposit accounts, NCB, FSB, a federally chartered, 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.

During the first quarter of 2009, NCB invested $7.0 million in NCB Financial Corporation, parent company of NCB, FSB. Under the investment limitations in its credit agreements, NCB itself will not be able to invest additional capital in NCB, FSB absent equity growth at NCB.

NCB, FSB’s capital exceeded the minimum capital requirements as of June 30, 2009 and December 31, 2008. The following table summarizes NCB, FSB’s capital and minimum capital requirements (ratios and dollars) as of June 30, 2009 and December 31, 2008 (dollars in thousands):


											To be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of June 30, 2009:
Tangible Capital (to tangible assets)	$	154,403		9.85	%	$	23,524		1.50	%		N/A		N/A
Total Risk-Based Capital (to risk-weighted assets)	$	169,012		11.69	%	$	115,711		8.00	%	$	144,639		10.00	%
Tier I Risk-Based Capital (to risk-weighted assets)	$	153,955		10.64	%		N/A		N/A		$	86,784		6.00	%
Core Capital (to adjusted tangible assets)	$	154,403		9.85	%	$	62,731		4.00	%	$	78,414		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	%

The Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends. NCB, FSB must provide prior notice to the Office of Thrift Supervision of the capital distribution. If NCB, FSB’s capital were ever to fall below its regulatory requirements or the Office of Thrift Supervision notified NCB, FSB that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice. As of June 30, 2009, no such limitations or restrictions existed.

14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

NCB 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 those instruments reflect the exposure that NCB has in particular classes of financial instruments. Unless noted otherwise, NCB does not require collateral or other security to support off-balance sheet financial instruments.

NCB’s 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. NCB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swap transactions, forward commitments, and financial futures contracts, the contract or notional amounts do not represent exposure to credit loss.

In the normal course of business, NCB 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. NCB evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by NCB upon extension of credit, is based on management’s credit evaluation of the customer. Collateral varies, but may include accounts receivable, inventory, property, plant and equipment, and residential and income-producing commercial properties.

NCB also makes rate lock commitments to extend credit to borrowers for the origination of Single-family Residential, Share, Cooperative and Commercial Real Estate Loans. In the case of Single-family Residential and Share Loans, the rate lock commitments generally extend for a 30-day period. Some of these commitments will expire due to the transactions not being completed within 30 days. For Cooperative and Commercial Real Estate Loans, the rate lock commitments can extend for 12 months or longer, but there is generally little to no fall out prior to closing.

Standby letters of credit can be either financial or performance-based. Financial standby letters of credit obligate NCB to disburse funds to a third party if the customer fails to repay an outstanding loan or debt instrument. Performance letters of credit obligate NCB 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 0.25% to 4.50% of the commitment amount. The standby letters of credit mature throughout 2009 to 2016. As of June 30, 2009, NCB had outstanding letters of credit with a total commitment amount of $286.3 million of which $250.9 million related to letters of credit issued in connection with certain variable rate municipal bonds. Under those letters of credit, NCB 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. During 2008, NCB provided funding for seven letters of credit for a total of $4.8 million of which all amounts were recovered at the time the bonds were remarketed and sold to other third-parties. As of June 30, 2009, none of the letters of credit remain outstanding for municipal bonds that could not be sold to another purchaser and payment is demanded. As of June 30, 2009, NCB had outstanding letters of credit with a total commitment amount of $286.3 million of which $250.9 million related to letters of credit issued in connection with certain variable rate municipal bonds which mature before the end of 2013. Under those letters of credit, NCB can be called upon to fund the amount of the municipal bond 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. During 2008, NCB 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 ws 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. As of June 30, 2009, none of the letters of credit related to the municipal bonds were funded. As of June 30, 2009, $19.1 million of the $250.9 million related to letters of credit issued in connection with certain variable rate municipal bonds were classified as criticized, and the associated reserve for losses on these unfunded commitments were $2.8 million.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantors, including Indirect Guarantees of Indebtedness of Others: an Interpretation of FASB Statement No. 5, 57 and 107 and rescission of FASB Interpretation No. 34.” In accordance with FIN 45, a liability of $7.1 million related to NCB’s obligation to stand ready to perform under outstanding letters of credit was recorded in other liabilities, and a corresponding asset of $7.4 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 June 30, 2009. A liability of $8.7 million related to NCB’s 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 contract or commitment amounts and the respective estimated fair value of NCB’s commitments to extend credit and standby letters of credit are as follows (dollars in thousands):


	Contract or				Estimated
	Commitment Amounts				Fair Value
	June 30,		December 31,		June 30,		December 31,
	2009		2008		2009		2008
Financial instruments whose contract amounts represent credit risk:
Undrawn commitments to extend credit	$	901,162	$	912,427	$	4,506	$	4,562
Rate lock commitments to extend credit:
Single-family Residential and Share Loans	$	12,460	$	8,661	$	235	$	144
Cooperative and Commercial Real Estate Loans	$	36,690	$	32,585	$	1,410	$	600
Standby letters of credit	$	286,252	$	293,711	$	10,652	$	12,131

Effective January 1, 2008, NCB valued certain rate lock commitments (that are ultimately intended for sale after the loan was funded) in accordance with SFAS 157 and SAB 109. See Note 16.

NCB had a general reserve of $5.2 million as of June 30, 2009 to cover its loss exposure to unfunded commitments. As of December 31, 2008, NCB had a general reserve of $1.7 million and a specific reserve of $1.0 million for the same purpose.

15. DERIVATIVE FINANCIAL INSTRUMENTS

NCB uses derivative financial instruments in the normal course of business for the purpose of reducing its exposure to fluctuations in interest rates. These instruments include interest rate swaps, financial futures contracts, and forward loan sales commitments. Existing NCB policies prohibit the use of derivative financial instruments for any purpose other than managing interest rate, spread and credit risk for NCB or any of its customers.

NCB enters into interest rate swaps and futures contracts and forward loan sales commitments to offset changes in fair value associated with fixed rate warehouse loans, rate lock commitments and debt due to changes in benchmark interest rates. Some of these interest rate swaps are designated derivatives hedging loans held-for-sale in a fair value hedging relationship. NCB may use additional derivative instruments in the future.

Interest rate swaps are executed to manage the interest rate risk associated with specific assets or liabilities. An interest rate swap agreement commits each party to make periodic interest payments to the other based on an agreed-upon fixed rate or floating rate index. There are no exchanges of principal amounts. Entering into an interest rate swap agreement involves the risk of default by counterparties and interest rate risk resulting from unmatched positions. The amounts potentially subject to credit risk are significantly smaller than the notional amounts of the agreements. NCB is not exposed to any credit loss in the event of nonperformance by its counter parties as of June 30, 2009. NCB does not anticipate nonperformance by any of its counterparties. Income or expense from interest rate swaps is treated as an adjustment to interest expense/income on the hedged asset or liability.

Financial futures are contracts for delayed delivery of specific securities at a specified future date and at a specified price or yield. NCB purchases/sells these contracts to economically hedge the interest rate risk associated with originating mortgage loans that will be held for sale. NCB has minimal credit risk exposure on these financial instruments since changes in market value of financial futures are settled in cash on the following business day, and payment is guaranteed by the clearinghouse. These futures contracts have not been designated as accounting hedges under SFAS 133, as amended.

Forward loan sales commitments lock in the prices at which Single-family Residential, Share, Multifamily and Cooperative Loans will be sold to investors. Management limits the variability of a major portion of the change in fair value of these loans held-for-sale by employing forward loan sale commitments to minimize the interest rate and pricing risks associated with the origination and sale of such loans held-for-sale. NCB also participates in cash window and mortgage-backed security programs with Fannie Mae to forward sell Cooperative, Residential Real Estate and Multifamily Loans. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these rate lock commitments expose NCB to variability in their fair value due to changes in interest rates. To mitigate the effect of this interest rate risk, NCB enters into offsetting forward loan sale commitments. Both the rate lock commitments and the forward loan sale commitments are undesignated derivatives, and accordingly are marked to fair value through earnings.

The estimated fair values of NCB’s financial futures contracts, interest rate swaps, interest rate lock commitments and forward sales commitments are recorded as a component of other assets and other liabilities on the consolidated balance sheet.

The fair values of derivative instruments on the consolidated balance sheet as of June 30, 2009 are as follows (dollars in thousands):


	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 under SFAS 133:
Interest rate swap agreements related to loans and loan commitments	Other assets	$	—	$	—	Other liabilities	$	3,146	$	(485	)

Total derivatives designated as hedging instruments under SFAS 133			—		—			3,146		(485	)


Derivatives not designated as hedging instruments under SFAS 133:
Forward sales commitments
Single-family Residential and Share Loans	Other assets		11,610		107	Other liabilities		6,788		(33	)
Cooperative and Multifamily Loans	Other assets		26,450		287	Other liabilities		14,940		(337	)
Rate lock commitments to extend credit:
Single-family Residential and Share Loans	Other assets		11,030		240	Other liabilities		1,430		(5	)
Cooperative and Commercial Real Estate Loans	Other assets		36,690		1,410	Other liabilities		—		—

Total derivatives not designated as hedging instruments under SFAS 133			85,780		2,044			23,158		(375	)

Total derivatives		$	85,780	$	2,044		$	26,304	$	(860	)

The fair values of derivative instruments on the consolidated balance sheet as of December 31, 2008 are as follows (dollars in thousands):


	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 under SFAS 133:
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		3,442		(848	)

Total derivatives designated as hedging instruments under SFAS 133			40,000		1,447			3,442		(848	)


Derivatives not designated as hedging instruments under SFAS 133:
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 under SFAS 133			65,418		896			14,707		(116	)

Total derivatives		$	105,418	$	2,343		$	18,149	$	(964	)

The effect of derivative instruments accounted for pursuant to SFAS 133 and designated as fair value hedging relationships on the consolidated statement of (loss) income for the six months ending June 30, 2009 are as follows (dollars in thousands):

Derivatives

Location of Gain

Amount of Gain

Location of Loss

Amount of Loss

Designated as Fair Value

Recognized in Income on

Hedging Relationships

Derivatives

Hedged Item

Interest rate swap agreements related to loans and loan commitments

Other income/(expense)

310

Other income/(expense)

(342

)

Total

310

(342

)

The effect of derivative instruments accounted for pursuant to SFAS 133 and designated as fair value hedging relationships on the consolidated statement of (loss) income for the three months ending June 30, 2009 are as follows (dollars in thousands):

