UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the fiscal year ended December 31, 2008
or
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission File number 2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
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United States of America
(12 U.S.C. Section 3001 et. seq.) | | 52-1157795 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
601 Pennsylvania Avenue N.W., North Building, Suite 750, Washington, D.C. 20004
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code(202)349-7444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements of the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer þ | | Smaller reporting company o |
| | | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined inrule 12b-2 of the Act): o Yes þ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the place at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: the registrant’s voting and non-voting common equity is not traded on any market.
Indicate the number of shares outstanding of each of the registrant’s classes of common
stock at December 31, 2008: Class B 1,726,718 and Class C 251,117. DOCUMENTS
INCORPORATED BY REFERENCE: None
ThisForm 10-K contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to 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, 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.
PART 1
ITEM 1. BUSINESS
GENERAL
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 “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. ThisForm 10-K 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.
In the legislation chartering NCB (the National Consumer Cooperative Bank Act or the “Act”), Congress stated its finding that cooperatives have proven to be an effective means of minimizing the impact of inflation and economic hardship on members/owners by narrowing producer-to-consumer margins and price spreads, broadening ownership and control of economic organizations to a larger base of consumers, raising the quality of goods and services available in the marketplace and strengthening the nation’s economy as a whole. To further the development of cooperative businesses, Congress specifically directed NCB (1) to encourage the development of new and existing cooperatives eligible for its assistance by providing specialized credit and technical assistance; (2) to maintain broad-based control of NCB by its voting shareholders; (3) to encourage a broad-based ownership, control and active participation by members in eligible cooperatives; (4) to assist in improving the quality and availability of goods and services to consumers; and (5) to encourage ownership of its equity securities by cooperatives and others.
The Act also directed NCB to form NCB Capital Impact, which is a non-profit organization without capital stock organized under the laws of the District of Columbia to perform only functions provided in the Act. NCB Capital Impact provides loans and technical support to cooperative enterprises. Consistent with the Act, NCB may make deductible, voluntary contributions to NCB Capital Impact.
NCB fulfills its statutory obligations in two fashions. First, NCB, directly and through its wholly-owned indirect subsidiary, NCB, FSB, makes loans and offers other financing services, which afford cooperative businesses substantially the same financing opportunities currently available for traditional enterprises. Second, NCB provides financial and other assistance to NCB Capital Impact.
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The Act was passed on August 20, 1978, and NCB commenced lending operations on March 21, 1980. In 1981, Congress amended the Act (the “Act Amendments”) to convert the Class A Preferred stock of NCB previously held by the United States to Class A notes as of December 31, 1981 (the “Final Government Equity Redemption Date”). NCB maintains its executive offices at 601 Pennsylvania Avenue, N.W., Suite 750, Washington, D.C. 20004. The telephone number of its executive offices is(202) 349-7444. NCB’s operations center is located in Arlington, Virginia. NCB also maintains regional offices in Anchorage, Alaska, New York, New York, and Oakland, California. NCB, FSB maintains its principal office in Hillsboro, Ohio and non-retail branches in New York, New York and Washington, D.C.
NCB, directly and through NCB, FSB, originates various types of loans. The following are the primary types of such loans.
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| • 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. |
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| • Commercial Loans | | Commercial Loans include unsecured or secured loans to businesses (including small business “SBA Loans” and loans to retailer members of wholesaler cooperatives), franchises, community associations, cooperative housing corporations (unsecured only) and other entities to refinance debt or fund capital improvements. Commercial Loans to businesses and franchises are primarily secured by personal property, rents or other cash flows. Commercial Loans to community associations (“Community Association Loans”) are secured by an assignment of condominium or homeowner assessments, accounts and rents and the association’s rights to collect them. |
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| | Commercial loans that are used for purposes other than the development and/or ownership of non-residential real property but are secured by non-residential real property are categorized as Real Estate — Commercial Loans. |
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| • Real Estate — Residential Loans | | Residential Real Estate Loans include Single-family Residential Loans, Share Loans, Cooperative Loans and Multifamily Loans. |
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| | Single-family Residential Loans are loans to individuals or investors to purchase, refinance, construct or improve residential property consisting of one to four dwellings and are secured by the underlying real estate. |
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| | Share Loans are loans to individuals or investors living in a cooperative housing corporation (created for the sole purpose of owning and managing a residential apartment property for the benefit of its resident shareholders) to finance the purchase or refinance a share within the cooperative. The share or stock certificate serves as collateral for the loan. |
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| | Cooperative Loans are loans to cooperative housing corporations to refinance existing debt or fund capital improvements to the common areas of the entire building. Cooperative Loans are secured by the first or second mortgage in the land and buildings and by an assignment of all leases, receivables, accounts and personal property of the cooperative housing corporation. |
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| | Multifamily Loans are loans to businesses or investors to purchase, refinance, construct or improve residential property consisting of five |
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| | or more dwellings (e.g. apartment housing, student housing, senior housing) and are secured by the underlying real estate. |
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| • Real Estate — Commercial Loans | | Commercial Real Estate Loans are loans to businesses (including small business “SBA Loans”) or investors to purchase, refinance, construct or improve non-residential property (e.g., retail centers, office buildings, industrial properties or self storage warehouse) and are secured by the underlying real estate. |
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| • Leases | | NCB has lease programs that it offers to customers. |
LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES
Eligibility Requirements
Cooperatives, cooperative-like organizations, and legally chartered entities primarily owned and controlled by cooperatives are eligible to borrow from NCB on a patronage basis under Section 108 of the Act if they are engaged in producing or furnishing goods, services or facilities primarily for the benefit of their members or voting stockholders who are the ultimate consumers of such goods, services or facilities. In addition, to be eligible to borrow from NCB under Section 108 of the Act the borrower must, among other things, (1) be controlled by its members or voting stockholders on a democratic basis; (2) agree not to pay dividends on voting stock or membership capital in excess of such percentage per annum as may be approved by NCB; (3) provide that its net savings shall be allocated or distributed to all members or patrons, in proportion to their patronage, or retain such savings for the actual or potential expansion of its services or the reduction of its charges to the patrons; and (4) make membership available on a voluntary basis, without any social, political, racial or religious discrimination and without any discrimination on the basis of age, sex, or marital status to all persons who can make use of its services and are willing to accept the responsibilities of membership. NCB may also purchase obligations issued by members of eligible cooperatives. NCB maintains member finance programs for members of distribution and purchasing cooperatives primarily in the food, franchise and hardware industries. In addition, organizations applying for loans must comply with other technical and financial requirements that are customary for similar loans from financial institutions.
Under the Act, NCB must make annual patronage dividends to its 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 the amount of their patronage does not depend on the amount of their stockholding. Under NCB’s 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.
NCB, both directly and acting through NCB, FSB, also makes certain non-patronage-based loans under the general lending authority and incidental powers provisions of Section 102 of the Act to entities and individuals other than eligible cooperatives, when NCB determines such loans to be incidental to and beneficial to lending programs designed for eligible cooperatives.
Lending Authorities
The Board of Directors establishes its policies governing the lending operations in compliance with the Act and management carries out the policies. Management in turn adopts and implements guidelines and procedures consistent with stated Board directives. The Board of Directors and management regularly review the lending policies and guidelines in order to make needed changes and amendments.
Management may approve individual credit exposures of up to 75% of the single borrower-lending limit, which is equal to 15% of NCB’s capital (using the definition of capital for national banks as set forth by the Office of the Comptroller of the Currency) without prior approval of the Board. The President may delegate authorities up to this limit to such committees and individual officers, as he may deem appropriate.
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All loan approvals require at least two manager’s signatures and the Bank’s senior management approves credit commitments that exceed an individual lending authority.
Cooperatives of Primary Producers
As provided by Section 105 of the Act the total dollar value of loans to cooperatives that produce, market and furnish goods, services and facilities on behalf of their members as primary producers (typically agricultural cooperatives) may not exceed 10% of the gross assets of NCB.
Interest Rates
NCB seeks to price its loans to yield a reasonable risk adjusted return on its portfolio in order to build and maintain its financial viability and to encourage the development of new and existing cooperatives. In addition, to ensure that NCB will have access to additional sources of capital in order to sustain its growth, NCB seeks to maintain a portfolio that is competitively priced and of sound quality.
Interest Rates for Real Estate Loans
NCB takes the following factors, among others, into consideration in pricing its Real Estate Loans: internal risk adjusted return objectives, prevailing market conditions, loan-to-value ratios, lien position, borrower payment history, reserves, occupancy level and cash flow. NCB fixes rates based on a basis point spread over U.S. Treasury securities with yields adjusted to constant maturity of one, three, five, seven or ten years. Interest rates may be fixed at the time of commitment for a period generally not exceeding 30 days. For Cooperative, Multifamily and Commercial Real Estate Loans, the rate lock commitments can extend 12 months or longer. Such loans that do rate-lock generally close absent unusual circumstances.
Interest Rates on Commercial Loans
NCB originates Commercial Loans at fixed and variable interest rates. Loan pricing is based on prevailing market conditions, income and portfolio diversification objectives and the overall assessment of risk of the transaction. Typically, Commercial Loan repayment schedules are structured by NCB with flat monthly principal reduction plus interest on the outstanding balance.
Fees
NCB assesses fees to cover its costs of consideration and handling of loan transactions, and to compensate NCB for setting aside funds for future draws under a commitment. The fees paid to outside vendors such as appraisers, environmental consultants and legal counsel retained by NCB for loan transactions are typically charged to the borrower.
Underwriting
When evaluating credit requests, NCB seeks to determine, among others, whether a prospective borrower has and will have sound management, sufficient cash flow to service debt, assets in excess of liabilities and a continuing demand for its products, services or use of its facilities, so that the requested loan will be repaid in accordance with its terms.
NCB evaluates repayment ability based upon an analysis of a borrower’s historical cash flow and conservative projections of future cash flows from operations. This analysis focuses on determining the predictability of future cash flows as a primary source of repayment.
Security
Loans made by NCB are generally secured by specific collateral. If collateral security is required, the value of the collateral must be reasonably sufficient to protect NCB from loss, in the event that the primary sources of repayment of financing from the normal operation of the cooperative, or refinancing, prove to be inadequate for debt repayment. Collateral security alone is not a sufficient basis for NCB to extend credit. Unsecured loans
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normally are made only to borrowers with strong financial conditions, operating results and demonstrated repayment ability.
Loans Benefiting Low-Income Persons
Under the Act, the Board of Directors must use its best efforts to insure that at the end of each fiscal year at least 35% of NCB’s outstanding loans are to (1) cooperatives whose members are predominantly low-income persons, as defined by NCB, and (2) other cooperatives that propose to undertake to provide specialized goods, services, or facilities to serve the needs of predominantly low-income persons. NCB defines a “low-income person,” for these purposes, as an individual whose family’s income does not exceed 80% of the median family income, adjusted for family size for the area where the cooperative is located, as determined by the Department of Housing and Urban Development. During 2008, NCB and NCB Capital Impact either directly funded or arranged the funding of over $553 million to borrowers meeting the low-income definition.
Loans to Cooperatives for Residential Purposes
Section 108 (a) of the Act prohibits NCB itself from making “any loan to a cooperative for the purpose of financing the construction, ownership, acquisition, or improvement of any structure used primarily for residential purposes if, after giving effect to such loan, the aggregate amount of all loans outstanding for such purpose would exceed 30 per centum of the gross assets of the Bank.”
To date, the 30% limitation on loans to housing cooperatives for such purposes has not restricted NCB’s ability to provide financial services to housing cooperatives. NCB has been able to maintain its position in the cooperative real estate market without increased real estate portfolio exposure by selling or securitizing real estate loans to secondary market purchasers of such loans. The preponderance of NCB real estate origination volume in recent years has been predicated upon sale to secondary market purchasers. Capital markets disruptions in 2007 and 2008 resulted in a significant reduction in the profitability of loans sold. There can be no assurance that NCB’s future lending to housing cooperatives for residential purposes will not be impaired by the statutory limit. As of December 31, 2008, approximately 5.9% of the total assets consisted of loans that are subject to the limitation.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”) and related regulations, depository institutions such as NCB, FSB have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate income areas, consistent with safe and sound banking practice. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines of business,and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiary.
OPERATIONS OF SUBSIDIARIES
NCB attempts to fulfill its statutory mission by providing financing opportunities to cooperatives directly and through its subsidiaries.
NCB Financial Corporation (“NCBFC”) is a Delaware chartered, wholly-owned, unitary savings and loan holding company subsidiary of NCB whose sole subsidiary is NCB, FSB.
NCB, FSB is a federally chartered, federally insured savings bank located in Hillsboro, Ohio, with retail branches in Ohio and non-retail branches in New York and Washington, D.C.
COMPETITION
Congress created and capitalized NCB because it found that existing financial institutions were not making adequate financial services available to cooperative, not-for-profit business enterprises. However, NCB experiences considerable competition in lending to the most credit-worthy cooperative enterprises.
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REGULATION
NCB is organized under the laws of the United States. The Farm Credit Administration examines NCB periodically, but that agency has no regulatory or enforcement powers over NCB. In addition, the Government Accountability Office is authorized to audit NCB. Reports of such examinations and audits are to be forwarded to Congress, which has the sole authority to amend or revoke NCB’s charter. The Office of Thrift Supervision (“OTS”) regulates NCB, FSB. As a savings and loan holding company, NCB itself is subject to limited regulatory and enforcement powers of and examination by the OTS pursuant to 12 U.S.C. § 1467a.
In connection with the insurance of deposit accounts, NCB, FSB, a federally insured savings bank, is required to maintain minimum amounts of regulatory capital. If NCB, FSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Deposit Insurance Fund (DIF), NCB, FSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions. NCB, FSB is also subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).
NCB and NCB, FSB are subject to a variety of federal, state and local laws, including laws relating to anti-money laundering and privacy.
The Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48 applies to all tax positions accounted for in accordance with FASB Statement 109. The term tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets.
The term tax position also encompasses, but is not limited to:
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| | • | A decision not to file a tax return |
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| | • | An allocation or a shift of income between jurisdictions |
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| | • | The characterization of income or a decision to exclude reporting taxable income in a tax return |
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| | • | A decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
TAXES
The Act provides that NCB shall be treated as a cooperative within the meaning of Section 1381(a)(2) of the Internal Revenue Code. As such and pursuant to the provisions of Subchapter T of the Internal Revenue Code and the Act, NCB, in determining its taxable income for federal income tax purposes, is allowed a deduction for an amount equal to any patronage dividends in the form of cash, Class B or Class C stock, or allocated surplus that are distributed or set aside by NCB during the applicable tax period. To date, NCB has followed the policy of distributing or setting aside such patronage dividends during the applicable tax period, which has reduced NCB’s federal income tax liability.
NCB has determined that under the Internal Revenue Code as amended by the Act, all income generated by NCB and its subsidiaries, with the exception of certain income of NCB, FSB, qualifies as patronage income under the Internal Revenue Code, with the consequence that NCB is able to issue tax deductible patronage dividends with respect to all such income.
Section 109 of the Act, as amended, provides that NCB itself, including its franchise, capital, reserves, surplus, mortgages or other security holdings and income, is exempt from taxation by any state, county, municipality or local taxing authority, except that any real property held by NCB is subject to any state, county, municipal or local taxation to the same extent according to its value as other real property is taxed.
NCB’s subsidiaries are subject to state income and franchise taxes.
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TEMPORARY LIQUIDITY GUARANTEE PROGRAM
On November 21, 2008, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC on October 14, 2008, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for noninterest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participating FDIC-insured institutions through December 31, 2009. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 150 basis points per annum, depending on the issue date and maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. NCB has elected to participate in both guarantee programs.
TROUBLED ASSET RELIEF PROGRAM
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 preferred stock investments in banks. Principal terms of this preferred stock program include payment of preferred cumulative 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 under the TARP.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “ARRA”) enacted by the U.S. Congress. The ARRA, among other things, imposed certain new executive compensation and corporate expenditure limits on all current and future recipients of funds under the TARP, as long as any obligation arising from the financial assistance provided to the recipient under the TARP remains outstanding, excluding any period during which the U.S. Treasury holds only warrants to purchase common stock of a TARP participation.
FURTHER INFORMATION
We make available free of charge on our internet website our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports have been electronically filed or submitted to the Securities and Exchange Commission (the “SEC”). These filings can be accessed on our website atwww.ncb.coop. These filings are also accessible on the SEC’s website atwww.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330.
ITEM 1A. RISK FACTORS
Like other financial companies, NCB is subject to a number of risks, many of which are outside of NCB’s direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1)credit risk, which is the risk that loan and lease customers or other counterparties will be unable to perform their contractual obligations, (2)market risk, which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (3)liquidity risk, which is the risk that NCB will have insufficient cash or access to cash to meet its funding and operating needs, and (4)operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.
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In addition to the other information included in this report, readers should carefully consider that the following important factors, among others, could materially impact our business, future results of operations, and future cash flows.
The preparation of NCB’s financial statements in conformity with the U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Further, the current volatility in the market and economic conditions may require the use of additional estimates and certain estimates may be subject to a greater degree of uncertainty.
(1) Credit Risk
Defaults in the repayment of loans may negatively impact NCB’s business.
A borrower’s default on its obligations under one or more of NCB’s loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the foreclosure and collection or restructuring of the loan.
In certain situations, where collection efforts are unsuccessful or acceptable workout arrangements cannot be reached, NCB may have to write-off the loan in whole or in part. In such situations, NCB may acquire real estate or other assets, if any, which secure the loan through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired.
NCB’s decisions regarding credit risk could be inaccurate and its allowance for loan losses may be inadequate, which could materially and adversely affect NCB’s business, financial condition, results of operations and future prospects. Additional loan losses will likely occur in the future and may occur at a rate greater than NCB has experienced to date.
Management periodically makes a determination of an allowance for loan losses based on available information, including the quality of NCB’s loan portfolio, certain economic conditions, the value of the underlying collateral and the level of non-accruing loans. Provisions to this allowance result in an expense for the period. The length and severity of the recession may affect NCB’s borrowers and; therefore management may determine that further increases in the allowance for loan losses are necessary. Bank regulatory agencies periodically review certain allowances for loan losses and the values they attribute to real estate acquired through foreclosure or other similar remedies. Such regulatory agencies may require NCB to adjust its determination of the value for these items. These adjustments could negatively impact NCB’s results of operations or financial condition.
In addition, NCB is engaged in making non-mortgage loans to commercial customers as well as making real estate loans and loans to individuals. Non-mortgage loans are generally considered not as safe as those loans secured by real estate.
NCB originates non-mortgage loans to small to medium-sized commercial customers primarily in the hardware, grocery, franchise, Employee Stock Ownership Plan (“ESOP”) and Alaska and Native American markets. These loans may be secured by furniture, fixtures, and equipment, inventory, and other collateral generally not considered as secure as real estate in the event of liquidation. Should market conditions or other factors impair the cashflow and operations of our small to medium-sized commercial customers, NCB could face an increase in delinquencies, increased provision requirementsand/or losses that may adversely impact financial performance.
In determining the size of the allowance, NCB relies on an analysis of its loan portfolio, experience and an evaluation of general economic conditions. If NCB’s assumptions prove to be incorrect, the current allowance may not be sufficient. With the volatility of the economic decline and unprecedented nature of the events in the credit and real estate markets during the latter part of 2008, NCB made significant adjustments to its allowance in 2008 and additional adjustments may continue to be necessary if the local or national real estate markets and economies continue to deteriorate. Material additions to the allowance would materially decrease net income. In addition, federal regulators periodically evaluate the adequacy of NCB’s allowance and may require an increase in the provision for loan and lease losses or recognition of further loan charge-offs based on judgments different than those
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of NCB’s management. Any further increase in NCB’s allowance or loan charge-offs could have a material adverse effect on NCB’s results of operations.
NCB may be called upon to fund letters of credit related to municipal bonds.
Some of NCB’s outstanding letters of credit have been issued in connection with certain variable rate municipal bonds. Under these types of letters of credit, NCB can be called upon to fund the amount of tendered municipal bonds in the event the holder seeks repayment and the bond cannot be sold to another purchaser. In the third quarter of 2008, NCB provided funding for seven of these letters of credit in the amount of $4.8 million. NCB cannot guarantee that it will not have to provide further funding for these types of letters of credit which could impact its financial condition.
Continued adverse developments in the financial markets and deterioration in global economic conditions could have a material adverse effect on NCB’s results of operations and financial condition.
Worldwide economic conditions deteriorated significantly during 2008. The highly volatile debt and equity markets, lack of liquidity, widening credit spreads and the collapse of several financial institutions have resulted in significant realized and unrealized losses in NCB’s investment portfolio. Also, this market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect NCB’s business, financial condition and results of operations.
Further deterioration or a continuation of recent market conditions may lead to a decline in the value of the assets that NCB holds or in the creditworthiness of its borrowers. In response to recent market disruptions, legislators and financial regulators implemented a number of mechanisms designed to add stability to the financial markets, including the provision of direct and indirect assistance to financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker dealers, implementation of programs by the United States Federal Reserve to provide liquidity to the commercial paper markets and other matters. The overall effects of legislative and regulatory efforts on the financial markets are uncertain, and they may not have the intended stabilization effects. While these measures have been implemented to support and stabilize the markets, these actions may have unintended consequences on the financial system or NCB’s business, including reducing competition or increasing the general level of uncertainty in the markets. Should these or other legislative or regulatory initiatives fail to stabilize and add liquidity to the financial markets, NCB’s business, financial condition, results of operations and prospects could be adversely affected.
NCB does not expect that the difficult conditions in the financial markets are likely to improve in the near future. A continuation or worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on NCB and others in the financial industry. In particular, NCB may face the following risks in connection with these events:
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| | • | Potential increase in regulation of NCB’s industry. Compliance with such regulation may increase NCB’s costs and limit its ability to pursue business opportunities. |
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| | • | The process NCB uses to estimate losses inherent in its credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of NCB’s borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of these estimates which may, in turn, impact the reliability of the process. |
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| | • | NCB may be required to pay significantly higher premiums to the FDIC because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. |
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| | • | There is no assurance that recently enacted legislation will stabilize the U.S. financial system and the impact on NCB of this legislation cannot be reasonably predicted at this time. |
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NCB relies on business relationships with other financial institutions to provide funding and to hedge against interest rate risk. In particular, NCB itself is party to a revolving credit facility with a syndicate of other banks. If the credit market remains disrupted, NCB may have difficulty refinancing such facility or further amending that facility if necessary in the future. Pricing under that facility may also rise if the credit markets remain frozen. In addition, NCB, FSB relies on funding from the Federal Home Loan Bank of Cincinnati. Should that institution cease to be able to provide funding as a result of continuing market disruptions, it would negatively impact NCB, FSB’s operations.
NCB may not be able to attract and retain banking customers at current levels.
Competition in the banking industry coupled with our relatively small size may limit the ability of NCB to attract and retain real estate, commercial and retail banking customers.
In particular, NCB’s competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries have larger lending limits and are thereby able to serve the credit and investment needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. NCB also faces competition from out-of-state financial intermediaries which have opened low-end production offices or which solicit deposits in their respective market areas.
Because NCB maintains a smaller staff and has fewer financial and other resources than the larger institutions with which it competes, it may be limited in its ability to attract customers. In addition, some of NCB’s current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than NCB can accommodate.
If NCB is unable to attract and retain banking customers, it may be unable to continue its loan growth and its results of operations and financial condition may otherwise be negatively impacted.
NCB, FSB’s deposit customers may pursue alternatives to deposits at its bank or seek higher yielding deposits causing NCB, FSB to incur increased funding costs.
Checking and savings account balances and other forms of deposits can decrease when deposit customers perceive alternative investments, such as the stock market or other non-depository investments as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments including products offered by other financial institutions or non-bank service providers. Increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives NCB, FSB undertakes to retain and increase deposits, including deposit pricing, can increase its costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, NCB can lose a relatively inexpensive source of funds, thus increasing funding costs.
NCB’s lines of business may be less diversified than its competitors.
NCB derives a significant amount of its earnings from blanket and share loan financing to housing cooperatives and then from members thereof. To the extent that cooperatives become a less favorable form of housing, become economically disadvantaged, or are negatively impacted by changing market conditions, NCB may be unable to attractand/or retain such banking customers and thereby may be unable to maintain or grow its business in this area and its results of operations and financial condition may be negatively impacted.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, NCB may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. NCB may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on
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inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on NCB’s business and, in turn, its financial condition and results of operations.
The failure of other financial institutions could adversely affect NCB.
NCB’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. NCB has exposure to different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies and other institutional clients. In certain of these transactions NCB is required to post collateral to secure the obligations to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, NCB may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. There is no assurance that any such losses would not materially and adversely affect NCB’s financial condition and results of operations.
In addition, many of these transactions expose NCB to credit risk in the event of a default by its counterparty or client. Also, the credit risk may be exacerbated when the collateral held by NCB cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the NCB. There is no assurance that any such losses would not materially and adversely affect NCB’s financial condition and results of operations.
Weakness in the real estate market, particularly in New York City, could negatively impact NCB’s banking business.
The real estate portfolio contains a concentration of loans in the New York City area; however, the majority of loans are to housing cooperatives with low loan-to-value ratios compared to other Commercial Real Estate Loans.
With a loan concentration in the New York City area, a decline in local economic conditions could adversely affect the values of our real estate collateral and our operating performance. Consequently, a decline in local economic conditions in the New York City area may have a greater effect on NCB’s earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.
In addition to considering the financial strength and cash flow characteristics of borrowers, NCB often secures loans with real estate collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If NCB is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values in the New York City area, its earnings and capital could be adversely affected.
A significant amount of NCB’s Residential Real Estate Loans are secured by property in the New York City area. Consequently, NCB’s ability to continue to originate these loans may be impaired by adverse changes in local and regional economic conditions in the New York City area real estate markets, or by acts of nature, including earthquakes, hurricanes, flooding and terrorist acts. Due to the concentration of real estate collateral, these events could have a material adverse impact on the ability of the borrowers of NCB to repay their loans and affect the value of the collateral securing these loans.
NCB’s business is subject to interest rate risk and fluctuations in interest rates may adversely affect its earnings.
Many of NCB’s assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, NCB’s earnings and profitability depend significantly on net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. NCB expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. If market interest rates should move contrary to NCB’s position, this “gap” will work against NCB and its earnings may be negatively affected. In light of NCB’s current volume and mix of interest-earning assets and
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interest-bearing liabilities, its interest rate margin could be expected to decrease during periods of rising interest rates and, conversely, to increase during periods of falling interest rates. NCB is unable to predict or control fluctuations of market interest rates, which are affected by many factors including the following:
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| | • | Inflation; |
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| | • | Recession; |
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| | • | Changes in unemployment; |
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| | • | The money supply; |
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| | • | Disorder and instability in financial markets; and |
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| | • | Governmental actions |
NCB’s asset/liability management strategy may not be able to control its risk from changes in market interest rates and it may not be able to prevent changes in interest rates from having a material adverse effect on NCB’s results of operations and financial condition. See “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A of thisForm 10-K for a further discussion of NCB’s sensitivity to interest rate changes.
Increases in interest rates may reduce demand for mortgage and other loans.
Higher interest rates increase the cost of mortgage and other loans to consumers and businesses and may reduce demand for such loans, which may negatively impact the NCB’s profits by reducing the amount of loan origination income.
NCB engages in derivative transactions, which expose it to credit and market risk.
NCB is exposed to credit and market risk as a result of its use of derivative instruments. NCB maintains a risk management strategy that includes the use of derivative instruments to mitigate the risk to earnings caused by interest rate volatility. Use of derivative instruments is a component of NCB’s overall risk management strategy in accordance with a formal policy that is monitored by management.
The derivative instruments utilized include interest rate swaps, futures contracts and forward loan sales commitments. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties based upon a notional principal amount and maturity date. Interest rate futures generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Forward loan sales commitments lock in the prices at which loans will be sold to investors. In the future NCB may also utilize other derivative instruments to mitigate other recognized risks.
NCB uses interest rate swaps, futures contracts and forward loan sales commitments to hedge loan commitments prior to actually funding a loan. During the commitment period, the loan commitments and related interest rate swaps, futures contracts and forward loan sales commitments are accounted for as derivatives and therefore recorded at fair value through the gain on sale. Once a commitment becomes a loan, the derivative associated with the commitment is designated as a hedge of the loan and is generally kept in place until such loan is committed for sale.
If the fair value of the derivative contract is positive, the counterparty owes NCB and a repayment risk exists. If the fair value of the derivative contract is negative, NCB owes the counterparty, so there is no repayment risk. 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.
NCB’s exposure to market risk is related to the impact that changes in interest rates has on the fair value of a financial instrument or expected cash flows. NCB manages the market risk associated with the interest rate hedge
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contracts by establishing formal policy limits concerning the types and degree of risk that may be undertaken. Compliance with this policy is monitored by management and reported to the Board of Directors.
Unexpected losses in future reporting periods may require NCB to adjust the valuation allowance against its deferred tax assets.
NCB evaluates the deferred tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between the future projected operating performance and the actual results. NCB is required to establish a valuation allowance for deferred tax assets if it determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, NCB evaluates all positive and negative available evidence as of the end of each reporting period. Future adjustments, either increases or decreases, to the deferred tax asset valuation allowance will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under the tax law. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that NCB will be required to record adjustments to the valuation allowance in future reporting periods. Such a charge could have a material adverse effect on our results of operations, financial condition and capital position.
NCB may be subject to a continuation of lower gains recorded from the sale of loans.
Another important source of income for NCB is gains recorded from the sale of Multifamily, Cooperative and Commercial Real Estate Loans. The gains are influenced by many variables, including changes in interest rates and the demand of investors to purchase securities backed by loans. During 2008, NCB has been negatively impacted by market changes, specifically, market conditions in the commercial mortgage-backed securities (“CMBS”) marketplace. The origination and sale of loans into the CMBS market had been a strong source of income for NCB. If current market conditions continue, NCB’s results of operations and financial condition may be negatively impacted.
NCB is subject to other-than-temporary impairment risk.
NCB recognizes an impairment charge when the declines in the fair value of equity and debt securities below their cost basis are judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. NCB considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the issuer, and NCB’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that NCB identifies as potentially distressed.
Impairment is considered temporary when the fair value of the instrument has been adversely impacted by market conditions, such as changes in interest rates or investor spreads, and NCB has the intent and ability to hold the instrument until such time as it expects to have received the contractual cash flows and recovered its investment. However, NCB’s intent to hold certain of these securities may change in future periods as a result of facts and circumstances impacting a specific security. If NCB’s intent to hold a security with an unrealized loss changes, and it does not expect the security to fully recover prior to the expected time of disposition, NCB will write down the security to its fair value in the period that its intent to hold the security changes.
Adverse credit market conditions may affect NCB’s ability to meet liquidity needs.
The credit markets have recently been experiencing extreme volatility and disruption, and in the second half of 2008, the volatility and disruptions reached unprecedented levels. In some cases, the markets have exerted downward pressures on availability of liquidity and credit capacity for certain issuers.
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NCB needs liquidity to, among other things, pay its operating expenses and interest on its debt, maintain its lending activities and replace certain maturing liabilities. Without sufficient liquidity, NCB may be forced to curtail its operations. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit and NCB’s credit ratings and credit capacity. NCB financial condition and cash flows could be materially affected by continued disruptions in financial markets.
NCB itself relies on several sources of funding, including a revolving credit facility with a syndicate of banks. NCB, FSB has separate sources of funding unrelated to those of NCB itself. As a result of the deteriorating economy, NCB was able to secure amendments to certain financial covenants in its revolving credit facility and prudential agreements. Those amendments require NCB to pledge all of its assets as security, increased the interest rate NCB must pay, and reduced NCB’s capacity under the revolving credit facility from a total of $350 million to a total of $225 million, with further reductions scheduled through the December 2010 maturity. Continued adverse conditions in the credit markets may make it difficult for NCB to refinance or further amend the agreement should it be required to do so in the future. There is also no assurance that NCB will continue to meet certain convents required under the amended agreements. In addition, NCB’s access to funds through the agreements is dependent on the ability of its senior creditors to meet their funding commitments. If NCB cannot obtain adequate sources of credit on favorable terms, or at all, its business, operating results and financial condition would be adversely affected. Adverse market conditions may also impact liquidity at NCB, FSB, which relies principally on deposits, borrowings from the Federal Home Loan Bank of Cincinnati, loan sales to Fannie Mae and other institutions.
Prepayments of loans may negatively impact NCB’s business.
Customers with adjustable rate loans generally may prepay the principal amount of their outstanding loans at any time. The speed at which such prepayments occur, as well as the size of such prepayments, are within such customers’ discretion. If customers prepay the principal amount of their loans, and NCB is unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on results of operations and financial condition.
Inability of customers to refinance loans may negatively impact NCB’s liquidity.
NCB, on a stand alone basis, has projected future funding needs based on certain assumptions regarding existing customer’s paying loans as they mature. In the event that the significant credit market disruption and the general economic downturn continues, such customers may be unable to find alternative sources of financing to payoff their loans to NCB. This could adversely affect NCB’s ability to fund new loans and meet its other operational costs.
NCB’s cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.
NCB’s cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures. NCB has traditionally obtained funds through the capital markets but more recently it has relied on borrowings by NCB itself under a revolving credit facility with a syndicate of banks, on borrowings by NCB, FSB from the Federal Home Loan Bank of Cincinnati, and on customer deposits at NCB, FSB. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. Historically and in comparison to commercial banking averages, NCB, FSB has had a higher percentage of its time deposits in denominations of $100,000 or more, in part because NCB, FSB has been positioned to serve business customers rather than retail customers, and business customers generally have higher levels of deposits. Within the banking industry, the amounts of such deposits are generally considered more likely to fluctuate than deposits of smaller denominations. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at NCB, FSB decreases relative to its overall banking operations, NCB may have to rely more heavily on borrowings as a source of funds in the future. As a result of credit market disruptions and the need to renegotiate certain financial covenants, the cost of borrowing by NCB itself under the revolving credit facility has increased, and there is no assurance that further pricing increases will not occur. The cost of borrowings by NCB, FSB from the Federal Home Loan Bank may also increase, resulting in a higher cost of funds for NCB, FSB as well.
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NCB is subject to extensive regulation and its business is highly regulated which could limit or restrict activities and impose financial requirements or limitations on the conduct of business.
NCB operates in a highly regulated environment and is subject to supervision and examination by federal and state regulatory agencies. The Farm Credit Administration examines NCB periodically, but that agency has no regulatory or enforcement powers over NCB. In addition, the Government Accountability Office is authorized to audit NCB. Reports of such examinations and audits are to be forwarded to Congress, which has the sole authority to amend or revoke NCB’s charter. NCB, FSB as a federal savings association is subject to regulation and supervision by the OTS.
Federal and state laws and regulations govern numerous matters including changes in the ownership or control of federal savings associations and of their holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extension of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The OTS possesses cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by bank and savings associations subject to its regulation. These and other restrictions limit the manner in which we may conduct business and obtain financing.
Furthermore, NCB’s business is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in monetary or legislative policies may affect the interest rates NCB must offer to attract deposits and the interest rates it must charge on loans, as well as the manner in which NCB offers deposits and makes loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally.
Furthermore, the recent disruptions in the financial markets and significant government involvement in financial institutions generally may lead to additional regulatory requirements. In that regard, on March 4, 2009, the Treasury and other federal agencies announced additional details relating to the Financial Stability Plan, which contains two significant programs to assist homeowners stay in their homes — the Home Affordable Refinance Program and the Home Affordable Modification Program. NCB is evaluating these programs as details emerge. In the event that NCB either elects to participate or is required to participate, the programs, and future governmental actions relating to financial institutions, may adversely affect NCB’s operations and profitability.
NCB is subject to regulatory capital adequacy guidelines, and if it fails to meet these guidelines, its financial condition would be adversely affected.
Under regulatory capital adequacy guidelines and other regulatory requirements, NCB’s subsidiary, NCB, FSB, must meet guidelines that include quantitative measures of assets, liabilities, and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If NCB fails to meet these minimum capital guidelines and other regulatory requirements, its financial condition would be materially and adversely affected. In the future, the regulatory accords on international banking institutions to be reached by the Basel Committee on Banking Supervision may require NCB to meet additional capital adequacy measures. NCB cannot predict the final form of, or the effects of, the regulatory accords. NCB’s failure to maintain the status of “well-capitalized” under its regulatory framework could affect the confidence of its customers and banking relationships, thus compromising its competitive position. In addition, failure to maintain the status of “well-capitalized” under NCB’s regulatory framework, or “well-managed” under regulatory examination procedures, could compromise NCB’s status as a bank holding company and related eligibility for a streamlined review process for acquisition proposals. NCB’s failure to maintain the status of “well-capitalized” under its regulatory framework could also impact NCB, FSB’s ability to expand its retail branching network and its ability to comply with its servicing agreements.
The financial services industry is undergoing rapid technological changes. If NCB is unable to adequately invest in and implement new technology-driven products and services, it may not be able to compete effectively, may be subject to interruption and instability or the cost to provide products and services may increase significantly.
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The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to providing better customer service, the effective use of technology increases efficiency and enables financial service institutions to reduce costs. NCB’s future success will depend, in part, upon our ability to address the customer needs by using technology to provide products and services to enhance customer convenience, as well as to create additional operational efficiencies. Many of NCB’s competitors have substantially greater resources to invest in technological improvements. NCB may not be able to effectively implement new technology-driven products and services, which could reduce NCB’s ability to effectively compete and, in turn, have a material adverse effect on its financial condition and results of operations.
NCB relies on technology to conduct much of its activity. NCB’s technological operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, unauthorized access and other similar events. Disruptions to or instability of NCB’s internal or external technology that allows customers to use its products and services could harm its business and reputation. In addition, technology systems, whether they be NCB’s own proprietary systems or the systems of third parties on whom it relies to conduct portions of its operations, are potentially vulnerable to security breaches and unauthorized usage. An actual or perceived breach of the security of technology could harm NCB’s business and reputation.
NCB’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, our business and a negative impact on its results of operations.
NCB relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems. While NCB has disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage NCB’s reputation, result in a loss of customer business, subject NCB to additional regulatory scrutiny, or expose NCB to civil litigation and possible financial liability, any of which could have a material adverse effect on its results of operations.
NCB’s controls and procedures may fail or be circumvented which could have a material adverse effect on its business, results of operations and financial condition.
NCB regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on NCB’s business, results of operations and financial condition.
Environmental liability associated with commercial real estate lending could result in losses.
In the course of its business, NCB may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, NCB might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. NCB may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on NCB’s business, results of operations and financial condition.
New accounting pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact NCB’s results of operations and financial condition.
Current accounting and tax rules, standards, policies, and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial
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reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on NCB, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and various taxing authorities, responding by adoptingand/or proposing substantive revision to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.
NCB is exposed to reputation, legal, compliance and other risks.
NCB is exposed to many types of operational risks, including reputation risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from NCB’s actual or alleged conduct in any number of activities, including lending practices and corporate governance and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect NCB’s ability to attract and keep customers and can expose it to litigation and regulatory action. Given the volume of transactions at NCB, certain errors may be repeated or compounded before they are discovered and successfully rectified. NCB’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. NCB may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. NCB is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is NCB) and to the risk that the NCB’s (or its vendors’) business continuity and data security systems prove to be inadequate.
NCB may not be able to attract and retain skilled people.
NCB’s success depends in large part on our ability to attract and retain key people and there are a limited number of qualified persons with knowledge of and experience in the banking industry in each of our markets. Furthermore, recent demand for skilled finance and accounting personnel among publicly traded companies has increased the importance of attracting and retaining these people. The unexpected loss of services of one or more of NCB’s key personnel could have a material adverse impact on its business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The federal government, as part of the American Recovery and Reinvestment Act and through other legislation and regulation, has imposed certain limitations on compensation to executives of financial institutions, including limitations on bonuses and severance payments. While NCB is not currently subject to such limitations, should NCB participate in certain programs or should the federal government take further actions, NCB may become subject to such limitations, which could adversely affect its ability to attract and retain key employees.
ITEM 2. PROPERTIES
NCB leases space for its Arlington, Virginia operations center, its Washington, D.C. executive offices and for three principal regional offices located in Anchorage, Alaska, New York City, New York and Oakland, California. NCB also maintains a Disaster Recovery facility in Silver Spring, Maryland. NCB, FSB maintains its principal offices in Hillsboro, Ohio with retail branches in Ohio and non-retail branches at NCB offices in New York, New York and Washington, D.C. NCB’s operations center and executive offices are approximately 76,000 and 3,500 square feet in size, respectively and regional offices range from approximately 2,900 to 9,700 square feet.
The rental expense for the fiscal year ended December 31, 2008 was $3.2 million for all offices combined.
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ITEM 3. LEGAL PROCEEDINGS
In the normal course of business NCB is involved in various types of disputes, which may lead to litigation or other legal proceedings. NCB has determined that pending legal proceedings will not have a material impact on NCB’s financial condition or future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NCB did not submit any matters to a vote of its security holders during 2008.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
NCB currently has two classes of stock outstanding, the rights of which are summarized as follows:
Class B Stock — The Act permits Class B stock to be held by borrowers of NCB and requires each patronage-based borrower from NCB under Section 108 of the Act to hold Class B stock at the time the loan is made at a par value equal to 1% of its loan amount. The Act prohibits NCB from paying dividends on Class B stock. There are two series of Class B stock outstanding.Class B-1 stock is Class B stock purchased from existing holders ofClass B-1 stock subsequent to May 1, 1992.Class B-1 stock previously included shares of Class B stock purchased for cash from NCB between June 28, 1984 and May 1, 1992, of which there are none outstanding.Class B-2 stock is Class B stock purchased for cash from NCB prior to June 28, 1984 and any Class B stock distributed as part of NCB’s patronage refund distribution. Class B stock is transferable to another eligible holder only with the approval of NCB. NCB does not permit any transfers ofClass B-2 stock and only permits transfers ofClass B-1 Stock at the stock’s $100 par value and only as are required to permit new borrowers to obtain their required holdings of Class B stock. In each instance, NCB specifies which holder(s) are permitted to transfer their stock to the new borrower, based upon which Class B stockholders with holdings of such stock beyond that required to support their loans have held such stock for the longest time. NCB also repurchased, at par value, any shares of Class B stock that it was required to repurchase from holders by the terms of the contracts under which such stock was originally sold by NCB. No such stock remains outstanding. Class B stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.
Class C Stock — The Act permits Class C stock to be held only by cooperatives eligible to borrow from NCB (or entities controlled by such borrowers). The Act allows NCB to pay dividends on Class C stock, but so long as any Class A notes are outstanding, limits dividends on Class C stock (or any other NCB stock) to the interest rate payable on such notes, which was 4.36% in 2008 using a weighted average. In 1994, NCB adopted a policy under which annual cash dividends on Class C stock of up to 2% of NCB’s net income may be declared. The policy does not provide any specific method to determine the amount, if any, of such dividend. Whether any such dividends will be declared and if so, in what amount, rests within the discretion of NCB’s Board of Directors. NCB has allocated $7.2 million of its 2008 retained earnings for patronage dividends in the form of stock to be distributed during 2009. NCB’s Board of Directors passed a resolution in 2008 reducing the cash portion of its patronage dividends to be distributed in 2009 to zero. In 2007, a cash dividend of $1.58 per Class C share was paid. In 1996, the Board approved a dividend de minimis provision which states that Class C stock dividends shall not be distributed to a stockholder until such time as the cumulative amount of the dividend payable to the stockholder is equal to, or exceeds, twenty-five dollars ($25.00) unless specifically requested by the stockholder. Class C stock is transferable to another eligible holder only with the approval of NCB. Class C stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.
There is no established public trading market for any class of NCB’s common equity and it is unlikely that any such market will develop in view of the restrictions on the transfer of NCB’s stock as discussed above. Holders of Class B stock may use such stock to meet the Class B stock ownership requirements established in the Act for patronage-based borrowers from NCB or NCB, FSB and may be permitted by NCB, within the limits set forth above, to transfer Class B stock to another patronage-based borrower from NCB or NCB, FSB.
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As of December 31, 2008, there were 2,556 holders of Class B stock and 471 holders of Class C stock.
Under the Act, NCB must make annual patronage dividends to its 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 the amount of their patronage does not depend on the amount of their stockholding. Under NCB’s 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 that became effective in 1995, as amended, NCB makes the non-cash portion of the dividend in the form of Class B stock until a patron has holdings of Class B stock of 12.5% of its loan amount and thereafter in Class C stock. Historically, NCB intended to pay a minimum of 35% of the patronage dividend in cash to those patrons with stock holdings of up to 5% or less of their loan amount and up to 55% to those patrons with stock holding of 10% or more of their loan amount. In order to preserve its capital, the Board of Directors has determined that, absent changed circumstances, NCB will not distribute any cash as part of the patronage dividend for the year ended December 31, 2008.
The chart below shows the number of shares of stock issued by NCB during the past three years.
| | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| |
| Class B Stock Issued | | | — | | | | 101,783 | | | | 158,732 | |
| Class C Stock Issued | | | — | | | | 6,464 | | | | 14,972 | |
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Item 6.
