UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

or

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)

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act): o Yes þ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the place at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the 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, 2009: Class B 1,795,981 and Class C 254,373.

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

INDEX

PART I
Item 1 Business			1
Item 1A Risk Factors			6
Item 2 Properties			17
Item 3 Legal Proceedings			17
Item 4 Removed and Reserved			17
PART II
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6 Selected Financial Data			19
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 7A Quantitative and Qualitative Disclosures about Market Risk			43
Item 8 Financial Statements and Supplementary Data			48
Item 9 Changes in and Disagreements with Accountants, on Accounting and Financial Disclosure			102
Item 9A Controls and Procedures			102
Item 9B Other Information			104
PART III
Item 10 Directors, Executive Officers and Corporate Governance			105
Item 11 Executive Compensation			111
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			127
Item 13 Certain Relationships and Related Transactions and Director Independence			127
Item 14 Principal Accountant Fees and Services			128
PART IV
Item 15 Exhibits, Financial Statement Schedules			129
Exhibit 3.3
Exhibit 4.1
Exhibit 10.68
Exhibit 10.69
Exhibit 10.73
Exhibit 14
Exhibit 23.1
Exhibit 24.35
Exhibit 24.36
Exhibit 24.37
Exhibit 24.38
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 99.1

This Form 10-K contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to National Consumer Cooperative Bank’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 National Consumer Cooperative Bank’s operations, pricing products and services.

PART 1

ITEM 1. BUSINESS

GENERAL

The National Consumer Cooperative Bank (“the Company”) is a financial institution, organized under the laws of the United States that primarily provides financial services to eligible cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United States. A cooperative enterprise is an organization owned by its members and engaged in producing or furnishing goods, services, or facilities for the benefit of its members or voting stockholders who are the ultimate consumers or primary producers of such goods, services, or facilities. The Company is structured as a cooperative institution whose voting stock can only be owned by its borrowers or those eligible to become its borrowers (or organizations controlled by such entities).

The Company operates directly and through its wholly owned subsidiaries, NCB Financial Corporation and NCB, FSB. This Form 10-K provides information regarding the consolidated business of the Company and its subsidiaries and, where appropriate and as indicated, provides information specific to the Holding Company, NCB Financial Corporation or NCB, FSB. In general, unless otherwise noted, references in this report to the Company refer to the Company and its subsidiaries collectively. The chart below provides specific explanations of the various entities that may be referenced throughout this Form 10-K:

Entity		Principal Activities
The Company		Financial institution that primarily provides financial services to eligible cooperatives or enterprises controlled by eligible cooperatives. Unless otherwise indicated, references to the Company are references to the consolidated business of the Company and its subsidiaries.
NCCB (“Holding Company”)		References to the “Holding Company” are references to the legal entity NCCB alone and not its subsidiaries.
NCB Financial Corporation		Intermediate holding company, wholly owned subsidiary of the Company and owner of NCB, FSB.
NCB, FSB		Federally chartered and Federal Deposit Insurance Corporation (FDIC)-insured thrift institution that provides a broad range of financial services to cooperative and non-cooperative customers. NCB, FSB is a wholly owned subsidiary of NCB Financial Corporation and is an indirect wholly owned subsidiary of the Company.

In the legislation chartering the Holding Company (the National Consumer Cooperative Bank Act or the “Act”), Congress stated its finding that cooperatives have proven to be an effective means of minimizing the impact of inflation and economic hardship on members/owners by narrowing producer-to-consumer margins and price spreads, broadening ownership and control of economic organizations to a larger base of consumers, raising the quality of goods and services available in the marketplace and strengthening the nation’s economy as a whole. To further the development of cooperative businesses, Congress specifically directed the Holding Company (1) to encourage the development of new and existing cooperatives eligible for its assistance by providing specialized credit and technical assistance; (2) to maintain broad-based control of the Holding Company by its voting shareholders; (3) to encourage a broad-based ownership, control and active participation by members in eligible cooperatives; (4) to assist in improving the quality and availability of goods and services to consumers; and (5) to encourage ownership of its equity securities by cooperatives and others.

The Act also resulted in the formation of NCB Capital Impact, which is a non-profit organization without capital stock organized under the laws of the District of Columbia to perform only functions provided in the Act. NCB Capital Impact provides loans and technical support to cooperative enterprises. Consistent with the Act, the Holding Company may make deductible, voluntary contributions to NCB Capital Impact.

The Holding Company fulfills its statutory obligations in two fashions. First, through its subsidiaries, it makes loans and offers other financing services, which afford cooperative businesses substantially the same financing opportunities currently available for traditional enterprises. Second, it provides financial and other assistance to NCB Capital Impact.

Under the Act, the Company must make annual patronage dividends to its patrons, which are those cooperatives from whose loans or other business the Company derived interest or other income during the year with respect to which a patronage dividend is declared. The Company allocates such patronage dividends among its patrons generally in proportion to the amount of income derived during the year from each patron. The Company’s stockholders, as such, are not automatically entitled to patronage dividends. They are entitled to patronage dividends only in the years when they have patronized the Company and the amount of their patronage does not depend on the amount of their stockholding. Under the Company’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.

The Company also makes certain non-patronage-based loans under the general lending authority and incidental powers provisions of Section 102 of the Act to entities and individuals other than eligible cooperatives, when the Company determines such loans to be incidental to and beneficial to lending programs designed for eligible cooperatives.

The Act was passed on August 20, 1978, and the Holding Company commenced lending operations on March 21, 1980. In 1981, Congress amended the Act (the “Act Amendments”) to convert the Class A Preferred stock of the Holding Company previously held by the United States to Class A notes as of December 31, 1981 (the “Final Government Equity Redemption Date”).

The Company maintains its executive offices at 601 Pennsylvania Avenue, N.W., Suite 750, Washington, D.C. 20004. The telephone number of its executive offices is (202) 349-7444. The Company’s operations center is located in Arlington, Virginia. The Company also maintains regional offices in Anchorage, Alaska, New York, New York, and Oakland, California. NCB, FSB maintains its principal office in Hillsboro, Ohio and non-retail branches in New York, New York and Washington, D.C.

The Company originates various types of loans. The following are the primary types of such loans.

•       Consumer Loans		Consumer Loans, including auto loans, include unsecured or secured loans to individuals primarily for personal use. If secured, Consumer Loans are secured by collateral other than real estate.
•       Commercial Loans		Commercial Loans include unsecured or secured loans to businesses (including small 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.
		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.
•       Real Estate — Residential Loans		Residential Real Estate Loans include Single-family Residential Loans, Share Loans, Cooperative Loans and Multifamily Loans.
		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.
		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.
		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.
		Multifamily Loans are loans to businesses or investors to purchase, refinance, construct or improve residential property consisting of five or more dwellings (e.g. apartment housing, student housing, senior housing) and are secured by the underlying real estate.
•       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.

LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES

Eligibility Requirements

Cooperatives, cooperative-like organizations, and legally chartered entities primarily owned and controlled by cooperatives are eligible to borrow from the Company on a patronage basis under Section 108 of the Act if they are engaged in producing or furnishing goods, services or facilities primarily for the benefit of their members or voting stockholders who are the ultimate consumers of such goods, services or facilities. In addition, to be eligible to borrow from the Company under Section 108 of the Act the borrower must, among other things, (1) be controlled by its members or voting stockholders on a democratic basis; (2) agree not to pay dividends on voting stock or membership capital in excess of such percentage per annum as may be approved by the Company; (3) provide that its net savings shall be allocated or distributed to all members or patrons, in proportion to their patronage, or retain such savings for the actual or potential expansion of its services or the reduction of its charges to the patrons; and (4) make membership available on a voluntary basis, without any social, political, racial or religious discrimination and without any discrimination on the basis of age, sex, or marital status to all persons who can make use of its services and are willing to accept the responsibilities of membership. The Company may also purchase obligations issued by members of eligible cooperatives. The Company maintains member finance programs for members of cooperatives primarily in the food, franchise and hardware industries. In addition, organizations applying for loans must comply with other technical and financial requirements that are customary for similar loans from financial institutions.

Lending Authorities

The Board of Directors establishes its policies governing the lending operations in compliance with the Act and management carries out the policies. Management in turn adopts and implements guidelines and procedures consistent with stated Board directives. The Board of Directors and management regularly review the lending policies and guidelines in order to make needed changes and amendments.

Management may approve individual credit exposures of up to 75% of the single borrower-lending limit, which is equal to 15% of the Company’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.

Cooperatives of Primary Producers

As provided by Section 105 of the Act the total dollar value of loans to cooperatives that produce, market and furnish goods, services and facilities on behalf of their members as primary producers (typically agricultural cooperatives) may not exceed 10% of the gross assets of the Company.

Interest Rates

The Company seeks to price its loans to yield a reasonable risk adjusted return on its portfolio in order to build and maintain its financial viability and to encourage the development of new and existing cooperatives. In addition, to ensure that the Company will have access to additional sources of capital in order to sustain its growth, the Company seeks to maintain a portfolio that is competitively priced and of sound quality.

The Company takes the following factors, among others, into consideration in pricing its Real Estate Loans: internal risk adjusted return objectives, prevailing market conditions, loan-to-value ratios, lien position, borrower payment history, reserves, occupancy level and cash flow. The Company fixes rates based on a basis point spread over U.S. Treasury securities with yields adjusted to constant maturity of one, three, five, seven or ten years. Interest rates may be fixed at the time of commitment for a period generally not exceeding 30 days. For Cooperative, Multifamily and Commercial Real Estate Loans, the rate lock commitments can extend 12 months or longer. Such loans that do rate-lock generally close absent unusual circumstances.

The Company originates Consumer and Commercial Loans at fixed and variable interest rates. Loan pricing is based on prevailing market conditions, income and portfolio diversification objectives and the overall assessment of risk of the transaction. Typically, Consumer and Commercial Loan repayment schedules are structured by the Company with flat monthly principal reduction plus interest on the outstanding balance.

Underwriting

When evaluating credit requests, the Company seeks to determine, among others, whether a prospective borrower has and will have sound management, sufficient cash flow to service debt, assets in excess of liabilities and a continuing demand for its products, services or use of its facilities, so that the requested loan will be repaid in accordance with its terms.

The Company evaluates repayment ability based upon an analysis of a 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 the Company are generally secured by specific collateral. If collateral security is required, the value of the collateral must be reasonably sufficient to protect the Company from loss, in the event that the primary sources of repayment of financing from the normal operation of the cooperative, or refinancing, prove to be inadequate for debt repayment. Collateral security alone is not a sufficient basis for the Company to extend credit. Unsecured loans normally are made only to borrowers with strong financial conditions, operating results and demonstrated repayment ability.