Derivatives

Location of Gain

Amount of Gain

Location of Loss

Amount of Loss

Designated as Fair Value

Recognized in Income on

Hedging Relationships

Derivatives

Hedged Item

Interest rate swap agreements related to loans and loan commitments

Other income/(expense)

232

Other income/(expense)

(270

)

Total

232

(270

)

The effect of derivative instruments not designated as hedging instruments under SFAS 133 on the consolidated statement of (loss) income for the six months ending June 30, 2009 (dollars in thousands):


Derivatives Not Designated	Location of Gain (Loss)	Amount of Gain (Loss)
as Hedging Instruments	Recognized in Income on	Recognized in Income on
under SFAS 133	Derivatives	Derivatives
Financial futures contracts	Other income/(expense)	$	10
Forward sales commitments
Single-family Residential and Share Loans	Other income/(expense)		90
Cooperative and Multifamily Loans	Other income/(expense)		(92	)
Rate lock commitments to extend credit:
Single-family Residential and Share Loans	Other income/(expense)		71
Cooperative and Commercial Real Estate Loans	Other income/(expense)		810
Interest rate swap agreements related to loans and loan commitments	Other income/(expense)		53
Interest rate swap agreements	Other income/(expense)		(117	)

Total		$	825

The effect of derivative instruments not designated as hedging instruments under SFAS 133 on the consolidated statement of (loss) income for the three months ending June 30, 2009 (dollars in thousands):


Derivatives Not Designated	Location of Gain (Loss)	Amount of Gain (Loss)
as Hedging Instruments	Recognized in Income on	Recognized in Income on
under SFAS 133	Derivatives	Derivatives
Financial futures contracts	Other income/(expense)	$	—
Forward sales commitments
Single-family Residential and Share Loans	Other income/(expense)		75
Cooperative and Multifamily Loans	Other income/(expense)		853
Rate lock commitments to extend credit:
Single-family Residential and Share Loans	Other income/(expense)		(203	)
Cooperative and Commercial Real Estate Loans	Other income/(expense)		799
Interest rate swap agreements related to loans and loan commitments	Other income/(expense)		—
Interest rate swap agreements	Other income/(expense)		(117	)

Total		$	1,407

NCB in the normal course of business enters into contractual commitments to extend credit to borrowers. The commitments become effective when the borrowers rate lock a specified interest rate within the time frames established by NCB. Market risk arises if interest rates and/or the return demanded by investors moves adversely between the time of the rate lock and the ultimate sale to an investor. These commitments are undesignated derivatives pursuant to the requirements of SFAS 133 and are accordingly marked to fair value through earnings. Fair value is determined pursuant to SFAS 157 and SAB 109.

16. FAIR VALUE MEASUREMENTS

During 2008, NCB elected to measure, at the time of origination, certain Cooperative and Multifamily Residential Real Estate Loans that were held-for-sale at fair value pursuant to the provisions of SFAS 159. Unrealized gains and losses for these identified loans were included in earnings. Of the $16.6 million Residential Real Estate Loans held-for-sale disclosed in Note 6, NCB has elected the fair value option under SFAS 159 for $4.8 million as of June 30, 2009. The difference in fair value of the loans under SFAS 159 that have been funded but not sold compared to their principal balance was $0.1 million and was recorded in gain on sale of loans as of June 30, 2009. The fair value option was not elected for the remaining $11.8 million Residential Real Estate Loans disclosed in Note 6. Further, NCB has not elected the fair value option for any of the $4.6 million of principal balance of Consumer and Commercial Loans disclosed in Note 6.

SFAS 157 establishes a fair value hierarchy for valuation inputs that gives 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 NCB 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 NCB’s financial assets and financial liabilities carried at fair value:

•

Interest-only Certificated and Interest-only Non-Certificated Receivables —reported at fair value utilizing Level 3 inputs, as limited secondary market information is available but utilized for the valuation of NCB’s interest-only receivables. Refer to Note 18 herein for a discussion of the assumptions used to measure the fair value of these 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.

•

CMO’s —a component of Mortgage-Backed Securities that NCB holds, are not traded in active markets and there is little secondary market data that can be used; but what is available is used to value the CMO’s. Therefore the assumptions used in the determination of the fair value of the CMO’s are considered Level 3. Except as noted in Note 4, herein, the assumptions used to value the CMO’s are disclosed in NCB’s Form 10-K and have not changed.

•

Equity Securities— traded in active markets; therefore, the pricing inputs are considered Level 1.

•

Derivative Instruments— because NCB’s derivative contracts are not listed on an exchange and, therefore quoted market prices are not available, NCB’s derivative positions are valued using models that use readily observable market parameters and are classified within Level 2 of the valuation hierarchy. Such derivatives include basic interest rate swaps.

•

Loans Held-For-Sale— NCB’s loans held-for-sale, for which the fair value option has been elected, are reported at fair value. NCB determines the fair value of the loans-held-for sale using discounted cash flow models which incorporate quoted observable prices from market participants. Therefore, NCB classifies these loans held-for-sale as Level 2.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):


					Significant
	Quoted Prices in Active		Significant Other		Unobservable
	Markets for Identical Assets		Observable Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		June 30, 2009
Assets
Interest-only certificated receivables	$	—	$	—	$	25,318	$	25,318
Interest-only non-certificated receivables				—		25,917		25,917
U.S. Treasury and agency obligations		14,992		—		—		14,992
Mutual funds		378		—		—		378
Mortgage-backed securities & CMO’s		—		13,131		4,100		17,231
Equity securities		29		—		—		29
Derivative instruments		—		2,044		—		2,044
Loans held-for-sale		—		4,837		—		4,837

Total	$	15,399	$	20,012	$	55,335	$	90,746


Liabilities
Derivative instruments	$	—	$	867	$	—	$	867

Total	$	—	$	867	$	—	$	867

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):


					Significant
	Quoted Prices in Active		Significant Other		Unobservable
	Markets for Identical Assets		Observable Inputs		Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		December 31, 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 CMO’s		—		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

The table below summarizes the changes in fair value for all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2009 (dollars in thousands):


	Interest-Only			Interest-Only			Collateralized
	Certificated			Non-certificated			Mortgage
	Receivables			Receivables			Obligations

Assets
Balance at December 31, 2008	$	27,854		$	27,264		$	3,938
Total gains or (losses) (realized/unrealized):
Included in earnings		—			—			(1,322	)⁽¹⁾
Included in other comprehensive income		348			(382	)		1,671
Purchases, issuances, settlements and fundings		—			1,230			—
Write down of asset due to prepayment		—			(15	)		—
Transfers in and/or out of Level 3		—			—			—
Principal repayments		—			—			(186	)
Amortization		(2,884	)		(2,180	)		(1	)

Balance at June 30, 2009	$	25,318		$	25,917		$	4,100


(1)		These losses included in earnings have been recognized as Other-than-temporary impairment losses on NCB’s Consolidated Statements of (Loss) Income for the three and six months ending June 30, 2009. All CMO’s are still held by NCB as of June 30, 2009.

The table below summarizes the changes in fair value for all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months ended December 31, 2008 (dollars in thousands):


	Interest-Only			Interest-Only			Collateralized
	Certificated			Non-certificated			Mortgage
	Receivables			Receivables			Obligations

Assets
Balance at December 31, 2007	$	33,828		$	29,932		$	7,255
Total gains or (losses) (realized/unrealized):
Included in earnings		—			—			(1,692	)⁽¹⁾
Included in other comprehensive income		(342	)		359			(1,215	)
Purchases, issuances, settlements and fundings		—			1,494			—
Write down of asset due to prepayment		—			(28	)
Transfers in and/or out of Level 3		—			—			—
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 Other-than-temporary impairment losses on NCB’s Consolidated Statements of (Loss) Income for the year ended December 31, 2008. All CMO’s were still held by NCB as of December 31, 2008.

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 June 30, 2009 and December 31, 2008:

•

Loans Held-For-Sale— NCB’s 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, after considering the effects of SFAS 133, of these loans was $8.6 million and $4.4 million as of June 30, 2009 and December 31, 2008, respectively. NCB determines the fair value of the loans-held-for sale measured at the lower of cost or fair value using discounted cash flow models which do not incorporate readily observable market data. Therefore, NCB classifies these loans held-for-sale as Level 3.

•

Mortgage servicing rights (“MSRs”)— NCB’s 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, NCB estimates the fair value of MSRs using discounted cash flow (“DCF”) models that calculate the present value of estimated future net servicing income. The model considers and incorporates individual loan characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. NCB reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. As the valuation inputs are largely unobservable, MSRs are classified within Level 3 of the valuation hierarchy. MSRs are carried at the lower of amortized cost or estimated fair value.

•

Impaired Loans— NCB’s 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 as of June 30, 2009 and December 31, 2008 (dollars in thousands):


	Quoted Prices in Active		Significant Other		Significant
	Markets for Identical Assets		Observable Inputs		Unobservable Inputs		Balance as of
	(Level 1)		(Level 2)		(Level 3)		June 30, 2009
Assets
Loans held-for-sale	$	—	$	—	$	9,044	$	9,044	⁽¹⁾
Mortgage servicing rights		—		—		4,402		4,402	⁽²⁾
Impaired loans		—		—		47,598		47,598	⁽³⁾

Total	$	—	$	—	$	61,044	$	61,044


	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 mortgage loans with fair values below cost and for which the fair value option has not been elected, are included in the table above. The related valuation allowance represents the cumulative adjustment to fair value of those specific mortgage loans.

(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.

(3)		This amount represents the fair value of impaired loans in accordance with SFAS 114.

SFAS No. 107, “Disclosure 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.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value and for those instruments that NCB has not measured at fair value on a recurring basis as of June 30, 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.

Accrued interest receivable and accrued interest payable— The carrying value of accrued interest payable is deemed to approximate fair value.

Deposit liabilities— The fair value of demand deposits, savings accounts, and certain money market deposits is determined using estimates of the value of the customer relationship provided by the Office of Thrift Supervision. 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.

Short-term and other borrowings— The carrying amounts approximate fair value.

Long-term debt— The fair value of long-term debt 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 NCB.

Subordinated debt— The fair value of subordinated debt 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 NCB.

Junior subordinated debt— The fair value of junior subordinated debt 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 NCB.

