Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - NATIONAL CONSUMER COOPERATIVE BANK /DC/ | c08392exv32.htm |
EX-31.1 - EXHIBIT 31.1 - NATIONAL CONSUMER COOPERATIVE BANK /DC/ | c08392exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NATIONAL CONSUMER COOPERATIVE BANK /DC/ | c08392exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
(12 U.S.C. Section 3001 et. seq.) | 52-1157795 | |
(State or other jurisdiction of 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) |
Registrants telephone number, including area code: (202) 349-7444
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o.
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). Yes o No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See Definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated 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
Exchange Act). Yes o No þ.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
September 30, 2010: Class B 1,795,981; Class C 254,373.
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(in thousands)
September 30, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 220,447 | $ | 258,406 | ||||
Federal funds sold |
4,326 | 7,684 | ||||||
Total cash and cash equivalents |
224,773 | 266,090 | ||||||
Restricted cash |
3,179 | 179 | ||||||
Investment securities |
||||||||
Available-for-sale |
48,089 | 29,805 | ||||||
Held-to-maturity |
387 | 387 | ||||||
Loans held-for-sale ($30.1 million and $1.8 million recorded
at fair value, respectively) |
45,149 | 35,730 | ||||||
Loans held-for-investment |
1,379,374 | 1,693,689 | ||||||
Less: Allowance for loan losses |
(43,221 | ) | (36,468 | ) | ||||
Net loans and lease financing |
1,336,153 | 1,657,221 | ||||||
Other assets |
108,466 | 104,125 | ||||||
Total assets |
$ | 1,766,196 | $ | 2,093,537 | ||||
Liabilities and Members Equity |
||||||||
Liabilities |
||||||||
Deposits |
$ | 1,117,498 | $ | 1,253,954 | ||||
Borrowings |
428,815 | 614,553 | ||||||
Other liabilities |
34,613 | 40,441 | ||||||
Total liabilities |
1,580,926 | 1,908,948 | ||||||
Members equity |
||||||||
Common stock |
205,035 | 205,035 | ||||||
Retained deficit unallocated |
(19,551 | ) | (19,650 | ) | ||||
Accumulated other comprehensive loss |
(214 | ) | (796 | ) | ||||
Total members equity |
185,270 | 184,589 | ||||||
Total liabilities and members equity |
$ | 1,766,196 | $ | 2,093,537 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
(in thousands)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income |
||||||||||||||||
Loans and lease financing |
$ | 20,093 | $ | 26,734 | $ | 66,086 | $ | 81,823 | ||||||||
Investment securities |
393 | 785 | 1,098 | 2,485 | ||||||||||||
Other interest income |
622 | 544 | 1,736 | 1,603 | ||||||||||||
Total interest income |
21,108 | 28,063 | 68,920 | 85,911 | ||||||||||||
Interest expense |
||||||||||||||||
Deposits |
5,301 | 6,650 | 16,411 | 21,759 | ||||||||||||
Borrowings |
5,049 | 13,297 | 19,225 | 26,301 | ||||||||||||
Total interest expense |
10,350 | 19,947 | 35,636 | 48,060 | ||||||||||||
Net interest income |
10,758 | 8,116 | 33,284 | 37,851 | ||||||||||||
Provision for loan losses |
2,151 | 12,182 | 11,009 | 36,967 | ||||||||||||
Net interest income (loss) after provision for loan losses |
8,607 | (4,066 | ) | 22,275 | 884 | |||||||||||
Non-interest income |
||||||||||||||||
Gain on mortgage banking activities and loan sales |
7,234 | 3,150 | 15,344 | 9,914 | ||||||||||||
Servicing fees |
970 | 714 | 3,976 | 3,066 | ||||||||||||
Letter of credit fees |
828 | 1,161 | 2,479 | 3,422 | ||||||||||||
Real estate loan fees |
418 | 137 | 1,005 | 473 | ||||||||||||
Other |
1,079 | 596 | 2,511 | 2,104 | ||||||||||||
Total non-interest income |
10,529 | 5,758 | 25,315 | 18,979 | ||||||||||||
Non-interest expense |
||||||||||||||||
Compensation and employee benefits |
7,377 | 7,339 | 23,487 | 22,903 | ||||||||||||
Provision for losses on unfunded commitments |
1,831 | 4,026 | 1,574 | 6,502 | ||||||||||||
Occupancy and equipment |
1,555 | 1,668 | 4,564 | 5,037 | ||||||||||||
Contractual services |
1,328 | 3,063 | 6,104 | 5,874 | ||||||||||||
Loan costs |
1,284 | 968 | 3,377 | 2,532 | ||||||||||||
FDIC premium |
978 | 535 | 2,810 | 1,992 | ||||||||||||
Information systems |
915 | 986 | 3,078 | 3,237 | ||||||||||||
Corporate development |
177 | 289 | 497 | 833 | ||||||||||||
(Loss) gain on sale of investments available-for-sale |
| (5 | ) | | 89 | |||||||||||
Other-than-temporary impairment losses (OTTI) (all OTTI is
credit-related) |
||||||||||||||||
Gross impairment losses |
| 2,312 | | 3,792 | ||||||||||||
Less:
impairments recognized in other comprehensive income (before taxes) |
| | | (158 | ) | |||||||||||
Net impairment losses recognized in earnings |
| 2,312 | | 3,634 | ||||||||||||
Lower of cost or market valuation allowance loans held-for-sale |
20 | 698 | (20 | ) | 289 | |||||||||||
Other |
693 | 663 | 2,057 | 1,728 | ||||||||||||
Total non-interest expense |
16,158 | 22,542 | 47,528 | 54,650 | ||||||||||||
Income (loss) before income taxes |
2,978 | (20,850 | ) | 62 | (34,787 | ) | ||||||||||
Income tax provision (benefit) |
75 | 889 | (37 | ) | (32 | ) | ||||||||||
Net income (loss) |
$ | 2,903 | $ | (21,739 | ) | $ | 99 | $ | (34,755 | ) | ||||||
Distribution of net income (loss) |
||||||||||||||||
Patronage dividend accrual |
$ | | $ | (97 | ) | $ | | $ | | |||||||
Retained earnings (deficit) |
2,903 | (21,642 | ) | 99 | (34,755 | ) | ||||||||||
$ | 2,903 | $ | (21,739 | ) | $ | 99 | $ | (34,755 | ) | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
(in thousands)
(Unaudited)
For the nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net income (loss) |
$ | 99 | $ | (34,755 | ) | |||
Other comprehensive loss: |
||||||||
Non-credit portion of OTTI |
| (158 | ) | |||||
Recognition of unrealized losses due to OTTI |
| 3,792 | ||||||
Remaining change in unrealized holding gain before tax on available-for-sale
investment securities and interest-only non-certificated receivables |
597 | 332 | ||||||
Tax effect |
(15 | ) | (116 | ) | ||||
Comprehensive income (loss) |
$ | 681 | $ | (30,905 | ) | |||
For the three months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net income (loss) |
$ | 2,903 | $ | (21,739 | ) | |||
Other comprehensive income (loss): |
||||||||
Recognition of unrealized losses due to OTTI |
| 2,312 | ||||||
Remaining
change in unrealized holding loss before tax on
available-for-sale investment securities and interest-only non-certificated receivables |
(55 | ) | (116 | ) | ||||
Tax effect |
(3 | ) | (22 | ) | ||||
Comprehensive income (loss) |
$ | 2,845 | $ | (19,565 | ) | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||
Retained | Retained | Other | Total | |||||||||||||||||
Common | Earnings | Deficit | Comprehensive | Members | ||||||||||||||||
Stock | Allocated | Unallocated | Loss | Equity | ||||||||||||||||
Balance, December 31, 2009 |
$ | 205,035 | $ | | $ | (19,650 | ) | $ | (796 | ) | $ | 184,589 | ||||||||
Net income |
| | 99 | | 99 | |||||||||||||||
Unrealized gain on available-for-sale investment securities
and interest-only non-certificated receivables, net of taxes |
| | | 582 | 582 | |||||||||||||||
Balance, September 30, 2010 |
$ | 205,035 | $ | | $ | (19,551 | ) | $ | (214 | ) | $ | 185,270 | ||||||||
Accumulated | ||||||||||||||||||||
Retained | Retained | Other | Total | |||||||||||||||||
Common | Earnings | Earnings | Comprehensive | Members | ||||||||||||||||
Stock | Allocated | Unallocated | Loss | Equity | ||||||||||||||||
Balance, December 31, 2008 |
$ | 197,784 | $ | 7,154 | $ | 25,008 | $ | (4,432 | ) | $ | 225,514 | |||||||||
Adjustment to opening balance |
| | 77 | (77 | ) | | ||||||||||||||
Balance, January 1, 2009 |
197,784 | 7,154 | 25,085 | (4,509 | ) | 225,514 | ||||||||||||||
Net loss |
| | (34,755 | ) | | (34,755 | ) | |||||||||||||
Non-credit portion of 2009 OTTI |
| | | (158 | ) | (158 | ) | |||||||||||||
2008 patronage dividends distributed in stock |
7,251 | (7,154 | ) | (97 | ) | | | |||||||||||||
Recognition of unrealized losses due to OTTI |
| | | 3,792 | 3,792 | |||||||||||||||
Remaining change in unrealized gain on available-for-sale investment
securities and interest-only non-certificated receivables, net of taxes |
| | | 216 | 216 | |||||||||||||||
Balance, September 30, 2009 |
$ | 205,035 | $ | | $ | (9,767 | ) | $ | (659 | ) | $ | 194,609 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 99 | $ | (34,755 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities |
||||||||
Provision for loan losses |
11,009 | 36,967 | ||||||
Provision for losses on unfunded commitments |
1,574 | 6,502 | ||||||
Amortization and writedown of interest-only receivables and servicing rights |
5,054 | 9,583 | ||||||
Depreciation and amortization, other |
1,726 | 6,172 | ||||||
Gain on mortgage banking activities and loan sales |
(15,344 | ) | (9,914 | ) | ||||
Net impairment losses recognized in earnings |
| 3,634 | ||||||
Loss on sale of investments available-for-sale |
| 89 | ||||||
Purchases of loans held-for-sale |
(246,968 | ) | (141,018 | ) | ||||
Loans originated for sale, net of principal collections |
(387,153 | ) | (351,378 | ) | ||||
Lower of cost or market valuation allowance |
(20 | ) | 289 | |||||
Net proceeds from sale of loans held-for-sale |
846,345 | 497,665 | ||||||
Increase in other assets |
3,161 | 8,544 | ||||||
Decrease in other liabilities |
(6,695 | ) | (1,652 | ) | ||||
Net cash provided by operating activities |
212,788 | 30,728 | ||||||
Cash flows from investing activities |
||||||||
Increase in restricted cash |
(3,000 | ) | | |||||
Purchase of
investment securities |
||||||||
Available-for-sale |
(25,000 | ) | (8,016 | ) | ||||
Proceeds from maturities or repayments of available-for-sale securities |
18,750 | 7,176 | ||||||
Proceeds
from the sale of available-for-sale securities |
| 10,902 | ||||||
Net decrease in loans held-for-investment |
78,390 | 28,145 | ||||||
Purchase of premises and equipment |
(169 | ) | (155 | ) | ||||
Net cash provided by investing activities |
68,971 | 38,052 | ||||||
Cash flows from financing activities |
||||||||
Net decrease in deposits |
(137,178 | ) | (65,258 | ) | ||||
Increase in borrowings |
| 189,515 | ||||||
Repayment of borrowings |
(185,738 | ) | (101,699 | ) | ||||
Incurrence of debt amendment costs |
(160 | ) | (3,392 | ) | ||||
Incurrence of financing costs |
| (3,425 | ) | |||||
Net cash (used in) provided by financing activities |
(323,076 | ) | 15,741 | |||||
(Decrease) increase in cash and cash equivalents |
(41,317 | ) | 84,521 | |||||
Cash and cash equivalents, beginning of period |
266,090 | 39,971 | ||||||
Cash and cash equivalents, end of period |
$ | 224,773 | $ | 124,492 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
For the nine months ended September 30, 2010 and 2009
(in thousands)
(Unaudited)
Supplemental schedule of non-cash investing and financing activities: | 2010 | 2009 | ||||||
Loans transferred to other real estate owned |
$ | 6,542 | $ | 4,909 | ||||
Loans held-for-sale transferred to loans held-for-investment, at the lower of cost or market |
2,656 | 3,788 | ||||||
Loans held-for-investment transferred to loans held-for-sale, at the lower of cost or market |
214,510 | 21,464 | ||||||
Exchage of loans held-for-sale for investment securities |
11,462 | | ||||||
Supplemental information: |
||||||||
Interest paid |
$ | 34,524 | $ | 40,347 | ||||
Income taxes paid |
277 | 599 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
NATIONAL CONSUMER COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
1. BASIS OF PRESENTATION
The Company has condensed or omitted certain information and footnote disclosures normally
included in financial statements presented in accordance with U.S. generally accepted accounting
principles, or GAAP, in the accompanying unaudited condensed consolidated financial statements.
The unaudited condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2009.
This Quarterly Report on Form 10-Q contains certain forward-looking statements which may be
identified by the use of words such as believe, expect, anticipate, should, planned,
estimated and potential. Examples of forward-looking statements include, but are not limited
to, estimates with respect to the Companys financial condition, results of operations and business
that are subject to various factors which could cause actual results to differ materially from
these estimates and most other statements that are not historical in nature. These factors
include, but are not limited to, general and local economic conditions, changes in interest rates,
debt covenants and compliance projections, other-than-temporary impairment evaluations, deposit
flows, demand for mortgage, commercial and other loans, real estate values, performance of
collateral underlying certain securities, competition, changes in accounting principles, policies,
or guidelines, changes in legislation or regulation, and other economic, competitive, governmental,
regulatory, and technological factors affecting the Companys operations, pricing products and
services.
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-Q 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-Q:
Entity | Principal Activities | |
The Company
|
Financial institution that primarily provides financial services to eligible cooperatives or enterprises controlled by eligible cooperatives. Unless otherwise indicated, references to the Company are references to the consolidated business of the Company and its subsidiaries. | |
NCCB (Holding Company)
|
References to the Holding Company are references to the legal entity of the National Consumer Cooperative Bank 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. |
7
Table of Contents
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 associations 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. The Companys 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 businesses SBA Loans) or investors for general borrowing purposes or 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. |
8
Table of Contents
2. ESTIMATES AND ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of net interest income, non-interest income and non-interest expense. The Companys more
significant estimates include: valuation of financial instruments, valuation of interests retained
as a result of loan sales, allowance for loan losses, evaluation of investments for
other-than-temporary impairment (OTTI) and measurement of impairment, and valuation of deferred tax
assets. While the Company believes the estimates and assumptions are reasonable based on
historical experience and other factors, actual results could differ from those estimates and these
differences could be material to the financial statements.
Accounting Policies
The following accounting policies comprise those that management believes involve estimates,
judgments and assumptions that are the most critical to aid in fully understanding and evaluating
the Companys reported financial results: fair value measurements, other-than-temporary impairment
of investments, allowance for loan losses and reserves for unfunded commitments, servicing assets
and interest-only receivables, derivative instruments and hedging activities, and income taxes.
The assumptions involved in applying these policies are discussed in the Companys Annual
Report on Form 10-K. Management evaluates these accounting estimates and assumptions on an
on-going basis. As of September 30, 2010, the Company has not made any significant changes to the
estimates and assumptions used in applying its critical accounting policies from its audited 2009
financial statements.
New Accounting Standards
The FASB issued new guidance regarding transfers and servicing of financial assets and
extinguishments of liabilities. This standard requires more information about transfers of
financial assets, including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. It eliminates the concepts of a
qualifying special-purpose entity, and a guaranteed mortgage securitization, changes the
requirement for derecognizing financial assets, and requires additional disclosures. During the
nine months ended September 30, 2010, the Company transferred loans to Fannie Mae and several other
institutions. These loans were evaluated for sale accounting under the application of this new
guidance. The Company has adopted and applied the provisions of this standard as of January 1,
2010.
The FASB issued new guidance regarding the consolidation of variable interest entities. This
standard changes how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. The determination of
whether a company is required to consolidate an entity is based on, among other things, an entitys
purpose and design and a companys ability to direct the activities of the entity that most
significantly impact the entitys economic performance, the obligation to absorb the expected
losses of the entity as well as the right to receive the expected residual returns of the entity.
The Company is not the primary beneficiary with respect to any variable interest entity.
The FASB amended its guidance regarding subsequent events so that SEC filers, as defined in
the Accounting Standards Updates (ASU), no longer are required to disclose the date through which
subsequent events have been evaluated in originally issued and revised financial statements.
The FASB amended guidance regarding Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The objective of the amendment is for an entity to
provide disclosures that facilitate financial statement users evaluation of the nature of credit
risk inherent in the entitys portfolio of financing receivables, how that risk is analyzed and
assessed in arriving at the allowance for credit losses and the changes and reasons for those
changes in the allowance for credit losses. In addition, the amendment requires an entity to
disclose credit quality indicators, past due information, and modifications of its financing
receivables. The disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures about activity that
occurs during a reporting period are effective for interim and annual reporting periods beginning
on or after December 15, 2010.