Loans Benefiting Low-Income Persons

Under the Act, the Board of Directors must use its best efforts to ensure that at the end of each fiscal year at least 35% of the Company’s outstanding commercial loans (together with NCB Capital Impact) are to (1) cooperatives whose members are predominantly low-income persons, as defined by the Company, and (2) other cooperatives that propose to undertake to provide specialized goods, services, or facilities to serve the needs of predominantly low-income persons. The Company defines a “low-income person,” for these purposes, as an individual whose 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 2009, the Company and NCB Capital Impact either directly funded or arranged the funding of over $391 million to borrowers meeting the low-income definition.

Loans to Cooperatives for Residential Purposes

Section 108 (a) of the Act prohibits the Holding Company from making “any loan to a cooperative for the purpose of financing the construction, ownership, acquisition, or improvement of any structure used primarily for residential purposes if, after giving effect to such loan, the aggregate amount of all loans outstanding for such purpose would exceed 30 per centum of the gross assets of the Holding Company.”

To date, the 30% limitation on loans to housing cooperatives for such purposes has not restricted the Company’s ability to provide financial services to housing cooperatives. The Company has been able to maintain its position in the cooperative real estate market without increased real estate portfolio exposure by selling or securitizing real estate loans to secondary market purchasers of such loans. The preponderance of the Company’s real estate origination volume in recent years has been predicated upon sale to secondary market purchasers. Capital markets disruptions over the last few years resulted in a significant reduction in the profitability of loans sold. Separately, however, NCB, FSB is not directly subject to the statutory limit. As of December 31, 2009, approximately 3.8% of the total assets consisted of loans that are subject to the limitation.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) and related regulations, depository institutions such as NCB, FSB have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate income areas, consistent with safe and sound banking practice. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository 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.

COMPETITION

Congress created and capitalized the Company because it found that existing financial institutions were not making adequate financial services available to cooperative, not-for-profit business enterprises. However, the Company experiences considerable competition in lending to the most credit-worthy cooperative enterprises.

REGULATION

The Holding Company is organized under the laws of the United States. The Farm Credit Administration examines the Holding Company periodically, but that agency has no regulatory or enforcement powers over the Holding Company. In addition, the Government Accountability Office is authorized to audit the Holding Company. Reports of such examinations and audits are to be forwarded to Congress, which has the sole authority to amend or revoke the Holding Company’s charter. The Office of Thrift Supervision (“OTS”) regulates NCB, FSB. As a savings and loan holding company, the Holding Company is subject to regulatory and enforcement powers of and examination by the OTS pursuant to 12 U.S.C. § 1467a.

In connection with the insurance of deposit accounts, NCB, FSB, a federally insured savings bank, is required to maintain minimum amounts of regulatory capital. If NCB, FSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Deposit Insurance Fund (DIF), NCB, FSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions. NCB, FSB is also subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).

The Holding Company and NCB, FSB are subject to a variety of federal, state and local laws, including laws relating to anti-money laundering and privacy.

FURTHER INFORMATION

The Company makes available free of charge on its internet website its most recent Annual Report on Form 10-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the report has been electronically filed or submitted to the Securities and Exchange Commission (the “SEC”). This filing can be accessed on the Company’s website at www.nccb.coop. All Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, applicable amendments to those filings are accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials the Company files 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 at 1-800-SEC-0330.

ITEM 1A. RISK FACTORS

Like other financial institutions, the Company is subject to a number of risks, many of which are outside of the Company’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 the Company’s financial condition or results of operation, (3) liquidity risk, which is the risk that the Company will have insufficient cash or access to cash to meet its funding and operating needs, (4) regulatory risk, which is the risk that regulatory actions imposed on the Company could adversely affect its operations and limit certain operational and funding activities, and (5) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.

In addition to the other information included in this report, readers should carefully consider that the following important factors, among others, could materially impact the Company’s business, future results of operations, and future cash flows.

(1) Credit Risk

Defaults in the repayment of loans may negatively impact the Company’s business.

A borrower’s default on its obligations under one or more of the Company’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, the Company may have to write-off the loan in whole or in part. In such situations, the Company may acquire real estate or other assets, if any, which secure the loan through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired.

The Company’s decisions regarding credit risk could be inaccurate and its allowance for loan losses may be inadequate, which could materially and adversely affect the Company’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 the Company has experienced to date.

In determining the size of the allowance, the Company relies on an analysis of its loan portfolio, actual and projected loss experience and an evaluation of general economic conditions. If the Company’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 2008 and 2009, the Company’s allowance has increased and additional increases may continue to be necessary if the local or national real estate markets and economies continue to deteriorate. Significant additions to the allowance would materially decrease net income. In addition, federal regulators periodically evaluate the adequacy of the Company’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 the Company’s management. Any further increase in the Company’s allowance or loan charge-offs could have a material adverse effect on the Company’s results of operations.

The Company originates non-mortgage loans to small to medium-sized commercial customers primarily in the hardware, grocery, franchise, Employee Stock Ownership Plan (“ESOP”) and Alaska and Native American markets. These loans may be secured by furniture, fixtures, and equipment, inventory, and other collateral generally not considered as secure as real estate in the event of liquidation. Should market conditions or other factors impair the cashflow and operations of the Company’s small to medium-sized commercial customers, the Company could face an increase in delinquencies, increased provision requirements and/or losses that may adversely impact financial performance.

The Company may be called upon to fund letters of credit related to municipal bonds.

Some of the Company’s outstanding letters of credit have been issued in connection with certain variable rate municipal bonds. Under these types of letters of credit, the Company can be called upon to fund the amount of the municipal bonds in the event: (1) the holder seeks repayment and the bond cannot be sold to another purchaser, (2) the lead bank cannot confirm the letter of credit or (3) the borrower cannot repay the amount of the bond. In an effort to mitigate the risk of possible future fundings of this kind, the Company has greatly curtailed marketing of this product line and is actively reducing its exposure in this area. The Company cannot guarantee that it will not have to provide further funding for these types of letters of credit which could impact its financial condition.

(2) Market Risk

Continued adverse developments in the financial markets and deterioration in U.S. economic conditions could have a material adverse effect on the Company’s results of operations and financial condition.

As a result of difficult worldwide economic conditions, the highly volatile debt and equity markets, lack of liquidity, widening credit spreads and the collapse of several financial institutions have resulted in significant realized and unrealized losses in the Company’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 the Company’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 the Company holds or in the creditworthiness of its borrowers. In response to recent market disruptions, legislators and financial regulators have implemented a number of mechanisms designed to add stability to the financial markets, including the provision of direct and indirect assistance to financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker dealers, implementation of programs by the United States Federal Reserve to provide liquidity to the commercial paper markets and other matters. While these mechanisms implemented have stabilized the markets, to some degree, should these or other legislative or regulatory initiatives fail to continue to stabilize and add liquidity to the financial markets, the Company’s business, financial condition, results of operations and prospects could be adversely affected.

A continuation or worsening of these financial market conditions would likely exacerbate the adverse effects of these difficult market conditions on the Company and others in the financial industry. In particular, the Company may continue to face the following risks in connection with these events:

	•		Potential increase in regulation of the Company’s industry. Compliance with such regulation may increase the Company’s costs and limit its ability to pursue business opportunities.
	•		The process the Company uses to estimate losses inherent in its credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of the Company’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.
	•		NCB, FSB may be required to pay significantly higher premiums to the FDIC because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

The Company relies on business relationships with other financial institutions to provide funding and to hedge against interest rate risk. If the credit market remains disrupted, the Company may have difficulty obtaining new financing or amending current financing if necessary in the future. Pricing of financings may also rise if the credit markets remain unstable. In addition, NCB, FSB relies on funding from the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank. Should those institutions cease to be able to provide funding as a result of continuing market disruptions, it would negatively impact NCB, FSB’s operations.

The Company may not be able to attract and retain banking customers at current levels.

Competition in the banking industry coupled with the Company’s relatively small size may limit the ability of the Company to attract and retain real estate, commercial and retail banking customers.

In particular, the Company’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. The Company also faces competition from out-of-state financial intermediaries which have opened low-end production offices or which solicit deposits in their respective market areas.

Because the Company maintains a smaller staff and has fewer financial and other resources than the larger institutions with which it competes, it may be limited in its ability to attract customers. In addition, some of the Company’s current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than the Company can accommodate.

If the Company is unable to attract and retain banking customers, it may impact the Company’s loan origination volume 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, the Company can lose a relatively inexpensive source of funds, thus increasing funding costs.

The Company’s lines of business may be less diversified than its competitors.

The Company derives a significant amount of its earnings from blanket and share loan financing to housing cooperatives and then from members thereof. To the extent that cooperatives become a less favorable form of housing, become economically disadvantaged, or are negatively impacted by changing market conditions, the Company may be unable to attract and/or retain such banking customers and thereby may be unable to maintain or grow its business in this area and its results of operations and financial condition may be negatively impacted.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, its financial condition and results of operations.

The failure of other financial institutions could adversely affect the Company.

The Company’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. The Company has exposure to different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies and other institutional clients. In certain of these transactions the Company may be required to post collateral to secure the obligations to the counterparties (i.e. future interest rate swaps). In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, the Company may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. There is no assurance that any such losses would not materially and adversely affect the Company’s financial condition and results of operations.

In addition, many of these transactions expose the Company to credit risk in the event of a default by its counterparty or client. Also, the credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. There is no assurance that any such losses would not materially and adversely affect the Company’s financial condition and results of operations.

Weakness in the real estate market, particularly in New York City, could negatively impact the Company’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 the Company’s real estate collateral and the Company’s operating performance. Consequently, a decline in local economic conditions in the New York City area may have a greater effect on the Company’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, the Company often secures loans with real estate collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If the Company is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values in the New York City area, its earnings and capital could be adversely affected.

A significant amount of the Company’s Residential Real Estate Loans are secured by property in the New York City area. Consequently, the Company’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 the Company to repay their loans and affect the value of the collateral securing these loans.

The Company’s business is subject to interest rate risk and fluctuations in interest rates may adversely affect its earnings.

Many of the Company’s assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, the Company’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. the Company expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either the Company’s interest-bearing liabilities will be more sensitive to changes in market interest rates than its interest-earning assets, or vice versa. If market interest rates should move contrary to the Company’s position, this “gap” will work against the Company and its earnings may be negatively affected. In light of the Company’s current volume and mix of interest-earning assets and interest-bearing liabilities, its interest rate margin could be expected to decrease during periods of rising interest rates and, conversely, to increase during periods of falling interest rates. The Company is unable to predict or control fluctuations of market interest rates, which are affected by many factors including the following:

	•		Inflation;
	•		Recession;
	•		Changes in unemployment;
	•		The money supply;
	•		Disorder and instability in financial markets; and
	•		Governmental actions

The Company’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 the Company’s results of operations and financial condition. See “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A of this Form 10-K for a further discussion of the Company’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 Company’s profits by reducing the amount of loan origination income.