Standby letters of credit and financial guarantees written— For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of guarantees and letters 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 following table summarizes the carrying amount and fair value of the financial instruments that NCB has not measured at fair value on a recurring basis (dollars in thousands):


	June 30, 2009				December 31, 2008
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	102,355	$	102,355	$	39,971	$	39,971
Held-to-maturity investment securities		387		374		387		374
Mortgage servicing rights		13,892		15,995		13,252		14,891
Loans held-for-sale		21,195		20,922		14,278		14,396
Loans and lease financing, net		1,872,539		1,858,880		1,930,124		1,973,435
Accrued interest receivables		9,833		9,833		11,169		11,169
Financial Liabilities:
Deposits		1,266,567		1,293,149		1,300,071		1,320,529
Short-term borrowings		175,600		175,591		225,000		225,000
Long-term debt		295,210		292,942		196,447		196,673
Subordinated debt		116,489		64,108		116,489		92,252
Junior subordinated debt		51,547		14,659		51,547		33,245
Accrued interest payable		5,342		5,342		6,151		6,151


	Contract or				Contract or
	Commitment		Estimated		Commitment		Estimated
Off-Balance Sheet Financial Instruments:	Amounts		Fair Value		Amounts		Fair Value
Undrawn commitments to extend credit	$	901,162	$	4,506	$	912,427	$	4,562
Standby letters of credit	$	286,252	$	10,652	$	293,711	$	12,131

17. SEGMENT REPORTING

NCB’s reportable segments are strategic business units that provide diverse products and services within the financial services industry. NCB 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 income consists of NCB’s 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. NCB 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 segment reporting for the six months ended June 30 (dollars in thousands):


								Retail and
	Commercial		Real Estate			Warehouse		Consumer					NCB
2009	Lending		Lending			Lending		Lending		Other			Consolidated
Net interest income:
Interest income	$	16,814	$	23,113		$	2,875	$	14,230	$	816		$	57,848
Interest expense		4,812		13,110			1,110		7,797		1,283			28,112

Net interest income		12,002		10,003			1,765		6,433		(467	)		29,736

Provision for loan losses		5,810		16,594			—		2,381		—			24,785

Non-interest income		2,617		2,229			7,168		909		707			13,630

Non-interest expense:
Direct expense		2,706		1,654			2,508		1,044		11,116			19,028
Overhead and support		4,786		2,922			3,764		2,019		—			13,491

Total non-interest expense		7,492		4,576			6,272		3,063		11,116			32,519


Income (loss) before taxes	$	1,317	$	(8,938	)	$	2,661	$	1,898	$	(10,876	)	$	(13,938	)


Total average assets	$	564,981	$	847,595		$	84,238	$	517,481	$	164,737		$	2,179,032


Total assets	$	543,168	$	855,830		$	71,993	$	501,422	$	185,295		$	2,157,708


								Retail and
	Commercial		Real Estate		Warehouse			Consumer					NCB
2008	Lending		Lending		Lending			Lending		Other			Consolidated
Net interest income:
Interest income	$	18,208	$	20,202	$	4,232		$	15,920	$	2,143		$	60,705
Interest expense		9,865		10,770		2,367			8,794		2,158			33,954

Net interest income		8,343		9,432		1,865			7,126		(15	)		26,751

Provision for loan losses		1,257		2,428		—			804		—			4,489

Non-interest income		3,094		2,384		4,030			1,079		630			11,217

Non-interest expense:
Direct expense		2,700		1,503		2,935			1,227		12,147			20,512
Overhead and support		2,971		1,639		3,175			1,469		—			9,254

Total non-interest expense		5,671		3,142		6,110			2,696		12,147			29,766


Income (loss) before taxes	$	4,509	$	6,246	$	(215	)	$	4,705	$	(11,532	)	$	3,713


Total average assets	$	503,391	$	607,127	$	135,449		$	529,917	$	183,198		$	1,959,082


Total assets	$	512,562	$	739,370	$	92,502		$	536,021	$	154,717		$	2,035,172

The following is the segment reporting for the three months ended June 30 (dollars in thousands):


									Retail and
	Commercial			Real Estate			Warehouse		Consumer					NCB
2009	Lending			Lending			Lending		Lending		Other			Consolidated
Net interest income:
Interest income	$	8,378		$	11,319		$	1,447	$	6,902	$	390		$	28,436
Interest expense		2,113			7,917			688		3,270		765			14,753

Net interest income		6,265			3,402			759		3,632		(375	)		13,683

Provision for loan losses		3,499			8,796			—		1,621		—			13,916

Non-interest income		1,436			953			3,853		661		346			7,249

Non-interest expense:
Direct expense		1,474			723			994		486		5,197			8,874
Overhead and support		3,524			1,776			2,040		1,324		—			8,664

Total non-interest expense		4,998			2,499			3,034		1,810		5,197			17,538


Income (loss) before taxes	$	(796	)	$	(6,940	)	$	1,578	$	862	$	(5,226	)	$	(10,522	)


Total average assets	$	554,397		$	848,674		$	85,733	$	510,004	$	193,627		$	2,192,435


Total assets	$	543,168		$	855,830		$	71,993	$	501,422	$	185,295		$	2,157,708


							Retail and
	Commercial		Real Estate		Warehouse		Consumer					NCB
2008	Lending		Lending		Lending		Lending		Other			Consolidated
Net interest income:
Interest income	$	8,602	$	10,754	$	1,685	$	8,235	$	956		$	30,232
Interest expense		4,429		5,377		953		4,222		994			15,975

Net interest income		4,173		5,377		732		4,013		(38	)		14,257

Provision for loan losses		1,333		1,042		—		430		—			2,805

Non-interest income		1,728		1,379		3,342		591		251			7,291

Non-interest expense:
Direct expense		1,360		751		1,608		558		6,580			10,857
Overhead and support		1,497		797		1,591		641		—			4,526

Total non-interest expense		2,857		1,548		3,199		1,199		6,580			15,383


Income (loss) before taxes	$	1,711	$	4,166	$	875	$	2,975	$	(6,367	)	$	3,360


Total average assets	$	508,498	$	668,708	$	113,543	$	541,609	$	187,541		$	2,019,899


Total assets	$	512,562	$	739,370	$	92,502	$	536,021	$	154,717		$	2,035,172

18. LOAN SALES AND SECURITIZATIONS

NCB sells loans in the whole loan and securitization markets. When NCB sells loans, it generally continues to retain the mortgage servicing rights and, depending on the nature of the sale, may also continue to retain interest-only securities (retained interests).

NCB has not sold any loans through securitized transactions in 2008 or 2009.

During the six months ended June 30, 2009 and 2008, NCB sold loans through non-securitized transactions to Fannie Mae. The net proceeds from the sale of these loans were $228.9 million and generated a total of $2.8 million in retained interests for the six months ended June 30, 2009. The net proceeds from the sale of these loans were $188.7 million and generated a total of $1.5 million in retained interests for the six months ended June 30, 2008.

NCB does not retain any interests on Consumer Loan sales, which generated net proceeds of $79.9 million and $194.3 million for the six months ended June 30, 2009 and 2008, respectively.

In total, NCB generated a gain on the sale of loans of $6.8 million and $3.9 million for the six months ended June 30, 2009 and 2008, respectively. NCB generated a gain on the sale of loans of $3.5 million and $3.2 million for the three months ended June 30, 2009 and 2008, respectively.

See Note 5 — Loan Servicing for a presentation of loan balances that NCB services.

Mortgage Servicing Rights (“MSR’s”)

MSRs arise from contractual agreements between NCB 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 NCB’s servicing of the related loans. Under these contracts, NCB 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, NCB receives a servicing fee ranging generally from 0.06% to 0.38% 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, NCB 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, NCB generally has the right to solicit the borrowers for other products and services.

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 fee income) for the six months ended June 30, 2009 and 2008 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		1,244			573			305			411		$	1,549		$	984
Amortization		(647	)		(428	)		(508	)		(447	)	$	(1,155	)	$	(875	)
Change in valuation allowance		184			—			62			154		$	246	⁽¹⁾	$	154	⁽¹⁾

Balance at June 30	$	3,659		$	3,033		$	10,233		$	10,650		$	13,892		$	13,683


(1)		This represents a recovery value of previously impaired MSR’s. The recovery recorded does not exceed amortized cost.

Changes in the valuation allowance for MSRs (included as a component of other assets) for the six months ended June 30, 2009 and 2008 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			—		13			138			272			138
Recoveries		(443	)		—		(75	)		(292	)		(518	)		(292	)

Balance at June 30	$	—		$	—	$	380		$	85		$	380		$	85

Considerable judgment is required to determine the fair value of NCB’s retained interests because these assets have Level 3 inputs under SFAS 157.

NCB’s 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 P&I 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 NCB services.

Key economic assumptions used in determining the fair value of MSRs at the time of sale for the six months ended June 30, are as follows:


	2009			2008
Weighted-average life (in years):
Share and Single-family Residential Loans		7.6			4.6
Multifamily, Cooperative and Commercial Real Estate Loans		6.0			7.0

Weighted-average annual prepayment speed:
Share and Single-family Residential Loans		10.2	%		23.8	%
Multifamily, Cooperative and Commercial Real Estate Loans		4.1	%		5.0	%

Residual cash flow discount rate (annual):
Share and Single-family Residential Loans		10.0	%		10.3	%
Multifamily, Cooperative and Commercial Real Estate Loans		7.4	%		9.0	%

Earnings rate P&I float, escrows and replacement reserves:
Share and Single-family Residential Loans		2.8	%		4.2	%
Multifamily, Cooperative and Commercial Real Estate Loans		2.5	%		3.5	%

Key economic assumptions used in measuring the period-end fair value of NCB’s MSRs as of June 30, 2009, and December 31, 2008, and the effect on the fair value of those MSRs from adverse changes in those assumptions are as follows (dollars in thousands):


	June 30,			December 31,
	2009			2008
Fair value of mortgage servicing rights:
Share and Single-family Residential Loans	$	4,204		$	2,878
Multifamily, Cooperative and Commercial Real Estate Loans	$	11,791		$	12,013

Weighted-average life (in years):
Share and Single-family Residential Loans		4.1			2.5
Multifamily, Cooperative and Commercial Real Estate Loans		6.5			6.8

Weighted-average annual prepayment speed:
Share and Single-family Residential Loans		22.0	%		33.5	%
Multifamily, Cooperative and Commercial Real Estate Loans		2.8	%		2.6	%
Impact on fair value of 10% adverse change:
Share and Single-family Residential Loans	$	(317	)	$	(245	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(84	)	$	(81	)
Impact on fair value of 20% adverse change:
Share and Single-family Residential Loans	$	(614	)	$	(500	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(166	)	$	(161	)