9
Table of Contents
The FASB amended guidance regarding Fair Value Measurements and Disclosures. The objective of the
amendment is to provide a greater level of disaggregated information and more robust disclosures
about valuation techniques and inputs to fair value measurements. The amendment requires new
disclosures for changes in sources for fair value measurements and clarifies existing disclosures
to disaggregate classes of assets and liabilities as well as disclose valuation techniques and
inputs. The new disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years.
3. SIGNIFICANT RISKS AND UNCERTAINTIES
Adverse Economic Conditions
The operating results of the Company depend largely on conditions in the credit markets and
capital markets, national economic conditions as well as economic conditions in the geographic
areas where the Companys borrowers reside or operate their business.
Although the Company believes that the negative impact of the financial markets on its
financial condition has subsided to some degree, very challenging economic conditions over the past
few years, including declining real estate values and increasing unemployment and commercial real
estate vacancy rates, have had and may continue to have an adverse impact on the quality of the
Companys loan portfolios. These conditions have caused deterioration in the quality of the loan
portfolios, including: (i) an increase in loan delinquencies, (ii) an increase in non-performing
assets and foreclosures, and (iii) a decline in the value of the underlying collateral. A further
worsening of these conditions would exacerbate the adverse effects on the profitability and capital
levels of the Company, and the Holding Company and NCB, FSB, individually.
Despite the continuation of challenging economic conditions into 2010, the Company has
continued its loan origination and sale activities to Fannie Mae and other willing buyers.
In 2009, the Holding Company violated certain financial covenants required under its revolving
credit facility and senior note agreements and as a result, these agreements have been amended on
several occasions and required the payment of various fees and higher interest costs. The
incurrence of these fees and higher interest costs have further adversely impacted the results of
the Companys operations and its capital levels.
The Company has taken actions to raise liquidity and repay the amounts due under the revolving
credit facility and senior note agreement and reduced the aggregate outstanding balance to $29.7
million at September 30, 2010 from $215.5 million at December 31, 2009. Although the Holding
Company was not required to fully repay the amounts due under the revolving credit facility and
senior note agreement by June 30, 2010, if it failed to do so, the Holding Company was required to
pay a fee of 2% of the outstanding debt balance as of June 30, 2010. Accordingly, the Holding
Company paid $0.8 million which is included in interest expense for the nine months ending
September 30, 2010 in the accompanying condensed consolidated statements of operations. On October
25, 2010, the Holding Company paid-off the final $29.7 million of its aggregate outstanding debt
that was under its two senior debt agreements, the revolving credit facility dated May 1, 2006 and
the Note Purchase and Uncommitted Master Shelf Agreement date December 28, 2001. See Note 14 for
more information on the Companys borrowings and debt maturities.
10
Table of Contents
Regulatory Matters
As disclosed in and filed as exhibits to the Companys 2009 Form 10-K, on March 15, 2010 the
following agreements and orders were entered into (together referred to as the OTS Actions):
| The Holding Company entered into a Stipulation and Consent to the Issuance of an Order
to Cease and Desist (the Order) with the Office of Thrift Supervision (OTS) on March
15, 2010. In addition to other requirements, the associated OTS order required 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. These items have been
submitted to the OTS, and the OTS has responded with a written non-objection as
contemplated by the order. The associated order also provides that the Holding Company 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. |
| NCB Financial Corporation entered into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist with the OTS on March 15, 2010. The associated 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. |
| NCB, FSB entered into a Supervisory Agreement with the OTS on March 15, 2010. The
principal elements of this 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 prior approval. Additionally,
NCB, FSB was required to submit a Business Plan within 45 days and a Liquidity Risk
Management Program within 30 days for OTS review and comment. These items have been
submitted to the OTS, and the OTS has responded with a written non-objection as
contemplated by the Supervisory Agreement. |
The Holding Company and its subsidiaries continue transacting normal banking business. The
Company has been actively engaged in responding to the concerns raised by the OTS and believes that
the Holding Company, NCB Financial Corporation and NCB, FSB are in compliance with the OTS Actions.
However, if the financial condition of the Company weakens, the OTS may, upon further inspection,
issue additional actions and require the Company to sell assets to increase liquidity, raise
capital, or take other steps as they consider necessary.
Capital Levels
The Holding Company and NCB Financial Corporation do not have depositors and are not subject
to regulatory capital requirements. However, NCB, FSB, as a federally chartered and federally
insured savings bank, is subject to various regulatory capital requirements.
11
Table of Contents
Under the regulatory guidelines, NCB, FSB was Well Capitalized as of September 30, 2010 and
December 31, 2009. The following table summarizes NCB, FSBs capital requirements (ratios and
dollars) (dollars in thousands):
To be Well Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2010: |
||||||||||||||||||||||||
Tangible Capital
(to tangible assets) |
$ | 166,085 | 11.42 | % | $ | 21,818 | 1.50 | % | N/A | N/A | ||||||||||||||
Total Risk-Based Capital
(to risk-weighted assets) |
181,188 | 14.67 | % | 98,805 | 8.00 | % | $ | 123,506 | 10.00 | % | ||||||||||||||
Tier I Risk-Based Capital
(to risk-weighted assets) |
165,738 | 13.42 | % | N/A | N/A | 74,104 | 6.00 | % | ||||||||||||||||
Core Capital (to adjusted
tangible assets) |
166,085 | 11.42 | % | 58,180 | 4.00 | % | 72,726 | 5.00 | % | |||||||||||||||
As of December 31, 2009: |
||||||||||||||||||||||||
Tangible Capital (to tangible assets) |
$ | 157,124 | 9.89 | % | $ | 23,834 | 1.50 | % | N/A | N/A | ||||||||||||||
Total Risk-Based Capital (to risk-weighted assets) |
173,911 | 12.68 | % | 109,742 | 8.00 | % | $ | 137,178 | 10.00 | % | ||||||||||||||
Tier I Risk-Based Capital (to risk-weighted assets) |
156,724 | 11.42 | % | N/A | N/A | 82,307 | 6.00 | % | ||||||||||||||||
Core Capital (to adjusted tangible assets) |
157,124 | 9.89 | % | 63,557 | 4.00 | % | 79,446 | 5.00 | % |
Managements Actions and Going Concern Considerations
In order to maintain compliance with the OTS Actions, the Company has taken actions to
preserve capital and to enhance liquidity levels, and the Holding Company, specifically, has
reduced its aggregate debt outstanding by fully repaying the revolving credit facility and senior
note. The Company can give no assurances that it will be able to continue to preserve and enhance
capital and liquidity, reduce other debt levels or reduce its exposure to contingent liabilities.
The Company remains vulnerable to general economic and operating conditions adversely
impacting the Companys borrowers, and the value of the real estate and other property that
collateralize the Companys loans. If the general economic and employment conditions, consumer
demand and real estate market conditions do not improve or decline further, then the level of
non-performing assets may not continue to decrease and may even increase.
As of September 30, 2010, the Company maintained liquid assets totaling $318.0 million as
follows: cash balances totaling $224.8 million; investments totaling $48.1 million; and loans
held-for-sale totaling $45.1 million. The majority of the cash on hand is held by NCB, FSB.
Dividends from NCB, FSB to the Holding Company would require approval by the OTS at this time.
If the Holding Company, NCB Financial Corporation or NCB, FSB were to engage in unsafe and
unsound banking practices, or NCB, FSBs regulatory capital levels deteriorate, the OTS has various
enforcement tools available to them including the issuance of capital directives, orders to cease
engaging in certain business activities and the issuance of modified or additional orders or
agreements, and could seek receivership of NCB, FSB.
As indicated above, NCB, FSB is not permitted to declare or pay any dividends or make any
other capital distributions to the Holding Company without prior approval of the OTS. Currently,
the Holding Company is not making any new loan originations or commitments and continues to perform
its obligations under existing contracts and agreements.
12
Table of Contents
4. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The composition of cash, cash equivalents and restricted cash is as follows (dollars in
thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Cash |
$ | 219,683 | $ | 251,922 | ||||
Cash equivalents |
764 | 6,484 | ||||||
Total cash and equivalents |
220,447 | 258,406 | ||||||
Federal funds sold |
4,326 | 7,684 | ||||||
Restricted cash |
3,179 | 179 | ||||||
Total |
$ | 227,952 | $ | 266,269 | ||||
As of September 30, 2010, the Companys restricted cash includes $3.0 million of cash required
to be reserved for treasury management services provided by a third-party banking institution and
$179 thousand of cash required to be reserved under the Companys lease agreement for its New York
office (included in restricted cash as of December 31, 2009.)
5. INVESTMENT SECURITIES
The composition of available-for-sale investment securities and interest-only non-certificated
receivables (included as a component of other assets) are as follows (dollars in thousands):
September 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Interest-only non-certificated receivables |
$ | 25,061 | $ | 149 | $ | (1,018 | ) | $ | 24,192 | |||||||
U.S. Treasury and agency obligations |
21,123 | 117 | (12 | ) | 21,228 | |||||||||||
Mortgage-backed securities |
23,371 | 456 | (18 | ) | 23,809 | |||||||||||
Collateralized mortgage obligations (CMOs) |
2,839 | 220 | (31 | ) | 3,028 | |||||||||||
Equity securities |
52 | | (28 | ) | 24 | |||||||||||
Total |
$ | 72,446 | $ | 942 | $ | (1,107 | ) | $ | 72,281 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Interest-only non-certificated receivables |
$ | 25,971 | $ | 201 | $ | (1,321 | ) | $ | 24,851 | |||||||
U.S. Treasury and agency obligations |
12,783 | 203 | | 12,986 | ||||||||||||
Mortgage-backed securities |
12,981 | 85 | | 13,066 | ||||||||||||
CMOs |
3,637 | 110 | (24 | ) | 3,723 | |||||||||||
Equity securities |
52 | | (21 | ) | 31 | |||||||||||
Total |
$ | 55,424 | $ | 599 | $ | (1,366 | ) | $ | 54,657 | |||||||
13
Table of Contents
The following tables present the duration of unrealized losses recognized on
available-for-sale investment securities and interest-only non-certificated receivables (dollars in
thousands):
September 30, 2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Interest-only non-certificated receivables |
$ | 817 | $ | (30 | ) | $ | 18,651 | $ | (988 | ) | $ | 19,468 | $ | (1,018 | ) | |||||||||
U.S. Treasury and agency obligations |
10,048 | (12 | ) | | | 10,048 | (12 | ) | ||||||||||||||||
Mortgage-backed securities |
570 | (18 | ) | | | 570 | (18 | ) | ||||||||||||||||
CMOs |
87 | (12 | ) | 84 | (19 | ) | 171 | (31 | ) | |||||||||||||||
Equity securities |
| | 26 | (28 | ) | 26 | (28 | ) | ||||||||||||||||
Total |
$ | 11,522 | $ | (72 | ) | $ | 18,761 | $ | (1,035 | ) | $ | 30,283 | $ | (1,107 | ) | |||||||||
December 31, 2009 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Interest-only non-certificated receivables |
$ | 1,111 | $ | (139 | ) | $ | 21,073 | $ | (1,182 | ) | $ | 22,184 | $ | (1,321 | ) | |||||||||
CMOs |
78 | (24 | ) | | | 78 | (24 | ) | ||||||||||||||||
Equity securities |
| | 29 | (21 | ) | 29 | (21 | ) | ||||||||||||||||
Total |
$ | 1,189 | $ | (163 | ) | $ | 21,102 | $ | (1,203 | ) | $ | 22,291 | $ | (1,366 | ) | |||||||||
The Companys investment securities in an unrealized loss position are evaluated for
other-than-temporary impairment on a quarterly basis. The Companys management evaluates the cause
of declines in the fair value of each security within each segment of the investment portfolio. The
results of those evaluations are as follows:
Interest-only non-certificated receivables
The interest-only non-certificated receivables have been valued using discount rates derived
from the commercial mortgage servicing rights market. The interest-only non-certificated
receivables are in an unrealized loss position primarily due to changes in the credit spreads
demanded by market participants from the time the asset was acquired to the balance sheet date.
See note 7 for further disclosure related to key economic assumptions used to value these
instruments. Each of the interest-only non-certificated receivables is collateralized only by
Cooperative Multifamily Loans originated by the Company. These loans were generally originated at
low loan to value ratios and the historical loss experience with respect to these loans has been
minimal. The Company does not view these assets as a source of short-term liquidity and does not
intend to sell nor believes it will be required to sell these instruments prior to the full
recovery of the amortized cost basis of these assets. Consequently as of September 30, 2010, the
unrealized losses on the interest-only non-certificated securities are considered temporary in
nature.
14
Table of Contents
CMOs
In evaluating the CMOs for other-than-temporary impairment, management monitors the credit
support of each of the bonds held by the Company, the delinquency and default rates of the
underlying collateral mortgages, and the credit ratings of each of the bonds. Although there have
been no cashflow interruptions on any of the five CMO securities through September 30, 2010, the
financial condition and credit quality of certain underlying issuers or collateral has deteriorated
over time. Prior to 2010, the Company had recognized aggregate OTTI on the CMOs of $3.2 million.
The Company projects expected cashflows based on updated estimates of delinquencies, default rates
and severity of losses in the event of default and other factors. As of September 30, 2010 the
Company does not expect any further deterioration in future cash flows from the CMOs and the
Company does not intend to sell nor is it probable that the Company will be required to sell the
CMO investment securities prior to the recovery of the carrying value. Consequently as of September
30, 2010, the unrealized losses on the CMOs are considered temporary in nature.
The Company did not recognize any OTTI on its available-for-sale investment securities or its
interest-only non-certificated receivables during the three and nine months ended September 30,
2010. The company recognized $2.3 million and $3.6 million of OTTI on its available-for-sale
investment securities during the three and nine months ended September 30, 2009, respectively.
The tables below presents a roll-forward of the credit-related losses recognized in earnings
(dollars in thousands):
For the three months ended | For the nine months ended | |||||||
September 30, 2010 | September 30, 2010 | |||||||
Beginning Balance |
$ | 3,171 | $ | 3,171 | ||||
Credit impairments of interest-only receivables and CMO securities |
| | ||||||
Ending Balance |
$ | 3,171 | $ | 3,171 | ||||
For the three months ended | For the nine months ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Beginning Balance |
$ | 2,937 | $ | 1,692 | ||||
Adjustment to opening balance |
| (77 | ) | |||||
Adjusted Beginning Balance |
$ | 2,937 | $ | 1,615 | ||||
Additions: |
||||||||
Initial credit impairments |
2,143 | 3,465 | ||||||
Subsequent credit impairments |
169 | 169 | ||||||
Ending Balance |
$ | 5,249 | $ | 5,249 | ||||
The maturities of available-for-sale U.S. Treasury and agency obligations investment
securities are as follows (dollars in thousands):
September 30, 2010 | ||||||||||||
Weighted | ||||||||||||
Amortized | Average | Fair | ||||||||||
Cost | Yield | Value | ||||||||||
Within 1 year |
$ | 12,709 | 0.85 | % | $ | 12,752 | ||||||
After 1 year through 5 years |
8,014 | 0.60 | % | 8,041 | ||||||||
After 5 years through 10 years |
85 | 5.76 | % | 102 | ||||||||
After 10 years |
315 | 5.62 | % | 333 | ||||||||
Total |
$ | 21,123 | 0.85 | % | $ | 21,228 | ||||||
Substantially all of the CMOs and
mortgage-backed securities have maturity dates greater than 10 years. The remaining contractual
principal maturities for mortgage-backed securities were determined assuming no prepayments.
Remaining expected maturities will differ from contractual maturities because borrowers may
have the right to prepay obligations before the underlying mortgages mature.
15
Table of Contents
6. LOANS HELD-FOR-SALE
Loans held-for-sale by category are as follows (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Consumer Loans |
$ | 3,093 | $ | 22,186 | ||||
Commercial Loans |
1,520 | 1,650 | ||||||
Residential Real Estate Loans |
40,536 | 11,894 | ||||||
Total |
$ | 45,149 | $ | 35,730 | ||||
The Company has elected to measure, at the time of origination, certain Cooperative and
Multifamily Residential Real Estate Loans that were held-for-sale, at fair value. Electing to use
fair value allows for a better offset of the change in fair value of the loan held-for-sale and the
forward loan sale commitment derivative used to economically hedge the loan without the burden of
complying with the requirements of derivative accounting standards. Unrealized gains and losses
for these identified loans are included in earnings. The Company has elected the fair value option
for $30.1 million and $1.8 million of Residential Real Estate Loans as of September 30, 2010 and
December 31, 2009, respectively.