The Company engages in derivative transactions, which expose it to credit and market risk.

The Company is exposed to credit and market risk as a result of its use of derivative instruments. The Company maintains a risk management strategy that includes the use of derivative instruments to mitigate the risk to earnings caused by interest rate volatility. Use of derivative instruments is a component of the Company’s overall risk management strategy in accordance with a formal policy that is monitored by management.

The derivative instruments utilized may include interest rate lock commitments, interest rate swaps, financial futures contracts and forward loan sales commitments. Interest rate lock commitments are created when borrowers lock in their contractual commitment to borrow funds at a specific interest rate within the timeframes established by the Company. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties based upon a notional principal amount and maturity date. Financial futures generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Forward loan sales commitments lock in the prices at which loans will be sold to investors.

The Company uses interest rate lock commitments, interest rate swaps, financial futures contracts and forward loan sales commitments to hedge loan commitments prior to actually funding a loan. During the commitment period, the loan commitments and related interest rate lock commitments, interest rate swaps, financial futures contracts and forward loan sales commitments are accounted for as derivatives and the changes in the fair value of these derivatives are therefore recorded through the gain on sale of loans. Once a commitment becomes a loan, the derivative associated with the commitment is designated as a hedge of the loan and is generally kept in place until such loan is committed for sale.

The Company is exposed to credit and market risk as a result of its use of derivative instruments. If the fair value of the derivative contract represents an asset, the counterparty owes the Company and a repayment risk exists. If the fair value of the derivative contract represents a liability, the Company owes the counterparty, so there is no repayment risk. The Company minimizes repayment risk by entering into transactions with financially stable counterparties that are specified by policy and reviewed periodically by management. When the Company has multiple derivative transactions with a single counterparty, the net mark-to-market exposure represents the netting of asset and liability exposures with that counterparty. The net mark-to-market exposure with a counterparty is a measure of credit risk when there is a legally enforceable master netting agreement between the Company and the counterparty. The Company uses master netting agreements with the majority of its counterparties.

The Company’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. The Company manages the market risk associated with the interest rate hedge contracts by establishing formal policy limits concerning the types and degree of risk that may be undertaken. Compliance with this policy is monitored by management and reported to the Board of Directors.

The Company may be subject to a continuation of lower gains recorded from the sale of loans.

An important source of income for the Company is gains recorded from the sale of Multifamily, Cooperative and Commercial Real Estate Loans. The gains are influenced by many variables, including changes in interest rates and the demand of investors to purchase securities backed by loans. The Company has continued to be negatively impacted by market changes which have substantially reduced the volume of securitization transactions occurring in the marketplace. In response to this development, the Company has expanded its relationship with Fannie Mae, allowing the Company to continue to sell Cooperative and Multifamily Loans. This has allowed the Company to offset market risk by more rapidly selling loans upon their origination. During 2008, the federal government put Fannie Mae and Freddie Mac into conservatorship. Although no effect has been felt as of yet by the Company, it is difficult to predict how the recession and federal government financial support of Fannie Mae and Freddie Mac will affect the Company’s business and results of operations. The Company nevertheless continues to sell loans to Fannie Mae and expects to continue to do so. If current market conditions continue, the Company’s results of operations and financial condition may be negatively impacted.

The Company is subject to other-than-temporary impairment risk.

The Company recognizes an impairment charge when the declines in the fair value of equity and debt securities below their cost basis are judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. The Company considers various factors in determining whether an impairment is other-than-temporary. At each reporting period the Company considers its intent and ability to hold, or whether it is more likely than not that the Company would be required to sell, securities before the expected recovery of the amortized cost basis. Losses considered to be related to credit deterioration of the underlying issuer(s) (e.g. expected cash flows will be less than the amortized cost basis of the investment security) will be reflected in earnings. Declines in value related to market factors will be presented as a component of accumulated other comprehensive income. Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that the Company identifies as potentially distressed.

If the Company’s intent to hold a security with an unrealized loss changes or it is required to sell securities before the expected recovery of the amortized cost basis, the Company has and will continue to write down its securities to fair value in the period that its intent to hold or requirement to sell the security changes.

(3) Liquidity Risk

Adverse credit market conditions may affect the Company’s ability to meet liquidity needs.

In recent years the financial markets have exerted downward pressures on availability of liquidity and credit capacity for certain issuers. The Company needs liquidity to, among other things, pay its operating expenses and interest on its debt, maintain its lending activities and replace certain maturing liabilities. Without sufficient liquidity, the Company may be forced to curtail its operations. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit and the Company’s credit ratings and credit capacity. The Company’s financial condition and cash flows could be materially affected by continued disruptions in financial markets.

As of December 31, 2009, the Company believes that it has adequate liquidity to meet all of its obligations. The Company plans to fund upcoming debt curtailments and maturities with some combination of cash on hand, proceeds from the delivery of loans held-for-sale, the receipt of interest and principal payments on loans receivable, and, potentially, through leveraging existing assets at the Holding Company through the use of a securitization vehicle or a secured borrowing, disposing of certain assets and raising funds from other capital sources. At this time, the Company does not have the intent to sell any additional specific investment securities or loans, nor is the Company required to sell any of its investments or loans at a loss such that the recognition of a loss is expected.

As disclosed in the Company’s Form 10-Q for the period ended June 30, 2009, the Holding Company was in default under its senior note purchase agreement and its revolving credit facility due to a violation of certain financial covenants as a result of increased loan loss provisions and charge-offs. During the third quarter of 2009, the Holding Company entered into forbearance agreements that temporarily suspended the need for the Holding Company to comply with certain financial covenants. On February 23, 2010, the Holding Company entered into amendments to each of the senior note purchase agreements and the revolving credit facility agreement that extend through December 15, 2010, the waivers and modifications already in place (see Note 16 for further discussion).

In the event that the Holding Company is ultimately unable to meet its amortization obligations under the most recent amendments to its senior note and revolving credit agreements, the lenders and the noteholders have the right to call and demand immediate repayment of any and all amounts due. Continued adverse conditions in the credit markets may make it difficult for the Holding Company to refinance or further amend the agreement should it be required to do so in the future. There is also no assurance that the Holding Company will continue to meet certain convents required under the amended agreements. If the Holding Company cannot obtain adequate sources of credit on favorable terms, or at all, its business, operating results and financial condition would be adversely affected.

Adverse market conditions may also impact liquidity at NCB, FSB, which relies principally on deposits, borrowings from the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank and loan sales to Fannie Mae and other institutions.

Concentration in deposit relationships may affect the Company’s ability to meet liquidity needs.

The Company’s deposits include brokered deposit relationships as well as customer deposit relationships. Downgrades in ratings could result in the loss of access to the brokered deposit market as well as the loss of customer deposits. Expiration of the FDIC’s Transaction Account Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000, could result in the loss of customer deposits.

Prepayments of loans may negatively impact the Company’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 the Company is unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on results of operations and financial condition.

Inability of customers to refinance loans may negatively impact the Company’s liquidity.

The Company 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 the Company. This could adversely affect the Company’s ability to fund new loans and meet its other operational costs.

The Company’s cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.

The Company’s cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures. The Company has traditionally obtained funds through the capital markets but more recently it has relied on borrowing capacity by NCB, FSB from the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank and on customer deposits at NCB, FSB. As a general matter, deposits are a less expensive source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. Historically and in comparison to commercial banking averages, NCB, FSB has had a higher percentage of its time deposits in denominations of $100,000 or more, in part because NCB, FSB has been positioned to serve business customers rather than retail customers, and business customers generally have higher levels of deposits. Within the banking industry, the amounts of such deposits are generally considered more likely to fluctuate than deposits of smaller denominations. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at NCB, FSB decreases relative to its overall banking operations, the Company may have to rely more heavily on borrowings as a source of funds in the future. As a result of credit market disruptions and the need to renegotiate certain financial covenants, the cost of borrowing by the Holding Company has increased, and there is no assurance that further pricing increases will not occur. The cost of borrowings by NCB, FSB from the Federal Home Loan Bank and the Federal Reserve Bank may also increase, resulting in a higher cost of funds for NCB, FSB as well.

(4) Regulatory Risk

The Company is subject to increased regulatory scrutiny and is subject to certain business limitations imposed by its principal banking regulator. Further, the Company may be subject to more severe future regulatory actions, beyond the extent of the enforcement actions issued on March 15, 2010, if its financial condition or performance weakens.

Federal and state laws and regulations govern numerous matters including changes in the ownership or control of federal savings associations and of their holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extension of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The Company’s principal regulator, the OTS, possesses cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by bank and savings associations subject to its regulation. These and other restrictions limit the manner in which the Company may conduct business and obtain financing.

Furthermore, the Company’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 the Company must offer to attract deposits and the interest rates it must charge on loans, as well as the manner in which the Company offers deposits and makes loans. NCB, FSB is expected to be subject to higher Federal Deposit Insurance Corporation deposit insurance premiums than those prevailing in prior periods. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally. The Company’s management and its board of directors have focused particular attention on the areas of asset quality, capital management, and liquidity, seeking to improve performance in each area in view of current unfavorable economic conditions.

On March 15, 2010, the Holding Company entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the OTS. The associated OTS Order (the “OTS Order”) provides that the Holding Company pay no cash dividends or redeem or repurchase any equity stock, and, not incur, issue, renew, rollover or increase any debt, except for the class A notes, without prior approval of the OTS. The OTS Order also requires the Holding Company to submit to the OTS a Business Plan within 45 days, and an updated Liquidity Risk Management Program within 30 days, both for review and comment. The OTS Order does not specify minimum tangible equity capital ratios. Rather, the Business Plan must establish such ratios that are “commensurate with the Holding Company’s stand alone risk profile that addresses, among other things, the Holding Company’s significant off-balance sheet liabilities.” The Business Plan must also address capital preservation and enhancement strategies to achieve the minimum tangible equity capital ratios that are established, strategies to ensure that the Holding Company’s obligations are met on a stand-alone basis without reliance on dividends from NCB, FSB and specific plans to reduce the risks from its current debt levels and contingent liabilities. The OTS Order shall remain in effect until terminated, modified, or suspended by written notice of such action by the OTS. The OTS Order, however, does not prohibit the Holding Company from transacting its normal business.