Residual cash flows discount rate (annual):
Share and Single-family Residential Loans		10.1	%		10.5	%
Multifamily, Cooperative and Commercial Real Estate Loans		9.0	%		9.0	%
Impact on fair value of 10% adverse change:
Share and Single-family Residential Loans	$	(129	)	$	(66	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(364	)	$	(384	)
Impact on fair value of 20% adverse change:
Share and Single-family Residential Loans	$	(251	)	$	(129	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(710	)	$	(748	)

Earnings rate of P&I float, escrow and replacement:
Share and Single-family Residential Loans		2.8	%		3.5	%
Multifamily, Cooperative and Commercial Real Estate Loans		3.0	%		3.0	%
Impact on fair value of 10% adverse change:
Share and Single-family Residential Loans	$	(55	)	$	(82	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(408	)	$	(404	)
Impact on fair value of 20% adverse change:
Share and Single-family Residential Loans	$	(111	)	$	(164	)
Multifamily, Cooperative and Commercial Real Estate Loans	$	(816	)	$	(808	)

Interest-Only Receivables

Activity related to interest-only receivables for the six months ended June 30, 2009 and 2008 is as follows (dollars in thousands):


	Interest-Only Certificated
	Receivables
	2009			2008
Balance at January 1 at fair value	$	27,854		$	33,828
Amortization		(2,884	)		(2,783	)
Change in mark-to-market		348			(2,667	)

Balance at June 30 at fair value	$	25,318		$	28,378


	Interest-Only Non-certificated
	Receivables
	2009			2008
Balance at January 1 at fair value	$	27,264		$	29,932
Additions		1,230			504
Amortization		(2,180	)		(2,275	)
Change in mark-to-market		(382	)		(3,328	)
Writedown of asset due to prepayment		(15	)		(1	)

Balance at June 30 at fair value	$	25,917		$	24,832

For interest-only receivables, NCB 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 NCB’s interest-only receivables at the time of sale are the life and discount rate of the estimated cash flows which are as follows:


	June 30,
	2009			2008
Weighted-average life (in years)		9.4			9.7
Weighted-average annual discount rate		9.00	%		11.57	%

The decrease in the discount rate from June 30, 2008 to June 30, 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 NCB’s interest-only receivables as of June 30, 2009 and December 31, 2008, and the effect on the fair value of those interest-only receivables from adverse changes in those assumptions are as follows (dollars in thousands):


	June 30,			December 31,
	2009			2008
Fair value	$	51,235		$	55,118
Weighted-average life (in years)		6.8			5.9
Weighted average annual discount rate		9.00	%		9.00	%
Impact on fair value of 10% adverse change	$	(1,225	)	$	(1,372	)
Impact on fair value of 20% adverse change	$	(2,401	)	$	(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.

As of June 30, 2009 and December 31, 2008, the total principal amount outstanding of the underlying loans of the interest-only receivables was $4.7 billion.

The following table summarizes the cash flows received from loan sale activity and retained interests for the six months ended June 30, (dollars in thousands):


	2009		2008
Net proceeds from other loan sales	$	228,946	$	188,690
Net proceeds from auto loan sales	$	79,876	$	194,285
Servicing fees received	$	3,262	$	3,306
Cash flows received on interest-only receivables	$	7,003	$	7,075

19. PATRONAGE DIVIDENDS

Under the National Consumer Cooperative Bank Act, NCB must make annual patronage dividends to its stock-holding patrons, which are those cooperatives from whose loans or other business NCB derived interest or other income during the year with respect to which a patronage dividend is declared. NCB allocates its patronage dividends among its patrons generally in proportion to the amount of income derived during the year from each patron. NCB stockholders, as such, are not automatically entitled to patronage dividends. They are entitled to patronage dividends only in the years when they have patronized NCB, and thus the amount of their patronage is not determined by the number of shares they hold. Under NCB’s 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.

Under NCB’s current patronage dividend policy, NCB 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 will be determined by NCB’s Board of Directors based upon its determination of the capital requirements of the Bank and other factors, in its discretion.

NCB has allocated $7.2 million of its 2008 retained earnings for patronage dividends in the form of stock to be distributed during 2009. The Board of Directors has not yet declared the amount of such dividend, but on December 31, 2008, in order to conserve capital, the Board of Directors determined that the cash portion of that patronage dividend will be zero. Thus, absent further action by the Board of Directors, no cash will be paid out in patronage dividend in 2009.

NCB has allocated $6.1 million of its 2009 retained earnings for patronage dividends to be distributed during 2010. NCB’s Board of Directors determined that the cash portion of the 2009 patronage dividend to be paid in 2010 will be zero.

20. IMMATERIAL CORRECTION OF AN ERROR IN PRIOR PERIODS

During the first quarter of 2009, NCB 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 (through December 2010). As a result of this error, NCB’s non-interest income presented on its consolidated statements of income (loss) 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.

In accordance with Staff Accounting Bulletin (SAB) No. 99,Materiality, and No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, 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. Consequently, NCB will revise its historical financial statements for the fourth quarter of 2008 and the year ended December 31, 2008 when these statements are presented again in future filings.

NCB corrected the effect of the error on the consolidated balance sheets 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 and for the year ended December 31, 2008. The consolidated statements of (loss) income for the three and six months ending June 30, 2009 are not affected by this error and includes amortization of $147 thousand and $289 thousand related to the basis adjustment for the three and six months ended June 30, 2009, respectively.

21. PROVISION FOR 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, FSB’s income is subject to state taxation, while only certain of NCB’s subsidiaries are subject to federal taxation. The income tax benefit for the six months ended June 30, 2009 was $0.9 million and the provision for the six months ended June 30, 2008 was $54 thousand. NCB, FSB’s effective weighted average state tax rate was approximately 5.7% as of June 30, 2009 compared to 5.2% as of June 30, 2008. The effective combined tax rate for both Federal and state tax was approximately 6.6% as of June 30, 2009 compared to 1.5% as of June 30, 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 NCB. As of June 30, 2009, NCB’s net deferred tax asset was $1.8 million and NCB has concluded that it is more likely than not that it will utilize this asset. Additional information related to NCB’s income taxes are disclosed in its Form 10-K.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing NCB’s results of operations. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and statistical data presented in this document and the December 31, 2008 audited consolidated financial statements and the accompanying notes included in NCB’s recent Annual Report on Form 10-K.

NCB primarily provides financial services to eligible cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United States. A cooperative enterprise is an organization which is owned by its members and which is 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. NCB is structured as a cooperative institution, whose voting stock can only be owned by its members or those eligible to become its members.

Recessionary economic conditions continued into 2009 and NCB’s financial results continue to be substantially impacted. Certain of NCB’s borrowers are experiencing financial difficulty which has resulted in increased provisions for loan losses. The volatile debt and equity markets, lack of liquidity, wide credit spreads and other events and factors have resulted in realized and unrealized losses for NCB (as disclosed).

Due to the general weakness in the economy, NCB has experienced deterioration in its loan portfolio and therefore continues to increase the provision for loan losses in 2009. Of the $24.8 million provision for loan losses, $17.4 is related to six Commercial Loans, $1.5 million is related to one Real Estate Loan and $1.9 million is related to four Consumer Loans. The recession that the U.S. economy is currently facing is impacting NCB’s borrowers and as a result, NCB is experiencing a higher frequency of loan impairments, both in number and severity, than in prior years.

As a result of the deterioration in the loan portfolio, NCB itself was in default under its senior note purchase agreement and under its revolving credit facility due to a violation of certain financial covenants because of increased loan loss provisions and charge-off’s principally related to a small number of borrowers experiencing pronounced financial difficulties, including several borrowers which have filed for bankruptcy. On August 14, 2009, NCB entered into a forbearance agreement with the required holders under each of NCB’s senior note purchase agreement and NCB’s revolving credit facility. The forbearance agreements were entered into under customary terms and conditions, including the suspension of the need for NCB to comply with certain financial covenants for the duration of the forbearance period. Other provisions include:

	•		a forbearance period that will expire on November 16, 2009 under the senior note purchase agreement and the revolving credit facility by each of the counterparties under those instruments.

	•		agreement by NCB to a minimum liquidity covenant during the duration of the forbearance period.

	•		the insertion of an additional asset quality target for NCB’s loan portfolio.

	•		agreement by NCB that certain yield maintenance amounts on account of the notes due 2009 and the notes due 2010 will be added to the principal balances thereof, and will be payable at maturity. The aggregate yield maintenance amount is approximately $6.8 million.

	•		an increase in the rates of interest to 300 basis points over the current rate for the senior note purchase agreement and 200 points over the base rate for the revolving credit facility. Prior to the interest rate increases, the interest rate for the senior note purchase agreement was fixed at 8.5% and the revolving credit facility was LIBOR plus 3.5% or prime (base rate) plus 1.0% as of June 30, 2009.

	•		the payment of a forbearance fee of 25 basis points of the aggregate outstanding principal amount of the senior notes and the aggregate principal amount outstanding of the revolving credit facility. Total forbearance fees are approximately $0.7 million.

Although NCB believes that it has adequate liquidity to meet all of its obligations for the duration of the forbearance period and it does not have the intent to sell any specific investment securities or loans nor is it more likely than not that it will be required to sell any of its investments that are currently impaired, NCB may need to monetize certain assets to raise funds to meet its obligations under the senior note agreement and credit agreement if it cannot reach agreement with its lenders or if the forbearance agreement otherwise terminates or expires without addressing NCB’s debt burden.

NCB has available resources and appropriate strategies to meet its liquidity needs and to counter the difficult operating conditions including but not limited to:

As of June 30, 2009, NCB has $102.4 million of cash on hand and loans held-for-sale of $21.0 million that could be used to meet liquidity needs if necessary. NCB also has an investment security portfolio and a loan portfolio which could be monetized to raise liquidity if necessary. However, at this time, NCB has no specific plan or intention to dispose of any particular investment security or loan receivable.

During 2008, the Federal Deposit Insurance Corporation (“FDIC”) Board of Directors approved the Temporary Liquidity Guarantee Program (“TLGP”). The program was created to strengthen confidence and encourage liquidity in the banking system by guaranteeing certain newly issued senior unsecured debt of banks, thrifts, and certain holding companies. During the first quarter of 2009, NCB issued $25.0 million of senior unsecured debt under this program. NCB issued an additional $63.7 million of senior unsecured debt during the second quarter of 2009, of which $13.7 million was issued by NCB, FSB itself. NCB has no further capacity to issue TLGP debt.