Selected Financial Data
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | |
| |
Profitability | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 123,701 | | | $ | 135,739 | | | $ | 118,454 | | | $ | 96,479 | | | $ | 72,442 | |
| Total interest expense | | | 67,305 | | | | 85,121 | | | | 72,096 | | | | 52,337 | | | | 35,122 | |
| Net interest income | | | 56,396 | | | | 50,618 | | | | 46,358 | | | | 44,142 | | | | 37,320 | |
| Net yield on interest earning assets | | | 2.84 | % | | | 2.67 | % | | | 2.68 | % | | | 2.76 | % | | | 2.60 | % |
| Non-interest income | | | 24,942 | | | | 11,969 | | | | 33,680 | | | | 37,216 | | | | 33,134 | |
| Non-interest expense | | | 58,259 | | | | 63,571 | | | | 55,532 | | | | 53,099 | | | | 44,142 | |
| Net income (loss) | | | 3,874 | | | | (472 | ) | | | 19,425 | | | | 25,647 | | | | 22,555 | |
Ratios | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 0.2 | % | | | 0.0 | % | | | 1.1 | % | | | 1.5 | % | | | 1.5 | % |
| Return on average members’ equity | | | 1.8 | % | | | -0.2 | % | | | 8.7 | % | | | 12.0 | % | | | 11.2 | % |
| Efficiency | | | 71.6 | % | | | 101.6 | % | | | 69.4 | % | | | 65.3 | % | | | 62.7 | % |
| | | | | | | | | | | | | | | | | | | | | |
| At December 31, | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | |
| |
Supplemental Data | | | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | $ | 14,278 | | | $ | 90,949 | | | $ | 242,847 | | | $ | 232,024 | | | $ | 303,289 | |
| Loans and lease financing | | | 1,957,191 | | | | 1,523,958 | | | | 1,380,738 | | | | 1,263,703 | | | | 1,114,658 | |
| Total assets | | | 2,154,892 | | | | 1,871,776 | | | | 1,829,477 | | | | 1,694,567 | | | | 1,612,870 | |
| Subordinated debt | | | 116,489 | | | | 118,989 | | | | 120,676 | | | | 123,117 | | | | 125,583 | |
| Junior subordinated debt | | | 51,547 | | | | 51,547 | | | | 50,647 | | | | 50,614 | | | | 50,580 | |
| Total borrowings | | | 589,483 | | | | 574,443 | | | | 743,769 | | | | 679,654 | | | | 748,307 | |
| Members’ equity | | | 226,757 | | | | 222,763 | | | | 227,838 | | | | 219,008 | | | | 205,490 | |
| Loans serviced for others | | | 5,550,592 | | | | 5,346,251 | | | | 4,682,056 | | | | 4,086,526 | | | | 3,471,926 | |
| Headcount | | | 316 | | | | 327 | | | | 306 | | | | 280 | | | | 266 | |
| Average members’ equity as a percentage of | | | | | | | | | | | | | | | | | | | | |
| Average total assets | | | 10.8 | % | | | 11.8 | % | | | 12.8 | % | | | 12.9 | % | | | 13.7 | % |
| Average total loans and lease financing | | | 12.1 | % | | | 13.3 | % | | | 14.3 | % | | | 14.7 | % | | | 16.1 | % |
| Net average loans and lease financing to average total assets | | | 87.6 | % | | | 87.6 | % | | | 88.2 | % | | | 86.3 | % | | | 83.8 | % |
| Net average earning assets to average total assets | | | 95.7 | % | | | 96.1 | % | | | 97.3 | % | | | 95.0 | % | | | 96.7 | % |
Credit Quality | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | 27,067 | | | | 17,714 | | | | 19,480 | | | | 20,193 | | | | 16,991 | |
| Allowance for loan losses to loans outstanding | | | 1.4 | % | | | 1.1 | % | | | 1.2 | % | | | 1.4 | % | | | 1.2 | % |
| Provision for loan losses | | | 18,650 | | | | 152 | | | | 3,667 | | | | 470 | | | | 2,511 | |
| Provision for loan losses to average loans outstanding, excluding loans held-for-sale | | | 1.0 | % | | | 0.0 | % | | | 0.3 | % | | | 0.0 | % | | | 0.2 | % |
| Non-accrual loans | | | 17,434 | | | | 13,324 | | | | 21,600 | | | | 14,200 | | | | 17,758 | |
| Real estate owned | | | 659 | | | | 310 | | | | 193 | | | | 10 | | | | 29 | |
| Non-performing assets | | | 18,093 | | | | 13,634 | | | | 21,793 | | | | 14,210 | | | | 17,787 | |
| Non-performing assets as a percentage of total assets | | | 0.8 | % | | | 0.7 | % | | | 1.2 | % | | | 0.8 | % | | | 1.1 | % |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing NCB’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.
Description of Business
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.
In the Act, Congress stated its finding that cooperatives have proven to be an effective means of minimizing the impact of inflation and economic hardship on members/owners by narrowing producer-to-consumer margins and price spreads, broadening ownership and control of economic organizations to a larger base of consumers, raising the quality of goods and services available in the marketplace and strengthening the nation’s economy as a whole. To further the development of cooperative businesses, Congress specifically directed NCB (1) to encourage the development of new and existing cooperatives eligible for its assistance by providing specialized credit and technical assistance; (2) to maintain broad-based control of NCB by its voting shareholders; (3) to encourage a broad-based ownership, control and active participation by members in eligible cooperatives; (4) to assist in improving the quality and availability of goods and services to consumers; and (5) to encourage ownership of its equity securities by cooperatives and others.
2008 Summary
Worldwide economic conditions deteriorated significantly during 2008. As a result, NCB’s financial results have been substantially impacted. The highly volatile debt and equity markets, lack of liquidity, widening credit spreads and the collapse of several financial institutions have resulted in significant realized and unrealized losses for NCB.
The economic recession has adversely impacted NCB’s operating results in a number of ways including, but not limited to, 1) reduced gains from loan sales as the securitization market for commercial mortgage backed securities has all but ceased functioning; 2) deteriorating credit quality of NCB’s borrowers and a corresponding increase in the provision for loan losses as these businesses have lost revenues due to decreased economic activity; and 3) recognition of other-than-temporary impairment on NCB’s investments in collateralized mortgage obligations. For the full year 2008, NCB recognized net income of $3.9 million. Although NCB, FSB had a profit of $2.0 million in the fourth quarter of 2008, this amount fell short of the $3.5 million fourth quarter 2008 profit required for NCB, FSB under NCB’s revolving credit facility, covenant thereby causing a breach. Additionally, management believed that there was a risk that NCB would violate certain other financial covenants under the revolving credit facility and NCB’s senior note agreement with Prudential later in 2009 unless some form of covenant relief was obtained. On March 31, 2009, NCB executed an amendment to both the Prudential agreement and the revolving credit facility agreement which waives the revolving credit facility covenant violation and amends various covenant thresholds on a prospective basis. Management has completed financial projections through December 31, 2010 and believes that NCB will be in compliance with all covenants through the maturity of the credit facility and the Prudential notes.
Other provisions of the amendment to the revolving credit facility included:
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| | • | An immediate reduction in the aggregate commitment amount to $225 million from $350 million |
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| | • | Further reductions in the aggregate revolving commitments by $30 million on the last day of each of the fiscal quarters ending June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010, and September 30, 2010. |
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| | • | All aggregate revolving commitments will be terminated by December 15, 2010 instead of April 29, 2011. |
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| | • | Interest cost increased to LIBOR plus 3.5% from LIBOR plus 0.75% |
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| | • | The revolving loan will also be collateralized by assets of NCB, including the stock in NCB, FSB |
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| | • | A limitation on the ability of NCB itself to make additional loans |
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| | • | Consent for NCB, FSB to borrow funds from the Federal Reserve Bank or other participating member banks |
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| | • | Consent for NCB, FSB to convert from a Thrift to a national bank charter, should the Board of Directors determine such action is in the best interest of NCB |
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| | • | Consent for NCB, FSB to issue FDIC guaranteed debt under the TLGP |
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| | • | Consent for NCB, FSB or NCB Financial Corporation to participate in the Capital Purchase Program under TARP |
Other provisions of the amendment to the Prudential agreement included:
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| | • | Interest cost increased to 8.5% with further increase to 10.5% in the event that NCB’s senior credit rating falls below investment grade |
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| | • | Change in stated maturity of one note from December 28, 2009 to [August 1, 2009] and a change in the stated maturity of the second note from December 28, 2010 to no later than December 15, 2010 |
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| | • | Proceeds of certain asset sales or capital raises be applied to reduce the outstanding balance of the 2010 note on a pro rata basis with the outstanding balance of the revolving credit facility |
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| | • | In 2010, minimum Cash and Cash Equivalent balances must be increased from $25 million in the first quarter to $95 million in the fourth quarter |
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| | • | NCB must maintain balances on its revolving credit facility equal to the outstanding balance of the 2010 note |
Prior to the economic downturn, the origination and sale of loans into the collateralized mortgage backed securities (“CMBS”) market had been a strong source of income for NCB. Unless and until the CMBS market recovers and loan origination and sale levels return to prior year levels, NCB has the following strategies in place to meet its liquidity needs and to counter the deteriorating conditions:
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| | 1. | On November 21, 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 newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. |
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.
Another component to the TLPG is the Transaction Account Guarantee Program (“TAGP”). As of December 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.
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| | 2. | NCB expanded its relationship with Fannie Mae, allowing NCB to continue to sell Cooperative and Multifamily Loans. In order to mitigate risk, NCB forward sells loan commitments on a loan by loan basis. During the third quarter of 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. |
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| | 3. | 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 preferred stock investments in banks. Principal terms of this preferred stock program include payment of preferred cumulative dividends on the Treasury’s stock, restrictions on the payment of common stock dividends, redemption provisions which (during the first three years) permit redemption only with proceeds of high-quality private capital, 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. |
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| | 4. | During 2008, NCB shifted its focus to originating loans held-for-investment and focused less on originating loans held-for-sale. |
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| | 5. | During 2008, NCB transferred $43.5 million of Commercial Real Estate Loans and Community Association Loans from loans held-for-sale to loans and lease financing in the first quarter of 2008 as the market for these loans was extremely limited. |
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| | 6. | During the second and third quarters of 2008, NCB sold $24.5 million and $31.0 million, respectively, of Share and Single-family Residential Real Estate Loans in an effort to generate non-interest income through gain on sale of loans and reinvest the proceeds in higher earning assets. These loans had originally been held for investment. |
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| | 7. | As of December 31, 2008, 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, the counterparty owes NCB and a repayment risk exists. If the fair value of the derivative contract is negative, 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. |
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| | 8. | As of December 31, 2008, NCB had outstanding letters of credit with a total commitment amount of $293.7 million of which $258.5 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. For the year ended December 31, 2008, NCB provided funding for seven letters of credit for a total amount of $4.8 million. Only one letter of credit in the amount of $22 thousand remains outstanding for municipal bonds that could not be sold to another purchaser as of December 31, 2008. In an effort to mitigate the risk of possible future fundings of this kind, NCB has greatly curtailed marketing of this product line and is actively reducing its exposure in this area. |
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| | 9. | During the twelve months ended December 31, 2008, NCB sold $20.0 million of investment securities. Most of these securities were sold in an effort to reinvest those proceeds in higher earning assets. Using a portion of these proceeds, NCB purchased $28.0 million of Community Association Loans during the second quarter of 2008. |
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| | 10. | Since year-end 2007, the fair value of NCB’s collateralized mortgage obligation (“CMO”) investment portfolio has decreased as the result of conditions in the financial markets. At December 31, 2008, management determined certain investment securities were other-than-temporarily impaired based upon an evaluation of the credit quality of underlying issuers. As a result, NCB recorded a $1.7 million other-than-temporary impairment charge on three of its five CMO investments securities, previously carried at $2.0 million. After the fourth quarter impairment charges, the carrying value of NCB’s collective CMO portfolio was $5.7 million as of December 31, 2008. Management concluded none of the other CMO investment securities with an unrealized loss as of December 31, 2008, were other-than-temporarily impaired. |
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| | 11. | Due to the general weakness in the economy, NCB has experienced some deterioration in its loan portfolio and therefore increased the provision for loan losses in 2008. The recession that the U.S. economy is currently facing is impacting NCB’s borrower’s and as a result, NCB is experiencing a higher frequency of loan impairments than in prior years. |
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| | 12. | 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 increases the potential sources of liquidity for NCB, FSB by permitting NCB, FSB to issue FDIC-guaranteed debt under the Temporary Liquidity Guarantee Program as well as to borrow under a federal funds program with the Federal Reserve and with other banks. |
Despite very challenging market conditions, NCB continues to believe that:
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| | • | Market demand for Cooperative and Multifamily Loans remains strong; |
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| | • | Due to the general weakness in the economy and the recession affecting NCB’s borrowers, NCB has experienced some deterioration in the credit quality of its loan portfolio and therefore an increase in the provision for loan losses and impaired loans during 2008. Although NCB is experiencing a higher frequency of loan impairments than in prior years, credit quality of NCB’s borrowers remains at an acceptable level; |
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| | • | Sales channels continue to exist for NCB’s loans held-for-sale; |
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| | • | NCB has no recourse obligation for losses related to loans sold to third parties; and |
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| | • | It will meet the revised debt covenants applicable to NCB itself under the amendments to the revolving credit facility and Prudential agreement and that both NCB and NCB, FSB will have adequate liquidity and will remain well-capitalized. |
Financial Performance Highlights for the Twelve Months Ended December 31, 2008
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| | • | Deposit growth of 26.5% from December 31, 2007. |
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| | • | Net income growth of $4.4 million from a loss of $0.5 million for the year ended December 31, 2007 to income of $3.9 million for the year ended December 31, 2008. |
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| | • | Increase in net yield on interest earning assets from 2.67% for the year ended December 31, 2007 to 2.84% for the year ended December 31, 2008. |
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| | • | Acceptable credit quality — Non-performing assets of 0.8% of total assets as of December 31, 2008 and 0.7% as of December 31, 2007. |
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| | • | Loan and lease financing growth of $433.2 million or 28.4% (net of $43.5 million transfer of loans held-for-sale). |
2008 and 2007 Financial Summary
NCB’s net income for the year ended December 31, 2008 was $3.9 million compared with a net loss of $0.5 million for the year ended December 31, 2007. The primary factors affecting the increase in the net income were a $13.0 million increase in non-interest income, a $5.3 million decrease in non-interest expense partially offset by a $12.7 million decrease in net interest income after provision for loan losses.
Total assets increased 15.1% or $283.1 million to $2.15 billion at December 31, 2008 from $1.87 billion at December 31, 2007. A $433.2 million increase in loans and lease financing more than offset a $76.7 million decrease in loans held-for-sale.
The return on average total assets was 0.2% and 0% for the years ended December 31, 2008 and 2007, respectively. For the years ended December 31, 2008 and 2007, the return on average members’ equity was 1.8% and -0.2%, respectively.
Net Interest Income
The largest source of revenue is net interest income, which is the difference between interest income on earning assets (primarily loans and securities) and interest expense on funding sources (including interest bearing deposits and borrowings). Earning asset balances and related funding, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Non-interest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of non-interest bearing sources of funds is captured in net interest margin, which is calculated as net interest income divided by average earning assets.
Net interest income for the year ended December 31, 2008 increased $5.8 million or 11.5% to $56.4 million compared with $50.6 million for the year ended December 31, 2007.
For the year ended December 31, 2008, interest income decreased 8.8% or $12.0 million, to $123.7 million compared with $135.7 million for the year ended December 31, 2007. The total average earning balances increased by $92.3 million and aggregate yields decreased from 7.17% in 2007 to 6.23% in 2008. The decrease resulted primarily from a decrease in Real Estate, Consumer and Commercial Loan yields which more than offset an increase in 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 December 31, 2007 to December 31, 2008 contributing $19.1 million to the decrease. An increase of $7.1 million in volume partially offset the $19.1 million decrease in rate.
Interest income from Real Estate (Residential and Commercial) Loans decreased $7.7 million or 10.0%. A decrease in average balances of $27.4 million or 2.4% contributed $1.7 million to the decrease, while a decrease in the yield from 6.69% in 2007 to 6.17% in 2008 contributed $6.0 million to the decrease. Consumer and Commercial Loans and Lease interest income decreased $0.9 million or 2.0%. The decrease in the yield from 8.35% in 2007 to 6.77% in 2008 contributed $9.9 million to the decrease in income, while an increase in average balances of $119.0 million or 21.0% offset $9.0 million of the year-over-year decrease. Interest income from investment securities and cash equivalents decreased by $2.6 million. A decrease in the yield from 6.06% in 2007 to 3.94% in 2008 contributed to the majority of the $2.6 million year-over-year decrease in investment securities interest income.
Other interest income, consisting only of excess yield, is generated from the Non-Certificated Interest-Only Receivables held by NCB. Emerging Issues Task Force Issue99-20: Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets(“EITF 99-20”) and the amendments toEITF 99-20 which are disclosed inEITF 99-20-1 provides specific guidance on the treatment of this excess yield. Under paragraph 11 ofEITF 99-20 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. This is offset by the amortization of the
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Interest-Only Receivable. Non-Certificated Interest-Only Receivables are recorded in the same manner as available-for-sale investment securities in accordance with SFAS 115. Excess yield income was $1.9 million and $2.6 million for the years ended December 31, 2008 and 2007, respectively, a decrease of $0.8 million. A $6.1 million decrease in the average balance contributed $0.5 million to the decrease while a decrease in the yield from 8.24% in 2007 to 7.17% in 2008 contributed $0.3 million to the decrease.
Interest expense decreased $17.8 million or 20.9% from $85.1 million for the year ended December 31, 2007 compared to $67.3 million for the year ended December 31, 2008.
Interest expense on deposits decreased $5.8 million or 13.4% from $43.3 million in 2007 to $37.5 million in 2008. The average cost of deposits decreased by 115 basis points from 4.50% to 3.35% contributing $12.1 million to the decrease in interest expense. An increase of $160.9 million in the deposit average balance offset the decrease in expense by $6.3 million. The weighted average rates on deposits at December 31, 2008 and 2007 were 2.75% and 4.19%, respectively. The average maturity of the certificates of deposit at December 31, 2008 and 2007 were 10.9 months and 13.8 months, respectively. The growth of deposits remains a key component of NCB’s funding capability.
Interest expense on short-term borrowings decreased by $8.8 million or 50.3% from $17.5 million in 2007 to $8.7 million in 2008. The average balance on short-term borrowings decreased by $64.8 million, which was primarily driven by the decrease in FHLB advances and contributed $3.2 million to the decrease in interest expense. The average cost of short-term borrowings decreased from 6.05% to 3.87%, contributing $5.6 million to the decrease.
Interest expense on long-term debt, other borrowings and subordinated debt decreased $3.2 million or 13.3%. The average cost of long-term, subordinated and other borrowings decreased from 6.22% in 2007 to 4.84% in 2008 contributing $5.6 million to the decrease in interest expense. The average balance increased by $43.8 million or 11.2%, offsetting $2.4 million of the decrease in interest expense.
For the year ended December 31, 2008, NCB recorded a $0.1 million offset to interest income associated with its swap contracts relating to the hedging of loans and loan commitments. NCB recorded $0.3 million of interest income and $0.2 million as an offset to interest income associated with its swap contracts relating to the hedging of loans and loan commitments for the years ended December 31, 2007 and 2006, respectively. In addition, NCB recorded an offset to interest expense of $0.8 million relating to the hedging of fixed-rate liabilities. NCB recorded as interest expense $0.9 million and $0.5 million relating to the hedging of fixed-rate liabilities for the years ended December 31, 2007 and 2006, respectively.
See Table 1 and Table 2 for detailed information of the changes in interest income and interest expense for 2008 and 2007.
26
Table 1
Changes in Net Interest Income
For the Years Ended December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 Compared to 2007 | | | 2007 Compared to 2006 | |
| | | Change in
| | | Change in
| | | Increase
| | | Change in
| | | Change in
| | | Increase
| |
| | | average
| | | average
| | | (Decrease)
| | | average
| | | average
| | | (Decrease)
| |
| | | volume | | | rate | | | Net* | | | volume | | | rate | | | Net* | |
| |
Interest Income | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Loans (Residential and Commercial) | | $ | (1,758 | ) | | $ | (5,984 | ) | | $ | (7,742 | ) | | $ | 10,174 | | | $ | 3,285 | | | $ | 13,459 | |
| Consumer and Commercial Loans and Leases | | | 8,999 | | | | (9,948 | ) | | | (949 | ) | | | 103 | | | | 3,126 | | | | 3,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans and lease financing | | | 7,241 | | | | (15,932 | ) | | | (8,691 | ) | | | 10,277 | | | | 6,411 | | | | 16,688 | |
| Investment securities and cash equivalents | | | 335 | | | | (2,898 | ) | | | (2,563 | ) | | | 436 | | | | 498 | | | | 934 | |
| Other interest income | | | (472 | ) | | | (312 | ) | | | (784 | ) | | | (129 | ) | | | (208 | ) | | | (337 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | | 7,104 | | | | (19,142 | ) | | | (12,038 | ) | | | 10,584 | | | | 6,701 | | | | 17,285 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 6,315 | | | | (12,076 | ) | | | (5,761 | ) | | | 10,095 | | | | 2,950 | | | | 13,045 | |
| Short-term borrowings | | | (3,212 | ) | | | (5,602 | ) | | | (8,814 | ) | | | (1,464 | ) | | | 594 | | | | (870 | ) |
| Long-term debt, other borrowings and subordinated debt | | | 2,420 | | | | (5,661 | ) | | | (3,241 | ) | | | 884 | | | | (34 | ) | | | 850 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest expense | | | 5,523 | | | | (23,339 | ) | | | (17,816 | ) | | | 9,515 | | | | 3,510 | | | | 13,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 1,581 | | | $ | 4,197 | | | $ | 5,778 | | | $ | 1,069 | | | $ | 3,191 | | | $ | 4,260 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| * | | 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. |
27
Table 2
Rate Related Assets and Liabilities
For the years ended December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | Average
| | | Income /
| | | Average
| | | Average
| | | Income /
| | | Average
| | | Average
| | | Income /
| | | Average
| |
| | | Balance* | | | Expense | | | Rate/Yield | | | Balance* | | | Expense | | | Rate/Yield | | | Balance* | | | Expense | | | Rate/Yield | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest earning assets Real Estate Loans (Residential and Commercial) | | $ | 1,133,851 | | | $ | 69,920 | | | | 6.17 | % | | $ | 1,161,204 | | | $ | 77,662 | | | | 6.69 | % | | $ | 1,005,553 | | | $ | 64,203 | | | | 6.38 | % |
| Consumer and Commercial Loans and Leases | | | 685,843 | | | | 46,405 | | | | 6.77 | % | | | 566,812 | | | | 47,354 | | | | 8.35 | % | | | 565,537 | | | | 44,125 | | | | 7.80 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans and lease financing | | | 1,819,694 | | | | 116,325 | | | | 6.39 | % | | | 1,728,016 | | | | 125,016 | | | | 7.23 | % | | | 1,571,090 | | | | 108,328 | | | | 6.90 | % |
| Investment securities and cash eqivalents | | | 140,036 | | | | 5,518 | | | | 3.94 | % | | | 133,333 | | | | 8,081 | | | | 6.06 | % | | | 125,907 | | | | 7,147 | | | | 5.68 | % |
| Other interest income | | | 25,930 | | | | 1,858 | | | | 7.17 | % | | | 32,060 | | | | 2,642 | | | | 8.24 | % | | | 33,562 | | | | 2,979 | | | | 8.88 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest earning assets | | | 1,985,660 | | | | 123,701 | | | | 6.23 | % | | | 1,893,409 | | | | 135,739 | | | | 7.17 | % | | | 1,730,559 | | | | 118,454 | | | | 6.84 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | (21,254 | ) | | | | | | | | | | | (18,479 | ) | | | | | | | | | | | (19,815 | ) | | | | | | | | |
| Non-interest earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash | | | 12,438 | | | | | | | | | | | | 10,366 | | | | | | | | | | | | 18,234 | | | | | | | | | |
| Other | | | 76,402 | | | | | | | | | | | | 65,300 | | | | | | | | | | | | 28,934 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest earning assets | | | 88,840 | | | | | | | | | | | | 75,666 | | | | | | | | | | | | 47,168 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 2,053,246 | | | | | | | | | | | $ | 1,950,596 | | | | | | | | | | | $ | 1,757,912 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Liabilities and members’ equity |
| Interest bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 1,122,383 | | | $ | 37,549 | | | | 3.35 | % | | $ | 961,489 | | | $ | 43,310 | | | | 4.50 | % | | $ | 728,352 | | | $ | 30,265 | | | | 4.16 | % |
| Short-term borrowings | | | 224,726 | | | | 8,696 | | | | 3.87 | % | | | 289,496 | | | | 17,510 | | | | 6.05 | % | | | 314,098 | | | | 18,380 | | | | 5.85 | % |
| Long-term debt, other borrowings and subordinated debt | | | 434,676 | | | | 21,060 | | | | 4.84 | % | | | 390,917 | | | | 24,301 | | | | 6.22 | % | | | 376,699 | | | | 23,451 | | | | 6.23 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest bearing liabilities | | | 1,781,785 | | | | 67,305 | | | | 3.78 | % | | | 1,641,902 | | | | 85,121 | | | | 5.18 | % | | | 1,419,149 | | | | 72,096 | | | | 5.08 | % |
| | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | |
| Other liabilities | | | 50,627 | | | | | | | | | | | | 78,344 | | | | | | | | | | | | 114,608 | | | | | | | | | |
| Members’ equity | | | 220,834 | | | | | | | | | | | | 230,350 | | | | | | | | | | | | 224,155 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and members’ equity | | $ | 2,053,246 | | | | | | | | | | | $ | 1,950,596 | | | | | | | | | | | $ | 1,757,912 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest earning assets | | $ | 203,875 | | | | | | | | | | | $ | 251,507 | | | | | | | | | | | $ | 311,410 | | | | | | | | | |
| Net interest revenues and spread | | | | | | $ | 56,396 | | | | 2.46 | % | | | | | | $ | 50,618 | | | | 1.99 | % | | | | | | $ | 46,358 | | | | 1.76 | % |
| Net yield on interest earning assets | | | | | | | | | | | 2.84 | % | | | | | | | | | | | 2.67 | % | | | | | | | | | | | 2.68 | % |
| | |
| * | | Average loan balances include non-accrual loans. |
28
Non-interest Income
(Dollars in thousands)
| | | | | | | | | |
| | | Non-interest income
| |
| | | for the years ended
| |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| |
| Gain (loss) on sale of loans | | $ | 6,016 | | | $ | (1 | ) |
| Servicing fees | | | 4,568 | | | | 4,651 | |
| Letter of credit fees | | | 4,356 | | | | 3,423 | |
| SFAS 133 adjustment | | | 3,256 | | | | (1,468 | ) |
| Commercial loan fees | | | 1,184 | | | | 428 | |
| Real estate loan fees | | | 1,002 | | | | 1,515 | |
| Prepayment fees | | | 735 | | | | 837 | |
| Other | | | 3,825 | | | | 2,584 | |
| | | | | | | | | |
| Total non-interest income | | $ | 24,942 | | | $ | 11,969 | |
| | | | | | | | | |
Total non-interest income increased $12.9 million or 108.4% from $12.0 million for the year ended December 31, 2007, to $24.9 million for the year ended December 31, 2008. This was driven by an increase of $10.8 million in gain on sale of loans, including the SFAS 133 adjustment, from a loss of $1.5 million in 2007 to a gain of $9.3 million in 2008 due to the mitigation of market risk. In order to mitigate risk, NCB forward sells loan commitments on a loan by loan basis. The increase was also due to a $0.9 million increase in letter of credit income due to new letters of credit issued during 2008.
Other non-interest income includes commercial loan fees, cash management service fees, dividends on FHLB stock and other miscellaneous income NCB earns. Other non-interest income increased $1.2 million from $2.6 million for the year ended December 31, 2007 to $3.8 million for the year ended December 31, 2008. Primarily contributing to the increase is a $1.3 million increase in Commercial loan fees and a $1.3 million gain on debt swap unwinds partially offset by a $1.2 million decrease in real estate fees.
During the second quarter of 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 $4.6 million Residential Real Estate Loans held-for-sale, the contractual principal amount of loans for which NCB has elected the fair value option under SFAS 159 totaled $0.5 million as of December 31, 2008. The difference in fair value of these loans compared to their principal balance was $20 thousand and was recorded in gain on sale of loans for the year ended December 31, 2008. The fair value option was not elected for NCB’s remaining $4.1 million Residential Real Estate Loans held-for-sale. Further, NCB has not elected the fair value option for any of the $9.7 million of principal balance of Consumer and Commercial Loans held-for-sale.
In total, non-interest income amounted to 30.7% of total net revenue (net interest income plus non-interest income) for the year ended December 31, 2008 compared with 19.1% for the year ended December 31, 2007.
The percentage of gain on the sold principal balance of Cooperative, Multifamily and Commercial Real Estate Loans increased from -0.24% in 2007 to 1.85% in 2008.
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 ratesand/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. Effective January 1, 2008, fair value is determined pursuant to SFAS 157 (commitments existing at January 1, 2008 and new commitments subsequent to January 1, 2008) and SAB 109 (only new commitments executed subsequent to January 1, 2008).
29
Prior to the adoption of SAB 109 and SFAS 157, the fair value of the interest rate lock commitments recorded in earnings considered only the effects of market interest rate changes and changes in market spreads between the date of the rate lock and either the loan closing date or the balance sheet date. SFAS 157 and SAB 109 require, in addition to these elements of fair value, consideration of the difference between retail and secondary market or investor spreads as well as the expected cash flows from servicing activities. The application of these accounting standards had the effect of recognizing a loss on loans, loan commitments and derivatives hedging these loans and loan commitments of $55.0 thousand for loans that will not be funded or delivered to investors until a date subsequent to December 31, 2008.
The transition provisions of SFAS 157 provide for retrospective application to, amongst others, financial instruments that were measured at fair value at initial recognition using a transaction price in accordance with Emerging Issues Task Force IssueNo. 02-03, “Issues involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”. NCB’s interest rate lock commitments were measured at inception at the transaction price. Upon adoption of SFAS 157 the difference between the carrying amount and fair value of these instruments was recognized as a cumulative effect adjustment to the beginning balance of retained earnings. The amount of the cumulative effect adjustment was a credit to retained earnings of $1.2 million. But for the adoption of SFAS 157, and excluding the effects of expected changes in market interest rates and market spreads for comparable loan commitments between January 1, 2008 and the date the loan was closed and delivered to an investor, this amount would have been recorded in gain on sale of loans.
The following table shows the unpaid principal balance of loans sold for the years ended December 31 (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Cooperative, Multifamily and Commercial Real Estate Loans: | | | | | | | | |
| Sold through securitizations | | $ | - | | | $ | 373,498 | |
| Other loan sales (primarily to Fannie Mae) | | | 273,660 | | | | 491,499 | |
| | | | | | | | | |
| Total Cooperative, Multifamily and Commercial Real Estate Loans | | | 273,660 | | | | 864,997 | |
| Consumer Loans (auto loans) | | | 357,179 | | | | 220,887 | |
| Single-family Residential Loans and Share Loans | | | 166,199 | | | | 109,255 | |
| SBA Loans | | | 9,553 | | | | 9,318 | |
| | | | | | | | | |
| Total | | $ | 806,591 | | | $ | 1,204,457 | |
| | | | | | | | | |
The Consumer Loan sales represent the sale, at par, of participations in auto loans. NCB purchases and sells these notes within a30-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 this30-day period.
During 2008, NCB made certain of its Residential Real Estate Loans held-for-investment available to investors for purchase. NCB sold $55.5 million of those Residential Real Estate Loans in an effort to reinvest the proceeds in higher earning assets. At the time of transfer from loans held-for-investment to loans held-for-sale the fair value of the loans was equal to or greater than the cost and therefore, NCB did not recognize a loss on the date of transfer.
30
Non-interest Expense
(Dollars in thousands)
| | | | | | | | | |
| | | Non-interest expense
| |
| | | for the years ended
| |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| |
| Compensation and employee benefits | | $ | 29,815 | | | $ | 32,703 | |
| Occupancy and equipment | | | 7,470 | | | | 8,057 | |
| Contractual services | | | 5,482 | | | | 5,944 | |
| Information systems | | | 4,627 | | | | 4,402 | |
| Loan costs | | | 2,479 | | | | 2,082 | |
| Net loss on other-than-temporary impairment and sale of available-for-sale securities | | | 1,525 | | | | 17 | |
| Corporate development | | | 1,345 | | | | 2,814 | |
| Travel and entertainment | | | 1,220 | | | | 1,449 | |
| Lower of cost or market valuation allowance | | | 832 | | | | 2,070 | |
| Provision for unfunded commitments | | | 659 | | | | 488 | |
| Deferred rent recognition related to lease termination | | | - | | | | (1,860 | ) |
| Lease termination costs | | | - | | | | 3,148 | |
| Other | | | 2,805 | | | | 2,257 | |
| | | | | | | | | |
| Total non-interest expense | | $ | 58,259 | | | $ | 63,571 | |
| | | | | | | | | |
Non-interest expense for the year ended December 31, 2008, decreased 8.3% or $5.3 million to $58.3 million compared with $63.6 million for the corresponding prior year period primarily due to a $2.9 million decrease in compensation and employee benefits resulting from: the decrease in regular base salary due to the reduction in headcount, a reduction in bonuses and commissions due to the economic downturn and a decrease in severance expense for employees in 2008 compared to 2007. Also contributing to the decrease in non-interest expense from 2007 to 2008 was a $1.5 million decrease in corporate development due to an overall effort to reduce corporate expenses, a $1.3 million decrease in lease termination costs from 2007, and a $1.2 million decrease in the lower of cost or market valuation resulting from implementation of SFAS 159. The decrease was partially offset by a $1.5 million increase in the loss on investments available-for-sale for CMO investments that were other than temporarily impaired as of December 31, 2008.
Credit Quality
To manage credit risk over a wide geographic area and lending in multiple industries, NCB uses a team-based approval process, which relies upon the expertise of lending teams familiar with particular segments of the industry in which we lend. Senior management approves those credit facilities exceeding delegated lending authority for each team in an attempt to ensure the quality of lending decisions. In order to keep abreast of economic events and market conditions throughout the United States, various lending teams regularly perform financial analysis of the industries and regions.
An inevitable aspect of the lending or risk assumption process is the fact that losses will be incurred. The extent to which losses occur depends on the risk characteristics of the loan portfolio. NCB emphasizes continuous credit risk management. Specific procedures have been established that seek to eliminate undue credit risk. They include a multilevel approval process, credit underwriting separate and apart from the approval process, and an ongoing assessment of the credit condition of the portfolio. In addition, a risk rating system is designed to classify each loan according to the risks unique to each credit facility.
Loans with risk characteristics that make their full and timely payment uncertain are assigned to the Risk Management Department. The Risk Management Department determines, on acase-by-case basis, the best course of action to restore a credit to an acceptable risk rating or to minimize potential losses to NCB.
31
The allowance for loan losses is increased by the provision for loan losses and decreased by the amount of charge-offs, net of recoveries. The allowance for loan losses is determined based on risk ratings, current and future economic conditions, concentrations, diversification, portfolio size, collateral and guarantee support and level of non-performing and delinquent credits, among other relevant factors.
In determining the size of the allowance, NCB relies on an analysis of its loan portfolio, experience and an evaluation of general economic conditions. If NCB’s assumptions prove to be incorrect, the current allowance may not be sufficient. With the volatility of the economic decline and unprecedented nature of the events in the credit and real estate markets during the latter part of 2008, NCB made significant adjustments to its allowance in 2008 and additional adjustments may continue to be necessary if the local or national real estate markets and economies continue to deteriorate. Material additions to the allowance would materially decrease net income. In addition, federal regulators periodically evaluate the adequacy of NCB’s allowance and may require an increase in the provision for loan and lease losses or recognition of further loan charge-offs based on judgments different than those of NCB’s management. Any further increase in NCB’s allowance or loan charge-offs could have a material adverse effect on its results of operations.
The consolidated allowance calculation on aloan-by-loan basis at December 31, 2008 was $27.1 million, which represents an increase of $9.4 million from December 31, 2007. The 2008 allowance for loan loss included net charge-offs of $9.3 million and provisions of $18.7 million. The allowance for loan losses was 1.4% and 1.1% of total loans and lease financing and was 1.4% and 1.2% of loans and lease financing, excluding loans held-for-sale, at December 31, 2008 and 2007, respectively. The allowance for loan losses was 1.50 and 1.30 times the non-performing assets at December 31, 2008 and 2007, respectively.
NCB bases credit decisions on the cash flows of its customers and views collateral as a secondary source of repayment.
The real estate portfolio contains a concentration of loans in the New York City area; however, the majority of loans are to seasoned housing cooperatives with low loan-to-value ratios. NCB also has minimal credit exposure to highly leveraged transactions, commercial real estate and construction loans. NCB has no foreign loan exposure.
Due to the general weakness in the economy, NCB has experienced some deterioration in its loan portfolio and therefore increased the provision for loan losses in 2008.
32
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| |
| Balance at beginning of year | | $ | 17,714 | | | $ | 19,480 | | | $ | 20,193 | | | $ | 16,991 | | | $ | 17,098 | |
| | | | | | | | | | | | | | | | | | | | | |
| Charge-offs | | | | | | | | | | | | | | | | | | | | |
| Consumer Loans | | | (2,111 | ) | | | (715 | ) | | | (254 | ) | | | (118 | ) | | | — | |
| Commercial Loans | | | (8,073 | ) | | | (1,737 | ) | | | (4,435 | ) | | | (380 | ) | | | (4,711 | ) |
| Real Estate Loans (Residential and Commercial) | | | — | | | | — | | | | (32 | ) | | | (9 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total charge-offs | | | (10,184 | ) | | | (2,452 | ) | | | (4,721 | ) | | | (507 | ) | | | (4,711 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries | | | | | | | | | | | | | | | | | | | | |
| Consumer Loans | | | 144 | | | | 297 | | | | 1 | | | | — | | | | — | |
| Commercial Loans | | | 743 | | | | 237 | | | | 340 | | | | 2,681 | | | | 2,092 | |
| Real Estate Loans (Residential and Commercial) | | | — | | | | — | | | | — | | | | 558 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total recoveries | | | 887 | | | | 534 | | | | 341 | | | | 3,239 | | | | 2,093 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net (charge-offs) recoveries | | | (9,297 | ) | | | (1,918 | ) | | | (4,380 | ) | | | 2,732 | | | | (2,618 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Provision for loan losses | | | 18,650 | | | | 152 | | | | 3,667 | | | | 470 | | | | 2,511 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at end of year | | $ | 27,067 | | | $ | 17,714 | | | $ | 19,480 | | | $ | 20,193 | | | $ | 16,991 | |
| | | | | | | | | | | | | | | | | | | | | |
The higher provision for loan losses in 2008 compared to prior periods reflects an increase in the allowance for loan losses throughout most of the year in response to changes in loan quality, coupled with increased losses as a result of declining Commercial Loan collateral values. In the fourth quarter of 2008, NCB recorded a provision for loan losses of $8.1 million, compared to $6.0 million and $38.0 thousand for the third quarter of 2008 and fourth quarter of 2007, respectively. Approximately $3.8 million, or 46.9%, of the fourth quarter 2008 provision was attributed to continued deterioration in loan quality within the Commercial Loan portfolio, while another $2.3 million, or 28.3% of the fourth quarter 2008 provision was due to continued declines in commercial real estate credit quality and collateral values.
Of the $18.7 million provision for loan losses for 2008, $16.4 million was related to Commercial Loans, $1.8 million was related to Real Estate Loans and $0.3 million was related to Consumer Loans.
Although loans and leases increased by $143.2 million from December 31, 2006 to December 31, 2007, the allowance for loan losses decreased principally due to the full repayment of one previously impaired loan with a significant reserve against it. Also, changes in the composition of loans within the portfolio led to a higher relative percentage of loans that, based on NCB’s risk rating system, are determined to have a lower credit risk.
Included within the provision for loan losses for the twelve months ended December 31, 2006 is $2.4 million related to the reclassification of a provision for unfunded commitments. The reclassification was the result of a letter of credit that was drawn on during the third quarter of 2006. Simultaneously, $2.4 million of the loan balance relating to the draw of the letter of credit was charged-off and is reflected in the $4.4 million of Commercial Loan charge-offs for the twelve months ended December 31, 2006.
Net charge offs or net recoveries were 0.5%, 0.1%, 0.3%, 0.2% and 0.2% of the average loan and lease financing balance for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively.
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Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
At December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | Percent of
| | | | | | Percent of
| | | | | | Percent of
| | | | | | Percent of
| | | | | | Percent of
| |
| | | Amount | | | Total | | | Amount | | | Total | | | Amount | | | Total | | | Amount | | | Total | | | Amount | | | Total | |
| |
| Loan and lease financing Consumer and Commercial Loans | | $ | 744,918 | | | | 38.1 | % | | $ | 572,872 | | | | 37.6 | % | | $ | 532,356 | | | | 38.6 | % | | $ | 574,123 | | | | 45.4 | % | | $ | 529,165 | | | | 47.5 | % |
| Real Estate Loans (Residential and Commercial) | | | 1,211,862 | | | | 61.9 | % | | | 950,512 | | | | 62.4 | % | | | 847,746 | | | | 61.4 | % | | | 684,951 | | | | 54.2 | % | | | 569,521 | | | | 51.1 | % |
| Leases | | | 411 | | | | 0.0 | % | | | 574 | | | | 0.0 | % | | | 636 | | | | 0.0 | % | | | 4,629 | | | | 0.4 | % | | | 15,972 | | | | 1.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans and lease financing | | $ | 1,957,191 | | | | 100.0 | % | | $ | 1,523,958 | | | | 100.0 | % | | $ | 1,380,738 | | | | 100.0 | % | | $ | 1,263,703 | | | | 100.0 | % | | $ | 1,114,658 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allocation of allowance for loan losses Consumer and Commercial Loans | | $ | 22,601 | | | | 83.5 | % | | $ | 10,907 | | | | 61.6 | % | | $ | 14,430 | | | | 74.1 | % | | $ | 14,780 | | | | 73.2 | % | | $ | 11,023 | | | | 64.9 | % |
| Real Estate Loans (Residential and Commercial) | | | 4,466 | | | | 16.5 | % | | | 6,807 | | | | 38.4 | % | | | 5,050 | | | | 25.9 | % | | | 5,413 | | | | 26.8 | % | | | 5,968 | | | | 35.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total allowance for loan losses | | $ | 27,067 | | | | 100.0 | % | | $ | 17,714 | | | | 100.0 | % | | $ | 19,480 | | | | 100.0 | % | | $ | 20,193 | | | | 100.0 | % | | $ | 16,991 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 5
IMPAIRED ASSETS
At December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| |
| Real estate owned | | $ | 659 | | | $ | 310 | | | $ | 193 | | | $ | 10 | | | $ | 29 | |
| Impaired loans | | | 20,377 | | | | 13,324 | | | | 21,600 | | | | 14,200 | | | | 17,758 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 21,036 | | | $ | 13,634 | | | $ | 21,793 | | | $ | 14,210 | | | $ | 17,787 | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage of loans and lease financing outstanding | | | 1.07 | % | | | 0.89 | % | | | 1.58 | % | | | 1.12 | % | | | 1.60 | % |
| | | | | | | | | | | | | | | | | | | | | |
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. Total impaired assets increased from $13.6 million at December 31, 2007 to $21.0 million at December 31, 2008. The increase of $7.4 million was primarily due to the addition of a $0.9 million Real Estate Loan, a $1.8 million Commercial Loan and a $1.5 million Commercial Loan. The increases are partially offset by the charge-off of a $4.3 million Commercial Loan that was previously in non- accrual status. As of December 31, 2008 and 2007, impaired assets as a percentage of total capital were 9.3% and 6.1%, respectively.
Of the $21.0 million of impaired loans as of December 31, 2008, $1.7 million was for a loan that was not in non-accrual status. However, the loan was deemed impaired due to the loan terms being restructured during 2007. The fair value of the collateral is greater than the current outstanding principal balance as of December 31, 2008; therefore NCB has not reserved a specific allowance for this loan. NCB will continue to classify this loan as impaired until the borrower has sufficient cash flow to support its debt.
2007 and 2006 Financial Summary
The net loss for the year ended December 31, 2007 was $0.5 million compared with a net income of $19.4 million for the year ended December 31, 2006. The primary factors affecting the decrease in the net income were a $21.7 million decrease in non-interest income, an $8.1 million increase in non-interest expense partially offset by a $7.8 million increase in net interest income after provision for loan losses.
34
Total assets increased 2.1% or $38.9 million to $1.87 billion at December 31, 2007 from $1.83 billion at December 31, 2006. A $143.2 million increase in loans and lease financing was more than offset by a $151.9 million decrease in loans held-for-sale.
The return on average total assets was 0% and 1.1% for the years ended December 31, 2007 and 2006, respectively. For the years ended December 31, 2007 and 2006, the return on average members’ equity was -0.2% and 8.7%, respectively.
Net Interest Income
Net interest income for the year ended December 31, 2007 increased $4.2 million or 9.2% to $50.6 million compared with $46.4 million for 2006.
For the year ended December 31, 2007, interest income increased 14.5% or $17.2 million, to $135.7 million compared with $118.5 million for the year ended December 31, 2006. The total average earning balances increased by $162.9 million and aggregate yields increased from 6.84% in 2006 to 7.17% in 2007. The increase resulted primarily from an increase in average Real Estate (Residential and Commercial) Loan balances as well as an increase in average yields on Real Estate (Residential and Commercial) and Commercial Loan and Lease balances.
Interest income from Real Estate (Residential and Commercial) Loans increased $13.5 million or 21.0%. An increase in average balances of $155.7 million or 15.5% contributed $10.2 million of the increase while an increase in the yield from 6.38% in 2006 to 6.69% in 2007 contributed $3.2 million. Consumer and Commercial Loans and Lease interest income increased $3.2 million or 7.32%. Average balances increased by $1.3 million, contributing $0.1 million to the increase. The increase in the yield from 7.80% in 2006 to 8.35% in 2007 contributed $3.1 million. Interest income from investment securities and cash equivalents increased $0.9 million. An $7.4 million or 5.9% increase in average balances contributed $0.4 million to the increase while the increase in yield from 5.68% in 2006 to 6.06% in 2007 contributed $0.5 million.