7. LOAN SALES
During the periods presented, the Company sold Commercial, Residential Real Estate and
Consumer Loans. Most Residential Real Estate and Commercial Loan sales to Fannie Mae are sold with
the servicing retained by the Company; therefore the Company records a Mortgage Servicing Right
(MSR) at the time of sale in addition to a non-certificated interest-only receivable. The sale
of Commercial and Residential Real Estate Loans generated a total of $5.3 million and $4.3 million
in retained interests for the nine months ended September 30, 2010, and September 30, 2009,
respectively. The Company does not retain servicing or any other interests on Consumer Loan sales.
In total, the Company generated a gain on mortgage banking activities and loan sales of $15.3
million for the nine months ended September 30, 2010 compared with $9.9 million for the nine months
ended September 30, 2009. Included in this amount are the fair value adjustments for the
undesignated derivatives for the interest rate locks and forward loan sales utilized in the
Companys mortgage banking activities. The amount of the fair value adjustment is $1.7 million and
$0.3 million for the nine months ended September 30, 2010 and 2009, respectively.
The following table summarizes the cash flows received from loan sale activity and retained
interests for the nine months ended September 30, (dollars in thousands):
2010 | 2009 | |||||||
Net proceeds from Consumer Loan sales |
$ | 266,299 | $ | 140,567 | ||||
Net proceeds from Commercial and Residential Real Estate Loan sales (1) |
580,046 | 357,268 | ||||||
Servicing fees received |
5,676 | 4,986 | ||||||
Cash flows received on interest-only receivables (2) |
5,085 | 10,520 |
(1) | For the nine months ended September 30, 2010, $12.0 million of the net proceeds represent
mortgage-backed securities recorded in exchange for loans. See discussion below for more
info. |
|
(2) | The 2009 cashflows received on interest-only receivables includes cashflows received from
certificated interest-only receivables which were all sold during the fourth quarter of 2009. |
During 2010, $2.7 million of Consumer Loans, originally held-for-sale as of December 31, 2009,
were transferred at the lower of cost or fair value to held-for-investment as the market for these
loans was extremely limited.
16
Table of Contents
During 2010, the Company transferred $214.5 million of loans that were classified as
held-for-investment to loans held-for-sale due to its change in intent to sell these loans to
provide liquidity and repay borrowings. These loans were subsequently sold at insignificant gains.
Of these loans sold, $176.1 million were Residential Real Estate Loans, $7.8 million were
Commercial Real Estate Loans, $28.4 million were Commercial Loans and $2.2 million were Consumer
Loans. During 2009, the Company sold $168.5 million of loans. Of these total loans sold, $149.1
million were Residential Real Estate Loans and $19.4 million were Commercial Loans.
During 2010, the Company transferred $11.5 million of Residential Real Estate Loans to a trust
created by Fannie Mae. The trust holds only the loans transferred by the Company, and the loans
have been fully guaranteed by Fannie Mae. The trust issued mortgage-backed securities fully
collateralized by the transferred loans. In exchange for the transfer, the Company retained 100
percent of these beneficial interests issued by the trust, as well as the contractual right to
continue to service the loans. The transfer meets the definition of a sale, and as a result, the
Company recognized a $0.5 million gain on the transfer for the nine months ended September 30,
2010.
During 2010, the Company transferred a 90 percent interest in a Commercial Loan with an unpaid
principal balance of $9.5 million to a participating interest holder. The remaining 10 percent
interest has been retained by the Company. The cash flows from the loan are divided proportionately
between the Company and the participating interest holder based on their ownership interest, and
the Company has not provided any guarantees with respect to the transferred portion. The
transferred portion meets the definition of a participating interest; and the Company has accounted
for the transfer of the participating interest as a sale, and recorded a gain of $0.4 million for
the nine months ended September 30, 2010. The Company retained the right to service the
participating portion of the loan.
MSRs are periodically tested for impairment. The impairment test is segmented into the risk
tranches, which are stratified, based upon the predominant risk characteristics of the loans such
as loan balance, interest rate, length of time outstanding, principal and interest terms and
amortization terms. Activity related to MSRs was as follows (dollars in thousands):
Share and Single-family Residential | Multifamily, Cooperative and | |||||||||||||||||||||||
Loans | Commercial Real Estate Loans | Total | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Balance at January 1 |
$ | 4,158 | $ | 2,878 | $ | 10,330 | $ | 10,374 | $ | 14,488 | $ | 13,252 | ||||||||||||
Additions |
885 | 1,594 | 2,054 | 650 | 2,939 | 2,244 | ||||||||||||||||||
Amortization |
(898 | ) | (913 | ) | (1,053 | ) | (778 | ) | (1,951 | ) | (1,691 | ) | ||||||||||||
Change in valuation
allowance(1) |
(134 | ) | 184 | 383 | (413 | ) | 249 | (229 | ) | |||||||||||||||
Balance at September 30 |
$ | 4,011 | $ | 3,743 | $ | 11,714 | $ | 9,833 | $ | 15,725 | $ | 13,576 | ||||||||||||
(1) | Any recoveries do not exceed amortized cost. |
Changes in the valuation allowance for MSRs (included as a component of other assets) were as
follows (dollars in thousands):
Share and Single-family Residential | Multifamily, Cooperative and | |||||||||||||||||||||||
Loans | Commercial Real Estate Loans | Total | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Balance at January 1 |
$ | | $ | (184 | ) | $ | (941 | ) | $ | (442 | ) | $ | (941 | ) | $ | (626 | ) | |||||||
Additional write-downs |
(134 | ) | (259 | ) | (218 | ) | (488 | ) | (352 | ) | (747 | ) | ||||||||||||
Recoveries |
| 443 | 601 | 75 | 601 | 518 | ||||||||||||||||||
Balance at September 30 |
$ | (134 | ) | $ | | $ | (558 | ) | $ | (855 | ) | $ | (692 | ) | $ | (855 | ) | |||||||
17
Table of Contents
The Company utilizes a third-party valuation service to estimate the fair value of its MSRs.
The MSR valuation process combines the use of sophisticated discounted cash flow models to arrive
at an estimate of fair value at the time of the loan sale and each subsequent balance sheet date.
The key assumptions used by our vendor for the valuation of MSRs are mortgage prepayment speeds,
the discount rate of residual cash flows and the earnings rate of principal and interest float,
escrows and replacement reserves. These variables can and generally will change from quarter to
quarter as market conditions and projected interest rates change. Multiple models are required to
reflect the nature of the MSR of the different types of loans that the Company services.
Key economic assumptions used in determining the fair value of MSRs at the time of sale for
the nine months ended September 30, were as follows:
2010 | 2009 | |||||||
Weighted-average life (in years): |
||||||||
Share and Single-family Residential Loans |
4.3 | 5.5 | ||||||
Multifamily, Cooperative and Commercial Real Estate Loans |
5.0 | 7.3 | ||||||
Weighted-average annual prepayment speed: |
||||||||
Share and Single-family Residential Loans |
18.3 | % | 16.0 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
2.0 | % | 4.8 | % | ||||
Residual cash flow discount rate (annual): |
||||||||
Share and Single-family Residential Loans |
10.1 | % | 10.0 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
13.5 | % | 9.0 | % | ||||
Earnings rate P&I float, escrows and replacement reserves: |
||||||||
Share and Single-family Residential Loans |
1.5 | % | 3.0 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
2.7 | % | 3.0 | % |
18
Table of Contents
Key economic assumptions used in measuring the period-end fair value of the Companys MSRs and
the effect on the fair value of those MSRs from adverse changes in those assumptions are as follows
(dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Fair value of mortgage servicing rights: |
||||||||
Share and Single-family Residential Loans |
$ | 4,011 | $ | 4,867 | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
13,278 | 11,214 | ||||||
Weighted-average life (in years): |
||||||||
Share and Single-family Residential Loans |
3.1 | 4.2 | ||||||
Multifamily, Cooperative and Commercial Real Estate Loans |
5.9 | 6.2 | ||||||
Weighted-average annual prepayment speed: |
||||||||
Share and Single-family Residential Loans |
26.2 | % | 20.7 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
2.6 | % | 2.6 | % | ||||
Impact on fair value of 10% adverse change: |
||||||||
Share and Single-family Residential Loans |
$ | (316 | ) | $ | (312 | ) | ||
Multifamily, Cooperative and Commercial Real Estate Loans |
(78 | ) | (61 | ) | ||||
Impact on fair value of 20% adverse change: |
||||||||
Share and Single-family Residential Loans |
(602 | ) | (629 | ) | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
(155 | ) | (121 | ) | ||||
Residual cash flows discount rate (annual): |
||||||||
Share and Single-family Residential Loans |
10.3 | % | 10.3 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
9.7 | % | 9.2 | % | ||||
Impact on fair value of 10% adverse change: |
||||||||
Share and Single-family Residential Loans |
$ | (100 | ) | $ | (149 | ) | ||
Multifamily, Cooperative and Commercial Real Estate Loans |
(405 | ) | (336 | ) | ||||
Impact on fair value of 20% adverse change: |
||||||||
Share and Single-family Residential Loans |
(195 | ) | (289 | ) | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
(790 | ) | (657 | ) | ||||
Earnings rate of P&I float, escrow and replacement: |
||||||||
Share and Single-family Residential Loans |
1.5 | % | 2.8 | % | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
2.8 | % | 2.8 | % | ||||
Impact on fair value of 10% adverse change: |
||||||||
Share and Single-family Residential Loans |
$ | (27 | ) | $ | (51 | ) | ||
Multifamily, Cooperative and Commercial Real Estate Loans |
(371 | ) | (330 | ) | ||||
Impact on fair value of 20% adverse change: |
||||||||
Share and Single-family Residential Loans |
(54 | ) | (102 | ) | ||||
Multifamily, Cooperative and Commercial Real Estate Loans |
(742 | ) | (659 | ) |
For non-certificated interest-only receivables, the Company estimates fair value both at
initial recognition and on an ongoing basis through the use of discounted cash flow models. The key
assumptions used in the valuation of the Companys interest-only receivables at the time of sale
are the life and discount rate of the estimated cash flows which are as follows:
September 30, | ||||||||
2010 | 2009 | |||||||
Weighted-average life (in years) |
6.9 | 9.4 | ||||||
Weighted-average annual discount rate |
9.00 | % | 9.00 | % |
19
Table of Contents
Key economic assumptions used in subsequently measuring the fair value of the Companys
interest-only non-certificated receivables and the effect on the fair value of the interest-only
non-certificated from adverse changes in those assumptions are as follows (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Fair value |
$ | 24,192 | $ | 24,851 | ||||
Weighted-average life (in years) |
5.7 | 8.9 | ||||||
Weighted average annual discount rate |
9.00 | % | 9.00 | % | ||||
Impact on fair value of 10% adverse change |
$ | (1,314 | ) | $ | (683 | ) | ||
Impact on fair value of 20% adverse change |
(1,908 | ) | (1,335 | ) |
All of the sensitivities above are hypothetical and should be used with caution. The effect of
a variation in a particular assumption on the fair value of the retained interest is calculated
independently without changing any other assumption. In reality, changes in one factor may result
in changes in another factor, which might compound or counteract the sensitivities.
The unpaid principal balance of loans serviced for others is not included in the accompanying
consolidated balance sheets. Changes in the portfolio of loans serviced for others are as follows
(dollars in thousands):
2010 | 2009 | |||||||
Balance at January 1 |
$ | 5,845,743 | $ | 5,550,592 | ||||
Additions |
502,747 | 351,619 | ||||||
Loan payments and payoffs |
(258,465 | ) | (240,365 | ) | ||||
Balance at September 30 |
$ | 6,090,025 | $ | 5,661,846 | ||||
8. LOANS HELD-FOR-INVESTMENT
Loans held-for-investment by category are as follows (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Consumer Loans |
$ | 14,051 | $ | 17,367 | ||||
Commercial Loans |
482,512 | 616,343 | ||||||
Real Estate Loans: |
||||||||
Residential |
542,862 | 680,736 | ||||||
Commercial |
339,924 | 379,086 | ||||||
Leases |
25 | 157 | ||||||
Total |
$ | 1,379,374 | $ | 1,693,689 | ||||
9. IMPAIRED LOANS
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. Outstanding
principal of loans considered impaired totaled $108.6 million and $97.7 million as of September 30,
2010 and December 31, 2009, respectively. Of these amounts $24.3 million and $24.7 million were
evaluated for impairment and determined to need no reserve. The aggregate average balance of
impaired loans was $104.3 million and $73.6 million for the nine months ending September 30, 2010,
and the year ending December 31, 2009, respectively. The interest income that was due but not
recognized on impaired loans was $4.2 million and $4.7 million for the nine months ended September
30, 2010 and September 30, 2009, respectively.
20
Table of Contents
As
of September 30, 2010 and December 31, 2009, the
Companys impaired loans included $26.2 million and $26.3 million, respectively 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 decline in the
value of the collateral. The remaining $82.4 million and $71.4 million, respectively of loans are
not accruing interest because the debt service payments were at least 90 days delinquent.
Due to significant changes in the current valuations of the properties collateralizing certain
loans, the Company restructured $14.4 million of impaired loans
with an aggregate reserve of $5.1 million during the nine months ended September 30, 2010. After the restructurings and charge-offs, the
aggregate unpaid principal balance of the restructured loans was $11.4 million with an aggregate
reserve of $2.8 million as of September 30, 2010.
As of September 30, 2010 reserves were deemed to be adequate to cover the estimated loss
exposure related to the impaired loans and there were no commitments to lend additional funds to
borrowers whose loans were impaired.
During
the third quarter of 2010, the Company sold $19.0 million of
impaired loans with
a carrying amount of $13.3 million, net of specific reserves, to a participating investor. The
Company recognized a $1.0 million gain on the sale of these loans.
10. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the components of the allowance for loan losses (dollars in
thousands):
September 30, 2010 | December 31, 2009 | |||||||
Allowance on impaired loans |
$ | 24,377 | $ | 14,347 | ||||
Allowance on non-impaired loans |
18,844 | 22,121 | ||||||
Total allowance for loan losses |
$ | 43,221 | $ | 36,468 | ||||
The following is a summary of the activity in the allowance for loan losses during the nine
months ended September 30 (dollars in thousands):
2010 | 2009 | |||||||
Balance as of January 1 |
$ | 36,468 | $ | 27,067 | ||||
Charge-offs |
||||||||
Consumer Loans |
(2,936 | ) | (5,196 | ) | ||||
Commercial Loans |
(3,279 | ) | (13,584 | ) | ||||
Real Estate Loans (Commercial and Residential) |
(2,909 | ) | (1,691 | ) | ||||
Total charge-offs |
(9,124 | ) | (20,471 | ) | ||||
Recoveries |
||||||||
Consumer Loans |
638 | 477 | ||||||
Commercial Loans |
347 | 733 | ||||||
Real Estate Loans (Commercial and Residential) |
128 | 13 | ||||||
Total recoveries |
1,113 | 1,223 | ||||||
Net charge-offs |
(8,011 | ) | (19,248 | ) | ||||
Provision for loan losses |
11,009 | 36,967 | ||||||
Provision reclassification |
3,755 | | ||||||
Balance as of September 30 |
$ | 43,221 | $ | 44,786 | ||||
21
Table of Contents
During 2009, deteriorating economic conditions, including declining real estate values and
increasing unemployment and commercial real estate vacancy rates, had an adverse impact on the
quality of the Companys loan portfolios. These conditions caused deterioration in the quality of
the loan portfolios, including: (i) an increase in loan delinquencies, (ii) an increase in
non-performing assets and foreclosures, and (iii) a decline in the value of the underlying
collateral. Although economic conditions have slightly begun to improve during 2010, the Companys
loan portfolio continues to be negatively impacted.
During 2009, the Company recognized a provision for unfunded commitments of $3.8 million
related to the probable expected loss on standby letters of credit with borrowers. During 2010,
these borrowers drew on, and the Company funded, the standby letters of credit creating a loan
receivable. The provision associated with these borrowers was reclassified from the reserve for
unfunded commitments (see Note 11) to the allowance for loan losses.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND GUARANTY OBLIGATIONS
The Company is a party to financial instruments with off-balance sheet risk. These financial
instruments may include undrawn lines of credit and standby letters of credit and involve, to
varying degrees, elements of credit and interest rate risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the exposure that the
Company has in particular classes of financial instruments. The Company may require collateral or
other security to support off-balance sheet financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other parties to
the undrawn lines of credit and standby letters of credit issued is represented by the contract or
notional amounts of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments.
Undrawn Lines of Credit
In the normal course of business, the Company makes commitments to extend lines of credit to
customers as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. The Company evaluates each customers creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is
based on managements credit evaluation of the customer. Collateral varies, but may include
accounts receivable, inventory, property, plant and equipment, and residential and income-producing
commercial properties. Since many of the commitments are expected to expire without being
partially or completely drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. As of September 30, 2010 and December 31, 2009, the Company had
outstanding undrawn lines of credit of $673.6 million and $764.9 million, respectively.