		Under the TLPG, the FDIC will temporarily guarantee 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 was scheduled to mature on or before June 30, 2009. Upon a payment default, the FDIC would continue to make scheduled interest and principal payments under the terms of the debt instrument through its maturity, except that, for debt issuances whose final maturities extend beyond June 30, 2012, at any time thereafter, the FDIC may elect to make a payment in full of all the outstanding principal and interest under the debt issuance.

		The FDIC also implemented the Transaction Account Guarantee Program (“TAGP”). As of December 31, 2008, NCB is participating in the TAGP. Under this program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.

NCB expects to continue to focus on originating a greater portion of loans at NCB, FSB as compared with NCB itself. This is principally due to the less expensive source of funding available to NCB, FSB, which can rely on customer deposits and borrowings from the Federal Home Loan Bank of Cincinnati, both of which have lower borrowing costs than the revolving credit facility used by NCB itself. In addition, a recent amendment to NCB’s revolving credit facility limits NCB’s ability to originate loans at NCB itself. Because of the limitation on commercial lending at NCB, FSB under the federal Home Owners Loan Act, the continued migration of lending from NCB to NCB, FSB may reduce the number of Commercial Loans made by NCB. The amendment, however, also increased the potential sources of liquidity for NCB, FSB by permitting NCB, FSB to issue FDIC-guaranteed debt under the TLGP as well as to borrow under a federal funds program with the Federal Reserve and with other banks.

On October 3, 2008, the Troubled Asset Relief Program (“TARP”) was signed into law. TARP gave the United States Treasury Department (“Treasury”) authority to deploy up to $750 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, Treasury announced plans to direct $250 billion of this authority into equity investments in banks under the Capital Purchase Program (“CPP”). Principal terms of the CPP include payment of preferred dividends on the Treasury’s stock, restrictions on the payment of common stock dividends, restrictions on stock repurchase programs, and restrictions on executive compensation. NCB is currently evaluating the potential benefits and costs associated with participating in the preferred stock program.

Results of Operations
For the six months ended June 30, 2009 compared to the six months ended June 30, 2008
Overview

NCB’s net loss for the six months ended June 30, 2009 was $13.0 million compared to net income of $3.7 million for the six months ended June 30, 2008.

Total assets increased less than 1.0% or $2.8 million to $2.16 billion as of June 30, 2009, from $2.15 billion as of December 31, 2008.

The annualized return on average total assets was -1.2% and 0.4% for the six months ended June 30, 2009 and 2008, respectively. The annualized return on average members’ equity was -11.7% and 3.3% for the six months ended June 30, 2009 and 2008, respectively.

Selected Financial Data
(Dollars In Thousands)


	For the three months ended June 30,						For the six months ended June 30,
Profitability	2009			2008			2009			2008
Net interest income	$	13,683		$	14,257		$	29,736		$	26,751
Provision for loan losses		13,916			2,805			24,785			4,489
Net interest income after provision for loan losses		(233	)		11,452			4,951			22,262
Non-interest income		7,249			7,291			13,630			11,217
Non-interest expense		17,538			15,383			32,519			29,766
Net (loss) income		(9,781	)		3,250			(13,017	)		3,659

Net yield on interest earning assets		2.61	%		2.93	%		2.82	%		2.84	%
Return on average assets		-1.8	%		0.6	%		-1.2	%		0.4	%
Return on average members’ equity		-18.0	%		5.9	%		-11.7	%		3.3	%
Efficiency ratio		83.8	%		71.4	%		75.0	%		78.4	%


	June 30,			December 31,
Supplemental Data	2009			2008
Loans held-for-sale	$	21,195		$	14,278
Loans and lease financing		1,913,240			1,957,191
Total assets		2,157,708			2,154,892
Total borrowings		638,846			590,726

Full time equivalent employees		281			316

Average members’ equity as a percentage of average total assets		10.2	%		10.8	%
Average members’ equity as a percentage of average total loans and lease financing		11.3	%		12.1	%

Net average loans and lease financing to average total assets		88.9	%		87.6	%
Net average earning assets to average total assets		95.3	%		95.7	%


	June 30,			December 31,
Credit Quality	2009			2008
Allowance for loan losses	$	40,701		$	27,067
Allowance for loan losses to loans outstanding		2.1	%		1.4	%
Non-accrual loans		75,302			16,777
Real estate owned		3,988			659
Total non-performing assets		79,290			17,436
Non-performing assets as a percentage of total assets		3.7	%		0.8	%
Non-performing assets as a percentage of total loans and lease financing		4.1	%		0.9	%

Net Interest Income

Net interest income for the six months ended June 30, 2009, increased $2.9 million or 10.8% to $29.7 million compared with $26.8 million for the six months ended June 30, 2008. The net yield on interest earning assets decreased from 2.84% for the six months ended June 30, 2008, to 2.82% for the same period in 2009.

For the six months ended June 30, 2009, interest income decreased by 4.7% or $2.9 million to $57.8 million compared with $60.7 million for the six months ended June 30, 2008. The decrease resulted primarily from a decrease in Real Estate, Consumer and Commercial Loan yields which more than offset an increase in Real Estate, Consumer and Commercial Loan balances year-over-year. The majority of NCB’s loan portfolio is indexed to rates that have re-priced downwards from June 30, 2008 to June 30, 2009.

Interest income from Real Estate (Residential and Commercial) Loans decreased $1.1 million or 3.2%. An increase in average balances of $153.8 million or 14.4% was more than offset by a 97 basis point decrease in average yield for the six months ending June 30, 2009 compared to the same period in 2008. Consumer and Commercial Loans and Lease interest income decreased $0.4 million or 1.7%. The decrease in the yield from 7.06% in 2008 to 5.95% in 2009 contributed $3.8 million to the decrease in income, while an increase in average balances of $106.0 million or 16.6% partially offset $3.4 million of the year-over-year decrease. Interest income from investment securities and cash equivalents decreased by $1.5 million. A decrease in the yield from 4.29% in 2008 to 3.01% in 2009 contributed $0.8 million and a decrease in volume contributed $0.7 million to the decrease in interest income.

Other interest income, consisting only of excess yield, is generated from the interest-only non-certificated receivables held by NCB. NCB 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 receivable, NCB is entitled to a cash interest payment which is offset by the amortization of the interest-only receivable. Interest-only non-certificated receivables are recorded in the same manner as available-for-sale investment securities. Other interest income was $1.1 million and $1.0 million for the six months ended June 30, 2009 and 2008, respectively.

Interest expense for the six months ended June 30, 2009, decreased $6.0 million or 17.5% from $34.0 million for the six months ended June 30, 2008 to $28.0 million for the six months ended June 30, 2009.

Interest expense on deposits for the six months ended June 30, 2009, decreased $4.0 million or 20.1% from $19.1 million in 2008 to $15.1 million in 2009. The average cost of deposits decreased by 141 basis points from 3.79% to 2.38% contributing $8.0 million to the decrease in interest expense. Average deposit balances for the six months ended June 30, 2009 grew by $262.5 million or 26.1% from 2008 to 2009 partially offsetting the decrease in deposit interest expense by $4.0 million.

Interest expense on short-term borrowings for the six months ended June 30, 2009 decreased by $0.6 million or 15.9% from $4.6 million in 2008 to $4.0 million in 2009. The average cost of short-term borrowing decreased from 3.63% to 3.34% accounting for $0.4 million of the decrease in interest expense. A $12.9 million decrease in average short-term borrowings contributed $0.2 million to the year-over-year decrease in interest expense.

For the six months ended June 30, 2009 interest expense on long-term debt, other borrowings and subordinated debt decreased $1.3 million or 12.6%. The average cost of borrowing decreased from 5.27% to 4.39% accounting for $1.8 million of the decrease while a $20.2 million increase in average long-term debt borrowings partially offset the decrease in interest expense by $0.5 million.

See Table 1 and Table 2 for detailed information of the increases and decreases in interest income and interest expense for the six months ended June 30, 2009.

Table 1
Changes in Net Interest Income
For the six months ended June 30,
(Dollars in thousands)


	2009 Compared to 2008
	Change in average			Change in average			Increase (Decrease)
	volume			rate			Net**
Interest Income
Real Estate (Residential and Commercial) Loans	$	4,511		$	(5,583	)	$	(1,072	)
Consumer and Commercial Loans and Leases		3,446			(3,830	)		(384	)

Total loans and lease financing		7,958			(9,414	)		(1,456	)
Investment securities and cash equivalents		(654	)		(838	)		(1,492	)
Other interest income		(37	)		128			91


Total interest income		7,267			(10,124	)		(2,857	)


Interest Expense
Deposits		4,050			(8,011	)		(3,961	)
Short-term borrowings		(225	)		(366	)		(591	)
Long-term debt, other borrowings and subordinated debt		487			(1,777	)		(1,290	)


Total interest expense		4,312			(10,154	)		(5,842	)


Net interest income	$	2,955		$	30		$	2,985


**		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.

Table 2
Rate Related Assets and Liabilities
For the six months ended June 30,
(Dollars in thousands)


	2009								2008
	Average			Income /		Average			Average			Income /		Average
	Balance*			Expense		Rate/Yield			Balance*			Expense		Rate/Yield
Assets
Interest earning assets
Real Estate (Residential and Commercial) Loans*	$	1,224,987		$	32,956		5.38	%	$	1,071,195		$	34,028		6.35	%
Consumer and Commercial Loans and Leases*		744,158			22,133		5.95	%		638,165			22,517		7.06	%

Total loans and lease financing*		1,969,145			55,089		5.60	%		1,709,360			56,545		6.62	%
Investment securities and cash equivalents		112,954			1,700		3.01	%		148,815			3,192		4.29	%
Other interest income		26,639			1,059		7.95	%		27,627			968		7.01	%

Total interest earning assets		2,108,738			57,848		5.49	%		1,885,802			60,705		6.44	%


Allowance for loan losses		(32,299	)							(18,747	)

Non-interest earning assets
Cash		34,041								9,609
Other		68,552								82,418

Total non-interest earning assets		102,593								92,027

Total assets	$	2,179,032							$	1,959,082


Liabilities and members’ equity
Interest bearing liabilities
Deposits	$	1,268,947		$	15,110		2.38	%	$	1,006,468		$	19,071		3.79	%
Short-term borrowings		238,500			3,977		3.34	%		251,404			4,568		3.63	%
Long-term debt, other borrowings and subordinated debt		411,339			9,025		4.39	%		391,165			10,315		5.27	%

Total interest bearing liabilities		1,918,786			28,112		2.93	%		1,649,037			33,954		4.12	%

Other liabilities		37,930								89,505
Members’ equity		222,316								220,540

Total liabilities and members’ equity	$	2,179,032							$	1,959,082

Net interest earning assets	$	189,952							$	236,765

Net interest revenues and spread				$	29,736		2.56	%				$	26,751		2.32	%
Net yield on interest earning assets							2.82	%							2.84	%


*		Average loan balances include non-accrual loans.