Interest expense increased $13.0 million or 18.1% from $72.1 million for the year ended December 31, 2006 compared to $85.1 million for the year ended December 31, 2007.
Interest expense on deposits increased $13.0 million or 43.1%. Average deposit balances grew by $233.1 million or 32.0% from 2006 to 2007, accounting for $10.0 million of the increase. Additionally, average deposit cost increased slightly by 34 basis points from 4.16% to 4.50%, accounting for $3.0 million of the increase.
Interest expense on short-term borrowings decreased by $0.9 million or 4.7%. The average balance on short-term borrowings decreased by $24.6 million, which was primarily driven by the decrease in FHLB advances and contributed $1.5 million to the decrease in interest expense. However, the average cost of short-term borrowings increased from 5.85% to 6.05%, offsetting the decrease by $0.6 million.
Interest expense on long-term debt, other borrowings and subordinated debt increased $0.9 million or 3.6%. The average balance increased by $14.2 million or 3.8%, accounting for the increase. In addition, the average cost of long-term, subordinated and other borrowings decreased slightly from 6.23% in 2006 to 6.22% in 2007.
NCB recorded, as an offset to interest income, $0.3 million, $0.2 million and $3.4 million associated with its swap contracts relating to the hedging of loans and loan commitments for the years ended December 31, 2007, 2006 and 2005, respectively. In addition and over the same respective periods, NCB recorded as interest expense $0.9 million, $0.5 million and $1.0 million relating to the hedging of fixed-rate liabilities.
See Table 1 and Table 2 for detailed information of the fluctuations in interest income and interest expense for 2007 and 2006.
Non-Interest Income
Total non-interest income decreased $21.7 million or 64.5% from $33.7 million for the year ended December 31, 2006 to $12.0 million in 2007. The decrease was primarily driven by a $19.9 million decrease in gain on loan sales from $19.9 million in 2006 to a loss of $1 thousand in 2007. The percentage of the sold principal balance of Cooperative, Multifamily and Commercial Real Estate Loans, decreased from a gain of 2.20 in 2006 to a
35
loss of -0.24% in 2007. This was due to the well publicized issues surrounding mortgage lending which had a severe negative effect on the commercial mortgage securitization market in the second half of 2007. The increased yield demanded by the ultimate purchasers of the loans during the second half of 2007 meant that many of the loans sold during this period were sold in a loss position as their pricing at the time of origination was at significantly lower levels.
In total, non-interest income amounted to 19.1% of total net revenue (net interest income plus non-interest income) for the year ended December 31, 2007 compared with 42.1% for the year ended December 31, 2006.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2007 increased 14.5% or $8.1 million to $63.6 million compared with $55.5 million for the year ended December 31, 2006 primarily due to a $1.7 million increase in compensation and employee benefits resulting from increased headcount and other factors discussed below, a $1.7 million increase in information systems costs relating to an information technology reorganization and an increase in network costs, a $3.1 million lease termination expense, a $1.9 million increase in the lower of cost or market valuation allowance on loans held-for-sale and an increase of $1.6 million in the provision for unfunded commitments. The increase was partially offset by the $1.9 million deferred rent recognition related to the lease termination. Non-interest expense as a percentage of average assets was 3.3% for 2007 compared with 3.2% for 2006.
2008 and 2007 Fourth Quarter Results
NCB’s net income for the three months ended December 31, 2008 was $0.2 million. This was a $4.9 million increase compared with a net loss of $4.7 million for the three months ended December 31, 2007. For the three months ended December 31, 2008, net interest income increased 23.0% or $2.9 million to $15.5 million compared with $12.6 million for the three months ended December 31, 2007.
For the three months ended December 31, 2008, interest income decreased 3.6% or $1.2 million to $32.5 million compared with $33.7 million for the three months ended December 31, 2007. The decrease was primarily due to a $1.1 million decrease in investment securities and cash equivalent interest income resulting from the decrease in yields during the three months ended December 31, 2008 compared to the same period in 2007.
For the three months ended December 31, 2008, interest expense decreased $4.0 million or 19.0% from $21.1 million for the three months ended December 31, 2007 to $17.1 million for the three months ended December 31, 2008. The decrease in interest expense resulted primarily from a $2.4 million decrease in deposit interest expense and a $1.6 million decrease in total borrowings. The decrease in yields on deposits and the reduction in the overall balance and yields of borrowings contributed to the decrease in interest expense.
For the three months ended December 31, 2008, total non-interest income increased $9.9 million or 305.9% to a gain of $6.7 million compared to a loss of $3.2 million for the three months ended December 31, 2007. This increase resulted primarily from an $8.5 million increase in the gain on sale of loans during the three months ended December 31, 2008 compared to the same period in 2007. Also, a $1.3 million increase in other income due to a gain in a debt swap unwind partially offset a $0.3 million decrease in servicing fees.
Non-interest expense for the three months ended December 31, 2008 decreased 6.2% or $0.9 million to $13.7 million compared with $14.6 million for the same period in 2007. This decrease is primarily the result of a $3.0 million decrease in compensation and employee benefits as a result of a $1.8 million reduction in bonuses and commissions and a $1.0 million decrease in severance pay expense. Also contributing to the decrease in non-interest expense is a $0.9 million decrease in provisions for unfunded commitments partially offset by an increase of $1.2 million loss on investments available-for-sale and a $1.6 million increase in the lower of cost or market value adjustment.
The income tax provision for the three months ended December 31, 2008 was $46 thousand, compared with an income tax benefit of $0.6 million for the three months ended December 31, 2007. The increase in the tax provision in 2008 was largely due to improved results in NCB’s subsidiaries subject to federal taxation, and improved performance at NCB, FSB.
36
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
For the Three Months Ended
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Dec. 31 | | | Sept. 30 | | | June 30 | | | Mar. 31 | | | Dec. 31 | | | Sept. 30 | | | June 30 | | | Mar. 31 | |
| |
| Interest income | | $ | 32,549 | | | $ | 30,448 | | | $ | 30,232 | | | $ | 30,473 | | | $ | 33,697 | | | $ | 35,106 | | | $ | 32,723 | | | $ | 34,213 | |
| Interest expense | | | 17,053 | | | | 16,299 | | | | 15,975 | | | | 17,979 | | | | 21,063 | | | | 22,532 | | | | 20,941 | | | | 20,585 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 15,496 | | | | 14,149 | | | | 14,257 | | | | 12,494 | | | | 12,634 | | | | 12,574 | | | | 11,782 | | | | 13,628 | |
| Provision (benefit) for loan losses | | | 8,119 | | | | 6,042 | | | | 2,805 | | | | 1,684 | | | | 38 | | | | 63 | | | | 438 | | | | (387 | ) |
| | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | |
| Income after provision (benefit) for loan losses | | | 7,377 | | | | 8,107 | | | | 11,452 | | | | 10,810 | | | | 12,596 | | | | 12,511 | | | | 11,344 | | | | 14,015 | |
| Non-interest income | | | 6,635 | | | | 7,120 | | | | 7,164 | | | | 4,024 | | | | (3,231 | ) | | | (3,122 | ) | | | 8,118 | | | | 10,204 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | | | 14,012 | | | | 15,227 | | | | 18,616 | | | | 14,834 | | | | 9,365 | | | | 9,389 | | | | 19,462 | | | | 24,219 | |
| Non-interest expense | | | 13,749 | | | | 14,773 | | | | 15,256 | | | | 14,481 | | | | 14,634 | | | | 15,186 | | | | 18,640 | | | | 15,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 263 | | | | 454 | | | | 3,360 | | | | 353 | | | | (5,269 | ) | | | (5,797 | ) | | | 822 | | | | 9,108 | |
| Provision (benefit) for income taxes | | | 46 | | | | 456 | | | | 110 | | | | (56 | ) | | | (588 | ) | | | (284 | ) | | | 206 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 217 | | | $ | (2 | ) | | $ | 3,250 | | | $ | 409 | | | $ | (4,681 | ) | | $ | (5,513 | ) | | $ | 616 | | | $ | 9,106 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings
One of NCB’s sources of funds is debt borrowings. NCB maintains credit facilities provided by a consortium of banks. As of December 31, 2008, NCB’s revolving credit agreement had a total facility of $350.0 million. As of December 31, 2008 and 2007, respectively $202.0 million and $111.0 million were outstanding under the revolving line of credit. An additional $5.4 million was issued in letters of credit thereunder as of December 31, 2008 and December 31, 2007. Therefore, as of December 31, 2008, $142.6 million was available under this facility.
During 2007, NCB entered into two separate amendments to its revolving credit agreement principally to adjust the return on assets and fixed charge coverage ratio covenants for the final two quarters of 2007 and for all of 2008. The second amendment also included an adjustment to the pricing, so that for London Interbank Offered Rate (LIBOR) loans, during 2008 and the first quarter of 2009, NCB would pay a minimum of LIBOR plus 0.75%. NCB paid $0.7 million in fees in connection with these amendments.
The economic recession has adversely impacted NCB’s operating results in a number of ways including, but not limited to, 1) reduced gains from loan sales as the securitization market for commercial mortgage backed securities has all but ceased functioning; 2) deteriorating credit quality of NCB’s borrowers and a corresponding increase in the provision for loan losses as these businesses have lost revenues due to decreased economic activity; and 3) recognition of other-than-temporary impairment on NCB’s investments in collateralized mortgage obligations. For the full year 2008, NCB recognized net income of $3.9 million. Although NCB, FSB had a profit of $2.0 million in the fourth quarter of 2008, that fell short of the $3.5 million fourth quarter 2008 profit required for NCB, FSB under NCB’s revolving credit facility, thereby causing a breach. Additionally, management believed that there was a risk that NCB would violate certain other financial covenants under the revolver and NCB’s senior note agreement with Prudential later in 2009 unless some form of covenant relief was obtained.
On March 31, 2009, NCB executed an amendment to both the Prudential agreement and the revolving credit facility agreement which waives the previous covenant violation in the credit agreement and amends various covenant thresholds on a prospective basis. Management has completed financial projections through December 31, 2010 and believes that NCB will be in compliance with all covenants through the maturity of the credit facility and the Prudential notes.
37
Other provisions of the amendment to the revolving credit facility included:
| | |
| | • | An immediate reduction in the aggregate commitment amount to $225 million from $350 million |
| |
| | • | Further reductions in the aggregate revolving commitments by $30 million on the last day of each of the fiscal quarters ending June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010, and September 30, 2010. |
| |
| | • | All aggregate revolving commitments will be terminated by December 15, 2010 instead of April 29, 2011. |
| |
| | • | Interest cost increased to LIBOR plus 3.5% from LIBOR plus 0.75% |
| |
| | • | The revolving loan will also be collateralized by assets of NCB, including the stock in NCB, FSB |
| |
| | • | A limitation on the ability of NCB itself to make additional loans |
| |
| | • | Consent for NCB, FSB to borrow funds from the Federal Reserve Bank or other participating member banks |
| |
| | • | Consent for NCB, FSB to convert from a Thrift to a national bank charter, should the Board of Directors determine such action is in the best interest of NCB |
| |
| | • | Consent for NCB, FSB to issue FDIC guaranteed debt under the TLGP |
| |
| | • | Consent for NCB, FSB or NCB Financial Corporation to participate in the Capital Purchase Program under TARP |
In addition, as of December 31, 2008 and 2007, NCB had $105.0 million and $155.0 million, respectively of privately placed debt issued to various institutional investors. In December of 2008, NCB prepaid all $50.0 million of the privately placed debt due in January of 2009 and paid a $63 thousand prepayment penalty in connection with the repayment.
On December 31, 2007, NCB amended its agreement with The Prudential Insurance Company of America and related entities (collectively “Prudential”) and its agreement with Metropolitan Life Insurance Company and related entities (collectively “MetLife”) principally to adjust the fixed charge coverage ratio covenants for 2008. The amendment with MetLife also increased the cap on the amount ofpaid-in-capital NCB may invest in NCB Financial Corporation, the parent of NCB, FSB. During the first quarter of 2008 NCB made a similar amendment with respect topaid-in-capital to the agreement with Prudential. NCB paid $0.4 million in fees in connection with these amendments. NCB prepaid the $50.0 million of debt related to the MetLife amended agreement in December 2008 and incurred a $63 thousand prepayment penalty.
Other provisions of the amendment to the Prudential agreement included:
| | |
| | • | Interest cost increased to 8.5% with further increase to 10.5% in the event that NCB’s senior credit rating falls below investment grade |
| |
| | • | Change in stated maturity of one note from December 28, 2009 to August 1, 2009 and a change in the stated maturity of the second note from December 28, 2010 to no later than December 15, 2010 |
| |
| | • | Proceeds of certain asset sales or capital raises be applied to reduce the outstanding balance of the 2010 note on a pro rata basis with the outstanding balance of the revolving credit facility |
| |
| | • | In 2010, minimum Cash and Cash Equivalent balances must be increased from $25 million in the first quarter to $95 million in the fourth quarter |
| |
| | • | NCB must maintain balances on its revolving credit facility equal to the outstanding balance of the 2010 note |
NCB, FSB is a member of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB) and has a pledge agreement with FHLB requiring advances to be secured by eligible mortgages with a principal balance of 125% to 250% of such advances. As of December 31, 2008, the FHLB facility was $318.8 million. NCB, FSB had $192.1 million in available unused committed borrowing capacity with the FHLB as of December 31, 2008. NCB,
38
FSB’s FHLB borrowing capacity is determined by the FHLB using several factors, including asset quality and performance, capital, earnings, liquidity and credit ratings. Changes in the factors could increase or reduce the available capacity. The amendments to the revolving credit agreement and Prudential agreement do not impact NCB’s ability to borrow from the FHLB. As of December 31, 2008, there were $113.0 million outstanding advances from the FHLB, of which $90.0 million were long-term, compared to $122.0 million at December 31, 2007, of which $50.0 million were long-term. NCB also has letter of credit availability in the FHLB facility of which $13.7 million and $15.9 million was issued as of December 31, 2008 and 2007, respectively.
NCB had no bid line availability as of December 31, 2008. As of December 31, 2007, NCB had $20.0 million of uncommitted bid lines available from several banks of which none was outstanding.
As of December 31, 2008 and 2007, under its Medium Term Note Program, NCB had authority to issue up to $151.0 and $136.0 million of medium term notes, respectively. On May 15, 2008, the most recent call date, NCB redeemed all $15.0 million of its medium term notes.
As of December 31, 2008 and 2007, NCB had authority to issue up to $50.0 million in preferred stock or subordinated debt. There was no preferred stock or subordinated debt under this authority outstanding as of December 31, 2008 and 2007.
Loans and Leases
During 2008 NCB shifted its focus to originating loans held-for-investment and focused less on originating loans held-for-sale. Loans and leases outstanding, including loans held-for-sale, increased $356.6 million or 22.1% from $1.6 billion at December 31, 2007 to $2.0 billion at December 31, 2008.
The Consumer and Commercial Loan and Lease portfolio increased 30.0% to $745.3 million at December 31, 2008 compared with $573.4 million at December 31, 2007 due principally to an increase in Consumer and Commercial Loan and Lease portfolio originations.
The Real Estate (Residential and Commercial) Loan portfolio increased 27.5% to $1.2 billion at December 31, 2008 from $950.5 million at December 31, 2007 due to an increase in portfolio Real Estate (Residential and Commercial) Loan originations during 2008. The Real Estate (Residential and Commercial) Loan portfolio is substantially composed of Multifamily Loans, Single-family Residential Loans and Share Loans.
NCB’s Consumer and Commercial Loan portfolio has a concentration in the food retailing and distribution industry. The loan types include lines of credit, revolving credits, and term loans. These loans are typically collateralized with general business assets (e.g., inventory, receivables, fixed assets, and leasehold interests). The loans will be repaid from cash flows generated by the borrower’s operating activities. NCB’s exposure to credit loss in the event of nonperformance by the other parties to the loan is the carrying amounts of the loans less the realizable value of collateral.
NCB’s loan portfolio is diversified both in terms of industry and geography. The following is the distribution of the loans outstanding at December 31:
| | | | | | | | | | | | | | | | | |
| | | Commercial Loans | | | Real Estate Loans | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
By Region: | | | | | | | | | | | | | | | | |
| Southeast | | | 35.1 | % | | | 37.8 | % | | | 22.1 | % | | | 19.7 | % |
| West | | | 30.0 | % | | | 24.3 | % | | | 22.7 | % | | | 26.0 | % |
| Northeast | | | 22.6 | % | | | 25.6 | % | | | 43.1 | % | | | 40.2 | % |
| Central | | | 12.3 | % | | | 12.3 | % | | | 12.1 | % | | | 14.1 | % |
| | | | | | | | | | | | | | | | | |
| | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
39
| | | | | | | | | |
| | | Percentage of
| |
| | | Total Loans | |
| | | 2008 | | | 2007 | |
| |
By Borrower Type: | | | | | | | | |
| Real Estate: | | | | | | | | |
| Residential | | | 42.4 | % | | | 51.0 | % |
| Commercial | | | 20.9 | % | | | 13.7 | % |
| Commercial: | | | | | | | | |
| Community Association | | | 7.1 | % | | | 5.8 | % |
| Food retailing and distribution | | | 5.4 | % | | | 6.9 | % |
| Franchise | | | 4.9 | % | | | 5.1 | % |
| Employee Stock Ownership Plan | | | 3.9 | % | | | 4.5 | % |
| Hardware | | | 3.3 | % | | | 3.3 | % |
| Non-Profit | | | 3.1 | % | | | 1.1 | % |
| Healthcare | | | 2.4 | % | | | 2.6 | % |
| Mission | | | 1.8 | % | | | 1.8 | % |
| Other | | | 4.8 | % | | | 4.2 | % |
| | | | | | | | | |
| | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
NCB originates Cooperative Loans to predominantly owner-occupied housing cooperatives. A significant portion of NCB’s mortgage loans is secured by real estate in New York City due to the city’s extensive cooperative market. As of December 31, 2008 and 2007, there were $469.9 million and $362.3 million of Cooperative Loans secured by real estate in New York City, respectively, representing 24% and 23% of total loans and leases outstanding, respectively. The collateral for Cooperative Loans consists of first mortgage liens on the land and improvements of cooperatively owned, multifamily and single-family residential properties and property leases. Furthermore, the Cooperative Loan portfolio includes loans secured by second mortgage liens. In addition, certain unsecured lines of credit have been issued to cooperative borrowers. The loans are repaid from operations of the cooperative. NCB’s exposure to credit loss in the event of nonperformance by other parties to the loans is the carrying amounts of the loans less the value of the collateral.
Table 7
MATURITY SCHEDULE OF LOANS
As of December 31, 2008
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| | | One Year or
| | | One to Five
| | | Over Five
| | | | |
| | | Less | | | Years | | | Years | | | Total | |
| |
| Consumer Loans | | $ | 845 | | | $ | 28,599 | | | $ | 23,657 | | | $ | 53,101 | |
| Commercial Loans | | | 72,539 | | | | 223,518 | | | | 395,760 | | | | 691,817 | |
| Real Estate Loans: | | | | | | | | | | | | | | | | |
| Residential | | | 32,623 | | | | 149,132 | | | | 635,783 | | | | 817,538 | |
| Commercial | | | 27,485 | | | | 169,502 | | | | 197,337 | | | | 394,324 | |
| Leases | | | 36 | | | | 375 | | | | — | | | | 411 | |
| | | | | | | | | | | | | | | | | |
| Total loans and leases | | $ | 133,528 | | | $ | 571,126 | | | $ | 1,252,537 | | | $ | 1,957,191 | |
| | | | | | | | | | | | | | | | | |
| Fixed interest rate loans | | $ | 26,938 | | | $ | 301,785 | | | $ | 360,389 | | | $ | 689,112 | |
| Variable interest rate loans | | | 106,590 | | | | 269,341 | | | | 892,148 | | | | 1,268,079 | |
| | | | | | | | | | | | | | | | | |
| Total Loans | | $ | 133,528 | | | $ | 571,126 | | | $ | 1,252,537 | | | $ | 1,957,191 | |
| | | | | | | | | | | | | | | | | |
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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 year ended December 31, 2008 was $129.5 million compared to $154.3 million for the year ended December 31, 2007. This $24.8 million decrease in cash provided was primarily due to the decrease in net proceeds from loans held-for-sale of $387.0 million and a increase in the purchase of loans held-for-sale of $132.6 million partially offset by an decrease in loans originated for sale, net of principal collections of $481.8 million.
Cash Used in Investing Activities. NCB’s net cash used in investing activities for the year ended December 31, 2008 was $439.9 million compared to $175.2 million for the year ended December 31, 2007. This $264.6 million increase in cash used was primarily due to a $294.5 million increase in cash used to originate loans, net of principal collections and prepayments, partially offset by a $53.6 million net decrease in cash used for investment activities (purchases, sales and maturities).
Cash Provided by Financing Activities. NCB’s net cash provided by financing activities for the year ended December 31, 2008 was $286.5 million compared to $36.9 million for the year ended December 31, 2007 primarily due a $214.5 million change in cash from the proceeds from short-term debt and a $51.4 million year-over-year increase in cash from deposits.
Asset and Liability Management
Asset and liability management is the structuring of interest rate sensitivities of an entity’s assets and liabilities in order to manage the impact of changes in market interest rates on net interest income. NCB’s liquidity and internal rate of return are managed by the Asset Liability Committee (“ALCO”), composed of senior officers of NCB, which meets monthly. The fundamental role of the ALCO is to devise and implement business strategies designed to enhance earnings and the economic value of equity while simultaneously maintaining a prudent level of exposure to interest rate risk. The ALCO devises balance sheet strategies for managing loans, investments, deposits, borrowed funds and off-balance sheet transactions to achieve desired financial performance. The ALCO also develops strategies for pricing various products and services as well as ensuring compliance with related Board policies and established regulatory requirements.
Liquidity and Capital Resources
The following describe NCB’s primary sources and uses of liquidity as of December 31, 2008:
| | |
| | • | Net proceeds from activity related to the sale of $808.8 million loans held-for-sale have been realized during the twelve months ending December 31, 2008 |
| |
| | • | Deposits, which have grown 26.5% since December 31, 2007 |
| |
| | • | Revolving line of credit available capacity of $142.6 million as of December 31, 2008 |
Debt maturities:
| | |
| | • | $20.0 million FHLB advances due June 2009 |
| |
| | • | $2.5 million Class A Notes due December 2009 |
| |
| | • | $55.0 million of privately place 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 |
NCB anticipates replacing the above debt maturities through a combination of continued deposit growth, loan sales, interest and principal payments on loans, the issuance of new debt (including debt under the TLGP) or the utilization of current debt facilities.
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NCB has established a liquidity plan which provides guidelines for liquidity management. For NCB’s liquidity management, it first determines the current liquidity position and then forecasts liquidity based on anticipated changes in the balance sheet. In its most current forecast, NCB expects to maintain adequate liquidity. Guidelines for the forecasted liquidity have been established. NCB believes that it has sufficient resources to meet its liquidity needs.
As described in the 2008 Summary, NCB executed amendments to both the Prudential and revolving credit facility agreements in March 2009. NCB’s liquidity forecasts remain adequate as the initial $125 million reduction and the subsequent quarterly $30 million reductions in aggregate revolving commitments are supported by loan maturities and amortization in NCB’s loan portfolio.
In addition, under the March 2009 revolving credit facility agreement amendment, NCB FSB’s potential liquidity sources increased as consent was given to issue FDIC guaranteed debt under the TLGP and to borrow funds from any Federal Reserve bank or any member of the Federal Reserve System.
FHLB available capacity of $192.1 million as of December 31, 2008. The amendments to the credit agreement and Prudential agreement do not impact NCB’s ability to borrow from the FHLB. The FHLB has the ability to increase or decrease borrowing availability based on various conditions and events.
Contractual Obligations
NCB has various financial obligations, including contractual obligations that may require future cash payments. Further discussion of the nature of each obligation is included in Notes 12 through 17 of the Notes to the Consolidated Financial Statements.
As of December 31, 2008, there were no material changes to either the type or maturity of contractual obligations from December 31, 2007.
The following table presents, as of December 31, 2008, significant fixed and determinable contractual obligations (including interest) to third parties by payment date (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | One Year or
| | | One to Three
| | | Three to Five
| | | Over Five
| | | | |
| | | Less | | | Years | | | Years | | | Years | | | Total | |
| |
| Deposits without a stated maturity | | $ | 346,760 | | | $ | - | | | $ | - | | | $ | - | | | $ | 346,760 | |
| Certificates of deposit | | | 761,189 | | | | 140,335 | | | | 31,653 | | | | 24,635 | | | | 957,812 | |
| Short-term borrowings | | | 225,076 | | | | - | | | | - | | | | - | | | | 225,076 | |
| Long-term debt | | | 76,879 | | | | 90,000 | | | | 30,000 | | | | - | | | | 196,879 | |
| Subordinated debt | | | 2,695 | | | | 28,989 | | | | 11,550 | | | | 73,450 | | | | 116,684 | |
| Junior subordinated debt | | | 950 | | | | - | | | | - | | | | 51,547 | | | | 52,497 | |
| Operating leases | | | 3,676 | | | | 7,200 | | | | 7,227 | | | | 28,448 | | | | 46,551 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 1,417,225 | | | $ | 266,524 | | | $ | 80,430 | | | $ | 178,080 | | | $ | 1,942,259 | |
| | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2008, NCB had one depositor with deposits in excess of 5% of NCB’s total deposits. This depositor had deposits of 8.8% of NCB’s total deposits. All of the $102.0 million of deposits from this depositor relate to certificates of deposit with early withdrawal penalties. Of the $102.0 million of certificates of deposit, $9.0 million mature within 3 months and $93.0 million has a maturity ranging from 4 months to 78 months. Thus, NCB does not consider this deposit concentration a significant liquidity risk.
Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Discussion of NCB’s commitments, contingent liabilities and off-balance sheet arrangements is included in Note 23 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.
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Capital
NCB’s capital position is projected to support growth and continuing access to financial markets. The average equity to average assets ratio was 10.8% for 2008 compared with 11.8% for 2007. The Act limits NCB’s outstanding debt to ten times its capital and surplus (including the subordinated debt). As of December 31, 2008, NCB, FSB maintained capital levels well in excess of regulatory requirements.
Patronage Policy
Each year, NCB, in accordance with the Act, declares patronage dividends approximately equal to its taxable net income thereby substantially reducing its Federal income tax. NCB has allocated $7.2 million of its 2008 retained earnings for patronage dividends in the form of stock to be distributed during 2009. NCB’s Board of Directors reduced the cash portion of the patronage dividend to be distributed in 2009 to zero.
In connection with the annual patronage dividend, NCB is required to distribute all patronage related income, less reserves for dividends on Class C stock, for interest on and redemption of Class A Notes, and for losses.
Provision for Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48 applies to all tax positions accounted for in accordance with FASB Statement 109. The term tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets.
The term tax position also encompasses, but is not limited to:
| | |
| | • | A decision not to file a tax return |
| |
| | • | An allocation or a shift of income between jurisdictions |
| |
| | • | The characterization of income or a decision to exclude reporting taxable income in a tax return |
| |
| | • | A decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
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 provision for the year ended 2008 was $0.6 million and the income tax benefit for the year ended 2007 was $0.7 million. NCB, FSB’s effective weighted average state tax rate was approximately 5.0% as of December 31, 2008 compared to 6.2% as of December 31, 2007. The increase in the tax provision was due to an increase in NCB, FSB’s income year over year.
The income tax provision for the three months ended December 31, 2008, was $46 thousand, compared with an income tax benefit of $0.6 million for the three months ended December 31, 2007. The increase in the tax provision in 2008 was largely due to improved results in NCB’s subsidiaries subject to federal taxation, and improved performance at NCB, FSB. Net income of NCB’s subsidiaries subject to federal taxation was approximately $296 thousand for the twelve months ended December 31, 2008 compared to a net loss of $62 thousand for the twelve months ended December 31, 2007. Net income at NCB, FSB was approximately $7.9 million for the twelve months ended December 31, 2008 compared to a net loss of $4.4 million for the twelve months ended December 31, 2007.
New Accounting Standards
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
43
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. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. NCB has elected to early adopt and apply the provisions of SFAS 161 effective December 31, 2008. Therefore the required enhanced disclosures of NCB’s derivative instruments and hedging activities and their effects on NCB’s financial position, financial performance and cash flows are included in this Form 10K (see Note 24 — Derivative Financial Instruments).
Statement of Financial Accounting StandardsNo. 140-4 and FASB Staff Position FASB Interpretation No. 46(R)-8
NCB transfers Cooperative, Multifamily and Commercial Real Estate Loans to trusts that issue various classes of securities to investors. Those trusts are designed to be qualifying special purpose entities (QSPE) as defined by Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”NCB has previously analyzed the governing pooling and servicing agreements for the commercial mortgage-backed securities (CMBS) trusts to which it transfers loans, and believes that their terms are consistent with the criteria in SFAS 140 for QSPE status. Regulators and standard setters have had discussions with industry participants and accounting firms regarding whether certain provisions that are common in CMBS structures satisfy the stringent QSPE criteria in SFAS 140.
In December 2008, the FASB amended SFAS 140 with the issuance of Statement of Financial Accounting StandardsNo. 140-4(“SFAS 140-4”) and FASB Staff Position FASB Interpretation No. 46(R)-8 (“FIN 46(R)-8”),“Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.”These new standards apply to transferors, sponsors, servicers, primary beneficiaries, and holders of significant variable interests in a variable interest entity (VIE) or QSPE.SFAS 140-4 and FIN 46(R)-8 are effective for the first interim period or fiscal year ending after December 31, 2008.
SFAS 140-4 requires NCB to disclose specific information related to the following matters:
| | |
| | 1) | NCB’s continuing involvement, as transferor, with financial assets it has transferred in an asset-backed financing arrangement or securitization, |
| |
| | 2) | The nature of any restrictions on assets reported in its balance sheet that relate to a transferred financial asset, and the carrying amounts of such assets, |
| |
| | 3) | How servicing assets and servicing liabilities are reported under SFAS 140, and |
| |
| | 4) | How NCB’s financial position, financial performance, and cash flows, as transferor, are affected by the transfer of financial assets that the it may continue to be involved with if the related securitization or asset-backed financing arrangements are accounted for as secured borrowings or as sales. |
All required disclosures underSFAS 140-4 are included in the Consolidated Notes to the Financial Statements in thisForm 10-K (see Note 27).
FIN 46(R)-8 requires NCB to disclose specific information related to the following matters:
| | |
| | 1) | The significant judgments and assumptions NCB made in determining whether it must consolidate a VIEand/or disclose information about its involvement with a VIE, |
| |
| | 2) | The nature of restrictions on a consolidated VIE’s assets if reported in NCB’s balance sheet, and the carrying amounts of such assets, |
| |
| | 3) | The nature of the risks associated with NCB’s involvement with a VIE and changes in those risks, and |
| |
| | 4) | How involvement with a VIE affects NCB’s financial position, financial performance, and cashflows. |
NCB does not believe FIN 46(R) — 8 is applicable as of December 31, 2008.
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Critical Accounting Policies
Fair Value Measurements
On January 1, 2008, NCB adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”),“Fair Value Measurements.”SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (see Note 25 — Fair Value Measurements).
In October 2008, the FASB issued Staff PositionNo. 157-3(“SFAS 157-3”),“Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”.SFAS��157-3 clarifies the application of SFAS 157 (see Note 25) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. NCB adoptedSFAS 157-3 effective July 1, 2008.
The provisions of Statement of Financial Accounting Standards No. 159 (“SFAS 159”),“The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,”were adopted by NCB on January 1, 2008. SFAS 159 allows NCB, at specified election dates, to measure certain financial instruments at fair value. Unrealized gains and losses on financial instruments for which the fair value option has been elected are included in earnings. Electing to use fair value allows a better offset of the change in fair value of the loan and the derivative instruments used to hedge them without the burden of complying with the requirements of SFAS 133. Subsequent to the adoption of SFAS 159, loan origination costs for those loans where the fair value election was made are recognized in non-interest expense as incurred. Previously, these origination costs would have been capitalized as part of the carrying amount of the loans and recognized as a reduction of gains on loan sales.
Staff Accounting Bulletin No. 109
On January 1, 2008, NCB adopted Staff Accounting Bulletin No. 109 (“SAB 109”)“Written Loan Commitments Recorded at Fair Value through Earnings.”SAB 109 requires fair value measurements of derivatives or other written loan commitments recorded through earnings to include the future cash flows related to the loan’s servicing rights. SAB 109 also states that internally developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment or to written loan commitments that are accounted at 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 loan and loan commitments of $1.4 million for loans that will not be funded or delivered to investors until a date subsequent to December 31, 2008.
Other-Than-Temporary Impairment of Investments
NCB’s investment securities portfolio and retained beneficial interests in securitized financial assets are evaluated for impairment on a quarterly basis pursuant to the guidance in Statement of Financial Accounting Standard No. 115, as amended “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), Emerging Issues Task Force IssueNo. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”(“EITF 99-20”),and the amendments toEITF 99-20 which are disclosed inEITF 99-20-1 (issued January 2009 effective as of December 31, 2008.) Each individual security is evaluated for impairment. Impairment is considered temporary when the fair value of the instrument has been adversely impacted by market conditions, such as changes in interest rates or investor spreads, and NCB has the intent and ability to hold the instrument until such time as it expects to have received the contractual cash flows and recovered its investment.
Securities that will be held for indefinite periods of time, including those that may be sold in response to changes in market interest rates and related changes in the security’s prepayment risk, needs for liquidity and changes in the availability and the yield of alternative investments are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses are determined on an aggregate basis, excluded from earnings
45
and reported as other comprehensive income net of any tax effect. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold and are included in earnings.
Securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are reported at amortized cost. The investment portfolio is periodically evaluated for other than temporary impairment.
NCB recognizes an impairment charge when the declines in the fair value of equity and debt securities below their cost basis are judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. NCB considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that NCB identifies as potentially distressed. It is not necessary for an adverse change in cash flows to occur in order to determine that an impairment is other-than-temporary. When an investment security or retained interest is determined to be other than temporarily impaired, the carrying value is reduced to fair value and an impairment charge is recognized.
Allowance for Loan Losses
The allowance for loan losses is an estimate of known and inherent losses in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5 “Accounting for Contingencies,” which requires that losses be accrued when they are probable of having occurred and reasonably estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the balance of loans which are impaired.
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. Impairment is measured based upon the present value of future cash flows discounted for at the loan’s effective interest rate; or, the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent.
A risk rating system is designed to classify each loan according to the risk unique to the credit facility. The expected loss for each risk rating is determined using historical loss factors and collateral position of the credit facility. All loans are evaluated individually and assigned a risk rating.
Reserves for impaired loans are established based upon the above criteria. Reserves on all other loans are calculated on aloan-by-loan basis based upon the probability of the default and the loss in the event of default for each risk rating, based on historical experience.
NCB charges off loans, i.e. reduces the loan balance, when the loans are deemed to be uncollectible at which time the allowance for loan losses is reduced.
Servicing Assets and Interest-Only Receivables
SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (SFAS No. 140) requires that entities that acquire servicing assets through either purchase or origination of loans and sell or securitize those loans with servicing assets retained must allocate the total cost of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair value.
Servicing assets, stated net of accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans. Furthermore, servicing assets are assessed for impairment based on lower of cost or fair value. In addition, mortgage-servicing assets must be stratified based on one or more predominant risk characteristics of the underlying loans and impairment is recognized through a valuation allowance for each impaired stratum.
46
Interest-only receivables are created when loans are sold and a portion of the interest retained by NCB does not depend on the servicing work being performed. The interest-only receivables are amortized to interest income using the interest method. Interest-only receivables that are certificated have been included as investment securities consistent with SFAS No. 115. Interest-only receivables that are not certificated are included as other assets.
Substantially all interest-only receivables pertain to Cooperative Loans. These mortgages are typically structured with prepayment lockouts followed by prepayment penalties, yield maintenance provisions, or defeasance through maturity. In calculating interest-only receivables, NCB discounts the cash flows through the lockout or defeasance period. Cash flows beyond the lockout or defeasance period are included in the fair value of the interest-only receivable only to the extent that NCB is entitled to receive the prepayment or yield maintenance penalty.
Gains or losses on sales and securitizations depend, in part, on the previous carrying amount of the loans involved in the transfer and are allocated between the loans sold and the retained interests based on their relative fair value at the date of sale. Since quoted market prices are generally not available, NCB estimates fair value of these interest-only receivables by determining the present value of future expected cash flows using modeling techniques that incorporate management’s best estimates of key variables, including credit losses, prepayment speeds, prepayment lockouts and discount rates commensurate with the risks involved. Gains on sales and securitizations are reported in non-interest income.
The fair value of the interest-only receivables is determined using discounted future expected cash flows at various discount rates. In an effort to maximize the value of interest-only receivables, most cooperative mortgages have very strict prepayment restrictions. The most common prepayment protection is a lockout period, followed by either a fixed percentage penalty, or some form of yield maintenance. For loans that do not have prepayment options, the related interest-only receivable is adjusted at the time of prepayment.
For certificated interest-only receivables, the discount rate of future expected cash flows is equal to a spread over the benchmark index at which the respective loans were priced. For non-certificated interest-only receivables, the discount rate of future expected cash flows is equal to a market spread over the benchmark index for similar certificated interest-only receivables adjusted by a premium to reflect the less liquid nature of the non-certificated interest-only receivable. An appropriate spread, determined by reference to what market participants would use for similar financial instruments, is added to the index to determine the current discount rate.
The weighted average life of each interest-only receivable will vary based on the average life of the underlying collateral.
Interest-only receivables that are subject to prepayment risk such that NCB may not recover substantially all of its investment are recorded at fair value with subsequent adjustments reflected in other comprehensive income or in earnings if the fair value of the interest-only receivable has declined below its carrying amount and such decline has been determined to be other than temporary.
Accounting for Derivative Instruments and Hedging Activities
NCB maintains a risk management strategy that includes the use of derivative instruments to reduce unplanned earnings fluctuations caused by interest rate volatility. Use of derivative instruments is a component of NCB’s overall risk management strategy in accordance with a formal policy that is monitored by management, which has delegated authority over the interest rate risk management function.
The derivative instruments utilized include interest rate swaps, futures contracts and forward loan sales commitments. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties based upon a notional principal amount and maturity date. Interest rate futures generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Forward loan sales commitments lock in the prices at which loans will be sold to investors.
NCB uses interest rate swaps, futures contracts and forward loan sales commitments to offset changes in fair value associated with loan commitments prior to funding the related or underlying loan. During the
47
commitment period, the loan commitments and related interest rate swaps, futures contracts and forward loan sales commitments are accounted for as derivatives and therefore recorded at fair value through income. Once funded the loan generally becomes the hedged item in a fair value hedging relationship.
NCB is exposed to credit and market risk as a result of its use of derivative instruments. If the fair value of the derivative contract is positive, the counterparty owes NCB and a repayment risk exists. If the fair value of the derivative contract is negative, NCB owes the counterparty, so there is no repayment risk. NCB minimizes repayment risk by entering into transactions with financially stable counterparties 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.
Market risk is the adverse effect that a change in interest rates, credit risk or comparative currency values has on the fair value of a financial instrument or expected cash flows. NCB manages the market risk associated with the interest rate hedge contracts by establishing formal policy limits concerning the types and degree of risk that may be undertaken. Compliance with this policy is monitored by management and reported to the Board of Directors.
All derivatives are recognized on the balance sheet at fair value. When a derivative contract is entered into, NCB determines whether or not it will be designated as a fair value hedge pursuant to provisions of FAS 133. NCB documents the relationships between the hedging instruments and the hedged items to link all derivatives that are designated as fair value hedges to specific assets and liabilities on the balance sheet. NCB assesses, both at inception and on an on-going basis, the effectiveness of all hedges in offsetting changes in fair values of hedged items. NCB discontinues hedge accounting prospectively when (1) the derivative is no longer effective in offsetting changes in fair value of a hedged item; or (2) the derivative matures or is sold, terminated or exercised.
When hedge accounting is discontinued because the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and the hedged asset or liability will no longer be adjusted to reflect changes in fair value attributed to the hedged risk. In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value with the changes in fair value recognized in earnings.
For derivative instruments designated as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in current earnings during the period of the change in fair values.
As of December 31, 2008 and 2007, NCB had not entered into any cash flow hedges.
Income Taxes
The Act provides that NCB shall be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T and the Act, NCB issues its member-borrowers patronage dividends, which are tax deductible to NCB thereby reducing its taxable income. NCB has determined that all income generated by NCB and its subsidiaries, with the exception of certain income of NCB, FSB, qualifies as patronage income under the Internal Revenue Code as amended by the Act with respect to NCB, with the consequence that NCB is able to issue tax deductible patronage dividends with respect to all such income. The Act also provides that NCB is exempt from state and local taxes with the exception of real estate taxes. Certain NCB subsidiaries, however, are subject to federal and state income taxes.
48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NCB’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. NCB also has exposure to different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies and other institutional clients. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, NCB may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty.
In addition, many of these transactions expose NCB to credit risk in the event of a default by its counterparty or client. Also, the credit risk may be exacerbated when the collateral held by NCB cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the NCB.
NCB’s principal market risk exposure remains interest rate risk.
NCB’s asset and liability management process manages NCB’s interest rate risk by structuring the balance sheet and derivative portfolios to maximize net interest income while maintaining an acceptable level of risk to changes in market interest rates. The achievement of this goal requires a balance between profitability, liquidity, and interest rate risk.
Interest rate risk is managed by the ALCO in accordance with policies approved by NCB’s Board of Directors. The ALCO formulates strategies designed to ensure appropriate level of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates and liquidity, business strategies, and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, warehouse loans and commitments to originate loans (“mortgage pipeline”), and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity.
To effectively measure and manage interest rate risk, NCB uses simulation analyses to determine the impact on net interest income of various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and market value sensitivity measures are utilized to provide additional insights concerning the interest rate risk management process. Executive management and NCB’s Board of Directors review the overall interest rate risk position and strategies on an ongoing basis. NCB has traditionally managed its business to maintain limited exposure to changes in interest rates.
NCB hedges a portion of its interest rate risk by entering into certain financial instruments including interest rate swaps, caps, floors, financial options, financial futures contracts, and forward delivery contracts. A hedge is a transaction to reduce risk by creating a relationship whereby changes in the value of the hedged asset or liability are offset in whole or in part by changes in the value of the financial instrument used for hedging. The impact of all hedging relationships is included in the following analysis.
The following tables present an analysis of the sensitivity of NCB’s net interest income and economic value of portfolio equity (market value of assets, less liabilities and derivative instruments.) The interest rate scenarios presented in the table include interest rates at December 31, 2008 and December 31, 2007 as adjusted for instantaneous parallel rate changes upward and downward of up to 200 basis points.
Net interest income was reasonably well insulated against the impact of changes in market interest rates at both December 31, 2008 and December 31, 2007. The impact of changing market interest rates is nonlinear due to the existence of customer options, primarily loan prepayments options, embedded in the balance sheet.
49
Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates. The net interest income variability reflects NCB’s interest sensitivity gap (defined below) and other factors.
| | | | | | | | | | | |
| 2008 | |
| | | | | | | Change In
| |
| | | | | | | Economic Value
| |
Change In
| | | Change In Net
| | | of Portfolio
| |
Interest Rates | | | Interest Income | | | Equity | |
| |
| | +200 | | | | -9.6 | % | | | -15.1 | % |
| | +100 | | | | -4.4 | % | | | -6.9 | % |
| | -100 | | | | 1.1 | % | | | 2.7 | % |
| | -200 | (1) | | | n/a | | | | n/a | |
| | | | | | | | | | | |
| 2007 | |
| | | | | | | Change In
| |
| | | | | | | Economic Value
| |
Change In
| | | Change In Net
| | | of Portfolio
| |
Interest Rates | | | Interest Income | | | Equity | |
| |
| | +200 | | | | -5.4 | % | | | -9.2 | % |
| | +100 | | | | -2.2 | % | | | -3.7 | % |
| | -100 | | | | 1.1 | % | | | 2.2 | % |
| | -200 | | | | 1.4 | % | | | 3.2 | % |
| | |
| (1) | | Due to the low level of interest rates as of December 31, 2008, it is not possible, nor meaningful to disclose results for this scenario. |
Key assumptions used in the sensitivity analysis of net interest income and economic value of portfolio equity include the following:
| | |
| | 1. | Balance sheet balances for various asset and liability classes are held constant for the net interest income simulations. |
| |
| | 2. | Prepayment assumptions are predicated on an analysis of historical prepayment behavior and management expectations. |
| |
| | 3. | Spread relationships between various interest rate indices and interest-earning assets and interest bearing liabilities estimated based on the analysis of historical relationships and management expectations. |
The interest rate sensitivity gap (“gap”) is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. During a period of rising interest rates, a positive gap (where the amount of assets maturing and repricing within one year exceeds liabilities maturing or repricing within one year) would tend to have a positive impact on net interest income while a negative gap would tend to have a detrimental impact. During a period of declining interest rates, a negative gap would tend to have a positive impact on net interest income while a positive gap would tend to have a detrimental impact. NCB’s one-year cumulative gap analysis at December 31, 2008 was negative $351.4 or -16.31% of assets. The one-year cumulative gap analysis at December 31, 2007 was positive $79.8 million or 4.38% of assets. These variations in gaps year over year are consistent with the simulation results that show relative changes in net interest income in response to changes in market interest rates.