On March 15, 2010, NCB Financial Corporation, the mid-tier holding company for NCB, FSB, entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the OTS. The associated Order (the “Mid-Tier OTS Order”) provides that NCB Financial Corporation pay no cash dividends or redeem or repurchase any equity stock and shall not incur, issue, renew, rollover or increase any debt, without prior approval of the OTS.

On March 15, 2010, NCB, FSB entered into a Supervisory Agreement with the OTS (together with the OTS Order and the Mid-Tier OTS Order, the “OTS Actions”). The principal elements of the Supervisory Agreement provide that NCB, FSB not increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter without prior approval and shall not declare or pay any dividends or make any other capital distribution without the prior written approval of the OTS. Additionally, NCB, FSB must submit a Business Plan within 45 days and a Liquidity Risk Management Program within 30 days for OTS review, comment and approval. The Supervisory Agreement does not specify a minimum Tier 1 (Core) Capital Ratio or a Total Risk-Based Capital Ratio. Rather, the Business Plan must establish such ratios that are “commensurate with the Association’s risk profile.” The Business Plan must also include policies for maintaining an adequate allowance for loan and lease losses and various financial projections to be updated periodically. The Supervisory Order will remain in effect until modified or terminated by the OTS. The Supervisory Order does not, however, restrict NCB, FSB from transacting its normal banking business. NCB, FSB has and will continue to serve clients in all areas including making loans, subject to the limitation described above, accepting deposits and processing banking transactions. All client deposits remain fully insured to the limits set by the FDIC. NCB, FSB remains well capitalized for all regulatory purposes.

The Company has been actively engaged in responding to the concerns raised by the OTS and believes that the Holding Company is in compliance with the OTS Order, NCB Financial Corporation is in compliance with the Mid-Tier OTS Order and, NCB, FSB is in compliance with the Supervisory Agreement. However, if the financial condition of the Company weakens, the OTS may, upon further inspection, issue additional actions and require the Company to sell assets to increase liquidity, raise capital, or take other steps as they consider necessary.

NCB, FSB is subject to regulatory capital adequacy guidelines, and if it fails to meet these guidelines, its financial condition would be adversely affected.

Under regulatory capital adequacy guidelines and other regulatory requirements, NCB, FSB, must meet guidelines that include quantitative measures of assets, liabilities, and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If NCB, FSB fails to meet these minimum capital guidelines and other regulatory requirements, its financial condition would be materially and adversely affected. In the future, the regulatory accords on international banking institutions to be reached by the Basel Committee on Banking Supervision may require NCB, FSB to meet additional capital adequacy measures. NCB, FSB cannot predict the final form of, or the effects of, the regulatory accords. NCB FSB’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, FSB’s regulatory framework, or “well-managed” under regulatory examination procedures, could compromise NCB FSB’s status as a bank holding company and related eligibility for a streamlined review process for acquisition proposals. NCB FSB’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.

(5) Operational Risk

The financial services industry is undergoing rapid technological changes. If the Company is unable to adequately invest in and implement new technology-driven products and services, it may not be able to compete effectively, may be subject to interruption and instability or the cost to provide products and services may increase significantly.

The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to providing better customer service, the effective use of technology increases efficiency and enables financial service institutions to reduce costs. The Company’s future success will depend, in part, upon the Company’s ability to address the customer needs by using technology to provide products and services to enhance customer convenience, as well as to create additional operational efficiencies. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services, which could reduce the Company’s ability to effectively compete and, in turn, have a material adverse effect on its financial condition and results of operations.

The Company relies on technology to conduct much of its activity. The Company’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 the Company’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 the Company’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 the Company’s business and reputation.

The Company’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, the Company’s business and a negative impact on its results of operations.

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems. While the Company has disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of the Company’s information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on its results of operations.

The Company’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.

The Company regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’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, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on the Company’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 the Company’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 reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on the Company, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.

The Company is exposed to reputation, legal, compliance and other risks.

The Company is exposed to many types of operational risks, including reputation risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from the Company’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 the Company’s ability to attract and keep customers and can expose it to litigation and regulatory action. Given the volume of transactions at the Company, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’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. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. the Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company’s (or its vendors’) business continuity and data security systems prove to be inadequate.

The Company may not be able to attract and retain skilled people.

The Company’s success depends in large part on the Company’s ability to attract and retain key people and there are a limited number of qualified persons with knowledge of and experience in the banking industry in each of the Company’s markets. Furthermore, recent demand for skilled finance and accounting personnel among publicly traded companies has increased the importance of attracting and retaining these people. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on its business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

The Company’s agreements with the OTS have placed limitations on its ability to make changes to compensation and benefits for its senior executive officers which could adversely affect its ability to attract and retain skilled people.

ITEM 2. PROPERTIES

The Company leases space for its Arlington, Virginia operations center, its Washington, D.C. executive offices and for three principal regional offices located in Anchorage, Alaska, New York City, New York and Oakland, California. The Company also maintains a Disaster Recovery facility in Silver Spring, Maryland. NCB, FSB maintains its principal offices in Hillsboro, Ohio with retail branches in Ohio and non-retail branches at the Company offices in New York, New York and Washington, D.C. The Company’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, 2009 was $3.1 million for all offices combined.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business the Company is involved in various types of disputes, which may lead to litigation or other legal proceedings. The Company has determined that pending legal proceedings will not have a material impact on the Company’s financial condition or future operations.

ITEM 4. REMOVED AND RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

The Company currently has two classes of stock outstanding, the rights of which are summarized as follows:

Class B Stock — The Act permits Class B stock to be held by borrowers of the Company and requires each patronage-based borrower from the Company under Section 108 of the Act to hold Class B stock at the time the loan is made at a par value equal to 1% of its loan amount. The Act prohibits the Company from paying dividends on Class B stock. There are two series of Class B stock outstanding. Class B-1 stock is Class B stock purchased from existing holders of Class B-1 stock subsequent to May 1, 1992. Class B-1 stock previously included shares of Class B stock purchased for cash from the Company between June 28, 1984 and May 1, 1992, of which there are none outstanding. Class B-2 stock is Class B stock purchased for cash from the Company prior to June 28, 1984 and any Class B stock distributed as part of the Company’s patronage refund distribution. Class B stock is transferable to another eligible holder only with the approval of the Company. The Company does not permit any transfers of Class B-2 stock and only permits transfers of Class B-1 Stock at the 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, the Company specifies which holder(s) are permitted to transfer their stock to the new borrower, based upon which Class B stockholders with holdings of such stock beyond that required to support their loans have held such stock for the longest time. the Company also repurchased, at par value, any shares of Class B stock that it was required to repurchase from holders by the terms of the contracts under which such stock was originally sold by the Company. No such stock remains outstanding. Class B stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.

Class C Stock — The Act permits Class C stock to be held only by cooperatives eligible to borrow from the Company (or entities controlled by such borrowers). The Act allows the Company to pay dividends on Class C stock, but so long as any Class A notes are outstanding, limits dividends on Class C stock (or any other the Company stock) to the interest rate payable on such notes, which was 3.81% in 2009 using a weighted average. In 1994, the Company adopted a policy under which annual cash dividends on Class C stock of up to 2% of the Company’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 the Company’s Board of Directors. In 1996, the Board approved a dividend de minimis provision which states that Class C stock dividends shall not be distributed to a stockholder until such time as the cumulative amount of the dividend payable to the stockholder is equal to, or exceeds, twenty-five dollars ($25.00) unless specifically requested by the stockholder. Class C stock is transferable to another eligible holder only with the approval of the Company. Class C stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.

There is no established public trading market for any class of the Company’s common equity and it is unlikely that any such market will develop in view of the restrictions on the transfer of the Company’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 the Company or NCB, FSB and may be permitted by the Company, within the limits set forth above, to transfer Class B stock to another patronage-based borrower from the Company or NCB, FSB.

As of December 31, 2009, there were 2,637 holders of Class B stock and 498 holders of Class C stock.

Under the Company’s current patronage dividend policy that became effective in 1995, as amended, the Company makes the non-cash portion of the dividend in the form of Class B stock until a patron has holdings of Class B stock of 12.5% of its loan amount and thereafter in Class C stock. The cash portion of each patronage refund, if any, will be determined by the Company’s Board of Directors based upon its determination of the capital requirements of NCB, FSB and other factors, in its discretion. The Company’s agreements with the OTS places limitations on its ability to declare, make and pay cash dividends or make capital distributions.

The Company distributed $7.3 million of its 2008 retained earnings for patronage dividends in the form of stock during the third quarter of 2009. In order to conserve capital, The Board of Directors determined that the cash portion of that patronage dividend would be zero; therefore, no cash was paid out in patronage dividends in 2009. As of December 31, 2009, the Company has not allocated any of its 2009 retained earnings for patronage dividends to be distributed during 2010.

The chart below shows the number of shares of stock issued by the Company during the past three years.

		2009				2008				2007
Class B Stock Issued			69,263				—				101,783
Class C Stock Issued			3,258				—				6,464

(Dollars in thousands)

For the Years Ended December 31,		2009				2008				2007				2006				2005
Profitability
Total interest income		$	114,835			$	123,701			$	135,739			$	118,454			$	96,479
Total interest expense			68,472				67,285				85,121				72,096				52,337
Net interest income			46,363				56,416				50,618				46,358				44,142
Provision for loan losses			44,099				18,650				152				3,667				470
Net interest income after provision for loan losses			2,264				37,766				50,466				42,691				43,672
Non-interest income			24,388				23,679				11,969				33,680				37,216
Non-interest expense			73,409				58,259				63,571				55,532				53,099
Net (loss) income			(44,638	)			2,631				(472	)			19,425				25,647
Ratios
Net yield on interest earning assets			2.20	%			2.84	%			2.67	%			2.68	%			2.76	%
Return on average assets			-2.0	%			0.1	%			0.0	%			1.1	%			1.5	%
Return on average members’ equity			-21.3	%			1.2	%			-0.2	%			8.7	%			12.0	%
Efficiency			103.8	%			72.7	%			101.6	%			69.4	%			65.3	%

As of December 31,		2009				2008				2007				2006				2005
Supplemental Data
Loans held-for-sale		$	35,730			$	14,278			$	90,949			$	242,847			$	232,024
Loans and lease financing			1,693,689				1,957,191				1,523,958				1,380,738				1,263,703
Total assets			2,093,537				2,154,892				1,871,776				1,829,477				1,694,567
Total borrowings			614,553				590,726				574,443				743,769				679,654
Members’ equity			184,589				225,514				222,763				227,838				219,008
Loans serviced for others			5,845,743				5,550,592				5,346,251				4,682,056				4,086,526
Fulltime equivalent employees			248				316				327				306				280
Average members’ equity as a percentage of:
Average total assets			9.6	%			10.8	%			11.8	%			12.8	%			12.9	%
Average total loans and lease financing			10.7	%			12.1	%			13.3	%			14.3	%			14.7	%
Net average loans and lease financing to average total assets			87.6	%			87.6	%			87.6	%			88.2	%			86.3	%
Net average earning assets to average total assets			94.7	%			95.7	%			96.1	%			97.3	%			95.0	%
Credit Quality
Allowance for loan losses			36,468				27,067				17,714				19,480				20,193
Allowance for loan losses to loans outstanding			2.1	%			1.4	%			1.1	%			1.2	%			1.4	%
Nonaccrual loans			71,401				17,434				13,324				21,600				14,200
Real estate owned			2,315				659				310				193				10
Total non-performing assets			73,716				18,093				13,634				21,793				14,210
Non-performing assets as a percentage of total assets			3.5	%			0.8	%			0.7	%			1.2	%			0.8	%
Non-performing assets as a percentage of total loans and lease financing			4.4	%			0.9	%			0.9	%			1.6	%			1.1	%

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 the Company’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.