Non-interest Income
(dollars in thousands)


	Non-interest income
	for the six months ended
	June 30,
	2009		2008
Gain on sale of loans	$	6,620	$	577
Servicing fees		2,352		2,587
Letter of credit fees		2,261		2,145
Lower of cost or market valuation allowance		410		30
Real estate loan fees		336		312
SFAS 133 adjustment		143		3,304
Prepayment fees		107		569
Other		1,401		1,693

Total	$	13,630	$	11,217

Total non-interest income increased $2.4 million or 21.5% from $11.2 million during the six months ended June 30, 2008, to $13.6 million for the six months ending June 30, 2009. This was driven primarily by an increase of $2.9 million in gain on sale of loans, including the SFAS 133 adjustment, from $3.9 million for the six months ended June 30, 2008 to $6.8 million for the six months ending June 30, 2009. In order to mitigate risk, NCB forward sells loan commitments on a loan by loan basis.

The percentage of gain on the sold principal balance of Cooperative, Multifamily and Commercial Real Estate Loans increased from a loss of 0.68% in the first six months of 2008 to a gain of 3.33% in the first six months of 2009.

NCB, in the normal course of business, enters into contractual commitments to extend credit to borrowers. The commitments become effective when the borrowers rate lock a specified interest rate within the time frames established by NCB. Market risk arises if interest rates and/or the return demanded by investors moves adversely between the time of the rate lock and the ultimate sale to an investor. These commitments are undesignated derivatives pursuant to the requirements of SFAS 133 and are accordingly marked to fair value through earnings.

The application of SFAS 157 and SAB 109 had the effect of recognizing a gain on loans, loan commitments and derivatives hedging these loans and loan commitments of $0.7 million for loans that will not be funded or delivered to investors until a date subsequent to June 30, 2009.

The following table shows the unpaid principal balance of loans sold during the six months ended June 30 (dollars in thousands):


	2009		2008
Cooperative, Multifamily and Commercial Real Estate Loans:
Sold through securitizations	$	—	$	—
Other loan sales		100,022		111,335

Total Cooperative, Multifamily and Commercial Real Estate Loans		100,022		111,335
Consumer Loans (auto loans)		79,876		194,285
Single-family Residential Loans and Share Loans		118,635		78,887
SBA Loans		7,173		567

Total	$	305,706	$	385,074

The Consumer Loan sales represent the sale, at par, of participations in auto loans. NCB purchases and sells these notes within a 30 day cycle. The primary economic benefit to NCB of this program is the net interest income it earns while these notes are on the balance sheet for this 30 day period.

Non-interest Expense
(dollars in thousands)


	Non-interest expense
	for the six months ended
	June 30,
	2009			2008
Compensation and employee benefits	$	15,565		$	17,297
Occupancy and equipment		3,370			3,522
Contractual services		2,811			2,367
Provision for losses on unfunded commitments		2,476			227
Information systems		2,252			2,527
Loan costs		1,564			1,125
Total other-than-temporary impairment losses		1,480			—
Portion of losses recognized in other comprehensive income (before taxes)		(158	)		—

Net impairment losses recognized in earnings		1,322			—
FDIC premium		1,456			406
Corporate development		543			651
Travel and entertainment		334			560
Loss (gain) on sale of investments available-for-sale		95			(7	)
Other		731			1,091

Total	$	32,519		$	29,766

Non-interest expense for the six months ended June 30, 2009, increased 9.2% or $2.7 million to $32.5 million compared with $29.8 million for the corresponding prior year period. The increase was primarily due to a $1.3 million increase in impairment loss and a $2.2 million increase in provision for losses on unfunded commitments due to the downgrade of three letters of credit and a $1.1 million increase in FDIC premium expense, partially offset by a $1.7 million decrease in compensation and employee benefits.

Per SFAS 65, loans held-for-sale that have not been specifically identified for fair value accounting under SFAS 159 must be recorded at the lower of cost or fair value. For the six months ending June 30, 2009, NCB recorded a change in the SFAS 65 valuation allowance of $0.3 million to reflect the current market pricing for NCB’s loans held-for-sale at June 30, 2009.

NCB acquired five CMO securities issued by Morgan Stanley in 2007 for $8.5 million. During the six months ending June 30, 2009, there were $0.2 million of principal repayments on the CMO’s. Management monitors the credit support of each of the bonds held by NCB, 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 June 30, 2009, the financial condition and credit quality of certain underlying collateral has deteriorated. NCB 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, NCB recognized OTTI of $1.7 million on three of the five CMO investment securities. During the second quarter of 2009, and based on NCB’s most recent estimates of the aforementioned factors, NCB recognized OTTI of $1.5 million on a fourth CMO investment security, reducing the carrying value from $1.8 million to $0.3 million. No OTTI was recognized for the fifth CMO security given the substantial amount of subordination to that tranche.

The application of new accounting guidance resulted in the recognition of $158.0 thousand for market-related OTTI losses in other comprehensive income for the three and six months ending June 30, 2009. NCB also adjusted its beginning 2009 retained earnings to reflect the $77.0 thousand of market-related OTTI related to 2008. As of June 30, 2009, NCB does not intend to sell nor is it more likely than not that NCB will be required to sell the CMO investment securities.

Credit Quality

Since December 31, 2008, the allowance for loan losses increased by $13.6 million, or 50.4% to $40.7 million. This included $0.6 million of recoveries received and $11.8 million of charge-offs on loans.

The allowance for loan losses represented 2.1% and 1.4% of total loans and lease financing, excluding loans held—for-sale, as of June 30, 2009 and December 31, 2008, respectively. The allowance as a percentage of non-performing assets was 45.0% as of June 30, 2009 compared with 155.0% as of December 31, 2008. During the first half of 2009, NCB experienced additional weakness in the credit quality of its loan portfolio, especially in the Healthcare and Employee Stock Ownership Plan (“ESOP”) segments. Healthcare credits accounted for $24.1 million or 30.5% of non-performing assets as of June 30, 2009. There were no non-performing assets in the Healthcare segment as of December 31, 2008. ESOP credits accounted for $15.4 million or 19.5% of non-performing assets as of June 30, 2009 and $0.3 million or 1.7% of non-performing assets as of December 31, 2008. NCB anticipates that further weakness in its loan portfolio is likely.

NCB’s increased provision for loan losses and increased charge-off activity was primarily driven by severe financial problems experienced by a limited number of borrowers. Certain of these borrowers had higher loan balances than NCB’s typical borrower. Certain of these borrowers also filed suddenly and unexpectedly for bankruptcy protection during the second quarter of 2009. Of the $24.8 million provision for loan losses, $17.4 is related to six Commercial Loans, $1.5 million is related to one Real Estate Loan and $1.9 million is related to four Consumer Loans.

As of June 30, 2009, NCB had outstanding letters of credit with a total commitment amount of $286.3 million of which $250.9 million related to letters of credit issued in connection with certain variable rate municipal bonds which mature before the end of 2013. Under those letters of credit, NCB can be called upon to fund the amount of the municipal bond 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. During 2008, NCB 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 ws 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. As of June 30, 2009, none of the letters of credit related to the municipal bonds were funded. As of June 30, 2009, $19.1 million of the $250.9 million related to letters of credit issued in connection with certain variable rate municipal bonds were classified as criticized, and the associated reserve for losses on these unfunded commitments were $2.8 million.

Table 3
IMPAIRED ASSETS
(dollars in thousands)


	June 30,			March 31,			December 31,			September 30,			June 30,
	2009			2009			2008			2008			2008

Real estate owned	$	3,988		$	1,286		$	659		$	469		$	956
Impaired loans		86,531			66,061			20,377			22,248			16,234


Total	$	90,519		$	67,347		$	21,036		$	22,717		$	17,190


As a percentage of loans and lease financing outstanding		4.73	%		3.46	%		1.07	%		1.21	%		0.96	%

The aggregate average balance of impaired loans was $48.4 million and $16.3 million for the six months ended June 30, 2009, and the year ended December 31, 2008, respectively. As of June 30, 2009, NCB’s impaired loans included $12.6 million of loans still accruing interest and $75.3 million of loans not accruing interest. As of December 31, 2008, NCB’s impaired loans included $3.6 million of loans still accruing interest and $16.8 million of loans not accruing interest.

For the three months ended June 30, 2009 compared to the three months ended June 30, 2008

Overview

NCB’s net loss for the three months ended June 30, 2009 was $9.8 million compared to net income of $3.3 million for the three months ended June 30, 2008.

The annualized return on average total assets was -1.8% and 0.6% for the three months ended June 30, 2009 and 2008, respectively. The annualized return on average members’ equity was -18.0% and 5.9% for the three months ended June 30, 2009 and 2008, respectively.

Net Interest Income

Net interest income for the three months ended June 30, 2009, decreased $0.6 million or 4.2% to $13.7 million compared with $14.3 million for the three months ended June 30, 2008.

For the three months ended June 30, 2009, interest income decreased by 5.9% or $1.8 million to $28.4 million compared with $30.2 million for the six months ended June 30, 2008. The decrease resulted primarily from a decrease in Real Estate, Consumer and Commercial Loan yields which more than offset an increase in Real Estate, Consumer and Commercial Loan balances year over year. The majority of NCB’s loan portfolio is indexed to rates that have re-priced downwards from June 30, 2008 to June 30, 2009.