While the gap position is a useful tool in measuring interest rate risk, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. For example, the gap position reflects only the prepayment assumptions pertaining to the current rate environment. Assets tend to prepay more rapidly during periods of declining interest rates than during periods of rising interest rates. Because of this and other risk factors not contemplated by the gap position, an institution could have a matched gap position in the current rate environment and still have its net interest income exposed to interest rate risk.
50
The tables 8 and 9 set forth the expected maturity and repricing characteristics of NCB’s consolidated assets, liabilities and derivative contracts at December 31, 2008 and 2007.
Table 8
INTEREST RATE SENSITIVITY
At December 31, 2008
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Over
| | | | |
| | | Interest -
| | | Interest -
| | | Interest -
| | | Interest -
| | | Interest -
| | | 12 Months and
| | | | |
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | Non-Interest
| | | | |
| | | 30 days | | | 3 month | | | month | | | 12 month | | | Total | | | Sensitive | | | Total | |
| |
| Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 39,971 | | | $ | - | | | $ | - | | | $ | - | | | $ | 39,971 | | | $ | - | | | $ | 39,971 | |
| Investment securities | | | 2,216 | | | | 2,692 | | | | 7,637 | | | | 10,229 | | | | 22,774 | | | | 45,711 | | | | 68,485 | |
| Loans and leases* | | | 342,282 | | | | 268,479 | | | | 122,380 | | | | 220,812 | | | | 953,953 | | | | 990,449 | | | | 1,944,402 | |
| Other assets - net | | | 58,126 | | | | 785 | | | | 6,452 | | | | 12,804 | | | | 78,167 | | | | 23,867 | | | | 102,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 442,595 | | | $ | 271,956 | | | $ | 136,469 | | | $ | 243,845 | | | $ | 1,094,865 | | | $ | 1,060,027 | | | $ | 2,154,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 393,139 | | | $ | 166,133 | | | $ | 222,369 | | | $ | 230,607 | | | $ | 1,012,248 | | | $ | 196,960 | | | $ | 1,209,208 | |
| Short-term borrowings | | | 225,000 | | | | - | | | | - | | | | - | | | | 225,000 | | | | - | | | | 225,000 | |
| Long-term debt | | | 1,447 | | | | 40,000 | | | | 20,000 | | | | 15,000 | | | | 76,447 | | | | 120,000 | | | | 196,447 | |
| Subordinated debt | | | - | | | | 36,810 | | | | - | | | | 40,782 | | | | 77,592 | | | | 38,897 | | | | 116,489 | |
| Jr. Subordinated debt | | | 51,547 | | | | - | | | | - | | | | - | | | | 51,547 | | | | - | | | | 51,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 671,133 | | | $ | 242,943 | | | $ | 242,369 | | | $ | 286,389 | | | $ | 1,442,834 | | | $ | 355,857 | | | $ | 1,798,691 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other non-interest bearing, net | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 356,201 | | | $ | 356,201 | |
| Effect of interest rate swap and financial futures | | | - | | | | 43,442 | | | | - | | | | (40,000 | ) | | | 3,442 | | | | (3,442 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities & members’ equity, net of derivatives | | $ | 671,133 | | | $ | 286,385 | | | $ | 242,369 | | | $ | 246,389 | | | $ | 1,446,276 | | | $ | 708,616 | | | $ | 2,154,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repricing differences | | $ | (228,538 | ) | | $ | (14,429 | ) | | $ | (105,900 | ) | | $ | (2,544 | ) | | $ | (351,411 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap | | $ | (228,538 | ) | | $ | (242,967 | ) | | $ | (348,867 | ) | | $ | (351,411 | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap as % of total assets | | | -10.61 | % | | | -11.28 | % | | | -16.20 | % | | | -16.31 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| * | | Includes loans held-for-sale and allowance for loan losses. |
51
Table 9
INTEREST RATE SENSITIVITY
At December 31, 2007
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Over
| | | | |
| | | Interest
| | | Interest
| | | Interest
| | | Interest
| | | Interest
| | | 12 Months and
| | | | |
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | sensitivity
| | | Non-Interest
| | | | |
| | | 30 days | | | 3 month | | | 6 month | | | 12 month | | | Total | | | Sensitive | | | Total | |
| |
| Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 63,724 | | | $ | - | | | $ | - | | | $ | - | | | $ | 63,724 | | | $ | - | | | $ | 63,724 | |
| Investment securities | | | 16,883 | | | | 8,790 | | | | 6,894 | | | | 23,252 | | | | 55,819 | | | | 49,764 | | | | 105,583 | |
| Loans and leases* | | | 140,753 | | | | 439,381 | | | | 96,915 | | | | 157,860 | | | | 834,909 | | | | 762,284 | | | | 1,597,193 | |
| Other assets - net | | | 70,523 | | | | 482 | | | | 703 | | | | 1,407 | | | | 73,115 | | | | 32,161 | | | | 105,276 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 291,883 | | | $ | 448,653 | | | $ | 104,512 | | | $ | 182,519 | | | $ | 1,027,567 | | | $ | 844,209 | | | $ | 1,871,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities Deposits | | $ | 202,499 | | | $ | 127,965 | | | $ | 153,720 | | | $ | 143,557 | | | $ | 627,741 | | | $ | 358,120 | | | $ | 985,861 | |
| Short-term borrowings | | | 183,000 | | | | - | | | | - | | | | - | | | | 183,000 | | | | - | | | | 183,000 | |
| Long-term debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | 220,907 | | | | 220,907 | |
| Subordinated debt | | | - | | | | 39,310 | | | | - | | | | - | | | | 39,310 | | | | 79,679 | | | | 118,989 | |
| Jr. Subordinated debt | | | 51,547 | | | | - | | | | - | | | | - | | | | 51,547 | | | | - | | | | 51,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 437,046 | | | $ | 167,275 | | | $ | 153,720 | | | $ | 143,557 | | | $ | 901,598 | | | $ | 658,706 | | | $ | 1,560,304 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other non-interest bearing, net | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 311,472 | | | $ | 311,472 | |
| Effect of interest rate swap and financial futures | | | 766 | | | | 45,399 | | | | - | | | | - | | | | 46,165 | | | | (46,165 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities & members’ equity, net of derivatives | | $ | 437,812 | | | $ | 212,674 | | | $ | 153,720 | | | $ | 143,557 | | | $ | 947,763 | | | $ | 924,013 | | | $ | 1,871,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repricing differences | | $ | (145,929 | ) | | $ | 235,979 | | | $ | (49,208 | ) | | $ | 38,962 | | | $ | 79,804 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap | | $ | (145,929 | ) | | $ | 90,050 | | | $ | 40,842 | | | $ | 79,804 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap as % of total assets | | | -7.70 | % | | | 4.93 | % | | | 2.29 | % | | | 4.38 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| * | | Includes loans held-for-sale and allowance for loan losses. |
Table 8 indicates that on December 31, 2008 NCB had gaps (as a percentage of total assets) of negative 13.65% and 14.40% at the one year and six month time horizons, respectively. Table 9 indicates that on December 31, 2007, NCB had a positive gap (as a percentage of total assets) of 4.38% and 2.29% at the one year and six month time horizons, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NCB’s financial statements and notes thereto are set forth beginning on the following page. NCB is not subject to any of the requirements for supplementary financial information contained in Item 302 ofRegulation S-K.
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Members of National Consumer Cooperative Bank:
We have audited the accompanying consolidated balance sheets of National Consumer Cooperative Bank and subsidiaries (the Company) as of December 31, 2008, and 2007, and the related consolidated statements of income (loss), comprehensive income (loss), changes in members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Consumer Cooperative Bank and subsidiaries as of December 31, 2008, and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
McLean, Virginia
March 31, 2009
53
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 39,971 | | | $ | 63,724 | |
| Investment securities | | | | | | | | |
| Available-for-sale (amortized cost of $71,869 and $107,396) | | | 68,098 | | | | 105,166 | |
| Held-to-maturity (fair value of $374 and $431) | | | 387 | | | | 417 | |
| Loans held-for-sale ($14.4 million and $0 million recorded at fair value, respectively per SFAS 159) | | | 14,278 | | | | 90,949 | |
| Loans and lease financing | | | 1,957,191 | | | | 1,523,958 | |
| Less: Allowance for loan losses | | | (27,067 | ) | | | (17,714 | ) |
| | | | | | | | | |
| Net loans and lease financing | | | 1,930,124 | | | | 1,506,244 | |
| Other assets | | | 102,034 | | | | 105,276 | |
| | | | | | | | | |
| Total assets | | $ | 2,154,892 | | | $ | 1,871,776 | |
| | | | | | | | | |
Liabilities and Members’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
| Deposits | | $ | 1,300,071 | | | $ | 1,027,452 | |
| Other liabilities | | | 38,581 | | | | 47,118 | |
| Borrowings | | | | | | | | |
| Short-term | | | 225,000 | | | | 183,000 | |
| Long-term | | | 196,447 | | | | 220,907 | |
| Subordinated debt | | | 116,489 | | | | 118,989 | |
| Junior subordinated debt | | | 51,547 | | | | 51,547 | |
| | | | | | | | | |
| Total borrowings | | | 589,483 | | | | 574,443 | |
| | | | | | | | | |
| Total liabilities | | | 1,928,135 | | | | 1,649,013 | |
| | | | | | | | | |
Members’ equity | | | | | | | | |
| Common stock | | | 197,784 | | | | 197,891 | |
| Retained earnings | | | | | | | | |
| Allocated | | | 7,154 | | | | — | |
| Unallocated | | | 26,251 | | | | 28,200 | |
| Accumulated other comprehensive loss | | | (4,432 | ) | | | (3,328 | ) |
| | | | | | | | | |
| Total members’ equity | | | 226,757 | | | | 222,763 | |
| | | | | | | | | |
| Total liabilities and members’ equity | | $ | 2,154,892 | | | $ | 1,871,776 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
54
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended December 31, 2008, 2007, and 2006
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands) | |
| |
| Interest income | | | | | | | | | | | | |
| Loans and lease financing | | $ | 116,325 | | | $ | 125,016 | | | $ | 108,328 | |
| Investment securities | | | 5,518 | | | | 8,081 | | | | 7,147 | |
| Other interest income | | | 1,858 | | | | 2,642 | | | | 2,979 | |
| | | | | | | | | | | | | |
| Total interest income | | | 123,701 | | | | 135,739 | | | | 118,454 | |
| | | | | | | | | | | | | |
| Interest expense | | | | | | | | | | | | |
| Deposits | | | 37,549 | | | | 43,310 | | | | 30,265 | |
| Short-term borrowings | | | 8,696 | | | | 17,510 | | | | 18,380 | |
| Long-term debt, other borrowings and subordinated debt | | | 21,060 | | | | 24,301 | | | | 23,451 | |
| | | | | | | | | | | | | |
| Total interest expense | | | 67,305 | | | | 85,121 | | | | 72,096 | |
| | | | | | | | | | | | | |
| Net interest income | | | 56,396 | | | | 50,618 | | | | 46,358 | |
| Provision for loan losses | | | 18,650 | | | | 152 | | | | 3,667 | |
| | | | | | | | | | | | | |
| Net interest income after provision for loan losses | | | 37,746 | | | | 50,466 | | | | 42,691 | |
| | | | | | | | | | | | | |
| Non-interest income | | | | | | | | | | | | |
| Gain (loss) on sale of loans | | | 6,016 | | | | (1 | ) | | | 19,930 | |
| Servicing fees | | | 4,568 | | | | 4,651 | | | | 4,537 | |
| Letter of credit fees | | | 4,356 | | | | 3,423 | | | | 3,513 | |
| SFAS 133 adjustment | | | 3,256 | | | | (1,468 | ) | | | 775 | |
| Commercial loan fees | | | 1,184 | | | | 428 | | | | 463 | |
| Real estate loan fees | | | 1,002 | | | | 1,515 | | | | 728 | |
| Prepayment fees | | | 735 | | | | 837 | | | | 1,312 | |
| Other | | | 3,825 | | | | 2,584 | | | | 2,422 | |
| | | | | | | | | | | | | |
| Total non-interest income | | | 24,942 | | | | 11,969 | | | | 33,680 | |
| | | | | | | | | | | | | |
| Non-interest expense | | | | | | | | | | | | |
| Compensation and employee benefits | | | 29,815 | | | | 32,703 | | | | 31,038 | |
| Occupancy and equipment | | | 7,470 | | | | 8,057 | | | | 8,700 | |
| Contractual services | | | 5,482 | | | | 5,944 | | | | 6,086 | |
| Information systems | | | 4,627 | | | | 4,402 | | | | 2,697 | |
| Loan costs | | | 2,479 | | | | 2,082 | | | | 1,609 | |
| Net loss on other-than-temporary impairment and sale of available-for-sale securities | | | 1,525 | | | | 17 | | | | 29 | |
| Corporate development | | | 1,345 | | | | 2,814 | | | | 3,132 | |
| Travel and entertainment | | | 1,220 | | | | 1,449 | | | | 1,554 | |
| Lower of cost or market valuation allowance | | | 832 | | | | 2,070 | | | | 133 | |
| Provision (credit) for unfunded commitments | | | 659 | | | | 488 | | | | (1,077 | ) |
| Deferred rent recognition related to lease termination | | | — | | | | (1,860 | ) | | | — | |
| Lease termination costs | | | — | | | | 3,148 | | | | — | |
| Other | | | 2,805 | | | | 2,257 | | | | 1,631 | |
| | | | | | | | | | | | | |
| Total non-interest expense | | | 58,259 | | | | 63,571 | | | | 55,532 | |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 4,429 | | | | (1,136 | ) | | | 20,839 | |
| Provision (benefit) for income taxes | | | 555 | | | | (664 | ) | | | 1,414 | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 3,874 | | | $ | (472 | ) | | $ | 19,425 | |
| | | | | | | | | | | | | |
| Distribution of net income (loss) | | | | | | | | | | | | |
| Patronage dividends | | $ | 7,154 | | | $ | — | | | $ | 17,446 | |
| Retained earnings | | | (3,280 | ) | | | (472 | ) | | | 1,979 | |
| | | | | | | | | | | | | |
| | | $ | 3,874 | | | $ | (472 | ) | | $ | 19,425 | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
55
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years ended December 31, 2008, 2007, and 2006
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands) | |
| |
| Net income (loss) | | $ | 3,874 | | | $ | (472 | ) | | $ | 19,425 | |
| Other comprehensive income | | | | | | | | | | | | |
| Unrealized holding loss before tax on available-for- sale investment securities and non-certificated interest- only receivables | | | (1,173 | ) | | | (4,227 | ) | | | (525 | ) |
| Tax effect | | | 69 | | | | 7 | | | | 7 | |
| | | | | | | | | | | | | |
| Comprehensive income (loss) | | $ | 2,770 | | | $ | (4,692 | ) | | $ | 18,907 | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
56
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
For the Years ended December 31, 2008, 2007, and 2006
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated
| | | | |
| | | | | | Retained
| | | Retained
| | | Other
| | | Total
| |
| | | Common
| | | Earnings
| | | Earnings
| | | Comprehensive
| | | Members’
| |
| | | Stock | | | Allocated | | | Unallocated | | | Income (Loss) | | | Equity | |
| | | (Dollars in thousands) | |
| |
Balance, December 31, 2005 | | $ | 170,868 | | | $ | 13,307 | | | $ | 33,423 | | | $ | 1,410 | | | $ | 219,008 | |
| Net income | | | — | | | | — | | | | 19,425 | | | | — | | | | 19,425 | |
| Adjustment to prior year dividends | | | — | | | | 4,003 | | | | (6,402 | ) | | | — | | | | (2,399 | ) |
| Cancellation of stock | | | (1,008 | ) | | | 60 | | | | 900 | | | | — | | | | (48 | ) |
| Other dividends paid | | | — | | | | — | | | | (512 | ) | | | — | | | | (512 | ) |
| 2005 patronage dividends distributed in stock | | | 17,370 | | | | (17,370 | ) | | | — | | | | — | | | | — | |
| 2006 patronage dividends | | | | | | | | | | | | | | | | | | | — | |
| To be distributed in cash | | | — | | | | — | | | | (7,118 | ) | | | — | | | | (7,118 | ) |
| Retained in form of equity | | | — | | | | 10,328 | | | | (10,328 | ) | | | — | | | | — | |
| Unrealized loss on available-for-sale investment securities and non-certificated interest-only receivables, net of taxes | | | — | | | | — | | | | — | | | | (518 | ) | | | (518 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 187,230 | | | | 10,328 | | | | 29,388 | | | | 892 | | | | 227,838 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | (472 | ) | | | — | | | | (472 | ) |
| Adjustment to prior year dividends | | | — | | | | 497 | | | | (485 | ) | | | — | | | | 12 | |
| Cancellation of stock | | | (164 | ) | | | — | | | | 155 | | | | — | | | | (9 | ) |
| Other dividends paid | | | — | | | | — | | | | (386 | ) | | | — | | | | (386 | ) |
| 2006 patronage dividends distributed in stock | | | 10,825 | | | | (10,825 | ) | | | — | | | | — | | | | — | |
| Unrealized loss on available-for-sale investment securities and non-certificated interest-only receivables, net of taxes | | | — | | | | — | | | | — | | | | (4,220 | ) | | | (4,220 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 197,891 | | | | — | | | | 28,200 | | | | (3,328 | ) | | | 222,763 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | 3,874 | | | | — | | | | 3,874 | |
| Adjustment to initially apply FAS 157 | | | — | | | | — | | | | 1,224 | | | | — | | | | 1,224 | |
| Cancellation of stock | | | (107 | ) | | | — | | | | 107 | | | | — | | | | — | |
| 2008 patronage dividends | | | | | | | | | | | | | | | | | | | | |
| To be distributed in cash | | | — | | | | — | | | | — | | | | — | | | | — | |
| Retained in form of equity | | | — | | | | 7,154 | | | | (7,154 | ) | | | — | | | | — | |
| Unrealized loss on available-for-sale investment securities and non-certificated interest-only receivables, net of taxes | | | — | | | | — | | | | — | | | | (1,104 | ) | | | (1,104 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | $ | 197,784 | | | $ | 7,154 | | | $ | 26,251 | | | $ | (4,432 | ) | | $ | 226,757 | |
| | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
57
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 2008, 2007, and 2006
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands) | |
| |
Cash flows from operating activities | | | | | | | | | | | | |
| Net income (loss) | | $ | 3,874 | | | $ | (472 | ) | | $ | 19,425 | |
| Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses | | | 18,650 | | | | 152 | | | | 3,667 | |
| Provision (credit) for losses on unfunded commitments | | | 659 | | | | 488 | | | | (1,077 | ) |
| Amortization and writedown of interest-only-receivables and servicing rights | | | 12,369 | | | | 11,402 | | | | 10,260 | |
| Depreciation and amortization, other | | | 3,790 | | | | 3,150 | | | | 6,349 | |
| (Gain) loss on sale of loans including SFAS 133 adjustment | | | (9,272 | ) | | | 1,469 | | | | (20,705 | ) |
| Net loss on other-than-temporary impairment and sale of available-for-sale securities | | | 1,525 | | | | 17 | | | | 29 | |
| Purchase of loans held-for-sale | | | (355,136 | ) | | | (222,489 | ) | | | (179,493 | ) |
| Loans originated for sale, net of principal collections | | | (349,825 | ) | | | (831,604 | ) | | | (899,556 | ) |
| Lower of cost or market valuation allowance | | | 832 | | | | 2,070 | | | | 133 | |
| Net proceeds from sale of loans held-for-sale | | | 808,824 | | | | 1,195,830 | | | | 1,091,690 | |
| Tenant improvement allowance | | | — | | | | 3,656 | | | | — | |
| Lease termination costs | | | — | | | | 3,148 | | | | — | |
| Lease termination incentive | | | — | | | | (1,585 | ) | | | — | |
| Deferred rent recognition related to lease termination | | | — | | | | (1,860 | ) | | | — | |
| Decrease (increase) in other assets | | | 167 | | | | (8,368 | ) | | | (3,460 | ) |
| Decrease in other liabilities | | | (6,689 | ) | | | (747 | ) | | | (5,381 | ) |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 129,534 | | | | 154,257 | | | | 21,881 | |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Decrease (increase) in restricted cash | | | — | | | | 5,398 | | | | (248 | ) |
| Purchase of investment securities | | | | | | | | | | | | |
| Available-for-sale | | | (63,004 | ) | | | (77,044 | ) | | | (107,770 | ) |
| Held-to-maturity | | | — | | | | — | | | | (17 | ) |
| Proceeds from maturities of investment securities | | | | | | | | | | | | |
| Available-for-sale | | | 66,803 | | | | 50,375 | | | | 107,034 | |
| Held-to-maturity | | | 30 | | | | 52 | | | | 9 | |
| Proceeds from the sale of investment securities | | | | | | | | | | | | |
| Available-for-sale | | | 24,197 | | | | 1,037 | | | | 2,725 | |
| Net increase in loans and lease financing | | | (439,678 | ) | | | (145,189 | ) | | | (131,580 | ) |
| Purchase of portfolio loans | | | (27,591 | ) | | | — | | | | — | |
| Purchase of premises and equipment | | | (533 | ) | | | (9,800 | ) | | | (5,036 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (439,776 | ) | | | (175,171 | ) | | | (134,883 | ) |
| | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| Net increase in deposits | | | 272,056 | | | | 220,662 | | | | 69,421 | |
| Increase (decrease) in short-term borrowings | | | 42,000 | | | | (172,500 | ) | | | 39,318 | |
| Proceeds from issuance of long-term borrowings | | | — | | | | — | | | | 105,000 | |
| Repayment of long-term borrowings | | | (25,000 | ) | | | — | | | | (80,000 | ) |
| Repayment of subordinated borrowings | | | (2,500 | ) | | | (2,500 | ) | | | (2,500 | ) |
| Incurrence of financing costs | | | (67 | ) | | | (1,287 | ) | | | (1,053 | ) |
| Patronage dividends paid | | | — | | | | (7,107 | ) | | | (11,917 | ) |
| Other dividends paid | | | — | | | | (386 | ) | | | (512 | ) |
| | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 286,489 | | | | 36,882 | | | | 117,757 | |
| | | | | | | | | | | | | |
| (Decrease) increase in cash and cash equivalents | | | (23,753 | ) | | | 15,968 | | | | 4,755 | |
| Cash and cash equivalents, beginning of period | | | 63,724 | | | | 47,756 | | | | 43,001 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 39,971 | | | $ | 63,724 | | | $ | 47,756 | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
58
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 2008, 2007 and 2006
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands) | |
| |
Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | | | | |
| Unrealized holding loss on available-for-sale investment securities and non-certificated interest-only receivables, net of tax | | $ | (1,104 | ) | | $ | (4,220 | ) | | $ | (518 | ) |
| Loans transferred to other real estate owned | | $ | 1,087 | | | $ | 180 | | | $ | 193 | |
| Transfer of loans held-for-sale to loans and lease financing | | $ | 43,462 | | | $ | — | | | $ | 10,092 | |
| Transfer of loans and lease financing to loans held-for-sale | | $ | 67,737 | | | $ | — | | | $ | — | |
| Common stock cancelled and loan losses recovered against allowance for loan losses | | $ | — | | | $ | 9 | | | $ | 48 | |
Supplemental information: | | | | | | | | | | | | |
| Interest paid | | $ | 68,385 | | | $ | 81,860 | | | $ | 71,315 | |
| Income taxes paid | | $ | 361 | | | $ | 562 | | | $ | 1,636 | |
The accompanying notes are an integral part of these consolidated financial statements.
59
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008, 2007 and 2006
| |
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization
National Consumer Cooperative Bank, doing business as NCB, is a U.S. Government-chartered corporation organized under the National Consumer Cooperative Bank Act (the “Act”). NCB provides loans and financial services primarily to cooperatives. NCB Financial Corporation (“NCBFC”), a wholly owned subsidiary, is the holding company of NCB, FSB, a federally-chartered thrift institution. NCB, FSB provides a broad range of financial services to cooperative and non-cooperative customers.
The 1981 amendments to the Act also directed NCB to form NCB Development Corporation, now NCB Capital Impact, a related entity, which is a non-profit organization without capital stock organized under the laws of the District of Columbia to perform only functions provided in the Act. NCB Capital Impact provides loans and technical support to cooperative enterprises. NCB Capital Impact’s bylaws provide for a majority of the nine to fifteen members of the Board of Directors to be appointed by the members of NCB Capital Impact, who comprise the members of NCB’s Board, with a majority of directors to be appointed from among the members of the NCB Board. Consistent with the Act, NCB makes deductible, voluntary contributions to NCB Capital Impact.
Principles of Consolidation
The consolidated financial statements include the accounts of NCB and its subsidiaries. All significant inter-company balances and transactions have been eliminated. The consolidated financial statements of NCB do not include the assets, liabilities or results of operations of NCB Capital Impact or NCB Capital Trust I (“Trust”), a Delaware statutory trust formed by NCB in 2003 in connection with the issuance of trust preferred securities.
Based on the guidance in FASB Interpretation No 46R (“FIN 46R”), NCB does not consolidate its investment in the Trust.
On November 21, 2008, NCB sold its LLC units in NCB Community Works (“CCW”), in which NCB held 50% interest with the remaining 50% being owned by NCB Capital Impact, which sold its share at the same time. As part of the sale of CCW, NCB transferred some excluded assets from CCW to NCB Communities LLC, a newly formed entity in which NCB owns 50% and the remaining 50% is owned by NCB Capital Impact.
Estimates
The preparation of financial statements in conformity with the U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flow, cash equivalents include cash on hand, amounts due from banks, overnight investments and time deposits. Although cash equivalents generally have maturities of ninety days or less, time deposits subject to early withdrawal penalties and with maturities greater than ninety days have been included in cash equivalents.
Investments
NCB’s investment securities portfolio and retained beneficial interests in securitized financial assets are evaluated for impairment on a quarterly basis pursuant to the guidance in Statement of Financial Accounting Standard No. 115, as amended“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), Emerging Issues Task Force IssueNo. 99-20“Recognition of Interest Income and Impairment on Purchased and
60
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Retained Beneficial Interests in Securitized Financial Assets”(“EITF 99-20”),and the amendments toEITF 99-20 which are disclosed inEITF 99-20-1 (issued January 2009 effective as of December 31, 2008.) Each individual security is evaluated for impairment. Impairment is considered temporary when the fair value of the instrument has been adversely impacted by market conditions, such as changes in interest rates or investor spreads, and NCB has the intent and ability to hold the instrument until such time as it expects to have received the contractual cash flows and recovered its investment.
Securities that will be held for indefinite periods of time, including those that may be sold in response to changes in market interest rates and related changes in the security’s prepayment risk, needs for liquidity and changes in the availability and the yield of alternative investments are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses are determined on an aggregate basis, excluded from earnings and reported as other comprehensive income net of any tax effect. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold and are included in earnings.
Securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are reported at amortized cost.
NCB recognizes an impairment charge when the declines in the fair value of equity and debt securities below their cost basis are judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. NCB considers various factors in determining whether an impairment is other-than-temporary, including, but not limited to, the severity and duration of the impairment, forecasted recovery of unrealized losses, the financial condition and near-term prospects of the investee, whether it becomes probable that there has been an adverse change in cash flows to NCB, and NCB’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that NCB identifies as potentially distressed. When an investment security or retained interest is determined to be other-than-temporarily impaired, the carrying value is reduced to fair value and an impairment charge is recognized.
The valuation of securities for impairment is subject to risks and uncertainties and is intended to determine whether declines in fair value should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions and future changes in the factors mentioned in the proceeding paragraph. It is reasonably possible that such factors could change in the future which could result in other-than-temporary impairments.
Derivative Instruments and Hedging Activities
NCB maintains a risk management strategy that includes the use of derivative instruments to reduce unplanned earnings fluctuations caused by interest rate volatility. Use of derivative instruments is a component of NCB’s overall risk management strategy in accordance with a formal policy that is monitored by management, which has delegated authority over the interest rate risk management function.
The derivative instruments utilized include interest rate swaps, futures contracts and forward loan sales commitments. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties based upon a notional principal amount and maturity date. Futures generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Forward loan sales commitments lock in the prices at which loans will be sold to investors.
NCB uses interest rate swaps, futures contracts and forward loan sales commitments to offset changes in fair value associated with loan commitments prior to funding the loan. During the commitment period, the loan commitments and related interest rate swaps, futures contracts and forward loan sales commitments are accounted for as derivatives and therefore recorded at fair value through the gain on sale. Once funded, loans are generally economically hedged with the related forward sale commitment or an interest rate swap. The designation of a hedge
61
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
relationship is not necessary as most loans are recorded at fair value with the adoption of SFAS 159. However, NCB still maintains some hedge relationships for those loans for which the fair value option was not elected.
NCB is exposed to credit and market risk as a result of its use of derivative instruments. If the fair value of the derivative contract is positive, the counterparty owes NCB and a repayment risk exists. If the fair value of the derivative contract is negative, NCB owes the counterparty, so there is no repayment risk. NCB minimizes repayment risk by entering into transactions with financially stable counterparties 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.
Market risk is the adverse effect that a change in interest rates or comparative currency values has on the fair value of a financial instrument or expected cash flows. NCB manages the market risk associated with the interest rate swap contracts by establishing formal policy limits concerning the types and degree of risk that may be undertaken. Compliance with this policy is monitored by management and reported to the Board of Directors.
All derivatives are recognized on the balance sheet at fair value. When a derivative contract is entered into, NCB determines whether or not it will be designated as a fair value hedge. When entering into hedging transactions, NCB documents the relationships between the hedging instruments and the hedged items to link all derivatives that are designated as fair value hedges to specific assets and liabilities on the balance sheet. NCB assesses, both at inception and on an on-going basis, the effectiveness of all hedges in offsetting changes in fair values of hedged items.
NCB discontinues hedge accounting prospectively when (1) the derivative is no longer effective in offsetting changes in fair value of a hedged item; or (2) the derivative matures or is sold, terminated or exercised.
When hedge accounting is discontinued because the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and the hedged asset or liability will no longer be adjusted to reflect changes in fair value attributable to the hedged risk. In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value with the changes in fair value recognized in earnings.
For derivative instruments designated as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings during the period of the change in fair values. At December 31, 2008 and 2007, NCB had not designated any derivative instruments in cash flow hedge relationships.
Fair Value Measurements
On January 1, 2008, NCB adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”),“Fair Value Measurements.”SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (see Note 25 — Fair Value Measurements).
The provisions of Statement of Financial Accounting Standards No. 159 (“SFAS 159”),“The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,”were also adopted by NCB on January 1, 2008. SFAS 159 allows NCB, at specified election dates, to measure certain financial instruments at fair value. Unrealized gains and losses on financial instruments for which the fair value option has been elected are included in earnings. Electing to use fair value allows a better offset of the change in fair value of the loan and the derivative instruments used to hedge them without the burden of complying with the requirements of SFAS 133. Subsequent to the adoption of SFAS 159, loan origination costs for those loans where the
62
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fair value election was made are recognized in non-interest expense as incurred. Previously, these origination costs would have been capitalized as part of the carrying amount of the loans and recognized as a reduction of gains on loan sales.
Staff Accounting Bulletin No. 109
On January 1, 2008, NCB adopted Staff Accounting Bulletin No. 109 (“SAB 109”)“Written Loan Commitments Recorded at Fair Value through Earnings.”SAB 109 requires fair value measurements of derivatives or other written loan commitments recorded through earnings to include the future cash flows related to the loan’s servicing rights. SAB 109 also states that internally developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment or to written loan commitments that are accounted at 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 loan and loan commitments of $1.4 million for loans that will not be funded or delivered to investors until a date subsequent to December 31, 2008.
Loan Origination Fees, Commitment Fees, and Related Costs
Loan fees received and direct origination costs are accounted for in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans or, with respect to loans held-for-sale, as an adjustment to gain on sale of loans at the time of sale. The remaining unamortized fees on loans repaid prior to maturity are recognized as interest income. If a commitment is exercised during the commitment period, the remaining net fee or cost at the time of exercise is recognized over the life of the loan as an adjustment of yield.
Loans and Lease Financing and Loans Held-for-Sale
Loans and lease financing are carried at their principal amounts outstanding, net of deferred loans origination fees and costs and net of any discounts and premiums. Loans held-for-sale for which NCB has not elected the fair value option, are carried at the lower of cost or fair value and net of deferred origination fees and costs, discounts and premiums and the effects of hedge accounting or changes in fair value. NCB determines whether a loan would qualify as held-for-sale at the time the loan is originated.
Interest income is calculated in accordance with the terms of each individual loan and lease. NCB typically discontinues the accrual of interest on loans when principal or interest are ninety days or more in arrears or sooner when there is reasonable doubt as to collectibility. Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can be reasonably expected.
When loans are sold, the gain or loss is recognized in the Consolidated Statement of Income (Loss) as the proceeds less the book value of the loan, including unamortized fees and direct origination costs.
Allowance for Loan Losses
The allowance for loan losses is an estimate of known and inherent losses in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5 “Accounting for Contingencies,” which requires that losses be accrued when they are probable of having occurred and reasonably estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the balance of loans which are impaired.
63
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Impairment is measured based upon the present value of future cash flows discounted at the loan’s effective interest rate; or, the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent.
A risk rating system is designed to classify each loan according to the risk unique to the credit facility. The expected loss for each risk rating is determined using historical loss factors and collateral position of the credit facility. All loans are evaluated individually and assigned a risk rating.
Reserves for impaired loans are established for impaired loans based upon the above criteria. Reserves on all other loans are calculated on aloan-by-loan basis based upon the probability of default and the expected loss in the event of default for each risk rating, based on historical experience.
NCB charges off loans, (i.e. reduces the loan balance,) when the loans are deemed to be uncollectible, at which time the allowance for loan losses is reduced.
Loan Sales and Securitizations
NCB’s recognition of a gain or loss on the sale or securitization of loans is accounted for in accordance with Standards of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 140 requires that a transfer of financial assets in which NCB surrenders control over the assets be accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The carrying value of the assets sold is allocated between the assets sold and the retained interests based on their relative fair values.
To receive sale accounting for an asset transfer, SFAS 140 requires a “true sale” analysis of the treatment of the transfer under state law if the company was a debtor under the bankruptcy code. The “true sale” analysis includes several legal factors including the nature and level of recourse to the transferor and the nature of retained servicing rights. The “true sale” analysis is not absolute and unconditional but rather contains provisions that make the transferred assets “bankruptcy remote” should the transferor file for bankruptcy.
Once the “true sale” criteria has been satisfied under SFAS 140 for securitizations, other factors concerning the nature of the extent of the transferor’s control over the transferred financial assets are taken into account, including whether the special purpose entity (“SPE”) has complied with rules concerning qualifying special purpose entities in order to determine if the de-recognition of financial assets is warranted.
NCB obtains a legal opinion regarding the “true sale” of the transferred financial assets as part of the securitization process. The “true sale” opinion provides reasonable assurance that the transferred assets would not be characterized as property of the transferor in the event of insolvency.
The securitization process involves the sale of loans to a bankruptcy remote special purpose entity which then sells the loans to a separate, transaction-specific trust in exchange for considerations generated by the sale of the securities issued by the securitization trust. The securitization trust issues and sells debt securities to third party investors that are secured by payments on the loans. NCB has no obligation to provide credit support to either the third party investors or the securitization trust. Neither the third party investors nor the securitization trust generally have recourse to NCB’s assets or NCB and have no ability to require NCB to repurchase their securities other than through enforcement of the standard representations and warranties. NCB does make certain representations and warranties concerning the loans, such as lien status, and if NCB is found to have breached a representation and warranty, NCB may be required to repurchase the loan from the securitization trust. NCB does not guarantee any securities issued by the securitization trust. The securitization trust represents a “qualifying special purpose entity”, which meets the criteria of SFAS 140, and therefore is not consolidated for financial reporting purposes.
64
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Servicing Assets and Interest-Only Receivables
SFAS No. 140 requires entities to allocate the total cost of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair value upon transfer of the loan.
Servicing assets, stated net of accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated for the underlying loans. Servicing assets are assessed for impairment based on lower of cost or fair value. In addition, mortgage-servicing assets must be stratified based on one or more predominant risk characteristics of the underlying loans and impairment is recognized through a valuation allowance for each impaired stratum.
Interest-only receivables are created when loans are sold and a portion of the interest retained by NCB does not depend on the servicing work being performed. The interest-only receivables are amortized to interest income using the interest method. Interest-only receivables that are certificated have been included as investment securities consistent with SFAS No. 115. Interest-only receivables that are not certificated are included as other assets.
Substantially all interest-only receivables pertain to Cooperative Loans made to cooperative housing corporations. These mortgages are typically structured with prepayment lockouts followed by prepayment penalties, yield maintenance provisions, or defeasance through maturity. In calculating interest-only receivables, NCB discounts the cash flows through the lockout or defeasance period. Cash flows beyond the lockout period are included in the fair value of the interest-only receivable only to the extent that NCB is entitled to receive the prepayment or yield maintenance penalty.
Gains or losses on sales and securitizations depend, in part, on the previous carrying amount of the loans involved in the transfer and are allocated between the loans sold and the retained interests based on their relative fair value at the date of sale. Since quoted market prices are generally not available, NCB estimates the fair value of these interest-only receivables by determining the present value of future expected cash flows using modeling techniques that incorporate management’s best estimates of key variables, including credit losses, prepayment speeds, prepayment lockouts and discount rates commensurate with the risks involved. Gains on sales and securitizations are reported in non-interest income.
The fair value of the interest-only receivables is determined using discounted future expected cash flows at various discount rates. In an effort to maximize the value of interest-only receivables, most cooperative mortgages have very strict prepayment restrictions. The most common prepayment protection is a lockout period, followed by either a fixed percentage penalty, or some form of yield maintenance. For loans that do not have prepayment options, the related interest-only receivable is adjusted at the time of prepayment.
For certificated interest-only receivables, the discounted rate of future expected cash flows is equal to a spread over the benchmark index at which the respective loans were priced. For non-certificated interest-only receivables, the discounted rate of future expected cash flows is equal to a market spread over the benchmark index for similar certificated interest-only receivables adjusted by a premium to reflect the less liquid nature of the non-certificated interest-only receivable. For quarterly valuations, the index is adjusted to reflect market conditions. An appropriate spread, determined by reference to what market participants would use for similar financial instruments, is added to the index to determine the current discount rate.
The weighted average life of each interest-only receivable will vary with the mortgage terms that back the transaction.
Interest-only receivables that are subject to prepayment risk such that NCB may not recover substantially all of its investment are recorded at fair value with subsequent adjustments reflected in other comprehensive income or in earnings if the fair value of the interest-only receivable has declined below its carrying amount and such decline has been determined to be other than temporary.
65
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Assets
Premises and equipment are carried at cost less accumulated depreciation. Buildings and building improvements are depreciated on a straight-line basis over either their useful lives or 39 years. Leasehold improvements are depreciated on a straight-line basis over the term of the lease. Furnishings are depreciated using an accelerated method and are depreciated over five or seven years. Equipment and software are depreciated using an accelerated method over seven, five or three years, depending on the type of equipment or software.
Income Taxes
The Act provides that NCB shall be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T and the Act, NCB issues its member-borrowers patronage dividends, which are tax deductible to NCB thereby reducing its taxable income. NCB has determined that all income generated by NCB and its subsidiaries, with the exception of certain income of NCB, FSB, qualifies as patronage income under the Internal Revenue Code as amended by the Act with respect to NCB, with the consequence that NCB is able to issue tax deductible patronage dividends with respect to all such income. The Act also provides that NCB is exempt from state and local taxes with the exception of real estate taxes. Certain NCB subsidiaries, however, are subject to federal and state income taxes.
NCB provides for income taxes under SFAS No. 109, “Accounting for Income Taxes”. The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases.
The Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48 applies to all tax positions accounted for in accordance with FASB Statement 109. The term tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The adoption of FIN 48 did not impact NCB’s financial statements as NCB does not currently have any uncertain tax positions.
| |
| 2. | CASH AND CASH EQUIVALENT |
The composition of cash and cash equivalents at December 31 is as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Cash | | $ | 25,677 | | | $ | 23,224 | |
| Cash equivalents | | | 14,294 | | | | 40,500 | |
| | | | | | | | | |
| Total | | $ | 39,971 | | | $ | 63,724 | |
| | | | | | | | | |
66
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The composition of available-for-sale investment securities and interest-only non-certified receivables (included as a component of other assets) as of December 31 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | | | | Unrealized
| | | Unrealized
| | | | |
| | | Amortized Cost | | | Gains | | | Losses | | | Fair Value | |
| |
| Interest-only certificated receivables | | $ | 29,906 | | | $ | 20 | | | $ | (2,072 | ) | | $ | 27,854 | |
| Interest-only non-certificated receivables | | | 28,019 | | | | 619 | | | | (1,374 | ) | | | 27,264 | |
| U.S. Treasury and agency obligations | | | 18,247 | | | | 388 | | | | — | | | | 18,635 | |
| Mutual funds | | | 881 | | | | — | | | | — | | | | 881 | |
| Mortgage-backed securities and CMO’s | | | 22,783 | | | | — | | | | (2,086 | ) | | | 20,697 | |
| Equity securities | | | 52 | | | | — | | | | (21 | ) | | | 31 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 99,888 | | | $ | 1,027 | | | $ | (5,553 | ) | | $ | 95,362 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | | | | Unrealized
| | | Unrealized
| | | | |
| | | Amortized Cost | | | Gains | | | Losses | | | Fair Value | |
| |
| Interest-only certificated receivables | | $ | 35,539 | | | $ | 65 | | | $ | (1,776 | ) | | $ | 33,828 | |
| Interest-only non-certificated receivables | | | 31,027 | | | | 550 | | | | (1,645 | ) | | | 29,932 | |
| U.S. Treasury and agency obligations | | | 53,920 | | | | 243 | | | | (117 | ) | | | 54,046 | |
| Corporate notes | | | 5,830 | | | | 46 | | | | (20 | ) | | | 5,856 | |
| Mutual funds | | | 1,573 | | | | — | | | | (115 | ) | | | 1,458 | |
| Mortgage-backed securities and CMO’s | | | 10,482 | | | | 3 | | | | (625 | ) | | | 9,860 | |
| Equity securities | | | 52 | | | | 66 | | | | — | | | | 118 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 138,423 | | | $ | 973 | | | $ | (4,298 | ) | | $ | 135,098 | |
| | | | | | | | | | | | | | | | | |
NCB’s investment securities portfolio and retained beneficial interests in securitized financial assets are evaluated for impairment on a quarterly basis pursuant to the guidance in Statement of Financial Accounting Standard No. 115, as amended“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), Emerging Issues Task Force IssueNo. 99-20“Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”(“EITF 99-20”)and the amendments toEITF 99-20 which are disclosed inEITF 99-20-1. Each individual security is evaluated for impairment.
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; corporate notes; mortgage-backed securities; and equity securities. Interest-only receivables are created when NCB sells loans directly into securitizations and the portion retained by NCB does not depend on the servicing work being performed. Interest-only non-certificated receivables are created when NCB sells loans to individual investors (not into securitizations) and the portion retained by NCB does not depend on the servicing work being performed. Each of the interest-only receivables is collateralized by loans originated by NCB. Interest-only certificated receivables are included in available-for-sale investment securities on the accompanying balance sheet. Interest-only non-certificated receivables are included in other assets on the accompanying balance sheet.
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
67
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
types of investments. As of December 31, 2008, the unrealized losses on the interest-only certificated and non-certificated securities are considered temporary in nature. NCB has the ability and intent to hold these investments until a recovery of current fair value, which may be maturity.
For the twelve months ending December 31, 2008, NCB purchased $42.4 million of U.S. Treasury and agency obligations. Also, $59.8 million of this type of security matured and $20.0 million were sold during the twelve months ending December 31, 2008. Also, $1.8 million of mortgage-backed securities were transferred to U.S. Treasury investments during the twelve months ending December 31, 2008.
NCB determined that its mutual fund investment was other than temporarily impaired and recognized a loss of $0.2 million on the income statement for the twelve months ending December 31, 2008. NCB sold $0.5 million of mutual funds during the twelve months ending December 31, 2008.
During 2008, NCB sold its entire corporate note portfolio for proceeds of $3.3 million and recognized a gain of $8 thousand. The corporate notes were classified as available-for-sale securities. NCB decided to exit this type of investment because of the expectation of expanding distress and deterioration in the market for such notes.
As of December 31, 2008, NCB held mortgage-backed securities issued by Freddie Mac and Fannie Mae as well as collateralized mortgage obligations (“CMO’s”) issued by Morgan Stanley. 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. NCB purchased $19.3 million of mortgage-backed securities and had $4.1 million of principal repayments during the twelve months ending December 31, 2008. There were $0.3 million of principal repayments on the CMO’s during the twelve months ending December 31, 2008.
The CMO’s were issued by Morgan Stanley in 2007. 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. During the fourth quarter of 2008, and although there have been no cashflow interruptions on the CMO’s, management determined certain of its CMO investment securities were other-than-temporarily impaired as a result of deterioration in the financial condition and the credit quality of underlying issuers both indicative, that it was no longer probable that NCB would receive the contracted cash flows through maturity. As a result, NCB recorded a $1.7 million other-than-temporary impairment charge on three of its five CMO investment securities, previously carried at $2.0 million, and was recorded in the loss on sale of other assets as of December 31, 2008. After the fourth quarter impairment charges, the carrying value of NCB’s collective CMO portfolio was $5.7 million as of December 31, 2008. Given the higher subordination levels for more senior tranches none of the other CMO investment securities with an unrealized loss as of December 31, 2008, were determined to be other-than-temporarily impaired.