Standby Letters of Credit
Standby letters of credit can be either financial or performance-based. Financial-based
standby letters of credit obligate the Company to disburse funds to a third party if the customer
fails to repay an outstanding loan or debt instrument. Performance-based standby letters of credit
obligate the Company to disburse funds if the customer fails to perform a contractual obligation,
including obligations of a non-financial nature. For the Companys standby letters of credit
issued in connection with certain variable rate municipal bonds, the Company can be called upon to
fund the amount of the municipal bond in the event the holder seeks repayment and the bond cannot
be sold to another purchaser. As of September 30, 2010, issuance fees associated with the standby
letters of credit range from 0.80% to 4.25% of the commitment amount and mature throughout 2010 to
2016.
As of September 30, 2010 and December 31, 2009, a liability of $3.9 million and $4.4 million,
respectively, related to the Companys obligation to stand ready to perform under outstanding
standby letters of credit and is presented as other liabilities, and a corresponding asset of $3.3
million and $5.2 million, respectively, was presented as other assets in the condensed consolidated
balance sheet related to the issuance fees from the standby letters of credit. The stand-ready
obligation is initially recognized at fair value and subsequently amortized over the term of the
letter of credit.
22
Table of Contents
Subsequent to the initial recognition of the stand-ready obligation, the Company monitors its
standby letters of credit for future probable loss in the event these letters are drawn upon by the
customer. In the event that a customer draws on its letter of credit, then the amount previously
recognized for the specific stand-ready obligation is reclassified to the reserve for losses. This
evaluation considers whether the customer is a borrower under another lending arrangement with the
Company and the current status of that lending arrangement.
As of September 30, 2010 and December 31, 2009, the Company had a reserve for losses on
standby letters of credit of $8.0 million and $9.3 million, respectively. As of September 30,
2010, the Company had outstanding standby letters of credit with a total commitment amount of
$208.5 million of which $89.6 million were for borrowers with other lending arrangements that are
classified as criticized. As of December 31, 2009, the Company had outstanding standby letters of
credit with a total commitment amount of $245.2 million of which $73.4 million were classified as
criticized.
The following is a summary of the activity in the reserve for losses on undrawn lines of
credit and standby letters of credit, which is included in other liabilities (dollars in
thousands):
2010 | ||||
Balance as of January 1 |
$ | 10,403 | ||
Provision for losses on unfunded commitments |
1,574 | |||
Provision reclassification * |
(3,755 | ) | ||
Balance as of September 30 |
$ | 8,222 | ||
2009 | ||||
Balance as of January 1 |
$ | 2,675 | ||
Provision for losses on unfunded commitments |
6,502 | |||
Balance as of September 30 |
$ | 9,177 | ||
* | See Note 10 for information regarding this reclassification. |
12. OTHER ASSETS
Other assets consisted of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Interest-only non-certificated receivables, at fair value |
$ | 24,192 | $ | 24,851 | ||||
Mortgage servicing rights |
15,725 | 14,488 | ||||||
Premises and equipment, net |
11,119 | 11,957 | ||||||
Federal Home Loan Bank stock |
9,651 | 9,651 | ||||||
Accrued interest receivable |
8,248 | 9,101 | ||||||
Other real estate owned |
8,123 | 2,315 | ||||||
FDIC prepaid premium |
5,407 | 7,957 | ||||||
Fees receivable from standby letters of credit |
3,261 | 5,163 | ||||||
Other prepaid assets |
4,696 | 2,864 | ||||||
Derivative assets |
4,695 | 1,419 | ||||||
Debt issuance costs |
3,285 | 4,687 | ||||||
Equity method investments |
3,375 | 3,046 | ||||||
Other |
6,689 | 6,626 | ||||||
Total other assets |
$ | 108,466 | $ | 104,125 | ||||
The FHLB of Cincinnati, with whom NCB, FSB banks, has not reduced dividends or provided notice
that they have suspended stock redemptions therefore, the decision of some Federal Home Loan Banks
(FHLB) to reduce dividend payments and restrict redemptions of stock has not affected the Company.
23
Table of Contents
13. DEPOSITS
Deposits, all of which are held by NCB, FSB, consisted of the following (dollars in
thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate Paid | Balance | Rate Paid | |||||||||||||
Non-interest bearing demand deposits |
$ | 104,842 | | $ | 141,493 | | ||||||||||
Interest-bearing demand deposits |
208,826 | 0.60 | % | 211,228 | 1.06 | % | ||||||||||
Savings deposits |
8,685 | 0.28 | % | 8,930 | 0.27 | % | ||||||||||
Certificates of deposit |
795,145 | 2.33 | % | 892,303 | 2.25 | % | ||||||||||
Total deposits |
$ | 1,117,498 | 1.77 | % | $ | 1,253,954 | 1.78 | % | ||||||||
The scheduled maturities of certificates of deposit with a minimum denomination of $100,000
are as follows (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Within 3 months |
$ | 138,403 | $ | 116,558 | ||||
Over 3 months through 6 months |
105,135 | 104,160 | ||||||
Over 6 months through 12 months |
138,016 | 164,624 | ||||||
Over 12 months |
302,137 | 382,023 | ||||||
Total certificates of deposit |
$ | 683,691 | $ | 767,365 | ||||
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the
amount of deposits insured by the FDIC to $250,000. Effective July 21, 2010, the increase of
deposit insurance coverage to $250,000 is permanent, under legislation passed on that date.
As of September 30, 2010, NCB, FSB had one depositor with deposits in excess of 5% of NCB,
FSBs total deposits. This depositor had 9.4% or $105.0 million of NCB, FSBs total deposits of
which $4.0 million are maturing within three months. The remaining $101.0 million have maturities
ranging from three months to 76 months. The aforementioned depositor has pooled a larger number of
individual depositors and placed the aggregate funds with NCB, FSB. All of the related individual
deposits are within the $250,000 threshold to be fully insured as of September 30, 2010.
NCB, FSB had $423.5 million and $589.1 million of brokered deposits all relating to
certificates of deposit as of September 30, 2010 and December 31, 2009, respectively. Of the
$423.5 million of brokered certificates of deposit, $98.3 million mature within three months and
$325.2 million has a maturity ranging from four months to 63 months. The Company is actively
working to decrease its brokered deposit concentration.
Deposit interest expense is summarized as follows (dollars in thousands):
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest-bearing demand deposits |
$ | 334 | $ | 632 | $ | 1,446 | $ | 2,051 | ||||||||
Savings deposits |
7 | 6 | 19 | 18 | ||||||||||||
Certificates of deposit |
4,960 | 6,012 | 14,946 | 19,690 | ||||||||||||
Total deposit interest expense |
$ | 5,301 | $ | 6,650 | $ | 16,411 | $ | 21,759 | ||||||||
24
Table of Contents
14. BORROWINGS
The carrying amounts and maturities of the Companys various debt instruments are as follows
(dollars in thousands):
Balance | Balance | |||||||||||||||
September 30, | December 31, | Maturity Date as of | ||||||||||||||
Type | 2010 | 2009 | Interest Rate | September 30, 2010 | ||||||||||||
Revolving credit facility |
$ | 18,038 | $ | 128,394 | 13.50 | % | Repaid October 2010 | |||||||||
Long-term FHLB |
10,000 | 10,000 | 5.80 | % | June 2011 | |||||||||||
Long-term FHLB |
10,000 | 10,000 | 3.55 | % | June 2011 | |||||||||||
Long-term FHLB |
20,000 | 20,000 | 5.63 | % | July 2011 | |||||||||||
Long-term FHLB |
25,000 | 25,000 | 1.42 | % | August 2011 | |||||||||||
Long-term FHLB |
10,000 | 10,000 | 4.42 | % | June 2012 | |||||||||||
Long-term FHLB |
10,000 | 10,000 | 4.40 | % | June 2013 | |||||||||||
Long-term FHLB |
10,000 | 10,000 | 4.54 | % | June 2013 | |||||||||||
Long-term FHLB |
10,000 | 10,000 | 3.18 | % | March 2014 | |||||||||||
Long-term FHLB |
20,000 | 20,000 | 3.20 | % | March 2014 | |||||||||||
Long-term FHLB |
20,000 | 20,000 | 3.22 | % | August 2014 | |||||||||||
145,000 | 145,000 | |||||||||||||||
Senior notes |
11,662 | 87,092 | 13.50 | % | Repaid October 2010 | |||||||||||
Temporary Liquidity Guarantee Program debt |
25,000 | 25,000 | 2.74 | % | February 2012 | |||||||||||
Temporary Liquidity Guarantee Program debt |
63,688 | 63,688 | 2.09 | % | May 2012 | |||||||||||
88,688 | 88,688 | |||||||||||||||
Subordinated debt Class A (current) |
23,989 | 23,989 | 4.79 | %* | December 2010 | |||||||||||
Subordinated debt Class A (non-current) |
90,000 | 90,000 | 2.18 | %* | October 2020 | |||||||||||
Junior subordinated debt |
51,547 | 51,547 | 3.20 | % | January 2034 | |||||||||||
Debt valuation and discount |
(109 | ) | (157 | ) | ||||||||||||
Total borrowings |
$ | 428,815 | $ | 614,553 | ||||||||||||
* | Weighted average interest rate |
Revolving Credit Facility and Senior Notes
The Holding Company has reduced its aggregate debt outstanding on the revolving credit
facility and senior note to $29.7 million at September 30, 2010 from $215.5 million at December 31,
2009.
On October 25, 2010, Holding Company paid-off the final $29.7 million of its aggregate
outstanding debt that was under its two senior debt agreements, the revolving credit facility dated
May 1, 2006 and the Note Purchase and Uncommitted Master Shelf Agreement date December 28, 2001.
25
Table of Contents
Federal Home Loan Bank Borrowings (FHLB)
NCB, FSB has a pledge agreement with the FHLB requiring advances to be secured by eligible
mortgages or investments. NCB, FSBs borrowing capacity is determined by several factors
including: the market value of eligible collateral, asset quality, capital, earnings, liquidity,
credit ratings and approval by the FHLB. Changes in these factors could increase or reduce the
available capacity. Any amendments to the revolving credit and senior note agreements have not
impacted NCB, FSBs ability to borrow from the FHLB.
As of September 30, 2010, the total FHLB facility was $197.1 million of which $145.0 million
of debt borrowings and $15.1 million in letters of credit were outstanding. As of December 31,
2009, the total FHLB facility was $205.9 million of which $145.0 million of debt borrowings and
$23.5 million in letters of credit were outstanding.
NCB, FSB has granted a blanket security interest to the FHLB of the following: Share and
Single-family Residential Loans, Multifamily Loans, Commercial Real Estate Loans, Home Equity Lines
of Credit and specifically assigned Investment Securities. NCB, FSB submits a quarterly
certification to the FHLB specifying the eligible loan collateral. As of September 30, 2010, based
on the last quarterly certification of June 30, 2010, NCB, FSB had pledged the following eligible
loan collateral to the FHLB: Share and Single-family Residential of $224.4 million, Multifamily of
$14.0 million and Commercial Real Estate of $85.3 million. As of December 31, 2009, based on the
last quarterly certification of September 30, 2009, NCB, FSB had pledged the following eligible
loan collateral to the FHLB: Share and Single-family Residential of $382.0 million and Multifamily
of $32.5 million. As of September 30, 2010 and December 31, 2009, NCB, FSB had $32.4 million and
$12.2 million of investments specifically pledged to the FHLB, respectively.
Subordinated Debt
On December 31, 1981, the Holding Company issued unsecured subordinated debt to the U.S.
Treasury (Treasury) in the amount of $184.3 million as provided in the Act, as amended, in the
form of Class A notes in full redemption of the Class A Preferred stock previously owned by the
Government.
The following table shows, pursuant to the Amended Financing Agreement, the amortization
schedule of the Class A notes (dollars in thousands):
Debt Amortization | ||||||||||||||||
Beginning | Periodic | |||||||||||||||
Year | Balance | Annual Amortization | Amortization | Ending Balance | ||||||||||||
2010 |
$ | 113,989 | $ | | $ | 23,989 | $ | 90,000 | ||||||||
2011 |
90,000 | 5,000 | | 85,000 | ||||||||||||
2012 |
85,000 | 5,500 | | 79,500 | ||||||||||||
2013 |
79,500 | 6,050 | | 73,450 | ||||||||||||
2014 |
73,450 | 6,655 | | 66,795 | ||||||||||||
2015 |
66,795 | 7,320 | | 59,475 | ||||||||||||
2016 |
59,475 | 8,053 | | 51,422 | ||||||||||||
2017 |
51,422 | 8,858 | | 42,564 | ||||||||||||
2018 |
42,564 | 9,744 | | 32,820 | ||||||||||||
2019 |
32,820 | 10,718 | | 22,102 | ||||||||||||
2020 |
22,102 | | 22,102 | | ||||||||||||
Total |
$ | 67,898 | $ | 46,091 | ||||||||||||
The Amended Financing Agreement provides for the deferral of principal payments. In the event
that a scheduled amortization payment is not made by the end of the applicable year, the rate on
any note that is repriced prior to such deferred payment being made will reprice at the
then-current treasury rate for the tenure of that note plus 700 basis points. At the same time,
the rate on the remaining notes increase by 100 basis points and increase by an additional 100
basis points each six month period (up to a maximum add-on of 700 basis points over the treasury
rate) as long as the deferred payment remains unpaid. Once the deferred payment is made, the rate
on all of the notes returns to the contract rate of the treasury rate plus 100 basis points.
The Class A notes and all related payments are subordinate to any secured and unsecured notes
and debentures thereafter issued by the Holding Company, but the notes and subordinated debt issued
by the Holding Company, that by its terms are junior to the Class A notes, have first preference
with respect to the Holding Companys assets over all classes of stock issued by the Holding
Company. Under the Bank Act, the Holding Company currently cannot pay any dividend on any class of
stock at a rate greater than the statutory interest rate payable on the Class A notes.
26
Table of Contents
15. DERIVATIVE FINANCIAL INSTRUMENTS
The estimated fair values of the Companys derivative instruments are recorded gross as a
component of other assets and other liabilities on the condensed consolidated balance sheet as
follows (dollars in thousands):
September 30, 2010 | ||||||||||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Balance Sheet | Contract/Commitment | Estimated | Balance Sheet | Contract/Commitment | Estimated | |||||||||||||||||||
Location | Amounts | Fair Value | Location | Amounts | Fair Value | |||||||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||
Forward sales commitments: |
||||||||||||||||||||||||
Single-family Residential and Share Loans |
Other assets | $ | 8,733 | $ | 22 | Other liabilities | $ | 11,094 | $ | (55 | ) | |||||||||||||
Cooperative and Multifamily Loans |
Other assets | 47,465 | 519 | Other liabilities | 61,221 | (2,005 | ) | |||||||||||||||||
Rate lock commitments to extend credit: |
||||||||||||||||||||||||
Single-family Residential and Share Loans |
Other assets | 12,455 | 321 | Other liabilities | | | ||||||||||||||||||
Cooperative and Commercial Real Estate Loans |
Other assets | 79,121 | 3,833 | Other liabilities | | | ||||||||||||||||||
Total derivatives not designated as hedging instruments |
$ | 147,774 | $ | 4,695 | $ | 72,315 | $ | (2,060 | ) | |||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Balance Sheet | Contract/Commitment | Estimated | Balance Sheet | Contract/Commitment | Estimated | |||||||||||||||||||
Location | Amounts | Fair Value | Location | Amounts | Fair Value | |||||||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||
Forward sales commitments: |
||||||||||||||||||||||||
Single-family Residential and Share Loans |
Other assets | $ | 9,669 | $ | 137 | Other liabilities | $ | 377 | $ | (1 | ) | |||||||||||||
Cooperative and Multifamily Loans |
Other assets | 31,450 | 480 | Other liabilities | 8,300 | (109 | ) | |||||||||||||||||
Rate lock commitments to extend credit: |
||||||||||||||||||||||||
Single-family Residential and Share Loans |
Other assets | 6,843 | 88 | Other liabilities | 2,198 | (21 | ) | |||||||||||||||||
Cooperative and Commercial Real Estate Loans |
Other assets | 21,050 | 714 | Other liabilities | 16,950 | (154 | ) | |||||||||||||||||
Total derivatives not designated as hedging instruments |
$ | 69,012 | $ | 1,419 | $ | 27,825 | $ | (285 | ) | |||||||||||||||
Changes in the fair values of the Companys undesignated derivative instruments are recorded
in earnings as a component of the gain on mortgage banking activities.
27
Table of Contents
The fair value of the Companys rate lock commitments to borrowers includes, as applicable:
| the assumed gain/loss of the expected loan sale to the investor; |
| the effects of interest rate movements between the date of rate lock and the
balance sheet date; and |
| the estimated fair value of the cash flows associated with servicing the loan |
The fair value of the Companys forward sales contracts to investors solely considers effects
of interest rate movements between the trade date and the balance sheet date. The market price
changes are multiplied by the notional amount of the forward sales contracts to measure the fair
value.