Interest income from Real Estate (Residential and Commercial) Loans decreased $1.4 million or 7.8%. An increase in average balances of $110.2 million or 9.9% was more than offset by a decrease in the yield from 6.26% in 2008 to 5.25% in 2009. Consumer and Commercial Loans and Lease interest income increased $0.2 million or 1.7%. The decrease in the yield from 6.56% in 2008 to 6.04% in 2009 contributed $0.9 million to the decrease in income, while an increase in average balances of $69.1 million or 10.4% partially offset $1.1 million of the year-over-year decrease in yields. Interest income from investment securities and cash equivalents decreased by $0.6 million. A decrease in the yield from 4.02% in 2008 to 2.82% in 2009 contributed $0.4 million and a decrease in volume contributed $0.2 million to the decrease in interest income.

Other interest income, consisting only of excess yield, is generated from the interest-only non-certificated receivables held by NCB. NCB 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 receivable, NCB is entitled to a cash interest payment which is offset by the amortization of the interest-only receivable. Interest-only non-certificated receivables are recorded in the same manner as available-for-sale investment securities. Other interest income was $0.5 million for the three months ended June 30, 2009 and 2008.

Interest expense for the three months ended June 30, 2009, decreased $1.2 million or 7.5% from $16.0 million for the three months ended June 30, 2008 to $14.8 million for the three months ended June 30, 2009.

Interest expense on deposits for the three months ended June 30, 2009, decreased $2.0 million or 22.0% from $9.0 million in 2008 to $7.0 million in 2009. The average cost of deposits decreased by 136 basis points from 3.52% to 2.16% contributing $3.9 million to the decrease in interest expense. Average deposit balances for the three months ended June 30, 2009 grew by $276.3 million or 27.1% from 2008 to 2009 partially offsetting the decrease in deposit interest expense by $1.9 million.

Interest expense on short-term borrowings for the three months ended June 30, 2009 increased by $0.5 million or 20.9%. The average cost of short-term borrowing increased from 3.00% to 5.48% accounting for $1.5 million of the increase in interest expense. A $99.1 million decrease in average short-term borrowings partially offset $1.0 million of the year-over-year increase in interest expense. The increase in the average cost of short-term borrowing is due to an increase in the average cost on the revolving line of credit that ranged from 4.25% to 6.25% during the three months ending June 30, 2009 compared to a range of 3.22% to 3.48% during the three months ending June 30, 2008.

For the three months ended June 30, 2009 interest expense on long-term debt, other borrowings and subordinated debt increased $0.3 million or 6.1%. A $50.1 million or 12.7% increase in average balances contributed $0.6 million to the year-over-year increase in interest expense while a decrease in the average cost of borrowing from 4.87% to 4.62% partially offset $0.3 million of the year-over-year increase in interest expense.

See Table 1A and Table 2A for detailed information of the increases and decreases in interest income and interest expense for the three months ended June 30, 2009.

Table 1A
Changes in Net Interest Income
For the three months ended June 30,
(Dollars in thousands)


	2009 Compared to 2008
	Change in average			Change in average			Increase (Decrease)
	volume			rate			Net**
Interest Income
Real Estate (Residential and Commercial) Loans	$	1,586		$	(2,939	)	$	(1,353	)
Consumer and Commercial Loans and Leases		1,088			(903	)		185

Total loans and lease financing		2,674			(3,842	)		(1,168	)
Investment securities and cash equivalents		(249	)		(397	)		(646	)
Other interest income		12			6			18


Total interest income		2,436			(4,232	)		(1,796	)


Interest Expense
Deposits		1,964			(3,941	)		(1,977	)
Short-term borrowings		(1,051	)		1,513			462
Long-term debt, other borrowings and subordinated debt		592			(299	)		293


Total interest expense		1,504			(2,726	)		(1,222	)


Net interest income	$	932		$	(1,506	)	$	(574	)


**		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.

Table 2A
Rate Related Assets and Liabilities
For the three months ended June 30,
(Dollars in thousands)


	2009								2008
	Average			Income /		Average			Average			Income /		Average
	Balance*			Expense		Rate/Yield			Balance*			Expense		Rate/Yield
Assets
Interest earning assets
Real Estate (Residential and Commercial) Loans*	$	1,224,268		$	16,070		5.25	%	$	1,114,026		$	17,423		6.26	%
Consumer and Commercial Loans and Leases*		731,825			11,046		6.04	%		662,698			10,861		6.56	%

Total loans and lease financing*		1,956,093			27,116		5.54	%		1,776,724			28,284		6.37	%
Investment securities and cash equivalents		117,649			828		2.82	%		146,844			1,474		4.02	%
Other interest income		26,320			492		7.48	%		25,690			474		7.38	%

Total interest earning assets		2,100,062			28,436		5.42	%		1,949,258			30,232		6.20	%


Allowance for loan losses		(34,551	)							(19,637	)

Non-interest earning assets
Cash		51,883								9,309
Other		75,041								89,736

Total non-interest earning assets		126,924								99,045

Total assets	$	2,192,435							$	2,028,666


Liabilities and members’ equity
Interest bearing liabilities
Deposits	$	1,295,675		$	7,004		2.16	%	$	1,019,404		$	8,981		3.52	%
Short-term borrowings		194,958			2,671		5.48	%		294,097			2,209		3.00	%
Long-term debt, other borrowings and subordinated debt		443,345			5,078		4.58	%		393,229			4,785		4.87	%

Total interest bearing liabilities		1,933,978			14,753		3.05	%		1,706,730			15,975		3.74	%

Other liabilities		40,630								101,320
Members’ equity		217,827								220,616

Total liabilities and members’ equity	$	2,192,435							$	2,028,666

Net interest earning assets	$	166,084							$	242,528

Net interest revenues and spread				$	13,683		2.37	%				$	14,257		2.46	%
Net yield on interest earning assets							2.61	%							2.93	%


*		Average loan balances include non-accrual loans.

Non-interest Income
(dollars in thousands)


	Non-interest income
	for the three months ended
	June 30,
	2009		2008
Gain on sale of loans	$	3,486	$	2,998
Servicing fees		1,404		1,514
Letter of credit fees		1,244		1,129
Lower of cost or market valuation allowance		198		127
Real estate loan fees		139		160
SFAS 133 adjustment		49		154
Prepayment fees		27		324
Other		702		885

Total	$	7,249	$	7,291

Total non-interest income decreased $0.1 million or 0.6% from $7.3 million during the three months ended June 30, 2008, to $7.2 million for the three months ending June 30, 2009. This was driven primarily by a decrease of $0.3 million in prepayment fees and a decrease of $0.2 million in other non-interest income partially offset by the gain on sale of loans of $0.4 million.

The percentage of gain on the sold principal balance of Cooperative, Multifamily and Commercial Real Estate Loans increased from a gain of 1.98% in the second quarter of 2008 to a gain of 2.87% in the second quarter of 2009.

The application of SFAS 157 and SAB 109 had the effect of recognizing a gain on loans, loan commitments and derivatives hedging these loans and loan commitments of $0.1 million for loans that will not be funded or delivered to investors until a date subsequent to June 30, 2009.

The following table shows the unpaid principal balance of loans sold during the three months ended June 30 (dollars in thousands):


	2009		2008
Cooperative, Multifamily and Commercial Real Estate Loans:
Sold through securitizations	$	—	$	—
Other loan sales		68,929		59,113

Total Cooperative, Multifamily and Commercial Real Estate Loans		68,929		59,113
Consumer Loans (auto loans)		54,239		112,779
Single-family Residential Loans and Share Loans		54,920		52,101
SBA Loans		1,429		567

Total	$	179,517	$	224,560

Non-interest Expense
(dollars in thousands)


	Non-interest expense
	for the three months ended
	June 30,
	2009			2008
Compensation and employee benefits	$	7,124		$	9,035
Provision for losses on unfunded commitments		2,145			111
Occupancy and equipment		1,665			1,762
Total other-than-temporary impairment losses		1,480			—
Portion of losses recognized in other comprehensive income (before taxes)		(158	)		—

Net impairment losses recognized in earnings		1,322			—
Contractual services		1,375			1,309
Information systems		1,118			1,210
FDIC premium		1,006			181
Loan costs		843			715
Corporate development		257			361
Travel and entertainment		180			306
Loss (gain) on sale of investments available-for-sale		154			(11	)
Other		349			404

Total	$	17,538		$	15,383

Non-interest expense for the three months ended June 30, 2009, increased 14.0% or $2.1 million to $17.5 million compared with $15.4 million for the corresponding prior year period. The increase was primarily due to a $1.3 million increase in net other-than-temporary impairment losses and a $2.0 million increase in provision for losses on unfunded commitments due to the downgrade of three letters of credit and a $0.8 million increase in FDIC premium expense, partially offset by a $1.9 million decrease in compensation and employee benefits due to a decrease in employee incentives and a decrease in severance expense since 2008.

Per SFAS 65, loans held-for-sale that have not been specifically identified for fair value accounting under SFAS 159 must be recorded at the lower of cost or fair value. For the three months ending June 30, 2009, NCB recorded a change in the SFAS 65 valuation allowance of $0.1 million to reflect the current market pricing for NCB’s loans held-for-sale at June 30, 2009.

Non-interest expense for the three months ending June 30, 2009 also included an OTTI charge of $1.3 million, net of the market-related OTTI of $158.0 thousand presented in comprehensive income, related to NCB’s investment in CMO securities as described earlier.

Liquidity and Capital Resources

In the event that we are ultimately unable to reach an agreement to amend the existing loan agreements or otherwise repay and extinguish the senior note agreement and revolving credit agreement prior to the expiration or termination of the forbearance agreements, the lenders and the noteholders have the right to call and demand immediate repayment of any and all amounts due.

The following describe NCB’s primary sources and uses of liquidity as of June 30, 2009:

	•		NCB plans to fund loan curtailments and 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, if necessary, through leveraging existing assets through the use of a securitization vehicle, disposing of certain assets and raising funds from other capital sources. At this time, NCB does not have the intent to sell any specific investment securities or loans nor is it more likely than not that NCB will sell any of its investments or loans at a loss.

	•		FHLB available capacity of $129.6 million as of June 30, 2009 compared to $192.1 million as of December 31, 2008 as a result of NCB’s reduction of deposits and corresponding increase in FHLB funds as a source of funding. As of June 30, 2009, the FHLB of Cincinnati, with whom NCB banks, has not provided notice of any potential dividend cancellations. This capacity is not affected by the forbearance agreements.

	•		Potential funding from the Federal Reserve Bank or other participating member banks.

	•		Potential funding through Capital Purchase Program under TARP.