68
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present the fair value of available-for-sale investment securities and interest-only non-certificated receivables (included as a component of other assets) 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 as of December 31 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| |
| Interest-only certificated receivables | | $ | 1,448 | | | $ | (26 | ) | | $ | 25,365 | | | $ | (2,046 | ) | | $ | 26,813 | | | $ | (2,072 | ) |
| Interest-only non-certificated receivables | | | — | | | | — | | | | 18,044 | | | | (1,374 | ) | | | 18,044 | | | | (1,374 | ) |
| Mortgage-backed securities and CMO’s | | | 16,759 | | | | (293 | ) | | | 3,641 | | | | (1,793 | ) | | | 20,400 | | | | (2,086 | ) |
| Equity securities | | | 52 | | | | (21 | ) | | | — | | | | — | | | | 52 | | | | (21 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 18,259 | | | $ | (340 | ) | | $ | 47,050 | | | $ | (5,213 | ) | | $ | 65,309 | | | $ | (5,553 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | |
| | | 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 | | $ | 7,192 | | | $ | (285 | ) | | $ | 23,372 | | | $ | (1,491 | ) | | $ | 30,564 | | | $ | (1,776 | ) |
| Interest-only non-certificated receivables | | | 19,847 | | | | (1,047 | ) | | | 5,916 | | | | (598 | ) | | | 25,763 | | | | (1,645 | ) |
| U.S. Treasury and agency obligations | | | 5,830 | | | | (110 | ) | | | 3,472 | | | | (7 | ) | | | 9,302 | | | | (117 | ) |
| Corporate notes | | | 1,230 | | | | (17 | ) | | | 1,497 | | | | (3 | ) | | | 2,727 | | | | (20 | ) |
| Mutual funds | | | — | | | | — | | | | 1,458 | | | | (115 | ) | | | 1,458 | | | | (115 | ) |
| Mortgage-backed securities and CMO’s | | | 8,451 | | | | (595 | ) | | | 36 | | | | (30 | ) | | | 8,487 | | | | (625 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 42,550 | | | $ | (2,054 | ) | | $ | 35,751 | | | $ | (2,244 | ) | | $ | 78,301 | | | $ | (4,298 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The maturities of available-for-sale U.S. Treasury and agency obligations and corporate note investment securities as of December 31 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 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2007 | |
| | | | | | Weighted
| | | | |
| | | Amortized
| | | Average
| | | Fair
| |
| | | Cost | | | Yield | | | Value | |
| |
| Within 1 year | | $ | 43,019 | | | | 4.84 | % | | $ | 42,948 | |
| After 1 year through 5 years | | | 16,731 | | | | 4.46 | % | | | 16,954 | |
| | | | | | | | | | | | | |
| Total | | $ | 59,750 | | | | 4.73 | % | | $ | 59,902 | |
| | | | | | | | | | | | | |
69
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 31 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | | Cost | | | Gains | | | Losses | | | Value | |
| |
| Corporate debt securities | | $ | 387 | | | | — | | | $ | (13 | ) | | $ | 374 | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | |
| | | | | | Gross
| | | Gross
| | | | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | | Cost | | | Gains | | | Losses | | | Value | |
| |
| Corporate debt securities | | $ | 417 | | | $ | 14 | | | | — | | | $ | 431 | |
The maturities of held-to-maturity investments as of December 31 are as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | Weighted
| | | | |
| | | Amortized
| | | Average
| | | Fair
| |
| | | Cost | | | Yield | | | Value | |
| |
| Within 1 year | | $ | — | | | | 0.00 | % | | $ | — | |
| After 1 year through 5 years | | | 387 | | | | 7.37 | % | | | 374 | |
| | | | | | | | | | | | | |
| Total | | $ | 387 | | | | 7.37 | % | | $ | 374 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2007 | |
| | | | | | Weighted
| | | | |
| | | Amortized
| | | Average
| | | Fair
| |
| | | Cost | | | Yield | | | Value | |
| |
| Within 1 year | | $ | — | | | | 0.00 | % | | $ | — | |
| After 1 year through 5 years | | | 417 | | | | 8.13 | % | | | 431 | |
| | | | | | | | | | | | | |
| Total | | $ | 417 | | | | 8.13 | % | | $ | 431 | |
| | | | | | | | | | | | | |
Mortgage-backed securities have contractual maturities, which differ from actual maturities because borrowers may have the right to call or prepay obligations.
The unpaid principal balance of loans serviced for others are not included in the accompanying consolidated balance sheets.
70
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in portfolio of loans serviced for others were as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Balance at January 1 | | $ | 5,346,251 | | | $ | 4,682,056 | |
| Additions | | | 449,412 | | | | 983,570 | |
| Loan payments and payoffs | | | (245,071 | ) | | | (319,375 | ) |
| | | | | | | | | |
| Balance at December 31 | | $ | 5,550,592 | | | $ | 5,346,251 | |
| | | | | | | | | |
See Note 28 for an analysis of Mortgage Servicing Rights related to the above portfolio of loans serviced for others.
Loans held-for-sale by category as of December 31, are as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Consumer Loans | | $ | 940 | | | $ | 2,983 | |
| Commercial Loans | | | 8,766 | | | | 19,487 | |
| Real Estate Loans: | | | | | | | | |
| Residential | | | 4,572 | | | | 53,068 | |
| Commercial | | | — | | | | 15,411 | |
| | | | | | | | | |
| Total | | $ | 14,278 | | | $ | 90,949 | |
| | | | | | | | | |
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 $0.5 million Residential Real Estate Loans as of December 31, 2008. The unpaid principal balance of the Residential Real Estate Loans for which the fair value option was not elected is $4.1 million as of December 31, 2008. NCB did not early adopt SFAS 159 as of December 31, 2007, therefore NCB had not elected the fair value option for any of its loans held-for-sale as of that date. As of December 31, 2008, and December 31, 2007, respectively, NCB recorded a valuation allowance of $0.9 million and $2.3 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 25 for a discussion of the valuation allowance recorded against those loans for which the fair value option has been elected.
During 2008, NCB made certain of its Residential Real Estate Loans held-for-investment available to investors for purchase. NCB sold $67.7 million of those Residential Real Estate Loans in an effort to reinvest the proceeds in higher earning assets. At the time of transfer from loans held-for-investment to loans held-for-sale the fair value of the loans was equal to or greater than the cost and therefore, NCB did not recognize a loss on the date of transfer.
During 2008, $43.5 million of loans held-for-sale were transferred, at the lower of cost or market value, to loans and lease financing. An expense of $0.3 million was charged through the lower of cost or market valuation allowance upon transfer, representing the write-down of the loans from their cost basis to fair value.
During the second half of 2007 and during 2008, NCB focused more on originating loans held-for-investment rather than loans held-for-sale primarily due to the deterioration in market conditions that have significantly impacted NCB’s ability to sell loans through securitized transactions.
On July 30, 2008, a housing bill was signed into law which grants the Treasury Department broad authority to safeguard Fannie Mae and Freddie Mac and authorizes the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. It cannot be predicted whether this recent legislation will result in significant improvement in financial and economic conditions affecting the banking industry. If, notwithstanding
71
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the federal government’s recent fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present additional significant challenges for the U.S. banking and financial services industry and for NCB. While it is difficult to predict how long these conditions will exist and which markets and businesses of NCB may be affected, these factors could continue to present risks for some time for the industry and NCB.
Activity related to loans held-for-sale for the years ended December 31, are as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Balance at January 1 | | $ | 90,949 | | | $ | 242,847 | |
| Originations | | | 349,825 | | | | 831,604 | |
| Purchases | | | 355,136 | | | | 222,489 | |
| Sales* | | | (806,591 | ) | | | (1,204,457 | ) |
| Transfer of loans and lease financing to loans held-for-sale | | | 67,737 | | | | — | |
| Transfer of loans held-for-sale to loans and lease financing | | | (43,462 | ) | | | — | |
| Change in valuation: SFAS 133 valuation adjustment | | | (685 | ) | | | 536 | |
| Change in valuation: lower of cost or market valuation allowance | | | 1,369 | | | | (2,070 | ) |
| | | | | | | | | |
| Balance at December 31 | | $ | 14,278 | | | $ | 90,949 | |
| | | | | | | | | |
| | |
| * | | Includes write-off of unamortized deferred fees and costs of $0.5 million |
| |
| 6. | LOANS AND LEASE FINANCING |
Loans and leases outstanding by category as of December 31, are as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Consumer Loans | | $ | 53,101 | | | $ | 16,898 | |
| Commercial Loans | | | 691,817 | | | | 555,974 | |
| Real Estate Loans: | | | | | | | | |
| Residential | | | 817,538 | | | | 749,868 | |
| Commercial | | | 394,324 | | | | 200,644 | |
| Leases | | | 411 | | | | 574 | |
| | | | | | | | | |
| Total | | $ | 1,957,191 | | | $ | 1,523,958 | |
| | | | | | | | | |
During 2008, NCB purchased $28.0 million of Community Association Loans, presented as a component of Commercial Loans, at a premium from First National Bank of Arizona.
The largest geographic concentration of Commercial Loans (held for investment and held-for-sale) was in the Southeast region and amounted to 35.1% as of December 31, 2008. The region with the largest concentration of Commercial Loans (held for investment and held-for-sale) at December 31, 2007 was the Southeast region amounting to 37.8%. The largest borrower type for Commercial Loans was community associations at 7.1% and food retailing and distribution at 6.9% as of December 31, 2008 and 2007, respectively. No other borrower type exceeds 5.4% as of December 31, 2008. Real Estate Loans had the highest geographical concentration of 43.1% as of December 31, 2008 in the Northeastern United States (primarily New York City) compared to 40.2% as of December 31, 2007.
72
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Total outstanding principal of loans considered impaired totaled $20.4 million and $13.3 million as of December 31, 2008 and December 31, 2007, respectively. The aggregate average balance of impaired loans was $16.3 million, $18.6 million, and $18.3 million for the years ended December 31, 2008, 2007, and 2006, respectively. The interest income that was due, but not recognized on impaired loans was $1.1 million, $2.5 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, NCB had an allowance of $6.3 million on the $20.4 million of impaired loans. As of December 31, 2007 NCB had an allowance of $3.3 million on the $13.3 million of impaired loans. Reserves as of December 31, 2008 were deemed to be adequate to cover the estimated loss exposure related to the impaired loans.
Although NCB is experiencing a higher level of classified loans than in prior years, the credit quality of borrowers remains at an acceptable level.
Of the $20.4 million of impaired loans as of December 31, 2008, $1.7 million was for a Commercial Loan that was not in non-accrual status. However, the loan was deemed impaired due to the debt being restructured during the second quarter of 2007. The fair value of the collateral is greater than the current outstanding principal balance as of December 31, 2008; therefore, NCB has not reserved a specific allowance for this loan. NCB will continue to classify this loan as impaired until the borrower has sufficient cash flow to support its debt.
As of December 31, 2008, there were no commitments to lend additional funds to borrowers whose loans were impaired.
| |
| 8. | ALLOWANCE FOR LOAN LOSSES AND UNFUNDED COMMITMENTS |
The following is a summary of the components of the allowance for loan losses as of December 31, (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Allowance on impaired loans | | $ | 6,314 | | | $ | 3,255 | | | $ | 6,768 | |
| Allowance on other loans | | | 20,753 | | | | 14,459 | | | | 12,712 | |
| | | | | | | | | | | | | |
| Total allowance for loan losses | | $ | 27,067 | | | $ | 17,714 | | | $ | 19,480 | |
| | | | | | | | | | | | | |
73
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the activity in the allowance for loan losses during the years ended December 31 (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
Balance at January 1 | | $ | 17,714 | | | $ | 19,480 | | | $ | 20,193 | |
| | | | | | | | | | | | | |
| Charge-offs | | | | | | | | | | | | |
| Consumer Loans | | | (2,111 | ) | | | (715 | ) | | | (254 | ) |
| Commercial Loans | | | (8,073 | ) | | | (1,737 | ) | | | (4,435 | ) |
| Real Estate (Residential and Commercial) | | | — | | | | — | | | | (32 | ) |
| | | | | | | | | | | | | |
| Total charge-offs | | | (10,184 | ) | | | (2,452 | ) | | | (4,721 | ) |
| | | | | | | | | | | | | |
| Recoveries | | | | | | | | | | | | |
| Consumer Loans | | | 144 | | | | 297 | | | | 1 | |
| Commercial Loans | | | 743 | | | | 237 | | | | 340 | |
| | | | | | | | | | | | | |
| Total recoveries | | | 887 | | | | 534 | | | | 341 | |
| | | | | | | | | | | | | |
| Net charge-offs | | | (9,297 | ) | | | (1,918 | ) | | | (4,380 | ) |
| | | | | | | | | | | | | |
| Provision for loan losses | | | 18,650 | | | | 152 | | | | 3,667 | |
| | | | | | | | | | | | | |
Balance at December 31 | | $ | 27,067 | | | $ | 17,714 | | | $ | 19,480 | |
| | | | | | | | | | | | | |
The higher provision for loan losses in 2008 compared to prior periods reflects an increase in the allowance for loan losses throughout most of the year in response to changes in loan quality, coupled with increased losses as a result of declining Commercial Loan collateral values. In the fourth quarter of 2008, NCB recorded a provision for loan losses of $8.1 million, compared to $6.0 million and $38.0 thousand for the third quarter of 2008 and fourth quarter of 2007, respectively. Approximately $4.2 million, or 51.8%, of the fourth quarter 2008 provision was attributed to continued deterioration in loan quality within the Commercial Loan portfolio, while another $2.3 million, or 28.3% was due to continued declines in commercial real estate credit quality and collateral values.
Of the $18.7 million provision for loan losses for 2008, $16.6 million was related to Commercial Loans, $1.8 million was related to Real Estate Loans and $0.3 million was related to Consumer Loans.
Although loans and leases increased by $143.2 million from December 31, 2006 to December 31, 2007, the allowance for loan losses decreased from 2006 to 2007 principally due to the full repayment of one previously impaired loan with a significant reserve against it. Also, changes in the composition of loans within the portfolio led to a higher relative percentage of loans that, based on NCB’s risk rating system, are determined to have a lower credit risk.
Included within the provision for loan losses for the twelve months ended December 31, 2006 is $2.4 million related to the reclassification of a provision for unfunded commitments. The reclassification was the result of a letter of credit that was drawn on during the third quarter of 2006. Simultaneously, $2.4 million of the loan balance relating to the draw of the letter of credit was charged-off and is reflected in the $4.4 million of Commercial Loan charge-offs for the twelve months ended December 31, 2006.
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
74
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
The following is a summary of the activity in the reserve for losses on unfunded commitments, which is included in other liabilities, during the years ended December 31 (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Balance at January 1 | | $ | 2,016 | | | $ | 1,528 | | | $ | 2,605 | |
| Provision (credit) for losses on unfunded commitments | | | 659 | | | | 488 | | | | (1,077 | ) |
| | | | | | | | | | | | | |
| Balance at December 31 | | $ | 2,675 | | | $ | 2,016 | | | $ | 1,528 | |
| | | | | | | | | | | | | |
The $1.1 million credit for losses on unfunded commitments in 2006 includes the $2.4 million reclassification to the provision for loan losses (as discussed above) offset by other provisions for losses on unfunded commitments during 2006.
| |
| 9. | TRANSACTIONS WITH RELATED PARTIES |
Section 103 of the Act, as amended, requires that holders of Classes B and C stock elect twelve of the fifteen members of NCB’s Board of Directors and that they have actual cooperative experience. NCB voting stock is, by law, owned only by borrowers and entities eligible to borrow. The election rules require that candidates for the Board of Directors have experience as a director or senior officer of a cooperative organization that currently holds Class B or Class C stock. Therefore, it is not unusual for Board members to be directors or employees of NCB borrowers. NCB therefore has conflict of interest policies, which require, among other things, that a Board member be disassociated from decisions which pose a conflict of interest or the appearance of a conflict of interest. Loan requests from cooperatives with which members of the board may be affiliated are subject to the same eligibility and credit criteria, as well as the same loan terms and conditions, as all other loan requests.
In addition, NCB through its subsidiary, NCB, FSB, enters into transactions in the normal course of business with its directors, officers, employees, and their immediate family members.
For the years ended December 31, 2008 and December 31, 2007, activity related to loans and leases, including loans held-for-sale, to cooperatives affiliated with NCB’s Board of Directors and to officers, employees, and their immediate family members is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | January 1, 2008 | | | Additions | | | Deductions | | | December 31, 2008 | |
| |
| Outstanding balances | | $ | 72,144 | | | $ | 45,777 | | | $ | (26,052 | ) | | $ | 91,869 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | January 1, 2007 | | | Additions | | | Deductions | | | December 31, 2007 | |
| |
| Outstanding balances | | $ | 95,493 | | | $ | 27,026 | | | $ | (50,375 | ) | | $ | 72,144 | |
| | | | | | | | | | | | | | | | | |
The majority of the above activity is related to cooperatives affiliated with NCB’s Board of Directors.
During 2008, 2007, and 2006, NCB recorded interest income of $4.7 million, $6.5 million, and $6.8 million, respectively, on loans to related parties.
As of December 31, 2008 and 2007, deposits from cooperatives affiliated with NCB’s Board of Directors and their immediate families were $64.0 million and $86.2 million, respectively. Certain officers and employees of NCB had deposits totaling $4.4 million and $6.4 million as of December 31, 2008 and 2007, respectively.
75
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 10. | PREMISES AND EQUIPMENT |
Premises and equipment are included in other assets and consist of the following as of December 31 (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Leasehold improvements | | $ | 10,819 | | | $ | 10,558 | |
| Furniture and equipment | | | 6,204 | | | | 5,984 | |
| Premises | | | 3,840 | | | | 3,878 | |
| Other | | | 626 | | | | 668 | |
| | | | | | | | | |
| Total premises and equipment | | | 21,489 | | | | 21,088 | |
| Less: Accumulated depreciation | | | (8,042 | ) | | | (5,957 | ) |
| | | | | | | | | |
| Total premises and equipment, net | | $ | 13,447 | | | $ | 15,131 | |
| | | | | | | | | |
Depreciation of premises and equipment included in non-interest expense for the years ended December 31, 2008, 2007, and 2006 totaled $2.2 million, $2.0 million, and $2.9 million, respectively.
During 2007, NCB terminated the lease for its offices at 1725 Eye Street. The termination agreement required the payment of $1.562 million by the Arlington landlord directly to the 1725 Eye Street landlord and the payment of $1.585 million by NCB to the 1725 Eye Street landlord in 2007. Through an amendment to the Arlington Lease, NCB simultaneously received reimbursement of its payment of $1.585 million from the Arlington landlord in 2007. In accordance with the FASB’s TechnicalBulletin No. 88-1, the payments made to the 1725 Eye Street landlord were recognized as a lease termination cost in the consolidated statements of income (loss) and a lease incentive liability on the consolidated balance sheet. NCB recognized the remaining deferred rent liability associated with the vacated 1725 Eye Street premises that amounted to $1.9 million in 2007.
At December 31, 2008 and 2007, other assets consisted of the following (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Interest-only non-certificated receivables | | $ | 27,264 | | | $ | 29,932 | |
| Premises and equipment, net | | | 13,447 | | | | 15,131 | |
| Mortgage servicing rights | | | 13,252 | | | | 13,420 | |
| Accrued interest receivables | | | 11,169 | | | | 11,162 | |
| Federal Home Loan Bank stock | | | 9,651 | | | | 9,274 | |
| Valuation of letters of credit | | | 9,021 | | | | 9,961 | |
| Equity method investments | | | 3,269 | | | | 2,735 | |
| Debt issuance costs | | | 2,297 | | | | 3,343 | |
| Derivative assets | | | 2,258 | | | | 982 | |
| Prepaid assets | | | 1,231 | | | | 1,635 | |
| Loan related receivables | | | 761 | | | | 2,478 | |
| Other | | | 8,414 | | | | 5,223 | |
| | | | | | | | | |
| Total other assets | | $ | 102,034 | | | $ | 105,276 | |
| | | | | | | | | |
Refer to Note 3 for a discussion regarding other-than-temporary impairment assessments of the interest-only non-certificated receivables.
76
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The decision of some Federal Home Loan Banks to reduce dividend payments and restrict redemptions of stock has not affected NCB. The Federal Home Loan Bank of Cincinnati, with whom NCB banks, has not reduced dividends or provided notice that they have suspended stock redemptions.
Minimum future rental payments on premises and office equipment under non-cancelable operating leases having remaining terms in excess of one year as of December 31, 2008 are as follows (dollars in thousands):
| | | | | |
| | | Amount | |
| |
| 2009 | | $ | 3,676 | |
| 2010 | | | 3,658 | |
| 2011 | | | 3,542 | |
| 2012 | | | 3,618 | |
| 2013 | | | 3,609 | |
| 2014 and thereafter | | | 28,448 | |
| | | | | |
| Total payments | | $ | 46,551 | |
| | | | | |
Rental expense on premises and office equipment in 2008, 2007, and 2006 was $3.2 million, $3.9 million, and $3.9 million, respectively.
NCB is obligated to take additional space in the Arlington, Virginia office space totaling approximately 10,800 rentable square feet on dates selected by the landlord in accordance with the lease between September 2012 and September 2018.
Deposits as of December 31 are summarized as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | | | | Average
| | | | | | Average
| |
| | | Balance | | | Rate Paid | | | Balance | | | Rate Paid | |
| |
| Non-interest bearing demand deposits | | $ | 90,423 | | | | — | | | $ | 41,591 | | | | — | |
| Interest-bearing demand deposits | | | 248,960 | | | | 1.04 | % | | | 275,238 | | | | 3.24 | % |
| Savings deposits | | | 7,376 | | | | 0.31 | % | | | 6,637 | | | | 0.75 | % |
| Certificates of deposit | | | 953,312 | | | | 3.48 | % | | | 703,986 | | | | 4.85 | % |
| | | | | | | | | | | | | | | | | |
| Total deposits | | $ | 1,300,071 | | | | 2.75 | % | | $ | 1,027,452 | | | | 4.19 | % |
| | | | | | | | | | | | | | | | | |
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $675.2 million and $549.4 million at December 31, 2008 and 2007, respectively.
As of December 31, the scheduled maturities of certificates of deposit with a minimum denomination of $100,000 were as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Within 3 months | | $ | 176,774 | | | $ | 138,179 | |
| Over 3 months through 6 months | | | 143,744 | | | | 116,228 | |
| Over 6 months through 12 months | | | 189,644 | | | | 95,969 | |
| Over 12 months | | | 165,046 | | | | 198,976 | |
| | | | | | | | | |
| Total certificates of deposit | | $ | 675,208 | | | $ | 549,352 | |
| | | | | | | | | |
77
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NCB has a Liquidity Policy and a Liquidity Contingency Plan, both board approved and continually monitored that addresses NCB’s cashflow needs; specifically the cash flow needed to satisfy maturing certificates would be derived from the sale of loans held-for-sale, loan maturities and issuance of new certificates of deposit. Maturing certificates are further supported by unused Federal Home Loan Bank borrowing capacity which is $192.1 million at December 31, 2008.
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the amount of deposits insured by the Federal Deposit Insurance Corporation (FDIC) to $250,000. On October 14, 2008, the FDIC announced a new program — the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits.
Deposit interest expense for the years ended December 31 is summarized as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Interest-bearing demand deposits | | $ | 4,884 | | | $ | 10,750 | | | $ | 7,985 | |
| Savings deposits | | | 37 | | | | 81 | | | | 88 | |
| Certificates of deposit | | | 32,628 | | | | 32,479 | | | | 22,192 | |
| | | | | | | | | | | | | |
| Total deposit interest expense | | $ | 37,549 | | | $ | 43,310 | | | $ | 30,265 | |
| | | | | | | | | | | | | |
The remaining contractual maturities of certificates of deposit as of December 31 are as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | |
| | | Less than
| | | $100,000
| | | | |
| | | $100,000 | | | and Greater | | | Total | |
| |
| 2009 | | $ | 246,527 | | | $ | 510,162 | | | $ | 756,689 | |
| 2010 | | | 24,154 | | | | 68,112 | | | | 92,266 | |
| 2011 | | | 6,146 | | | | 41,923 | | | | 48,069 | |
| 2012 | | | 304 | | | | 19,827 | | | | 20,131 | |
| 2013 | | | 701 | | | | 10,821 | | | | 11,522 | |
| 2014 and thereafter* | | | 272 | | | | 24,363 | | | | 24,635 | |
| | | | | | | | | | | | | |
| Total | | $ | 278,104 | | | $ | 675,208 | | | $ | 953,312 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2007 | |
| | | Less than
| | | $100,000
| | | | |
| | | $100,000 | | | and Greater | | | Total | |
| |
| 2008 | | $ | 135,060 | | | $ | 350,375 | | | $ | 485,435 | |
| 2009 | | | 13,938 | | | | 86,044 | | | | 99,982 | |
| 2010 | | | 4,048 | | | | 35,683 | | | | 39,731 | |
| 2011 | | | 1,379 | | | | 39,968 | | | | 41,347 | |
| 2012 | | | 181 | | | | 19,714 | | | | 19,895 | |
| 2013 and thereafter* | | | 28 | | | | 17,568 | | | | 17,596 | |
| | | | | | | | | | | | | |
| Total | | $ | 154,634 | | | $ | 549,352 | | | $ | 703,986 | |
| | | | | | | | | | | | | |
| | |
| * | | Includes discount on certificates of deposit |
78
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 14. | SHORT-TERM BORROWINGS |
Short-term borrowings include debt fundings drawn on and repaid within one year, regardless of the maturity date of the source of funding.
The carrying amounts and weighted average rates for short-term borrowings as of December 31 are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | | | | Weighted
| | | | | | Weighted
| |
| | | | | | Average
| | | | | | Average
| |
| | | Outstanding | | | Rate | | | Outstanding | | | Rate | |
| |
| Lines of credit | | $ | 202,000 | | | | 1.85 | % | | $ | 111,000 | | | | 5.46 | % |
| FHLB advances | | | 23,000 | | | | 0.34 | % | | | 72,000 | | | | 3.90 | % |
| | | | | | | | | | | | | | | | | |
| Total short-term borrowings | | $ | 225,000 | | | | 1.70 | % | | $ | 183,000 | | | | 4.84 | % |
| | | | | | | | | | | | | | | | | |
The average and maximum balance outstanding for short-term borrowings during the year as of December 31 are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 |
| | | Average
| | Maximum
| | Average
| | Maximum
|
| | | Balance
| | Balance
| | Balance
| | Balance
|
| | | Outstanding | | Outstanding | | Outstanding | | Outstanding |
| |
| Lines of credit | | $ | 146,333 | | | $ | 202,000 | | | $ | 126,162 | | | $ | 152,000 | |
| FHLB advances | | $ | 88,850 | | | $ | 139,700 | | | $ | 163,334 | | | $ | 280,400 | |
Revolving Credit Facilities
As of December 31, 2008, NCB had a $350.0 million committed revolving line of credit of which $202.0 million was outstanding. An additional $5.4 million was issued in letters of credit thereunder as of December 31, 2008. Therefore, as of December 31, 2008, $142.6 million was available under the revolving line of credit facility.
During 2007, NCB entered into two separate amendments to its revolving credit agreement principally to adjust the return on assets and fixed charge coverage ratio covenants for the final two quarters of 2007 and for all of 2008. The second amendment also included an adjustment to the pricing, so that for London Interbank Offered Rate (LIBOR) loans, during 2008 and the first quarter of 2009, NCB will pay a minimum of LIBOR plus 0.75%. NCB paid $0.7 million in fees in connection with these amendments.
For the full year 2008, NCB recognized net income of $3.9 million. Although NCB, FSB had a profit of $2.0 million in the fourth quarter of 2008, this amount fell short of the $3.5 million fourth quarter 2008 profit required for NCB, FSB under NCB’s revolving credit facility covenants, thereby causing a breach. Additionally, management believed that there was a risk that NCB would violate certain other financial covenants under the revolving credit facility and NCB’s senior note agreement with Prudential later in 2009 unless some form of covenant relief was obtained. On March 31, 2009, NCB executed an amendment to the revolving credit facility agreement which waives the revolving credit facility covenant violation and amends various covenant thresholds on a prospective basis. Management has completed financial projections through December 31, 2010 and believes that NCB will be in compliance with all covenants through the maturity of the credit facility and the Prudential notes.
Provisions of this most current amendment include:
| | |
| | • | An immediate reduction in the aggregate commitment amount to $225 million from $350 million |
79
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | • | Further reductions in the aggregate revolving commitments by $30 million on the last day of each of the fiscal quarters ending June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010, and September 30, 2010. |
| |
| | • | All aggregate revolving commitments will be terminated by December 15, 2010 instead of April 29, 2011. |
| |
| | • | Interest cost increased to LIBOR plus 3.5% from LIBOR plus 0.75% |
| |
| | • | The revolving loan will also be collateralized by assets of NCB, including the stock in NCB, FSB. |
| |
| | • | A limitation on the ability of NCB itself to make additional loans |
| |
| | • | Consent for NCB, FSB to borrow funds from the Federal Reserve Bank or other participating member banks |
| |
| | • | Consent for NCB, FSB to convert from a Thrift to a national bank charter, should the Board of Directors determine such action is in the best interest of NCB |
| |
| | • | Consent for NCB, FSB to issue FDIC guaranteed debt under the TLGP |
| |
| | • | Consent for NCB, FSB or NCB Financial Corporation to participate in the Capital Purchase Program under TARP |
Interest expense from borrowings under the revolving line of credit facilities was $4.9 million, $8.0 million and $6.2 million, in 2008, 2007 and 2006, respectively.
Borrowing rates under the revolving credit facility are based on the prime rate, federal funds rate or the LIBOR and vary with the amount of borrowings outstanding. In addition, a change in agency ratings could also impact borrowing rates. Total commitment fees paid for revolving credit facilities were $0.6 million, $0.4 million, and $0.6 million, in 2008, 2007 and 2006, respectively. As part of the December 31, 2007 amendment described above, the commitment fee was increased, for 2008 and the first quarter of 2009, to a minimum of 0.25% from 0.20% of the unused commitment balance. The March 2009 facility amendment further increases the commitment fee to 0.60% of the unused commitment balance. All borrowings under the facility, which are outstanding at expiration of the facility, are due at that time.
NCB had no bid line availability as of December 31, 2008. As of December 31, 2007, NCB had $20.0 million of uncommitted bid lines available from several banks, of which none were outstanding.
Other Short-term Borrowings
NCB, FSB has a pledge agreement with the Federal Home Loan Bank of Cincinnati, Ohio (FHLB) requiring advances to be secured by eligible mortgages and securities with a principal balance of 135% — 400% of such advances. As of December 31, 2008 and 2007, respectively, the principal balance of these eligible mortgages and securities totaled $490.7 million and $451.8 million. The FHLB facility was $318.8 million at December 31, 2008 and $298.3 million at December 31, 2007. Outstanding advances at December 31, 2008 and 2007 were $113.0 million and $122.0 million, respectively, of which $90.0 million and $50 million were long-term advances as of December 31, 2008 and 2007, respectively. Short-term FHLB borrowings mature within 90 days NCB had approximately $192.1 million available capacity under its FHLB facility as of December 31, 2008. NCB, FSB also has letter of credit availability in the FHLB facility of which $13.7 million and $15.9 million was issued as of December 31, 2008 and 2007, respectively.
Interest expense on advances for the years ended December 31, 2008, 2007 and 2006 was $5.8 million, $11.3 million and $9.7 million, respectively, of which $3.8 million, $2.8 million and $1.4 million was for long-term advances at December 31, 2008, 2007 and 2006, respectively. Interest expense on commercial paper borrowings for the year ended December 31, 2006 was $2.8 million. NCB terminated its commercial paper program during 2006.
80
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In an effort to reduce NCB’s cost of funds, NCB developed a program under which it borrows, on a short-term basis, from certain customers. As of December 31, 2008 and 2007, there were no short-term borrowings outstanding under this program.
Long-term borrowings include those fundings for which the maturity was greater than one year at the time the amounts were drawn. As of December 31, 2008, the maturity of certain of these instruments is within the next twelve months.
The carrying amounts for long-term debt as of December 31, are as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
Prudential Long-Term Private Placements | | | | | | | | |
| 5.62% fixed rate debt due December 2009(1) | | $ | 55,000 | | | $ | 55,000 | |
| 5.60% fixed rate debt due December 2010(2) | | | 50,000 | | | | 50,000 | |
| | | | | | | | | |
Total Prudential Long-Term Private Placements | | | 105,000 | | | | 105,000 | |
| | | | | | | | | |
Other Long-Term Private Placements | | | | | | | | |
| 5.52% fixed rate debt due January 2009, prepaid December 2008 | | | — | | | | 50,000 | |
| | | | | | | | | |
Total Long-Term Private Placement Notes | | | — | | | | 50,000 | |
| | | | | | | | | |
Medium Term Notes | | | | | | | | |
| 5.67% fixed rate debt due May 2013, called May 2008 | | | — | | | | 15,000 | |
| | | | | | | | | |
Total Medium Term Notes | | | — | | | | 15,000 | |
| | | | | | | | | |
| | | | | | | | | |
FHLB Long-Term Advances | | | | | | | | |
| 5.62% fixed rate due June 2009 | | | 20,000 | | | | 20,000 | |
| 5.80% fixed rate due June 2011 | | | 10,000 | | | | 10,000 | |
| 5.63% fixed rate due July 2011 | | | 20,000 | | | | 20,000 | |
| 3.55% fixed rate due June 2011 | | | 10,000 | | | | — | |
| 4.42% fixed rate due June 2012 | | | 10,000 | | | | — | |
| 4.40% fixed rate due June 2013 | | | 10,000 | | | | — | |
| 4.54% fixed rate due June 2013 | | | 10,000 | | | | — | |
| | | | | | | | | |
Total FHLB Long-Term Advances | | | 90,000 | | | | 50,000 | |
| | | | | | | | | |
| SFAS No. 133 valuation | | | 1,447 | | | | 907 | |
| | | | | | | | | |
| Total Long Term Debt | | $ | 196,447 | | | $ | 220,907 | |
| | | | | | | | | |
| | |
| (1) | | The March 2009 amendments to the Prudential agreement amends the interest rate to 8.50% and the stated maturity to August 1, 2009 although Prudential retains the right to extend the maturity back to December 2009. |
| |
| (2) | | The March 2009 amendments to the Prudential agreement amends the interest rate to 8.50% and the stated maturity from December 28, 2010 to December 15, 2010. |
As of December 31, 2008, the long-term advances from the FHLB constitute the only long-term debt that is secured, and except to the extent of such security, none of the long-term debt has priority over the other. In addition as of December 31, 2008, none of the long-term debt is convertible and there are no contingencies on the payments of principal and interest.
81
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NCB entered into master shelf agreements with The Prudential Insurance Company of America and related entities (collectively “Prudential”) in 1999 and 2001, which allowed NCB to issue private placement senior note debt. NCB issued long-term, fixed rate debt on this facility in 1999, 2001, 2005, and 2006. NCB issued $50.0 million in December 2005 at a fixed rate of 5.60% and this tranche will mature in December 2010. In December 2006, NCB issued $55.0 million at a fixed rate of 5.62% that will mature in December 2009. The interest rates and stated maturity dates of both of these notes have been amended as described in the footnotes to the table above. All of these notes require semi-annual payments of interest only.
NCB entered into a note purchase agreement with Metropolitan Life Insurance Company and related entities (collectively “MetLife”) in January 2003 to issue $50.0 million in private placement note debt. The debt was issued at a fixed rate of 5.52% and had a scheduled maturity of January 2009. In December of 2008, NCB prepaid all $50.0 million of this debt and paid a penalty of $63 thousand in connection with the prepayment.
NCB has a shelf agreement in which it can issue Medium Term Notes through various agents. These notes can be issued with either a fixed or floating rate with any maturity within the shelf agreement. In May 2003 NCB issued $15.0 million of fixed rate notes through Wachovia Securities, Inc. with a fixed rate of 5.67% with a semi-annual call and maturing in May 2013. The $15.0 million fixed rate notes required semi-annual payments of interest only. On May 15, 2008, the most recent call date, NCB redeemed all outstanding Medium Term Notes.
As of December 31, 2008, NCB has a series of interest rate swap agreements, which have a combined notional amount of $40.0 million. The effect of the agreements is to convert $40.0 million of the long-term debt from a weighted average fixed rate of 5.62% to a floating rate based on the three-month LIBOR rate plus a spread, which repriced throughout the year. As of December 31, 2008, the weighted average three-month LIBOR on the swaps was 1.47% with an effective weighted average spread of 0.65%.
As of December 31, the total notional amount, related maturity date and interest rate detail are as follows (dollars in thousands):
| | | | | | | | | |
| 2008 |
Notional Amount | | Maturity Date | | Libor Index |
| |
| $ | 40,000 | | | 2009 | | | Three month | |
As of December 31, 2007, NCB had a series of interest rate swap agreements, which have a combined notional amount of $100.0 million. The effect of the agreements is to convert $100.0 million of the long-term debt from a weighted average fixed rate of 5.60% to a floating rate based on the three-month LIBOR rate plus a spread, which repriced throughout the year. As of December 31, 2007, the weighted average three-month LIBOR on the swaps was 4.95% with an effective weighted average spread of 1.09%.
As of December 31, the total notional amount, related maturity date and interest rate detail are as follows (dollars in thousands):
| | | | | | | | | |
| 2007 | |
Notional Amount | | | Maturity Date | | Libor Index | |
| |
| $ | 65,000 | | | 2009 | | | Three month | |
| | 20,000 | | | 2010 | | | Three month | |
| | 15,000 | | | 2013 | | | Three month | |
| | | | | | | | | |
| $ | 100,000 | | | | | | | |
| | | | | | | | | |
On December 31, 2007, NCB amended its master shelf agreement with Prudential and its senior note agreement with MetLife principally to adjust the fixed charge coverage ratio covenants for 2008. The amendment with MetLife also increased the cap on the amount ofpaid-in-capital NCB may invest in NCB Financial Corporation, the parent of NCB, FSB to 35%. On February 25, 2008, NCB made a similar amendment with
82
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respect topaid-in-capital to the senior note agreement with Prudential, increasing the same cap to 35%. NCB paid $0.4 million in fees in connection with these amendments.
In March 2009, NCB further amended its agreement with Prudential. Provisions of the amendment to the Prudential agreement amended various covenant thresholds on a prospective basis and also included:
| | |
| | • | Interest cost increased to 8.5% with further increase to 10.5% in the event that NCB’s senior credit rating falls below investment grade |
| |
| | • | Change in stated maturity of one note from December 28, 2009 to [August 1, 2009] and a change in the stated maturity of the second note from December 28, 2010 to no later than December 15, 2010 |
| |
| | • | Proceeds of certain asset sales or capital raises be applied to reduce the outstanding balance of the 2010 note on a pro rata basis with the outstanding balance of the revolving credit facility |
| |
| | • | In 2010, minimum Cash and Cash Equivalent balances must be increased from $25 million in the first quarter to $95 million in the fourth quarter |
| |
| | • | NCB must maintain balances on its revolving credit facility equal to the outstanding balance of the 2010 note |
On December 31, 1981, NCB issued unsecured subordinated debt to the U.S. Treasury (“Treasury”) in the amount of $184.3 million as provided in the Act, as amended, in the form of Class A notes in full redemption of the Class A Preferred stock previously owned by the Government.
In November 2003 NCB entered into a definitive Amended and Restated Financing Agreement (the “Amended Financing Agreement”), with the Treasury relating to repayment of and interest payable on the Class A notes maturing in 2020 that were originally issued by NCB to Treasury on December 31, 1981.
In December 2003, NCB, pursuant to the Amended Financing Agreement, made a $53.6 million payment to Treasury to prepay its91-day renewing Class A note. Also on that date, NCB replaced the remaining three Class A notes outstanding, in the aggregate amount of $129.0 million, by issuing five new replacement Class A notes of renewing maturities.
At maturity, each note is replaced with a reissued note for the same term, with an interest rate based upon the yield on Treasury securities of comparable maturities, as of the date of repricing, plus 100 basis points, subject to the final maturity date of October 31, 2020, on which date all remaining balances under the notes are due.
During 2008, $2.5 million of the subordinated debt was paid down pursuant to the Amended Financing Agreement. During 2009, pursuant to the same agreement, $2.5 million of the subordinated debt will be paid down from the3-year tranche repricing on December 15, 2009. The interest payments for each tranche are determined in
83
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with the following schedule, which also includes the carrying amounts of the subordinated debt at December 31, (dollars in thousands):
| | | | | | | | | | | | | |
| 2008 | |
| | | | | | Next Repricing
| | | Carrying
| |
Index | | Rate | | | Date | | | Amount | |
| |
| 91 - day Treasury rate | | | 1.02 | % | | | 16-Mar-09 | | | $ | 36,810 | |
| 2 - year Treasury rate | | | 4.31 | % | | | 15-Dec-09 | | | | 15,718 | |
| 3 - year Treasury rate | | | 5.63 | % | | | 15-Dec-09 | | | | 25,064 | |
| 7 - year Treasury rate | | | 4.79 | % | | | 15-Dec-10 | | | | 32,847 | |
| 10 - year Treasury rate | | | 5.28 | % | | | 15-Dec-13 | | | | 6,050 | |
| | | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 116,489 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2007 | |
| | | | | | Next Repricing
| | | Carrying
| |
Index | | Rate | | | Date | | | Amount | |
| |
| 91 - day Treasury rate | | | 3.88 | % | | | 17-Mar-08 | | | $ | 39,310 | |
| 2 - year Treasury rate | | | 4.31 | % | | | 15-Dec-09 | | | | 15,718 | |
| 3 - year Treasury rate | | | 5.63 | % | | | 15-Dec-09 | | | | 25,064 | |
| 7 - year Treasury rate | | | 4.79 | % | | | 15-Dec-10 | | | | 32,847 | |
| 10 - year Treasury rate | | | 5.28 | % | | | 15-Dec-13 | | | | 6,050 | |
| | | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 118,989 | |
| | | | | | | | | | | | | |
The following table shows, pursuant to the Amended Financing Agreement, the amortization schedule of the five Class A notes as of December 31, 2008 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Debt Amortization | |
| | | | | | | | | Periodic
| | | | |
Year | | Beginning Balance | | | Annual Amortization | | | Amortization | | | Ending Balance | |
| |
| 2008 | | $ | 118,989 | | | $ | 2,500 | | | $ | — | | | $ | 116,489 | |
| 2009 | | | 116,489 | | | | 2,500 | | | | — | | | | 113,989 | |
| 2010 | | | 113,989 | | | | — | | | | 23,989 | | | | 90,000 | |
| 2011 | | | 90,000 | | | | 5,000 | | | | — | | | | 85,000 | |
| 2012 | | | 85,000 | | | | 5,500 | | | | — | | | | 79,500 | |
| 2013 | | | 79,500 | | | | 6,050 | | | | — | | | | 73,450 | |
| 2014 | | | 73,450 | | | | 6,655 | | | | — | | | | 66,795 | |
| 2015 | | | 66,795 | | | | 7,320 | | | | — | | | | 59,475 | |
| 2016 | | | 59,475 | | | | 8,053 | | | | — | | | | 51,422 | |
| 2017 | | | 51,422 | | | | 8,858 | | | | — | | | | 42,564 | |
| 2018 | | | 42,564 | | | | 9,744 | | | | — | | | | 32,820 | |
| 2019 | | | 32,820 | | | | 10,718 | | | | — | | | | 22,102 | |
| 2020 | | | 22,102 | | | | — | | | | 22,102 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 72,898 | | | $ | 46,091 | | | | | |
| | | | | | | | | | | | | | | | | |
The Class A notes and all related payments are subordinate to any secured and unsecured notes and debentures thereafter issued by NCB, but the notes and subordinated debt issued by NCB, that by its terms are junior to the Class A notes, have first preference with respect to NCB’s assets over all classes of stock issued by NCB. NCB
84
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
currently cannot pay any dividend on any class of stock at a rate greater than the statutory interest rate payable on the Class A notes (See Note 22).
The Act also states that the amount of NCB borrowings, which may be outstanding at any time, shall not exceed 10 times the paid-in capital and surplus that, as defined by the Act, includes the subordinated debt.
| |
| 17. | JUNIOR SUBORDINATED DEBT |
In December 2003, NCB sold $50.0 million of trust preferred securities through a Delaware statutory business trust, NCB Capital Trust I (“Trust”). NCB owns all of the common securities of this Trust. The Trust has no independent assets or operations and exists for the sole purpose of issuing preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by NCB. The junior subordinated debentures, which are the sole assets of the Trust, are unsecured obligations of NCB, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of NCB. This debt is based on the3-month LIBOR rate plus 290 bps and the rate resets every 3 months.
The following is a schedule of outstanding Junior Subordinated debt as of December 31, 2008 and 2007 (dollars in thousands):
| | | | | | | | | | | | | |
| | | | | | | Carrying
|
| | | | | | | Amount
|
Index | | Index Rate | | Maturity Date | | 2008 |
| |
3-month LIBOR | | | 4.82 | % | | | 07-Jan-34 | | | $ | 51,547 | |
| | | | | | | | | | | | | |
| | | | | | | Carrying
|
| | | | | | | Amount
|
Index | | Index Rate | | Maturity Date | | 2007 |
| |
3-month LIBOR | | | 5.24 | % | | | 07-Jan-34 | | | $ | 51,547 | |
| |
| 18. | COMMON STOCK AND MEMBERS’ EQUITY |
NCB’s common stock consists of Class B stock owned by its borrowers and Class C stock owned by entities eligible to borrow from NCB.