The methodologies and inputs used to value all of the Companys derivative instruments are
discussed in Note 16. The effect of the changes in fair value of the Companys derivative
instruments included in the gain on mortgage banking activities in the condensed consolidated
statements of operations is as follows (dollars in thousands):
For the three months ended September 30, 2010 | ||||||||||||||||
Assumed Gain | Interest Rate | Servicing | Total Fair Value | |||||||||||||
(Loss) From | Movement | Rights | Adjustment | |||||||||||||
Loan Sale | Effect | Value | Gain/(Loss) | |||||||||||||
Forward sales commitments |
||||||||||||||||
Single-family Residential and Share Loans |
$ | | $ | 27 | $ | | $ | 27 | ||||||||
Cooperative and Multifamily Loans |
| 763 | | 763 | ||||||||||||
Rate lock commitments to extend credit: |
||||||||||||||||
Single-family Residential and Share Loans |
35 | (29 | ) | 32 | 38 | |||||||||||
Cooperative and Commercial Real Estate Loans |
305 | (349 | ) | 62 | 18 | |||||||||||
Total fair value measurement, September 30, 2010 |
$ | 340 | $ | 412 | $ | 94 | $ | 846 | ||||||||
For the nine months ended September 30, 2010 | ||||||||||||||||
Assumed Gain | Interest Rate | Servicing | Total Fair Value | |||||||||||||
(Loss) From | Movement | Rights | Adjustment | |||||||||||||
Loan Sale | Effect | Value | Gain/(Loss) | |||||||||||||
Forward sales commitments: |
||||||||||||||||
Single-family Residential and Share Loans |
$ | | $ | (170 | ) | $ | | $ | (170 | ) | ||||||
Cooperative and Multifamily Loans |
| (1,857 | ) | | (1,857 | ) | ||||||||||
Rate lock commitments to extend credit: |
||||||||||||||||
Single-family Residential and Share Loans |
33 | 112 | 17 | 162 | ||||||||||||
Cooperative and Commercial Real Estate Loans |
1,169 | 1,854 | 251 | 3,274 | ||||||||||||
Total fair value measurement, September 30, 2010 |
$ | 1,202 | $ | (61 | ) | $ | 268 | $ | 1,409 | |||||||
28
Table of Contents
16. FAIR VALUE MEASUREMENTS
The Company has elected to measure, at the time of origination, certain Cooperative and
Multifamily Residential Real Estate Loans that were held-for-sale at fair value. Electing to use
fair value allows for a better offset of the change in fair value of the loan and the derivative
instruments used to economically hedge the loans without the burden of complying with the
requirements of derivative accounting standards. Unrealized gains and losses for these identified
loans are included in earnings. Of the $40.5 million and $11.9 million of Residential Real Estate
Loans held-for-sale disclosed in Note 6, the contractual principal amount of loans for which the
Company has elected the fair value option totaled $30.1 million and $1.8 million as of September
30, 2010 and December 31, 2009, respectively. The difference in fair value of these loans compared
to their principal balance was $0.5 million and $23 thousand and was recorded in gain on mortgage
banking activities as of September 30, 2010 and December 31, 2009, respectively.
| U.S. GAAP establishes a fair value hierarchy for valuation inputs that give the highest
priority to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. |
| A description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the valuation
hierarchy, is set forth in the Companys annual report as of December 31, 2009 on Form
10-K. There have been no changes in these methodologies from December 31, 2009. |
The following table summarizes financial assets and financial liabilities measured at fair
value on a recurring basis segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (dollars in thousands):
September 30, 2010 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in Active | Significant Other | Unobservable | Balance as of | |||||||||||||
Markets for Identical Assets | Observable Inputs | Inputs | September 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Assets |
||||||||||||||||
Interest-only non-certificated receivables |
$ | | $ | | $ | 24,192 | $ | 24,192 | ||||||||
U.S. Treasury and agency obligations |
21,228 | | | 21,228 | ||||||||||||
Mortgage-backed securities |
| 23,809 | | 23,809 | ||||||||||||
CMOs |
| | 3,028 | 3,028 | ||||||||||||
Equity securities |
24 | | | 24 | ||||||||||||
Derivative instruments |
| 4,695 | | 4,695 | ||||||||||||
Loans held-for-sale |
| 30,103 | | 30,103 | ||||||||||||
Total |
$ | 21,252 | $ | 58,607 | $ | 27,220 | $ | 107,079 | ||||||||
Liabilities |
||||||||||||||||
Derivative instruments |
$ | | $ | 2,060 | $ | | $ | 2,060 | ||||||||
Total |
$ | | $ | 2,060 | $ | | $ | 2,060 | ||||||||
29
Table of Contents
The following table summarizes financial assets and liabilities measured at fair value on a
recurring basis segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value (dollars in thousands):
December 31, 2009 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in Active | Significant Other | Unobservable | ||||||||||||||
Markets for Identical Assets | Observable Inputs | Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2009 | |||||||||||||
Assets |
||||||||||||||||
Interest-only non-certificated receivables |
$ | | $ | | $ | 24,851 | $ | 24,851 | ||||||||
U.S. Treasury and agency obligations |
12,986 | | | 12,986 | ||||||||||||
Mortgage-backed securities |
| 13,066 | | 13,066 | ||||||||||||
CMOs |
| | 3,723 | 3,723 | ||||||||||||
Equity securities |
31 | | | 31 | ||||||||||||
Derivative instruments |
| 1,419 | | 1,419 | ||||||||||||
Loans held-for-sale |
| 1,773 | | 1,773 | ||||||||||||
Total |
$ | 13,017 | $ | 16,258 | $ | 28,574 | $ | 57,849 | ||||||||
Liabilities |
||||||||||||||||
Derivative instruments |
$ | | $ | 285 | $ | | $ | 285 | ||||||||
Total |
$ | | $ | 285 | $ | | $ | 285 | ||||||||
There were no transfers of assets or liabilities between Level 1 and Level 2, or from Level 2
to Level 3 during the periods presented.
The tables below summarize the changes in fair value for all financial assets and liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
(dollars in thousands):
For the nine months ended September 30, 2010 | ||||||||
Interest-Only Non- | Collateralized Mortgage | |||||||
certificated Receivables | Obligations | |||||||
Balance at December 31, 2009 |
$ | 24,851 | $ | 3,723 | ||||
Total gains or (losses) (realized/unrealized): |
||||||||
Included in earnings |
| | ||||||
Included in other comprehensive income |
311 | 79 | ||||||
Purchases, issuances, settlements and fundings |
2,438 | | ||||||
Write down of asset due to prepayment |
(25 | ) | | |||||
Principal repayments |
| (798 | ) | |||||
Amortization |
(3,383 | ) | 24 | |||||
Transfers out of Level 3 |
| | ||||||
Balance at September 30, 2010 |
$ | 24,192 | $ | 3,028 | ||||
30
Table of Contents
For the nine months ended September 30, 2009 | ||||||||||||
Interest-Only | Collateralized | |||||||||||
Certificated | Interest-Only Non- | Mortgage | ||||||||||
Receivables | certificated Receivables | Obligations | ||||||||||
Balance at December 31, 2008 |
$ | 27,854 | $ | 27,264 | $ | 3,938 | ||||||
Total gains or (losses) (realized/unrealized): |
||||||||||||
Included in earnings (1) |
(2,143 | ) | | (1,491 | ) | |||||||
Included in other comprehensive income |
2,053 | (322 | ) | 1,951 | ||||||||
Purchases, issuances, settlements and fundings |
| 2,041 | | |||||||||
Write down of asset due to prepayment |
| (15 | ) | | ||||||||
Principal repayments |
| | (286 | ) | ||||||||
Amortization |
(4,358 | ) | (3,291 | ) | 2 | |||||||
Transfers out of Level 3 |
(23,406 | ) | | | ||||||||
Balance at September 30, 2009 |
$ | | $ | 25,677 | $ | 4,114 | ||||||
(1) | These losses included in earnings have been recognized as OTTI losses on the Companys
condensed consolidated statements of operations for the year ended December 31, 2009. |
Certain financial assets and financial liabilities are measured at fair value on a
nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example, when there is evidence
of impairment). A description of the valuation methodologies used for instruments measured at fair
value on a non-recurring basis as of September 30, 2010 and December 31, 2009 are disclosed in the
Companys annual report on Form 10-K as of December 31, 2009. There have been no changes to these
methodologies through September 30, 2010.
The following tables summarize the fair value of instruments measured on a non-recurring
basis (dollars in thousands):
September 30, 2010 | ||||||||||||||||
Quoted Prices in Active | Significant Other | Significant | Balance as of | |||||||||||||
Markets for Identical Assets | Observable Inputs | Unobservable Inputs | September 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Assets |
||||||||||||||||
Loans held-for-sale |
$ | | $ | 6,484 | $ | | $ | 6,484 | (1) | |||||||
Mortgage servicing rights |
| | 5,432 | 5,432 | (2) | |||||||||||
Impaired loans |
| | 64,731 | 64,731 | (3) | |||||||||||
Total |
$ | | $ | 6,484 | $ | 70.163 | $ | 76,647 | ||||||||
December 31, 2009 | ||||||||||||||||
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical Assets | Observable Inputs | Unobservable Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2009 | |||||||||||||
Assets |
||||||||||||||||
Loans held-for-sale |
$ | | $ | 29,494 | $ | | $ | 29,494 | (1) | |||||||
Mortgage servicing
rights |
| | 7,059 | 7,059 | (2) | |||||||||||
Impaired loans |
| | 83,094 | 83,094 | (3) | |||||||||||
Total |
$ | | $ | 29,494 | $ | 90,153 | $ | 119,647 | ||||||||
(1) | Only loans held-for-sale with fair values below cost and for which the fair value option has
not been elected, are included in the table above. |
|
(2) | Mortgage servicing rights are accounted for at amortized cost and tested on a quarterly basis
for impairment. The impairment test is segmented into the risk tranches, which are stratified,
based upon the predominant risk characteristics of the loans. The table above only includes
the fair value of the strata of mortgage servicing rights that were impaired as of the balance
sheet date. None of these impairments were considered other-than-temporary at September 30,
2010 and December 31, 2009. |
|
(3) | This amount represents the fair value of impaired loans for which a valuation allowance has
been recognized. |
31
Table of Contents
Guidance about fair value of financial instruments requires disclosure of fair value
information about financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices are not available for
identical or comparable instruments, fair values are based on estimates using the present value of
estimated cash flows using a discount rate commensurate with the risks involved or other valuation
techniques. The resulting fair values are affected by the assumptions used, including the discount
rate and estimates as to the amounts and timing of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent markets and, accordingly,
the fair values may not represent actual values of the financial instruments that could have been
realized as of year-end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for purposes of this disclosure as of September 30, 2010 and December 31,
2009:
Cash and cash equivalents The carrying amount approximates fair value.
Loans held-for-investment The fair market value of adjustable rate loans is estimated by
discounting the future cash flows using the rates at which similar loans would be made to
borrowers with similar credit quality and the same stated maturities. The fair value of
fixed rate commercial and other loans and leases, excluding loans held-for-sale, is
estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit quality and for the same remaining
maturities. This method of estimating fair value does not incorporate the exit price
concept in a fair value measurement and is appropriate for this specific disclosure.
Deposit liabilities The fair value of demand deposits, savings accounts, and certain money
market deposits is determined using a discounted cash flow approach and considers the value
of the customer relationship. The fair value of fixed-maturity certificates of deposit is
estimated using a discounted cash flow calculation that applies interest rates currently
being offered on certificates of deposits of similar remaining maturities.
Borrowings The fair value of borrowings is estimated by discounting the future cash flows
using the current borrowing rates at which similar types of borrowing arrangements with the
same remaining maturities could be obtained by the Company. In determining the fair value
of the Companys borrowings, the Company considered its own credit worthiness and ability to
repay the outstanding obligations upon their contractual maturity.
32
Table of Contents
The following table summarizes the carrying amount and fair value of the financial instruments
that the Company has not measured at fair value on a recurring basis (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 224,773 | $ | 224,773 | $ | 266,090 | $ | 266,090 | ||||||||
Held-to-maturity investment securities |
387 | 378 | 387 | 372 | ||||||||||||
Loans held-for-sale |
45,149 | 45,912 | 35,730 | 35,846 | ||||||||||||
Loans held-for-investment, net |
1,336,153 | 1,323,757 | 1,657,221 | 1,618,271 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
1,117,498 | 1,138,639 | 1,253,954 | 1,279,749 | ||||||||||||
Borrowings |
428,815 | 354,960 | 614,553 | 527,888 |
Contract or | Contract or | |||||||||||||||
Commitment | Estimated | Commitment | Estimated | |||||||||||||
Off-Balance Sheet Financial Instruments: | Amounts | Fair Value | Amounts | Fair Value | ||||||||||||
Undrawn commitments to extend credit |
$ | 673,611 | $ | 3,368 | $ | 764,888 | $ | 3,824 | ||||||||
Standby letters of credit |
208,532 | 5,246 | 245,165 | 7,728 |
17. SEGMENT REPORTING
The Companys reportable segments are strategic business units that provide diverse products
and services within the financial services industry. The Company has five reportable segments:
Commercial Lending, Real Estate Lending, Warehouse Lending, Retail and Consumer Lending and Other.
The Commercial Lending segment provides financial services to cooperative and member-owned
businesses. The Real Estate Lending segment originates and services multi-family cooperative real
estate and community association loans (included in Commercial Loans in Note 8) nationally, with a
concentration in New York City. The Warehouse Lending segment originates Residential and
Commercial Real Estate Loans for sale in the secondary market. The Retail and Consumer Lending
segment provides traditional banking services such as lending and deposit gathering to retail,
corporate and commercial customers. The Other segment income consists of the Companys unallocated
administrative income and expense and net interest income from investments and corporate debt after
allocations to segments. The Other segment assets consist mostly of unallocated cash and cash
equivalents, investment securities, Federal Home Loan Bank stock, premises and equipment and equity
investment securities. The Company evaluates segment performance based on earnings before taxes.
The accounting policies of the segments are substantially the same as those described in the
summary of significant accounting policies.