	•		During the first quarter of 2009, NCB issued $25.0 million of senior unsecured debt under the TLGP program. In the second quarter of 2009, NCB issued an additional $50.0 million of unsecured debt under the TLGP program, of which $13.7 million was issued by NCB, FSB itself.

	•		During the first half of 2009, NCB invested $7.0 million in NCB Financial Corporation, parent company of NCB, FSB to support NCB, FSB’s Total Risk-Based Capital Ratio target of 12%. Under the investment limitations in its credit agreements, NCB itself will not be able to invest any additional capital in NCB FSB absent equity growth at NCB.

	•		$2.5 million Class A Notes due December 2009

	•		$55.0 million of privately placed debt due December 2009

	•		$50.0 million of privately placed debt due December 2010

	•		$24.0 million of Class A notes amortization due December 2010

Sources and Uses of Funds

NCB’s 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 loan originations and purchases of investment securities.

Cash Provided by Operating Activities.NCB’s net cash provided by operating activities for the six months ended June 30, 2009 was $15.9 million compared to $46.9 million of net cash provided by operating activity for the six months ending June 30, 2008. This $30.9 million change was primarily due a $35.0 million net decrease net cash used for the purchase and origination of loans held-for-sale, net of principal collections, a $74.2 million decrease in the net proceeds from the sale of loans held-for-sale, a $16.7 million decrease in net income, partially offset by a $20.3 million increase in the provision for loan losses.

Cash Provided by (Used in) Investing Activities.NCB’s net cash provided by investing activities for the six months ended June 30, 2009 was $37.2 million compared to $245.6 million of net cash used in investing activities for the six months ended June 30, 2008. This $282.7 million change was primarily due to a $244.8 million decrease in cash used to originate loans and lease financing, net of principal collections and prepayments and a $27.6 million decrease in cash used to purchase portfolio loans.

Cash Provided by Financing Activities.NCB’s net cash provided by financing activities for the six months ended June 30, 2009 was $9.3 million compared to $166.8 million for the six months ended June 30, 2008. The $176.1 million decrease in cash provided was primarily due to a $94.1 million decrease in cash provided by deposits a $131.1 million increase in cash used to repay short-term borrowings, partially offset by a $73.5 million increase in net cash provided by long-term borrowings.

Interest-Bearing Liabilities

Per Table 4 below, interest-bearing liabilities, including accrued interest increased 0.8% to $1.91 billion as of June 30, 2009 compared with $1.90 billion as of December 31, 2008.

For the six months ended June 30, 2009, deposits, all of which are held at NCB, FSB, decreased 2.3% to $1.27 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 funds). The weighted average rate on deposits as of June 30, 2009 was 2.1% compared to 2.8% as of December 31, 2008. The average maturity of the certificates of deposit as of June 30, 2009 was 14.7 months compared with 10.9 months as of December 31, 2008.

As of June 30, 2009, NCB had one depositor with deposits in excess of 5% of NCB’s total deposits. This depositor had 8.4% of NCB’s total deposits. All of the $106.0 million of deposits from this depositor relate to certificates of deposit with early withdrawal penalties that have maturities ranging from 3 months to 60 months. Thus, NCB does not consider this deposit concentration a significant liquidity risk.

Table 4
Interest-Bearing Liabilities
(including accrued interest as of June 30, 2009)
(dollars in thousands)


	June 30,		December 31,
	2009		2008		% Change
Deposits	$	1,270,434	$	1,304,572		-2.6	%
Short-term debt		175,499		225,076		-22.0	%
Long-term debt		295,716		198,123		49.3	%
Subordinated debt		116,675		116,684		0.0	%
Junior subordinated debt		52,038		52,497		-0.9	%

Total	$	1,910,362	$	1,896,952		0.7	%

Total borrowings, including accrued interest, increased $47.8 million or 8.1% from $592.4 million as of December 31, 2008 to $640.2 million as of June 30, 2009.

NCB had $110.6 million of advances from the FHLB facility, of which $100.0 million were long-term, as of June 30, 2009 compared to $113.0 million as of December 31, 2008, of which $90.0 million were long-term. NCB also has letter of credit availability in the FHLB facility of which $13.3 million and $13.7 million was issued as of June 30, 2009 and December 31, 2008, respectively.

As a result of NCB’s default under its senior note purchase agreement and under its revolving credit facility due to a covenant violation as of June 30, 2009, NCB was subject to the following increases to its cost of debt:

•

agreement by NCB that certain yield maintenance amounts on account of the notes due 2009 and the notes due 2010 will be added to the principal balances thereof, and will be payable at maturity. The aggregate yield maintenance amount is approximately $6.8 million.

	•		a resetting of the interest rate to a rate, which is 300 basis points over the current rate under the senior note purchase agreement and to a rate which is 200 points over the base rate under the revolving credit facility.

	•		the payment of a forbearance fee of 25 basis points of the aggregate outstanding principal amount of the senior notes and the aggregate principal amount outstanding of the revolving credit facility. Total forbearance fees are approximately $0.7 million.

As of June 30, 2009, NCB’s long-term borrowings, as disclosed on its consolidated balance sheet, consisted of advances from the FHLB, maturing between June 2011 and March 2014 of $100.0 million, $55.0 million of privately placed debt due in December 2009, $50.0 million of privately placed debt due in December 2010 and $88.7 million of senior unsecured debt issued under the Temporary Liquidity Guarantee Program (“TLGP”). During the first quarter of 2009, NCB issued $25.0 million of senior unsecured TLGP debt with a maturity date of February 15, 2012. In connection with this debt issuance, NCB incurred $0.9 million of costs which have been capitalized and included as a component of other assets. The capitalized costs are amortized over the remaining contractual maturity of the debt agreement. During the second quarter of 2009, NCB issued an additional $50.0 million of senior unsecured debt under the TLGP with a maturity of May 27, 2012, of which $13.7 million was issued by NCB, FSB itself. In connection with this debt issuance, NCB incurred $2.3 million of costs which have been capitalized and included as a component of other assets.

As of December 31, 2008, NCB’s long-term borrowings, as disclosed on its consolidated balance sheet, included $70.0.0 million of FHLB advances maturing between June 2011 and June 2012, $20.0 million of FHLB advances that matured in June 2009, $55.0 million of privately placed debt due in December 2009 and $50.0 million of privately placed debt due in December 2010.

Contractual Obligations

Other than the changes to NCB’s senior note agreements and revolving credit facility agreement, there have been no material changes to either the type or maturity of contractual obligations from what was disclosed in NCB’s 2008 Annual Report on Form 10-K. NCB entered into amendments to the senior note agreements and revolving credit facility agreement on March 31, 2009 and disclosure of these amendments is included in NCB’s Annual Report on Form 10-K and NCB’s Quarterly Report on Form 10-Q for March 31, 2009. With respect to the senior note agreements (two notes — one due in December 2009 and one due in 2010) and revolving credit agreement, NCB has disclosed in this Form 10-Q that it has violated certain covenants for the quarter ending June 30, 2009. As disclosed in this filing, NCB has entered into forbearance agreements with the lenders. NCB can provide no assurances that the parties will resolve all matters related to the senior note and revolving credit facility agreements during the forbearance period. In the event that NCB is unable to reach an agreement to further amend the existing loan agreements, obtain waivers beyond the forbearance period or otherwise repay or extinguish the senior note agreements and revolving credit facility agreement prior to the expiration of the forbearance agreement, the holders of the notes and lender have the right to call the loans and demand immediate repayment of amounts due. The aggregate amount outstanding as of June 30, 2009 under these agreements is $270.0 million.

Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

Discussion of NCB’s commitments, contingent liabilities and off-balance sheet arrangements is included in Notes 14 and 15 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 NCB’s historical experience.

As of June 30, 2009, NCB has derivative counterparty risk relating to certain interest rate swaps it has with a counterparty. If the fair value of the derivative contract is positive (an asset), the counterparty owes NCB and a repayment risk exists. If the fair value of the derivative contract is negative (a liability), NCB owes the counterparty, so there is no repayment risk while the fair value of the contract remains negative. NCB minimizes repayment risk by entering into transactions with counterparties that NCB believes to be financially stable that are specified by policy and reviewed periodically by management. When NCB has multiple derivative transactions with a single counterparty, the net mark-to-market exposure represents the netting of positive and negative 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 NCB and the counterparty. NCB uses master netting agreements with the majority of its counterparties

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference to the discussion contained under the caption “Overview” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 4T. CONTROLS AND PROCEDURES

NCB’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, NCB’s Chief Executive Officer and Chief Financial Officer concluded that NCB’s disclosure controls and procedures are functioning effectively to provide reasonable assurance that NCB can meet its obligations to disclose in a timely manner material information required to be included in NCB’s reports under the Exchange Act.

There has been no change in NCB’s internal control over financial reporting that occurred during NCB’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, NCB’s internal control over financial reporting.

Part II OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business NCB is involved in various types of litigation and disputes, which may lead to litigation. NCB has determined that pending or unasserted legal actions will not have a material impact on its financial condition or future operations.

Item 1A. Risk Factors

In the event that NCB is unable to reach an agreement to amend the existing loan agreements or otherwise repay and extinguish the senior note agreement and revolving credit agreement prior to the expiration of the forbearance agreement, the lenders and noteholders have the right to call and demand immediate repayment of any and all amounts due. NCB believes that it has adequate liquidity to meet all of NCB’s obligations and NCB does not have the intent to sell any specific investment securities or loans nor is it more likely than not that NCB will sell any of its investments that are currently impaired, but NCB may need to monetize certain assets to raise funds to meet its obligations under the senior note agreement and credit agreement if an agreement cannot be reached with NCB’s lenders. Further, NCB is confident that agreements will be reached with all of the lenders during the forbearance period.

Other than the aforementioned, there have been no material changes in the risk factors described in Item 1A (“Risk Factors”) of NCB’s Annual Report on Form 10-K since the year ended December 31, 2008.

Item 6. Exhibits

The following exhibits are filed as part of this report:


Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

Exhibit 32		Section 1350 Certifications

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

NATIONAL CONSUMER COOPERATIVE BANK

Date: August 14, 2009



	By:
		Richard L. Reed,
		Executive Managing Director, Chief Financial Officer

	By:
		David Sanders
		Senior Vice President, Corporate Controller

EXHIBIT INDEX


Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

Exhibit 32		Section 1350 Certifications

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Avg

Consumer Loans

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.

Commercial Loans

Commercial Loans include unsecured or secured loans to businesses (including small businesses “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 association’s rights to collect them.

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.