2009 Summary

The Company’s financial results have been substantially impacted by the recessionary economic conditions. The recession that the U.S. economy has faced prior to and during 2009, and continues to face is impacting the Company’s borrowers, and as a result, the Company is experiencing a higher frequency of loan losses, both in number and severity, than in prior years. Specifically, increased foreclosure rates, unemployment rates and credit scores, in localities in which many of the Company’s loans are most highly concentrated, have resulted in corresponding increases to the Company’s provision for loan losses which has been the primary reason for the Company’s net financial losses during 2009. Another factor impacting the Company’s financial results during 2009 was significant impairments on investments, both realized and unrealized, as a result of the volatile debt and equity markets, lack of liquidity, wide credit spreads and other events and factors. Also, increased cost of funds and a significant increase in amortization of debt costs related to the Holding Company’s forbearance agreements have negatively impacted the Company’s 2009 financial results.

Debt Amendments

As disclosed in the Company’s Form 10-Q for the period ended June 30, 2009, the Holding Company was in default under its senior note purchase agreement and its revolving credit facility due to a violation of certain financial covenants. The covenant violations were primarily a result of increased loan loss provisions and charge-offs, principally related to a small number of borrowers experiencing pronounced financial difficulties, including several borrowers which have filed for bankruptcy. NCB, FSB is not a guarantor under either the senior note purchase agreement or the revolving credit facility. However, both facilities are secured by the assets of NCB Financial Corporation, which has pledged all of the stock of NCB, FSB in connection with such guarantees.

On August 14, 2009, the Holding Company entered into forbearance agreements with each of the required holders under each of the senior note purchase agreements and the revolving credit facility agreement. The forbearance agreements were entered into under customary terms and conditions, including the suspension of the need for the Holding Company to comply with certain financial covenants for the duration of the initial forbearance period which had an expiration date of November 16, 2009.

On November 16, 2009, the Holding Company entered into amendments of the forbearance agreements which extended the forbearance period through February 17, 2010 then through February 23, 2010. In connection with the execution of the amended forbearance agreements, the Holding Company repaid $12.5 million of the senior note debt and $18.5 million of the revolving credit facility debt and paid a total forbearance amendment fee of $1.1 million.

On February 23, 2010, the Holding Company entered into amendments to each of the senior note purchase agreements and the revolving credit facility agreement. As described below, these amendments generally extended, through December 15, 2010, the waivers and modifications that have been in place since August 14, 2009, under applicable forbearance agreements. These amendments also contained provisions for the final maturities of the debt secured by the amendments and established certain fees and milestones in connection therewith. The amendments removed substantially all of the financial covenants compliance requirements. The Company full expects to remain in full compliance with the remaining three financial covenants through the maturity date. No amendment, waiver or other fees were required to be paid in connection with the extension of the forbearance period from February 17, 2010 to December 15, 2010.

Since August 14, 2009, the Holding Company has paid down the aggregate debt outstanding under the two facilities from $276.8 million to $87.6 million as of March 31, 2010. This repayment has been largely funded by principal payments and interest received on loans receivable and asset sales executed at par or with discounts of less than 1%.

The Amendments were entered into under customary terms and conditions, with specific provisions including:

	•		Final maturity of December 15, 2010 for both facilities;
	•		No amendment or other closing fee;
	•		Interest rate on both facilities of 13.5%;
	•		Required to reduce the principal through paydowns such that maximum aggregate debt outstanding is as follows:

$68.0 million on April 30, 2010 (aggregate outstanding was $87.6 million as of March 31, 2010)

$60.0 million on June 30, 2010

$30.0 million on September 30, 2010;

	•		Not withstanding the amortization schedule, a fee of 2% of then-outstanding debt will be due if secured debt is not fully repaid by June 30, 2010;
	•		Debt payments based on periodic cash sweeps of available cash over $50.0 million through June 30, 2010, and $45.0 million thereafter;
	•		Fee of 0.20% of the then-outstanding debt if the ratio of then-outstanding debt to performing loans and cash of the Holding Company is greater than the amounts, as follows: ·

37% on February 28, 2010 (actual was 31% as of February 28, 2010)

30% on April 30, 2010

28% on June 30, 2010

28% on September 30, 2010;

	•		The Holding Company continues to not have access to the revolving line of credit;
	•		The Holding Company continues to be restricted from issuing any new extensions of credit and remains bound by limitations on the extension of existing credits. As contemplated, over the near term, the lending activities of the Holding Company will be carried out, in part, by NCB, FSB and its affiliate NCB Capital Impact;
	•		Certain yield maintenance penalty attributable to the senior notes were added to the principal balances thereof, as of August 14, 2009, and will be payable at maturity. The aggregate yield maintenance was approximately $6.8 million. Because the lenders and noteholders had the right to call and demand immediate repayment of any and all amounts due through the initial forbearance period expiring November 16, 2009, the yield maintenance penalty was fully amortized over the 90-day period from August 14, 2009 to November 16, 2009, and was added to the outstanding balance of the revolving credit facility and senior note balances.

The Holding Company intends to work to repay or refinance these obligations on or before June 30, 2010. In the event that the Holding Company is ultimately unable to refinance or otherwise meet its amortization obligations under the Amendments, the lenders and the noteholders have the right to call and demand immediate repayment of any and all amounts due.

The Holding Company believes that it has adequate liquidity to meet all of its obligations for the duration of the amended agreements and beyond. The Holding Company plans to fund loan curtailments and 2010 debt maturities with some combination of cash on hand, proceeds from the delivery of loans held-for-sale, the receipt of interest and principal payments on loans receivable, and potentially, through leveraging existing assets through the use of a securitization vehicle or another borrowing transaction, disposing of certain assets and raising funds from other capital sources. At this time, the Holding Company does not have the intent to sell any specific investment securities or loans, nor is it required to sell any of its investments or loans at a loss.

Regulatory Matters

On March 15, 2010, the Holding Company entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the OTS. The associated OTS Order (the “OTS Order”) provides that the Holding Company pay no cash dividends or redeem or repurchase any equity stock, and, not incur, issue, renew, rollover or increase any debt, except for the class A notes, without prior approval of the OTS. The OTS Order also requires the Holding Company to submit to the OTS a Business Plan within 45 days, and an updated Liquidity Risk Management Program within 30 days, both for review and comment. The OTS Order does not specify minimum tangible equity capital ratios. Rather, the Business Plan must establish such ratios that are “commensurate with the Holding Company’s stand alone risk profile that addresses, among other things, the Holding Company’s significant off-balance sheet liabilities.” The Business Plan must also address capital preservation and enhancement strategies to achieve the minimum tangible equity capital ratios that are established, strategies to ensure that the Holding Company’s obligations are met on a stand-alone basis without reliance on dividends from NCB, FSB and specific plans to reduce the risks from its current debt levels and contingent liabilities. The OTS Order shall remain in effect until terminated, modified, or suspended by written notice of such action by the OTS. The OTS Order, however, does not prohibit the Holding Company from transacting its normal business.

On March 15, 2010, NCB Financial Corporation, the mid-tier holding company for NCB, FSB, entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the OTS. The associated Order (the “Mid-Tier OTS Order”) provides that NCB Financial Corporation pay no cash dividends or redeem or repurchase any equity stock and shall not incur, issue, renew, rollover or increase any debt, without prior approval of the OTS.

On March 15, 2010, NCB, FSB entered into a Supervisory Agreement with the OTS (together with the OTS Order and the Mid-Tier OTS Order, the “OTS Actions”). The principal elements of the Supervisory Agreement provide that NCB, FSB not increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter without prior approval and shall not declare or pay any dividends or make any other capital distribution without the prior written approval of the OTS. Additionally, NCB, FSB must submit a Business Plan within 45 days and a Liquidity Risk Management Program within 30 days for OTS review, comment and approval. The Supervisory Agreement does not specify a minimum Tier 1 (Core) Capital Ratio or a Total Risk-Based Capital Ratio. Rather, the Business Plan must establish such ratios that are “commensurate with the Association’s risk profile.” The Business Plan must also include policies for maintaining an adequate allowance for loan and lease losses and various financial projections to be updated periodically. The Supervisory Order will remain in effect until modified or terminated by the OTS. The Supervisory Order does not, however, restrict NCB, FSB from transacting its normal banking business. NCB, FSB has and will continue to serve clients in all areas including making loans, subject to the limitation described above, accepting deposits and processing banking transactions. All client deposits remain fully insured to the limits set by the FDIC. NCB, FSB continues to take deposits, make loans and provide other financial services to its customers and remains well capitalized for regulatory purposes.

The Company has been actively engaged in responding to the concerns raised by the OTS and believes that the Holding Company is in compliance with the OTS Order, NCB Financial Corporation is in compliance with the Mid-Tier OTS Order and, NCB, FSB is in compliance with the Supervisory Agreement. However, if the financial condition of the Company weakens, the OTS may, upon further inspection, issue additional actions and require the Company to sell assets to increase liquidity, raise capital, or take other steps as they consider necessary.

These orders and agreements will remain in effect until terminated, modified, or suspended by written notice of such action by the OTS, acting by and through its authorized representatives.

2009 and 2008 Financial Summary

The Company’s net loss for the year ended December 31, 2009 was $44.6 million compared with net income of $2.6 million for the year ended December 31, 2008. The primary factors contributing to the net loss for 2009 were a $10.0 million decrease in net interest income, a $25.4 million increase in the provision for loan losses and a $7.4 million increase in the provision for unfunded commitments.

Total assets decreased 2.9% or $61.4 million to $2.09 billion as of December 31, 2009 from $2.15 billion as of December 31, 2008. A $263.5 million decrease in loans and lease financing combined with a $38.3 million decrease in investment securities more than offset the $226.1 million increase in cash and cash equivalents as of December 31, 2009.