The following relates to common stock as of December 31:
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Class B | | | Class C | | | Class B | | | Class C | |
| |
| Par value per share | | $ | 100 | | | $ | 100 | | | $ | 100 | | | $ | 100 | |
| Shares authorized | | | 1,900,000 | | | | 300,000 | | | | 1,900,000 | | | | 300,000 | |
| Shares issued and outstanding | | | 1,726,718 | | | | 251,117 | | | | 1,727,541 | | | | 251,371 | |
85
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in Class B and C common stock are described below (dollars in thousands):
| | | | | | | | | | | | | |
| | | Class B | | | Class C | | | Total | |
| |
| Balance, December 31, 2005 | | $ | 147,484 | | | $ | 23,384 | | | $ | 170,868 | |
| 2005 patronage dividends distributed in common stock | | | 15,873 | | | | 1,497 | | | | 17,370 | |
| Cancellation of stock | | | (621 | ) | | | (387 | ) | | | (1,008 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2006 | | | 162,736 | | | | 24,494 | | | | 187,230 | |
| 2006 patronage dividends distributed in common stock | | | 10,178 | | | | 647 | | | | 10,825 | |
| Cancellation of stock | | | (160 | ) | | | (4 | ) | | | (164 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 172,754 | | | | 25,137 | | | | 197,891 | |
| 2007 patronage dividends distributed in common stock | | | — | | | | — | | | | — | |
| Cancellation of stock | | | (82 | ) | | | (25 | ) | | | (107 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2008 | | $ | 172,672 | | | $ | 25,112 | | | $ | 197,784 | |
| | | | | | | | | | | | | |
Members’ equity currently includes the two classes of common stock, allocated and unallocated retained earnings, and accumulated other comprehensive income or loss. Allocated retained earnings have been designated for patronage dividend distribution, whereas unallocated retained earnings have not been designated.
Patronage-based borrowers from NCB or NCB, FSB under section 108 of the Act are required to own Class B stock in NCB. Stock owned by a borrower may be cancelled by NCB, at NCB’s sole discretion, in case of certain events, including default.
| |
| 19. | REGULATORY CAPITAL AND RETAINED EARNINGS OF NCB, FSB |
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.
86
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NCB, FSB’s capital exceeded the minimum capital requirements as of December 31, 2008 and 2007. The following table summarizes NCB, FSB’s capital and pro-forma minimum capital requirements (ratios and dollars) as of December 31, 2008 and 2007 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | To be Well
| |
| | | | | | For Capital
| | | Capitalized
| |
| | | | | | Adequacy
| | | Under Prompt Corrective
| |
| | | Actual | | | Purposes | | | Action Provisions | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| |
| 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 | % |
| As of December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Tangible Capital (to tangible assets) | | $ | 127,684 | | | | 9.86 | % | | $ | 19,425 | | | | 1.50 | % | | | N/A | | | | N/A | |
| Total Risk-Based Capital (to-risk-weighted assets) | | | 136,659 | | | | 12.46 | % | | $ | 87,721 | | | | 8.00 | % | | $ | 109,651 | | | | 10.00 | % |
| Tier I Risk-Based Capital (to-risk-weighted assets) | | | 127,194 | | | | 11.60 | % | | | N/A | | | | N/A | | | | 65,791 | | | | 6.00 | % |
| Core Capital (to adjusted tangible assets) | | | 127,684 | | | | 9.86 | % | | $ | 51,800 | | | | 4.00 | % | | | 64,750 | | | | 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 December 31, 2008, no such limitations or restrictions existed.
Substantially all employees are covered by a non-contributory, defined contribution retirement plan. NCB contributes 6% of each employee’s salary after one year of employment. Total expense for the retirement plan for 2008, 2007, and 2006 was $1.0 million, $1.0 million, and $0.9 million, respectively.
NCB maintains an employee thrift plan organized under Internal Revenue Code Section 401(k) and matches up to 6% of each participant’s salary for every 1% the employee contributes. Participants receive vesting credit (non-forfeitable rights to the money in their 401(k) account) based on their number of years of employment with NCB. Contributions and expenses for 2008, 2007, and 2006 were $1.1 million, $1.2 million and $0.9 million, respectively.
87
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Participant matching contributions and earnings for the defined contribution retirement plan and the thrift plan are vested in accordance with the following schedule:
| | | | | |
Years of Service | | Vesting | |
| |
| less than 2 years | | | 0 | % |
| 2 | | | 20 | % |
| 3 | | | 50 | % |
| 4 | | | 70 | % |
| 5 | | | 85 | % |
| 6 | | | 100 | % |
The Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48 applies to all tax positions accounted for in accordance with FASB Statement 109. The term tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets.
The term tax position also encompasses, but is not limited to:
| | |
| | • | A decision not to file a tax return |
| |
| | • | An allocation or a shift of income between jurisdictions |
| |
| | • | The characterization of income or a decision to exclude reporting taxable income in a tax return |
| |
| | • | A decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
Each year under the Act, NCB must declare tax-deductible patronage dividends in the form of cash, stock, or allocated surplus, which effectively reduce NCB’s federal income tax liability. Patrons of NCB receiving such patronage dividends consent to include them in their taxable income. NCB has allocated $7.2 million of its 2008 retained earnings for patronage dividends in the form of stock to be distributed during 2009. NCB’s board of directors passed a resolution to allow NCB to reduce its cash patronage dividend to be distributed in 2009 to zero which NCB has chosen to do as of December 31, 2008.
The provision (benefit) for income taxes for the years ended December 31, consists of the following (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Current tax expense | | | | | | | | | | | | |
| Federal | | $ | 54 | | | $ | (274 | ) | | $ | 495 | |
| State and local | | | 646 | | | | (135 | ) | | | 869 | |
| | | | | | | | | | | | | |
| Total current | | | 700 | | | | (409 | ) | | | 1,364 | |
| | | | | | | | | | | | | |
| Deferred tax (benefit) provision | | | | | | | | | | | | |
| Federal | | | 46 | | | | (21 | ) | | | (197 | ) |
| State and local | | | (191 | ) | | | (234 | ) | | | 247 | |
| | | | | | | | | | | | | |
| Total deferred | | | (145 | ) | | | (255 | ) | | | 50 | |
| | | | | | | | | | | | | |
| Provision (benefit) for income taxes | | $ | 555 | | | $ | (664 | ) | | $ | 1,414 | |
| | | | | | | | | | | | | |
88
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences for the years ended December 31 (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Statutory U.S. tax rate | | $ | 1,506 | | | $ | (386 | ) | | $ | 7,085 | |
| Patronage dividends | | | (1,405 | ) | | | 365 | | | | (6,982 | ) |
| State and local taxes | | | 454 | | | | (369 | ) | | | 1,115 | |
| Other | | | — | | | | (274 | ) | | | 196 | |
| | | | | | | | | | | | | |
| Provision (benefit) for income taxes | | $ | 555 | | | $ | (664 | ) | | $ | 1,414 | |
| | | | | | | | | | | | | |
Deferred tax assets net of liabilities, included in other assets, are composed of the following at December 31, (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Allowance for loan losses | | $ | 1,021 | | | $ | 486 | |
| Deferred commitment fees | | | 311 | | | | 264 | |
| Mark to market adjustments | | | — | | | | 201 | |
| Net operating loss carryforward | | | — | | | | 271 | |
| Security valuations | | | 161 | | | | 7 | |
| Other | | | 120 | | | | 121 | |
| | | | | | | | | |
| Gross deferred tax assets | | | 1,613 | | | | 1,350 | |
| | | | | | | | | |
| Mortgage servicing rights | | | (294 | ) | | | (306 | ) |
| Federal Home Loan Bank stock dividends | | | (632 | ) | | | (571 | ) |
| | | | | | | | | |
| Gross deferred tax liabilities | | | (926 | ) | | | (877 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | 687 | | | $ | 473 | |
| | | | | | | | | |
Management has concluded that it is more likely than not that all deferred tax assets will be realized based on NCB’s history of earnings and management’s expectations that NCB will generate sufficient taxable income in future years to offset the reversal of temporary differences.
| |
| 22. | INCOME AVAILABLE FOR DIVIDENDS ON STOCK |
Under existing senior debt agreements, the aggregate amount of cash dividends on Class C stock, together with patronage dividends payable in cash, is limited to the sum of $15,000,000 plus 50% of NCB’s consolidated adjusted net income accumulation (or minus 100% of NCB’s consolidated adjusted net income in the case of a deficit) from January 1, 1992 through the end of the most current fiscal year ended. If the aggregate amount of cash dividends and patronage dividends payable in cash exceeds the limitation previously described, total patronage dividends payable in cash and cash dividends payable on any calendar year may not exceed 20% of NCB’s taxable income for such calendar year. As of December 31, 2008, NCB was not limited by the restrictions detailed above and thus the amount available for dividends on stock was approximately $129.2 million.
Notwithstanding the above restriction, NCB is prohibited by law from paying dividends on its Class C stock at a rate greater than the statutory interest rate payable on the subordinated Class A notes. Those rates for 2008, 2007, and 2006 are 4.36%, 5.32% and 4.88%, respectively. Consequently, the amounts available for payment on the Class C stock for 2008, 2007, and 2006 are $1.1 million, $1.3 million, and $1.2 million, respectively. In addition, under the Act and its bylaws, NCB may not pay dividends on its Class B stock.
89
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 23. | 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 notional 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 acase-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 a30-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 0.5% to 4.5% of the commitment amount. The standby letters of credit mature throughout 2009 to 2016. As of December 31, 2008, NCB had outstanding letters of credit with a total commitment amount of $293.7 million of which $258.5 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. For the year ended December 31, 2008, NCB provided funding for seven letters of credit for a total amount of $4.8 million. Of the $4.8 million, NCB had funds outstanding on only one letter of credit in the amount of $22 thousand remains outstanding for municipal bonds that could not be sold to another purchaser as of December 31, 2008.
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 $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 related to the issuance fees from the stand by letters of credit as of December 31, 2008. A liability of $9.8 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 $10.0 million was recorded in other assets in the Consolidated Balance Sheet as of December 31, 2007.
90
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The contract or commitment amounts and the respective estimated fair value of NCB’s commitments to extend credit and standby letters of credit as of December 31, are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | Contract or
| | | Estimated
| |
| | | Commitment Amounts | | | Fair Value | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Financial instruments whose contract amounts represent credit risk: | | | | | | | | | | | | | | | | |
| Undrawn commitments to extend credit | | $ | 912,427 | | | $ | 879,718 | | | $ | 4,562 | | | $ | 4,399 | |
| Rate lock commitments to extend credit: | | | | | | | | | | | | | | | | |
| Single-family Residential and Share Loans | | | 8,661 | | | $ | 5,912 | | | | 144 | (1) | | $ | (32 | ) |
| Cooperative and Commercial Real Estate Loans | | $ | 32,585 | | | $ | 38,055 | | | $ | 600 | (1) | | $ | (546 | ) |
| Standby letters of credit | | $ | 293,711 | | | $ | 280,959 | | | $ | 12,131 | | | $ | 13,165 | |
| | |
| (1) | | 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 25. |
NCB had a general reserve of $1.7 million and a specific reserve of $1.0 million as of December 31, 2008 to cover its loss exposure to unfunded commitments. As of December 31, 2007, NCB had a general reserve of $2.0 million for the same purpose.
| |
| 24. | 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 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 loans held-for-sale, 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 fair value hedging relationships. NCB may use additional derivative instruments in the future.
91
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
| | | | | | Balance Sheet
| | | | |
| | | Location | | | Fair Value | | | Location | | | Fair Value | |
| |
| Derivatives designated as fair value hedging instruments under SFAS 133: | | | | | | | | | | | | | | | | |
| Interest rate swap agreements related to debt | | | Other assets | | | $ | 1,447 | | | | Other liabilities | | | $ | — | |
| Interest rate swap agreements related to loans and loan commitments | | | Other assets | | | | — | | | | Other liabilities | | | | (848 | ) |
| | | | | | | | | | | | | | | | | |
| Total derivatives designated as hedging instruments under SFAS 133 | | | | | | | 1,447 | | | | | | | | (848 | ) |
| | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments under SFAS 133: | | | | | | | | | | | | | | | | |
| Financial futures contracts | | | Other assets | | | | — | | | | Other liabilities | | | | (10 | ) |
| Forward sales commitments | | | | | | | | | | | | | | | | |
| Single-family Residential and Share Loans | | | Other assets | | | | 4 | | | | Other liabilities | | | | (21 | ) |
| Cooperative and Multifamily Loans | | | Other assets | | | | 127 | | | | Other liabilities | | | | (85 | ) |
| Rate lock commitments to extend credit: | | | | | | | | | | | | | | | | |
| Single-family Residential and Share Loans | | | Other assets | | | | 165 | | | | Other liabilities | | | | — | |
| Cooperative and Commercial Real Estate Loans | | | Other assets | | | | 600 | | | | Other liabilities | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total derivatives not designated as hedging instruments under SFAS 133 | | | | | | | 896 | | | | | | | | (106 | ) |
| | | | | | | | | | | | | | | | | |
| Total derivatives | | | | | | $ | 2,343 | | | | | | | $ | (954 | ) |
| | | | | | | | | | | | | | | | | |
The effect of derivative instruments in SFAS 133 and designated as fair value hedging relationships on the consolidated statement of income (loss) for the year ended December 31, 2008 are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | Location of
| | | Amount of
| | | Location of
| | | Amount of
| |
| | | Gain (Loss)
| | | Gain (Loss)
| | | Gain (Loss)
| | | Gain (Loss)
| |
Derivatives
| | Recognized in
| | | Recognized in
| | | Recognized in
| | | Recognized in
| |
Designated as Fair Value
| | Income on
| | | Income on
| | | Income on
| | | Income on
| |
Hedging Relationships | | Derivatives | | | Derivatives | | | Hedged Item | | | Hedged Item | |
| |
| Interest rate swap agreements related to debt | | | Interest income/(expense | ) | | $ | 540 | | | | Interest income/(expense | ) | | $ | (540 | ) |
| Interest rate swap agreements related to loans and loan commitments | | | Other income/(expense | ) | | | 772 | | | | Other income/(expense | ) | | | (685 | ) |
| | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 1,312 | | | | | | | $ | (1,225 | ) |
| | | | | | | | | | | | | | | | | |
92
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effect of derivative instruments not designated as hedging instruments under SFAS 133 on the consolidated statement of income (loss) for the year ended December 31, 2008 are as follows (dollars in thousands):
| | | | | | | | | |
| | | Location of Gain (Loss)
| | | Amount of Gain (Loss)
| |
Derivatives Not Designated as Hedging Instruments
| | Recognized in Income on
| | | Recognized in Income on
| |
under SFAS 133 | | Derivatives | | | Derivatives | |
| |
| Financial futures contracts | | | Other income/(expense | ) | | $ | (27 | ) |
| Forward sales commitments | | | | | | | | |
| Single-family Residential and Share Loans | | | Other income/(expense | ) | | | 106 | |
| Cooperative and Multifamily Loans | | | Other income/(expense | ) | | | 120 | |
| Rate lock commitments to extend credit: | | | | | | | | |
| Single-family Residential and Share Loans | | | Other income/(expense | ) | | | 175 | |
| Cooperative and Commercial Real Estate Loans | | | Other income/(expense | ) | | | 1,150 | |
| Interest rate swap agreements related to loans and loan commitments | | | Other income/(expense | ) | | | 1,268 | |
| | | | | | | | | |
| Total | | | | | | $ | 2,792 | |
| | | | | | | | | |
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 anagreed-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 exposed to credit loss in the event of nonperformance by its counterparties in the aggregate amount of $1.5 million at December 31, 2008. 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 a cash window program 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 market 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.
93
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The contract or notional amounts and the respective estimated fair value of NCB’s financial futures contracts, interest rate swaps and forward sales commitments as of December 31, are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | Notional Amounts | | | Fair Value | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Financial futures contracts | | $ | 500 | | | $ | 6,400 | | | $ | (10 | ) | | $ | 17 | |
| Interest rate swap agreements related to debt | | $ | 40,000 | | | $ | 100,000 | | | $ | 1,447 | | | $ | 907 | |
| Interest rate swap agreements related to loans and loan commitments | | $ | 3,442 | | | $ | 70,190 | | | $ | (848 | ) | | $ | (2,888 | ) |
| Forward sales commitments | | | | | | | | | | | | | | | | |
| Single-family Residential and Share Loans | | $ | 5,793 | | | $ | 15,010 | | | $ | 4 | | | $ | (102 | ) |
| Cooperative and Multifamily Loans | | $ | 32,585 | | | $ | 25,630 | | | $ | 42 | | | $ | (78 | ) |
| |
| 25. | FAIR VALUE MEASUREMENTS |
During the second quarter of 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 $4.6 million Residential Real Estate Loans held-for-sale disclosed in Note 5, the contractual principal amount of loans for which NCB has elected the fair value option under SFAS 159 totaled $0.5 million as of December 31, 2008. The difference in fair value of these loans compared to their principal balance was $20 thousand and was recorded in gain on sale of loans as of December 31, 2008. The fair value option was not elected for the remaining $4.1 million Residential Real Estate Loans disclosed in Note 5. Further, NCB has not elected the fair value option for any of the $9.7 million of principal balance of Consumer and Commercial Loans disclosed in Note 5.
On January 1, 2008, NCB adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”),“Fair Value Measurements.”SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approachand/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, 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. |
94
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 effective January 1, 2008:
| | |
| | • | Certificated and Non-Certificated Interest-Only-Receivables — reported at fair value utilizing Level 3 inputs, as limited secondary market information is available regarding the valuation of NCB’s interest-only receivables. |
| |
| | • | U.S. Treasury and Agency Obligations —reported at fair value utilizing Level 1 inputs from readily observable data in active secondary fixed income markets. |
| |
| | • | Mutual Funds and 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. Collateralized Mortgage Obligations, 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. Therefore the assumptions used in the determination of the fair value of Collateralized Mortgage Obligations are considered Level 3. |
| |
| | • | 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. |
95
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes financial assets and financial 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):
| | | | | | | | | | | | | | | | | |
| | | Quoted Prices in
| | | | | | | | | | |
| | | Active Markets for
| | | Significant Other
| | | Significant
| | | Balance as of
| |
| | | Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| | | December 31,
| |
| | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2008 | |
| |
Assets | | | | | | | | | | | | | | | | |
| Interest-only certificated receivables | | $ | — | | | $ | — | | | $ | 27,854 | | | $ | 27,854 | |
| Interest-only non-certificated receivables | | | — | | | | — | | | | 27,264 | | | | 27,264 | |
| U.S. Treasury and agency obligations | | | 18,635 | | | | — | | | | — | | | | 18,635 | |
| Mutual funds | | | — | | | | 881 | | | | — | | | | 881 | |
| Mortgage-backed securities and 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 | | $ | 18,666 | | | $ | 20,442 | | | $ | 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 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 | ) |
| 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 | |
| | | | | | | | | | | | | |
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).
96
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis as of December 31, 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 principal balance of these loans was $13.8 million at December 31, 2008. 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 estateand/or business assets including equipment, inventoryand/or accounts receivable. |
The following table summarizes the fair value of instruments measured on a non-recurring basis as of December 31, 2008 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | Quoted Prices in
| | | | | | | | | | |
| | | Active Markets for
| | | Significant Other
| | | Significant
| | | Balance as of
| |
| | | Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| | | December 31,
| |
| | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2008 | |
| |
Assets | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | $ | — | | | $ | — | | | $ | 4,028 | | | $ | 4,028 | (1) |
| Mortgage servicing rights | | | — | | | | — | | | | 4,351 | | | | 4,351 | (2) |
| Impaired loans | | | — | | | | — | | | | 14,063 | | | | 14,063 | (3) |
| | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | 22,442 | | | $ | 22,442 | |
| | | | | | | | | | | | | | | | | |
| | |
| (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) | | The fair value of the impaired loans only includes those loans that were evaluated under SFAS 114. |
As detailed in Note 24, NCB in the normal course of business enters into rate lock 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 ratesand/or the return demanded by investors
97
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, both of which NCB adopted on January 1, 2008.
The transition provisions of SFAS 157 provide for retrospective application to, amongst others, financial instruments that were measured at fair value at initial recognition using a transaction price in accordance with Emerging Issues Task Force IssueNo. 02-03,“Issues involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.”NCB’s interest rate lock commitments were measured at inception at the transaction price. Upon adoption of SFAS 157, the difference between the carrying amount and the fair value of these interest rate lock commitments was recognized as a cumulative effect adjustment to the beginning balance of retained earnings. The carrying amount of $38.1 million and the fair value amount of $39.3 million resulted in a $1.2 million cumulative effect adjustment to the beginning balance of retained earnings.
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 December 31, 2008:
Cash and cash equivalents — The carrying amount approximates fair value.
Mortgage servicing rights — The fair value of mortgage servicing rights is based on discounted future net cash flows received for servicing mortgages at current market rates offered by purchasers of mortgage servicing rights.
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.
Loans held-for-sale — The fair value of loans held-for-sale is based on market prices for similar loans sold in the secondary market, adjusted for differences in loan characteristics.
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.
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 as of December 31, 2008 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Carrying
| | | | | | Carrying
| | | | |
| | | Amount | | | Fair Value | | | Amount | | | Fair Value | |
| |
Financial Assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 39,971 | | | $ | 39,971 | | | $ | 63,724 | | | $ | 63,724 | |
| Held-to-maturity investment securities | | | 387 | | | | 374 | | | | 417 | | | | 431 | |
| Mortgage servicing rights | | | 13,252 | | | | 14,891 | | | | 13,420 | | | | 18,246 | |
| Loans held-for-sale | | | 14,278 | | | | 14,396 | | | | 90,949 | | | | 92,708 | |
| Loans and lease financing, net | | | 1,930,124 | | | | 1,973,435 | | | | 1,506,244 | | | | 1,527,295 | |
| Accrued interest receivables | | | 11,169 | | | | 11,169 | | | | 11,162 | | | | 11,162 | |
Financial Liabilities: | | | | | | | | | | | | | | | | |
| Deposits | | | 1,300,071 | | | | 1,320,529 | | | | 1,027,452 | | | | 1,020,396 | |
| Short-term borrowings | | | 225,000 | | | | 225,000 | | | | 183,000 | | | | 183,000 | |
| Long-term debt | | | 196,447 | | | | 196,673 | | | | 220,907 | | | | 219,035 | |
| Subordinated debt | | | 116,489 | | | | 92,252 | | | | 118,989 | | | | 103,103 | |
| Junior subordinated debt | | | 51,547 | | | | 33,245 | | | | 51,547 | | | | 50,390 | |
| Accrued interest payable | | | 6,151 | | | | 6,151 | | | | 7,232 | | | | 7,232 | |
| | | | | | | | | | | | | | | | | |
| | | Contract or
| | | | Contract or
| | |
| | | Commitment
| | Estimated
| | Commitment
| | Estimated
|
Off-Balance Sheet Financial Instruments: | | Amounts | | Fair Value | | Amounts | | Fair Value |
| |
| Undrawn commitments to extend credit | | $ | 912,427 | | | $ | 4,562 | | | $ | 879,718 | | | $ | 4,399 | |
| Standby letters of credit | | $ | 293,711 | | | $ | 12,131 | | | $ | 280,959 | | | $ | 13,165 | |
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 6) nationally, with a concentration in New York City. The Warehouse Lending segment originates Residential
99
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and Commercial Real Estate Loans for sale in the secondary market. The Retail and Consumer Lending segment provides traditional banking services such as lending and deposit gathering to retail, corporate and commercial customers. The Other segment consists of 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 years ended December 31, 2008, 2007 and 2006 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Real
| | | | | | Retail and
| | | | | | | |
| | | Commercial
| | | Estate
| | | Warehouse
| | | Consumer
| | | | | | NCB
| |
2008 | | Lending | | | Lending | | | Lending | | | Lending | | | Other | | | Consolidated | |
| |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 36,103 | | | $ | 46,122 | | | $ | 7,883 | | | $ | 30,077 | | | $ | 3,516 | | | $ | 123,701 | |
| Interest expense | | | 19,764 | | | | 23,469 | | | | 3,980 | | | | 16,251 | | | | 3,841 | | | | 67,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 16,339 | | | | 22,653 | | | | 3,903 | | | | 13,826 | | | | (325 | ) | | | 56,396 | |
| Provision (benefit) for loan losses | | | 12,275 | | | | 4,629 | | | | — | | | | 1,746 | | | | — | | | | 18,650 | |
| Non-interest income | | | 6,585 | | | | 4,384 | | | | 9,759 | | | | 3,186 | | | | 1,028 | | | | 24,942 | |
| Non-interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct expense | | | 4,398 | | | | 3,135 | | | | 5,442 | | | | 2,194 | | | | 21,443 | | | | 36,612 | |
| Overhead and support | | | 6,022 | | | | 4,436 | | | | 7,736 | | | | 3,453 | | | | — | | | | 21,647 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest expense | | | 10,420 | | | | 7,571 | | | | 13,178 | | | | 5,647 | | | | 21,443 | | | | 58,259 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before taxes | | $ | 229 | | | $ | 14,837 | | | $ | 484 | | | $ | 9,619 | | | $ | (20,740 | ) | | $ | 4,429 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total average assets | | $ | 524,470 | | | $ | 707,111 | | | $ | 117,704 | | | $ | 531,160 | | | $ | 172,801 | | | $ | 2,053,246 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 577,063 | | | $ | 847,259 | | | $ | 68,505 | | | $ | 532,424 | | | $ | 129,641 | | | $ | 2,154,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
100
NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Real
| | | | | | Retail
| | | | | | | |
| | | Commercial
| | | Estate
| | | Warehouse
| | | Consumer
| | | | | | NCB
| |
2007 | | Lending | | | Lending | | | Lending | | | Lending | | | Other | | | Consolidated | |
| |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 40,378 | | | $ | 36,496 | | | $ | 23,690 | | | $ | 29,579 | | | $ | 5,596 | | | $ | 135,739 | |
| Interest expense | | | 22,110 | | | | 20,487 | | | | 18,399 | | | | 19,437 | | | | 4,688 | | | | 85,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 18,268 | | | | 16,009 | | | | 5,291 | | | | 10,142 | | | | 908 | | | | 50,618 | |
| (Benefit) provision for loan losses | | | (1,488 | ) | | | 936 | | | | — | | | | 704 | | | | — | | | | 152 | |
| Non-interest income | | | 4,331 | | | | 4,478 | | | | (396 | ) | | | 1,110 | | | | 2,446 | | | | 11,969 | |
| Non-interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct expense | | | 6,455 | | | | 3,205 | | | | 4,837 | | | | 3,197 | | | | 24,067 | | | | 41,761 | |
| Overhead and support | | | 8,383 | | | | 4,006 | | | | 5,371 | | | | 4,050 | | | | — | | | | 21,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest expense | | | 14,838 | | | | 7,211 | | | | 10,208 | | | | 7,247 | | | | 24,067 | | | | 63,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before taxes | | $ | 9,249 | | | $ | 12,340 | | | $ | (5,313 | ) | | $ | 3,301 | | | $ | (20,713 | ) | | $ | (1,136 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total average assets | | $ | 462,938 | | | $ | 479,066 | | | $ | 370,052 | | | $ | 493,498 | | | $ | 145,042 | | | $ | 1,950,596 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 493,998 | | | $ | 524,318 | | | $ | 156,270 | | | $ | 511,532 | | | $ | 185,658 | | | $ | 1,871,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Real
| | | | | | Retail
| | | | | | | |
| | | Commercial
| | | Estate
| | | Warehouse
| | | Consumer
| | | | | | NCB
| |
2006 | | Lending | | | Lending | | | Lending | | | Lending | | | Other | | | Consolidated | |
| |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 34,735 | | | $ | 30,610 | | | $ | 21,176 | | | $ | 27,525 | | | $ | 4,408 | | | $ | 118,454 | |
| Interest expense | | | 20,028 | | | | 15,661 | | | | 16,698 | | | | 16,226 | | | | 3,483 | | | | 72,096 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 14,707 | | | | 14,949 | | | | 4,478 | | | | 11,299 | | | | 925 | | | | 46,358 | |
| Provision (benefit) for loan losses | | | 5,278 | | | | (337 | ) | | | — | | | | (1,274 | ) | | | — | | | | 3,667 | |
| Non-interest income | | | 4,338 | | | | 3,526 | | | | 22,855 | | | | 1,709 | | | | 1,252 | | | | 33,680 | |
| Non-interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct expense | | | 6,206 | | | | 3,981 | | | | 4,517 | | | | 4,813 | | | | 21,168 | | | | 40,685 | |
| Overhead and support | | | 4,765 | | | | 3,276 | | | | 2,914 | | | | 3,892 | | | | — | | | | 14,847 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest expense | | | 10,971 | | | | 7,257 | | | | 7,431 | | | | 8,705 | | | | 21,168 | | | | 55,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before taxes | | $ | 2,796 | | | $ | 11,555 | | | $ | 19,902 | | | $ | 5,577 | | | $ | (18,991 | ) | | $ | 20,839 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total average assets | | $ | 472,553 | | | $ | 321,095 | | | $ | 353,341 | | | $ | 480,083 | | | $ | 130,840 | | | $ | 1,757,912 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 456,178 | | | $ | 433,875 | | | $ | 329,793 | | | $ | 484,263 | | | $ | 125,368 | | | $ | 1,829,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| 27. | LOAN SALES AND SECURITIZATIONS |
NCB sells loans in the whole loan and securitization markets. When NCB sells loans, it generally retains the mortgage servicing rights and, depending on the nature of the sale, may also retain interest-only securities (retained interests).
NCB did not sell any loans through securitized transactions during the twelve months ended December 31, 2008. During the twelve months ended December 31, 2007, NCB sold loans through securitized transactions and
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retained interest-only receivables. The net proceeds from NCB’s 2007 sale of loans through securitized transactions were $370.2 million and generated a total of $3.2 million in retained interests.
During the years ended December 31, 2008 and 2007, NCB sold loans through non-securitized transactions to Fannie Mae. The net proceeds from the sale of these loans were $451.7 million and generated a total of $3.6 million in retained interests for the year ended December 31, 2008. The net proceeds from the sale of these loans were $604.7 million and generated a total of $7.1 million in retained interests for the year ended December 31, 2007.
NCB does not retain any interests on Consumer Loan sales, which generated net proceeds of $357.2 million and $220.9 million for the years ended December 31, 2008 and 2007, respectively.
In total, NCB generated a gain on the sale of loans of $6.0 million for the year ended December 31, 2008 compared with a loss of $1 thousand for the year ended December 31, 2007.
See Note 4 — Loan Servicing for a presentation of loan balances that NCB services.
Mortgage Servicing Rights (“MSRs”)
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 generally ranging from 0.06% to 0.40% 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.
Activity related to MSRs for the years ended December 31, was as follows (dollars in thousands):
| | | | | | | | | |
| | | Mortgage Servicing Rights | |
| | | 2008 | | | 2007 | |
| |
Balance at January 1 | | $ | 13,420 | | | $ | 9,362 | |
| Additions | | | 2,048 | | | | 5,574 | |
| Amortization | | | (1,829 | ) | | | (1,277 | ) |
| Change in valuation allowance | | | (387 | ) | | | (239 | ) |
| | | | | | | | | |
Balance at December 31 | | $ | 13,252 | | | $ | 13,420 | |
| | | | | | | | | |
As of December 31, 2008 and 2007 the MSR balance relating to the servicing of Share and Single-family Residential Loans was $2.9 million. As of December 31, 2008 and 2007 the MSR balance relating to the servicing of all other loans was $10.4 million and $10.5 million, respectively.
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the valuation allowance for MSRs (included as a component of other assets) for years ended December 31 were as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
Balance at January 1 | | $ | 239 | | | $ | — | |
| Additional write-downs | | | 716 | | | | 239 | |
| Recoveries | | | (329 | ) | | | — | |
| | | | | | | | | |
Balance at December 31 | | $ | 626 | | | $ | 239 | |
| | | | | | | | | |
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 years ended December 31 were as follows:
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Weighted-average life (in years): | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 3.8 | | | | 5.6 | | | | 3.9 | |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 7.2 | | | | 8.5 | | | | 8.7 | |
| Weighted-average annual prepayment speed: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 26.9 | % | | | 20.0 | % | | | 28.4 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 6.6 | % | | | 5.0 | % | | | 4.6 | % |
| Residual cash flow discount rate (annual): | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 10.3 | % | | | 10.0 | % | | | 10.3 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 9.0 | % | | | 9.4 | % | | | 11.0 | % |
| Earnings rate P&I float, escrows and replacement reserves: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 4.05 | % | | | 5.00 | % | | | 5.00 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 3.43 | % | | | 5.41 | % | | | 5.34 | % |
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Key economic assumptions used in measuring the period-end fair value of NCB’s MSRs as of December 31, and the effect on the fair value of those MSRs from adverse changes in those assumptions are as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Fair value of mortgage servicing rights: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | 2,878 | | | $ | 4,277 | | | $ | 3,868 | |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | 12,013 | | | $ | 13,969 | | | $ | 8,191 | |
| Weighted-average remaining life (in years): | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 2.5 | | | | 5.3 | | | | 5.7 | |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 6.8 | | | | 7.3 | | | | 7.9 | |
| Weighted-average annual prepayment speed: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 33.5 | % | | | 20.2 | % | | | 19.5 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 2.6 | % | | | 2.9 | % | | | 2.3 | % |
| Impact on fair value of 10% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (245 | ) | | $ | (180 | ) | | $ | (164 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (81 | ) | | $ | (69 | ) | | $ | (26 | ) |
| Impact on fair value of 20% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (500 | ) | | $ | (343 | ) | | $ | (313 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (161 | ) | | $ | (137 | ) | | $ | (52 | ) |
| Residual cash flows discount rate (annual): | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 10.5 | % | | | 10.0 | % | | | 10.3 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 9.0 | % | | | 9.0 | % | | | 11.0 | % |
| Impact on fair value of 10% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (66 | ) | | $ | (117 | ) | | $ | (112 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (384 | ) | | $ | (486 | ) | | $ | (365 | ) |
| Impact on fair value of 20% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (129 | ) | | $ | (228 | ) | | $ | (218 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (748 | ) | | $ | (947 | ) | | $ | (705 | ) |
| Earnings Rate of P&I float, escrow and replacement: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | | 3.5 | % | | | 5.0 | % | | | 5.0 | % |
| Multifamily, Cooperative and Commercial Real Estate Loans | | | 3.0 | % | | | 4.6 | % | | | 5.3 | % |
| Impact on fair value of 10% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (82 | ) | | $ | (120 | ) | | $ | (1 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (404 | ) | | $ | (597 | ) | | $ | (475 | ) |
| Impact on fair value of 20% adverse change: | | | | | | | | | | | | |
| Share and Single-family Residential Loans | | $ | (164 | ) | | $ | (240 | ) | | $ | (3 | ) |
| Multifamily, Cooperative and Commercial Real Estate Loans | | $ | (808 | ) | | $ | (1,194 | ) | | $ | (950 | ) |
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest-Only receivables
Activity related to interest-only receivables for the years ended December 31 is as follows (dollars in thousands):
| | | | | | | | | |
| | | Interest-Only
| |
| | | Certificated
| |
| | | Receivables | |
| | | 2008 | | | 2007 | |
| |
Balance at January 1 at fair value | | $ | 33,828 | | | $ | 39,950 | |
| Additions | | | — | | | | 1,108 | |
| Amortization | | | (5,632 | ) | | | (5,377 | ) |
| Change in mark-to-market | | | (342 | ) | | | (1,770 | ) |
| Writedown of asset due to prepayment | | | — | | | | (83 | ) |
| | | | | | | | | |
Balance at December 31 at fair value | | $ | 27,854 | | | $ | 33,828 | |
| | | | | | | | | |
| | | | | | | | | |
| | | Interest-Only
| |
| | | Non-certificated
| |
| | | Receivables | |
| | | 2008 | | | 2007 | |
| |
Balance at January 1 at fair value | | $ | 29,932 | | | $ | 33,053 | |
| Additions | | | 1,494 | | | | 3,619 | |
| Amortization | | | (4,493 | ) | | | (4,376 | ) |
| Change in mark-to-market | | | 359 | | | | (2,314 | ) |
| Writedown of asset due to prepayment | | | (28 | ) | | | (50 | ) |
| | | | | | | | | |
Balance at December 31 at fair value | | $ | 27,264 | | | $ | 29,932 | |
| | | | | | | | | |
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 as of December 31:
| | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| |
| Weighted-average life (in years) | | | 9.5 | | | | 8.7 | | | | 9.2 | |
| Weighted-average annual discount rate | | | 18.08 | % | | | 6.44 | % | | | 6.99 | % |
The increase in the discount rate from December 31, 2007 to December 31, 2008 is attributable to an increase in the investor spreads that would be demanded if these interest-only receivables were sold as of December 31, 2008.
Key economic assumptions used in subsequently measuring the fair value of NCB’s interest-only receivables as of December 31, and the effect on the fair value of those other interest-only receivables from adverse changes in those assumptions are as follows (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Fair value | | $ | 55,118 | | | $ | 63,760 | |
| Weighted-average life (in years) | | | 5.9 | | | | 6.5 | |
| Weighted average annual discount rate | | | 9.00 | % | | | 8.12 | % |
| Impact on fair value of 10% adverse change | | $ | (1,372 | ) | | $ | (1,574 | ) |
| Impact on fair value of 20% adverse change | | $ | (2,688 | ) | | $ | (3,084 | ) |
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 31, 2008 and 2007 the total principal amount outstanding of the underlying loans of the interest-only receivables was $4.7 billion and $4.5 billion, respectively. As of December 31, 2008 there was $19.8 million or 0.4%, of delinquent loans. As of December 31, 2007 there was $4.9 million or 0.1%, of delinquent loans.
The following table summarizes the cash flows received from loan sale activity and retained interests for the years ended December 31, (dollars in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Net proceeds from loans sold through securitizations | | $ | — | | | $ | 370,178 | |
| Net proceeds from auto loan sales | | $ | 357,179 | | | $ | 220,887 | |
| Net proceeds from other loan sales | | $ | 451,645 | | | $ | 604,765 | |
| Servicing fees received | | $ | 6,781 | | | $ | 5,950 | |
| Cash flows received on interest-only receivables | | $ | 13,992 | | | $ | 14,880 | |
1. On March 31, 2009, NCB executed an amendment to both the Prudential agreement and the revolving credit facility agreement which waives NCB’s previous covenant violation in its prior credit agreement and amends various covenant thresholds on a prospective basis. Management has completed financial projections through December 31, 2010 and believes that NCB will be in compliance with all covenants through the maturity of the credit facility and the Prudential notes.
2. On November 21, 2008, the Federal Deposit Insurance Corporation (“FDIC”) Board of Directors approved the TLGP. The program was created to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.
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 under debt covered by the program, the FDIC would continue to make scheduled interest and principal payments under the terms of the debt instrument through its maturity. The guarantee extends up to three years or December 31, 2012.
On February 11, 2009, under the TLGP, NCB issued $25 million of debt. The debt has a 2.74% fixed rate, requires semi-annual payments of interest and matures on February 15, 2012. The debt is backed by the full faith and credit of the United States government. NCB is eligible to issue another $50 million under the TLGP before June, 2009. NCB paid an FDIC fee of $0.8 million related to this debt issuance to be amortized over a three-year period.
NCB, FSB has separate capacity to issue $13 million in FDIC-guaranteed debt, and it is evaluating whether to participate in the guaranteed debt program.
Another component to the TLPG is 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.
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NATIONAL CONSUMER COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NCB is involved in various litigation arising from the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on NCB’s consolidated financial position, results of operations, or liquidity.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
NCB’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated NCB’s disclosure controls and procedures as of December 31, 2008 pursuant to Exchange ActRule 13a-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.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of National Consumer Cooperative Bank and subsidiaries (the Bank) is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is defined inRule 13a-15(f) or15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP) and includes those policies and procedures that:
| | |
| | • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Bank; |
| |
| | • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of management and directors of the Bank; and |
| |
| | • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on its financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections or evaluations of effectiveness regarding future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
The Bank’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework.” Based on this assessment, management has concluded that the Bank’s internal control over financial reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of the Bank’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Bank’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
| | | |
/s/ Charles E. Snyder
| | /s/ Richard L. Reed
|
| Charles E. Snyder | | Richard L. Reed |
| President and Chief Executive Officer | | Chief Financial Officer |
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors and executive officers of NCB and the positions held by each are as follows:
| | | | | | | | | | | | | |
| | | | | Year First
| | | | | | |
| | | | | Elected or
| | | End of
| | | |
| | | Position | | Appointed | | | Term | | Age | |
| | | | |
| |
| Irma Cota | | Chairperson of the Board of Directors and Director | | | 2004 | | | 2010 | | | 55 | |
| Stuart M. Saft | | Vice Chairperson of the Board of Directors and Director | | | 2007 | | | 2010 | | | 61 | |
| Charles E. Snyder | | President and Chief Executive Officer | | | 1983 | | | - | | | 55 | |
| Roger B. Collins | | Director | | | 2005 | | | 2011 | | | 60 | |
| Peter A. Conrad | | Director | | | 2008 | | | 2011 | | | 59 | |
| Steven F. Cunningham | | Director | | | 2005 | | | 2011 | | | 67 | |
| William F. Hampel | | Director | | | 2004 | | | 2010 | | | 57 | |
| Grady B. Hedgespeth | | Director | | | 2003 | | | 2009 | | | 52 | |
| Janis Herschkowitz* | | Director | | | 2007 | | | 2010 | | | 49 | |
| Rosemary Mahoney | | Director | | | 2003 | | | 2009 | | | 48 | |
| Stephanie McHenry | | Director | | | 2001 | | | 2009 | | | 46 | |
| Richard A. Parkinson | | Director | | | 2003 | | | 2009 | | | 59 | |
| Alfred A. Plamann | | Director | | | 2008 | | | 2011 | | | 66 | |
| Walden Swanson | | Director | | | 2007 | | | 2010 | | | 58 | |
| Nguyen Van Hanh* | | Director | | | 2007 | | | 2010 | | | 71 | |
| Steven A. Brookner | | Executive Managing Director, NCB; | | | 1997 | | | - | | | 45 | |
| | | Chief Executive Officer, NCB, FSB | | | | | | | | | | |
| Patrick N. Connealy | | Managing Director, Chief Credit Officer, NCB | | | 1986 | | | - | | | 52 | |
| Frank Fasano | | Chief Information Officer | | | 1997 | | | - | | | 42 | |
| Mark W. Hiltz | | Managing Director, Chief Risk Officer | | | 1982 | | | - | | | 60 | |
| Kathleen M. Luzik | | Managing Director, NCB; Chief Operating Officer, NCB, FSB | | | 1991 | | | - | | | 45 | |
| James C. Oppenheimer | | General Counsel and Corporate Secretary | | | 2008 | | | - | | | 40 | |
| Richard L. Reed | | Executive Managing Director, Chief Financial Officer, NCB; | | | 1985 | | | - | | | 50 | |
| | | Chief Financial Officer, NCB Financial Corporation and NCB, FSB | | | | | | | | | | |
| | |
| * | | Presidentially appointed Directors who will serve until their successors are appointed and confirmed. |
Irma Cota is President and CEO of North County Health, a Comprehensive Community Health Center with 10 clinic sites and a staff of 500. She is a former President of California Primary Care Association and past President of the San Diego Council of Community Clinics. Ms. Cota holds a masters degree in public health from San Diego State University. Having over thirty years of experience specializing in health/medical, Ms. Cota has extensive experience in working with non-profit boards of directors. She is currently the Vice Chair of the California State University San Marcos University Council.
Stuart M. Saft is a Partner at the real estate practice of Dewey & LeBouf. Prior to that, Mr. Saft was a Partner and Chairman of the Real Estate division at Wolf Haldenstein Adler Freeman & Herz LLP. Mr. Saft holds a Doctor of Jurisprudence from Columbia University Law School.
Charles E. Snyder was named President and Chief Executive Officer of NCB in January 1992. He had been Corporate Vice President and Chief Financial Officer of NCB from 1983 to December 1991.
Roger Collins is President and Chief Executive Officer of Harp’s Food Stores, Inc., a regional grocery chain located in Arkansas, Oklahoma, and Missouri. He currently serves on the boards of directors of Associated Wholesale Grocers and the National Grocers Association. Mr. Collins has a B.S. in economics from Rice University and an MBA from the University of Texas at Austin.
Peter A. Conrad is President and Chief Executive Officer of the Cooperative Central Bank in Boston, Massachusetts. Mr. Conrad has been a trustee of the Cooperative Banks Employees Retirement Association (CBERA) and the Cooperative Banks Employees Benefit Association (CBEBA) since June, 2005.
Steven F. Cunningham is President Emeritus of IMARK Group, Inc., a purchasing cooperative of independently owned electrical suppliers and equipment wholesalers located in Oxon Hill, Maryland. He currently
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serves as President and Director of Elite Distributors Insurance Co., located in Grand Cayman. He also serves as a director of Mutual Services Cooperative and is currently chair of the National Cooperative Business Association’s Board of Directors. Mr. Cunningham has a bachelor’s degree in accounting from Lehigh University, Bethlehem, Pennsylvania.
William F. Hampel is Senior Vice President for Research and Policy Analysis and Chief Economist of Credit Union National Association located in Washington, D.C. Mr. Hampel holds a Bachelor of Arts degree in Economics from University of Dallas and a PhD in Economics from Iowa State University. Mr. Hampel was a member of the board of CUNA Credit Union from 1991 to 2004 serving as secretary, treasurer, vice president, and chair. Mr. Hampel is also a member of CUNA’s regulatory and legislative advocacy team.