33
Table of Contents
For the three months ended September 30: | ||||||||||||||||||||||||
Retail and | ||||||||||||||||||||||||
Commercial | Real Estate | Warehouse | Consumer | Consolidated | ||||||||||||||||||||
2010 | Lending | Lending | Lending | Lending | Other | Company | ||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Interest income |
$ | 5,987 | $ | 9,294 | $ | 1,284 | $ | 4,150 | $ | 393 | $ | 21,108 | ||||||||||||
Interest expense |
1,363 | 5,358 | 218 | 2,299 | 1,112 | 10,350 | ||||||||||||||||||
Net interest income |
4,624 | 3,936 | 1,066 | 1,851 | (719 | ) | 10,758 | |||||||||||||||||
Provision (benefit) for loan losses |
1,568 | 354 | | 229 | | 2,151 | ||||||||||||||||||
Non-interest income |
1,245 | 1,081 | 7,587 | 184 | 432 | 10,529 | ||||||||||||||||||
Non-interest expense: |
||||||||||||||||||||||||
Direct expense |
835 | 956 | 1,149 | 487 | 5,527 | 8,954 | ||||||||||||||||||
Overhead and support |
1,761 | 1,996 | 2,376 | 1,071 | | 7,204 | ||||||||||||||||||
Total non-interest expense |
2,596 | 2,952 | 3,525 | 1,558 | 5,527 | 16,158 | ||||||||||||||||||
Income (loss) before taxes |
$ | 1,705 | $ | 1,711 | $ | 5,128 | $ | 248 | $ | (5,814 | ) | $ | 2,978 | |||||||||||
Total average assets |
$ | 396,123 | $ | 676,825 | $ | 88,296 | $ | 331,427 | $ | 322,251 | $ | 1,814,922 | ||||||||||||
Total assets |
$ | 388,772 | $ | 647,726 | $ | 71,932 | $ | 331,949 | $ | 325,817 | $ | 1,766,196 | ||||||||||||
For the three months ended September 30: | ||||||||||||||||||||||||
Retail and | ||||||||||||||||||||||||
Commercial | Real Estate | Warehouse | Consumer | Consolidated | ||||||||||||||||||||
2009 | Lending | Lending | Lending | Lending | Other | Company | ||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Interest income |
$ | 7,782 | $ | 11,700 | $ | 1,623 | $ | 6,580 | $ | 378 | $ | 28,063 | ||||||||||||
Interest expense |
2,418 | 11,490 | 1,095 | 3,046 | 1,898 | 19,947 | ||||||||||||||||||
Net interest income |
5,364 | 210 | 528 | 3,534 | (1,520 | ) | 8,116 | |||||||||||||||||
Provision for loan losses |
7,321 | 2,648 | | 2,213 | | 12,182 | ||||||||||||||||||
Non-interest income |
1,332 | 417 | 3,323 | 354 | 332 | 5,758 | ||||||||||||||||||
Non-interest expense: |
||||||||||||||||||||||||
Direct expense |
1,336 | 953 | 947 | 506 | 6,865 | 10,607 | ||||||||||||||||||
Overhead and support |
4,301 | 3,090 | 2,868 | 1,676 | | 11,935 | ||||||||||||||||||
Total non-interest expense |
5,637 | 4,043 | 3,815 | 2,182 | 6,865 | 22,542 | ||||||||||||||||||
(Loss) income before taxes |
$ | (6,262 | ) | $ | (6,064 | ) | $ | 36 | $ | (507 | ) | $ | (8,053 | ) | $ | (20,850 | ) | |||||||
Total average assets |
$ | 527,852 | $ | 857,395 | $ | 94,272 | $ | 506,107 | $ | 227,215 | $ | 2,212,841 | ||||||||||||
Total assets |
$ | 525,503 | $ | 858,934 | $ | 79,995 | $ | 485,865 | $ | 206,722 | $ | 2,157,019 | ||||||||||||
34
Table of Contents
For the nine months ended September 30: | ||||||||||||||||||||||||
Retail and | ||||||||||||||||||||||||
Commercial | Real Estate | Warehouse | Consumer | Consolidated | ||||||||||||||||||||
2010 | Lending | Lending | Lending | Lending | Other | Company | ||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Interest income |
$ | 19,952 | $ | 30,002 | $ | 3,680 | $ | 14,189 | $ | 1,097 | $ | 68,920 | ||||||||||||
Interest expense |
4,684 | 19,053 | 1,148 | 7,367 | 3,384 | 35,636 | ||||||||||||||||||
Net interest income |
15,268 | 10,949 | 2,532 | 6,822 | (2,287 | ) | 33,284 | |||||||||||||||||
Provision for loan losses |
6,817 | 2,747 | | 1,445 | | 11,009 | ||||||||||||||||||
Non-interest income |
3,298 | 3,704 | 12,145 | 1,234 | 4,934 | 25,315 | ||||||||||||||||||
Non-interest expense: |
||||||||||||||||||||||||
Direct expense |
2,659 | 2,942 | 4,545 | 1,448 | 18,644 | 30,238 | ||||||||||||||||||
Overhead and support |
3,973 | 4,138 | 6,964 | 2,215 | | 17,290 | ||||||||||||||||||
Total non-interest expense |
6,632 | 7,080 | 11,509 | 3,663 | 18,644 | 47,528 | ||||||||||||||||||
Income (loss) before taxes |
$ | 5,117 | $ | 4,826 | $ | 3,168 | $ | 2,948 | $ | (15,997 | ) | $ | 62 | |||||||||||
Total average assets |
$ | 436,986 | $ | 696,227 | $ | 86,953 | $ | 381,200 | $ | 328,757 | $ | 1,930,123 | ||||||||||||
Total assets |
$ | 388,772 | $ | 647,726 | $ | 71,932 | $ | 331,949 | $ | 325,817 | $ | 1,766,196 | ||||||||||||
For the nine months ended September 30: | ||||||||||||||||||||||||
Retail and | ||||||||||||||||||||||||
Commercial | Real Estate | Warehouse | Consumer | Consolidated | ||||||||||||||||||||
2009 | Lending | Lending | Lending | Lending | Other | Company | ||||||||||||||||||
Net interest income: |
||||||||||||||||||||||||
Interest income |
$ | 24,597 | $ | 34,813 | $ | 4,498 | $ | 20,810 | $ | 1,193 | $ | 85,911 | ||||||||||||
Interest expense |
7,104 | 23,820 | 2,243 | 12,169 | 2,724 | 48,060 | ||||||||||||||||||
Net interest income |
17,493 | 10,993 | 2,255 | 8,641 | (1,531 | ) | 37,851 | |||||||||||||||||
Provision for loan losses |
13,131 | 19,243 | | 4,593 | | 36,967 | ||||||||||||||||||
Non-interest income |
3,949 | 2,646 | 10,081 | 1,263 | 1,040 | 18,979 | ||||||||||||||||||
Non-interest expense: |
||||||||||||||||||||||||
Direct expense |
4,042 | 2,607 | 3,045 | 1,549 | 17,976 | 29,219 | ||||||||||||||||||
Overhead and support |
9,069 | 5,863 | 6,772 | 3,727 | | 25,431 | ||||||||||||||||||
Total non-interest expense |
13,111 | 8,470 | 9,817 | 5,276 | 17,976 | 54,650 | ||||||||||||||||||
Income (loss) before taxes |
$ | (4,800 | ) | $ | (14,074 | ) | $ | 2,519 | $ | 35 | $ | (18,467 | ) | $ | (34,787 | ) | ||||||||
Total average assets |
$ | 552,468 | $ | 850,897 | $ | 87,620 | $ | 513,648 | $ | 185,794 | $ | 2,190,427 | ||||||||||||
Total assets |
$ | 525,503 | $ | 858,934 | $ | 79,995 | $ | 485,865 | $ | 206,722 | $ | 2,157,019 | ||||||||||||
35
Table of Contents
18. PROVISION FOR INCOME TAXES
Pursuant to its Charter, the Holding Company and its subsidiaries are subject to federal
income taxes for certain activities only. The federal income tax provision is determined on the
basis of non-patronage income generated by NCB, FSB and reserves set aside for dividends on Class C
stock. All of NCB, FSBs income is subject to state taxation. The income tax provision for the
three months ended September 30, 2010 and September 30, 2009 was $75 thousand and $0.9 million,
respectively. The income tax benefit for the nine months ended September 30, 2010 and September
30, 2009 was $37 thousand and $32 thousand, respectively. NCB, FSBs effective weighted average
state tax rate was approximately 6.1% as of September 30, 2010 compared to 5.3% as of September 30,
2009. The effective combined tax rate for both federal and state tax was 59.7% as of September 30,
2010 compared to less than 1% as of September 30, 2009 resulting from the impact of business
activities that do not qualify as patronage income under the Internal Revenue Code as amended by
the Act with respect to the Company.
36
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The purpose of this analysis is to provide the reader with information relevant to
understanding and assessing the Companys results of operations. In order to fully appreciate this
analysis, the reader is encouraged to review the consolidated financial statements and statistical
data presented in this document and the December 31, 2009 audited consolidated financial statements
and the accompanying notes included in the Companys recent Annual Report on Form 10-K.
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-Q 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-Q:
Entity | Principal Activities | |
The Company
|
Financial institution that primarily provides financial services to eligible cooperatives or enterprises controlled by eligible cooperatives. Unless otherwise indicated, references to the Company are references to the consolidated business of the Company and its subsidiaries. | |
NCCB (Holding Company)
|
References to the Holding Company are references to the legal entity of the National Consumer Cooperative Bank 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. |
Third Quarter 2010 Summary
The Companys financial results continue to reflect the challenging economic and operating
conditions, and the residual effect of the recession that the U.S. economy has faced prior to and
during 2009 continues to impact the Companys borrowers. Increased cost of funds, fees and
amortization of debt costs related to the Holding Companys amendments to its revolving credit
facility and senior note agreements have also negatively impacted the Companys 2010 financial
results to date.
During 2010 economic conditions improved to some degree. The Company has experienced more
favorable operating results in 2010, reversing the trend of losses from the nine months ended
September 30, 2009 primarily because of a significant decrease in the Companys provision for loan
losses from 2009. The decrease in the provision for loan losses was primarily the result of a
stabilization in the credit quality of the Companys loan portfolio during the nine months ended
September 30, 2010.
37
Table of Contents
Debt Amendments
As of June 30, 2009, the Holding Company was in default under its senior note purchase
agreement and its revolving credit facility due to a violation of certain financial covenants. 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 extended certain waivers and
modifications established during 2009, removed substantially all of the financial covenants
compliance requirements and established a payment amortization schedule with a final maturity of
December 15, 2010.
The Holding Company was required to reduce the aggregate principal through paydowns such that
the maximum aggregate debt outstanding was (1) $68.0 million on April 30, 2010, (2) $60.0 million
on June 30, 2010 and (3) $30.0 million on September 30, 2010. Although the Holding Company was not
required to fully repay the amounts due under the revolving credit facility and senior note
agreement by June 30, 2010, if it failed to do so, the Holding Company was required to pay a fee of
2% of the outstanding debt balance as of June 30, 2010. Accordingly, the Holding Company paid $0.8
million which is included in interest expense for the nine months ending September 30, 2010 in the
accompanying condensed consolidated statements of operations. As of September 30, 2010 the Holding
Company was in full compliance with the remaining financial covenants.
On October 25, 2010, the
Holding Company paid-off the final $29.7 million of its aggregate outstanding debt that was under
its two senior debt agreements, the revolving credit facility dated May 1, 2006 and the Note
Purchase and Uncommitted Master Shelf Agreement date December 28, 2001.
In February of 2010, the Company amended both agreements to extend the final maturity date to
December 15, 2010. The Holding Company was able to make the final payments more than seven weeks
ahead of the final maturity date in order to reduce the interest expense that had been accruing
under each facility at 13.5%.
Regulatory Matters
As disclosed in and filed as exhibits to the Companys 2009 Form 10-K, on March 15, 2010 the
following agreements and orders were entered into (together referred to as the OTS Actions):
| The Holding Company entered into a Stipulation and Consent to the Issuance of an Order
to Cease and Desist (the Order) with the Office of Thrift Supervision (OTS) on March
15, 2010. In addition to other requirements, the associated OTS order required 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. These items have been
submitted to the OTS, and the OTS responded with a written non-objection as contemplated by
the order. The associated order also provides that the Holding Company 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. |
||
| NCB Financial Corporation entered into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist with the OTS on March 15, 2010. The associated 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. |
||
| NCB, FSB entered into a Supervisory Agreement with the OTS on March 15, 2010. The
principal elements of this 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 prior approval. Additionally,
NCB, FSB was requested to submit a Business Plan within 45 days and a Liquidity Risk
Management Program within 30 days for OTS review and comment. These items were submitted
to the OTS, and the OTS has responded with a written non-objection as contemplated by the
Supervisory Agreement. |
38
Table of Contents
The Holding Company and its subsidiaries continue transacting normal banking business. The
Company has been actively engaged in responding to the concerns raised by the OTS and believes that
the Holding Company, NCB Financial Corporation and NCB, FSB are in compliance with the OTS Actions.
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.
Results of Operations
For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009
Overview
For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009
Overview
The Companys net income for the nine months ended September 30, 2010 was $0.1 million
compared to a net loss of $34.8 million for the nine months ended September 30, 2009.
Total assets decreased 15.6% or $327.3 million to $1.77 billion as of September 30, 2010, from
$2.09 billion as of December 31, 2009 as the proceeds from loan curtailments and loan sales were
used to reduce outstanding borrowings.
The annualized return on average total assets was less than 0.1% for the nine months ended
September 30, 2010 and -2.1% for the nine months ended September 30, 2009. The annualized return
on average members equity was 0.1% and -21.2% for the nine months ended September 30, 2010 and
2009, respectively.
39
Table of Contents
Selected Financial Data
(Dollars In Thousands)
(Dollars In Thousands)
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Profitability | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net interest income |
$ | 10,758 | $ | 8,116 | $ | 33,284 | $ | 37,851 | ||||||||
Provision for loan losses |
2,151 | 12,182 | 11,009 | 36,967 | ||||||||||||
Net interest income (loss) after provision for loan losses |
8,607 | (4,066 | ) | 22,275 | 884 | |||||||||||
Non-interest income |
10,529 | 5,758 | 25,315 | 18,979 | ||||||||||||
Non-interest expense |
16,158 | 22,542 | 47,528 | 54,650 | ||||||||||||
Net income (loss) |
2,903 | (21,739 | ) | 99 | (34,755 | ) | ||||||||||
Ratios |
||||||||||||||||
Net yield on interest earning assets |
2.59 | % | 1.52 | % | 2.54 | % | 2.39 | % | ||||||||
Return on average assets |
0.6 | % | -3.9 | % | 0.0 | % | -2.1 | % | ||||||||
Return on average members equity |
6.4 | % | -41.1 | % | 0.1 | % | -21.2 | % | ||||||||
Efficiency ratio |
75.9 | % | 162.5 | % | 81.1 | % | 96.2 | % |
September 30, | December 31, | |||||||
Supplemental Data | 2010 | 2009 | ||||||
Loans held-for-sale |
$ | 45,149 | $ | 35,730 | ||||
Loans held-for-investment |
1,379,374 | 1,693,689 | ||||||
Total assets |
1,766,196 | 2,093,537 | ||||||
Total borrowings |
428,815 | 614,553 | ||||||
Fulltime equivalent employees |
240 | 248 | ||||||
Ratios |
||||||||
Average members equity as a percentage of average total assets |
9.5 | % | 9.6 | % | ||||
Average members equity as a percentage of average total loans and lease financing |
11.6 | % | 10.7 | % | ||||
Net average loans and lease financing to average total assets |
79.9 | % | 87.6 | % | ||||
Net average earning assets to average total assets |
88.3 | % | 94.7 | % |
September 30, | December 31, | |||||||
Credit Quality | 2010 | 2009 | ||||||
Allowance for loan losses |
$ | 43,221 | $ | 36,468 | ||||
Non-accrual loans |
82,333 | 71,401 | ||||||
Real estate owned |
8,123 | 2,315 | ||||||
Total non-performing assets |
90,456 | 73,716 | ||||||
Ratios |
||||||||
Allowance for loan losses to loans outstanding |
3.0 | % | 2.1 | % | ||||
Non-performing assets as a percentage of total assets |
5.1 | % | 3.5 | % | ||||
Non-performing assets as a percentage of total loans held-for-investment |
6.6 | % | 4.4 | % |
40
Table of Contents
Net Interest Income
The primary source of the Companys 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 yield on interest earning assets, which is
calculated as net interest income divided by average earning assets.
Net interest income for the nine months ended September 30, 2010, decreased $4.6 million or
12.1% to $33.3 million compared with $37.9 million for the nine months ended September 30, 2009.
The net yield on interest earning assets increased from 2.39% for the nine months ended September
30, 2009 to 2.54% for the same period in 2010.
For the nine months ended September 30, 2010, interest income decreased by $17.0 million or
19.8% to $68.9 million compared with $85.9 million for the nine months ended September 30, 2009.
The decrease resulted primarily from a $222.7 million decrease in average Residential and
Commercial Real Estate Loan volume and a decrease of $155.2 million in average Consumer and
Commercial Loan volume. Average yields on all loan types did not vary significantly
year-over-year; however, the average yield on investment securities and cash equivalents decreased
156 basis points from the nine months ended September 30, 2009 to the nine months ended September
30, 2010.
Interest expense for the nine months ended September 30, 2010, decreased $12.4 million or
25.9% from $48.1 million for the nine months ended September 30, 2009 to $35.6 million for the nine
months ended September 30, 2010.
Variable interest rates, to which NCB, FSBs deposits are tied, have decreased significantly
from the nine months ended September 30, 2009 to the nine months ended September 30, 2010 which is
the primary cause of the $5.3 million year-over-year decrease in deposit interest expense.
Specifically, NCB, FSBs cost of deposits has decreased 49 basis points from 2.27% for the nine
months ended September 30, 2009 to 1.78% for the nine months ended September 30, 2010. NCB, FSBs
average total deposits have also decreased slightly year-over-year and NCB, FSBs brokered
deposits, all relating to certificates of deposit, decreased $165.6 million from December 31, 2009
to September 30, 2010. As of September 30, 2010, of the $423.5 million of brokered certificates of
deposit, $98.3 million mature within three months and $325.2 million have a maturity ranging from
four months to 63 months. The Company is actively working to decrease this concentration of
brokered deposits.
Interest expense on borrowings decreased $7.1 million or 26.9% from September 30, 2009 to
September 30, 2010. The decrease in interest expense for the nine months ended September 30, 2010
from the nine months ended September 30, 2009 was primarily attributable to a $175.6 million
decrease in average borrowing balances for the nine months of 2010 as compared to the nine months
of 2009. The Holding Company aggressively repaid its senior note and revolving
credit facility debt during 2010 in compliance with requirements in the most recent debt
amendments. The decrease in average balances more than offset the impact of the Holding Companys
$0.8 million charge to interest expense during the nine months ended September 30, 2010 as a result
of not fully repaying all amounts due under the revolving credit facility and senior note debt
agreements as of June 30, 2010.
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 the nine months
ended September 30, 2010 and September 30, 2009.