The return on average total assets was -2.0% and 0.1 % for the years ended December 31, 2009 and 2008, respectively. For the years ended December 31, 2009 and 2008, the return on average members’ equity was -21.3% and 1.2%, respectively.

Net Interest Income

The largest source of revenue is net interest income, which is the difference between interest income on earning assets (primarily loans and securities) and interest expense on funding sources (including interest bearing deposits and borrowings). Earning asset balances and related funding, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Non-interest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of non-interest bearing sources of funds is captured in net interest margin, which is calculated as net interest income divided by average earning assets.

Net interest income for the year ended December 31, 2009 decreased $10.0 million or 17.7% to $46.4 million compared with $56.4 million for the year ended December 31, 2008.

For the year ended December 31, 2009, interest income decreased 7.2% or $8.9 million, to $114.8 million compared with $123.7 million for the year ended December 31, 2008. Aggregate yields decreased from 6.23% in 2008 to 5.45% in 2009, contributing $16.4 million to the decrease in interest income. However an increase in average earning balances of $122.9 million year-over-year, partially offset in the amount of $7.5 million the overall decrease in interest income from 2008 to 2009. A significant volume of sales of loans and investments during the fourth quarter of 2009 resulted in the decrease of period end earning balances although average earning balances increased year-over year. The majority of the Company’s loan portfolio is indexed to rates that have re-priced downward from December 31, 2008 to December 31, 2009, contributing $16.4 million to the decrease.

Other interest income, consisting only of excess yield, is generated from the interest-only non-certificated receivables held by the Company. The Company recognizes the excess of all cash flows attributable to the beneficial interest estimated at the transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Thus, based on the terms in each interest-only non-certificated receivable, the Company is entitled to a cash interest payment. This is offset by the amortization of the interest-only non-certificated receivable. Excess yield income was $2.2 million and $1.9 million for the years ended December 31, 2009 and 2008, respectively, an increase of $0.3 million.

Interest expense on borrowings increased $10.8 million or 36.4% from 2008 to 2009. The increase was primarily attributable to fees incurred and increased interest costs related to the Holding Company’s forbearance agreements for its revolving credit facility and senior notes during 2009. As a result of the forbearance agreements, the scheduled maturity of the borrowings was accelerated. Accordingly, the Company accelerated the amortization of issuance costs, included as a component of interest expense, and other fees that were deferred and amortized over the contractual maturity of the related debt arrangement. The acceleration of the amortization of these deferred issuance costs increased interest expense by $11.3 million from $1.2 million in 2008 to $12.5 million in 2009. Also, related to the forbearance agreements, the interest rate on the revolving credit facility has increased significantly during 2009 from approximately 350 basis points over the prime rate at the beginning of 2009 to the current rate of 13.5%. The senior notes interest rate has increased by more than 500 basis points over the initial rate during the year to the current rate of 13.5% primarily as a result of the forbearance agreements.

Variable interest rates, to which NCB FSB’s deposits are tied, have decreased significantly from 2009 to 2008. Specifically, NCB FSB’s costs of deposits have decreased 116 basis points from 3.35% in 2008 to 2.19% in 2009. NCB, FSB had $589.1 million and $612.5 million of brokered deposits all relating to certificates of deposit as of December 31, 2009 and December 31, 2008, respectively. These brokered deposits were 47.0% and 47.1% of total deposits as of December 31, 2009 and December 31, 2008, respectively. Of the $589.1 million of certificates of deposit, $113.5 million mature within 3 months and $475.6 million has a maturity ranging from 4 months to 72 months. The Company is actively working to decrease this concentration of brokered deposits.

See Table 1 and Table 2 for detailed effects of changes in rates and balances outstanding by specific product type and their effects on interest income and interest expense for 2009 and 2008.

Table 1
Changes in Net Interest Income
For the Years Ended December 31,
(Dollars in thousands)

		2009 Compared to 2008												2008 Compared to 2007
		Change in				Change in				Increase				Change in				Change in				Increase
		average				average				(Decrease)				average				average				(Decrease)
		volume				rate				Net*				volume				rate				Net*
Interest Income
Real Estate Loans (Residential and Commercial)		$	5,793			$	(9,388	)		$	(3,595	)		$	(1,758	)		$	(5,984	)		$	(7,742	)
Consumer and Commercial Loans and Leases			2,046				(5,591	)			(3,545	)			8,999				(9,948	)			(949	)
Total loans and lease financing			7,839				(14,979	)			(7,140	)			7,241				(15,932	)			(8,691	)
Investment securities and cash equivalents			(325	)			(1,720	)			(2,045	)			335				(2,898	)			(2,563	)
Other interest income			14				305				319				(472	)			(312	)			(784	)
Total interest income			7,528				(16,394	)			(8,866	)			7,104				(19,142	)			(12,038	)
Interest Expense
Deposits			4,224				(13,797	)			(9,573	)			6,315				(12,075	)			(5,760	)
Borrowings			(36	)			10,796				10,760				(1,119	)			(10,957	)			(12,076	)
Total interest expense			4,188				(3,001	)			1,187				5,196				(23,032	)			(17,836	)
Net interest income		$	3,340			$	(13,393	)		$	(10,053	)		$	1,908			$	3,890			$	5,798

Table 2
Rate Related Assets and Liabilities
For the years ended December 31,
(Dollars in thousands)

		2009												2008												2007
		Average				Income /				Average				Average				Income /				Average				Average				Income /				Average
		Balance*				Expense				Rate/Yield				Balance*				Expense				Rate/Yield				Balance*				Expense				Rate/Yield
Assets
Interest earning assets
Real Estate Loans (Residential and Commercial)		$	1,234,253			$	66,325				5.37	%		$	1,133,851			$	69,920				6.17	%		$	1,161,204			$	77,662				6.69	%
Consumer and Commercial Loans and Leases			717,972				42,860				5.97	%			685,843				46,405				6.77	%			566,812				47,354				8.35	%
Total loans and lease financing			1,952,225				109,185				5.59	%			1,819,694				116,325				6.39	%			1,728,016				125,016				7.23	%
Investment securities and cash equivalents			130,190				3,473				2.67	%			140,036				5,518				3.94	%			133,333				8,081				6.06	%
Other interest income			26,107				2,177				8.34	%			25,930				1,858				7.17	%			32,060				2,642				8.24	%
Total interest earning assets			2,108,522				114,835				5.45	%			1,985,660				123,701				6.23	%			1,893,409				135,739				7.17	%
Allowance for loan losses			(38,413	)											(21,254	)											(18,479	)
Non-interest earning assets
Cash			44,138												12,438												10,366
Other			70,661												76,402												65,300
Total non-interest earning assets			114,799												88,840												75,666
Total assets		$	2,184,908											$	2,053,246											$	1,950,596
Liabilities and members’ equity
Interest bearing liabilities
Deposits		$	1,274,883			$	27,977				2.19	%		$	1,122,383			$	37,550				3.35	%		$	961,489			$	43,310				4.50	%
Borrowings			658,727				40,495				6.15	%			659,402				29,735				4.51	%			680,413				41,811				6.14	%
Total interest bearing liabilities			1,933,610				68,472				3.54	%			1,781,785				67,285				3.78	%			1,641,902				85,121				5.18	%
Other liabilities			41,889												50,627												78,344
Members’ equity			209,409												220,834												230,350
Total liabilities and members’ equity		$	2,184,908											$	2,053,246											$	1,950,596
Net interest earning assets		$	174,912											$	203,875											$	251,507
Net interest revenues and spread						$	46,363				1.91	%						$	56,416				2.45	%						$	50,618				1.98	%
Net yield on interest earning assets											2.20	%											2.84	%											2.67	%

Non-interest Income
(Dollars in thousands)

		Non-interest income for the
		years ended December 31,
		2009				2008
Gain on sale of loans		$	12,305			$	6,016
Letter of credit fees			4,566				4,356
Servicing fees			3,992				4,568
Real estate loan fees			662				1,002
Commercial loan fees			363				1,184
Prepayment fees			221				735
Change in unrealized (loss) gain on derivatives			(53	)			3,256
Other			2,332				2,562
Total non-interest income		$	24,388			$	23,679

Total non-interest income increased slightly by $0.7 million or 3.0% from $23.7 million for the year ended December 31, 2008, to $24.4 million for the year ended December 31, 2009. Gain on sale of loans increased by $6.3 million or 104.5% year-over-year. The increase in gain on sale from 2008 to 2009 was due to two factors, (1) an increase in volume year-over-year, and (2) a decrease in losses realized on the sale of loans year-over-year. In late 2007, the credit markets began deteriorating, and credit spreads at which loans were originated began to widen. Consequently, loans originated in late 2007 were sold in 2008 at losses because the Company did not effectively hedge this risk. In order to mitigate this risk, beginning in 2008 and throughout 2009, the Company forward sold all loans, on a loan by loan basis, to investors at, or near, the date of interest rate lock. This policy locked in the Company’s gains and eliminated its exposure to credit and interest rate risk that led to the losses realized in early 2008.

Other non-interest income includes cash management service fees, dividends on FHLB stock and other miscellaneous income the Company earns.

In total, non-interest income amounted to 34.5% of total net revenue (net interest income plus non-interest income) for the year ended December 31, 2009 compared with 29.6% for the year ended December 31, 2008.

The following table shows the unpaid principal balance of loans sold and percentage of gain for the years ended December 31 (dollars in thousands):

		2009								2008
						Percentage								Percentage
		Balance				of Gain				Balance				of Gain
Cooperative, Multifamily and Commercial Real Estate Loans:		$	381,956				1.33	%		$	273,660				1.85	%
Consumer Loans (auto loans)			180,202				0.00	%			357,179				0.00	%
Single-family Residential Loans and Share Loans			242,980				1.38	%			166,199				1.52	%
SBA Loans			9,359				2.97	%			9,553				4.10	%
Total		$	814,497				1.50	%		$	806,591				1.15	%

The Consumer Loan sales represent the sale, at par, of participations in auto loans. The Company purchases and sells these notes within a 30-day cycle; therefore the Company does not earn a gain on sale of these loans. The primary economic benefit to the Company of this program is the net interest income it earns while these notes are on the balance sheet for this 30-day period.