Grady B. Hedgespeth is the Director of Financial Assistance for the United States Small Business Administration located in Washington, D.C. He was the founder and president of BankBoston Development Company, the nation’s first bank-owned urban investment bank. Mr. Hedgespeth is an honors graduate of the University of Virginia and the Kennedy School of Government at Harvard.
Janis Herschkowitz is President and Chief Executive Office of PRL, Inc, a group of manufacturing companies located in Cornwall, Pennsylvania. Ms. Herschkowitz holds a Bachelor of Arts degree in International Relations from Penn State University and a Masters in Business Administration in Finance from the University of Texas.
Rosemary K. Mahoney is Chief Executive Officer of Coopmetrics. Ms. Mahoney is a member of the Board of Directors of the National Cooperative Business Association, Thanexus, Inc. and the National Cooperative Grocers Association.
Stephanie McHenry is President of ShoreBank Cleveland Banking Region. Prior to the merger of ShoreBank affiliated institutions, she was President and Chief Operating Officer of ShoreBank in Cleveland, Ohio. Prior to joining ShoreBank Ms. McHenry was director of Minority Business Development of Greater Cleveland Growth Association and Executive Director of Northern Ohio Minority Business Council since 1998.
Richard A. Parkinson is the President and Chief Executive Officer of Associated Food Stores, Inc., in Salt Lake City, Utah. Mr. Parkinson also served as a member of the executive committee of the Board for Associated Food Stores.
Alfred A. Plamann was named President & Chief Executive Officer of Unified in September 1999 when Los Angeles-based Certified Grocers of California, Ltd. merged with United Grocers, Inc. of Portland, Oregon. Currently, he serves on the Board of the Food Marketing Institute as well as the National Cooperative Grocers Association. He is a member of the Los Angeles Area Chamber of Commerce (Board member), the Town Hall of Los Angeles (Board member), the George L. Graziadio School of Business & Management — Pepperdine University (Board of Visitors member), the Southern California Chapter of the National Association of Corporate Directors, Weingart Center Association, a non-profit organization that provides assistance to the homeless in Los Angeles, and is a former Chairman of the San Gabriel Valley Council of Boy Scouts of America. Mr. Plamann holds a B.S. in accounting and real estate from the University of Colorado and an M.B.A. from the University of Pennsylvania (Wharton).
Walden Swanson is a Founder and Chief Executive Officer of CoopMetrics, the first cooperative incorporated under the progressive Minnesota cooperative statutes. Mr. Swanson has served on numerous cooperative boards, including NCB Capital Impact, the National Cooperative Business Association, the Cooperative Development Fund, and the Central Committee of the International Cooperative Alliance.
Nguyen Van Hanh is an Affiliate Professor of George Mason University, specializing in international economics and higher education reform. Dr. Van Hanh holds a PhD in Economics from the University of California at Davis, having earlier received a Bachelor of Science with high honors and a Master’s of Science degree in Agricultural Science both from the University of Florida
Steven A. Brookner is the Chief Executive Officer of NCB, FSB since November 2001 and Executive Managing Director at NCB responsible for overseeing the real estate originations, capital markets, servicing and investor reporting functions of NCB. From 1997 through September 1998, he was a Managing Director responsible
111
for strategic initiatives and new product development. Previously, he was a partner of Hamilton Securities Group for one year and Co-founder and Principal of BNC & Associates, a financial and management consulting firm, for five years.
Patrick N. Connealy is a Managing Director and Chief Credit Officer of NCB. Prior to joining NCB in 1986, he worked as a supervisory officer with the Farm Credit Administration in Washington, DC, and as assistant vice president and loan officer for the Farm Credit Bank of Omaha.
Frank Fasano is the Chief Information Office of NCB. Prior to becoming CIO, he served as Chief Technology Officer, Senior Vice President, and Vice President of IT Operations. Mr. Fasano joined NCB in 1997 and is a graduate of Georgetown University.
Mark W. Hiltz is a Managing Director and Chief Risk Officer of NCB. He was a Corporate Vice President and Manager of Special Assets from 1994 to 1998 and a Senior Vice President of the Special Assets Department from 1986 to 1994. Previously he was Vice President of Loan Administration from 1983 to 1986 and General Auditor from 1982 to 1983.
Kathleen M. Luzik is a Managing Director of NCB, and Chief Operating Officer of NCB, FSB. Ms. Luzik joined NCB in 1991, and has held positions as a real estate underwriter and lender, business development officer, vice president of secondary marketing, and managing director of real estate loan servicing. In 1999, she was named managing director of NCB’s Real Estate Group where she was responsible for all operational activities of the Real Estate Group, overseeing the National Real Estate and Master Servicing Teams. Prior to joining NCB, Ms. Luzik was a financial analyst for the Patrician Financial Company.
James C. Oppenheimer is the General Counsel and Secretary of NCB. Prior to joining NCB in 2008, he was a partner at Goodwin Procter LLP in Washington D.C. He graduated from the University of Chicago Law School in 1997 with honors.
Richard L. Reed is Executive Managing Director and Chief Financial Officer of NCB. He was named Senior Vice President and Chief Financial Officer in 1994. Prior to that, he was Vice President and Treasurer from 1992 to 1994. He was Vice President, Treasury from 1989 to 1992.
Non-Incumbent Nominees for Directorships
Jane Garcia
Gary A. Officer
Kenneth Rivkin
Robynn Shrader
Gail Ment
Judy Ziewacz
Jane Garcia is the Chief Executive Officer of La Clinicia de La Raza, Inc., and has served in that role since April 1983. As CEO of La Clinicia de La Raza, she oversees long-range fiscal and program planning and manages the day-to-day operations of a $62 million comprehensive health care operation in California. She is a board member of Alta Bates Summit Medical Center and the California Primary Care Association. Jane holds a Bachelor’s degree from Yale University and a Master of Public Health degree from the University of California, Berkeley.
Gary A. Officer is the President and Chief Executive Officer of Rebuilding Together, Inc., the nation’s largest non-profit home remodeling organization serving 1800 communities nationwide. In this role, he serves as the national spokesperson for the organization and serves as the lead business development and staff officer with responsibilities for the organization’s key practice areas. He is a past president of the National Credit Union Foundation (NCUF). Gary holds a Bachelor’s degree from the University of Manchester, England and a Master’s degree from the London School of Economics.
Kenneth A. Rivkin is the Managing Director of CMBS Capital Markets at Credit Suisse. For the past twenty-five years, Kenneth worked in commercial and investment banking at Credit Suisse, Bank of America, and their predecessors. He is a member of a housing cooperative and a current board director of 227 East 57th Street
112
Corporation. Kenneth holds a Bachelor’s degree from Brown University and a Master’s degree from the Sloan School of Management at MIT.
Robynn Shrader is the Chief Executive Officer of National Cooperative Grocers Association. In this role, she oversees a national trade organization/purchasing co-op representing 111 independent businesses in 32 states with over $1 billion in annual sales volume. A member of the New Pioneer Cooperative Board of Directors, she holds a Bachelor’s degree from San Diego State University.
Gail Urbas Ment is the President of Emtec Metal Products, an ESOP manufacturer of custom architectural metal products for residential and commercial products. She is a member of the Hungry Hollow Food Coop and is the President of the Board of 126 Street Condominium Association. Gail holds a Bachelor’s degree from the University of Wisconsin.
Judy Ziewacz is the Executive Director of the Office of Energy Independence of the State of Wisconsin. In this role, she helps the state expand in new markets of green energy, clean technology and new products. She is the Executive Director of the Cooperative Development Foundation and was a member of the Board of Group Health Cooperative in Madison, WI. Judy holds a Bachelor’s degree from the University of Wisconsin.
COMPOSITION OF BOARD OF DIRECTORS
The Act provides that the Board of Directors of NCB shall consist of 15 persons serving three-year terms. An officer of NCB may not also serve as a director. The President of the United States is authorized to appoint three directors with the advice and consent of the Senate. Of the Presidential appointees, one must be selected from among proprietors of small business concerns that are manufacturers or retailers; one must be selected from among the officers of the agencies and departments of the United States; and one must be selected from among persons having extensive experience representing low-income cooperatives eligible to borrow from NCB. Janis Herschkowitz is the Presidential appointee from among proprietors of small business concerns. Nguyen Van Hanh is the Presidential appointee from among persons representing low-income cooperatives. The seat for the presidential appointee from among the officers of the agencies and departments of the United States is currently vacant.
The holders of Class B and Class C stock elect the remaining 12 directors. Under the bylaws of NCB, each stockholder-elected director must have at least three years experience as a director or senior officer of the class of cooperatives that he or she represents. The five classes of cooperatives are: (a) housing, (b) consumer goods, (c) low-income cooperatives, (d) consumer services, and (e) all other eligible cooperatives. At all times each class must have at least one, but not more than three, directors representing it on the Board.
No director may be elected to more than two consecutive full terms. After expiration of the term of a director, he or she may continue to serve until a successor has been elected or has been appointed and qualified.
COMMITTEES OF THE BOARD
The Board of Directors directs the management of NCB and establishes the policies of NCB governing its funding, lending, and other business operations. In this regard, the Board has established a number of committees, such as Audit/Risk Management, Mission Banking/Low Income, Executive/Compensation, Corporate Governance and Strategic Planning Committees.
The Audit/Risk Management Committee assists the Board of Directors in fulfilling its statutory and fiduciary responsibilities. It is responsible for overseeing all examinations and audits, monitoring all accounting and financial reporting practices, determining that there are adequate administrative and internal accounting controls and assuring that NCB, its subsidiaries and affiliate are operating within prescribed policies and procedures and in conformance with the applicable conflict of interest policies. The members of the committee are Roger B. Collins (Chair), Stephanie McHenry, William F. Hampel, Richard A. Parkinson, Stuart M. Saft, and Peter Conrad. The Board of Directors has determined that Roger B. Collins, is an “audit committee financial expert” and is “independent,” as those terms are defined in applicable regulations of the Securities and Exchange Commission (Item 407) underRegulation S-K).
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The Mission Banking/Low Income Committee is responsible for evaluating NCB’s best efforts to achieve 35 percent of loans outstanding to low income cooperatives in accordance with established policies and for recommending to management ways in which NCB can further leverage its resources to have maximum impact on low income communities. The Committee is also responsible for collaborating with NCB Capital Impact to establish a plan for the creation and implementation of a development banking strategy that integrates and focuses resources across NCB and NCB Capital Impact, resulting in a range of development banking financial services that can be delivered to low income communities and other community development financial institutions. The members of the committee are Rosemary K. Mahoney (Chair), Alfred Plamann, Irma Cota, Grady B. Hedgespeth, Nguyen Van Hanh, Walden Swanson, Stephanie McHenry and Steven F. Cunningham.
The Executive/Compensation Committee exercises all powers of the Board of Directors when failure to act until the next regular meeting will adversely affect the best interests of NCB, authorizes actions on fast moving issues when authority is granted by the entire Board, reviews and approves loans in excess of management authority and loan policy exceptions, serves as the appeal authority for loan turndowns, recommends nominees to the Board to fill unexpired terms of previously elected board members and reviews and recommends the consolidated annual budget for board approval. The members are Irma Cota (Chair), Stuart Saft, Rosemary Mahoney, Richard A. Parkinson and Roger B. Collins.
The Executive/Compensation Committee is also responsible for assuring that the senior executives are compensated effectively in a manner consistent with the stated compensation strategy of NCB. The Executive/Compensation Committee also communicates the compensation policies to the members and the reasoning behind such policies, and recommends to the Board retainer and meeting fees for the Board of Directors and Committees of the Board. They also review NCB’s compensation strategy for executive council and matters relating to management succession. The Executive/Compensation Committee reviews NCB’s employee benefit programs.
The Corporate Governance Committee, formerly called the Nominating Committee, annually oversees the election for NCB directors. The committee periodically drafts election rules on behalf of the Board of Directors and reviews modifications and election materials. The Committee reviews the eligibility of nominees taking into consideration financial experience, size of constituency, organization represented, leadership and ability. The members of the committee are Grady B. Hedgespeth (Chair), Irma Cota, Janis L. Herschkowitz, Richard A. Parkinson, Stuart M. Saft, Walden Swanson and Rosemary K. Mahoney.
The Strategic Planning Committee monitors and reviews all NCB-related entities’ planning activities delegated to them by the Board. The members of the committee are Irma Cota (Chair) and the full Board of Directors.
CODE OF ETHICS
NCB has adopted a code of conduct and ethics that includes an NCB Senior Financial Officers’ Code of Ethics that applies to NCB’s principal executive officer, principal financial officer and principal accounting officer. A copy of the code is filed as an exhibit to this annual report.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview
NCB’s executive compensation program is designed to attract, retain, motivate and reward talented executives, including named executive officers (“NEOs”), who contribute to NCB’s growth and success. These objectives also guide NCB in establishing all of its compensation programs. As a result, the executive compensation program for NCB’s NEOs has the same overall structure as NCB’s other compensation programs.
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Compensation Philosophy and Objectives
NCB’s philosophy is that as employees, including its NEOs, progress to higher levels at NCB, an increasing proportion of their pay should be linked to NCB’s success. In keeping with that philosophy, NCB bases compensation packages on a number of factors: the level of job responsibility, individual performance, company performance and marketplace considerations. NCB’s executive compensation program rewards NEOs for sustained financial and operating performance and leadership excellence. In this way, the programs serve as a mechanism to build loyalty among NCB’s executives, including the NEOs, align their interests with NCB’s Strategic Plan and encourage them to remain at NCB for long and productive careers.
NCB is not currently participating in any federal programs under the Emergency Economic Stabilization Act or the American Recovery and Reinvestment Act that require its executive compensation programs to be modified. Should that change, NCB may be required to modify its compensation programs to ensure compliance.
Implementing NCB’s Philosophy and Objectives
The Board of Directors (the “Board”) has delegated the authority and responsibility to establish and administer NCB’s executive compensation to the Executive/Compensation Committee (the “Committee”). The Committee determines the overall compensation goals, how to implement them and who administers them, including delegating authority to the CEO and involving management to help design performance incentive compensation.
Benchmarking
NCB strives to provide competitive overall compensation for its Chief Executive Officer (“CEO”) and other NEOs and to achieve an appropriate mix between base salary, incentive compensation and other benefits. To further these goals, every other year the Committee engages independent executive compensation consultants to review CEO and other NEO compensation packages. Annually, the Committee reconsiders whether to retain an independent consultant or to rely on previously provided information. The Committee and the CEO each use these reviews as a reference to inform their judgment in setting total CEO and other NEO compensation, respectively, in line with company objectives and in a manner that is competitive with comparable organizations in the banking and financial services industry with assets of at least $2 billion and an employee population under 500. To determine significant changes in individual CEO and NEO compensation, NCB considers significant changes to a NEO’s responsibility and significant changes in the relevant market. To further its goal of fostering executive commitment and long-term service, NCB seeks to compensate NEOs with total compensation packages within the 50th to 75th percentile range of the relevant market data.
Compensation Decisions
Under its delegated authority, the Committee determines and administers the CEO’s compensation package, which is approved by the Board. After reviewing market data and reports from the independent consultants, the Committee meets with the CEO to discuss and determine his annual compensation package and individual performance objectives for the year. The Committee sets the CEO’s overall compensation package and reports its decision to the Board. At the end of the year, the Board conducts a performance evaluation of the CEO in light of the agreed upon objectives, his contribution to NCB performance, and other leadership accomplishments. The Committee takes the Board’s evaluation into consideration when it determines the CEO’s award under the LTIP (as defined below), and the Committee recommends to the Board an award under the STIP (as defined below) along with any other changes to the CEO’s compensation.
The Committee delegates responsibility to the CEO to evaluate and determine compensation packages for the other NEOs. The other NEOs, along with the other executives, each write a “Max Plan,” which consists of individual goals and objectives linked to the wider NCB performance goals. The executives, including the other NEOs, present them to the CEO for approval. At the end of the year, the CEO carefully evaluates each of the other NEO’s performance by reference to individual Max Plans and assesses each individual’s achievement of agreed upon objectives, contribution to NCB performance and other leadership accomplishments. After evaluation, the CEO determines any merit increases in base salary for the upcoming year and incentive compensation awards for
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the executives, including the other NEOs. For both the CEO and the other NEOs, past compensation is not a factor in determining incentive plan awards.
Components of 2008 Executive Compensation
The elements of NCB’s executive compensation programs are:
| | |
| | • | base salary; |
| |
| | • | short-term incentive compensation; |
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| | • | long-term incentive compensation; |
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| | • | core employee benefits; |
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| | • | retirement benefits; and |
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| | • | perquisites and other personal benefits. |
In 2008, NCB distributed compensation among base salary, cash incentive awards and other benefits. For the CEO, these elements were paid approximately in the following percentages: 49% for base salary, 29% for incentive compensation and 22% for other benefits. The other NEOs were paid in the following approximate percentages: 63% for base salary, 24% for incentive compensation and 13% for other benefits.
Base Salary
NCB provides its employees, including its NEOs, a base salary for services performed each year. To attract, retain and motivate its employees, NCB sets base salaries at approximately the median of the market, but they vary depending on the scope of responsibilities, skill set, long-term performance and the period of time performing those responsibilities. Typically, NCB reviews base salary levels annually as part of each individual’s performance review and also upon any change in job responsibilities.
The annual salary review for the CEO and other NEOs takes into account the following factors:
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| | • | ndividual performance; |
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| | • | market value of the NEO’s responsibility and skill set; and |
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| | • | contribution to NCB. |
After review, the Committee recommends merit increases for the CEO based on individual performance and may recommend adjustments to base salary. The CEO, in turn, may implement merit increases or other adjustments to the base salaries of other NEOs based on the individual performance and other factors.
Performance-Based Incentive Compensation
NCB believes incentive compensation should represent a significant portion of executive compensation to align the interests of NCB executives, including NEOs, with the NCB Strategic Plan and reflect the fact that the performance of high-level executives impacts NCB’s success and growth. As a result, NCB has two non-equity cash incentive plans for its NEOs: the Executive Management Short-Term Incentive Plan (the “STIP”) and the Executive Long-Term Incentive Plan (the “LTIP,” collectively with the STIP, the “Incentive Plans”). In furtherance of NCB’s philosophy to reward financial operating success and to encourage long-term commitment, the Incentive Plans compensate NEOs for performance success by reference to specific company short-term and long-term performance goals, and to individual achievements with respect to the STIP only.
Executive Management Short-Term Incentive Plan
The STIP is an annual cash incentive program for certain NCB executives, including the NEOs. Each year, the Committee reviews the plan objectives, specific performance goals established for each objective, weights assigned to each of them and potential awards under the STIP. Thereafter, the Committee recommends the plan to the Board for any action and approval. Consistent with NCB’s overall compensation philosophy, the objectives in the STIP parallel those of the performance plans for teams and individuals throughout NCB, including the NEOs.
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Performance under the plan is reviewed by management quarterly and communicated to STIP participants to motivate them to achieve the performance goals.
STIP for 2008
The 2008 STIP was modified from the balanced scorecard approach of prior plans which awarded points for achieving certain objectives to a plan focused on achieving a certain level of net income and continuing to meet critical mission objectives.
In summary, under the 2008 STIP all of the following objectives had to be achieved for the CEO and other NEOs to receiveany STIP for 2008:
| | |
| | Ø | Grow Core Profitability |
| | |
| | • | Pretax net income must be at least $13 million |
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| | • | Non-performing assets must not exceed 1.5% of total assets |
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| | • | Must achieve “best efforts” evaluation for low income business development |
For the CEO and the other executives, including NEOs, the STIP for 2008 had a potential award of 45% and 35% of Adjusted Base Salary, respectively. The term “Adjusted Base Salary” means the salary calculated as if any increase in base salary effective February 1 of the STIP year applied retroactively since January 1 of that same year. Management reports its performance against each objective to the Board and recommends, based on that performance, that each participant be eligible for an incentive payment equal to a certain percentage of his Adjusted Base Salary. The potential maximum percentage of Adjusted Base Salary awarded for the points earned is based on a schedule set forth in the plan. The Committee then recommends the actual award for the CEO, and the CEO determines actual awards for the other NEOs, each within their discretion up to the maximum percentage available for the points earned.
If pretax net income for 2008 had equaled $13 million and the Risk Management and Mission Banking objectives were met, the STIP award for the CEO and the other NEOs would have been awarded at a maximum of 25% and 20% for the CEO and the other NEOs, respectively. If all three objectives were met and pretax income was greater than $13 million, then the award percentage would have increased proportionately to the target award levels of 45% and 35% for the CEO and the other NEOs, respectively for 2008. The target award levels may have been awarded if pretax net income had been at least $23 million.
In addition, under the 2008 STIP, if pretax net income exceeded the $23 million target and the Risk Management and Mission Banking objectives were satisfied, the CEO (or the Committee with respect to the CEO) would have have had discretion to award an Add-on award. The maximum Add-on award was 5% of Adjusted Base Salary for the CEO and 7.5% of Adjusted Base Salary for all other executives, including NEOs. For each 1% that pretax net income exceeded the target of $23 million in pretax net income, 1% of Adjusted Base Salary is added to the award earned up to a maximum award of 50% of Adjusted Base Salary for the CEO and 42.5% of Adjusted Base Salary for all other executives, including NEOs.
The Committee determines the STIP award (if any) for the CEO and submits a report of its determination to the Board. The CEO, as authorized by the Committee, determines the STIP awards (if any) for the other executives, including all of the other NEOs. The actual amounts awarded for the 2008 STIP award are reported in the Summary Compensation Table and explained in the notes to it. Because the income thresholds were not met in 2008, no STIP payments have been made.
STIP for 2009
For 2009 NCB’s STIP is designed to reward performance across a broad range of key performance targets. The targets align performance expectations with the challenging economic environment within the United States, and particularly within the Financial Services industry. It is designed to link the performance of the CEO and the
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other executives, including NEOs, to the critical areas of NCB’s performance including Earnings, Asset Quality, Liquidity, Capital Maintenance, Regulatory compliance and compliance with loan agreement covenants.
For the CEO and the other executives, including NEOs, the STIP for 2009 will have a potential award of 70% and 52% of Adjusted Base Salary, respectively. If pretax net income equals $11.7 million, the STIP award for the CEO and the other NEOs will be awarded at a maximum of 60% and 42% for the CEO and the other NEOs, respectively. If all objectives are met and pretax income is greater than $11.7 million, then the award percentage will increase proportionately to the maximum award levels of 70% and 52% for the CEO and the other NEOs, respectively for 2009. The maximum award levels may be awarded when pretax net income is at least $17.6 million.
Awards made under the 2009 STIP will be made (if any) in 2010.
Executive Management Long-Term Incentive Plan
In 1999, in furtherance of motivating and retaining executives for the long-term, NCB established the LTIP to provide long-term incentive awards for NCB’s executives, including NEOs, consistent with NCB’s long-term strategic plan. The LTIP sets forth company-wide performance goals for a three year period and establishes award levels proportionally to the stated performance goals.
In 1999, the Board delegated to the Committee the authority and responsibility to administer the LTIP and approve the participants, the measurement period, potential awards and the performance goals. Pursuant to that authority, the Committee reviews and approves LTIP awards (if any) for the CEO based on approved performance goals specified in the plan. In addition, the Committee delegated its authority to the CEO to administer the LTIP with respect to the other executives, including the other NEOs. Pursuant to that authority, the CEO determines the other executives’ awards, including the NEO awards, by reference to approved performance goals specified in the plan.
Each LTIP has a three year performance period and executives, including NEOs, receive awards, if earned, based on achievement of NCB strategic long-term performance goals but only at the end of the entire period. Awards vest at the end of the three year period and are based on a percentage of a NEO’s “Aggregate Base Salary,” which is the sum of the NEO’s base salary in years one and two of the applicable plan period. Awards, if earned, are payable more frequently than every three years; they are payable every other year because a new LTIP period commences at the beginning of the third year of the immediately preceding three year LTIP period. This structure encourages long-term commitment because executives, including NEOs, only receive long-term incentive compensation, if at all, every other year based on NCB’s previous three years of performance.
If employment terminates before an award vests due to cause or involuntary termination, then it is forfeited. In the event of death, disability or retirement before the end of a LTIP three year period, the NEO or the NEO’s beneficiary is entitled to a prorated award (if any) based upon the number of months that the NEO was employed during the plan period. If a change in control occurs, awards vest at the target performance level as of the date of the change in control, unless NCB’s actual performance exceeds the target level on such date, in which case, any awards vest at the superior performance level.
2007 to 2009 LTIP
In January 2007, the Committee approved the 2007 to 2009 LTIP for the period of January 1, 2007 through December 31, 2009. The Committee used the 2007 to 2009 Strategic Plan to set the performance goals and will evaluate performance, certify it and pay awards (if any) in 2010.
For the 2007 to 2009 LTIP, the Committee set threshold and target percentages of Aggregate Base Salary at the same level as under the previous two LTIP periods, but increased the maximum percent of Aggregate Base Salary from 81.25% to 87.5% for the CEO and from 56.25% to 62.5% for the other executives, including the NEOs. These maximum thresholds are computed by multiplying the maximum percentage available (shown on the 2007 to 2009 LTIP table below as 70% for the CEO and 50% for the other NEOs) by 25% (the increase for a low income market development adjustment) and adding those two figures for the maximum percentage. The Committee
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designated (1) financial strength; (2) value to customers; and (3) deposit growth as the overall categories of performance goals and set performance goals and weights as detailed in the LTIP 2007 to 2009 plan table below:
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| | | | | | | | | | Goal |
PERFORMANCE GOALS
| | | | | | | | | |
| 01/01/07 - 12/31/09 | | | Weight
| | | Awards
| | | Threshold | | | Target | | | Superior |
| Financial Strength: Average ROE at NCB, FSB over three years | | | 50% | | | | | | 13.5% Average
ROE | | | 15% Average
ROE | | | 16.5% Average
ROE |
| | | | | | | | | | | | | | | | |
| | | | | | | CEO | | | 10% of Base
Salary | | | 25% of Base
Salary | | | 35% of Base
Salary |
| | | | | | | | | | | | | | | | |
| | | | | | | NEOs | | | 7.5% of Base
Salary | | | 15% of Base
Salary | | | 25% of Base
Salary |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Value to Customers: Total commitments and financial transactions arranged for customers including loans, leases, letters of credit, private placements and deals closed by referral sources | | | 25% | | | | | | $5.5 billion 2007
through 2009 | | | $6 billion 2007
through 2009 | | | $7 billion 2007
through 2009 |
| | | | | | | | | | | | | | | |
| | | | | | CEO | | | 5% of Base
Salary | | | 12.5% of Base
Salary | | | 17.75% of Base
Salary |
| | | | | | | | | | | | | | | | |
| | | | | | | NEOs | | | 3.75% of Base
Salary | | | 7.5% of Base
Salary | | | 12.5% of Base
Salary |
| | | | | | | | | | | | | | | | |
| Deposit Growth: From the base levels at 12/31/06, increase deposits over three years with at least $50 million of total deposits in non-interest bearing DDA excluding escrows for saleable real estate loans | | | 25% | | | | | | 75% Increase | | | 125% Increase | | | 150% Increase |
| | | | | | | | | | | | | | | |
| | | | | | CEO | | | 5% of Base
Salary | | | 12.5% of Base
Salary | | | 17.5% of Base
Salary |
| | | | | | | | | | | | | | | | |
| | | | | | | NEOs | | | 3.75% of Base
Salary | | | 7.5% of Base
Salary | | | 12.5% of Base
Salary |
| | | | | | | | | | | | | | | | |
| Total | | | 100% | | | CEO | | | 20% of Base
Salary | | | 50% of Base
Salary | | | 70% of Base
Salary |
| | | | | | | | | | | | | | | | |
| | | | | | | NEOs | | | 15% of Base
Salary | | | 30% of Base
Salary | | | 50% of Base
Salary |
| | | | | | | | | | | | | | | | |
| Adjustment for Low Income Market Development | | | -15% of Total
Award | | | +0% | | | +25% of Total
Award |
| | | | | | | | | | | | | | | | |
Based on the formula in the 2007 to 2009 LTIP table, the estimated award level for the CEO is 5% of Aggregate Base Salary and for the executives including the other NEOs is 3.75% of Aggregate Base Salary as of December 31, 2008. Pursuant to the plan, whether any awards are actually earned under the plan is subject to NCB’s actual performance for January 1, 2007 to December 31, 2009, which may only be determined after that time. Awards, if any, under this plan are not payable until 2010 after certification of performance. Accordingly, the elements of the performance goals in the 2007 to 2009 LTIP have not been satisfied yet. In addition, under the plan no awards vest until the end of the performance period, and even then are subject to certification and approval. Since the three year period is ongoing and no awards have been earned as of December 31, 2008, no information is included in the Summary Compensation Table with respect to the 2007 to 2009 LTIP.
In 2008, the Committee certified performance and approved cash awards for plan performance at 31.9% of Aggregate Base Salary for the CEO and 22.2% of Aggregate Base Salary for the other NEOs for the 2005 to 2007 LTIP. As a result, the Summary Compensation Table includes the award amounts paid out in 2008 for each NEO under the 2005 to 2007 LTIP.
2009 to 2011 LTIP
As of the date of filing the Compensation Committee had not approved a LTIP for the period 2009 to 2011. The Committee determined, given the severe economic conditions within the U.S, that it needed more time to establish a plan for this three year period to ensure that it would both meet the strategic objectives of NCB and be a suitable incentive to NCB’s Executives, including its NEOs.
LTIP Document
Principally in order to comply with the requirements of IRC Section 409A taking effect in 2008, the Board of Directors amended the Long Term Incentive Plan document.
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Benefits
Core Employee Benefits
NCB offers core employee benefits to all of its employees, including its NEOs, to meet their needs in the event of illness or injury and to enhance productivity and job satisfaction with programs that focus on work/life balance. NCB provides life insurance coverage and accidental death and dismemberment insurance at three times annual salary up to a maximum of $1,000,000 for the CEO and $750,000 for the other NEOs. NCB also provides travel accident insurance, worker’s compensation and retirement insurance.
Through its consumer banking program, NCB provides all of its employees, including its NEOs, and directors the opportunity to earn an extra one percent interest on deposits, reduced fees on a variety of checking and savings accounts, a one percent lower interest rate than otherwise available for consumer loans and a one percent rebate up to $10,000 annually on mortgage loans.
In keeping with NCB’s goal of rewarding long-term commitment, NCB honors employees, including its NEOs, with cash service awards for every five years of service beginning on an employee’s fifth anniversary in varying amounts depending on the length of service.
Retirement Benefits
To facilitate employee retention, NCB provides employees, including NEOs, opportunities to save for retirement under the NCB Retirement and 401(k) Plan. Employees who participate select from a variety of options to invest their retirement savings. NCB balances the savings and retirement plans’ effectiveness as a compensation and retention tool with their cost.
Employees, including NEOs, may make pre-tax contributions qualified under section 401(k) of the Internal Revenue Code (“IRC”). Each eligible employee, including the NEOs, may elect to contribute up to 60% of base salary or $15,500 (the limit prescribed by the IRC) for 2008. NCB matches employee contributions up to 6% of base salary. With continuous service, NCB’s matching contributions vest incrementally after two years and fully vest after six years.
NCB also makes non-elective retirement contributions under NCB’s plan for all of its employees, including the NEOs, beginning one year after their employment with NCB. NCB contributes approximately 6% of each eligible employee’s base salary up to $230,000, as limited by IRC. Like NCB’s 401(k) matching contributions, retirement account contributions vest incrementally after two years and fully vest after six years with continuous service.
The two plans are combined and maintained in one account. NCB’s Retirement and 401(k) Plan is a tax-qualified defined contribution plan. NCB does not have any tax-qualified defined benefit pension plans.
Deferred Compensation
NCB has also implemented an unfunded Deferred Compensation Plan to motivate and retain executives, including the NEOs, and directors by providing them with additional flexibility in structuring the timing of their compensation payments. NCB provides this benefit to allow NEOs to save for retirement in a tax-efficient manner at minimal cost to NCB. Because other similarly situated financial institutions provide deferred compensation plans, NCB believes that its Deferred Compensation Plan is an important recruitment and retention tool.
Under the Deferred Compensation Plan, NEOs may defer receipt of base salary and cash incentive compensation payments. Any amount deferred is credited with interest at a rate equal to the average yield on actively traded U.S. Treasury issues, adjusted to a constant maturity of one year plus one percent. The reported interest rate is determined in December of the prior year. In 2008 and 2006 the interest rate credited to these accounts was not “above market;” accordingly, earnings on deferred amounts under the Deferred Compensation Plan do not appear in the Summary Compensation Table. The interest rate credited to these accounts under the Deferred Compensation Plan in 2007 was “above market;” accordingly, earnings on deferred amounts that were “above market” appear in the summary compensation table. NCB pays compensation benefits deferred under the plan on July 1 or December 31 following a NEO’s retirement, disability or termination.
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Additionally, NCB entered into a deferred compensation agreement with NCB’s CEO, on November 4, 1994, in recognition of NCB’s improved financial condition and operating results during the period of his presidency beginning in January 1992. The CEO’s deferred compensation agreement is also an incentive for him to continue serving as NCB’s President. Under his deferred compensation agreement, the CEO may elect to defer an amount or percentage of his compensation. Interest is credited to the account on the last day of each quarter in an amount equal to 100 basis points above the yield on a five-year U.S. Treasury Note with a maturity date on or nearest to the date of such quarterly credit. Like the accounts under NCB’s Deferred Compensation Plan, the CEO’s account is unfunded. The interest rate credited under the CEO’s deferred compensation agreement in 2008 and 2007 was not “above market;” accordingly, those earnings do not appear on the summary compensation table. In 2006 the interest rate credited was “above market;” accordingly, those earnings on deferred amounts that were “above market” do appear in the Summary Compensation Table.
NCB does not pay compensation benefits deferred under the CEO’s compensation agreement earlier than three months after the date of the CEO’s retirement or other termination of employment. Accumulated amounts under the Deferred Compensation Plan and the CEO’s deferred compensation agreement are shown in the Nonqualified Deferred Compensation Table and are discussed in further detail under the heading “Nonqualified Deferred Compensation.”
Principally in order to comply with the requirements of IRC Section 409A taking effect in 2008, NCB amended its Deferred Compensation Plan and its deferred compensation agreement with the CEO.
Perquisites and Other Personal Benefits
NCB provides its executives, including its NEOs, with perquisites and other personal benefits that are reasonable and consistent with its overall compensation program to better enable NCB to attract and retain superior employees for key positions. These benefits are reflected in the Summary Compensation Table in the “All Other Compensation” column. These benefits include monetary service awards, discretionary spot awards for individual achievement, premiums paid on life insurance policies, in some instances payments to defray income tax incurred with respect to those life insurance premiums, and a car allowance for the CEO. The Committee annually reviews the level of perquisites and other personal benefits provided to its executives to ensure that they are consistent with NCB’s compensation philosophy and objectives.
Salary Continuation Program
NCB has a salary continuation program to assist eligible employees in transitioning to other employment. Employees, including NEOs, are eligible for the program with the approval of the applicable division head and the Managing Director of Human Resources. This program is an efficient and cost-saving way to provide extended protection and financial reassurance to NCB employees, including NEOs, and thereby facilitates NCB’s retention and productivity goals. It is competitive with the programs offered by comparable organizations.
To participate in the program employees must have at least 90 days of service at NCB. The amount of salary continuation available under the program increases with the length of service at NCB up to a maximum of one year of service and is contingent on the employee executing a release. Eligible employees, including the NEOs, also may continue to receive medical insurance benefits and will receive payment for vacation accrued as of the date of termination. Salary continuation benefits cease in certain circumstances, including when the person dies, or continues employment with NCB or an acquiring entity in a non-comparable position. Other than the salary continuation program available to NCB employees generally, NCB does not have severance agreements with its NEOs, other than the CEO.
NCB has a severance agreement with the CEO to provide reasonable and conservatively competitive payments and benefits if NCB terminates him without cause. Termination for cause includes but is not limited to the CEO’s failure to perform substantial duties, gross negligence, bad faith or willful misconduct.
The CEO’s severance agreement also provides benefits in the event of the CEO’s voluntary termination without good cause on nine months’ prior written notice. In exchange for NCB’s agreement to pay severance under this agreement, the CEO must comply with non-competition and confidentiality provisions and provide limited
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consulting services to NCB for three years up to a maximum of 15 days per year on matters to which he devotes significant time while at NCB.
Principally in order to comply with the requirements of IRC Section 409A taking effect in 2008, the severance agreement with the CEO was amended in 2008. The agreement also extended the CEO’s severance from 18 to 24 months in certain circumstances. For a more detailed description of these post-employment benefits, see the discussion under “Potential Payments upon Termination or Change in Control.”
THE COMPENSATION COMMITTEE REPORT
The Executive/Compensation Committee of NCB has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) ofRegulation S-K with management and, based on such review and discussion, the Executive/Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in NCB’s annual report onForm 10-K.
Irma Cota, Chair
Stuart Saft
Roger B. Collins
Richard Parkinson
Rosemary Mahoney
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COMPENSATION OF THE OFFICERS
The Summary Compensation Table below summarizes the total compensation earned by each of NCB’s NEOs for the years ended December 31, 2008, 2007 and 2006.
SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Change in Pension
| | | | | | | |
| | | | | | | | | | | | Value and
| | | | | | | |
| | | | | | | | | Non-Equity
| | | Nonqualified
| | | | | | | |
| | | | | | | | | Incentive Plan
| | | Deferred
| | | All Other
| | | | |
| | | | | | | | | Compensation
| | | Compensation
| | | Compensation
| | | | |
Name and Principal Position | | Year | | | Salary | | | (2) | | | Earnings (3) | | | (4) | | | Total | |
| |
| Charles E. Snyder, | | | 2008 | | | $ | 524,773 | | | $ | 307,567 | | | $ | — | | | $ | 245,363 | | | $ | 1,077,703 | |
| President & Chief Executive Officer | | | 2007 | | | $ | 523,412 | | | $ | — | | | $ | — | | | $ | 249,855 | | | $ | 773,267 | |
| | | | 2006 | | | $ | 490,129 | | | $ | 917,128 | | | $ | 1,376 | | | $ | 225,050 | | | $ | 1,633,683 | |
| Richard L. Reed | | | 2008 | | | $ | 303,160 | | | $ | 124,582 | | | $ | — | | | $ | 44,009 | | | $ | 471,751 | |
| Executive Managing Director & | | | 2007 | | | $ | 302,188 | | | $ | — | | | $ | — | | | $ | 42,796 | | | $ | 344,984 | |
| Chief Financial Officer | | | 2006 | | | $ | 284,236 | | | $ | 340,222 | | | $ | — | | | $ | 27,900 | | | $ | 652,358 | |
| Steven A. Brookner | | | 2008 | | | $ | 395,902 | | | $ | 146,546 | | | $ | — | | | $ | 142,009 | | | $ | 684,457 | |
| Executive Managing Director of | | | 2007 | | | $ | 389,736 | | | $ | — | | | $ | — | | | $ | 141,304 | | | $ | 531,040 | |
| NCB & Chief Executive Officer of NCB, FSB | | | 2006 | | | $ | 324,087 | | | $ | 405,605 | | | $ | — | | | $ | 125,900 | | | $ | 855,592 | |
| Kathleen M. Luzik | | | 2008 | | | $ | 292,118 | | | $ | 110,536 | | | $ | — | | | $ | 44,009 | | | $ | 446,663 | |
| Managing Director of NCB and | | | 2007 | | | $ | 289,510 | | | $ | — | | | $ | 216 | | | $ | 42,776 | | | $ | 332,502 | |
| Chief Operating Officer of NCB, FSB | | | 2006 | | | $ | 254,182 | | | $ | 311,755 | | | $ | — | | | $ | 27,900 | | | $ | 593,837 | |
| Mark Hiltz | | | 2008 | | | $ | 251,412 | | | $ | 95,058 | | | $ | — | | | $ | 38,842 | | | $ | 385,312 | |
| Managing Director & Chief Risk | | | 2007 | | | $ | 242,781 | | | $ | — | | | $ | — | | | $ | 37,551 | | | $ | 280,332 | |
| Officer | | | 2006 | | | $ | 218,122 | | | $ | 281,514 | | | $ | — | | | $ | 34,902 | | | $ | 534,538 | |
| Charles H. Hackman | | | 2008 | | | $ | 292,310 | | | $ | 116,752 | | | $ | — | | | $ | 52,533 | | | $ | 461,595 | |
| Former Managing Director & Chief | | | 2007 | | | $ | 278,934 | | | $ | — | | | $ | 1,020 | | | $ | 37,759 | | | $ | 317,713 | |
| Credit Officer of NCB and NCB, FSB(1) | | | 2006 | | | $ | 269,060 | | | $ | 355,277 | | | $ | — | | | $ | 27,900 | | | $ | 652,237 | |
| | |
| (1) | | Charles H. Hackman, a Managing Director and the Chief Credit Officer of NCB retired, with an effective date of June 30, 2008. Under a retirement agreement between NCB and Mr. Hackman, Mr. Hackman will receive full salary and continuation of benefits (including medical, dental, vision and life insurance) until March 10, 2010. In addition, NCB will provide a yearly bonus in lieu of employer contributions to the 401(k) and retirement plans on the following dates for the following amounts: December 31, 2008 ($24,000), December 31, 2009 ($48,000), and March 10, 2010 ($11,000). Disability benefits paid by NCB for Mr. Hackman ceased as of June 30, 2008. Health care reimbursement account benefits for Mr. Hackman ended at December 31, 2008. |
| |
| (2) | | For 2008 the Non-Equity Incentive Plan Compensation column reflects cash awards to the NEOs for performance in 2008 under the STIP and the2005-2007 LTIP. The 2008 STIP specified three objectives, all of which were required to be achieved before any payment would be made. Because one of the objectives, “Grow Core Profitablity” was not achieved, no payment under the 2008 STIP was made to either the CEO or other NEOs. |
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In 2008, the Committee certified performance and approved cash awards for plan performance at 31.9% of Aggregate Base Salary for the CEO and 22.2% of Aggregate Base Salary for the other NEOs for the 2005 to 2007 LTIP. As a result, the Summary Compensation Table includes the award amounts paid out in 2008 for each NEO under the 2005 to 2007 LTIP.
| | | | | | | | | | | |
| | | | | 2005 - 2007 LTIP
| | | | |
| | | | | (performance measure
| | | | |
Name | | 2008 STIP | | completed February 2008) | | | Total | |
| |
| Charles E. Snyder | | - | | $ | 307,567 | | | $ | 307,567 | |
| Richard L. Reed | | - | | $ | 124,582 | | | $ | 124,582 | |
| Steven A. Brookner | | - | | $ | 146,546 | | | $ | 146,546 | |
| Kathleen M. Luzik | | - | | $ | 110,536 | | | $ | 110,536 | |
| Mark Hiltz | | - | | $ | 95,058 | | | $ | 95,058 | |
| Charles H. Hackman | | - | | $ | 116,752 | | | $ | 116,752 | |
| |
| |
For 2007, the Non-Equity Incentive Plan Compensation column reflects cash awards to the NEOs for performance in 2007 under the STIP. The 2007 STIP specified a maximum amount that may be awarded to the CEO and the other NEOs for a given balanced score achieved for 2007 under the 2007 STIP. NCB achieved a balanced score of 80 points under the 2007 STIP scorecard. Accordingly, NCB’s score of 80 points under the plan was enough for an award of up to 40% of Adjusted Base Salary and up to 30% of Adjusted Base Salary for the CEO and the other executives, including NEOs, respectively. However, it is within the discretion of the Committee for the CEO and within the discretion of the CEO for the other executives, including the NEOs to determine the actual amount of an award (if any) under the STIP. For 2007 the Committee and the CEO exercised that discretion due to NCB’s overall financial performance and made no awards under the 2007 STIP even though the actual performance achieved permitted an award.
Also, there were no LTIP payments earned during 2007 because the certification of performance and approval of the award completing the prerequisite for awards under the LTIP did not occur until February 2008.
For 2006, the Non-Equity Incentive Plan Compensation column on the Summary Compensation Table reflects cash awards to the NEOs for performance in 2006 under the STIP and the 2003 to 2005 LTIP.
The amounts awarded under each Incentive Plan in 2006 are listed separately below in the 2006 Non- Equity Incentive Awards Table, as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | Add-on 2006
| | | | | | | |
Name | | 2006 STIP | | | STIP | | | 2003 - 2005 LTIP | | | Total | |
| |
| Charles E. Snyder | | $ | 223,256 | | | $ | 24,806 | | | $ | 669,066 | | | $ | 917,128 | |
| Richard L. Reed | | $ | 102,025 | | | $ | 16,616 | | | $ | 222,036 | | | $ | 340,677 | |
| Steven A. Brookner | | $ | 119,438 | | | $ | 19,451 | | | $ | 266,716 | | | $ | 405,605 | |
| Kathleen M. Luzik | | $ | 91,287 | | | $ | 14,867 | | | $ | 205,601 | | | $ | 311,755 | |
| Mark Hiltz | | $ | 76,681 | | | $ | 12,569 | | | $ | 192,264 | | | $ | 281,514 | |
| Charles H. Hackman | | $ | 94,174 | | | $ | 15,337 | | | $ | 245,766 | | | $ | 355,277 | |
| |
| |
STIP Awards 2006
The amount listed in the 2006 STIP column was earned in 2006 and paid in February 2007. NCB’s performance for 2006 earned 90 points of the 100 point maximum under the 2006 STIP. Based on that performance, NCB paid STIP awards at the maximum percentage rate available in the amount of 45% of the CEO’s Adjusted Base Salary and 35% of each of the other NEO’s Adjusted Base Salary. For 2006, the pretax net income exceeded the budget and as a result the CEO and other NEOs were eligible to receive Add-on awards in the estimated amount of 5.0% and 5.7% of Adjusted Base Salary, respectively. Those amounts are listed in the 2006 STIP Add-on column.