41
Table of Contents
Table 1
Changes in Net Interest Income
For the nine months ended September 30,
(Dollars in thousands)
Changes in Net Interest Income
For the nine months ended September 30,
(Dollars in thousands)
2010 Compared to 2009 | ||||||||||||
Change in average | Change in | Increase (Decrease) | ||||||||||
volume | average rate | Net** | ||||||||||
Interest Income |
||||||||||||
Real Estate (Residential and Commercial) Loans |
$ | (8,910 | ) | $ | 80 | $ | (8,830 | ) | ||||
Consumer and Commercial Loans and Leases |
(6,919 | ) | 12 | (6,907 | ) | |||||||
Total loans and lease financing |
(15,829 | ) | 92 | (15,737 | ) | |||||||
Investment securities and cash equivalents |
166 | (1,553 | ) | (1,387 | ) | |||||||
Other interest income |
(145 | ) | 278 | 133 | ||||||||
Total interest income |
(15,808 | ) | (1,183 | ) | (16,991 | ) | ||||||
Interest Expense |
||||||||||||
Deposits |
(705 | ) | (4,643 | ) | (5,348 | ) | ||||||
Borrowings |
(7,015 | ) | (61 | ) | (7,076 | ) | ||||||
Total interest expense |
(7,720 | ) | (4,704 | ) | (12,424 | ) | ||||||
Net interest income |
$ | (8,088 | ) | $ | 3,521 | $ | (4,567 | ) | ||||
** | Changes in interest income and interest expense due to changes in rate and volume have been
allocated to change in average volume and change in average rate in proportion to the absolute
dollar amounts in each. |
42
Table of Contents
Table 2
Rate Related Assets and Liabilities
For the nine months ended September 30,
(Dollars in thousands)
Rate Related Assets and Liabilities
For the nine months ended September 30,
(Dollars in thousands)
2010 | 2009 | |||||||||||||||||||||||
Income / | Average | Income / | Average | |||||||||||||||||||||
Average Balance* | Expense | Rate/Yield | Average Balance* | Expense | Rate/Yield | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest earning assets |
||||||||||||||||||||||||
Real Estate (Residential and Commercial) Loans* |
$ | 1,010,163 | $ | 40,454 | 5.34 | % | $ | 1,232,860 | $ | 49,284 | 5.33 | % | ||||||||||||
Consumer and Commercial Loans and Leases* |
574,858 | 25,632 | 5.95 | % | 730,054 | 32,539 | 5.94 | % | ||||||||||||||||
Total loans and lease financing* |
1,585,021 | 66,086 | 5.56 | % | 1,962,914 | 81,823 | 5.56 | % | ||||||||||||||||
Investment securities and cash equivalents |
138,281 | 1,098 | 1.06 | % | 126,233 | 2,485 | 2.62 | % | ||||||||||||||||
Other interest income |
24,167 | 1,736 | 9.58 | % | 26,354 | 1,603 | 8.11 | % | ||||||||||||||||
Total interest earning assets |
1,747,469 | 68,920 | 5.26 | % | 2,115,501 | 85,911 | 5.41 | % | ||||||||||||||||
Allowance for loan losses |
(43,469 | ) | (36,056 | ) | ||||||||||||||||||||
Non-interest earning assets |
||||||||||||||||||||||||
Cash |
145,403 | 40,623 | ||||||||||||||||||||||
Other |
80,720 | 70,359 | ||||||||||||||||||||||
Total non-interest earning assets |
226,123 | 110,982 | ||||||||||||||||||||||
Total assets |
$ | 1,930,123 | $ | 2,190,427 | ||||||||||||||||||||
Liabilities and members equity |
||||||||||||||||||||||||
Interest bearing liabilities |
||||||||||||||||||||||||
Deposits |
$ | 1,229,897 | $ | 16,411 | 1.78 | % | $ | 1,276,321 | $ | 21,759 | 2.27 | % | ||||||||||||
Borrowings |
482,024 | 19,225 | 5.32 | % | 657,670 | 26,301 | 5.33 | % | ||||||||||||||||
Total interest bearing liabilities |
1,711,921 | 35,636 | 2.78 | % | 1,933,991 | 48,060 | 3.31 | % | ||||||||||||||||
Other liabilities |
34,901 | 37,702 | ||||||||||||||||||||||
Members equity |
183,301 | 218,734 | ||||||||||||||||||||||
Total liabilities and members equity |
$ | 1,930,123 | $ | 2,190,427 | ||||||||||||||||||||
Net interest earning assets |
$ | 35,548 | $ | 181,510 | ||||||||||||||||||||
Net interest revenues and spread |
$ | 33,284 | 2.48 | % | $ | 37,851 | 2.10 | % | ||||||||||||||||
Net yield on interest earning assets |
2.54 | % | 2.39 | % |
* | Average loan balances include non-accrual loans. |
43
Table of Contents
Non-interest Income
(dollars in thousands)
(dollars in thousands)
Non-interest income for the nine | ||||||||
months ended September 30, | ||||||||
2010 | 2009 | |||||||
Gain on mortgage banking activities and loan sales |
$ | 15,344 | $ | 9,914 | ||||
Servicing fees |
3,976 | 3,066 | ||||||
Letter of credit fees |
2,479 | 3,422 | ||||||
Real estate loan fees |
1,005 | 473 | ||||||
Other |
2,511 | 2,104 | ||||||
Total |
$ | 25,315 | $ | 18,979 | ||||
Total non-interest income increased $6.3 million or 33.4% from $19.0 million during the
nine months ended September 30, 2009 to $25.3 million for the nine months ending September 30,
2010. This was driven primarily by an increase of $5.4 million gain on mortgage banking activities
and loan sales from $9.9 million for the nine months ended September 30, 2009 to $15.3 million for
the nine months ending September 30, 2010. The increase in the number and aggregate principal of
loans previously held-for-investment and loans originated as held-for-sale coupled with increases
in margins on sales resulted in the increase in gain on mortgage banking activities and loan sales.
Principal balances of multifamily cooperative and commercial real estate cooperative loans
sold were $296.5 million and $184.8 million for the nine months ended September 30, 2010 and
September 30, 2009 respectively. Gain recognized on these sales were $7.8 million and $6.4 million
for the nine months ended September 30, 2010 and September 30, 2009 respectively. Gain recognized
on loans that have been forward sold were $1.7 million and $0.3 million for the nine months ended
September 30, 2010 and September 30, 2009 respectively.
Principal balances of single family residential and share loan residential loans sold were
$131.3 million and $158.8 million for the nine months ended September 30, 2010 and September 30,
2009 respectively. Gain recognized on these sales were $2.6 million and $3.0 million for the nine
months ended September 30, 2010 and September 30, 2009 respectively.
Principal balances of loans held for investment that were transferred to loans held for sale
and subsequently sold totaled $140.8 million nine months ended September 30, 2010 with a gain
recognized on these sales of $2.2 million.
Consumer Loan sales represent the sale of participations in auto loans. The Company purchases
and sells these notes that are held-for-sale within a 30 day cycle. 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. Unpaid principal balance of Consumer Loans sold were $0.3
million and $0.1 million for the nine months ended September 30, 2010 and 2009, respectively.
During
the third quarter of 2010, the Company sold $19.0 million of
impaired loans with
a carrying amount of $13.3 million, net of a specific reserve, to a participating investor. The
Company recognized a $1.0 million gain on the sale of these loans.
The increase in servicing fees from the nine months ended September 30, 2009 to the nine
months ended September 30, 2010 is primarily the result of the recapture of income from the
recovery of previous impairments on the Companys MSRs, coupled with an increase in the volume of
loans serviced by the Company.
44
Table of Contents
The decrease in letter of credit fees from the nine months ended September 30, 2009 to the
nine months ended September 30, 2010 reflects a decrease in the outstanding balance of the
Companys letters of credit from September 30, 2009 to September 30, 2010.
Non-interest Expense
(dollars in thousands)
(dollars in thousands)
Non-interest expense for the nine months | ||||||||
ended September 30, | ||||||||
2010 | 2009 | |||||||
Compensation and employee benefits |
$ | 23,487 | $ | 22,903 | ||||
Contractual services |
6,104 | 5,874 | ||||||
Occupancy and equipment |
4,564 | 5,037 | ||||||
Loan costs |
3,377 | 2,532 | ||||||
Information systems |
3,078 | 3,237 | ||||||
FDIC premium |
2,810 | 1,992 | ||||||
Provision for losses on unfunded commitments |
1,574 | 6,502 | ||||||
Corporate development |
497 | 833 | ||||||
Lower of cost or market valuation allowance loans held-for-sale |
(20 | ) | 289 | |||||
Loss on sale of investments available-for-sale |
| 89 | ||||||
Other-than-temporary impairment losses (OTTI) (all OTTI is credit-related) |
||||||||
Gross impairment losses |
| 3,792 | ||||||
Less: impairments recognized in other comprehensive income (before taxes) |
| (158 | ) | |||||
Net impairment losses recognized in earnings |
| 3,634 | ||||||
Other |
2,057 | 1,728 | ||||||
Total |
$ | 47,528 | $ | 54,650 | ||||
Non-interest expense for the nine months ended September 30, 2010 decreased by $7.2
million compared to the nine months ended September 30, 2009 primarily because there has been no
OTTI thus far during 2010 compared to the $3.6 million of OTTI during this same time in 2009.
The provision for unfunded commitments is based on our expected losses for these commitments.
Estimates of projected losses coupled with a decline in the aggregate outstanding commitment
expense resulted in a decrease in the provision for the 2010 period as compared to the 2009 period.
The $0.8 million increase in loan costs is primarily due to losses and legal fees incurred for a
loan the company repurchased from Fannie Mae due to a title deficiency.
Compensation and employee benefits expense increased $0.6 million to $23.5 million for the
nine months ended September 30, 2010 from $22.9 million for the prior corresponding period.
Retention bonuses given to certain employees during 2010 more than offset a reduction in the number
of employees.
Credit Quality
Since December 31, 2009, the allowance for loan losses increased by $6.7 million, or 18.4% to
$43.2 million. This included $1.1 million of loan recoveries received and $9.1 million of loans
charged off. The allowance for loan losses represented 3.1% and 2.2% of loans held-for-investment,
as of September 30, 2010 and December 31, 2009, respectively. The allowance as a percentage of
non-performing assets was 47.8% as of September 30, 2010
compared with 49.5% as of December 31,
2009.
Of the $11.0 million provision for loan losses, $4.9 million is related to Commercial Loans,
$3.9 million is related to Real Estate Loans and $2.2 million is related to Consumer Loans. Net
charge-offs were 0.6% and 1.8% of the loans held-for-investment balance for the periods ended
September 30, 2010 and December 31, 2009, respectively.
45
Table of Contents
Table 3
IMPAIRED ASSETS
(dollars in thousands)
IMPAIRED ASSETS
(dollars in thousands)
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
2010 | 2010 | 2010 | 2009 | 2009 | ||||||||||||||||
Real estate owned |
$ | 8,123 | $ | 6,660 | $ | 5,397 | $ | 2,315 | $ | 3,553 | ||||||||||
Impaired loans |
108,570 | 106,305 | 104,563 | 97,748 | 147,001 | |||||||||||||||
Total |
$ | 116,693 | $ | 112,965 | $ | 109,960 | $ | 100,063 | $ | 150,554 | ||||||||||
As a percentage of loans held-for-investment |
8.46 | % | 7.76 | % | 7.15 | % | 5.91 | % | 7.97 | % | ||||||||||
During 2009, deteriorating economic conditions, including declining real estate values
and increasing unemployment and commercial real estate vacancy rates, adversely impacted the
quality of the Companys loan portfolios resulting in (i) an increase in loan delinquencies, (ii)
an increase in non-performing assets and foreclosures, and (iii) a decline in the value of the
underlying collateral. Although economic conditions appear to have stabilized during 2010, the
Company believes that certain of its borrowers remain under stress and the Companys loan portfolio
continues to be negatively impacted. The decrease in the provision for loan losses for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 is partially
the result of a reduction in the number of classified loans, the repayment of classified loans and
rating upgrades to certain other adversely classified loans.
During 2009, the Company recognized a provision for unfunded commitments of $3.8 million
related to the probable expected loss on certain standby letters of credit with borrowers. During
2010, these borrowers drew on, and the Company funded, these standby letters of credit creating a
loan receivable. The provision associated with these borrowers was reclassified from the reserve
for unfunded commitments (see Note 11) to the allowance for loan losses.
Standby Letters of Credit
As of September 30, 2010, the Company had outstanding standby letters of credit with a total
commitment amount of $208.5 million of which $89.6 million were classified as criticized. As of
December 31, 2009, the Company had outstanding standby letters of credit with a total commitment
amount of $245.2 million of which $73.4 million were classified as criticized. During 2010, the
Company funded two standby letters of credit in the aggregate amount of $9.8 million. In
connection with the fundings, the related provision for the standby letters of credit was
transferred from the reserve for unfunded commitments to the allowance for loan losses as of
September 30, 2010. During 2009, one letter of credit was funded in the amount of $6.9 million
with an expected loss of $5.1 million recognized and charged-off.
46
Table of Contents
Results of Operations
For the three months ended September 30, 2010 compared to the three months ended September 30, 2009
Overview
For the three months ended September 30, 2010 compared to the three months ended September 30, 2009
Overview
The Companys net income for the three months ended September 30, 2010 was $2.9 million
compared to a net loss of $21.7 million for the three months ended September 30, 2009.
The annualized return on average total assets was 0.6% and -3.9% for the three months ended
September 30, 2010 and 2009, respectively. The annualized return on average members equity was
6.4% and -41.1% for the three months ended September 30, 2010 and 2009, respectively.
Net Interest Income
Net interest income for the three months ended September 30, 2010, decreased $2.7 million or
33.3% to $10.8 million compared with $8.1 million for the three months ended September 30, 2009.
For the three months ended September 30, 2010, interest income decreased by 24.9% or $7.0
million to $21.1 million compared with $28.1 million for the three months ended September 30, 2009.
The decrease resulted primarily from a $288.7 million decrease in average Residential and
Commercial Real Estate loan balance and a decrease of $181.5 million in average Consumer and
Commercial Loan balance. Average yields on all loan types did not vary significantly
year-over-year; however, the average yield on investment securities and cash equivalents decreased
106 basis points from the three months ended September 30, 2009 to the three months ended September
30, 2010.
Interest expense for the three months ended September 30, 2010, decreased $9.5 million or
48.1% from $19.9 million for the three months ended September 30, 2009 to $10.4 million for the
three months ended September 30, 2010.
Variable interest rates, to which NCB, FSBs deposits are tied, have decreased from the three
months ended September 30, 2009 to the three months ended September 30, 2010 which is the primary
cause of the $1.3 million year-over-year decrease in deposit interest expense. Specifically, NCB,
FSBs cost of deposits has decreased 23 basis points from 2.06% in the three months ended September
30, 2009 to 1.83% in the three months ended September 30, 2010.
Interest expense on borrowings for the three months ended September 30, 2010 decreased $8.2
million or 62.0%. The decrease in interest expense for the three months ended September 30, 2010
from the three months ended September 30, 2009 was primarily attributable to a $231.7 million
decrease in average borrowing balances for the third quarter of 2010 as compared to the third
quarter of 2009. The Holding Company has been aggressively paying down its senior note and
revolving credit facility debt during 2010 in compliance with requirements in the most recent debt
amendments. The decrease in average balances more than offset the impact of the Holding Companys
$0.8 million charge to interest expense during the three months ended September 30, 2010 as a
result of not fully repaying all amounts due under the revolving credit facility and senior note
debt agreements as of June 30, 2010.
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 the three
months ended September 30, 2010 and September 30, 2009.