Non-interest Expense
(Dollars in thousands)

		Non-interest expense for the
		years ended December 31,
		2009				2008
Compensation and employee benefits		$	31,272			$	29,815
Contractual services			8,495				5,482
Provision for unfunded commitments			8,080				659
Occupancy and equipment			6,675				7,470
Information systems			4,295				4,627
Other-than-temporary impairment losses (OTTI)			3,782				1,692
Loan costs			3,462				2,479
FDIC premium			2,551				823
Corporate development			1,019				1,345
Travel and entertainment			764				1,220
Lower of cost or market adjustment			329				832
Loss (gain) on sale of investments available-for-sale			23				(167	)
Other			2,662				1,982
Total non-interest expense		$	73,409			$	58,259

Non-interest expense for the year ended December 31, 2009, increased 25.9% or $15.1 million to $73.4 million compared with $58.3 million for the corresponding prior year period primarily due to a $7.4 million increase in the provision for unfunded commitments as a result of a $51.6 million increase in criticized letters of credit, a $1.7 million increase in FDIC premiums resulting from special fees assessed by the FDIC during 2009, a $3.0 million increase in contractual services for legal fees relating to the forbearance agreements and a $2.1 million increase in OTTI losses related to the OTTI of the Company’s interest-only certificated receivables that were sold during 2009.

Although the Company had a reduction in headcount during 2009, its compensation and employee benefits expense increased $1.5 million from 2008 to 2009. The primary cause of the year-over-year increase in compensation and employees benefits expense is the severance expense for employees affected by the Company’s reduction in force during 2009 in order to align itself with changing market conditions.

Credit Quality

To manage credit risk over a wide geographic area and lending in multiple industries, the Company uses a team-based approval process, which relies upon the expertise of lending teams familiar with particular segments of the industry in which the Company lends. Senior management approves those credit facilities exceeding delegated lending authority for each team in an attempt to ensure the quality of lending decisions. In order to keep abreast of economic events and market conditions throughout the United States, various lending teams regularly perform financial analysis of the industries and regions.

An inevitable aspect of the lending or risk assumption process is the fact that losses will be incurred. The extent to which losses occur depends on the risk characteristics of the loan portfolio. The Company emphasizes continuous credit risk management. Specific procedures have been established that seek to eliminate undue credit risk. They include a multilevel approval process, credit underwriting separate and apart from the approval process, and an ongoing assessment of the credit condition of the portfolio. In addition, a risk rating system is designed to classify each loan according to the risks unique to each credit facility.

Loans with risk characteristics that make their full and timely payment uncertain are assigned to the Risk Management Department. The Risk Management Department determines, on a case-by-case basis, the best course of action to restore a credit to an acceptable risk rating or to minimize potential losses to the Company.

The allowance for loan losses is increased by the provision for loan losses and decreased by the amount of charge-offs, net of recoveries. The allowance for loan losses is determined based on risk ratings, current and future economic conditions, concentrations, diversification, portfolio size, collateral and guarantee support and level of non-performing and delinquent credits, among other relevant factors.

In determining the size of the allowance, the Company relies on an analysis of its loan portfolio, probabilities of default and loss in event of default expected based on historical actual losses, and an evaluation of general economic conditions. Federal regulators periodically evaluate the adequacy of the Company’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 the Company’s management.

Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
(Dollars in thousands)

		2009				2008				2007				2006				2005
Balance at beginning of year		$	27,067			$	17,714			$	19,480			$	20,193			$	16,991
Charge-offs
Consumer Loans			(4,355	)			(2,111	)			(715	)			(254	)			(118	)
Commercial Loans			(30,193	)			(8,073	)			(1,737	)			(4,435	)			(380	)
Real Estate Loans (Residential and Commercial)			(1,857	)			—				—				(32	)			(9	)
Total charge-offs			(36,405	)			(10,184	)			(2,452	)			(4,721	)			(507	)
Recoveries
Consumer Loans			824				144				297				1				—
Commercial Loans			789				743				237				340				2,681
Real Estate Loans (Residential and Commercial)			94				—				—				—				558
Total recoveries			1,707				887				534				341				3,239
Net (charge-offs) recoveries			(34,698	)			(9,297	)			(1,918	)			(4,380	)			2,732
Provision for loan losses			44,099				18,650				152				3,667				470
Balance at end of year		$	36,468			$	27,067			$	17,714			$	19,480			$	20,193

The allowance for loan losses represented 2.2% and 1.4% of total loans and lease financing, excluding loans held-for-sale, as of December 31, 2009 and December 31, 2008, respectively. The allowance as a percentage of non-performing assets was 49.5% as of December 31, 2009 compared with 149.6% as of December 31, 2008. The decrease in this percentage can be primarily attributed to an increase in non-performing assets and partially to a significant increase in charge-offs during 2009.

During 2009, the Company experienced additional weakness in the credit quality of its loan portfolio, especially in the Healthcare and Employee Stock Ownership Plan (“ESOP”) portfolios (included in Commercial Loans). Healthcare credits accounted for $20.1 million or 27.3% of non-performing assets as of December 31, 2009. There were no non-performing assets in the Healthcare segment as of December 31, 2008. ESOP credits accounted for $6.7 million or 9.1% of non-performing assets as of December 31, 2009 and $0.3 million or 1.7% of non-performing assets as of December 31, 2008. Cooperative Housing credits accounted for $12.1 million or 16.5% of the non-performing assets as of December 31, 2009. There were no non-performing assets in the Cooperative Housing segment as of December 31, 2008.

As of December 31, 2009 and December 31, 2008, reserves were deemed to be adequate to cover the estimated loss exposure related to the impaired loans. As of December 31, 2009 and December 31, 2008, there were no commitments to lend additional funds to borrowers whose loans were impaired.

Although the Single-family Residential and Share Loan portfolios continue to perform well, there has been a steady increase in foreclosure and unemployment rates in localities in which these loans are most highly concentrated. As a result of these factors, during 2009 the Company’s allowance for loan losses was adjusted to increase the allocation for those Single-family Residential and Share Loans with an Acceptable rating from 18 basis points to 30 basis points of the loan balance.

The Consumer Loan portfolio has not been performing well as a result of the increase in unemployment rates and decrease of credit scores in localities in which these loans are most highly concentrated. As a result of these factors, during 2009, the Company’s allowance for loan losses was adjusted for those Consumer Loans with an Acceptable or Watch List rating by an increase from 2 basis points to 6 basis points of the loan balance. The loss in the event of default for the Company’s Commercial Loans and Commercial Real Estate Loans was also increased due to continued deterioration in those portfolios. The allowance for Consumer Loans with a Special Mention rating was adjusted from 2 basis points to 7 basis points of the loan balance during 2009.

The Company’s increased provision for loan losses and increased charge-off activity was primarily driven by severe financial problems experienced by a limited number of borrowers. A number of these borrowers had higher loan balances than the Company’s typical borrower. Certain of these borrowers also filed for bankruptcy protection during 2009. The increase in provision is also a response to changes in loan quality, coupled with increased losses as a result of declining Commercial Loan collateral values. During the third quarter of 2009, the Company adjusted certain of the inputs in its allowance for loan loss calculation for its Single-family Residential Loan, Share Loan, Commercial Loan, Commercial Real Estate Loan and Consumer Loan portfolios to reflect the current market conditions. The adjustments resulted in an increase of $3.9 million to the Company’s allowance for loan losses as of December 31, 2009.

Of the $44.1 million provision for loan losses for 2009, $33.0 million was related to Commercial Loans, $3.0 million was related to Real Estate Loans and $8.1 million was related to Consumer Loans.

Net (charge-offs) recoveries were 1.8%, 0.5%, 0.1%, 0.3% and 0.2% of the average loan and lease financing balance for the years ended December 31, 2009, 2008, 2007, 2006 and 2005, respectively.

Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
As of December 31,
(Dollars in thousands)

		2009								2008								2007								2006								2005
						Percent of								Percent of								Percent of								Percent of								Percent of
		Amount				Total				Amount				Total				Amount				Total				Amount				Total				Amount				Total
Loan and lease financing
Consumer and Commercial Loans		$	633,710				37.4	%		$	744,918				38.1	%		$	572,872				37.6	%		$	532,356				38.6	%		$	574,123				45.4	%
Real Estate Loans (Residential and Commercial)			1,059,822				62.6	%			1,211,862				61.9	%			950,512				62.4	%			847,746				61.4	%			684,951				54.2	%
Leases			157				0.0	%			411				0.0	%			574				0.0	%			636				0.0	%			4,629				0.4	%
Total loans and lease financing		$	1,693,689				100.0	%		$	1,957,191				100.0	%		$	1,523,958				100.0	%		$	1,380,738				100.0	%		$	1,263,703				100.0	%
Allocation of allowance for loan losses
Consumer and Commercial Loans		$	27,159				74.5	%		$	22,601				83.5	%		$	10,907				61.6	%		$	14,430				74.1	%		$	14,780				73.2	%
Real Estate Loans (Residential and Commercial)			9,309				25.5	%			4,466				16.5	%			6,807				38.4	%			5,050				25.9	%			5,413				26.8	%
Total allowance for loan losses		$	36,468				100.0	%		$	27,067				100.0	%		$	17,714				100.0	%		$	19,480				100.0	%		$	20,193				100.0	%

Table 5
IMPAIRED ASSETS
As of December 31,

(Dollars in thousands)

		2009				2008				2007				2006				2005
Real estate owned		$	2,315			$	659			$	310			$	193			$	10
Impaired loans			97,748				20,377				13,324				21,600				14,200
Total		$	100,063			$	21,036			$	13,634			$	21,793			$	14,210
Percentage of loans and lease financing outstanding			5.91	%			1.07	%			0.89	%			1.58	%			1.12	%

A loan is considered impaired when, based on current information, it is probable the Company will be unable to collect all amounts due under the contractual terms of the loan. As of December 31, 2009, the Company had an allowance of $14.7 million on the $97.7 million of impaired loans. The aggregate average balance of impaired loans was $73.6 million and $16.3 million for the years months ended December 31, 2009 and December 31, 2008, respectively. As of December 31, 2009, the Company’s impaired loans included $26.3 million of loans still accruing interest because the borrower is making timely debt service payments; however, the loans were impaired due to actual or probable deterioration in the financial condition or performance of the borrower or due to a significant decline in the value of the collateral. The remaining $71.4 million of loans are not accruing interest because the debt service payments were at least 90 days delinquent. As of December 31, 2008, the Company’s impaired loans included $17.4 million of loans still accruing interest because the borrower is making timely debt service payments; however, the loans were impaired due to actual or probable deterioration in the financial condition or performance of the borrower or due to a significant decline in the value of the collateral. The remaining $3.0 million of loans were not accruing interest because the debt service payments were at least 90 days delinquent. Although some of the Company’s loans are still accruing interest, the loans are considered impaired due to deterioration in the financial condition of the borrower or due to a significant decline in the value of the collateral.