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2003 to 2005 LTIP Awards
NCB paid the 2003 to 2005 LTIP award (the “2006 LTIP Award”) in February 2006 for NCB’s performance over the three year period of January 1, 2003 to December 31, 2005 in proportion to the long-term performance goals achieved. Pursuant to the LTIP, the awards were based on the NEOs Aggregate Base Salary with a maximum award potential of 81.25% and 56.25% of that Aggregate Base Salary for the CEO and each NEO, respectively. Based on NCB’s performance, NCB paid an award equal to 75.53% and 50.53% of Aggregate Base Salary to the CEO and each NEO, respectively.
Add-on 2006 STIP Award
The add-on 2006 STIP award was paid in 2007 at a rate of 5.0% of the CEO’s Adjusted Base Salary and 5.9% of the Adjusted Base Salary for the other NEOs.
| | |
| (3) | | This amount is the “above market” interest earned on deferred compensation for 2007 and 2006. The effective interest rate for 2007 was 6.1%, which was 0.33% above the applicable market. The effective interest rate for 2006 was 5.9%, which was 0.26% above the applicable market. In 2008 the interest earned on deferred compensation was not “above market”. |
| |
| (4) | | For each NEO, the amount shown in the “All Other Compensation” column is comprised of the following for 2008: |
NCB’s contribution of $13,800 to the retirement contribution accounts of each NEO, which is further explained in the Compensation, Discussion and Analysis under the heading “Retirement Benefits.”
NCB’s matching contribution of $13,800 to the 401(k) contribution accounts of each NEO, which is further explained in the Compensation, Discussion and Analysis under the heading “Retirement Benefits.”
NCB’s insurance premium payments in the amount of $1,920 for the CEO and $1,440 for all other NEOs, except Mr. Hackman, whose premium was $288.
NCB’s health insurance premium payments in the amount of $9,268 for Mr. Hackman and Mr. Hiltz and $14,393 for all other NEOs.
NCB’s long-term disability insurance premiums in the amount of $10,066 for the CEO and amounts ranging from $533 to $720 for all other NEOs.
The “All Other Compensation” column for Mr. Snyder and Mr. Brookner includes $183,900 and $98,000, respectively, to pay life insurance policy premiums and to defray income tax incurred with respect to those life insurance premiums; Mr. Snyder’s compensation also includes a $7,484 car allowance.
Narrative to the Summary Compensation Table
For 2008, 2007 and 2006, each of the NEOs received cash compensation in the form of a base salary, non-equity incentive compensation, retirement and savings plans contributions, and some other personal benefits as described in the footnotes (3) and (4) to the Summary Compensation Table. In addition, NCB’s NEOs participate in NCB’s core benefits programs as described in the Compensation Discussion and Analysis under the heading “Benefits.” NCB’s NEOs did not receive any payments during 2008, 2007 and 2006 that would be characterized as “Bonus,” “Stock Awards” or “Option Awards,” and as a result, NCB has not included those columns in its Summary Compensation Table.
NCB has no written employment agreements with its NEOs, except the CEO. NCB has an agreement with its CEO, pursuant to which NCB agrees to continue to employ him and the CEO agrees to devote his time, attention, skills and efforts to the performance of his duties. If NCB terminates him without cause or if he resigns, in some circumstances, the agreement provides for post-employment benefits. The CEO’s post-employment benefits are described more fully under the heading “Post-Employment Benefits” in the Compensation Discussion and Analysis and under the heading “Potential Payments on Termination of Employment or Change in Control.”
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Grants of Plan-Based Awards – 2008
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Estimated Future Payouts Under Non-
| |
| | | | | | | | | | | | Equity Incentive Plan Awards | |
| | | Grant
| | | Action
| | | | | | Threshold
| | | Target
| | | Maximum
| |
Name | | Date (1) | | | Date (2) | | | Plan (3) | | | Amount | | | Amount | | | Amount | |
| |
| Charles E. Snyder | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $131,473 | | | | - | | | $ | 236,652 | |
| Richard L. Reed | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $60,632 | | | | - | | | $ | 106,106 | |
| Steven A. Brookner | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $78,829 | | | | - | | | $ | 137,950 | |
| Kathleen M. Luzik | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $58,424 | | | | - | | | $ | 102,241 | |
| Mark Hiltz | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $50,000 | | | | - | | | $ | 87,500 | |
| Charles H. Hackman | | | 01/01/08 | | | | 02/01/08 | | | | STIP(4 | ) | | $ | 0 to $55,966 | | | | - | | | $ | 97,941 | |
This table sets forth the range of potential awards available under NCB’s 2008 STIP, described in the Compensation Discussion and Analysis, under the heading “Performance-Based Incentive Compensation.” The amounts in the table above are calculated based on the NEOs salaries at December 31, 2008, which differ from the NEOs total 2008 salary reflected in the Summary Compensation Table. The STIP provides performance based cash awards. NCB has no equity incentive plans. The fact that no payments were actually awarded under this plan is reflected in the Summary Compensation Table.
| |
| (1) | The grant date is the date that begins the measurement period under the applicable Incentive Plan. |
| |
| (2) | The action date listed in this column is the date NCB adopted the plan setting forth the performance goals, with the weights attributable to each goal and the corresponding potential awards. |
| |
| (3) | This column indicates the plan applicable to the potential awards. |
| |
| (4) | Under the 2008 STIP, NCB determined the actual award by reference to the performance by NCB over three objectives for the one year period, as described in the Compensation Discussion and Analysis under the heading “Short-Term Incentive Compensation for 2008.” The STIP only has a set maximum percentage of Adjusted Base Salary potentially available, but no stated target or minimum. In other words, even if NCB had achieved performance sufficient to earn the minimum required performance level, whether any amount and how much would have been awarded under the plan is discretionary. Accordingly, to show the fact that the minimum performance level could result in varying percentages of Adjusted Base Salary available as an award or none at all, NCB has shown the threshold under the plan as the range of potential awards up to the maximum award. In light of the structure of this plan, the “target” amount in the table is blank. Under the 2008 STIP, the threshold percentages ranged from 0% to 25% of Adjusted Base Salary and from 0% to 20%, respectively for the CEO and the other NEOs. The maximum percentages were 45% and 35%, respectively for the CEO and the other NEOs. |
Nonqualified Deferred Compensation
The Deferred Compensation Table below sets forth certain information with respect to non-tax qualified deferrals of compensation by NCB’s NEOs, none of whom deferred any compensation in 2008.
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Deferred Compensation Table – 2008
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Aggregate
| | | | |
| | | Executive
| | | Aggregate
| | | Withdrawals/
| | | | |
| | | Contributions in
| | | Earnings
| | | Distributions
| | | Aggregate Balance at
| |
Name | | 2008 | | | in 2008 | | | in 2008 | | | 12/31/08 | |
| |
| Charles E. Snyder | | $ | - | | | $ | 24,530 | | | $ | - | | | $ | 661,384 | |
| Richard L. Reed | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Steven A. Brookner | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Kathleen M. Luzik | | $ | - | | | $ | 5,400 | | | $ | - | | | $ | 130,053 | |
| Mark Hiltz | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Charles H. Hackman | | $ | - | | | $ | 25,448 | | | $ | (40,102 | ) | | $ | 574,262 | |
Narrative to Deferred Compensation Table
Eligible participants, including NEOs, in the Deferred Compensation Plan may elect to defer up to 100% of incentive compensation payments and up to 25% of their base salary. To defer compensation under the plan, participants generally must submit an irrevocable election no later than December 31st of the year preceding the year in which the compensation to be deferred is to be earned.
NCB maintains unfunded individual accounts for each participant and credits each account with the amount deferred by the participant and interest at the rate of actively traded U.S. Treasury issues, adjusted to a constant maturity of one year, plus one percent. The reported interest rate is determined in December of the prior year. For 2008, the interest rate determined as of December 31, 2007 was 4.26%.
Payments under the Deferred Compensation Plan will commence following the NEO’s separation of service from NCB or after the NEO has reached the age of 65, if still employed by NCB. However, a NEO may be allowed to access funds in his deferred compensation account earlier than the beginning of the first month following retirement or separation from NCB under certain circumstances upon a showing of financial hardship. Distributions are made in lump sum, or in annual installments over a maximum of five (5) years, generally, at the election of the participant.
Under the CEO’s deferred compensation agreement, he may elect to defer some amount or percentage of his compensation. Interest is credited to his account on the last day of each quarter in an amount equal to 100 basis points plus the yield on a five-year U.S. Treasury Note with a maturity date on or nearest to the date of such quarterly credit.
NCB does not pay compensation benefits deferred under the CEO’s deferred compensation agreement earlier than thirty (30) days after the date of the CEO’s separation of service from NCB. At that time pursuant to the agreement, NCB makes annual payments on the anniversary of such termination date in equal amounts of $25,000 or 20% of the account balance or in a lump sum. In the event of death prior to the date of final payment, the remaining balance is paid to his beneficiary on the 60th day after his death. Like the Deferred Compensation Plan, this account is unfunded.
NCB does not make contributions to any accounts under the Deferred Compensation Plan or under the CEO’s deferred compensation agreement, other than the credited interest. Accordingly, NCB has not included a column for registrant’s contributions.
Principally in order to comply with the requirements of IRC Section 409A taking effect in 2008, NCB amended the deferred compensation agreement with the CEO in 2008. The agreement was also amended to eliminate the requirement that, absent a written election to the contrary, NCB would defer ten percent (10%) of the CEO’s salary each year. Also in 2008, NCB agreed to make the CEO whole for any tax liability he may incur in 2009 as a result of NCB’s failure to have deferred ten percent (10%) of his income in the years 2005 through 2008, during which time he did not make an election. NCB estimates his tax liability in that regard to be approximately $61,000.
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Potential Payments Upon Termination of Employment or Change of Control
The discussion and tables below describe potential payments and benefits to which each NEO would be entitled under certain circumstances (“Trigger Events”) if the NEO’s employment with NCB terminates. Trigger Events include: voluntary termination with good reason; voluntary termination without good reason; involuntary termination for cause; involuntary termination without cause; termination due to death, disability, or retirement; and termination due to change of control. The applicable Trigger Events under each agreement or program entitling the NEO to payments or benefits upon termination or change of control vary and are described in more detail below.
The payments and benefits discussed and shown in the tables below do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees upon termination generally, including continued participation in health, dental or vision insurance; salary continuation for up to one year; payment of accrued vacation leave; and 401(k) and retirement plan benefits. The amounts shown on the tables in this section assume that the effective date of each Trigger Event is December 31, 2008, and reflect the estimated amounts earned and payable as of that date. The actual amounts to be paid can only be determined at the time any such event occurs.
Regular benefits under the NCB Retirement and 401(k) Plan
See “Retirement Benefits” in the Compensation Discussion and Analysis.
Deferred Compensation
Under the Deferred Compensation Plan applicable to the NEOs (except the CEO), in the event of a separation of service, the unfunded amount credited to each NEO is payable under the terms of the plan. Assuming a Trigger Event effective December 31, 2008, the amounts are payable beginning January 1, 2009. Amounts are payable either in a lump sum or annual installments over 5 years, as elected by the NEO or the NEO’s beneficiary, subject to certain limitations in the plan.
Under the CEO’s deferred compensation agreement, if a separation of service occurred retirement or termination of employment occurred on December 31, 2008, then NCB would be obligated to make annual payments to the CEO or his beneficiary beginning on February 1, 2009 in the amount of 20% of the unfunded amount.
The amounts payable under the Deferred Compensation Plan and the CEO’s deferred compensation agreement upon separation from service are shown in the Nonqualified Deferred Compensation Table.
LTIP
The LTIP rewards performance over a three-year measurement period. The current three-year measurement period spans from January 1, 2007 through December 31, 2009 (“2007 to 2009 LTIP”). In the event of death or disability, before the end of the three-year period, the award amount is prorated based on the number of months employed during the three-year measurement period.
To determine the award for termination due to death or disability occurring on December 31, 2008, the terms of the LTIP provide for the following assumptions: (1) that the NEO received the same base salary that he or she was receiving on the date of the applicable event, and (2) that NCB achieved the target level of performance without regard to the actual level achieved. For 2008, the awards available for meeting the target performance goals were 50% of Aggregate Base Salary and 30% of Aggregate Base Salary for the CEO and the other NEOs, respectively. Under these circumstances, the amount of the award is prorated based on the number of months an employee was employed under the plan. Where the death or disability occurs on December 31, 2008, the employee would have been employed for 24 months under the 2007 to 2009 LTIP. The certification of performance and approval of awards are presumed under these circumstances and NCB is deemed to have achieved the target level of performance without regard to the actual level achieved and without any certification and approval. Under the 2007 to 2009 LTIP the amount would be prorated to two-thirds of the target level of 50% of Aggregate Base Salary. The amounts payable under the 2007 to 2009 LTIP for termination due to death or disability occurring on December 31, 2008 for each NEO is shown in the table below.
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| | | | | |
| | | Amount payable under
| |
Name | | 2007 - 2009 LTIP | |
| |
| Charles E. Snyder | | $ | 349,768 | |
| Richard L. Reed | | $ | 121,070 | |
| Steven A. Brookner | | $ | 156,776 | |
| Kathleen M. Luzik | | $ | 116,326 | |
| Mark Hiltz | | $ | 99,508 | |
Charles H. Hackman(1) | | $ | - | |
| |
| (1) | As part of the retirement agreement with NCB, Mr. Hackman is not entitled to any payout from the2007-2009 LTIP. |
For termination due to change of control, the NEOs are entitled to an award based on the rate for performance meeting target goals or the rate for actual performance estimated on the applicable date, if higher. The estimatedy performance as of December 31, 2008 was below the target rate, thus the applicable rate for termination due to a change in control is at the target goal level of 50% of Aggregate Base Salary and 30% of Aggregate Base Salary for the CEO and the other NEOs, respectively. Unlike awards made for termination due to death or disability, payments for termination due to change of control are not subject to any prorating.
If employment terminated on December 31, 2008 due to cause or involuntary termination, the requisite certification of performance and approval of awards under the LTIP would not have occurred and the LTIP award would be forfeited.
| | | | | | | | | |
| | | Termination Due to Death
| | | | |
Name | | or Disability | | | Change in Control | |
| |
| Charles E. Snyder | | $ | 349,768 | | | $ | 524,653 | |
| Richard L. Reed | | $ | 121,070 | | | $ | 181,605 | |
| Steven A. Brookner | | $ | 156,776 | | | $ | 235,164 | |
| Kathleen M. Luzik | | $ | 116,326 | | | $ | 174,489 | |
| Mark Hiltz | | $ | 99,508 | | | $ | 149,263 | |
| Charles H. Hackman | | $ | - | | | $ | - | |
STIP
In the event a NEO is terminated for cause or involuntarily terminated without cause, the STIP is forfeited. For all other Trigger Events, assuming the date of the Trigger Event is December 31, 2008 and NCB achieved all three objectives under the 2008 STIP, the CEO and the other NEOs, within the discretion of the Committee and the CEO, respectively, are eligible for an award under the plan up to 45% of 2008 Adjusted Base Salary for the CEO and 35% of 2008 Adjusted Base Salary for the other NEOs. The 2008 STIP required that each of the three objectives must be achieved before any payout could be made under the plan. Because one of the objectives in the plan, “Grow Core profitability”, was not met no awards under the 2008 STIP would be made. Therefore, these amounts are zero as of December 31, 2008.
Life Insurance Proceeds
As reflected in the Summary Compensation Table in the “All Other Compensation” column and described in the notes to it, NCB pays premiums on life insurance policies for each of its NEOs and pays premiums for additional life insurance for Mr. Snyder and Mr. Brookner. The policies available for all NEOs have a face value of $1,000,000 and $750,000 for the CEO and the other NEOs, respectively. The supplemental policies for Mr. Snyder and Mr. Brookner have with a face value of $2,640,970 and $3,076,000, respectively. All ownership rights of the supplemental policies belong to Mr. Snyder and Mr. Brookner. In the event of death, the insurer, not NCB, would pay the face value of the deceased NEO’s policy or policies, as the case may be, to the designated beneficiary. Also, in the event of Mr. Snyder’s death, NCB would be entitled to a payment of $177,823 from the proceeds to reimburse it for the initial premium paid by NCB in 2002. Due to changes in federal tax laws and the enactment of Sarbarnes-
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Oxley, NCB now pays the premiums on behalf of Mr. Snyder and treats the entire premium payment as taxable compensation to him, as described in more detail above in the section titled “Perquisites and Other Personal Benefits.”
Because all regular salaried employees of NCB are entitled to life insurance for three times base salary up to a maximum amount of $500,000, the amounts shown below reflect only the additional benefits to which the NEOs are entitled. The CEO is also entitled to continued premium payments for his additional life insurance policy for six months following termination under certain circumstances under his severance agreement, as described in more detail below in the section titled “Benefits Payable to the CEO under Severance Agreement.”
| | | | | |
Name | | Termination Due to Death | |
| |
| Charles E. Snyder | | $ | 2,963,147 | (1) |
| Richard L. Reed | | $ | 250,000 | |
| Steven A. Brookner | | $ | 3,326,000 | (1) |
| Kathleen M. Luzik | | $ | 250,000 | |
| Mark Hiltz | | $ | 250,000 | |
| Charles H. Hackman | | $ | 250,000 | |
| |
| (1) | These amounts are based upon the face value of Mr. Snyder’s and Mr. Brookner’s supplemental policies, less, in Mr. Snyder’s case, the amount payable to NCB to reimburse it for the initial premium. The policies are variable life insurance policies and the actual amount of the death benefit will vary depending on the earnings on the investment options selected by the NEO under the policy. |
Benefits Payable to the CEO under Severance Agreement
NCB has no severance agreements with its NEOs, except its CEO. Under his severance agreement, the CEO receives cash payments and other employee benefits for any Trigger Event except termination for cause or for death. The severance agreement entitles him to receive continued salary payments in an amount that is the greater of (1) his base salary at the rate on the termination date, or (2) if within the 60 days prior to his termination his salary was reduced, his salary prior to such reduction, for twenty four (24) months following termination, other than for cause or as a result of death. Because regular salaried employees of NCB are entitled to salary continuation for up to one year, based on years of service, the amount shown in the table reflects the additional twelve (12) months of base salary to which the CEO would be entitled under the severance agreement.
In addition to salary continuation, the CEO is entitled to other benefits. Many of these benefits are also available to regular salaried employees of NCB under its salary continuation program. Benefits to which the CEO would be entitled under the severance agreement not otherwise available to regular salaried NCB employees are: payment of accrued sick leave; an amount equal to the cost of NCB providing the NCB Retirement and 401(k) Plan benefits as though the CEO continued to be employed by NCB during the first six months following involuntary termination other than for cause or death; premium payments for the CEO’s supplemental life insurance policy for six months following termination; and payment of additional disabilitybuy-up insurance premiums for six months. As of December 31, 2008, the CEO had zero accrued sick leave. The estimated amounts payable for a Trigger Event except termination for cause or for death, for the remaining benefits are shown in the table below.
If both parties agree, the CEO may be paid in one lump-sum for the value of all of his severance benefits. If the CEO is terminated for a disability that renders him unable to perform his job, the benefits payable under the severance agreement are reduced by the amount of any disability benefits actually received under any other NCB employee disability benefits. If the CEO secures new employment during the payout period, then NCB’s obligation to pay benefits is terminated or reduced as follows: If the new position has a base salary plus bonus or incentive compensation (the “New Compensation”) equal to at least 90% of the CEO’s base salary plus an amount equal to his average incentive compensation for the five fiscal years preceding the termination year (the “Old Compensation”), then his severance benefit terminates. Otherwise, his severance benefit is reduced to an amount that combined with the New Compensation, equals 90% of his Old Compensation.
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In exchange for severance benefits, the CEO must execute a mutual release under which the CEO releases NCB of any obligations arising from the CEO’s employment, with the exception of the CEO’s earned deferred compensation, and NCB releases the CEO of any claims it has or may have against the CEO. Payment of severance benefits is contingent on certain provisions for the three years beginning on termination, including the non-competition and confidentiality provisions pursuant to which the CEO may not (1) become a substantial owner, employee or agent of any NCB competitor, or (2) induce any officer of NCB or an affiliate to leave NCB or engage in a competitive business. Furthermore, during that period, the CEO must provide limited consulting services to NCB upon request up to a maximum of 15 days per year, on matters to which he devoted significant time while at NCB and thereafter, cooperate with any governmental investigation or any litigation arising out of matters to which he devoted significant amounts of time while at NCB.
If the CEO voluntarily terminates employment without good reason, but provides NCB at least nine months prior notice, then the CEO is entitled to continuation of salary for one year. However, because regular salaried employees of NCB are entitled to salary continuation for up to one year, based on years of service, the CEO receives no greater payments under this provision, as reflected in the table below.
| | | | | | | | | | | | | |
| | | Any Termination in
| | | | | | | |
| | | Employment, Except
| | | Voluntary
| | | | |
| | | Termination for
| | | Termination Without
| | | | |
Name | | Cause or for Death | | | Good Reason | | | | |
| |
| Charles E. Snyder | | | | | | | | | | | | |
| Salary continuation | | $ | 524,773 | | | $ | - | | | | | |
| Accrued sick leave | | $ | - | | | $ | - | | | | | |
| Continued retirement payments | | $ | 14,700 | | | $ | - | | | | | |
| 401(k) Pension | | $ | 14,700 | | | $ | - | | | | | |
| Premium payments for supplement life insurance policy | | $ | 91,950 | | | $ | - | | | | | |
Premium payments for additional disabilitybuy-up insurance | | $ | 4,745 | | | $ | - | | | | | |
Director Compensation Table – 2008
| | | | | | | | | |
| | | Fees Earned or
| | | | |
| Name | | Paid in Cash | | | | |
| |
| Irma Cota, Chairperson | | $ | 31,000 | | | | | |
| Stuart M. Saft | | $ | 23,000 | | | | | |
| William F. Casey, Jr., Chairperson | | $ | 5,750 | | | | | |
| Roger B. Collins | | $ | 25,000 | | | | | |
| Peter Conrad | | $ | 16,500 | | | | | |
| Steven Cunningham | | $ | 21,500 | | | | | |
| William Hampel | | $ | 20,000 | | | | | |
| Grady B. Hedgespeth | | $ | 23,250 | | | | | |
| Janis Herschkowitz | | $ | 4,877 | | | | | |
| Jeff Leonard | | $ | 3,250 | | | | | |
| Rosemary Mahoney | | $ | 23,250 | | | | | |
| Stephanie McHenry | | $ | 23,000 | | | | | |
| Richard A. Parkinson | | $ | 20,500 | | | | | |
| Alfred A. Plamann | | $ | 18,250 | | | | | |
| Walden Swanson | | $ | 20,500 | | | | | |
| Nguyen Van Hanh | | $ | 4,267 | | | | | |
| David G. Nason* | | $ | - | | | | | |
* As the Presidential appointee from among the officers of the agencies and departments of the United States, Mr. Nason was not entitled to director compensation during his tenure as a member of the Board of Directors.
131
Narrative to Director Compensation Table
Members of NCB’s Board of Directors (the “Board”) receive cash compensation for their Board service as shown in the preceding table. Under the Act, directors who are appointed by the President of the United States from among proprietors of small business and from persons with experience in low-income cooperatives are entitled to (1) compensation at the daily equivalent of the compensation of a GS 18 civil servant which amounted in 2008 to $610 a day, and (2) travel expenses. Typically, these directors receive compensation for no more than nine days a year. The director appointed by the President of the United States from among the employees of the United States Government is not entitled to any compensation from the Company, other than reimbursement of expenses.
Directors elected by shareholders are entitled to (1) annual retainer of $13,000, (2) $1,000 for serving as the chair of any committee, except the annual compensation for the Audit Committee Chair is $3,000, (3) $1,000 for each board meeting attended, (4) $500 for each committee meeting attended in person up to two meetings per day, (5) one-half of the above amounts for meetings if attended by conference call or webinar and (6) travel expenses. The Chair of the Board is entitled to $8,000 in compensation in addition to the above amounts. Directors of subsidiary corporations are entitled to (1) $500 for each board meeting attended and half that amount for attending such meetings via conference call or webinar and (2) travel expenses. Chairs of affiliate/subsidiary boards are entitled to an additional compensation of $3,000 per year.
NCB directors do not receive stock or option awards or non-equity incentive plan compensation for their service as directors. They are entitled to participate in some of the benefit programs, which are generally available to all NCB employees. Directors may participate in NCB’s Deferred Compensation Plan under the same terms as the NEOs as described under the heading “Nonqualified Deferred Compensation.” None of the current NCB directors have elected to participate in the Deferred Compensation Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Stock Ownership of Certain Stockholders and Management
Three of NCB’s stockholders own in excess of 5% of the outstanding shares of NCB’s Class B or Class C stock. The shareholders purchased a portion of this stock in connection with sizable loans made by NCB to them and received a portion of the stock as patronage dividends from NCB. NCB’s voting policy, however, does not allocate voting rights solely based on the number of shares of Class B or Class C stock held and prohibits any one stockholder from being allocated more than five percent of the votes allocated in connection with any stockholder action.
The following table shows those cooperatives that owned more than 5 percent of NCB’s Class B or Class C stock as of December 31, 2008.
| | | | | | | | | | | | | | | | | |
| | | Class B Stock | | | Class C Stock | |
| | | | | | Percent of
| | | | | | Percent of
| |
| Name of Shareholders | | Shares | | | Class | | | Shares | | | Class | |
| |
| The Co-operative Central Bank | | | 30,500 | | | | 1.77 | % | | | 29,614 | | | | 11.79 | % |
| Greenbelt Homes, Inc. | | | 14,440 | | | | 0.84 | % | | | 29,518 | | | | 11.75 | % |
| Group Health, Inc.* | | | 14,227 | | | | 0.82 | % | | | 15,068 | | | | 6.00 | % |
* Included in Group Health, Inc. is Central Minnesota Group Health Plan’s (who is affiliated with Group Health, Inc.) 5,469 and 3,588 shares of Class B and Class C stock, respectively.
Because the Act restricts ownership of NCB’s Class B and Class C stock to eligible cooperatives, NCB’s officers and directors do not own any Class B or Class C stock, although cooperatives with which such officers and directors are affiliated may own such stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Certain Transactions
In the ordinary course of business, NCB has made loans at prevailing interest rates and terms to directors and executive officers of NCB and to certain entities to which these individuals are related. As of December 31, 2008 and 2007, loans to executive officers and current directors of the company and its affiliates, including loans to their associates, totaled $68.5 million and $20.3 million, respectively. During 2008, loan additions were $68.1 million and loan repayments were $20.0 million. There were no related party loans that were impaired, non-accrual, past due, restructured or potential problems at December 31, 2008 or December 31, 2007.
NCB had term loans with Harp’s Food Stores, Inc. of which Mr. Collins is President and CEO. As of December 31, 2008, the term loans had outstanding balances totaling $7.7 million.
NCB had a loan with Moreland Court TPC, LP. Shorebank, of which Stephanie McHenry is President of its Cleveland Banking Region, bought a participation in this loan from NCB. As of December 31, 2008, the balance of the loan was $9.5 million. NCB also had a $3.0 million line of credit with Moreland Court TPC, LP of which $2.3 million was outstanding as of December 31, 2008.
NCB entered into an agreement with Unified Western Grocers (UWG) of which Mr. Plamann is President and Chief Executive Officer, to purchase member loans originated or to originate loans directly to members of UWG. The outstanding amount of the loans as of December 2008 was $46.1 million. NCB also had a $12.9 million revolving line of credit to UWG of which there was $2.9 million outstanding as of December 31, 2008.
NCB believes that the foregoing transactions contain terms comparable to those obtainable in an arm’s length transaction. NCB has determined that these loans were made in the ordinary course of business on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectability or present unfavorable features. The loans were made in accordance with NCB’s lending policies and regulatory requirements, properly approved and evaluated for disclosure in the financial statements.
Director Independence
Each director is considered by NCB to be an independent director. NCB uses the independence standards adopted by the NASDAQ Stock Market, Inc. (“NASDAQ”). (NCB does not have any securities listed on NASDAQ, but SEC rules require that reporting companies such as NCB select independence standards of a national securities exchange or national securities association, such as NASDAQ). Most importantly, no director is an officer of, or employed by, NCB or any of its subsidiaries. Although some cooperatives associated with directors have loan relationships with NCB (described in the section above), no director has a relationship that, in the opinion of NCB’s Board of Directors, would interfere with the exercise of independent judgment of the director in carrying out his or her responsibilities.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
NCB has paid or expects to pay the following fees to KPMG LLP for work performed in 2008 and 2007 (in thousands):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Audit fees | | $ | 520 | | | $ | 463 | |
| Audit-related fees | | | - | | | | 29 | |
| Tax fees | | | - | | | | - | |
| All other fees | | | 14 | | | | - | |
| | | | | | | | | |
| Total fees | | $ | 534 | | | $ | 492 | |
| | | | | | | | | |
133
Audit fees include fees for services that would normally be provided by the accountant in connection with the statutory and regulatory filings or engagements and that generally only an independent accountant can provide. In addition to fees for an audit or review in accordance with generally accepted auditing standards, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC. Audit-related fees are assurance related services that are traditionally performed by the independent accountant, such as: employee benefit plan audits, due diligence related to mergers and acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards. Tax fees would relate to the review of corporate tax filings. No other fees have been incurred by NCB.
The audit committee has reviewed the fees paid to KPMG LLP. These policies and procedures involve annual pre-approval by the Audit Committee of the types of services to be provided by NCB’s independent auditor and fee limits for each type of service on both a per engagement and aggregate level. Additional service engagements that exceed these pre-approved limits must be submitted to the Audit Committee for further pre-approval.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15(a)(1) The following financial statements are filed as a part of this report.
Financial Statements as of December 31, 2008, 2007 and 2006:
| | | |
| Page # | | |
| |
| | | |
| 42 | | Report of Independent Registered Public Accountants |
| | | |
| 43 | | Consolidated Balance Sheets |
| | | |
| 44 | | Consolidated Statements of Income (Loss) |
| | | |
| 45 | | Consolidated Statements of Comprehensive (Loss) Income |
| | | |
| 46 | | Consolidated Statements of Changes in Members’ Equity |
| | | |
| 47-48 | | Consolidated Statements of Cash Flows |
| | | |
| 49-86 | | Notes to the Consolidated Financial Statements |
Item 15(a)(2) Not applicable
Items 15(a)(3) and 15(b) The following exhibits are filed as a part of this report.
| | | | | |
| Exhibit No. | | | | |
| |
| | | | | |
| (a) | | 3.1 | | National Consumer Cooperative Bank Act, as amended through 1981 |
| | | | | |
| (c) | | 3.2 | | 1989 Amendment to National Consumer Cooperative Bank Act |
| | | | | |
| (kk) | | 3.3 | | Bylaws of NCB |
| | | | | |
| (kk) | | 4.1 | | Election Rules of NCB. For other instruments defining the rights of security holders, see Exhibits 3.1 and 3.2 |
| | | | | |
| (h) | | 4.11 | | Form of Indenture for Debt Securities |
| | | | | |
| (i) | | 4.12 | | Form of Fixed Rate Medium-term Note |
| | | | | |
| (j) | | 4.13 | | Form of Floating Rate Medium-term Note |
| | | | | |
| *(kk) | | 10.3 | | Deferred Compensation Agreement with Charles E. Snyder |
| | | | | |
| *(x) | | 10.4 | | Severance Agreement with Charles E. Snyder |
| | | | | |
| *(kk) | | 10.5 | | Employment Agreement with Charles E. Snyder |
| | | | | |
| (b) | | 10.7 | | Subordination Agreement with Consumer Cooperative Development Corporation (now NCB Capital Impact) |
| | | | | |
| *(x) | | 10.13 | | NCB Executive Long-Term Incentive Plan Approved 7/28/03 |
| | | | | |
| *(ii) | | 10.14 | | NCB Executive Long-Term Incentive Plan Approved 1/19/05 |
| | | | | |
| *(ii) | | 10.15 | | NCB Executive Long-Term Incentive Plan Approved 1/23/07 |
| | | | | |
| (n) | | 10.25 | | Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company (Dec. 2001) |
| | | | | |
| (p) | | 10.31 | | Split Dollar Agreement with Chief Executive Officer |
| | | | | |
| *(x) | | 10.33 | | NCB Executive Short-Term Incentive Plan for 2004 |
| | | | | |
| *(ii) | | 10.32 | | NCB Executive Short-Term Incentive Plan for 2005 |
| | | | | |
| *(ii) | | 10.35 | | NCB Executive Short-Term Incentive Plan for 2006 |
| | | | | |
| *(ii) | | 10.36 | | NCB Executive Short-Term Incentive Plan for 2007 |
| | | | | |
| *(ii) | | 10.38 | | NCB Executive Short-Term Incentive Plan for 2008 |
| | | | | |
| (kk) | | 10.39 | | NCB Executive Short-Term Incentive Plan for 2009 |
| | | | | |
| (w) | | 10.37 | | Amended and Restated Financing Agreement with U.S. Treasury dated November 26, 2003 |
135
| | | | | |
| Exhibit No. | | | | |
| |
| | | | | |
| (x) | | 10.43 | | First Amendment dated December 9, 2003 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
| | | | | |
| (x) | | 10.44 | | Purchase Agreement relating to Trust Preferred Securities dated December 15, 2003 |
| | | | | |
| (x) | | 10.45 | | Indenture related to Junior Subordinated Debt Securities dated December 17, 2003 |
| | | | | |
| (x) | | 10.46 | | Guarantee Agreement dated December 17, 2003 |
| | | | | |
| *(x) | | 10.47 | | Memorandum of Understanding with Respect to Tax Treatment of Employer Payments under Split Dollar Arrangement with CEO, dated December 30, 2003 |
| | | | | |
| (ee) | | 10.48 | | Blanket Agreement for Advances with Federal Home Loan Bank of Cincinnati dated June 30, 2006 |
| | | | | |
| (z) | | 10.51 | | Second Amendment dated December 31, 2004 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
| | | | | |
| *(z) | | 10.52 | | Memorandum of Understanding With Respect to Tax Treatment of Employer Payments Under Split- Dollar Agreement with Charles Snyder |
| | | | | |
| (ii) | | 10.53 | | First Amendment dated October 16, 2006 to Credit Agreement among NCB, various banks and SunTrust Bank, as administrative agent |
| | | | | |
| *(z) | | 10.54 | | Agreement to Provide Supplemental Retirement Benefits for CEO of NCB, FSB |
| | | | | |
| (bb) | | 10.55 | | Lease for 2011 Crystal Drive, Arlington, Virginia 22202 |
| | | | | |
| (dd) | | 10.56 | | Credit Agreement among NCB, various banks and SunTrust Bank, as administrative agent |
| | | | | |
| (hh) | | 10.57 | | Second Amendment dated September 28, 2007 to Credit Agreement among NCB, various banks and SunTrust Bank, as administrative agent |
| | | | | |
| (ii) | | 10.58 | | Third Amendment dated December 31, 2007 to Credit Agreement among NCB, various banks and SunTrust Bank, as administrative agent |
| | | | | |
| (ii) | | 10.59 | | Second Amendment dated December 31, 2007 to Note Purchase Agreement with Metropolitan Life Insurance Company et al |
| | | | | |
| (ii) | | 10.60 | | Third Amendment dated December 28, 2006 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
| | | | | |
| (ii) | | 10.61 | | Fourth Amendment dated December 31, 2007 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
| | | | | |
| (ii) | | 10.62 | | Fifth Amendment dated February 25, 2008 to Note Purchase and Uncommitted Master Shelf Agreement with Prudential Insurance Company of America et al |
| | | | | |
| (jj) | | 13 | | 2007 Annual Report |
| | | | | |
| (kk) | | 14 | | NCB Senior Financial Officers’ Code of Ethics |
| | | | | |
| (ll) | | 21.1 | | List of Subsidiaries and Affiliates of NCB |
| | | | | |
| (kk) | | 23.1 | | Consent of KPMG LLP |
| | | | | |
| (n) | | 24.11 | | Power of Attorney by Stephanie McHenry |
| | | | | |
| (x) | | 24.19 | | Power of Attorney by Irma Cota |
| | | | | |
| (x) | | 24.20 | | Power of Attorney by Grady B. Hedgespeth |
| | | | | |
| (x) | | 24.21 | | Power of Attorney by Rosemary Mahoney |
| | | | | |
| (x) | | 24.22 | | Power of Attorney by Richard A. Parkinson |
| | | | | |
| (z) | | 24.26 | | Power of Attorney by William Hampel |
| | | | | |
| (aa) | | 24.27 | | Power of Attorney of Roger Collins |
| | | | | |
| (aa) | | 24.28 | | Power of Attorney of Steven Cunningham |
| | | | | |
| (ii) | | 24.29 | | Power of Attorney of Janis Herschkowitz |
| | | | | |
| (ii) | | 24.30 | | Power of Attorney of Nguyen Van Hanh |
136
| | | | | |
| Exhibit No. | | | | |
| |
| | | | | |
| (ii) | | 24.31 | | Power of Attorney of Stuart M. Saft |
| | | | | |
| (ii) | | 24.32 | | Power of Attorney of Walden Swanson |
| | | | | |
| (kk) | | 24.33 | | Power of Attorney of Peter A. Conrad |
| | | | | |
| (kk) | | 24.34 | | Power of Attorney of Alfred A. Plamann |
| | | | | |
| (kk) | | 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications |
| | | | | |
| (kk) | | 31.2 | | Rule 13a-14(a)/15d-14(a) Certifications |
| | | | | |
| (kk) | | 32 | | Section 1350 Certifications |
| | | | | |
| (kk) | | 99.1 | | Registrant’s 2009 Election Materials |
| | |
| * | | Exhibits marked with an asterisk are management contracts or compensatory plans. |
| |
| (a) | | Incorporated by reference to the exhibit of the same number filed as part of Registration StatementNo. 2-99779 (Filed August 20, 1985). |
| |
| (b) | | Incorporated by reference to the exhibit of the same number filed as part of Amendment No. 1 to Registration StatementNo. 2-99779 (Filed May 7, 1986). |
| |
| (c) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1989 (FileNo. 2-99779). |
| |
| (d) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the three months ended June 30, 1992 (FileNo. 2-99779). |
| |
| (e) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1994 (FileNo. 2-99779). |
| |
| (f) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1995 (FileNo. 2-99779). |
| |
| (g) | | Incorporated by reference to Exhibit 10.16 filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1989 (FileNo. 2-99779). |
| |
| (h) | | Incorporated by reference to Exhibit 4.1 filed as part of Amendment No. 1 to Registration StatementNo. 333-17003 (Filed January 21, 1997). |
| |
| (i) | | Incorporated by reference to Exhibit 4.2 filed as part of Amendment No. 1 to Registration StatementNo. 333-17003(Filed January 21, 1997). |
| |
| (j) | | Incorporated by reference to Exhibit 4 to the registrant’s report on Form8-K filed February 11, 1997 (FileNo. 2-99779). |
| |
| (k) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1997 (FileNo. 2-99779). |
| |
| (l) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 1999 (FileNo. 2-99779). |
| |
| (m) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 1999 (FileNo. 2-99779). |
| |
| (n) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 2001 (FileNo. 2-99779). |
| |
| (o) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended March 31, 2002 (FileNo. 2-99779). |
| |
| (p) | | Incorporated by reference to exhibit 17 filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2002 (FileNo. 2-99779). |
| |
| (q) | | Incorporated by reference to exhibit 20 filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2002 (FileNo. 2-99779). |
| |
| (r) | | Incorporated by reference to exhibit 28 filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2002 (FileNo. 2-99779). |
137
| | |
| (s) | | Incorporated by reference to exhibit 99 filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended September 30, 2002 (FileNo. 2-99779). |
| |
| (t) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 2002 (FileNo. 2-99779). |
| |
| (u) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended March 31, 2003 (FileNo. 2-99779). |
| |
| (v) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the quarter ended June 30, 2003 (FileNo. 2-99779). |
| |
| (w) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s report onForm 8-K filed December 23, 2003 (File No. 2-99779). |
| |
| (x) | | Incorporated by reference to the exhibit of the same number filed as part the registrant’s annual report onForm 10-K for the year ended December 31, 2003 (FileNo. 2-99779). |
| |
| (y) | | Incorporated by reference to the exhibit of the same number filed as part the registrant’s quarterly report onForm 10-Q for the quarter ended March 31, 2004 (FileNo. 2-99779). |
| |
| (z) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the year ended December 31, 2004 (FileNo. 2-99779) |
| |
| (aa) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual reportForm 10-K for the period ended December 31, 2005 (FileNo. 2-99779) |
| |
| (bb) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s report onForm 8-K, January 30, 2006 (File No. 2-99779) |
| |
| (cc) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the period ended March 31, 2006 (FileNo. 2-99779) |
| |
| (dd) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s report onForm 8-K filed May 5, 2006 (File No. 2-99779) |
| |
| (ee) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the period ended June 30, 2006 (FileNo. 2-99779) |
| |
| (ff) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual reportForm 10-K for the period ended December 31, 2006 (FileNo. 2-99779) |
| |
| (gg) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the period ended March 31, 2007 (FileNo. 2-99779) |
| |
| (hh) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the period ended September 30, 2007 (FileNo. 2-99779) |
| |
| (ii) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s annual report onForm 10-K for the period ended December 31, 2007 (FileNo. 2-99779) |
| |
| (jj) | | Incorporated by reference to the exhibit of the same number filed as part of the registrant’s quarterly report onForm 10-Q for the period ended March 31, 2008 (FileNo. 2-99779) |
| |
| (kk) | | Filed herewith |
| |
| (ll) | | Included in Part I of this report orForm 10-K |
**********
Item 15(c) All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or the notes thereto.
138
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
| | | |
DATE:March 31, 2009 | | |
| | | Charles E. Snyder |
| | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:
| | | | | | | |
| Signature | | Title | | Date |
| |
| | | | | |
| * /s/ William F. Casey Jr.
William F. Casey Jr. | | Chairperson of the Board of Directors and Director | | 03/31/09 |
| | | | | |
| * /s/ Irma Cota
Irma Cota | | Vice Chairperson of the
Board of Directors and Director | | 03/31/09 |
| | | | | |
| * /s/ Charles E. Snyder
Charles E. Snyder | | President and Chief Executive
Officer | | 03/31/09 |
| | | | | |
| * /s/ Peter A. Conrad
Peter A. Conrad | | Director | | 03/31/09 |
| | | | | |
| * /s/ Roger B. Collins
Roger B. Collins | | Director | | 03/31/09 |
| | | | | |
| * /s/ Steven F. Cunningham
Steven F. Cunningham | | Director | | 03/31/09 |
| | | | | |
| * /s/ William F. Hampel
William F. Hampel | | Director | | 03/31/09 |
| | | | | |
| * /s/ Grady B. Hedgespeth
Grady B. Hedgespeth | | Director | | 03/31/09 |
| | | | | |
| * /s/ Janis Herschkowitz
Janis Herschkowitz | | Director | | 03/31/09 |
| | | | | |
| * /s/ Rosemary Mahoney
Rosemary Mahoney | | Director | | 03/31/09 |
| | | | | |
| * /s/ Stephanie McHenry
Stephanie McHenry | | Director | | 03/31/09 |
| | | | | |
| * /s/ Richard A. Parkinson
Richard A. Parkinson | | Director | | 03/31/09 |
| | | | | |
| * /s/ Alfred A. Plamann
Alfred A. Plamann | | Director | | 03/31/09 |
139
| | | | | | | |
| Signature | | Title | | Date |
| |
| | | | | |
| * /s/ Stuart M. Saft
Stuart M. Saft | | Director | | 03/31/09 |
| | | | | |
| * /s/ Walden Swanson
Walden Swanson | | Director | | 03/31/09 |
| | | | | |
| * /s/ Nguyen Van Hanh
Nguyen Van Hanh | | Director | | 03/31/09 |
| | | | | |
| * /s/ Richard L. Reed
Richard L. Reed | | Executive Managing Director,
Principal Financial Officer | | 03/31/09 |
| | | | | |
| * /s/ David Sanders
David Sanders | | Senior Vice President, Principal Accounting Officer | | 03/31/09 |
| | | | | |
*By /s/ Richard L. Reed Richard L. Reed (Attorney-in-Fact) | | | | |
140
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS, WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its information the registrant’s election materials for its 2009 annual meeting. The registrant has not yet distributed the 2008 annual report to stockholders and will furnish such report to the Commission when it is sent to security holders.
Exhibit Index
| | | |
| Ex. No. | | Exhibit |
| |
| | | |
| 3.3 | | Bylaws of NCB |
| | | |
| 4.1 | | Election Rules of NCB. For other instruments defining the rights of security holders, see Exhibits 3.1 and 3.2 |
| | | |
| 10.3 | | Deferred Compensation Agreement with Charles E. Snyder |
| | | |
| 10.5 | | Employment Agreement with Charles E. Snyder |
| | | |
| 10.39 | | NCB Executive Short-Term Incentive Plan for 2009 |
| | | |
| 14 | | NCB Senior Financial Officers’ Code of Ethics |
| | | |
| 23.1 | | Consent of KPMG LLP |
| | | |
| 24.33 | | Power of Attorney of Peter A. Conrad |
| | | |
| 24.34 | | Power of Attorney of Alfred A. Plamann |
| | | |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications |
| | | |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certifications |
| | | |
| 32 | | Section 1350 Certifications |
| | | |
| 99.1 | | Registrant’s 2009 Election Materials |
141