47
Table of Contents
Table 1A
Changes in Net Interest Income
For the three months ended September 30,
(Dollars in thousands)
Changes in Net Interest Income
For the three months ended September 30,
(Dollars in thousands)
2010 Compared to 2009 | ||||||||||||
Change in average | Change in average | Increase (Decrease) | ||||||||||
volume | rate | Net** | ||||||||||
Interest Income |
||||||||||||
Real Estate (Residential and Commercial) Loans |
$ | (3,747 | ) | $ | (215 | ) | $ | (3,962 | ) | |||
Consumer and Commercial Loans and Leases |
(2,692 | ) | 13 | (2,679 | ) | |||||||
Total loans and lease financing |
(6,439 | ) | (202 | ) | (6,641 | ) | ||||||
Investment securities and cash equivalents |
18 | (410 | ) | (392 | ) | |||||||
Other interest income |
(46 | ) | 124 | 78 | ||||||||
Total interest income |
(6,467 | ) | (488 | ) | (6,955 | ) | ||||||
Interest Expense |
||||||||||||
Deposits |
(649 | ) | (700 | ) | (1,349 | ) | ||||||
Borrowings |
(3,615 | ) | (4,633 | ) | (8,248 | ) | ||||||
Total interest expense |
(4,264 | ) | (5,333 | ) | (9,597 | ) | ||||||
Net interest income |
$ | (2,203 | ) | $ | 4,845 | $ | 2,642 | |||||
** | Changes in interest income and interest expense due to changes in rate and volume have been
allocated to change in average volume and change in average rate in proportion to the absolute
dollar amounts in each. |
48
Table of Contents
Table 2A
Rate Related Assets and Liabilities
For the three months ended September 30,
(Dollars in thousands)
Rate Related Assets and Liabilities
For the three months ended September 30,
(Dollars in thousands)
2010 | 2009 | |||||||||||||||||||||||
Average | Income / | Average | Average | Average | ||||||||||||||||||||
Balance* | Expense | Rate/Yield | Balance* | Income / Expense | Rate/Yield | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest earning assets |
||||||||||||||||||||||||
Real Estate (Residential and Commercial) Loans* |
$ | 959,696 | $ | 12,366 | 5.15 | % | $ | 1,248,349 | $ | 16,328 | 5.23 | % | ||||||||||||
Consumer and Commercial Loans and Leases* |
520,766 | 7,727 | 5.94 | % | 702,305 | 10,406 | 5.93 | % | ||||||||||||||||
Total loans and lease financing* |
1,480,462 | 20,093 | 5.43 | % | 1,950,654 | 26,734 | 5.48 | % | ||||||||||||||||
Investment securities and cash equivalents |
157,129 | 393 | 1.00 | % | 152,358 | 785 | 2.06 | % | ||||||||||||||||
Other interest income |
23,832 | 622 | 10.44 | % | 25,795 | 544 | 8.44 | % | ||||||||||||||||
Total interest earning assets |
1,661,423 | 21,108 | 5.08 | % | 2,128,807 | 28,063 | 5.27 | % | ||||||||||||||||
Allowance for loan losses |
(45,633 | ) | (43,449 | ) | ||||||||||||||||||||
Non-interest earning assets |
||||||||||||||||||||||||
Cash |
117,501 | 53,572 | ||||||||||||||||||||||
Other |
81,631 | 73,911 | ||||||||||||||||||||||
Total non-interest earning assets |
199,132 | 127,483 | ||||||||||||||||||||||
Total assets |
$ | 1,814,922 | $ | 2,212,841 | ||||||||||||||||||||
Liabilities and members equity |
||||||||||||||||||||||||
Interest bearing liabilities |
||||||||||||||||||||||||
Deposits |
$ | 1,157,368 | $ | 5,301 | 1.83 | % | $ | 1,290,780 | $ | 6,650 | 2.06 | % | ||||||||||||
Borrowings |
441,344 | 5,049 | 4.58 | % | 673,076 | 13,297 | 7.90 | % | ||||||||||||||||
Total interest bearing liabilities |
1,598,712 | 10,350 | 2.59 | % | 1,963,856 | 19,947 | 4.06 | % | ||||||||||||||||
Other liabilities |
34,680 | 37,302 | ||||||||||||||||||||||
Members equity |
181,530 | 211,683 | ||||||||||||||||||||||
Total liabilities and members equity |
$ | 1,814,922 | $ | 2,212,841 | ||||||||||||||||||||
Net interest earning assets |
$ | 62,711 | $ | 164,951 | ||||||||||||||||||||
Net interest revenues and spread |
$ | 10,758 | 2.49 | % | $ | 8,116 | 1.21 | % | ||||||||||||||||
Net yield on interest earning assets |
2.59 | % | 1.52 | % |
* | Average loan balances include non-accrual loans. |
49
Table of Contents
Non-interest Income
(dollars in thousands)
(dollars in thousands)
Non-interest income for | ||||||||
the three months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Gain on mortgage banking activities and loan sales |
$ | 7,234 | $ | 3,150 | ||||
Servicing fees |
970 | 714 | ||||||
Letter of credit fees |
828 | 1,161 | ||||||
Real estate loan fees |
418 | 137 | ||||||
Other |
1,079 | 596 | ||||||
Total |
$ | 10,529 | $ | 5,758 | ||||
Non-interest income for the three months ended September 30, 2010 increased by $4.8
million compared to the three months ended September 30, 2009 primarily due to the year-over-year
increase in the gain on mortgage banking activities and loan sales. The increase in the number and
aggregate principal of loans previously held-for-investment and loans originated as held-for-sale
coupled with increases in margins on sales resulted in the increase in gain on mortgage banking
activities and loan sales.
Principal balances of multifamily cooperative and commercial real estate cooperative loans
sold were $131.8 million and $84.7 million for the three months ended September 30, 2010 and
September 30, 2009 respectively. Gain recognized on these sales were $3.9 million and $3.1 million
for the three months ended September 30, 2010 and September 30, 2009 respectively. A gain was
recognized on loans that have been forward sold were $0.4 million for the three months ended
September 30, 2010 compared with a loss of $0.7 million for the three months ended September 30,
2009.
Principal balances of single family residential and share loan residential loans sold were
$27.7 million and $40.1 million for the three months ended September 30, 2010 and September 30,
2009 respectively. Gain recognized on these sales were $0.9 million and $0.8 million for the three
months ended September 30, 2010 and September 30, 2009 respectively.
Principal balances of loans held for investment that were transferred to loans held for sale
were $50.7 million for the three months ended September 30, 2010 with a gain recognized on these
sales of $1.6 million.
The Consumer Loan sales represent the sale, at par, of participations in auto loans. The
Company purchases and sells these notes that are held-for-sale within a 30 day cycle. 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. Unpaid principal balance of Consumer Loans
sold were $72.2 million and $60.7 million for the three months ended September 30, 2010 and 2009,
respectively.
During
the third quarter of 2010, the Company sold $19.0 million of
impaired loans with
a carrying amount of $13.3 million, net of a specific reserve, to a participating investor. The
Company recognized a $1.0 million gain on the sale of these loans.
The increase in servicing fees from the three months ended September 30, 2009 to the three
months ended September 30, 2010 is primarily the result of the recapture of income from previous
impairments on the Companys MSRs, coupled with an increase in the loans serviced by the Company.
The decrease in letter of credit fees from the three months ended September 30, 2009 to the
three months ended September 30, 2010 reflects a decrease in the outstanding balance of the
Companys letters of credit from September 30, 2009 to September 30, 2010. The Company is making
an effort to reduce its exposure on letters of credit by not committing to new letters of credit.
50
Table of Contents
Non-interest Expense
(dollars in thousands)
(dollars in thousands)
Non-interest expense for | ||||||||
the three months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Compensation and employee benefits |
$ | 7,377 | $ | 7,339 | ||||
Provision for losses on unfunded commitments |
1,831 | 4,026 | ||||||
Occupancy and equipment |
1,555 | 1,668 | ||||||
Contractual services |
1,328 | 3,063 | ||||||
Loan costs |
1,284 | 968 | ||||||
FDIC premium |
978 | 535 | ||||||
Information systems |
915 | 986 | ||||||
Corporate development |
177 | 289 | ||||||
(Loss) gain on sale of investments available-for-sale |
| (5 | ) | |||||
Other-than-temporary impairment losses (OTTI) (all OTTI is credit-related) |
||||||||
Gross impairment losses |
| 2,312 | ||||||
Less: impairments recognized in other comprehensive income (before taxes) |
| | ||||||
Net impairment losses recognized in earnings |
| 2,312 | ||||||
Lower of cost or market valuation allowance loans held-for-sale |
20 | 698 | ||||||
Other |
693 | 663 | ||||||
Total |
$ | 16,158 | $ | 22,542 | ||||
Non-interest expense for the three months ended September 30, 2010 decreased by $6.4
million compared to the three months ended September 30, 2009.
Decreases evident in the table above include: (1) no OTTI during 2010 as compared to $2.3
million recognized during the three months ending September 30, 2009; (2) a $2.2 million decrease
in the provision for losses on unfunded commitments because of a decline in the dollar amount of
letters of credit and commitments outstanding as of September 30, 2010 compared to September 30,
2009, coupled with stabilization in the credit quality of the companys unfunded commitments during
2010 and (3) a $1.7 million decrease in contractual services due to the decrease in legal fees and
the reduction of costs related to the restructuring of debt.
During 2010 NCB, FSB agreed to retention bonuses for some of its employees which are subject
to continued employment and a non-compete agreement. The Company expensed $0.3 million of
retention bonuses during the three months ending September 30, 2010. The employees must be
employed on each of the payment dates to receive payment.
Liquidity and Capital Resources
As of September 30, 2010, the Company believes that it has adequate liquidity to meet all its
obligations. As of September 30, 2010, the Company had cash on hand of $224.8 million, investments
of $48.5 million and loans held-for-sale of $45.1 million. Dividends from NCB, FSB to the Holding
Company require OTS consent at this time. The following describe the Companys primary
sources and uses of liquidity as of September 30, 2010:
| The Company continues to generate cash through the receipt of scheduled and unscheduled
repayments on loans receivable. |
51
Table of Contents
| During 2010, the Company sold $168.8 million of loans that were held-for-investment. Of
these loans sold, $130.4 million were Residential Real Estate Loans, $7.8 million were
Commercial Real Estate Loans, $28.4 million were Commercial Loans and $2.2 million were
Consumer Loans. During 2009, the Company sold $168.5 million of loans that were
held-for-investment. Of these total loans sold, $149.1 million were Residential Real
Estate Loans and $19.4 million were Commercial Loans. |
||
| With respect to NCB, FSB, FHLB available unused borrowing capacity was $36.9 as of
September 30, 2010 which was a $0.5 million decrease from $37.4 million as of December 31,
2009. As of September 30, 2010, the FHLB of Cincinnati, with whom NCB, FSB banks, has not
provided notice of any potential dividend cancellations. |
||
| FRB unused borrowing capacity was $57.1 million and $78.0 million as of September 30,
2010 and December 31, 2009, respectively. |
||
| In addition to funding operations and debt service, liquidity will fund the maturity and
withdrawal of certificates of deposit, specifically brokered deposits. NCB, FSBs brokered
deposit balances were $423.5 million and $589.1 million or 37.9% and 47.0% of total
deposits as of September 30, 2010 and December 31, 2009, respectively. NCB, FSB intends to
continue to reduce its concentration of brokered deposits with some combination of growth in non-brokered deposits, cash on
hand, proceeds from the delivery of loans held for sale and the receipt of interest and
principal payments on loans held-for-investment. |
||
| The Company has a Liquidity Policy and a Liquidity Contingency Plan, both board approved
and continually monitored that addresses NCB, FSBs cashflow needs. Specifically, the cash
flow needed to satisfy maturing certificates of deposit would be derived from repayments on
loans held-for-investment, proceeds from the sale of loans held-for-sale, loan maturities
and issuance of new certificates of deposit. Maturing certificates of deposit are further
supported by unused FHLB borrowing capacity which was $36.9 million and $37.4 million as of
September 30, 2010 and December 31, 2009, respectively and unused borrowing capacity from
the Federal Reserve Bank (FRB) which was $57.1 million and $78.0 million as of September
30, 2010 and December 31, 2009, respectively. |
Sources and Uses of Funds
The Companys principal sources of funds are loan sale proceeds, loan interest and principal
payment collections, deposits from customers and debt borrowings. The principal uses of funds are
retirement of debt, loan originations, repayment of debt and purchases of investment securities.
Cash Provided by Operating Activities. The Companys net cash provided by operating
activities for the nine months ended September 30, 2010 was $212.8 million compared to $30.7
million for the nine months ended September 30, 2009. This $182.1 million change was primarily due
to a $348.6 million increase in net proceeds from the sale of loans held-for-sale, partially offset
by a $26.0 million decrease in the provision for loan losses and a $141.8 million net increase in
cash used for the purchase and origination of loans held-for-sale.
Cash Provided by Investing Activities. The Companys net cash provided by investing
activities for the nine months ended September 30, 2010 was $69.0 million compared to $38.1 million
for the nine months ended September 30, 2009. This $30.9 million change was primarily due to a
$50.3 million decrease in cash used to originate loans and lease financing, net of principal
collections partially offset by a $3.0 million increase in restricted cash and a $16.3 million net
decrease in cash provided from available-for-sale investment activities.
Cash (Used in) Provided by Financing Activities. The Companys net cash used in financing
activities for the nine months ended September 30, 2010 was $323.1 million compared to $15.7
million of cash provided for the nine months ended September 30, 2009. The $338.8 million increase
in cash used was primarily due to a $84.0 million net increase in cash used to repay debt
borrowings, a $189.5 million decrease in debt borrowings and a $71.9 million decrease in cash
provided by deposit activities.
52
Table of Contents
Interest-Bearing Liabilities
Table 4
Interest-Bearing Liabilities
(including accrued interest)
(dollars in thousands)
Interest-Bearing Liabilities
(including accrued interest)
(dollars in thousands)
September 30, | December 31, | |||||||||||
2010 | 2009 | % Change | ||||||||||
Deposits |
$ | 1,119,543 | $ | 1,256,046 | -10.9 | % | ||||||
Borrowings |
431,422 | 617,611 | -30.1 | % | ||||||||
Total |
$ | 1,550,965 | $ | 1,873,657 | -17.2 | % | ||||||
The decrease in deposits, all of which are held at NCB, FSB, from December 31, 2009 to
September 30, 2010 was a result of efforts to reduce brokered certificates of deposit and use the
proceeds from sales of loans to reduce borrowings. The weighted average rate on deposits was 1.8%
as of September 30, 2010 and December 31, 2009. The average maturity of the certificates of
deposit as of September 30, 2010 was 16.6 months compared with 17.7 months as of December 31, 2009.
The decrease in borrowings, including accrued interest, from December 31, 2009 to September
30, 2010 was primarily a result of the required debt pay downs in accordance with the revolving
credit facility and senior note agreement amendments.
As of September 30, 2010, the Company has the following contractual debt maturities:
Amount | ||||
2010 |
$ | 53,689 | ||
2011 |
65,000 | |||
2012 |
98,688 | |||
2013 |
20,000 | |||
2014 |
50,000 | |||
2015 and thereafter |
141,547 | |||
Total payments |
$ | 428,924 | ||
Patronage Dividends
Under the National Consumer Cooperative Bank Act, the Company must make annual patronage
dividends to its stock-holding patrons, which are those cooperatives from whose loans or other
business the Company derived interest or other income during the year with respect to which a
patronage dividend is declared. The Company allocates its patronage dividends among its patrons
generally in proportion to the amount of income derived during the year from each patron. The
Company stockholders, as such, are not automatically entitled to patronage dividends. They are
entitled to patronage dividends only in the years when they have patronized the Company, and thus
the amount of their patronage is not determined by the number of shares they hold. Under the
Companys current patronage dividend policy, patronage dividends may be paid only from taxable
income and only in the form of cash, Class B or Class C stock, or allocated surplus.
The cash portion of each patronage refund, if any, is determined by the Companys Board of
Directors based upon its determination of the capital requirements of the Company and other
factors, in its discretion.
In
light of financial losses in 2009, on August 5, 2010, the
Companys Board of Directors determined not to declare a stock or cash
dividend with respect to 2009 activities.
53
Table of Contents
Contractual Obligations
The Company has various financial obligations, including contractual obligations that may
require future cash payments. Further discussion of the nature of each obligation is included in
Notes 13 and 14 of the Notes to the Consolidated Financial Statements.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
Discussion of the Companys commitments, contingent liabilities and off-balance sheet
arrangements is included in Note 11 of the Notes to the Consolidated Financial Statements.
Commitments to extend credit do not necessarily represent future cash requirements, as these
commitments may expire without being drawn on based upon the Companys historical experience.
54
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the discussion contained under the caption Overview in Part I,
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 4T. | CONTROLS AND PROCEDURES |
The Companys management, including its Chief Executive Officer and Chief Financial Officer,
evaluated its disclosure controls and procedures as of the end of the period covered by this report
pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures
are functioning effectively to provide reasonable assurance that the Company can meet its
obligations to disclose in a timely manner material information required to be included in the
Companys reports under the Exchange Act.
There has been no change in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company is involved in various types of litigation and
disputes, which may lead to litigation. The Company has determined that pending or unasserted
legal actions will not have a material impact on its financial condition or future operations.
Item 1A. Risk Factors
The risk factor described below updates the risk factors in Part 1, Item 1A. Risk Factors in
the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The risks and
uncertainties described below are not the only ones that the Company faces. Additional risks and
uncertainties may also impair the Companys business operations.
Recently enacted regulatory reforms could have a significant impact on the Companys business,
financial condition and results of operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act). Although certain provisions of the Dodd-Frank Act
will not apply to banking organizations with less than $10 billion of assets, such as the Company,
the changes resulting from the legislation will impact the Companys business. The Dodd-Frank Act
will permit the Company to pay interest on business checking accounts, which could (i) cause the
Federal Reserve Board to amend its Regulation D establishing reserve requirements for depository
institutions, and (ii) significantly reduce or eliminate the need for depository institutions to
offer sweep account products. Additionally, effective July 6, 2010, regulatory changes in
overdraft and interchange fee restrictions may reduce the Companys non-interest income. The
Company is currently in the process of evaluating this regulatory change, but has not fully
quantified the full impact. Compliance with the Dodd-Frank Acts provisions may curtail the
Companys revenue opportunities, increase its operating costs, require the Company to hold higher
levels of regulatory capital and/or liquidity or otherwise adversely affect its business or
financial results in the future. Management is actively reviewing the provisions of the Dodd-Frank
Act and assessing its probable impact on the Companys business, financial condition, and result of
operations. However, because many aspects of the Dodd-Frank Act are subject to future rulemaking,
no assurance can be given as to the ultimate effect that the Dodd-Frank Act or any of its
provisions may have on the Company, the financial services industry or the nations economy.
55
Table of Contents
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit 31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
Exhibit 31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
Exhibit 32
|
Section 1350 Certifications |
56
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned there unto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
Date: November 15, 2010
By: | /s/ Richard L. Reed | |||
Richard L. Reed, | ||||
Executive Managing Director, Chief Financial Officer |
||||
By: | /s/ David Sanders | |||
David Sanders | ||||
Senior Vice President, Corporate Controller |
57