Letters of Credit

As of December 31, 2009, the Company had outstanding letters of credit with a total commitment amount of $245.2 million of which $67.9 million were classified as criticized with an associated reserve for losses on these unfunded commitments of $10.3 million. As of December 31, 2008, the Company had outstanding letters of credit with a total commitment amount of $293.7 million of which $16.2 million were classified as criticized with an associated reserve for losses on these unfunded commitments of $2.0 million. During 2008, the Company provided funding for eight letters of credit for a total of $16.4 million of which $5.8 million was a result of the lead bank not being able to confirm the letter of credit and $10.6 million was the result of an inability to sell the bond to another purchaser. All amounts were recovered at the time the letter of credit was confirmed by the lead bank or when the bonds were remarketed and sold to other third-parties. During 2009, one letter of credit was funded in the amount of $6.9 million with probable loss of $5.1 million and subsequently charged-off.

2008 and 2007 Financial Summary

The Company’s net income for the year ended December 31, 2008 was $2.6 million compared with a net loss of $0.5 million for the year ended December 31, 2007.

Total assets increased 15.1% or $283.1 million to $2.15 billion at December 31, 2008 from $1.87 billion at December 31, 2007. A $433.2 million increase in loans and lease financing more than offset a $76.7 million decrease in loans held-for-sale.

The return on average total assets was 0.1% and 0% for the years ended December 31, 2008 and 2007, respectively. For the years ended December 31, 2008 and 2007, the return on average members’ equity was 1.2% and -0.2%, respectively.

Net Interest Income

Net interest income for the year ended December 31, 2008 increased $5.8 million or 11.5% to $56.4 million compared with $50.6 million for 2007.

For the year ended December 31, 2008, interest income decreased 8.8% or $12.0 million, to $123.7 million compared with $135.7 million for the year ended December 31, 2007. The total average earning balances increased by $92.3 million while aggregate yields decreased from 7.17% in 2007 to 6.23% in 2008. The decrease in interest income resulted primarily from an increase in average Consumer and Commercial Loan balances which was more than offset by a decrease in yields on all loan types.

Interest income from Real Estate (Residential and Commercial) Loans decreased $7.7 million or 10.0%. A decrease in average balances of $27.4 million or 2.4% contributed $1.8 million to the decrease while a decrease in the yield from 6.69% in 2007 to 6.17% in 2008 contributed $5.9 million to the year-over-year decrease. Consumer and Commercial Loans and Lease interest income decreased $0.9 million or 2.0%. The decrease in the yield from 8.35% in 2007 to 6.77% in 2008 contributed $9.9 million to the decrease in income, while an increase in average balances of $119.0 million or 21.0% offset $9.0 million of the year-over-year decrease in income. Interest income from investment securities and cash equivalents decreased by $2.6 million. A decrease in the yield from 6.06% in 2007 to 3.94% in 2008 contributed to the majority of the $2.6 million year-over-year decrease in investment securities interest income.

Interest expense decreased $17.8 million or 20.9% from $85.1 million for the year ended December 31, 2007 compared to $67.3 million for the year ended December 31, 2008.

Interest expense on deposits decreased $5.7 million or 13.4% from $43.3 million in 2007 to $37.6 million in 2008. The average cost of deposits decreased by 115 basis points from 4.50% to 3.35% contributing $12.0 million to the decrease in interest expense. An increase of $160.9 million in the deposit average balance partially offset the decrease in expense by $6.3 million. The weighted average rates on deposits at December 31, 2008 and 2007 were 2.75% and 4.19%, respectively. The average maturity of the certificates of deposit at December 31, 2008 and 2007 were 10.9 months and 13.8 months, respectively. The growth of deposits remains a key component of the Company’s funding capability.

Interest expense on borrowings decreased by $12.1 million or 28.9%. The average balance on borrowings decreased by $21.0 million, which was primarily driven by the decrease in FHLB advances and contributed $1.1 million to the decrease in interest expense. The average cost of borrowings decreased from 6.14% to 4.51%, contributing $11.0 million to the decrease.

See Table 1 and Table 2 for detailed effects of changes in rates and balances outstanding by specific product type and their effects on interest income and interest expense for 2008 and 2007.

Non-Interest Income

Total non-interest income increased $11.7 million or 97.8% from $12.0 million for the year ended December 31, 2007 to $23.7 million for the year ended December 31, 2008. This was driven by an increase of $10.8 million in gain on sale of loans, including the derivative accounting adjustment, from a loss of $1.5 million in 2007 to a gain of $9.3 million in 2008 due to the mitigation of market risk. In order to mitigate risk, the Company forward sells loan commitments on a loan by loan basis. The increase was also due to a $0.9 million increase in letter of credit income due to new letters of credit issued during 2008.

In total, non-interest income amounted to 29.6% of total net revenue (net interest income plus non-interest income) for the year ended December 31, 2008 compared with 19.1% for the year ended December 31, 2007.

Non-Interest Expense

Non-interest expense for the year ended December 31, 2008 decreased 8.3% or $5.3 million to $58.3 million compared with $63.6 million for the year ended December 31, 2007 primarily due to a $2.9 million decrease in compensation and employee benefits resulting from: the decrease in regular base salary due to the reduction in headcount, a reduction in bonuses and commissions due to the economic downturn and a decrease in severance expense for employees in 2008 compared to 2007. Also contributing to the decrease in non-interest expense from 2007 to 2008 was a $1.5 million decrease in corporate development due to an overall effort to reduce corporate expenses, a $1.3 million decrease in lease termination costs from 2007, and a $1.2 million decrease in the lower of cost or market valuation resulting from implementation of a fair value accounting standard. The decrease was partially offset by a $1.7 million increase in the loss on investments available-for-sale for CMO investments that were other than temporarily impaired as of December 31, 2008.

2009 and 2008 Fourth Quarter Results

The Company’s net loss for the three months ended December 31, 2009 was $9.9 million. This was an $8.9 million increase compared with a net loss of $1.0 million for the three months ended December 31, 2008. For the three months ended December 31, 2009, net interest income decreased 45.2% or $7.0 million to $8.5 million compared with $15.5 million for the three months ended December 31, 2008.

For the three months ended December 31, 2009, interest income decreased 11.1% or $3.6 million to $28.9 million compared with $32.5 million for the three months ended December 31, 2008. The decrease was primarily due to a $1.5 million decrease in commercial loans interest income resulting from the decrease in yields during the three months ended December 31, 2009 compared to the same period in 2008.

For the three months ended December 31, 2009, interest expense increased $3.4 million or 20.0% from $17.0 million for the three months ended December 31, 2008 to $20.4 million for the three months ended December 31, 2009. The increase in interest expense resulted primarily from a $6.6 million increase in total borrowings interest expense and a $3.2 million decrease in total deposit interest expense. The increase in total borrowings was triggered by an increase in interest rates due to the forbearance agreements and incurrence of fees associated with the forbearance agreements that are included in interest expense. A reduction in yields from the three months ended 2009 to the three months ended 2008 was the primary contributor to the overall decrease in deposit interest expense.

For the three months ended December 31, 2009, total non-interest income remained stable at $5.4 million for the three months ended December 31, 2009 and December 31, 2008.

Non-interest expense for the three months ended December 31, 2009 increased 37.2% or $5.1 million to $18.8 million compared with $13.7 million for the same period in 2008. This increase is primarily due to a $3.5 million increase in compensation and employee benefits as a result of a $2.7 million increase in bonuses and incentives and a $0.9 million increase in severance pay expense. Also contributing to the quarter-over-quarter increase in non-interest expense is a $1.8 million increase in provisions for unfunded commitments.

The income tax benefit for the three months ended December 31, 2009 was $2.1 million, compared with a tax provision of $46 thousand for the three months ended December 31, 2008. The decrease in the tax provision was largely due to a $1.5 million reversal of the Company’s valuation allowance as a result of new legislation allowing the Company to carry back prior period net operating losses. The decrease was also a result of NCB, FSB’s net operating loss of $6.6 million for the year ended December 31, 2009 compared to net income of $7.9 for the year ended December 31, 2008.

Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
For the Three Months Ended
(Dollars in thousands)

		2009																2008
		Dec. 31				Sept. 30				June 30				Mar. 31				Dec. 31				Sept. 30				June 30				Mar. 31
Interest income		$	28,925			$	28,063			$	28,436			$	29,412			$	32,549			$	30,448			$	30,232			$	30,473
Interest expense			20,412				19,947				14,753				13,360				17,033				16,299				15,975				17,979
Net interest income			8,513				8,116				13,683				16,052				15,516				14,149				14,257				12,494
Provision for loan losses			7,133				12,182				13,916				10,869				8,119				6,042				2,805				1,684
Income after provision for loan losses			1,380				(4,066	)			(233	)			5,183				7,397				8,107				11,452				10,810
Non-interest income			5,409				5,758				7,249				6,229				5,372				7,120				7,164				4,024
Net revenue			6,789				1,692				7,016				11,412				12,769				15,227				18,616				14,834
Non-interest expense			18,759				22,542				17,538				14,829				13,749				14,773				15,256				14,481
(Loss) income before income taxes			(11,970	)			(20,850	)			(10,522	)			(3,417	)			(980	)			454				3,360				353
(Benefit) provision for income taxes			(2,087	)			889				(741	)			(180	)			46				456				110				(56	)
Net (loss) income		$	(9,883	)		$	(21,739	)		$	(9,781	)		$	(3,237	)		$	(1,026	)		$	(2	)		$	3,250			$	409

Loans and Leases

Loans and leases outstanding, including loans held-for-sale, decreased $242.1 million or 12.3% from $2.0 billion at December 31, 2008 to $1.7 billion at December 31, 2009.

The Consumer and Commercial Loan and Lease portfolio decreased 14.9% to $633.9 million at December 31, 2009 compared with $745.3 million at December 31, 2008 due principally to a decrease in Consumer and Commercial Loan and Lease portfolio originations.

The Real Estate (Residential and Commercial) Loan portfolio decreased 12.6% to $1.1 billion at December 31, 2009 from $1.2 billion at December 31, 2008 due to a decrease in portfolio Real Estate (Residential and Commercial) Loan originations during 2009. The Real Estate (Residential and Commercial) Loan portfolio is substantially composed of Multifamily Loans, Single-family Residential Loans and Share Loans.

The Company’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. The Company’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.

The Company’s loan portfolio is diversified both in terms of industry and geography. The following is the distribution of the loans outstanding as of December 31:

		Commercial Loans								Real Estate Loans
		2009				2008				2009				2008
By Region:
Southeast			33.6	%			35.1	%			22.1	%			22.1	%
Northeast			27.4	%			22.6	%			36.4	%			43.1	%
West			27.3	%			30.0	%			28.4	%			22.7	%
Central			11.7	%			12.3	%			13.1	%			12.1	%
			100.0	%			100.0	%			100.0	%			100.0	%